Private Equity
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Bird shows improving scooter economics, long march to profitability
Newly reported financial data from Bird, an American scooter sharing service, shows a company with an improving economic model and a multiyear path to profitability. However, that path is fraught unless a number of scenarios all work out in concert and without a glitch.
Bird, well known for its early battles with domestic rival Lime, is pursuing a SPAC-led deal that will see it go public and raise fresh capital. The former startup is merging with Switchback II Corporation in a deal that values it at around $2.3 billion, including a $160 million PIPE (private investment in public equity) component. (Note: The group purchasing TechCrunch’s parent company from its own parent company is part of the Bird PIPE.)
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COVID-19 hasn’t been kind to Bird and similar companies around the world. As many around the world stayed home, usage of shared-asset services and ride-hail applications fell sharply. Bird saw rides decline. Airbnb took a temporary hit. Uber and Lyft saw ride demand fall.
Responses to the crisis were varied. Airbnb cut costs and raised external capital. Lyft cut expenses and focused on its core model while Uber grew its food delivery business, which saw transaction volume soar as demand fell for its traditional business.
Meanwhile, Bird flipped its entire business model. That decision has helped the scooter outfit improve its economics markedly, giving it a shot at generating profit in the future — provided its forecasts prove achievable.
This morning, let’s talk about how Bird has changed its business, their impacts on its operating results and how long the company thinks its climb to profitability is.
Fleet management → Fleet managers
In their initial forms, Bird and Lime bought and deployed large fleets of electric scooters. Not only was this capital intensive, the companies also wound up with costs that were more than sticky — charging wasn’t simple or cheap, moving scooters around to balance demand took both human capital and vehicles, and the list went on.
Throw in vehicle depreciation — the pace at which scooters in the wild degraded from use or abuse — and the businesses proved excellent vehicles for raising capital and throwing that money at more scooters, costs, and, as it turned out, losses.
Results improved somewhat over time, though. As scooter-share companies increasingly built their own hardware, their economics improved. Sturdier scooters meant lower depreciation, and better battery tech could allow for more rides per charge. That sort of thing.
But the model wasn’t incredibly lucrative even before COVID-19 hit. Costs were high, and the model did not break-even, even on a gross margin basis, let alone when considering all corporate expenses. You can see the financial mess from that period of operations in historical Bird results.
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Perform a quality of earnings analysis to make the most of M&A
As a startup founder, there will be three scenarios in which you’ll need to understand how to properly do a quality of earnings (QofE) if you want to maximize value.
The first scenario will be when you decide to raise a Series A and subsequent VC rounds, followed by when you do a strategic acquisition, and lastly, when you sell your company.
This post is a framework for how to think and organize your QofE and go through the most common items that you’ll want to keep top of mind for every M&A and private equity transaction you may be part of.
Why perform a QofE?
The goal of a QofE is to adjust the reported EBITDA to calculate a restated EBITDA that best reflects the current state of the company on an ongoing basis. It also presents a historical adjusted EBITDA that is comparable throughout the last two or three years.
QofE can have a significant impact on a company valuation for three main reasons:
- The adjusted EBITDA will be used by a buyer/investor as the basis for valuation (for companies valued based on an EBITDA multiple).
- The adjusted revenue will be used to recalculate the effective growth rate.
- The adjusted revenue and EBITDA will form the basis of forecasts.
With that in mind, every entrepreneur must understand how to properly form a view of what is the proper adjusted EBITDA and adjusted revenue of your company. It is common for founders in an M&A process to be unfamiliar with the notion of QofE and leave value on the table.
When performed by a professional transaction service advisory team, the quality of earnings is a result of a thorough review of all the documents generally available in a data room.
This breakdown aims to ensure that you won’t be that founder and that you’ll be armed to negotiate your company valuation on equal ground with your investors. If you are in the seller’s shoes, you will get the advantage of understanding how an experienced investor or buyer thinks. If you’re in the buyer’s shoes, you’ll benefit from understanding and valuing your acquisitions better.
How is a QofE professionally performed?
