First Stage Investor: Issue No. 21

Bringing Virtual Reality to Work
New Recommendation: WorldViz

By Andy Gordon, Co-Founder, First Stage Investor

They’re all coming soon…

Driverless cars. Drones. The blockchain. Plus several other frontier technologies.

When they do, they’ll make the impossible possible. That’s what new
technologies do.

We live in such an exciting time. Most people have no idea of the amazing changes coming down the pike.

Even fewer have heard of one particularly jaw-dropping technology.

Coming across remarkable technologies every day, I thought I was pretty inured to the jaw-dropping phenomenon.

But the one I’m about to introduce to you? I assumed it was at least a year away from becoming available.

I was wrong. It’s ready right now.

WorldViz’s virtual meeting technology has the potential to completely change the way we communicate and share ideas.

I believe it will give face-to-face meetings a whole new meaning.

A Game-Changing Product 15 Years in the Making

This not-so-young startup has no real competitors. Nobody is even close to placing virtual reality (VR) at the service of manufacturers in the way that WorldViz is…

It’s one reason why the company has been able to ramp up to $5 million a year in revenue.

WorldViz was founded in 2002. Within a very short time, it carved out a position of leadership in VR technology for enterprises.

For the last decade, its VR platforms have let companies quickly design, manipulate and test new products in real-world scenarios. Then, in 2015, it had a breakthrough.

WorldViz co-founder Matthias Pusch says it was “not so much in our technology as in our thinking of how to put our technology to use.”

WorldViz had a front-row seat to the advances made in VR software, systems and tools.

It saw the cost of VR hardware dropping precipitously.

And it noticed a surprising trend. Contrary to all expectations, VR technology was gaining a bigger and faster foothold among enterprises than among gamers and consumers.

That sealed the deal, Matthias told me. WorldViz began filing patents (four approved and five more pending) for a user-friendly platform that lets company personnel meet and give presentations virtually.

It did an alpha test and then a beta one. It iterated and reiterated. It made a series of improvements to its platform.

It experimented with price points and payment models before settling on three levels ranging from a low of $125 per month to a max of $2,500 per month.

Then in January 2018, with product-market fit nailed down, it rolled out its intuitively easy-to-use platform to the public.

Its Initial Users Speak Up

Customers were impressed… One customer, STERIS Corp., said, “Vizible is transforming the future of healthcare design at our company.”

Another customer, Travel Group Hotels & Resorts, said, “Vizible really almost leapfrogs us from where we are now in marketing to where we’re going to be tomorrow.”

A familiar and trusted voice also spoke up: Jan Goetgeluk, founder and CEO of Virtuix, one of our portfolio holdings.

He said, “The WorldViz team has a strong vision and an impressive track record of bringing real value to businesses.”

The Hard Things About “Easy”

WorldViz’s new cloud-based VR collaboration product, Vizible, lets users hold VR meetings anywhere and with anyone.

Now, that’s pretty cool. And it’s a huge technological feat to pull off. But the real challenge?

To make it easy. And to make these meetings as productive as traditional ones. Mission accomplished on both counts.

The technology lets users move about in the space… use a virtual laser pointer… zoom in on objects… and annotate and measure them.

Users can drag their own content (be it PDFs, videos, audio or 3-D models) into a VR presentation and position it wherever they want.

Once a user is invited to a Vizible meeting, all they need to do is accept the invitation and then join the host using a PC, an Oculus Rift VR headset, an HTC Vive VR headset or a 3-D projection system.

What I also like is that support for mobile VR devices, such as Google Daydream and Samsung Gear VR, as well as WebVR, is scheduled to arrive by Memorial Day.

WorldViz Earns Top Grades

Adam and I have a neat little 45-criteria test startups must pass before we recommend them. WorldViz easily passed our test.

We don’t have the space to go into all the details, but about 80% of the most important ones fall under one of four broad categories we call the “four M’s”: market, monetization, metrics and management. So let’s see how WorldViz scored so highly…

Market. Consumer VR entertainment is slowly gaining momentum.

