Equity crowdfunding in the U.S. started in 2016 as a means for the ordinary person to invest in venture capital deals with as little as $10. Since then, the landscape has changed significantly, with transactional value reaching $4.68 billion in 2020. Businesswire projects equity crowdfunding to grow at a rate of 16% year over year for the next five years as popularity increases among both investors and start-ups.
In 2020, the SEC raised the $1 million a year crowdfunding limit to $5 million and $75 million for Regulation crowdfunding and Regulation A+, respectively. Consequently, many more attractive companies have decided to raise capital on crowdfunding sites instead of seeking VC investment.
My top seven start-ups currently raising:
- Manta Biofuel
- Diamante BlockChain
- IX Water
These seven companies are showing a tremendous amount of scale and industry penetration. I based my picks on vetting processes, economic fundamentals, the competitive landscape of respective industries and the deal on the table.
Equity Crowdfunding: Manta Biofuel
This company uses algae to make renewable crude oil. It’s filling a crucial gap in the market by accommodating existing energy infrastructure with a renewable energy source. Its product will be a valuable stop-gap until we determine what’s going to drive energy in the long run (i.e hydrogen or lithium).
Manta takes it a step further by farming algae in a cost-effective manner, using its “proprietary magnetic harvesting machine.” The mid- to long-term aim is to sell their equipment to farmers who’d like to add an additional revenue stream to their businesses.
It’s currently raising a maximum of $2 million on Republic with a valuation cap of $6 million. This isn’t a priced round but instead a Crowd SAFE agreement with a 25% discount on the subsequent round. Mantra isn’t producing revenue yet and is still in a Beta stage, but they’ve signed $1 million worth of LOIs.
Notable investors include the U.S. Department of Energy, the state of Maryland, and the founder’s capital.
Irrigreen is another highly vetted company currently raising on Republic. Water is slowly but surely becoming a very scarce resource in today’s day and age. Water bills have gone up by roughly 80% over the past decade, and lawn sprinklers have 30%-40% efficiency ratings.
I’m passionate about water preservation, as I’ve observed how inefficient water use is resulting in landscapes deteriorating and industrial job losses.
Irrigreen has created digital outdoor sprinklers that use 50% less water than normal sprinklers. The company has six patents in place and has received $4.9 million in funding from various Silicon Valley angel groups. With 300-plus installations since the product launched, the company’s doubled its revenue YoY while running on a 61% gross margin.
It’s currently raising $1.07 million in the form of Crowd SAFE agreements with a 20% discount and a valuation cap of $16 million. The deadline is on the 21st of June, so investors should act swiftly if they’d like to invest.
Equity Crowdfunding: Alphaflow
Entering the world of alternative real estate debt, Alphaflow is a platform which provides local private lenders with institutional capital. Its integrated platform allows institutional investors to access a pool of private real estate lenders and yield improved debt-adjusted returns. The company’s received more than $1 billion in institutional funding via its platform.
Alphaflow is raising $3.93 million in a Crowd SAFE agreement with a valuation cap of $55 million on Republic. Alternative debt financing in the real estate market is competitive, but Alphaflow seems to be well ahead of the pack. Notable investors include Social Capital, Y Combinator and Clocktower. The company can be considered as a “unicorn” and a safer investment if you’re looking for one.
With eSports projected to grow at a rate of 24.4% per year in the next six years, this company has a solid foundation to work from. Tempo is an interactive gaming platform that aims to provide the viewer with a chance to participate instead of the experience being an end-to-end experience. The company has found this model scalable, as it has achieved a monthly visitor base of 1.5 million. Since its inception in 2014, it has become the hub for strategy game content.
Tempo achieved revenue of $2.4 million in 2020 and is on course to achieve its projected revenue target of $4.5 million in 2021. It has raised $5.8 million to date, with the likes of Galaxy Interactive investing.
It’s currently raising $1.07 million in a Crowd SAFE round via Republic. The valuation cap is $30 million, and investors in this round will receive a 20% discount on Tempo’s next funding round.
Equity Crowdfunding: PittMoss
PittMoss makes organic soil by using metropolitan waste. PittMoss focuses on providing value to its customers by selling curated soil, which is beneficial to their plants. Additionally, the company operates in an efficient manner, as it uses renewable sources as materials which lead to cost-cutting. The company has doubled its customer base since 2017 and its products are sold in more than 150 stores across the United States.
