Going by everything I heard in the last weeks of December, 2016 was a tough year.
With down rounds and flat rounds… plus scarce sightings of IPOs.
Sorry, I don’t agree.
I’m not disputing the facts. But 2016 was also the year that startup investing for everybody got underway (with the government’s introduction of Regulation Crowdfunding and Regulation A+).
2016 was also the year my partner Adam and I built a portfolio of crowdfunded startups for our First Stage Investor members.
A bit of background…
This is our paid crowdfunding service. We designed it for investors new to startups… and for those who simply don’t have the time to do all the research themselves.
We research the startups, grill the founders, dig into the markets they’ve targeted, test out their products (when possible), check out the competition and do a few other things.
If a startup gets top grades from us, we issue a recommendation to our members.
We started last July with three objectives:
- To recommend at least eight startups by the end of the year.
- To put together a diversified portfolio. (I’ll get into exactly what that means later on.)
- To recommend only top-shelf startups.
How did we do? Let’s break down our portfolio and find out.
- Geography. Five startups are from Silicon Valley and the remaining five are from elsewhere. In terms of regional breakdown, six are from the West Coast, two are from the East Coast, one is from the South and one is from the Midwest.
- Team. Two companies have a single founder, six have two founders, and two have three founders. As far as age goes, four are in their 20s, nine are in their 30s and five are in their 40s.
- Expertise. The single founders have non-technical backgrounds. Of the two-person founding teams, three have both technical and marketing people at the helm. And three are led by teams with business and marketing experience but no technical experience. Of the two three-person teams, their backgrounds span marketing, technology and sector expertise.
- Revenue. Only three companies were pre-revenue. Of the remaining seven, I rated one as early revenue. These seven companies also have one thing in common: They’re growing their revenues at a rapid rate. Growth from month to month or quarter to quarter is a significant metric for us. Amount of revenue is less so. It’s just too early.
- Product-market fit (PMF). I considered only two of our holdings as pre-PMF. Both were changing their pricing policies. One was raising prices, and the other was beginning to go from a freemium to premium service. You see, a product that has value for customers at one price point may not at another. Half of the remaining companies I rated as having early and not-quite-established PMF – understandable at these very early stages. Time will tell.
- Market. Nine out of 10 have large but not explosively growing markets, the exception being our virtual reality startup. I expect growth to take off.
- Defensibility. How well can these companies stave off wannabes? I rated 2.5 of our startups as having low defensibility. The half? That’s a network company that could have the requisite network as soon as this year to ward off encroachers. It’s just not there yet.
- Scalability. No compromises here. All 10 of our companies were graded as scalable or highly scalable.
- Portal. We sourced four of our recommended companies from SeedInvest and another four from Wefunder. One came from Republic and the other from Bankroll.
- Series. Five were raising seed funds. Four were Series A investments. The one company that doesn’t fit neatly into a funding stage is our beer company; it’s more of a later-stage investment.
- Sectors. Of our startups, four are consumer goods, one is music streaming, one is Internet of Things, one is on-demand, one is social media, one is VR and one is transportation. All are consumer facing.
So back to our three objectives…
We recommended 10 startups. We exceeded by two the eight companies we wanted to put into our portfolio. Mission accomplished!
As for diversity…
We did a good job, especially in terms of founding teams and sectors.
Can we improve? Absolutely.
Geographically, I’d like to choose fewer Silicon Valley companies. I think the deal flow is going to get better outside San Francisco. I plan on taking advantage.
Market-wise, I’d like to find an explosive market and a great startup to ride it. There are enticing candidates in fields spanning from healthcare to artificial intelligence.
Looking back, what did we do exceptionally well? I’d say identifying startups with established and fast-growing revenues.
And I’m not apologizing for our three pre-revenue companies. They’ll have huge upsides once they start that phase of growth.
The trickiest category?
For example, we have two startups successfully building brands. I rated one – the beer company – as having high defensibility. Customers keep going back to the beer they like.
The other – an apparel company – I thought had relatively low defensibility. Customers have much less loyalty to clothing brands.
Fortunately, this company keeps pushing out great products at irresistible prices. But it’s a tougher business model to execute.
And now, let’s get to some of the biggest changes for crowdfunding in 2017.
- There will be more portals to source from. We really like the job SeedInvest and Wefunder are doing. But, for the sake of diversification, the more, the better.
- We’ll also see a different mix of up-and-coming sectors. Security of all kinds is an area that’s getting bigger and bigger.
- I’m also interested in technologies that bring efficiencies to construction projects – a sector that is looming large.
- Artificial intelligence is breaking through into the main stream. Startup and legacy companies alike are integrating AI technology into their products.
- And whichever way healthcare goes, the technology backstopping it continues to advance, with multiple breakthroughs imminent. Very exciting.
We’d like to hear your thoughts as well. What do you think is coming down the pike in 2017?
Invest early and well,
Founder, Early Investing