StrictlyVC, LLC

Six months ahead.

Barry Kramer

The Surprisingly Not-Terrible Impact of All Those Late-Stage Rounds on IPOs

Double-alaskan-rainbowYou’ve seen the headlines; you know that over the last couple of years, a growing number of startups has gone public at valuations below where they were valued as privately held companies (or sunk past them quickly).

You’ve also come to understand that a lot of late, and often lofty, private company valuations are getting set by investors who receive preferred shares in exchange for their checks. What that means: those investors receive downside protection in the form of rights to get paid ahead of other investors — or to get paid back more than other investors — in case the companies’ value declines.

There’s a silver lining, though. According to new research out of the law firmFenwick & West, which has been actively tracking financing terms, of the 41 U.S.-based technology companies that went public either last year or 2014 and that had raised venture funding in the prior three years (life sciences companies were not included), just 20 percent — that’s eight companies — saw these so-called ratchets triggered.

More here.

StrictlyVC: May 7, 2015

Good morning, dear readers!

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Top News in the A.M.

Alibaba, the Chinese e-commerce giant, is replacing CEO Jonathan Lu with the company’s COO, Daniel Zhang. Lu took over as chief executive from Alibaba’s founder and executive chairman Jack Ma two years ago.  The New York Times has more here.

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The Venture Math Behind These Giant Financings

To better understand unicorn valuations, the law firm Fenwick & West recently analyzed the financing terms of 37 U.S.-based venture backed companies that raised money at valuations of $1 billion or more in the 12-month period ending March 31.

Among the firm’s findings about these financings is that only a quarter were led by “traditional” VCs and the rest were led by mutual funds, hedge funds, sovereign wealth funds and corporate investors. The investors also received significant downside protection in case the companies’ values decline. Not last — and not surprisingly — many of these later-stage investors are looking at far less upside than these companies’ earlier investors, which may create issues for some down the road regarding if and when to sell to an acquirer, as well as when to go public.

We talked earlier this week with Barry Kramer, a partner at Fenwick and the author of the firm’s new report, to learn more about the numbers. What follows is a bit of that chat, edited for length.

Were you at all surprised that a full 75 percent of the money that poured into these so-called unicorns came from nontraditional investors?

That’s what I expected. These are the mutual groups and hedge funds that used to invest in IPOs, but IPOs are getting delayed so much that these companies now have the same [risk profile] at the late-stage [as newly public companies].

Also, VCs don’t typically invest at these really high valuations.

Yet traditional VCs, including many early-stage investors, are keeping their board seats at these privately held companies. Did your research touch on the impact of those seats not necessarily turning over? A public offering usually results in some fresh blood on the board.

That’s an interesting point that we didn’t examine, though I think two things could be happening. Because IPOs are being delayed and VCs are serving on these boards longer, it might be impacting their ability to [spend more time] with more junior companies. The other thing I see is that because these [earlier-stage VCs] have, say, 10 to 15 percent of the company, they’re very engaged and attentive because of that economic interest, whereas with public companies, that’s [not always the case].

In your report, you say that roughly 22 percent of the unicorn companies you studied have dual-class common stock structures — which provide founders and management and, in some cases, other shareholders with super voting rights. Was there any type of pattern? For example, were the companies with dual stock structures more often founded by serial entrepreneurs with track records of success?

We’re definitely seeing this much more than 10 years ago, though it’s really all over the map. If you’re two kids out of school without a track record and you get your first venture round, people might look at you funny if you want a dual track structure. You can still do it later, once you have some leverage [because your company is performing well], but it’s often a negotiation. Other times, yes, people are more understanding of founders who have a track record if they ask to [implement a dual stock structure] at an early stage because the founders have proven they know how to run a company.

Your report talks at length about how much downside protection investors are getting in these deals, though you say they have more protections in an acquisition scenario than with an IPO. Can you explain?

In many of these cases, company valuations could fall 80 percent in value, and investors would still get their money back [because of their liquidation preferences]. The typical company will have, let’s say, a $10 billion valuation. And lets say that early-stage investors put in $200 million and later-stage investors invested $800 million [for a total of $1 billion invested]. If the company’s value falls to $2 billion [the price an acquirer is willing to offer for it], all those investors will [be repaid]. But let’s say the company goes public, and you’re a later-stage investor who has acquired preferred shares at $30 per share. If it goes out at $25 a share, you’ll have lost $5 a share.

Of course, companies that go public are typically doing well, so these later-stage investors are investing with the idea that even if they lose a bit at the IPO, the stock will pop up over time.

