EC venture capital

Welcome to the late-stage discount market, where everything is on sale and few folks are buying • ZebethMedia

By zebethcontrolPosted on November 2, 2022Posted in cb insights, EC Newsletter, EC venture capital, startup valuations, Startups, The Exchange, Venture, venture capitalNo Comments

If you are raising money for an early-stage startup today, there’s reason to be hopeful when it comes to the price that you might be able to charge for shares in your company. The later stage your startup is, however, the worse your chances are to raise funds at a price that you like. New data from CB Insights indicates that, on a global basis, the farther along the alphabet a startup’s next funding round is, the more valuation pressure that transaction will be under from a price perspective. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. The data is surprising in how clear it is in trend terms, but not too surprising. Recall that mega-rounds, or venture capital deals worth $100 million or more, have fallen precipitously this year. While median deal size through the third quarter has been flat in the early- and mid-stage startup market, late-stage deals have gotten smaller this year. With that backdrop, falling late-stage valuations are hardly surprising. Venture investor and SaaS aficionado Jason Lemkin had this to say today: My summary of Venture Markets in Nov 2022: Series B and later even worse than looks in data: 85%+ of investing here has simply ceased[.] Lower volume implies less demand; less demand implies less competition around deal price; less competition means lower prices.

Unicorns face 5-1 odds as they wait for public markets to warm • ZebethMedia

By zebethcontrolPosted on November 1, 2022Posted in battery ventures, cloud, EC Cloud and Enterprise Infrastructure, EC Newsletter, EC venture capital, Enterprise, Startups, VentureNo Comments

Earlier today, The Exchange dug into changing investor sentiment regarding growth and profitability. A new report looking at cloud and software companies from Battery Ventures ran the math on how investors are rewarding faster growth from less unprofitable companies — dare we say, profitable companies? — with the data indicating that, at least for now, growth is no longer enough to maximize corporate value. For startups busy stacking new revenue with minimal burn, the situation is good news. For companies that raised while money was cheap — and sitting on huge valuations predicated on yesteryear’s valuations — the news that profitability is in vogue again is far from welcome. Many unicorns are likely now trapped between changing investor preferences and a general compression of the value of software companies. Why? Because many a unicorn was minted during the 2020-2021 era on the back of quick revenue growth more than anything else. And, as revenue multiples stretched to the sky during that time period, a great number of startups reached the $1 billion valuation threshold — or a multiple thereof — on the back of small, if quickly expanding, top line. If revenue multiples have come down, that’s bad news for unicorns. If revenue multiples have come down and growth is losing comparative luster to profits, high-burn unicorns that were once valued more for something else are doubly bound by changing market conditions. Even worse, Battery points out a few difficult facts about just how many unicorns might be able to go public in the coming years compared to how many unicorns there are in the market today. There’s a lining of good news in the data for truly standout startups. But for the bog-standard unicorn, there’s more than just storm clouds on the horizon. Why is the math bad? In the last 10 years, Battery counts 200 software companies that went public. In contrast, the venture firm counts more than 1,000 new unicorns minted over the same time frame. That’s a 5-1 ratio of IPOs to new billion-dollar companies.

Are investors really paying more for profits than growth today? • ZebethMedia

By zebethcontrolPosted on November 1, 2022Posted in battery ventures, cloud, EC Cloud and Enterprise Infrastructure, EC Newsletter, EC venture capital, Enterprise, Startups, The Exchange, VentureNo Comments

