$4 Trillion of Unicorns

$4 Trillion of Unicorns


By Keith Teare • Issue #298 • View online

Putin invades Ukraine and Tiger invades Series A rounds. OK Not the same thing. This week we look at the 3 venture asset classes, unicorns, with content from @profgallaway, @geneteare, @crunchbasenews, @eastdakota, @cape and @LocalGlobeVC and others

Content

Editorial

Crunchbase News tells us that the company has updated its Unicorn Board and that:

There are 59 so-called decacorns — companies valued at $10 billion or more — within the group. Just a year ago, there were only around half that count, at 31 decacorns.

Three of these decacorns are valued above $100 billion and stand as the most valuable private companies in the world: Shanghai-based TikTok owner ByteDance, valued at $180 billion; payments platform Hangzhou-based Ant Group, at $150 billion; and Hawthorne, California-based space travel company SpaceX, at $100 billion.

The Crunchbase board is a great asset. But it seems that we should soon see more than a single board. The unicorn board has 591 2021 vintage unicorns (and that does not include the 240 or so companies that exited above $1 billion in 2021 but were not unicorns prior to their exit). Over 800 $1 billion values in 2021 alone. A unicorn board is useful but there is a need now for a decacorn board, a centicorn board and who knows how soon we will see private company values well above $100 billion?

The pace of unicorn production is staggering, and accelerating, to the point that it is becoming ordinary to be a unicorn. And that is not explained by any “bubble”. It is mainly the result of the market opportunities available and the speed at which companies are making progress in growing their businesses. This is all fueled by the abundance of capital available to energize the companies pursuing those opportunities.

But that momentum provides a canvas on which the venture capital industry is evolving. The latest news, highlighted this week, is that Tiger Global and D1 — two of the most prolific allocators of capital, are planning to shift strategy. Berber Jin of The Information covers that news. Tomasz Tunguz writes about the consequences of that change. He posits that 2022 could see a counter-trend to the reduction in public market values. He explains why series A and B round values might go up in light of the new capital Tiger, D1 and others may bring to the earlier stage investment table.

This is further evidence of the trend we have covered here — that of large allocators coming earlier and earlier into the venture ecosystem. We have explained in the past that there are three asset classes within venture. The seed, venture and growth stages. Normally the pre-seed, seed and Series A stages are thought of as early stage, Series B, C and D as Venture and Series E and later as growth.

Those assumptions may be challenged as larger allocators are prepared to invest at the still risky A round stage. And seed stage investors will be challenged to do their pro-rata — which today kicks in at the B round, but may now focus more on the A round.

For those not versed in the specifics of venture capital these may seem like unimportant points, but they will shape the entire venture ecosystem over the next few years. And large amounts of money will be impacted.

At SignalRank we keep a live view of the ecosystem. Looking at the 2021 unicorns is interesting.

They collectively raised the following amounts round by round:

Prior to the A Round: $1.7 billion

At the A Round: $19.5 billion

At the B Round: $30 billion

At the C Round: $39 billion

At the D Round: $35.5 billion

Post D Round: $56 billion

88.35% of all capital raised came after the A round. If large allocators invest earlier the equation will change. This has implications for seed investors and also for early stage venture investors. It likely means that growth investors will also move from the E, F and later rounds to the B, C and D rounds, increasing the dilution experienced by seed investors at those stages. The trend to value growth happening when a company is pre-IPO will accelerate. Thanks to Gené Teare and Crunchbase for their work.

More in the video.

Video


The Unicorn Phenomenon

The Crunchbase Unicorn Board: Value Of World’s Biggest Startups Doubles In A Year To $4 Trillion

Gené Teare, February 22, 2022

There are now more than 1,200 current unicorn startups — private companies valued at $1 billion or more — in the world, per The Crunchbase Unicorn Board.

These unicorn companies have collectively raised more than $700 billion in funding over their lifetimes and reached a new milestone this year: Topping $4 trillion in value for the first time. That’s double the value of the world’s unicorns at the end of 2020, when the 650 private companies on the list were altogether valued at around $2 trillion.

