Datto
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Why you have to pay attention to the Indian startup scene
This is The TechCrunch Exchange, a newsletter that goes out on Saturdays, based on the column of the same name. You can sign up for the email here.
Back in August during Y Combinator’s two-day demo extravaganza, TechCrunch noted a number of startups from India that stood out from the batch. Names like Bikayi (e-commerce tools), Decentro (consumer banking APIs), Farmako Healthcare (digital health records) and MedPiper Technologies (helping hire health professionals) joined our list of favorites from the batch.
Seeing so many India-focused startups in the mix wasn’t a fluke. Data shows that India’s venture capital scene has grown sharply in recent years. 2019 was the country’s biggest ever in terms of venture dollars invested, with Bain counting $10 billion during the year.
In 2020, the third quarter brought the country’s venture capital scene back to form. After a somewhat average start to the year, Indian startups saw their venture capital investment fall to just $1.5 billion in Q2, the lowest quarterly tally since 2016. But data via KPMG and PitchBook make it plain that Q3 was a rebound, with $3.6 billion invested into Indian startups during the three-month period.
That figure was not a historical record, mind; the Q3 total looks to be only the fourth-biggest VC quarter in India’s startup history since at least 2013 and, perhaps, ever. But it was a good bounce-back during a crippling pandemic all the same. The country’s VC deal count also rebounded a bit in the third quarter, with some of that money landing in big chunks, including a $500 million investment into Byju’s this September.
Smaller startups are also seeing strong results. Bikayi is one such startup. TechCrunch caught up with the company via email, digging into its post-Demo Day results. Its monthly recurring revenue (MRR) grew 60% in August from its July results, it said. And in late August the company told TechCrunch that it was on track to reach $1 million annual recurring revenue (ARR) by the end of the year.
Bikayi said more recently that it recorded 100% growth in the number of merchants it supports, and 100% revenue growth in September. So the WhatsApp-focused Shopify-for-India is racing ahead. October results, Bikayi CEO Sonakshi Nathani added, are looking “promising” as well.
To get a better handle on the Indian startup market more broadly, The Exchange got ahold of Accel investors Arun Mathew (based in the United States), and Prayank Swaroop (based in India), for a bit of digging.
Historically, falling bandwidth and smartphone costs along with improved Internet reliability helped lay the foundation for the recent Indian startup wave, according to Swaroop. Mathew added that some high-profile successes like Flipkart made startups a more attractive option, with the ecommerce company’s success helping to “change the tenor” of the conversation around founding tech firms in recent years.
It also helps, Swaroop added, that seasoned folks from existing Indian tech companies are branching out and starting companies of their own, recycling knowledge into new, smaller companies. This is a key method by which Silicon Valley has managed to create an outsized number of hits over time; a concentration of operators who have built big startups are key grist in the unicorn mill. And there’s more money being raised to help power new Indian tech companies.
All told, 2019 was a huge year for the Indian startup market in venture capital terms, and 2020’s recovery is underway. Let’s see what gets built.
Market Notes
The Exchange spent a lot of this week digging into venture capital data and trends, something that we love to do. If you need to catch up, here’s our look at the U.S. venture capital scene in Q3, and here are our notes on the more global picture. And we touched on India above. What more could there be?
Well, some data on healthcare-focused companies is just what we need. Per a new report from CB Insights, there are 41 healthcare-focused unicorns today. More importantly, startups focused on health-related matters (telemedicine, mental health, AI, etc.) just had a record quarter. Even for a pandemic, $21.8 billion went into the space across 1,539 global rounds in the third quarter. That’s far more activity than I would have guessed.
- Moving on, The Exchange compiled a look at how quickly a few dozen startups grew in Q3, which was very good fun.
- The Equity crew also covered a number of media-and-housing-related startup rounds here if that is your jam. There were also some jokes.
- Datto went public this week, giving the market a look at what slower, more profitable software companies are worth in revenue-multiple terms. The news was mostly good.
- On the insurtech beat, New Front announced that it has raised $100 million, most recently at a $500 million valuation. And we noted in our growth-rate piece that Next Insurance raised $250 million last month, which has missed our attention. Oh, and Chicago-based Clearcover has news out this week, which we care about given the impending Root Insurance IPO (notes on its valuation here). The two companies both insure drivers.
