Underground Profits

By Wayne Mulligan, on Thursday, April 30, 2015

I have a close friend named Adam who’s an “addict.”

But he’s not addicted to drugs or alcohol...

He’s addicted to start-ups.

“I can’t help myself,” he once told me. “Whenever I hear a great pitch for a new start-up, I want to write a check and invest in the company on the spot.”

I get where he’s coming from: it’s easy to get swept up in a compelling story about a start-up that might actually change the world.

But basing an investment decision on emotion can be dangerous to your wallet:

If your goal as an early-stage investor is to make money, you need to make decisions based on facts and data.

Let me show you what I mean.

Underground Profits

Recently, a start-up called Underground Cellar hit our radar.

Its goal is to be the dominant online marketplace for wine.

This is a big opportunity—wine is a $150 billion market and moving online at 30% per year—and Underground Cellar has an interesting twist...

Here’s how it works:

Imagine going into a wine shop with $12 in your pocket...

Given your cash on hand, you assume you'll be buying a bottle of Robert Mondavi—but instead, you walk out with a $400 bottle of Hundred Acre Cabernet...

And it only cost you $12.

Essentially, that’s the experience that Underground Cellar is creating online:

You buy some reasonably-priced bottles on its website—and occasionally, you hit the wine “lotto” and end up with a sensational, high-end bottle.

Based on its fast-growing sales, consumers seem to love the experience:

The company has grown from $50,000 in sales in December 2014, to over $300,000 in sales last month. It’s on track to generate over $3 million in sales this year.

And its investors include well-known venture capitalists including Barbara Corcoran from ABC’s hit TV show, “Shark Tank.”

As you can see: it’s a pretty compelling pitch—the kind of pitch that might lead to an emotional decision to invest in it.

So to counteract this emotion, we started gathering some facts...

The “Wine Guy”

Over the years, Matt and I have developed a network of industry experts that span dozens of different sectors.

These experts have become an invaluable resource for gathering information and data on potential new investments.

One of them happens to be an expert in the wine industry.

He’s spent his career running some of the largest online wine companies in the world, and he’s currently one of the leading experts in “wine e-commerce.”

So when we heard about Underground Cellar, we decided to invite him over to the office after work to hear what he had to say.

A “Clever” Business Model?

Over a bottle of Barolo, he soon gave us his verdict:

The company was certainly interesting, he said, but once it hit $20 million or so in sales, it was at risk of stalling out. (After he voiced this concern, he asked that we not mention his name; he didn’t want to offend anyone in the industry).

The reason, he explained, is because of how the wine industry views “discounting.”

To put it simply, wineries don’t like their wine to be sold at a discount. Discounting cheapens the brand, and it creates conflicts with their sales partners.

That’s why Underground Cellar had to devise such a “clever” business model to hide these discounts: if it simply offered discounted wine, the wineries would probably stop working with them.

But our contact thought Underground Cellar was being too clever...

Its “free upgrade” mechanism might appeal to enough users for it to build a small business—but to reach the broader market and build a big business, it would need to be far more transparent about its discounting strategy...

And that’s where it would run into trouble with the wineries.

Data-Driven Decisions

After analyzing the numbers, our “Wine Guy” recommended passing on the investment—and we were thankful for the insights he gave us.

The thing is, we understand that not everyone will have a network to reach out to when they’re contemplating an investment.

And that’s why we built our research system, CrowdabilityIQ.

It provides you with data and facts, and performs the investment analysis for you.

For example, in the case of Underground Cellar, CrowdabilityIQ came to the same conclusion as our industry expert—the system determined that investors should “pass” on the investment.

CrowdabilityIQ might not be as much fun as our “Wine Guy” (it doesn’t, for example, tell stories about wine tasting bachelorette parties in Napa gone wrong)...

But it can certainly help you make informed decisions based on data and facts instead of emotion.

And ultimately, that’s how you’ll become a successful early-stage investor.

Best Regards,
Wayne Mulligan
Wayne Mulligan


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