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The accelerating digital transformation, redux
Earlier this week, TechCrunch covered a grip of earnings reports showing that some companies helping other businesses move to modern software solutions are seeing accelerated growth. Inside the Software as a Service (SaaS) world, this is known as the digital transformation. Based on how many software companies are talking about it, the pace of change is only picking up.
But since we published that first entry, a number of SaaS companies that have posted financial results seemed to disappoint investors. Seeing some companies in the high-flying sector struggle made us sit back and think. What was going on?
Today we’re going to explore how the digital transformation’s acceleration seems real enough, but how it’s not landing equally. We’ll start by going over a short run of earnings results, talk to Yext CEO Howard Lerman about what his B2B SaaS company is seeing, and wrap with notes on what could be coming next from software shops.
A quick word on digital transformation
We all hear about digital transformation, but it’s hard to define. Generally, it’s a broad area that includes digitization of manual processes, modern software development practices like continuous delivery and containerization and a general way of moving faster via technology — especially in the cloud.
Speaking last month on Extra Crunch Live, Box CEO Aaron Levie defined the term as he sees it. “The way that we think about digital transformation is that much of the world has a whole bunch of processes and ways of working — ways of communicating and ways of collaborating where if those business processes or that way we worked were able to be done in digital forms or in the cloud, you’d actually be more productive, more secure and you’d be able to serve your customers better. You’d be able to automate more business processes.” he said.
What we’re seeing now is that the pandemic has accelerated the rate of change much faster than many had anticipated. Efforts to slow the spread of COVID-19 and its related workplace disruptions have accelerated what would have been a normal timetable. But on its own, that doesn’t mean the market is seeing equal results across every company and industry that might be part of that trend.
Earnings results
Lots of SaaS companies reported earnings this week, but two sets of returns stuck out as we reviewed the results, those from Slack and Smartsheet.
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Join Eventbrite CEO Julia Hartz for a live Q&A: June 11 at 3 pm EST/Noon PDT/7 pm GMT
One of the earliest disruptions created by the novel coronavirus manifested in the form of event cancellations. Some of the world’s biggest tech conferences, like F8 and Google NEXT, got postponed and others turned to digital options to still connect. Even Disrupt is going digital this year.
It is an unprecedented time for the events world, so we are bringing someone right in the center of it to our Extra Crunch Live stage: Eventbrite CEO Julia Hartz. In fact, Extra Crunch members can ask their own questions directly to the CEO and are encouraged to do so live on the call.
Hartz is leading the publicly traded company as it grows more popular than ever with hundreds of millions of dollars in revenue. At the same time, the global slowdown of in-person event ticketing due to COVID-19 has had a material impact on Eventbrite’s business. What does that mean for employee morale? Collaboration with other companies? And overall culture at the business?
Eventbrite has swiftly transitioned to virtual events, with thousands of listings across categories like professional events, classes, health and wellness, science and tech, community and culture and more. Hartz also told Billboard that the company remains committed to serving independent music venues, which have been hit hard by the global health crisis, and hinted that Eventbrite may shift to a self-service ticket model.
The company reported that, since enhancing its online events service in 2019, and in the midst of social distancing, Eventbrite users are posting nearly 20k online events every day, with a 2,000+ percent year-over-year increase of online events taking place in April 2020 compared to April 2019. This announcement came after Eventbrite said it would cut $100 million in costs, which included layoffs.
We’ll talk with Hartz about how she is leading her company through a crisis and what the future holds for bringing people together. We’ll also discuss how widespread layoffs may impact the future of diversity in our workforces.
Hartz will also be asked to weigh in on advice for other founders hoping to emerge from COVID-19 from fundraising to strategy. As always, EC subscribers are invited to log onto the call to ask questions live.
Details are below for Extra Crunch subscribers; if you need a pass, get a cheap trial here.
Chat with you all in a week!
