By Keith Teare • Issue #313
This week sees a major shift from public to private investment, with UBS and Cathie Wood’s ARK weighing in. But what is the secret to unlocking private wealth growth? Content from @ArkInvest @UBS @join_EF @fpert041 and @geneteare from @crunchbasenews
- Private Wealth Secrets
- UBS advises private investments
- Cathie Wood’s ARK to invest in private companies
- Tracking Private Growth
- The 34 new Unicorns from May
- Why new VC funds beat old ones
- Regulation Week
- Lina Khan’s plan to take on big tech
- EU’s message scanning plans questioned
- The US privacy Bill is a huge deal
- News of the Week
- Elon gets data
- YC is back in person
- Data DAO’s attract funding
- June unicorns start to appear
- Funding falls, but not in every stage
- D1 may be screwed
- Series A and Seed analysis from Pitchbook
- Essays of the Week
- The deck that changed my life
- China’s Rick Kids
- Startup of the Week
- Tweet of the Week
- Entrepreneur First returns 17x Cash on cash
Maybe I am biased in what I choose to read. No, I definitely am biased. I look for what is new in the Silicon Valley world that I live in. And while I appreciate that Palo Alto is not the whole world, it has secrets that others would benefit from knowing. The biggest secret is that wealth creation mostly happens for investors who can access private assets. Listed stocks and shares are handily outperformed by private ones. 2020 and 2021 seemed to indicate that public company investing was back in vogue and beneficial to investors. The 2022 market correction has definitely set the clock back to at least 2019, and perhaps earlier. For public investors, that is clearly not good, but for those focused on earlier investments into private assets, it is back to normal.
This week contains ample evidence of the swing back to private investing, from UBS and also from Cathie Wood’s Ark Invest. It also has evidence of life in the private space. Crunchbase focuses on the 34 new unicorns from May. And there are reports of serious funding rounds from the first part of June. The Tweet of the Week reports that Entrepreneur First, a UK-based investor with Reid Hoffman as an investor and board member, returned 17x cash to its early investors. Private returns can be very good.
Of course, US investment rules mostly prevent retail investors from buying private assets unless they are “accredited” investors – in other words, rich, or relatively so. Even the new SEC proposals for private companies limit the amount they can raise from non-accredited investors to $10m (RegD) or $75m (RegA).
At SignalRank I track a subset of investors who, on average, outperform the rest of the private equity asset classes. We call them the GPRank 100. These are the top 100 investors in seed-stage companies. EF is one of them, as is SeedCamp, LocalGlobe, Initialized Capital, Floodgate, Cowboy, Homebrew, Haystack, SV Angel, Y Combinator, and many more.
Looking at 2022 private investments through the investments made by the GPRank 100 tells a story of continued opportunity.
The table of pre-seed, seed and Series A rounds for 2022 looks like this:
That is over 1600 rounds since January. The trend shows fewer rounds and less capital deployed but a consistent $6m per round as a median investment amount. I will continue to track this.
These rounds all contain a GPRank 100 investor where the likelihood of a good outcome is significantly higher than the market as a whole.
If we do the same for Series B rounds in 2022, where a GPRank 100 invested prior to the series B we see the following:
Again, the trend is for fewer rounds, and up until May a declining amount deployed. May is 127% of April, so an increase in capital deployed. The median invested is in a range of $44-55m. That declined each month until May and then trended up. But May was still only 85% of January in terms of gross investments.
Because the companies funded here are GPRank 100 companies, they represent the creme de la creme of private opportunities. They are the asset class that everybody should want to be in.
SignalRank’s algorithm’s further segment these companies and we can use predictive analytics with a high degree of confidence to separate out the top 10%, with a 29% likelihood of gaining a 30x gain in value over 5 years from the Series B round.
Nothing that has happened in the public markets changes the dynamics of this asset class.
But the gains achievable are not available unless you are rich – an accredited investor. That needs to change and it is why I am personally focused on creating a publicly listed vehicle that captures these opportunities and shares them with ordinary investors.
More in the video.
The Private Wealth Secret
In a UBS survey, 80 percent of family offices reported investing in private equity, which includes venture capital, up from 77 percent in 2021 and 75 percent in 2020.
«With inflation high, central bank liquidity flagging and interest rates rising, family offices are reviewing their strategic asset allocation. They’re reducing fixed income allocations and sacrificing liquidity for returns, as they increase investments in private equity, real estate and private debt,» UBS said. «Against this backdrop, most believe uncorrelated returns will be harder to find. As they explore new possibilities, they’re looking for alternative diversifiers including active strategies, alongside illiquid assets and derivatives.»
For private equity plays, investing both directly into private businesses and in funds is the favored approach, the UBS Global Family Office report for 2022 said. Technology, healthcare, social assistance and real estate are common sectors for the investments, the report said.
