New Recommendation: Hemster

By Adam Sharp, Co-Founder, First Stage Investor

I’m extremely excited to present our newest recommendation, Hemster. This promising young startup is looking to revolutionize a huge but outdated market: the tailoring industry.

This is one of the most promising equity crowdfunding deals I’ve seen in years.

The problem with traditional clothing sizing is that about 11% of people actually fit into “small,” “medium” or “large.”

That means in order to get a good fit, they need tailoring. But the traditional in-store tailoring model is broken. Most stores don’t offer tailoring at all. Of the ones that do, many pay for unionized, in-store tailors. And most lose money on that operation.

Hemster is attacking both of these opportunities.

Hemster wants to make it simple for retailers to offer their customers tailoring services.

This startup has shown strong revenue growth, is addressing a multibillion-dollar market with little organized competition and has a strong founder in Allison Lee. Vin (our Senior Managing Editor) and I spoke with Allison for about an hour, and we were both extremely impressed. She is hungry, motivated and smart. She’s exactly the type of founder we like to invest in.

In a nutshell, Hemster makes it simple for retail stores to offer custom tailoring to their customers. It does this in an innovative way by partnering with mall owners, who in turn offer Hemster services to tenants.

Partnering with mall owners has a number of advantages. Importantly, it allows Hemster to use the mall’s concierge team to help coordinate drop-offs and pickups. Here’s how it works.

Let’s say you’re shopping at Banana Republic or J. Crew. The dress or pants don’t fit as well as you’d like, but the store’s sales team says that’s not a problem – Hemster will alter it for you. Hmmm, you think… A custom fit from Banana Republic? That works for me. So you tell the salesperson, “Sure, let’s custom-fit this.”

The store’s sales team will then take your measurements and input them into the computer system. After you pay for the clothes, most stores will drop them off with mall concierge (a few make you bring them to the concierge). The average tailoring order is $25 at retail locations.

A Hemster contractor then picks up the clothes from the concierge, sorts them and delivers them to a tailor partner who specializes in altering that specific type of garment.

The tailor then alters them and returns them to the concierge for you to pick up a few days later.

A Hemster contractor picks up roughly 100 garments from each location three times a week.Hemster pays a small monthly rental fee to the mall (about $500) for space to store the garments.

Mall owners see Hemster as a perk they can offer tenants, and the stores that use it have seen a noticeable increase in sales as a result.

One of Hemster’s main customers, Michael Kors, reported a 28% boost in sales as a result of the partnership. Hemster says the average increase in sales for a store that offers its services is around 15%.

Customers who use Hemster are also more likely to be highly satisfied with their purchase, as it fits perfectly and looks great. It’s a win-win for Hemster and its retailer partners.

Hemster handles the marketing and logistics, and its tailor partners get a major new source of business.

Hemster pockets a healthy percentage of the tailoring charge.

Hemster has developed an innovative “RulerSticker” to make taking measurements easy. No chalk or special training is required.

Traction

Hemster has shown strong revenue growth for such a young startup.

Here’s the recent trend in revenue growth:

June: $15,000

July: $25,000

August: $28,000.

This is a remarkable growth trajectory, and Hemster has raised very little money to date. With the cash it just raised ($250K), plus the amount it raises in this round on Republic, I expect it to expand aggressively.

Hemster is currently live in six malls in San Francisco and Los Angeles and has around 4,000 customers. Thirty stores are using Hemster. And that’s across more than 10 brands.

This is extremely encouraging, as Allison reports once one store has Hemster, others in the area quickly want it as well. Word is spreading organically about Hemster, and it fields a large number of incoming calls and emails along the lines of “When will you be at my mall?”

To accommodate this demand, Allison and the Hemster team have aggressive expansion plans.

They plan to launch in the following areas this year:

• Washington, D.C.
• Chicago
• Houston
• Dallas
• Miami
• Ft. Lauderdale.

The model is working, and Hemster has shown strong growth, increasing sales 250% quarter over quarter since it launched in 2017. Current customers include…

• Zara
• Michael Kors
• Club Monaco
• Outdoor Voices
• Reformation
• Bonobos
• J. Crew
• Banana Republic.

Customer loyalty and return business numbers look extremely strong so far. Roughly 50% of customers use Hemster on a quarterly basis. This is a fantastic signal that the model is working.

Hemster is currently employing four full-time employees and 13 contractors. It is keeping its “burn rate” (cash expenditure) relatively low at around $60,000 per month.

Future Possibilities

Hemster’s business model is extremely attractive as it is being built out right now. But I’m also excited about the various possibilities down the road.