Pittmoss has three key revenue streams, including commercial growers, wholesale distribution, and e-commerce. Its products sell for a gross margin of 45%, and they’ve recognized $900,000 in revenue to date.
Its current offering on Republic presents investors with the opportunity to invest at a valuation cap of $7 million in the form of a Crowd SAFE agreement. The company has raised nearly $4.5 million in previous rounds. Notable investors include Mark Cuban and several angel funding groups.
I invested in this company in April 2020, and it has made significant progress ever since. IX Water is another company that’s working towards water preservation. It manufactures and sells equipment to industrial companies that traditionally dispose of their wastewater. The benefit to IX’s customers is that they can re-use their wastewater and reduce their costs in the long run. Their products range from $450,000 to $12 million in price and they started selling them in the U.S. in 2020.
The company earns additional revenue from maintenance and installation.
With a valuation of $13 million, they’re currently raising $1.07 million in a priced round on Start Engine. Water IV offers investors common equity at a share price of $1.25. Investors need to bear in mind that their model is based on cost cutting and industrial demand.
Considering the offered share price, it’s a lucrative investment should both of those boxes be ticked.
Equity Crowdfunding: WebJoint
This business concept would’ve been somewhat of an illusion prior to states’ legalization of cannabis, and could be poised for bigger gains if federal legalization s on the horizon.
WebJoint is a cannabis delivery software that serves more than a third of the licensed cannabis delivery operators in California. WebJoint has seen a staggering 346% increase in YoY deliveries, with nearly 2 million deliveries completed in California alone. The owners consider its value-add the fact that they’re only focused on delivery while many of their competitors attempt to operate throughout the entire downstream value chain. There’s been much speculation that Cannabis will continue to be deregulated as clinical trials roll out successfully. WebJoint is well positioned to take advantage of a potential increase in subsequent demand.
It’s currently raising working capital on Start Engine, which would allow it to expand into other states. WebJoint is currently valued at $44 million and is raising $1.07 million at $3.48 per share. This is a good deal on paper, but potential regulatory hurdles need to be considered.
How To Spot Value
A common issue with crowdfunding investments is that many investors make investment decisions based on fantasy. It’s of the utmost importance to understand whether you’re buying into a good deal or not. A company might do well, but this doesn’t necessarily mean the investor will benefit as a consequence. Here are a few methods that I use.
- Price to Book Value: The price-to-book-value multiple is popular in stock and private equity analysis. This multiple will only work if the company’s raising a priced round and if you can get a hold of their audited financial statements. Divide the price per share by the equity per share on the balance sheet. Follow up by comparing it to an industry average and determine whether you think the share price versus its current value is justified. It’s important to benchmark this ratio to a venture capital multiple and not a stock market multiple, as early stage private equity multiples will be higher than stock multiples.
- Comparable Firms: Another method to use is to find companies operating in the same industry at various stages of their lifecycles. Compare growth rates such as cash flow yield, revenue CAGR, and gross margin. Use your comparables and determine whether the company is ahead of pace versus similar companies at their various stages.
- Comparables Transactions: This is the most important metric, as investors need to understand potential exit strategies. Search for related companies who’ve recently undergone initial public offerings (IPOs), acquisitions, or an additional VC funding round. You’re trying to determine the most likely transactional outcome. If the primary outcomes in the industry are IPOs, peer group stock performances after listing need to be tracked. If high acquisition transactional flow is present, it needs to be determined what the premiums are on the acquisition prices of comparable companies. If the company operates in an industry where multiple VC funding rounds are popular, it needs to be determined whether these rounds have historically added value or diluted shareholders.
The companies mentioned in this article are scaling well due to reasons such as industry disruption, cost-cutting, and industry growth. Investors should bear in mind that investing in equity crowdfunding should be done with a long-term investing goal of typically 8-12 years. Even if you’re a risk-seeking investor, you shouldn’t allocate more than 10% of your portfolio to venture capital. If you have any questions regarding equity crowdfunding, feel free to contact me directly.
Investing through equity and real estate crowdfunding or asset tokenization requires a high degree of risk tolerance. Despite what individual companies may promise, there’s always the chance of losing a portion, or the entirety, of your investment. These risks include:
1) Greater chance of failure
2) Risk of fraudulent activity
3) Lack of liquidity
4) Economic downturns
5) Dearth of investor education
Read more: Private Investing Risks
On the date of publication, Steve Booyens held a position in IX Water and PittMoss. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.