And with that, we’re cutting Market Notes short this week for some important TechCrunch news:
Hey y’all. It’s Megan Rose Dickey busting into Alex’s newsletter for a couple of quick news items. First, I officially launched my newsletter, Human Capital! It covers labor and diversity and inclusion in tech. Also, I relaunched the Mixtape podcast with my colleague Henry Pickavet. You can check out our first episode of Season 3 about California’s gig worker ballot measure Prop 22 here.
Megan is amazing and you should check out her pod and newsletter.
Various and Sundry
As always, there was more good stuff to share here than I can possibly fit, so let’s get right into the data, takes, links and other delicacies.
- Data collected on by a Midwest-focused group concerning its region makes the case for VCs to look more closely at the center of the United States. Why? It’s cheaper to build there, which, combined with lower startup prices, means investors get a bigger bang for their buck. And return multiples for VCs (MOICs, if you care) look strong in Chicago.
- Everyone is burned out.
- Netflix and Intel took stick after their earnings failed to excite investors, in what could be a small warning sign ahead of next week’s earnings-palooza.
- The SPAC boom is precisely as ludicrous as you imagined it to be.
- And while there are loads of late-stage money, first financings are worth an ever-smaller fraction of the VC pie.
- What are the youngest VCs in the world focused on? Well, according to a survey of Gen Z VCs, their top three focuses are the creator economy, edtech and social gaming.
- How Yext evolved on its path to going public, and beyond.
Wrapping, a survey from Salesforce shows that enterprise cloud CEOs are reporting better-than-anticipated revenue growth and lower-than-anticipated churn, when compared to their March estimates. That is probably why earnings haven’t been a disaster and so many unicorns were able to go public in Q3.
That and valuations in the public sphere are higher than what private investors are dishing up, inverting the market’s last few years.
See you Monday,
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Datto trades modestly higher after pricing IPO at top of range
After pricing at $27 per share, Datto’s stock rose during regular trading. By mid-afternoon the data and security software company was worth $28.10 per share, up a hair over 4%.
The company’s IPO comes on the back of a rapid-fire Q3 in which a host of technology companies, particularly software, made it to the public markets. While the number of un-exited unicorns in the United States still rose in the quarter, Q3 brought with it a wave of liquidity that felt long coming.
Datto’s IPO is one among what appears set to be a smaller Q4 class, though offerings like Airbnb and Affirm are still tipped to be coming in short order. Airbnb and Affirm each announced that they have filed privately to float, though have yet to publicly drop their S-1 filings.
The Datto IPO was interesting for a few reasons, including its mix of slower growth and rising profitability, its place in the midst of the current Vista drama and how well it was priced.
While 2020 has brought with it many venture-backed IPOs, the year has also brought a nearly commensurate number of complaints about the IPO process itself. After many tech, and tech-ish, companies saw their values skyrocket after pricing and listing, vocal tech and venture figures argued that IPOs were effectively handing upside from companies to underwriting banks, and their customers.
There was some merit to the arguments. Datto, however, will not stoke similar fires. Up a mere few points from its IPO price, it was priced pretty much perfectly from the perspective of raising as much money as it could for itself in its debut.
Datto will use its IPO proceeds to pay down debts that it accrued during its takeover from Vista (private equity: a good deal for private equity). However, Datto’s CEO Tim Weller told TechCrunch in a call that the company will still be well-capitalized after the public offering, saying that it will have a very strong cash position.
The company should have places to deploy its remaining cash. In its S-1 filings, Datto highlighted a COVID-19 tailwind stemming from companies accelerating their digital transformation efforts. TechCrunch asked the company’s CEO whether there was an international component to that story, and whether digital transformation efforts are accelerating globally and not merely domestically. In a good omen for startups not based in the United States, the executive said that they were.
The company did not entertain a SPAC-led public debut, with Datto’s founder, Austin McChord, saying that his company had long planned a traditional public offering. Closing on the Vista front, McChord said that the removal of Vista’s Brian Sheth was immaterial to Datto’s IPO process.
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Lessons from Datto’s IPO pricing and revenue multiple
Last night Datto priced its IPO at $27 per share, the top end of its range that TechCrunch covered last week. The data and security-focused software company had targeted a $24 to $27 per-share IPO price range, meaning that its final per-share value was at the top of its estimates.
