Bonfire of The Unicorns?

A reminder for new readers. That Was The Week collects the best writing on critical issues in tech, startups, and venture capital. I select the articles because they are of interest. The selections often include things I disagree with. The articles are only snippets. Click on the headline to go to the original. I express my point of view in the editorial and the weekly video below.

This Week’s Video and Podcast:

Content this week from @kteare, @ajkeen, @kwharrison13, @Cashflow_Cowboy, @@Samirkaji, @ttunguz, @jaygoldberg, @lightlawrence2, @KateClarkTweets, @ingridlunden, @cartainc, @vincerCFO, @TuesdayCapital, @pgallagher99, @stripe @collinson


Editorial: Bonfire of the Unicorns

Essays of the Week

Historical Futurism

Venture Capital and the Retail Investor

Raising a fund in a downturn

Fundraising in Confusing Times

Fundraising is Hard – Fund of Fund Fundraising is Harder

Unicorns Hobbled Amid VC Pullbacks

The Unicorn Fire Sales Ahead

Hopin, the struggling virtual conference unicorn, sells events and engagement units to RingCentral

Reset & Rethink – Assessing Venture Capital with Gené Teare of Crunchbase

Video of the Week

LK-99 – Room Temperature Super Conductor

AI of the Week

SEC Proposes New Conflict of Interest Regime for Predictive Technology

Where Will AI Have the Biggest Impact? Healthcare.

News Of the Week

State of Private Markets: Q2 2023

Early-Stage Venture Capital Investment Down 54%

Coatue Raises $331 Million for Early-Stage Fund, 34% Below Target

Alphabet Stands Out in a Trio of Unimpressive Earnings

Meta Posts Strong Q2 Results as Facebook Crosses 3B Monthly Active Users

AngelList expands into private equity with the acquisition of fintech startup Nova

Venture Capital Firm Sequoia Cuts Crypto Fund by 66%

Volkswagen takes 5% stake in XPeng as part of Chinese EV deal

Tuesday Capital, a Silicon Valley firm that moved to Austin during the pandemic, captures $31M for its newest seed-stage fund

Startup of the Week


Tweet of the Week

Stripes New CFO

Editorial: Bonfire of the Unicorns

Kate Clark from The Information is often highlighted in That Was The Week. This week she writes about the broader implications of Hopin selling its events business to RingCentral. Her headline screams about The Unicorn Fire Sale Ahead.

So a Bonfire of the Unicorns is this week’s theme.

It may seem like a depressing and pessimistic headline, and indeed, the chasm between the 2021 valuations achieved by companies and the 2023 reality seems massive. But the reality is that Hopin’s business has not been able to realize the kinds of revenues anticipated by investors.

Hopin is a Covid-era Unicorn. It built software for virtual events. The software’s promise was always ahead of its capabilities, as is often the case with startups. It acquired competitors and adjacent companies to fill out its offering, and it did host some significant events and drove early promising revenues.

But Covid restrictions relaxed, and real-world events returned. Its revenues flattened and declined. A look at Hopin’s funding history clearly shows this rise during the Covid period.

This week’s sale announcement of core products to RingCentral does not disclose deal terms. Hopin is left with the products derived from its acquisition of StreamYard.

Hopin, one of the most iconic startups of the pandemic era, said this week it sold its virtual event and webinar hosting business to RingCentral, and that its founder and CEO, Johnny Boufarhat, is stepping down. The sale marks a pitiful finale for the once-heralded startup.

Axios reported, “No financial terms were disclosed, but the price is said to be in the “low hundreds of millions” of dollars.”

And continued:

“Hopin plans to use some of the proceeds, plus existing cash, to provide partial liquidity for its venture capital backers, who invested more than $1 billion. Specifically, those participating in the Series B round and beyond can expect to recoup around half of their outlays.

They’d also remain shareholders in the remaining company, which is pivoting to focus on a video streaming product called StreamYard (based on a 2021 acquisition). There might even be a rebrand in the future.

Among the changes will be the departure of Hopin CEO Johnny Boufarhat, who netted nearly $200 million via a secondary tied to the 2021 venture round.

Not all investors, however, seem interested in sticking around for what’s effectively a new company, revalued closer to $400 million, and are expected to exit effectively. Likely parties here are crossover firms like Altimeter Capital Management.

The new valuation should help Hopin attract new employees, as the prior price made hiring difficult.”

So, investors will not get back the $1 bn the company had raised but will retrieve something while having a stake in what remains of the company.

Clark compares Hopin to Clubhouse, another high flier during Covid with a valuation to match. She goes on to say, “Hundreds of other unicorn startups will likely wrestle with a similar fate: They must find a shot-gun marriage or face collapse.”

This is in a week where it was reported that Union Square Ventures has marked down its assets by about 26%. Some commentators are reacting and suggesting that the markdown is too aggressive. Based on the trends, it may be too little. Most funds have yet to go through an audit that will force the re-valuing of assets, but it will likely be ugly when they do.

In that context, it isn’t surprising that:

…the market for new venture funds remains trapped in molasses. One new fund we have been working closely with over the past two years encapsulates this pretty well. A year ago, they were able to go from first LP meeting to getting a check in six to eight weeks. Then the markets imploded in the second half of 2022. Now it takes nine months to go just from the first meeting to second meeting. LPs love the. thesis and love the team, it’s just that they cannot make investment decisions.

The blockage in venture capital is a symptom of the 2020-2022 investment cycle. Hundreds of billions of dollars of value are trapped inside valuations that cannot be carried forward without significant structural adjustments in cap tables and valuations. Inside rounds (see the Carta state of the market report) and down rounds are needed to clear the blockage. In the absence of that, companies will run out of cash and be closed or sold for pennies on the dollar, as happened to Clutter this week.

This creates a tricky situation. There is a lot of real innovation that can drive enormous value happening in 2023. LK-99 is this week’s startup of the week and is a good example of what is coming. AI is obviously similar in terms of its value-creating potential. Money is hard to come by from traditional sources. This opens up a lot of opportunities for non-traditional investors to take advantage of the gap. Family Offices, Endowments, and Angels can come into their own for the next one or two years and own significant stakes in the next generation of wealth creation. Inventing the future is valuable, and funding that value creation is lucrative. Money will start to flow, but we may be surprised where it comes from as the system tries to unblock itself.

In that vain – hats off to Pat Gallagher of Tuesday Capital for raising a new seed fund this week. And to Steffan Tomlinson for becoming CFO at Stripe. Both good friends and worthy winners in a week of gloomy news.

Essays of the Week

Historical Futurism

Using Science Fiction to Invent the Future


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When I worked at TCV, our office used to be in downtown Palo Alto at the corner of Emerson and University. Every day, we would go to lunch at the Palo Alto Creamery, or the Sweetgreen on Ramona (or Nobu if Howie got his way). Regardless of which option we chose, we always ended up walking past the corner of Emerson and Hamilton.

Across the street from the Creamery, I would walk past the windows of The Institute For The Future. I would see displays showing off trinkets of the past: Walkman, Gameboys, and other 80s and 90s paraphernalia. I had no idea what the organization did, but I was always fascinated seeing gear like this:

One day, I got curious enough that I went inside to learn more about what they did. I don’t know what I expected (time machine manufacturing, maybe?) But turned out the business was pretty normal. Advisory services, partnerships, and a pretty cool 10-year forecast that they’ve been doing for 50 years! I still have the flyer they gave me when I walked in.

Turns out, the IFTF was a spin-off from the RAND Corporation setup in 1968 to help organizations with “future studies.” In the original mission statement of the organization, they laid out three key focuses:

To explore systematically the possible futures for our nation and for the international community.

To ascertain which among these possible futures seems desirable, and why.

To seek means by which the probability of their occurrence can be enhanced through appropriate purposeful action.

That was one of my first exposure to the idea of futurology, futurism, and futurists. From there, it became one of my portfolio ideas. I’ve found myself collecting writing, experts, and resources to understand how people have predicted the future, what they got right, what they got wrong, and why.

The longer I’ve been an investor, the more I’ve found myself dancing with this idea of predicting the future. Is that what we’re supposed to be doing as investors? As founders? The simplest idea comes from Alan Kay:

“The best way to predict the future is to invent it.”

That might be the approach. Just build it, and the future will come. But I think there is an intellectual opportunity to better understand how the future comes to be. Sometimes the future is much more simple than we expect it to be, but sometimes the future requires a lot more work to make it better than it would be otherwise.

Another perspective is one I’ve written about before, and it comes from Matt Cohler, a partner at Benchmark:

“Our job is not to see the future, it’s to see the present very clearly.”