When, where, Zoom
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What grocery startup Weee! learned from China’s tech giants
When Larry Liu moved to the U.S. in 2003, one of the first challenges he experienced was the lack of Chinese ingredients available in local groceries. A native of Hubei, a Chinese province famous for its freshwater fish and lotus-inspired dishes, Liu got by with a limited supply found at local Asian groceries in the Bay Area.
His yearning for home food eventually prompted him to quit a stable financial management role at microcontroller company Atmel and go on to launch Weee!, an online market selling Asian produce, snacks and skincare products.
Like other players in grocery e-commerce, the five-year-old startup has seen exponential growth since the coronavirus outbreak as millions are confined to cooking and eating at home. Nearly a quarter of Americans purchased groceries online to avoid offline shopping during the pandemic, according to Statista data. Online grocery giants Instacart and Walmart Grocery boomed, both hitting record downloads.
In a Zoom call with TechCrunch, Liu, who’s now chief executive of Weee!, said that COVID-19 played a “very important role” in his company’s recent growth, and paved its way to profitability.
“It happened a lot faster than we expected, but we were growing rapidly with even more ambitious plans for expansion prior to COVID-19,” he said. “People are buying more because restaurants are closed. Many are first-time users of grocery delivery.”
The startup’s revenue is up 700% year-over-year and is estimated to generate an annual revenue in the lower hundreds of millions of dollars.
Online grocery, the WeChat way
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How to get the most from your corporate VC after you get the check
Scott runs operations at Kruze Consulting, a fast-growing startup CFO consulting firm. Kruze is based in San Francisco with clients in the Bay Area, Los Angeles and New York.
Bill Growney, a partner in Goodwin’s Technology & Life Sciences group, focuses his practice on advising technology and other startup companies through their full corporate life-cycle.
Raising capital from a corporate VC can bring many benefits beyond just money. Strategic CVCs, who measure ROI based on the strength of the strategic partnership with their portfolio companies as well as the financial return, will typically seek to maximize their relationships with startups for a long time after the investment is made.
Specifically, a CVC investor can offer the following to an entrepreneur:
- Resources and product feedback. CVC parent companies often have deep institutional expertise and teams of subject-matter experts who can advise startups on product development and guide them through issues.
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Partnerships. CVCs can leverage their supply chain and operations to build new partnerships that otherwise may have taken months or years for startups to create.
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Distribution. Strategic CVCs can become a distribution channel for a startup, connect that startup with their suppliers, or even use the startup to become a channel for the parent company.
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Branding halo. If a large company is willing to invest in your startup, it’s a strong signal that your product is good and that your business has a bright future.
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Acquisition. Many CVCs invest in startups that they may want to acquire down the line. A CVC may also endorse an exit-seeking portfolio company to their partner companies or suppliers.
Granted, seeing results from these benefits takes time, and even the best of intentions during a capital raise process may not always yield an optimal strategic relationship.
Here’s a list of factors to keep in mind for founders who want the best chances of a productive and successful relationship with their CVC.
Know which type of CVC you’re dealing with from the outset. In our previous posts, we outlined the three types of CVCs — experienced institutional investors, industry-specific strategics, and beginner or “tourist” CVCs. As we’ve discussed, be sure to spend time interviewing and building relationships with CVCs to determine which type they are, what kinds of benefits and resources they can offer and what their history looks like in terms of successfully partnering with startups over time. When in doubt, ask other founders who have done deals with them!
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The IPO window is open (again)
Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
ZoomInfo went public yesterday. After pricing its IPO $1 ahead of its proposed range at $21 per share, the company closed its first day’s trading worth $34.00, up 61.9%, according to Yahoo Finance. Then the company gained another 5.2% in after-hours trading.
Whether you feel that this SaaS player was worth the revenue multiple its original, $8 billion valuation dictated — let alone that same multiple times 1.6x — the message from the offering was clear: the IPO window is open.
This is not news to a few companies looking to take advantage of today’s strong equity prices.
Used-car marketplace Vroom is looking to get its shares public before its Q2 numbers come out, despite a history of slim gross profit generation. The company hopes to go public for as much as $1.9 billion, a modest uptick from its final private valuations.
