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To buy time for a failing startup, recreate the engineering process
In non-aerobatic fixed-wing aviation, spins are an emergency. If you don’t have spin recovery training, you can easily make things worse, dramatically increasing your chances of crashing. Despite the life-and-death consequences, licensed amateur pilots in the United States are not required to train for this. Uncontrolled spins don’t happen often enough to warrant the training.
Startups can enter the equivalent of a spin as well. My startup, Kolide, entered a dangerous spin in early 2018, only a year after our Series A fundraise. We had little traction and we were quickly burning through our sizable cash reserves. We were spinning out of control, certain to hit the ground in no time.
Kolide had a lot going for it that enabled me to recover the company, but by far the most important was that we recognized we were in a spin very early, and we had enough cash remaining (and therefore sufficient time) to execute a recovery plan.
All spins start with a stall — a reduction in lift when either the aircraft is flying too slowly or the nose is pointed too high. In Kolide’s case, we were doing both.
First, we raised too much money too fast. In order to justify the post-money valuation that came with the raise, we set unattainable goals. To make matters worse, we lacked the confidence in our product and strategy, so we developed our solution with hesitancy, underspending in critical areas. As a result, we were flying too steep and too slow. We stalled.
If a stall isn’t corrected promptly, a spin can develop. Flat spins are one of the worst. Once the flat spin starts, there are a number of techniques experienced pilots should perform to recover the aircraft. Nearly all of these techniques require a critical resource, altitude — or, put another way, time.
Just like amateur pilots, startup CEOs don’t receive spin recovery training. When Kolide was spinning out of control, the vast majority of the advice I received was to cut our losses and sell the company or return the money to the investors.
At the time, I didn’t find any promising examples of companies with these same problems successfully recovering; I found only smoldering wreckage. By February 2019, my co-founders departed.
Despite this tell-tale sign of imminent demise, I was ultimately able to recover and put us on track for a great fundraise. Here’s how I recreated the engineering process.
Buying time
Kolide had a lot going for it that enabled me to recover the company, but by far the most important was that we recognized we were in a spin very early, and we had enough cash remaining (and therefore sufficient time) to execute a recovery plan. Even waiting just a few more months would have likely changed the outcome.
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4 strategies for building a digital health unicorn
It’s an entrepreneur’s market in digital health today, with startups raising record-breaking funding at soaring valuations and debuting on public markets to eager investors.
According to CB Insights, as of March 3, 2021, there are 51 healthcare unicorns — “startups” — worth $1 billion or more around the world. Global venture capital funding, including private equity and corporate VC, into digital health was the highest ever in the first quarter 2021 at $7.2 billion, according to Mercom Capital Group.
The massive influx of capital to healthcare should not be surprising; the pandemic has made it starkly clear that digital health is the future of healthcare. To that end, we should anticipate additional healthcare exits worth more than $1 billion in the near term. Which again, is great for entrepreneurs — as long as they understand how hard it is to build a unicorn in healthcare. Today, becoming a unicorn requires founders who are long on vision and operational experience.
Today, becoming a unicorn requires founders who are long on vision and operational experience.
Company founders most often turn to veteran investors for help with grand-slam strategies to create the next healthcare unicorn. That’s why many of them seek counsel from the Merck Global Health Innovation Fund: Because we have the experience, resources, successful track record and networks to build real scale in digital health.
During the pandemic, lots of investors jumped in to invest in digital health for the first time. But we’ve been investing for more than a decade. Two of our portfolio companies, Preventice Solutions and Livongo, exited last year as unicorns, rounding out the $6.2 billion in digital health market value MGHIF has exited over the last two years. And we are expecting two more unicorn exits in 2021. But we’re not stopping there; we’ll be investing our $500 million fund in drone-supported supply chain technologies, telehealth, AI, digital pathology, remote clinical trials and Internet of Medical Things (IoMT).
Given our success, here are four instrumental strategies to building a unicorn in digital health that we know work.
