Here’s the deal. I’ve just given you $100 million to start your own bank (you can thank me later) on your own private island. U.S. rules don’t apply there. You make your own rules. So what would they be? Here’s my fantasy list…
- I’m the only bank on the island.
- I’m outlawing defaults. You get money from us. You pay up.
- No other lending facility is allowed to match my rates. They’re the best.
- My customers are growing like weeds, along with their need for financing.
- My biggest customer is the island government. It loves my bank. It tells all the companies that do business with it to use us.
Who wouldn’t love to own this bank? The government has your back. There’s no default risk or competition. The profits roll in. And they get bigger with each passing quarter.
Alas, this is the stuff of fantasy, right?
Well, as far as having your own island, yes.
But the other stuff? As crazy as it sounds, it’s only a slight exaggeration of what a truly innovative financing company called Endeavour does. And you can own Endeavour (or at least part of it) by investing in it. It’s one of the most remarkable and de-risked investment opportunities I’ve come across in a long time. And – as with all of my First Stage Investor startups – it has remarkable upside.
So what exactly does Endeavour do?
It buys invoices to help startups and smaller companies manage their cash. Its customers are mostly Department of Defense (DOD) contractors. Endeavour pays them $0.90 on the dollar. So, say it’s a $100,000 invoice. The company or contractor gets paid $90,000. And it gets its payment within a couple of days. At the end of the 30 days, the government pays Endeavour the full value of the invoice. Endeavour then reimburses the contractor just under $0.07 per dollar, keeping $0.034 (or 3.44%) for itself. Then it takes the same $100,000 and does the whole thing again the next month… and the month after that and so on. Over 12 months, it makes about a 41% profit on that $100,000. (Geek Note: Endeavour’s actual portfolio yield is currently 42.7%.)
That high yield is pretty amazing, considering it’s basically risk-free. The closest that investors can get to something that low-risk is extremely safe and boring government bonds. As of December 2021, U.S. 10-year government bonds were providing an interest rate of 1.46%.
If you’re like me, at this point you’re searching for flies in the ointment. No deal is this good. What’s the catch?
So this is a good time to return to our fantasy list. I’ll tell you exactly what’s true and what’s slightly exaggerated.
- Endeavour is the only bank on the island. This is admittedly not quite true, but not far off either. Endeavour is one of only 20 companies the government has vetted and approved to finance DOD and national security projects. As such, the DOD has given Endeavour a “Trusted Capital Provider” designation. Considering that there are 4,377 FDIC-insured commercial banks in the U.S., that’s a very exclusive club. But it gets better. Endeavour is the only one out of these handpicked 20 that provides non-dilutive financing (meaning no warrants or equity in return for financing).
- Defaults are outlawed. This is a colorful way of saying that the government has a zero default rate. All Endeavour has to do is confirm the contract is indeed a government-approved one. In practice, it has proved out. Endeavour has not had a single default on the nearly 100 invoices it’s purchased. Technically, the default risk hasn’t been completely wiped out. A meteor could hit the Earth. A global financial collapse could happen. One of the DOD’s huge prime contractors could have cash problems. Or a government shutdown could happen. These last two are the most likely of unlikely events to happen. But even in these cases, the risk is only a delay of payment, not the loss of principle. This is rather amazing when you recall that defaulting on mortgage payments is what brought the global banking system to its knees in 2007 to 2010. Many banks went under. It’s mind-boggling (in a good way) that Endeavour has sidestepped this risk.
- No other lending facility can match its rates. It’s true. Endeavour’s rate of 3% per 30 days is well below the competition’s 5% to 10% rates. Plus, Endeavour buys 90% of the invoice’s value, while the industry average is 80%. All this provides a real moat and allows the company to focus on its next big task: spreading the word that it has the best terms and rates. The money it raises in this round will be used to double (or more) Endeavour’s current rate of adding four clients a month.
