Invest in a Sweetly Scalable Franchise Set for Explosive Growth

By Andy Gordon, Co-Founder, First Stage Investor

Early investors love sectors with explosive growth. And the healthy fast-food franchise space certainly qualifies.

Smoothie King now has more than 900 locations around the world. Tropical Smoothie Cafe (known for its fresh ingredients) opened 59 restaurants last year and has about 775 locations nationwide.

Extreme Pita (which pairs traditional pita bread with fresh, healthy ingredients) has more than 175 stores across Canada and the U.S.

Playa Bowls boasts more than 65 stores nationwide. It serves dishes featuring acai (pronounced ah-sah-EE) berries, which not only taste great but also are incredibly good for you.

Acai berries are rich in vitamin A, calcium, zinc and manganese. They also contain anthocyanins, which give the berries antioxidant properties. Anthocyanins are known to decrease levels of bad cholesterol.

Playa Bowls started out as a makeshift pop-up stand on Ocean Avenue in Belmar, New Jersey. Desi Saran, who played a big role in driving the popularity of Playa Bowls, has now started his very own acai-based food franchise called Sweetberry.

It offers meals like acai bowls, salads, smoothies, wraps and poke bowls at prices that undercut the competition. In a little more than a year, it has opened 19 locations across New Jersey, Florida, Illinois, South Carolina, North Carolina and Virginia.

You can find some of the best startup opportunities in the fast-growing food franchise industry.

But because it’s such a competitive space, leadership and execution are critically important.

This is where Sweetberry really shines.

Its early traction and execution have been outstanding. That gives investors as well as potential franchisees (independent store operators) ample reason to believe Sweetberry is headed for bigger things.

And, now, what you’ve all been waiting for… how Sweetberry ranks in our proprietary startup assessment model, which weeds out the great opportunities from those we should pass on: the four M’s (Market, Metrics, Monetization and Management).

A proven MARKET that keeps on growing: Acai dishes are more popular than ever. Playa Bowls and Juice It Up were among the first franchises to bring acai bowls to the U.S. They proved that demand is real, is growing and can support franchises with big expansion plans.

The health food industry is just ramping up. Global health food sales reached $1 trillion in 2017, according to Forbes. And 88% of Americans say they would pay more for healthy food. In 2017, Forbes ranked acai the fifth most popular food trend. Demand for acai bowls has only grown since then.

So the acai market is not old. But it’s not new anymore either. It’s already showing saturation signs in a few places (like New Jersey).

Sweetberry plans to stay away from major cities where saturation is an issue and give preference to smaller cities, towns and suburbs where there’s less competition. It’s also targeting areas with large numbers of millennials.

The two most important METRICS to consider are the profitability of individual stores and Sweetberry’s overall expansion rate. The more profitable the stores, the better the company can sustain growth and increase the overall number of stores.

In the franchise business, profitability is usually measured by EBITDA, or earnings before interest, taxes, depreciation and amortization.

(Geek note: Why EBITDA instead of operating profits? Because EBITDA is considered a more useful way of evaluating the actual earning power of a restaurant’s operation. It’s also viewed as a better way to compare the businesses of multiple restaurants that often carry different debt levels or depreciation values. To calculate EBITDA, restaurant owners subtract their fixed costs from their gross profits, while ignoring noncash expenses such as depreciation and interest payments. Operating profit, on the other hand, is calculated by subtracting the cost of goods sold, plus cash and noncash expenses, from total sales.)

The food franchise industry standard for EBITDA margins (as a percentage of total sales) in the public sector is 12% to 13%. Sweetberry’s best store boasts an 18% to 20% EBITDA margin. (Note: Many of its stores are too new to measure EBITDA.) And only one of its stores has had to be closed down due to a lack of profitability.

The store that closed down was a corporate store, not a franchise. Sweetberry has 13 corporate stores and six franchises. In corporate stores, Sweetberry gets to keep all the revenue. But it has to assume all of the risk, putting up the capital to lease the store, build it out and operate it.

Sweetberry is switching to a primarily franchise model. That’s because it’s the only way to scale. In the franchise model, franchisees assume the risk and the cost of leasing the store, building it out, and operating it. That reduces the financial risk for Sweetberry. Additionally, franchisees pay Sweetberry a 6% royalty in order to use the Sweetberry menu, branding, recipes, etc.

Desi is gunning for margins that average between 15% and 20%. Keep in mind that in the first year of a store’s opening, margins tend to be low as stores work out the kinks and establish a reputation. The good news: He’ll be better able to address this issue with the money from Sweetberry’s current raise.