For example, the data Hemster is collecting is highly valuable. The combination of data on what customers are buying and their measurements is extremely valuable to both Hemster and its retail partners.

Eventually Hemster could partner with retailers to sell tailored clothing directly to consumers. Or it could even do it on its own.

With startups, I always look for businesses with the potential to expand in multiple directions. It helps to be flexible at this early stage, and I believe Hemster has a very good handle on this aspect of its business. It’s making adjustments to the model as needed and executing at a high level.

I’m extremely bullish on Hemster. I believe this one has the potential to produce extremely high returns. With a minimum investment of $100, it’s a no-brainer and offers an excellent risk/reward.If you want to learn more, I recommend visiting Hemster.co, the company’s official site.

How to Invest

Hemster is currently raising money on Republic.co. If you don’t have a Republic account yet, you’ll need to sign up for one at https://republic.co/register.

You can choose to register using your Facebook account, Twitter account or email address. I recommend creating an account on Republic, but it’s up to you.

Once you’re signed up and logged in on Republic.co, go to the Hemster deal page here: https://republic.co/hemster.

Click on the blue “Invest in Hemster” button in the upper-right-hand corner of the page. Select the amount you want to invest, then pay using a credit card or your bank account. Republic’s site will walk you through all the required steps.

Risks

Like all startup investments, this one carries significant risk. The investment you are making is not liquid (meaning you cannot sell it easily). The idea with startup investments is to buy and hold until the company either is acquired or has an IPO. You may get an opportunity to sell earlier, but I do not recommend doing so.

Never invest money you can’t afford to lose.

We recommend building a portfolio of 10 to 20-plus startup investments in order to have a chance at hitting a home run. ■

TIME TO SELF-REGULATE

A Call for Action

The Single Most Important Move the Crypto Community Must Make… NOW

By Andy Gordon, Co-Founder, First Stage Investor

It happened again today (as I write). Another big cryptocurrency exchange got hacked. Zaif, a licensed exchange from Japan, lost about $60 million.

Disappointing news. But surprising? Nope. Hacks happen… less often than they did, say, a couple of years ago. But too often nonetheless.

Many exchanges are upgrading security protocols. But it’s tough for the white hats to stay ahead of the black hats.

While hacks make headlines, that’s not the most critical issue facing exchanges.

Price manipulation is not only more frequent but also more insidious.

At least with hacks, you know when they happen. Prices, on the other hand, can be manipulated without detection.

When prices surge or plunge, is it the invisible hand of the market or is it a malicious band of traders manipulating prices for their own personal gain?

Even after the fact, it’s hard to know.

A University of Texas study said tether was used in 2017 to manipulate the price of bitcoin. But another more recent study from Australia’s University of Queensland said tether’s impact was “statistically insignificant.”

It’s hard to pinpoint when prices are manipulated and to what extent. But few crypto insiders deny it happens. It’s an open secret that exchanges are targeted by unscrupulous players who are able to manipulate prices individually or in groups.

They’re almost never caught. That’s a problem.

Every single time the SEC rejects an ETF proposal, it cites price manipulation as one of the reasons it did so.

A report just released by the New York attorney general’s office criticized exchanges for “not yet implementing serious market surveillance capacities (akin to traditional trading venues) to detect and publish suspicious trading activity.”

And let’s not forget these are not victimless crimes. If millions of dollars are being pocketed from manipulating crypto prices, then there are people (on the other side of the trade) who are losing millions because they’re not cheating.

The solution? Well, it’s obvious. Regulations. Fair, transparent and enforceable regulations.

Why I Don’t Trust Government Regulations

Can the government get it right? Probably not.

The government almost never gets it right. If it did, I’d be a billionaire. That may be a slight exaggeration, but not much of one. Uncle Sam has stood in my way a few too many times.

The Foreign Corrupt Practices Act is a real bugaboo of mine. It was passed in 1977, the year I got my masters from the London School of Economics and started my business career. Great timing, huh?

The law prohibits payments to foreign government officials. On the surface, that’s a commendable thing to do. But in reality, it hurts U.S. businessmen. Countless deals were never consummated because American businesses were held to higher standards than their competitors.

As head of an international trade and finance firm headquartered in Indonesia, I hated it. My business rivals from Germany, Japan and other countries parked BMWs in Indonesian officials’ driveways. Me? I took them out to dinner. Guess who won those contracts?

