Is it time to worry?
While StartEngine’s Q1 results weren’t bad, with some 36% growth, it seems the Q2 didn’t quite meet the same expectations. In both quarters, revenue was actually driven by other services like Owner's bonus and transfer agent services because platform fees actually declined quite a bit in both instances. The overall first half only saw revenue growth of 7% YoY.
So… Is it time to worry? Personally, I don’t think so. There are some hidden gems among the report that I think will end up helping them quite a bit. Realistically, StartEngine declined due to increased competition in their Reg A’s from DealMaker and then general sentiment around the overall market. VC money dropped two quarters in a row from their December highs and by as much as 25% YoY with no signs of recovery. VCs and Angel investors do regularly use the platform for deal flow opportunities (Although probably not many top firms), so it’s likely that had some impact on it. More likely, however, was the inflation spikes cutting into many people's expendable income that caused a decline. Whatever the reason, it happened, and realistically the future is likely what is more important.
So what will the future look like in Q3 & Q4?
I would be surprised if SE doesn’t see a YoY increase in platform fees for a few reasons. First, Q3 and Q4 are always some of StartEngine’s best quarters because most companies end their raises in December. StartEngine doesn’t typically collect revenue until after the raise is complete, just due to their fee structure. Similarly, Boxabl is ending their campaign in August, RentBerry, JetToken, and several other large raises are winding down soon as well.
This will likely give a boost, and StartEngine is currently onboarding lots of companies, so there are going to be some gems in there still to come. Last year, StartEngine lost Prime Trust and actually stopped accepting and onboarding new companies for a lot of November and December to transfer companies over from Prime Trust to themselves to continue raising. So, not having to deal with that this year will also give them a boost. While that won’t be too much, as companies launching in December probably won’t complete their raise until the following year, it could have other impacts.
As well, some of the positive effects from VCs reducing funding will likely start to take effect, and I think the increased deal flow will actually start to show its benefits then. Many of these companies that apply to raise in Q4 of 2021 and Q1 of 2022 might not get their Reg A going until Q2 and Q3. Many of the Reg CFs only take about 6 weeks, but there will still likely be plenty of companies moving a lot slower and onboarding later in the year from Q1 and Q2 of 2022.
If they are able to have slight or even decent increases in platform fees, then Q3 and Q4 could shape up to be solid quarters. They will likely see boosts in revenue from the Owners Bonus and transfer agent services like they have seen in the past couple of quarters. These streams have been performing well and growing, so there’s a chance they could pull these quarters into record territory and salvage the rest of the year. I don’t think we see 100% YoY growth, but I think a 30–50% YoY growth is definitely in the cards. These alternative revenue streams growing, to me, are hidden gems because if they can get platform fees on track, and keep growing the other streams, then we will start to see some big growth numbers.
If they can also get Secondary launching, that would be another boost, even if not particularly large. Don’t get me wrong, if the launch is incredibly successful and goes well, then it could be a large boost depending on the fee structure. The 5% sell fee isn’t conducive to active trading, so they might update it, hoping for higher volume. If that’s the case, and they are able to get a few million in volume in Q4, then that is still tens of thousand in revenues. It could also give a boost to the Owner's bonus revenue if they keep the fee reduction.
Admittedly, it doesn’t look good for the first half. Realistically, I figured early on that the first half was going to be somewhat rough without Knightscope and Wavemaker labs gone and then the continued large Reg A’s leaving. However, they’re doing well with how many have jumped ship.
(A Tweet of mine from Feb talking about growth this year (Just to show I wasn’t bullish for the first half)
However, I do think things will pick up a bit in the second half. This isn’t unfounded optimism either, as I realistically wasn’t expecting a blowout year this year with Knightscope IPOing and Wax Invest leaving early on. Nonetheless, I think they will likely be able to turn it around in the second half.