2,576 Investors got Screwed

Here, a platform that let consumers invest in Airbnb properties, goes bust.

It had a promising pitch - riding the Airbnb wave, Here raised $1.3M on Wefunder

Just 6 months after receiving its fresh funding, Here shuts down.

Was this avoidable? Let's dig into Here's fundraising page to see if there were any red flags at the time.

WERE THERE SIGNS?

Neither Here nor There…

Here came onto the scene offering users the ability to invest in individual Airbnb properties for as little as $250. An offering like this had broad appeal to a wide swath of potential investors.

Airbnb’s are an asset class that seem simple on the surface, at least in comparison to stocks. It's also more visually appealing, getting to sift through nice pictures of Airbnb and investing in the ones you like. And lastly, it's completely passive - Here handled all the logistics with guests, cleaning, and repairs.

Here also came with the backing of venture capital, with a few firms contributing a total of $5M into the startup early on. The marketing was slick, the branding professional, and Here cruised to raising $1.3M from 2,576 investors.

Not all startups end up surviving, but Here's demise was quicker than expected. The startup would last just 6 months following their fresh round of funding from the crowd. That's pretty bad and a smear on the equity crowdfunding space.

I didn't review Here when it was raising money, but let's take a look to see if there were signs that this one was a bust. Without diving into the business itself, the first major red flag came in the terms of the investment.

Here was raising on an uncapped SAFE, which is extremely unfavorable to investors. A SAFE, or Simple Agreement for Future Equity, is an investment vehicle that converts your ownership stake into a number of equity shares at some point in the future. This future moment is either an exit or subsequent funding round.

There are two essential components to a SAFE:

1. The Discount Rate

This is the discount that investors get to convert their shares at upon this future equity event. If there's a subsequent funding round where shares are being sold for $10 each, you receive yours for $9 apiece.

2. The Valuation Cap

A valuation cap provides additional opportunity for upside. Let's say that you invest $1,000 into a SAFE with a $10M valuation cap. If the company raises a subsequent round at a $50M valuation, your shares still convert into equity BUT at the $10M valuation. This means you get your shares at an 80% discount to the $50M valuation.

Here’s what makes SAFEs appealing for investors - your investment will always be converted at whichever terms are more favorable to the investor: using the discount rate or valuation cap.

On an uncapped SAFE, there simply is no valuation cap.

So let's say you invest $1,000 into a SAFE with a 10% discount rate and NO valuation cap. The startup proceeds to crush it, and they raise another round at a $500M valuation. You get a 10% better deal than new investors, which is decent but really not an investment home run. Whereas if that same investment had a $10M valuation cap, you'd be sitting on a 5,000% return.

Uncapped SAFEs essentially take away all the upside in a startup investment. Avoid them.

Next, we can look to Here's financial documents since they provided little to no numbers on their Wefunder page. Two huge issues stick out like a sore thumb.

• Out of Control Burn

The company lost an understandable $460k in 2021, but that loss accelerated to $2.3M in 2022. Somehow, Here 10x'd their payroll in that same period from $178k -> $1.78M. I don't know if other items are bundled into this line item, but definitely doesn't look good on the surface. Here also spent over $600k on 'Professional Services' in 2022 - I'd also like to know the details of this major expense.

• Ineffective Advertising

Here generated $1.3M in revenue in 2022. This alone is somewhat impressive - but we cannot view this figure in a vacuum. Shrewd investors must evaluate the amount of advertising it took to reach that revenue.

We can see that Here aggressively funneled $786k into Advertising & Marketing according to their financial documents. That's roughly a 1.6x Return-on-Ad-Spend. Having worked advertising campaigns on numerous Fortune 500, I can tell you that this is extremely low. While you're technically bringing in more revenue per dollar spent, it's nearly impossible to run a profitable operation at 1.6x ROAS.

CLOSING THOUGHTS + VERDICT

IR Team fumbles the bag…

The last callout I want to make is around how their Investor Relations team handled their community round. The discussion forum is usually a lively section on the fundraise where potential investors can direct questions at the founder. This usually provides clarity, reveals the founder's critical thinking skills, and gives a glimpse into how the startup will communicate with its investors.

What Here did in the discussion forum I have not seen with any other startup - ever.

To every single question, they responded with a generic message: 

This is downright lazy and uninspiring to investors. I assume they didn't answer any questions that people emailed in. And it shows that you probably can't expect any quality communication to follow after your investment.

The problem with Here was that there was a lot of red flags, as laid out above. Red flags aren't always damning, if there are reasonable answers to explain them. But Here put up a stone wall to potential investors and left them with no answers.

Hindsight is 20/20, but I like to think that I would have easily passed on this investment had I given it a look.