Angel Investor Question-Would You Invest?
- Posted by Jeff Carter
- on April 27th, 2013
Here is an investment question for you. You have money to invest and are approached by a person with a cutting edge technology: 3D printing.
You have heard of 3D printing and they want to set up a retail store to offer 3D printing to the masses. Here is a video on what they do.
This is a real business. They are fundraising. If you want to invest, contact them directly or leave a comment at the blog. I asked for the company’s permission to post this before posting.
It looks really cool. 3D printing itself is neat. Josh Brown of The Reformed Broker has invested money in some 3D print companies.
From here on out-every fact is made up for the purposes of analysis. Meaning, I haven’t seen a presentation, don’t know any real numbers etc. I am just putting it out there for “case study” purposes so you can go through the same intellectual process angel investors go through. I have linked to relevant articles on the 3D printing industry at the bottom.
From the Wohlers Associates report;
“Low-cost 3D printers affect both the professional and consumer markets. The increased sale of these machines over the past few years has taken additive manufacturing (AM) mainstream more than any other single development. 3D printers have helped spread the technology and made it more accessible to students, researchers, do-it-yourself enthusiasts, hobbyists, inventors, and entrepreneurs.”
The entrepreneur is committed. He has sacrificed everything to start this business. He’s young, graduated magna cum laude from college and was always a leader. He has been employed consistently since graduation at jobs in the energy business, and left to undertake this venture. He has two other co-founders and they have similar backgrounds.
What about the money?
In the first two years, the company will lose money. A lot of it. There is expense to building out a brick and mortar network, hiring employees, marketing, and buying machines and material to stock the stores. By year three, they should be close to break even. In year four, as stores become stable and growth is stable, they ramp up their profits. Remember, year four will be 2017, a year after the market takes off according to Forbes. Year five will be blow out numbers with $30M in revenue.
As the years go forward, the cost of machines is expected to drop. They also will get nice depreciation effects for their cash flow from a tax perspective.
What about potential exits?
The exit on this company will be a large retailer purchasing them. Or, if they get really big and have nice revenues, they could IPO.
They are looking to raise $2M dollars at a $5M dollar pre money valuation. The money will go straight into expansion and marketing. It’s not going to be the terminal round, and the company contemplates at least 3 more rounds of financing. The investor would receive preferred stock in return for cash.
The balance sheet looks good with no debt on it. There was a previous convertible debt friends and family round of $65,000, that converts to preferred equity at a 10% discount to the valuation.
Plan on holding the stock for seven years before exit. You will have the ability to invest in subsequent rounds at the same percentage as your first investment. A typical exit in the industry is 10x revenue. That means if they hit their targets, the company will be worth $300 million in five years.
Inventory on the balance sheet consists only of supplies, since they don’t make products to sell. The company can take orders over the internet, or walk in orders and make product. People will come in and pick up their product or the company will ship it to online or mail requests.
They have little accounts receivable, and some accounts payable as they use it for cash flow by extending payments to creditors as long as they can. They have some sales and all cash is plowed back into marketing after paying meager salaries typical of startups.
It’s possible to walk into the store, draw a picture on a white board, and produce the product in one visit.
Currently, the company is based in a small northeastern town in a low population state. They are bootstrapping and haven’t taken any formal investor money so far. They have proven their concept, have traffic in their store and the concept is easily replicable.
They will use free social media for a lot of their marketing. The product has a “wow” factor and people think it’s neat. The initial target market is parents with grade school age kids. But the markets could be bigger, as crafters, teens, and people that are just interested in creating things come on board.
There are other investors actively looking at this company. You won’t be the only person in the round. It’s unclear if you are going to get a board seat, but at the bare minimum, you will get board observation rights.
There are maker labs, and a smattering of 3D print shops opening up across the country and world. Very few public libraries have them. No one has done a formally marketed retail chain concept that makes 3D printing accesible for the masses.
3D printing has been in the news. There are stories in print, radio, and television every day. People have been exposed to it.
Yesterday, Fred Wilson wrote this,
I have found that return and ridicule are highly correlated over the years. We have made more money on things that were highly ridiculed than on any other cohort. When I see people laughing at ideas and companies we have backed, I smile. It means we are going to make a lot of money on that investment.
and at the same time wrote this,
The same logic applies to starting companies. If you start a company in a market everyone knows is going to be big, then you will have a ton of competition. If, however, you start a company in a market everyone is laughing at, you won’t have too many competitors.
It’s your checkbook. Would you invest?
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)