What the MasterClass effect means for edtech

MasterClass, which sells a subscription to celebrity-taught classes, sits on the cusp of entertainment and education. It offers virtual, yet aspirational learning: an online tennis class with Serena Williams, a cooking session with Gordon Ramsay. While there’s the off chance that an instructor might actually talk to you — it has happened before — the platform mostly just offers paywalled documentary-style content.

The vision has received attention. MasterClass is raising funding that would value it at $2.5 billion, as scooped by Axios and confirmed independently by a source to TechCrunch. But while MasterClass has found a sweet spot, can the success be replicated?

Investors certainly think so. Outlier, founded by MasterClass’ co-founder, closed a $30 million Series C this week, for affordable, digital college courses. The similarities between Outlier and its founder’s alma mater aren’t subtle: It’s literally trying to apply MasterClass’ high-quality videography to college classes. This comes a week after I wrote about a “MasterClass for Chess lovers” platform launched by former Chess World Champion Garry Kasparov.

Two back-to-back MasterClass copycats raising millions in venture capital makes me think about if the model can truly be verticalized and focused down into specific niches. After 2020 and the rise of Zoom University, we know edtech needs to be more engaging, but we don’t know the exact way to get there. Is it by creating micro-learning communities around shared loves? Is it about gamification? Aspirational learning has different incentives than for-credit learning. In order to be successful, Outlier needs to prove to universities it can use MasterClass magic for true outcomes that rival in-person lectures. It’s a harder, and more ambtious promise.

My riff aside, I turned to two edtech founders to understand how they see the MasterClass effect panning out, and to cross-check my gut reaction.

Taylor Nieman, the founder of language learning startup Toucan:

Although I do love how these models try to lean into this theme of “invisible learning” like we leverage with Toucan, it faces the same issues as so many other consumer products that try to steal time out of people’s very busy days. Constantly competing for time leads to terrible engagement metrics and very high churn. That leads me to question what true learning outcomes could occur from little to no usage of the product itself.

Amanda DoAmaral, the founder of Fiveable, a learning platform for high school students:

Masterclass is important for showing us why educational content should be treated more like entertainment. All of our bars for content quality is much higher now than it ever was before and I’m excited to see how that affects learning across the board.

For students, it’s about creating environments that support them holistically and giving them space to collaborate openly. It feels so obvious that these spaces should exist for young people, but we’ve lost sight of what students actually need. At my school, we built policies that assumed the worst in students. I want to flip that. Assume the best, be proactive to keep them safe, and create ways to react when we need to.

Anyways, that’s just some nuance to chew on during this fine day. In the rest of this newsletter, we will focus a lot on tactical advice for founders, from the money they raise to the peacock dance they might want to do one day. Make sure to follow me on Twitter @nmasc_ so we can talk during the week, too!

The peacock dance

You know when male peacocks fan their feathers to court a lover? That, but for startups trying to get acquired. As one of our many rabbit holes on Equity this week, we talk about Discord walking away from a Microsoft deal, and if that deal ever existed in the first place or if it was just a way to drum up investor excitement in the audio gaming platform.

Here’s what to know: Discord is reportedly pursuing an IPO after walking away from talks with multiple companies that were looking to acquire the audio gaming giant.

Discord aside, the consolidation environment continues to be hot for some sectors.

Four business people used ropes to tighten their money bags, economic austerity, reduced income, economic crisis

Image Credits: VectorInspiration / Getty Images

Even venture capital knows that the future isn’t simply venture capital

Clearbanc, a Toronto-based fintech startup that gives non-dilutive financing to businesses, has rebranded alongside a $100 million financing that valued it at $2 billion. Now rebranded as Clearco, the startup wants to be more than just a capital provider, but a services provider, too.

Here’s what to know: The startup has been on a tear of product development for the past year, launching services such as valuation calculators or runway tools. It’s a step away from what Clearbanc originally flexed: the 20-minute term sheet and rapid-fire investment. I talk about some of the levers at play in my piece:

Many of Clearco’s newest products are still in their infancy, but the potential success of the startup could nearly be tied to the general growth of startups looking for alternatives to venture capital when financing their startups. Similar to how AngelList’s growth is neatly tied to the growth of emerging fund managers, Clearco’s growth is cleanly related to the growth of founders who see financing as beyond a seed check from Y Combinator.

abstract human brain made out of dollar bills isolated on white background

Abstract human brain made out of dollar bills isolated on white background. Image Credits: Iaremenko / Getty Images

Don’t market your opportunity away

Keeping on the theme of tactical advice for founders, let’s move onto talking about marketing. Tim Parkin, president of Parkin Consulting, explained how startup founders can use marketing as a tool to stand out in the noisy environment. Differentiation has never been harder, but also more imperative.

