Why Silicon Valley needs more visas

When I hear protesters shout, “Immigrants are welcome here!” at the San Francisco immigration office near my startup’s headquarters, I think about how simple a phrase that is for a topic that is so nuanced, especially for me as an immigrant entrepreneur.

Growing up in Brazil, I am less familiar with the nuances of the American debate on immigration legislation, but I know that immigrants here add a lot of jobs and stimulate the local economy. As an immigrant entrepreneur, I’ve tried to check all of those boxes, and really prove my value to this country.

My tech startup Brex has achieved a lot in a short period of time, a feat which is underscored by receiving a $1 billion dollar valuation in just one year. But we didn’t achieve that high level of growth in spite of being founded by immigrants, but because of it. The key to our growth and to working towards building a global brand is our international talent pool, without it, we could never have gotten to where we are today.

So beyond Brex, what do the most successful Silicon Valley startups have in common? They’re also run by immigrants. In fact, not only are 57% of the Bay Area’s STEM tech workers immigrants, they also make up 25% of business founders in the US. You can trace the immigrant entrepreneurial streak in Silicon Valley from the founders of SUN Microsystems and Google to the Valley’s most notorious Twitter User, Tesla’s Elon Musk.

Immigrants not only built the first microchips in Silicon Valley, but they built these companies into the tech titans that they are known as today. After all, more than 50% of billion dollar startups are founded by immigrants, and many of those startups were founded by immigrants on H-1B visas.

Photo courtesy of Flickr/jvoves

While it might sound counterintuitive, immigrants create more jobs and make our economy stronger. Research from the National Foundation of American Policy (NFAP) has shown that immigrant-founded billion-dollar companies doubled their number of employees over the past two years. According to the research, “WeWork went from 1,200 to 6,000 employees between 2016 and 2018, Houzz increased from 800 to 1,800 employees the last two years, while Cloudflare went from 225 to 715 employees.”

We’ve seen the same growth at Brex. In just one year we hired 70 employees and invested over $6 million dollars in creating local jobs. Our startup is not alone, as Inc. recently reported, “50 immigrant-founded unicorn startups have a combined value of $248 billion, according to the report [by NFAP], and have created an average of 1,200 jobs each.”

One of the fundamental drivers of our success is our international workforce. Many of our key-hires are from all over Latin America, spanning from Uruguay to Mexico. In fact, 42% of our workforce is made up of immigrants and another 6% are made up of children of immigrants. Plenty of research shows that diverse teams are more productive and work together better, but that’s only part of the reason why you should bet on an international workforce. When you’re working with the best and brightest from every country, it inspires you to bring forth your most creative ideas, collaborate, and push yourself beyond your comfort zone. It motivates you to be your best.

With all of the positive contributions immigrants bring to this country, you’d think we’d have less restrictive immigration policies. However, that’s not the case. One of the biggest challenges that I face is hiring experienced, qualified engineers and designers to continue innovating in a fast-paced, competitive market.

This is a universal challenge in the tech industry. For the past 10 years, software engineers have been the #1 most difficult job to fill in the United States. Business owners are willing to pay 10-20 percent above the market rate for top talent and engineers. Yet, we’re still projected to have a shortage of two million engineering jobs in the US by 2022. How can you lead the charge of innovation if you don’t have the talent to do it?

What makes matters worse is that there are so few opportunities and types of visas for qualified immigrants. This is limiting job growth, knowledge-sharing, and technological breakthroughs in this country. And we risk losing top talent to other nations if we don’t loosen our restrictive visa laws.

H1-B visa applications fell this year, and at the same time, these visas have become harder to obtain and it has become more expensive to acquire international talent. This isn’t the time to abandon the international talent pool, but to invest in highly specialized workers that can give your startup a competitive advantage.

Already, there’s been a dramatic spike in engineering talent moving to Canada, with a 40% uptick in 2017. Toronto, Berlin, and Singapore are fastly becoming burgeoning tech hubs, and many fear (rightfully) that they will soon outpace the US in growth, talent, and developing the latest technologies.

This year, U.S. based tech companies generated $351 billion of revenue in 2018. The U.S. can’t afford to miss out on this huge revenue source. And, according to Harvard Business School Professor William R. Kerr and the author of The Gift of Global Talent: How Migration Shapes Business, Economy & Society, “Today’s knowledge economy dictates that your ability to attract, develop, and integrate smart minds governs how prosperous you will be.”

Immigrants have made Silicon Valley the powerhouse that it is today, and severely limiting highly-skilled immigration benefits no-one. Immigrants have helped the U.S. build one of the best tech hubs in the world— now is the time for startups to invest in international talent so that our technology, economy, and local communities can continue to thrive.

Investors and entrepreneurs need to address the mental health crisis in startups

Colin Kroll, was the co-founder of Vine and HQ Trivia, both consumer sensations that brought joy to millions; Anthony Bourdain, had been a chef, journalist and philosopher, who brought understanding and connectedness to millions of lives; while Robin Williams built a career as a brilliant comedian and actor.

What these three share in common is that they were all people at the pinnacle of their industry and they all died too soon. Their premature loss is a tragedy.

The most brilliant and creative amongst us are sometimes the most troubled and nowhere is that clearer than in the entrepreneurial ecosystem. With each passing unnecessary death the importance of mental health comes briefly into focus… but that focus lasts no longer than a news cycle and nothing changes. The time for lip service came and went long ago. We must take these issues seriously and we need to act.

The mental health epidemic is real. There are 18.5% Americans that will suffer from mental illness this year, 4% of them will suffer so acutely that it will substantially limit their ability to live their lives.

That means it is extremely likely you or someone you know is suffering right now and could use support. Moreover, unlike many of the challenges we face today, the most common expressions of mental health disorder (anxiety, depression, substance abuse and imposter syndrome) are largely addressable through individual action. Not only should we all take action, we all cantake action.

While national mental health statistics are troubling, they are downright terrifying for entrepreneurs. According to a study by Michael Freeman, entrepreneurs are 50% more likely to report having a mental health condition with some specific conditions being incredibly prevalent amongst founders.

