Hi everyone,
I hope you enjoyed last week’s issue on Cityfunds — the index-like real estate funds for entire cities.
Today we’re looking at Finlete, a company you’ve probably seen us fawning over recently.
Well, we’ve been excited for a reason: this company lets you invest in minor league athletes and get a cut of their future on-field earnings when they go pro.
Finlete has yet to officially launch, but they’ve made key moves, and are raising money right now to bring their platform to the world.
Today, we’ll go into the mechanics of how Finlete works, analyze their operations, and evaluate their fundraising offering.
This issue features a special podcast with CEO Rob Connolly.
Let’s find out more
Summary
- Stage: Pre-seed
- Type: Convertible note (Debt that converts to equity. You’re betting Finlete will be worth more than $6m in the future)
- Accreditation: Both accredited and non-accredited investors are welcome
- Geos: Worldwide investors accepted, except for a few Canadian provinces and sanctioned countries
- Minimum investment: $250
- Investment horizon: 5+ years. Equity will be converted when Finlete is financed, acquired, or goes public.
- Link: finlete.co/invest
The problem with investing in athletes
Readers may recall we did a kick-ass issue on investing in athletes.
While researching that issue, we discovered Finlete, and were intrigued. While investing in sports teams is arguably the single best alternative investment out there, unless you’re a PE firm or supervillain’s best friend, investing in a team is likely out of reach.
In the film Hustle, Adam Sandler plays a basketball scout that stumbles across a diamond in the rough named Bo Cruz.
If Cruz signs with an NBA team, Sandler would receive a cut of his salary. So Sandler pumps a bunch of money into training, housing and getting Cruz to try out for the major leagues.
Of course, most people don’t have the connections, capital or facilities to actually do this.
But what if you knew someone that did?
That’s where Finlete comes in.
What is Finlete?
Finlete may be one of the most unique companies we’ve ever done a Deep Dive on.
These guys are doing something very few other companies have done: fractionalizing athletes.
Sure, private equity firms have been signing minor-league prospects to future earning contracts (FECs), clearly taking advantage of the lack of competition. But everyone else has been unable to participate. The best retail investors could do is invest in trading cards and memorabilia.
With Finlete’s player contracts, anyone can invest in young athletes in return for a share of their future professional contracts.
Finlete is starting its recruiting with minor-league baseball. They’ve already signed their first player: Yerry Rodriguez, a pitcher on the Texas Rangers’ 40-man roster (these are the players that make up the active roster).
This is the first of many players, and the first of many sports. They want to get 100 athletes signed across baseball, football, hockey, and MMA.
Once they’ve got the process down pat, the sky’s the limit.
Finlete’s team
Finlete’s management team has three folks.
First up is CEO Rob Connolly. We just recorded a podcast with the guy, and can safely say he’s as jolly as he looks.
Podcast topics:
- Poverty-level wages earned by minor-league baseball players
- How Finlete identifies the athletes to invest in
- The benefits of selling a portion of your career earnings
- Fernando Tatis, Jr.’s payout from a $350 million contract
- Investing in Finlete’s pre-seed round at finlete.co/invest
Rob’s got a solid history of founding startups that get acquired. He founded AgentBuzz (acquired by OakParkCreative) and HeroDogBox (acquired by GetPetBox).
Finlete’s other Co-Founder is Vivek Parekh. Vivek has been an important player in the tech industry since the early 2000s. He was a lead engineer for startups (Jasper and Rentefits), as well as major companies like Walmart and Yahoo.
The duo is supported by CFO Michael Bryan. Michael has experience working in operations for the MLB – giving him important industry connections.
The problem with baseball’s pay structure
Before we go any further, we must stress how little minor-league players are paid.
The average minor league baseball player earns, over a full season, about $11,200. But the average cost of living for a US adult is $38,266 per year. The math just doesn’t add up.
Players are literally earning below minimum wage. Some are so poor they have to live without refrigerators, or the means to cook raw meat.
At any given time, about 10% of minor league players are on the cusp of making it to the big leagues. But in the meantime they have bills to pay and mouths to feed. How can athletes focus on becoming the best when they have no financial security?
How Finlete works
Finlete pays out athletes now, and in exchange, owns 10% of their future earnings.
Ownership is passed onto customers in the form of 100,000 shares. (Each share has a different value depending on how much Finlete invests in each player.)