Here’s what to know: Parkin outlines four ways that martech will shift in 2021, strapped with anecdotes and a nod to the importance of investing in influencers.

Red ball on curved light blue paper, blue background. Image Credits: PM Images / Getty Images

Around TechCrunch

Your humble yet favorite startup podcast, Equity, got nominated for a Webby! Me and the team need your help to win, so please vote for us here. Your support means a ton.

This newsletter will always be free, but if you do want to support me, feel free to use code STARTUPSWEEKLY for 25% off a subscription to Extra Crunch.

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zoom glitch

Image Credits: TechCrunch

Thanks for reading along today and everyday. Sending love to my readers in India and everyone around the world that is facing yet another deadly surge of this horrible disease. I’m rooting for you.

N

Outschool is the newest edtech unicorn

Outschool, a marketplace providing small-group, virtual after-school activities for children has raised a $75 million Series C led by Coatue and Tiger Global Management. TechCrunch first learned of the round from sources familiar with the transaction; the company confirmed the deal to TechCrunch later today.

The new funding values Outschool’s at $1.3 billion, around 4 times higher than its roughly $320 million valuation set less than a year ago.

To date, Outschool has raised $130 million in venture capital to date, inclusive of its new round.

The company’s valuation growth curve is steep for any startup, let alone an edtech concern that saw the majority of its growth during the pandemic. But while CEO and co-founder Amir Nathoo says his company’s new valuation is partially a reflection of today’s fundraising frenzy, he thinks revenue sustainability is a key factor in his company’s recent fundraise.

The new unicorn’s core product is after school classes for entertainment or supplemental studies, on an ongoing or one-off basis. As the company has grown, ongoing classes have grown from 10% of its business to 50% of its business, implying that the startup is generating more reliable revenue over time.

The change from one-off classes to enduring engagements could be good for the company and its students. On the former, recurring revenue is music to investor ears. On the latter, students need repetition to develop close relationships with a course and a group. Ongoing classes about debate or a weekly zombie dance class makes for a stickier experience.

Nathoo says everyone always asks what the most popular classes are, but said it continues to change since its main clientele – kids – have evolving favorites. One week it might be math, the other it might be minecraft and architecture.

Its changing revenue profile helped Outschool generate more than $100 million in bookings in 2020, compared to $6 million in 2019 and just $500,000 in 2017. Nathoo declined to share the company’s expectations for 2021 beyond “projecting to grow aggressively.”

Outschool reached brief positive cash flow last year as a result of massive growth in bookings, but Nathoo shared that that has since changed.

“My goal is to always stay within touching distance of profit,” he said. “But given the fast change in the market, it makes sense to invest aggressively into opportunities that will make sense in the long-term.”

What’s next

Nathoo expects to grow Outschool’s staff from 110 people to 200 by the end of the year, with a specific focus on international growth. In 2020, Outschool launched in Canada, New Zealand, Australia and the UK, so hiring will continue there and elsewhere.

On the flip side, Outschool isn’t  teachers at the same clip it was at the height of the pandemic in the United States. When the pandemic started, Outschool had 1,000 teachers on its platform. Within months, Outschool grew to host 10,000 teachers, a screening process that the founder explained was resource-heavy but vital. Outschool makes more money if teachers join the platform full-time: teachers pocket 70% of the price they set for classes, while Outschool gets the other 30% of income. But, Nathoo views the platform as more of a supplement to traditional education. Instead of scaling revenue by convincing teachers to come on full-time, the CEO is growing by adding more part-time teachers to the platform.

Similar to how Airbnb created a host endowment fund to share its returns with the people who made its platform work, Outschool has dedicated 2% of its fundraise to creating a similar program to reward teachers on its platform in the event of liquidity.