Raise the “right amount” of capital to build the right company
We often ask entrepreneurs: Would you rather own 20% of a $50 million company or 5% of a $1 billion company? To most, the answer is obvious. In our experience, too many entrepreneurs worry about dilution and never raise the right amount of capital.
It’s well known that companies with rapidly growing revenues are valued at a premium — but it’s important to remember that this is hard to do in healthcare. Getting to scale takes time because healthcare is so complicated and involves so many stakeholders.
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How one founder made the most of Y Combinator in a pandemic year
This week, we welcome guest Hana Mohan to our podcast Found. Hana is the co-founder and CEO of MagicBell, a new startup she created with Josue Montano that recently graduated from Y Combinator’s Winter 2021 cohort. MagicBell is a full-featured plug-and-play notifications inbox aimed at developers who want to build one into their own product, but don’t want to have to build one from scratch.
Hana’s experience as an entrepreneur spans multiple companies, including her last one, which she grew to significant success in terms of annual revenue. She’s also a proud transgender woman, who underwent her transition mid-way through her existing history as a founder and entrepreneur. Hana talks to us about the challenges she faced taking on her transition in an industry where the focus is often exclusively on how hard you’re hustling and what you’re building next, and about her origin story as a founder coming from an environment where there weren’t necessarily many examples with similar life experience to look to for inspiration.
During our chat, Hana also shared lots of insight into YC, and what it provides founders, as well as perspective on what it was like going through the program during a global pandemic in a remote context. Finally, she offers some great context on finding your first investors and customers as a distributed team.
We loved talking to Hana, and we hope you love the episode. You can subscribe to Found in Apple Podcasts, on Spotify, on Google Podcasts or in your podcast app of choice. Definitely leave us a review and let us know what you think, or send us direct feedback either on Twitter or via email. Come back next week for yet another great conversation with a founder all about their own one-of-a-kind startup journey.
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Sorbet raises $6M seed led by Viola Ventures to tackle the thorny financials of paid time off
A U.S./Israeli startup, Sorbet — which is tackling what companies do with the financial risks as employees accrue paid time off (PTO) — has raised $6 million in a seed funding round led by Viola Ventures, with participation by Global Founders Capital and Meron Capital.
The economics of paid time off is relatively hidden in the business world, but essentially, Sorbet takes on the burden of this PTO from employers and then allows employees to spend it. This gives the employers far more control over the whole process and the ability to forecast its impact on the business.
Sorbet says that in the U.S., employees use only 72% of PTO balances, even though it’s the most sought-after benefit. But this, effectively, comes out at 768 million unused days off a year, worth around $224 billion. This creates a difficult problem for CFOs and accountants because its creates balance sheet liabilities on the company’s books, says Sorbet. If the employee doesn’t use all of their PTO, the employer can end up owing them a lot of money, which creates a cash flow liability on the company’s books. So Sorbet buys out these PTO liabilities from employees, then loads the cash value of the PTO on prepaid credit cards for the employees.
Speaking to me on a call, CEO and co-founder Veetahl Eilat-Raichel, said: “We researched this whole idea of paid time off and found this huge, massive market failure and inefficiency around the way that PTO is constructed. It’s kind of one of those things where, on the face of it, there’s this boring bureaucratic payroll item that turns into a boring balance sheet item. But under it is a $224 billion problem for U.S. businesses… If you think about it, employers are borrowing money from their employees at the worst terms possible and employees aren’t benefitting either. So everyone’s hurting here.”
She said: “Sorbet assumes the liability on ourselves and so then we can allow the company to control their cash flow and decide when they want to pay us back. They gain a lot of financial value because we are able to be very, very attractive on our funding. So it saves costs, it provides them with complete control of their cash flow and it allows them to give out amazing financial benefits to employees at a time where we can all use some extra cash right now.”
The platform Sorbet has built will, it says, sync with calendars, HR and payroll systems, identify habits and then proactively suggest personalized, pre-approved 3-6 hour “Micro Breaks”, 1-4 day “Micro Vacations” and +1 week Vacations. This, says the startup, increases PTO used by as much as 15%.