What’s better: growing quickly or making lots of money? The answer, in startup terms, is both. But because there is a natural tension between growth (which usually comes with incremental costs, often in advance of new revenues) and profitability (allowing revenue to further extend its coverage of operating costs), most startups lean more on the growth side of the equation. It’s not hard to understand why. Venture investors provide capital that often greatly exceeds a startup’s revenue base, allowing the company to hire and market aggressively — and build, we hasten to add — in hopes of far-larger future scale at the cost of near-term profitability. The tradeoff between growth and profitability is often detailed in the so-called Rule of 40. Indeed, the rubric that combines a growth metric (measured in year-over-year terms) and a profitability result (measured in percent-of-revenue terms) in hopes of the sum meeting or exceeding 40 has generated derivative metrics for companies of a particular age or segment. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. Naturally, the Rule of 40 is not something that applies to, say, pre-revenue startups hoping to raise a pre-seed round. It’s a metric that applies to startups that are generating revenues at a sufficient scale to make the numbers reasonable; no one cares if you can meet the Rule of 40 while tripling your revenue from $1 to $3 per year, but if you are expanding your revenues from $1 million to $3 million per year, the rule is likely something you’ll be measured against. Now that venture markets are in retreat and public markets have been revalued, there’s been some push for startups to change their posture, trading some growth now for smaller deficits. A flight to quality, some call it. We’d call it a rebalancing away from quicker growth and staggering losses toward merely rapid growth and less cash burn. Battery Ventures recently dropped a new report (the “State of the OpenCloud 2022”) that includes some fascinating data on the profit/growth conversation. It’s something that we’ve touched on repeatedly here at ZebethMedia as both venture investors and their public-market cognates have shaken up their valuation models.

It will take a ‘bulletproof’ startup to break the IPO logjam • ZebethMedia

By zebethcontrolPosted on October 31, 2022Posted in EC Newsletter, EC venture capital, IPOs, M&A, Startups, The Exchange, VentureNo Comments

That Intel managed to spin out Mobileye as a public company was good news of sorts for the technology exit market. But a single successful corporate spinout is not a sign that public-market tech debuts are back. Indeed, with news that Instacart is now pushing for a 2023 IPO, the upcoming calendar for tech exits (apart from M&A) is more than weak. It’s moribund. Perhaps that’s why the Twitter-Musk saga — an anti-IPO in that we’re seeing the social media company go private — is consuming so much oxygen: There’s not that much else going on when it comes to fascinating exits. Well, the UserTesting sale aside, I suppose. The Exchange explores startups, markets and money. Read it every morning on ZebethMedia+ or get The Exchange newsletter every Saturday. What we care about is understanding when IPOs may return, as they could provide another method by which late-stage startups can raise capital. Currently, there’s concern that some unicorns are uninvestable and will therefore die. More capital to the cohort of billion-dollar startups could alleviate some of those pressures, not to mention help confirm the new pricing chart for startup shares.

6 reasons why you shouldn’t join an accelerator • ZebethMedia

By zebethcontrolPosted on October 31, 2022Posted in accelerators, Column, EC Column, EC venture capital, startup accelerators, Startups, TechStars, VentureNo Comments

Saba Karim is director of the startup pipeline at Techstars. As the head of startup pipeline at Techstars, I’ve been getting on calls with founders, attending events, speaking on stages like ZebethMedia’s Disrupt and hosting countless Twitter Spaces. Each time, I’ve been telling founders why they should join an accelerator. Now, I am changing things up and going to lay out six reasons you shouldn’t join an accelerator. If you only need funding You’re better off going to VCs, angel investors, crowdfunding, applying for grants or seeking venture debt. Accelerators usually take more (equity), because they provide more than just money. They give you funding and fundraising opportunities, mentorship and networks, workshops and usually a place to work. If you don’t need any of that, then you don’t need an accelerator. Accelerators are great because they’re a forcing mechanism to reach your most desired outcome by the end of the program, but no one is going to drag you out of bed every morning. Keep in mind that funding will solve your money problems, but it won’t solve everything else. You’ll still need to figure out how to acquire customers, find the best talent, build an incredible product, assemble a great advisory board and get to product-market fit. Do you just need funding? Lucky you. For crowdfunding, you can’t go wrong with Republic or WeFunder. For venture debt options, check out SVB or Mercury, and OpenGrants for, well, grants. To do customer development Customer development, also known as customer discovery or idea validation, is the notion of validating your startup idea. You don’t need an accelerator to tell you to talk to your customers. You should be doing it anyway. Otherwise, why are you building the thing you want to build? Yes, many accelerators accept companies at the idea stage, but it’s usually on the premise that primary or secondary research has been conducted to show you’re building something people have said they would use and/or pay for.