In a Quora AMA, Matt Cohler elaborated on what he meant by that:

“First of all I should clarify that when I talked about noticing the present first, I meant it in the context of surfacing and pursuing new investment opportunities. Once a venture investor is actually working with a company it’s critically important for that person to be able to see around corners — not to predict the future many years out, but to have the experience, pattern-recognition and judgment to know what’s coming next and to help an entrepreneur and company make good decisions by making use of that knowledge.”

So first? We see the present clearly. Then? We see around corners. But as important as it is to turn the next corner, that’s something ants can do too. If you want to make meaningful changes to how the future plays out, you need to be able to zoom out……

Venture Capital and the Retail Investor

Posted by Cowboy Investing, November 8, 2021

[Editor: This is an old post but very relevant to the next phase]

There is a segment of the technology and venture capital communities that believe a lack of access to the venture capital asset class is a major disadvantage to the individual investor. The story tends to go something along the lines that venture capital has tremendous returns and the barriers to investment are limiting the wealth building capabilities of individuals while favoring wealth accumulation for the very rich. An example comes from Fred Wilson’s blog post on May 5th, 2021 titled Half of All VCs Beat The Stock Market. Fred closed his post with the following:

“The VC market remains largely out of reach of many “main street” investors as the SEC limits these fund investments to qualified and accredited investors. That has never made sense to me and is yet another example of the “well meaning” rules resulting in the wealthy getting wealthier and everyone else missing out.”

– Fred Wilson

Alex Rampell and Marc Andreessen communicated a similar narrative during their interviews with Patrick O’Shaughnessy on Invest Like the Best. Each person mentioned is a better investor than myself and I would be thrilled if my career success was a fraction of their own, but I disagree with their view on this topic. There are also far less reputable individuals who are more aggressive about championing open access to venture investing and alternative assets in general.

I’m going to present a case that the story of accessing venture will improve the lives of retail investors is overblown as average venture returns aren’t clearly better than public market alternatives and illiquid assets often don’t address the challenges of the retail investor. Many of the considerations will apply to other private markets asset classes including private equity and real estate, so venture isn’t alone in my critiques, for those that believe access to these illiquid assets with make a meaningful change to the wealth generating ability of non-accredited investors.

Is The Performance Story Real?

Let’s start by looking at the investing outcomes of venture relative to more accessible liquid alternatives. My belief is the paper reference by Fred in his blog post from Harris, Jenkinson, Kaplan, an Stucke (“HJKS Paper”) dated November 2020 overstates the relative returns of the venture industry compared to public markets due to data biases and the existence of a more appropriate liquid investment benchmark than what is used in the piece. Please check out the paper if you want to dive deeper into the methodology and for interesting information on persistence of returns (along with conclusions favorable to emerging fund managers).

While the HJKS Paper uses the S&P 500 and Russell 2000 benchmarks to compare returns, the Nasdaq 100 (or QQQs) are a better proxy as a public market alternative given the underlying industry exposure. The S&P 500 and Russell 2000 have technology sector exposure well below that of the venture asset class at this time. Data below doesn’t account for historical differences (both potentially closer to or further diverging from the index). A more appropriate benchmark comparison will remove some of the delta in performance associated with the beta exposure to the underlying industries. Using Cambridge Associates data on the industry composition of the venture asset class, below is a table detailing the industry composition of the Cambridge Venture Index (“CVI”), S&P 500, Russell 2000, and Nasdaq 100.  Also below is a table showing the delta between the CVI and the three public indexes. The Nasdaq 100 is likely the best proxy to the CVI out of the three options based on industry exposure.

How much of the difference in performance can be explained by sector exposure?

Returns data from Cambridge through June 2021 presents a mixed picture of performance relative to a more appropriate benchmark to account for industry betas. Cambridge’s Nasdaq Modified Public Market Equivalent (“mPME”) is a composite of the whole Nasdaq index, which should be roughly in-line with the Nasdaq 100’s performance given the disproportionate weighting of the largest 100 stocks on the overall performance. The 25-year window has spectacular returns for venture capital, which happens to include the tech bubble. The 20-year window has material underperformance relative to the Nasdaq mPME with roughly flat relative performance in the five, ten, and fifteen year windows. Venture outperformed in the one and three year time frames. The mixed record for the whole asset class calls into question how much benefit a retail investor would realize with venture exposure in their portfolios.

One could argue recent history entered a period where venture can continue to outperform given the scale and scope of businesses being created at this time. Relative to the twenty-year window, there would need to be a persistent shift in return outcomes going forward and not just a small window of venture excelling. I’m assuming the tech bubble window was a unique period and not something that would occur with enough frequency that those return outcomes are consistent enough to impact long run returns for investors. Twenty years is a long time to lag public alternatives. Carlota Perez’s work on technological revolutions could imply that if tech bubble level events do occur with some repeatable frequency, the cadence could be every fifty to sixty years. Near term outperformance by venture, the results of investments made years ago, may not continue unless the breadth and scope of the opportunity set is greater than the market’s drive to elevate valuations at all levels of growth investing. In my view, continued levels of excessive performance would attract more competition at higher prices as seen by the behavior of firms like Tiger Global that would drive down future prospective returns for the asset class.

Another consideration that weakens the case for venture’s outperformance is that the HJKS data set likely overstates average venture returns. Burgiss returns data used in the HJKS Paper is based off of investment returns from LPs using the Burgiss platform. Over 1,000 LPs use the platform including pensions, endowments, family offices, and other institutional investors. The professionalism implied by LPs paying for the service most likely means a venture firm of a minimum quality is partnering with the LPs in the sample. The average AUM of venture funds in the sample is $226M ($300B over 1,329 funds) also implying a certain level of quality in GP given the amount of funds raised. Removing, what is likely, a material number of underperforming managers would positively skew the returns reported in the sample. Given the difficulty tracking private markets returns, Cambridge’s venture index data also likely has some degree of performance inflation given the selection biases of the types of GPs and LPs contributing to their data set.

While almost a decade old, the Kauffman Foundation’s 2012 We Have Met the Enemy and He is Us report paints a less optimistic picture about outcomes from a large venture portfolio.

“The cumulative effect of fees, carry, and the uneven nature of venture investing ultimately left us with six-nine funds (78 percent) that did not achieve returns sufficient to rewards us for patient, expensive, long-term investing”.

-Kauffman Foundation, We Have Met the Enemy and He is Us

Venture can be a game worth playing, but you need to be in the winners. The hope of excess returns with average outcomes is most likely overrepresented in the HJKS Paper given the selection bias of the data used.

Low Hanging Fruit

I find the narrative that being unable to access venture capital, or alternative investments generally, has a meaningful impact to financial outcomes of individuals to be disconnected from the challenges of median retail investors. Below is a chart from the October 2021 JPMorgan Guide to the Markets. The chart shows that the average investor’s return outcomes aren’t exceptional and there are liquid investment options that would materially improve the financial outcomes for the average investor before even considering adding alternatives to the portfolio.

The Average Investor has a long way to go.

Getting individual investors to achieve the returns of a 40/60 portfolio of stocks and bonds, let alone 60/40 equities and bonds or the S&P 500, would double their annual realized returns. The HJKS paper notes the venture asset class underperformed public markets for the 1980s and from 1999 to 2006 meaning that venture outperformance may not happen for a decade despite the liquidity difference. Given existing behavior by retail investors, creating products or companies that can effectively address the challenges of achieving market outcomes with easily accessible liquid investments would be more relevant and impactful for the average investor than changing regulations to allow people access to venture capital or alternatives with a nominal allocation.

I imagine some will present the case that robust secondary markets are a solution to solve for liquidity and risk management issues allowing more practical investment by retail investors into the venture asset class. Cost effective and liquid secondary markets would certainly be a benefit. Potential cash drag issues and forced selling in secondary markets to meet potential redemptions raises questions if there is a structure to invest in alternatives that would allow the retail investor to outperform public market alternatives. Given the precarious savings position of many households, redemptions would likely come in times of economic stress with negative impacts on liquidation prices of illiquid assets in forced sale environments. Maybe there is a potential product similar to a lifecycle fund that has a broad allocation with a piece of the portfolio being allocated to alternatives that reduces the potential liquidity stress in times of market stress with high redemptions. A single product focused on venture or alternatives would have potential challenges relative to more liquid alternatives in times of heavy redemptions.