On the other hand, enterprise VR is surging ahead.

It’s growing at a compound annual growth rate of 59.6%. At that pace, by 2021, it’s projected to top consumer entertainment revenues.

Research firm Tractica projects enterprise spending on VR and AR (augmented reality) will be roughly 35% greater than consumer spending on VR and AR entertainment by 2021 (not including hardware-related revenues).

Tractica estimates the “vast addressable markets… for the five largest areas where enterprise VR will grow will be worth over $1 trillion in 2017.”

Believe me, consumer VR’s day will come. And it will be big.

But for right now, it’s hard to ignore two huge
business-spending buckets…

The first is travel. Companies spend $1.25 trillion globally on business travel. The second is sales technology.

Companies spend $2.4 billion a year on presentation tech… $2.1 billion on video… and $1.8 billion on business communications.

Of course, not all business travel is to show or assess complex projects, product designs and schematics.

But Vyopta found that 15% of business travel gets reduced when businesses invest in telepresence technology.

So if 15% of the $1.25 trillion budget can be saved (and it’s probably much more), that’s $187.5 billion in potential savings from using WorldViz’s services.

WorldViz’s markets are not only vast but growing rapidly.

Monetization. WorldViz recently changed its revenue model.

It went from an a la carte model to a subscription model with three levels…

The company anticipates 60% of its revenue will come from its Pro Account this year. The remaining 40% will be split roughly equally between the Standard and Enterprise ones.

WorldViz says Vizible will be accelerating revenues going forward, beginning with a doubling of revenue from $5 million in 2017 to $10 million in 2018. (With the first quarter almost completed, WorldViz tells me this projection is probably conservative.)

By 2021, the company says Vizible will be the company’s biggest revenue earner.

Given this year’s $10 million revenue target, its valuation of $19 million is more than reasonable.

WorldViz’s monetization strategy is more advanced (and more proven) than the strategies of the overwhelming majority of our current holdings (when I first recommended them).

I give it an A+ here.

Metrics. The key metric I look at in any SaaS (software as a service) business is the ratio of lifetime value to customer acquisition costs. WorldViz says the average lifetime value of its customers is $50,000. And the customer acquisition costs are $5K to $8K.

That’s a range of 6 to 10 for this ratio… way above the 3.0 we look for.

Its growth metric equals or exceeds the 100% year-over-year increase we look for, as you can see from the chart on the previous page.

It also adheres to one of my favorite rules, the 40% rule. The 40% rule says losses are acceptable if
revenue growth is above 40%. If it’s below, companies need to show profits.

For example, if you’re growing by 100% a year, you can lose 60%. But if you’re growing by 20% a year, you need to make a profit of 20%.

So how does WorldViz do vis-à-vis the 40% rule? In January, which the company projected would be the worst month of 2018 for losses, the losses amounted to 36%. Its next worst month is projected to be July, when projected losses amount to 12%. It also has two other losing months.

Unless WorldViz’s projections are way off, the company easily exceeds the 40% rule requirement.

Again, what this means is its growth-to-expenses ratio is in a sweet spot.

Management. CEO Andy Beall heads WorldViz’s deeply experienced management team. I’ve had several phone conversations with him.

He’s a very accomplished guy. Not only is he the company’s CEO and chief tech officer, but he also co-directs the Research Center for Virtual Environments and Behavior at the University of California.

And his research interests aren’t exactly run-of-the-mill. They include visual psychophysics, collaborative virtual environments, and advanced displays and controls. Ho-hum.

His co-founder Matthias, mentioned earlier, brings 15 years of experience in VR engineering, marketing and sales to WorldViz. Before joining WorldViz, Matthias was a highly paid consultant to McKinsey & Company.

WorldViz has 35 employees in all.

How to Invest

First, you’ll need to register for an account on
SeedInvest.com if you haven’t already. Fill out all the fields and confirm your account via email. (Note to new users: We have known the team at SeedInvest for years now, and we trust its platform.)