When performed by a professional transaction service advisory team, the quality of earnings is a result of a thorough review of all the documents generally available in a data room. These include, but are not limited to: Legal documentation, financial statements (P&L, balance sheet, cash flow), audit reports, management presentation and contracts.
When doing a QofE analysis, it’s key to consistently ask yourself: “Can or should this information translate into an adjustment of revenue or EBITDA, net working capital (NWC) or net debt?”
Why did we include NWC and net debt? That is because they often have an indirect impact on adjusted EBITDA. Think of an adjustment to the historical level of inventory. Less inventory likely means fewer storage costs. So if you adjust historical inventory, you’ll want to also impact your adjusted EBITDA.
On top of reviewing all the aforementioned documents, your QofE analysis will heavily rely on interviewing management. No matter how long you look at the financials, if you can’t have management confirm information or explain trends, you won’t be able to draw proper conclusions and understand the numbers.
Principles for efficiently building your QofE
- Automatically link everything you read and hear to potential QofE adjustments. This has to become second nature during the engagement.
- Always think about all the ways an event or item that qualifies for an adjustment impacts the financial statements overall. For instance, if the event impacted revenue, did it impact costs in some way as well?
- Make sure that the cost you are adjusting was not already offset by another accounting entry (i.e., had no impact on EBITDA).
- Make sure that the cost you adjust for was classified above EBITDA in the first place.
- Make sure that you can quantify each adjustment in the most objective and rational way. This is sometimes not possible and you may have to come up with a range.
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Founders must learn how to build and maintain circles of trust with investors
Many VCs tout their mentorship and hands-on approach to founders, especially those who run early-stage startups. But in the recent era of lightning-fast rounds closing at sky-high valuations, the cap tables of early-stage startups are becoming increasingly crowded.
This isn’t to say that the value VCs bring has diminished. If anything, it’s quite the opposite — this new dynamic is forcing founders to be extremely selective about exactly who is sitting around their mentorship table. It’s simply not possible to have numerous deep and meaningful relationships to extract maximum value at the early stage from seasoned investors.
Founders should definitely pursue big rounds at sky-high valuations, but it’s important that they recognize how important it is to manage who they allow into their mentorship circles. Initially, founders should make sure their first layer consists of the real “doers” — usually angels and early venture investors who founders meet with weekly (or more frequently) to help solve some of the most granular problems.
Everything from hiring to operational hurdles all the way to deeper, more personal challenges like balancing family life with a rapidly growing startup.
This circle is where the real mentorship happens, where founders can be open and vulnerable. For obvious reasons, this circle has to be small, and usually consist of two to six people at most. Anything more simply becomes unwieldy and leaves founders spending more time managing these relationships than actually building their company.
How founders manage their VC circles can mean the difference in success or failure for a thousand different reasons.
The second layer should consist of the “quarterly crowd” of investors. These aren’t necessarily people who are uninterested or unwilling to participate in the nitty gritty of running the company, but this circle tends to consist of VCs who make dozens of investments per year. They, like their founders, aren’t capable of managing 50 relationships on a weekly basis, so their touch points on company issues tend to move slower or less frequently.
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A blueprint for building a great startup founding team
In a company’s early days, the difference between C-level executives and the rest of the organization is simple — employees can walk away from a failure, but the leaders cannot. Under these conditions, certain kinds of people thrive in leadership roles and can take a company from ideation to production.
While there’s no magic formula for what works and what doesn’t, successful startups share common traits in terms of the way their foundational leadership teams are built.
We’ve all experienced what it looks like on the negative end of the spectrum — people making points simply to hear their own voice, leaders competing for credit and clashing agendas. When people would rather be heard than contribute, the output suffers. Members of a healthy leadership team are unafraid to let others have the limelight, because they trust the mission and the culture they’ve built together.
An honest self-assessment is necessary and this is something that only exceptional and selfless founders are capable of.
We are all imperfect human beings, founders included. There are always going to be moments that leaders can’t predict, and mistakes come with the territory. The right leadership team should be able to mitigate the unexpected, and sometimes make the future easier to predict. Putting the right people in the right roles early on can be the difference between success and failure — and that starts at the top.
Start by determining who will lead as CEO
Investors love founder-CEOs, and founders are often fantastic candidates for this role. But not everyone can do it well, and more importantly, not everyone wants to.
