ImaginativePRO Blog

VC-BACKED STARTUP LIFE EXPECTANCY EXPECTD TO FALL DRAMATICALLY IN 2023 AND 2024

Only one out of every 10 startups survives, said the old adage. But that was far from the case during the boom years of the last cycle when company failure rate was low—very low.

Miguel Luiña, managing director of fund investments at Hamilton Lane said,

"VCs expected a certain percentage of their portfolio not to make it to the next round, but [company survival] has been off the charts."

He added that for certain managers, almost 100% of their companies raised subsequent funding during the capital-rich era that ended last year.
  
The number of VC-backed companies filing for bankruptcy or shutting down has hovered around 1,000 per year since 2016, according to PitchBook data. At the same time, new startup formation has increased, as measured by first VC financing, greatly exceeding startup failures.

Staying alive

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But the years of low startup mortality are coming to an end.

Last week, Wyre, a nearly 10-year-old blockchain-based payments company, reportedly told employees that it is going out of business. A couple of days later, The Wall Street Journal reported that Genesis, a large crypto lender, is considering filing for bankruptcy protection.

While last year's valuation correction has yet to force many companies to close their doors, investors expect the shutdown rate to shoot up dramatically in the second half of 2023 and into 2024.

Micah Rosenbloom, a co-founding partner at Founder Collective said,

"I think loss ratios will be triple—or some big multiple of what they've been." 

The most severe ramifications of the slump are taking a while to manifest for several reasons.

Startups entered the downturn with a decent amount of cash that allowed them to continue operating, and investors did everything possible to help their portfolio companies stay alive by providing bridge financings or helping them secure venture debt.

But most venture capitalists won't be as supportive of their weaker investments this year, as they seek to protect existing capital commitments.

Yash Patel, a general partner at Telstra Ventures said,

"In 2022, [VCs] put money in a lot of companies that probably they shouldn't have." 

Last year, there was still "hope" that many struggling startups could be kept alive, but now it looks like VCs may have been throwing good money after bad, Patel said.

"Investors are going to get very strict about their reserve allocations, saving [funds] for the best winners."

While the number of shutdowns is still low, high-profile closures are on the rise.

So far, the prominent shutdowns have been in the battered crypto space, but investors expect failures in other technology areas.

As to what kind of businesses will go under, VCs are not singling out specific verticals. 

Rosenbloom of Founder Collective said,

"I think it's going to be companies that just either didn't realize how hard this is going to get and could not get control of their burn rates."

COMMENTARY:  At end of Q3 2022, Venture capital activity measured by exits is down against the historic levels achieved in 2021 and Q1 2022 but still well above historical averages. At the same time there has been a uniquely positive aspect of 2022 for the venture industry with US and global “dry powder”—funds available to be invested—standing at a record $572 billion globally and $290 billion in the US.

Today, VC funds are very well stocked to make rounds of new investments at much healthier valuations compared to one year ago.  However, the dramatic valuation gains of the last five years mean established venture investors are typically overexposed within portfolios (“the denominator effect”), pausing on new allocations. At the same time, new institutional venture investors are appearing, especially in family offices, foundations, and endowments (along with their outsourced CIOs), all assessing how to build venture exposure for decades to come.

Lessons From Past History -- Technological Innovations Always Wins

It’s almost over-written that recessionary times bring out the best in exceptional entrepreneurs and young companies. Like an ice bath to a strong athlete, the shock from rapid change in the environment forces rapid adaptability and resilience while narrowing operating focus and creativity. 

During recessions the strongest startup companies are quicker and more adaptive to:

• Cost efficiency needs.
• Customer acquisition gets cheaper.  
• Hiring gets easier to compete in.

(Competitor layoffs and reduced stock option values in bigger corporations mean the opportunity cost of quitting to join a startup you’ve had your eye on for some time is lower.) In addition, the most talented entrepreneurs and companies enjoy competing to secure new capital rounds in an environment where investors get much more selective.  

There are secular factors to bear in mind as a driver of venture capital investments, over and above the capital market cycle. Accel Founder Arthur Patterson, whose lifetime of venture experience spans multiple market cycles, shared with me the observation that the supply of innovative new companies is the real determinant of overall longer-term returns, created primarily by technological innovation but with social behavior trends also a factor in enabling new company supply.

These secular factors in the formation of new companies are independent of VCs or IPOs. Consider how the year 2008 was not only the lowest point in the business cycle but also a pivotal year in the development of mobile (iPhone 2 released ex-US and with 3G) and cloud computing technologies (DropBox first software release, 2008, with iPhone app 2009). Facebook and Twitter would not have gone viral in the same way in the early 2000s on desktop web browsers as they did on smartphones from 2008-10.

Mar Hershenson, Managing Partner, Pear Venture Capital provides a view of the future.  

“We will see more real companies and better investors. Less money in the system means companies need to have better operational excellence (do more with less money). Investors are also going back to basics. Diligence is back, along with appreciation for companies that are building real value, not relying only on future value.  Less founders. Less investors. More opportunities. When it is harder, the tourists leave.”

Startups are going to have a tough year in 2023. While many have gotten their burn rates way down, most startups still are losing money and will eventually need to raise capital in 2023. Because most startups avoided raising in 2022, there will be a glut of startup companies in the market for capital this year and while there is plenty of venture capital sitting on the sidelines waiting to be deployed, VCs will be much more selective, instead of funding everything that moves as we’ve done over the last few years.

Good businesses with product market fit, positive unit economics, and strong leadership teams will raise capital although it will be at the new normal in terms of valuation. I believe that “new normal” is more or less where we were in 2015:

• Seed rounds were done around $10mm.
• A rounds were done around $15mm to $25mm.
• B rounds were done around $25mm to $50mm.
• Growth rounds had a cap at 10x revenues.

This new normal will lead to many:

• Flat Rounds - A flat round cis when the valuation remains the same from the previous round of funding.  
• Down Rounds - A down round refers to a scenario where the value of a business at a time of investment is below the value of the same business during a previous period or financing round.  Normally during a down round, investors purchase equity in the business at a lower price, in comparison to previous investors.
• Inside Rounds - An inside round is additional investment that is made by a company's existing investors. From outside a company, it is difficult to know why it was done or whether a company is doing well or not.
• Structured Rounds - Highly structured rounds are almost debt that sits on top of the existing equity capitalization structure. 

None of that is good, but the worst of those options is rounds with a lot of structure.  I believe founders and CEO's and Boards should take the pain of a new valuation (flat, down, whatever) over structure.

But there is a huge number of startups out there that have not really found product market fit, have not created positive unit economics, and have unresolved issues in their founding teams and leadership teams. These startups will struggle to raise capital at any price and most of them will fail. This has already started to happen but because so much capital was raised in 2021 and the early part of 2022, it has taken longer for these companies to fail. I think we will see a lot of startups in this category go under or taken out in fire sales in the first half of 2023.

Venture Capital Slowdown Is In Full Swing

Global venture funding reached $74.5B in Q3’22, hitting a 9-quarter low. This represented a 34% drop quarter-over-quarter (QoQ) — the largest quarterly percentage drop in a decade — and a 58% decline from the investment peak reached in Q4’21.

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The number of deals fell to 7,936 total, marking a 10% quarterly drop.

US-based companies accounted for just under half (49%) of global funding in Q3’22, collectively raising $36.7B across 2,866 deals. Some of the largest rounds in the US went to TerraPower, EnergyX, and Xpansiv.