While family offices mainly invest at the expansion or growth equity stage, more are looking to invest at earlier stages as valuations have risen, the report said; around 63 percent said they usually invest in venture capital, up from 61 percent in 2021 and 53 percent in 2020, the survey found.
Around three-quarters of the family offices planning to increase their private equity investments over three to five years expect the segment will outperform public markets, the report said. It added that over half of that group are also looking for types of investments not available in public markets.
Link for Download
The chief executive of ARK Invest, the asset manager known for its bold — and risky — bets on tech and innovation, said yesterday afternoon that ARK is planning to launch a fund that will invest across both public and private markets. Right now, ARK’s funds invest solely in public equities.
“We’re going to start a crossover fund,” Wood said in an on-stage interview at the UP.Summit, a mobility conference taking place in Bentonville, Ark. this week. Wood declined to speak further about the fund because of Securities and Exchange Commission regulation, but an SEC filing from earlier this year reveals it will be a closed-end fund that will invest in public equities, early to late-stage startups, and venture capital funds, among other investments.
Tracking Private Growth
This cohort of new unicorn companies added $57 billion in value to the board, according to a Crunchbase News analysis.
By the numbers
The earliest funding stage for these companies to reach a billion-dollar valuation was at Series B, when seven of May’s new unicorns were minted. All three companies in crypto became unicorns at Series B.
And of this list, climate tech company Arcadia has the highest count of investors, at 31.
The average funding round raised over time for these new entrants was $261 million.
The most active investors in this cohort of companies are Tiger Global with seven portfolio companies, Insight Partners with five companies, and accelerator Y Combinator and Andreessen Horowitz, each with four portfolio companies.
Tiger Global was the most active in round counts, having invested in 13 funding rounds, an indicator that the firm has invested in all of these portfolio companies in advance of their $1 billion valuations.
Let’s meet the companies:…..
Three reasons why young venture capital firms are often more successful according to an investment platform that focuses on the asset class
As we have seen, there are 3 reasons why emerging fund managers might have slightly better performance than established VCs in today’s environment:
- First, most emerging firms raise small funds. Smaller funds generally outperform, as they can participate meaningfully in early rounds and a single outlier has the potential to generate strong fund-level performance, even if the fund is only able to garner modest ownership.
- Second, emerging fund managers tend to be made up of a smaller group of GPs or solo capitalists with strong industry insights and personal brand in a specific industry or trend, often when this is still nascent and overlooked by the established players.
- Third, most emerging fund managers do not have to worry about succession plans or manage an existing brand and track record. They can be focused on deliverying on their chosen strategy,
- Finally, data shows that the venture capital industry has strong reversion-to-the-mean effects, which implies that the Midas Touch tends to rub off over time — after about 60 portfolio company investments (See The Persistent Effect of Initial Success: Evidence from Venture Capital, § 3.2): “Little, if any, persistence [occurs] beyond the 60th portfolio company, implying long-term convergence to a common mean”.
The bottom line is that emerging fund managers have indeed an edge compared to established VCs in terms of fund performance. On the other hand, as with most investment opportunities, greater upside also means a greater risk. Therefore any investor looking to back successful new firms ultimately needs to be able to assess whether the managers of such VC funds have the ecosystem connections and unique insights to deliver on their investment thesis.
As her second year at the helm of the FTC approaches, Khan spoke to Recode’s Sara Morrison and Jason Del Rey about why antitrust reform is important, what her priorities are, how she’s approaching the consumer protection side of the FTC’s work, and if she’s enjoying herself. And we need to make sure that we’re using our tools to fully protect all Americans, including businesses, where they’re being harmed by anticompetitive or unlawful practices.
The executive body of the European Union is pushing forward with a proposal that will endanger privacy and security for us all. When this proposal was made public by the EU Commission last month, we said it was a terrible idea. Today, we’re joining together with more than 70 organizations in Europe and around the world to explain how dangerous this proposed law will be.
The Commission’s proposal would compel a broad range of technology companies to scan and analyze their users’ messages, in the name of fighting crimes against children. Email, texts, social media messages, and DMs could all be subject to plain-text access and scanning. It could eviscerate end-to-end encryption by installing client-side scanning on our devices.
Our letter explains the many ways that this EU scanning regulation puts us all at risk. Lawyers, journalists, human rights workers, political dissidents, and oppressed minorities — the people who need secure communications the most — will be the most affected. This also harms abused and at-risk children, who need to securely communicate with trusted adults to seek help.
These vulnerable people will be subject to constant law enforcement scans in the EU. Beyond the EU’s borders, it could be even worse. Once these special access systems are built, we can be sure that more authoritarian countries will demand the same ability to read our messages.
Today we’re officially asking the EU Commission to withdraw this proposed regulation.
Every single pig in the D.C. metro area took flight Friday when three key bipartisan lawmakers unveiled a draft of their actual, real-life, long-promised, but rarely materializing comprehensive privacy bill.
