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NextSeed is a crowdfunding platform specializing in local businesses. Instead of listing high-growth startup companies, NextSeed lists local pizza restaurants and coffee shops for investors to browse.
Given the lower growth potential of these businesses, investors loan money to companies and are paid back with interest. This provides a more predictable return profile when compared to startup investments.
- More consistent returns
- Impact local communities
- Invest with retirement accounts
- Lower upside potential
- Limited offerings available
Everyone has their favorite spot in their city. Whether it’s the local coffee shop you stop at everyday, the restaurant down the block that you can’t get enough of, or your crossfit gym, chances are there are at least a few local businesses you love.
You likely already support these places by spending money there, but what if you could invest in them as well? Fortunately, there are now a number of startup investment platforms that allow investors to support local businesses. One of the most prominent is NextSeed.
In this NextSeed review, we’ll dive into how the platform allows anyone to invest in small businesses. Additionally, we’ll lay out the pros and cons of the platform and whether it’s worth using.
NextSeed Review: Platform Highlights
- NextSeed is a platform built for allowing everyday investors to allocate their money to local businesses
- Investments are structured as debt, equity, or a hybrid model allowing investors additional flexibility
- NextSeed has a low minimum investment of $100 and does not require investors to be accredited
- Investors can choose to use a retirement account or entity account to potentially save on taxes
- There are a variety of financing structures available depending on the particular deal
- NextSeed places an emphasis on women-owned and other minority-owned businesses
What is NextSeed?
Founded in 2015, NextSeed is a platform designed to allow people to invest in their favorite small businesses. Local businesses are able to use the NextSeed platform to borrow money or sell ownership in order to raise money.
Investors are then able to browse deals and invest in the deals that interest them. When investing, you’re able to choose whether to do so in a traditional account, retirement account, or entity account. Retirement accounts will provide tax benefits provided you follow the regulations. Entity accounts, on the other hand, allow you to invest through an LLC or other business entity. As a result, this separates your personal assets from your business assets.
In late 2020, NextSeed merged with Republic. Republic is currently one of the largest startup investing platforms. Where Republic focuses on tech startups, gaming, crypto, and real estate assets, they saw an opportunity to acquire NextSeed to expand into the small business market.
How Does NextSeed Work?
Once you have created your account and selected your account type, you’re able to view all of the open deals on the platform. Each deal will contain financial information, a business plan, and other important information for investors.
NextSeed employs a strict vetting process to ensure that only the best of the best deals are listed. As a result, only the top 3% of companies that apply for funding are listed on the platform. Thanks to their selectivity, NextSeed boasts a 90%+ success rate on their campaigns. This means that fewer than 10% of businesses that use NextSeed fail to meet their fundraising goals.
When examining NextSeed deals, one of the most important aspects to look at is the type of securities offered. This information tells you how the investment is structured and how you’ll generate returns.
The returns you generate from NextSeed investments will depend on the financing structure of the investment. Some investments on NextSeed will be equity investments and others will be debt.
With an equity investment, you are receiving partial ownership in the business. In this scenario, you generate a return by either collecting distributions or selling your shares for more money in the future. With a small business, it is unlikely that there will be a liquidity event so you’ll likely be more reliant on periodic distributions.
More common on the NextSeed platform are debt investments. With a debt investment, you are essentially lending money to the business and receiving interest payments in return. These are more prevalent on NextSeed because they provide a higher likelihood of seeing a return on your investment.
NextSeed Debt Investments
Most debt investments on NextSeed are either term notes or revenue sharing notes.
With a term note, the investor receives a constant rate of interest for a fixed period. For example, the Morningside PlayCare deal has a 12% interest rate and a 48-month maturity. This means that investors will receive 12% interest on their investment for 4 years, after which point they will have been fully paid back. Investors in this deal do not receive any ownership in the underlying business.
Revenue sharing notes on the other hand are a bit more complex. These arrangements include two important numbers: an investment multiple and a revenue sharing percentage. For example, the NettBar Shady Acres deal has a revenue sharing percentage of 8.5% and an investment multiple of 1.4x. The timeline for this investment is also 48 months.
In action, this debt instrument works by repaying investors their initial investment plus the investment multiple. So if you were to invest $1,000 into NettBar Shady Acres, they are committing to paying you back a total of $1,400 over the span of 48 months. The 8.5% revenue sharing percentage means that the business will payout 8.5% of its revenues to investors. This is not in addition to the revenue multiple. Instead, this is where the revenue multiple comes from.
In some cases, the revenue share may not reach the required investment multiple by the maturity date. In that case, the company will be required to pay the remaining amount in a lump sum.
As a business, NextSeed needs to generate revenue. The primary way they do this is by charging fees to investors. Specifically, investors pay a 2% administrative fee on each payment the company makes to you.
Compared to other startup investing platforms, this is fairly reasonable. Most platforms charge anywhere from a 1% -2% fee as well as 20% carry. NextSeed does not charge carry on their investments, so this may compensate for the higher flat fee.
For example, if a company is paying a 12% interest rate, you’ll end up receiving 10% after fees are accounted for.
- Support local businesses by providing funding for expansion or other exciting projects
- Create an impact in your local community by investing where you live
- Generate more consistent returns through debt instruments
- Invest using a retirement account like a Roth IRA for free
- Use your corporation or LLC to invest in deals
- Most of the current offerings are located in a single city
- Lower upside potential when compared to other startup investing platforms
- 2% administrative fee can eat into your ROI
NextSeed Review: Final Thoughts
As far as startup investing platforms go, NextSeed certainly sets themself apart from the crowd. Instead of investing in high-growth startups, you are able to invest in local businesses in your own neighborhood.
While this limits your upside potential, it does allow you to potentially have a greater impact in your area.
Additionally, the low $100 minimum investment and the fact that there is no accreditation requirement makes the platform more accessible.
However, with any startup investment, it’s important to keep in mind the increased risk you are taking on. Even though most of NextSeed’s investments are debt instruments, there is a chance that the company goes bust before you receive your entire investment.
However, if you’re looking to put your dollars to work in your community, NextSeed could be a great option. Plus, now that Republic owns them, it’s likely that they’ll be around for quite a while.