Liquidity! We have Liquidity!

Welcome to this week’s edition of CROWDSCALE, where we bring Shark Tank to your inbox. We’ve got 3 great reads this week:

• 💵Market’s Open: StartEngine rolls out Marketplace

• 💀 Deathly Dollars: Startup is making millions from unique burial option

• 🕵️‍♂️ Missing Raises: Why are the number of raises declining?

Liquidity has arrived.

Way back in the stone age (2021), StartEngine had a part of its site called Secondary. It was essentially a place where investors could buy and sell their equity investments in startups.

This was touted as a huge win for investors because startup investing is extremely illiquid. Meaning, you often can’t access any of your money until there is an exit event, which either never happens or can take 10+ years.

Secondary existed so that investors could sell their shares earlier than that, should they ever want/need their money.

Plagued with issues, StartEngine shuttered Secondary

In a way, Secondary was set up for failure and StartEngine eventually shuttered the service.

• Trading hours were extremely limited to just 1-4pm on weekdays

• Only a select number of companies were available to trade on Secondary

• As a result, transaction volume was extremely low

Marketplace is zigging where Secondary zagged

StartEngine’s Marketplace is essentially the Ticketmaster for startup equity.

• Open 24/7

• No stock charts, someone sets their price and buyers can accept it or pass

• Available to all companies, even some off the StartEngine platform

The one catch? Selling you shares on Marketplace is only available to users that have a StartEngine Owner’s Subscription ($275 annually). Additionally, due to regulations Reg CF investments need to be held for one year before any resale can take place.

I think there’s going to be a lot of opportunity here to snag some shares for dirt cheap prices. Many inexperienced investors do not understand that it takes years for startups to exit, and they may decide to prematurely sell their shares at a low price.

Here’s a stat that made my head turn…

In 2022, the majority of deceased people were cremated instead of a traditional burial. Nearly 60% in the US opted for cremation services, up drastically from 24% in 1998.

Cost plays a major factor in this trend. Traditional burials cost an average $10,000 while cremation services can be found for 1/10th of that price. The death of the traditional burial is leaving room for one startup that wants to put an earthly spin on post-life services.

Traditional Burial → Cremation → Human Composting?

Katrina Spade saw an opportunity in the rapidly shifting funeral service industry to design a more earthly, eco-friendly burial. She’s the founder of Recompose, a Seattle-based startup that is pioneering a process to rapidly return the body to the earth.

The deceased are individually placed in a Recompose vessel that is designed to replicate the forest floor. Over a span of ~2 months the body is gradually turned into 1 cubic yard of soil that can either be donated or given to back to the family.

Spade touts the process as a more eco-friendly than cremation, which emits 700 million pounds of CO2 in the U.S. each year. And at a price of $7,000, Recompose stands to be less expensive than a traditional burial option.

Here’s the 2nd stat that made my jaw drop…

Recompose has done $1.6M in revenue during their first two years of operation, and are set to nearly match that total in year 3. I’m considering adding this to my portfolio, as there are a lot of things going in Recompose’s favor:

• Solid revenue traction, the $1.6M is just from their one Seattle location

• Revenue is mostly front-loaded. Recompose has a payment program called ‘Precompose’ that allows people to start paying for their funeral services ahead of time. They have $7.6M in booked revenue - this allows them to easily model out financials & helps with paying vendors on time.

• Changing legal landscape. Prior to 2019, Natural Organic Reduction (what Recompose is doing) was barred in all 50 states. Recompose has lobbied quite successfully and the process is now legal in 7 states just 4 years later.

Now here’s what I don’t like. The valuation is extremely high at $76M (pre-money). That’s 51x revenue, and Recompose wasn’t even close to profitability in 2022. Now while they did lose $3.8M, a bulk of these costs are attributed to one-time installation fees of their first location.

I think Recompose will have a relatively low cost-structure once their facilities are set up, so I’m not overly concerned with profitability. I also think that they can conservatively generate $4M annually at each location, which would be 571 people paying the base cost.

They should be able to scale to 25 cities in the US alone and therefore have a clear path to $100M in revenue (25 locations x $4M) while bringing their costs down with scale.

So while I would like to see a lower valuation at this stage, I think long-term that this investment could play out. If you’d like to check out Recompose’s investment round details, check it out below!

Reg A+ Deals are becoming more scarce

The above Kingscrowd chart depicts the number of times people mistake me for Ryan Gosling Reg A+ raises since 2020.

Reg A+ simply means that the company is at a more mature stage and can raise more money from investors. Ever since May of 2022, the number of Reg A+ raises has been in steady decline.

Multiple factors could be to blame - rising interest rates, a softening economy, and the fact that many companies raised huge sums during the stimmy check bonanza of 2021. But it remains a worrying sign for the industry as a whole, and maybe most so for StartEngine, which specializes in Reg A+ raises.

We’re gonna look towards the back half of the year to see if the Reg A+ market rebounds ✌️

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Please note that this is not financial advice, nor a recommendation to invest in any of the startups mentioned. Readers should conduct their own due diligence and understand that startup investing is a risky asset class.