Q3 2023 Investor Update

Dear Wefunder Investors,

The last year has been a roller coaster.

We grew rapidly from 2019 until about June of 2022 - then, as interest rates rose abruptly, most of the tech world - including Wefunder - was broadsided by the economy. Most tech valuations fell in half. Venture activity fell over 80%. Startups went from a growth at all costs mindset to conserving cash.

Wefunder is no exception. Our focus in 2023 has been on profitability and diversifying our revenue.

Thankfully, we are confident we’ve already passed the bottom of this macroeconomic cycle and are at the start of the next growth phase (more on that later). We’re excited for what is to come!

Highlights

Some highlights since our last update in February:

We remain the 2023 Market Share Leader

In 2022, Wefunder was named the largest online platform. We’ve continued that into 2023. According to Kingscrowd, Wefunder remains the market leader.

The 2023 numbers according to Kingscrowd:

Wefunder: 36%
StartEngine: 31%
Republic: 11%

StartEngine continues to be a strong competitor. They currently spend about about $1M more per month in marketing and sales than we do. StartEngine has an edge over Wefunder among the type of companies that are willing to spend over a third of their raise on paid advertising. We’ve chosen to cede that segment and focus instead on community-driven startups with passionate customers that we believe might offer higher returns.

Republic has become less of a threat in Regulation Crowdfunding. A couple years ago, we were concerned they might be able to poach the highest-quality startups, but that has not materialized. The amount of funding they deliver in Reg CF has fallen dramatically. They have 13 raises live on their site compared to our 150+. More importantly, Substack, Mercury, and Replit have chosen to work with us.

We’ve passed the bottom. Year-over-year growth is restored.

After interest rates rose in 2022, venture activity dropped over 80% by Q1 2023 according to Carta. AngelList called Q2 2023 the worst quarter in their history.

We’ve outperformed the broader market by about 2X. At the worst point in Q1, we saw ~36% year-over-year drop. We’ve also seen a recovery starting in June.

We helped Substack raise $8M in a day. Every unicorn has chosen Wefunder.

In March, Substack joined Mercury and Replit as the highest valued VC-backed startups that have chosen Wefunder to host their community round.

While we always are eager to help a small business owner raise as little as $50k for their coffee shop, we are absolutely ruthless in making sure that the best high-growth startups - defined objectively by the amount of VC funding they have from top tier investors - always choose Wefunder over our competition.

We believe that the best way to expand the market is to make it prestigious for the best startups to raise money from their customers. The best founders want to raise alongside other good startups. The investors will go to the platform that has the highest power law returns. That’s the virtuous cycle we are aiming for.

We diversified our banking partners

Some of you might remember when Silicon Valley Bank collapsed in March. Like much of the startup world, we also used Silicon Valley Bank - however, we always ensured that investor funds held by them were FDIC insured.

While no investor funds were at risk thanks to the FDIC, we wanted more flexibility. We’ve since re-architected our backend infrastructure to be able to work with multiple banking partners concurrently and can direct funds accordingly to maximize FDIC insurance above $250k per investor, as well as the interest revenue we earn.

We launched Capitalize

Historically, we’ve been extremely focused on only Regulation Crowdfunding. We now believe we have the bandwidth to diversify into other product lines and revenue streams. We are using our back-end escrow, payment processing, and SPV infrastructure in new ways to earn money.

In July, we released an iPhone app, Capitalize, to help founders more easily raise money from accredited investors in a Regulation D offering. It’s like Venmo for fundraising - in one click, a founder can invite an investor. In another click, that investor can make the investment.

Capitalize earns money when founders decide to use an SPV to aggregate smaller accredited investors as one entity on the cap table. We earn up to $8k per SPV.

Our goal is to introduce founders to our ecosystem well before they are ready for a Regulation Crowdfunding raise. Perhaps a year later, after they have stronger traction and an engaged user base, they can then run a community round available to retail investors, ultimately helping our core business.

We brought back our Y Combinator “orange” funds

From 2013 to 2016, we raised four venture funds - called Orange Funds - from accredited investors to invest in top tier Y Combinator startups before demo day. These 4 funds collectively have a 5X return multiple.

Unaccredited retail investors are unfortunately barred from investing in these funds by law. So we stopped offering the Orange Funds in mid-2016 to focus on our core business.

This year, we brought the Orange Funds back. We raised funds to invest in both the winter and summer batches of Y Combinator this year.

Right now, these funds are only available to accredited investors. However, we are working on ways to figure out how to allow unaccredited investors to invest. It’s legally complex.

Our portfolio of investments earned us significant carried interest

We have accumulated carried interest stakes in multiple unicorns that were seed-funded on Wefunder. This month, CaseText was acquired by Thomson Reuters for $650 million in cash. This represents a 16.9X multiple return for our investors. We earned 10% carried interest.