3 founders discuss how to navigate the nuances of early-stage fundraising • ZebethMedia

By zebethcontrolPosted on October 30, 2022Posted in Alloy Automation, EC TechCrunch Disrupt 2022, EC venture capital, fiveable, fundraising, Parthean, Startups, TechCrunch Disrupt 2022, Venture, venture capitalNo Comments

Fundraising isn’t a monolithic event but rather a series of meetings and pleasantries, each with their own vibe and nuance. Yet many pieces of fundraising advice to founders paint the process with a broad brush. We heard from three founders at ZebethMedia Disrupt last week: Amanda DoAmaral, co-founder and CEO of Fiveable; Arman Hezarkhani, founder of Parthean; and Sarah Du, co-founder of Alloy Automation, each of whom has raised in the extreme highs and lows of last 18 months. They spoke about navigating the process, what worked (and what didn’t) and how to customize your pitch to navigate the many subtleties of fundraising. For DoAmaral, it was important to spend time researching which investors may actually back her company. She said she’s had investors take meetings with her due to a warm intro despite having no actual intention to invest. “My co-founder and I got in a car and drove down to Tennessee thinking we’re gonna get this check. And this guy didn’t even trust me to like, be an attendee at this event. They’re not writing the check,” DoAmaral recalled. “People are not going to take me seriously if they’re not going to see me as someone that is their equal at all.” Du added that performing due diligence on potential backers beforehand is helpful, not only to find out whether they might actually invest in the company, but also if they will be good to work with. This is especially true for founders raising at the early stages who are looking at a long relationship ahead.

Latinx founders see VC funding drop as investors retreat from underrepresented cohorts • ZebethMedia

By zebethcontrolPosted on October 28, 2022Posted in EC DEI, EC venture capital, Latinx, Startups, VentureNo Comments

The latest Crunchbase data shows that Latinx-founded companies in the United States raised $250 million out of the $39.85 billion allocated in venture funds in the U.S. this Q3 — or about 0.63%.1 The Q3 sum is a sharp decrease from the $2.3 billion the cohort raised in Q3 last year and a dramatic decline from the $1.3 billion raise in Q2 this year. In total, 1.5% of all venture dollars so far in 2022 have been allocated to Latinx-founded companies, a drop from 2.5% last year, according to the Crunchbase analysis. The numbers are not surprising. Minorities and women overall are seeing dramatic dips in venture funding this year. ZebethMedia previously reported that Black founders raised $187 million this Q3, which meant, given historical data trends, the amount allocated to Latinx-founded companies wouldn’t be too far from that sum. Meanwhile, PitchBook found that female-founded companies have raised 1.9% of all venture funds so far this year, which is, again, a drop from the 2.4% the group raised last year. ZebethMedia noted before that investors tend to pull back toward their old networks to fund the founders who are familiar to them amid economic downturns — and those people tend to be white men. The somewhat encouraging news is that funding for early-stage Latinx-founded companies is on pace to exceed 2021’s total; much of the decline that we see in the above numbers came from a decrease in late-stage financing. The reality remains that women and minorities are not faring well right now when it comes to raising VC, and promises of change have dissipated. Last year, Latinx-founded U.S. companies raised $8.5 billion. Through the end of Q3 2022, that number stands at $2.7 billion, meaning it won’t even come close to passing last year’s record-breaking sum.