Founders are:

  • 2X more likely to suffer from depression
  • 6X more likely to suffer from ADHD
  • 3X more likely to suffer from substance abuse
  • 10X more likely to suffer from bi-polar disorder
  • 2X more likely to have psychiatric hospitalization;
  •  and 2X more likely to have suicidal thoughts

Photo courtesy of Flickr/Thomas Shahan

Addressing the ongoing mental health catastrophe in entrepreneurship is a moral imperative, and for wise investors, it should be a function of doing business.

Venture capitalists make their living off of the blood, sweat, and tears of founders. It is through their passion and efforts that we succeed or fail. We can either choose to see founders purely as a means to an end (generating returns) or we can see them as the whole people they are.

When I make an effort to get to know our founders beyond the most superficial level then I cannot help but be moved by their personal struggles. Seeing founders in our portfolio succeed on a personal level is just as rewarding for me as sharing in their professional success. Luckily, I believe the two are intrinsically linked, which means we don’t have to choose.

 As Michael Freeman writes:

“Mental health is as essential for knowledge work in the 21st century as physical health was for physical labor in the past. Creativity, ingenuity, insight, brilliance, planning, analysis, and other executive functions are often the cognitive cornerstones of breakthrough value creation by entrepreneurs.”

Depression, anxiety and mood disorders all actively work to undermine founder performance. They often contribute to burnout, co-founder conflict, toxic company culture, increased employee turnover, an inability to hire top talent, an inability to “show up” for important meetings and pitches and poor decision making in general. According to Noam Wasserman at HBS, 65% of failed startups fail for avoidable reasons like co-founder conflict. All of these experiences are exacerbated when founders are in a time of high mental and emotional strain.

Let’s assume that in a portfolio of 20 companies 15 of them fail or underperform and that Noam Wasserman’s 65% statistic holds true. That would mean that 10 of the 15 companies (65%) failed for avoidable “human centric” reasons. If a firm were able to help even half of those companies avoid failure caused by burnout and mental strain that would mean an additional five companies would be successful, doubling the number of successful outcomes in the portfolio.

Even if you’re a huge pessimist, to help change the trajectory for one out of ten companies, changes the portfolio from five winners to six. In other words, supporting founders before their “people problems” become business problems yields a 20% improvement in performance. Even if one were indifferent to the personal lives of the portfolio founders, they should care about founder health if they care about portfolio returns.

It’s great that investors profess to care about founders’ mental health, but words are not enough. We must act to reduce founders’ mental and emotional suffering. It’s the right thing to do and it’s good for business.

Photo courtesy of Flickr/Thomas Shahan

Why do entrepreneurs suffer so much more acutely? 

Mental health problems permeate every industry not just the tech industry, but the statistics above would seem to indicate that we have a particular problem. What causes entrepreneurs to suffer at substantially higher than average rates? It’s a hard question to answer, and soon research from progressive labs like that of the Founder Central Initiative will help us to identify these drivers. For now, based on our own observations of founders, we believe there are several explanations which may contribute.

Self-Selection: Most founders are smart, driven and skilled people whose resume could almost certainly land them a job with a higher lifetime expected value (the median salary at Facebook is now $240,000) but they still choose the grueling, uncertain and more creative founder journey. Founders are almost certainly pre-disposed towards certain conditions (like ADHD) for example, Garret Loporto, in his book, “The Davinci Method” cites Fortune Magazine as claiming that people with ADHD are 300% more likely to start their own company than others.

Poisonous industry tropes: The narratives our industry tells are less real than pictures that grace the front of fashion magazines and are just as destructive. Photoshopped pictures of “perfect people” create an unattainable standard of beauty, the constant stream of stories about “overnight success” and “crushing it” create an unattainable standard for founders.

Startups are hard: The magic of a great team is in building a group with complementary skills. When just starting out founders don’t have a complete team and are required to do things they are not well suited to do. Working on projects that do not fit within a leader’s innate skills tends to be emotionally draining. It’s not uncommon in an early startup for introverts in the company to have to pitch and make sales calls while extroverts are forced to sit at a desk and grind away in a CRM.

Startups are alienating: The all-encompassing nature of a startup often causes founders to spend less time with family, friends and significant others and many are required to re-locate away from these support networks for funding or strategic reasons. As stress at a company builds, founders are more inclined to double down at work (a natural response to an emergency).  This tendency only further burdens the founder by muting their supportive relationships and reduces their ability to cope with company pressures.

A founder must be a rock: There’s a lot of pressure put on founders to stay steady in times of company turmoil.  As a result, they are often alone when they need others the most.  Founders report that they feel that they cannot talk with their co-founders, especially when the problem is with the co-founder, they cannot pass the burden of their worry on to their employees, and feel that their friends and family do not understand or are tired of hearing about the company.

The “I am my company” syndrome: Founders blur the line between themselves and their companies in such a way that company failures often are felt as personal failures. Losing a customer contract or receiving a “no” from an investor can feel like a deeply personal rejection.

Founders eat last: I have yet to meet a founder who has a budgeted line item for self-care or who takes guilt free vacations. In almost every other skilled industry there is recognition that people have a right to take care of themselves and that a little bit of self-care actually leads to a more productive workforce. Investors, founders and poorly trained middle managers all perpetuate a myth in the startup ecosystem that the only way to be successful is to grind yourself inexorably to the bone.

Financial risk: In addition to opportunity cost, founders often go without a pay check and pour a significant portion of their personal capital into their businesses. This creates enormous financial stress and anxiety that sets up a scenario in which a business failure also creates personal financial ruin. A certain amount of “skin in the game” can be positive but founders are often already all-in emotionally with their businesses. A founder with too much skin in the game may live under a Sword of Damocles and be unable to focus on the key tasks, ironically bringing about their own worst fears.

Imposter Syndrome: Founders often suffer from the sense that they don’t belong where they are and that eventually they will be exposed as frauds. This leads founders to chalk success up to luck but to take all the blame for any failures. 58% of tech workers suffer from Imposter Syndromeand I suspect the number is substantially higher among founders.

Moving the goalposts: Founders find it difficult to celebrate the small wins, each victory brings on the next, greater challenge. The second most stressful time for founders is right before they are able to secure a major fundraise, the most stressful time is right afterwards.

