☠️ Crowdfunding Platform goes Bust

Welcome to this week’s edition of CROWDSCALE. You don’t need to be rich to invest in startups, and we’re here to help guide you. Many of you loved last week’s edition where we provided our investment rating of Crafter, a Techstars startup backed by Jason Calacanis. In today’s newsletter:

• Influencer Struggles: Influencer-centric crowdfunding platform calls it quits

• Stacking Bills: The Substack investment round heard around the world

• Mainstream Breakthroughs: 60 Minutes feature and Pete Davidson shoutout

ALAO (pronounced ‘allow’) entered the market with a unique spin on typical equity crowdfunding platforms. The premise was simple - users could invest in startups alongside influencers. It worked something like this:

• The platform finds startups that need funding, then aims to pair them with an influencer

• In addition to investing, the influencer becomes a long-term partner and (ideally) promoter of the company’s products

• ALAO then lists the startup on its platform and invites the public to invest alongside the influencer

I wrote about ALAO in its early days, and noted that they would face challenges weening startups away from more established players, and from limiting themselves to startups that align with influencers

The company may have realized the same thing, and quickly pivoted to a loyalty platform that rewarded customers with small slices of equity. ALAO unfortunately ran out of money before it could see this pivot materialize, and the company announced its closure on March 24th

My 2 Main Takeaways:

1. Open Up: Any time you narrow your investment pool (we limit investment raises to influencer-backed, sober founders, ex-athletes, etc.), it makes success extremely difficult. Our industry is small, don’t make it smaller.

2. Big Dogs are Big: Wefunder/StartEngine/Republic have reached the point where it will become highly difficult to take market share from them. New players will need to be extremely well-funded, and even then their prospects seem dim.

Substack, a platform for building newsletters & communities, announced that it was opening an extension of its Series B investment round to….well, everyone.

This set the Twitter world ablaze, and investment dollars began flowing in. At the time of this writing, over $7M has been reserved by 6,253 Substack writers, readers, and others who believe it to be a prudent investment

Due to regulation, the max amount Substack is able to raise is set at $5M, meaning some investors will get bumped from this round. Substack has noted that ‘Substack writers with paid features turned on’ will receive 1st dibs in the offering - it is unclear how the rest of the investors will be prioritized

Not everyone is sold that this is a good investment, with most dissenters claiming that the $650M post-money valuation isn’t justified with enough revenue. I’m going to do a deep-dive on this investment once Substack releases its financials, so make you’re subscribed to get that report.

My 3 Main Takeaways

1. VCs are Threatened: VCs are typically the only game in town for startup funding. But if there was an alternative choice like crowdfunding...that would greatly diminish their importance. Beware, and understand their incentives when they speak.

2. The First of Many - It’s a tough funding environment. Substack just showed the startup world that you can raise money quickly, get millions in free marketing promotion, and convert users into super-fans. Others will follow.

3. No One Knows TTW - Substack is ‘Testing the Waters’, meaning they are guaging investor interest before paying for an expensive financial audit (which is required to actually raise). Even The Verge was mystified on how Substack could raise without providing financials, which goes to show how much education is needed in this space

Crowdfunding has been picking up steam. Substack alone has put equity crowdfunding in the spotlight, but there are also several other crowdfunded-startups that are making waves:

• VIRTUIX, which has raised money via crowdfunding in the past, was featured in a National Smart Water TV ad with Pete Davidson

• PSYONIC, which has now raised over $1M via StartEngine, was featured in a special segment on 60 Minutes

• MERCURY BANK emerged as a major beneficiary of the SVB bank run, onboarding hundreds of new clients and billions of dollars in deposit inflows. This earned it mentions on news publications and some of the top business podcasts