We’ll get another dose of data when Vroom does price — how much investors are willing to pay for slim-margin revenue will tell us a bit more than what we learned from ZoomInfo, which has far superior gross margins. Investors have already signaled that they are content to value high-margin software-ish revenues richly. Vroom is more of a question, but if it does price strongly we’ll know public investors are looking for any piece of growth they can find.
This brings us to the latest news: Amwell has confidentially filed to go public. Formerly known as American Well, CNBC reports that the venture-backed telehealth company has dramatically expanded its customer base:
Telemedicine has seen an uptick in recent months, as people in need of health services turned to phone calls and video chats so they could avoid exposure to COVID-19. The company told CNBC last month that it’s seen a 1,000% increase in visits due to coronavirus, and closer to 3,000% to 4,000% in some places.
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A COVID-19 resilience test for B2B companies
TX Zhuo
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TX Zhuo is the managing partner of Fika Ventures, focusing on fintech, enterprise software and marketplace opportunities.
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Colton Pace
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Colton Pace is an investor at Fika Ventures. He previously held roles investing at Vulcan Capital and Madrona Venture Labs.
COVID-19 has transformed the global business landscape.
So much so that in a matter of weeks after the onset of the pandemic in the United States, Congress provided more than $1.1 trillion in fiscal stimulus directly to businesses and distressed industries — four times more than was distributed during the 2008-09 financial crisis.
It came as no surprise when, at the start of COVID-19, venture capital investors largely went pencils-down for several weeks and shifted their focus to their existing portfolio companies. Extending company runways, preparing for longer funding cycles and managing operations in a novel business environment became the crux of company resilience. Now, moving into May, we can see this shift reflected in both the decline in number of early-stage companies funded and total capital invested.
As investors begin acclimating to this new normal, they have begun wading into new opportunities in time-proven, healthy industries and new emerging industries that are positioned to succeed during the pandemic. While we are seeing lower valuations, we believe certain B2B technology companies may be uniquely poised to thrive, and are pursuing investment opportunities in this space with a renewed focus.
Image Credits: Crunchbase Data via Tableau Public
*Excluding Biotech & Pharmaceuticals (Source: Crunchbase Data via Tableau Public)
Prior to COVID-19, early-stage B2B investors wanted to see strong growth and healthy unit economics; 3X year-over-year sales growth or 10% monthly growth was the gold standard. An LTV-to-CAC ratio over 3X signified a healthy payback cycle. There was less focus on capital efficiency; for every $1 million invested, investors were happy with $500,000 in generated revenues. Get to these numbers and your next funding round was guaranteed — but no longer.
During COVID, and likely beyond, company expectations and goalposts have been adjusted; 2X year-over-year growth may be the new 3X. While growth and unit economics are important, there are now new health indicators that will determine if a B2B company will thrive in a post-COVID world. With that in mind, we have put together a COVID reslience test that startups can use as a north star to grow their business in this new world.
This COVID-19 test is meant to be a gated checklist that will indicate where efforts should be focused, whether it be sales, product or finance. Before we leave you to your own devices, we wanted to walk through a couple of these new post-COVID questions that you should try to answer (and why they are relevant).
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Pitch deck teardown: The making of Atlassian’s 2015 roadshow presentation
In 2015, Atlassian was preparing to go public, but it was not your typical company in so many ways. For starters, it was founded in Australia, it had two co-founder co-CEOs, and it offered collaboration tools centered on software development.
That meant that the company leaders really needed to work hard to help investors understand the true value proposition that it had to offer, and it made the roadshow deck production process even more critical than perhaps it normally would have been.
A major factor in its favor was that Atlassian didn’t just suddenly decide to go public. Founded in 2002, it waited until 2010 to accept outside investment. After 10 straight years of free cash flow, when it took its second tranche of investment in 2014, it selected T. Rowe Price, perhaps to prepare for working with institutional investors before it went public the next year.
We sat down with company president Jay Simons to discuss what it was like, and how his team produced the document that would help define them for investors and analysts.