Substance Abuse: Our industry is awash in alcohol and other substances that founders and tech workers are encouraged to consumer freely for bonding, as a social crutch, and for performance optimization. These substances are both a cause and a symptom of broader problems in the ecosystem.

I wager that simply reading the above list left you stressed out and self-identifying with a number of the factors that cause founders stress. Luckily there are some things we can all do to combat mental health strain.

Photo courtesy of Flickr/Thomas Shahan

What can investors and founders do about founder mental health?

Each of us who participates in the startup ecosystem contributes to the problem of poor founder health.  This puts each of us in a position to positively impact this experience by acting. Here are a few things we can do:

Destigmatize

o  Investors should make sure that the founders they work with know that they take mental health issues seriously. One way to do this is to take the Investors Pledge developed by Erin Frey and Ti Zhao at Kip. Just taking the pledge sends a powerful signal to founders that it’s OK for them to seek help. Better yet, investors, in their onboarding process with founders should explicitly touch on their support for the founders’ seeking mental health services when they feel compelled to do so.

o  Drop the act. Being an investor is different from being a founder but it isn’t easy and investors suffer in many of the same ways. If investors want to support their founders, they need to be authentic and vulnerable in front of them. Investors need to show founders its ok to open up and that it’s ok to have doubts or to struggle with mental health.

o  For founders, don’t spread or buy into the myths. When you’ve been grinding away on your business for years in anonymity and then have a major breakthrough, make sure your PR campaign accurately reflects the journey. You suffered to bring your company to the pinnacle of success and you had to invest heavily in yourself to survive the trip. Make sure when other founders read about your success they understand how you really got there.

Provide Resources

o  It’s easy for people to forget how financially constrained most founders are. Just because they’ve raised $5 million in a recent financing doesn’t mean they necessarily have the personal capital to seek help and support. A portion of financing rounds should be earmarked for the founders themselves and investors should hold founders accountable for investing in their wellbeing and development.

o  Founders need to include a line item in their P&L for wellness or self-care. Budgets are moral documents and they set the priorities of a company. If there is no line item for supporting the mental/physical/emotional well-being of the founders and employees, then the company will be devoid of the resources to offer this type of support. We, the participants in this ecosystem, need to put our money where our mouths are when we say that we are “founder friendly” and “invest in founders first”.

Don’t forget the mind body connection 

o  Mental, emotional and physical wellbeing are all deeply linked to one another. Just as mental health issues often lead to substance abuse, a lack of physical exercise or nutrition can also lead to depressive mood states and a lack of focus. The founder fifteen is as real as the freshman fifteen but it’s much more destructive.

Founders need to make sure to incorporate their physical activity of choice into their life, need to watch their nutritional intake and should consider activities such as yoga, meditation and intentional breathing that research shows help boost mood, sharpen focus and enhance emotional resilience. (Short plug, at Atlaswe work on addressing the whole person because we believe effective leaders are those who are both physically and emotionally fit.)

Connect, connect, connect 

o  Founders need to remain anchored in a support network. They should join a peer group, engage with old friends, go out on date nights with their significant other and make new friends. Not only is it a fun way to unload some of the pressure they’re under, but it’s a great reminder to founders that they have a separate existence from their company.

o  Founders should take an intentional vacation away from work, tech, and business. If, like me, a founder can’t voluntarily disconnect even while on vacation, they should consider joining a community like Soulscapeor traveling off the grid so that they are forced to disconnect and recharge. Burnout rarely appears as the primary track in startup postmortems, but a trained ear can usually find its influence.

o  Set a culture that is supportive of self-care. If everyone from the receptionist to the CEO is willing to seek help and take care of themselves, it creates a company-wide habit that enables everyone to thrive. A healthy culture will pay for itself a thousand times over in recruitment, lower turnover and happier, more productive people who are willing to sacrifice for the company when sacrifice is called for.

Set priorities not tasks

o  Founders and A-type personalities tend to live and die by their calendar and their task lists. Unfortunately, task lists are just reminders that there are countless things to be done. For most of us our task lists are quite literally infinite. This is a recipe for unbearable mental strain and unmanageable cognitive load. The definition of anxiety is when we perceive that our ability to achieve is overwhelmed by the tasks at hand, which is inevitable when our tasks are ill defined, too large or seemingly unending.  Instead of a task list, switch to a daily priorities list where only the urgent AND important items are listed. Completing these items may be more difficult but getting them off your plate is infinitely more satisfying.

 Be vigilant 

o  Learn the warning signs of depression and burnout. People who are drowning don’t wave their hands in the air and shout for help, they slip silently beneath the waves and only trained life guards tend to spot people in trouble. It’s the same way with depression. Depressed people don’t mope around and they aren’t necessarily sad so much as numb. Here are things to look out for:

  • Persistent feelings of pessimism
  • Sad, anxious or empty mood
  • Change in behavior and loss of interest in previously enjoyed activities
  • Change in diet or eating schedule
  • Change in sleep schedule
  • Irritability
  • Inability to make decisions or concentrate
  • You can also use this validated self-assessment for depression

Building companies is inherently hard mentally, physically and emotionally but our ecosystem is a toxic one with dozens of factors all contributing to make it even more so. We are quite literally killing ourselves and thereby sabotaging our long-term competitiveness. There are tangible actions each one of us can take to start fixing this toxicity but at the end of the day but I believe most of those actions boil down to treating each other and ourselves as human beings. If we recognize and embrace our weaknesses and support one another in our imperfections, we will start seeing a healthier more sustainable entrepreneurial ecosystem.

Resources:

National Suicide Prevention Hotline: 1-800-273-8255

Depression resources: https://www.everydayhealth.com/depression/guide/resources/

Free/Cheap Peer Groups: https://www.evryman.cohttps://www.chairmanmom.com; Atlas Events and Peer Groups

(if anyone knows of similar free resources, please share them in the comments)

Private equity buyouts have become viable exit options — even for early-stage startups

About 13 years ago I faced an excruciating decision: whether to sell my company, Pinnacle Systems, to a private equity firm or to another large public company. I felt that both suitors would treat my employees well (and I negotiated hard to make sure that was the case), and both offered a good asking price well above our value on NASDAQ.

