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Roelof Botha shares what Sequoia’s Black Swan memo got wrong
In March, famed investment firm Sequoia Capital published the Black Swan Memo, warning founders about the potential business consequences of the coronavirus, which had not yet been labeled a pandemic.
“It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing,” the memo read.
Six months later, Sequoia’s Roelof Botha is “surprised” at the state of venture capital and startups in the country, which are largely benefitting from — not struggling with — from COVID-19 tailwinds.
VCs are pouring money at a rapid clip into edtech, SaaS, low-code and no code, as well as telemedicine. In some cases, investors say venture funding has been hotter than ever ahead of the U.S. elections, beating not just March 2020, but 2019 records overall.
Sequoia, it seems, is happy to be wrong. This week, Sequoia Capital will have backed three of the 12 companies going public: Sumo Logic, Unity, and Snowflake. Snowflake is expected to go out at $30 billion valuation, which some say will be the largest U.S. software company to ever go public. Beyond the firm, numbers of unicorns are gearing up, or teasing, to go public in the coming weeks.
“I’m proud of the fact that we saw a few things and anticipated a few things,” he said during TechCrunch Disrupt. “But we also got many things wrong.”
Botha pointed to a few factors that saved startupland from freezing up. First, he said the U.S. government’s stimulus package helped make sure that there was not a “complete economic meltdown.”
“I didn’t quite expect that scale reaction,” Botha said. He’s referring to the $2 trillion CARES Act passed by Congress and signed by President Trump, which included PPP loans designed to provide a direct incentive for small businesses to keep their workers on the payroll. Tech recipients included Bolt Mobility, Getaround, Luminar, Stackin, TuSimple and Velodyne.
Botha addressed how tech companies have helped sustain businesses and operations amid the pandemic, which has trickled down to new customer growth and revenue.
Zoom, a Sequoia portfolio company, might be one of the best examples of how a tech company was poised to skyrocket during the pandemic. According to Botha, the firm, which still owns shares in the company, wishes it had held onto more of its position longer. Sequoia invested in Zoom when it was valued at $1 billion. Today, it is worth more than $100 billion, graduating from an enterprise videoconferencing service to a household consumer product.
To be fair, some of Sequoia’s warning signs proved true: Layoffs inundated Silicon Valley; companies shuttered citing a drop in revenue; and the market remains volatile.
“We also have to realize there’s a lot of pain and there are many mainstream businesses and local services and restaurants and coffee shops that often suffer economically,” he said. “I don’t want to be overly sanguine just because technology stocks have had a good run. As a country, we need to brace ourselves for helping everybody.”
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3 views on the future of geographic-focused funds
For many investors, the coronavirus has effectively taken geography out of the equation when it comes to vetting new opportunities.
While this dynamic opens up startups to more investment opportunities, venture capital firms that focus on a specific region are in a thornier spot. The competitive advantage they once had when raising — the notion that they’re focused on an area no one else is — is potentially threatened.
Natasha Mascarenhas, Danny Crichton and Alex Wilhelm of the TechCrunch Equity crew discussed the future of geographic-focused funds given the uptick of remote investing:
- Natasha: Early-stage regional funds can win if they remain focused
- Alex: Geo-focused venture funds will be weakened, but won’t die
- Danny: Geo-focused venture funds are dead (and should never have existed)
Natasha: Early-stage regional funds can win if they remain focused
Since 2014, Steve Case and his team have made an annual bus trip across the country to meet startups in emerging startup hubs. Five days, five cities and at least $500,000 of investment dollars given to startups. Case would even offer to fly out promising and hard-to-reach startups to have them join the trip.
The Rise of the Rest fund, with more than $300 million in assets under management, has invested in over 130 startups across 70 cities, including Austin, Chicago, Detroit, Los Angeles, New Orleans and Washington, D.C.
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Meet the anti-antitrust startup club
When Congress called in tech CEOs to testify a few weeks ago, it felt like a defining moment. Hundreds of startups have become unicorns, with the largest worth more than $1 trillion (or perhaps $2 trillion). Indeed, modern tech companies have become so entrenched, Facebook is the only one of the Big Five American tech shops worth less than 13 figures.