As noted previously, VC firms have huge amounts of a capital available for startups, but are adopting the "new normal" when deciding on seed to late stage rounds, and limiting funding in 2023 to startups with my "Big Four Must Haves": 

• Proven Market Fit.
• Sustainable Business Model.
• Experienced Management Team.
• Competitive Advantages.    

As a management consultant, I strongly recommend that startup CEO's and founders concentrate on innovation, indentifying their best customers, understanding the customer journey start-to-finish, rapid and precise execution to gain traction and market share and developing competitive advantages.  This is why an experienced management team is so important and essential in executing the "Big Four Must Haves."         

Deal Count and Value Declines in Q3 and Q4 2022 

The deal count in 2022 for the full year was 15,852, down 14% from 18,521 in 2021. And deal value was $238.3 billion, down 30% from $344.7 billion a year earlier, according to a report by Pitchbook and the National Venture Capital Association (NVCA).

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U.S. VC exit activity was 1,208 deals valued at $71.4 billion, down dramatically from 1,925 deals valued at $753.2 billion a year earlier

With each quarter the deal activity declined and that could foreshadow a slide in 2023, the report said.

On an annual basis, angel- and seed-stage deal activity remained relatively resilient in 2022, with $21.0 billion invested across an estimated 7,261 deals. However, the four consecutive quarters of declining deal counts could foreshadow a continued slide in 2023. Seed-stage deal sizes and pre-money valuations demonstrated notable growth over the 2021 figures due in part to a large number of actively investing micro-funds as well as the participation of nontraditional and crossover investors.

Exit Value and Exit Count Continue To Decline 

Nontraditional investors are slowing their capital deployment to VC amid less attractive risk/return profiles. Relative to 2021, the upside potential for the VC asset class declined significantly in 2022, which turned many investors away from the space. As such, just $24.1 billion in deal value involved nontraditional investors in Q4— the lowest quarterly value in three years. Not only are we seeing lower deal value, but we are also seeing fewer nontraditional participants within the venture ecosystem.

Exit activity continued its steep descent in 2022, with just $71.4 billion in total exit value generated—the first time this figure has dipped below $100 billion since 2016. Public exits of VC-backed companies have slowed to almost nonexistent levels, with just 14 public listings occurring in Q4, demonstrating how drastically institutional-investor appetite has been affected by rising interest rates and volatile macroeconomic factors.

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Acquisition activity has also declined significantly; Q4 posted roughly $763 million in total acquisition deal value, the first time we have seen this quarterly total fall below $1 billion in more than a decade.

How Many Startups Fail?

Approximately nine startups out of ten fail. 20% of the startups fail to complete even one year in the market.  In the following section, you will come across facts and figures related to the failure rates of startups. 

• 90% of the startups fail and are shut down. 
• Within the first year of establishment, 10% of startups fail. 
• Companies with 11 to 50 employees are at greater risk of failure. 
• 70% of startups fail within two to five years of their establishment. 

The following table breakdowns the startup failure rates after various years of establishment. 

Until The End of The Year	Failure Rate
1st year	20%
2nd year	30%
5th year	50%
10th year	70%

• Only 6% of the startups that went over Shark Tank have shut down.
• 75% of venture-backed companies rarely return the cash to the investors.  
• In 30 to 40% of cases of startup failure,  investors lose their initial investment. 
• Only 0.05% of the startups receive VC funding. 
• 43% of entrepreneurs are concerned about the failure of their startups. 
• 80% of e-commerce startups fail. The rest 20% succeed significantly.
• In the USA, 80% of startups fail.

Courtesy of an article dated December 22, 2022 appearing in Forbes, an article dated January 1, 2023 appearing in AVC, an article dated October 11, 2022 appearing in CBInsights, an article dated January 5, 2023 appearing in Venture Beat and an article dated  January 11, 2023 appearing in Pitchbook

WARBY PARKER FACING ECONOMIC UNCERTAINTY, REDUCES SALES OUTLOOK AND TRIMS COSTS TO REDUCE MOUNTING LOSSES FOR THE YEAR 2022

Warby Parker on Thursday joined the slew of retailers that have cut their financial forecasts for the year, even as it reported a narrower-than-expected loss in its fiscal second quarter and sales in-line with analysts’ estimates.

Chief Financial Officer Steve Miller said the eye glasses maker is facing an “uncertain macroeconomic environment.”  

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Miller said in a statement:

“We are taking a disciplined approach to managing costs to set us up for sustainable growth and profitability.”

As part of its efforts to trim expenses, Warby has cut 63 jobs, representing about 2% of its total employee base and 15% of corporate positions, a spokesperson confirmed to CNBC.

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In recent weeks, retailers including Walmart, Best Buy, Gap and Allbirds have lowered their expectations for sales or profits as they begin to see consumers cut back spending on discretionary items, such as apparel or electronics, amid soaring inflation. At the same time, though, luxury brands like Ralph Lauren and Versace owner Capri Holdings say people are still splurging on expensive shoes and handbags.

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At Warby, customer demand started to fall off in the second half of May, executives told analysts on a conference call Thursday morning. The company also said it pulled back on marketing spending as fewer people visited its brick-and-mortar shops.

Still, the retailer’s shares rallied Thursday, closing up more than 19%. Investors cheered the cost-cutting efforts as Warby attempts to turn a profit while still in growth mode.

Here’s how Warby did in its fiscal second quarter ended June 30 compared with what analysts were anticipating, based on Refinitiv estimates:

• Loss per share: 1 cent adjusted vs. 2 cents expected
• Revenue: $149.6 million vs. $149.5 million expected

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Warby’s loss for the three-month period ended June 30 widened to $32.2 million, or 28 cents per share, from a loss of $18.8 million, or 35 cents a share, a year earlier. Excluding one-time items, it lost a penny a share.

Sales grew roughly 14% to $149.6 million from $131.6 million a year earlier, boosted in part by loyal customers spending more money on average.

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The company said its count of active customers increased 8.7% to 2.26 million. It defines these customers as people who have made at least one purchase of any product or service from Warby in the previous 12-month period.

“While the losses are disappointing, they are somewhat understandable given that the company remains in expansion mode,” said Neil Saunders, managing director of GlobalData Retail.

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However, Saunders said, the main concern is that the money spent needs to translate into delivering stronger returns.

For fiscal 2022, Warby is now calling for sales to be within a range of $584 million to $595 million, down from a prior range of $650 million to $660 million.

It sees its adjusted EBITDA amounting to about $22 million to $26 million, including a $7.5 million hit related to pandemic-related disruptions to its business.

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In its latest quarter, Warby said it opened nine stores, bringing its total count of physical locations to 178. The retailer, founded online in 2010, has been ramping up its investments in real estate to reach more customers and market its brand. It hopes to one day grow to more than 900 stores.

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Beyond its glasses, Warby has a contact lens business and offers services in its stores for eye exams. The company has said that people who buy contacts from Warby end up spending more than those who only shop its eyewear.

Including Thursday’s gains, Warby shares have fallen more than 60% year to date.

COMMENTARY:   Warby Parker's sales began to soften about the same time many retail brands began to feel the effects of inflation and slowdown in buying by consumers.  Warby Parker joined the slew of retailers that have cut their financial forecasts for the year 2022.  Warby Parker reported a narrower-than-expected Q2 2022 quarterly loss and sales in-line with analysts' estimates. 