After raising what at the time felt like my first child, born in my living room and nurtured into a publicly traded entity, I was ready for it to take its next step and for me to take mine. I ultimately opted for the strategic sale, but I left the process intrigued by what was already an evolving dynamic between private equity firms and tech exits.

In years past, stigma often accompanied private equity sales. I know I felt that way, even under strong deal terms. Plus, private equity exits were only available to companies generating substantial annual revenues and often profits, making this exit option inaccessible for many startups. Today, private equity buyout firms can provide a solid (and on occasion excellent) exit route — as well as an increasingly common one, accounting for 18.5 percent of VC-backed exits in 2017.

Private equity firms are investing in a broad array of technology companies, including highly valued unicorns, but also early- to mid-stage profitable and unprofitable companies that a few years ago would have been unable to secure interest from these buyout firms.

In addition, the lines between venture capital and private equity are increasingly blurring, with more private equity investments in tech, and several-late stage VC firms creating large, billion-dollar plus late-stage growth funds. Further blurring the lines, some of the late-stage VC firms are taking controlling interests in startups, a strategy typically associated with private equity. Recently, one of our portfolio companies received an investment from a late-stage VC firm that acquired a majority stake by providing liquidity to some existing shareholders and investing in the company, utilizing a strategy typically associated with PE buyout firms.

The rise of private equity buyouts within the tech sector presents a viable exit option for founders, given the reality that most startups won’t ultimately IPO. (According to PitchBook, only 3 percent of venture-backed companies in the last decade eventually went public.)

If an IPO is not a realistic long-term option, the remaining primary exit option has typically been a sale to another company (a strategic buyer, in venture parlance). However, in the past few years, private equity firms have become aggressive buyers of private companies, sometimes bidding as high as or higher than strategic buyers. With one of my portfolio companies, a private equity buyer placed the second highest bid ahead of all but one strategic buyer and helped raise the final price from the strategic buyer just by being in the bidding process.

Founders who find themselves in negotiations with strategic buyers should also reach out to PE firms to optimize the outcome. Silver Lake, Francisco Partners, Thoma Bravo and Vista are a few technology-focused PE firms, and PitchBook’s annual liquidity report lists other firms. Vista has been especially active, acquiring many technology companies, including Infoblox, Lithium and Marketo. Not all PE firms are the same, just like not all VCs and strategic buyers are the same.

Years ago, when private equity buyouts were typically only large deals, new management teams were almost always brought in to tweak the edges of already successful companies. Today, each private equity firm has its own strategy — some only buy large profitable companies, others focus on mid-size acquisitions and some only buy early-stage (typically unprofitable) companies, which brings us to the next point.

Even early-stage startups can explore a PE exit, especially if things are not going well

While most readers are familiar with private equity buyers at later stages, what’s new is the emergence of PE activity at early stages. These firms acquire majority stakes in startups that have only raised early-stage investments but are having trouble scaling or raising the next round.

After a buyout, these private equity firms typically provide value by adding the missing elements, such as marketing or sales know-how, in order to kick-start the business and achieve scale. Their goal is to increase the value of the underlying asset by augmenting founder teams with the buyout firm’s own operational experts, sometimes combining newly acquired assets with already existing assets to create a stronger whole, or doubling-down on promising products (while shedding less promising offerings) to unlock potential.

Typically, these PE firms then sell the company to another company (usually a strategic buyer) for greater value. In some cases, these early-stage PE firms sell to another PE buyout firm further up market. In some of these acquisitions, founders can maintain minority ownership in the company (though not a controlling stake), which they can carry through to their “next exit.”

Unlike PE buyouts at later stages, PE buyouts at the earlier stages are not usually high-value exits; they are mostly an avenue to provide the founders some return for their hard work, rather than the disappointing returns they can expect from an acqui-hire or, even worse, a shutdown. If negotiated correctly, a private equity deal can give founders an opportunity to play another hand to the next exit.

Few founders create companies in order to flip them. Strong entrepreneurs create companies to transform their missions into reality and positively impact the world. Steve Jobs said, “I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.” An acquisition — particularly to private equity — may not have been the original goal, but it may fuel the continued pursuit of the founder’s mission. Or, perhaps it will enable the pursuit of a new and worthy mission.

TNB Aura closes $22.7M fund to bring PE-style investing to Southeast Asia’s startups

TNB Aura, a recent arrival to Southeast Asia’s VC scene, announced today that it has closed a maiden fund at SG$31.1million, or around US$22.65 million, to bring a more private equity-like approach to investing in startups in the region.

The fund was launched in 2016 and it is a joint effort between Australia-based venture fund Aura and Singapore’s TNB Ventures, which has a history of corporate innovation work. It reached a final close today, having hit an early close in January. It is a part of the Enterprise Singapore ‘Advanced Manufacturing and Engineering’ scheme which, as you’d expect, means there is a focus on hardware, IO, AI and other future-looking tech like ‘industry 4.0.’

The fund is targeting Series A and B deals and it has the firepower to do 15-20 deals over likely the next two to three years, co-founder and managing partner Vicknesh R Pillay told TechCrunch in an interview. There’s around $500,000-$4 million per company, with the ideal scenario being an initial $1 million check with more saved for follow-on rounds. Already it has backed four companies including TradeGecko, which raised $10 million in a round that saw TNB Aura invest alongside Aura, and AI marketing platform Ematic.

The fund has a team of 10, including six partners and an operating staff of four. It pitches itself a little differently to most other VCs in the region given that manufacturing and engineering bent. That, Pillay said, means it is focused on “hardware plus software” startups.

“We are very strong fundamentals guys,” Pillay added. We ask what is the valuation and decide what we can get from a deal. It’s almost like PE-style investing in the VC world.”

A selection of the TNB Aura team [left to right]: Samuel Chong (investment manager), Calvin Ng, Vicknesh R Pillay, Charles Wong (partners), Liu Zhihao (investment manager)

Another differentiator, Pillay believes, is the firm’s history in the corporate innovation space. That leads it to be pretty well suited to working in the B2B and enterprise spaces thanks to its existing networks, he said.

“We particularly like B2B saas companies and we believe we can assist them through of our innovation platforms,” Pillay explained.