After you’re registered and signed in to SeedInvest, navigate to this page.

On the page, click on the blue “INVEST” button. Select how much you want to invest, and follow the directions to submit your payment.

Deal Summary

Company: WorldViz
Industry: Business-to-business commerce, virtual reality, SaaS
Investment Type: Preferred equity
Valuation: $19 million
Round: Series A-1
Minimum Investment: $500
Portal: SeedInvest
Transfer Restrictions: Securities issued through Regulation Crowdfunding have a one-year restriction on transfer from the date of purchase – except to certain qualified parties as specified under Section 4(a)(6) of the Securities Act of 1933 – after which they become freely transferable.

Risks and Notices

WorldViz is an early-stage startup. All such investments are inherently risky, so never invest money you can’t afford to lose.

You should expect to hold this investment for five to seven years or longer. An acquisition is possible before then, but ideal early investments take years to reach an exit scenario, such as an IPO. ■

CRYPTO UPDATE

Free Crypto: How to Score It… and Avoid Scams

By Adam Sharp, Co-Founder, First Stage Investor

We’ve all seen ads online offering free stuff. “Get your free iPad!”

Of course, there’s often a catch to schemes like this. You have to share your personal information – and let the gift giver share it wherever they will – or sell stuff to your friends.

So 99% of the time I see something free advertised on the internet, I automatically dismiss it. But free crypto is a different matter. Giving away free crypto in “airdrops” can be an excellent way for a new project to gain traction.

For example, in the early days of bitcoin, project leader Gavin Andresen gave away 75,000 bitcoins to users. All people had to do was prove they were a real person by filling out a “CAPTCHA,” and voilà, as many as five bitcoins were sent to their wallets. Today those airdropped coins are worth as much as $45,000 per person.

This early bitcoin giveaway helped the network grow immeasurably. It boosted the “network effect,” a key factor that drives crypto adoption, and also spurred the vital “viral organic growth” that cryptos thrive on.

The ideal cryptocurrency has wide distribution – in other words, a lot of users and holders.

When an “airdrop” of coins or tokens happens, recipients get instant distribution. Some of these people will become champions of the new project. Some will buy more coins or tokens. And a few valuable coders may contribute directly to the software if they believe in the project.

Most importantly (and this is the whole idea behind an airdrop), some of the recipients will tell their friends about it. That can kick off a buying spree if the project seems promising and undervalued.

Others will begin mining and operating a node, which helps process transactions in many coins.

As you can see, airdrops make a lot of sense for crypto projects. And now that initial coin offerings are in legal trouble (particularly in the U.S. and China), airdrops have become a vital distribution mechanism for new coins.

So we’ll be paying a lot more attention to airdrops in the coming months. If you’re interested in getting started immediately, airdropalert.com is a good place to do so. One quick security tip: I recommend using a new email address for your airdrop registrations.

This way you won’t clog up your primary email account with potentially risky emails. It’s possible some of these email lists will be sold, rented or compromised. So, generally speaking, don’t click any links or open any attachments or anything else that you are even slightly suspicious of.

Types of Crypto Airdrops

There are many different types of airdrops. Some require you to own a specific coin. For example, a new token debuting on the Ethereum network (known as an ERC20 token) may choose to distribute a portion of its new tokens to every Ethereum owner. This (and other airdrops) is done through the blockchain in a very efficient fashion.

Other airdrops require registration on the project’s site. Often these projects perform detailed checks on registrants. Most of the time you’ll be added to the newsletter and receive updates.

Sometimes you’ll be required to follow the project’s primary Twitter account or join its Telegram channel (a chat service). This helps the project display better “social media metrics.” It’s a bit manipulative, since not all attendees actually interact or pay attention.

Overall, there’s not a ton of work involved in most airdrops. They do, however, require attention to detail and good security practices. I’m on the lookout for promising airdrops right now, and I’ll let you know as soon as I find any good ones. ■

investment strategy

Everything You Need to Know About Startup Investing

Strategies for Early-Stage Pursuits

By Andy Gordon, Co-Founder, First Stage Investor

First Stage Investor is a little more than 1 1/2 years old. We’re 26 holdings old… and 27 recommendations old. (We recommended DSTLD twice.)

