fundraising
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A recapitalization reckoning
If you’re an angel who invested in a startup that was meant to go public in 2014, you might be getting a little bit impatient. High-risk, high-reward investing has lost its shine in this environment: the stock market is a mess these days, and you want your cash back.
Enter recapitalization events, where startups restructure their entire cap table to squeeze out old investors, bring on new ones and shift the way equity and debt is managed. For investors, it’s a killer way to enter a company on friendlier terms than normal (read: desperation), and a nice way to get liquidity on a startup you’re betting on.
For founders, it’s rarely good news, as departing investors is not a metric they’re going to add to the pitch deck. As one investor said on background, the spur of coronavirus-related recapitalization events shows “hella dilution for desperate times.”
That’s what makes Workhuman’s transparency with its recent recapitalization event all the more enticing.
Last year, the human-resources platform brought in $580 million in revenue from customers like LinkedIn, Cisco, J&J and other clients. In April, business grew 40%. Co-founder and CEO Eric Mosley says business has grown five times in size since the company pulled back from its 2014 plans to IPO. Workhuman hasn’t raised a single venture round since 2004 (and doesn’t plan to any time soon).
Being conservative has paid off; although Workhuman has operated for nearly two decades, Mosley says he thinks the company is still at the “tip of the iceberg.” The company recently had a recapitalization event to sell the stakes of its earliest investors, who cut a $200,000 check more than 20 years ago.
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K Fund’s Jaime Novoa discusses early-stage firm’s focus on Spanish startups
Earlier this month, Spanish early-stage venture capital firm K Fund officially launched its second fund, which sits at €70 million, up from €50 million the first time around.
Targeting Spanish startups with an international outlook, the seed-stage firm plans to invest from €200,000 to €2 million, writing first checks in 25-30 companies. Meanwhile, a portion of the fund will also be set aside for follow-on funding for the most promising of its portfolio.
Described as business model- and sector-agnostic, K Fund currently has a mix of B2B and B2C companies in its portfolio across a wide variety of sectors, such as travel, fintech, insurtech and others. They include online travel agency Exoticca, HR software Factorial, insurtech startup Bdeo and Hubtype, a conversational messaging tech provider.
I caught up with K Fund’s Jaime Novoa to delve deeper into the firm’s investment remit, how the Spanish startup and tech ecosystem has developed over the last few years and to learn more about “K Founders,” the VC’s new pre-seed funding program.
TechCrunch: K Fund’s first fund was announced in late 2016 to back startups in Spain with an international outlook at seed and Series A. At €70 million, this second fund is €20 million larger but I gather the remit remains broadly the same. Can you be more specific with regards to cheque size, geography, sector and the types of startups you look for?
Jaime Novoa: We’re both agnostic in terms of business models and industries. Since our focus is, for the most part, Spain, we do not believe that the Spanish market is big enough to build a vertically focused fund, either in terms of business model or sector.
With our first fund we invested in 28 companies, with a slightly larger number of B2B SaaS companies than B2C ones, and across a wide variety of sectors. We do have a bit of exposure to travel and fintech/insurtech, but that’s because we’ve found several interesting companies in those spaces, not because we proactively said, “let’s invest in fintech/travel.”
In terms of check sizes, the core of the fund will be to make the same type of investments as in our first fund: first cheques from €200k to €2m and then sufficient capital for follow-on rounds. We’ll probably do a similar number of deals compared to the previous fund, but we want to have additional capital for follow-on purposes.
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In pandemic era, entrepreneurs turn to SPACs, crowdfunding and direct listings
If necessity is the mother of invention, then new business owners are getting very inventive in the ways in which they access cash. Relying on some long-tested and some new avenues to raise money, entrepreneurs are finding more ways to get public market cash faster than they would have in the past.
Whether it’s from Reg A crowdfunding dollars, Special Purpose Acquisition Companies (SPACs) or direct listings, these somewhat arcane and specialized financing vehicles are making a comeback alongside a rise in new funding mechanisms to get to market quickly and avoid the dilution that comes from private market rounds (especially since those rounds are likely to come at a reduced valuation given market conditions).
Some of these tools have existed for a while and are newly popular in an era where retail investors are driving much of the daily fluctuations of the public markets. Wall Street institutions are largely maintaining their conservative postures with regard to new offerings, so secondary market retail volume growth is outpacing institutional. Retail investors want into these new issues and are pouring into the markets, contributing to huge pops to new public offerings for companies like Lemonade this Thursday and creating an environment where SPACs and crowdfunding campaigns can flourish.
The rise of zero-commission brokerages and the popularization of fractional trading led by the startup Robinhood and adopted by every one of the major online brokers including Charles Schwab, TD Ameritrade, E-Trade and Interactive Brokers has created a stock market boom that defies the underlying market conditions in the U.S. and globally. For instance, daily trades on Robinhood are up 300% year-over-year as of March 2020.