The titanic valuations of many companies are predicated on current performance, cash on hand and lofty expectations for future growth. The pandemic has done little to stem Big Tech’s forward march and many startups have seen growth rates accelerate as other sectors rushed to support a suddenly remote workforce.
But inside tech’s current moment in the sun is a concern that Congress worked to highlight: Are these firms behaving anti-competitively?
By now you’ve heard the arguments concerning why Big Tech may be too big, but there’s a neat second story that we, the Equity crew, have been chatting about: Some startups are racing into the big kill zone.
They have to be a bit foolhardy to take on Google Gmail and Search, Amazon’s e-commerce platform or Apple’s App Store. Yet, there are startups targeting all of these categories and more, some flush with VC funding from investors who are eager to take a swing at tech’s biggest players
If the little companies manage to carve material market share for themselves, arguments that Big Tech was just too big to kill — let alone fail — will dissolve. But today, their incumbency is a reality and these startups are merely bold.
Still, when we look at the work being done, there are enough companies staring down the most valuable companies in American history (on an unadjusted basis) that we had to shout them out. Say hello to the “anti-antitrust club.”
Hey and Superhuman are coming after Gmail
Gmail has been the undisputed leader in consumer email for years (if not enterprise email, where Microsoft has massive inroads due to Exchange and Outlook). Startups have contested that market, including Mailbox, which sold to Dropbox for about $100 million back in 2013, but whenever a new feature came along that might entice users, Gmail managed to suck it up into its app.
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Zoom UX teardown: 5 fails and how to fix them
Valued at over $60 billion and used by millions each day for work and staying in touch with friends and family, the COVID-19 pandemic has helped make Zoom one of the most popular and relevant enterprise applications.
On one level, its surge to the top can be summed up in three words: “It just works.” However, that doesn’t mean Zoom’s user experience is perfect — in fact, far from it.
With the help of Built for Mars founder and UX expert Peter Ramsey, we dive deeper into the user experience of Zoom on Mac, highlighting five UX fails and how to fix them. More broadly, we discuss how to design for “empty states,” why asking “copy to clipboard” requests are problematic and other issues.
Always point to the next action
This is an incredibly simple rule, yet you’d be surprised how often software and websites leave users scratching their heads trying to figure what they’re expected to do next. Clear signposting and contextual user prompts are key.
The fail: In Zoom, as soon as you create a meeting, you’re sat in an empty meeting room on your own. This sucks, because obviously you want to invite people in. Otherwise, why are you using Zoom? Another problem here is that the next action is hidden in a busy menu with other actions you probably never or rarely use.
The fix: Once you’ve created a meeting (not joined, but created), Zoom should prompt and signpost you how to add people. Sure, have a skip option. But it needs some way of saying “Okay, do this next.”
Steve O’Hear: Not pointing to the next action seems to be quite a common fail, why do you think this is? If I had to guess, product developers become too close to a product and develop a mindset that assumes too much prior knowledge and where the obvious blurs with the nonobvious?
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Labster lands new cash to bring its virtual reality science lab software to Asia
You could Zoom call into your science class, or you could conduct a lab experiment in virtual reality. During the coronavirus pandemic, the latter has never felt more full of potential.
The global need for learning solutions beyond Zoom is precisely why Labster, a Copenhagen-based startup that helps individuals engage in STEM lab scenarios using virtual reality, is growing rapidly. Since March, the usage of Labster’s VR product has increased 15X.
On the heels of this unprecedented momentum, Labster joins a chorus of edtech startups raising right now, and announced it has brought on $9 million in equity venture funding. The round was led by GGV, with participation from existing investors Owl Ventures, Balderton and Northzone.
“COVID-19 has been a great awareness builder of Labster, opening teachers’ eyes to the good sides of online learning as opposed to Zoom-only learning, which is largely failing,” CEO and co-founder Michael Jensen told TechCrunch.
Labster sells its e-learning solution to support and enhance in-person courses. Based on the subscription an institution chooses, participants can get differing degrees of access to a virtual laboratory. Imagine a range of experiments, from understanding bacterial growth and isolation to exploring the biodiversity of an exoplanet. Along with each simulation, Labster offers 3D animations for certain concepts, re-plays of simulations, quiz questions and a virtual learning assistant.