The draft of the American Data Privacy and Protection Act represents a crucial compromise between Reps. Frank Pallone Jr., Cathy McMorris Rodgers and Sen. Roger Wicker, and would give Americans unprecedented rights over their privacy, including the right to sue tech companies that violate it.
So, has the time for federal privacy law in the U.S. finally come? Come on back down to ground, little piggies. This could take a while.
There’s a lot to this bill.
- It includes a sweeping data minimization requirement and would leave it to the FTC to determine what sort of data collection is considered “reasonably necessary, proportionate, and limited.” Your reminder here that FTC chair Lina Khan is also a privacy hawk.
- It would give Americans the ability to access their data, request that it be deleted or corrected and export it elsewhere.
- Companies would be prohibited from serving targeted ads to kids under 16 and would be limited in terms of how certain sensitive types of data can be processed and shared.
- And large data holders would have to conduct annual civil rights assessments on their algorithms’ impacts and submit those reports to the FTC.
There are two aspects of the draft that will likely prove particularly controversial.
- As part of their compromise, lawmakers would give Americans a private right of action in this bill. That’s a blow for the tech industry, which has fought such provisions in states across the country.
- “We have concerns about whether the bill could result in a new wave of nuisance lawsuits and look forward to reviewing the bill further,” Craig Albright, vice president of Legislative Strategy at BSA | The Software Alliance, said in a statement.
- But lawmakers also handed business interest groups a win by including a provision that would allow the federal privacy law to preempt state privacy laws — with a few notable exceptions.
- That could cause problems with privacy advocates, who hoped a federal law would be a floor, not a ceiling. “This law would supersede the emerging state comprehensive privacy laws and effectively freeze privacy legislation for years to come. So it needs to get it right,” Consumer Reports’ head of Tech Policy Justin Brookman tweeted.
But disagreements over those line items aren’t the only things standing in the way of the bill’s speedy passage.
- Sen. Maria Cantwell, who chairs the Senate Commerce Committee, still isn’t on board, and she would need to be for this bill to go anywhere this session. “For American consumers to have meaningful privacy protection, we need a strong federal law that is not riddled with enforcement loopholes,” Cantwell said in a statement.
- She objected in particular to the idea that the private right of action would begin four years after the law is enacted.
- And of course, this is an election year, which gives pretty much any legislation a fat chance of passing.
News of the Week
Company accused of refusing to provide sufficient information about number of false users
Elon Musk has accused Twitter of committing a “material breach” of his $44bn (£35bn) agreement to buy the company and has threatened to terminate the deal, in the clearest indication yet that the world’s richest man is preparing to walk away from the takeover.
Musk’s lawyers have written to Twitter accusing it of refusing to provide sufficient information about the number of false users on the service, as part of a simmering dispute over the number of spam and fake accounts that populate the platform.
Network ready to provide stream of daily data after world’s richest man threatened to pull out of $44bn purchase if Twitter refused
The social media company will provide the world’s richest man with access to a stream of data comprising more than 500 million tweets posted every day, according to the Washington Post. A number of companies already pay for access to the data, which includes a real-time record of tweets, the devices users tweet from and information about the accounts that tweet, the Post reported.
Dalton Caldwell and Michael Seibel provide an update on the upcoming Summer 2022 batch along with the changes and trends they’ve noticed in the startup world today. Apply to Y Combinator: https://www.ycombinator.com/apply/ Work at a startup: https://www.ycombinator.com/jobs #startups #business #tech
- Delphia plans to use consumer spending insights, employment patterns and public opinion data to deliver algorithmic models previously exclusive to hedge funds
- Data DAOs will become forces to be reckoned with in capital markets, Multicoin Capital managing partner says
A Toronto-based algo-advisor has raised $60 million in a Series A round led by Multicoin Capital to launch a native rewards token, increase the number of ways users can contribute data, and expand its headcount. Delphia CEO Andrew Peek said the company offers retail investors an alternative to passive robo-advisors and direct stock-picking through a platform like Robinhood.
Perimeter 81’s platform enables businesses to secure remote access, network traffic and endpoint devices, and enforce zero-trust network access, where there is no implicit trust on a network and information must be continuously validated.
Global venture funding in May 2022 reached $39 billion, Crunchbase data shows, marking the first month in more than a year when it dropped below $40 billion. The May figure is also well below the $70 billion peak VC funding reached in November 2021.
But while late-stage and technology-growth investing have been most severely impacted, seed funding remains surprisingly robust.
All in all, VC funding in May fell 14% month over month from $45 billion in April. It’s down 20% from $49 billion a year earlier in May 2021. The largest pullback was in late-stage venture capital, which fell from 2021 monthly averages by close to 40%.
