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Mailgun changes hands again as Thoma Bravo buys majority stake
Mailgun, an email API delivery service, announced today that it was selling a majority stake in the company to private equity firm Thoma Bravo. The companies did not share terms, but this is the second owner in the company’s eight-year history.
Mailgun provides API services for building email functionality into applications. It has more than 150,000 customers using its APIs, according to data provided by the company.
In a blog post announcing the investment, CEO William Conway said the new money should help the company expand its capabilities and accelerate the product roadmap, a common refrain from companies about to be acquired.
“We will be investing millions in the development of products you can use to enhance your deliverability, gain more insights into your emails and deliver an unparalleled experience for your customers. We’re also doubling down on customer success and enablement to ensure our customers have exactly what they need to scale their communications,” Conway wrote in the blog post.
The company, which was founded in 2010 and was a part of the Y Combinator Winter 2011 cohort, has had a complex history. Rackspace acquired it in 2012 and held onto it until 2017, when it spun out into a private company. At that point, Turn/River, another private equity firm, invested $50 million in the company. After today’s deal, Turn/River will maintain a minority ownership stake in Mailgun.
Mailgun typically competes with companies like Mailchimp and SendGrid. Thoma Bravo has a history of buying enterprise software companies. Most recently, it bought a majority stake in enterprise software company Apttus. It also has investments in SolarWinds, SailPoint and Blue Point Systems.
Thoma Bravo did not respond to a request for comment before publishing.
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Startups Weekly: A much-needed unicorn IPO update
As I’m sure everyone reading this knows, female-founded businesses receive just over 2 percent of venture capital on an annual basis. Most of those checks are written to early-stage startups. It’s extremely difficult for female founders to garner late-stage support, let alone cash $100 million checks.
Maybe that’s finally changing. This week, not one but two female-founded and led companies, Glossier and Rent The Runway, raised nine-figure rounds and cemented their status as unicorn companies. According to PitchBook data from 2018, there are only about 15 unicorn startups with female founders. Though I’m sure that number has increased in the last year, you get the point: There are hundreds of privately held billion-dollar companies and shockingly few of those have women founders (even fewer have female CEOs)…
Moving on…
I spent a good part of the week at San Francisco’s Pier 48 in a room full of vest-wearing investors. We listened to some 200 YC companies make their 120-second pitch and though it was a bit of a whirlwind, there were definitely some standouts. ICYMI: We wrote about each and every company that pitched on day 1 and day 2. If you’re looking for the inside scoop on the companies that forwent demo day and raised rounds, or were acquired, before hitting the stage, we’ve got that too.
Lyft: This week, Lyft set the terms for its highly-anticipated initial public offering, expected to be completed next week. The company will charge between $62 and $68 per share, raising more than $2 billion at a valuation of ~$23 billion. We previously reported its initial market cap would be around $18.5 billion, but that was before we knew that Lyft’s IPO was already oversubscribed. Here’s a little more background on the Lyft IPO for those interested.
Uber: The global ride-hailing business flew a little more under the radar this week than last week, but still managed to grab a few headlines. The company has decided to sell its stock on the New York Stock Exchange, which is the least surprising IPO development of 2019, considering its key U.S. competitor, Lyft, has been working with the Nasdaq on its IPO. Uber is expected to unveil its S-1 in April.
Ben Silbermann, co-founder and CEO of Pinterest, at TechCrunch Disrupt SF 2017.
Pinterest: Pinterest, the nearly decade-old visual search engine, unveiled its S-1 on Friday, one of the final steps ahead of its NYSE IPO, expected in April. The $12.3 billion company, which will trade under the ticker symbol “PINS,” posted revenue of $755.9 million in the year ending December 31, 2018, up from $472.8 million in 2017. It has roughly doubled its monthly active user count since early 2016, hitting 265 million last year. The company’s net loss, meanwhile, shrank to $62.9 million in 2018 from $130 million in 2017.
Zoom: Not necessarily the buzziest of companies, but its S-1 filing, published Friday, stands out for one important reason: Zoom is profitable! I know, what insanity! Anyway, the startup is going public on the Nasdaq as soon as next month after raising about $150 million in venture capital funding. The full deets are here.
General Catalyst, a well-known venture capital firm, is diving more seriously into the business of funding seed-stage business. The firm, which has investments in Warby Parker, Oscar and Stripe, announced earlier this week its plan to invest at least $25 million each year in nascent teams.
Earlier this week, Opendoor, the SoftBank -backed real estate startup, filed paperwork to raise even more money. According to TechCrunch’s Ingrid Lunden, the business is planning to raise up to $200 million at a valuation of roughly $3.7 billion. It’s possible this is a Series E extension; after all, the company raised its $400 million Series E only six months ago. Backers of OpenDoor include the usual suspects: Andreessen Horowitz, Coatue, General Atlantic, GV, Initialized Capital, Khosla Ventures, NEA and Norwest Venture Partners.
Startup capital
- UiPath is raising $400M at a more than $7B valuation
- Ola raises $300M as part of a new EV deal with Hyundai and Kia
- Music startup Splice raises $57.5M to sell samples
- Iterable lands $50M to expand its cross-channel marketing platform
- Guesty, meant for property managers on Airbnb, raises $35M
- Travis Kalanick invests in Kargo, the ‘Uber for Trucks’
- Catch emerges from Y Combinator with $5.1M
Backstage Capital founder and managing partner Arlan Hamilton, center.
Axios’ Dan Primack and Kia Kokalitcheva published a report this week revealing Backstage Capital hadn’t raised its debut fund in total. Backstage founder Arlan Hamilton was quick to point out that she had been honest about the challenges of fundraising during various speaking engagements, and even on the Gimlet “Startup” podcast, which featured her in its latest season. A Twitter debate ensued and later, Hamilton announced she was stepping down as CEO of Backstage Studio, the operations arm of the venture fund, to focus on raising capital and amplifying founders. TechCrunch’s Megan Rose Dickey has the full story.
This week, TechCrunch’s Connie Loizos revisited a long-held debate: Pro rata rights, or the right of an earlier investor in a company to maintain the percentage that he or she (or their venture firm) owns as that company matures and takes on more funding. Here’s why pro rata rights matter (at least, to VCs).