Photo credit: Labster.
While the majority of Labster’s customers are private institutions, the company landed a deal with all of California’s community colleges during the pandemic. The partnership added 2.1 million students to Labster’s customer base, which Jensen said has been bolstered by a broader growth in annual license deals and partnerships.
With GGV on board, Labster is looking to strengthen position in Asia. Breaking into new markets often requires a strategic investor with eyes on the ground on how that market works, thinks and, most importantly, learns. Asian markets are specifically lucrative for edtech companies because consumer spend is higher compared to the North American market.
Jenny Lee, a Shanghai-based partner with GGV, will take a board seat at Labster.
Lee has expressed interest in how automation, virtual and AI-based teachers can help bridge the gap between K-12 markets and lack of good-quality teachers everywhere.
Jensen said that the capital will also be used to bolster the company’s mobile offering, since Asian markets have high mobile usage compared to North American and European markets.
The round is significantly smaller than Labster’s previous $21 million Series B, closed in April of 2019. And it contrasts sharply to the momentum that has benefited edtech companies like MasterClass, Coursera and, reportedly, Udemy into raising nine-figure rounds.
So naturally, I asked Jensen: why the conservative raise?
Jensen says that the $9 million check was a strategic growth check to bring on GGV (all existing investors in Labster also participated in the round). Since being founded in 2012, the company has been relatively conservative in raising cash. To date, inclusive of this round, Labster has raised $40 million in venture capital.
He argues the new money, thus, is offensive capital instead of defensive capital. It’s a strategic check to open a global door.
This isn’t the first time an edtech company has raised a smaller round than expected during the coronavirus pandemic. In April, edtech unicorn Duolingo raised a short $10 million to expand into Asia and bring on General Atlantic as an investor to expand into global markets.
Duolingo, however, is cash-flow positive. Jensen did not comment on if Labster has turned a profit, but adds that it was a “significant up round” that brought the company’s valuation to above $100 million.
“Our primary objectives continue to be rapid growth and global impact, not profits,” he told TechCrunch.
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Seed funding tips and tricks from Uncork Capital founder Jeff Clavier
Angel funding, seed investing and generally focusing on earlier stage investing is a huge business in the world of startups these days — it helps investors get in early to the most promising companies, and (because of the smaller size of the checks) allows for even the less prolific to spread their bets.
There was a time when it was immensely difficult for a founder to get a first check, not least because there were fewer people writing them. However, Jeff Clavier was an exception to that rule.
As the founder of Uncork Capital (formerly known as SoftTech VC), he has been in the business of angel and seed investing for 16 years, popularizing the opportunity and highlighting the need for more support at this stage — well before it was cool. You could say he was early to early stage.
Clavier said that at the end of 2019, it was estimated that there were more than 1,000 firms focusing on seed investing in the market, but by the end of this year, there will be about 2,000. “Don’t ask me whether it makes any sense because when I started 16 years ago, I didn’t think would be a big deal,” he said. “But certainly that creates a bit of a conundrum for founders to try and understand.”
As of now, Clavier has made nearly 230 investments and counting.
TechCrunch Early Stage, our virtual conference highlighting that stage of startup life, was the perfect venue to hear from him on all things seed investing and building startups today. Below are some highlights, a link to the video and a pitch deck he put together for the chat. Questions were edited for space and clarity.
Not all VCs are created equal (so know who you are pitching)
First thing to understand is that not all VCs are created equal. There are a bunch of different firms, tons of them out there, and you as a founder need to understand what are the specifics of your pitch opportunity, how to match with the right firm, and to figure out what stage of “early” you happen to be.
Startups can be super early, or mid-stage, which is typically what we refer to as pre-seed. Then there’s the seed stage, where you have developed a product, with a demo. And there is post-seed, where you have product but are not quite ready to raise a Series A. So who are the firms that can actually be the right fit for me at those different stages? The qualification part of the targeting is really important. Especially in a COVID environment when you can’t spend the same kind of time with each other.
It’s useful for founders to try and understand investors better, maybe asking a couple of questions like, “When is the last time you made a brand new investment at seed stage?” And “How has your investment process changed as a result of COVID?”
For investors, you want to understand how you’re going to evolve your process to cope with the fact that you don’t spend time with those founders face-to-face. Some firms are still struggling with that.