According to data from the BATS exchange, the total trade count in the U.S. was up 71% and May trading was up more than 43% over 2019. Meanwhile, E-Trade daily average revenue trades posted a 244% increase in May over last year’s numbers.
Don’t call it a comeback
The appetite for new issues is growing and if many of the largest venture-backed companies are holding off on going public, smaller names are using SPACs to access public capital and reach these new investors.
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How $20 billion health care behemoth Blue Shield of California sees startups
In the two years since Jeff Semenchuk took the reins in the newly created position of chief innovation officer for Blue Shield of California, the nonprofit health insurer with $20 billion in revenues has stepped up its investments in startup companies.
As one of California’s largest insurance providers with more than four million members, Blue Shield plays an outsized role in technology adoption among physicians, hospital networks and patients. With that in mind, and with the acceleration of entrepreneurial activity around the multitrillion health care market, Semenchuk was brought on board after serving as chief executive of Yaro (now Virgin Plus) and CIO of Hyatt Hotels and co-founder of Citi Ventures.
Semenchuk said he sees Blue Shield as working to create a new health care system: “It’s not to perpetuate the health care system we have today.” Increasingly, startups have a role to play in that revisioning of health care services in America, according to Semenchuk.
“What I would say has happened over the last two years is that we have really focused on transformational innovation,” he added.
Investing in those transformational technologies involves taking cash directly from Blue Shield’s balance sheet for investments. The company doesn’t operate a corporate venture capital fund in the traditional sense, instead making strategic investments under the auspices of Semenchuk or Chief Financial Officer Sandra Clarke.*
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Volcker Rule reforms expand options for raising VC funds
It’s time to put on our thinking caps so we can discuss an esoteric but important policy change and how it is going to impact the VC world.
The 2008 financial crisis devastated the global economy. One of the reforms that came from the detritus of that situation was a policy known as the Volcker Rule.
The rule, proposed by former Fed chairman Paul Volcker and passed into law with the Dodd-Frank Act, was designed to limit the ways that banks could invest their balance sheets to avoid the kind of cataclysmic systemic risks that the world witnessed during the crisis. Many banks faced a liquidity crunch after investing in mortgage-backed securities (MBSs), collateralized debt obligations (CDOs), and other even more arcane speculative financial instruments (like POGs, or Piles Of Garbage) in seeking profits.
A number of reforms are underway to the Volcker Rule, which has been a domestic regulatory priority for the Trump administration since Inauguration Day.
One of the unintended consequences of the rule is that it limited banks from investing in certain “covered funds,” which was written broadly enough that it, well, covered VC firms as well as hedge funds and other private equity vehicles. Reforms to that policy (and to the rule in general) have been proposed for a decade with little traction until recently.
Now, a number of reforms are underway to the Volcker Rule, which has been a domestic regulatory priority for the Trump administration since Inauguration Day.
Proposed amendments to the Volcker Rule could be a lifeline for venture firms hit by market downturn
First, a simplification to some of the rule’s regulations was passed late last year and went into effect in January. Now, a final rule to reform the Volcker Rule’s applications to VC firms, among other issues, was agreed to by a group of U.S. regulatory agencies, and will go into effect later this year.
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How first-time fund managers are de-risking
After what felt like winter, investors say startup deals are back on — although the numbers suggest they never stopped. As Semil Shah of Haystack VC phrased it in a blog post, “It’s game on, pandemic or bust.”
This is good news for founders and big funds, but the investment landscape becomes more complicated when it comes to up-and-coming venture capitalists. “My impression of the current mood amongst traditional limited partners is that most have slowed down considerably in terms of net new investments, new relationships,” Shah told TechCrunch.
So rebound or not, we’re in a volatile time, and first-time fund managers are looking for unique ways to de-risk themselves.
One route: Put liquidity up high in your pitch deck. Moore Ventures, a new fund focused on investing in diverse teams working on sustainability, is experimenting with an unconventional fund structure. Instead of traditional ventures where returns come from multiple rounds of financing and an exit either through acquisition or IPO, Moore is concentrating on successful liquidity strategies throughout a portfolio company’s life.
Constant commercialization, if it works, could be music to a limited partner’s ears.
“Some will fall into the licensing model, some will be developing the product and then selling the design and manufacturing process to an existing company before expanding marketing and sales. Only if a company has the ability to expand its product base and scale will we plan to commercialize through the traditional company development process,” said Darius Sankey, a general partner at Moore Ventures.
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European VC firm Pale Blue Dot plans to fund 40 ‘planet-positive’ startups
Pale Blue Dot, a newly outed European venture capital firm focused on climate tech, announced this week the first closing of its debut fund at €53 million.
Targeting pre-seed and seed stage startups, the firm says it will consider software and technology investments with a strong positive climate impact. Current areas of focus include food/agriculture, industry, fashion/apparel, energy and transportation, with plans to back up to 40 companies out of fund one.