Employers can constantly renegotiate the terms of the loan with Sorbet, thus matching future cash flow, insulating themselves against salary raises (wage inflation), and take advantage of other benefits.
The co-founders are Eilat-Raichel, who previously worked at L’Oréal, Lockheed Martin and a fintech entrepreneur; Eliaz Shapira, co-founder and CPO; and Rami Kasterstein, co-founder and board member.
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Learn how to create an effective earned media strategy with Rebecca Reeve Henderson at TC Early Stage 2021
TechCrunch’s Early Stage 2021 is back for part two of our bootcamp-for-entrepreneurs event, with a focus on marketing and fundraising. Building on the first half of the event in April, this two-day virtual sprint will take place July 8 & 9, and we’re thrilled to welcome Rebecca Reeve Henderson as one of our all-star slate of experts. Rebecca will be joining us to share insight on how to build an effective earned media strategy for your startup, building on her deep expertise developing effective communications programs for some of the top business software companies in the world.
Earned media, aka the kind of exposure you get from a TechCrunch article, is a key element of any startup’s marketing strategy. It’s something that is best used as a complementary component to paid marketing and owned channel promotional efforts, but it’s also one of the trickiest things to get right, especially for first-time founders. Rebecca has worked with companies ranging from Slack, to Shopify, to Zapier, to Canva and many more, helping craft effective earned media strategies in one of the most difficult areas of all: B2B SaaS.
Image Credits: Rsquared Communications
Rebecca is also a founder herself, having built her communications company Rsquared from the ground up into an international business spanning the U.S. and Canada. Rsquared’s clients included startups at all stages of growth, from their very beginnings through to successful exits, including public market debuts, so she’s run effective communications campaigns at every point on the growth spectrum. Then in 2019, Rsquared had its own exit, with an acquisition by global communications firm Archetype.
We’ll hear tips from Rebecca on how earned media contributes to an effective overall communications strategy, and how you go about earning that media — including how to pitch media, and how to build successful long-term relationships with key reporters and publications in your industry.
Tickets for TC Early Stage: Marketing & Fundraising are available until this Friday at the early bird rate which gives you an instant $100 savings! Secure your seat before this weekend!
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Founders who don’t properly vet VCs set up both parties for failure
There’s a disconnect between reality and the added value investors are promising entrepreneurs. Three in five founders who were promised added value by their VCs felt duped by their negative experience.
While this feels like a letdown by investors, in reality, it shows fault on both sides. Due diligence isn’t a one-way street, and founders must do their homework to make sure they’re not jumping into deals with VCs who are only paying lip service to their value-add.
Looking into an investor’s past, reputation and connections isn’t about finding the perfect VC, it’s about knowing what shaking certain hands will entail — and either being ready for it or walking away.
Entrepreneurs are increasingly demanding more than a blank check: They want mentorship, product understanding and emotional support, as well as industry connections and expertise. If VCs can’t bring that value, founders now have plenty of other funding routes to choose from, like crowdfunding, angel syndicates, tokenization and SPACs.
To stay competitive, VCs have to at least advertise that they have more than deep pockets. But what if it stops there? Founders have to know exactly what they’re looking for in a VC, which means looking past the front page and vetting their investors.
The ideal investor for modern startups is an operator VC — someone who was a founder or operator at a company before becoming an investor. But even then, ticking boxes isn’t enough to ensure the investor won’t come with their own challenges, like being too hands-on or less strategically minded.
Looking into an investor’s past, reputation and connections isn’t about finding the perfect VC, it’s about knowing what shaking certain hands will entail — and either being ready for it or walking away. There is no single solution to this issue, but here are my recommendations to founders seeking a successful investor relationship in 2021.
Have a guiding framework
No founder-investor relationship can survive misalignment. Because you share responsibility on so many processes, both parties have to be on the same page. So before you even start fundraising, nail down the expectations you need your future investor to meet. What do you need the most? What does your dream investor look like?
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To sell or not to sell: Lessons from a bootstrapped CEO
The clock begins ticking on a startup the day the doors open. Regardless of a young company’s struggles or success, sooner or later the question of when, how or whether to sell the enterprise presents itself. It’s possibly the biggest question an entrepreneur will face.