At Uncork, we’re now past the point of portfolio triage that we had in the first few weeks of of the pandemic. What was surprising to me was the speed and velocity at which some deals actually.
Find an investment lead
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Can learning pods scale, or are they widening edtech’s digital divide?
Lucia, a six-year old, hides from Zoom calls and has rejected every edtech tool from Seesaw to Khan Academy. She will spend all of first grade in quarantine.
Her mother, Claire Díaz-Ortiz, says her daughter fits squarely into the “distance learning death zone.” The idea is that younger children are too young to do distance learning solo, even with tools meant to make it easier. Here’s one kindergartner’s remote fall class schedule:
Just got this schedule for my kindergartner’s “distance learning” in the fall and would just like to say LOL FOREVER TIMES A THOUSAND pic.twitter.com/CXXzdbwUWa
— Aubrey Hirsch (@aubreyhirsch) July 31, 2020
“And unfortunately for my daughter, I’m a VC, not a Zoom mom,” Díaz-Ortiz said.
The impact of the distance learning death zone, as Díaz-Ortiz calls it, is one of the reasons why many wealthy families with young children are considering a new solution: learning pods.
Learning pods are small clusters of children within the same age range who are paired with a private instructor. Depending on a parent’s preferences, learning pods could be an in-home or virtual experience and be either a full-time school replacement or supplemental learning.
In recent weeks, the concept has taken off all across the country, from suburbs to cities. There’s a Facebook group for Boulder, Colorado school districts; organizers launched Pandemic Pod San Diego to “connect families looking for in-home, teacher-led learning groups.” Some households are offering teachers a retainer. Among working mom groupchats, pods are taking off as a sanity lifesaver, especially as childcare responsibilities fall disproportionately on women.
Looking for the best 4-6th grade teacher in Bay Area who wants a 1-year contract, that will beat whatever they are getting paid, to teach 2-7 students in my back yard#microschool
If you know this teacher, refer them & we hire them, I will give you a $2k UberEats gift card
— jason@calacanis.com (@Jason) August 2, 2020
Startups are pivoting to keep up with the demand for private teachers. But because of high costs, only affluent families are able to form or join learning pods, which may limit the model’s ability to reach scale while extending the existing digital divide.
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Funding in an uncertain market: using venture debt to bridge the gap
Will Hutchins is a managing director at Espresso Capital, a leading provider of innovative growth financing and venture debt solutions.
While a handful of tech companies like Zoom and Shopify are enjoying massive gains as a result of COVID-19, that’s obviously not the case for most. Weaker demand, slower sales cycles, and customer insistence on pricing concessions and payment deferrals have conspired to cloud the outlook for many tech companies’ growth.
Compounding these challenges, a lot of tech companies are struggling to raise capital just when they need it most. The data so far suggests that investors, particularly those focused on earlier stage financings, are taking a more cautious approach to new deals and valuations while they wait to see how individual companies perform and which way the economy will go. With the outcome of their planned equity financings uncertain, some tech companies are revisiting their funding strategies and exploring alternative sources of capital to fuel their continued growth.
Forecasting growth in a pandemic: a difficult job just got harder
For certain businesses, COVID-19’s impact on revenue was immediate. For others, the effects of slower economic activity and tighter budgets surfaced more gradually with deals in the funnel before the pandemic closing in April and May. Either way, in the second half of 2020, technology CFOs face a common challenge: How do you accurately forecast sales when there’s very little consensus around key issues such as when business activity will return to pre-COVID levels and what the long-term effects of the crisis might be?
Unfortunately, navigating this uncertainty is just as daunting a challenge for investors. These days, equity investors’ assessment of a company’s growth potential, and the value they are willing to pay for that growth, aren’t just impacted by their view of the company itself. Equally important is their assumptions about when the economy will recover and what the new normal might look like. This uncertainty can lead to situations where companies and their potential investors have materially different views on valuation.
Longer funding cycles, more investor-friendly deals
While the full impact of COVID was felt too late to have a material impact on Q1 deal volumes, recently released data from Pitchbook and the NVCA suggest that 2020 will see a significant decrease in the number of companies funded, possibly by as much 30 percent compared to 2019 among early stage companies. And, while it often takes several months to see evidence of broad trends in investment terms, anecdotal evidence indicates investors are seeking to mitigate risk by demanding additional protective provisions.
