First Stage Investor Issue No. 41

First Stage Investor Issue No. 41
By Early Investing
Date December 6, 2019

Invest in the Company That’s Bringing Wine Out of the Dark Ages


Startup: Winc
Security type: Preferred equity
Valuation: $110 million
Minimum investment: $1,000
Where to invest: SeedInvest
Deadline: March 31, 2020

It’s very late in the game for delivery, dating and drinking startups. Based on the startup concepts I’d seen in the market recently – like changing the brakes on cars parked in the company parking lot, making tea out of tree bark or using an in-flight dating app – I thought all of the biggest opportunities had been disrupted and the only opportunities remaining were in niche markets.

I was wrong… There’s a GIANT MARKET that has remained unchanged for decades. Transactions worth $70 billion change hands every year in this market.

But customers aren’t quite sure what they’re buying. And suppliers aren’t quite sure that their products will hit the mark. Even those suppliers who do manage to hit it big with a product aren’t sure how they did it or, just as bad, how to repeat their success. That’s the wine industry in a nutshell. It’s one big guessing game. But that’s all about to change.

Streamlining Wine

Winc is a growing and innovative wine club company that’s on a mission to drag the wine selling and wine buying experiences into the 21st century.

Winc has half a million customers. It has produced 664 wines from 78 grape varieties and has sold 13 million bottles. And since its launch in 2011, it has grown at an average annual compound rate of 92%.

In this day and age of data, algorithms and increasing personalization, Winc has created a more efficient way to give wine lovers… well, wine that they love. In short, it’s reimagining the wine business from top to bottom. It creates about 60 to 70 new wine brands a year. Those brands offer about 120 new wines a year, or roughly two per brand.

Then Winc keeps track of just about everything: how well the bottles sell, who is buying them and the patterns that emerge. Do buyers of a new wine also like an existing wine? What other commonalities do they share, in terms of age, gender and other factors? What other features can a future wine incorporate to make this group even bigger?

This data helps Winc determine which new bottles are most likely to become big successes. It’s a lot of trial and error. But it’s data-driven trial and error. And no other wine company is doing this.

Winc is in the blockbuster business, just as much as Hollywood studios or pharma companies are. Winc’s been averaging about one blockbuster a year. As it grows its data set and improves its algorithms, its ability to develop blockbusters should also improve.

Winc’s blockbuster bottles add millions to overall sales every year. Its four blockbusters – Summer Water, Folly of the Beast (a nice pinot I highly recommend), Chop Shop and Pacificana – account for about a quarter of overall sales.

After Winc proves the salability of its wines through its own club members, it sells those bestsellers to national retailers like Whole Foods and Kroger. Those distributors more than double sales of those bottles while introducing the Winc brand to thousands of new customers.

About 15% of total sales come from retailers. Winc hopes that number will climb to 40% in five years’ time.

Winc also does well in the four M’sMarket, Monetization, Metrics and Management.

Not Your Auntie’s MARKET

At $70 billion, the wine market is as big as the U.S. textile and apparel market or the mobile game market. But get this: Only $3 billion is direct to consumer. Wine lovers (I’m one of them!) go to stores hoping to discover a great bottle of wine. I can’t tell you how many times I brought home a bottle I thought I’d love only to be disappointed. I know there are dozens and dozens of bottles out there I’d enjoy immensely.

But how do I find them? Through the internet. It’s getting better and better at personalizing choices… especially for younger generations,
are more likely to buy online.

Which is why Winc is targeting Gen Xers and millennials. They comprise more than 80% of its membership. Gen Xers will eclipse baby boomers to become the largest fine wine consuming generation by the year 2022. And millennials will eclipse Gen Xers in 2027.

Good MONETIZATION That’s Getting Better

Winc doesn’t just want to bring in money – it wants to get more money from a customer than it paid to acquire them. It costs Winc an average of just under $50 to acquire a customer. It wants to get at least $150 in sales from customers within the first year. Its latest figures show it’s doing even better: Customers spend an average of $125 in the first six months.

Over 5.5 years, customer spend increases to $400, which is a 4X return on customer acquisition costs. It will get better as Winc improves retention, grows national retail revenue (from $7 million today to $11 million in 2020) and cuts overhead costs.

METRICS Trending in the Right Direction

Winc spent 2018 de-emphasizing growth and focusing on better margins. It worked. In 2017, it had contribution margins (product price minus associated variable costs) of $34.10 per product. In 2018, it added $5 million to total sales. But its contribution margin increased to $42.40 per product. And customer lifetime revenue has grown from $125 to more than $400 in five years…

Winc’s metrics are trending in the right direction: sales up, revenue up, margins up and order value up… while variable (as opposed to fixed) costs are coming down.


