Welcome to “Equity,” TechCrunch’s venture capital and tech business podcast.
On this week, we were joined by Mike Ghaffary from Social Capital, who was the perfect guest because he used to run Eat24, when it was Yelp’s food delivery business. Food delivery is highly relevant to this week’s news.
Uber lost $4.5 billion last year, but CEO Dara Khosrowshahi said he’s not worried. Speaking at the Goldman Sachs Technology and Internet Conference in San Francisco on Wednesday, the newly appointed chief defended the company’s financials, saying that “we can turn the knobs to get this business even on a full basis profitable, but you would sacrifice growth and sacrifice innovation.”
He said that it’s Uber’s commitment to “developing” markets that are dragging things down, but he views that as an “optional investment.” However it’s the “right thing to do,” he said, claiming that the company won’t stop investing in Asia anytime soon.
Revenue last year was $7.5 billion, but Khosrowshahi was keen to tout a “$40 billion run rate,” a measurement of total transactions on the platform. He also spoke of a more than “100% revenue growth rate,” meaning that sales have more than doubled.
Khosrowshahi also addressed the company’s public image which he believes was “appropriately negative,” but insists that he was pleasantly surprised to find that the company has “good people,” who are committed to changing the world of transportation. “We deserve to be and we should be a brand that is beloved as an Amazon or a Google.”
He spoke of the settlement with Waymo, the self-driving car division of Google parent, Alphabet. Uber is “happy to put it behind us,” he said. “It was a very very significant distraction for the teams that were working on our autonomous technology.”
In general, he was very optimistic about self-driving cars and spoke of a day where the average ride will be about $1 per mile, down from roughly $2.50 per mile. It’s “the only way to get the cost down,” he said of driverless transportation.
Khosrowshahi also said the recent SoftBank investment was a major milestone because it provided liquidity for some employees and also “was a catalyst for us to move forward on some governance changes.” In particular, he’s referring to the lawsuit between Benchmark Capital and former CEO Travis Kalanick. “The acrimony between Bill and Travis didn’t serve the company well.”
Khosrowshahi has grand visions for the future, stating that he hopes Uber will get people to stop buying cars. “Traffic is going to get better.”
Featured Image: David Ryder/Bloomberg via Getty Images/Getty Images
If you’re a Twitter shareholder wondering if the company is about to get acquired, co-founder and CEO Jack Dorsey doesn’t want you to get that impression.
“There’s a lot of strength to our independence,” he said, at the Goldman Sachs Technology and Internet Conference in San Francisco on Tuesday. Dorsey believes that it’s important for Twitter’s business that they’re “not constrained.”
He also voiced commitment to building a “sustainable” business and providing “return to our shareholders.” He added that Twitter has “a lot left to prove but we’re proving it little by little every day.”
Twitter’s stock is down from its high of $69 in early 2014, but the company has had an impressive run in the past year, with shares going from $16.52 to $33.44 in the past 12 months.
At the conference, Dorsey spoke of his long-term vision for Twitter, and even downplayed the label “social network.” He views the platform as the “zeitgeist of what the world is thinking.”
He believes that video will continue to be a big revenue driver. “Video is our fastest growing in terms of monetization,” said Dorsey. He said that Twitter will be investing in “self-serve technologies” to make it easier for producers to use the service.
Dorsey also hopes to expand on the “moments” section, which allows users to see a collection of tweets around a particular topic. “There’s a lot of value in the what happened in the recap nature of our service,” he said, adding that “we’ve barely scratched the surface of it with a product like ‘moments.'”
He also spoke of using machine learning and deep learning to tailor the service to individual’s preferences. “We are failing today because we don’t have a lot of the personalizations we need,” he said. “If they have to search navigation to find it, we have failed.”
Led by Hunter Walk and Satya Patel, the seed stage venture firm has spent the past five years investing in U.S.-based startups at the onset. Several of its portfolio companies have gone on to raise significant funding, including Managed by Q, Shyp, and The Skimm. They’ve also had exits, including Bond Street, which was acquired by Goldman Sachs and Clementine, which was bought by Dropbox.
“Homebrew III’s strategy is to concentrate capital, time and reputation behind 6-8 new investments per year and to work closely with those teams to help them build the companies they envision,” said the firm’s blog post.
The company competes with a range of new investment apps – like Robinhood, Acorn, and others. These apps have particular appeal to the often younger, less experienced investors who are uncomfortable using traditional tools
However, Stash isn’t just targeting the millennial crowd – though its average user is aged 29 – it’s also broadly going after anyone who felt like they couldn’t participate in investing because they didn’t make enough money.
Most of its users make under $50,000 per year, and come from all walks of life – like teachers, retail workers, nurses, and even gig economy workers, for example.
In Stash, users can start building a portfolio with as little as $5, choose those investments that reflect their beliefs and goals, and continue to fund the account with automatic or manual transfers, as they choose. Along the way, Stash offers tips and articles to help people learn more about investing and financial strategies.
