CAPVEE Equity Crowdfunding Pick: Moonshot Brands
A Y-Combinator-backed eCommerce roll-up that looks good, but leaves some questions
CAPVEE Equity Crowdfunding Pick: Moonshot Brands
Company Summary:
Company: Moonshot Brands [https://www.moonshotbrands.com]
Platform: Wefunder [https://wefunder.com/moonshotbrands]
Minimum Investment: $100
Structure: SAFE (uncapped with 20% discount)
Funding Status: Public launch on April 14 ($1.0 million target)
CAPVEE Call: Neutral (Pending Valuation Cap Explanation)
Management Team: ★★★★★
Business Model: ★★★★★
Traction: ★★★★☆
Macro Tailwinds: ★★★★☆
Valuation: ★☆☆☆☆
CAPVEE Equity Crowdfunding Pick: Moonshot Brands
Moonshot Brands acquires, operates, and grows profitable e-commerce brands that sell their products on Amazon or Shopify. The company is backed by Y-combinator and leading VC funds such as Liquid2 Ventures, the fund of Pro Football Hall of Famer Joe Montana.
The business model is to rapidly acquire a portfolio of small e-commerce businesses and help them grow and scale their operations. This buy-and-build approach creates value through multiple arbitrage and by capturing synergies between portfolio companies. For readers who might not be familiar with these terms, there is an excellent article by Financier (July 2019), which explains the roll-up strategy in more detail.
An important point to consider is business selection. Moonshot Brands is looking to acquire profitable businesses with sales of $1 million to $30 million and products in either high-growth or high-potential niche-markets. The company has completed two acquisitions to date in the toys and games and office products sectors and generates $30 million in annual revenues.
The team has thus far made no disclosures with regards to acquisition financing terms, which is another important piece of the puzzle. The transactions can be financed with a combination of equity, debt, and seller’s notes, and this has – of course – a large impact on the return potential of your investment. As a result, investors place a high degree of trust in the team to diligently select and execute future transactions.
The Problem Moonshot Brands Solves
Most e-commerce owners work hard to grow their business, but often plateau in their development as they lack the necessary skills and capital to scale the business to the next level. This is understandable, as the required skills – such as sales & marketing, product development, logistics, and purchasing & manufacturing – are incredibly broad, and capacity expansions often require substantial investments in manpower, machinery, and inventory.
This is where Moonshot Brands swoops in. The company’s mission is to help these businesses reach their full potential through its operational expertise and access to capital, while allowing the sellers to retain a seat at the table, either in an advisory capacity or as a manager.
Furthermore, this is also a reasonable way for these e-commerce owners to take some money off the table, as they often have all or most of their wealth invested in their businesses.
The Team
Moonshot Brands was co-founded in 2020 by Allan Fisch and Craig Isakow. The founders have five successful exits between them, including used car marketplace Shift.com (IPO on NASDAQ) and home decor e-commerce site, HomeSav.
Allan Fisch, Co-Founder: Allan is a tech entrepreneur and business builder with twelve years of experience and four successful exits. Allan built HomeSav, a home decor e-commerce business which was acquired by PE firm American Capital. He also rolled-up Canada’s largest co-working space company, which was acquired by Regus (LON:IWG). Allan also built online lender LeapPay, acquired by Funding Circle, and Mavencare, acquired by Bayada Health.
Allan has a law degree from Yeshiva University and an MBA from the Wharton School of Business.
Craig Isakow, Co-Founder: Craig is an entrepreneurial executive with big company experience at McKinsey and Airbnb, and one successful exit. He was the first employee and Head of Business Development at now-public Shift.com (NASDAQ:SFT).
Craig holds two bachelor’s degrees, one in Industrial and Operations Engineering and another one in Economics from the University of Michigan, and an MBA from the Wharton School of Business.
We believe that the founders are a true five-star team! Their versatile industry background and deep understanding of sales & marketing, finance, and operations as well as strong roll-up track-record makes them a perfect team to rapidly source and diligently executive acquisitions and realize Moonshot Brands’ growth targets.
