First Stage Investor: Issue No. 18

Going Where No Weather Service Has Gone Before
New Recommendation: Sickweather

By Andy Gordon, Co-Founder, First Stage Investor

Companies like Sickweather remind me how today’s technologies can transform our daily routines tomorrow.

I’ll admit it. I check my weather app every day. I don’t want to be caught off guard if nasty weather is heading my way.

But what about the approach of “sickness storms”?

It’s new, so perhaps you haven’t heard that you can use your smartphone to check what nasty illnesses are coming tomorrow… or as far out as 15 weeks from now.

Predictive Technology for All

That’s exactly what Sickweather can do. Its forecasts are more than 90% accurate, even making predictions 15 weeks in advance.

Your local weatherman is less accurate with 15-day forecasts!

Consumers are showing their appreciation. One example: Weather Channel users are accessing Sickweather’s own forecasts – part of Weather Channel’s Application Programming Interface (API) – to the tune of 100 million API requests… EVERY DAY!

Businesses can also benefit.

That became painfully clear over the Thanksgiving holiday. On Black Friday, several Wal-Mart stores were undermanned. Was it poor planning?

Nope. It was because an unexpectedly high number of employees called in sick.

Sickweather’s technology would have given Wal-Mart plenty of advance warning to adjust manpower, says Graham Dodge, co-founder and CEO of Sickweather.

Fact is, up until now, consumer health companies didn’t have an accurate way to track and leverage product demand. In this day and age, not knowing who needs what when is (to be blunt) ridiculous.

With the availability of advanced machine learning and big data technology, such a state of affairs is ripe for disruption.

Sickweather is fulfilling a big need here.

Businesses are finally waking up to the idea that they don’t have to fly blind.

Here are just a few ways that businesses, knowing in advance when and where people are getting sick, are using Sickweather’s enterprise tools to more effectively reach out to consumers:

• Ketchum, a global PR Firm, planned Clorox’s flu-related marketing campaign by anticipating flu breakouts 15 weeks before they occurred.
• Pfizer used Sickweather Pro’s 15-week flu forecast to estimate the volume of pneumococcal vaccine sales.
• Sickweather enlisted hard-to-find participants for Radiant Research’s clinical trials for a new cold/flu remedy.
• Sickweather is triggering IBM’s Watson Advertising to spearhead health campaigns for clients like GlaxoSmithKline and its Theraflu product. GSK reported a 4% increase in sales thanks to Sickweather’s contribution.

Other big corporate clients that are using or have used Sickweather’s technology include CVS, Walgreens, Sanofi Pasteur and OMD.

A Leap Ahead of the Competition

Of course, Sickweather has competitors.

IQVIA collects some of the same data from pharmacy sales records and medical records.

Importantly, though, IQVIA doesn’t get data from social media or its own network of consumers (as opposed to Sickweather, whose community numbers more than 200,000 people).

Sickweather’s signals are stronger and come much earlier, making its data more accurate, predictive and forward-looking.

Sickweather’s larger peers, such as WebMD, demonstrate how much revenue can be made from this business model.

IQVIA generates nearly $8 billion a year, and its market cap is $21.9 billion. WebMD was acquired for $2.8 billion by KKR & Co.

At the time, WebMD’s annual revenue was about $750 million.

Both companies generate between $200 million and $450 million per year from consumer healthcare data and advertising sales.

And the market for health data analytics is growing. The increase in spending shown below is driven mostly by those analytics.

The churn rate on Sickweather’s enterprise licensing is 0% right now.

Assuming a 12% churn rate going forward, the company projects revenues will increase to more than $1 million in 2018.

Future projections beyond a couple of years are a speculative exercise.

Sickweather says it has the potential to generate $80 million a year in revenue in five years. Can it really do that?

In 2017, big data vendors pocketed nearly $4 billion from hardware, software and professional services revenues in the healthcare and pharmaceutical industry.

By 2020, that number is expected to reach $5.8 billion. By 2022, it will surely exceed $6 billion.

Sickweather is aiming to scalp a mere 1.1% to 1.3% of the total market.

Is that doable? Absolutely.

Especially if Sickweather can jump into other applications as it’s planning to do.

On its radar: mosquitoes, ticks, lice, certain cancers, chronic pain and mobility.

