StartEngine is raising an equity round at a $1.3 billion valuation. The company is one of the only unicorns — companies with valuations higher than $1 billion — to have ever raised money in the online crowdfunding market. The first unicorn to do so was Mercury in November 2021, when the company opened a small portion of its Series B private raise to its customers.

StartEngine had revenue of $29 million in 2021. Therefore, StartEngine has a 46x revenue-to-valuation ratio, which is high for a company at this stage of growth. When early-stage companies are overvalued, there is still room for growth and returns as the company will grow. But at this stage, if StartEngine goes public or gets acquired, it will likely give investors low returns. While a future valuation of StartEngine is impossible to know, investors might want to look at cases where inflated valuations are severely corrected by the market, such as Robinhood. 

Investors should also be aware that only 80% of the funds raised by StartEngine will go to the company. More than 50 stockholders are selling their shares and will receive a combined 20% of the money raised during this round. StartEngine CEO Howard Marks is selling the most shares and might receive up to $2 million if StartEngine raises its maximum of $46 million.

Therefore, if investors want to hold on to StartEngine’s stock after a potential public offering, there is a risk that the share price will devalue. But if investors want to sell their shares at exit opportunities, they should expect low returns. Since the risks associated with StartEngine, a growth stage company, are lower than for early stage companies, investors can expect that buying the company’s shares now will generate relatively low returns. 

StartEngine operates in the crowdfunding market, which has a healthy growth rate of 11% per year and was valued at $12.3 billion globally in 2021. The US accounts for 33% of that market, which brings StartEngine’s national market opportunity to $4.1 billion. The company provides mostly equity and collectibles crowdfunding. It does not address the segments of this market focused on donations, where GoFundMe is one of the leaders, or reward-based crowdfunding, where Kickstarter operates.

StartEngine is one of the leaders in the equity crowdfunding market, which consists of 75 funding portals. More than $456 million was invested in equity-based startup deals in 2021, and StartEngine deals collected $134 million. The company has the second-largest market share at 29%, right behind Wefunder, which attracted 36% of online equity investments. But in 2020, both StartEngine and Wefunder had close to 30% of the market, with StartEngine having a slight advantage over Wefunder. While it increased the amount invested on its platform — and therefore its revenue — StartEngine grew slightly less than Wefunder.

Funding platforms are regulated based on the JOBS Act by the Security and Exchange Commission and the Financial Industry Regulatory Authority (FINRA). They must adhere to legal standards and be approved by FINRA. Therefore, starting such a platform requires legal knowledge and an administrative process, which adds a barrier to entry to the market. 

Funding platforms are a two-sided marketplace. They must attract both startups and investors. Many platforms do not have enough startups deals to attract investors or enough investors to attract startups. Incoming platforms must leverage connections and large marketing campaigns to compete with the leaders in the industry and break through the network effect. This additional difficulty protects StartEngine in its position as a leader and makes it more difficult for new competitors to challenge its position.

Overall, StartEngine is operating in a quickly growing market where it holds a large market share as one of the industry leaders.

StartEngine was founded by CEO Howard Marks and Chairman Ron Miller. Marks is a serial entrepreneur who previously founded two game-related companies, Activision and Acclaim Games. Acclaim Games was acquired by Playdom in 2010, and the company closed down three months later. Marks holds a bachelor’s degree in computer engineering from the University of Michigan. 

Miller is also a serial entrepreneur. Prior to StartEngine, he founded the virtual law firm Miller & Associates LLP and the social security disability advocacy firm Disability Group Inc. Miller holds a bachelor’s degree in business administration and marketing from Michigan State University and a JD from the University of Detroit. The founders’ previous experiences as entrepreneurs are an asset in their quest to build a product that will be appreciated by startup founders.

StartEngine must deploy vigorous marketing efforts to attract both founders and investors. So CMO Johanna Cronin is a key component of the StartEngine team. While she doesn’t have any previous marketing experience, she is an early employee of StartEngine. She started in 2014 as the director of product and continued as a CMO in 2018. She holds a bachelor’s degree in psychology from Northwestern University.

StartEngine’s platform development is led by Joe Mathews, vice president of engineering. Mathews was previously the director of platform engineering at Science 37 and an engineering manager at BillTech. He holds a master’s in computer science from the University of Washington.

Finally, the team has found a strong advisor and spokesperson in Kevin “Mr. Wonderful” O’Leary. He is well known for being a television personality on Shark Tank, and his industry experience and network serve as valuable resources for StartEngine. 

StartEngine has more than 100 employees. The company received a 4.5-star rating on Glassdoor, and the CEO has a  90% approval rate. Since employees have a positive opinion of the company, the team is likely to be stronger and more efficient. StartEngine’s team, led by seasoned entrepreneurs, is set up to grow the company and is a good sign for investors.