For founders who self-funded (bootstrapped) their startup, a boardroom full of additional factors come into play. Some are the same as for investor-funded firms, but many are unique.
Put happiness at the center of the decision, and let your intuition — the instincts that made you the person you are today — be your guide.
After 18 years of bootstrapping a BI software firm into a business that now serves 28,000 companies and three million users in 75 countries, here’s what I’ve learned about myself, my company, about entrepreneurship and about when to grab for that brass ring.
Profitable or bust
Starting a software company 7,900 miles southwest of Silicon Valley requires some forethought and not a small amount of crazy. When we opened, it didn’t occur to us that one could have an idea and then go knock on someone’s door and ask for money.
Bootstrapping forced us to be a bit more creative about how we would go about building our company. In the early days, it was a distraction to growth, because we were doing other revenue-generating activities like consulting, development work, whatever we could find to keep ourselves afloat while we built Yellowfin. It meant we couldn’t be 100% focused on our idea.
However, it also meant we had to generate income from our new company from Day One — something funded companies don’t have to do. We never got into the mindset that it was okay to burn lots of cash and then cross our fingers and hope that it worked.
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Announcing our TC Sessions: SaaS virtual event happening October 27
Software-as-a-service (SaaS) is now the default business model for most B2B and B2C software startups. And while it’s been around for a while now, its momentum keeps accelerating and the ecosystem continues to expand as technologists and marketers are getting more sophisticated about how to build and sell SaaS products. For all of them, we’re pleased to announced TechCrunch Sessions: SaaS 2021, a one-day virtual event that will examine the state of SaaS to help startup founders, developers and investors understand the state of play and what’s next.
The single-day event will take place 100% virtually on October 27 and will feature actionable advice, Q&A with some of SaaS’s biggest names and plenty of networking opportunities. Importantly, $75 Early Bird passes are now on sale. Book your passes today to save $100 before prices go up.
We’re not quite ready to disclose our agenda yet, but you can expect a mix of superstars from across the industry, ranging from some of the largest tech companies to up-and-coming startups that are pushing the limits of SaaS.
The plan is to look at a broad spectrum of what’s happening with B2B startups and give you actionable insights into how to build and/or improve your own product. If you’re just getting started, we want you to come away with new ideas for how to start your company, and if you’re already on your way, then our sessions on scaling both your technology and marketing organization will help you to get to that $100 million annual run rate faster.
In addition to other founders, you’ll also hear from enterprise leaders who decide what to buy — and the mistakes they see startups make when they try to sell to them.
But SaaS isn’t only about managing growth — though ideally, that’s a problem founders will face sooner or later. Some of the other specific topics we will look at are how to keep your services safe in an ever-growing threat environment, how to use open source to your advantage and how to smartly raise funding for your company.
We will also highlight how B2B and B2C companies can handle the glut of data they now produce and use it to build machine learning models in the process. We’ll talk about how SaaS startups can both do so themselves and help others in the process. There’s nary a startup that doesn’t want to use some form of AI these days, after all.
And because this is 2021, chances are we’ll also talk about building remote companies and the lessons SaaS startups can learn from the last year of working through the pandemic.
Don’t miss out. Book your $75 Early Bird pass today and save $100.
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Startups book an expo booth at TC Sessions: Mobility 2021 to double down on connection and exposure
When it comes to fast-moving technology, mobility zooms ahead of the pack — both literally and figuratively. Early-stage startup founders and investors need to keep their fingers on the sector’s very rapid pulse and the best place to do that is, you guessed it, TC Sessions: Mobility 2021 on June 9.
If you’re eager to introduce your early-stage startup to the top leaders, investors, experts and policy makers across the mobility tech community, don’t just attend TC Sessions: Mobility — exhibit there. Double down on essential exposure and increase your opportunities.
Budget-friendly tip: The early-bird price remains active until May 5 at 11:59 pm (PST). Buy your Startup Exhibitor Package before the deadline hits and save 35 percent.