The Exchange explores startups, markets and money. Read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.
The Datto IPO won’t draw lots of attention; its business is somewhat dull, as selling software to managed service providers rarely excites. But, the public offering matters for a different reason: It gives us a fresh lens into today’s IPO market.
That lens is the perspective of slower, more profitable growth. What is that worth?
The value of quickly growing and unprofitable software and cloud companies is well known. Snowflake made a splash earlier this year on the back of huge growth and enormous losses. Investors ate its shares up, pushing its valuation to towering heights. This year we’ve even seen rapid growth and profits valued by public investors in the form of JFrog’s IPO.
But slower growth, software margins and profitability? Datto’s financial picture feels somewhat unique among the IPOs that TechCrunch has covered this year.
It’s a similar bet to the one that Egnyte is making; the enterprise software company crested $100 million ARR last year and announced that it grew by around 22% in the first half of 2020. And, it is profitable on an EBITDA basis. Therefore, the Datto IPO could provide a clue as to whether companies like Egnyte and the rest of the late-stage startup crop should be content to grow more slowly, but with the benefit of actually making money.
Lessons from Datto’s IPO pricing and revenue multiple
Here are the deal’s nuts and bolts:
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Digging into the next wave of tech IPOs
After taking five consecutive business days off from my work laptop — and to shout at my personal laptop while losing games on Dominion online — I am back. I missed you. And while The Exchange’s regular columns were off this week (Friday aside, which you can read here), there’s still a hell of a lot to talk about.
First, a new website. If you click here, you’ll be taken to a sortable list (spreadsheet? database?) of startups with Black founders. Dubbed The Black Founder List, it’s a great asset and tool.
For folks like myself with a research and reporting focus, the list’s sortability of companies founded by Black entrepreneurs by gender, stage and market focus is amazing. And, for investors, it should provide potential dealflow. Do you write lots of Series C checks? The Black Founder List has 23 Series B startups with Black founders. Or if you prefer Series D checks, there are 11 Series C startups with Black founders to check out.
Who is writing the most checks to Black founders? Among the top names are M25, a midwest VC group, Techstars Boston and a number of angels.
The website was compiled by much the same team that TechCrunch highlighted earlier this year, when their data collection work concerning Black founders was more spreadsheet than app. So, please point your thanks for the new resource to Yonas Beshawred, Sefanit Tades, James Norman and Hans Yadav.
The Black Founder List also has a data submission button, so if you notice a missing name, add it. I want the data set to be as robust as possible, as, I reckon, it will prove a great reporting resource. And public data like this obviates certain excuses from the investing class.
Market Notes
- I missed a lot this week that I was looking forward to, including the Asana and Palantir IPOs. For fuller thoughts, head here. Summaries follow:
- Asana’s direct listing and resulting valuation and implied revenue multiples make its direct listing a win for the company, and the model. If other SaaS companies have the ability to raise ample pre-debut cash, perhaps the direct listing is not as dead as it seemed a few months ago when SPACs stole its spotlight, and most companies were pursuing traditional IPOs regardless.
- Palantir’s direct listing did not feel hot until it dropped some strong revenue guidance. With that, its direct listing went fine despite its cosmically comedic voting structure. Watching Palantir’s higher-ups try to snuff public input while still providing a thin patina of democracy made me think more about Russia or Texas than a functioning democratic system.
- Looking ahead, Airbnb is said to be hunting up $3 billion for its own IPO. Airbnb had to take on a lot of expensive cash when its business collapsed in the early COVID days. It wanted to direct list. Now it’s going to cash in a huge pile during its debut.
- Good. More capital > less capital.
- Sticking to our late-stage theme, when I left, Root was said to be pursuing an IPO, and when I came back, Roblox is now also tipped to be plotting with the public markets. (Root’s IPO in the wake of the successful Lemonade debut made sense. Insurtech is hot.)
- The news should not be a surprise; Roblox’s model has found cachet with young gamers and has found a great way to make money at the same time. With a mix of Legos and video game design and Minecraft, perhaps it’s not a surprise that the company is doing well.
- Reuters reports that Roblox could be worth $4 billion when it goes public. I believe it.
- Datto is going public. Ron and Danny have the details here.
- And I chatted with a few Accel investors, the juicy bits from which you can find here.
