Wefunder Investment Memo

By Max Marchione & Adam Miller, 26 July 2021

Across the globe, access to information is unprecedented, markets are becoming increasingly frictionless and retail investing is on the rise. Markets for real estate, artwork and even classic cars have been democratised through fractional ownership and secondary markets.

Private venture capital is the natural next step and equity crowdfunding is the path to get there.

Wefunder is an equity crowdfunding marketplace raising $10-$20M on a $150M pre-money valuation. Equity crowdfunding refers to the process of raising capital from many investors, often 300+ per deal.

Wefunder is an equity crowdfunding marketplace raising $10-$20M on a $150M pre-money valuation. Equity crowdfunding refers to the process of raising capital from many investors, often 300+ per deal.

Ever wanted to invest in your favourite company only to find it’s private? Well with equity crowdfunding, you can do just that.

As an overview, Wefunder has:

• $200M+ GMV
• $1M revenue in Feb 2021
• 98% gross margins
• 5x YOY growth in investment volume

Our primary reason to invest was to express our bullish view on the equity crowdfunding industry through taking a position in the market leader, Wefunder, which has 40% market share. You can read Max’s thesis for crowdfunding here.

Timing is ripe for the nascent industry and Wefunder has proven product/market fit. We unpack these factors before addressing how we gained conviction regarding our primary concern: the depth of the market and whether Wefunder has in place a sufficient playbook for growth.

Timing

US regulatory changes and EU market entry provide structural tailwinds making now the opportune time to raise. Both of these events will increase demand for crowdfunding. This raise can therefore be seen as a pre-emptive move to prepare for this demand.

US Regulatory change

Several regulatory changes went into effect in March 2021. The changes include:

• Companies can now raise up to $5m per year from unaccredited investors: This is likely to almost double Wefunder’s revenue.
• Companies can start campaigns within 15 mins: Compliance work now only needs to be done after rounds close, making it easier than ever to start raising.
• Investment limit changes: Anyone can now become an accredited investor and investment limits have increased. This should increase the average investment size on the platform.

European Launch

With new European crowdfunding laws coming into effect in October 2021, Wefunder is going to be launching into a $2.5b market. This is an opportunity to introduce new companies and investors onto its platform, and in the long-term may provide a revenue stream rivalling its US operations.

Metrics

Investment volume/GMV

Wefunder’s GMV has increased by 103% annually during its history, and has increased even faster looking at a quarterly view, with almost 7x growth from Q1 2020 to Q1 2021. The Q1 2021 figure yields an annual GMV run rate of $272M but we think >$300M GMV is more likely given the March figure of $32M.

Take Rate

Wefunder charges an 8.3% take rate on investments raised. This is lower than its two largest competitors, which both charge 11%.

Revenue

$1M in revenue in each February and March annualises to $12M revenue. Given that revenue lags GMV by 3 months and that GMV increased spectacularly in Q1 2021, we could see over $20m in revenue for 2021.

Expenses and profitability

Wefunder has an attractive gross margin of 98%, and low operating expenses. This is because Wefunder (1) owns its technology stack, reducing variable costs, and (2) spends very little on marketing. Indeed, Wefunder’s CAC is close to zero with 50% of companies discovering the platform through Wefunder’s referral network. Whilst this approach keeps costs low, it is not scalable as it relies on employees reaching out to founders. We are happy to see that Wefunder has started to trial a new, scalable referral rewards system. Whilst this increases customer acquisition costs, we predict LTV/CAC to remain above 25x.

Ultimately, low OPEX means that Wefunder is already profitable, giving it an edge over competitors with hefty cost structures.

Valuation

On Wefunder’s present ~$12M revenue run rate and a $160M valuation its revenue multiple is 13x. Given our revenue forecasts, Wefunder’s true forward multiple could stand at less than 10x.

Another method for valuing marketplaces is as a multiple of GMV. The median GMV multiple is 1.3x for marketplace startups. Using the 1.3x multiple, Wefunder would be valued at $353M, a significant premium to its current valuation. Adjusting for Wefunder’s lower take rate compared to other marketplaces, our calculations yield a valuation of $242M using the GMV multiple method.

Can Wefunder scale?

At a $150M valuation, we’re looking for signs that the team can build a scalable engine across all key functions, particularly sales, the lifeblood of a business.

Market sizing & the growth outlook

Currently Wefunder is launching 44 companies per month with an average raise of $225K.