Founding partners Hampus Jakobsson, Heidi Lindvall and Joel Larsson are stalwarts of the Nordic tech ecosystem and beyond: Jakobsson co-founded TAT (The Astonishing Tribe), which was sold to Blackberry in 2012, and is a prominent angel investor in Europe, most recently a venture partner at BlueYard Capital . Lindvall is the former head of accelerator and investment team at Fast Track Malmö, with a background in human rights and media. Larsson was previously managing director at Fast Track Malmö, with a technical background and prior fund management experience.
I put questions to all three, delving deeper into Pale Blue Dot’s remit and the firm’s investment thesis. We also discussed the macro trends that warrant a fund specializing in climate tech and why Europe is poised to become a leader in the space.
Pale Blue Dot is a new VC fund specializing in climate tech, but in a sense — and to varying degrees — isn’t every venture capital fund a climate tech fund these days?
Heidi Lindvall: We think all funds should be “planet-positive” and working for a better world, but it will take time until it is a focus. Still, most funds look at a potential positive impact late in their assessment and will not decline the deal if the startups wouldn’t be significantly pulling the world in a good direction.
Hampus Jakobsson: Focus has both upsides and downsides.
The negative part with being niche is that we won’t do investments in amazing people or startups that we don’t think are “climate-contributing enough” or that the founders aren’t doing it in a genuine way (as the risk of them to paying attention to the impact might lead them to become a noncontributing company).
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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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What should startup founders know before negotiating with corporate VCs?
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.
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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.
More posts by this contributor
Corporate venture capitalists (CVCs) are booming in the startup space as large companies look to take advantage of the fast-paced innovation and original thinking that entrepreneurs offer.
For startups, taking funding from CVCs can come with many benefits, including new opportunities for marketing, partnerships and sales channels. Still, no founder should consider a corporate investor “just another VC.” CVCs come with their own set of priorities, strategic objectives and rules.
When it comes to choosing a CVC with which to enter negotiations, the most important step is doing your own diligence beforehand. An entrepreneur’s goal is to find the perfect match to partner with and guide you as you grow your business. So before you start discussing terms, you’ll want to understand what’s driving the CVC’s interest in venture investing.
While traditional VCs are purely financially driven, CVCs can be in the venture game for a variety of reasons, including finding new technology that might generate marketplace demand for their products. An example is Amazon’s Alexa fund, which invested into emerging companies that drive use and adoption of Alexa. Alternatively, a CVC’s parent company may be looking to invest in tech that will help them operate their own products more efficiently, such as Comcast Ventures investing in DocuSign.
As a rule of thumb, the bigger CVC funds like GV and Comcast tend to be financially driven, meaning they’ll be approaching negotiations through a financial lens. As such, the negotiating process more closely resembles an institutional fund. You as a founder have to do the work to figure out what’s driving your CVC — is this a customer acquisition or distribution opportunity? Or are they seeking to find a source of knowledge transfer and/or bring new tech into their parent company?
“Before negotiating, always look at a CVC’s existing portfolio,” says Rick Prostko, managing director at Comcast Ventures. “Have they made a lot of investments, at what stage, and with whom? From this information you’ll see the strategic thinking of the CVC, and you can determine how best to position yourself when you begin negotiations.”
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Strategies for surviving the COVID-19 Series B squeeze
Mikael Johnsson is a co-founder and general partner of Oxx, a venture capital firm investing in European SaaS companies at growth stage.
A generation of companies now needs to forget what it has learned. The world has changed for everyone, and nowhere is this more true than in fundraising.
I’ve been investing in technology companies for over twenty years, and I’ve seen how venture capitalists respond in bull and bear markets. I’ve supported companies through the downturns that followed the dot-com bubble and the global financial crisis, and witnessed how founders adapt to the new environment. This current pandemic is no different.
A growth company that only a few months ago was shopping for a $20 million, $30 million, or even $40 million Series B, with a choice of potential investors, must now acknowledge that the shelves may well have emptied.
VCs who were assessing potential new deals at the beginning of the year have had to abruptly adjust their focus: Q1 venture activity in Europe was under its 2019 average, and the figures for the coming months are likely to be much worse as the pipeline empties of deals that were already in progress.
The simple reason for this is that VCs are having to rapidly reallocate their two principal assets: time and capital. More time has to be spent stitching together deals for portfolio companies in need of fresh funding, with little support from outside money. As a result, funds will be putting more capital behind their existing companies, reducing the pool for new investments.
Added to those factors is uncertainty about pricing. VCs take their lead on valuation from the public markets, which have plummeted in tech, as elsewhere. The SEG index of listed SaaS stocks was down 26% year-to-date as of late March. With more pain likely ahead, few investors are going to commit to valuations that founders will accept until there is more certainty that the worst is behind us. A gap will open between newly cautious investors and founders unwilling to bear haircuts up to 50%, dramatic increases in dilution and even the prospect of down rounds. It will likely take quarters — not weeks — for that gulf to be bridged and for many deals to become possible again.
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