Decacorns

There are 59 so-called decacorns — companies valued at $10 billion or more — within the group. Just a year ago, there were only around half that count, at 31 decacorns.

Three of these decacorns are valued above $100 billion and stand as the most valuable private companies in the world: Shanghai-based TikTok owner ByteDance, valued at $180 billion; payments platform Hangzhou-based Ant Group, at $150 billion; and Hawthorne, California-based space travel company SpaceX, at $100 billion.

A record year

An unprecedented 591 companies joined The Unicorn Board in 2021. Another 141 companies exited, either via acquisition or IPO. That marks a record year on both counts.

In 2020, new unicorns tallied 167, while 58 companies exited.

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Crunchbase Unicorn Company List

The Crunchbase Unicorn Board is a curated list of global unicorn companies powered by Crunchbase’s comprehensive private company data.

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Venture Capital — Performance and Models

LP Expectations vs. VC Realities

‘We’re looking to underwrite a 5x net return from our seed managers in this vintage.’ — Overheard from a large institutional LP last November

Amongst this jargon is a simple message that is terrifying for most VCs — ‘I expect you give me back 6.5 dollars for every dollar I give you. ?’

In the boom of the past 2 years the expectations on seed fund returns have risen sharply. You can understand why — over a third of the funds deployed just last year in Europe are already 2x on paper. Many of the 2009–2013 vintages that have matured in the past 18 months have led quite a few GPs to retire or move to Miami.

EIF — the largest LP in European Venture getting pretty excited about the paper results of 2019–2020 Vintages

And with these changing expectations come changing behaviors.

One of the biggest changes these expectations from LPs bring on VC’s is an even sharper focus to optimize for the home run outcome at all costs.

A 100m exit for a company that’s only raised a seed round is life-changing for founders. But in a world where a fund is trying to return 6.5x gross it simply doesn’t move the needle enough to matter.

The power-law always determines VC returns. So while getting a 5x here and there was nice, it wasn’t going to put you on the Midas List. Now with even higher expectations, investors are much more inclined to want to take a higher likelihood of a zero with a low likelihood of a 50x, than a guarantee of a 5x on their money.

The game has moved on, fund size has increased, valuations have gone up and if exits aren’t in the 10x+ range it’s unlikely to make any difference to a fund other than recycling the capital back into something that you think can get you to that 10x+ number.

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Tiger Global, D1 Capital Signal Pullback From Big Private Tech Deals Amid Market Rout

Responding to a steep sell-off in technology stocks, some hedge funds and other investment firms with large public stock portfolios have been turning away from investing in the most mature startups, reducing what’s been a crucial source of funding for the better part of two years. Instead they are focusing on buying beaten-down public tech stocks or investing in younger startups.

Tiger Global Management told its investors in a webinar earlier this month that it would no longer focus on backing large, late-stage startups preparing to go public, said a person with direct knowledge of the discussion. Instead, partner Scott Shleifer said the New York hedge fund would focus on investing in younger firms in Series A and B rounds, the person added. Shleifer did not elaborate on the reason behind the shift in strategy, but it followed the sharp decline in tech stocks over the past three months.

Other hedge funds including D1 Capital Partners, which invested in dozens of startup deals in the past couple of years, and smaller firms such as Octahedron Capital also have slowed down the pace of new late-stage private investments, according to three people with direct knowledge of the matter. These firms, also known as crossover funds, are instead focusing on buying shares of public tech companies that have sunk in value compared to the all-time highs they traded at last year.

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Why Early Valuations Might Surge in 2022

Will year-end Series A and B valuations top or trail those of January? This question sits atop most founders’ lips and boardroom agendas. The broad market sentiment is they will be lower.

Public-market software valuations have withered more than 60% from their highs. Alarm about interest rates, QE ending, and geopolitical risk have swirled around public technology companies, kinking the valuation curve.

Amidst this gloomy backdrop, The Information published a story on hedge funds’ strategy shift. Instead of late-stage opportunities, they’ll be focusing on early-stage venture in 2022. If true, Series A and B markets may surge upward against the countervailing depressive momentum.