Warby Parker opened a record 35 stores in 2021 to end the year with 161.  Warby Parker plans on opening a total of 40 stores in 2022.  Warby Parker had 188 stores in the U.S. on July 27, 2022, but the economic uncertainty will probably put a halt to any new store openings in the second half of 2022.

Warby Parker's primary target customers are hip and fashionable millennial-aged consumers between 25-34.  Warby Parker customers are socially active, purchase online, overshare and engage on social media channels.  Warby Parker understands them very well. These young consumers have a bustling loyalty to the brand.  This may be Warby Parker's Achilles heel for the following reasons:

• Millennials have the highest median income but are burdened with high levels of debt from home loans, automobile loans, personal loans and student loans, and this debt is growing at a faster rate than any other generation.
• Millennials are the largest generation and growing as a group because lower wage earning middle class workers are falling behind economically and trickling down into the millennial generation group.
• A 2019 survey by Fannie Mae found that 55% of millennials and Generation Z believe that homeownership is “out of reach financially.” Several factors, including the rising cost of housing and pre-existing debt (often from student loans), present barriers to homeownership for these generations — and new obstacles continue to emerge.
• Millennials cannot afford today's high rents and utilities and often have one or more roommates to lessen this burden.  
• Millennials do not make enough to save for retirement or emergencies and often resort to credit cards to make ends meet.    
• 60% of millennials (those born between 1983 and 2002) are considered middle-class, compared to 70% of baby boomers (those born between 1943 and 1964) when they were in their twenties, according to the report, “Under Pressure: The Squeezed Middle Class.” Worldwide, the share of households considered middle-class has slipped from 64% in the 1980s to 61% today. 

It is not all bad news for Warby Parker.  Growth opportunities include progressive lenses, which account for 20 percent of Warby’s mix versus 45 percent of all prescription glasses sold in the U.S. Progressive glasses start at $295, Warby’s highest price point and highest margin.  Buyers of progressive lenses tend to be 45 years or older.  Dave Gilboa, co-CEO at Warby Parker said, “Progressives purchases tend to skew more toward bricks and mortar given the complex nature of the prescription and the older customer demographic.”

Stores also enable eye exams, which accounted for less than two percent of Warby’s sales in 2021 compared to 10-to-15 percent at a typical optical retailer. Neil Blumenthal, co-CEO, said exams also “give us greater control over the customer experience.”

Finally, in-store exams support sales of contact lenses, which doubled in 2021 to four percent of Warby’s sales versus 15-to-20 percent at a typical optical retailer. Industrywide, 70 percent of consumers buy glasses and contacts in the same location where they have an eye exam.

Courtesy of an article dated August 11, 2022 appearing in CNBC, an article dated April 27, 2022 appearing in Seeking Alpha, and an article dated March 24, 2022 appearing in Retail Wire, and an article dated April 12, 2019 appearing in CNBC

U.S. VC FIRMS RAISED $137.5 BILLION AS OF Q2 2022, WILL SURPASS THE $142.1 BILLION RAISED IN THE ENTIRE YEAR 2021

Venture capital is on track to register its largest fundraising year on record despite the market correction.

So far this year, VC funds in the US have closed on $137.5 billion, just shy of 2021's full-year total of $142.1 billion, according to PitchBook data.

Just this month, Lightspeed raised $7.1 billion across four funds, Battery Ventures announced $3.8 billion in funding, and Oak HC/FT closed on a nearly $2 billion fund. In addition to these behemoth pools of capital, 47 other firms have raised their newest and, in most cases, largest-ever funds in July.

Miguel Luiña, head of global venture and growth equity for Hamilton Lane, which advises limited partners and backs venture funds. said,

"Over three-quarters of our venture managers were back with new fundraises within the last year." 

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LPs have been overwhelmed by an unprecedented number of VC firms returning to market earlier than expected with larger fundraises. Pension funds, endowments and other mainstream limited partners operate under strict asset-allocation targets that limit how much venture exposure they can maintain. As a result, many LPs don't have room in their budgets to renew commitments with every one of their VC partners.

A handful of LPs told PitchBook that they had to let go of some venture relationships or resort to writing smaller checks to existing partners. These allocation constraints have disproportionately affected smaller and newer VC firms.

Still, PitchBook data shows that the fundraising environment turned out to be, on the whole, less difficult than predicted at the start of the downturn. However, overall 2022 VC fund activity is unlikely to increase significantly through the rest of the year, according to Luiña.

Luina says,

"There are still a few groups who are raising here and there, but the bulk of fundraising happened in the first half of this year, and so we're not expecting another big wave until the first quarter of next year."  

COMMENTARY:  Although VC firms are having a banner year raising capital for their investment funds and are likely to exceed the 2021 full-year total (Q2 '22 $137.5 billion vs Full Year 2021 $142.1 billion), but VC investments in startups have taken a plunge.   

Global venture capital firms invested $108.5B across 7,651 deals last quarter — marking the biggest quarterly percentage drop in deals (and the second-largest drop in funding) in a decade.  Despite this eye-opening decline, funding and deal totals remain above levels last seen in 2020.

US-based companies accounted for nearly half of all funding, with some of the largest rounds of the quarter going to Epic Games, SpaceX, and Intersect Power.

While markets could shift meaningfully during the second half of the quarter as both economic and geopolitical events unfold, assuming these investment trends continue, Q2’22 will see the lowest total for quarterly funding since the end of 2020. Other notable Q2’22 venture activity projections include:

• US deals and dollars are going down. US venture funding is projected to drop 13% in Q2’22, while deals are expected to decline by 22%. US companies are on track to raise $61B this quarter, the lowest total since 2020.
• Mega-rounds (deals worth $100M+) are projected to account for $61B of funding by the end of Q2’22, which would mark an 18% drop QoQ.
• Global funding for retail tech is on pace to drop by 50% in Q2’22, with fintech and digital health showing a QoQ decline of 28% and 25%, respectively.
• The IPO market is decelerating. The total number of companies going public in Q2’22 is projected to reach 92, marking a 9-quarter low and a 34% drop QoQ. US-based startups are expected to account for 20 of these IPOs, down 13% QoQ.​
• M&A activity has not been spared from the slowdown; there is projected to be a 22% drop in global M&A activity in Q2’22. A similar trend is being seen in ​the US, where M&A deals are on pace to fall by 25% QoQ.
• The unicorn club is becoming a bit more exclusive. Quarterly unicorn births are on track to fall below 100 for the first time since 2020, with 62 unicorns projected to emerge in Q2’22.

 Courtesy of an article dated August 3, 2022 appearing in Pitchbook and an article dated May 19, 2022 appearing in CBInsights and an article dated May 19, 2022 appearing in NFCA Blog

EQUITY CROWDFUNDING SIMPLIFIED -- RAISING STARTUP CAPITAL ONLINE

 

Equity Crowdfunding is an alternative form of startup capital that lets you raise funds from the public in exchange for unlisted shares (equity) in the business. Unlisted shares aren't listed or bought or sold on an official public stock exchange, but sold online through an equity crowdfunding portal that has been approved by the SEC (FINRA).  An alternative to giving investors shares is to offer them a convertible note.

Enacted on April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act created the United States' equity crowdfunding industry. At first, only accredited investors were allowed to invest. By June 2015, another part of the JOBS Act, Title IV (Regulation A+), went into effect.