- The company has a large and rapidly growing customer base in search of financing help. The economy of Maryland — the state I live in — would collapse without its defense industry. I imagine that’s true for half the states in the US. Endeavour’s target markets of defense, space, intelligence, cyber and IT are HUGE. Its potential customers number 213,000. And many of them are fed up with banks that don’t like them or the space, defense and national security markets they serve. Talk about complacency. These markets generate $2.7 trillion in transactions a year. And collectively they’re expected to grow at a runaway 13% annual rate over the next five years. At that rate, the market would be worth an astounding $4.97 trillion by 2027. The banks’ loss is Endeavour’s large and very lucrative gain.
- Its biggest customer is the government. It makes sense that Endeavour has used its Trusted Capital Provider designation to provide funding in the DOD’s Trusted Capital Marketplace. That’s not going to change. But Endeavour is giving itself permission to provide up to 10% of its funding to companies undertaking state and municipal projects. Right now, 3.3% of its funding is for these projects.
As I said, I wasn’t exaggerating much. And to tell the truth, I haven’t seen any flies in the ointment either. But I did need clarification on one issue in particular. Endeavour redirects 50% of its profit to investments in nonprofit and charitable enterprises that support America’s veterans, their families and their communities.
I really liked the idea. But I was concerned that it could cripple the company’s growth and make any tough periods it may have to go through in the future much more difficult.
Co-founder and CEO Chris Lay convinced me that the 50% profit reinvestment is a big net positive. It not only aligns with the company’s values, but also creates critical goodwill within the military and DOD communities. It has bolstered growth, Chris says, while also providing an additional moat. Existing and potential competitors would be hard-pressed to do something similar.
Another moat is the $100 million bankroll it got from a reputable institutional credit fund called Coventure. Endeavour’s goal is simple. It wants to use the entire $100 million every month for buying receipts. That would amount to buying $1.2 billion worth of receipts a year. The yearly revenue take would be a cool $41.28 million.
That’s a bit down the road. It made half a million in 2021. Its current run rate is $2.66 million. And it plans to make $5.28 million this year and, with a bigger bankroll, $60 million within four years.
The company is already funding larger deals (averaging $163,000) at a greater frequency than last quarter. Endeavour’s two founders believe that all of these trends — deals growth, deal size growth, and client growth — will continue, making its revenue projections well within reach. It’s ambitious. And a lot has to go right. But Chris and his co-founder James Parker have done a great job of putting Endeavour in a position to get it done. At this very early pre-profit stage of the company, that’s pretty much all investors can ask for.
Future execution will have to be exceptional. The founders don’t have to be rocket scientists. But it helps that these guys specialize in the sciences. James is a trained astrophysicist, and Chris is a trained neurobiologist. Both also have plenty of entrepreneurial experience inside and outside of military contracting. Most importantly, they’ve shined in their leadership roles at Endeavour. I don’t expect that will change.
I usually spend little to no time pondering endgame scenarios. They tend to be too speculative for my tastes. So without commenting or judging, I’ll let the founders speak for themselves on the subject. They say at a reasonable 3X book value (plus the 14% or higher dividends the company is projected to generate over the next four years), investors could get a 11X return or more when a liquidity event occurs at some point.
It’s perhaps something to keep in mind.
Security type: Crowd Note
Valuation (cap): $18 million
Interest rate: 5%
Conversion discount: 20%
Minimum investment: $1,000
Where to invest: SeedInvest
Deadline: January 21, 2022
How to Invest
Endeavour is raising up to $3 million in this round. You can invest through SeedInvest. If you don’t already have a SeedInvest account, you’ll need to sign up for one. Once you verify your account and are logged in to SeedInvest, visit the Endeavour deal page.
Then click the button to invest. Enter the amount you want to invest, starting as low as $1,000, and proceed through the required steps. Be sure your investment is confirmed, then you’re good to go.
This opportunity, like all early-stage investments, is risky. Early-stage investments often fail. The investment you’re making is NOT liquid. Expect to hold your position for five to 10 years. An earlier exit is always possible but should not be expected.
All that said, I believe Endeavour offers an attractive risk-reward ratio.