Hedge funds’s big chip stacks have become a market force in venture during the last three years. PitchBook surmises non-traditional VC (aka hot money) comprises 78% of venture dollars invested in 2021. Across Series A to Series E rounds in the US, hedge funds participated in 63% of startup financings worth more than $200B in 2021. That figure didn’t crest $4b ten years ago.

Though some hedge funds index the market, they haven’t indexed it by stage. 2021 marked a near universal strategic focus on Series C, D, and E rounds. Hedge funds appeared on the cap table in more than 35% of Series C, D, and E rounds in the US.

In contrast, these investors wholly disregarded Series As and Bs. A paltry 1.3% of Series As and Bs received hedge fund money — effectively zero.

Should this investor cadre focus earlier, we should expect the red and blue lines to reverse course, and suddenly. But by how much?

The surge of hedge fund capital into Series C-E investing boosted median pre-money valuations 150% in 2021. Causation is hard to prove, but correlation, its weaker brother, suggests these dollars influenced the market quite a bit.

Hedge fund activity correlates at 0.95 with mid-stage valuations, explaining 90% of the variance.

Last year, early stage prices expanded by half without the benefit of hedge-fund money. Deep stacks entering the early market will pressure valuations more because the early market is one-third the size of the Series C-E market.

Founder preferences may differ at the early stage than the growth stage. The value propositions of board seats, venture platforms for hiring, business development, & marketing, and more active investing will be tested in 2022.

Hedge fund flows into early venture will challenge the market’s bearish disposition and define pricing dynamics in 2022. Whether positive or negative pricing momentum will prevail is hard to predict. But the answer isn’t as simple as it was a few weeks ago.

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Molten Ventures participates in $190 million Series C in fintech PrimaryBid

Today we are delighted to announce that Molten Ventures has participated in a $190m Series C funding round in PrimaryBid, the fintech platform that provides retail investors with fair access to public markets.

PrimaryBid’s platform provides a safe and frictionless way for issuers to include their stakeholders and loyal communities in IPOs and subsequent capital market transactions, allowing individual investors to share in a company’s success alongside institutional investors. The platform was used for a number of high-profile IPOs in 2021, including Deliveroo, PensionBee, and the US IPO of MCG Group (Soho House), which used PrimaryBid to provide access to its UK members.

Molten also used the PrimaryBid platform to allow retail investors to participate in its £111m raise in June 2021. Since its $50m Series B funding round in October 2020, which Molten also participated in, PrimaryBid has become fully regulated in the EU, launched alongside Euronext in France in June 2021, and helped hundreds of thousands of individual investors participate in capital market transactions.

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Meet The VC Firm With $544 Million To Buy ‘Orphaned’ Startup Stakes From Other Funds — Forbes

NewView Capital founder Ravi Viswanathan has worked with startups as a venture capitalist for more than two decades. He’s never seen the game change more than in its most recent stretch.

He rattles off some highlights (and some low ones): the sudden lockdown of early 2020; the host of new players who split off from known firms or launched first-time funds; the increased startup interest from hedge funds and public market specialists; the record dollars flowing in and the more recent pullback. “The last two or three years have been the most extraordinary,” Viswanathan says.

In the thick of it all, Viswanathan’s firm is hoping to profit through a less-common approach. Founded in 2018, the firm looks to build positions in startups by buying out other VC firms — either a portfolio of their equity holdings, or taking some or all of an investment à la carte. And Viswanathan has two new funds, worth a combined $544 million, in new capital to do it.

NewView’s pitch is simple: With startups taking longer to go public or exit, firms with strong paper returns face pressure to return some immediate cash to their own backers. And as investors switch firms, set up their own shingle or retire, some companies find themselves orphans, part-owned by firms where their lead supporter is long gone. “The first reaction is, ‘What is this?’” Viswanathan says. “Then as you go through it, they start embracing that it’s a way to reset the clock.” Forbes

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SEC — Restricting Access to Private Wealth Growth

SEC plans to 10x the definition of “accredited investor”

In an effort to “enhance investor protection and disclosure” the United States Securities and Exchange Commission, SEC, is planning to raise the limit for who is eligible to become a so-called “accredited investor”, or who is allowed to invest in “unregistered” share offerings, startups in the common tung.