In 2015, the SEC adopted Regulation Crowdfunding to implement the requirements of Title III which permitted eligible companies to raise capital using Regulation Crowdfunding beginning May 16, 2016.

Investing through equity crowdfunding can give the investor a greater degree of personal satisfaction than investing in a blue-chip or large-cap company. Equity crowdfunding may offer more avenues for such targeted investments than publicly traded companies.

For those of you seeking investors for your startup, consider alternative financing sources like equity crowdfunding.  Please review Equity Crowdfunding Simplified, my newest e-book targeting startup founders, that explains what equity crowdfunding is, how it works, legal requirements, filing requirements, classes of investors, investor rules, advertising limitations, pro's and con's, tips for launching a successful equity crowdfunding campaign and much more.  

 

Courtesy of a YouTube video titled, "Equity Crowdfunding Simplified" by Tommy Toy, ImaginativePRO

WHERE STARTUP FUNDING REALLY COMES FROM (INFOGRAPHIC)

Prominent VCs and angel investors may dominate the headlines with their big sticker investments, but personal loans and credit – along with investments from friends and family – make up the lion's share of funding for startups in the U.S.

According to data compiled by Fundable, only 0.91 percent of startups are funded by angel investors, while a measly 0.05 percent are funded by VCs.  In contrast, 57 percent of startups are funded by personal loans and credit, while 38 percent receive funding from family and friends.  

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COMMENTARY:   Financing a startup is not a simple process.  Below we break down every step of the process and how it impacts your ownership. The first thing to understand about startup funding is that is not done all at once. There are multiple rounds of funding that occur as the business grows.

In the beginning stages, funding will typically come from your savings, loans, and family members. You should create a pitch deck, demonstrate an understanding of the market, and use this as an opportunity to show you have the skills necessary to run a business. 

After you have solidified your pitch, you should consider bringing on a startup co-founder. This person can be someone to bounce your ideas off, or even someone that compliments your skillset. Keep in mind that startups with two co-founders raise 30% more than startups with only one. 

The next stage is known as pre-seed funding. This is when you present your fine-tuned pitch to family and friends, and potential angel investors. Keep your expectations in check, startup funding for this round typically doesn’t exceed a million dollars. However, this money will be critical to the success of your company, allowing you to hire your first employees or even secure an office to work out of. Another option at this stage is to secure a business loan. You’ll have to pay back the loan with interest, but you also won’t be giving up equity.

The next stage is called the seed round. $1.7 million is the typical amount raised during this phase. This is the stage where venture capitalist funds and accelerators start to show interest in your company. However, depending on the source of funding, you may give up 10-25% of equity during this stage. 

The Series A round is the funding round that switches the focus from your company’s potential to its traction in the marketplace. Positive market reception increased revenue, and savvy use of previous investments will all play a role in this round of funding. Venture capitalists, hedge funds, and private equity firms will all be interested during this stage. Series A investments average around $10.5 million and may cost anywhere from 15 to 50% of the equity in exchange. Some businesses elect to try equity crowdfunding at this stage if they don’t attract a lot of interest from large investors. 

The Series B  round funding is traditionally used to scale your business to keep up with increased demand amid strong signs of growth and success.  In this round, you can expect around $25 million in funds in exchange for 15-30% of equity. Series B funding will also draw more scrutiny from potential investors, so make sure the business is fully fleshed out and ready to operate on a much larger scale. 

The Series C round is typically the last funding round before a potential initial public offering (IPO). Investment banks and private equity firms will be targets during this stage. If you make it to this round, your company will not be seen as a risky investment and more attractive to more conservative investors. Money raised during this round could be used to acquire competitors, increase the company’s global footprint, or increase the valuation before an IPO. 

During all the startup funding rounds described above, the shares of the company are privately held, and can’t be offered to the public. Through an IPO, the previously private shares can now be sold to the public. This allows investors to liquidate their shares if they choose and allows the company to raise even more money. Once a company goes public, the value of the company switches from an investor’s valuation to the trust and judgment of the public at large. 

Courtesy of an article dated November 20, 2013 appearing in Entrepreneur.com and an article dated October 26, 2019 appearing in My Startup Land

GLOBAL VENTURE CAPITAL FUNDING REPORT FOR Q2 2020: FUNDING THROUGH THE GLOBAL COVID19 PANDEMIC

Despite the turmoil of an ongoing pandemic, global venture funding for the second quarter of 2020 was not as dire as we expected, but it was down from previous years.

Overall, total global venture dollars for 2020 track at $129 billion for the first half of the year. This includes all funding stages, from seed, venture, corporate venture and private equity rounds in venture-backed companies. 

That $129 billion is down from the peak in 2018, and down 7 percent from the first half of 2019. 

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Market predictions

In our first-quarter venture funding report we reported on varying trends across regions with China demonstrating the largest decrease quarter over quarter and year over year. The pandemic hit China earlier than most other parts of the world. We predicted the reckoning would come in the second quarter with founders negotiating funding in a changed market.

Toward the end of the first quarter and into the second quarter of 2020, the pandemic’s impact was felt across large sections of the globe, resulting in high counts of layoffs by technology startups, shifts to remote work seemingly overnight, and markets shutting down. Industries hit hard were travel, last-mile mobility, restaurants, events and more. 

In NFX’s most recent VC and founder sentiment survey, 60 percent of VCs report that early-stage valuations have dropped by 20 percent to 30 percent. Of the founders surveyed, 30 percent experienced a reduction in revenue. But this is not the full picture, as 23.5 percent of founders reported an increase in revenue. 

Despite the turmoil and revised funding plans for many startups, funding held up. We saw increased funding to biotech specifically, and decreased funding to transportation, and real estate. 

Diving Into The Second Quarter

Of that $129 billion, Crunchbase recorded $69.5 billion invested across all funding stages for the second quarter specifically. This is up 17 percent quarter over quarter and down 2 percent year over year with one notable caveat–a sizable raise by one company that somewhat skews the data. 

For this quarter, 138 funding rounds were raised at above $100 million, which represents 61 percent of all funding raised at $42.1 billion. Rounds below $100 million at $27.3 is the lowest amount recorded since early 2017. 

The largest funding to a single company went to Reliance Jio, the largest mobile network operator in India. Reliance Jio has amassed a user base of 400 million in a short time, and has raised multiple billion-dollar rounds this quarter. Led first by Facebook at $5.7 billion, the company raised another $9 billion from a range of growth investors and sovereign wealth funds from the U.S. and Asia in the second quarter.   

Previous rounds above $10 billion were raised by Ant Financial with a $14 billion Series C in the second quarter of 2018, and JUUL, which raised $12.8 billion in the last quarter of 2018. 

Should you remove Reliance Jio from the second quarter–given the voluminous amount of funding to one company–the numbers would look vastly different. Funding would be down by 9 percent quarter over quarter and 23 percent year over year.

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For Q2 2020, we are reporting on actual funding vs. projected funding. With the trend toward larger rounds reported in a timely manner, along with the growth in super giant rounds, projecting funding round amounts make less sense. A year out we see an increase per quarter– below 10 percent–for funding amounts. 

For funding counts we notice a strong data lag, especially at the early and seed stages, by as much as 26 percent to 41 percent a year out. 

Funding By Stage 

It is interesting to examine how each stage holds up through the pandemic. 