About 75 equity crowdfunding platforms are authorized to operate by the Financial Industry Regulatory Authority. They have different levels of development, industry focuses, and prices. As one of the leaders in the market, StartEngine faces its closest competition in Wefunder and Republic. 

StartEngine has three main products: an equity crowdfunding platform, collectible investment opportunities, and a secondary trade platform to exchange private startup shares. Neither Republic nor Wefunder has a secondary platform. It is a key differentiator for StratEngine and will attract investors that are looking for short-term returns. The company also offers an owner’s bonus subscription that allows large investors to benefit from 10% bonus shares on many raises. This system is comparable to Amazon’s Prime subscription. It becomes financially valuable after investors put a certain amount in startups and might push investors to invest more on StartEngine rather than on competitors’ platforms. 

StartEngine does not allow SAFE (simple agreements for future equity) offerings on its platform, and most of its startup deals offer investors equity. This differentiates the platform from Wefunder and Republic, as both competitors offer large quantities of SAFEs on their platforms. Some investors prefer the certainty of buying shares at a fixed price over a SAFE, which will only convert at a future date.

StartEngine has several revenue sources. The company collects 7% of the dollar amount raised by startups, receives an additional 2% in equity, and charges an extra $10,000 when the offering is complete. StartEngine also charges investors up to 3.5% of their investments on startup deals, a 5% fee on the shares they trade on its secondary market, and offers an owner’s bonus subscription for $275 per year.

StartEngine is more expensive for startups than Wefunder and Republic. Wefunder charges a 7.5% fee but does not require equity. Republic collects 2% of equity on startup deals but only charges a 6% fee. The platforms’ designs and marketing strategies are also different and appeal to different types of investors. Customers solely looking for equity deals will gravitate toward StartEngine. But some might prefer the detailed financial and ownership information directly provided by Wefunder. Wefunder encourages social proof by requiring startups to have a lead investor. Republic offers investments in real estate, crypto, and video games on top of startup equity deals.

StartEngine is a leader in the equity crowdfunding market. It faces two close competitors that also gather large networks of investors and many startup investment opportunities. StartEngine offers a few differentiation points that sets it slightly apart from its competitors. But the differences are not drastic enough to prevent founders and investors from considering competitors.

StartEngine’s Form A, displayed on its website, does not contain its latest financial statements and only displays up to June 2021. KingsCrowd uses the information provided on StartEngine’s Form 1-K to provide investors with the latest information. Investors should note that despite the fact that StartEngine started raising after publishing its 2021 financials, the company didn’t update its raise page to reflect that.

StartEngine’s revenue more than doubled between 2020 and 2021, growing from $12.5 million to $29 million. This growth correlates with the 131.2% growth of dollars invested in equity-based deals between 2020 and 2021. However, StartEngine didn’t grow its market share and was surpassed by Wefunder, which owns 7% more market share. 

Additionally, StartEngine lost more than $1 million in 2021. Loss is common for a startup, but investors may wonder if the company’s funds were efficiently managed. In the case of StartEngine, it is questionable. CEO Howard Marks was paid more than $1 million in 2021. The two other highest-paid employees, Allen Jebsen and Joshua Amster, both vice presidents of sales, respectively received $788,345 and $677,565. While higher salaries may inspire more motivation, spending more than $2.4 million on the salaries of three people for a company with $29 million in revenue gives those employees more than 8% of the company’s revenue. With lower executive salaries, StartEngine could have easily been profitable. And data shows that these salaries are unusually high. The median salary of CEOs leading companies generating between $25 million and $50 million in revenues is $355,000, 3x lower than Marks’ salary. The median salary of vice president of sales in the US is around $250,000, which is 3x lower than the salaries received by Jebsen and Amster. Therefore, even if StartEngine greatly increased its revenue last year, investors should note that paying the CEO and sales executives closer to the median salaries received by their peers could have allowed the company to reach profitability. And without profitability, StartEngine is not a sustainable business and depends on the equity sold to investors.

StartEngine doesn’t have any long-term debt as of 2020. Its short-term debt of $6 million is more than 3x lower than its available cash and 4x lower than its revenue. Therefore, it is not a concern for investors. StartEngine has already fundraised more than $87 million, which demonstrates its potential to gather the funds necessary for it to scale.

As the second-largest crowdfunding platform, StartEngine hosted 806 deals between 2018 and 2021, and its deals received more than $134 million in investments in 2021 alone. Furthermore, its user count jumped from 400,000 in 2020 to 760,000 in 2021. The company has been featured in a number of publications over the years, including The New York Times, The Wall Street Journal, and Forbes, which highlights how much attention it has earned. StartEngine also benefits from the fame of its advisor and spokesperson, Kevin “Mr. Wonderful” O’Leary, who is well-known as a television personality from Shark Tank. O’Leary’s industry knowledge, connections, and fame are assets to StartEngine. 