Graham is facing an important inflection point. His pipeline is filling up fast. So keeping churn down (which he expects to do) and adding large clients is both doable and critical. As is aggressively adding to the company’s big data collection.

Graham, who has served on boards and technical work groups for the CDC, the National Voluntary Organizations Active in Disaster and the Kennedy Krieger Institute, is in the middle of forming a partnership with a large manufacturer of internet-enabled rapid immunoassay devices that test for several illnesses, including flu, strep, RSV and Lyme disease.

Sickweather will also soon announce partnerships with a telehealth company and a nonprofit flu advocacy organization.

You can see all the pieces falling into place… finally.

Pre-money valuation is set at an extremely reasonable $3.75 million. It’s been higher in the past.

But in going from an advertising to a licensing model, the company is only now reaching the point where it’s ready to fully monetize its technology.

In other words, you’re getting in at exactly the right time and at a discount from earlier-priced rounds.

Founded in 2011, Sickweather is backed by notable early-stage investors 500 Startups and Techstars. (Superstar angel investor Brad Feld is a co-founder.) You can invest as little as $500 or as much as you want.

How to Invest

Here’s how to invest. If you’re already registered with SeedInvest…

• Go directly to the Sickweather listing at https://earlyinvesting.com/sickweather
• Click on the blue box labeled “Invest.”
• You will then be asked a series of quick and easy questions to execute your investment.
• The first one is “How much do you wish to invest?” Sickweather has set the minimum investment at $500. You can invest more, but you can’t invest less.
• Follow the instructions, and choose your preferred payment method. Complete the process and, if you run into any problems, email SeedInvest at contactus@seedinvest.com.

If you’re not registered with SeedInvest…

• Go to www.seedinvest.com and click “Sign up.”
• Once registered, search for “Sickweather.”

Editor’s Note: If you’re new to First Stage Investor, or if you just need a refresher on how to invest in startups through portals like SeedInvest, check out our video tutorial “Investing in Startups Through Online Portals”. ■

taking profits with cryptos

When to Take Profits With Cryptocurrencies

By Adam Sharp, Co-Founder, First Stage Investor

Deciding when to take profits is one of the trickiest aspects of owning any cryptocurrency.

All of the holdings in the First Stage Investor cryptocurrency portfolio (bitcoin, Ethereum, Litecoin and New Economy Movement) are up significantly, so I wanted to take a moment to discuss this important topic.

As a reminder, I believe we’re at the very beginning of an era for bitcoin and other cryptocurrencies. To illustrate this, we have a chart showing the speed at which consumers adopt new technologies.

The tiny teal line in the bottom right corner of the chart is (roughly) where bitcoin and cryptocurrencies are in the consumer adoption cycle.

Clearly it’s still very early, with only a few million people holding significant cryptocurrency positions today.

If the adoption rate keeps accelerating, however, then we’re well on our way to cryptocurrency going “mainstream,” and the gains are just getting started.

Weighing Risk vs. Opportunity

I’m one of the biggest cryptocurrency bulls you’ll ever meet. But it’s important to acknowledge that there are still risks that could derail cryptocurrency’s rise.

The two risks I consider most significant are a negative government intervention and the hacking of a large exchange.

I don’t think either of these potential black swan events is likely to happen.

Cryptocurrency exchanges today are extremely secure, with more than 90% of coins kept offline in “cold storage” in geographically diverse locations.

In addition, governments have taken a mostly reasonable approach to cryptocurrency thus far.

Still, a completely unpredictable (or black swan) event is possible, and we need to consider this when making a decision on whether to take some profits.

In my view, the chance of a black swan event is small when weighed against the prospect of cryptocurrency truly going mainstream.

But ultimately, the answer to “Should I take some profits?” will depend on your personal situation.

If you’re sitting on large gains and any of these statements apply to you, it’s probably time to take some profits:

• You have high-interest debt and could pay it off.
• You need the money in the near term.
• You’re retiring soon and your nest egg is underfunded.
• Cryptocurrency has grown to make up more than 30% of your overall investment portfolio.

However, if the following statements apply to you, then I would keep holding:

• You have more than 10 years until retirement.
• You can wait until you’ve held at least one year, when gains will be taxed at the long-term rate.
• You don’t need the money anytime soon.
• You are comfortable holding long term.

Personally, I’m holding. The upside potential from here is still tremendously large.