Desi aims to open 15 more stores (all franchises) in the next 12 months. That should easily raise the company’s overall revenue to well over $5 million, compared with this year’s projected $4.5 million in revenue and last year’s $3.2 million.

MONETIZATION and beyond: In the food franchise space, monetization involves offering snacks and meals that people will pay for. Sweetberry’s prices slightly undercut most other healthy food franchise offerings. And the food gets overwhelmingly good reviews…

• “They do not skimp on the fruit, and the taste was perfectly balanced. It is also extremely filling…”
• “THE BEET WRAP IS FIRE!!!!!! Deff come back for that.”
• “Great customer service as well. One person in our party of six ordered an oatmeal but because it would take an extra 15 minutes, they offered two coffees on the house! How lovely is that?!”

Sweetberry’s main concern is not making money but making a profit. Desi says the company will be profitable next year.

MANAGEMENT knows its stuff: When Playa Bowls bought Desi out, he made a great deal of money. He could have bought a mansion on a remote beach and retired. Instead, he took some of that money – nearly $800,000 – and invested it in Sweetberry.

Food franchises can be challenging to run. But Desi believed he had the requisite experience. He had learned the hard lessons and wanted to apply them to a new and better acai-based food franchise with higher upside potential.

When I talked to him, I was impressed with his ideas on branding, menus, pricing and how to find the best locations for his franchise stores. He knows his stuff. And he’s kept prices down. It costs only $150,000 to open a store. He favors smaller stores (1,200 square feet is ideal, he says) at cheaper rents serving underserved neighborhoods. He prefers smaller menus too. And he values well-known co-tenants like Starbucks that ramp up foot traffic.

If Future Upside Is What You’re Looking For…

Sweetberry’s potential upside is huge. Consider Chipotle Mexican Grill. Its customizable menu features naturally raised and organic products.

It has an EBITDA of $460 million. Using an industry standard 5X multiplier, its valuation comes to $2.3 billion.

Panera, which features organic and all-natural products, has a $423 million EBITDA. That translates to a $2.1 billion valuation. And Subway, whose healthy sandwiches never exceed 900 milligrams of sodium or 6 grams of fat, is worth more than $3.5 billion.

Sweetberry is taking its first steps on the journey to success. It’s still very early.

Desi is a talented and determined founder. He’s not putting any limits on how big Sweetberry can get.

As crowdfunders, we invest to hit it big. Sweetberry offers us that opportunity.

How to Invest

Sweetberry is raising up to $1.07 million on Republic. If you don’t already have a Republic account, you can sign up for one here.

Once you verify your account and are logged in to Republic, visit the Sweetberry deal page.

Then click the blue “Invest in Sweetberry” button. Enter the amount you want to invest, starting as low as $100, and proceed through the required steps. Be sure your investment is confirmed, then you’re good to go.

Risks

This opportunity, like all early-stage investments, is risky. Early-stage investments often fail. Sweetberry might need to raise another round
of funding in a year or two, if not sooner.

If it executes well, this shouldn’t be a problem. But that’s a risk worth considering when investing in early-stage companies. The investment you’re making is NOT liquid.

Expect to hold your position for five to 10 years. An earlier exit is always possible but should not be expected.

All that said, I believe Sweetberry offers an attractive risk-reward ratio. ■

BUY, BUY, BUY (Cannabis)

Get In Sync With Cannabis Stocks

By Vin Narayanan, Senior Managing Editor, First Stage Investor

Don’t really want to make it tough
I just want to tell you that I’ve had enough
It might sound crazy but it ain’t no lie
Baby bye bye bye buy buy buy

That’s right. It’s time to buy, buy, buy… cannabis stocks. In the coming days, we’re going to recommend five cannabis stocks for you to buy. We’ve been studying and researching the cannabis market for years. And we have five stocks that we really think are worth investing in. They’re strong companies poised for long-term success. At current prices, they’re absolute bargains. And they can handle the growing pains that come with regulatory uncertainty and a young industry. 

And there will be growing pains. Only 11 states and Washington, D.C., have legalized marijuana for recreational use. Medical marijuana is legal in 33 states (including the 11 states that legalized recreational cannabis). Despite all of that, the American marijuana industry is already worth $10.4 billion, according to New Frontier Data. 

Marijuana is still illegal at the federal level. That means the big institutional investors that typically bankroll startups are not allowed to invest in private marijuana companies. And because marijuana startups don’t have access to the capital they need to grow and scale, they go public early to raise money.

As a result, marijuana companies are a rare commodity – growth-stage companies trading on public stock markets.

So evaluating pot stocks is a lot like evaluating startups. You’re looking at companies that are focused on growing. They’re growing in immature markets. Things are not always going to go as planned. Consistent profitability is a future milestone.