The Adverse Selection Problem

Based on the returns data presented earlier, the real case for venture investing helping materially change the wealth creation ability of retail investors is for the average investor getting access to the RIGHT venture funds or a structural change in asset class returns going forward. I’ve expressed my skepticism of venture asset class level returns being structurally different in the future relative to the past. Data on performance persistence of high performing funds is meaningful, but how likely are these select organizations to open access to their platforms when they already have a group of institutions willing to provide the GPs with as much capital as the GP desires?

Raising a fund in a downturn

Venture Unlocked
Tomasz Tunguz of Theory Ventures on strategically raising a fund in a downturn, Why Firms Need a Business Model, and different views on portfolio construction
Listen now (46 min) | Follow me @samirkaji for my thoughts on the venture market, with a focus on the continued evolution of the VC landscape. On this week’s show we’re excited to have Tomasz Tunguz, Founder of newly formed Theory Ventures. Tomasz spent nearly 15 years at Redpoint Ventures, before recently spinning out to start Theory Ventures. Earlier this year, Theory close…

Listen now

On this week’s show we’re excited to have Tomasz Tunguz, Founder of newly formed Theory Ventures. Tomasz spent nearly 15 years at Redpoint Ventures, before recently spinning out to start Theory Ventures. Earlier this year, Theory closed a $230MM fund to back early stage entrepreneurs.

Those who have followed Tomasz’s writing, know that he is incredibly analytical and thoughtful in his approach to business. This conversation was no different as we went deep into topics such as portfolio construction theory, business models in VC, and how to be strategic in raising a VC fund. 

In this episode, we discuss:

(01:42) Why Tomasz joined Redpoint
(03:01) The decision to start Theory Ventures
(06:32) Raising his first fund during one of the most difficult raise environments in recent history
(07:45) What his plan was with the raise
(10:47) How Tomasz created and sustained momentum during his raise
(16:12) Common objections from LPs and how he overcame them
(19:49) What it means for a venture firm to have a business model
(23:00) How Theory’s thesis addresses the problem of multiples in the venture market
(24:59) Winning deals without paying premiums
(26:13) Why the 3x net returns on venture needs to increase to be competitive
(27:40) Getting comfortable with a smaller portfolio
(31:29) Tomasz’s mental model of picking and diligence with a smaller portfolio
(34:30) Qualitative signs he looks for in founders and companies
(38:19) Why Tomasz embraces the emerging manager label
(39:30) What the next decade of venture looks like
(42:07) The best career advice he’s received

I’d love to know what you took away from this conversation with Tomasz. Follow me @SamirKaji and give me your insights and questions with the hashtag #ventureunlocked. If you’d like to be considered as a guest or have someone you’d like to hear from (GP or LP), drop me a direct message on Twitter.

Fundraising in Confusing Times

July 26, 2023 · by D/D Advisors · in Uncertainty. ·

We spend a lot of time raising money, both for companies and investment vehicles. And so we have some thoughts about the current state of the fundraising market, but forewarning – we really have more questions than answers. There is a lot of uncertainty in the markets right now.

First, from a company fundraising point of view, conditions are not great. The latest Pitchbook/NVCA data shows deal activity is down considerably from this time last year. The amounts raised in the first two quarters are less than half of the same period last year.

However, they estimate the number of deals has fallen, by a far lower amount. There are a few ways to interpret that. Critically, it means that deal values are down significantly. Given that most people agree that valuations had gotten out of hand in 2021/2022, this is not surprising. But it still hurts. We think VCs are are trimming their portfolios, either explicitly or implicitly, foregoing follow-on rounds in much of their portfolio to focus on those companies they think are doing best. This does not seem as painful as in prior downturns because many companies saw this downturn coming far enough in advance to stock up their cash balances. In addition, the overall economy is still fairly healthy. This seems to mean that most portfolio companies fall into the “Save” bucket, it’s just that they are burning far less and thus not raising as much.

Anecdotally, we have seen a big shift in our consulting practices. On average, over the past decade about half of our consulting work came from early-stage companies. Today, most of that has dried up. Companies that raised money earlier this year had to fight tooth and claw through a very protracted process, but they were able to raise money in the end. However, start-ups still on the roster are starting to do betterl – hitting their targets, building revenue, and are starting to dip their toes in the funding markets a bit more readily. On the other hand, the corporate side of our business has picked up sharply. Right now, we are not doing much targeting work for big companies looking to make acquisition, but our sense is that is not too far over the horizon.

All of this is to say that start-ups have cut a lot of costs and hunkered down. Assuming the US does not enter the recession that Wall Street is convinced is coming any day now, we think start-up fundraising should start to pick up later this year or early next year. That market will not be a return to the frothy early 20’s, but should at least allow companies to start hiring a bit more and return to their Quest for Growth.

That being said, the market for new venture funds remains trapped in molasses. One new fund we have been working closely with over the past two years encapsulates this pretty well. A year ago, they were able to go from first LP meeting to getting a check in six to eight weeks. Then the markets imploded in the second half of 2022. Now it takes nine months to go just from the first meeting to second meeting. LPs love the. thesis and love the team, it’s just that they cannot make investment decisions.

Our sense is that these LPs do not have much clarity of the value of their allocations. In 2022, they may have allocated 5% of funds to venture. Now they know that many of the VCs holding their funds have seen paper values of their portfolio fall considerably, but those VCs are reluctant to take full write downs on those portfolios. Beyond contractual obligations, many VCs are reluctant tor recognize the full extent of the write-downs because that makes raising their next funds that much harder. So LPs may see that on paper they have 6% or 7% venture allocations, and so they need to reduce their exposure. At the same time, they recognize that in reality they probably have only 3% or 4% in venture. Any rational person would just wait this out. And to be clear, there are plenty of venture funds that are doing well, but beyond “AI” it is hard for anyone in this ecosystem to feel much cheer.

The whole industry is still very much in the process of adjusting to a very different interest rate environment. Everyone is still trying to figure it all out. Hopefully, things will start to clear up soon, but our sense is that we still have a ways to go and a few more shoes to drop before things start to resemble a new normal.

Fundraising is Hard – Fund of Fund Fundraising is Harder

Marc Penkala General Partner @ āltitude

𝗟𝗲𝘁’𝘀 𝘀𝘁𝗮𝗿𝘁 𝘄𝗶𝘁𝗵 𝘁𝗵𝗲 𝗶𝗻𝗰𝗼𝗻𝘃𝗲𝗻𝗶𝗲𝗻𝘁 𝘁𝗿𝘂𝘁𝗵:

US fund-of-fund fundraising dropped by a whopping 88% YoY from 2021 to 2022 and by 87% YoY from 2022 to H1 2023. In other words, fundraising dropped YoY from USD 24.4B to 400M in 2 years, which is mind-blowing. The EU fund-of-fund fundraising landscape and performance looks probably very similar on a smaller scale.  

Considering that only 10% -20% of fund-of-funds allocations go to emerging managers, they are close to irrelevant or even non-existent. In 2022, fund-of-funds likely provided “only” USD 300M to 600M of the 36.9B raised by emerging fund managers in the US, which is anywhere between 0.8% and 1.6% of the money raised. 2023 does not look any different; it is even worse – US fund-of-funds probably invest “only” 0.2% to 0.4% into emerging managers. 

𝗦𝗼 𝘄𝗵𝘆 𝘄𝗼𝘂𝗹𝗱 𝗲𝗺𝗲𝗿𝗴𝗶𝗻𝗴 𝗺𝗮𝗻𝗮𝗴𝗲𝗿𝘀 𝘀𝗽𝗲𝗻𝗱 𝘀𝗶𝗴𝗻𝗶𝗳𝗶𝗰𝗮𝗻𝘁 𝘁𝗶𝗺𝗲 𝗿𝗮𝗶𝘀𝗶𝗻𝗴 𝗳𝗿𝗼𝗺 𝗳𝘂𝗻𝗱-𝗼𝗳-𝗳𝘂𝗻𝗱𝘀 𝗮𝗻𝘆𝘄𝗮𝘆𝘀? Aside from the fact that most fund-of-funds only invest in 10-15 funds with tickets ranging from as low as 200k to some millions. 

One reason might be the kind of “halo” an emerging VC fund gets if a known and respected tier 1 fund-of-fund, such as Isomer Capital, Aldea Ventures, equation, RSJ Investments, or Blue Future Partners comes on board. 

Another one might be the access to their LP network and, of course, their VC fund portfolio, which could be highly relevant for deal flow or follow-on funding. 

The main driver is surely the mental sparring, general feedback, and access to a fund-of-fund’s knowledge base looking at thesis, strategy, fund model and execution from the GPs.