Startup founders should ask themselves a few questions before they lose sleep over the prospect of handing over the reigns:
- Do I even want to be CEO? If yes, for how long?
- Can I maximize the potential of the company if I’m not the CEO?
- Am I really the best person for this job at this stage?
An honest self-assessment is necessary and this is something that only exceptional and selfless founders are capable of. In many cases, founders decide they need outside help to fill the role. While a CEO may not be your first hire — or even one of the first five — the person you choose will ultimately occupy your organization’s most critical leadership role, so choose wisely.
What to look for: Ambitious vision grounded in execution reality. Your CEO should have hands-on experience that allows them to see around corners, predict pitfalls and identify opportunities.
What to watch out for: Leaders who lack respect for the founding vision or the ability to hire and balance an executive team quickly. A good CEO should be able to manage short-term cash flow and go-to-market needs without compromising the true north, while building a foundation and culture for the long term.
Then, hire a leader for your engineering team
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Allocations sees a world where myriad, smaller private equity funds are the norm
This morning Allocations, a fintech startup building software to help smaller private equity funds form and operate, announced that it has raised a $4 million round at a $100 million valuation.
The startup also shared a host of performance metrics, including that it reached a $4.6 million revenue run rate in June, and a $6 million bookings run rate in the same month.
Allocations also told TechCrunch that it has posted 28% monthly revenue growth over the last 12 months. With metrics like that, our curiosity was piqued. What is Allocations building that is attracting so much early demand? And how does the company’s thesis regarding the future of private equity funds intersect with microventure funds themselves?
What Allocations does
Born from CEO Kingsley Advani’s efforts in building a community of angel investors, and the issues that he ran into spinning up special purpose vehicles (SPVs), Allocations started off as software built to scratch its founder’s itch. SPVs are an increasingly common way to raise capital for a single investment from pooled sources, and in today’s rapid-fire venture capital market, Advani had to race to get capital into deals before they closed.
As with many technology startups, Allocations is software designed to solve a known pain point. The old way of putting together SPVs just didn’t match the expected pace at which private investors are expected to commit to investing.
Today the startup’s software helps its users to create new SPVs and funds more quickly, also helping investors manage capital calls and the like after their fund is formed. The startup charges either one-time (in the case of an SPV, by definition a single-shot investment), or recurring fees (multiasset SPVs and funds). A 30-investment fund will cost its managers $15,000 per year through Allocations.
But how many funds are there for the startup to support? Is there enough market to allow Allocations to become a large enterprise itself? So far, the company has attracted some 300 funds to its roster. Advani thinks that there will be plenty of demand. In an interview with TechCrunch, the founder noted that present-day denizens of major funds locked out of material carry — venture economic upside, more simply — can peel off and start their own fund, allowing them much better economics. That dynamic could spur demand for his startup’s services.
Advani also said that family offices and other major capital pools that once fought for allocation into brand-name venture capital funds and other private equity vehicles — venture capital is a subset of private equity — are increasingly chasing smaller funds that may post better returns than larger investing partnerships can manage. This is the law of large numbers in reverse; it’s easier to 10x a $10 million fund than a $10 billion vehicle.
Advani expects his customers will put together multiple funds. Per the CEO, the goal of new fund managers is to get to their second fund. So, new managers often invest their first fund quickly in hope of reaching their second more quickly — more funds means more fees for Allocations.
In the startup’s view, the market will see many more small-scale private equity funds in time, perhaps smaller than $10 million in capital. This perspective mirrors what TechCrunch has seen in the market lately, with rolling funds rising to prominence in the early-stage startup investing, and solo GPs putting together what feels like more microfunds than ever.
Allocations fits into the larger trend of fintech startups taking antiquated models in the world of money and making them faster, more modern and often lower cost. Sure, there’s miles of distance between Allocations and Robinhood, but as both are about smaller investors, democratization of investing access, and using tech to tear down old walls, they are more brethren than different species.
Update: It’s a $4 million round, not $5 million. Post has been corrected.