Understanding this gives you an edge. Many investors have been fleeing pot stocks for the last 12 months because they don’t understand growth-stage companies. People who invest primarily in stocks like to see profits – not just the promise of profits.

But marijuana companies aren’t mature enough to consistently deliver profits. And the excitement over marijuana’s potential profits has evaporated. Pot stocks have been getting hammered for the last 12 months.

This chart provides a good look at just how far pot stocks have fallen. It’s the Marijuana Index. It’s like the Dow Jones Industrial Average but for North American cannabis stocks. And as you can see, last November was a high point for the sector. It’s been largely downhill since.

That makes now a great time to buy cannabis stocks. The excitement bubble has burst. And what’s left are the bargain-basement prices of some really good companies that are poised to dominate the cannabis space for years to come.

Just look at the prices of some of the better-known marijuana stocks in the chart below. (Note: These stocks are not necessarily in our upcoming cannabis portfolio. But they are illustrative of the types of bargains that are available right now.)

You succeed in the stock market by buying low and selling high. And right now, we’re on the low side. 

Don’t want to be a fool for you
Just another player in your game for two
You may hate me but it ain’t no lie
Baby bye bye bye buy buy buy

In 2018, Barclays estimated the size of the global marijuana market at about $150 billion. And it predicted the market will grow to $272 billion by 2028. Earlier this year, Barclays forecast that if the U.S. legalized cannabis at the federal level, the U.S. marijuana market would instantly be worth $28 million, growing to $41 billion by 2028.

Adding up everything the cannabis industry touches – from banking to farming to medicine – the marijuana industry could affect $2.6 trillion in goods and services globally.

Despite the recent swoon in marijuana stocks, no sensible investor would give up on a market of that size. The marijuana industry is going to be huge. And it’s going to be profitable. You want to get in on the ground floor. 

To be fair, this has been a tough year for marijuana companies. Canadian dispensaries, particularly in densely populated provinces like Ontario, have opened at a painfully slow rate. That’s been a major drag on sales.

It’s taking months for Canadian regulators to approve cultivation and processing licenses. So the Canadian supply chain is struggling to meet demand. Add high taxes to those problems, and it’s no wonder the Canadian black market is still thriving.

California is also struggling to approve marijuana-related licenses. That, combined with high taxes, is keeping the Golden State’s underground marijuana market in business. Also, New Jersey and New York didn’t legalize recreational marijuana as many were expecting. (But they probably will within the next year or so.)

Constellation Brands, which invested $4 billion in Canopy Growth Corporation last year, ousted Canopy’s CEO and co-founder, Bruce Linton, after a subpar earnings report this year. And CannTrust lost its license because it grew marijuana illegally!

So, yes, there have definitely been headwinds this year. But none of them change the fundamentals of the sector. Between medical marijuana, recreational marijuana, edibles and CBD, the global marijuana industry is going to be worth hundreds of billions – if not trillions – of dollars within a decade.

And we have some major catalysts coming up. Next year, sales of recreational marijuana in Illinois and Michigan will begin. Those are the sixth and 10th most populous states in the country.

This December, sales are expected to begin in Canada for “Cannabis 2.0” – the next wave of Canada’s adult-use recreational marijuana market that includes edibles, cannabis-laced drinks and more. And several states are considering legalizing marijuana through the legislature or ballot initiatives in 2020. Boom times are coming for cannabis. It will take a few years. But they’re coming. And now is the time to buy into the market.

We’ll soon be introducing a brand-new First Stage Investor cannabis portfolio to take advantage of this buying opportunity. And we’ll start with five top-notch cannabis stock recommendations. So stay tuned for details. 

It ain’t no lie
I want to see you out that door
Baby bye bye bye buy buy buy ■

Profit From Planting Trees

Hug a Tree, Save the World and Make Up to 30X

By Andy Gordon, Co-Founder, First Stage Investor

Editor’s Note: We first recommended our members invest in World Tree back in March because we were blown away by its profit potential. And apparently so were you. It quickly became one of our most popular recommendations ever. And why not? It’s a rare low-risk, high-reward investment. And a chance to help save the world one tree at a time. 

Now it’s a new planting season. And World Tree is accepting investments again. So we think you should reinvest (or get in for the first time if you missed out). We’ve updated a few details in the deal terms, but this is essentially the same investment opportunity we recommended earlier this year. And it’s a fantastic one. So don’t miss out!

Forget asteroids, nuclear war or a global pandemic. What’s going to destroy the Earth as we know it is climate change. If you think it’s not coming soon, you’re right. It’s already here. 