Always thinking long term
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Decrypted: iOS 13.5 jailbreak, FBI slams Apple, VCs talk cybersecurity
It was a busy week in security.
Newly released documents shown exclusively to TechCrunch show that U.S. immigration authorities used a controversial cell phone snooping technology known as a “stingray” hundreds of times in the past three years. Also, if you haven’t updated your Android phone in a while, now would be a good time to check. That’s because a brand-new security vulnerability was found — and patched. The bug, if exploited, could let a malicious app trick a user into thinking they’re using a legitimate app that can be used to steal passwords.
Here’s more from the week.
THE BIG PICTURE
Every iPhone now has a working jailbreak
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Is Zoom the next Android or the next BlackBerry?
Gaurav Jain is one of the founders of Afore Capital, a $124 million fund focused on pre-seed. He was also an early product manager for Android.
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In business, there’s nothing so valuable as having the right product at the right time. Just ask Zoom, the hot cloud-based video conferencing platform experiencing explosive growth thanks to its sudden relevance in the age of sheltering in place.
Having worked at BlackBerry in its heyday in the early 2000s, I see a lot of parallels to what Zoom is going through right now. As Zooming into a video meeting or a classroom is today, so too was pulling out your BlackBerry to fire off an email or check your stocks circa 2002. Like Zoom, the company then known as Research in Motion had the right product for enterprise users that increasingly wanted to do business on the go.
Of course, BlackBerry’s story didn’t have a happy ending.
From 1999 to 2007, BlackBerry seemed totally unstoppable. But then Steve Jobs announced the iPhone, Google launched Android and all of the chinks in the BlackBerry armor started coming undone, one by one. How can Zoom avoid the same fate?
As someone who was at both BlackBerry and Android during their heydays, my biggest takeaway is that product experience trumps everything else. It’s more important than security (an issue Zoom is getting blasted about right now), what CIOs want, your user install base and the larger brand identity.
When the iPhone was released, many people within BlackBerry rightly pointed out that we had a technical leg up on Apple in many areas important to business and enterprise users (not to mention the physical keyboard for quickly cranking out emails)… but how much did that advantage matter in the end? If there is serious market pull, the rest eventually gets figured out… a lesson I learned from my time at BlackBerry that I was lucky enough to be able to immediately apply when I joined Google to work on Android.
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India’s richest man built a telecom operator everyone wants a piece of
As investors’ appetites sour in the midst of a pandemic, a three-and-a-half-year-old Indian firm has secured $10.3 billion in a month from Facebook and four U.S.-headquartered private equity firms.
The major deals for Reliance Jio Platforms have sparked a sudden interest among analysts, executives and readers at a time when many are skeptical of similar big check sizes that some investors wrote to several young startups, many of which are today struggling to make sense of their finances.
Prominent investors across the globe, including in India, have in recent weeks cautioned startups that they should be prepared for the “worst time” as new checks become elusive.
Elsewhere in India, the world’s second-largest internet market and where all startups together raised a record $14.5 billion last year, firms are witnessing down rounds (where their valuations are slashed). Miten Sampat, an angel investor, said last week that startups should expect a 40%-50% haircut in their valuations if they do get an investment offer.
Facebook’s $5.7 billion investment valued the company at $57 billion. But U.S. private equity firms Silver Lake, Vista, General Atlantic, and KKR — all the other deals announced in the past five weeks — are paying a 12.5% premium for their stake in Jio Platforms, valuing it at $65 billion.
How did an Indian firm become so valuable? What exactly does it do? Is it just as unprofitable as Uber? What does its future look like? Why is it raising so much money? And why is it making so many announcements instead of one.
It’s a long story.
Run up to the launch of Jio
Billionaire Mukesh Ambani gave a rundown of his gigantic Indian empire at a gathering in December 2015 packed with 35,000 people including hundreds of Bollywood celebrities and industry titans.
“Reliance Industries has the second-largest polyester business in the world. We produce one and a half million tons of polyester for fabrics a year, which is enough to give every Indian 5 meters of fabric every year, year-on-year,” said Ambani, who is Asia’s richest man.
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