If you enjoy this newsletter, be sure to check out TechCrunch’s venture-focused podcast, Equity. In this week’s episode, available here, Crunchbase News editor-in-chief Alex Wilhelm and I chat about Glossier, Rent The Runway and YC Demo Days. Then, in a special Equity Shot, we unpack the numbers behind the Pinterest and Zoom IPO filings.
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VCs have growing appetite for ‘AgriFood’
Venture investors are pouring billions of dollars into feeding their hunger for food and agriculture startups. Whether that trend line is due to enthusiasm for the sector or just broader heavy investing in the VC space is much less clear.
According to a recent report published by AgFunder – a VC and investing marketplace focused on the agriculture and food sectors – the “AgriFood” space is booming. Using data from Crunchbase and several other data partners, the organization published its “2018 AgriFood Tech Investing Report” this morning, finding that investment in AgriFood companies increased 43% year-over-year, reaching $16.9 billion in 2018.
AgFunder classifies AgriFood tech as “the small but growing segment of the startup and venture capital universe that’s aiming to improve or disrupt the global food and agriculture industry.” Their definition is intentionally broad, encompassing everything from crop and livestock biotech, property management systems, and payments, to biomaterials and meat alternatives, all the way up to tech platforms for restaurants, grocers, deliveries and at-home cooks.
While some of the AgriFood tech categories – such as delivery or restaurant software – have long been popular destinations for venture capital, we’re now seeing a more diverse array of startups innovating across the entire food supply chain. According to the report, expansion in AgriFood is fairly consistent across upstream (agricultural and farming) subsectors to downstream (more consumer-facing) subsectors, with each group growing roughly 44% and 42% year-over-year respectively.
The data also shows growth occurring across almost all deal stages. AgriFood saw huge increases in the average deal size and total investment for late-stage companies in particular, as venture-backed startups have grown to global scale. And penetrating and attracting capital from international markets seems more feasible than ever. AgriFood investing, which traditionally has been largely US-centric, is rapidly becoming a global phenomenon, with more than half of total funding – and some of the largest rounds – now coming from companies and investors outside the US.
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Taali takes its popped water lily snacks from Y Combinator to the world
Aditya and Aarti Kochhar Kaji didn’t set out to start the snack food business Taali Foods when they were studying for their business degrees at Harvard.
The couple both hail from Mumbai and met at the University of Pennsylvania . They were married before starting at Harvard’s Business School and initially were interested in other areas — Aarti was exploring a career in venture capital and Aditya was looking at the food and beverage industry broadly in his classes at Harvard.
Addicted to snack foods like chips and popcorn to fuel her Harvard study sessions, Aarti started making popped water lily seeds as a snack — a food both she and her husband had grown up eating in India, she said.
The seeds, which are high in anti-oxidants and low in fat, have been a staple of Ayurvedic medicine — thanks to their purported anti-inflammatory properties, and are a staple of Indian snacking traditions. Now, with American consumers on the hunt for healthier snacks, they’re becoming a big business in the U.S. as well.
Y Combinator is very on-trend, with its decision to invest and accelerate Taali as part of its most recent cohort of startups. But in this instance you may call the accelerator a fast follower rather than a progenitor of this trend.
No less auspicious a food tastemaker than Whole Foods named water lily seeds as one of the top 10 new food trends of 2019. With that attention, competitors to Taali abound.
Bohana and AshaPops are just two new snack food companies floating on the popped water lily seed movement. Bohana even managed to nab the attention of PepsiCo’s Nutrition Greenhouse competitive accelerator.
It’s no secret that technology investors are investing more heavily in consumer businesses — everything from snack foods to period products and baby formula — and startups need only point to the success of Amazon as the everything store to show that there’s always money to be made in the category.
Indeed, at $1.47 trillion, the consumer packaged goods industry dwarfs technology as a share of the nation’s economy.
As Ryan Caldbeck, the head of the consumer-focused investment firm CircleUp noted last year:
The uptick in tech VC dollars going to the CPG market is partly because tech investing is brutally competitive and saturated, and largely because these VCs are awakening to the strong historical returns in CPG, especially with the trend leaning towards small brands stealing market share.
Consumer is a massive market – about 3x the size of tech, as seen below.
Despite the size of the market, the early-stage has historically been underserved by investors due to market inefficiencies like the geographic dispersion of brands and a lack of structured information sources (i.e. there is no Silicon Valley for consumer, and certainly no Crunchbase equivalents – yet).
Strong exits are already possible for consumer brands — and not necessarily from the big-ticket, headline grabbing acquisitions like Dollar Shave Club. Last week This is L. — the condom and period product retailer — sold for roughly $100 million after raising seed funding from investors, including 500 Startups and Y Combinator.
Taali was similarly bootstrapped before it was accepted into Y Combinator. The company is already selling its snacks through Amazon and in retail locations like Fairway in New York and Central Market in Texas. The founders expect to be in stores in California in the next few months.
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How to prepare for an investment apocalypse
Micah Rosenbloom
Contributor
Contributor
Micah Rosenbloom is a venture partner at Founder Collective.
Unlike 2000 and 2008, everyone in the startup world is expecting a crash to come at any moment. But few are taking concrete steps to prepare for it.
If you’re running a venture-backed startup, you should probably get on that. First, go read RIP Good Times from Sequoia to get a sense for how bad it can get, quickly. Then take a look at the checklist below. You don’t need to build a bomb shelter, yet, but adopting a bit of the prepper mentality now will pay dividends down the road.
Don’t wait, prepare
The first step in preparing for a coming downturn is making a plan for how you’d get to a point of sustainability. Many startups have been lulled into a false sense of confidence that profit is something they can figure out “later.” Keep in mind, it has to be done eventually and it’s easier to do when the broader economy isn’t crashing around you. There are two complicating factors to keep in mind.
You’ll have to do it with less revenue
In a downturn, business customers skip investing in capital equipment and new software. Likewise, consumer discretionary spending goes way down. The result is you’ll likely have less revenue than you do now. War-game a variety of scenarios — what you’d do if you lost 20 percent, 50 percent or 80 percent of your revenue, and what decisions would have to be taken to survive.