When an athlete makes it to the MLB, as an investor you would be entitled to 0.00001% per share. This sounds very low. Here’s how the numbers play out.
- Let’s assume each share is worth $50.
- Let’s assume you invested $250 to buy five shares of a young Carlos Santana.
- This would entitle you to 0.00005% of his career earnings, which total $90m
- So your cut would be $4,545 – an ROI of 1,718%
Finlete created a handy “What If” calculator that you can play around with to see how much you’d earn by investing in different players.
Finlete’s business model
For investors, the process is nice and smooth. Just create an account, pick the athlete you want to invest in, and buy shares.
On Finlete’s side, things are a bit more complex.
They use a three-step process to find athletes.
1. Identify
Finlete’s CTO, Vivek, is a “machine learning whiz” who has developed an AI algorithm to source the next top prospects. The software crunches data from 1,300+ minor league players across a dozen factors:
- Bat speed
- Batting avg
- Slugging %
- Power
- Speed
- Age
- Team
- Track record
- etc
The algorithm spits out a score between 0 and 100, and Finlete attempts to set up meetings with players scoring 90+
Yes, this data-driven approach is very Moneyball-esque.
2. File
If the athlete agrees, Finlete turns to their contract lawyer (who has experience fractionalizing artwork). He takes a form 1-A to the SEC so they can offer a Reg A+ offering. This process takes 6-12 weeks.
3. Sell
If the player agrees, Finlete creates 100,000 shares, and uses profits from the sale to reinvest in the next athlete.
It sounds simple enough, but remember Finlete is still on first base in this new game they’re playing.
How does Finlete plan to make money?
Finlete has a clear path to profitability.
Let’s say Finlete agrees to pay a $500k upfront for 10% of a player’s career earnings. Including fees (legal and audit fees, travel and agent transfers, etc) The total out-of-pocket cost is around $615k.
So, the contract is divvied into 100,000 shares, valued at $6.15 each.
- Finlete keeps 10% of these shares for themselves, and sells the remaining 90% to fans at a 30% markup
- So in this scenario, investors would buy shares for $7.98
This model is interesting, this is the first time I’ve actually seen one quite like it. It means Finlete doesn’t have to rely on all of their athletes being a home run — as they sell enough shares, they’ll profit.
In addition, Finlete also plans to sell independent scouting reports and other premium features to investors.
In a few years, Finlete’s goal is to introduce a full-scale alternative trading market for athlete shares. This will introduce yet another revenue stream: trading fees.
Finally, (and this is even further down the roadmap) but Finlete also wants to allow private equity firms to list their future earnings contracts on Finlete’s trading platform.
How do investors get paid?
Shareholders will receive payouts in the form of dividends twice per year. These will hit Finlete accounts two weeks after the All-Star Game (July 12) and two weeks after the World Series (October).
Dividends are distributed via an SEC-regulated stock management system.
Eventually, fans will be able to sell their shares through the trading marketplace Finlete is creating.
Are there any other investor perks?
Yep. Finlete understands that sports are emotional. It’s about more than just money.
The team wants to build a community of what they call Fanvestors
Investors will gain access to a whole slew of really cool perks. Think exclusive meet and greets, signed merchandise, and personal messages from each athlete.
This will all be accessible via the Athlete Investor Portal, which provides video updates about the athlete’s life, performances and more.
How will liquidity work?
As we mentioned above, to allow fans to trade their stocks in athletes via a secondary marketplace, Finlete will need to create what’s known as an Alternative Trading System (ATS).
Essentially, they want to become the Coinbase or Robinhood of fractionalized athletes. Think of it like DraftKings meets Robinhood.
This platform is at least a couple of years away. But if they execute on this, it could launch Finlete into the stratosphere.
The team believes their future athlete trading platform is what will make them a billion-dollar company.
Investment opportunity
Finlete is raising $1.1m via WeFunder.
To be clear, this opportunity lets you invest in Finlete, the underlying company, not the athletes themselves.
Since Finlete keeps 10% of their athlete’s future earnings on every contract they put together, investing in the business gives you broad exposure to all their athletes.
Investment type
- Investors are buying convertible notes. These convert into equity if Finlete is acquired or goes public.
- The valuation is $6m. So as an investor, you’re assuming Finlete will be worth more than this at exit
Previous raises
Finlete has already raised 220k in its pre-sound round, thanks to early angel investors and friends + family. The biggest investor here was ComcastNBC , a startup incubator that owns 8% of Finlete.