Large financial institutions have only begun to dip their toes into the cryptocurrency space.

Exchange-traded funds are possible this year. And cryptocurrency’s viral organic growth cycle is stronger than ever.

Long-term holding is still by far the best way to make money in cryptocurrency.

And the future of cryptocurrency has never looked brighter.

With this article, my goal is simply to provide a framework for members to start thinking about whether and when to book some gains, in a broad sense.

I will be providing ongoing advice on individual coins, and if the fundamentals change in any of our holdings, I’ll always notify you immediately.

If you do decide to take some profits, my one piece of advice is this…

Leave some money on the table. There’s nothing worse than selling a coin entirely only to watch it rise another 10X, or even 100X. (I learned this one the hard way.)

I am considering taking some profits this year, only because cryptocurrency has become an oversized chunk of my portfolio.

Of course, I’ll let you know at least seven days beforehand if I do sell any of our recommendations.

Remember…

• There’s nothing wrong with taking some money off the table when you’re up big.
• If you do take profits, I recommend leaving the bulk invested for the long term.
• Cashing out 10% to 20% of your holdings after a run-up like this may be right for some members.

I remain extremely bullish and can’t wait to see what 2018 brings. ■

playbook

Equity Crowdfunding Playbook Part 12

How to Evaluate Revenue Sharing Deals

By Andy Gordon, Co-Founder, First Stage Investor

Editor’s Note: This is Part 12 of a 12-part series called the First Stage Investor Equity Crowdfunding Playbook. If you missed the previous installments, you can find them here:www.earlyinvesting.com/playbook/.

Revenue sharing arrangements are being crowdfunded in increasing numbers.

It’s a completely different kind of investment opportunity than your typical early-stage fundraising deal.

For one, you’re not getting equity. You’re making a loan. You get paid back with interest.

It’s the interest you make that’s so hard to resist.

Broadly, in terms of risk and reward, it’s more like a corporate bond.

The reward is the income stream from the interest.

The risk? For bonds, it’s that the company won’t have enough money to pay your bond interest.

For revenue sharing, it’s that the company won’t have enough revenue to share.

The ultimate risk – whether it be for stocks, bonds or revenue sharing deals – is the same: If the company goes under, you’re out of luck.

The Many Benefits of Revenue Sharing

Investing in the early stages of a company can be very financially rewarding.

Unfortunately, more often than not, you have to wait several years to cash out profits.

This won’t always be the case as secondary markets and exchanges for these shares develop. But it’s the case now.

With revenue sharing, there’s no waiting. Once the raise is over, the sharing part begins.

Payments are made quarterly. You pocket your first cash delivery within three months (at most).

The other big advantage?

It’s the interest you make.

Investment-grade corporate bonds typically earn between 3% and 5%. U.S. government bond rates?

The going rate for a three-month bond these days is 1.26%. For a 30-year bond, it’s 2.76%.

You can do much better with revenue sharing.

Achieving an annual rate in the 5% to 10% range is doable and much better than the 1% to 5% that blue chip dividend companies provide.

Sometimes you can make much more than that.

Revenue sharing deals offer other benefits too.

Their risks are lower than corporate bonds because of the way companies structure their revenue sharing deals.

The first thing taken out of the company’s revenue is what it owes you. Even before its tax payment. Even if it doesn’t have enough money to pay all its bills…

YOU GET PAID. (Corporate bond issuers get away with a much looser arrangement.)

In fact, a company can be mired in red ink and drowning in costs, but as long as it’s pulling in revenue, YOU GET PAID.

As an equity crowdfunder, you’re taking a significant risk as to whether the company you’re backing makes it to the next round of fundraising.

That’s much less of a concern here.

With payment based on revenues, investors need only look at current and projected revenue. It’s very simple.

Okay, there is a possible worst-case scenario.

If you expect to get fully paid over, say, three years, and the company tries and fails to raise funds after two years and goes under, you also suffer the consequences.

So what are revenue sharing deals?

Some are project-based. A company is set up to do a specific project, be that a movie or theater production or something else.

Others have “use of funds” that’s similar to equity crowdfunding and focused on expansion.

The project-based deals tend to be “uncapped.”

Your interest income keeps coming as long as the project generates revenue.

Revenue sharing can also be “capped.”