Sometimes capital can’t be had at any valuation
When a downturn comes, capital markets don’t soften, they seize. Depending on how bad a hypothetical financial crisis got, there’s a good chance that investors would close up their checkbooks and triage. If you aren’t one of your investor’s favorite portfolio companies, there’s a decent chance you may be left in the cold. Don’t even assume you’ll be able to close a down round. Fortunately, showing a plan with a clear path to profitability will allay investors concerns that you’ll need their capital indefinitely and make it more likely you’ll be able to raise.
Planning around these three realities — the need for profits, while experiencing dropping revenue, in a world where capital can’t be had at any valuation — is going to lead to unpleasant conclusions. A dramatically diminished business, major layoffs, and a decisive drop in morale are likely outcomes. Thankfully, you can take steps now to help soften the landing, or if you’re really successful, avoid it entirely.
Avoid “growth at all costs” mentality
Getting acquisition costs under control will help you in two ways. First, it’ll lower your burn rate. Chasing growth for growth’s sake is always a short-sighted decision, but especially during the late part of the business cycle. Avoid this even if you’re VC is encouraging it. Second, by carefully analyzing the inputs to your acquisition cost, it will force you to examine the dynamics of your business. It gives you an opportunity to decide if a poorly performing channel or lackluster sales reps are actually smart investments. Even cutting your payback period from 12 months to nine will provide an increased measure of visibility and control.
Increase the hiring bar
Instagram took over the web with a team of a dozen. Craigslist is a pillar of the internet with a staff of 40 employees. WhatsApp supported hundreds of millions of daily users with fewer than 50 people. Chances are you need fewer people than you think.
In his new book, Scott Belsky shares an algorithm he used building Behance into a $100M company — automate, automate, then hire. His point was that founders should encourage teams to push hard on improving processes and other labor-saving tools before adding more FTEs.
Don’t institute a hiring freeze or take other actions that might spook the staff, but do send the message that new hires should be the last resort, not the first response to a challenge.
Preach discipline — build it into the culture
Founders often try to change spending habits, and in turn culture, when it’s too late. Is there a fair bit of business class flying among the executive team? Do your employees stretch your free dinner policy by staying just past the dinner hour to take advantage of free food? At most tech ventures, everyone is truly an owner. Try to help the entire team to internalize that they are spending their own money.
Get to know your potential acquirers
The week the market drops 50 percent is not the week to start a M&A conversation. You should be getting to know the five most likely buyers of your company, now. Find out who the decision makers at each of the companies are and build relationships. Make it a point to catch up with these people at conferences and even consider sending them regular updates about your company’s progress (but not too much data). You’re not running a formal sales process, but helping build up the internal desire to buy your company if the opportunity presents itself. It may not be the exit of your dreams, but it’s nice to have options if you need them.
Jettison expensive office space
If you’re coming to a T-juncture regarding office space, you may want to prioritize price and lease flexibility over quality and location. I remember one of our offices at my start-up was a twelve month lease with 6 months free. The landlords were desperate, and so were we!
Front-load revenue
If you’re in the kind of business that will support annual contracts, figure out a way to offer them. Pre-sell credits to consumers at a discount. More fundamentally, think about how you might be able to adjust your business model so you can get paid before you deliver services. Plenty of viable businesses are asphyxiated by delays in accounts receivable, don’t allow your ambitions to be thwarted by accounting.
Diversify your customer base
One lesson learned in the 2000 bubble was that startups that serve other startups tend to be hit hardest. It’s important to think about how a downturn will impact your customer base. If more than 30 percent of your revenue comes from one industry (perhaps start-ups!), or heaven help you, a single customer, start thinking about managing risk by diversifying your customer base.
Raise a pre-emptive round (AND DON’T SPEND IT)
Topping up your balance sheet at this point isn’t a bad idea, provided you have the discipline to treat it as a rainy day fund. Communicate this rationale to your investors. It’s also important to use this moment to reflect on valuation. An eye-popping valuation will feel good when you sign the term sheet, but it’s going to feel like a millstone if the economy turns, and the market for blue-chip tech stocks drops precipitously.
Consider venture debt
Many VCs discourage venture debt. They’ll say “if you need more money, we’ll backstop you.” The problem is when things ugly, they may not be there. Debt providers are a good way to extend the runway. The thing is that it’s best to raise debt capital when you don’t need it. Venture debt can add ⅓ to ½ of additional capital to some funding rounds with minimal dilution and relatively modest interest rates. Do note that when things get bad, some debt funds can get aggressive so do your homework before taking the notes.
Don’t panic
It’s tough to predict the top of the market. CNN, Time, The Atlantic, The Wall Street Journal, and many others argued Facebook paying $1 billion for Instagram was a sure sign of a bubble — in 2012. Reputable commentators have claimed that we’re in a bubble every year since, see 2013, 2014, 2015, 2016, 2017, and 2018. Going into survival mode in any of those years would have been a serious mistake for most startups.
Still, we’re only two quarters away from marking the longest economic expansion in US history. The good times have got to end at some point. Venture capital is a hell of a drug and withdrawal can be painful. Keep in mind that there’s no correlation between how much a company raised and how well they did on the public markets. If you’re struggling to make your startup’s economics work, read up on dozens of “invisible unicorns” who show that you can get big without relying on outsized amounts of venture capital.
If your house is in order when the downturn hits, you may actually be able to grow through it. As unprepared competitors go out of business, you’ll find that talent is more plentiful and customer acquisition costs plummet. Some of the best companies have been founded and thrived in the worst of times — if you’re prepared.
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How students are founding, funding and joining startups
Shawn Xu is a managing partner at The Dorm Room Fund.
There has never been a better time to start, join or fund a startup as a student.
Young founders who want to start companies while still in school have an increasing number of resources to tap into that exist just for them. Students that want to learn how to build companies can apply to an increasing number of fast-track programs that allow them to gain valuable early stage operating experience. The energy around student entrepreneurship today is incredible. I’ve been immersed in this community as an investor and adviser for some time now, and to say the least, I’m continually blown away by what the next generation of innovators are dreaming up (from Analytical Space’s global data relay service for satellites to Brooklinen’s reinvention of the luxury bed).
Bill Gates in 1973
First, let’s look at student founders and why they’re important. Student entrepreneurs have long been an important foundation of the startup ecosystem. Many students wrestle with how best to learn while in school —some students learn best through lectures, while more entrepreneurial students like author Julian Docks find it best to leave the classroom altogether and build a business instead.
