YieldTalk news and links - 01 October 2021

New/Updated Platform Reviews

New review: HappyNest is a consumer-style mobile app offering low-minimum commercial real estate investments open to all investors. Getting started is easy, but prospective investors should be aware that withdrawing funds within less than 3 years may trigger penalties, and all dividends are automatically re-invested unless you opt-out. HappyNest was founded by a West Point graduate with 10+ years of real estate experience, and brings a very consumer-oriented, mobile-first experience to real estate investing. Our rating: Very Good.

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Updated review: When I first looked at EquityNet several years ago, I gave it a poor rating in part because the website barely worked at all, and there were very limited options for communicating with the companies looking for funding. They’ve since invested heavily in improving the website (though it still reads as dated), and addressed several of my original concerns, so I agreed to take another look. Things have definitely improved, but their primary business still seems to be selling services to entrepreneurs to help them develop a business and fundraising plan, then marketing those businesses to their database of prospective accredited investors. Put a different way, many platforms market to investors, emphasizing the quality of their offerings; EquityNet markets to entrepreneurs, emphasizing the quality of their investors. EquityNet is not alone in taking a “let the marketplace decide” approach, but prospective investors should be aware of that before investing. Our rating: Good.

Notable Offerings

• 🍕 Basil Street is raising a $20M Series B on SeedInvest (our review) to scale their “automated pizza kitchen” which “uses patented technology that gives customers a piping hot, delicious, 10-inch, Italian-style pizza that cooks in about 3-minutes. With our robotics technology, we are able to reduce labor costs and create a low-cost, scalable business model.” Minimum investment is $998, and open to all investors. More at Seedinvest
• Crowdstreet (our review) has launched their Opportunity Zone Fund II, which is “an actively managed Qualified Opportunity Zone Fund that targets diversification across ~4-6 projects with potential to defer, reduce, and eliminate eligible capital gains taxes for investors.” Minimum investment is a hefty $150K, though it may offer significant tax advantages. More at Crowdstreet.

Worth Reading this Week

If you’ve heard the term “DeFi” (short for “decentralized finance”) but aren’t quite sure what it means or why it matters, this briefing from the Economist is both a digestible primer and a wake-up call to start paying attention (for example, the Ethereum blockchain settled $2.5 trillion in transactions in Q2 2021 – about the same amount as Visa settled in the same period):

Talk of blockchains, daos and metaverses sounds so utterly bewildering and far-fetched that it might be tempting to give up listening to the DeFi crowd. The success of this nascent technology is, indeed, far from guaranteed. But piece by piece a new kind of economy is being built through applications on various blockchains. Each addition makes it more likely that the whole will amount to something meaningful and powerfully disruptive.

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🐹 OTOH a hamster in Germany has been picking cryptocurrency trades for more than 3 months and delivering returns that beat both the S&P 500 and Bitcoin 🤷:

The livestreamed hamster, named Mr. Goxx, has been independently trading a portfolio of various cryptocurrencies since June 12, and so far its performance has been impressive. As of Friday, the portfolio was up nearly 24%, according to the @mrgoxx twitter feed that documents daily performance, along with every trade made by the hamster. Mr. Goxx’s performance outpaces bitcoin and the S&P 500 over the same time period.

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A recurring theme in this newsletter (and indeed at YieldTalk overall!) is that new funding and financing models like investment crowdfunding are complements to the existing ecosystem, rather than replacements, helping to find and fund projects and companies overlooked by incumbents. New research from the Brookings Institute called Beyond VC: Financing technology entrepreneurship in the rest of America puts some helpful data and context around just how underserved many regions and industries are by the traditional VC model for funding technology entrepreneurship:

Companies that may achieve steady or uneven—but not rocket ship—growth are often not great fits to receive venture financing. Such companies may have long sales cycles, sell into markets with big—but not $100 billion—revenue potential or require significant capital expenditures or regulatory approvals prior to scale. The disincentives for venture capitalists to invest in such companies are reflected in the industries on which they do focus: in 2020, the internet and software sectors consumed over 47% of the nation’s VC investment, while the industrial sector hovered at 4% and agriculture and energy/utilities each did not crack 1%. Sectors like agriculture, government, and manufacturing thus see limited VC-driven innovation due to the incompatibility of the venture financing model with these sectors’ sales cycles, market potential, and growth trajectories. However, even technology companies operating in industries more attractive to VC may not be able to access such financing if they do not exhibit the rapid growth trajectory sought by venture capitalists, leaving many sustainably growing technology companies with limited funding options.

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The High Cost of the High Cost of Housing

Productivity in Agriculture (for labor) has grown 16X since 1947. The corresponding growth in Construction for the same time period? Zilch. There’s some challenges with the underlying data collection (a lot of labor hours aren’t tracked when an industry relies heavily on undocumented workers) and there’s important differences in types of construction (it seems that productivity for many industrial and commercial building construction is indeed up) but there is no question construction is more expensive than it should be compared with the tech-driven productivity gains seen in so many other sectors over the past 50 years. This first in a 2-part series on construction labor productivity offers helpful context and nuance for real estate investors (and investors contemplating investments in construction tech).

[P]roductivity in construction has been either stagnant or negative since the early 1970s. Mismeasurement of prices might mean the decline isn’t quite as bad as advertised, and some construction industries (and many construction activities) have probably seen their productivity grow somewhat. But none of these caveats is nearly big enough to reverse the basic fact of long-term stagnation

A consequence of high construction costs – combined with a radical reshuffling of where Americans want to live and work post-Covid and continued strain on global supply chains – is that housing prices have risen nearly 20% over the past 12 months, as measured by the S&P Corelogic Case-Shiller Index, with prices in Phoenix jumping an eye-popping 32.4%. A consequence of that is that US household net worth set a record in Q2, increasing 4.3%. Those kinds of housing price increases are clearly unsustainable. But the juxtaposition of home-price increases with record household wealth is a reminder that we have this weird collective cognitive dissonance between lamenting about the high price of housing and simultaneously parking the majority of our wealth in our houses on the hopes their value will rise and outpace inflation.

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If you’ve explored investing in startups, you’ve probably also seen at least a few startup pitch decks. A lot of them (especially for very early stage companies) will reference a company’s “MVP” or “minimum viable product”, a term coined by Eric Ries in his seminal book The Lean Startup. Gagan Biyani writes in First Round Review that it’s a mistake to jump to quickly to building anything no matter how “minimal” it may be. He argues in favor of “minimum viable testing” instead, and his detailed framework provides some useful tools for probing the progress and process of startups you might be considering investing in:

Minimum Viable Testing involves identifying hypotheses you have about a market and creating tests that only focus on those hypotheses, not the long-term vision, the customer’s opinions, company or product building. This method forces you to be even more minimal in your initial tests, so that you can save time and have higher accuracy on your eventual initial product.

Odds and Ends

• StartEngine (our review reports $2M in net income on $13.4M in revenue for the first half of 2021
• Real estate platform Groundfloor (our review) has formally launched their mobile app “Stairs”: “All Stairs deposits qualify for 4% interest, and now you can earn an additional 2% interest by setting up Recurring Transfers (+1%) and by turning on Round Ups (+1%)”
• Commercial Real Estate investment platform EquityMultiple (our review) announced the launch of Short Term Notes, offering short-term liquidity (the first series has a 180-day term)