Crowdfunding Continues to Motor Ahead
This week, my No. 1 private investment pick StartEngine announced H1 results. Revenue at the crowdfunding firm more than doubled to $13.4 million, and net income topped $2 million. Put another way, the company’s profit margin now rivals that of 152-year-old Goldman Sachs (NYSE:GS).
Investors shouldn’t be surprised — StartEngine’s billionaire CEO Howard Marks is a proven operator. In 1991, he and fellow entrepreneur Bobby Kotick bought bankrupt Activision (NASDAQ:ATVI) for $1.2 million and turned it into a $35 billion gaming behemoth. Mr. Marks would follow up with a second act by creating Acclaim Games and selling it to Disney (NYSE:DIS) in 2010.
What’s surprising however, is that StartEngine’s current funding round has only attracted 5,300 investors. Perhaps all of Reddit’s attention has turned to meme stocks Farmmi (NASDAQ:FAMI) and Camber Energy (NYSEAMERICAN:CEI). Or maybe investors simply can’t be bothered to open a private investing account.
But don’t be fooled. When the right horse and jockey find each other, nothing should stop you from going to the ends of the earth to place a bet. Today, I’m going to explain why… and reveal a new bonus pick too.
Should Moonshot Investors Bet on the Horse or Jockey?
Investors have long argued about what’s more important:
- Industry. Pick a fast-growing market (crypto, quantum computing, flying cars) and even the most inept management team can do well.
- Team. Bet on proven operators (Warren Buffett, Elon Musk) and they’ll find a way to succeed, even in hopeless industries.
It’s essentially the stock market version of “would Batman beat Superman in a fight?”
Now, I can’t answer the superhero question (though my money would be on Squirrel Girl). But the evidence for Moonshot investors is clear:
In the long run, you need BOTH the horse and the jockey.
On the one hand, venture capitalists betting on proven entrepreneurs aren’t wrong. The jockey matters.
Academic studies have long shown that survival rates and firm valuation are both deeply affected by their leaders; one macabre study found that startup survival rates dropped 15% after the death of any founding team member.
Meanwhile, people betting on flying cars also have a point. The horse matters too.
A separate survey found that startups in high-growth areas from robotics to big data had exit multiples 5 times greater than those in lower-growth ones like adtech. (Armed with such information, one assumes Ryan Cohen’s GameStop (NYSE:GME) makeover will involve e-selling Bitcoin (CCC:BTC-USD) miners that run on self-driving solar panels.)
The Amnesiac Investor
Yet people are constantly drawn to investments that lack one or both qualities.
Bad Team. Consider what happens without a competent team. In those cases, we end up with firms like Lordstown Motors (NASDAQ:RIDE), an electric truck maker founded by the disgraced ex-CEO of Workhorse Motors (NASDAQ:WKHS). These companies tend to spin their wheels for months before running out of money.
Bad Industry. Or what about putting a proven operator in a lousy business? That doesn’t work either, as proven by Robert LaPenta of $45 billion defense contractor L-3 Communications (NYSE:LHX). The experienced manager — who was one of the three “L’s” in L-3 — saw his next firm Revolution Lighting (OTCMKTS:RVLT) get thrashed in the competitive world of LED retrofits.
The “Horse and Jockey” Investment
Or “Unicorn and Jockey,” perhaps?
I can hear you already: “Let’s get to the point, Mr. Moonshot.”
Fair enough. If it isn’t obvious by now, I’m saying all this to introduce my new “Horse and Jockey Strategy” — for those rare moments in time when companies have BOTH a stunning team and a winning industry.
My #1 Food & Beverage Moonshot Pick
Let’s consider a hot industry: beer-alternative beverages.
If your friend group is anything like mine, you probably have some White Claw fans (or “Truly Seltzaah” up in Boston). And those with healthier cohorts might be familiar with Celsius (NASDAQ:CELH), a maker of wellness-related energy drinks that went gangbusters at the end of 2020.
But with thousands of beverage startups vying for cash, how can you tilt the odds of success in your favor?
Here’s where the Horse and Jockey method comes in. We’ve already picked our promising industry (i.e., Bud Light alternatives), so now it’s time to pick the right team.
