First Stage Investor Issue No. 42

First Stage Investor Issue No. 42
By Early Investing
Date January 10, 2020

What a Crowdfunding Portfolio Can Tell Us About the Future

Normal people have no idea what the future holds. But you do. Because you’re not normal.

You’re an early investor. You belong to a very small and special group. Less than 1% of the adult population are equity crowdfunders – people who invest in companies that play an outsized role in shaping the future.

Imagine having invested in Uber or Airbnb eight years ago. Just listening to the founders would have given you a peek into the future of ride-sharing and home-sharing years before they actually arrived in your town.

Early investors have insights others don’t. That’s not normal. We hope you’re okay with that.

And those insights aren’t restricted to the products these startups offer. Early investors understand how startups bring us disruptive products: the platforms they employ, the screens they’re on and the tech they use…

Which is why I’m basing my five predictions for the 2020s on the startups in our First Stage Investor portfolio. They’re instigating deeply disruptive change. So here’s the future according to the First Stage Investor portfolio.

Healthy Fast Food on Every Street Corner?

Ah, the joys of eating well. I just got back from a restaurant, where, much to my delight, my trout almondine was served up swimming in butter. That used to be the definition of eating well. How things have changed! Eating well now means eating healthy.

You can now hit the road and eat fast, cheap and healthy. Global health food sales reached $1 trillion in 2017, according to Forbes. And healthy food is getting cheaper and faster by the year, keeping up with the fast-rising demand for healthy and low-cost nourishment. Hopping aboard this trend are two of my favorite First Stage Investor portfolio companies: Sweetberry, whose dishes feature the impossibly healthy açai berry, and Everytable, which serves healthy and fresh food at cheeseburger prices. Everytable is the more radical and disruptive idea of the two. But both will be part of a powerful trend of eating healthier while on the go.

Healthcare Comes Home

I remember (with surprising vividness considering it was 45 years ago) the slogan from one of the most popular TV ad campaigns ever: “Don’t leave home without it.”  “It” being your American Express card.

When it comes to healthcare, an updated slogan would simply say, “Don’t leave home.” From food, laundry and car care to massages and meals, why leave home? More and more products and services are coming to you. And healthcare is finally contributing to this massive trend, beginning with home diagnostics. Diagnostics is a burgeoning area of innovation and entrepreneurial activity. Big tech companies (including Google, Microsoft and Tencent) have invested in 13 diagnostic startups this decade. Our portfolio company InnaMed is among the most exciting I’ve seen. It lets people take at-home blood tests to detect cardiac problems. Soon, it will let them take tests for kidney health, fertility, metabolic disorders, and several chronic and rare diseases.

If those people end up needing medicine, NowRx, another one of our First Stage Investor holdings, will deliver it right to their door – the same day and at no extra charge.

Breakthroughs in Opioid Treatments and Alternatives

The opioid crisis is far from over. Millions of patients are now in treatment. And the 2020s will be a search for closure and justice. At some point next year, the several hundred court cases against the makers and purveyors of opioid drugs should free up tens of billions of dollars to help combat the opioid crisis. Look for more startups offering telemedicine to help keep opioid addicts from relapsing. But the real solution is to replace opioids with an equally effective painkiller that can also help patients conquer addiction.

Legacy pharma companies are used to spending enormous amounts of money on drug development. But don’t ignore startups. Sometimes it takes a very small company to think very big. Our portfolio company Phoenix PharmaLabs has as good a chance as any global pharma company of developing an opioid alternative. Its drug is a nonaddictive opioid. And the scientific evidence for its effectiveness is very promising. An effective, nonaddictive alternative would help put the opioid crisis behind us.

New Technology Won’t Reverse Climate Change but Will Make a Big Difference

Global average sea levels have crept up by 7 to 8 inches over the past century. Melting ice contributes more and more to that rise each year, and the rate of melt has potentially increased sixfold since 1979. A brutal heat wave parked itself over Greenland this summer for nearly a week and caused a surge of melting ice. That melting ice could dump somewhere between 2 and 13 inches of extra water into the world’s oceans by 2100. And experts say that record-breaking hot summers like this past one will cease to be the exception.

Our portfolio holding World Tree is doing its best to put that day off as long as possible. It’s planting thousands of special trees. And it plans to plant 3.5 million of them over the next five years. Just 1 acre of these trees absorbs 103 tons of carbon dioxide a year – that’s 11 times more carbon dioxide than any other type of tree can take in. Another of our companies, EnergyFunders, is helping to fund renewable energy, including wind, solar and hydro. And HyperSciences wants to use its hypervelocity drilling technology to reach extreme depths, finally making geothermal drilling effective and affordable.