Unicorns Hobbled Amid VC Pullbacks

Non-public companies valued at $1 billion and up haven’t sprung back with the stock market.

By Larry Light

In mythology, unicorns have magical powers, from healing sickness to turning water potable.

In finance, their enchantment is fading, owing to over-valuation that lately has crashed. Unlike the flying, one-horned horses of fable, the financial unicorns—private startups worth $1 billion or more—have run up against forces pulling them back to earth.

On paper, venture capital-backed unicorns, many of them tech-tilted companies, are valued at $5 trillion. But their recent problems have sliced that in half, by the estimate of Coatue Management, a technology-oriented investment firm with both private and public holdings. There are “too many unicorns requiring too much capital,” a Coatue research presentation stated.

As initial public offerings and acquisitions have dried up, so has the ability of unicorns to furnish their VC backers with lucrative exits. Or any exits, for that matter: As these unicorns cannot go public or be bought by others, they have a hard time raising new money from now-dubious investors, by Coatue’s assessment.

One problem: The field has become too crowded. A decade ago, when Aileen Lee of Cowboy Ventures coined the term, only 44 unicorns existed. By this year, that has swelled to 1,350, the firm’s report declared.

By Coatue’s measure, the unicorns’ valuation reductions are stark, cascading from their 2021 peaks. Consider three online companies that Coatue has re-valued: Grocery deliverer Instacart is down 69%, online payment processor Stripe is off 47% and Chinese fashion retailer Shein has fallen 34%. Yet, by the values those companies have announced, apparently all three still are unicorns (Instacart, for instance, places its worth at $10 billion).

Part of Coatue’s valuation method is to compare unicorns with similar young companies that have gone public in the last few years. Despite an overall market recovery in 2023 after a calamitous 2022, these new-ish publicly traded outfits still are far down from their maximum levels. Take DoorDash, a competitor to Instacart: It went public in December 2020 and peaked in November 2021.As of last Friday, it was off 63.5% from that high point.  

The lack of exits and the reluctance of investors to plug more capital into the unicorns stem from such factors as the administration of President Joe Biden’s push for antitrust enforcement against large tech companies and a credit contraction after Silicon Valley Bank’s collapse.

An S&P Global Market Intelligence research note concluded that the stretch from January to March was “the worst quarter for venture capital and early stage investing in [five] years, with the startup industry struggling to raise funds and stay afloat.” Thus, VC “funding in startups has seen a significant decline, with funding cut in half across North America.”

While in general, technology stocks have recovered from a 2022 dive, the same cannot be said for many fledgling companies. One big reason: Venture investors appear to have gone too far, and many are tapped out. The VC industry has “become bloated to unsustainable levels during the later years of the boom cycle,” a PitchBook analysis found. In 2013, there were 850 active VC firms, a number that by 2023 had ballooned to more than 2,500.

Certainly, some unicorns remain in great shape. Few doubt that artificial intelligence lab OpenAI (said to be valued at $40 billion, and the recipient of a big investment from Microsoft) and Elon Musk’s rocket launcher, SpaceX ($150 billion), have held up valuation-wise and could do well with a public offering.

But for the balance of the class, a dose of magic would sure come in handy these days.

The Unicorn Fire Sales Ahead

By Kate Clark, Aug. 3, 2023 11:19 AM PDT ·

Hopin, one of the most iconic startups of the pandemic era, said this week it sold its virtual event and webinar hosting business to RingCentral, and that its founder and CEO, Johnny Boufarhat, is stepping down. The sale marks a pitiful finale for the once-heralded startup.

Similar to Clubhouse, the chat app valued at $4 billion in 2021, Hopin had reached a unicorn valuation in record time before fetching a whopping $7.8 billion valuation in 2021. I’ll always remember it as the company that investors insisted was once in a generation, even after pandemic restrictions were lifted and it became clear virtual events would not be as popular in a post–Covid-19 world. For those investors, there was no room for doubt!

Fast-forward to 2023, and Hopin’s core business is worth just hundreds of millions, according to Axios—a fraction of its former price. But what appears to be the beginning of the end for Hopin hardly stands out in a sea of struggling startups. Slowly, an entire cohort of unicorns that raised capital effortlessly in 2020 and 2021 is dying or finding buyers at fire-sale prices. 

Berlin-based rapid-delivery company Gorillas, which raised more than $1 billion in venture capital funding during the peak of the bull market, struggled to survive once investors tightened the purse strings, for example. It sold to grocery app Getir late last year in a deal valued at $1.2 billion, well below its $3 billion peak valuation.

And it’s not just companies with a billion-dollar valuation. As my colleague Natasha reported this week, storage startup Clutter, last valued at $600 million, ran out of cash last month. To stay alive, it struck a deal to be sold for pennies on the dollar to a business partner and existing backer, Iron Mountain. It had raised more than $300 million, according to PitchBook. Those on its cap table, which include SoftBank and Sequoia Capital, won’t be getting their money back. And Parade, an underwear startup that raised capital at a near $200 million valuation last year, is in talks to sell, my colleague Ann reported today. I expect, given the current dismal state for direct-to-consumer startups, that Parade’s sale price will be far less than its last valuation. 

These kinds of emergency M&A deals are the new normal. It’s a painful scenario for all parties involved. In Clutter’s case, its sale is also an example of how startups struggle to raise more VC when they hold so much debt—as well as immense challenges facing capital-intensive startups, a story foreshadowed last year by the collapse or retreat of several instant-delivery companies starting last year.

Hundreds of other unicorn startups will likely wrestle with a similar fate: They must find a shot-gun marriage or face collapse. As in past cycles, some of these could emerge as new companies—even successful ones. Hopin, since it sold its core virtual events business, is focusing on a new video streaming product, StreamYard. Some of Hopin’s later investors will remain shareholders in that new company, according to Axios. Andreessen Horowitz, General Catalyst and Tiger Global Management invested in its later rounds. But Hopin as we know it is dead in the water. A Hopin spokesperson declined to comment on its new valuation. Its new CEO Badri Rajasekar said in an emailed statement that the company has “a healthy and growing balance sheet” and “is in a great position to invest in growth.”

The growing list of disappearing startups raises the question about what founders and investors can learn from the recent past. Valuations, of course, were one signal: The number of unicorns had reached insane levels—roughly 600 were minted in 2021, according to Crunchbase. Only 44 reached billion-dollar valuations in the first half of this year.

Hopin, the struggling virtual conference unicorn, sells events and engagement units to RingCentral

Ingrid Lunden @ingridlunden / 6:10 AM PDT•August 2, 2023

Image Credits: Westend61 / Getty Images

Hopin, the virtual events startup that saw its star (and valuation) rise quickly during the COVID-19 pandemic, is most definitely coming down to earth. Today the company announced that it has sold its Events and Session business units to RingCentral for an undisclosed sum. Events is Hopin’s event management platform for planning and producing virtual and hybrid events — arguably the core of the whole business — while Session is its toolset for managing interactive engagement during events.

The companies said that the acquisition will include tech assets, customer relationships (that is, customers using the tools) and engineering, product and go-to-market talent. All of these will be added to RingCentral’s video solutions business, adding events to its existing offerings in meetings, webinars and video “rooms.” Both will be rebranded as “RingCentral Events” and “RingCentral Sessions.”

Hopin says that it becomes a strategic partner of RingCentral with this deal, but it will also continue to operate as a standalone business with its remaining products StreamYard for livestreaming, Streamable for video hosting and Superwave for “community building.” And, it will be doing all of that under new leadership. Badri Rajasekar, who had been CTO and CPO, is taking on the role of CEO from founder and current CEO Johnny Boufarhat. (Rajasekar joined in 2021 when Hopin acquired Jamm, which became Session.)

We have reached out to Hopin to ask if the RingCentral will become a shareholder in the remaining business of Hopin as a result of the deal, and to see if they would share any more information. (It has already said that it would not, though.)

The news is the latest chapter in a turbulent time for Hopin, which was founded in London in 2019 and became one of the rising stars during the pandemic, providing tools to companies to organize and run virtual events — conferences, large meetings — after they could not hold live, in-person gatherings. (Disclosure: TechCrunch has been a customer of Hopin’s.)

That led Hopin to raise more than $1 billion in venture funding from big-name investors that included Andreessen Horowitz, General Catalyst, LinkedIn, Coatue, Salesforce, Tiger and many more. Coming off of a huge couple of years of business during the pandemic, in 2021, it was valued at nearly $7.7 billion. Its customer list features Slack, VMware, UPS, Pepsi and many more.