Overall, StartEngine’s strong financial performance and traction are attractive signals for investors, but investors should be aware that the company’s top officers’ salaries are unusually high — even if the company isn’t profitable.

StartEngine is a pretty low-risk investment. The company is operating in a regulated market and needs to attract both investors and founders for its service to be operational. Traditionally, these points increase the market risk of a company. However, in the case of StartEngine, they do not appear to really impact the company’s risk. StartEngine is already a leader in the equity crowdfunding market, and the regulation and network barriers are an advantage for the company, as they can slow the entry of new leaders into the market. Financially, StartEngine is still growing its revenue exponentially and has low debts. Therefore, StartEngine is a low-risk investment.

StartEngine’s last round closed in December 2021, when the company raised an additional $29.4 million with a valuation of $786 million. In the current round, the company’s valuation has grown by 67% to reach $1.3 billion. The company is still overvalued, but this valuation growth coincides with StartEngine’s large revenue growth. Between 2020 and 2021, StartEngine’s revenue grew from $12.6 million to $29 million. The company also lost more than $1 million in 2021. According to KingsCrowd, the number of deals on StartEngine grew from 143 in 2020 to 283 in 2021, and the company claims to have increased its user base from 400,000 to 760,000. StartEngine’s growth correlates with the overall growth of the equity crowdfunding market. The total amount of dollars invested in equity-based deals grew from $197.3 million in 2020 to $456.4 million in 2021. To sustain this trend, StartEngine’s team grew from 62 to 104 members. Therefore, StartEngine successfully took advantage of the market growth as one of the leading funding platforms.

StartEngine is raising a few months after its last round closed in December 2021, in which the company raised more than $29 million. In the meantime, it is estimated to have more than doubled its revenue, and its valuation went up by 67% to reach $1.3 billion. With an estimated revenue of $29 million, StartEngine’s revenue-to-valuation ratio is a high 46x. While it is not uncommon to see such overvalued companies in the equity crowdfunding market, it is concerning in the case of StartEngine. The company could struggle to be acquired at this price if its revenues do not increase quickly. Its share price could also be severely corrected in the case of a public offering. Furthermore, only 80% of the funds raised during this round will go to the company, while 20% of it will repay existing stakeholders who sell their shares. Therefore, these terms are not favorable to investors. 

Additionally, the company lost more than $1 million in 2021. While it is common for startups to lose money, investors should note that the company lost this amount the same year it paid $2.4 million in salaries for three of its highest-paid team members. This number is 3x higher than the median salaries received by the CEOs and sales vice presidents of comparable companies. Investors should wonder whether StartEngine’s operational management is financially sound given this heavy loss.

StartEngine demonstrated efficient execution last year. While the equity crowdfunding market more than doubled, StartEngine took advantage of the momentum and grew its revenue from $12.6 million to $29 million. StartEngine benefits from being one of the leading funding platforms, and the strong barriers to entry that face any new competitor work to its advantage. StartEngine has some key differentiation points from the other two leading platforms, Wefunder and Republic, as it offers a secondary market to resell startup shares outside of their rounds. While StartEngine’s services are more expensive for startups than its competitors, it still attracts many companies and sustains itself with various sources of revenue.

To support its growth, StartEngine increased its team to more than 100 members. Its two co-founders, Ron Miller and Howard Marks, are both serial entrepreneurs. They have not only the experience to lead StartEngine’s growth but also the skills to create a product that fulfills founders’ needs. StartEngine is a pretty low-risk investment. The company is a leader in a rapidly growing market.

StartEngine is one of the three leading equity crowdfunding platforms. It offers an easy way for startup founders to raise funds from their communities and brings a large selection of startup deals to non-accredited investors. StartEngine is highly overvalued. Its recent valuation growth to $1.3 billion may be a concern for investors at this stage, as they may see limited returns in the case of an acquisition or public offering. For now, the company is not profitable. It lost more than $1 million in 2021 but paid its CEO and two sales executives a combined $2.4 million, which is unusually high for a company of its size. With lower salaries, StartEngine could have been profitable.

But while the share value is too high, the growth itself is justified by the company’s impressive results. In 2021, StartEngine deals collectively raised $134 million, which helped the platform increase its revenue to $29 million in 2021. StartEngine powers its growth with close to 100 employees and the leadership of two serial entrepreneurs, Ron Miller and Howard Marks. StartEngine has some points of differentiation from its two main competitors, Wefunder and Republic. The company offers mostly equity rounds and created a secondary market for investors to exchange shares before public offerings. StartEngine benefits from a rapidly growing market. The amount of dollars invested on equity crowdfunding deals more than doubled between 2020 and 2021. Therefore, StartEngine has been rated a Deal to Watch by the KingsCrowd investment team.

For questions regarding the KingsCrowd analyst report or ratings for this company, please reach out to support@kingscrowd.com.

Analysis written by Léa Bouhelier-Gautreau, May 2, 2022.