The Digital Currency War Heats Up

Libra will flop in 2020 due to a slew of hostile regulations banning or severely limiting its use. Next year, China will be the first country to implement a digital currency in its dogged pursuit of eventually replacing the dollar with the yuan. The U.S. will get a late start in responding to China’s aggressive digital coin initiative. But none of this will matter at the end of the day. The biggest and most popular open-source cryptocurrency we all know – bitcoin – will prevail over its government-backed challengers. That’s why we’re sticking with our cryptocurrency portfolio allocation of 70% bitcoin. It’s still your best bet.

Activist Government Era

Entering the Activist Government Era

Free trade. Unfettered growth. Disruption. Those three trends have defined the business landscape for the last 40 years as governments have taken a generally hands-off approach to regulating business while creating a giant global market.

But tensions between the private sector and the government are rising.

And while disruption isn’t going anywhere (read Adam Sharp’s piece about disruption here), the pro-free trade, pro-big-business approach that dominated government policy and politics for almost 40 years is either going away or undergoing a significant transformation.

Free Trade

Let’s journey back to the 1970s. In terms of trade, that decade was a far different world from the one we live in today. China and the United States weren’t even on speaking terms to start the decade. In fact, it wasn’t until 1971 that the U.S. and China began talking to each other at the highest levels.

The Cold War was still going strong. And the U.S. was still actively fighting the Vietnam War.

The U.S. viewed the world through a Cold War prism. Any country that opposed communism and the Soviets was our friend; any country that supported them, our enemy.

Free trade was merely an afterthought in that environment. Sure, people wanted it. But only if it helped their country’s cause.

Fast-forward 40 years, and free trade is the defining characteristic of the new world order.

First, the Cold War ended with the collapse of the Soviet Union in the late ’80s. Then in the ’90s, we saw the European Union, North American Free Trade Agreement (NAFTA) and World Trade Organization take hold.

In the span of almost a decade, we moved from a world divided by the Cold War to one united by trade.

And because global markets are now so interconnected, countries use sanctions and other economic measures (for the most part) to maintain global order.

China is now our biggest trading partner, followed by Canada, Mexico and Japan. In 1990, the United States’ real gross domestic product (GDP) – as opposed to nominal GDP, which doesn’t take inflation into account – stood at $9.4 trillion. As of 2018, it’s more than $19 trillion.

Clearly, the free trade (and internet) era has been kind to the United States (and the rest of the world, for that matter). But it hasn’t been kind to everyone.

The manufacturing sectors of developed economies have taken large hits. Jobs have shifted overseas. And the “direct path” to the middle class either has disappeared or is shrinking rapidly.

Automation is threatening even more jobs. And the internet and software have disrupted almost every sector of the economy.

As a result, a lot of people are struggling – financially and emotionally. They’re in jobs and financial situations they didn’t anticipate. They’re struggling to advance. They’re struggling to save and live. And they want things to be more like they used to be.

The desire to return to a world before our economies and politics became so interconnected is now a dominant force in American politics. And it’s the driving force behind Brexit. Both the United States and the U.K. are entering a more protectionist era.

It’s why the U.S. scuttled the Trans-Pacific Partnership (TPP) trade agreement in 2017. Fifteen years ago, Congress would have approved this trade (and security) agreement without raising an eyebrow. But in 2016, both presidential contender Hillary Clinton and President Trump ran against the TPP. And Republicans and Democrats alike applauded the deal’s demise.

It’s why the Trump administration renegotiated NAFTA and the U.S. is embroiled in a trade war with China. And it’s why U.K. Prime Minister Boris Johnson has his foot on the accelerator, trying to complete Britain’s exit from the EU as quickly as possible.

In response to this protectionist shift, the EU is adopting its own protectionist policies under the guise of “European sovereignty,” or “making Europe stronger.”

Ursula von der Leyen, the new president of the European Commission, said the EU will take a more aggressive approach to protecting its trade interests. That includes responding to sanctions with even more sanctions and pursuing cases against countries that undercut European companies with unfair pricing because of subsidies. (Never mind the fact that this is exactly what the EU does.)

The EU’s new trade commissioner, Phil Hogan, says he wants to start blocking the takeover of European companies by foreign entities.

And the EU will continue to flex its muscles against the U.S. tech industry. It has already fined Google a combined $9.5 billion since 2017. It also has Facebook in its sights for violating the EU’s privacy policy. Those fines could be in the billions. And Apple and Amazon may be next.

Tech Wars Ramp Up

The EU isn’t the only one targeting the U.S. tech industry. Republicans and Democrats are both unhappy with America’s big tech companies. The GOP believes that the tech industry is biased against conservatives and that, because tech companies have amassed so much power and influence, something needs to be done to break up or regulate the sector.

