Localstake Review: Invest in Local Startups
Localstake is a crowdfunding platform that lets small startups quickly raise funding from local investors. Keep reading to learn if you should invest.
SustainFi October 26, 2021
Rating: Good (3.5 / 5)
- Investment Type: revenue share loans, equity, convertible debt, or traditional debt
- Minimum Investment: starting at $100
- Maturity: varies, as short as 2-3 years
- Liquidity: none
- Some investments are open to non-accredited investors
- Investor fees: none
- You get to support local businesses
- No fees
- Low minimum investment
- Individual businesses may offer non-monetary perks
- Some opportunities are open to non-accredited investors
- Lending to small businesses is extremely risky
- Localstake is a startup with an undisclosed track record
- Localstake is not responsible if the business defaults
- No secondary market
- Barebones website
- Few investment opportunities
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What is Localstake?
Indianapolis, Indiana-based Localstake is a local business crowdfunding platform like Mainvest. Founded by two former investment bankers, Ryan Flynn and Brandon Smith, Localstake raised $560,000 in seed funding.
Localstake mostly features small consumer and brick and mortar businesses, though we’ve also found a few solar projects, which may be interesting to green energy investors. Although many of the investments are food and beverage-focused, some of the projects on the platform included Veridian at County Farm, the nation’s first mixed-income net-zero energy community, and Solar Capital, a developer of affordable solar power solutions.
Localstake lists growing companies with revenues that are looking to raise between $50,000 and $500,000 ($250,000 on average for a successful raise). Startups use funds to hire people, open more locations, and buy equipment.
How does Localstake work?
Once you’ve registered on the platform, you can browse businesses that are looking to fundraise, indicate an interest amount, and commit to investing. Unlike other crowdfunding platforms with take it or leave it terms, Localstake lets businesses gauge investor interest and work out mutually acceptable investment terms.
Depending on the type of business, the investment can take four forms.
- Revenue share loans. Just like Mainvest, Localstake lets investors loan money to startups in return for a percentage of revenue generated by the business (such as 2-10%) until investors earn a specified multiple of their money, such as 1.5x. So, if you invest $100, you will get a percentage of revenue until you get $150 back. Your annual return depends on how long the business takes to pay you $150, making it hard to compare investments. Revenue share loans have a maturity date, such as 6-8 years, at which point the entire amount, such as $150, becomes due.
- Preferred equity. By investing in preferred equity, you receive a share of ownership in the business on “preferred” terms. Preferred equity has some privileges over the other type of equity, common equity. For example, if the business is sold or liquidated, preferred equity holders get their money back before common equity holders. In a startup that’s fundraising, the founders usually hold common equity, and investors hold preferred equity.
- Convertible debt. By investing in convertible notes, you give a loan to the business, and this loan converts into equity at a discount in the next financing round. Convertible notes are usually issued by early-stage startups because it’s hard to determine how much the business is worth. To reward you for investing early, your loan converts into equity at a discount (e.g., 20%), which gives you better terms versus later-stage investors.
- Traditional debt. Traditional debt is an instrument most of us are familiar with. You loan money to the business, and they promise to pay you back at a specific time, with interest. Debt can be secured (or backed by some form of collateral) or unsecured.
How does Localstake select the businesses on its platform?
Localstake reviews the information provided by the businesses to make sure it’s not misleading and the company isn’t fraudulent, as required by crowdfunding regulations. They also do background checks on management teams and credit checks on existing businesses. It’s not clear what percentage of startups Localstake approves. (In contrast, Mainvest says that it approves only 5% of applications.)
Besides, Localstake is an intermediary, not a co-investor, so it’s up to you to do proper diligence. Since Localstake makes money from listing fees, their incentive is to list as many businesses as possible. Though, longer-term, for the Localstake platform to be successful, they need investors to make money, too.
The platform lists 43 successfully funded businesses, but we couldn’t find any businesses that were actively fundraising in October 2021.
The most successful fundraisers on the platform to date include:
- Ogden’s Own, a distillery making craft spirits, which raised nearly $2 million
- Veridian at County Farm, a solar mixed-income neighborhood
- Sana Packaging, a cannabis packaging business
- Commongrounds Cooperative, a real estate development cooperative
- Cardinal Spirits, a craft distillery
How much can I invest?
If you are not an accredited investor, under Regulation Crowdfunding (Reg CF), you can invest at most $2,200 if your income or net worth is less than $107,000. If your income and net worth are greater than $107,000, you can invest 10% of your net worth and annual income, whichever is greater, up to $107,000. If you are an accredited investor, there are no limits.
How do I invest with Localstake?
You can invest as an individual or via joint account, self-directed IRA, entity, or trust.
Here is what you need to do:
- Create an account. Note that once you sign up for a new account, you are subject to a 30-day waiting period before you can invest
- Find an investment opportunity and express interest in the business. Expressing interest gives you access to more diligence materials and the ability to participate in events, like a meet and greet at the local brewery
- Provide feedback, including any changes in investment terms you would like to see
- Invest by signing the investment documents and transferring funds
- Once you’ve invested, you will get financial updates from the business and access to the investor forum
What fees does Localstake charge?
Investing with Localstake is free to investors. Still, you should always double-check the terms of any potential offering to make sure there are no hidden fees.
Is Localstake safe?
Localstake is a registered broker-dealer, and Regulation CF requires them to perform background checks on the businesses and their management.
However, most startups fail, and investment returns are not guaranteed. In fact, you could lose your entire investment.
Besides, Localstake is a new platform that doesn’t publish a track record and has raised less than $1 million in venture capital.
As an alternative investment, the funds you invest are not FDIC or SIPC-insured.
Localstake vs. Mainvest
Mainvest is a more established local business crowdfunding platform that competes with Localstake.
Both platforms offer:
- A minimum investment starting at just $100
- Opportunities for non-accredited investors
- Revenue sharing notes
- No investor fees
However, Mainvest also offers:
- Multiple investment opportunities at any given time
- A better website experience
- Clear investment terms
- A Better Business Bureau accreditation
- Greater transparency (Mainvest approves 5% of the businesses that apply, and 97% of businesses listed on the platform are in good standing)
🔔 Read our review of Mainvest.
🔔 Looking for other ways to invest with impact? Check our guide to investing in communities and small businesses.