Based on reported fundings, over $2 billion was invested at the seed stage this quarter. Seed funding data lags the most, as smaller seed fundings are added by founders after the quarter in which they were raised.

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Early-stage fundings came in at $19.6 billion for the quarter, up 3 percent quarter over quarter and down year over year by 21 percent. Counts for the two most recent quarters will go up over time. 

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Late-stage investments totaled $35.7 billion, flat quarter over quarter and down year over year by 9 percent. 

Some 80 unicorn companies raised funding rounds this quarter. Funding rounds above $500 million went to Airbnb, Zuoyebang, Sana Biotechnology, Stripe, Palantir Technologies and Tokopedia. Google subsidiary Waymo, and Didi Chuxing subsidiary Qingju also raised large rounds. 

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With the $9 billion in private equity rounds to Reliance Jio, technology growth tracks in at $12 billion this quarter. 

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Leading M&A

Global M&A for venture-backed companies tracked at $14.8 billion, less than half of Q1 2020. (It is worth noting that the majority of reported acquisitions do not include a price.) For this chart we also exclude acquired technology companies that have previously gone public. 

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The largest acquisition this quarter was that of Istanbul-based Peak Games, a developer of mobile games, which was acquired by Zynga for $1.8 billion. Also this quarter, Amazon acquired California-based Zoox, a developer of autonomous vehicles for $1.2 billion, and in-home fitness provider Mirror, based out of New York, was acquired by Lululemon for $500 million. Also from New York, Giphy, the social image and search company was acquired by Facebook for $400 million. 

The first quarter of 2020 was strong for M&A with the acquisitions of Infor, Credit Karma and Plaid and topping $35.8 billion in deal volume. 

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Notable IPOs

The majority of IPOs were clustered in June 2020 as the markets recovered from the initial impact of the pandemic. For venture-backed IPOs, ZoomInfo raised the largest amount at $935 million, and Vaxcyte, developer of a vaccine for COVID-19 raised close to $250 million. Electric truck maker, Nikola Motor Co., went public via a reverse merger, which valued the company at $12 billion. 

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COMMENTARY:

In my earlier post for North America Q2 2020 Venture Capital Investments Down, Angel and Seed Take Huge Hit, I pointed out how the COVID19 Global Pandemic had negatively impacted venture capital investments among all startup stages in North America,

The recent spike in COVID19 infections will likely continue to negatively impact venture capital investments among seed and angel investments and early stage investments.  Venture capital firms will most likely continue to fund late-stage startups because of their experienced management teams, proven sustainable business models and changes in operating procedures during this pandemic. 

There has been a reset in venture this year as we come out of two strong years in funding to technology startups peaking in 2018. 

However the reset is not as dramatic as we might have expected. 

In the past month, the IPO market seems to be opening up with a number of tech companies filing to go public namely nCino, Snowflake, Palantir Technologies, Jamf and Amwell Health.  Lemonade and Accolade both went public on July 2 as the third quarter kicked off. 

However the second quarter of 2020 will be remembered for the police killing of George Floyd, the protests across the world angered by the brutal treatment of Black Americans, and the need for America to account for itself when it comes to systemic racism.

Courtesy of an article dated July 3, 2020 appearing in Crunchbase titled, "Q2 2020 Global Venture Report: Funding Through Pandemic" 

NORTH AMERICA Q2 2020 VENTURE CAPITAL INVESTMENTS DOWN, ANGEL AND SEED TAKE HUGE HIT

 

 

 

 

 

 

 

 

 

 

In March, as we all began to fully wrap our heads around the potential impact of the COVID-19 pandemic, the future of startup funding seemed clearly in jeopardy.

Many hypothesized that there would be a slowdown in funding and fewer deals made. The logistics of how firms could invest in a company and teams they’ve never met was a whole new obstacle. Further, how investors commit with confidence amid such uncertainty in the world was (and is) a major challenge.

But investors adapted and deals still happened.

However, with the end-of-quarter data in hand, we see that venture dollars invested in North American startups were down for the first half of the year compared to the first half of last year. The same was true specifically for the second quarter.

In general, funding counts for the most recent quarter will be lower as funding rounds are added after the quarter closes. Typically, the data lag is greater at the seed and early funding stages. Funding amounts are less impacted as larger funding rounds are more likely to be announced in a timely manner. (For more on this, see our Methodology section below).

According to Crunchbase data, $64 billion was invested in North American startups (companies based in Canada and the United States) in the first half of 2020. That’s down 10 percent compared to the same period in 2019, when $70 billion was invested.

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(In the above chart, the actual 1-H 2020 number may shift slightly given reporting delays. See Methodology description below for more details.)

The chaos surrounding COVID-19 in the United States really started in March, basically toward the end of the first quarter. So the reality check came in the second quarter.

The second quarter of 2020 was the first full quarter in the new COVID-19 world, and during that time $29.8 billion was invested in North American startups–18 percent less than the same period last year and 12 percent less than the previous quarter.

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The majority of VC funding raised throughout Q2 was in supergiant rounds, or those of $100 million or more. Although supergiant rounds were flat year over year, rounds below $100 million were down 31 percent year over year.

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The overall dollar volume for VC funding in North America was down for the second quarter of 2020 compared to the same period last year and the number of deals was also down for companies across all stages.

Funding By Stage

A few data points to consider by funding stage:

• Seed and angel investment saw $1.1 billion across 699 deals in the second quarter of 2020, down from $1.7 billion across 1,773 deals in the second quarter of 2019.  COVID19 had a huge negative impact on Q2 2020 seed and angel investments,  down -54.5% based on dollars invested and down -253.6% based on the number of deals funded. 
• Early-stage investment saw $11.1 billion invested across 555 deals in Q2 2020, down from $12.6 billion across 887 deals in Q2 2019. COVID19 had a very negative impact on Q2 2020 early-stage investments, down -13.5% based on dollars invested and down -159.8% based on the number of deals funded. 
• Late-stage saw $15.9 billion invested in Q2 2020 across 191 deals, compared to $20.7 billion across 306 deals in Q2 2019.  COVID19 had a very negative impact on Q2 2020 late-stage investments, down -30.2% based on dollars invested and down -60.2% based on the number of deals funded. 

Notable large funding rounds include Waymo’s $750 million raise, Sana Biotechnology’s $700 million Series A, and Stripe’s $600 million Series G. Airbnb had the largest raise of the quarter for a VC-backed company, taking in $1 billion as the travel industry took a hit due to COVID-19. The round came from private equity firms Silver Lake and Sixth Street.

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Exits

Exits also took a hit in Q2. Acquisitions of venture-backed North American companies (that hadn’t previously gone public) were down significantly in Q2 2020–for acquisitions with disclosed amounts–compared to all of the past year. There were 177 acquisitions totaling $9.7 billion in Q2 2020, down from 278 acquisitions totaling $21.7 billion for the year-ago period.

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Among the largest M&A deals were Invitae’s acquisition of ArcherDX for $1.4 billion, Amazon’s acquisition of Zoox for $1.2 billion, and SoFi’s acquisition of Galileo Financial Technologies for $1.2 billion. Quarantine helped boost at-home fitness companies, and athleisure company Lululemon was able to nab connected fitness startup Mirror for $500 million.