How to raise funds when you aren’t in the Bay Area • ZebethMedia

By zebethcontrolPosted on October 27, 2022Posted in EC TechCrunch Disrupt 2022, EC venture capital, fundraising, remote work, Startups, TechCrunch Disrupt 2022, VentureNo Comments

Perhaps sitting perched somewhere in sunny Miami, Florida, is a founder wondering the best ways to fundraise for a company when situated outside a traditional tech hub like the Bay Area. They need not worry. Last week, Mike Asem from M25, Elizabeth Yin of Hustle Fund and Accel’s Rich Wong answered that question at ZebethMedia Disrupt. The consensus of the venture capitalists was that remote work accelerated the trend of VCs looking at emerging markets, founders and companies throughout the nation. That and social media — specifically Twitter — have made it easier to connect with people. To some, sliding into an investor’s DMs can be just as legitimate as diving into one’s network for a warm intro. “We noticed a couple of years ago, in looking at our own analytics, that most of our deals were coming through Twitter,” Yin said at Disrupt. “If I look at my portfolio, my companies who are active on Twitter actually do have an easier time raising money because investors feel like they know them.”

The UserTesting sale to private equity is bad news for unicorns • ZebethMedia

By zebethcontrolPosted on October 27, 2022Posted in EC venture capital, Startups, Sunstone Partners, thoma bravo, user testing, VentureNo Comments

News broke this morning that UserTesting, a former startup that went public last year, is selling to private equity (Thoma Bravo, Sunstone Partners) for $1.3 billion, or $7.50 per share in cash. The deal, expected to close in the first half of 2023, does include a “go-shop” period, in case a better deal crops up. Holders of UserTesting shares have some cause for joy. The customer insight platform is selling for what it describes as a “premium of approximately 94% over [its] closing stock price” yesterday. As a result, shares of UserTesting soared today as investors digested the news. UserTesting dropped earnings this morning in conjunction with the deal news, giving us a window into its health. We can cross those numbers with the final price that UserTesting will command in the sale to improve our understanding of the value of smaller technology companies — at least when compared to the giants of their industry. The lessons thereof are pretty simple and not great for yet-private unicorns. Looking at the deal, it’s clear that single-digit SaaS multiples are not merely real but durable. UserTesting is exiting at a nearly 100% premium for a fraction of the price at which it went public last year. Unless the company is a financial mess, that’s terrifying for unicorns that raised money last year.

3 VCs explain how founders can stand out when pitching • ZebethMedia

By zebethcontrolPosted on October 27, 2022Posted in EC TechCrunch Disrupt 2022, EC venture capital, fundraising tactics, Startups, TechCrunch Disrupt 2022, VentureNo Comments

Venture capitalists get flooded with startup pitches, which can make it difficult for founders, especially those building in crowded categories, to stand out. And while every investor is looking for something different, there are ways founders can improve their chances of getting noticed. Speaking at last weeks’ Disrupt 2022 conference, investors Annie Case, a partner at Kleiner Perkins; Sheel Mohnot, co-founder of Better Tomorrow Ventures; and Jomayra Herrera, partner at Reach Capital, said that the founders who manage to capture their attention are the ones who come to the pitch process prepared. Of course, this could mean a lot of things. Case said that it’s incredibly helpful when founders help investors prepare for their pitch meeting. When founders send over information before the pitch, or offer a preview of the deck, she can to go beyond surface-level questions right away, which leaves more time for in-depth questions, she said. That allows her to walk away from the meeting with more information, which could help a founder get a check down the line. If you’re starting a company, and there are three or four other companies that people would look at, I expect you to know intimate details about them. Sheel Mohnot, co-founder, Better Tomorrow Ventures For Herrera, just sending over a partial or basic pitch deck, or a demo, if relevant, can be wildly helpful. “I generally recommend having almost like a teaser version of the deck with enough data and information to give us a sense of where you are in terms of the journey of your company,” Herrera said. “Just enough information so that we come prepared to the meeting.” The three investors agreed that founders should come to the pitch meeting ready to answer questions about the team, progress and TAM. Mohnot said it’s a red flag when companies don’t seem to have thought through these potential questions, especially when it comes to competition. “If you’re starting a company, and there are three or four other companies that people would look at [in the space], I expect you to know intimate details about those companies,” Mohnot said.