Crowdfunding for Computers that Can Smell

Imagine having a magical crystal ball that lets you see into the future. Imagine knowing — with 100% certainty — that a specific event will come to pass.

That’s the strange circumstance I found myself in back in the winter of 2005.

You see, I just knew that Apple would launch a device that combined a mobile phone with a music player. I could feel it and see it as if it were right in front of me. And if consumer interest in this device was equal to that of the iPod, Apple’s revenues would rise like a hot air balloon.

…an amazing technology, a multibillion-dollar market and a company that is currently accepting investments. Should we write a check?

To benefit financially from this vision, I could have bought stock in Apple. But I felt my upside would have been limited: A single successful product launch doesn’t generally move a large-cap stock like Apple.

My best bet, I decided, was to find a small, publicly traded company that would have its world changed if Apple launched a mobile phone — for example, one of the companies that made their components. If I could find one that was still cheap, I could buy it and make out like a bandit.

I spent months and months researching Apple’s suppliers. I searched under every rock and every sea…

And finally, I found just the company I was looking for.

I’ll tell you more about it and how it changed my fortunes in a moment. But first I want to share with you my latest vision — my latest look into a crystal ball…

The vision I’m talking about relates to a privately held business. It’s called Aromyx.

Aromyx produces a technology that’s nothing short of revolutionary.

They’ve created a microchip that can detect, interpret and identify smells and tastes just like a human brain. For example, let’s say a team of chemists is attempting to create a fancy new perfume for a company like Chanel. They would put a drop of the new perfume onto an Aromyx chip, and automatically, magically, an image would appear on their computer screen — an “aromagraph” — representing the reaction of the human brain.

Based on the aromagraph, the chemists would see how the brain’s reaction to the scent was similar to, or different from, existing scents on the market and then make adjustments as needed.

The real-world applications of a technology like this — not just for fragrances, but for consumer packaged goods, foods and beverages — are enormous.

Currently, in order to test and create new products, companies spend roughly $37.5 billion every year on human panels. Basically, they recruit thousands and thousands of people to participate in focus groups in order to predict how the world will respond to a new product. That’s a time-intensive process, and costly!

Aromyx not only provides a faster and more accurate tool — but at $300 per chip, it creates both a cost-effective solution for its clients and a moneymaker for itself.

This type of technology is the future of consumer packaged goods development — at least that’s what my crystal ball says.

If the company can capture just 3% of the market, it’s a $1 billion business.

Aromyx is currently raising a round of capital from investors like you. You can see more about it on public fundraising platform AngelList.

So to sum up the opportunity: an amazing technology, a multibillion-dollar market and a company that is currently accepting investments. Should we write a check?

Not so fast! We know firsthand how easy it is to get excited about startup opportunities like this and make emotional decisions. That’s why we wrote The 10 Crowd Commandments, a free, easy-to-digest framework that helps you evaluate early-stage investment opportunity.

Let’s take a quick look at how Aromyx stacks up on the positive side of the Crowd Commandment ledger:

  • Market demand from paying customers: Although Aromyx’s product hasn’t yet launched, the senior vice president for chemical procurements from Procter & Gamble (owner of dozens of brands, including Tide detergent, Secret deodorant and Crest toothpaste) said he’d “buy thousands of these right now” if the chips were available
  • Straightforward business model: It costs $100 to make a chip, and they sell it for $300. After subtracting the normal costs to run the business, what remains is profit
  • Competition: While competition exists, Aromyx has over 29 legal patents — that will help them build defensibility
  • Strong management team: They’ve started and sold companies before.

However, our “Commandments” also give us reasons to be concerned:

  • While Aromyx has already received millions of dollars in government grants and funding, there aren’t any notable private investors involved — i.e., venture capitalists or angel investors who invest to earn a profit. As we like to say here at Crowdability, it’s always good to “be a follower” in deals like this. Following professional investors ensures that someone has negotiated competitive terms and done some serious due diligence
  • Another concern is that they’re raising $2 million, but they don’t say exactly what they’ll do with the funds. For example, will they build their team, sign up 10 new major customers and reach positive cash flow? If we invest today, what financial results should we expect? They don’t say! There isn’t a clear explanation in any of their materials.

So what should we do here?

Maybe my experience with the “Apple crystal ball” can be of some assistance…

As it turns out, I was right about Apple launching their mobile device. The iPhone has generated billions of dollars in value for Apple and its shareholders and changed the entire mobile landscape.

But the stock I was so bullish on — one of Apple’s suppliers — didn’t fare so well. The company was called PortalPlayer. I say “was” for a simple reason: The company is no longer publicly traded. Shortly before the iPhone was released, Apple announced that it would be switching to a new component manufacturer. It was “game over” for PortalPlayer, and “game over” for my investment, too.

Other than that my crystal ball seems to have been momentarily broken, what lessons can we learn from my failed investment?

Well, for one thing, even though I was extremely excited about PortalPlayer, I followed my playbook for early-stage investing — an early set of rules similar to The 10 Crowd Commandments. The most important rule I followed was this: Don’t commit too much of your capital to any one stock. Yes, despite my enthusiasm for PortalPlayer, I made only a small commitment to it. I was diversified.

You see, when it comes to investing in startups and early-stage technology companies, there’s no such thing as a sure thing. To protect yourself, you need to diversify, committing only small amounts of capital to speculative ideas like PortalPlayer — or to companies like Aromyx.

If you ultimately decide to invest in Aromyx, commit only a small amount of your available capital — and make sure to build a diversified startup portfolio by making many other early-stage investments too.

Speaking of which, there’s a new opportunity on AngelList that has us very excited — essentially, it’s a “mutual fund” for startups.

Regards,

Wayne Mulligan
for The Daily Reckoning

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