Exclusive: 2019 HAX report reveals hardware startup trends

Hardware startups are expanding from the world of consumer tech; global hardware accelerator HAX knows this better than most and details the latest trends in its yearly report. One of the most active early-stage hardware investors, the group today released exclusively to TechCrunch its yearly report with insights on hardware startups.

The report highlighted several vital insights: hardware companies are increasingly entering the public market, and more privately-held hardware startups are exceeding a valuation of $1 billion. Of those unicorns, more than 50% are Chinese hardware companies.

Greylock GP Sarah Guo is as bullish on SaaS as ever

Hello and welcome back to Equity, TechCrunch’s venture capital-focused podcast, where each week we discuss other people’s money and what sense their investment choices make (or don’t).

This week was honestly a treat. We had Kate Clark in the studio along with Alex Wilhelm and a special guest, Sarah Guo from Greylock Partners, a venture firm (obviously). Guo has the distinction of having the best-ever fun fact on the show.

We kicked off with Grammarly, a company that recently put $90 million into its accounts. We chatted about for whom it was built, and if we use it today. One thing that felt clear was that consumers are more willing than before to pay for their tooling. And that means that companies like Grammarly may prove strong investment candidates.

Next, we hit on two more rounds, namely Tiger Global’s investment into Lattice and Clari’s $60 million Series D. Starting with Lattice, a performance management company founded by none other than Sam Altman’s brother, Jack. The startup raised $25 million from Tiger Global; read more about that here.

Clari led us to a discussion of vertical SaaS, and Guo’s views on the future of SaaS products (she’s bullish). Alex and Guo had a lot to say on this subject.

After talking over a few rounds, the discussion turned to the Q3 venture market. A few things stood out from the data and projections. First, that early-stage fundraising was a little light in the quarter. It could be a single-quarter wobble, but the data was worth chewing on all the same. And, second, that seed deal and dollar volume were hot once again.

And we wrapped with a discussion of Tempest, a new sobriety-focused startup that raised a $10 million round. Honestly, we aren’t sure how we feel about the business model. Please let us know if you have thoughts.

It was a good time. A big thanks to Guo for coming on the show, and a shout-out to the team that makes Equity happen: Chris Gates and Henry Pickavet.

Equity drops every Friday at 6:00 am PT, so subscribe to us on iTunesOvercast, Pocketcast, Downcast and all the casts.

Airbnb’s WeWork problem

Airbnb may be another overvalued “unicorn,” but it’s no WeWork.

The Information this morning reported new Airbnb financials — indicating a massive increase in operating losses — that immediately call Airbnb’s future into question. Precisely, Airbnb lost $306 million on operations on $839 million in revenue, namely as a result of marketing spend, in the first quarter of 2019. In total, Airbnb invested $367 million in sales and marketing, representing a 58% increase year-over-year, in Q1. The company is gearing up for a major liquidity event next year and is making a concerted effort to rake in new customers, as any soon-to-be-public business would.

Given WeWork’s sudden demise, coupled with Uber and Lyft’s lukewarm performances on the stock markets, many have wondered how Wall Street will respond to Airbnb’s eventual IPO prospectus. Will money managers have an appetite for another over-valued Silicon Valley darling? Or will the market compete like mad for shares in the massive home-sharing marketplace?

But Airbnb, again, is no WeWork, and I wager Wall Street will have a much friendlier approach to its offering. For one, Airbnb’s co-founder and chief executive officer Brian Chesky isn’t dropping $60 million on private jets — I don’t think. CEO behaviors aside, Airbnb has more capital in the bank than it has raised in its entire 11-year history, which is a whole lot of money. This is all according to a source who is familiar with Airbnb’s financials and shared this detail with TechCrunch following The Information’s Thursday morning report. As for Airbnb, the company told TechCrunch, “we can’t comment on the figures, but 2019 is a big investment year in support of our hosts and guests.”

Airbnb’s CEO Brian Chesky speaks at TechCrunch Disrupt SF 2014

Airbnb has attracted more than $3.5 billion in equity funding at a $31 billion valuation and has even more locked away in its bank account. Additionally, Airbnb has an untouched $1 billion credit line, the source said. Presumably, the referenced credit line is the 2016 $1 billion debt financing from JPMorgan, CitiGroup, Morgan Stanley and others.

Moreover, Airbnb has been “cumulatively” free cash flow positive for some time, meaning that it’s seen more money coming in than going out during recent quarters, according to our source. It has been reported that Airbnb surpassed $1 billion in revenue in the second quarter of 2019 and in the third quarter of 2018, but we’re guessing the business did not top $1 billion in Q4 of 2018 or Q1 of 2019 because it if had, that information would probably have been “leaked.”

Finally, Airbnb has been profitable on an EBITDA (earnings before interest, taxes, depreciation and amortization) basis for two consecutive years, the company announced in January. Gross bookings, meanwhile, are growing, as is Airbnb’s business offering and its experiences product.

Why does any of this matter, you ask?

Thoma Bravo makes $3.9 billion offer to acquire security firm Sophos

Sophos announced this morning that private equity firm Thoma Bravo, has agreed to buy the British company for £3.1 billion ($3.9 billion USD). The price is based on $7.40 USD per share and the company indicated that the board of directors will recommend that shareholders accept the offer.

Sophos CEO Kris Hagerman, as you would expect, put the deal in the brightest possible light. “Sophos is actively driving the transition in next-generation cybersecurity solutions, leveraging advanced capabilities in cloud, machine learning, APIs, automation, managed threat response, and more. We continue to execute a highly-effective and differentiated strategy, and we see this offer as a compelling validation of Sophos, its position in the industry and its progress,” he said in a statement.

But private equity firms typically look for undervalued firms that they can purchase and either combine with other properties or find ways to build up their value. Thoma Bravo indicated in a public filing that it saw a firm, it called “a global leader in next-generation cybersecurity solutions spanning endpoint, next-generation firewall, cloud security, server security, managed threat response, and more,” it stated in the filing.

The company has 400,000 customers in 150 countries, 47,000 channel partners and more than 100 million users, according to the filing. The stock price was up this morning on the news, according to reports.

It’s worth noting that just last week, TechCrunch’s Zack Whittaker reported on “a vulnerability in [Sophos’] Cyberoam firewall appliances, which a security researcher says can allow an attacker to gain access to a company’s internal network without needing a password.” The company issued an advisory last week on the problem, indicating it had issued a patch on September 30th.

Brad Feld: what founders need to know about recent changes in VC deal terms

Extra Crunch offers members the opportunity to tune into conference calls led and moderated by the TechCrunch writers you read every day. This week, TechCrunch’s Connie Loizos hopped on the line with prominent investor, entrepreneur, thought leader, and Techstars co-founder Brad Feld to discuss the latest edition of his book “Venture Deals”, his advice to founders and investors, and his take on hot button issues of the day (including dual-class shares, direct listings, and what happened at WeWork).

In their conversation, Brad and Connie discuss the need to know information when it comes to preparing for, structuring and executing venture deals, and how that information has changed over the past several decades. Feld walks through the major topics that have been added in the latest edition of the book, such as how to handle venture debt, as well as tactical attributes that aren’t currently in the book, such as secondary market trading.

Brad also gives his take on the most effective fundraising tactics for founders, and what common pieces of advice might be overblown.

Brad Feld: “I think the approach to the amount of money that you’re raising is both nuanced and evolves based on what financing round you’re at. So if you’re in an early round, some of the characteristics are different than if you’re in a later round. But I think the general truism… that I like to use when people say, “Well, how much money should I raise?”

I start with two variables and you the entrepreneur get to define those two variables. The two variables are: the amount of money you raise and what getting to the next level means. The amount of money you should raise is the amount of money that you need to get your business to the next level. There are lots of different ways to define what next level is and by forcing yourself internally to define next level and then define what you need in terms of capital to get to that next level… when you’re raising that first round of financing or even the second or third round of financing, it helps you size rationally what you need versus reactively to whatever the market characteristics are.