I’ve had several conversations with founders Geoff McFarlane and Brian Smith. They make as strong a pair of founders as I’ve seen in a long time. Geoff comes from a hospitality background and is as sharp as they come. Brian, a widely respected sommelier and winemaker, not only knows his wine but also shows an impressive depth of knowledge about the business end of winemaking. Individually, they have serious skills. Together, I’m convinced they have what it takes to take Winc to great heights.

A Winning Investment Opportunity

Winc is a Series D company. This is your rare chance to invest in a mature growth-stage company. The minimum investment is $1,000. Shares are going for $1.41. And Winc’s $110 million pre-money valuation is reasonable. Winc is also offering an exclusive bonus for First Stage Investor members: Get 45% off your first box of wine by clicking here.

Winc aces our four M’s. It has a great plan to grow organically and by acquisition. It’s a top 20 wine supplier. And it has set its sights on breaking into the top five within five years.

How to Invest

Winc is raising up to $15 million on SeedInvest. If you don’t already have a SeedInvest account, you’ll need to sign up for one. Once you verify your account and are logged in to SeedInvest, visit the Winc deal page. Then click the button to invest. Enter the amount you want to invest, starting as low as $1,000, and proceed through the required steps. Be sure your investment is confirmed, then you’re good to go.


This opportunity, like all early-stage investments, is risky. Early-stage investments often fail. 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 Winc offers an attractive risk-reward ratio.

Canada’s Weed Woes

Blame Canada for Pot Stock Struggles

When legal recreational cannabis sales began in Canada on October 17, 2018, marijuana companies and investors were brimming with confidence.

A large industrialized country had finally legalized marijuana. And with an adult population of nearly 30 million people, Canada would finally show the world just how big and lucrative the recreational marijuana industry could be.

Aurora Cannabis. Canopy Growth. Aphria. Tilray. They’re all Canadian. And they’re among the biggest marijuana companies in the world.

Their stocks were soaring. They were going to take over the world. First Canada. Then the United States. And then the rest of the globe.

But what no one had counted on was an inept Canadian bureaucracy.

Canada put Health Canada, the country’s department of public health, in charge of regulating the Canadian marijuana industry. And Health Canada hasn’t been up to the task.

Retail locations are opening at a snail’s pace. And supply hasn’t been able to keep up with demand.

Entering 2019, Health Canada had more than 800 pending applications for processing, sales and cultivation licenses. On average, it’s taking 341 days to approve licenses to sell marijuana.

And the time it takes to approve cultivation licenses is anywhere from six months to a few years. It took Aphria almost two years just to get its upgrade of an existing facility approved!

The failure to approve retail locations has depressed sales. And the failure to approve grow facilities has made it difficult to keep up with the demand.

It’s almost as if Health Canada wants the legal marijuana industry to go away.

Canada’s marketing and advertising restrictions for marijuana aren’t helping matters either.

Canada bans the use of mass advertising, sponsorships, endorsements, testimonials and promotions for marijuana.

It also prohibits communicating information about marijuana’s price or distribution.

Canada also artificially restricted the size of the marijuana market by allowing only the sale of the flower and oils.

These structural flaws have made it difficult for the legal, regulated cannabis industry to take off.

In the third quarter of this year, the average price (to consumers) of legal marijuana was CA$10.23 per gram, according to Statistics Canada (which is run by the Canadian government). Statistics Canada reports that the average price of black market marijuana in the third quarter was $5.59.

It’s no wonder the big legal marijuana companies in Canada are struggling.

Health Canada’s bureaucratic quicksand, combined with limits on products and marketing, has slowed growth and created a thriving black market.

It’s also infected the larger marijuana industry. Every time a Canadian marijuana giant misses earnings or revenue estimates, stock prices for the entire sector plummet. And because pot stocks are dominated by retail investors (institutional investors are largely unable to invest in pot companies because pot is illegal at the federal level in the U.S.), prices can drop rapidly. Retail investors typically hold on to their investments for less time – and have a lower risk tolerance – than institutional investors.

Canada’s approach is fundamentally unacceptable. Fortunately, there are signs of progress. Health Canada is trying to speed up the review process for licenses. And the sale of edibles and other cannabis derivatives is expected to begin this month.

But it’s going to take some time before the promise of the Canadian market becomes a reality.