The post SEC plans to 10x the definition of “accredited investor” appeared first on CryptoSlate.

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SEC ‘Accredited Investor’ Definition Tweak Faces Equity Concerns

The SEC’s plan to reconsider who is eligible to invest in startups’ privately-held share offerings is stirring questions about equity and diversity.

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As UK Raises Taxes, Where Do Venture Capital Trusts Fit In? — Wealth Briefing

UK start-ups have performed remarkably during the pandemic with a quarter of the UK’s “unicorns” created in 2021. In particular, tech start-ups were booming with £26 billion ($35.3 billion) raised, doubling the previous year’s figures and creating a record number of unicorns. (1) Indeed, times of great change often create opportunities for accelerated innovation, as we also saw in 2007 to 2009.

Investors wanting to take advantage of this could potentially find an answer in VCTs. If chosen carefully, VCTs can offer investors key benefits that allow them to capitalise on the optimism from economic recovery and back high-quality companies at attractive valuations to generate robust returns. And, with inflation jumping 5.4 per cent in December, the highest level in almost 30 years, income-seeking investors may find VCTs’ ability to pay tax-free dividends particularly compelling. (2)

Rising taxes prompt surge of funding

While the skills of VCT managers are key to delivering strong returns, the tax advantages of these investment vehicles are considerable and are also a factor for investors who commit capital to the sector. With an additional 1.25 per cent tax hike on dividends and national insurance contributions coming into play next year, tax relief is a top priority for many investors (3) and, indeed, 72 per cent of VCT investors say that tax breaks are the primary reason for investing in them. (4) This is because they remain a highly tax-efficient investment solution, allowing investors to claim income tax relief upfront worth 30 per cent of the amount invested, up to an investment of £200,000, and earn tax-free dividends and capital gains. Wealth Briefing

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SPAC deals waning, VC market booming — Digitimes

Global transactions of special purpose acquisition companies (SPACs) have slowed down, whereas the venture capital (VC) market last year posted the strongest performance levels ever and will remain high in 2022, a report by KPMG showed.

Going public via overseas SPACs is appealing for Taiwan’s startups aiming to get listed on the New York Stock Exchange or the Nasdaq. For example, Gogoro, Taiwan-based electric scooter maker and battery swapping system supplier, has announced its plan to launch an initial public offering (IPO) on the Nasdaq via a merger with a SPAC.

However, KPMG’s report showed that SPAC deals in Q421 continued to drop and that some companies emerging via SPACs did not do well with their IPOs.

During the last quarter, some enterprises had considered going public via SPACs, but they dropped the idea and turned to capital raising through multiple rounds, KPMG said, highlighting the increasing prioritization of IPO readiness over speed.

On the other hand, “2021 was the strongest year for VC investment on record,” and VC-backed companies raised a total of US$171.4 billion across 8,710 deals, the report said.

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The Subscription Economy

Top subscription app revenue grew 41% in 2021 to reach $18.3 billion

It’s no wonder why mobile publishers are battling to keep more of their subscription revenue out of the hands of platforms like Apple and Google — a new report indicates the top 100 non-game, subscription-based apps saw their consumer spend increase 41% in 2021 to $18.3 billion, up from $13 billion in 2020. And this […]

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The Changing Big Tech Landscape

Inside Facebook’s $10 Billion Breakup With Advertisers

Facebook was long one of the surest bets in digital advertising. No longer.

Martha Krueger, who runs a gift-basket business called Giften Market, used to spend her entire advertising budget on Meta Platforms Inc.’s Facebook and Instagram. She picked up a new customer for every $14 she spent.