One of Outschool’s most ambitious goals is, ironically, to go in school. While some startups have found success selling to schools amid the pandemic, district sales cycles and tight budgets continue to be a difficult challenge for scaling purposes. Still, the startup wants to make its way into students’ lives through contracts with schools and employers, which could help low income families access the platform. Nathoo says enterprise sales is a small part of its business, but the strategy began just last year as part of COVID-19 response. It is currently piloting its B2B offering with a number of schools.

Outschool will also consider acquiring early-stage startups focused on direct-to-consumer learning in international markets. While no acquisitions have been made by the startup to date, consolidation in the edtech sector broadly is heating up.

Nathoo stressed that Outschool’s continued growth, even as schools reopen, has de-risked the company from post-pandemic worries.

“There’s going to be a big spike of in-person activities because everyone is going to want to do that at once,” he said. “But then we’re going to settle at some more even distribution because the future of education is hybrid.”

He added that Outschool’s ethos around online learning hasn’t changed since conception. The company has never seen opportunity in the for-credit, subject-matter digital education sector, and instead has focused more on supplemental ways to support students after school.

“That’s the piece of the education system that is underserved and that was missing,” he said. “The advantages of online learning will remain in the convenience, the cost, and the variety of what you can get that isn’t always available locally.”

Let’s talk about gaslighting and fundraising

“Most of the startups I give advice to about how to raise venture capital shouldn’t be raising venture capital,” an investor recently told me. While the idea that every startup isn’t venture-backable might run counter to the narrative to the barrage of funding news each week, I think it’s important to double click on the topic. Plus, it keeps coming up, off the record, on phone calls with investors!

As venture grows as an asset class, the access to capital has broadened from a dollar perspective, but I do think the difficulties that remain is an important dynamic to call out (and something no one talks about during an upmarket). Beyond the fact that only a small subset of startups truly can pull off scaling to the point of venture-level returns, it is still hard for even qualified founders to raise venture capital. Venture capital is still a heavily white, male-led industry, and as a result contains bias that disproportionately limits access for underrepresented founders.

Eniac founding partner Hadley Harris applied this dynamic to the current market boom in a recent tweet: A lot of people are misunderstanding this VC funding market. More money is flowing into the market but the increase is not evenly distributed. The market believes winners can be much bigger but not necessary that there will be more winners. It’s still very hard for most to raise a VC.

To say otherwise is to gaslight the early-stage or first-time founders that have spent months and months trying to raise their first institutional dollars and failed. So ask yourself: Seed rounds have indeed grown bigger, but for who? What comes at the cost of the $30 million seed round? Are the founders that can raise overnight from diverse backgrounds? Are investors backing first-time founders as much as they are backing second- or third-time entrepreneurs?

The answers might leave you debating about the boundaries, and limitations, of the upcoming hot-deal summer.

A few weeks ago, I wrote about the disconnect between due diligence and fundraising right now. Now we’ve moved onto the disconnect, and bifurcation, within first-check fundraising itself. There is so much more we can get into about the fallacy of “democratization” in venture capital, from who gets to start a rolling fund to the lack of assurance within equity crowdfunding campaigns.

We’ll get through it all together, and in the meantime make sure to follow me on Twitter @nmasc_ for more hot takes throughout the week.

In the rest of this newsletter, we will talk about fintech politics, the Affirm model with a twist, and sneakers-as-a-service.

Ex-Coinbase talks politics

The inimitable Mary Ann Azevedo has been dominating the fintech beat for us, covering everything from the latest Uruguayan unicorn to Acorn’s scoop of a debt management startup. But the story I want to focus on this week is her interview with ex-Coinbase counsel & former Treasury official, Brian Brooks.

Here’s what to know: Coinbase CEO Brian Armstrong notoriously released a memo last year denouncing political activism at work, calling it a distraction. In this exclusive interview, Brooks spoke about how blockchain is the answer to financial inclusion, and argued why politics needs to be taken out of tech.

We don’t want bank CEOs making those decisions for us as a society, in terms of who they choose to lend money to, or not. We need to take the politics out of tech. All of us do a lot of different things, and we have no idea on a given day, whether what we’re doing is popular with our neighbors or popular with our bank president or not. I don’t want the fact that I sometimes feel Republican to be a reason why my local bank president can deny me a mortgage.

Image Credits: Bryce Durbin/TechCrunch

The Affirm for X model

While Affirm may have popularized the “buy now, pay later” model, the consumer-friendly business strategy still has room to be niched down into specific subsectors. I ran into one such startup when covering Plaid’s inaugural cohort of startups in its accelerator program.

Here’s what to know: Walnut is a new seed-stage startup that is a point-of-sale loan company with a healthcare twist. Unlike Affirm, it doesn’t make money off of fees charged to consumers.

Image Credits: Bryce Durbin/TechCrunch

Everything you could ever want to know about StockX

In our latest EC-1, reporter Rae Witte has covered a startup that leads one of the most complex and culturally relevant marketplaces in the world: sneakers.

Here’s what to know: StockX, in her words, has built a stock market of hype, and her series goes into its origin story, authentication processes and a market map.

Image Credits: Nigel Sussman

Around TechCrunch

Found, a new podcast joining the TechCrunch network, has officially launched! The Equity team got a behind-the-scenes look at what triggered the new podcast, the first guests and goals of the show. Make sure to tune into the first episode.

Also, if you run into any paywalls while browsing today’s newsletter, make sure to use discount code STARTUPSWEEKLY to get 25% off an annual or two-year Extra Crunch subscription.

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And that’s a wrap! Thanks for making it this far, and now I dare you to go make the most out of the rest of your day. And by make the most, I mean listen to Taylor’s Version.

Warmly,

N

So you want to raise a Series A

During a seed funding round, a founder needs to convince a venture capital investor on a vision. But during a Series A fundraise, napkin-stage ideas don’t make the cut — a founder needs product progress, numbers, and revenue (or at least a plan to eventually generate some).

In many ways, the stakes are higher for a Series A — and Bucky Moore, a partner at Kleiner Perkins, joined TechCrunch Early Stage last week to give founders tactical advice on the process of raising one.

Moore spoke about storytelling over semantics, pricing, and where his firm sees itself “raising the bar” for startups.

Here are a few key points; a full video and a transcript of the entire conversation are linked at the bottom.


Explain to investors why you are raising now

More companies will raise seed rounds than Series A rounds, simply due to the fact that many startups fail, and venture only makes sense for a small fraction of businesses out there. Every check is a new cycle of convincing and proving that you, as a startup, will have venture-scale returns. Moore explained that startups looking to move to their next round need to explain to investors why now is their moment.

The way I think about “why now” is [that] it is an opportunity for you as a founder to convey a unique insight and understanding of your market opportunity, the history of the space that you’re in, why companies have succeeded or failed in that space, historically speaking, and what are the known challenges from a go-to-market perspective; what headwinds will you be up against at a macro level. These are all things that I think people like me get really excited about when hearing unique insight from founders, because it suggests that they’ve really studied their market opportunity, and they understand it. (Timestamp: 2:19)

Startups, Supreme, and soft-circling your way to an investment

In an Extra Crunch Live this past week, Cleo Capital founding partner Sarah Kunst broke down what founders can learn from Supreme, a sought-after streetwear brand. She argued that founders, similar to Supreme, should build a brand around themselves that is so well-respected and has clout that whenever they start something new, investors will line up.

“A Supreme shirt that costs $100 bucks in the store will cost $1,000 online so, as an investor, I am just a kid on the street corner flipping sportswear,” Kunst mentioned. “Who do I think is going to be an investment with such velocity that getting in early is going to be more than worth it as they grow.”

I think this is the best framing I’ve seen about how to drum up excitement for a startup as a founder. FOMO isn’t a strategy, it’s a tactic. What really works, as Kunst alluded to, is when founders can point to key insights they’ve had throughout their career beyond the context of a fundraising process. In other words, anyone can create a nice t-shirt and slap a logo on it. Which founder in this sector is going to give it meaning? It might be the one with the big former exit, the one that was the first Black woman to ever build a unicorn, or the one that was on the ground facing the pain point they now want to solve.

We get into how to build a fundraising process, the concept of soft-circling an investor and what Kunst says is one of her biggest pet-peeves in a pitch deck on the site, but I wanted to give you that sneak peek for now.

Saying ‘yes, please’ to no code

This week, Airtable was valued at $5.77 billion from a fresh Series E fundraise.

Here’s what to know: As we discussed on Equity, Airtable is far more than a savvy Excel sheet with bells and whistles. It is one of the leaders in the no-code movement, and founder Howie Liu recently opened up its API to promote developer innovation atop its platform.