That doesn’t mean you shouldn’t invest in the big Canadian pot companies. It just means you have to adjust your timeline for success.

Now is a good time to buy because pot stocks are a bargain, especially considering just how much this industry is going to grow.

Over the course of the next few years, the cannabis market will reach incredible new heights. It won’t happen as quickly as you’d like. It will be a slow and steady march instead of a meteoric rise.

But it will happen.

And that means if you’re going to invest in pot stocks, you have to be in it for the long haul. There’s no shortcut to success. Buy now while you can still get bargain prices. And then hold. You’re investing in what could be a $66 billion global marijuana market by 2025. And these companies represent your best chance to capture a piece of that pie.

Money Printing

The 2020s Will Be a Decade of Money Printing

For investors, “Don’t Fight the Fed” was excellent advice this decade. American stocks rose almost in a straight line along with QE (quantitative easing) and lower interest rates. It’s been an incredible run for U.S. markets in this “easy money” period.

Low interest rates didn’t just goose the U.S. economy. I believe the defining trend of the 2010s was the incredibly low interest rates across much of the globe. And now, as we head into the 2020s, it looks like U.S. interest rates are headed down to zero again, and possibly lower.

That means our investment strategy has to adapt accordingly. Because I believe a period of lower average returns is inevitable.

First, we have to understand: What effects do low interest rates have? And what do they mean for your portfolio over the next decade?

Investor Behavior

To understand the impact of low rates, we have to look at investor behavior. When the Fed lowers rates, it is lowering bond yields. That means income investors get paid less on their investments.

Right now the 10-year Treasury yields a paltry 1.8% (0% once you account for inflation). But you can get a 4% yield, or higher, buying dividend stocks. As a result, retirees who “should” be in bonds are increasingly being forced into the stock market for income. This is a big reason the stock market has soared during this last decade of low interest rates.

More than anything else, low interest rates encourage people to take on more investment risk.

This is exactly what the Fed wants – to push more money into stocks and inflate asset valuations, which makes people “feel richer” and spend more. This theory is known as the “wealth effect.”

Here’s how ex-Fed Chairman Ben Bernanke described the effects of low rates and QE in a Washington Post op-ed:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action…

And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

It’s now U.S. government and central bank policy to try to juice the market higher. And it’s “worked” incredibly well so far. The S&P 500 currently sports a rich price-to-earnings (P/E) ratio of 24. The Nasdaq trades at 25 times earnings, and the Russell 2000 trades at a very pricey 41 times earnings.

Profit margins are also near record highs at 11.3%. They recently peaked at 12% but have fallen slightly since. If margins return to more “normal” levels (5% to 6%), this will make stocks twice as expensive on a P/E basis.

So the question is, how much longer will this bull market last?

We know that bond yields are already very low. And now the overall dividend yield on the S&P 500 Index is just 1.83%. Like the 10-year Treasury, it also yields zero after you take inflation into account.

These tiny yields are a new phenomenon. As you can see in the chart below, prior to 1980, the S&P yielded an average of around 5%. But its yield has dropped dramatically since then.

I believe that stocks will eventually correct to more historically normal levels. But it could take years for this to happen. And the market could soar much higher before then.

The president and the Federal Reserve seem determined to make sure the market won’t crash. And they appear eager to print money to fund U.S. deficits via a new policy of “not QE” – aka buying $60 billion of Treasurys per month.

I believe this new Fed asset purchase program will become permanent and grow rapidly. Who else is going to buy $1 trillion worth of debt issued by the U.S. per year?

I strongly suspect that, over the next decade, the U.S. will print a ridiculous amount of money. Modern Monetary Theory (MMT) – a macroeconomic theory that asserts that countries that issue their own currencies can never run out of money the way people or businesses can, and can thus print as much money as they need to – has already started, with the Fed monetizing
billion of debt a month.

And though I’m not in favor of it, I do admit that MMT will probably work for a while. There’s still a lot of global demand for U.S. dollar assets. So MMT and low rates are probably how we’re going to deal with the debt.

I believe inflation will eventually kick in, and the dollar will lose some of its luster. If sustained inflation does happen in the next decade, high-quality stocks will be a pretty good place to hide out. This is one of the reasons I believe stock valuations could stay elevated for a while – they’re also one of the best inflation hedges around.

Investment Plan

For these reasons, I’m not even going to try shorting the U.S. market. That’s dangerous. But I am limiting my exposure to U.S. stocks and looking to emerging markets, precious metals and startups for more sustainable growth.