For this, I’ve gone ahead and chosen three companies on StartEngine with similar valuations ranging from $9 million to $15 million. Here are the paraphrased bios of their founders:
- Colin Davis. Born tinkerer whose interest has ranged from cars, to architecture, to recycling, before finally landing on cider making. He also co-manages a herd of highland cattle with his dad.
- William Stuart. [No listed background]
- Steve Luttman. Founder of Leblon Cachaça spirits, acquired by Bacardi in 2015. Former executive at Möet Hennessey and Unilever.
Now, if you were going to invest $5,000 for a potential 10x return, which would you pick?
Probably #3, right?
It turns out that if you had picked Steve Luttman, you would be investing alongside one of the most experienced marketers in the world of niche spirits. Since selling Leblon, Mr. Luttman has gone on to consult for a number of now-recognizable brands: Aviation American Gin, Astral Tequila, and Tyku Sake, to name a few.
His new venture, Hercules Mulligan, puts him back in the driver’s seat.
And it’s a company to watch.
Not only has Mr. Luttman’s company already sold 12,000 bottles of its rum & rye spirit. He’s also poached Flaviar founder Grisa Soba to be his chief strategy officer, and filled his team with experienced brand managers from Campari to Hennessy.
Even better? Its $9 million valuation makes Hercules Mulligan the cheapest of the three firms I considered.
Now, I’m not saying that the other two firms will necessarily fail.
- Colin Davis’ Vermont-based Shacksbury generated $2.2 million in 2020 sales.
- William Stuart’s Colorado Sake Co. operates in a faster-growing segment than the other two firms.
- Steve Luttman’s Hercules Mulligan could still fail in its niche.
But all else being equal? The data tells us that it’s better to go with an experienced entrepreneur.
Experts in Consumer Packaged Goods (CPG) companies know one blockbuster product doesn’t guarantee a second hit. Many learn the lesson the hard way; consider SkinnyPop’s younger sibling, Paqui Tortilla Chips, which flopped at market.
Others (like Mr. Luttman) already know that CPG products are a numbers game. Since no one can predict the food fad of 2025, it’s better to take multiple bites at the apple than put all your eggs in one beer-lined basket.
That’s why the expert marketer launched multiple brands on liquor e-commerce site Flaviar before moving forward with Hercules Mulligan. And if a rum & rye mix doesn’t succeed, it’s almost certain that Mr. Luttman will pivot to a different concoction that works.
Interested investors should head over to StartEngine, where you can still buy into Hercules Mulligan today. (And if you’re interested in buying StartEngine, they’re still fundraising too).
How to Find the Next Airbnb
Back in 2008, Brian Chesky and Joe Gebbia were total nobodies. Their firm, a home-sharing site, had run out of money after making just $5,000 in sales. And a marketing gimmick where the duo sold “Obama O’s” and “Cap’n McCain’s” cereal boxes netted just $30,000 — not nearly enough for the firm to keep going.
But in a last-ditch effort to survive, they applied to Y Combinator, a Silicon Valley startup incubator.
According to Wired, their initial interview didn’t go well.
[Y-Combinator founder Paul] Graham’s first question was, “People are actually doing this? Why? What’s wrong with them?”
But after Mr. Graham learned about the cereal box story, everything changed. Suddenly, the experienced venture capitalist stopped caring about the business model. If these founders were driven enough to do anything to succeed, surely they would eventually find a business model that worked.
In Mr. Graham’s words: “Wow, you guys are like cockroaches. You just won’t die.”
The rest, of course, is Airbnb’s (NASDAQ:ABNB) history.
Picking Winning Early-Stage Moonshot
I know what you’re thinking. “Wealthy VCs like Paul Graham are successful because they can interview founders directly… but how are we supposed to know who’s any good?”
Fortunately for us, Mr. Graham’s experience shows that it’s easy to pick winning teams. Just watch what they do, rather than what they say.
Often, this involves choosing tried-and-true leaders — Ryan Cohen at Gamestop, RJ Pittman at Matterport (NASDAQ:MTTR), and Howard Marks at StartEngine all make the cut.
But sometimes, it involves watching how startups pivot around failure. Because when a startup team is willing enough to keep a project alive, perhaps that’s a sign that you’ve found the next Moonshot investment.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.