Image Credits: Cadalpe (opens in a new window) / Getty Images

A seedy asset class

Per Climate Editor Jonathan Shieber, farmland could become the next big asset class modernized by marketplace startups.

Here’s what to know: One startup, AcreTrader, is trying to create a Robinhood for buying farmland, which I think is indicative of how lucrative some view a patch of land. CEO Carter Malloy thinks that while private equity often gets press for being in the land game, most land is owned by smaller ownership through families.

“Over the last few months, we’ve consistently seen our offering sizes grow while our funding windows shrink, showcasing the fast-growing desire surrounding this resilient asset class,” he said.

More places for investors to throw their money reminds me of two other stories for you to check out:

"A green row celery field in the Salinas Valley, California USA"

A green row celery field in the Salinas Valley, California USA. Image Credits: Pgiam (opens in a new window)/ Getty Images

Around TechCrunch

Consider these upcoming notes as the coupon section for your early-stage founder and investor dreams.

First up, I’m tossing you a discount code to our TechCrunch Early Stage conference, our two-day virtual event for founders, investors and operators. Use code “TCARTICLE” to get 20% off your ticket so you can attend super cool events like how to bootstrap with Calendly’s Tope Awotona and OpenView’s Blake Bartlett, how to pitch your Series A fundraise with Kleiner Perkins’ Bucky Moore, and finance for founders with Alexa von Tobel.

Secondly, we are already well into planning TechCrunch Disrupt 2021! Grab super early-bird passes for less than $100, to attend our all-virtual event.

Thirdly, thank you for all the support. DM me any questions you might have, and I really hope to see your lovely faces there.

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Social+ payments: Why fintechs need social features

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Survey: Share feedback on Extra Crunch

Talk next week,

N

Extra Crunch Live is back in 2021, connecting founders with tech giants and each other

In April 2020, when the entire world was laser-focused on the coronavirus pandemic, we realized that startupland was in unprecedented territory. How should startups navigate fundraising, operations, and better understand the market? 

In a matter of a couple weeks, we spun up a little series called Extra Crunch Live, giving Extra Crunch members the chance to hear from and connect with leaders across the industry. We brought on some of the biggest names in tech and VC, including likes of Roelof Botha, Kirsten Green, Zach Perret, Charles Hudson, Aileen Lee, Mark Cuban, Howard Lerman, Niko Bonatsos, Alexa Von Tobel, Aileen Lee and the list could go on and on and on

Somehow, we did 44 episodes of the show in 2020, the year of our Lord. 

By any measure, it’s been a huge success. But we’re not ones to rest on our laurels here at TechCrunch. Which is why I’m thrilled to announce Extra Crunch Live 2.0. 

In 2021, we’ll be tweaking the format of ECL to provide even more interactivity between founders and audience members and the speakers we host on the show. You’re going to love it. 

What’s New: 

  • Series A – Learn how others have fundraised! We’ll have a segment dedicated to hearing from founder/investor duos who walk us through the Series A pitch deck that led to investment. 
  • Pitch Deck Teardowns – Extra Crunch members will have the opportunity to submit their pitch deck and get feedback from our guests, which will include VCs and founders (EC members can submit their pitch decks right here!). 
  • Live Pitch-offs – Audience members can raise their hand to practice their elevator pitch in front of the audience and get real-time feedback from VCs.
  • Networking!! – The Extra Crunch membership is a community. ECL will be an opportunity to meet your fellow audience members, even in a virtual environment. Who knows? Maybe you’ll meet your next cofounder or investor! 
  • Consistency – ECL will always be at 12pm PT/3pm ET on Wednesdays. When it comes to your calendar, set it and forget it. 

We’re super excited about our ECL plans for 2021 and we hope you are, too. More on upcoming speakers soon. 

Remember, Extra Crunch Live events are for EC members only, so if you haven’t joined Extra Crunch, get over here! 

What to expect while fundraising in 2021

At the end of 2019, no one would have predicted what an unpredictable and difficult year it has been for both startups and VCs in the fundraising world. Now we are staring down the end of 2020 and looking toward what we all hope is a better, safer 2021. What will this new year bring? With an end-of-year sprint to close deals, the anticipation of a new presidential administration and the hope of a COVID-19 vaccine on the horizon, startups and VCs know that change is on the horizon — but how much of that change will be positive?