Democrats are less concerned about bias and more concerned about power – and wielding that power responsibly. They simply don’t trust big tech to protect individuals and act in a way that benefits society. Many Democrats also believe that Silicon Valley behemoths are stifling competition by either buying their competitors or forcing them out of business. As a result, Democrats are interested in breaking up the sector. In fact, Democratic presidential candidate Elizabeth Warren is running on breaking up big tech.

Big tech is facing an existential crisis. And the U.S. government is done taking a hands-off approach. The tech landscape 10 years from now will be vastly different from the one we see today.

The Activist Government Era

The tech sector isn’t alone in this. The pharmaceutical industry knows the government is coming for it too. Drug prices are ridiculously and unnecessarily high. The public is frustrated. And politicians are beginning to respond to that frustration. President Trump, for example, is leading the charge to allow states to import prescription drugs from Canada.

The 2020s will be marked by governments getting more actively involved in business. From embracing new trade protectionism and economic nationalism to wielding its influence to break up large sectors or create a fairer consumer environment, the government is done sitting on the sidelines. Politicians are ready to flex their muscles and intervene in business. And that’s something all of us are going to have to get used to.

Medical Marijuana’s New Heights

The 2020s Will Propel Medical Marijuana to a New Level

A new decade is upon us. We’re going to see new technologies emerge… new companies rise to compete with existing giants… and new medical discoveries change the world.

I’m optimistic about what’s to come. And while flying cars and delivery robots are fun to imagine, they’re not what I’m most excited about.

Medical marijuana will have a much bigger impact – perhaps bigger than anything else this decade.

As of January 2020, 33 states and Washington, D.C., have legalized medical marijuana. A handful of other states have highly restrictive medical marijuana laws – including Iowa, which permits only the use of cannabis extracts that are high in cannabidiol (CBD) and low in tetrahydrocannabinol (THC), and only for specific conditions. But I believe those restrictions will be lifted as medical marijuana becomes more and more popular as a treatment option over the next decade. And by the end of the 2020s, medical marijuana will be legalized at the federal level.

States have been legalizing medical cannabis since the 1990s. Progress has been slow but steady. And now that more than half the country has legalized medical cannabis, momentum is on cannabis’s side. The 2020s are set to finish the journey.

Here are four catalysts that will propel the federal government to legalize medical marijuana.

Patient Stories

We’re just beginning to explore the healing potential of medical marijuana. Yet we already know it has the power to help thousands of people with a wide range of conditions, including epilepsy, chronic pain, anxiety and more.

And the stories of how medical marijuana helps people will be instrumental in convincing voters and politicians to legalize medical marijuana.

The most famous story belongs to Charlotte Figi, a little girl who was having 300 seizures a week. She was unable to walk, talk or eat. Then she started taking drops of cannabis oil. And now she’s riding her bike and living a normal life. There’s also 2-year-old Jaelah Jerger, who was having up to 30 seizures a day. But after a week of CBD treatment, her seizures were mostly gone. And Janie Maedler turned to cannabis as a nontoxic treatment option for her daughter Rylie’s aggressive bone tumors. Rylie’s tumors shrank and were eventually removed. And Rylie said the treatment helped her feel like herself again.

The evidence is piling up. And lawmakers can’t ignore it much longer. Especially because medical cannabis is a natural and effective alternative to opioids. Opioids are highly addictive and often an ineffective treatment option. Worse, more than 400,000 Americans have overdosed on opioids since 1999. Medical cannabis is far safer and more effective.

2020 Election

The November presidential election could also accelerate the spread of medical marijuana, with most 2020 Democratic presidential hopefuls supporting full legalization and the rest favoring decriminalization or letting the states decide.

Medical cannabis will remain on track no matter who wins the election. President Trump has said on multiple occasions that states should decide on legalization. And states have historically shown they are willing to accept medical marijuana (even if it’s in restricted forms).

Government Research

The government is also (slowly but surely) beginning to open up cannabis research. Marijuana is currently listed as a Schedule I drug (meaning it has no accepted medical use and is highly susceptible to abuse), which makes it extremely difficult for anyone to research.

But in September 2019, the National Center for Complementary and Integrative Health, which is part of the National Institutes of Health, agreed to fund research on the potential pain-relieving properties of cannabis. The research grants are worth $3 million. It’s not a lot, but it’s a start. And it’s an important step in the right direction.

CBD Market Growth

CBD is the most popular marijuana treatment. Some of the products already being used by patients and doctors include CBD oil and CBD edibles. And the CBD market is poised for explosive growth. The global market was estimated to be worth around $3 billion in 2018 and is expected to grow anywhere from 22% to 125% over the next five years.