The torrent of pandemic-fueled virtual events, however, started to dry up, not just because a number of competitors entered the field, but because many in-person events — if they didn’t disappear altogether — gradually started to return. (That was a market turn that impacted a lot of businesses, not just Hopin.)

An article in the FT from April 2022 noted that its “explore” tab, for discovering virtual confabs that one might want to attend, listed fewer than 500 events, down from more than 15,000 in November 2020.

Hopin has not raised any further money since 2021, and between then and now it has gone through multiple rounds of layoffs affecting hundreds of employees.

RingCentral, which competes with conferencing services like WebEx, Zoom and GoogleMeet, is publicly traded and has a market cap of just under $4 billion — ironically, significantly smaller than Hopin’s last private valuation.

It will be using the new assets to further diversify its business. In the age-old technology struggle in which the question of “is this a platform, or a service on a platform?” is asked, this move firmly puts virtual events into the latter category.

Reset & Rethink – Assessing Venture Capital with Gené Teare of Crunchbase

Video of the Week

LK-99 – Room Temperature Super Conductor

AI of the Week

SEC Proposes New Conflict of Interest Regime for Predictive Technology

A wide range of technology would be swept up by the proposal, which forbids conflict disclosure as an alternative to elimination related to the covered technologies.

By Paul Mulholland

The Securities and Exchange Commission proposed a new rule last week requiring advisers and broker/dealers to eliminate or neutralize conflicts of interest that arise from their use of predictive analytics, artificial intelligence or other “covered technology.”

Specifically, advisers and broker/dealers must “eliminate or neutralize the effect of conflicts of interest associated with the firm’s use of covered technologies in investor interactions that place the firm’s or its associated person’s interest ahead of investors’ interests.”

“Covered technology,” according to an SEC factsheet, “includes a firm’s use of analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor.”

Blair Burnett, an attorney with the SEC’s division of investment management, said at a July 26 open hearing that the proposal has three components. The proposal would require that a firm eliminate or neutralize the effect of a conflict of interest related to covered technologies. It would require written policies and procedures that describe the use of covered technologies and the conflicts associated with their use; the processes used to eliminate those conflicts; and an annual review of those procedures. Lastly, firms must keep appropriate records documenting their compliance with the rule.

Two elements of the proposal have been identified by the dissenting commissioners and other experts as likely to be controversial in the financial industry: the inability to simply disclose conflicts of interest and the breadth of the definition of covered technology.

Disclosure vs. Elimination

Ethan Corey, a senior counsel with Eversheds Sutherland, says requiring advisers to eliminate conflicts without the option to disclose them “is pretty much unprecedented.” He explains that securities laws “do not preclude advisers from having substantial conflicts of interest,” but advisers do have the responsibility to disclose and mitigate those conflicts and obtain informed consent from clients.

Sanjay Lamba, an associate general counsel at the Investment Adviser Association, notes that advisers have fiduciary duties to their clients to disclose and mitigate conflicts as explained in a Commission Interpretation issued in 2019. “This proposal seems to departing from that interpretation regarding disclosure by not permitting it as an alternative to elimination,” Lamba said.

Corey says the SEC believes that conflicts created by artificial intelligence and predictive analytics, which are the primary but not sole target of the proposal, are relatively opaque, complicated and quick to evolve, such that disclosure is not a useful tool in addressing the conflicts generated by them.

Matt Rogers, an attorney with K&L Gates, adds that the SEC sees conflicts related to artificial intelligence as uniquely unfit for disclosure. The technology influences decisions in real time, and the disclosure might be too complex or evolving to be useful to investors. As a result, he says, this is “something the industry is going to push back on pretty hard.”

Adam Kanter, a partner in Mayer Brown, notes that the issue is more relevant for retail investors than  for institutional investors, because many robo-adviser services or algorithmic recommendations are geared toward smaller and less sophisticated investors. Retail investors “need more hand holding,” and the SEC likely has this on their mind as well. Kanter acknowledged that this change “would be fairly unique” by not permitting disclosure.

“Covered Technology” Definition

Despite AI being the main target of the proposal and a topic of interest for SEC Chairman Gary Gensler for months, this definition is “extremely broad,” according to Corey. Commissioner Hester Peirce remarked at the hearing that the SEC is effectively “banning technologies we don’t like.”

William Birdthistle, the director of the division of investment management at the SEC and a proponent of the rule, responded to Peirce and said he wants the proposed rule to be limited to technology that forecasts and directs investing. He acknowledged that the definition’s breadth is a “concern” and invited stakeholders to provide specific recommended changes when commenting to the SEC about the proposal.

As for whether this definition and proposal together are likely to discourage the use of covered technologies, Corey says, “the short answer is: Yes.”

Lamba concurs and explains that it will take a lot of work just to determine if a firm is even using covered technology. This proposal “would really discourage firms from using” covered technology, the definition of which goes far beyond AI. 

At the hearing, Peirce suggested the definition could apply to some uses of a Microsoft Excel spreadsheet. Rogers agrees this is a plausible interpretation of the proposal: “A spreadsheet could become a covered technology” by inputting demographic data on a client and then populating a model portfolio for that client; that spreadsheet is a component in computing, modeling and optimizing.

“I don’t think anybody thinks that a spreadsheet is AI,” says Rogers, “but based on how the rule is proposed, it would be captured.” He adds: “Without concrete examples, industry is really going to have a rough time to eliminate or mitigate a conflict if disclosure isn’t enough.”

The comment period for the proposal will remain open for 60 days following its entry in the Federal Register.

Where Will AI Have the Biggest Impact? Healthcare.

by Daisy Wolf and Vijay Pande

Recently, we received an email about a healthcare panel entitled “Using AI with Modern Fax Capabilities to Reduce Administrative Burden.”

We immediately thought, “wait, what?”

But yes, we had read it correctly: There was a panel on integrating AI with fax machines in healthcare!

Are we stuck in the 1980s? Shouldn’t healthcare just get with the times and stop using fax machines?

We had to laugh.

But under the surface, this email tells us a lot.

It reveals why AI will have a bigger impact in healthcare than in any other industry and why AI talent should be incredibly excited by that opportunity.

Hear us out.

It’s no secret that traditional enterprise software has struggled to penetrate healthcare. Emails about “modern fax capabilities” demonstrate this pretty clearly. Healthcare is 20% of the American economy, but only one of the largest 100 public software companies is a healthcare company.

The successful healthcare software companies are incredible businesses, but they are few and far between. Healthcare as an industry has been slow to adopt technology, reluctant to burden overwhelmed IT teams, and train burned-out staff on new systems.

But that is about to change.

Just as emerging markets went straight from using cash to mobile payments (“leapfrogging” credit cards altogether), healthcare is going to move straight from fax machines to AI (“leapfrogging” traditional vertical software).

With AI, healthtech companies no longer need to fight the uphill battle of training people on software. Instead, they can sell AI that acts like a person and takes more and more of the work off healthcare professionals’ plates, enabling them to work on more interesting problems and practice at the top of their licenses.

The pitch is simple: “Don’t want more software? Cool, we can give you AI ‘people’ who are cheap, fast, cheerful and empathic.”

We believe that any new technology has to be 10 times better to successfully displace the last one—marginal improvements aren’t worth the effort. Enterprise software struggled to clear that 10x bar in healthcare; AI clears it easily.

This revolution will start with the non-clinical use cases. AI will take on the work of call centers, scheduling, prior authorization, medical coding, revenue cycle management, and fighting medical bills…..

News Of the Week

State of Private Markets: Q2 2023

July 28, 2023
Kevin Dowd and Peter Walker

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Executive summary

Venture funding on Carta inched upward in Q2. Startups combined to raise more than $15.4 billion in funding during the second quarter of 2023, up 26% from Q1. In several other areas of the venture landscape, such as early-stage valuations and late-stage deal counts, the story is similar: Numbers were trending back up in Q2 after significant declines in recent quarters. 

Even with these recent gains, the venture market remains a long way off from the salad days of 2021. While capital raised was up significantly in Q2 on a quarterly basis, it’s still down 58% year over year. And there are other signs that the fundraising environment remains tight. For instance, nearly 20% of all rounds raised in Q2 were down rounds, the second-highest quarterly figure of the past five years. 

It might be some time before activity returns to the record-setting pace of recent years. But it appears the overall venture market found a floor in the first half of 2023.

Q2 highlights

Late-stage deal counts are ticking up: For the first time since Q3 2021, the number of venture investments on Carta increased in Q2 at every stage from Series B onward. The downturn had hit these later stages particularly hard: Deal counts at Series B, C, D, and E+  had declined by at least 50% from recent highs. 