Another pet peeve was the rules that governed use of Export-Import Bank (EXIM) financing. The most attractive financing option for overseas projects was “concessionary financing.” It provided below-market rates, which I really needed to compete in Southeast Asia. That’s because my peers from South Korea and Japan routinely offered below-market lending terms from their local banks to companies in Indonesia, Malaysia and elsewhere.

But there was – ahem – a slight problem with accessing these highly sought-after terms for my customers.

EXIM required me to document the concessionary financing offers made by my rivals for projects I was bidding on. Otherwise, EXIM wouldn’t help me.

I actually did that one time. But it involved bribing a local government official for a copy of the contract proposal, including financial terms.

Oops, broke another rule.

The other 50 times or so, I broke no rules. Consequently, getting those documents proved impossible.

Regulations and I aren’t best friends. But here’s the thing…

Many in the crypto community are more dismissive of regulations than I am. Their response to the New York attorney general’s report on crypto market manipulation was pretty predictable.

Here’s one of the nicer comments (courtesy of ShapeShift CEO Erik Voorhees)…

New York is going to lose its position at the head of global finance if it doesn’t change soon. Keep up the good work.

Not much sympathy there. And it’s not surprising. Crypto’s first coin, bitcoin, was created amid a deep distrust of governments.

This distrust colors the crypto community’s views on government regulations. Sure, there’s good reason for it. But hey, guys, it’s time to move on.

I’ve said it numerous times and I’m saying it again: The industry needs rules. It’s the only way crypto can proceed and fulfill its vast potential.

At the same time, handing over crypto’s future to the SEC and whatever regulatory regime it imposes on the industry makes me nervous as hell. Fortunately, there’s another way to rein in the bad actors and make the exchanges more responsible.

Another Path Forward

Usually this discussion is framed as a choice between government regulations and no regulations.

But there’s a third path: self-regulation. Crypto players abiding by rules of their own making. The government remaining on the outside, observing (as an interested party) but not interfering unless asked to by the crypto community itself.

These rules would be more aligned with the sensibilities of the crypto community. And they would be managed by the very people developing the technology and use cases… the ones who “get” crypto… and understand what the industry needs to succeed.

Another big plus is that these crypto innovators, developers and entrepreneurs have “skin in the game.” They would be incentivized to make a self-imposed regulatory scheme work.

There’s precedent for this type of thing. FINRA is a self-governing body that oversees stock-exchange-related investing activities. It has its share of critics. But it gets the job done.

In September, the Gemini exchange proposed a self-regulating body modeled after the National Futures Association, a self-regulating body that oversees the derivatives industry (which is under the Commodity Futures Trading Commission’s jurisdiction) and that cooperates with the CFTC.

Named the Virtual Commodity Association (VCA), this new body would seek to promote “price discovery, efficiency and transparency” while providing incentives for “the detection and deterrence of manipulative and fraudulent acts and practices.” It would interact with and inform regulators, as well as conduct “periodic examinations of members.” It would also impose “agreed-upon sanctions” on non-complying members.

Bitstamp, Bittrex and bitFlyer USA have joined Gemini in putting forth this proposal. But Coinbase, the biggest U.S. crypto exchange, hasn’t agreed to join VCA yet.

Gemini is owned by the Winklevoss twins, whose ETF proposal was rejected by the SEC because of price manipulation concerns, among other issues.

Who knows when the U.S. government will get its act together and create a crypto regulatory framework! The crypto community can’t afford to wait any longer… especially for a set of regulations that might turn out to be more of a hindrance than a help.

Instead, it should take its destiny into its own hands. It won’t be easy. Self-regulation requires a fine balance of incentives and penalties to get it right.

It’s a tall order, but if done right, it could accelerate crypto’s entry into the mainstream investment space by years. Now’s the time. How about it, guys? ■

spotting crypto scams

How to Spot and Avoid Cryptocurrency Scams

By Adam Sharp, Co-Founder, First Stage Investor

Cryptocurrency is the most disruptive technology to come along in my lifetime.

It has the potential to transform the financial world in much the same way the internet transformed information. Unfortunately, with any technology growing as quickly as crypto, there will be bad actors.

Here we show you the various types of scams out there and how to avoid them.

Let’s get started.

Pump and Dump Scams

Pump and dump scams are common in crypto. In this scam, an individual or group acquires a large stake in a coin, “pumps” up the price and then “dumps” their coins on new investors.

Typically these groups will target small coins with a low trading volume because it’s easier to manipulate the price.

Pumping the price up is accomplished in multiple ways. Often it’s as simple as hiring a group of people to post positive comments all over the internet. Common spots where you might see this type of manipulative content include Reddit, Twitter and chat rooms.