That’s their only protection?

There are other types of IPO protections. In one common type, the investor puts in a provision that says: If you go public at less than $30, you give me more stock, so I’m effectively paying the [IPO] price. In another scenario, the investor insists that the company can’t go public at less than the price it paid for its shares unless the company gets the investor’s approval first. So there are mechanisms, but [there are less of them appearing in these deals].

For Kramer’s full report, which is very much worth reading, click here.

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New Fundings

908 Devices, a Boston, Ma.-based company that makes battery-operated, hand-held chemical detection tools used in mass spectrometry, has raised $11.6 million in Series C funding led by Saudi Aramco Energy Ventures (SAEV), with participation from earlier backers ARCH Venture Partners, Razor’s Edge Ventures, University of Tokyo Edge Capital and Schlumberger, along with individual investors. The company has now raised $29.3 million altogether, shows Crunchbase.

Adaptive Biotechnologies, a six-year-old, Seattle, Wa.-based company that provides research and diagnostic tools to scientists and clinicians involved in genomic immunology, has raised $195 million in Series F funding led by Matrix Capital Management, with participation from Senator Investment Group,Tiger Global Management, Rock Springs Capital and an unnamed healthcare investor, along with earlier backers Viking Global, Casdin Capital and Alexandria Real Estate Equities. Forbes has more here.

Aiwujiwu, a Shanghai, China-based rental and home listing portal and transaction platform, has raised $120 million in Series D funding from GGV Capital, Morningside Ventures, Shunwei Capital, and Banyan Capital. Tech in Asia has more here.

Banjo, a four-year-old, Redwood City, Ca.-based social discovery app, has raised $100 million in new funding from the Japanese tech giant SoftBank. The round pushes Banjo’s total funding to more than $120 million. Others of its investors include Balderton Capital, BlueRun Ventures and VegasTechFund. Venture Capital Dispatch has much more here.

Blitsy, a 3.5-year-old, Chicago-based arts and crafts e-commerce site, has raised $3.6 million in Series A funding led by Greycroft Partners, with participation from Data Point Capital and earlier backers Chicago Ventures, FireStarter Fund, and Lakewest Venture Partners. The company had previously raised around $2 million in equity and debt financing, shows Crunchbase.

Chartbeat, a six-year-old, New York company that helps Web publishers measure reader engagement, has raised $15.5 million in Series C funding led by Harmony Partners, with participation from Digital Garage and earlier backers Index Ventures, DFJ, Jason Calacanis and Jeff Clavier.

Closeup.FM, a 1.5-year-old, Knoxville, Tn.-based company whose software facilitates pop-up events powered by fans, has raised an undisclosed amount of seed funding from Angel Capital Group.

Cursive Labs, a 10-month-old, San Diego-based venture studio, has raised $2.2 million in Series A funding, including from Crescent Ridge Partners Ventures, Wavemaker Partners, Keshif Ventures, Bootstrap Incubation, and Howard Lindzon, among others.

Cybereason, a three-year-old, Cambridge, Ma.-based company whose endpoint detection and response platform reveals and investigates cyber-attacks in real time, has raised $25 million in Series B funding led by Spark Capital, with participation from earlier backer CRV and strategic investor Lockheed Martin. The company has now raised at lesat $29.6 million altogether, shows Crunchbase.

Doblet, a 1.5-year-old, San Francisco-based company that provides an on-demand phone charging service at a growing number of venues, has raised $1.3 million in seed funding led by SoftTech VC.

Eboox, a two-year-old, Milan, Italy-based company that builds online stores for its customers, has raised $1.1 million in funding, including from Programma 101 and Club Digitale.

eDaijia, a four-year-old, Beijing-based company whose app lets anyone with a car sign up to be a designated driver, has raised $100 million in Series D funding led Warburg Pincus, with participation from earlier backers Matrix Partners and Lightspeed Venture Partners. More here.

e-Kare, a two-year-old, Fairfax, Va.-based digital health company that speeds the assessment and monitoring of chronic wounds from a mobile device, has raised an undisclosed amount of funding from the Center for Innovative Technology‘s CIT GAP Funds. More here.

Govini, a four-year-old, Washington, D.C.-based intelligence startup to companies that sell goods and services to the public sector, has raised $20 million in Series C funding from new and existing investors, including Accel Partners, Salesforce Ventures, and Symphony Technology Group. More here.