I actually encourage entrepreneurs to raise the least amount of money they need to get to the next level, or at least that’s the number that they go out to market with. Not a range, not a big number because you’re trying to drive some kind of valuation characteristic off a big number, but the amount of money that you actually think you need to get to the next level. Then if you can be oversubscribed, that’s an awesome situation.”

Feld and Connie dive deeper into current issues in the startup and venture landscape, including Brad’s take on the impact of the SoftBank Vision Fund, what went down at internally and externally at both WeWork and Uber, as well as how boards, executives and founders can manage cult of personality and static company cultures.

For access to the full transcription and the call audio, and for the opportunity to participate in future conference calls, become a member of Extra Crunch. Learn more and try it for free. 

Connie Loizos: I think the last time I saw you in person was out here in San Francisco at an event I was hosting and that was maybe two years ago?

Brad Feld: Yup, that’s right. That was at the Autodesk Lab if I remember correctly.

Loizos: Yes. It’s good to hear your voice, and thank you for joining us on this call. We have a lot of readers who are big fans of yours that are on the line and are eager to learn about your book “Venture Deals” and your broader thoughts about the current state of the market. And that said, I know you only have so much time, so let’s dive first into the book. So ‘Wiley’, your publisher has just put out the fourth edition of this book “Venture Deals”, and it’s really easy to appreciate why. I was looking through it and it’s so incredibly useful about how venture deals come together and possible pitfalls to avoid. And given there are always new entrepreneurs emerging, it continues to be highly relevant.

Can I ask you, so how do you go about updating a book like this, given that some things change and some things stay the same?

Why venture capital firms need culture experts

When Susan Fowler’s 2017 blog post shined a light on Uber’s raucous culture, outlining rampant harassment and sexism, a debate erupted. What role do the deep-pocketed investors behind the company, those who allowed it to scale to monstrous proportions, have in developing and nurturing its culture? Entrepreneurs and venture capitalists themselves wondered aloud, how involved should a venture fund be in early-stage recruiting processes and ensuring a safe environment for employees? If a culture is bad, unsafe, damaging, is it the VC’s fault?

Late-stage venture funds, for the most part, miss the opportunity to deeply impact their portfolio companies’ cultures. When they invest, typically large sums of capital in companies with hundreds of employees and multiple offices, the company’s culture is formed and, as Uber and others have proven, rebuilding culture a decade in is no easy challenge. Early-stage funds, however, the people that write the very first check in startups, have a front-row seat to decisions crucial to defining how a company operates and treats its employees in the long term. These people, if they care to, have the power to help determine key hires and establish company values, norms and behaviors from the get-go.

This week, San Francisco-based early-stage fund True Ventures hired its first-ever vice president of culture, a move that suggests VCs are taking concrete steps toward further involving themselves in the company-building process from a D&I and hiring perspective. Madeline Kolbe Saltzman joins the firm, which raised $635 million across two new funds last year, from Handshake, where she was the VP of people and talent.

“There’s a responsibility to guide the company and the founder to being the best they can be, and that involves paying attention to who you’re hiring and how people are being treated,” Saltzman tells TechCrunch. “If we can come in and establish inclusive norms, my hope is that our companies will scale inclusively as well.”

Most venture capitalists are in regular communication with active investments. Early-stage investors, particularly, are very involved with building businesses, facilitating hires and scaling. But as they seek to decrease cash-burn or find product-market fit, VCs are not often very concerned with issues of diversity and inclusion, something that’s became increasingly important as companies are finally being held accountable for the diversity of their workforces.

Dig into the key issues in venture today with investor and Techstars co-founder Brad Feld

Few can hold a candle to Brad Feld’s list of accolades in the startup, tech and venture world. As a multi-time founder of both startups and venture firms alike, Feld is widely known for having co-founded the Techstars accelerator — now a Silicon Valley and startup institution — as well as Foundry Group, the early and growth-stage venture fund that has raised nearly $2.5 billion over seven funds, in just over a decade.

Feld is equally, if not more, recognized outside of the investing world as a thought leader through both his widely followed blog “Feld Thoughts” and through authoring a number of books and guides to the startup and venture worlds. Feld recently published the fourth edition of his acclaimed and seemingly timeless book “Venture Deals: Be Smarter Than Your Lawyer And Venture Capitalist” (which he co-authored with Foundry Group co-founder Jason Mendelson), which acts as a manual to raising venture capital by walking through tactical advice around negotiating a term sheet, what to consider when selling your business, arguments for and against convertible debt and much more.

TechCrunch’s Silicon Valley editor Connie Loizos will be sitting down with Brad for an exclusive conversation this Thursday, October 10th at 11:00 am PT on Extra Crunch. Brad, Connie and Extra Crunch members will be digging into the latest edition of “Venture Deals,” Brad’s advice to founders and investors and his take on hot-button issues of the day (including dual-class shares, direct listings and what happened at WeWork).

Extra Crunch members will also have the opportunity to ask questions! We will pause during the call to take questions from Extra Crunch subscribers. Alternatively, you can email questions to [email protected].

Tune in to join the conversation and for the opportunity to ask Brad and Connie any and all things venture.

To listen to this and all future conference calls, become a member of Extra Crunch. Learn more and try it for free.

As Sinai Ventures returns first fund, partner Jordan Fudge talks new LA focus

At age 27, Jordan Fudge is quietly making a splash in the VC world.

Fudge is the managing partner of Sinai Ventures, a multi-stage VC fund that manages $100 million and has more than 80 portfolio companies including Ro, Drivetime, Kapwing, and Luminary. His 2017 investment in Pinterest — a secondary shares deal from his prior firm that was rolled into Sinai when he spun out — will have returned the value of Sinai’s Fund I by itself once the lockup on shares expires next week.

Fudge and co-founder Eric Reiner, a Northwestern University classmate, hired staff in New York and San Francisco when Sinai launched in early 2018. Today, they’re centralizing the team in Los Angeles for its next fund, a bet on the rising momentum of the local startup ecosystem and their vision to be the city’s leading Series A and B firm.

Fudge and Reiner have intentionally stayed off the radar thus far, wanting to prove themselves first through a track record of investments.

Kwaku EDITS V2

Jordan Fudge. Image via Sinai Ventures

A part-time film financier who also serves on the board of LGBT advocacy non-profit GLAAD, Fudge describes himself as an atypical VC firm founder, an edge he’s using to carve out his niche in a crowded VC landscape.

I spoke with Fudge to learn more about his strategy at Sinai and what led to him founding the firm. Here’s the transcript (edited for length and clarity):

Eric Peckham: Tell me the origin story here. How did Sinai Ventures get seeded?

Jordan Fudge: I was working for Eagle Advisors, a multi-billion dollar family office for one of the founders of SAP, focused on the tech sector across public markets, crypto, and eventually VC deals. Two years in, I pitched them on spinning out to focus on VC and they seeded Sinai with the private investments like Compass and Pinterest I had done already, plus a fresh fund to invest out of on my own. It was $100 million combined.

First mover advantage: Does it matter in startup fundraising?

We know the world of startup funding is competitive. In fact, I’m speaking at TechCrunch Disrupt on this very topic alongside pre-seed investor Charles Hudson of Precursor Ventures, early-stage investor Annie Kadavy of Redpoint Ventures. I’ve also written extensively for TechCrunch and ExtraCrunch about how founders can optimize their pitch decks to make the most of the 3 minutes and 44 seconds the average VC will spend looking at their deck. We’ve also analyzed the best time of year founders can fundraise to get the most attention from potential investors.

But what can VCs do to make sure they’re getting the biggest piece of the most promising looking companies? We dug into how founders choose their lead investor to gain some insight into how a VC can become more competitive in a rapidly growing market.

Before we dig into the numbers

The data included in this research came from companies that explicitly opted in to participate by responding to an automated email sent to them. We are incredibly appreciative to these founders for making this research possible. You can read more about our startup opt-in process and other aspects of our methodology here.

In this article, I’ll talk about how founders choose their VCs, both in oversubscribed rounds and non-oversubscribed rounds, and how investors can use that information to beat out their competitors.

For VCs, competition is getting harder

Getting a startup funded is a massive hurdle. The good news is there’s actually far more money available now than just a few years ago. In fact, in the first half of 2019 there was $20.6 billion in new capital introduced into the startup market.

