Deal Abstract

https://wefunder.com/rad

Managed marketplace for advertisers to find influencers who will repost their content. Generated $125k in revenue in Q4, tripling revenue in a quarter. Has some tricky issues to resolve whether serving the most inexpensive market is a sustainable business, and whether the value hypothesis of streamlining content doesn’t eviscerate influencer value add.

Shout out to reader John for forwarding me the deal!


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The 6 Calacanis Characteristics (91 161 18)

CheckYes/No
1. A startup that is based in SVNo: Santa Monica, CA
2. Has at least 2 founders Yes: No (Has four in C-Suite but only CEO has meaningful voting power)
3. Has product in the market Yes
4. 6 months of continuous user growth or 6 months of revenue.Yes: 2019Q4 was $10k, 2020Q1 was $31.5k, 2020Q2 was $125k.
5. Notable investors?No: Looked through ExpertDojo and Dzhel Ventures and don’t recognize any portfolio companies or the funds founders.
6. Post-funding, will have 18 months of runway No: 2019 burn was $706k, targeting $1MM in funding so coming in right around 17 months of runway.
400% revenue growth from Q1-Q2, 1000% user growth from Q1-Q2, Grew from 4 to 16 clients in 2020

The 7 Thiel Questions (ETMPDDS)

  1. The Engineering question:
    • Good: assuming that businesses spending $3k-$5k a year on advertising don’t have any way of getting influencers at scale with accountability, this product is definitely better than the alternative.
  2. The Timing question
    • Good: Ad-pocalypse and budget-strapped influencers means there should be more demand on both sides of the marketplace.
  3. The monopoly question
    • Good: Network effects for micro-influencers and micro-brands spending money. Can scale quickly.
  4. The people question: 
    • Fine: Team seems fine. CRO has particularly relevant experience, CEO has executive experience with online companies and e-commerce.
  5. The distribution question
    • Good: They’re a marketing company trying to get advertisers and influencers to use their advertising and influence platform.
  6. The durability question
    • Good: Not sure if there’s much defenses against multihoming (e.g. a competitor copies and they go on both apps much like Uber/Lyft,) but network makes it pretty defensible.
  7. *What is the hopeful secret?: 
    • By neglecting businesses that spend $3k-$5k in annual digital spending and influencers who earn less than this amount, businesses have missed a smaller-but-more-numerous client base.

What has to go right for the startup to return money on investment:

  1. Maintain Quality While Scaling Efficiently: Onboarding thousands of influencers and tiny ad accounts while maintaining some degree of quality is not easy. This product is a low-price product, inherently, which means toeing the line between a budget offering and a complete meltdown is very fine.
  2. Keeping Clients on the Ecosystem: I’m glad that the CEO isn’t concerned about advertisers and influencers connecting off platform, but this platform needs to demonstrate value so both will want to stay on the platform.
  3. Build a Great Brand: Marketing tech, especially social media marketing tech, feels extremely sleazy. If this company can build a real brand and demonstrate value, that’ll overcome user skepticism.

What the Risks Are

  1. Self-Cannibalization: What happens if churn becomes greater than growth? Both from lack of platform value add and also because customers and influencers on this marketplace are small fish/may exit the marketplace?
  2. Thesis is Wrong: I can see the value of standardizing the video content, but what if customers only trust the influencers because of their unique content? Sure, standardizing saves work for the advertiser and the influencer, but if results in drops of conversion, then the entire business’s raison d’être is gone.
  3. Low Margin Business With Ceiling: if RAD only sticks to low margin, low profit business, could they hit a ceiling in growth?

Muhan’s Bonus Notes

Financials (References)

  • Current Fundraised: $745k
  • Valuation: ~$5MM

Updates

This is where I’ll post updates about the company. This way all my notes from offering to post-offering updates will be on one page.

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

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So, did I invest?

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Other thoughts, questions, comments, or concerns? Write me at mail@muhanzhang.com and let me know.