Itineris, a 12-year-old, Deurle, Belgium-based company that provides operational software and services to the utilities industry, has raised $10 million in funding led by GIMV, with participation from return backers PMV and company founder Edgard Vermeersch. The company has so far raised $20.9 million altogether, shows Crunchbase.

Jetbay, a 2.5-year-old, Mountain View, Ca.-based online platform for foreign travelers to research and book their trips to China, has raised $1.6 million in seed funding led by ChinaRock Capital Management. TechCrunch has more here.

KFit, a months-old, Singapore-based company that, like ClassPass in the U.S., enables users to get into a variety of fitness studios with just one monthly membership, has reportedly raised a “seven-figure” round, including from 500 Startups, SXE Ventures, Founders Global and numerous individual investors.

Microf, a five-year-old, Albany, Ga.-based consumer finance company that provides rent-to-own solutions for the residential HVAC industry, has raised $12.3 million in funding from Rotunda Capital Partners.

Moximed, a nine-year-old, Hayward, Ca.-based company that makes knee implants for pre-arthoplasty patients, has raised $33 million in funding from Vertex Venture Holdings, with participation from earlier backers New Enterprise Associates, Gilde Helathcare Partners, Morgenthaler Ventures, and GBS Venture Partners. The company has raised at least $80.6 million to date, shows Crunchbase.

NurturMe, a 5.5-year-old, Austin, Tex.-based company that makes organic dried baby food and toddler snacks, has raised $1.5 million in funding, including from EcoEnterprises Fund.

Robinhood, a 2.5-year-old, San Francisco-based zero-fee stock trading app, has raised $50 million in new funding led by New Enterprise Associates, with participation from Vaizra Investments and earlier backers Index Ventures and Ribbit Capital, among others.The company has now raised $66 million altogether, it says.

Spyryx Biosciences, a 2.5-year-old, Chapel Hill, N.C.-based company that’s making therapeutics for respiratory diseases, has raised $18 million in Series A funding from Canaan Partners, Hatteras Venture Partners and 5AM Ventures.

Symbiomix Therapeutics, a three-year-old, Newark, N.J.-based biopharmaceutical company that’s developing medicines for serious women’s health infections, has closed the third and final tranche of its $41 million Series A funding, with backing from OrbiMed, Fidelity BioSciences, HBM Partners, and Square 1 Bank.

Toppr, a two-year-old, Mumbai, India-based startup that helps students prepare for entrance exams, has raised $10 million from Fidelity Growth Partners India, SAIF Partners, and Helion Ventures. TechCrunch has more here.

Trizic, a 2.5-year-old, San Francisco, Ca.-based digital wealth advisory firm, has raised $2 million in seed funding, including from Operative Capital.

Zanbato, a five-year-old, Mountain View, Ca.-based platform that connects institutional investors with alternative investment opportunities, has raised $8 million in Series B funding led by AITV (Accelerate-IT Ventures), with participation from earlier backer Formation 8 and other unnamed investors. The company has now raised at least $15.8 million, shows Crunchbase.

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New Funds

Point Reyes Management, a seven-year-old, Sausalito, Ca.-based investment firm, has launched a super angel fund focused on early stage startups called the e.fund. It’s writing checks of between $50,000 and $250,000 and has already backed 10 startups. More here.

Storm Ventures, a 15-year-old, Menlo Park, Ca.-based venture firm that focuses primarily on enterprise technologies, has closed its fifth fund with $180 million, reports Fortune. The fund is being managed by three general partners: Tae Hea Nahm, Jason Lemkin, and Ryan Floyd, with cofounders Sanjay Subhedar and Alex Mendez moving into advisory roles, says Fortune. StrictlyVC has talked in the last year with Nahm, about what U.S. investors can learn from Korea, and with Lemkin, about why enterprise startups are growing much faster than even two years ago.

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Exits

PlayHaven, a San Francisco-based mobile ad network, has been acquired for undisclosed terms by RockYou, a San Francisco-based gaming and in-game advertising company. PlayHaven was previously sold to the L.A.-based startup studio Science Inc. last fall for undisclosed terms. TechCrunch has more here.

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People

Goldman Sachs said yesterday that 51-year-old Stuart Bernstein, head of its clean technology and renewables and the venture capital coverage groups, is retiring from the firm after 24 years. Bloomberg has more here.

So far this year, 17 percent of Intel‘s senior hires have been historically underrepresented minorities — double the rate of last year, says the company. Intel has also doubled its senior hiring among women to 33 percent, CEO Brian Krzanich said yesterday. CIO has the story here.