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5 factors founders must consider before choosing their VC
Though 2021 is far from over, it’s already witnessed a record level of venture capital activity in the technology sector. With larger round sizes announced daily, founders may have their pick of term sheets — but they need to think critically and strategically about which firms to add to their cap table.
So far this year, we’ve seen $292.4 billion in venture financing across the globe, of which $138.9 billion was raised in the United States. Specific to tech companies, the capital is only accelerating: In Q2, founders raised 157% more capital compared to the same period last year, according to the latest data from CB Insights.
It’s not just that more companies are raising money — they are doing so at a higher valuation. Median seed and Series A stage valuations today stand at $12 million and $42 million, respectively, up 20% to 30% from 2020. This can be partly attributed to growing exits/M&A activity in the technology sector, a record number of IPOs and a general bullishness around technology, as well as low interest rates and liquidity in the market.
Good VCs who are aligned with a startup’s vision create more value than the dollars they bring to the table.
At a time when we are witnessing record VC activity, founders would be well served to go back to the basics and focus on the principles of fundraising when determining who sits on their cap table. Here are a few pointers for founders in that direction:
1. Value > valuation
Good VCs who are aligned with a startup’s vision create more value than the dollars they bring to the table. Typically, such value is created across a few distinct functions — product, sales, domain expertise, business development and recruiting, to name a few — based on the background of the partners of the fund and the composition of their limited partners (investors in the venture fund).
Further, the right VC can serve as an authentic, objective sounding board for CEOs, which can be an asset to have as a startup navigates uncertainty and the typical challenges that come with scaling a young company. As founders assess multiple term sheets, it’s worth thinking through whether they should optimize for VCs who offer the highest valuation, or for ones who bring the most value to the table.
2. A two-way street
Running an efficient fundraising process, in part, entails holding VCs accountable to their own diligence requests. While it is unfortunately common for VCs to request a lot of data upfront, startups should share information after assessing intent and appetite on the investors’ part.
For every additional data request, founders are well within their rights (and should) check with their potential investors on where the process stands and get indicative timelines for moving forward with next steps. Mark Suster said it best: “Data rooms are where fundraising processes go to die.”
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What Square’s acquisition of Afterpay means for startups
On Sunday Square announced it was gobbling up Afterpay in a deal worth $29 billion at the time of announcement. Alex followed up yesterday with more details on why the deal made sense for Square and Afterpay over here, but we wanted to ask some notable VCs what it means for the startup market.
For context, the Square deal follows a ton of money and interest flowing into the BNPL market. Just this year, VCs have invested in companies like Alma ($59.4 million, January 2021), Scalapay ($48 million, January 2021), Wisetack ($19 million, February 2021), Zilch ($80 million, April 2021) and Dividio ($30 million, June 2021).
Most of the investors we reached out to were generally bullish on the Square and Afterpay integration, but they were less excited about opportunities for other consumer BNPL businesses to emerge.
Then there’s Klarna, which raised $639 million at a post-money valuation of $45.6 billion in June, after raising $1 billion in March at a post-money valuation of $31 billion.
There’s also interest from some major public companies. After a slow start, PayPal is aggressively pushing BNPL services with merchants that offer it as a payment option. And there are reports that Apple is building its own BNPL offering through Apple Pay.
We reached out to Commerce Ventures founder and GP Dan Rosen, Better Tomorrow Ventures founding partner Jake Gibson, Fika Ventures partner TX Zhuo, and Matthew Harris of Bain Capital Ventures to see what they thought of the deal, as well as what it might mean for the opportunity for other BNPL companies and startups.
The main takeaways? “Buy now, pay later” may be effective at driving retail conversion, but scale matters and long-term margins look slim for BNPL startups.
Now, let’s hear from the venture community.
The venture view
Why is the BNPL market so hot?
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Introducing the Open Cap Table Coalition
On Tuesday, the Open Cap Table Coalition announced its launch through an inaugural Medium post. The goal of this project is to standardize startup capitalization table data as well as make it far more accessible, transparent and portable.
For those unfamiliar with a cap table, it’s a list of who owns your company’s securities, which includes your company shares, options and more. A clear and simple cap table should quickly indicate who owns what and how much of it they own. For a variety of reasons (sometimes inexperience or bad advice) too many equity holders often find companies’ capitalization information to be opaque and not easily accessible.
