Dear Startup Investor,
Our portfolio holding Magnises is a credit card company.
It also serves as a sort of club for millennials.
And, much like an American Express card, it offers perks to its members.
You can think of it as the American Express card for millennials… but clubbier.
For example, it has a deluxe townhouse in Manhattan where members hang out.
We recommended Magnises to you in June 2014.
At the time, they were operating just in New York City. Getting 50 applications a day. And accepting about a third of them.
They have since expanded into Washington, D.C. – a development Adam and I applauded at the time.
Not surprisingly, the company doubled its daily intake of applications from 50 to 100.
Revenue from membership fees grew from $1.2 million in 2014 to $2.1 million in 2015. Here’s a chart depicting the growth…
It’s the kind of chart that public stock market investors would drool over.
But, quite frankly, it’s the kind of growth startups at this early stage need to have. To attract more funding. To hire high-caliber people. And to raise their valuations.
(That’s no small matter. The higher their valuations, the fewer shares they have to issue to raise more money. And that minimizes dilution for founders and early investors alike.)
Adam and I expect annual growth for seed companies to be 50% to 100% year over year. We’re not exactly drooling.
Yet Magnises is at the high end of our range. Suffice it to say, we’re pleased with its growth so far.
Major Expansion in 2016
It’s still very early in the game.
So, the question we’re constantly asking the founders of our startup portfolio companies is this…
“What’s next?”
We love how Magnises answers this question.
To date, growth has been driven by expanding into an additional city – in effect doubling the cities it’s in.
To sustain this pace, Magnises would have to add two more cities this year.
That would have met our minimum expectations. Not great. But not horrible.
I’m very pleased to report to you that Magnises’ expansion plans are far more ambitious.
Expansion Is Well-Timed
Starting in 2016, its growth will be getting several powerful boosts.
For one, it’s tweaking its monetization model.
Up until now, it made 70% of its revenue from annual membership fees. This year, advertising revenue will exceed fees, Magnises’ founders say. It should account for 60% to 70% of revenue.
And the other big boost?
Magnises is expanding into 10 more cities this year.
It already has 10,450 members. Expansion plans should lift that number above 50,000 and lead to substantially more membership revenue.
The company has also found market/product fit. The telltale sign? Its 80% membership renewal rate. Solid proof that millennials like what Magnises has to offer.
So there’s no reason to think the company’s ambitious expansion plans are early.
2.5X Profit Is Just the Beginning
Magnises has begun another fundraising round (Series A). It has raised more than $400,000 of the $500,000 it’ll be using to finance the launch.
When we invested in mid-2014, the company’s cap was $7 million. For its current raise, it’s $17 million.
If you could sell your shares to investors participating in this round, you’d make nearly 2.5X.
But of course you can’t. You should know this already. But I don’t mind repeating why this is so.
You are in the long-term investment game.
You can (and should) monitor the rising valuations of your startup investments. But your shares can’t be cashed out until a “liquidity event.”
An IPO or buyout, in other words.
If all goes well, by that time, Magnises will be in dozens of cities, including perhaps a couple of overseas ones. And your profit will be anywhere from 10X to 50X.
This is not pie-in-the-sky thinking. This is what early investors legitimately hope for when they see their companies scale successfully.
When we first chose Magnises for our portfolio, we loved the idea of an American Express card for millennials. It was one of those “big ideas” that could return humongous profits.
We also liked the company’s traction, but it was nascent. And we liked the founders, their professionalism and entrepreneurial background.
One-and-a half years later, we’re more confident about all of this…
The idea of such a card finding willing users has been borne out. Traction has accelerated. And the founders have executed.
Magnises has aced its tests so far. This is a critical year for the company. Execution will be tougher than ever. But by this time next year, we’ll have a much better idea of whether Magnises is a 2X to 5X company or a 50X to 100X company.
It’ll be a lot of fun to see how the year plays out. I’ll be sure to let you know of further developments.
But so far, so good.
Invest early and well,
Andy Gordon
Startup Investor Portfolio