Avoiding these scams is relatively simple. Ignore most comments promoting specific cryptos on the web. And be especially suspicious of commenters promoting very small coins.

If you see someone recommending a coin that looks interesting, check the user’s posting history. Are they a real crypto investor or a pumper? Have they made good calls before?

Also beware that pump and dump groups have become smarter over time. I’ve seen recent posts that mix in reputable coins with tiny, low-quality ones. So never base your decision on the fact that users are highlighting good coins along with smaller, questionable coins.

Exit Scams

An exit scam refers to any cryptocurrency project that fraudulently raises money from investors, then exits without delivering a product or even giving an explanation. It’s the crypto equivalent of “ghosting.”

Exit scams were more common during the height of the ICO craze. But there are still plenty of low-quality projects out there that may eventually earn this dubious distinction. It’s been reported that around $100 million has already been lost in exit scams in the crypto world, so this is certainly something to keep an eye out for.

Here’s how to avoid these.

First, you need to take a serious look at the team behind the coin/token. Does the project prominently list team members on its site? Are their LinkedIn and other social media profiles legit? Do they have recommendations from colleagues? Relevant work experience? Do the team members list the crypto project as their primary occupation?

You’d be surprised how many projects I’ve screened that didn’t fit this criteria. Projects that don’t pass this test should be dismissed instantly.

The easiest way to avoid exit scams is to only invest in projects with real working products. Almost every exit scam has had nothing more than a white paper explaining the project and a simple website. None of them actually built anything.

Moral of the story: Don’t invest in projects that are all promise and no product. Every crypto project raising money from the public should at least have a test version of its software up and running. However, many don’t and never will.

The best projects start building because the team is passionate about its product. Then it raises money further down the road. So if a project says it needs to raise money before it starts building, my advice is to stay far, far away.

Phishing Scams

I would guess that phishing scams are the most common way people lose crypto. These attacks are also used extensively to hack bank and email accounts, as well as identities.

These attacks have become extremely sophisticated in recent years, so knowing how to spot a phishing attack could save you a lot of time, money and frustration.

The most common type is the “deceptive phishing attack.” These occur when someone impersonates a legitimate organization in an attempt to acquire your login information.

So a scammer might send you an email that looks like it’s from Coinbase. The subject line might be something like “Security Alert.” Inside, it tells you that you need to change your password immediately and gives you a link to click on.

If the email is a phishing attack, the link won’t lead you to Coinbase.com. It’ll lead you to a site that looks like Coinbase and then ask you to log in. Once you do, the hackers have your login and password information. They can use it to log in to the real site and possibly steal your coins.

Moral of the story: If you get an email from an exchange or other company with which you have an account, don’t click on links in the email. Go directly to the site itself (making sure you type in the address correctly).

Once you’re at the site, before you log in, check the address bar to make sure that you’re at the correct site and that it is a secure connection. You can tell if the site is using a secure connection by reading the full address in your browser.

• https://www.example.com – secure site (note the https://)
• http://www.example.com – unsecured site

Fortunately, exchanges and other crypto sites have fixed most of these login theft issues by requiring users to use two-factor authentication.

But hackers have adapted as well. Phishing attacks can now infect your computer with malicious software. So you have to be extremely careful about the links you click on today. When in doubt, go directly to the site rather than clicking on a link in an email.

Attachments can also infect your machine, so never open attachments unless you know exactly what they are and who they came from. If you’re unsure about something, don’t open it. And check with the sender by phone or email to make sure it’s legit.

Remember to always use strong password security. Choose long, random passwords, write them down and store them in multiple safe locations. Use unique passwords for each of your accounts (email, bank, exchange, etc).

In our increasingly digital age, security is more important than ever. These precautions and steps don’t take long to do, but they could save you from a serious headache in the future. ■

dumb and dumber

A Sign of the Apocalypse

Cramer and Dr. Doom Perform Mindless Meld

By Andy Gordon, Co-Founder, First Stage Investor

I consider Cramer a top-five contrarian indicator. There are few analysts who are as reliably wrong as he is. I wouldn’t be surprised if this one ends up being ranked with his call to get out of Hewlett-Packard in 2012. Within six months, HP had doubled in price.

Roubini is no Cramer. He’s actually one of the better economists around and an expert on debt issues and policy questions. I read his blog religiously back in the day. And this is classic Roubini – skeptical and sharply critical of those guilty of putting other people’s hard-earned money at risk (like big banks). If only he had a point.