Outside of Singapore — which is a heavy focus thanks to the relationship with Enterprise Singapore — TNB Aura is focused on Indonesia, the Philippines, Thailand and Vietnam, four of the largest markets that form a large chunk of Southeast Asia’s cumulative 650 million population. With an internet population of over 330 million — higher than the entire U.S. population — the region is set to grow strongly as internet access increases. A recent report from Google and Temasek tipped the region’s digital economy will triple to reach $240 billion by 20205.

The report also found that VC funding in Southeast Asia is developing at a fast clip. Excluding unicorns, which distort the data somewhat, startups raised $2.6 billion in the first half of this year, beating the $2.4 billion tally for the whole of 2017.

There are plenty of other Series A-B funds in the region, including Jungle Ventures, Golden Gate Ventures, Openspace Ventures, Monks Hill Ventures, Qualgro and more.

Cities that didn’t win HQ2 shouldn’t be counted out

The more than year-long dance between cities and Amazon for its second headquarters is finally over, with New York City and Washington, DC, capturing the big prize. With one of the largest economic development windfalls in a generation on the line, 238 cities used every tactic in the book to court the company – including offering to rename a city “Amazon” and appointing Jeff Bezos “mayor for life.”

Now that the process, and hysteria, are over, and cities have stopped asking “how can we get Amazon,” we’d like to ask a different question: How can cities build stronger start-up ecosystems for the Amazon yet to be built?

In September 2017, Amazon announced that it would seek a second headquarters. But rather than being the typical site selection process, this would become a highly publicized Hunger Games-esque scenario.

An RFP was proffered on what the company sought, and it included everything any good urbanist would want, with walkability, transportation and cultural characteristics on the docket. But of course, incentives were also high on the list.

Amazon could have been a transformational catalyst for a plethora of cities throughout the US, but instead, it chose two superstar cities: the number one and five metro areas by GDP which, combined, amounts to a nearly $2 trillion GDP. These two metro areas also have some of the highest real estate prices in the country, a swath of high paying jobs and of course power — financial and political — close at hand.

Perhaps the take-away for cities isn’t that we should all be so focused on hooking that big fish from afar, but instead that we should be growing it in our own waters. Amazon itself is a great example of this. It’s worth remembering that over the course of a quarter century, Amazon went from a garage in Seattle’s suburbs to consuming 16 percent — or 81 million square feet — of the city’s downtown. On the other end of the spectrum, the largest global technology company in 1994 (the year of Amazon’s birth) was Netscape, which no longer exists.

The upshot is that cities that rely only on attracting massive technology companies are usually too late.

At the National League of Cities, we think there are ways to expand the pie that don’t reinforce existing spatial inequalities. This is exactly the idea behind the launch of our city innovation ecosystems commitments process. With support from the Schmidt Futures Foundation, fifty cities, ranging from rural townships, college towns, and major metros, have joined with over 200 local partners and leveraged over $100 million in regional and national resources to support young businesses, leverage technology and expand STEM education and workforce training for all.

The investments these cities are making today may in fact be the precursor to some of the largest tech companies of the future.

With that idea in mind, here are eight cities that didn’t win HQ2 bids but are ensuring their cities will be prepared to create the next tranche of high-growth startups. 

Austin

Austin just built a medical school adjacent to a tier one research university, the University of Texas. It’s the first such project to be completed in America in over fifty years. To ensure the addition translates into economic opportunity for the city, Austin’s public, private and civic leaders have come together to create Capital City Innovation to launch the city’s first Innovation District at the new medical school. This will help expand the city’s already world class startup ecosystem into the health and wellness markets.

Baltimore

Baltimore is home to over $2 billion in academic research, ranking it third in the nation behind Boston and Philadelphia. In order to ensure everyone participates in the expanding research-based startup ecosystem, the city is transforming community recreation centers into maker and technology training centers to connect disadvantaged youth and families to new skills and careers in technology. The Rec-to-Tech Initiative will begin with community design sessions at four recreation centers, in partnership with the Digital Harbor Foundation, to create a feasibility study and implementation plan to review for further expansion.

Buffalo

The 120-acre Buffalo Niagara Medical Center (BNMC) is home to eight academic institutions and hospitals and over 150 private technology and health companies. To ensure Buffalo’s startups reflect the diversity of its population, the Innovation Center at BNMC has just announced a new program to provide free space and mentorship to 10 high potential minority- and/or women-owned start-ups.

Denver

Like Seattle, real estate development in Denver is growing at a feverish rate. And while the growth is bringing new opportunity, the city is expanding faster than the workforce can keep pace. To ensure a sustainable growth trajectory, Denver has recruited the Next Generation City Builders to train students and retrain existing workers to fill high-demand jobs in architecture, design, construction and transportation. 

Providence

With a population of 180,000, Providence is home to eight higher education institutions – including Brown University and the Rhode Island School of Design – making it a hub for both technical and creative talent. The city of Providence, in collaboration with its higher education institutions and two hospital systems, has created a new public-private-university partnership, the Urban Innovation Partnership, to collectively contribute and support the city’s growing innovation economy. 

Pittsburgh

Pittsburgh may have once been known as a steel town, but today it is a global mecca for robotics research, with over 4.5 times the national average robotics R&D within its borders. Like Baltimore, Pittsburgh is creating a more inclusive innovation economy through a Rec-to-Tech program that will re-invest in the city’s 10 recreational centers, connecting students and parents to the skills needed to participate in the economy of the future. 

Tampa

Tampa is already home to 30,000 technical and scientific consultant and computer design jobs — and that number is growing. To meet future demand and ensure the region has an inclusive growth strategy, the city of Tampa, with 13 university, civic and private sector partners, has announced “Future Innovators of Tampa Bay.” The new six-year initiative seeks to provide the opportunity for every one of the Tampa Bay Region’s 600,000 K-12 students to be trained in digital creativity, invention and entrepreneurship.

These eight cities help demonstrate the innovation we are seeing on the ground now, all throughout the country. The seeds of success have been planted with people, partnerships and public leadership at the fore. Perhaps they didn’t land HQ2 this time, but when we fast forward to 2038 — and the search for Argo AISparkCognition or Welltok’s new headquarters is well underway — the groundwork will have been laid for cities with strong ecosystems already in place to compete on an even playing field.