This is particularly important for the small percentage of startups that survive in the long term, as growth makes for far more complicated cap tables.
A critical part of good startup hygiene is to always have a clean and updated cap table. Since there is no set format and cap tables are generally not out in the open, they are often siloed rather than collaborative.
Cap tables are near and dear to me as someone who has advised hundreds of startups over the past two decades as the founder of an accelerator, a venture partner and a senior adviser at a government-funded startup launchpad. I have been on the shareholder side of the equation as well and can assure you that pretty much nothing destroys trust between shareholders and startups quicker than poor communication, especially around issues such as the current status of the cap table.
A critical part of good startup hygiene is to always have a clean and updated cap table.
I really like the idea of a cap table being an open corporate record, because the value proposition to the companies is clear. From the time a startup creates a cap table, it’s prone to inaccuracy, friction and mistakes. What this means in practice is that startups may spend money on cap-table-related issues that they should be spending on other things. From a legal process perspective, the law firm that is brought in to help with these issues has to deal with tedious back-end work, so the legal time isn’t high value for either the startup or the law firm.
The value proposition for equity holders is equally clear. All equity holders have a general and legal interest in a company’s capitalization information. They have the right to this information, which they may need for a variety of reasons (including, if things ever get really bad, an aggrieved shareholder action). So making this information clear and easily accessible is a service to equity holders and can also encourage more investment, especially from less experienced investors.
When I imagine what this project could become in the next couple of years, I think back to late 2013, when Y Combinator announced the SAFE (simple agreement for future equity). I think the SAFE is a good analogy here, as no one knew what it was and people wondered if this was a nice-to-have rather than a must-have for startups. But the end result was a dramatic improvement in the early-stage capital-raising process.
While the coalition’s founders include Morgan Stanley’s Shareworks, LTSE Software and Carta, it’s also heavy on Big Law, with Cooley, Goodwin Procter, Wilson Sonsini Goodrich & Rosati, Orrick, Gunderson Dettmer, Latham & Watkins, and Fenwick & West rounding out the group of 10 founding members.
So what’s the real motivation of seven law firms, which together saw revenue of over $10 billion in 2020 to collaborate on an open cap table product for startups? Deal flow.
Big Law has been trying for a couple of decades to build relationships with startups at the stage where it makes no sense for a startup to be dealing with a massive and expensive law firm. Their efforts to build startup programs have often fallen short and received mixed reviews. They have also been far too heavy on the self-serve and too light on the “we’re going to give you our regular Big Law level of services at a small fraction of the costs just in case you make it big and can one day pay our regular fees.” So these firms are trying to separate themselves from the rest of the Big Law pack by building this entrepreneur-friendly tech.
The coalition has already produced its initial version of the open cap table. The real question is whether this is going to be a big deal, as the SAFE was, or whether it’s going to be a vanity solution in search of a real problem. My best guess is that if this coalition gets all the relationships right, doesn’t get greedy and understands that there is a social good component at play here, this could be, reasonably quickly, as impactful as the SAFE was.
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Egyptian ride-sharing company Swvl plans to go public in a $1.5B SPAC merger
Cairo and Dubai-based ride-sharing company Swvl plans to go public in a merger with special purpose acquisition company Queen’s Gambit Growth Capital, Swvl said Tuesday. The deal will see Swvl valued at roughly $1.5 billion.
Swvl was founded by Mostafa Kandil, Mahmoud Nouh and Ahmed Sabbah in 2017. The trio started the company as a bus-hailing service in Egypt and other ride-sharing services in emerging markets with fragmented public transportation.
Its services, mainly bus-hailing, enables users to make intra-state journeys by booking seats on buses running a fixed route. This is pocket-friendly for residents in these markets compared to single-rider options and helps reduce emissions (Swvl claims it has prevented over 240 million pounds of carbon emission since inception).
After its Egypt launch, Swvl expanded to Kenya, Pakistan, Jordan and Saudi Arabia. The company also moved its headquarters to Dubai as part of its strategy to become a global company.