When you get back your loan plus whatever amount was promised above that, the deal is done.

So here are the five things you need to know in order to evaluate revenue sharing deals:

1. Capped deals tend to be safer. Uncapped deals for projects, even those headed by people “who have done it before,” have an unknown quality to them.Uncapped deals are difficult to assess, in my experience. On the other hand, capped deals have lower upside than uncapped ones.In essence, you’re trading upside for more certainty, something I have no problem doing.
2. You invest with two X factors: future revenue and amount of money raised.A company’s projected revenue should be less of a guessing game than the amount of money it ends up raising.Here’s how the math works: The greater the revenue and the quicker investors are paid, the higher their annual interest rate will be.

   So you really need to do your homework here and not underestimate future revenue.

   The more money that’s raised, the slower investors are paid. Why?

   For example, a company (whatever its revenue) would take twice as many years to pay back $1 million raised as it would $500,000 raised.

   The more years it takes for you to get paid, the lower your annual interest rate.

   The fewer years it takes to get paid, the higher your annual interest rate.

   Here’s an extreme case: You’re the only person who invests, and you’re promised you’ll get your money back plus 50%.

   The company thought hundreds of people would invest and it would take years to pay them back… at something like a 5% annual interest rate.

   But because it’s just you getting paid, you get all your money in the first year at an effective 50% interest rate.

   You win and the company loses (big time). But, if this were a real example, wouldn’t you want the company to do a successful raise?

3. Risk varies greatly from deal to deal.You should have enough details to assess risk and come to an informed decision.Remember what I said: Assessing risk is all about future revenue.

   You’re not looking for unicorns. You’re not looking for companies with massive markets or game-changing products.

   You’re not even looking for profitable companies.

   The bar is lower.

   And the risk assessment is more focused and therefore much easier than assessing early-stage companies raising equity rounds.

4. There are deals where risk is minimal and realistic annual returns invade double-digit territory.How do I know? I put one of these deals – Napa Valley Distillery (NVD) – into our startup portfolio.In one scenario, I projected revenue to be $3.5 million with its raise reaching the maximum target of $1 million.

   Investors’ annual compound interest rate would be 10%.

   In another scenario, I projected a lower revenue rate ($3 million) with a much lower raise ($600,000).

   Investors’ annual compound interest rate would be 15%.

   In both scenarios, because NVD had stable and growing revenue, I considered the risk to be extremely low.

   (By the way, NVD is raising again for a reasonable $1.15 per share. The minimum investment is $5,000, and it’s open to accredited investors only. Visit MicroVentures.com for more details.)

5. As these kinds of deals increase in number, you will be able to choose the risk and reward profile that suits you best.I strongly suggest you try to identify the anomaly. The riskier the deal, the higher the promised return should be.So look for not-so-risky deals with generous revenue sharing terms (like the NVD deal).

Remember, the two main risks – that the company would go out of business or its revenues would collapse – are very unlikely.

But there is some risk.

You should not put these deals in the same bucket as your U.S. government bonds.

These are definitely a lot riskier.

But the better ones provide outstanding financial rewards for the risk assumed – making it well worth putting them into your startup portfolio. ■

crypto portfolio update

Cryptocurrency Portfolio Checkup

By Adam Sharp, Co-Founder, First Stage Investor

Here is a detailed overview of the First Stage Investor cryptocurrency portfolio. To view our cryptocurrency holdings, visit www.earlyinvesting.com/fsi-cryptocurrencies/.

Bitcoin (BTC)

It’s been a dramatic and exciting time for bitcoin holders.

Millions of new cryptocurrency owners are rushing into the market, and most are still buying their first bitcoin investments.

However, the bitcoin network is struggling with high transaction volume, delayed sends and high fees. It also appears someone is maliciously spamming the blockchain to slow things down. This is to be expected.

Fixes to delays and slowdowns are in the works, including the optional software upgrade called “Segwit” (which still hasn’t been implemented by most exchanges, probably because it will lower fees and make transactions more efficient). “Schnorr signatures,” which should be implemented sometime in 2018, will also help dramatically.

The Lightning Network, which will allow users to move transactions off the main blockchain, also has the potential to vastly improve bitcoin’s scaling issues.

I may have been premature in saying that Bitcoin Cash (BCH) is no longer a threat. However, I am not recommending that members buy back into Bcash.