What We Like
- Moonshot Brands is addressing a huge and growing market. Over 3 million e-commerce brands are selling through Amazon or Shopify accounting for more than $400 billion in sales in 2020. The addressable market is expected to continue to grow at a healthy CAGR of 5% until 2025.
- Third party sellers have increased their market share on Amazon from 3% to 58% between 1999 and 2018. This trend is expected to continue for the foreseeable future.
- The buy & build strategy can generate significant value through multiple arbitrage and by capturing synergies among similar companies. We believe that the team has the necessary skills and experiences to successfully source and execute acquisitions to realize the strategy’s value-creation potential.
- The company has made two acquisitions that total $30 million in revenue. Moonshot Brands’ goal is to reach $200 million in annual revenues by December 2021, which we view as ambitious but possible.
- The team is backed by Y-combinator and Silicon VC funds Liquid2 Ventures and Garage Ventures, which means that the team and the business model have been properly vetted. This is a notable vote of confidence.
What Makes Us Nervous
- No disclosures have been made regarding acquisition terms, which has a large impact on the return potential of the investment. We are also alarmed about the terms of the investment, which don’t appear to be investor-friendly, to say the least (please see below for further analysis).
- Integration is always a key challenge in a roll-up. While we believe that the strategy can achieve significant value through multiple arbitrage, the extent of synergy among a diverse portfolio of eCommerce businesses is unclear. Empirical research shows that the benefits in this area often are overstated, for example, according to McKinsey “in about a quarter of all cases [cost synergies] are overestimated by at least 25%”.
- As with any third party seller, Moonshot faces platform risk. Sellers on platforms like Amazon are at the mercy of the marketplace operator. The platform has final say over products listed and fees charged. It is also safe to assume that the platforms use proprietary seller data for their own business purposes (ex. Amazon private label goods). Moonshot’s Shopify businesses do not have this problem.
The Investment
The investment is structured as an uncapped SAFE with a 20% discount. For those new to private market investing, a SAFE gives you the right to buy common stock in the company at the next financing round, in this case at a 20% discount. Unlike a convertible note, future equity is not a loan. As such, it does not accrue interest, have a maturity date, or have a legal obligation to be paid back. You should therefore only invest in future equity, if you believe that the company can and will raise financing in the future, as there is no time-limit which forces the company to convert the future equity into common stock.
The valuation cap is typically the number to focus on, as you are essentially betting that the company will be worth more than this in the future. However, in this case the valuation is uncapped. Our view is that an uncapped valuation is very difficult to stomach as the investor has no assurance they’re paying a reasonable price.
As this is a critical consideration, we refer our readers to an in-depth article on this subject by TechCrunch.
It’s also worth noting that this crowdfunding campaign is currently in a Testing-The-Waters (TTW) phase, which allows the company to get an indication of investor interest without making the usual disclosures and filings.
The CAPVEE Call
With Allan and Craig at the helm and backed by venerable venture capital groups, Moonshot Brands has the potential to become a major player in the e-commerce roll-up space. There are a few examples of groups that have recently executed a similar strategy with tremendous success like Thrasio, which has raised nearly $1 billion and is purportedly readying for a stock-market listing. We believe Moonshot Brands’ goal to reach $200 million in annual revenue by December 2021 is ambitious but achievable. Beyond buying revenue, it is critical that the company makes sensible financial decisions and builds a defensible portfolio.
Having said that, we do not think that it is prudent to invest in an uncapped SAFE, as investors have little insight into how much they’re paying for the future returns. This leads us to issue a neutral recommendation.
We are big fans of the team and the business model, so we will do our best to connect with Allan and Craig to further understand their choices regarding the investment structure..
Further reading:
Website [https://www.moonshotbrands.com]
Platform [https://wefunder.com/moonshotbrands]
Useful articles:
Financier (July 2019): Strategy for our time: ‘buy and build’ steps up
[https://www.financierworldwide.com/strategy-for-our-time-buy-and-build-steps-up],
TechCrunch (April 2016): Practice safe financing
[https://techcrunch.com/2016/04/26/practice-safe-financing]
McKinsey (May 2004): Most buyers routinely overvalue the synergies to be had from acquisitions. They should learn from experience
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Disclosure: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice