Kudos to Postmates. Raising a $140M round in a crowded space (food delivery) right now is no easy task. Even at a flat price to last year's valuation, I still applaud CEO Bastian Lehmann's ability to get fresh capital ( from a returning VC investor , no less) in the current fundraising environment.
But I think Postmates' flat round is a symbol of what's happening elsewhere in Startupland. There's a lot of cost-cutting going on . Hear me out.
Let's make one assumption about all late-stage, venture-backed startups:
If we assume ^^ is true, then you can do 1 of 2 things to avoid going extinct:
Option #1: Raise more money!
Option #2: Spend less
Bastian went with Option #1: raising money . In fact, it would appear he spent the better part of a year doing so. Here's a timeline.
So if you asked Bastian to visualize his year at Postmates in 2016, he'd probably just show you this:
(Or maybe he took 101. Guess it depends on traffic.)
Bastian took the hard route. He pounded the pavement, showed investors that he has a way to turn a dollar into two (hopefully soon), and was willing to optimize for cash (before he ran out) over valuation. So that's Option #1.
Option #2 is to spend less. Which is happening a lot right now but it was waaaaaay less exciting to write about, or to read about.
Cost cutting is incredibly dull and unsensational. And yet so….pragmatic! Little costs add up ( check out how HotelTonight saved $8,000 just by...asking nicely ). And silly costs add up, too (just ask Dropbox about their LIFE-SIZE chrome panda that cost a cool $100K ).
But chrome pandas ain't got sh*t on how expensive humans are. People are effing expensive . Know how I know? For one, I'm a founder (and I love our team to bits). For another, just look at all these well-established startups cutting headcount recently:
Now, you may be thinking "jeez, what a bunch of ruthless, good-for-nothing, entitled CEOs just taking away the livelihoods of those hard-working engineers/content-managers/SEO-wizards/support-ninjas*." And that's a very natural reaction to have.
But really y ou should be proud of them for firing people . For reducing their headcount. For making a really, really, really hard decision that will impact them emotionally (not all founders are robots). Layoffs don't increase the popularity of any CEOs, but they give companies a chance to survive, and to hopefully be 10x the size they are now, and to hopefully allow you to continue getting General Tso's chicken to your doorstep on Sundays when you're just not in the mood to walk.
So is "flat the new up" ? No. But it's a good reminder that startups are taking action so that they can fight another day.
(* Side note: there are currently 76 Ninja job openings in the San Francisco Bay Area )
We recently published three new infographics regarding the exits of Dollar Shave Club (acquired by Unilever), Jet.com (acquired by Walmart), and Nutanix (recently set the terms and price for their IPO). Take a look to see what these events mean for the major investors of the company - you might be surprised by some of the outcomes.
We regularly publish these infographics to help illustrate the impact of funding rounds for early investors in an effort to "demystify" startup funding.
The team at EquityZen has been hard at work over the past few months working on a slew of product features and improvements to further bolster the customer experience for all of our clients. These features have ranged from small improvements to major product releases. We are excited to highlight some of the most impactful changes here.
Arguably our most exciting new feature is a tool that allows users to search across an entire universe of private companies to conduct their own due diligence. We’ve made it easy (or should I say “EZ”?) to filter the universe by Sector, VC Investors, Total Funding, and even the age of the company. Want to learn more about a few three-year-old companies backed by Khosla Ventures in the gaming industry? Head over to EZ Advantage and apply your filtering criteria. After selecting a few companies from the filtered results, you can compare their important metrics side-by-side, giving you quick access to key details about the companies that meet your criteria.
We have a lot of clients that want to complete transactions across multiple entities, such as a personal account and a trust that has been set up for their beneficiaries. Previously, the process for doing this was a bit tedious – our clients had to set up separate accounts with limited connectivity between them. We’ve drastically improved upon this feature – you can now easily make investments across multiple accounts from a single location and receive aggregated reporting on your holdings across multiple entities. It makes it much easier to complete transactions and also gives you a full view of your investments across multiple user profiles. Financial Advisors with investment discretion on behalf of their clients should also find this useful.
One of the things we strive to do is provide prompt updates on any companies in which you have either expressed interest or made an investment. We’ve created a new section on the EquityZen platform called “ My News ”, which gives you personalized updates on such companies. It’s easy to search for specific company news or browse all the recent news related to companies on your “ Watchlist ” (see next section) without needing to dig through piles of unread e-mails in your inbox.
We majorly overhauled the “ Watchlist ”, which is a central location for you to manage which companies you are interested in. Once you express interest in a specific company, we will automatically add it to the “ My Watchlist ” section of your account. We’ve given you the ability to give us more information related to your interest, including whether or not you are looking to transact at a specific valuation. It’s also easy to see which companies are now accepting investments on the EquityZen platform, allowing you to view additional information related to the opportunity quickly and efficiently. Not interested in a company anymore? Remove it from your Watchlist and we won’t provide updates to you anymore.
Trying to look for all the documents you’ve ever signed related to your transactions? Need them before tax season comes around again? We figured. We have always given you a central repository of documents related to your transactions within your profile, but we’ve made it even easier now. Everything is consolidated in one location called “ My Documents ”, so you don’t need to look for them on a specific transaction-by-transaction basis.
We’ve made it easier to access some of the most important pages on our platform, including updates about your investments and the vast amount of market research that we have produced and curated. We eliminated redundant links and simplified the overall navigation for all users.
We hope you are as excited as we are about some of these new features and encourage you to give us feedback on our investment platform. We are constantly trying to improve upon the way that private market transactions are completed, and believe we have come a long way in a short amount of time.
A special shout-out to our development team for their hard work in building, iterating, and releasing all of these great new features.
You wouldn't have predicted this six months ago.
On February 18, we published a post titled " The Pre-IPO Investing Opportunity in a Down Market. " The S&P 500 and NASDAQ Composite were fresh off declines of over -7% and -11%, respectively, to start 2016. The stock prices of certain public tech companies had plummeted after poor earnings announcements. Where was a U.S. equity investor to go?
Chart 1: S&P 500 Index and NASDAQ Composite
(Feb 16, 2016 - August 31, 2016)
Source: Google Finance
Since the week of our post, public equity markets in the U.S. have rallied (Chart 1), and the tech sector has performed well. The lesson? When making long-term investment decisions, past performance, especially that of the recent past, of an asset class or sector is not necessarily indicative of future results.
Investing is filled with over-simplified advice, one of the most long-standing examples being that market timing doesn’t work. While there is a class of investors and traders that would argue against that belief, the fact remains that making an investment is often more important than when you make the investment. This can be true in public equity markets and certainly applies in private markets.
In February, we wrote about pre-IPO investments as a way to diversify your investment portfolio (see our post “ Why Alternatives Should Be Part of Your Investment Portfolio ”). How should you think of pre-IPO investments after a period of upward movement in public markets?
Pre-IPO investing is first and foremost a growth investment.
It’s been widely reported that market returns are shifting from public markets to private markets. Companies are staying private longer, and names like Uber ($63B), AirBnB ($30B), and Pinterest ($11B) are generating value for their private investors and raising “quasi-IPO’s” – $100M+ private funding rounds. 1
Chart 2: U.S. VC-Backed Tech IPOs vs. Private Tech IPOs
Source: CB Insights
One way to capture this upside potential, therefore, is to allocate to the private markets.
With an eye to the future, here are a few indicators supporting the case for pre-IPO investing as part of the growth allocation in your portfolio today:
1. Strong Tech Earnings
Technology was the bright spot in an otherwise lackluster second-quarter earnings season and is currently the standout sector showing promising third-quarter expectations, particularly on the heels of strong performance reports from Alphabet (Google), Facebook, and others. While strong earnings from specific public companies does not necessarily mean that private companies will perform similarly, these are the companies in whose footsteps current private companies seek to follow.
2. Uptick in M&A
Global tech M&A revenue has reached $1.9 billion this year, according to Dealogic. In the past few weeks alone, activity has picked up significantly – both public and private companies are getting scooped up in deals like Verizon-Yahoo, Didi-Uber, Tesla-SolarCity, Walmart-Jet, and Unilever-Dollar Shave Club. Buyers are out there, which is a good sign for growth-oriented investors.
3. Multiple Expansion
Public investors have shown they are willing to pay more per dollar of revenue (or dollar of earnings) for tech stocks. 2 This has positive effects on private tech companies and their prospects of commanding higher valuations in any type of near-term exit (acquisition or IPO). Twilio, which went public in June at a revenue multiple of 6.4 and now trades significantly above its $15 per share IPO price, 3 is an extreme example.
Traditionally, investors have turned to assets like foreign stocks and real estate for growth. Given current uncertainties in global markets and property values, pre-IPO investments deserve a look.
3. Revenue multiple based on company valuation of $1.23 billion at $15 per share and $193 million in trailing-12-month revenue as of March 31, 2016. See:
It is just as important for companies to take similar measures to protect against unfortunate, yet entirely conceivable disasters. This planning is especially crucial for startups. As Forbes has kindly reminded its readers,
90% of startups fail
. One of its advised conditions for creating a successful startup: design a product that is “perfect for the market”. Certainly no easy task. What happens in the end if a product isn’t quite…perfect? What happens if that 90% becomes 100%? All of a sudden, customers who had depended on the company’s services would be left without a safety net.
A mantra frequently heard from company management is “our customers come first!” Yet, those same customers, individuals and businesses alike, are too often left in the dark when a firm closes shop. Companies should acknowledge the possibility of their demise and have contingencies in place for the sake of its customers. Firms that work with people’s money or personal information have an additional moral, if not fiduciary, responsibility to protect it. It is one thing if you suddenly cannot play Pokemon Go or listen to your favorite song on your music app, but it is a completely different thing altogether to be unable to withdraw your well-earned money from your online investment platform. Yet, instances of such businesses leaving their customers high and dry after going insolvent or filing for bankruptcy are far too common.
Let’s consider Nirvanix, the cloud storage provider who filed for bankruptcy in the fall of 2013. Following several successful funding rounds, the company, seemingly out of the blue, announced that it was shutting down operations, giving customers just two short weeks to recover their stored data ( Infoworld, “Cloud Storage Provider Nirvanix is Closing its Doors "). Two weeks. If you stored your kids’ photos on Nirvanix and were on vacation during those two weeks, tough luck. You can bet those customers will think twice about which data storage provider they give their personal information to in the future; and a written insolvency plan will be one of the first things they check for.
Another example affecting individuals and businesses is that of Zirtual, the virtual assistant service provider. Zirtual is still alive, but only after an interesting (to say the least) week late last summer. On August 10th of 2015, Maren Kate Donovan, the company’s founder and CEO, announced that Zirtual would cease operations due to an excessive cash burn. It would terminate its employees and cut off its service to loyal customers. Luckily, a day later, Donovan announced that Startups.co would salvage Zirtual, allowing it to continue operations the following week ( Medium.com, “Zirtual: What Happened and What’s Next” ). But what if there had been no Startups.co, no white knight to save the company at the last second? All customers and enterprise clients would have been left on their own.
A common theme evident in each of these, and countless other narratives, is that customers suffer when companies fold without a proper transition. While it is incredibly difficult to generate product awareness and publicity, customer trust is even more challenging to build. Startup founders that make a concerted effort to demonstrate that their customers’ needs come first will find it far easier to earn that trust.
The need for good planning for extreme events is one of the biggest takeaways from the global financial crisis of 2008-09, the worst of the last 80 years. Customer assets evaporated because large banks did not have a robust contingency plan in place for a chain of seemingly unlikely events. Startups, with unfavorable odds of survival, have all the more incentive to consider business continuity as a core customer service they must offer.
Caveat emptor is not good enough. Today, anyone that operates a business that handles customer money should publicly state what happens to that money if the business does not survive. How will customers’ assets be accessible and protected in the event of insolvency?
We at EquityZen, a marketplace for private investments, believe that FinTech firms, especially those managing their customers’ money, must ensure that those funds are completely secure no matter what. We strive to put customer needs first. In the FAQ portion of our website, we candidly face the prospect of our own mortality, addressing what happens in the unlikely scenario that “something happens to EquityZen?” before detailing a prepared structure of a back-up manager who “would ensure orderly administration of the fund and distribution of its assets” ( https://equityzen.com/faq/ ).
Will the Patriots' "backup plan" help the team survive Tom Brady's suspension?
If you were an investor or shareholder, wouldn’t you feel more comfortable knowing that the organization with whom you had entrusted your capital had existing measures in place to keep it secure even in the unlikely scenario of something happening to the company? I fly a lot and while I have never used the floatation device under my seat, I sure am glad airlines put them there.
FinTech founders need not curtail their optimism or compromise their vision, but instead, must accept that as leaders, they have an added level of responsibility to their customers. Against all their natural instincts, they must prepare for mortality, so that early adopter customers are not penalized when something goes wrong. Young companies must have a contingency plan in place to protect customers and their assets. We are in an age where cybersecurity breaches (see last summer’s Ashley Madison hack ) and regulatory probes against high-profile CEOs (see Elizabeth Holmes, Theranos ) are almost commonplace. Customer trust is at a premium. In a world where 90% of start-ups fail, those that neglect to recognize that fact will quickly see their 10% chance of success turn to zero.
When individuals think of their investment portfolio, they tend to think of more traditional asset classes: fixed income (bonds) and equities (stocks). Historically, individual investors have not had easy access to alternative asset classes, such as hedge funds, real estate, private equity or venture capital. However, with the emergence of online investment platforms and the rapid advancement in the fintech industry, many alternative asset classes are now available to accredited investors at manageable minimums, allowing them to further diversify and potentially enhance their investment portfolio. The next obvious question is: why invest in alternative asset classes in the first place?
By diversifying your portfolio across different types of investments, you hope to primarily do two things: a) protect yourself during market downturns and b) participate in positive markets while taking less overall risk. Said differently, diversification should lead to lower volatility for your overall investment portfolio. Lower volatility is important because, all else being equal, it allows your portfolio to compound more quickly over time and could have a significant impact on the cumulative return of your portfolio. Frankly, it also helps from a “peace of mind” perspective – not having your investments rise and fall rapidly in conjunction with major market swings may give you more conviction to stick with your investment strategy over the long term. Think about it in the context of having “many eggs in many baskets”.
One of the more traditional benchmarks for a “diversified” portfolio is what is known as the “60 / 40 Portfolio”. This means that 60% of your portfolio is invested in stocks and 40% of your portfolio is invested in fixed income. Of the two asset classes, equities are considered “riskier” (in part due to higher historical volatility) but also present the most upside potential. Fixed income, on the other hand, is considered less risky and tends to provide a more stable return profile. Obviously this is just a baseline – younger investors who have a longer investment horizon tend to be more heavily invested in equities since they can withstand additional risk in order to try and achieve higher growth. Older investors, on the other hand, tend to be more invested in fixed income since their investment horizon is shorter. 1
Adding alternatives can provide diversification benefits because they tend to have a low correlation to traditional asset classes and also may have lower volatility than equities. Both of these features may make them attractive portfolio additions, but need to be balanced with the fact that alternatives also tend to give you less liquidity than traditional asset classes. Unlike stocks or bonds, you generally cannot buy and sell alternatives freely on a publicly traded (or even privately traded) market. This liquidity characteristic is why alternatives tend to be a smaller allocation for individuals in a “modern portfolio” compared to stocks and bonds.
It should also be noted that there is no standard definition for “alternatives” – many people define the asset class differently. Personally, I like BlackRock’s definition the most: “core diversifiers, sources of potential return and investments that provide risk exposures that, by their very nature, have a low correlation to something else in an investor’s portfolio.” 2
These characteristics are visualized nicely in this chart by J.P. Morgan 3 :
This chart is your typical “efficient frontier” which plots risk (volatility) on the x-axis against return on the y-axis. Here you can see that adding an allocation to alternative investment strategies has historically increased returns without an increase in volatility, which is precisely what you would want in an investment.
Another thing to note is that institutional investors, who are often viewed as the “smart money”, have been using alternatives for quite some time to help diversify their investment portfolio and attempt to enhance their returns. In fact, according to the 2015 NACUBO-Commonfund Study of Endowments, endowments allocated 29% of their total investment portfolio to alternative strategies on average. 4
In our mind, private company investments are a core piece of the overall “alternatives” landscape because they fit the characteristics defined above. Unfortunately there is not a specific pre-IPO company index out there, but we can use a few widely accepted indices as a proxy to illustrate the impact of adding private companies to an investment portfolio.
Specifically, if you look at the Cambridge Associates Venture Capital Fund Index, you can see that it has a 0.42 correlation to the S&P 500, calculated quarterly, since Q1 1990 5 and therefore should act as an investment portfolio diversifier. For the uninitiated, a correlation of 1.0 would be perfect correlation (i.e. the asset classes move in lockstep with one another).
In addition, if you look even more specifically at the U.S. Venture Capital - Late & Expansion Stage Index, you can see that it has generated excess returns of 2.5%, 0.41%, and 5.5% over the S&P 500 over the past 3, 5 and 10 year periods, and has actually outperformed the S&P 500 over almost every period over the last 30 years. 6
While these indices are not a direct proxy for late stage, pre-IPO companies, we do believe that they carry similar characteristics and we believe that allocating a portion of your public equity exposure to private companies makes sense for diversification purposes. However it should be noted that investing in private companies does involve a fair amount of risk and, like any other investment, investors should be cautious of making an outsized investment in a single company. Further, no individual security can be expected to behave as the sum of the components of an index and individual securities may have no performance correlation with an index.
We believe that alternatives do have a place in individual investor portfolios because they provide a source of return diversification that is difficult to replicate with traditional asset classes. With the emergence of online investment platforms that offer access to alternative investments at reasonable minimums, individuals now have the ability to invest in asset classes that were previously accessible only to the largest endowments and pension plans. More individual investors should take advantage of the opportunity to allocate a portion of their portfolio to these types of investments.
1 Source: Fidelity. https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/diversify-your-portfolio . Accessed on June 6th, 2016.
2 Source: BlackRock. “The New Diversification: Open Your Eyes to Alternatives, A Conversation with Dr. Christopher Geczy”, Page 8. https://www.blackrock.com/es/literature/brochure/open-your-eyes-to-alternatives-conversation-with-chris-geczy.pdf . Accessed on June 6th, 2016.
3 Source: J.P. Morgan Asset Management. U.S. Guide to the Markets, Q2 2016, Page 55. https://am.jpmorgan.com/blob-gim/1383280028969/83456/jp-littlebook.pdf . Accessed on June 6th, 2016.
4 Source: National Association of College University Business Officers. 2015 NACUBO-Commonfund Study of Endowments. “Asset Allocations for U.S. College and University Endowments and Affiliated Foundations, FY2015”, http://www.nacubo.org/Documents/EndowmentFiles/2015_NCSE_Public_Tables_Asset_Allocations.pdf . Accessed on June 7th, 2016.
Leave your email for latest posts and commentary on startup economics.