Are Debt and Revenue-Share Interest Rates Fair for Investors?

CHART OF THE WEEK 📈

By Brian Belley | Read

While many investors typically feel that debt deals are "lower-risk" than equity deals in investment crowdfunding, I've always wondered if that's really the case. As investors, we have plenty of options for where to put our money — like zero-risk savings accounts at banks currently offering 4.6% or even 5% interest! So, I decided to dig into the data on debt and revenue-share offerings to see if the interest rates are actually compensating investors for the risks they’re taking.

TLDR: to adequately compensate Reg CF investors for risk and opportunity costs, we estimate that the current average debt interest rate should be roughly 11.1% on pre-revenue deals and 10.2% on post-revenue deals. For revenue share notes, the break-even payback multiple should be a minimum of 2X for pre-revenue deals and 1.9X for post-revenue deals.

Other key takeaways:

• Average debt interest rate for Reg CF and Reg A offerings since mid-2022: 11.2% over 6.4 years.

• Overall failure rate for debt/revenue-share businesses: 4.5% (70 out of 1,569) within 1.9 years.

• Pre-revenue companies are the riskiest, with 54 failures (5.4%) vs. 1.5-3.0% for post-revenue companies.

• Only one company with over $500k in revenues has failed, suggesting higher revenues indicate lower risk (0.7% failure rate).

• Estimated break-even interest rate for investors: 11.1% for pre-revenue deals and 10.2% for post-revenue deals, assuming a 4.3% risk-free rate and 5% risk premium.

• Lower-risk deals (over $1M in annual revenues) might require lower interest rates by investors around 9.7% (or a 1.81X payback multiple over 6.4 years).

• Revenue share deals may not be compensating investors fairly, with an average payback multiple of only 1.17X (vs. a 2X estimated multiple required for the risk) and a rev share percentage of 5.5%.

To see more charts and analysis on debt interest rates, including whether or not debt interest rates in Reg CF have been changing over time, read the full article here.

Q3 Demo Day Announcement

Join us for our next KingsCrowd Demo Day of Summer 2024 on Wednesday, July 17th at 1pm ET, sponsored by Atlas Rd. Dive into the latest innovations as top-tier startups pitch their groundbreaking solutions. Witness firsthand the entrepreneurial spirit as founders showcase their businesses in technology, healthcare, and beyond. Don't miss this opportunity to engage with pioneering leaders and discover investment opportunities shaping the future. Mark your calendars for an afternoon of inspiration by registering below!

PITCH REVIEW 💸

By Teddy Lyons \ Deal Report

Brief: Food waste is a significant environmental issue, contributing to climate change and environmental degradation. In the United States alone, a substantial amount of nutritious vegetables are discarded as waste, eventually turning into methane gas (28X more potent than CO2) when it rots in a landfill. Trashy addresses this problem by creating snack chips from these nutritious vegetable scraps. By repurposing these otherwise wasted organic greens, Trashy not only offers a delicious and nutritious snack option but also contributes to the fight against climate change.

Key People: Trashy is led by founder and CEO Kaitlin Mogentale, who initially founded Trashy’s predecessor Pulp Pantry back in 2020. She led the company to millions of dollars in both online and retail revenue, and also to a successful run on ABC’s Shark Tank where she received three offers.

As she has pivoted the company into a full rebrand as Trashy, she has already done the hard work of building out relationships with distributors and retail chains to get her new product line to market quickly. As such, she is perfectly positioned to lead Trashy to a successful future.

Summary

Here's what we like: With distribution across 600 premium locations and a customer base exceeding 600,000, the company has demonstrated strong market traction with its initial product, Pulp Pantry. The company has now rebranded itself to Trashy, and will be utilizing the same infrastructure it used to produce and sell the new Trashy product line. The backing of reputable VC investors such Branch Venture Group further validates Trashy's potential.

Here's what we don't: The company has experienced a substantial decline in annual revenue, dropping by 61.88% to $381,545. This revenue decline was due to the company completely rebranding itself from Pulp Pantry to Trashy. The fact that the company is now rebranding is also a risk, as the initial product line of Pulp Pantry was not able to gain enough retail and consumer traction to build a viable business. According to the founder, large grocery chains found the name Pulp Pantry to be unappealing and unappetizing. This is why the company is rebranding to Trashy with a focus on communicating the upcycled food and environmental message to customers.

LAST WEEK’S POLL RESULTS

Would you invest in Sensate?

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🎙 INSIDE STARTUP INVESTING

By Sam Fiske \ Listen

In this episode, Chris engages with Caroline Strzalka, Co-Founder and COO of Overplay, a company merging gaming, the creator economy, and AI innovation. Overplay's platform allows users to transform any video into an interactive mini-game, creating a new form of media engagement. Caroline, with her rich background from Sesame Street to investment banking (and a repeat founder), brings a unique perspective on media interaction, focusing on user-generated content and interactive experiences.

STAFF PICKS 🌶️

Epi One

The company has developed a diagnostic testing platform for early detection of cancer. Epi One uses innovative DNA-based biomarker identification methods for faster and more accurate cancer detection. It can also detect prostate, lung, and pancreatic cancers. The company is led by an experienced team and is backed by $3.1 million in early angel funding.

• Pre-Money Valuation: $45 million

• Minimum Investment: $495

MedVector

MedVector is a telemedicine platform that aims to accelerate clinical trials. It connects subjects from across the world to clinical trial sites and increases participation in clinical trials. The platform is actively working with 20 clinical trial sites and is the official partner of the State of Delaware’s Health Information Network for clinical research.

• Pre-Money Valuation: $25 million

• Minimum Investment: $500

VirZOOM

Next generation of interactive and immersive in-house fitness through virtual reality. VirZOOM offers multiple virtual activities that are a lot of fun. The business has reported 966,586 installs, generated $3 million in sales, received a major development grant from Meta, and partnered with Google.

• Pre-Money Valuation: $61.4 million

• Minimum Investment: $1,001