Indeed, some of our most iconic founders are Microsoft’s Bill Gates and Facebook’s Mark Zuckerberg, both student entrepreneurs who launched their startups at Harvard and then dropped out to build their companies into major tech giants. A sample of the current generation of marquee companies founded on college campuses include Snap at Stanford ($29B valuation at IPO), Warby Parker at Wharton (~$2B valuation), Rent The Runway at HBS (~$1B valuation), and Brex at Stanford (~$1B valuation).
Some of today’s most celebrated tech leaders built their first ventures while in school — even if some student startups fail, the critical first-time founder experience is an invaluable education in how to build great companies. Perhaps the best example of this that I could find is Drew Houston at Dropbox (~$9B valuation at IPO), who previously founded an edtech startup at MIT that, in his words, provided a: “great introduction to the wild world of starting companies.”
Student founders are everywhere, but the highest concentration of venture-backed student founders can be found at just 5 universities. Based on venture fund portfolio data from the last six years, Harvard, Stanford, MIT, UPenn, and UC Berkeley have produced the highest number of student-founded companies that went on to raise $1 million or more in seed capital. Some prospective students will even enroll in a university specifically for its reputation of churning out great entrepreneurs. This is not to say that great companies are not being built out of other universities, nor does it mean students can’t find resources outside a select number of schools. As you can see later in this essay, there are a number of new ways students all around the country can tap into the startup ecosystem. For further reading, PitchBook produces an excellent report each year that tracks where all entrepreneurs earned their undergraduate degrees.
Student founders have a number of new media resources to turn to. New email newsletters focused on student entrepreneurship like Justine and Olivia Moore’s Accelerated and Kyle Robertson’s StartU offer new channels for young founders to reach large audiences. Justine and Olivia, the minds behind Accelerated, have a lot of street cred— they launched Stanford’s on-campus incubator Cardinal Ventures before landing as investors at CRV.
StartU goes above and beyond to be a resource to founders they profile by helping to connect them with investors (they’re active at 12 universities), and run a podcast hosted by their Editor-in-Chief Johnny Hammond that is top notch. My bet is that traditional media will point a larger spotlight at student entrepreneurship going forward.
New pools of capital are also available that are specifically for student founders. There are four categories that I call special attention to:
- University-affiliated accelerator programs
- University-affiliated angel networks
- Professional venture funds investing at specific universities
- Professional venture funds investing through student scouts
While it is difficult to estimate exactly how much capital has been deployed by each, there is no denying that there has been an explosion in the number of programs that address the pre-seed phase. A sample of the programs available at the Top 5 universities listed above are in the graphic below — listing every resource at every university would be difficult as there are so many.
One alumni-centric fund to highlight is the Alumni Ventures Group, which pools LP capital from alumni at specific universities, then launches individual venture funds that invest in founders connected to those universities (e.g. students, alumni, professors, etc.). Through this model, they’ve deployed more than $200M per year! Another highlight has been student scout programs — which vary in the degree of autonomy and capital invested — but essentially empower students to identify and fund high-potential student-founded companies for their parent venture funds. On campuses with a large concentration of student founders, it is not uncommon to find student scouts from as many as 12 different venture funds actively sourcing deals (as is made clear from David Tao’s analysis at UC Berkeley).
Investment Team at Rough Draft Ventures
In my opinion, the two institutions that have the most expansive line of sight into the student entrepreneurship landscape are First Round’s Dorm Room Fund and General Catalyst’s Rough Draft Ventures. Since 2012, these two funds have operated a nationwide network of student scouts that have invested $20K — $25K checks into companies founded by student entrepreneurs at 40+ universities. “Scout” is a loose term and doesn’t do it justice — the student investors at these two funds are almost entirely autonomous, have built their own platform services to support portfolio companies, and have launched programs to incubate companies built by female founders and founders of color. Another student-run fund worth noting that has reach beyond a single region is Contrary Capital, which raised $2.2M last year. They do a particularly great job of reaching founders at a diverse set of schools — their network of student scouts are active at 45 universities and have spoken with 3,000 founders per year since getting started. Contrary is also testing out what they describe as a “YC for university-based founders”. In their first cohort, 100% of their companies raised a pre-seed round after Contrary’s demo day. Another even more recently launched organization is The MBA Fund, which caters to founders from the business schools at Harvard, Wharton, and Stanford. While super exciting, these two funds only launched very recently and manage portfolios that are not large enough for analysis just yet.
Over the last few months, I’ve collected and cross-referenced publicly available data from both Dorm Room Fund and Rough Draft Ventures to assess the state of student entrepreneurship in the United States. Companies were pulled from each fund’s portfolio page, then checked against Crunchbase for amount raised, accelerator participation, and other metrics. If you’d like to sift through the data yourself, feel free to ping me — my email can be found at the end of this article. To be clear, this does not represent the full scope of investment activity at either fund — many companies in the portfolios of both funds remain confidential and unlisted for good reasons (e.g. startups working in stealth). In fact, the In addition, data for early stage companies is notoriously variable in quality, even with Crunchbase. You should read these insights as directional only, given the debatable confidence interval. Still, the data is still interesting and give good indicators for the health of student entrepreneurship today.
Dorm Room Fund and Rough Draft Ventures have invested in 230+ student-founded companies that have gone on to raise nearly $1 billion in follow on capital. These funds have invested in a diverse range of companies, from govtech (e.g. mark43, raised $77M+ and FiscalNote, raised $50M+) to space tech (e.g. Capella Space, raised ~$34M). Several portfolio companies have had successful exits, such as crypto startup Distributed Systems (acquired by Coinbase) and social networking startup tbh (acquired by Facebook). While it is too early to evaluate the success of these funds on a returns basis (both were launched just 6 years ago), we can get a sense of success by evaluating the rates by which portfolio companies raise additional capital. Taken together, 34% of DRF and RDV companies in our data set have raised $1 million or more in seed capital. For a rough comparison, CB Insights cites that 40% of YC companies and 48% of Techstars companies successfully raise follow on capital (defined as anything above $750K). Certainly within the ballpark!