We’ve been averaging nearly three recommendations every two months. We’ve kept our older members busy, and we intend to do the same for our newer members.

Old and new members alike can look forward to getting plenty of exciting startups to invest in as we move forward.

Yet old members have an advantage over our new ones… They know more, by virtue of being with us longer. Even if the only thing they read is our recommendations, it’s still true.

That’s no accident. We pack our recommendations with information and useful insights so you can make an informed decision on whether to invest.

But we also want to teach you how to invest… so you can begin seeing startups how we see them.

It doesn’t happen overnight. And while it’s true our newer members have some serious catching up to do, I want to speed them along the learning curve…

Right here and right now! What follows is a mini overview of what you need to know to invest intelligently in startups. Read it, and then read it again.

Near the end, you’ll find a little bonus: some hard-won clues I’ve discovered through the years about some of the unexpected ways the very best startups reveal themselves to investors.

In It for the Long Haul

The first thing you should know is this…

Our ultimate goal is to watch our investments go from very small to very big.

The reason why is simple. It means big gains for us. Time plus growth equals large returns.

What could be simpler than that? Early investors are marathon runners, not sprinters. The “race” can take three years if you’re lucky, but more typically five to 10 years.

Facebook’s “overnight” success was years in the making. As were the successes of Google, Amazon and 99% of unicorns (startups with a valuation of at least $1 billion).

These races don’t allow you to drop out. In other words, you can’t cash out your investment. They’re basically illiquid until a “liquidity event” happens – a buyout or an initial public offering (IPO). Patience is required.

Spotify was founded 12 years ago; Dropbox and Credit Karma 11 years ago; Airbnb 10 years ago; Uber and Slack nine years ago… and so on.

Early investors still haven’t cashed out on any of these companies (as I write this). But don’t feel sorry for them.

They’ve watched their companies grow from very small to very big. They’re going to be making huge profits from their investments… anywhere from 50X to 500X.

Worth the wait, I’d say. An even simpler equation that captures the essence of our investing space…

Long haul equals huge haul. A small group of investors have been taking advantage of this equation for decades. And now YOU can.

Curious as to how we got from there to here? Let me fill you in.

The President Who Built the Wall

The president of the United States said it was time. The country’s economy was in shambles. A wall must be built.

Sound familiar?

Except this was not President Trump. Nor was it this century. And in this case, the wall went up.

The president who built this wall? Franklin D. Roosevelt. The legislation that got it done? The Securities Act of 1933.

It forbade most people from buying shares of nonpublic companies – startups, in other words.

It initiated a period of more than 80 years when investing in startups was not a right but a privilege… reserved for the privileged.

The rich. The economic elite. The politically connected.

That all changed in 2012, when the Jobs Act was signed into law – but it took a couple more years to knock down the wall built around startups. Finally, the SEC issued the enabling regulations needed.

In mid-2015, EVERYBODY became eligible to invest (though with limitations as to how much).

It ushered in the dawn of a new age of investing. Don’t look now, but YOU are its early adopters, trailblazers and pioneers.

Congratulations.

The early bird gets the worm. Great young companies equipped with new ideas, technology and business models, and led by brilliant and often seasoned entrepreneurs, are asking YOU for money.

It’s a great time to be an early investor. (In case you didn’t know!)

The Upside

Then again, nobody knew. Not me, not my partner Adam, not anybody.

What we did know was that venture capitalists made much more money investing in startups than investors did investing in public companies, including tech companies listed on the Nasdaq.

But these were professional investors whose pockets were as deep as their expertise… Could their success translate to individual investors?

Would these part-time “amateur” investors do as well in choosing the best small companies at such an early stage of development?

Remember, these companies typically sport bare-bones products, little or no revenue and still-evolving growth strategies.