When Apple Inc. introduced a privacy feature for mobile devices last year that restricts user tracking, she said, her costs to acquire such customers rose 10-fold. In October, she shifted her whole ad budget to search ads onAlphabet Inc.’s Google.

Lots of other companies that depend on e-commerce sales, including makers of nutritional powders, eyebrow stencils and toilet sprays, are taking a look at their bottom lines and deciding the same thing. They are slashing their spending on Facebook and Instagram and sending their ad money to Google, Amazon.com Inc., Snap Inc. and other platforms, according to ad buyers and e-commerce companies.

The privacy change is hitting the heart of Meta’s business: its ability to target ads at users with precision and prove to marketers that the ads generate sales. Earlier this month, Meta said it expects a roughly $10 billion hit to sales this year as the result of the Apple change, which requires apps to ask users for permission to track their activity and share it.

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Web 3 Update

Stablecoins Soar in Value as Everything Else in Crypto Shrinks

By Katherine Greifeld, February 24, 2022, 4:44 AM PST

The hottest spot in crypto right now is coins with prices that don’t move.

Stablecoins, cryptocurrencies which peg their value to assets such as the U.S. dollar, have ballooned in size over the past few months as Bitcoin and other coins whipsaw. The total market capitalization of stablecoins currently stands around $180 billion, up from roughly $38 billion a year ago, Coin Metrics data compiled by The Block show. By comparison, the total crypto universe is largely stagnant over the past year.

The surge in market value shows that crypto traders are effectively moving their holdings to cash, according to James Malcolm of UBS. Bitcoin prices have collapsed by about 50% since mid-November, with many smaller coins posting even bigger declines. Rather than moving money off crypto-trading exchanges by converting back into fiat currencies — a cumbersome and potentially costly process — it’s easier for investors to simply wait out the volatility in stablecoins, Malcolm said.

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NFTs, Cryptocurrencies and Web3 Are Multilevel Marketing Schemes for a New Generation

By Christopher Mims

In a recent ad for cryptocurrency exchange FTX, Tom Brady asks seemingly everyone in his contact list, “You in?” As in, are you going to join him in buying some crypto, and not, presumably, in being a football star married to a supermodel. The pitch is straightforward celebrity-endorsement fare, designed to capitalize on the FOMO that is the standard psychological tactic of those who are already invested in cryptocurrencies and related technologies, and who would like the rest of us to come aboard. Mr. Brady has an equity stake in FTX.

A “You in?”-style pitch is also typical of successful multilevel marketing companies. Both make a virtue of the fact that our getting “in” will obviously enrich those urging us to do so, by driving up the value of their own holdings or network. And then, hey, the same could be true for us!

It’s a siren song as old as the promise of attaining financial freedom by selling herbal supplements, cosmetics or leggings from the comfort of your home, enhanced and refined by the ways in which modern communications systems can rapidly elevate ideas and movements from the fringe to the center of national and global conversation.

But how does owning or trading crypto, which is after all just data — infinitely reproducible, supposedly nearly free thanks to the internet — make one rich? Or for that matter, owning or trading other digital assets like NFTs (or “nonfungible tokens”) that have become all the rage among celebrity art collectors? The straightforward premise: By using the blockchain — a type of public database that anyone can access and everyone can (supposedly) trust — it is possible to create a chunk of data, known as a token, that is unique in the world, and cannot be reproduced. In other words, it is possible to make a digital object, be it a piece of art or a crypto coin, scarce.


Essays of the Week

Apple: Thief | No Mercy / No Malice

Round numbers have no inherent meaning — they’re a consequence of 10 fingers. But they provide a benchmark, a way to focus our observations. The last few years in tech, we’ve witnessed several firms breach $1 trillion market capitalizations, a few hit $2 trillion, and one touch $3 trillion.

Let’s set a more audacious goal: $1 trillion in revenue. We’re still a few years away — the largest company by revenue today, Walmart, brought in $559 billion last fiscal year. And while market cap can fluctuate 20%+ in several minutes, revenue is closer to the epicenter of stakeholder value, because it benchmarks actual commerce. The English call revenue “turnover,” which conveys someone doing actual work.