Dorm Room Fund and Rough Draft Ventures companies in our data set have an 11–12% rate of survivorship to Series A. As a benchmark, a previous partner at Y Combinator shared that 20% of their accelerator companies raise Series A capital (YC declined to share the official figure, but it’s likely a stat that is increasing given their new Series A support programs. For further reading, check out YC’s reflection on what they’ve learned about helping their companies raise Series A funding). In any case, DRF and RDV’s numbers should be taken with a grain of salt, as the average age of their portfolio companies is very low and raising Series A rounds generally takes time. Ultimately, it is clear that DRF and RDV are active in the earlier (and riskier) phases of the startup journey.
Dorm Room Fund and Rough Draft Ventures send 18–25% of their portfolio companies to Y Combinator or Techstars. Given YC’s 1.5% acceptance rate as reported in Fortune, this is quite significant! Internally, these two funds offer founders an opportunity to participate in mock interviews with YC and Techstars alumni, as well as tap into their communities for peer support (e.g. advice on pitch decks and application content). As a result, Dorm Room Fund and Rough Draft Ventures regularly send cohorts of founders to these prestigious accelerator programs. Based on our data set, 17–20% of DRF and RDV companies that attend one of these accelerators end up raising Series A venture financing.
Dorm Room Fund and Rough Draft Ventures don’t invest in the same companies. When we take a deeper look at one specific ecosystem where these two funds have been equally active over the last several years — Boston — we actually see that the degree of investment overlap for companies that have raised $1M+ seed rounds sits at 26%. This suggests that these funds are either a) seeing different dealflow or b) have widely different investment decision-making.
Dorm Room Fund and Rough Draft Ventures should not just be measured by a returns-basis today, as it’s too early. I hypothesize that DRF and RDV are actually encouraging more entrepreneurial activity in the ecosystem (more students decide to start companies while in school) as well as improving long-term founder outcomes amongst students they touch (portfolio founders build bigger and more successful companies later in their careers). As more students start companies, there’s likely a positive feedback loop where there’s increasing peer pressure to start a company or lean on friends for founder support (e.g. feedback, advice, etc).Both of these subjects warrant additional study, but it’s likely too early to conduct these analyses today.
Dorm Room Fund and Rough Draft Ventures have impressive alumni that you will want to track. 1 in 4 alumni partners are founders, and 29% of these founder alumni have raised $1M+ seed rounds for their companies. These include Anjney Midha’s augmented reality startup Ubiquity6 (raised $37M+), Shubham Goel’s investor-focused CRM startup Affinity (raised $13M+), Bruno Faviero’s AI security software startup Synapse (raised $6M+), Amanda Bradford’s dating app The League (raised $2M+), and Dillon Chen’s blockchain startup Commonwealth Labs (raised $1.7M). It makes sense to me that alumni from these communities that decide to start companies have an advantage over their peers — they know what good companies look like and they can tap into powerful networks of young talent / experienced investors.
Beyond Dorm Room Fund and Rough Draft Ventures, some venture capital firms focus on incubation for student-founded startups. Credit should first be given to Lightspeed for producing the amazing Summer Fellows bootcamp experience for promising student founders — after all, Pinterest was built there! Jeremy Liew gives a good overview of the program through his sit-down interview with Afterbox’s Zack Banack. Based on a study they conducted last year, 40% of Lightspeed Summer Fellows alumni are currently active founders. Pear Ventures also has an impressive summer incubator program where 85% of its companies successfully complete a fundraise. Index Ventures is the latest to build an incubator program for student founders, and even accepts founders who want to work on an idea part-time while completing a summer internship.
Let’s now look at students who want to join a startup before founding one. Venture funds have historically looked to tap students for talent, and are expanding the engagement lifecycle. The longest running programs include Kleiner Perkins’ class=”m_1196721721246259147gmail-markup–strong m_1196721721246259147gmail-markup–p-strong”> KP Fellows and True Ventures’ TEC Fellows, which focus on placing the next generation’s most promising product managers, engineers, and designers into the portfolio companies of their parent venture funds.
There’s also the secretive Greylock X, a referral-based hand-picked group of the best student engineers in Silicon Valley (among their impressive alumni are founders like Yasyf Mohamedali and Joe Kahn, the folks behind First Round-backed Karuna Health). As these programs have matured, these firms have recognized the long-run value of engaging the alumni of their programs.
More and more alumni are “coming back” to the parent funds as entrepreneurs, like KP Fellow Dylan Field of Figma (and is also hosting a KP Fellow, closing a full circle loop!). Based on their latest data, 10% of KP Fellows alumni are founders — that’s a lot given the fact that their community has grown to 500! This helps explain why Kleiner Perkins has created a structured path to receive $100K in seed funding to companies founded by KP Fellow alumni. It looks like venture funds are beginning to invest in student programs as part of their larger platform strategy, which can have a real impact over the long term (for further reading, see this analysis of platform strategy outcomes by USV’s Bethany Crystal).
KP Fellows in San Francisco
Venture funds are doubling down on student talent engagement — in just the last 18 months, 4 funds have launched student programs. It’s encouraging to see new funds follow in the footsteps of First Round, General Catalyst, Kleiner Perkins, Greylock, and Lightspeed. In 2017, Accel launched their Accel Scholars program to engage top talent at UC Berkeley and Stanford. In 2018, we saw 8VC Fellows, NEA Next, and Floodgate Insiders all launch, targeting elite universities outside of Silicon Valley. Y Combinator implemented Early Decision, which allows student founders to apply one batch early to help with academic scheduling. Most recently, at the start of 2019, First Round launched the Graduate Fund (staffed by Dorm Room Fund alumni) to invest in founders who are recent graduates or young alumni.
Given more time, I’d love to study the rates by which student founders start another company following investments from student scout funds, as well as whether or not they’re more successful in those ventures. In any case, this is an escalation in the number of venture funds that have started to get serious about engaging students — both for talent and dealflow.
Student entrepreneurship 2.0 is here. There are more structured paths to success for students interested in starting or joining a startup. Founders have more opportunities to garner press, seek advice, raise capital, and more. Venture funds are increasingly leveraging students to help improve the three F’s — finding, funding, and fixing. In my personal view, I believe it is becoming more and more important for venture funds to gain mindshare amongst the next generation of founders and operators early, while still in school.