I’m not going to argue that there isn’t price manipulation. There’s a lot of that, especially with the smaller coins that have little liquidity. It doesn’t take much money to move prices around. The solution? Increase liquidity across the board. The best way to do that? Approve ETFs. The problem with approving ETFs? A lack of liquidity that has given rise to price manipulation. Round and round he goes. Roubini is stuck inside a circular argument, ultimately arguing against himself.

Chapman’s specialization at the Bank of Canada is fintech, cryptocurrencies and blockchain technology. When hardcore crypto believers make this kind of statement, it’s kind of ho-hum. But Chapman is a card-carrying member of the central bank bureaucracy.

The U.S. State Department has a phrase for this: “going native.” It happens when an American diplomat remains in one place for too long and begins identifying more with the interests of the country he’s posted to than with U.S. interests. Chapman’s statement makes perfect sense, though I’m a little surprised he’s given public voice to it. Maybe he’s gone native. ■

this month in fintech

Australia, IBM Using Blockchain to Solve Big Problems

Andy Gordon begins his monthly fintech tour in Australia. Then he lets IBM’s blockchain initiatives take him down memory lane… and back to the future.

Fixing Australia’s $23 Billion Problem

Australia’s equity clearing and settlement costs total around AU$100 million a year, according to the Australian Securities Exchange (ASX).

It’s a big number. But try wrapping your arms around AU$23 billion! That’s the cost when including communications and other related issues, according to a presentation ASX made recently.

ASX wants to use distributed ledger technology (most DLT is blockchain-based, but not all) to whittle down those costs.

Instead of reconciling records in multiple databases, participants will run nodes. They’ll be able to connect to the whole (single) database instead. It’ll be far more efficient, ASX says.

The exchange is looking to roll the system out by the end of 2020.

“Signed, Sealed and Delivered”

The saying has its origins in the world of commerce. A signature gives a mutual commitment of delivery/payment the force of law. Originally, the contract (or the envelope it was delivered in) displayed the unique red seal (originally applied with hot wax but later done with red ink) of the signatory.

When I was doing business in Asia, I had one for my company. But there’s a more recent reason why I’m familiar with the phrase. It reminds me of a song (“Signed, Sealed, Delivered I’m Yours”) by one of my all-time favorite musicians, Stevie Wonder. I chose another song of his, “Isn’t She Lovely,” for the father-daughter dance at my daughter Rachie’s wedding last year. (See photo.)

These days, companies want to track what they’re buying or selling every step of the way. That’s where a new blockchain supply platform called TradeLens comes in.

Developed jointly by IBM and Maersk, it has signed up 94 firms, including shippers, logistics companies, port operators and others.

It does three things:

• It accesses the blockchain itself, which tracks goods from factory to delivery.
• It provides APIs (application programming interfaces) to build new applications on top of the platform.
• It includes a set of standards to facilitate data sharing and workflow.

Historically, data has been trapped in the silos of various participants in the supply chain and consequently very hard to share.

This data is safer, with built-in digital encryption, and participants can now check any aspect of the flow in real time.

It’s also more efficient. Customs, for example, can track the entire process from start to finish by clicking on a block in the blockchain instead of requesting data from each entity manually.

It should also reduce fraud by bringing more eyeballs into the process.

[Geek Note: TradeLens is built on the IBM Blockchain platform, which uses the open source relative of Linux, Hyperledger Fabric.] TradeLens has already completed its pilot stage. It’s now available through an early adopter program and is expected to be commercially ready by the end of this year.

In a closely related initiative (which I mentioned in the last issue), Citigroup, along with Commerzbank, is combining blockchain technology with artificial intelligence and the Internet of Things to create a rival tracking system, one that will let participants make “real time” payments.

IBM Goes for Seconds

IBM has a second potential hit product out. This one, called IBM Blockchain World Wire, is based on the Stellar protocol and showcases blockchain’s many transformative advantages. World Wire makes instant cross-border money transfers a reality. It eliminates the middlemen – in this case, the multiple banks involved in a single payment transaction. It clears and settles cross-border payments in near real time. And it can integrate with any existing payment system. How it works is fascinating…

The two transacting parties have to agree on a digital asset that serves as a bridge between the two fiat currencies in a cross-border payment. It can be a central bank digital currency, a stablecoin or another cryptocoin of their choice. The banks use the World Wire API to convert their fiat currencies into the chosen digital asset. The platform then quickly converts the digital asset into the second fiat currency (for the receiver). It all happens almost instantaneously.

Interestingly, in a recent survey, IBM was found to be the most popular large tech company for blockchain solutions. Sixty-five percent of respondents named it as their “go to” choice. It has more than 1,500 employees working on this technology. ■

portfolio update