The map of VC is shifting: In Q2, companies in the West census region raised 44.3% of all venture capital on Carta. That’s still more than any other region, but it’s down from a 51.2% share of capital raised in Q1. The Midwest, South, and Northeast regions all saw their share of VC funding rise, led by the Northeast, which claimed 29.9% of all Q2 capital.

Employees aren’t exercising their stock options: Employees opted to exercise just 26% of their vested stock options in Q2, tied for the lowest exercise rate since at least the start of 2018. As recently as Q4 2021, employees exercised 46% of vested options. Since then, the exercise rate has declined for six straight quarters.

Note: If you’re looking for more industry-specific data, you can also download the addendum to this report to get an extended dataset. 

Key trends

While the amount of venture dollars raised on Carta increased by 26% in Q2, the total number of deals stayed relatively flat. This means that the average investment size also increased, growing from about $10.4 million in Q1 to $13.1 million in Q2. 

In terms of both deal count and cash raised, this was the slowest Q2 since at least 2018. At the halfway point, 2023 is on pace to be the quietest year for venture activity since at least 2018. 

The startup valuation reset is real. Nearly 19% of all primary fundings  on Carta in Q2 were down rounds, marking the third straight quarter in which that rate has been above 15%. Those three quarters represent the three highest rates of down rounds since at least the start of 2018. 

Early-Stage Venture Capital Investment Down 54%

Dollars invested by VCs and the number of funding transactions fell in the first half, and exit deals remained elusive.

Published Aug. 2, 2023

Vincent Ryan, Senior Reporter-at-Large

Risk-averse venture capitalists continued to pull back on investing in U.S. companies at nearly all stages of financing in the first half of 2023. Like banks, VCs are tighter with their terms and using a higher bar to judge prospective business investments. 

VC exits were also rare in the first half, according to the second-quarter Pitchbook/NVCA Venture Monitor, discouraging limited partners from putting capital back into the VC ecosystem.

While venture-growth and exit-stage companies were some of the first startups to feel the funding pinch, going back to early 2022, the “pressure from scarcer capital availability has trickled down … to the earliest part of the venture lifecycle,” stated the Pitchbook/NVCA Venture Monitor report.

In the angel and seed stage, first-half deal value fell to $6.8 billion from $14.5 billion in the first half of 2002.

Total capital invested in U.S.-based early-stage companies fell for the sixth straight quarter, to $10 billion, the lowest quarterly aggregate since the second quarter of 2020. Totaling up the first and second quarters, early-stage deals were down 54% in value compared with 2022.

The capital-demand-to-supply ratio for early-stage venture capital was at 1.5x, according to Pitchbook/NVCA, meaning that for every $1.50 sought by startups, only $1 is supplied from the investor side.

“To secure equity financing, companies need to show sufficient progress in product development, prove product-market fit, and demonstrate strong traction that it has already received,” the Pitchbook/NVCA report stated.

Liquidity events, or exits, remained elusive. Through the first half of 2023, Pitchbook/NVCA observed just $12 billion in exit value generated from 471 recorded exits, down from 785 transactions worth $51.5 billion in the first half of 2022.

“Immense amounts of capital are trapped in late- and venture-growth-stage startups hesitant to gamble on whether their financial performance can withstand the intense scrutiny of the public markets,” according to Pitchbook/NVCA.

As per historical norms, acquisitions accounted for the majority of liquidity events but unusually they also accounted for more than half of the exit value, at $6.8 billion.

The Pitchbook/NVCA report said, “VCs continue to urge their portfolio companies to seek liquidity, even if it means taking lower overall returns via an acquisition.”

AI Boost?

The fintech sector, which attracted a whopping $46 billion of U.S. venture capital in 2021, rebounded slightly on a global basis in the first half. Total funding value rose to $14 billion last quarter, the highest quarterly total since Q2 2022, according to S&P Global Market Intelligence.

But some large deals, including Stripe’s $6.9 billion funding round and Ant Group’s consumer finance unit’s $1.5 billion in funding, masked a wider deterioration in the first half of 2023, said Sampath Sharma Nariyanuri, a fintech research analyst at S&P Global Market Intelligence.

A bright spot, however, could be forming in the sector of fintech companies that employ artificial intelligence. In the first half, more than 60 funding rounds globally totaling $1 billion involved such companies, according to S&P, most in the seed to growth stages.

The largest funding round for an AI-based fintech startup was the $100 million invested in AlphaSense, a Bloomberg and FactSet competitor that plans to deploy generative AI in its products, in April. The capital raising, led by Alphabet, valued AlphaSense at $1.8 billion.

Coatue Raises $331 Million for Early-Stage Fund, 34% Below Target

By Kate Clark, July 31, 2023 11:26 AM PDT

Coatue co-founder Philippe Laffont. Photo by Getty.

Coatue Management has raised $331 million for its third fund focused on early-stage startups, according to a financial filing, a third less than its target and lower than its previous early-stage fund. The smaller than anticipated total shows how the firms that raised huge funds during the pandemic investing boom are falling short of their fundraising goals, taking longer to reach them or choosing to raise smaller funds as valuations for private tech companies sink.

The New York hedge fund and venture capital firm, which previously placed successful early-stage bets on design company Figma and corporate card startup Ramp, planned to raise $500 million for its third early-stage fund by the end of 2022 and to focus part of it on artificial intelligence startups, The Information reported in October. That size would have topped $475 million raised for its second early-stage fund in 2021. A person close to Coatue said that the recent filing represented an interim close and that the firm expects to raise additional capital for the fund.

• Coatue venture fund falls 34% below target
• Sequoia, Tiger and Insight have resized funds
• Limited partners are overexposed to venture funds

VC firms have been struggling to meet their fundraising targets as limited partners, the individuals and institutions that invest in VC funds, have pulled back following a tech stock sell-off last year that left their portfolios overexposed to venture. And some firms are choosing to raise smaller funds to make them more profitable.

Tiger Global Management and Insight Partners, two other major startup backers, recently reduced their targets for upcoming funds, and Sequoia Capital reduced the size of its crypto fund, as well as its ecosystem fund, which makes investments in other funds, The Wall Street Journal reported. These smaller investment vehicles stand in contrast with the boom years. Tiger, for instance, closed a $12.7 billion fund last year, topping its prior targets. Coatue raised billions of dollars for its last growth fund, according to securities filings.

Coatue’s smaller early-stage fund comes as the firm reduces the pace of its new investments. In 2021, it was one of the most active startup backers, participating in 170 VC rounds, according to PitchBook. But the firm has inked only 18 VC investments so far in 2023, according to the financial data firm. Coatue’s recent bets include AI startups Runway and Replit.

Coatue became known during the tech bull market of 2020 and 2021 for making big bets on mature startups on the cusp of going public, but it also reaped paper gains from the run-up in private tech valuations that buoyed young startups. In 2019, it backed Figma at a $400 million valuation, a fraction of the $20 billion price tag Adobe offered for the company in September. The same year it also backed Ramp at a $25 million valuation. Ramp raised capital at an $8 billion valuation in 2022. That valuation could fall, however, if the company were to raise money again because startup equity prices have sunk amid the downturn. (See Coatue’s 46-page slide deck on changes in the private tech market).

Coatue’s new fund is overseen by Thomas Laffont, a co-founder of the firm, and Dan Rose, the chair of Coatue Ventures. David Cahn, a former Coatue general partner who served as chief operating officer of its VC business, left for Sequoia in February. The same month, Coatue hired former Snap Vice President Ben Schwerin to make early-stage startup investments.

Alphabet Stands Out in a Trio of Unimpressive Earnings

By Martin Peers

July 25, 2023 5:00 PM PDT

Meh. June-quarter earnings out Tuesday from Alphabet, Microsoft, Snap and Spotify shouldn’t excite anyone about the state of business in tech. The digital ad market is showing what can only be called an uneven recovery, while enterprise software appears to be still struggling. Alphabet seems to have had the best quarter of the companies reporting today, with revenue growth accelerating meaningfully from the first quarter. But let’s not get too excited. That means revenue grew 7% instead of 3%. Still, that was good enough for investors, who sent Alphabet stock jumping more than 6%.