I can’t wait to see what’s next for student entrepreneurship in 2019. If you’re interested in digging in deeper (I’m human — I’m sure I haven’t covered everything related to student entrepreneurship here) or learning more about how you can start or join a startup while still in school, shoot me a note at sxu@dormroomfund.com. A massive thanks to Phin Barnes, Rei Wang, Chauncey Hamilton, Peter Boyce, Natalie Bartlett, Denali Tietjen, Eric Tarczynski, Will Robbins, Jasmine Kriston, Alicia Lau, Johnny Hammond, Bruno Faviero, Athena Kan, Shohini Gupta, Alex Immerman, Albert Dong, Phillip Hua-Bon-Hoa, and Trevor Sookraj for your incredible encouragement, support, and insight during the writing of this essay.
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How business-to-business startups reduce inequality
Sib Mahapatra is a writer and co-founder of Bureau, an end-to-end office furniture startup in NYC.
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When considering the structural impact of technology companies on our economy and society, we tend to focus on questions of scale and monopoly.
It’s true that the FAANG companies and more recent winners (Airbnb, Uber) have surfed a combination of network effects, preferential access to capital and classic efficiencies of scale to generate tremendous value for their shareholders — to the detriment of new entrants who attempt to unseat them.
At their high water mark in mid-2018, FAANG alone made up 11 percent of the total market cap of the S&P 500 and 38 percent of the index’s year-to-date gain, representing a doubling in their influence in only five years. The question of regulating technology companies — to the point of instituting anti-trust actions — has even become a rare point of relative concord between Democrats and Republicans in Congress.
But is the narrative of tech companies in the 2010s only a story of economic consolidation and growing inequality? Many of the most successful B2B startups of the last decade are aligned by a theme that paints a different picture. By transforming the nature of the costs required to start a business, these startups are reducing the influence of capital and leveling the playing field for new entrants to share in the surplus generated by the secular shift to a tech-mediated economy.
Source: Getty Images/MIKIEKWOODS
A path to equal opportunity: Turning fixed costs into variable costs
What do AWS, WeWork, Stord, Gusto
But they are alike in the economic purpose they serve for their customers. Each of these services takes a fixed cost — a bank of servers, a lease, a legal retainer — and transforms it into a variable cost. As a refresher, a fixed cost stays constant regardless of output, and variable costs scale with the output of a business.
When my father started his software consulting business in the early 1990s, I remember the giant boxes of AIX servers that arrived at our apartment, and tagging along to office tours in central New Jersey before he decided to run the company out of our spare bedroom. Back then, starting almost any kind of business was hard because of high fixed costs. Without AWS or WeWork, you shelled out upfront for hardware and a lease.
Access to capital, whether in the form of a bank loan, savings or friends and family was a prerequisite for entrepreneurship.
Today, startups make it possible to start and scale almost any kind of business while incurring few fixed costs. Want to found an e-commerce store? Start with a free Shopify account and dropship your inventory. Want to become a freelance designer? Put a shingle up on Fiverr and meet clients at a Breather you rent by the hour.
Whether software or hardware or labor, building a business is way easier when overhead is transformed into a string of flexible microservices that you only pay for as you grow.
Image courtesy of Getty Images
Lower fixed costs means capital matters less
Taken together, startups that turn fixed costs into variable costs make it less capital-intensive to start a business. This decreases the influence of gatekeepers and aggregators of capital — an impact evident in the way entrepreneurs think about starting businesses today.
It’s no coincidence that the rise of B2B startups fitting this theme has coincided with the bootstrap movement, in which tech entrepreneurs with major ambitions demur from raising venture funding because — well, they don’t need the money anymore.
It has also coincided with a renaissance in freelance entrepreneurship: 56.7 million Americans freelanced in 2018. Beyond the economic benefits of working for yourself — the fastest growing segment of freelancers earns more than $75,000 a year — freelancers can access the lifestyle and health benefits of owning their destiny, which aren’t directly captured but play a role in the economic picture. Indeed, 51 percent of freelancers said no amount of money would lure them into a traditional job, and 64 percent reported feeling healthier and happier.
When capital plays a reduced role in new business formation, access to capital plays a smaller role in determining who will succeed. More companies are founded, and the economy becomes more likely to birth new Davids that will unseat the Goliaths. Economics 101: lower barriers to entry create markets that converge on perfect competition instead of oligarchic concentration.
Source: Getty Images/ERHUI1979
Variable costs don’t scale, but that’s OK
Variable costs have their downsides. A startup with a relatively higher proportion of fixed costs — the profile of the classic high-tech software business — can achieve higher profit margins as it scales. Compare Microsoft or Google, which pay high fixed costs in the form of salaries and servers but few costs in delivering their services and achieve operating margins of 25-30 percent, to Costco, which takes in more than $100 billion of annual revenue but earns an operating margin in the single digits.
That’s OK. Neither type of cost is “better” or “worse,” but having the option to decide how to structure costs through a company’s life cycle can meaningfully impact an entrepreneur’s ability to execute a business idea.
Founders investigating startup ideas — and politicians debating the impact of technology — would do well to pay attention to how B2B companies have democratized access to entrepreneurship.
Equality of outcome arrives from equality of opportunity — and a future where millions of people can start businesses, differentiate and succeed on the basis of their ability and value proposition, rather than their access to capital, sounds like a promising representation of the egalitarian ethos Silicon Valley wants to bring to pass.
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Startups Weekly: Squad’s screen-shares and Slack’s swastika
We’re three weeks into January. We’ve recovered from our CES hangover and, hopefully, from the CES flu. We’ve started writing the correct year, 2019, not 2018.
Venture capitalists have gone full steam ahead with fundraising efforts, several startups have closed multi-hundred million dollar rounds, a virtual influencer raised equity funding and yet, all anyone wants to talk about is Slack’s new logo… As part of its public listing prep, Slack announced some changes to its branding this week, including a vaguely different looking logo. Considering the flack the $7 billion startup received instantaneously and accusations that the negative space in the logo resembled a swastika — Slack would’ve been better off leaving its original logo alone; alas…
On to more important matters.
Rubrik more than doubled its valuation
The data management startup raised a $261 million Series E funding at a $3.3 billion valuation, an increase from the $1.3 billion valuation it garnered with a previous round. In true unicorn form, Rubrik’s CEO told TechCrunch’s Ingrid Lunden it’s intentionally unprofitable: “Our goal is to build a long-term, iconic company, and so we want to become profitable but not at the cost of growth,” he said. “We are leading this market transformation while it continues to grow.”