In terms of companies going public, there was a lull in the IPO market–at least for tech companies. Only toward the end of Q2 did tech IPOs pick back up. ZoomInfo and Vroom had notable exits, raising $935 million and $468 million, respectively.In conclusion

COMMENTARY:  

I have counseled my clients to make the necessary adjustments to their business models, operating procedures and digital marketing strategies to take into account the New Normal of COVID19.   The huge spikes in COVID19 confirmed infection cases (now 3,468,435 confirmed cases as I post this) occurring throughout the US during July, and the lack of a national strategy or policies by the Trump Administration to curtail these infections, I do not have much confidence in Q3 venture capital investments or possibly even Q4.  

Angels and venture capital firms will stick with late stage startups that have proven management teams and sustainable business models, and that have made the necessary adjustments to their business models and operating procedures to operate during the recent COVID19 spikes.  Many states are now reversing course and closing down businesses that have a reputation as potential "super spreaders" of the COVID19 virus.  This will have a negative impact on the economy and increase unemployment numbers which are at historic highs.  As a consequence, seed and early stage startups will continue to suffer from a lack of sufficient funding until the US can control the spread of the COVID19 virus or find a vaccine.  

Courtesy of an article dated July 13, 2020 titled, "North America Q2 Venture Report:  Funding Down As Expected" appearing in Crunchbase.

THE TOP VENTURE CAPITAL FIRMS IN 2018, MOST ACTIVE VC FIRMS, VC DEAL INVESTMENT CONTINUES STRONG IN 2019

Data from Crunchbase reveals who the active VCs are now, and who might be the best investors to pitch with your deck.  There is plenty of money out there, from plenty of hungry investors.  According Pitchbook:

The most dollars are going into late stage startups, followed by early stage funding, then funding for technology growth and angel or seed series rounds.

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Now find out who is handing out the cash…

Active Lead Investors

According to data from Crunchbase here are the 10 most active lead investors. 

1. Start-Up Chile
2. Insight Venture Partners
3. Tencent Holdings
4. New Enterprise Associates
5. Sequoia Capital China
6. Accel
7. Sequoia Capital
8. Higher Ground Labs
9. Quake Capital Partners
10. Goldman Sachs

Most Active Seed Stage Investors

Whenever you are pitching, you want to be sure you are reaching those who are most likely to fund your type of round. According to Crunchbase, these were the most active investors in seed rounds during the past 3 months. 

1. Startup-Chile
2. Hiventures
3. Crowdcube
4. Plug and Play
5. Innovation Works
6. 500 Startups
7. Innova Memphis
8. Entrepreneurs Roundtable
9. Berkeley SkyDeck Fund
10. Quake Capital Partners

According to Pitchbook: 

        

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Top Early Stage Investors

If you are raising an early stage round, consider these active players: 

1. IDG Capital
2. New Enterprise Associates
3. Sequoia Capital China
4. Accel
5. Y Combinator
6. ZhenFund
7. Sequoia Capital
8. Matrix Partners China
9. Intel Capital
10. Index Ventures

According Pitchbook:

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Most Active Late Stage Investors 

If you are looking to raise a Series B or anything above for a growth stage round you may want to tap into the following firms:

1. Sequoia Capital
2. Tencent Holdings
3. Insight Venture Partners
4. Bpifrance
5. Goldman Sachs
6. Bessemer Venture Partners
7. New Enterprise Associates
8. Khosla Ventures
9. Andreessen Horowitz
10. Sequoia Capital China

According Pitchbook:

"Driven by the massive $12.8 billion funding of Juul, total late-stage capital invested in 4Q 2018 recorded a decade high of $30.8 billion and total late stage funds of $82.5 billion for the year 2018. Removing Juul, total capital invested still came in at a near-record level."

Who Has the Money Now?

When strategizing who you will pitch, it is not only worth looking at who has recently been active in putting money into deals, but who is achieving successful exits, and may now be flush with capital and bullish on reinvesting some of those gains.

Factors to Consider in Choosing Who to Pitch

Connecting with potential investors, presenting and attending meetings takes up precious time that could be used to work on and push your business forward. Getting funded can help to make big leaps in growth, but it is still a task that should be approached efficiently. As an entrepreneur, your biggest resource is time.

The data above may reveal the willingness of different venture capital firms to get involved at different series of funding, and at different positions within each of those fundraising rounds. Data on exits and fundraising by these firms can also be useful for gauging who has the liquidity and sense of urgency to act quickly in the months ahead as well.

It is smart to know which potential angel and venture capital firm investors are most likely to place capital into your industry. Have they shown interest in your type of business, product category, or size of deal you are offering? Have they been successful in it? Was it a good experience for them? Could your venture help compliment other recent investments they’ve made?

Knowing if they are likely to stay in the game and follow up with more capital in your next fundraising round can be valuable too. That could dramatically reduce the time and effort you have to make next time.

Perhaps even more importantly, are they a good fit for you? Remember that money is just one reason to venture down this path. It’s only one of the benefits of these relationships. Ask yourself how they can help beyond the money. What is their history of relationships with the startups and CEOs they’ve funded in the past? Is there alignment in goals, values, timelines and the terms they likely to offer?

Summary

Funding for startups is plentiful in the current economy. New record amounts of investment are being made, and by a diverse range of investors. Knowing who these active investors are may help shorten the time it takes to get funded, while providing more efficiency in the process. Do your homework, learn who your ideal investors are, and design a powerful pitch deck that gets their attention, and closes the deal faster.

COMMENTARY:  According to the Pitchbook-National Venture Capital Association (NVCA), through the first half of 2019, total VC deal value has reached $66.0 billion and is nearly on pace to match 2018’s $130.6 billion record.   For Q1 2019, total VC deal value reached $32.6 billion across 1,853 deals.  For Q2 2019, total VC deal value reached $33.4 billion. 

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If this pace holds, 2019 would mark the second consecutive year in which VC invested has topped $100 billion, substantiating how the strategy has matured over the last decade. The ability of companies to raise rounds of $100 million or more in the private markets is one of the most stark changes, with the number of mega-deals exploding from 36 in 2013 to 208 in 2018. Robust exit activity has boosted returns and produced strong distributions for LPs, who are recycling that capital into new VC funds. With this level of capital availability, we expect investment activity to persist in strength. Growing businesses are further supported by non-VC sources of capital, such as corporates and PE firms, which continue to seek out high-growth VC opportunities and the associated returns.

The biggest story in the venture industry from 2Q was the exit market, fueled by 34 venture-backed IPOs that pushed exit value to a record $138.3 billion. The high-profile nature and aftermarket success of most of these newly public companies should also imbue confidence in the 14 VC-backed companies currently in IPO registration. Including M&A activity, total venture-backed exit value for the first half of 2019 reached $188.5 billion, eclipsing every full-year total on record.

 

A crucial aspect of the flood of big VC-backed exits is the liquidity they bring not only for the companies and their employees but also for venture funds and LPs. With so many VC-backed companies staying private for longer and with gains consequently staying primarily on paper, some LPs tapped out their allocation to venture. Recent gains flowing back to LPs will allow them to reinvest in venture, so the dip in venture fundraising observed early in 2019 is likely transient and not indicative of declining LP interest in the asset class.