According to The Arcview Group, CBD retail sales are projected to reach $12.6 billion by 2024. As more and more Americans become health-focused, CBD health and wellness products will continue to fill the market. And before you know it, CBD health supplements will become as common as gummy vitamins.

Moving Forward

Medical marijuana has the power to change lives. It’s saved children’s lives. And it’s vastly improving the quality of life for many adults. It’s a safe, effective form of medicine that succeeds where traditional treatments fall short. And it’s not going anywhere.

The government will have no choice but to legalize it at the federal level. To ignore this viable form of medicine is morally, socially and economically irresponsible. Lawmakers will come to realize that.

Whether because of the burgeoning CBD market or the millions of patients who could benefit, the government will move to legalize medical marijuana. And the world will be better and brighter as a result.

A Decade of Disruptions

The 2020s Will Be a Decade of Extreme Disruptions

The word “disruption” gets thrown around a lot. It’s almost become a cliché. But there’s a good reason we hear it so much.

The internet, combined with software, is revolutionizing the world. In the last decade, technology has advanced by leaps and bounds.

As a result, starting a software company today costs perhaps one-hundredth of what it used to. Modern companies can use free open source software to run a large portion of their operations. Throw in cheap cloud hosting, and you have a recipe for innovation… and disruption.

Today a software company can be launched for less than $1 million. That’s enough to hire a few web developers or pay them with stock if needed. Many startup founders today are talented programmers who can write the initial code themselves.

For the determined entrepreneur, marketing and selling products is far easier than it’s ever been. Startups can target precisely who they want to sell to using advertising tools from Google, Facebook, LinkedIn and other companies. They can electronically sign documents instantly. And thanks to the mobile revolution, everyone has the internet in their pocket. It’s simply a matter of getting the right message in front of the right people.

A Dramatic Improvement

It wasn’t always this easy to start a software company – or to market one. Experienced software developers used to be scarce. Today there are an estimated 4.4 million software developers in the U.S. That’s up from 680,000 in 2000, according to Academic.

In addition to developers, companies once needed their own web servers and experienced people to run them. The cost of these alone amounted to hundreds of thousands of dollars. In total, it used to cost probably 15 or 20 times as much as it does now to launch a software startup.

And advertising before the internet was crude and ineffective. Companies had to rely on mass advertising in the Yellow Pages, on TV and the radio, and in newspapers and magazines. You couldn’t target the ads. And it was hard to measure success.

Now startups scale faster than ever before. Look at Square, a leading payment firm. This company was founded in 2009, and today it appears to be winning a lucrative market, using better software as its unfair advantage.

Most of America is comfortable doing business and social activities on the internet. This is a big moment, if you think about it. We’ve entered an era of technological literacy.

It opens up every single sector in every industry to disruption. Software, done correctly, makes companies vastly more productive. That’s what’s driving the heart of this change.

A Trend at Its Beginning

Software-driven startups are causing disruptions across all industries. The companies that use software and the web most efficiently are winning. The companies that struggle with software and the internet are dying.

There has truly never been a better time to build or invest in a private startup.

Unfortunately, most investors still don’t have exposure to these kinds of investments. And, no, the Russell 2000 small cap index doesn’t count. There aren’t too many disruptive tech startups in the Russell 2000 these days. It’s mostly made up of midsized financial and pharma companies, with a few mediocre tech companies sprinkled in. Most hot tech startups today go public only when most of the growth is over, and they’re already worth tens of billions of dollars by that point. They go practically straight into the S&P 500.

The vast majority of early-stage action is in private markets. Going into the 2020s, I believe this trend will continue. Early-stage capital formation continues to shift to private markets. In 2018, there was roughly $99.5 billion of venture capital investment made in the U.S. That’s up from $29 billion in 2008.

There’s a good reason money is rushing into startups. Venture capitalists are absolutely killing it at the early stages, with average returns of 43% per year over the last 25 years, according to the Cambridge Associates Venture Capital Index.

I believe the best way to invest successfully in the 2020s is to have exposure to high-quality private startup companies – either through Regulation D (for accredited investors) or Regulation Crowdfunding (for everyone else).

Investing in quality startups gives us upside that nothing else can. When you invest in a company worth $5 million or $10 million, the sky’s practically the limit on your potential returns. Of course, we have to be comfortable taking on risk and losing on many of our investments. But those are simply the rules of the game.

If you’re patient enough to wait five or 10 years to get paid, there’s no better bet to be made. Just make sure you diversify across at least 20 startup deals if you can. Don’t plunk down your whole wad on one investment, no matter how promising it seems.

I plan to keep investing in startups throughout the 2020s. I believe they give investors a good chance at outperforming in what could be a very chaotic economy.

For the 2020s, I believe there will be no bigger theme than disruption.

Portfolio Updates