Seed stage proves more resilient
Late-stage and technology growth investing has been the most impacted by this year’s venture pullback. Last month, venture investors globally spent $22.3 billion in the late- and growth-stage sectors — down 38% from the 2021 monthly average of $36.2 billion.
But early-stage funding is not immune to the withdrawal, either. While growth equity investors last year invested record dollars in high-growth earlier-stage companies, they’ve pulled back this year. All in all, early-stage funding reached $13.7 billion last month, down 22% from the average monthly funding in 2021 at $17.6 billion.
Seed funding was the most robust funding stage last month, with $3.1 billion invested in seed-stage companies last month. Seed funding, in fact, increased 11% from the average $2.8 billion invested monthly at seed in 2021.
The firm borrowed money to buy stakes in private companies and posted massive gains. But as valuations fade, such bullishness is veering into losses across the industry.
Hedge funds were tallying gains on their hottest bet in years when Dan Sundheim reached an unusual deal with JPMorgan Chase & Co. to go even further.
With the bank’s help in August 2020, Sundheim’s D1 Capital Partners used its stakes in private companies as collateral for borrowing $2 billion that the firm could put toward yet more of those stakes, among other things. Last year that focus on private companies looked brilliant, as D1 updated its valuations and posted a whopping 70% gain in that part of its portfolio.
Now, the industry is bracing for a reckoning.
Across Wall Street, billionaire investors and their advisers are urgently trying to figure out how much exposure they have to plunging values in Silicon Valley unicorns and other private ventures. They’re reviewing disclosures by some of the most active buyers of those assets, including D1, Tiger Global Management, Coatue Management, Lone Pine Capital and Viking Global Investors.
Clients had been giving their money managers more leeway to buy assets that can be hard to value and slow to sell. Some firms used leverage to boost returns.
After being largely unaffected by the pressure that market turmoil has put on larger tech companies, early-stage startups are beginning to feel the chill.
Changes in the market climate often come quickly, but those trends can take awhile to show up in a comprehensive dataset. But deal-by-deal, anecdotal evidence gives investors a good sense of which way the winds are blowing.
As a limited partner in close contact with seed-stage VCs, Michael Kim has an especially clear window into the early-stage venture capital market. His firm, Cendana Capital, is a fund-of-funds that backs dozens of seed firms, including Lerer Hippeau, Susa Ventures, Freestyle Capital and Uncork VC. Kim also regularly checks in with Series A-focused funds about their financing requirements.
His takeaway is that VCs have recently adopted a distinctly more conservative approach to early-stage deals.
Over the last two or three months, seed and Series A deal valuations have dropped significantly, and early-stage investors have gotten more selective, focusing on startups that can meet more substantial revenue targets than were required in the past.
Last year, the typical best-in-class Series A deal was raising around $20 million at a post-money valuation of $120 million, according to Kim. But recently those round sizes and valuations have tumbled to about $10 million and $50 million, respectively, he said. As a result, founders are accepting increased dilution of the stakes they hold in their own companies.
Essays of the Week
A presentation deck is a single thesis or idea. So we got to work making a single Keynote deck that would decide our fate.
Much of their social capital has survived even Mao’s purges | Graphic detail
The authors found that elites born before 1940 were 7% likelier than their contemporaries to have finished secondary school. Their stigmatised children were 3% less likely to have done so than others their age. By 2010 the children of old elites earned 5% less than other Chinese.
But things flipped back. Descendants of the old elite born between 1966 and 1990 were 6% more likely to finish high school than their contemporaries. In 2010 they earned 12% more than other Chinese. They even earned 2% more than party members.
The researchers found that the old elite’s grandchildren are more enterprising and work longer hours than the descendants of those who had lower social standing. Although the elite’s capital was destroyed 70 years ago, their social capital has endured. ■
Startup of the Week
Branch snags $147M at a $1.05B valuation, showing that thorny insurtech market not impervious to growth
Branch, a startup offering bundled home and auto insurance, has raised $147 million in Series C funding at a postmoney valuation of $1.05 billion.
Weatherford Capital, a family-owned private investment firm, led the round, which also included participation from existing and new backers such as Acrew, American Family Ventures, Anthemis, Gaingels, Greycroft, HSCM Ventures, Narya, SignalFire and Tower IV. With this latest financing, Columbus, Ohio–based Branch has raised $229.5 million in total funding since its 2017 inception.
Branch, according to co-founder and CEO Steve Lekas, is the only insurance company that he is aware of that can bind insurance through an API, and the only one that can bundle auto and home insurance in a single transaction.
Another way Branch is unique, he adds, is that it can be embedded into the buying experience. In other words, the company has partnered with mortgage or security system providers to integrate insurance at the point of sale in their products. For example, if a person is closing on a home, they have the option of purchasing Branch insurance at the same time. Partners include Homepoint, OpenRoad Lending and SimpliSafe, among others.