In venture capital, it’s still the age of the unicorn

This month marks the 5-year anniversary of Aileen Lee’s landmark article, “Welcome To The Unicorn Club”.

At the time, the piece defined a new breed of startup — the $1 billion privately held company. When Lee did her first count, there were 39 “unicorns”; an improbable, but not impossible number.. Today, the once-scarce unicorn has become a global herd with 376 companies on the roster and counting.

But the proliferation of unicorns begs raises certain questions. Is this new breed of unicorn artificially created? Could these magical companies see their valuations slip and fall out of the herd? Does this indicate an irrational exuberance where investors are engaging in wish fulfilment and creating magic where none actually existed?

List of “unicorn” companies worth more than $1 billion as of the third quarter of 2018

There’s a new “unicorn” born every four days

The first change has been to the geographic composition and private company requirement of the list. The original qualification for the unicorn study was “U.S.-based software companies started since 2003 and valued at over $1 billion by public or private market investors.” The unicorn definition has changed and here is the popular and wiki page definition we all use today: “A unicorn is a privately held startup company with a current valuation of US$1 billion or more.”

Beyond the expansion of the definition of terms to include a slew of companies from all over the globe, there’s been a concurrent expansion in the number of startup technology companies to achieve unicorn status. There is a tenfold increase in annual unicorn production.

Indeed, while the unicorn is still rare but not as rare as before. Five years ago, roughly ten unicorns were being created a year, but we are approaching one hundred new unicorns a year in 2018.

As of November 8, we have seen eighty one newly minted unicorns this year, which means we have one new unicorn every four days.

There are unicorn-sized rounds every day

These unicorns are also finding their horns thanks to the newly popularized phenomena of mega rounds which raise $100 million or more. These deals are ten times more common now, than they were only five years ago.   

Back in 2013, there were only about four mega rounds a month, but now there are forty mega rounds a month based on Crunchbase data. In fact, starting from 2015, public market IPO has for the first time no longer been the major funding source for unicorn size companies.

Unicorns have been raising money from both traditional venture capital but also more from the non-traditional venture capital such as SoftBank, sovereign wealth funds, private equity funds, and mutual funds.

Investors are chasing the value creation opportunity.   Most people probably did not realize that Amazon, Microsoft, Cisco, and Oracle all debuted on public markets for less than a $1 billion market cap (in fact only Microsoft topped $500 million), but today they together are worth more than $2 trillion dollars  

It means tremendous value was created after those companies came to the public market.  Today, investors are realizing the future giant’s value creation has been moved to the “pre-IPO” unicorn stage and investors don’t want to miss out.

To put things in perspective, investors globally deployed $13 billion in almost 20,000 seed & angel deals, and SoftBank was able to deploy the same $13 billion amount in just 2 deals (Uber and WeWork).  The SoftBank type of non-traditional venture world literally redefined “pre-IPO” and created a new category for venture capital investment.

Unicorns are staying private longer

That means the current herd of unicorns are choosing to stay private longer. Thanks to the expansion of shareholders private companies can rack up under the JOBS Act of 2012; the massive amount of funding available in the private market; and the desire of founders to work with investors who understand their reluctance to be beholden to public markets.

Elon Musk was thinking about taking Tesla private because he was concerned about optimizing for quarterly earning reports and having to deal with the overhead, distractions, and shorts in the public market.  Even though it did not happen in the end, it reflects the mentality of many entrepreneurs of the unicorn club. That said, most unicorn CEOs know the public market is still the destiny, as the pressure from investors to go IPO will kick in sooner or later, and investors expect more governance and financial transparency in the longer run.

Unicorns are breeding outside of the U.S. too

Finally, the current herd of unicorns now have a strong global presence, with Chinese companies leading the charge along with US unicorns. A recent Crunchbase graph indicated about 40% of unicorns are from China,, 40% from US, and the rest from other parts of the world.

Back in 2013, the “unicorn” is primarily a concept for US companies only, and there were only 3 unicorn size startups in China (Xiaomi, DJI, Vancl) anyways.  Another change in the unicorn landscape is that, China contributed predominantly consumer-oriented unicorns, while the US unicorns have always maintained a good balance between enterprise-oriented and consumer-oriented companies.  One of the stunning indications that China has thriving consumer-oriented unicorns is that China leads US in mobile payment volume by hundredfold.

The fundamentals of entrepreneurship remain the same

Despite the dramatic change of the capital market, a lot of the insights in Lee’s 5-year old blog are still very relevant to early stage entrepreneurs today.

For example, in her study, most unicorns had co-founders rather than a single founder, and many of the co-founders had a history of working together in the past.

This type of pattern continues to hold true for unicorns in the U.S. and in China. For instance, the co-founders of Meituan (a $50 billion market cap company on its IPO day in September 2018) went to school together and had co-founded a company before

There have been other changes. In the past three months alone, four new US enterprise-oriented unicorns have emerged by selling directly to developers instead of to the traditional IT or business buyers; three China enterprise-oriented SaaS companies were able to raise mega rounds.  These numbers were unheard of five years ago and show some interesting hints for entrepreneurs curious about how to breed their own unicorn.

The new normal is reshaping venture capital 

Once in a while, we see eye-catching headlines like “bubble is larger than it was in 2000.”   The reality is companies funded by venture capital increased by more than 100,000 in the past five years too. So the unicorn is still as rare as one in one thousand in the venture backed community.

What’s changing behind the increasing number of unicorns is the new normal for both investors and entrepreneurs. Mega rounds are the new normal; staying private longer is the new normal; and the global composition of the unicorn club is the new normal. 

Just look at the evidence in the venture industry itself. Sequoia Capital, the bellwether of venture capital, raised a whopping $8 billion global growth mega fund earlier this year under pressure from SoftBank and its $100 billion mega-fund. And Greylock Partners, known for its focus and success in leading early stage investment, recently led a unicorn round for the first time in its 53-year history.  

It’s proof that just as venture capitalists have created a new breed of startups, the new startups and their demands are reshaping venture capital to continue to support the the companies they’ve created.

