Should You Invest in this Crafting Empire?

Welcome to this week’s edition of CROWDSCALE, where I break down startup investing for the masses.

We saw another down week in overall crowdfunding activity this week, and appear to be hovering around early 2021 figures.

That didn’t stop me from digging through the 581 startups that are publicly raising to see if I could find one worth investing in. I came across Crafter, an online crafting subscription and marketplace. It immediately caught my attention. Prominent VC backing, a highly regarded startup accelerator, and an industry I knew to be a sleeping giant.

Below is my full CROWDSCALE review on Crafter. I spoke with the founder for an hour, and researched the company for many more than that. Please note that I did end up investing in Crafter, and that the below should not be considered investment advice.

Let’s get into it.

Business Model

Crafter is a 3-pronged business. The company primarily began as a subscription box for crafts, complete with an online lesson to guide customers. Crafter now offers over 100 of these courses - consumers can learn how to make stained glass, leather bags, and even specialized ceramics.

Once the consumer is inside the Crafter.com eco-system, their 2nd business model takes shape. Crafter operates a marketplace of crafting supplies so that its customers can replenish what they need to continue crafting.

Lastly, Crafter has operated several partnerships with brick + mortar stores like Anthropologie, Nordstrom, and Michaels. In these partnerships, Crafter will typically bring an artist in to teach an in-person crafting session. While Crafter’s founder informed me that these are profitable endeavors, this third business prong is more focused on creating brand exposure for the company.

Getting into some hard figures on the business, Crafter pays an average of $20 to acquire each customer. Due to the recurring revenue opportunities with its marketplace, Crafter is able to extract $280 in lifetime value (LTV) from its customers.

Right now, Crafter is getting customers in the door with their subscription offering. I believe that the real opportunity lies in the marketplace, and that this will one day serve as a destination for all crafters, independent of the subscription service.

On the cost side, Crafter has 2 main expenses. Crafter pays 3rd parties for a majority of its subscription supplies (although most wooden tools are manufactured by Crafter). They also pay artists to create & teach workshops on the Crafter platform.

Crafter was burning through $100k/month in 2022 to rapidly expand its customer base. It’s since lowered its burn, grown its revenue, and made cost-cutting measures, like cutting its expensive ad agency. Morgan Spenla, the company’s founder, confirmed that the company is now close to profitability, and is generating a cash burn of about $20k/month.

I think that Crafter can extract enough value from customers for this to be a sustainable business, and it’s certainly trending that way. I’ll elaborate in the next section, but for business model, this one gets a solid 16/20 from me.

Total Addressable Market

Arts + Crafts is big. $44 billion-level big. Crafter estimates that there are 180M crafters in the US alone. I’m much more conservative and believe that the true figure is closer to 86.6M based on data from Statista.

Still, if your LTV is $280, then having 86.6M potential customers means this has potential to be big. Crafter currently counts 25,000 members in its ranks. If it can scale to 5% of the crafting market, that would translate to $1.2B in revenue. Assuming a 5-year customer lifespan, this would come out to around $243M in revenue per year. The way Crafter’s growing, it might just get there.

Crafter is growing at a compound annual growth rate (CAGR) of 39%. 2022 revenue came in at around $2.1M, and Spenla expects to conservatively generate $3.45M in 2023. This is an estimate, but at a projected 64% YoY increase, this would signify that the company is accelerating its growth.

Crafting may not be as sexy as something like AI, but it’s a behemoth of an industry and I believe the potential is there. 17/20 

Competition & Risks

Crafter is not without risks, and below I will detail some that I came across:

• Was crafting a pandemic fad, when everyone was stuck at home?

  • I think the accelerated revenue growth refutes this.

• Won’t people just shop at Michaels?

  • Crafter is a home for high quality products & materials. Michaels and the other main brick + mortar stores are largely crafting-versions of Walmart. The quality isn’t there, and so this is where Crafter really differentiates itself. The startup makes some of its own goods, and also strikes exclusive agreements with premium suppliers to deliver the best materials.

• Can Michaels or Joann Fabrics launch a competing offering?

  • Yes, but they probably won’t. Although they could put significant funding behind it and force it to be somewhat successful, it would make more sense for them to acquire Crafter. Especially with the valuation where it is (more to come on this).

• There is a good amount of competition in the space, can Crafter break out of the clutter?

  • This might be the most fair critique. A google search of ‘crafting supplies’ and Crafter is nowhere to be found. I think they have a unique angle (high-quality, detailed lessons, subscription box), and this should allow them to stand out. However the company will need to invest in SEO to start ranking higher.

…14/20

Founder Strength

I had the opportunity to speak with Morgan Spenla for nearly an hour, and listened to her podcast appearance on This Week In Startups. She’s extremely pragmatic, able to depict a clear vision, and is very likable. She’s also a beast. Here’s some of her standout achievements:

• Took out half of her 401k to self-fund the business in its early years

• With no formal experience, built the initial website for The Crafters Box herself

• She’s led Crafter all while raising 4 kids, one of which was born in the last two years

• Morgan was recruited into Techstars after a remarkable performance at a pitch competition

Morgan’s proven to be scrappy, and her pragmatism should set the company up for sustainable success. 19/20 

Exit Potential

I believe the exit potential for Crafter is high. The old guard of crafting supplies is going to see this operation grow quickly, and it makes perfect sense as an acquisition target.

This thing will grow to the point where it will be a liability for either Michaels or Joann Fabrics NOT to acquire it. The only question here is, will it be Crafter acquiring them? 8/10

Valuation

There are a sliver of shares remaining at Early Bird terms ($8M valuation). For most investors, this startup stands at a $10M valuation. With thousands of paying customers, a path to profitability, and moderate revenue projections of $3.45M in 2023, I believe this to be charity work by Crafter.

Given the potential for this operation to scale, I don’t think it’s wild to see this business eventually grow to $243M in annual revenue. The business’ profitability would then determine how much of an asking price they can ask from a potential acquirer. 9/10 

Tallying up all the scores, I give Crafter an 83/100. This one has potential in my book, and as mentioned above I decided to invest myself. If you would like to learn more about Crafter, you’re welcome to check out this opportunity here!

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