As 2020 proved, no one can say for sure what 2021 will bring, but I’d like to put a few predictions on the table based on DocSend’s data and research, including the DocSend Startup Index, as well as some trends I’ve seen and my own experiences. These predictions center around how we’ll fundraise post-pandemic, how the funding divide may widen for some, what fundraising activity could look like into 2021, a few sectors we think will fare well and will incorporate some tips on how to succeed in the new year, no matter what comes our way.

We’ll interact through a mix of the old and the new

The pandemic forced all of us to drastically change how we work and interact with colleagues and clients. When the pandemic subsides and vaccines are widely available, in-person meetings and gathering back at the office will definitely resume, but it’s safe to say the old ways of networking and fundraising won’t shift back 100%. Founders and VCs alike have navigated the ups and downs of remote networking and fundraising interactions and will stick to what works and what doesn’t.

Is traveling to a conference the best way for a founder to have a chance at meeting the VC who is right to support their business? Will a VC want to drive an hour through Bay Area traffic for an in-person status update meeting on their latest investment? Zoom fatigue aside, video conference calls do have some benefits — efficiency, no travel time — although not all meetings are best conducted virtually.

No matter what 2021 has in store, founders can still take proactive steps to help them succeed in their fundraising efforts.

The extent to which businesses go in-person or stick to virtual meetings could depend directly on what round of fundraising they are working toward or have completed. Businesses in the pre-seed round might stick with more Zoom meetings in order to conserve resources.

Founders in the seed round will likely split between video and in-person meetings as they are under pressure to show traction in this round, as we found in our report on seed fundraising, yet will also need to conserve resources and time. For Series A, they might have to meet less in person because they have established relationships with their investors. Series B might see more in-person meetings as their business has reached a level of complexity that is difficult to communicate via a deck or video conference.

The funding divide may widen for those outside Silicon Valley

TikTok test lets users fundraise for charity from their profile

TikTok is testing a new feature that allows users to directly from their TikTok profiles raise funds for causes and charities they care about. Those who are in the test group will find a new option when they click “Edit Profile” directing them to choose a nonprofit from a list of vetted organizations and charities, like the American Cancer Society, American Heart Association, Red Cross, ASPCA, Black Girls Code, CDC Foundation and many others.

Once selected, the user’s profile will feature the charity in red text just below their bio. When a visitor then clicks on the name of the organization, they’re taken to a screen that allows them to make a donation.

The feature itself is powered by charitable fundraising platform Tiltify, which handles the payment processing for the donation transactions.

The new option was discovered by social media consultant Matt Navarra (crediting a Twitter user @Sphinx). He tweeted screenshots of the feature on Tuesday, which show how users can add a charity and how visitors would make donations.

This new option follows the April launch of another fundraising feature that allowed TikTok creators to raise money for coronavirus relief efforts.

At that time, fundraising was only available by way of interactive “Donation Stickers” that users could add to their TikTok videos and live streams.

When the donation sticker is tapped, it takes you to a screen to make donations, also powered by Tiltify.

In addition to health organizations and other well-known nonprofits, the list of charities to choose from for the stickers included many that were hardest hit by coronavirus shutdowns — like those for actors, musicians, educators and restaurant workers, for example.

TikTok confirmed the same charities and nonprofits participating in the donation stickers program are also available through the new profile feature.

A number of social media platforms have directed resources and funds toward coronavirus relief in 2020, including Facebook, Twitter, Snapchat and TikTok.

In TikTok’s case, it pledged $250 million to support front-line workers, educators and local communities affected by the COVID-19 pandemic (across a variety of relief funds). And it provided an additional $125 million in advertising credits to public health organizations and businesses looking to rebuild.

TikTok confirmed to TechCrunch the new feature to add nonprofits to the bio is still considered a test, and represents “another way for the TikTok community to support the causes and charities they care about.”

The feature was made available directly to testers in its TestFlight program and was not based on whether they were already using donation stickers.

The company did not say when the feature would roll out to the broader public.

 

Robinhood raises $200M more at $11.2B valuation as its revenue scales

Robinhood announced this morning that it has raised $200 million more at a new, higher $11.2 billion valuation. The new capital came as a surprise.

