Lessons learned and where to go from here.
I have been investing in startups for a little over two years now, and I have had a good run so far. A few weeks ago, I wrote a story about how it’s going and what my expectations for 2023 are. You can find that here
One of the things I said is that I expect some bankruptcies. At the time, there were roughly 2 companies I have effectively written off. One investment was one of my earlier investments that looked cool, but as soon as the raise ended, they sold the profitable part of their business almost immediately, then went radio silent. I haven’t heard anything from them since, despite reaching out a few times.
The other one was Whipr, a startup backed by Daymond John and several big names in fitness. They had millions in pre-orders from a successful Kickstarter and raised $1.35 million on StartEngine.
This looked like they had huge demand, and now the money to fund it. The industry was great with demand for people wanting home gyms due to Covid, and others as demand rebounds in a post-covid world.
Once they realize those millions in revenue, they can raise money at a higher valuation due to those multiples, and the valuation was low enough that investors could have some pretty good gains and momentum in a subsequent raise after a year or so.
Unfortunately, there were likely elements out of their control that not only stalled this but ultimately caused their bankruptcy. For those that remember the massive shortages around the world in early 2022 due to shipping constraints, that ultimately caused shipping costs to skyrocket mid-transit, costing the company hundreds of thousands of dollars with no product to fund the business.
It was basically a death spiral from there. They announced things going poorly, which meant nobody was going to keep investing in a sinking ship. The reduced runway meant StartEngine didn’t accept them, which likely would have helped fund them again to get back on their feet, and things just kept getting worse. Recently, they announced they would officially be closing their doors for good.
From an investment standpoint, it’s hard to have a specific takeaway here. They were pre-revenue when I invested, but they had a manufactured product. This was an investment based on the potential and momentum they had built up, not the current business. Also they went out of business mostly based on an event that impacted the entire world, and largely out of their control. Seemingly, I think it had the all elements of a winner, but a continually unfortunate run.
This was one of my larger investments at roughly $2500, so it is definitely a hit, but still, overall, less than 5% of my portfolio. Other investments are still performing well enough that if they were to IPO, I would be in the green by quite a large margin. So, while it was a hit to my portfolio, it’s expected.
The one incredibly clear lesson here is this: diversify.
On a per-startup basis, this was less than 2% of my portfolio. On a per dollar basis, it was less than 5%. If I had only invested in 10 companies, that would be closer to 10%, and since this is about double what I normally invest, it’d be more than that. It’d be an unfortunately big hit.
The other lesson is tapering expectations and don’t fall in love with a company. I thought this would be a winner, and I was wrong. I think that about all of my investments though, even though I liked this one a bit more.
Further, this was not only anticipated, but expected. I knew I would see some bankruptcies this year in my portfolio, so this did not come as a shock to me.
As a personal improvement, I probably could have helped the startup a bit more. I didn’t want to write about it to garner investments knowing it would go out of business, but I do know some people I probably could have a large following in the fitness space and probably worked something out. I did try and reach out but never heard a response back, though.
Currently, I plan to write it off as a capital loss and go on with life. I still have dozens of other investments doing incredibly well, and I expect to see some exits as things begin to ramp-up. Some of my investments have actively said they are simply waiting for the market to improve before they IPO, and I believe those companies are in a strong position going into an IPO. I think the second half of 2023 will see a rebound and strong growth, so I would be surprised if I don’t see an exit in late 2023, or early 2024. I further expect at least 2–3 exits in 2024, 2025, and 2026.
I currently have four companies positioned incredibly well for an IPO, and I think I will see a few more break out soon too. So, we’re in a great spot right now and still happy with the results.
I know I wrote positively about this company, so I apologize if anyone followed me into this trade. Obviously, I lost money here too, but that’s why I generally encourage people to use my writings to learn, but make their own decisions.