 

The IPOs of companies such as Uber, Zoom and Pinterest stole headlines in 2Q, but VC-backed life science companies, particularly biotech, continued to see robust IPO activity. The insatiable public market appetite for life sciences companies has resulted in an active M&A market as well. This is particularly important for medical device and supply companies, which have experienced a healthy M&A environment in 2019. On the investment front, life sciences trends have mirrored those seen across the venture industry: fewer, larger deals and rising valuations. If current trends continue, life science companies as a proportion of total VC investment could reach the highest level since 2011, indicating the growing strength of the sector within the venture industry.

 

Courtesy of article submitted by by Alejandro Cremades titled Top Venture Capital Firms and a press release dated January 10, 2019 by Pitchbook and the Pitchbook-NVCA Venture Monitor for Q1 2019 and the Pitchbook-NVCA Venture Monitor for Q2 2019 

SNAP'S Q1 2017 EARNINGS UNDERWHELM INVESTORS, REVS $150 MIL, BELOW WALL ST EST, USER GROWTH SLOWS, STOCK TANKS

 

Snap reported quarterly financial results for its first time as a public company on Wednesday, posting revenue that missed estimates and slower-than-expected user growth.

Shares plummeted more than 20 percent on Thursday. The company spent $2 billion on stock-based compensation expenses after its initial public offering, widening net losses for the quarter to $2.2 billion.

CEO Evan Spiegel got a $750 million bonus for taking Snap public. He told analysts on a conference call that the company was focused on improving quality for users during the first quarter, especially for those with Android mobile phones.

Despite the steep loss during the quarter, Snap is "still in investment mode," the company's chief financial officer, Drew Vollero, said on a conference call with analysts.

The Numbers

• Revenue: $150 million reported vs. $158 million expected by a Thomson Reuters consensus estimate.
• Global DAUs: 166 million reported vs. 167.3 million expected by StreetAccount.
• ARPU: 90 cents reported vs. 90 cents per share expected by StreetAccount.
• Loss of $2.31 a share including compensation expenses.
• Analysts at Thomson Reuters estimate an adjusted loss of 20 cents per share, wider than the 19 cents expected.

That's compared with revenue of $38.8 million in the year-ago period.

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Amid trouble at Facebook and Google, unprofitable underdog Snapchat aims for engagement

As the company behind the viral ephemeral messaging app and Spectacles glasses, Snap's IPO was the biggest technology offering since Alibaba.

And it's growing at an extraordinary rate: Revenue rose 286 percent year over year in the first quarter. Daily active users rose 36 percent from the year-ago period, and average revenue per user grew 181 percent.

More than 3 billion Snaps were made daily in the first quarter, the company said, up from 2.5 billion in the third quarter of 2016. Users spent an average of 30 minutes a day on Snapchat, the company's chief strategist, Imran Khan, said on the conference call, and cited Nielsen data showing that many Snap users could not be reached by traditional TV channels.

Khan told CNBC.  

"We made good progress this quarter improving the performance and quality of our Snapchat application, especially on Android, which has helped result in increased net user adds and engagement.  We still have a lot of work to do, and are excited about the potential from continued performance improvements."

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But since its IPO in early March, Snap has faced an uphill battle to convince Wall Street it can make money with advertising, even with Facebook and Google dominating the market.

Spiegel said that automation will help the company make more money for advertisers.

Khan said.  

"People are going to copy your product if you build great stuff.  Just because Yahoo has a search box doesn't make it Google."

Facebook, in particular, has pushed aggressively into Snap's turf. Boss Mark Zuckerberg told analysts that Instagram Stories has 200 million daily active users, and WhatsApp Status has more than 175 million daily active users.

As a whole, Facebook has 1.28 billion daily active users, nearly eight times as many as Snapchat.

Other revenue sources, like Spectacles, have hardly made a dent in the company's business. Analysts surveyed by Thomson Reuters expect Snap to post a per-share loss through the end of 2018.

Snap has not made great gains in the markets, trading mostly below the high of $29.44 in its first week of trading. Indeed, the stock fell as low as $17.07 after hours, just 7 cents above its IPO price, as shares changed hands in heavy volume.

When Facebook, Yelp, Twitter and LinkedIn reported their first quarterly results as public companies, the stocks fell by an average 14.1 percent the next day, according to Jim Strugger, derivatives strategist at MKM Partners.

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Snap should have set its expectations lower, Art Hogan, chief market strategist at Wunderlich Securities, told CNBC's "Closing Bell" on Wednesday. He explained that a company's first earnings report as a public company is "really dependent" on executives giving realistic guidance. But that's just part of the growing pains of becoming a public company, Hogan said.

COMMENTARY:   I won't lie to you,  I am not a fan of startups with unproven or unsustainable business models and no evidence of profitability.  In my opinion, Snap Inc has many similarities to Twitter:  1) user growth slowing down at time of IPO filing, 2) lack of profitability and 3) small market focus (primarily Millennials).  Snaps has positioned itself as a "camera app" that allows Millennials, its core user demographics, to share photos that automatically disappear.  

In a blog post dated October 10, 2016, I commented on Snap Inc's proposed $25 billion IPO.  Like Twitter before it, I had a lot of reservations about the Snap IPO, because there were already strong signs that user growth was slowing down, and many analysts like myself, felt that Snap's business model, which depended almost entirely on advertising, was unsustainable. Furthermore, Snap derived the majority of its ad revenue from the U.S., so in order to sustain growth, this required expanding its user base internationally.   

Snap is very slow in providing advertisers with the tools they need to target potential customers, and this is the same thing that plagued Twitter's ad revenue growth.  On May 4, 2017, Snap announced a suite of tools to help advertisers market to its users more effectively.  If you ask me, they should've done this much sooner.

For those of you who like reading the minutes of Snap Inc's Q1 2017 earnings conference call with investors, you will find it all below:

Snap Q1 2017 Earnings Conference Call Notes from Tommy Toy

Snapchat is opening itself up to advertisers of all sizes with new buying tools

According to an announcement on May 4, 2017, starting this June, Snap is going a step further by flinging wide its gates to advertisers of all sizes and budgets with a new suite of self-service tools. The move could help considerably grow Snap's fledgling ad business, which is expected to reach $1 billion in revenue this year.

Releasing a self-service ads manager is intended to erase any friction that may be keeping advertisers off Snapchat, a company spokesperson told Business Insider. Snap expects larger buyers to still go through one of its auction partners, which offer more custom targeting like timing ads to run alongside TV campaigns or during specific weather conditions.

Snapchat's new ads manager will let any advertiser buy, manage, and view reporting for their campaigns. All ad formats, including app install ads, sponsored geofilters, and fullscreen video, are available alongside existing targeting capabilities like goal-based bidding. The manager is free to use and requires no minimum ad spend.

A new mobile dashboard will also allow marketers to see their ads like a normal user, view analytics, and get notification updates about their campaigns directly from the Snapchat app. Over 20 brands are testing these new tools now as part of a private beta, and Snap plans to make them available to everyone in June.

Below is the Snap Inc Q1 2017 Earnings Report Press Release: 

Snap Q1 2017 earnings report from Tommy Toy

Courtesy of an article dated March 13, 2017 appearing in MedaPost MoBlog, an article dated May 10, 2017 appearing in MediaPost Social Media & Marketing Daily, an article dated May 11, 2017 appearing in CNBC and an article dated May 4, 2017 appearing in Business Insider

ROTHENBERG VENTURES IMPLODES AMID LAVISH SPENDING BY FOUNDER, EXODUS OF KEY EMPLOYEES, SEC INVESTIGATION

Rothenberg Ventures management team with Mike Nothenberg (fifth from left) (Click Image To Enlarge)

Rothenberg Ventures, the four-year-old, San Francisco-based seed-stage venture firm, may be on the brink of implosion, say several sources close to the firm.