To 3x at $225K per raise, Wefunder must launch 200 companies per month — a mammoth undertaking. Alternatively, at $500K per raise, that becomes 100 companies per month.

We believe this is possible for several reasons:

1. Wefunder projects the average raise size to increase to 500K with the regulatory changes on 15 March 2021. This regulatory change increases the minimum raise size by 5x, from $1M to $5M.
2. 248 companies are launching on 15 March with these regulatory changes.
3. EU equity crowdfunding reforms go live in November 2021. This massively expands the EU market, into which Wefunder has not yet expanded.

The existing crowdfunding market size in Europe and the US is $5B jointly. But we think it is reductive to look at the current market size. Instead, we break down the 2025 TAM as follows:

1. The US venture capital market is predicted to reach $230B by 2025.
2. In listed equities, retail investors account for 20% of trading volume.
3. Analogising retail investing in listed equities to crowdfunding in unlisted startups, we conservatively create three cases for the proportion of the VC market captured by crowdfunding (‘capture’): a. Base case = 5% capture ⇒ $12B TAM b. Downside case = 2.5% capture ⇒ $6B TAM c. Upside case = 10% capture ⇒ $23B TAM

But this is conservative because crowdfunding actually expands the existing VC market as it allows startups to raise that might not otherwise get funding. Market research group Technavio puts the market at $25B in 2025.

If Wefunder grows from 40% to 50% market share and retains its 8.3% take rate, annual revenue from America amounts to $332M.* Alternatively, using Technavio’s figures, it amounts to $2,075M.**

In addition, Wefunder plans to expand to Europe which more than doubles its TAM.

But wait, there’s more. Wefunder’s revenue streams are not restricted to a take rate. Other revenue sources could include:

1. Replacing the 8.3% take rate with 5% carry, as per AngelList.
2. Launching rolling funds and other managed investment products.
3. Advertising revenue: startups pay for featured listings and other companies pay for traditional advertising.
4. Data monetisation opportunities.
5. Upsell opportunities to startups raising on the platform: legal services, marketing services, etc.
6. Upsell opportunities to investors on the platform: portfolio tracking & management subscription services; paid analyst reports; subscription fees to participate in a secondary market.

Can Wefunder capture these growth opportunities

Market share and network effects

Marketplaces have inherent network effects. More startups on the platform draws more investors to the platform due to greater choice. More investors on the platform attracts more startups to the platform due to a greater pool of capital. This now draws even more investors to the platform. It’s a flywheel.

Proven track record and momentum

From 2019 to 2020, Wefunder’s year-on-year investment volume grew by 5 times. From Q1 2020 to Q1 2021, investment volume grew from $10.6M to $68M — that’s almost 7 times!

All this was done with less than $200k marketing spend and a lean team. In 2019, Wefunder CEO stated:

“Money isn’t really the bottleneck right now. It just pays for too many people, useless marketing, high salaries, and shiny offices…comfort is not our goal”

Plan from here

Costs for 2020 were $655K, a step change from the $19M that Wefunder just raised. Therefore, Wefunder has a hefty war chest. For many startups, this cash buffer might incentivise wastefulness. But, as mentioned, Wefunder have a track record of lean operations. The team is equipped to make $19M go a long way. And despite Wefunder’s market leading position, there are several areas that sorely require capital. In particularly, Wefunder’s website is clunky and it’s brand is stale.

We were therefore relieved to see plans to (1) increase headcount by 2.5x comprised 40% of engineers & designers, and (2) redesign the website. Wefunder’s CEO is deftly aware of Wefunder’s problem areas, a trait we are happy to see.

Wefunder are accelerating hiring to remain ahead of competition. As CEO Nick Tommarello puts it:

“One of our smaller competitors raised $36M recently. While we don’t mind being less resourced (we even enjoy it, as constraints breed creativity), we also don’t want to ever be in a position where a competitor can outspend us 10:1.”

From here, we would like to see greater acceleration of the referral engine and sales process. We are looking for evidence of an accelerating go-to-market engine that has attractive unit economics at scale. Wefunder’s competitors have been active in securing partnerships — Startengine partnered with Shark Tank celebrity, Kevin O’Leary, and Republic recently partnered with 500 Startups — so we are watchful for any marketing plays by Wefunder.

Footnotes

• $8B/yr * 50% market share * 8.3% take rate = $332M annual revenue from the US.
• $50B/yr * 50% * 8.3% = $2.075B annual revenue.