I believe the 2020s will be much kinder to cheap emerging markets than the 2010s were. Emerging markets got beaten up over the last decade. The largest emerging market ETF, Vanguard FTSE Emerging Markets ETF, is up only 11% over the last decade (October 1, 2009, to October 1, 2019).

During the same period, the S&P 500 returned 184%. And the Nasdaq returned 286%.

Noted institutional investor GMO now predicts U.S. large cap stocks will return an average of -4.2% annually over the next seven years, when factoring in inflation. In contrast, GMO says emerging market value stocks should have average annual real returns of 7.4% over that time frame.

In the emerging market value category, my favorite country is Russia. I mentioned Russian stocks back in our January 2019 issue of First Stage Investor:

If you’re a bargain hunter with risk tolerance, there’s Russia. It’s arguably the cheapest market in the world today, trading at around a 6.7 P/E ratio. Of course, there are political, currency and oil price risks with this investment. But Russia is one of the few countries in the world with barely any debt or deficit, and I think that will benefit its markets in coming years.

Russian stocks have done well since, up 35% this year. But I think they’re still cheap at an average P/E ratio of 6.6 and a yield of around 4%. I realize some people don’t like Russia, and that’s fine. For me it’s simply a cold investment decision. It’s a dirt cheap market with improving fundamentals and profit growth.

Gold and silver are finally starting to trend upward, and I expect this to continue throughout most of the 2020s. It’s going to be a decade of very active central banks printing a lot of money. This should benefit precious metals as faith in fiat currencies slowly erodes.

I am also convinced that the 2020s will bring more technological disruption than ever before. Software-driven companies are taking over the world, and the trend is spreading to every industry.

So don’t get me wrong; I’m not bearish on the entire U.S. economy, just sections of it. I’m extremely bullish on U.S. startups, for example. I’m a big believer in the ability of startups to disrupt incumbents.

There’s never been a better time to be a U.S. startup investor. And I plan to continue investing in startups going forward. But startup investors should realize going in that these are not liquid, and that they’re high-risk, high-reward investments.

That’s my investment game plan for the 2020s. What’s yours? Let us know at

Home61 Update

Portfolio Update

Home61 Expands Into a New City

The real estate industry is sorely in need of disruption. Homebuyers have to go through a maddening amount of paperwork. And real estate agents have to spend hours creating and processing said paperwork and finding leads. The average agent also closes around two deals a year, which is hardly a way to make a living.

That’s why we were so excited to recommend Home61 in February 2018. Home61 wants to update the real estate industry by combining new technology and a highly trained workforce. In addition to many other innovations, the company has created a proprietary algorithm to match clients with real estate agents based on language, finances and other factors; technology that generates the homebuying contract within seconds; tons of data for clients; and more. And Home61 is tapping into a massive market – the U.S. real estate market is worth at least $27 trillion.

We spoke with Home61 CEO and co-founder Olivier Grinda recently to see how the company is progressing. Here’s what we learned.


Home61 is now expanding beyond its home city of Miami. Its first new market is Austin, Texas. Olivier said he chose Austin because it is similar in size to Miami, is growing quickly and has a more educated population than Miami. It’s also more recession-proof than other cities.

Home61’s expansion into Austin is a key test for the real estate startup. Olivier wants to prove Home61 can operate in more than one city. And it will also be easier for the company to raise venture capital money in Austin, which has become one of the country’s most popular cities for startups. Austin’s low cost of living and large population of college students (i.e., potential employees and founders) means the city has the third-highest startup density in America. (In fact, you can check out our August 2019 issue for an infographic that explains this.)

Hard Numbers

Home61’s revenue grew from $2.5 million in the first nine months of 2018 to $3.1 million in the first nine months of 2019. The company’s contribution margin (commissions minus marketing costs) have gone from $122,000 in the first 10 months of 2018 to $310,000 so far this year. Home61 has also decreased its customer acquisition costs since 2018, from $880 to $502 per customer.

Cultural Changes

Home61 has also changed how it hires agents, implementing higher recruiting standards. In the early years, the company had a roster of 100 agents, but only 20 to 30 of them were active (i.e., they had made a deal within the past three months). Now the roster has been pared to 76 agents, and 55 of them are active. Olivier says the Home61 culture has improved immensely as a result.

The company also spends a lot of time teaching its agents about the Home61 tech platform and how they can use it to generate leads. As a result, each agent generates around $759,000 in sales per year and makes an average of $49,000 in income – far more than the competition. “The more we teach them… the more they come back,” Olivier said.