Part of that enthusiasm may reflect Alphabet’s news that highly respected Chief Financial Officer Ruth Porat will transition to a new role as president and chief investment officer while retaining the finance role until a successor can be found. Porat, who is in her mid-60s, might have been expected to leave the company after spending eight years in the demanding role of CFO. If that’s the case, Sundar Pichai has pulled off a big win by persuading her to stay, which perhaps explains what seemed like his genuine enthusiasm on the investor call for her new role. And even if that role is meant to be less onerous than the finance chief role, it’s still an important job. Part of her new position is dealing with policymakers and regulators. Improving relations with those folks is vitally important for the company’s Google division, which is facing multiple antitrust lawsuits in the U.S. and Europe. Given the widespread criticism of Pichai’s effectiveness as CEO, keeping Porat around is surely a relief for investors.

And the slow improvement in Alphabet’s business likely helped lift investors’ moods. Search advertising sped up, while YouTube once again reported growth in advertising. The only part of its ad business to shrink was its networks unit, where Google sells ads on other companies’ websites; that weakness underlines the patchiness of the digital ad market. Meanwhile, Google Cloud increased its profits from the first quarter and maintained its revenue growth rate at 28%. It was quite the contrast with Microsoft, where Azure slowed slightly and some other key metrics—such as growth in commercial bookings—also weakened from the previous quarter. While Microsoft’s revenue growth was a little stronger than in the previous quarter, it was a marginal improvement—from 7% growth in the March quarter to 8%. 

Still, things could be a lot worse, as Snap showed. Its revenue shrank 4%—not as bad as the 7% decline in the first quarter, but that’s likely cold comfort to investors given that the company projected as much as a 5%  decline for the third quarter. So, barring some incredible improvement in the fourth quarter, Snap will report lower revenues for 2023 than for 2022, despite steady growth in users. Also alarming is that Snap is once again burning cash. Snap stock fell nearly 20% in after-hours trading to just above $10. This is a company that went public in 2017 at $17 a share. You really have to ask whether Snap has entered Twitter territory in terms of facing years of anemic revenue growth. Watch out, Evan Spiegel: We know how that turned out for Twitter (I mean, X).

Meta Posts Strong Q2 Results as Facebook Crosses 3B Monthly Active Users

Published July 26, 2023

By Andrew Hutchinson, Content and Social Media Manager

Meta has shared its latest performance update, which shows that Facebook added another 27 million users in the most recent quarter, while it also crossed 3 billion monthly actives for the first time, showing that there’s still life in the big blue app yet.

As you can see in this graph, the majority of Facebook’s user growth is still coming from the Asia Pacific region, where the app is seeing steady take-up in developing markets, including India and Indonesia. Improvements in local connectivity are bringing more people online, which logically sees more of them logging into the app, though growth in EU and U.S. has largely stalled, reflecting mass adoption in these regions.

That’s largely the same in the monthly user counts, though as you can see, European Facebook usage has actually declined once again, after seeing a slight jump last quarter.

Really, Facebook’s not the cool app of the moment, so it makes sense that some attention is waning in established markets. But even so, 3 billion monthly actives is a huge milestone, which no other app is even close to at this stage.

In terms of revenue, Meta brought in $32 billion for the period, an 11% increase year-over-year.

The challenge for Meta, as it is for all social companies, is that while its seeing growth in developing regions, it’s still hugely reliant on its established markets for revenue, and it’ll take time before these new users bring in significant profit.

But still, $32 billion is a strong result, amid shifting economic conditions, which reinforces Meta’s ongoing strength and durability, in alignment with the latest ad market swings.

In terms of ad performance, Meta says that ad impressions delivered across its apps increased by 34% year-over-year in Q2, while the average price per ad decreased by 16%. Meta’s still finding more ad opportunities, and developing new placement options, and while more ads could impact the user experience, clearly, the overall usage numbers have remained steady, despite this rise.

And this is before you consider the potential of Threads as an ad platform, which is not on the cards as yet, but may be soon.

In terms of costs, Reality Labs, its VR/AR division, continues to weigh down its results, posting a $3.7 billion loss for the quarter, which is pretty much in line with the performance that it’s seen over the last year.

Meta’s VR headset sales fell again in the period, though that could change later this year, with the release of its Quest 3 units, which offer advanced connectivity and control for its next-level experiences.

VR remains an uncertain element, but an essential part of Meta’s metaverse vision, so you can expect that investment to continue rising, as Meta seeks more ways to bridge people across into its wholly digital plane, which may one day be how we all engage and interact.

Meta’s currently on track to lose $15 billion in VR investment for the full year, which would best last year’s $14 billion loss in VR development.

AngelList expands into private equity with acquisition of fintech startup Nova

Mary Ann Azevedo @bayareawriter / 6:44 AM PDT•July 28, 2023

Image Credits: dane mark / Getty Images

AngelList, an organization that started out by teaming up founders with early-stage investors, is expanding into the private equity space. And it’s acquired a Y Combinator-backed fintech startup in the industry to kickstart that effort.

Founded in 2010, AngelList started as a mailing list for high-quality angel investors before turning into one of the most powerful fundraising channels for early-stage startups. Over the years, it has evolved its model and today touts itself as an organization that “creates products and services for venture firms, investors, startups, and fund managers to accelerate innovation.” Earlier this year, venture capitalist Harry Stebbings, host of podcast “The Twenty Minute VC” podcast, shared his view that AngelList had transitioned from being an SPV (special purpose vehicle) provider to “slowly becoming the software platform for the entire industry venture and startup ecosystem.”

With its mid-June acquisition of Nova (only the company’s second buy since inception), which has built investor management software for institutional private funds, AngelList continues to broaden its scope.

Over the years, for example, AngelList has moved from solely serving micro-funds to launching SPVs to pioneering the concept of rolling funds, which are investment vehicles that raise money through a quarterly subscription from interested investors. Another offering is Stack, a suite of products designed to compete with Carta in providing services to help founders start, operate and maintain ownership over their companies. 

The move into private equity might feel like it’s counter to AngelList’s original venture focus but CEO Avlok Kohli, who took the helm of the company in 2019, told TechCrunch in an exclusive interview that he believes the expansion into private equity was a logical and natural one.

“At the highest level, the way to think about what AngelList does is we’re really building the infrastructure that powers the startup economy, including all the infrastructure needed to run venture funds,” he said. “This includes serving the GPs and LPs in the funds…Over the years, we have continued to move up market.”

The expansion is also indicative of the lifecycle of a startup, which typically starts by raising capital from venture funds, Kohli added.

“As they mature, the scope of capital providers they can tap into expands into private equity and of course, even the public markets,” he said. “So, this is expanding the lifecycle of products AngelList can build to serve startups throughout their journey.”

Venture Capital Firm Sequoia Cuts Crypto Fund by 66%

Published July 28, 2023

By Chuks Nnabuenyi Jr

Amid the recent turmoil in the private markets, Silicon Valley-based venture capital firm Sequoia Capital has been forced to retrench and make significant changes to its funds. 

The firm has cut the size of two of its funds, including a cryptocurrency vehicle that was raised just last year.

The cryptocurrency fund, which was originally valued at $585 million, has now been reduced to $200 million. 

Additionally, the ecosystem fund, which supports smaller venture funds and solo investors, has been halved from $900 million to $450 million. These reductions were communicated to the firm’s limited partners in March this year.

The decision to downsize the funds comes in response to the broad downturn in private technology companies and a liquidity crunch for some of Sequoia’s limited partners. 

Limited partners are the investors who provide capital to venture capitalists to invest on their behalf. With the current challenges in the market, Sequoia aims to sharpen its focus on seed-stage opportunities and provide liquidity to its investors.

Sequoia Capital has been experiencing a series of significant changes this year. In June, it announced the split of its Chinese entity as a result of bias between the United States and China. 

After an illustrious 38-year tenure at the firm, Michael Moritz, a prominent partner, who played a pivotal role in expanding the company and establishing Sequoia as a top-tier technology investment group, is stepping down.

The venture capital industry is facing a precarious moment, as private markets reset after more than a decade of growth where funds expanded significantly in scope and scale. 

The ecosystem and crypto investment funds had been  launched by Sequoia in early 2022 when the venture market was thriving. 

However, the landscape has since shifted due to rising interest rates, declining economic confidence, and a stall in venture investment and public listings.

The move to downsize the cryptocurrency fund indicates Sequoia’s pivot away from larger crypto players towards early-stage startups as recent challenges in the crypto industry have reduced opportunities for backing larger companies.

Volkswagen takes 5% stake in XPeng as part of Chinese EV deal

Kirsten Korosec @kirstenkorosec / 8:55 AM PDT•July 26, 2023

Image Credits: XPeng

VW Group announced Wednesday a pair of deals with Chinese automakers aimed at shoring up sales in China.