Larger funds typically known for investing in later stages have introduced seed funds so they can invest with promising businesses earlier.  Kleiner Perkins announced a $600 million early-stage fund in January, GGV raised a second $460 million “Discovery Fund” last year, even Sequoia Capital operates a scout program with a $180 million fund.

This means smaller funds or those who only invest in earlier rounds might get overlooked when founders are looking for investors.

Investor meetings are a two-way street

In addition to having to compete for the best deals, VCs don’t get it right every time. For every Uber, there are hundreds of Juiceros. The reason they only spend a few minutes looking at a pitch deck is because they’re constantly looking at pitches in hopes they’ll come across another unicorn.

But while it seems like the investors are holding all the cards, if founders optimize their pitch deck and book their meetings in a short window, they can actually create a sense of urgency for the VCs. We’ve seen this recently with the amount of founders reporting oversubscribed rounds.

When looking at how founders chose their lead investors, we discovered that there was a massive difference between those that raised oversubscribed rounds and those that didn’t.

Being the first to move means a lot, until it doesn’t

What was the number one factor in founders deciding on who to choose as their lead investor? We found that nearly 48% of founders chose their lead investor because they were the first one to make the offer.

Anecdotally this makes sense. When DocSend was raising we received a lot of “maybes” during our first few meetings. However, once we had a term sheet most of those “maybes” flipped to a firm “yes.” In fact, many investors that had originally promised a $25k or $50k investment if we found other backers were suddenly asking for $300k or $500k.

We had so many investors interested that our round was oversubscribed and we had to make some choices about who we wanted as an investor. That could have been avoided if any of those VCs had simply acted first.

But when you look at the data a different way, we found that moving first was significantly more important in oversubscribed rounds than those that weren’t. And the more oversubscribed they were, the more valuable moving first becomes.

For founders whose rounds were more than 20 percent oversubscribed, 60 percent of them chose their VC because they came in first with a term sheet. But that dropped to 50 percent for founders that were only slightly oversubscribed and all the way to 38 percent for those founders that weren’t oversubscribed at all.

While we would have thought name-brand VCs might move first, and that top tier interest may cause an oversubscribed round, we found that not to be the case. In both oversubscribed and non-oversubscribed rounds 28 percent of founders reported that a name brand factored into their decision. And for those who chose a name brand investor, only 33 percent of those founders reported that their lead VC moved first. 

The more oversubscribed a round is, the more likely it is that some VCs aren’t going to make the cut. To avoid being the firm that didn’t get the deal it’s best to move quickly when you see a company you like.

A fast round isn’t always an oversubscribed one

Another surprising thing that came up in our research was the amount of time founders spent raising and how that affected their decision making. While we assumed oversubscribed rounds happened significantly faster than the average of 11-15 weeks, we found that oversubscribed rounds only came in slightly under, at 8.6 weeks. However, there was a lot of variability in that number.

We saw some oversubscribed rounds close in as little as 3 weeks and some take as long as 20. So there’s no way to tell whether a round will be oversubscribed based on the time spent fundraising. This means that even if you meet a founder who’s been raising for 10 weeks, it’s still smart to move quickly if you want to be the lead investor.

We would have also thought longer rounds would have benefited the first term sheet more, but there was virtually no difference in the impact of the first acting VC when looking at time. When looking at founders that spent less than 12 weeks raising and those that spent more than 12 weeks, there was virtually no difference in the percent that chose their lead investor based on the first term sheet (at 47 percent and 48 percent respectively).

Terms only matter in oversubscribed rounds

When choosing your lead investor, you would think the terms would be a significant reason to choose one VC over another. But we found that it was barely a factor for most people. In fact, only 4 percent of founders who weren’t oversubscribed cited terms as a major factor.

They instead focused on VCs that had experience in their industry (at 42 percent). But for oversubscribed rounds the percentage of founders who chose their lead investor based on terms shot up to 38. Meaning when the round gets competitive, so do the terms. But they still gave an edge to that first term sheet they received.