Next Steps

Olivier says if Home61 can improve its overall revenue by 50% to 100%, the company will raise more money and expand into more cities. One possibility is expanding to five cities by 2021, though that timeline might be extended. And the company is in talks to buy some Austin brokerages. Home61 is considering a crowdfunding raise to finance its Austin initiative. We’ll let you know the details if and when it takes place.

Big Checks, Bigger Problems

The Highway to Disaster Is Paved With Dollar Bills

$100 million checks – AT MINIMUM… I hate it. It’s just about the most ridiculous idea I’ve come across. Also one of the most dangerous.
– Andy Gordon, July 2018

I said this long before Uber, Juul, Snap, Tesla and more than a dozen other startups lost their shine… and before their worth plunged because they couldn’t make a profit.

For most of these companies, profits are a distant destination. And most of them haven’t even mapped a way to get there.

Venture capital (VC) firms made big investments in these startups because they were fast-growing companies that might eventually become big and profitable.

The problem is that only the growth was real. Profitability? That was mostly hope and speculation.

Now, startup investing is a highly speculative exercise. For startups just beginning to build out their product, operations, marketing and physical footprint, revenue is one of the few hard metrics investors can actually evaluate.

That’s why VC firms salivate over startups with fast-growing revenues.

For founders, spending a lot in the early stages is hard to avoid. And covering all or even most of the money going out the door with money coming in the door is difficult. If early-stage companies were forced to do this, they would cut costs at the expense of overall growth.

Growing into profits is what excites VC investors. Cost-cutting into profits? Not so much. That shrinks their upside.

And low upside is a big problem for big VC firms. They need unicorns in their portfolios to give their limited partners the big payback they expect.

So these investors write huge checks to these startups… and hope that someday they’ll grow both huge and profitable. But what if they can’t do both?

In the private startup world of VC investing, that’s not a problem. But in the public stock investing world, companies that continually hemorrhage money don’t get a get-out-of-jail-free card.

Because public stock investors value profitable companies much more than pre-IPO investors do.

Highway to Disaster

It wasn’t always like this. Twenty years ago, money-losing companies did indeed go public.

But back then, public stock investors expected companies to become profitable within about 18 months of their IPO. Nowadays, startups joining the public exchanges offer a boilerplate warning: “We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.” Pretty open-ended.

Startup land is now giving us inflated valuations and unapologetic hypergrowth strategies – like blitzscaling, which prioritizes speed while completely ignoring efficiency.

None of this would be happening – at least at this scale – without cheap capital. It’s the great enabler. VC firms are growing their funds bigger and bigger because they can.

And VC investors aren’t the only ones pouring money into startups. Dozens of corporations have startup investing arms. Billions of dollars flow into VC funds from a couple dozen sovereign wealth funds. Even mutual funds and other institutional funds are dipping their big toes into VC investing.

But one entity more than any other took big VC checks to another level. Into the stratosphere, really. SoftBank believed it could weaponize $100 million-plus checks to give its startup investments a huge and unassailable competitive advantage.

Spending to grab talent, market share and key partners fairly early on can start a company on the road to success…

But it can also be the highway to disaster. I’ve seen it time and again. Too much money encourages sloppiness and complacency. The more money,
seems, the more stupidity.

Companies are forced to scale quickly. Efficiency becomes a luxury they can’t afford. Anything less than a billion-dollar valuation is suboptimal for their deep-pocketed investors.

As companies raise larger and larger sums of money, their valuations must also keep up. After all, a $200 million company can’t raise $500 million. That places unreasonable expectations on a startup. And it makes raising a future round at an even higher valuation extremely problematic.

The Blame Game

SoftBank doesn’t take the blame for all this. It says it doesn’t allow its portfolio companies to spend money willy-nilly. There has to be a goal. “We have a phrase,” SoftBank says. “Nail it, then scale it.”

Founders taking these enormous checks also justify their actions. In the words of Uber CEO Dara Khosrowshahi, “Rather than having [SoftBank’s] capital cannon facing me, I’d rather have their capital cannon behind me.”

Money is a powerful enabler. With the right founder and startup, it can be a terrific positive force. With the wrong founder (WeWork’s Adam Neumann, anybody?), it can lead to supersized losses.

I saw the fallout from these massive funds writing gigantic checks coming a year and a half ago. At the time, I said, “Big money can be a highway to disaster… And founders who go this route may come to regret it.”

Have any lessons been learned? SoftBank CEO Masayoshi Son plans to target companies with clearer paths to profits, according to reports. It’s a small step in the right direction. But he still wants to raise another $100 billion fund.

And that’s not a good omen at all.

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