The educational aspect is a big differentiator as well. In addition to in-app advice and tips, there’s online investment and financial education available. The company’s various products are also designed with the goal of helping people better understand their money, and participate in the large investment ecosystem.
“Our clients now have the chance to step off the sidelines, and do this thing they were effectively excluded from for way too long – that’s really what drives us. So many are saying now ‘I can save,’ ‘I can open a retirement account’ or ‘I can open an investment account,'” says Stash CEO Brandon Krieg. “Our extension of these products – and the fundraising – offer more accessibility to this huge group of people. We think it’s over 100 million in the U.S. that need this,” he adds.
Today, Stash’s app has grown to 1.7 million clients and 5 million subscribers. That’s up from 850,000 total users last year. The rate of growth has also increased. In 2017, Stash was seeing over 25,000 new users joining per week; now that figure is approximately 40,000 new clients per week. In addition, 86 percent of its users continue to be first-time investors.
The company has used its funding to continually create new features and products. Last summer, it launched support for retirement accounts with Stash Retire, which is now seeing significant traction. With Retire, users can automate investment into both Roth and Traditional IRAs with just $15 to start.
Over the past few months, Stash also launched a coaching system that trains people how to become an investor by doling out points and advice as they take particular steps, as well as a savings account product called Smart Save.
The latter analyzes the client’s spending and earning patterns, then automates savings on their behalf. Funds are held in FDIC-backed accounts and earn .6% interest.
Today, Stash has begun to roll out custodial accounts, where parents can invest on behalf of their children, with the intention to hand over the account to the child when they become of age to invest themselves – either 18 or 21, depending on the state.
Stash’s product ambitions aren’t stopping with investment, retirement, and savings, however. This year, it will also launch a new banking service.
Similar to a product like Simple, Stash’s bank accounts will be held at a still undisclosed partner bank, while the company instead focuses on building better banking software.
“We’re going to introduce banking in a different way to our clients,” says Krieg of Stash’s banking plans. “There’s the parts of banking that are really important to us: how to help our customers understand their money; understand how they’re spending and saving; and ultimately help our banking clients live better lives.”
The banking service, like other Stash products, will infuse advice and education into the app as Stash learns from the client’s spending and earning patterns.
Unlike traditional investment products, Stash isn’t targeting the wealthy, nor does it have high fees – it charges $1/month for accounts under $5,000 and .25% on those over $5,000, for example. But that raises the question of how or when the company will become profitable.
Krieg, however, is optimistic on this front.
“We’re quickly on track to become a break-even company,” he says, adding that scaling Stash is less challenging than a traditional investment advisory.
“Building a financial services company driven by technology is much different than the incumbent banks and large investment advisors who have a lot of [staff], really high investment, sales’ people salaries, and commissions. We don’t have that here,” Krieg continues. “We can scale and grow this platform without dramatically increasing our costs. And what we’ve found over the last year is that our cost of customer acquisition are dropping as our brand builds and as we grow.”
With the additional funding, Stash aims to continue to develop its products and brand, and double its team of 120 over the course of the year.
Jason Rowley is a venture capital and technology reporter for Crunchbase News.
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In the world of venture capital, the prospect of a successful “exit” looms large in the minds of investors. A VC’s business model is less about the money that goes into a startup than it is about what comes out. It’s true that most companies fail to exit gracefully, and of those that do, surprisingly few exit by going public. The majority of exits take place through mergers and acquisitions (M&A).
But there are a couple of more general questions to be asked and answered than in those articles. For instance, from the standpoint of VIC multiples, are larger exits better? And are companies that have raised less venture funding more likely to generate higher multiples? These answers can be found.
But before getting into the weeds, let’s clear out some reminders and disclaimers. We’re not answering the question “Are startups with less venture funding more or less likely to exit?” Crunchbase News has already taken a stab at that question and found that, unless a startup raised less than around $9 million in venture funding, there isn’t a strong correlation between total capital raised and likelihood of being acquired. And like that previous foray into exit data, we’re only looking at mergers and acquisitions because there’s a larger sample set to be found.
If you’re interested in what kind of data we used for this analysis, skip to the end of the post for notes on methodology. If not, read on for answers.
Big exits are better exits for multiples
When it comes to acquisitions, in general, bigger is better if the goal is to deliver a high ratio of valuation to invested capital.
The chart below displays VIC multiple data on the vertical axis and the acquisition value on the horizontal axis. Keep in mind that this chart uses a logarithmic scale (e.g. based on powers of 10) on both axes to include the very broad range of results.
Based on the 225 acquisition events in this data set, there is a positive and statistically significant correlation between the final acquisition price and VIC ratios.
A correlation such as this shouldn’t come as a surprise. The vast majority of companies don’t raise more than a few tens of millions of dollars, and 99 percent of U.S. companies raise less than around $160 million, as Crunchbase News found last May.