Various and Sundry
- Draper Esprit, a Europe-focused venture capital fund that trades on the London Stock Exchange, raised £110 million this week. Esprit is a fun shop to track (I’ve known its denizen James since his LSE days), because it’s more transparent than most VC firms than you’re familiar with thanks to its structure.
- According to the firm’s release, its share sale was “oversubscribed.” Tech.eu has more.
- Mobile app spend grew to $29.3 billion in Q3, driven by 36.5 billion installs, per SensorTower. Revenue was up 32% year-over-year.
- Uber sold $500 million worth of Uber Freight to a PE firm.
- As noted, tech stocks had a bad September, but just how bad might surprise you.
- And I covered Noyo’s Series A before I left, with the post going up on Monday.
- In short, Noyo is doing the hard work to build APIs to connect the world of health insurance. It’s a huge, hard task.
- The $12.5 million was “led by Costanoa Ventures and Spark Capital. Prior investors Core Innovation Capital, Garuda Ventures, the Webb Investment Network, Precursor Ventures and Homebrew upped their investment in the new round.”
- (I can’t shake the thought that there’s something in the middle of the no-code/low-code boom, and startups delivering more of their products via APIs instead of as managed services. And please don’t say mashups, we left that phrase behind ages ago.)
- I missed the window for officially commenting on the Coinbase culture dustup — the Equity crew did talk about it while I was AFK — so I will merely share this thread as my $0.02.
- Also, read this from Eileen Burbidge on TechCrunch concerning the same matter. It’s good.
Regular morning Exchange columns return Monday morning. It’s good to be back.
By the way, TechCrunch Sessions: Mobility is coming up next week. I am going! To help you get there, here’s a 50% off code for you to get full access to the event. Or if it’s your jam, this code will get you into the expo and breakout sessions for free.
Chat soon,
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Vista-owned backup and recovery company Datto files to go public
When Vista Equity Partners acquired backup and disaster recovery firm Datto in 2017, it was easy to think that was the end of the company’s story. It would be comfortably absorbed into the private equity portfolio continuing to make money for the firm, but that’s not really the way Vista works. It tends to build up its companies, sometimes eventually taking them public, and yesterday that’s what happened when Datto filed its S-1.
Datto has been busy since it was acquired and reports a healthy $507 million in annual recurring revenue (ARR) along with 17,000 managed service provider (MSP) customers. Among those, it has more than 1000 customers contributing over $100,000 in ARR. MSPs are service providers that act as a company’s IT department when they don’t have internal resources.
The company has included a standard $100 million placeholder for the amount they intend to raise for the event, and that will almost certainly change. In a nod to its manage service provider customer base, the company’s ticker symbol will be MSP.
When the company raised its $75 million Series B in 2015, former CEO and founder Austin McChord, said that the company was already profitable at that point, two years before Vista came knocking. “As a profitable company, Datto isn’t raising capital to fund operations, but instead, to enter new markets and build new products and technology,” he said in a statement at the time.
You can see that in the company’s financials. In the first six months of 2020, the company had subscription revenues of $234 million and a gross profit of $178 million. When sales and marketing and other costs are added in, the company had a net income of $10 million. That’s compared to $196 million in subscription revenue in the same period of 2019, a gross profit of $143 million, and a net loss of about $26 million.
In short, the company has managed to grow top-line revenue, keep its cost of revenues flat, and manage the growth of its other expenses to limit their effect on the bottom line. That swung its net income per share from -$0.19 to $0.07.
Of course, companies like Datto always try to make the numbers look good in preparation for a public offering, so the real understanding will come in the next few quarters as we see if Datto can sustain its growth and keep expenses in check.
When I spoke to Alan Cline, senior managing director at Vista last year, he said his firm tends to like high-performing startups like Datto that have built substantial companies.
“Software is the easiest place to innovate inside of technology. We see a huge advantage in terms of the productivity that it drives for the end business customer, and to us that high ROI is powerful because whether it’s an up market or a down market, if I can prove to you you’re going to make more money or save money in your own operations by using my software, you can find the budget,” Cline told TechCrunch.
Just last year another company in the Vista portfolio, Ping Identity, filed to go public for the same $100 million placeholder, eventually offering 12.5 million shares at $15 per share. Today the company is trading at $31.68 per share with a market cap of over $2.5 billion.
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