By 2040, the average temperature of the world will have risen 1.5 degrees since the late 1800s, according to the U.N. Intergovernmental Panel on Climate Change. Tens of millions of people (especially in small island countries) will be forced to confront serious flooding. Extreme heat will become more common for as much as 14% of the global population. This is in 20 years’ time!

What happens if temperatures increase by 2 degrees? Millions will lose their homes. But that’s nothing compared with a 4-degree increase… That would bring major flooding to coastal cities around the world, significantly increase water scarcity and malnutrition, and result in unprecedented heat waves, according to a World Bank report.

Governments are increasingly aware that they need to do something. And in their own messy and ineffectual way, they’re trying to get a grip on this massive problem. But if we’re counting on our governments to fix this problem, we’re in big trouble. Fortunately, dozens of startups are developing new technologies and business models to attack this monumental issue. 

These companies’ solutions range from simple to wildly ambitious. It doesn’t get more low-tech than painting streets white to reflect sunlight. The high-tech counterpart is sending sets of mirrors into orbit. These mirrors are decades away and, if ever implemented, would cost at least $1 trillion. 

Another high-tech idea is strategically spraying aerosols into the atmosphere. Volcanoes that spew large amounts of gases into the atmosphere do pretty much the same thing. But it will be years before the full benefits and risks of “aerosol injection” (aka solar dimming) are understood. Harvard’s initial test of injecting calcium carbonate particles into the stratosphere is years away.Fortunately, there is a solution that’s ready right now… that has a significant impact on carbon dioxide levels… and that does NOT require government help or participation. Best of all, it’s profitable.

World Tree to the Rescue

That solution comes from World Tree, which is planting trees all over North, Central and South America without any government backing. But the company isn’t planting just any tree. 

World Tree is planting only Empress Splendors. These are the world’s fastest-growing hardwood trees. An acre of Empress Splendors absorbs 103 tons of carbon dioxide a year (11 times more than any other tree). It can be used to make furniture, musical instruments, veneers, surfboards, sailboats and more. (Critically, it’s NOT used as fuel, which would spit the carbon dioxide right back into the atmosphere.)

Fast growth. Carbon-eating monster. A wide range of applications. All necessary ingredients for World Tree to include YOU as a financier in exchange for pocketing surprisingly large profits down the road.

World Tree wants to plant 3.5 million more Empress Splendors over the next five years. For that to happen, it needs farmers and money. So it came up with a profit-sharing scheme to attract both.

Investors can finance planting a full acre with a $2,500 check (which is also the minimum investment). As an investor, you get 25% of the profits. Farmers get 50%. And World Tree gets 25%.

Everybody makes out incredibly well. Here’s the math. One 10-year-old acre generates 24,750 board feet (a conservative estimate that assumes a 25% loss of trees planted). The revenue generated per board foot (after costs) ranges from $3 to $14. At $3 per board foot, that’s $74,250 in revenue. Your 25% share comes to $18,562. World Tree gets the same, per acre. And the farmers get double that amount. Using the lowest price the lumber could fetch, with a cautious 25% loss estimate, investors still make a 7.4X return.

I believe the 25% loss assumption is too high and the minimum $3 per board foot price is too low. Most farmers are currently reporting survival rates above 90%. And Australian company Paulownia Timber prices sawn board at $10.25 per board foot. For the same board that has been dried and planed, the price increases to $13.05.

If we choose NOT to be ultraconservative and put the loss of trees at a more realistic 10% and raise the price to $10 per board foot (best-case price is $14 for high-grade lumber), your 25% share comes to $74,250… on a $2,500 investment.

THAT’S A 30X GAIN. 

So for this investment, I consider $18,562 the minimum expected return and $74,250 the maximum. For more information, go to World Tree’s Wefunder page. It’s raising up to $10 million. You’ll need to sign up for an account there if you haven’t yet. Once you’re signed in to Wefunder, head over to the World Tree page. Then enter the amount you want to invest and click the green “Invest” button on the right side of the screen. The minimum investment is $2,500.

Risks

All early-stage investments are risky. While this one has substantial traction and a very reasonable valuation, you can still lose your investment. As always, don’t invest money you can’t afford to lose. You should expect to hold on to this investment for 10 years. ■

Recession Prep

How to Prepare for a Recession

Adam Sharp, Co-Founder, First Stage Investor

We are now more than 10 years into the bull market in stocks. The average bull market lasts 4.5 years, so we’re way past due for a slowdown. The Federal Reserve helped fuel the extended bull market by keeping interest rates low and monetary conditions easy.

But now warning lights are flashing that we’re finally heading for a recession. And it’s critically important to understand the signals that indicate the bull market is ending – and how to prepare for a recession. 