Deal of the week: Knock gets $400M to take on Opendoor
Will 2019 be a banner year for real estate tech investment? As $4.65 billion was funneled into the space in 2018 across more than 350 deals and with high-flying startups attracting investors (Compass, Opendoor, Knock), the excitement is poised to continue. This week, Knock brought in $400 million at an undisclosed valuation to accelerate its national expansion. “We are trying to make it as easy to trade in your house as it is to trade in your car,” Knock CEO Sean Black told me.
While we’re on the subject of VCs’ favorite industries, TechCrunch cybersecurity reporter Zack Whittaker highlights some new data on venture investment in the industry. Strategic Cyber Ventures says more than $5.3 billion was funneled into companies focused on protecting networks, systems and data across the world, despite fewer deals done during the year. We can thank Tanium, CrowdStrike and Anchorfree’s massive deals for a good chunk of that activity.
Send me tips, suggestions and more to kate.clark@techcrunch.com or @KateClarkTweets.
I would be remiss not to highlight a slew of venture firms that made public their intent to raise new funds this week. Peter Thiel’s Valar Ventures filed to raise $350 million across two new funds and Redpoint Ventures set a $400 million target for two new China-focused funds. Meanwhile, Resolute Ventures closed on $75 million for its fourth early-stage fund, BlueRun Ventures nabbed $130 million for its sixth effort, Maverick Ventures announced a $382 million evergreen fund, First Round Capital introduced a new pre-seed fund that will target recent graduates, Techstars decided to double down on its corporate connections with the launch of a new venture studio and, last but not least, Lance Armstrong wrote his very first check as a VC out of his new fund, Next Ventures.
More money goes toward scooters
In case you were concerned there wasn’t enough VC investment in electric scooter startups, worry no more! Flash, a Berlin-based micro-mobility company, emerged from stealth this week with a whopping €55 million in Series A funding. Flash is already operating in Switzerland and Portugal, with plans to launch into France, Italy and Spain in 2019. Bird and Lime are in the process of raising $700 million between them, too, indicating the scooter funding extravaganza of 2018 will extend into 2019 — oh boy!
- Niantic finally closed its Series C with $245 million in capital commitments and a lofty $4 billion valuation.
- Outdoorsy, which connects customers with underused RVs, raised $50 million in Series C funding led by Greenspring Associates, with participation from Aviva Ventures, Altos Ventures, AutoTech Ventures and Tandem Capital.
- Ciitizen, a developer of tools to help cancer patients organize and share their medical records, has raised $17 million in new funding in a round led by Andreessen Horowitz.
- Footwear startup Birdies — no, I don’t mean Allbirds or Rothy’s — brought in an $8 million Series A led by Norwest Venture Partners, with participation from Slow Ventures and earlier investor Forerunner Ventures.
- And Brud, the company behind the virtual celebrity Lil Miquela, is now worth $125 million with new funding.
TechCrunch’s Josh Constine introduced readers to Squad this week, a screensharing app for social phone addicts.
If you enjoy this newsletter, be sure to check out TechCrunch’s venture-focused podcast, Equity. In this week’s episode, available here, Crunchbase editor-in-chief Alex Wilhelm and I marveled at the dollars going into scooter startups, discussed Slack’s upcoming direct listing and debated how the government shutdown might impact the IPO market.
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Private equity buyouts have become viable exit options — even for early-stage startups
Ajay Chopra
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Contributor
Ajay Chopra co-founded Pinnacle Systems in his living room and grew it to a multi-billion dollar public company before becoming a venture capitalist with Trinity Ventures.
About 13 years ago I faced an excruciating decision: whether to sell my company, Pinnacle Systems, to a private equity firm or to another large public company. I felt that both suitors would treat my employees well (and I negotiated hard to make sure that was the case), and both offered a good asking price well above our value on NASDAQ.
After raising what at the time felt like my first child, born in my living room and nurtured into a publicly traded entity, I was ready for it to take its next step and for me to take mine. I ultimately opted for the strategic sale, but I left the process intrigued by what was already an evolving dynamic between private equity firms and tech exits.
In years past, stigma often accompanied private equity sales. I know I felt that way, even under strong deal terms. Plus, private equity exits were only available to companies generating substantial annual revenues and often profits, making this exit option inaccessible for many startups. Today, private equity buyout firms can provide a solid (and on occasion excellent) exit route — as well as an increasingly common one, accounting for 18.5 percent of VC-backed exits in 2017.
Private equity firms are investing in a broad array of technology companies, including highly valued unicorns, but also early- to mid-stage profitable and unprofitable companies that a few years ago would have been unable to secure interest from these buyout firms.
In addition, the lines between venture capital and private equity are increasingly blurring, with more private equity investments in tech, and several-late stage VC firms creating large, billion-dollar plus late-stage growth funds. Further blurring the lines, some of the late-stage VC firms are taking controlling interests in startups, a strategy typically associated with private equity. Recently, one of our portfolio companies received an investment from a late-stage VC firm that acquired a majority stake by providing liquidity to some existing shareholders and investing in the company, utilizing a strategy typically associated with PE buyout firms.
The rise of private equity buyouts within the tech sector presents a viable exit option for founders, given the reality that most startups won’t ultimately IPO. (According to PitchBook, only 3 percent of venture-backed companies in the last decade eventually went public.)
If an IPO is not a realistic long-term option, the remaining primary exit option has typically been a sale to another company (a strategic buyer, in venture parlance). However, in the past few years, private equity firms have become aggressive buyers of private companies, sometimes bidding as high as or higher than strategic buyers. With one of my portfolio companies, a private equity buyer placed the second highest bid ahead of all but one strategic buyer and helped raise the final price from the strategic buyer just by being in the bidding process.
Founders who find themselves in negotiations with strategic buyers should also reach out to PE firms to optimize the outcome. Silver Lake, Francisco Partners, Thoma Bravo and Vista are a few technology-focused PE firms, and PitchBook’s annual liquidity report lists other firms. Vista has been especially active, acquiring many technology companies, including Infoblox, Lithium and Marketo. Not all PE firms are the same, just like not all VCs and strategic buyers are the same.
Years ago, when private equity buyouts were typically only large deals, new management teams were almost always brought in to tweak the edges of already successful companies. Today, each private equity firm has its own strategy — some only buy large profitable companies, others focus on mid-size acquisitions and some only buy early-stage (typically unprofitable) companies, which brings us to the next point.
