StartEngine is one of the leaders in the fast-growing market for equity crowdfunding. But the company is also raising money for its own growth. And yes, anyone can participate (note that the minimum investment is $506.25). So should you invest in StartEngine? Well, there are certainly some interesting advantages. But as with any private investment, there are some negatives to consider, of course.
However, before looking at these, let’s first get a backgrounder on the company. First of all, Howard Marks founded StartEgnine in 2014.
As a serial entrepreneurial, he had first-hand experience with the challenges of raising money. He believed that creating a platform and pooling capital from a large number of investors – in an efficient way – would be a gamechanger.
Keep in mind that Marks also knows how to grow successful businesses. To this end, he was one of the original creators of Activision Blizzard (NASDAQ:ATVI), which currently sports a market capitalization of $61 billion. He also would go on to launch Acclaim Games and sell it to Disney (NYSE:DIS).
How StartEngine Works
In terms of the types of equity crowdfunding on the site, there are two options. One is Regulation Crowdfunding. This is where a company can raise up to $1.07 million per year and any investor can participate.
A company can offer different types of equity. Examples include common and preferred shares (which have extra investor protections), including debt instruments, like convertible notes. One of the most common is the SAFEs (Simple Agreement for Future Equity) instrument, which can be turned into equity based on a trigger event like an IPO (Initial Public Offering) or acquisition.
Next, there is the Regulation A offering. With this, a company can raise up to $50 million a year. But the regulations are more onerous. Note that a Regulation A offering is often called a “mini IPO” since there is a qualification process with the Securities and Exchange Commission (SEC). In some cases, a company may list the shares on an exchange or the over-the-counter market.
StartEngine has the distinction of pulling off the first Regulation A offering (based on the law that made crowdfunding legal). It was for the $17 million capital raise for Elio Motors.
For those who are thinking of whether to invest in StartEngine, it is encouraging that the momentum has continued, even with the impact of the COVID-19 pandemic. For the first half of this year – based on the unaudited financials – the company posted revenues of $5.4 million, up 186% on a year-over-year basis. There was a net loss of $1.9 million during this period.
Consider that about 48% of the install base consists of 48% of repeat investors. And since inception, the platform has facilitated over $150 million in fundings.
There are some other developments to consider:
- Branding: Kevin O’Leary is now a strategic advisor to StartEngine. As one of the hosts of the Shark Tank tv show and a serial entrepreneur, he has an avid following on social media like Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR). In other words, his involvement should help boost user numbers and deal flow.
- Secondary Trading: One of the problems with equity crowdfunding is the liquidity. But StartEngine has set out to solve this with the creation of an ATS (alternative trading system), which allows stockholders to sell their positions. This platform will be launched some time in October.
Should You Invest in StartEngine?
The company has raised $12.5 million at a valuation of $221 million. There are over 8,700 investors in the deal. However, the funding will close within eight days.
So then should you invest in StartEngine? No doubt, there are a variety of risks. Equity crowdfunding is still in the nascent stages and there have not be many exists. There could also be an adverse impact if the economy continues to suffer for a prolonged period of time. This would certainly weigh on the performance of the investments.
On the other hand, StartEngine is a top player in the industry, has been innovating its platform and has been growing at a rapid clip. There is also the benefit of diversification since the company participates across many offerings. So all in all, when taking into account the pros and cons, investing in StartEngine does look like a good way to get exposure to the crowdfunding segment.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.