We also have offers on the secondary market for our seed investments in Rappi, Checkr, EquipmentShare, and other unicorns in our portfolio.

We reduced vendor spend by over 50%

I’ve always been proud with how lean Wefunder is. Over a decade, we’ve only raised about $21 million to fund ourselves. Despite competitors raising up to 10X more - Republic alone over $220 million - we’ve always outcompeted them.

However, one lesson I learned this year was how small operational costs compound over time… until, through inattention, they are no longer small (SaaS startups are quite skilled at overcharging!). As soon as we turned our focus to cutting costs, we found it relatively easy to cut our vendor spend by over 50%. We now have a much leaner operation.

Our total monthly expenses - payroll, vendor costs, everything - is expected to be under $750,000 in September. That’s under the $1M per month that StartEngine spends on their marketing and sales alone.

We now earn over $200k per month from “other” revenue

One of our goals this year was to expand into new revenue streams beyond just earning transaction revenue from Regulation Crowdfunding via Wefunder Portal. Other divisions of the company now earn over $200,000 per month. We aim to grow this over 2024.

Improved branding & content

Wefunder has historically not focused on brand and marketing. We’ve been much better at “doing the thing” than “talking about the thing”. We’re now ready to start improving. Some projects we’ve rolled out in the past few months:

Going Forward

Macroeconomic outlook

No one has a crystal ball. Maybe I am wrong. Maybe China invades Taiwan and all bets are off. Black swans are hard to predict.

But I personally believe that we have passed the bottom and are at the start of the next growth cycle - that the Fed is achieving the soft landing.

My reasoning:

Headline annual inflation was 9.1% in June 2022. It’s now 3%.
The NASDAQ is up 34% from Jan 1 through Aug 8
Unemployment is 3.5%
More subjective, I believe innovations like AI and climate tech will increase our productivity through the 2020’s, leading to a new wave of GDP growth.

I expect faster growth for Wefunder in early 2024. I subscribe to Fred Wilson’s belief that the private markets lag the public markets by ~6 months. Carta believes we have already hit the floor and AngelList thinks a full-fledged recovery will happen in early 2024.

We see this in our own data. Our most leading indicator, the estimated value of the deals that entered our pipeline, has about doubled in August year over year. This bodes well for our future growth prospects.

The future of Wefunder’s product

I expect improving market conditions will lead to 2X growth in 2024. But what’s next after that? How can we grow 10X?

Our focus in 2024 will be on dramatically improving the investor experience. More specifically, how can we make Wefunder a place you’d be motivated to visit weekly? What would make investors love us more? How can we make it a place where you’d want to allocate a portion of your retirement savings, because you are more confident in the chance of the long-term returns?

This is what we must do to dramatically expand the market.

Historically, almost all of our energy went into nailing the “table stakes” basics: the internal tooling to launch dozens of compliant campaigns and transfer tens of thousands of small-dollar investments per month. We’ve also focused on a high-quality first-time investor experience: one reason we are the market leader is that we are the easiest and highest-converting way for startups to onboard their customers to be their investors.

The remainder of 2023 will be on working on other features I consider table stakes, such as rolling out a new portfolio screen that shows your unrealized returns (a long time coming!).

But I am personally most excited for what is next.

There are two areas that gave me the drive to start Wefunder and then the passion to stick with it for a decade.

One area is giving “normal people” the ability to invest in the best private companies - to help reduce wealth inequality. When I started Wefunder in 2012, I thought it was absurd that the wealthy had a government-protected monopoly on access to the highest-growth investments. We’ve made tremendous strides since then, but it’s not enough. I want to spend 2024 on finding more ways to give Wefunder investors access to high-quality investments that have the potential for high returns - the sorts of returns that only well-networked accredited investors currently enjoy.

The other area is more emotional. I personally find the most fulfilling moments in my life are when I help others reach their potential. That’s what angel investing is about for me - believing in someone, proving it with my investment, and then helping them reach their dream. I can think of dozens of ways Wefunder can make this experience far more powerful - to propagate a social movement where millions of new angels help fund the things that create more wealth for us all.

Almost 10,000 people have believed in Wefunder and invested in it. That motivates us all to do our best to make you proud. We’re grateful to you all. And in many ways, that’s what we want to propagate outwards to tens of thousands of other companies, all funded by those who believe in them.

We’re just getting started.

Request for Help: Please Comment

We recently formed an investor experience team with 4 engineers.

What would you like them to work on?

Please comment on this post with what you’d like to see them do. It could be as simple as making sure an obscure bug is fixed. Or an idea for a major new feature.

Of course, we can’t promise we have the bandwidth to do it this year. But we’ll definitely factor in feedback from our investors in how we prioritize!