We don’t have a complete answer. It’s still too early. We know more about equity crowdfunding for accredited investors because it began four years earlier. The data comes from the portals they use to source deal flow. And it’s very encouraging.

The average return of FundersClub from mid-2012 to mid-2016 was 28.7%. For AngelList deals since 2013, it’s 46%.

Try getting anything close to that on the public exchanges.

The Downside

The main one? High risk. So high you’ll have more losers than winners in your portfolio. So listen carefully to what I say next…

It doesn’t matter. The most successful early investors have many losers. Their winners are so big that they more than offset the losers.

The real risks? There are two.

1. NOT investing in startups (It’s one of the few remaining places where you can make unbelievable gains.)
2. Staying away from the riskier startups (Why is this a risk? They tend to be the more disruptive ones. And the bigger the disruption, the bigger the potential profit.)

Another downside? It’s hard. Damn hard.

Of course, you can bypass this risk by simply relying on our advice and following our recommendations.

Still, it’s something you should at least be aware of. It’s so hard because it’s so early. This early on, you don’t know – you can’t know – what you need to know to make a good investment choice.

I’ve described this more succinctly in the past this way: “You don’t know what you don’t know.”

Fortunately, Adam and I bring a ton of experience to the table. We have a handle on how to do this kind of investing. So you can follow our advice ad infinitum or until you master this form of investing. It’s up to you.

Hitting Your Numbers

Not a big ask: Just invest a little in a lot of startups. Fifteen is the minimum. There’s no maximum.

We’ve recommended 26 so far in our First Stage Investor portfolio. If you’ve invested in all of them, you’ve already hit your numbers.

Investing in more startups is even better. The more startups you invest in, the less risky it is.

The math shows you why… Let’s say you’re investing $100 in each startup in your portfolio. You’ve invested in three. You need one big winner.

Even the shrewdest of venture capitalists would hesitate taking a 1 out of 3 proposition. The odds aren’t in your favor.

But 1 out of 10? Much more likely. So you decide to add seven more startups. You spend $700 more, bringing your total to $1,000 for the entire portfolio.

And let’s say that one of your additional seven holdings hits it big. Valued at $5 million, it grows into a $200 million company (not such a high bar in startup land).

That’s 40X without dilution or roughly 20X with dilution. (Dilution is a reduction in the ownership percentage of a share of stock – or, in this case, startup – caused by the issuance of new shares.)

Let’s also assume the other holdings in your portfolio amount to nothing. Your extra $700 brings in $2,000 ($100 X 20).

You make almost three times the extra money you spent on the seven additional holdings. And you double your money on your overall portfolio investment of $1,000. And that’s assuming the worst about your other holdings.

It’s very unlikely that all will go under and you’ll lose all your money. If you just make your original investments back on half your holdings, your returns jump from 100% to 150%.

Diversify

A great risk management method is diversifying your investments. That means buying companies from different regions, different countries, different portals and different sectors…

And buying companies raising at different stages (pre-seed, seed, post-seed, Series A, the bridge raise between seed and Series A, etc.).

The later you invest, the more you know… And the more track record a company can show you, the less risk you take on. So what’s the best stage to invest in? It’s not what you think.

Best Pre-IPO Stage

I found this out thanks to Horsley Bridge Partners (HBP), a large and far-flung investment company based in San Francisco. It has offices in London and Beijing. It also has a database of 5,500 “realized” deals.

I decided to delve into its database to answer this very question: What’s the best stage for investors to back a company?

Investors who invest in the later stages think they know.

They’ll tell you investing when they do (think DocuSign, Spotify or Dropbox a couple years ago) increases their chances of getting positive returns on their investments.

They’ll tell you that the higher share prices of these companies (compared with the share prices of early-stage companies) are worth it.

They make a smaller profit per portfolio holding, but more of their holdings give back something.

Makes sense, right? Not so fast. Turns out that the failure rates (losing part or all of an investment) of these late-stage investors and early-stage investors are surprisingly close: 52% for mid- to late-stage investors and 62% for seed- and early-stage investors.

