Already on our 4th issue of Democratizing.Finance! It’s been 4 short months, and we’re sitting at about 40 readers, so thanks to everyone reading! Feel free to share so we can spread the word about Equity Crowdfunding!
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Tip of the Month
Cash is King — As the downturn continues, cash is going to be king. Venture Capital markets are already slowing down, and Equity Crowdfunding is seeing slight and stagnant growth. This means funding is going to become increasingly competitive, and startups might not be able to rely on large, subsequent funding rounds. So, where does that leave investors?
Downturns can either make or break a startup. The downturn can discourage founders from starting up new businesses since times are bad, interest rates are high, and funding is scarce. Similarly, poorly managed companies will be affected by these same factors and end up going out of business. This all results in significantly less competition for those startups that do survive and primes them for massive growth opportunities once market sentiment shifts in a more positive direction.
This means looking for companies that have strong cash positions and low debt. Even better is if you can find companies that are profitable. or close to it. These are the companies likely to continue to succeed because they can sustain themselves and don’t have the pressure of bankruptcy.
State of the Market
Things have not been good, unfortunately. StartEngine and Wefunder are both reporting stagnant revenue growth and lower or stagnant raise amounts. Despite the total number of raises sitting close to all-time highs, total funding amounts are declining and sitting at multi-year lows. Here are some graphs from KingsCrowd that represent this a bit better:
As you can see, the total number of raises is climbing and is actually near an all-time high.
However, the total amount raised and the average raised per campaign are continually declining. One thing to note is the fact that KingsCrowd doesn’t track Reg A’s, so there are millions of dollars not being tracked here, and with that data, the story could be different. However, the market in general, isn’t looking very strong right now. I don’t expect it to decline much more, as the 3rd and 4th Quarters are always the strongest for Equity Crowdfunding. This is because lots of companies launch in the summer, and most companies like to end their campaign near the end of the year.
As macro concerns persist and the Fed continues to fight inflation, I do think valuations will continue to come down, and the broader market will continue to compress. However, I don’t think it will be as bad as 2008 or anything of the sort. I think 2022 will continue to be a rather lackluster year, and things will pick up sometime in 2023 for both Equity Crowdfunding and the broader market. This could mean the IPO cancellations we’ve seen recently could start back up in late 2023 and 2024, and the industry starts getting back on track.
Top 3 Picks of the Month
Here are three companies that caught my attention this month and why I like them.
Groundfloor — Groundfloor has been making subtle waves in the FinTech scene, but I think that will quickly turn into a tsunami. It’s currently sitting at a valuation of $243 million, but it definitely looks like it has unicorn potential. They have loaned out a whopping $192,858,384 through their platform. This has generated $11 million in revenue in 2021 and sitting at a respectable 100% YoY growth. It’s also something I could definitely see myself using and frankly plan to use now that it’s on my radar.
RentBerry — This one has been on my radar for a while, but I was never quite convinced. Their failed crypto project and the subsequent heavy fallout was a bit of an issue for me, but I think they are moving in a positive direction now. They have attracted notable attention from institutional investors, angels, and VC funds despite the downturn, and their main platform, Rentberry, is doing exceptionally well. Further, the fact that they will own 3 platforms is further enticing, and I think Flexible living could be really big.
SapientX — With only an $8 million valuation, and claims of some of the best and most accurate speech recognition software on the market, this could be huge. The company claims to have 99% accuracy and can understand 40 languages completely offline. If true, this could not only become a standalone unicorn but a highly competitive buyout candidate from dozens of major players across the board.
It’s been a relatively slow news month. As outlined in the “state of the market,” one of the big things has been the market slow down and stagnant growth. For such a new industry with so much momentum, I think a lot of people are surprised to see basically no growth across the board. StartEngine released financials showing a 14% decline in revenue YoY, and the first half revenue growth was only 7%.
Wefunder is sitting in a similarly poor position with only slight growth and actually declining incredibly fast going into the second half. StartEngine gets a large portion of its total amount raised from Reg A raises, but Wefunder ONLY uses Reg CF. So while most months it shows Wefunder beating StartEngine on KingsCrowd (and sometimes by a wide margin), it’s usually not as bad because it doesn’t take into account Reg A. Despite this, StartEngine has actually raised more in just Reg CF in June and August than Wefunder. Some indicators this might be turning around has been StartEngine’s update for the “biggest week ever,” recently showing a massive increase in new members, investment volume, and their raise starting to pick up momentum.
Some other notable news is Boxabl’s record raise. They raised privately through Dalmore on their website as well as a public raise on StartEngine. Between the two, they maxed out the $75 million Reg A and tens of millions past that as well. Once the Reg A maxed out, they opened up a Reg CF and proceeded to max that out AND get a massive waitlist in the millions of dollars.
One exciting thing was the announcement of StartEngine’s partnership with IndieGoGo. IndieGoGo, being a billion-dollar company with tens of millions of users and thousands of companies, is a great partner. This will allow StartEngine to drive deal flow and cross-pollinate audiences between the two to help the equity crowdfunding market grow.
Thanks for reading, and till next month! In the meantime, if you want to stay up to date with all things Equity Crowdfunding, make sure to head over to https://www.democratizing.finance and sign up for a free account to get free resources on investing in startups and tons of news and blog posts about the industry!