Swvl offerings have expanded beyond bus-hailing services. Now, the company offers inter-city rides, car ride-sharing, and corporate services across the 10 cities it operates in across Africa and the Middle East.
Queen’s Gambit, the women-led SPAC in charge of the deal, raised $300 million in January and added $45 million via an underwriters’ overallotment option focusing on startups in clean energy, healthcare and mobility sectors.
The statement also mentions a group of investors — Agility, Luxor Capital and Zain Group — which will contribute $100 million through a private investment in public equity, or PIPE.
Per Crunchbase, Swvl has raised over $170 million. From an African perspective, Swvl features as one of the most venture-backed startups on the continent. The company has been touted to reach unicorn status in the past and will when this SPAC merger is completed.
The company will aptly trade under the ticker SWVL. The listing will make it the first Egyptian startup to go public outside Egypt and the second to go public after Fawry. It will also make the mobility company the largest African unicorn debut on any U.S.-listed exchange, beating Jumia’s debut of $1.1 billion on the NYSE. In the Middle East, Swvl joins music-streaming platform Anghami as the second startup to go public via a SPAC merger.
Swvl had annual gross revenue of $26 million in 2020, according to the statement, and the company expects its annual gross revenue to increase to $79 million this year and $1 billion by 2025 after expanding to 20 countries across five continents.
On why Queen’s Gambit picked Swvl for this deal, Victoria Grace, founder and CEO, said in a statement that the company fit the profile of what she was looking for: “a disruptive platform that solves complex challenges and empowers underserved populations.”
“Having established a leadership position in key emerging markets, we believe Swvl is ready to capitalize on a truly global market opportunity,” she added.
In May, TechCrunch wrote that SPACs didn’t target African startups for several reasons, including a lack of global appeal and private capital and market satisfaction. Judging by Grace’s comments, Swvl has that global appeal and is ready to venture into the public market despite being in operation for just four years.
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How to prepare for M&A, your most likely exit avenue
Despite the plentiful headlines about mega billion-dollar M&A transactions, record IPOs and the rapid growth of SPACs, small deals will continue to be the most likely exit for the vast majority of tech startups. In the over 30 years I’ve worked on M&A at White & Case, Barclays and my current firm Ascento Capital, I have seen too many startups that are not prepared for an exit via a merger or sale. This article will provide specific recommendations on how to prepare your startup for M&A.
While it is good to strive for a billion-dollar-plus sale, a successful IPO or a SPAC deal, it is practical to prepare your startup for a smaller transaction.
Global M&A hit record highs in the second quarter with a total deal value of $1.5 trillion, but smaller transactions vastly outnumber mega billion-dollar deals. The U.S. saw a total of 16,672 deals in the year ended June 31, but only 583, or 3% of that number, were valued at more than a billion dollars (FactSet). The IPO market is healthy again, but M&A still represents 88% of exits: So far this year, there were 503 IPOs and 5,203 deals, according to the CB Insights Q2 2021 State of Venture Report. After the SEC announced in early April that it was considering new guidance on SPAC IPOs, the rate of new SPAC issuances fell by around 90%.
While it is good to strive for a billion-dollar-plus sale, a successful IPO or a SPAC deal, it is practical to prepare your startup for a smaller transaction.
Here are a few recommendations that will prepare your startup for an M&A exit:
Track M&A in your subsector
Set up an alert on Google News for M&A activity in your subsector. For example, if your startup is in the IoT subsector, search for “IoT acqui” and this will pick up news stories on acquisitions in the IoT space. Save the search so you can go to Google News on a regular basis. Also track your closest competitors on Google News, particularly to see who is selling their company.
Prepare a list of likely acquirers
Prepare a list of the companies or firms most likely to buy your startup. This list should include domestic and international companies, businesses in non-tech industries, private equity firms and their portfolio companies, as well as VC-backed companies. Track these likely acquirers on Google News as well.
Consider executing a parallel track
Consider approaching the top 10 likely acquirers when you are raising the next round of capital. If your startup gets M&A offers and VC term sheets at the same time, this will provide your board of directors choices on the path ahead. Knowing the M&A activity in your startup’s subsector and the 10 most likely acquirers will impress VCs and increase the chances of being funded.
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