(Interestingly, ComcastNBC made a big splash investing in Acorns, one of the OG micro-investing platforms).
Use of funds
So far, Finlete has raised about $200k of its $1.1m goal.
They have a few clear objectives for the funds:
- 47% will be used for signing top-tier MLB prospects. Finlete can then take the future earning contract shares to market.
- 20% will go toward creating a Reg A offerings with the SEC — absolutely necessary for the business to go live.
- 16% will go to marketing
- 15% will be used to pay the team (About $165k split between three employees. Nice and lean.)
Investment requirements
Both accredited and non-accredited investors can invest for a minimum of just $250.
How does Finlete stack up?
Liquidity
😐 Mixed
investing in a pre-seed startup via convertible notes is about as illiquid as it gets. There’s no guarantee that Finlete ever secures an exit. They may strike out before reaching their goal of signing 100+ athletes, too.
You’re looking at 5+ years before it might get converted to equity.
However, if and when Finlete builds its dream trading platform, platform liquidity will be excellent, and company liquidity will likely follow.
Returns potential
🔥 Superb
Investing directly in the athletes is a high-risk, high-reward opportunity. It’s extremely hard to make it to the majors (studies have put the figure at 10%) so each player could be a home-run or a strikeout.
Investing in Finlete as a company mitigates that risk somewhat, since you’re investing in the infrastructure, not the players themselves.
If a player makes it big, the returns can be massive. Just look at baseball’s biggest contracts in 2023. Gerrit Cole will earn $36m this season.
Ultimately, the success of the company depends on their ability to secure terrific players. Can Finlete pick up a player like Cole?
I’m also impressed with the way Finlete is thinking about revenue streams. If they execute well, I think they are setting themselves up for a potential acquisition by a company like DraftKings.
Competition
👍 Not bad
Finlete isn’t first-to-market and has a clear competitor in PE firms and Big League Advantage, a company that also takes 10% of future earnings.
However, Finlete has some notable advantages:
- BLA is a private fund with high barriers to entry
- BLA has no secondary marketplace (nor plans to make one)
- BLA has been criticized for targeting and exploiting vulnerable athletes
- Finlete is a grassroots community that provides investors with personalized perks. BLA has none of this.
Minimum investment
Good
$250 for the pre-seed round on WeFunder is a nice and low minimum.
Each athlete’s share is valued at just $50, which is great too.
Platform usability
Fine, but hard to say
At this point, Finlete is still in its early stages and its online platform still needs to be developed. It looks good, but lacks a lot of information and content.
Similarly, the images we’ve seen of the Finlete back-end look sleek and easy to use, but we can’t tell for sure until they’re made public.
The planned Finlete ATS is a good infrastructure bet on the emerging athlete investment field. If successful in launching, Finlete would capture a commission on each trade and also could become the preferred partner for non-Finlete future earning contracts to be traded.
Setting up an ATS (or partnering with an existing ATS) involves significant work and legal expenses, including SEC approval, which takes quite a while and is not guaranteed.
Closing thoughts
Think about this question: why do you love sports?
Everyone answers this differently. For some, it’s the sense of community, or their ties to a team. Others just have a pure, raw love for the sport itself
But I think it’s fair to say, for most, people love sport because of the athletes. The drama, the journeys, and the stories we get from watching the best compete are what it’s all about.
Finlete takes the nucleus of this love, added an investment component, and combined it with a clear problem many athletes need to solve: They have huge skills, but low finances.
The prospect of everyday fans being able to invest in the next big thing is hugely compelling. Imagine hitting a home run by investing in a young Aaron Judge? It’s not a pipe dream, it can and will happen. Finlete is making it a reality.
Yes, they’re super early in this game. But that’s exactly why I would consider investing.
I believe in the team and think Finlete is onto something big.
Disclosures
- Finlete is a current sponsor of Alts; this was a paid deep dive.
- We do not own any shares of Finlete or any Finlete athletes through ALTS 1.
- I am planning on investing in Finlete’s WeFunder.
This issue is a sponsored deep dive, meaning Alts has been paid to write an independent analysis of Finlete. Finlete has agreed to offer an unconstrained look at its business & operations. Finlete is also a sponsor of Alts, but our research is neutral and unbiased. This should not be considered financial, legal, tax, or investment advice, but rather an independent analysis to help readers make their own investment decisions. All opinions expressed here are ours, and ours alone. We hope you find it informative and fair.