Of course, the tendency for bigger exits to generate bigger returns is just a rough rule of thumb, and there are plenty of cases where big exits don’t correspond to big multiples. Here are two examples:
These latter two examples offer a convenient segue to the penultimate section. There, we’ll explore the relationship between how much money a startup raises, and its ratio of valuation to invested capital at time of exit.
In the chart below, you can find a plot of total equity funding measured against VIC ratios at exit, again using a logarithmic scale for the X and Y axes.
Out of our sample of 225 acquisitions, we find a slight but statistically significant negative correlation between the amount of equity funding a startup has raised and the final VIC ratio.
And here, too, the results shouldn’t be that surprising. After all, as we saw in earlier examples, a lot of venture funding can weigh down a company’s chances of getting a big exit. It’s easier for a startup with $1 million in venture funding to be acquired for $10 million than it is for a company with $100 million in VC backing to exit for $1 billion plus.
Of those companies that managed to raise a lot of money and generate an outsized VIC multiple, many of them are in the life sciences. Again, this isn’t surprising, considering that sectors like biotech, pharmaceuticals and medical devices are incredibly capital-intensive in the U.S. due to long trial periods and the high cost of regulatory compliance. Unlike the mobile sector, where a small amount of capital can go a long way, it usually takes a lot of money to create something of serious value in the life sciences.
Multiples matter, but most exits are still good exits
The goal of investing is to get more money out than you put in. This is true for investors ranging from pre-seed syndicates all the way up to massive sovereign wealth funds. If we want to characterize any exit with less than a 1.0 VIC ratio as “bad” and everything above 1.0 is “good,” then most of the exits in our data set, specifically 88 percent of them, are good. Of course, there’s some sampling and survivorship bias that probably leans in favor of the good side. But regardless, most companies will deliver more value than was put into them, assuming they can find the exit.
But assuming a company does find a buyer, we’ve found some factors correlated to higher VIC multiples. Bigger deals correspond to bigger multiples, and companies with less capital raised can often deliver bigger returns to investors.
So while venturing out, it’s always important to keep an eye on the exit.
Methodology: A dive into exit data
There are a number of places we could have started our analysis, and we opted for a fairly conservative approach. Using data from Crunchbase, we started with the set of all U.S.-based companies founded between 2003 and today. (This is what Crunchbase Newshas been calling “the Unicorn Era,” in homage to Aileen Lee’s original definition for the new breed of billion-dollar private companies.)
To ensure that we’re working with the fullest-possible funding record, we filtered out all companies that didn’t raise funds at the “seed or angel stage.” We further filtered out companies that have missing round data. (For example, having a known Series A round, a known Series C round, but missing any record of a Series B round.) Startups that raised equity funding rounds with no dollar-volume figure associated with it were also excluded.
We finally merged this set of companies with Crunchbase’s acquisition data to ultimately produce a table of acquired companies, the amount of equity funding they raised prior to acquisition, the name of the company that bought the startup and the amount of money paid in the deal. Again, by starting with acquired companies for which Crunchbase has relatively complete funding records, the resulting set of 225 M&A events, while small, is more likely to produce a more robust and defensible set of findings.
Atlanta-based Cardlytics made its public debut on Friday, closing the day at $13.37, just a little above the IPO price of $13. The company sold 5.4 million shares, raising $70 million.
Cardlytics works with financial institutions like Bank of America and 2,000 others to run cash back programs. It partners with brands across restaurant, retail, travel, grocery and home subscription categories to offer discounts. Starbucks, Spotify, Airbnb, Hilton and Whole Foods are amongst the places where banking customers will find deals.
The business “presents consumers with targeted offers based on their purchase behavior,” co-founder and CEO Scott Grimes told TechCrunch. And “we can drive people into stores, not just online.”
Bank customers select which deals they want and the discounts are automatically applied when they shop at choice locations. The company says it has saved customers $230 million to date.
But Cardlytics is not yet making money, however. It brought $112.8 million in revenue for 2016, but had losses of $75.7 million. Revenue for 2015 was $77.6 million, with losses of $40.6 million.
“We may not be able to sustain our revenue growth rate in the future,” warned the requisite “risk factors” section of the IPO filing.
Co-founder and COO Lynne Laube maintains that they will continue to generate more advertising partnerships because “for every $1 we bring them $30 of influenced sales.” She also was quick to claim that Cardlytics isn’t invading customer privacy because the data they see is anonymized. “Only the banks know,” she said.
Cardlytics has raised almost $200 million in equity financing from Discovery Capital, Canaan Partners, Polaris Venture Capital and others, dating back to 2009. CEO Scott Grimes used to work at Canaan as a principal.
Bank of America and J.P. Morgan were the underwriting banks managing the offering. Cooley and Gunderson Dettmer served as counsel.