Interestingly, a potential deciding factor in oversubscribed rounds could be how well the VC and the founder get along. In those rounds that were significantly oversubscribed, over 46% of respondents said how well they got along with their VC was a factor in choosing them to be the lead. Compare that to only 19% of founders in non-oversubscribed rounds who cited rapport as a key factor in choosing a lead investor.

For many smaller firms getting edged out by bigger players boasting multi-stage funds, it may be as simple as being decisive and personable when it comes to landing the most competitive investments.

Africa Roundup: CcHub’s iHub acquisition, Andela’s $50M run-rate and layoffs, Transsion’s IPO

Two of Africa’s powerhouse tech incubators joined forces in September. Nigerian innovation center and seed-fund CcHub acquired Nairobi based iHub.

The purchase amount was undisclosed, but CcHub will finance the deal out of its real-estate project to build a new 10-story HQ in Lagos, CcHub CEO Bosun Tijani told TechCrunch.

Details are emerging on how the two entities will operate together, but Tijani noted some degree of autonomy. The names — CcHub and iHub — will remain the same. Tijani is now co-CEO of both organizations.

Nekesa Were continues as iHub managing director. And iHub’s existing programs will remain, with CcHub extending to Kenya some of its existing activities in education, healthcare and governance.

CcHub will also use the iHub addition to expand the investment scope of its Growth Capital Fund.

The acquisition brings together two of Africa’s most powerful tech hubs by membership networks, volume of programs, startups incubated, and global visibility. CcHub and iHub visitors and partnerships span Zuckerberg, Mayer, Facebook, Google, and several African governments.

There’ll be a lot to cover on how this merger shapes up. At a high level, for now, the CcHub-iHub union creates a direct innovation link between two of Africa’s most active markets for VC and startup formation — Nigeria and Kenya .

Africa-focused tech talent accelerator Andela  announced cuts of 400 junior engineers across Kenya,  Uganda and Nigeria just as the startup released first-time earnings figures indicating it will surpass $50 million in revenues for 2019.

On the disjointed news, Andela CEO told TechCrunch the layoffs were due to a shift in market demand for the startup’s more senior developers.

Andela’s client base is comprised of more than 200 companies around the world that pay for the African developers Andela selects and trains to work on projects.

The Series D tech-venture is one of Africa’s most visible (by press volume) and best funded ― backed by $181 million in VC from investors that include the Chan Zuckerberg Initiative.

Johnson said the layoffs were not due to a lack of demand or financial woes. That’s probably why Andela released first-time figures of a $50 million run-rate for 2019, something of a rarity for a startup to reach in less than five years. That’s even more rare for ventures in Africa. Only one VC-backed digital company has revealed annual revenues between $50 and $100 million. That’s Jumia, the e-commerce startup that listed in an NYSE IPO earlier this year.

The departing Andela software engineers gained severance packages and are receiving placement assistance from partners including incubators CcHub and iHub.

Chinese mobile phone and device maker Transsion listed in an IPO on Shanghai’s new NASDAQ-like STAR Market, a Transsion spokesperson confirmed to TechCrunch.

Headquartered in Shenzhen, Transsion is a top seller of smartphones in Africa under its Tecno brand. The company has also started to support venture funding of African startups.

Transsion issued 80 million A shares at an opening price of 35.15 yuan (≈ $5.00) to raise 2.8 billion yuan (or ≈ $394 million).

Transsion plans to spend 1.6 billion yuan (or $227 million) of its STAR Market raise on building more phone assembly hubs, and around 430 million yuan ($62 million) on research and development, including a mobile phone R&D center in Shanghai.

Transsion has a manufacturing facility in Ethiopia and announced plans to build an R&D facility in India.

There are a couple things to watch with Transsion’s IPO. First, the public listing, and accompanying capital could mean more venture funding for African startups.

Transsion-funded Future Hub already teamed up with Kenya’s Wapi Capital in August to source and fund early-stage African fintech startups.

Transsion’s IPO and growing presence in Africa also accompanies TechCrunch coverage over the last year that signals China’s growing digital influence in Africa (see Extra Crunch analysis).

More Africa-related stories @TechCrunch

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