Early-stage investors are 60% more likely to achieve 10X gains than those investing in the later and more expensive rounds.

In HBP’s own words, “The downside protection afforded by investing later is fairly small, while the upside potential is significantly dampened.”

The early stages are the sweet spot, where risk is somewhat higher but returns are substantially higher. So where can you find these early-stage startups looking for money from the crowd?

The Startup Portals

More than 30 have registered with the Financial Industry Regulatory Authority, or FINRA. About a half dozen of these have separated from the pack. Here’s a chart tracking their traction…

Our First Stage Investor portfolio has taken recommendations from five of the six. (NextSeed is the one exception.)

These portals play an important role in startup land.

For one, most curate deal flow, accepting only the ones that meet the standards they set.

They’re where you can find videos of the companies, along with their decks, teams, traction histories, planned uses of funding, financials and founder backgrounds.

They all have Q&A sections too. Some of the best information is in the answers that founders give to inquiring prospective investors in this section.

When I did a little research on the portals a couple of months ago, I found out that one year after crowdfunding was launched, 335 companies filed with the SEC to raise via the portals under crowdfunding rules.

Success rates varied greatly. Overall, these 335 companies had a 43% success rate (of hitting their minimum targets or higher) and a 30% failure rate. (The remaining 27% consisted of raises not yet completed.)

The 155 successful companies raised just over $40 million, averaging $282,000 per raise.

Here’s a snapshot of the number of current recommendations we’ve gotten from each of the portals in the chart…

Of the more recent ones, Republic (a spinoff of AngelList) and Netcapital are coming on strong.MicroVentures (which has joined forces with rewards-based crowdfunding site Indiegogo) also has a bright future.

We hold all five in equally high regard.

I recommend you register with all five portals if you haven’t done so already. Make sure to enter your payment information so that if a greatopportunity comes along, you can act quickly.

And don’t forget to sign up for their email alerts if necessary. Most portals email announcements regularly, but you should also check the sites from time to time.

Fun and Profitable

Adam and I feel the same way about startup investing as we do crypto investing.

It’s a great way to make a lot of money. It’s the most exciting thing I’ve ever done (and believe me, I’ve done a lot). And, I’ll admit, they go together… fun and profits. I don’t think I would be having nearly as much fun without profiting from early investments in startups (and crypto opportunities).

Admittedly, these are only “paper” gains. The big cash gains come later. Just how big remains to be seen. But I love our portfolio.

The companies are growing. The founders are executing at a high level. The revenues are ramping up.

It’s going this well because we’ve made smart choices. And with this overview, you should have a much better idea of what goes into making smart decisions.

I hope that makes your startup investing even more enjoyable. ■

APRIL PORTFOLIO

Lendsnap Explores Partnerships and New Systems

Portfolio Update

By Allison Brickell, Managing Editor, First Stage Investor

When we first recommended Lendsnap in May of last year, we thought the company had a pretty good shot at succeeding in the home mortgage sector.

The company found that one-third of a broker’s or lender’s time is spent tracking down documents and data – a human labor cost that amounts to $15 billion every year.

Lendsnap is tackling this problem with a streamlined service that allows brokers and lenders to more easily access the paperwork they need.

Andy caught up with founder and CEO Orion Parrott to get an update on the company.

Parrott said Lendsnap is getting ready to release a new product that provides lenders and borrowers with a complete and extremely easy-to-use point-of-sale system. Orion says it truly covers everything that’s needed for effective communication between loan officers and borrowers.

It has started beta testing the product and has been getting helpful feedback from investors.

Lendsnap works with a company whose technology allows Lendsnap to automatically gather the financial documents and information that it provides to its clients.

Lendsnap has also partnered with an insurance company. Parrott said the company will be a referral partner for closing deals.

Lendsnap is considering several other partnerships as well. We’ll be keeping an eye on its progress.

If you’re interested in getting a mortgage, consider sending an email to Lendsnap directly at info@lendsnap.com. ■