As of this writing, the vast majority of Coinbase users have still not had a chance to sell their Bcash. We don’t know what will happen to the price when they do.

Nobody knows exactly how the battle between Bcash and bitcoin will play out. I, of course, am betting that the original bitcoin will come out on top. It’s the clear favorite.

Certain parties, including some of the largest miners, are pushing very hard for Bcash to succeed, however. So we will continue to watch the situation and notify you if action is advised.

Overall, I remain extremely bullish on bitcoin going into 2018. It is likely to be the first coin large institutions flock to and will almost certainly have the first ETF. Those alone are more than enough reason to “hodl” bitcoin. (In the cryptocurrency community, people often say they are “hodling” – holding on for dear life – instead of holding.)

But there’s also the fact that bitcoin has an unrivaled security track record, the largest network of users, the best brand and the most liquidity.

Litecoin (LTC)

Litecoin has been on fire this year. The appeal of this coin is becoming obvious to the masses. It’s a lot like bitcoin, but faster, more decentralized and cheaper to transact in.

I’ve known about this little gem since 2013, so it was a little surreal hearing CNBC hosts gush over Litecoin at the end of 2017.

The big recent news is that Litecoin founder Charlie Lee announced he has sold all of his Litecoin. However, this is NOT a bad thing. Charlie has an influential public persona in the cryptocurrency world. So he feels it’s very important that when he promotes Litecoin, it doesn’t appear that he’s doing so for personal reasons. He remains Litecoin’s No. 1 evangelist and can now freely promote it without people questioning his motives.

I think it’s a smart move, and it does not diminish my bullish view on Litecoin in the least.

Litecoin is now doing more trade volume than bitcoin was a year ago. Merchants are expressing interest in using it as a payment mechanism. And the coin’s excellent community is growing extremely fast.

The Litecoin Foundation is getting serious about business development and is working with a number of potential partners. Its goals are to broaden the appeal of Litecoin and encourage its use as a currency.

Following Charlie’s announcement that he sold his Litecoin, he posted an exciting teaser for the Litecoin community on Twitter.

“One huge unexpected surprise.” That’s the line I’m most excited about here.

Charlie is the real deal and wouldn’t post this type of hint without something major in the pipeline.

As bitcoin continues to improve its transaction times and high fees, my outlook for Litecoin remains bright.

Ethereum (ETH)

Ethereum is performing well as it prepares for a proposed upgrade called Casper, a major overhaul of how the network operates.

If it’s successful, Casper will change Ethereum from a “proof of work” consensus system (similar to bitcoin) to what’s called a “proof of stake” system.

When the upgrade is complete, Ethereum will no longer be “mined” by dedicated computers with powerful graphics cards. It will be “staked” in “nodes” run by holders of Ethereum. The details are complex, but here’s what you need to know about Casper:

• It’s far more energy-efficient.
• It will require a certain number of coins to operate a “node.” (I’ve heard 100 or 1,000, but it’s not set yet.)
• It may be possible to pool smaller amounts of Ethereum to stake a node. We don’t know exactly how that will work yet.
• It will reward holders who “stake” coins with transaction fee revenue in the form of more Ethereum (like cryptocurrency “dividends”).

Ethereum remains the top platform for distributed applications and the No. 1 platform used in ICOs.

It’s still very early in this project’s journey, but we are beginning to see its tremendous potential.

New Economy Movement (XEM)

New Economy Movement has come to life and recently hit an all-time high of just over $1.

Most of the buying action seems to be going on in Korea and Japan, where the public is going absolutely crazy for cryptocurrency.

Here are some recent NEM highlights:

• It was added to the Trezor hardware wallet as a supported coin.
• Its development team is making progress on major overhaul “Catapult.”
• The NEM foundation has announced a “hackathon” with $30,000 in prizes for building apps on NEM.
• NEM has launched a wallet app on the popular Asian messaging platform WeChat.

NEM developers continue to improve many aspects of the platform while working on Catapult, which will be a big upgrade to NEM’s infrastructure.

No Changes to Portfolio

For now, I’m not recommending any changes to our cryptocurrency portfolio. I feel good about the coins we’re in. And as I often say, the key to making money in cryptocurrency is simple: Hold.

I’m researching new opportunities constantly and will notify you as soon as we have a new recommendation. ■