The launch of the StartEngine Secondary™ market for the shares of private companies valued for between a few million and a billion in October 2017 by StartEngine, a leading U.S. crowdfunding platform was a transformational event for the capital markets. To fully understand the significance of why see my November 17, 2017, article “StartEngine’s new secondary market extremely disruptive to capital markets”. The launch was also the catalyst for the following:
- StartEngine gaining a first mover advantage to emerge as the” Ameritrade” of the crowdfunding industry
- Equity crowdfunding to begin its drive to becoming a utility and ubiquitous by 2020
The passage of Title III of the JOBS Act in 2016 enabled anyone, regardless of their level of affluence or income, to invest in startup private companies. This has resulted in individuals having opportunities to invest tiny amounts into startups which have the potential to multiply by one hundred-fold or more.
With the odds of winning through investment in a startup better than those of the lottery; crowdfunding and most especially, startup investing, is poised to explode. Thanks to StartEngine, anyone can now utilize a smart device and a debit or credit card to spend as little as $10 to purchase shares of a startup that can be sold for a quick profit. Startup investing will become more popular than mobile games.
The now-accelerating crowd will be a boon for those startup and early stage companies, including StartEngine, which have been emerging to provide the infrastructure for crowdfunding. To understand how this will unfold, all one has to do is to take a look back at the early days of the web. As it always does, history will repeat itself. Those who invested in the web’s primary infrastructure providers: Amazon, Yahoo and Ebay prior to 2000, when they were still startups, made over 1,000 times on their investments.
My argument is that the demand by the public to participate in online equity crowdfunding has been pent up since 1996, when the web started on its path to ubiquity. That demand was stunted by the SEC which had crowdfunding bans in place from the SEC’s formation in 1933 until May of 2016, when the ban was lifted which had prohibited the public from investing small amounts in startups.
StartEngine, which most recently ranked as the 2nd largest Regulation CF crowdfunding platform in the US, has a huge advantage in becoming the “Ameritrade” of the online equity crowdfunding industry. The securities related online crowdfunding industry will be among the top four largest digital industries in the world by 2025.
StartEngine’s advantage over all of its competitors is management, management, management; to echo real estate’s tenet. The company is led by its CEO and co-founder Howard Marks. Mr. Marks, who has a degree in Computer Science from the University of Michigan, is considered to be among the key pioneers of the video game industry. He was instrumental in turning around Activision when it was on its death bed in 1991. Marks, the former chairman of Activision, and his partners; including Las Vegas casino magnate, Steve Wynne, rescued the company from insolvency in 1991. Marks also founded another video game company, Acclaim which was acquired by Disney. Howard is uniquely suited to drive online equity crowdfunding to become ubiquitous. The strategy that he is following to develop the products and services for StartEngine’s crowdfunding platform is the same that he utilized to drive video games to become ubiquitous.
Although StartEngine is still a small company, its recent financials and financial ratios demonstrate that its digital business and revenue model is now firing on all cylinders. Key financial metrics for 6 months ended June 30, 2017:
- Revenue increased by 224%
- Operating expenses increased by only 7.5%
- Net Loss declined by 32%
- Gross Margin @ 70%
StartEngine’s operating expenses for its 100% digital model increasing by only 7% as compared to a 224% increase in revenue is telling. Even more importantly, its gross margin increased significantly and to 70%. This is in line with the gross margins of the online brokerage industry. For example, Ameritrade’s most recent gross margin was 74%.
Since StartEngine is now the favorite to become the “Ameritrade” of the online crowdfunding industry, its market capitalization has the potential to get to above $20 billion ten years out in 2027. That would equate to $1100 per share as compared to the $5 price its shares now fetch. In the event that StartEngine does not become the largest, but would instead be among the top three in 2027, its share price could potentially reach $400; if it were to obtain a valuation comparable to E*TRADE.
|Market Capitalizations of three largest US online brokers as of 11/01/17|
Due to StartEngine having a first mover advantage in online equity crowdfunding, a digital industry which is projected to become one of the largest industries in the world, it would not be surprising for its market cap to go to a billion or more by as soon as 2018. If StartEngine gets to a billion dollar valuation its share price could potentially be at $40 or above by the end of 2018. This would represent an eight fold increase as compared to the $5.00 price that StartEngine’s unrestricted shares can be purchased for via its current offering.