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An unsurprising wave of video-focused startups is trying to make video calls better
As Zoom and Microsoft and Google hammer it out for video-chat hegemony, startups are developing apps and services that either add on or compete with the major players.
There hasn’t been enough activity — yet — to call it a boom, but there’s enough going on to warrant our attention. Call it a boomlet, if you will, of startups looking to ride the wave of demand that video-conferencing has seen during the COVID-19 pandemic.
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The big players are not sitting still. Zoom has spent lots of 2020 on platform security after a surge in popularity exposed some frayed ends. Google has been working to make Meet, its own video-chat service, better and easier to find. And Microsoft has been hammering Teams’s abilities into stronger form as it uses the same product to fend off both Slack and Zoom, which is a tall order.
Other giants are getting into the mix. Reliance Jio, the Indian telecom subsidiary of megacorp Reliance, recently launched JioMeet, which has turned heads for looking rather similar to Zoom. It also quickly raced to millions of downloads. (That Google just put billions into JioMeet’s parent is an odd twist in the video-chatting wars; Google has effectively helped fund a competitor in the country, it appears.)
TechCrunch’s parent company, Verizon, recently bought BlueJeans, giving the American telecom company its own video chatting service. (It’s also eyeing the Indian market.)
But that’s only part of the action. More recently we’ve seen interesting rounds for video-chat software startups Macro and Mmhmm. And we’ve seen money go into companies like Daily.co, which want to let any company bake video-chatting capabilities into their service. And Y Combinator-backed Sidekick has been in the press lately, after building a hardware solution in mind for today’s remote workers who need video comms.
An upstart boomlet, then, amid a war of the majors. But should we have expected anything less from the huge wave of demand that COVID-19 kicked off? Zoom was growing quickly before the pandemic. Now the public company and a host of rivals, big and small, all want a larger slice of an expanding pie.
Video-conferencing startups
The two most interesting recent venture rounds for video-conferencing startups are those belonging to Mmhmm and Macro.
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Emergence’s Jason Green thinks some of the tech backlash is justified, but the B2B opportunities still outweigh the challenges
Jason Green, co-founder and partner at Emergence, is one of the leading VCs investing in enterprise startups at the moment. But even with the focus on B2B, many of their companies have become household names — Zoom, Yammer, Box and Salesforce among them.
Now, we’re all living in a climate where everything has been turned upside down. Meetings are virtual, the future economy and collective health of the world are unknowns, and being an investor — or a founder — comes with completely new parameters and rules of engagement.
We sat down with Green for an enlightening hour to talk about the challenges of all that, plus making deals, running a business, and suddenly finding your quiet, B2B name being turned into a verb. It was an interesting conversation, worth a read for enterprise startups and investors, but — similar to how B2B can spill into consumer — equally insightful for many more.
Extra Crunch Live is our new virtual speaker series for Extra Crunch members. Folks can ask their own questions live during the chat, with guests that include Aileen Lee, Kirsten Green, Mark Cuban and many, many more. You can check out the schedule here.
Below, you’ll find a lightly edited transcript of our recent chat with Green.
How is sourcing impacted in the current climate?
Sourcing is not much different. We follow the same due diligence process, so when we make an investment, the whole team basically dives in and does due diligence. So we make manager references and customer calls and spend time with each of the management team having one-on-ones. In some ways, it was better. First of all, we could very easily do breakout rooms with each of the individual management team members and then come back. So there was this dynamism to the meeting that we hadn’t had before. We were able to basically record it and share it with folks that couldn’t participate. So all of us had all the information when we were making the decision together. That was pretty special, actually. So it took a little bit longer, it probably took about 50% longer than we would have done otherwise. But I think actually, now knowing what we’ve done, we could probably compress it back to our normal timeframe. So I think in a lot of ways, we’ve learned like a lot of folks that we can do things remotely that we probably didn’t think were possible before. Hopefully, we’ll see how the investment turns out, but we’re super excited about it.
Are you considering more startups outside the Valley, and how are they viewing their own place outside the Valley?
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