NextSeed Review: Invest To Support Local Businesses

NextSeed is an online crowdfunding investment platform for startups and small businesses. They focus on women- and minority-owned businesses, reportedly crowdfunding at least $15 million since 2015.

Anna Yen June 16, 2021

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Rating: Good (4.0 / 5)

Summary

  • Investment Type: debt and equity investments
  • Minimum Investment: $100
  • Targeted Return: varies
  • Maturity: varies
  • Liquidity: none
  • Open to non-accredited investors
  • Fees and expenses: 1-2% on all payments businesses make to investors

Pros

  • Easy access to pre-vetted investments in local startups
  • Open to both accredited and non-accredited investors
  • No upfront or annual management fees
  • Low minimum investment
  • The majority of funded companies have been women- or minority-owned

Cons

  • Lending to small businesses is extremely risky
  • Only 3-4 open investments at a time
  • Unclear how thorough the vetting process is
  • No secondary market for your investment

What is NextSeed?

NextSeed’s investment platform gives you the opportunity to fund vetted small businesses around the U.S. A Kickstarter meets Shark Tank, the platform offers debt and equity investments in local companies.

NextSeed was founded in 2014 in Houston, Texas, by Abraham Chu, Robert Dunton, and Youngro Lee. In November 2020, private investment platform Republic bought NextSeed, adding tech startups, gaming, crypto, and real estate assets to the ecosystem.

All told, NextSeed boasts paying out over $7 million to its investors since 2015.

How does NextSeed work?

Prospective investors can open an account and browse the 3-4 options typically on the menu. Each borrowing company includes detailed descriptions of their:

  • Funding need and money raised
  • Company history
  • Business model
  • Competitive advantages
  • Management team

Each month, NextSeed facilitates payments from the businesses to its investors. NextSeed’s Education Center details the process, risks, and opportunities related to adding local businesses to your investment portfolio.

How does NextSeed select the businesses on its platform?

While NextSeed’s first investments were limited to restaurants and retailers in Texas and California, they’ve since expanded to states like New York, Washington, Utah, and Colorado.

NextSeed states that only 3% of applicants have successfully passed their vetting process. However, NextSeed doesn’t provide information on what the screening process looks like beyond legal and financial background checks.

Since 2015, 75% of all funded dollars have gone to women- or minority-owned businesses, totaling over $15 million.

As of June 2021, there were four investments available on the platform:

  • Morningside PlayCare, a New York-based school focused on language immersion and early education
  • Cherry Block Craft Butcher and Texas Kitchen, a Houston-based steakhouse
  • The Rabbit Hole HTX, a cocktail bar and nightlife destination in Houston, Texas
  • Republic Boot Co, a handcrafted bootmaker in Texas

As you can see, investments are still concentrated in Houston, Texas, where NextSeed was founded.

What are the investment terms on the NextSeed platform?

While NextSeed doesn’t charge annual fees or any fees to invest, investors pay 2% of any payments processed from a business. Investments in prior campaigns are subject to a 1% fee on payments. Examples of investment types include:

Debt Investments. Companies borrow money and promise to repay it with interest. Typically, debt investments last up to eight years. Debt investments are considered to be safer than equity investments. Debt investments on the NextSeed platform can take the form of:

  • Term Notes. Term notes require businesses to make set monthly payments, and if a business misses a payment, it would be in default. The interest rate is set upfront. 
  • Revenue Sharing Notes. Revenue sharing notes do not require businesses to make monthly payments. The business must pay a specified percentage of revenue (such as 10%) to investors until total payments reach a specified multiple of the amount you invested (such as 1.4x). If the business doesn’t generate revenue, it doesn’t have to pay anything to investors, and it isn’t in default. Full payment for the revenue sharing note is due at the maturity date, at which point the business would be in default if it doesn’t make the full payment. 

Preferred Equity Investments. Equity investors become longer-term part owners. The company typically pays quarterly dividends to your account without giving you voting or management rights. 

How do I invest?

Types of accounts offered. In addition to individual investment accounts, NextSeed offers entity investment accounts (for corporations or LLCs) and self-directed IRA investment accounts at no additional cost. 

To get started, all you have to do is open an account, research your options, and click “Invest Now” to participate in live deals. There is a $100 investment minimum, though companies can increase that amount.

Companies choose whether to allow only accredited investors under Regulation D or any investors under Regulation Crowdfunding (Regulation CF). As of June 2021, all investments on the platform were open to non-accredited investors under Regulation CF.

How much can I invest?

If you are not an accredited investor, under Regulation Crowdfunding, you can invest at most $2,200 if your income or net worth is less than $107,000. After that, you can invest between 5% and 10% of your net worth and annual income, whichever is greater. If you are an accredited investor, there are no limits. You can learn more here.

Is NextSeed safe?

Launched in 2015, NextSeed was one of the first crowdfunding platforms. NextSeed Securities LLC is also a registered broker-dealer, subject to FINRA oversight.

When you fund your NextSeed account or contribute funds toward a specific business, your money is held in escrow at NextSeed’s partner bank, GoldStar Trust Company. While uninvested, FDIC insurance protects your money up to $250,000.

But once the company meets its minimum funding goal, your money is invested, and you assume all associated risks. If the company falls short of its goal, you’ll receive a full refund to your NextSeed account.

Though NextSeed performs legal and financial background checks on each company, returns are not guaranteed.

Keep in mind that many businesses are local startups without proven track records – which means a higher degree of risk. As such, NextSeed is best for experienced investors or those with high risk tolerance.

We also suggest diversifying among several opportunities on the platform if you choose to invest.

💰 Takeaway

NextSeed lets you support local businesses, including many led by women and minorities. Although many local businesses do not make it, the ones that do succeed can make a lasting impact on the community.


🔔 Looking for other ways to invest with impact? Check our guide to investing in communities and small businesses.

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