The German automaker said it will invest $700 million into Chinese automaker XPeng as part of a deal to jointly develop and produce two mid-sized EVs for China. Volkswagen will acquire a 4.99% stake in XPeng, under the agreement.

The new battery-electric vehicles will be produced at VW’s new development, innovation and procurement center in Hefei and sold in China under the Volkswagen brand. Earlier this year, VW Group announced plans to invest €1 billion ($1.1 billion) into the facility, called 100%TechCo., in an attempt to respond to China’s fast-changing consumer needs.

The EVs will have DNA from each automaker. The vehicles will be based off of XPeng’s flagship G9 SUV. The connectivity and advanced driver assistance system software, which is often compared to Tesla’s FSD system, will also come from XPeng. The models are expected to start production in 2026, according to XPeng.

In a separate agreement, which was also announced Wednesday, VW brand Audi said it’s expanding its partnership with SAIC to produce luxury EVs for the Chinese market. The companies plan to develop a new platform for premium EVs. The company didn’t announce any other details, including when these EVs might hit the marketplace.

Tuesday Capital, a Silicon Valley firm that moved to Austin during the pandemic, captures $31M for its newest seed-stage fund

Connie Loizos@cookie / 12:40 PM PDT•August 1, 2023

Image Credits: Photo by Tamir Kalifa/Getty Images / Getty Images

Austin seems to agree with Tuesday Capital.

When the 12-year-old seed-stage outfit — originally called CrunchFund  —  was co-founded by longtime VC Patrick Gallagher and TechCrunch founder Michael Arrington, it was interwoven with the Silicon Valley scene. In has since widened its net. Part of the shift owes to the pandemic, when many venture firms began meeting with far-flung founders online. Part of it owes to James Prashant Fonseka. He joined Tuesday Capital as an associate in 2015, was promoted to partner in 2020, and lived like a “nomad” for much of that strange time, connecting in person with founders Tuesday Capital might have missed otherwise.

Indeed, Tuesday’s team ultimately decided to move the firm from San Francisco to Austin, and it has “definitely been easier to get to New York and other East Coast cities,” says Gallagher, who says he feels “great about the decision” to pull up the firm’s Bay Area stakes. “We have a strong community of founders from our portfolio companies that are now based in Austin,” he says, referring to some who moved during the pandemic and three other teams that Tuesday Capital has backed since it relocated. Austin also “expanded our reach and increased our access to really great deal flow,” Gallagher insists.

The transition went smoothly enough that Gallagher says the outfit just closed its fifth seed-stage fund with $31 million in capital commitments from many of the same family offices and institutions that have supported Tuesday Capital for years.

It wasn’t a piece of cake, suggests Gallagher. The firm is too small for large institutional investors. SPACs have fallen out of fashion, cutting off one avenue for some of Tuesday Capital’s portfolio companies to go public. (Those of its portfolio companies that merged with blank-check companies and got themselves onto the market include Rover, Opendoor, Satellogic, Inspirato, and Getaround.)

Meanwhile, the economic climate has obviously changed meaningfully between now and when Tuesday Capital announced a similar size fund ($30 million), almost exactly two years ago. “I definitely think that it is harder than ever to raise a fund in general, regardless of size,” Gallagher says.

Nevertheless, the firm’s portfolio, along with the support it offers startups — which includes PR, design, and community building — were leading reasons why LPs have continued to back the firm across its various funds, Gallagher says.

Though Tuesday Capital doesn’t yet have the kind of cash on cash returns about which some firms might brag (“it takes a long time for our funds to start to generate meaningful liquidity,” he explains), it has shown its ability to get into buzzy deals, certainly. In addition to writing checks to Uber, Digital Ocean, Gitlab, Opendoor, and Airbnb, among others, its still-private portfolio also holds some highly valued companies, including Zipline (valued at $4.2 billion back in April), Solugen ($2 billion as of last October), and Human Interest ($1 billion as of a year ago).

LPs also see what a lot of VCs have seen across 2023, suggests Gallagher, including the opportunity for VCs to get more bang for their buck at long last.

Though the firm plans to continue writing initial checks of $250,000 to $500,000, it’s “definitely getting more ownership today compared to 18 months ago,” though Gallagher adds that it’s “still less” than when the firm started in 2011.

Startup of the Week

Inside the DIY Race to Replicate LK-99

Experts doubt claims that LK-99 is a room-temperature superconductor set to open up a future of levitating trains and quantum tech. Andrew McCalip wants to see for himself.

ALL THAT ANDREW McCalip wanted for his 34th birthday was a shipment of red phosphorus. It was a tough request—the substance happens to be an ingredient for cooking meth and is controlled by the US Drug Enforcement Agency—but also an essential one, if McCalip was going to realize his dream of making a room-temperature superconductor, a holy grail of condensed matter physics, in his startup’s lab over the next week. It required four ingredients, and so far he had access to three.

His followers on X (that is, Twitter, post-rebrand), offered ideas: He could melt down the heads of a pile of matchsticks, or try to buy it in pure form off Etsy, where the DEA might not be looking. Others offered connections to Eastern European suppliers. They were deeply invested in his effort. Like McCalip, many had learned about a possible superconductor called LK-99 earlier that week through a post on Hacker News, which linked to an Arxiv preprint in which a trio of South Korean researchers had claimed a discovery that, in their words, “opens a new era for humankind.” Now McCalip was among those racing to replicate it.

Superconductivity—a set of properties in which electrical resistance drops to zero—typically appears only under frigid or high pressure conditions. But the researchers claimed LK-99 exhibited these qualities at room temperature and atmospheric pressure. Among the evidence: an apparent drop in resistance to zero at 400 Kelvin (127 degrees Celsius) and a video of the material levitating above a magnet. The authors, led by Ji-Hoon Kim and Young-Wan Kwon, proposed that this was the result of the Meissner effect, the expulsion of a magnetic field as a material crosses the threshold of superconductivity. If that were true, it could indeed lead to a new era: resistanceless power lines, practical levitating trains, and powerful quantum devices.

On X and Reddit, large language models went by the wayside. The new star was condensed matter physics. Online betting markets were spun up (the odds: not particularly good). Anons with a strangely sophisticated knowledge of electronic band structure went to war with techno-optimistic influencers cheering on an apparent resurgence of technological progress. Their mantra was seductive, and maybe a little reductive: a return to a time of leapfrogging discoveries—the lightbulb, the Manhattan Project, the internet—where the impact of scientific discovery is tangible within the span of a human’s earthly presence. “We’re back,” as one X user put it.

Experts are doubtful. Multiple versions of the LK-99 paper have appeared online with inconsistent data—reportedly the result of warring between the authors about the precise nature of the claim. The researchers aren’t well known in the field, and their analysis lacks basic tests typically used to confirm superconductivity. Spurious claims are also so common in the field that physicists joke about USOs—“unidentified superconducting objects”—a play on UFOs. (Most recent sighting: a room-temperature, high-pressure material from a University of Rochester lab that has been dogged by accusations of plagiarism and rigged data.) There are more likely explanations for the levitation, explains Richard Greene, a condensed matter physicist at the University of Maryland, including magnetic properties in the compound in its normal, non-superconducting state. The betting markets probably had it right: Odds are the new era is not yet upon us.

But the claim is still worth checking out, Greene adds.

What if room temperature superconductors were real?

Tim De Chant @tdechant / 12:30 PM PDT•August 2, 2023

Image Credits: Jubobroff/ Wikimedia Commons under a CC BY-SA 3.0 license

Hope springs eternal. For decades, there have been claims that researchers have created room-temperature superconductors. The materials promise to conduct an electric current with zero resistance while throwing off powerful magnetic fields. They’re a Holy Grail of materials science.

Last week, a team from South Korea claimed to have created one — and not just a material that superconducts at ambient temperature, but one that does so at ambient pressure, too. Oh, and it’s made of relatively common materials, including lead, phosphorus and copper. The researchers published their findings on a preprint server. While not the gold standard in scientific publishing, it’s a decent first step that allows other experts to vet the claims.

It’s still too early to tell whether their extraordinary claims will hold up, but some preliminary theoretical work suggests that they’re not out of the realm of possibility. Still, many researchers remain skeptical.

But what if the claims were true? Myriad industries would be ripe for upheaval. Here are a few that would stand to gain the most.

Fusion power

If scientists really have discovered a room-temperature superconductor, then last year’s surprise darling technology would be again catapulted into the headlines. The problem with fusion power hasn’t been whether it can be done, but whether it produces more power than the required equipment consumes. The National Ignition Facility’s experiment last winter proved that net-positive fusion power was more than just theoretically possible.

Tweet of the Week