Even early-stage startups can explore a PE exit, especially if things are not going well
While most readers are familiar with private equity buyers at later stages, what’s new is the emergence of PE activity at early stages. These firms acquire majority stakes in startups that have only raised early-stage investments but are having trouble scaling or raising the next round.
After a buyout, these private equity firms typically provide value by adding the missing elements, such as marketing or sales know-how, in order to kick-start the business and achieve scale. Their goal is to increase the value of the underlying asset by augmenting founder teams with the buyout firm’s own operational experts, sometimes combining newly acquired assets with already existing assets to create a stronger whole, or doubling-down on promising products (while shedding less promising offerings) to unlock potential.
Typically, these PE firms then sell the company to another company (usually a strategic buyer) for greater value. In some cases, these early-stage PE firms sell to another PE buyout firm further up market. In some of these acquisitions, founders can maintain minority ownership in the company (though not a controlling stake), which they can carry through to their “next exit.”
Unlike PE buyouts at later stages, PE buyouts at the earlier stages are not usually high-value exits; they are mostly an avenue to provide the founders some return for their hard work, rather than the disappointing returns they can expect from an acqui-hire or, even worse, a shutdown. If negotiated correctly, a private equity deal can give founders an opportunity to play another hand to the next exit.
Few founders create companies in order to flip them. Strong entrepreneurs create companies to transform their missions into reality and positively impact the world. Steve Jobs said, “I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.” An acquisition — particularly to private equity — may not have been the original goal, but it may fuel the continued pursuit of the founder’s mission. Or, perhaps it will enable the pursuit of a new and worthy mission.
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In emerging markets there are no copycats, just budding entrepreneurs
Federico Antoni
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Contributor
Federico Antoni is managing partner at ALLVP, an early-stage VC based in Mexico. He is a lecturer in management at the Stanford Graduate School of Business.
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Every year I teach an MBA course at Stanford about the exciting opportunities for tech investors and entrepreneurs in developing economies. When we designed the syllabus back in 2013, Rocket Internet was still firing on all cylinders on four continents. The unapologetic machine built to copy big American internet companies created billions of dollars for the Samwer brothers and its backers. During Rocket’s golden years, the best startups in the developing economies seemed to inevitably have an original reference in Silicon Valley.
Accordingly, we added a class about the opportunity of replicating business models to seize this information arbitrage. Call it the second-mover advantage.
Despite my conviction about the model, the copycat word — short for replicating startups and attached to these ventures — annoyed me from the start. More than a term to describe a straightforward recipe to launch, I see it as an unconscious way to belittle an entire group of hard-charging founders and investors.
Indeed, while in foreign eyes, we have been building a Mexican Kickstarter, a Middle Eastern Uber, an Indian Amazon or a Colombian Postmates, I argue visionary founders are taking a simple idea that already exists and creating new worlds.
On the internet, there are Einsteins and there are Bob the Builders. I’m Bob the Builder. Oliver Samwer, founder of Rocket Internet
Gateway to entrepreneurship
While impact is the final goal, founders can approach the journey in different ways. The most common approach in the startup world is to use the business method, or more pompously, the design thinking methodology. “Fall in love with the problem, not the solution,” mentors keep telling a succession of startup clusters in acceleration programs. The best and “leanest” way to product market fit is by starting small then keep iterating the solution until you nail it.
A second way to start is favored by engineers and scientists: Take a new promising technology or a forgotten molecule, then find a big problem. Keep iterating until you find a problem worth solving, like a hammer looking for a nail.
A third way is starting like painters create, building skills by copying classics, or like a new chef cooks by starting with iconic recipes: replicate a proven idea and iterate until you find traction.
Until a few years ago it was ostensibly the only way to scale in developing economies. The model helped raise local capital from risk-averse investors who needed reassurance. The playbook to scale was unfolding a couple of years ahead and served as a guide to founders without previous startup experience and no local role models. The potential acquirer was identified and sometimes contacted in advance. Founders weren’t crazy and investors weren’t dumb.
Replicating a business model has served in emerging ecosystems as the gateway to entrepreneurship and venture investing.
Photo courtesy of Flickr/A_Marga
Riding the next wave
According to conventional wisdom, new ecosystems around the world grow through the following three stages, be them in developing economies or more developed countries. First, local and foreign entrepreneurs replicate successful models focused on local markets. Then as the ecosystem evolves, founders start applying existing technologies to solve local problems. Finally, as the tech space matures, new technologies begin to flourish.
In my opinion, those stages never happen sequentially as stated by ecosystem observers. Successful startups that started with a foreign inspiration can outgrow the master. If they are not bought into submission by the first mover, some of the most famous copycats reinvented the original and made it better: Mercado Libre is much more relevant in the e-commerce space than eBay . Flipkart is hardly an Amazon, not to mention WeChat. These companies are in turn some of the most prolific tech innovators on the globe. Truly ecosystems evolve organically in unique ways reflecting their history, geopolitical environment, economic structure and cultural features.
Two ways to defend the status quo: “It’s been done before” and “It’s never been done before.” –Thibault @Kpaxs
In defense of talent
Recently, it’s hard to hear American observers use the word copycat to describe any American company. After all, Guilt replicated VentesPrivees and Lime, Chinese dockless bike sharing and many more examples. All American startups are treated as innovators while the rest as mere followers.
Recently, Chinese or Indian startups seem to be given the benefit of the doubt regarding their originality. Is it because these regions have become more innovative? Maybe. But it’s also because these ecosystems have gained the respect of Silicon Valley. Indeed, Chinese consumer tech surpassed decisively the U.S. as the most important country in terms of investments.
So here’s my humble suggestion to our wealthier and more accomplished colleagues: stop using the c-word with founders. It’s offensive. Most probably, these founders are facing more challenges to build their companies and lower odds for success that the first mover. If anything, they have more merit than the originals.
As for founders, when they call you a me-too, remember all teams started somewhere, somehow. In fact, most started like Bob the Builder before turning into Einsteins. The truth is, it doesn’t matter where you start. You can start by applying a new technology or protocol. You can start with a problem you feel passionate about. You can start by replicating a business model. It doesn’t really matter if you take a big swing at the future and trust you will figure out how to make it happen. It doesn’t matter what label they use while you change the world for the better.
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