The Great Heist

Revenue of $1 trillion won’t be found in a single category. Few categories even offer a $1 trillion market, and market dominance in any category comes with problems. It’s better to have a 20% share of five markets than 100% of one. Diversity offers security, and monopolies attract legal attention: Facebook and Google’s shared dominance of digital advertising makes it easier to fit them into the antitrust legal framework.

A trillion in revenue will require stealing markets from incumbents. It’s already happening in Big Tech: Amazon flew head-on into the cloud, Microsoft is eating gaming, and in the next decade we will see The Great Heist: $1 Trillion Edition. One company is best poised to ascend to the Iron Throne of theft.

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The Sales Sandwich

The most consistent sales leader I’ve worked with hit plan 27 consecutive quarters. How can a sales leader develop similar repeatability? Much goes into it here are the reports he used to manage his team at the board level.

The PQR (pipeline-to-quota) funnel is first. Pipeline is the total value of the accounts within a stage or later. Quota is the aggregate quota on the street for the quarter. Divide P by Q to get PQR.

This hypothetical startup amassed 2.3x PQR at Stage 3+. This team is off to a good start with 0.7x of the quarter’s number in Stage 5+ at the beginning of a quarter. Each business’s PQR funnel will differ depending on their sales cycle, ACVs, and overall motion. For stage definitions, see [1].

Will the sales leader attain plan? It depends on the sales cycle of the product. If the sales cycle lasts 45 days, the startup has time to move Stage 2 opportunities to Stage 6 before quarter end. If the sales cycle is 120 days, well…it’s going to take some heroics or heavy discounts.

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Baidu’s robotaxi service is now available in all ‘first-tier’ Chinese cities

Baidu’s Apollo Go robotaxi service should now be a regular sight in China’s biggest population hubs. Gizmodo and state-owned China Daily report the tech firm has introduced Apollo Go to Shenzhen’s Nanshan District, making self-driving taxis available in every ‘first-tier’ Chinese city following rollouts in six cities that include Beijing, Guangzhou and Shanghai. The launch covers one of the most densely populated regions in southern China (Shenzhen’s total population tops 13 million), and offers autonomous rides on the home soil of local tech industry heavyweights like Huawei and Tencent.

The initial robotaxi service is available through Baidu’s Apollo Go app at 50 stations between 9AM and 5PM. The initial focus is on “high-frequency” transport arteries, including Shenzhen Talent Park and the surrounding area. Baidu plans to expand coverage to more than 300 stations by the end of 2022.

Apollo Go is far from ubiquitous at this stage. Baidu expects to serve 65 cities by 2025, and won’t reach 100 cities until 2030. It also faces growing competition from rivals like AutoX, which also offers self-driving rides to the public. Even so, this represents one of the largest real-world robotaxi deployments. Waymo’s One service is only generally available in parts of the Phoenix metropolitan area, while GM’s Cruise just recently began offering limited public rides in San Francisco. Baidu is ahead of the curve, and it’s just a question of whether or not the company can sustain that advantage.

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Startup of the Week: LocalGlobe

2021 in a few numbers…

Even from the vantage point of early February, it feels as if 2022 is going to be a year where we consolidate a lot of what happened over the last two years. It’s hard not to see 2021 as a landmark year for society at large — it certainly was one for innovation, our industry, this ecosystem, the founders we partner with, and our team.

2021 required us all to find new ways of working and accelerated adoption of digital technology so profoundly that in years to come we’ll consider it pivotal in sowing the seeds of the next decade.

At LocalGlobe and Latitude, we made great progress with our key long term focus areas of investing in our team and infrastructure. At the same time, we were able to demonstrate that our core geography, which we call New Palo Alto, is capable not only of delivering world-class returns and leading the way when it comes to ethical innovation, but of having a positive impact on all stakeholders — or as we put it, being a good neighbour.

We’d like to share a few numbers that demonstrate what we experienced in 2021 and set the stage for our plans for 2022 and the decade beyond.

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Tweet of the Week


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