StartEngine is Arguably the Most Exciting Startup Yet

We launched Bottom Line Investing with the premise that the industry of investing in startups is still in its infancy.

As it turns out, one of the most promising startup investment opportunities available today is being built with similar foundations. In fact, I’ve already singled it out here at BLI as a key resource for finding the best private investment deals.

Since 2015, StartEngine has served investors with leading platform focusing on disruptive startups and emerging growth companies across every sector. It’s mission: To “help entrepreneurs achieve their dreams by democratizing access to capital.”

Lucky for you, StartEngine is currently raising its own capital through a Reg A+ Equity Crowdfunding offering of common stock made available through its own platform — but only for a couple more days!

To be clear, StartEngine’s current funding round ends on November 16, 2023 at 12:59 AM MST November 18, 2023 at 2:00 AM ET (the offering deadline was extended slightly after this piece was initially published).

And yes, I understand that’s a tight deadline for some. I’d have covered the raise in detail earlier had we not only just launched launched Bottom Line Investing more than a few weeks ago (and noting I’m only now beginning to ramp my writing here!).

Still, for those who read this report in retrospect, this profile can serve as both an instructive exercise for startup investing and a primer for StartEngine’s (likely) future funding rounds.

So why do I like StartEngine so much? Let’s apply our BLAST investing framework to see:

On StartEngine’s enormous impact, large market

B - Big Impact: I want to find companies working to make a significant positive difference in the world — and those capable of fundamentally changing the way we do things for the better. StartEngine meets this requirement in spades, from its mission of helping entrepreneurs achieve their dreams by democratizing capital, to building out a platform that’s fundamentally changed how investors think about portfolio diversification.

StartEngine stands tall as one of the United States’ first platforms for startup investing, and has helped founders raise over 1,000 rounds of capital through a startup-investing community of 1.8 million users.

Recognizing that liquidity is one of the biggest reasons startups fail — and addressing one of the key pain points of investing in startups — StartEngine also recently launched “StartEngine Secondary,” an easy-to-use secondary market that provides ordinary investors with access to liquidity for their startup investments. StartEngine Secondary is still a pilot program, but has already helped over 1,200 investors trade more than $1.4 million worth of shares in startups and collectible assets.

L - Large Market: I’m looking for businesses targeting a sizable, growing customer base that can generate substantial revenue as they scale. And I want total market opportunities measured in billions of dollars — not “just” millions.

Indeed, investments in regulation crowdfunding have more than doubled since 2021, helping young companies raise more than $2 billion over the past two years alone. But regulation crowdfunding still only represents a minuscule slice of the more than $10 trillion (yes, with a “t,” or ten thousand billions) in capital allocated to private markets as a whole.

Suffice to say StartEngine enjoys an enviable growth runway as it works to shift that capital away from not only competitors, but also private equity as a whole. On the former, back in May StartEngine even acquired the assets (including email lists, its website, and other IP) of fellow equity crowdfunding platform SeedInvest, a competitor that had funded over $470 million over the previous 10 years.

On leadership, the (eventual) path to profitability

A - Adaptable Management: I’m looking for businesses with capable, adaptable leadership with relevant experience, skills, and the flexibility to adjust to changing industry dynamics. Here again, I’m confident with those at the helm of StartEngine, including co-founders Howard Marks and Ron Miller who serve as the company’s CEO and Chairman of the Board, respectively.

Mr. Marks might sound familiar because he previously co-founded both video game behemoth Activision (and also served as its chairman from 1991 to 1996), and later Acclaim Games before it was sold to Disney in 2010.

Miller, for his part, has founded, built, and sold five companies through management buyouts, private equity, private investors and public markets.

StartEngine also snagged Shark Tank’s Kevin O’ Leary as Strategic Advisor and paid spokesperson. Mr. Wonderful’s sizable influence certainly can’t hurt.

S - Sustainable Growth: I also look for startups with a realistic plan to balance growth with profitability without compromising the company's vision and values.

That’s not as much of an issue given StartEngine’s unique position access to liquidity and proven ability raise capital (it’s raised more than $80 million to date, including this funding round), as well as the fact StartEngine has more than quintupled its annual revenue run rate over the past four years.

StartEngine has also significantly outperformed competitors in terms of funding for the past two years, raising $362 million through Reg CF and Reg A+ rounds from 2021 to 2022 (versus $249.6 million for WeFunder and $165.3 million for Republic over the same period).

But what about eventual profitability? That’s a wild card in these early stages; StartEngine incurred a net loss attributable to shareholders of roughly $3.1 million and $9.6 million in Q3 2022 and the first nine months of 2022, respectively — its latest periods of reported (unaudited) results — compared to net income of roughly $904,000 and nearly $3 million, respectively, over the same year-earlier periods. Predictably, however, note the bulk of that swing to a loss was driven by a massive increase in operating expenses (R&D, Sales & Marketing, and general/administrative costs). That’s fine by me as StartEngine scales operations, but I’ll be keeping a close eye on its progress toward sustained profitability down the road.

On valuation — and the Bottom Line

T - Transparent Operations: I also want businesses I can trust to do right by all stakeholders, favoring those that are honest, ethical and accountable. StartEngine has already demonstrated as much through its noble mission and stated values, while the SEC filings related to this funding round — specifically its offering circular — appropriately disclose its operating results, revenue sources, compensation, equity, and ownership structures painstaking detail.

I see no red flags on the transparency front — but there is one potential (if unsurprising) yellow flag: StartEngine clearly states that the valuation for the company “at this stage is difficult to assess.”

Indeed, StartEngine’s Reg A+ offering is being made at a lofty $1.32 billion valuation set by the company itself — an 11X increase from the $120 million pre-money valuation it set for its previous equity crowdfunding round only five years ago.

At the same time — while that’s fantastic news for earlier investors — in the world of publicly traded equities, I’ve never worried too much about overpaying for a seemingly “expensive” stock if I believe it has a reasonable chance to grow into its valuation over the long term. An investment is worth what its shareholders are willing to pay, after all — and Mr. Wonderful himself even took to StartEngine’s platform earlier this year to warn of the pitfalls of not setting an appropriate valuation for your business early on.

StartEngine has raised over $22 million this round from 11,149 investors as of this writing. And I think this appears to be an appropriate price for a fast-growing business with virtually no near-term ceiling.

If StartEngine’s growth story continues to play out like I think it can, I think there will be many people who regret not getting in while they still could.

Disclosure: This content is for informational purposes only and is not intended to be personal financial advice.