First Stage Investor

Don’t Invest Based on Sector

Don’t Invest Based on Sector
By Adam Sharp
Date October 24, 2019

One of the most common mistakes I see new startup investors make is that they tend to go for deals in “hot” industries.

The attraction is understandable. Startups focusing on things like artificial intelligence, drones, cannabis, blockchain or SaaS (software as a service) can be tempting. But unless they have serious traction and growth, my advice is to steer clear.

In any “hot” or trendy industry, there are tons of companies raising money at any given time. But very few go on to become successful.

Let’s look at an example of a company I wouldn’t recommend investing in, even though it operates in an industry I love. Sunjoined is a hemp company raising money on Wefunder. It’s already raised more than $320,000.

But I’ve examined its entire profile. And I still don’t understand what Sunjoined’s business plan is. It calls itself a “network of trusted hemp farmers.” The company says it “plants, grows, harvests, processes, sells, and distributes hemp materials and products.” But it doesn’t seem to have any revenue to date. And it had $50 in the bank before this campaign.

Here’s how Sunjoined answers the question “How will you make money?” in the Q&A section…

Sunjoined makes money by providing brokering services for all parties in the industry. By connecting interested parties, Sunjoined benefits the entire process and is compensated with a small fee. Sunjoined also grows alongside other network farmers to add more acreage to total supply. Some of Sunjoined farmed materials will be used to establish a direct-to-consumer distribution network.

This doesn’t really tell us much. From what I can tell, the company hasn’t even figured out a business model. There’s no revenue, just some progress on social media. Yet it’s raising money at a $4 million valuation cap. So, while I love the hemp industry, there’s no way I would invest in Sunjoined. I wish it luck. But I don’t consider this to be an investable deal.

I recommend investing primarily in companies that already have substantial revenue and solid growth. That will give you a much bigger chance of hitting a big winner. We have a lot of deals to choose from today, so take advantage of it. Be picky.

Moral of the story: Never invest in a startup just because it’s in an industry you’re bullish on. I recommend targeting companies primarily based on their traction and growth, regardless of what industry they’re in.

Top Posts on Early Investing