The top 10 cities for $100M VC rounds in 2018 so far

Crunchbase News recently profiled a selection of U.S. companies’ largest VC raised in 2018, and no surprise here: the 10 largest rounds all topped out well north of $100 million.

A major driver of global venture dollar growth is the relatively recent phenomenon of companies raising $100 million or more in a single venture round. We’ve called these nine and 10-figure deals, which shine brightly in the media and are hefty enough to bend the curve of VC fund sizes upwards, “supergiants” after their stellar counterparts.

And like stars, venture-backed companies tend to originate and co-exist in clusters, while the physical space between these groups is largely empty.

We noticed that many of the companies behind these supergiant rounds are headquartered in just a few metro areas around the United States. In this case, it’s mostly just the SF Bay Area, plus others scattered between Boston, Los Angeles, San Diego and one (Magic Leap) in the unfortunately named Plantation, Florida.

The San Francisco Bay Area is perhaps one of the best-known tech and startup hubs in the world. Places like Boston, NYC and Los Angeles, among others, are perhaps just as well-known. But how do these cities stack up as clusters for companies raising supergiant rounds?

Superclusters

That question got us wondering how these locales rank against other major metropolitan areas throughout the world. In the chart below, we’ve plotted the count of supergiant venture rounds1 topping out at $100 million or more through November 5. These numbers are based off of reported data in Crunchbase, exclude private equity rounds and do not account for deals that may have already been closed but haven’t been publicly announced yet.

Although U.S.-based companies have raised more supergiant rounds (168 year to date) than their Chinese counterparts (160 year to date), Chinese companies raise much bigger rounds, even at this supergiant size class.

How much more? U.S. companies have raised $38.4 billion, year to date, in nine and 10-figure venture rounds alone. Chinese companies have raised $69 billion across their 160 supergiant deals, which includes the largest-ever VC deal: a $14 billion Series C round raised by Ant Financial.

2018 in perspective

2018 is already a record year for venture funding worldwide. With more than $275 billion in projected total venture dollar volume so far, 2018’s year-to-date numbers have already eclipsed 2017’s full-year figures (a projected $220 billion, roughly) by more than $55 billion.2

And there’s still about eight weeks left to go before it’s New Year’s Eve.

  1. We use the same classification rules for what is and is not a “venture” round as we’ve used in our quarterly reports. Check out the methodology section of our most recent global VC report, from Q3 2018, to learn more about how Crunchbase News categorizes rounds.
  2. We’re referring to the same type of projected data we use in the quarterly reports. Check out the methodology section of our most recent global VC report, from Q3 2018, to learn more about how Crunchbase News uses projected and reported data.

Mexican venture firm ALL VP has a $73 million first close on its latest fund

Buoyed by international attention from U.S. and Chinese investors and technology companies, new financing keeps flowing into the coffers of Latin American venture capital firms.

One day after the Brazilian-based pan-Latin American announced the close of its $150 million latest fund comes word from our sources that ALL VP, the Mexico City-based, early stage technology investor, has held a first close of $73 million for its latest investment vehicle.

The firm launched its first $6 million investment vehicle in 2012, according to CrunchBase, just as Mexico’s former President Enrique Peña Nieto was coming to power with a pro-business platform. One which emphasized technology development as part of its strategy for encouraging economic growth.

ALL VP founding partner Fernando Lelo de Larrea said he could not speak about ongoing fundraising plans.

And while the broader economy has stumbled somewhat since Nieto took office, high technology businesses in Mexico are surging. In the first half of 2018, 82 Mexican startup companies raised $154 million in funding, according to data from the Latin American Venture Capital Association. It makes the nation the second most active market by number of deals — with a number of those deals occurring in later stage transactions.

In this, Mexico is something of a mirror for technology businesses across Latin America. While Brazilian startup companies have captured 73% of venture investment into Latin America — raising nearly $1.4 billion in financing — Peru, Chile, Colombia and Argentina are all showing significant growth. Indeed, some $188 million was invested into 23 startups in Colombia in the first half of the year. 

Overall, the region pulled in $780 million in financing in the first six months of 2018, besting the total amount of capital raised in all of 2016.

It’s against this backdrop of surging startup growth that funds like ALL VP are raising new cash.

Indeed, at $73 million the first close for the firm’s latest fund more than doubles the size of ALL VP’s capital under management.

ALL VP management team

But limited partners can also point to a burgeoning track record of success for the Mexican firm. ALL VP was one of the early investors in Cornershop — a delivery company acquired by Walmart for $225 million earlier this year. Cornershop had previously raised just $31.5 million and the bulk of that was a $21 million round from the Silicon Valley-based venture capital firm, Accel.

International acquirers are making serious moves in the Latin American market, with Walmart only one example of the types of companies that are shopping for technology startups in the region. The starting gun for Latin American startups stellar year was actually the DiDi acquisition of the ride-hailing company 99 for $1 billion back in January.

That, in turn, is drawing the attention of early stage investors. In fact, it’s venture capital firms from the U.S. and international investors like Naspers (from South Africa) and Chinese technology giants that are fueling the sky-high valuations of some of the region’s most successful startups.

Loggi, a logistics company raised $100 million from SoftBank in October, while the delivery service, Rappi, raked in $200 million in August, in a round led by Andreessen Horowitz and Sequoia Capital.

In a market so frothy, it’s no wonder that investment firms are bulking up and raising increasingly large funds. The risk is that the market could overheat and that, with a lot of capital going to a few marquee names, should those companies fail to deliver, the rising tide of capital that’s come in to the region could just as easily come back out.

 

Monashees raises $150 million for its eighth Brazilian fund

As technology investment and exits continue to rise across Brazil, early stage venture capital firm monashees today announced that it has closed on $150 million for its eighth investment fund.

Commitments came from Temasek, the sovereign wealth fund affiliated with the Singaporean government, China’s financial technology company, CreditEase; Instagram co-founder Mike Krieger, the University of Minnesota endowment; and fund-of-funds investor Horsley Bridge Partners.

S-Cubed Capital, the family office of former Sequoia Capital partner, Mark Stevens, and fifteen high net worth Brazilian families and investment groups also invested in the firm’s latest fund.