We reported yesterday that several high-level employees had parted ways with Rothenberg, including:

• Tom Leep, Director of Finance (father of Tommy Lepp)
• Tommy Leep, Partner, Head of San Francisco Office (left July 2016)
• Chief Revenue Officer (left August 17, 2016)
• Chief Financial Officer (left in June 2016)
• James Taylor, General Manager (left August 2016)
• Fran Hauser, Partner (left July 2016; Hauser was a former president of digital at Time Inc. Hauser was brought in with some fanfare as a venture partner in May 2014. Yesterday, she updated her LinkedIn profile to reflect that she left Rothenberg in July.

Messages to Rothenberg have not been returned. According to one source, Rothenberg Ventures founder Mike Rothenberg has told those remaining that “very few people will be left.” In what appears to be a related development, the firm’s site has also been down since last night.

Why the mass exodus? According to one source, Rothenberg Ventures is under investigation by the SEC after a lower-level employee alerted the agency to what this person reported as wire fraud and breach of fiduciary duty. This same source says the employee was subsequently fired and is now suing the firm for retaliation.

All SEC investigations are conducted privately.  An investigation does not mean that the agency will file a case in federal court or bring an administrative action.

Either way, a much thornier issue for Rothenberg Ventures, say numerous former employees, is founder Rothenberg himself, who has sometimes seemed to live more like a billionaire than the manager of a modest venture fund — spending lavishly to attract moneyed individuals as investors and, over time, growing increasingly focused on becoming as famous as some of them.

Making a millionaire

It all began as a minor if inspirational story, proof that the American Dream can still come true.

Rothenberg, an Austin native who says he comes from humble means —  “no one in my family has any money,” he once told us — was smart enough to nab an undergraduate, then graduate degree, from Stanford, then bootstrap a real estate fund with his brother before moving on to Harvard to secure an MBA.

Soon afterward, inspired by business leaders he had met while at Stanford, Rothenberg planted himself in San Francisco and got down to the business of trying to shake up the stodgy venture industry.  Step one involved raising a $5 million fund from “friends, family, and former roommates,” as reported in a Bloomberg story about Rothenberg last year.

His timing was ideal as these things go.  In 2012, the market was in the middle of a three-year upswing, following the financial crisis of late 2008.  A number of newer faces was also beginning to gain prominence in the venture industry, along with the trust of so-called limited partners — the individuals and institutions that fund venture firms.

Rothenberg is also a natural salesperson, and as such, quickly evolved his pitch for Rothenberg from yet another seed-stage fund to a thought-leading outfit willing to make big bets on virtual reality before most people in Silicon Valley saw it as a major opportunity.

Indeed, by late 2014, Rothenberg Ventures — whose more garden-variety bets include the clothing company Chubbies and the floral delivery startup BloomThat — announced it was launching a virtual reality startup accelerator, River, and that it planned to provide $100,000 in seed funding to virtual reality companies expressly. Among its bets was Fove, which makes an eye-tracking head-mounted display and went on to raise an $11 million Series A round earlier this year.

Rothenberg Ventures founder Mike Rothenberg durng promotion of RIVER, a virtual reality accelerator (Click Image To Enlarge)

But employees say that as the firm grew, so too did Rothenberg’s spending, and not merely on their paychecks.

Among the expensive ways that Rothenberg found to market the firm to prospective limited partners, he hired race-car driver Collete Davis and spent hundreds of thousands of dollars more to maintain and transport her race car to events. Another $200,000 reportedly went toward a suite at the Super Bowl that was meant to woo investors.

Rothenberg Ventures — which counts many people in tech and finance as backers, including Jeff Seibert, a former head of product at Twitter, and Michael Cronin, founder of the private equity firm Weston Presidio — also inserted itself increasingly into celebrity circles, say employees, including buying tickets to the Golden Globes, co-sponsoring actor Chase Crawford’s 30th birthday party in West Hollywood, and spending unsparingly to executive produce a video for Coldplay.

Says one source, “Mike wants to be famous.”

They say he began to live as if he were, too, with many other examples of seemingly out-of-control spending. Among them, says one source, Rothenberg had hired up to three executive assistants at one point. He also employed a personal assistant for himself and a private driver. Further, employees say he refused to fly coach and instead maintained a $2,000-per-month membership with the young, subscription-only airline service Surf Air.

They also say Rothenberg began to spend an inordinate amount of time managing his reputation, as questions began to surface around how he afforded it all. When Bloomberg last year questioned the firm’s ability to finance itself, Rothenberg sent two employees to SFO, purchasing them airline tickets so they could head to airport newsstands and buy copies of the issue in hopes that it wouldn’t be as widely read.

All the while, Rothenberg was hiring, employing up to 60 people across Rothenberg Ventures at one point. For a firm that manages hundreds of millions of dollars, that wouldn’t be a startling amount of overhead. But Rothenberg Ventures has raised $47 million across four funds dating back to 2013, according to SEC filings. Given that firms typically collect 2 percent of what they raise in management fees, that would leave just $940,000 for Rothenberg’s entire operation. In fact, most funds of a similar size are run by two or three people.

Next steps

What happens now is anyone’s guess, including whether Rothenberg will be forced to sell any stakes in the company’s 100-plus portfolio companies to a secondaries specialist. When we asked a founder of a top secondaries shop for more information today, the executive declined to provide any information, saying only that Rothenberg Ventures “has been super nice to me.”

Certainly, while employees paint a picture of an overly ambitious founder who paid too little attention to his firm’s finances, many outsiders like Rothenberg and benefited richly from Rothenberg Ventures’ generosity.

Among its most popular events is an annual Founders Field Day at AT&T Park, where the San Francisco Giants play. In April of last year, the outlet Recode likened it to a scene lifted from “Silicon Valley” after the HBO show opened its second season, two weeks earlier, with a scene at the baseball park.

Employees say Rothenberg loved it.

COMMENTARY:  I just love it when controversy surrounds a venture capital firm, especially when it involves its founder, and that founder goes crazy spending investor capital.  With so many key members of the managment team bailing out, some with just a few months on the job, it is clearly time to "abandon ship."  Still no response from Mike Rothenberg.  The SEC investigation must be going full speed ahead.  There's probably a lot more going on besides the lavish spending.   The shutdown of the website is another clear signal that this VC firm is not taking on any new startups.  The high flying and party days are over for Rothenberg Ventures.  

At the end of 2015, Rothenberg Ventures was the VC leader in the number of investments made in the AR/VR space with a total of 32 startups in which it had invested.  These ventures are very early stage, so it remains to beseen whether any of them will pan out or ever reach unicorn status.  

CB Insights Infographic of Leading VC firms investing the the AR-VR Space between 2011 and 2015 (Click Image To Enlarge)

It appears the Mike Rothenberg has a preference for founders who graduated from Stanford and Harvard.  Mike attended both schools.  An intriguing coincidence or preference on the part of Mike. 

To be continued.

Courtesy of an article dated August 18, 2016 appearing in TechCrunch and an article dated January 6, 2013 appearing in TechCrunch and an article datd January 28, 2016 appearing in CBInsights