Reading the Signals

First, share buybacks are slowing. S&P 500 companies are on track to buy back 15% less stock than they did in 2018.

This is extremely troubling because buybacks have been the leading driver of stock market growth over the last decade.

In fact, stock buybacks are basically the only thing pushing the U.S. market higher. Households and big institutions have been net sellers of U.S. stocks, and foreigners are barely buying stock.

If the buyback frenzy stalls, the market could go down sharply. I believe that buybacks will largely decide the market’s direction, so I’m keeping a close eye on them.

But buybacks aren’t the only way spending is slowing among S&P 500 companies. Goldman Sachs analysts anticipate cash spending for the entire year will decline by 6%, making it the sharpest yearly decline since 2009. 

In addition, earnings estimates for the S&P 500 continue to drop.

Wall Street estimates for the third quarter have fallen more than 10% since October 2018. (You may have read in the mainstream press that we had a strong earnings season in the third quarter. But that’s primarily because companies beat the lowered estimates.) It sure does look like we’re headed for a recession.

And when you throw in the ongoing trade war, which I don’t think will be meaningfully resolved anytime soon, we get an ugly picture.

How I’m Prepping for the Next Recession

All recessions are unique. But they generally share certain characteristics. In modern times, one of the most important aspects to consider is the Federal Reserve.

The Federal Reserve will attempt to prevent a recession by printing money. I’m not sure that’s going to work this time, but I’m sure it’ll try. Knowing this will help us plan our strategy for surviving the next recession. 

First up: I like markets that other investors don’t. One of these is emerging markets. Yes, there are some countries where stocks are still cheap. And if the Federal Reserve does print gobs of money, which could hurt the dollar, owning foreign stocks will be even more attractive.

In Russia, for example, the average stock trades at a price-to-earnings (P/E) ratio of around 5. Compare that with an average P/E ratio of around 23 in the U.S., and you can see the attraction. 

Now, there are serious problems in Russia, like corruption and poorly run companies. But Russia also has almost no government debt, which I believe will be an advantage going forward. Its growth hasn’t been fast in recent years, but it has been managing to grow without going further into debt. The country has also weathered severe economic sanctions and low oil prices. And it seems to have come out of it as more independent. 

Russian companies are heavily tilted toward the energy sector, as the country is one of the biggest energy exporters in the world. So if you’re bearish on oil and gas, you may want to avoid Russian stocks. But I remain bullish. And Russian stocks are finally in a strong uptrend, which bodes well for their future performance.

Gold and silver also perform well during recessions and during times when the central bank is printing money. I believe both are going to happen in the near future, so it just makes sense to own precious metals.

Shift Toward Value?

Value stocks (cheap but high quality) have been underperforming for the last decade. A recent article by Institutional Investor summed up the situation well:

Value stocks are underperforming in a way that they haven’t since the 2008 financial crisis and the early 2000s technology bubble.

QMA, a quantitative equity and multi-asset manager that is part of Prudential Financial’s investment management business, contends that current conditions are highly unusual – and said it expects performance to sharply reverse, with cheap stocks once again outperforming expensive ones.

Typically, high-quality stocks that are priced well relative to their value and which have improving growth expectations tend to outperform the broader market. Recently, however, stocks with weaker characteristics – and which are also expensive – have delivered far better returns.

I also believe this situation will soon reverse itself. It’s been all about momentum and growth stocks for the last 10 years, but value stocks are due for a period of outperformance. 

So if you’re looking for stocks to hold during a recession but don’t like emerging markets, look into U.S. value stocks. There are still some decent bargains out there, though they’re hard to find.

If the bulk of your stock portfolio is tied up in high-growth momentum stocks, consider reducing your exposure. During a recession, these “highfliers” tend to get hammered. Going into a recession with too much exposure to growth can be crippling for a portfolio. 

I strongly feel like now is the time to switch out expensive stocks for cheaper options. To put it simply, in a recession, cheap stocks have a lot less distance to fall than expensive ones do. 

I may be off on my timing by a year or more, but I don’t see us escaping a recession for much longer than that. Eventually the bill for the party comes due, and I believe that time is getting much closer. ■

Meet Adam Sharp. In Silicon Valley, He’s Known
as “the Startup Guy.”
He’s invested in 98 startups, including one that grew by 35X and one that grew by 60X. He’s on a first-name basis with some of the brightest minds in the startup world. And he now runs the country’s leading research firm for startup investing. His new mission in life? Helping Main Street Americans tap into the explosive gains of the startup space. He’s just discovered a little-known gateway to this exciting market.
Click here now.