As one of the largest venture capital firms in Latin America with over $430 million in capital under management, monashees has been involved in some of the most successful investments to come from the region. Altogether, monashees portfolio companies have gone on to raise roughly $2 billion from global investors after raising money from the Sao Paulo-based venture capital firm.

“We are excited to further advance our partnership with the monashees team,” said Du Chai, Managing Director at Horsley Bridge Partners . “Over the course of our partnership, we have continued to be impressed by monashees’ strong team, platform and their ability to attract the region’s leading entrepreneurs.”

In the past year, investment in Latin American startup companies has exploded.  The ride-hailing service 99 was acquired for $1 billion and Rappi, a delivery service, managed to raise $200 million at a $1 billion valuation. Another delivery service, Loggi, caught the attention of SoftBank, which invested $100 million into the Brazilian company.

Public markets are also rewarding Latin American startups with continued investment and high valuations. Stone Pagamentos, a provider of payment hardware technology, raised $1.1 billion in its public offering on the Nasdaq with an initial market capitalization of $6.6 billion.

“monashees brings a truly unique set of skills to the table, with a disciplined investment strategy, as well as the unmatched local expertise and knowledge that leads the team to identify and invest in the region’s best founders,” said Stuart Mason, Chief Investment Officer at the University of Minnesota . “The recent billion-dollar acquisition of 99 by DiDi is not only a milestone for the local ecosystem, but validation of this sentiment and suggests that there’s no liquidity hurdle for great companies in Latin America. We are excited to partner with monashees as it continues to find and nurture the best opportunities going forward.”

 

Africa Roundup: Local VC funds surge, Naspers ramps up and fintech diversifies

Africa’s VC landscape is becoming more African with an increasing number of investment funds headquartered on the continent and run by locals, according to Crunchbase data summarized in this TechCrunch feature.

Drawing on its database and primary source research, Crunchbase identified 51 “viable” Africa-focused VC funds globally—defining viable as formally established entities with 7-10 investments or more in African startups, from seed to series stage.

Of the 51 funds investing in African startups, 22 (or 43 percent) were headquartered in Africa and managed by Africans.

Of the 22 African managed and located funds, 9 (or 41 percent) were formed since 2016 and 9 are Nigerian.

Four of the 9 Nigeria located funds were formed within the last year: Microtraction, Neon Ventures, Beta.Ventures, and CcHub’s Growth Capital fund.

The Nigerian funds with the most investments were EchoVC (20) and Ventures Platform (27).

Notably active funds in the group of 51 included Singularity Investments (18 African startup investments) Ghana’s Golden Palm Investments (17) and Musha Ventures (36).

The Crunchbase study also tracked more Africans in top positions at outside funds and  the rise of homegrown corporate venture arms.

One of those entities with a corporate venture arm, Naspers, announced a massive $100 million fund named Naspers Foundry to support South African tech startups. This is part of a $300 million (1.4 billion Rand) commitment by the South African media and investment company to support South Africa’s tech sector overall. Naspers Foundry will launch in 2019.

The initiatives lend more weight to Naspers’ venture activities in Africa as the company has received greater attention for investments off the continent (namely Europe, India and China), as covered in this TechCrunch story.

“Naspers Foundry will help talented and ambitious South African technology entrepreneurs to develop and grow their businesses,” said a company release.

“Technology innovation is transforming the world,” said Naspers chief executive Bob van Dijk. “The Naspers Foundry aims to both encourage and back South African entrepreneurs to create businesses which ensure South Africa benefits from this technology innovation.”

After the $100 million earmarked for the Foundry, Naspers will invest ≈ $200 million over the next three years to “the development of its existing technology businesses, including OLX,  Takealot, and Mr D Food…” according to a release.

In context, the scale of this announcement is fairly massive for Africa. According to recently summarized Crunchbase data, the $100 million Naspers Foundry commitment dwarfs any known African corporate venture activity by roughly 95x.

The $300 million commitment to South Africa’s tech ecosystem signals a strong commitment by Naspers to its home market. Naspers wasn’t ready to comment on if or when it could extend this commitment outside of South Africa (TechCrunch did inquire).

If Naspers does increase its startup and ecosystem funding to wider Africa— given its size compared to others—that would be a primo development for the continent’s tech sector.

If mobile money was the first phase in the development of digital finance in Africa, the next phase is non-payment financial apps in agtech, insurance, mobile-lending, and investech, according to a report by Village Capital covered here at TechCrunch.

In “Beyond Payments: The Next Generation of Fintech Startups in Sub-Saharan Africa,” the venture capital firm and their reporting partner, PayPal, identify 12 companies it determined were “building solutions in fintech subsectors outside of payments.”

Village Capital’s work gives a snapshot of these four sub-sectors — agricultural finance, insurtech, alternative credit scoring and savings and wealth — including players, opportunities and challenges, recent raises and early-stage startups to watch.

The report highlights recent raises by savings startup PiggybankNG and Nigerian agtech firm FarmCrowdy. Village Capital sees the biggest opportunities for insurtech startups in five countries: South Africa, Morocco, Egypt, Kenya and Nigeria.

In alternative credit scoring and lending it sees blockchain as a driver of innovation in reducing “both transaction costs and intermediation costs, helping entrepreneurs bypass expensive verification systems and third parties.”

The Founders Factory expanded its corporate-backed accelerator to Africa, opening an office in Johannesburg with the support of some global and local partners.

This is Founders Factory’s first international expansion and the goal is “to scale 100 startups across Sub-Saharan Africa in five years,” according the accelerator’s communications head, Amy Grimshaw.

Founders Fund co-founder Roo Rogers will lead the new Africa office. Standard Bank is the first backer, investing “several million funds over five years,” according to Grimshaw.

The Johannesburg accelerator will grow existing businesses through a bespoke six-month program, while an incubator will build completely new businesses focused on addressing key issues on the continent.

Founder Funds will hire over 40 full-time specialists locally, covering all aspects needed to scale its startups including product development, UX/UI, engineering, investment, business development and, growth marketing. This TechCrunch feature has more from Founders Fund management on the outlook for the new South Africa accelerator.

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