Speaking at a conference in Stockholm yesterday, Martin Lorentzon, chairman of the streaming service Spotify, was asked about competitive threats, including Tidal, the company acquired by entertainer Jay Z in March for $56 million. His cheeky response: “I’ve got 99 problems – and Jay Z ain’t one.”

Games maker Zynga said yesterday that as part of a $100 million cost reduction program, it’s laying off 364 people, which is 18 percent of its total headcount. Recode has more here.

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Essential Reads

A 3-D printed gun lawsuit has launched a new war between arms control and free speech.

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Detours

Wages are growing faster at larger companies.

Whole Foods is opening a cheaper line of stores.

At Harvard, engineering a better brisket.

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Retail Therapy

“The Surge” exhibition. (Its opening reception is tonight.)

The Venture Math Behind All These Giant Financings

MathTo better understand unicorn valuations, the law firm Fenwick & West recently analyzed the financing terms of 37 U.S.-based venture backed companies that raised money at valuations of $1 billion or more in the 12-month period ending March 31.

Among the firm’s findings about these financings is that only a quarter were led by “traditional” VCs and the rest were led by mutual funds, hedge funds, sovereign wealth funds and corporate investors. The investors also received significant downside protection in case the companies’ value declines. Not last — and not surprisingly — many of these later-stage investors are looking at far less upside than the companies’ earlier investors, which may create issues for some down the road regarding if and when to sell to an acquirer, as well as when to go public.

We talked earlier this week with Barry Kramer, a partner at Fenwick and the author of the firm’s new report, to learn more about the numbers. What follows is a bit of that chat, edited for length.

Were you at all surprised that a full 75 percent of the money that poured into these so-called unicorns came from nontraditional investors?

That’s what I expected. These are the mutual groups and hedge funds that used to invest in IPOs, but IPOs are getting delayed so much that these companies now have the same [risk profile] at the late-stage [as newly public companies].

Also, VCs don’t typically invest at these really high valuations.

Yet traditional VCs, including many early-stage investors, are keeping their board seats at these privately held companies. Did your research touch on the impact of those seats not necessarily turning over? A public offering usually results in some fresh blood on the board.

That’s an interesting point that we didn’t examine, though I think two things could be happening. Because IPOs are being delayed and VCs are serving on these boards longer, it might be impacting their ability to [spend more time] with more junior companies. The other thing I see is that because these [earlier-stage VCs] have, say, 10 to 15 percent of the company, they’re very engaged and attentive because of that economic interest, whereas with public companies, that’s [not always the case].

In your report, you say that roughly 22 percent of the unicorn companies you studied have dual-class common stock structures — which provide founders and management and, in some cases, other shareholders with super voting rights. Was there any type of pattern? For example, were the companies with dual stock structures more often founded by serial entrepreneurs with track records of success?

We’re definitely seeing this much more than 10 years ago, though it’s really all over the map. If you’re two kids out of school without a track record and you get your first venture round, people might look at you funny if you want a dual track structure. You can still do it later, once you have some leverage [because your company is performing well], but it’s often a negotiation. Other times, yes, people are more understanding of founders who have a track record if they ask to [implement a dual stock structure] at an early stage because the founders have proven they know how to run a company.

Your report talks at length about how much downside protection investors are getting in these deals, though you say they have more protections in an acquisition scenario than with an IPO. Can you explain?

In many of these cases, company valuations could fall 80 percent in value, and investors would still get their money back [because of their liquidation preferences]. The typical company will have, let’s say, a $10 billion valuation. And lets say that early-stage investors put in $200 million and later-stage investors invested $800 million [for a total of $1 billion invested]. If the company’s value falls to $2 billion [the price an acquirer is willing to offer for it], all those investors will [be repaid]. But let’s say the company goes public, and you’re a later-stage investor who has acquired preferred shares at $30 per share. If it goes out at $25 a share, you’ll have lost $5 a share.

Of course, companies that go public are typically doing well, so these later-stage investors are investing with the idea that even if they lose a bit at the IPO, the stock will pop up over time.

That’s their only protection?

There are other types of IPO protections. In one common type, the investor puts in a provision that says: If you go public at less than $30, you give me more stock, so I’m effectively paying the [IPO] price. In another scenario, the investor insists that the company can’t go public at less than the price it paid for its shares unless the company gets the investor’s approval first. So there are mechanisms, but [there are less of them appearing in these deals].

For Kramer’s full report, which is very much worth reading, click here.