Talk about a rapt audience. One big reason people attend the show is to see and meet exciting, innovative new startups. A Startup Exhibitor Package lets you showcase your tech, build your network and expand your opportunities for growth and success. Here’s what your package includes (Note: They’re available only to pre-Series A, early-stage startups).
- Virtual booth space: Display your pitch deck, host a video display and demo your products.
- Lead generation: Track booth visitors for easy post-show follow-up.
- Event passes: The package price includes four passes to TC Sessions: Mobility. Bring your team and increase your networking opportunities.
- Full event access: You can tune in to all presentations on every stage.
- Video on-demand: No FOMO for you. You’ll have VOD access to all presentations after the show ends.
- Breakout sessions: Don’t miss these presentations, each with a special focus.
- Networking: Whether you connect on the fly using the virtual platform’s chat feature or find specific people and schedule meetings using CrunchMatch, our AI-powered networking platform, you’ll make connections to drive your mobile business forward.
Keeping with the networking theme, this is how Karin Maake, senior director of communications at FlashParking, described her experience.
“TC Sessions: Mobility isn’t just an educational opportunity, it’s a real networking opportunity. Everyone was passionate and open to creating pilot programs or other partnerships. That was the most exciting part. And now — thanks to a conference connection — we’re talking with Goodyear’s Innovation Lab.”
Don’t miss your chance to sashay your superior stuff in front of the mobility industry’s leading mover, shakers and makers. Buy a Startup Exhibitor Package now, save 35 percent and get ready for TC Sessions Mobility 2021.
Is your company interested in sponsoring or exhibiting at TC Sessions: Mobility 2021? Contact our sponsorship sales team by filling out this form.
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Citadel ID raises $3.5M for API-delivered income and employment verification
This morning Citadel ID announced a combined $3.5 million raise for its income and employment verification service. The startup provides an API to customer companies, allowing them to rapidly verify details of consumer employment.
The capital came from a blend of venture firms and angels. On the firm side, Abstract and Soma VC were in there, along with ChapterOne. Brianne Kimmel put capital in as well, according to the startup. And denizens with work histories at companies like Zynga (Mark Pincus), Stripe (Lachy Groom), Carta (Henry Ward) and others also put cash into the fundraise. (The company reached out to add that Fathom Capital also put a good amount in the round.)
Citadel was founded back in June of 2020, before raising capital, snagging its first customer and shipping its product all inside of the same year.
The idea for Citadel ID came when co-founder Kirill Klokov worked at Carta, the cap-table-as-a-service startup that recently built an exchange for the trading of private stock. Klokov discovered while working on the tech side of the company how hard it was to verify certain data, like employment and income and identity.
As Carta deals with money, stock and the collection and distribution of both, you can imagine why having a quick way to verify who worked where, and since when, mattered to the company. But Klokov came to realize that there wasn’t a good solution in the market for what Carta needed, sans building integrations to a host of payroll managers by hand and dealing with lots of data with varying taxonomies. That or using an in-the-market product, like Equifax’s The Work Number, which the founder described as expensive and offering relatively low coverage.
To fill the market void Klokov helped found Citadel ID, quickly building integrations into payroll managers where there were hooks for code, and working around older login systems when needed. Citadel ID’s service allows regular folks to provide access to their employment data to others, allowing for the verification of their income (a rental group, perhaps), or employment (Carta, perhaps) quickly.
Per the startup the market demand for such verifications is in the hundreds of millions every year in the United States. So, Citadel should have plenty of market space to grow into. Citadel ID has around 20 customers today, it told TechCrunch, and charges on a per verification basis.
Finally, while Citadel also offers data via its website and not merely through its API, the startup still fits inside the growing number of startups we’ve seen in recent quarters foregoing traditional SaaS, and instead offering their products via a developer hook (sometimes referred to as a “headless” approach). API-delivered startups are not new, after all Twilio went public years ago. But their model of product delivery feels like it’s gaining momentum over managed software offerings.
Let’s see how quickly Citadel ID can scale before it raises its Series A.
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