Astute observers of all things fintech will recall that Robinhood, a popular stock trading service, has raised capital multiple times this year, including an initial $280 million round at an $8.3 billion valuation, and a later $320 million addition that brought its valuation to $8.6 billion.


The Exchange explores startups, markets and money. You can read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.


Those rounds, coming in May and July, now feel very passé in the sense that they are frightfully cheap compared to the price at which Robinhood just added new funds. D1 Partners — a private capital pool founded in 2018 — led the funding.

The unicorn’s new nine-figure tranche, a Series G, values the firm at $11.2 billion. A $2.6 billion bump in about a month is an impressive result, one that points to an inescapable conclusion: Robinhood is still growing, and fast.

How fast is the question. There are three things to bring up in this regard: Trading growth at Robinhood, the company’s soaring incomes from selling order flow to other financial institutions, and, oddly enough, crypto. Let’s peek at each and come up with a good why as to the new Robinhood valuation.

After all, we’re going to see an IPO from this company before the markets get less interesting, if it’s smart.

Growth

Robinhood is currently walking a line between enthusiasm that its trading volume is growing and conservatism, arguing that its userbase is not majority-comprised of day traders. The company is stuck between the need for huge revenue growth and keeping pedestrian users from tanking their net worth with unwise options bets.

It’s worth noting that Robinhood spent a lot of its funding round announcement email to TechCrunch talking about its users safety and education work. It makes sense given that we know that the company is seeing record trades, and record incomes from options themselves. After a Robinhood user killed themself after misunderstanding an options trade on the platform, Robinhood pledged to do better. We’re keeping tabs on how well it manages to meet the mark of its promise.

But back to the revenue game, let’s talk volume. On the trading front Robinhood has lots of darts. And by darts we mean daily average revenue trades. Robinhood had 4.31 million DARTs in June, with the company adding that “DARTs in Q2 more than doubled compared to Q1” in an email.

The huge gain in trading volume does not mean that most Robinhood users are day trading, but it does imply that some are given the huge implied trading volume results that the DARTs figure points to. Robinhood saw around 129,300,000 trades in June, which is 30 days. That’s a lot!

And the company is making soaring money off that volume. As The Exchange wrote just the other week about Robinhood’s Q2 payment for order flow:

According to The Block’s own calculations, Robinhood saw saw its total payment for order flow revenue roughly double, rising from $90.9 million in Q1 2020 to $183.3 million in Q2 2020, a 102% increase. [ … ] A $183.3 million quarterly run-rate for payment for order flow puts Robinhood on a $733.20 million yearly run-rate from the single product — user trade routing — alone. The company also generates income from a subscription service, among other techniques. But the growth alone from its order flow payment business makes the unicorn’s valuation multiple increasingly attractive.

That’s impressive growth from a big revenue base.

Robinhood is likely so attractive to private investors because it has tapped a geyser of trading.

  • DARTs: Up more than 100% in Q2 compared to Q1.
  • Payment for order flow: Up more than 100% in Q2 compared to Q1.

Are we shocked that here in Q3 2020 the company is stacking up a war chest? It makes pretty damn good sense, and its revenue gains undergird its valuation. Robinhood probably has decent margins on its core service, though not SaaS-like if we had to guess, so it does deserve a high-ish multiple. Toss in huge growth and the company can command an even higher result.

And that is before we get to crypto. Robinhood added crypto trading back in early 2018, to somewhat grand note at the time. That was back when crypto was mainstream in a way that Robinhood is now, ironically.

We bring all that up as suddenly crypto trading looks lucrative. Here’s Square from its most recent earnings report:

Cash App generated $875 million of bitcoin revenue and $17 million of bitcoin gross profit during the second quarter of 2020, up 600% and 711% year over year, respectively. Bitcoin revenue and gross profit benefited from an increase in bitcoin actives and growth in customer demand.

Now, a caveat. Bitcoin revenue at Square is essentially gross sales of bitcoin with a tiny margin, but the gains detail the demand change that the payments giant has seen in terms of demand. Or more simply, Robinhood’s huge crypto revenue growth is not really revenue growth, but expansion in the gross payment volume for bitcoin that it processed.

Still, if Robinhood is enjoying similar boosts to its crypto trading, it could see rapidly rising crypto trading revenues. Add those to its rising DARTs and other revenue that we can more easily understand, and the company’s growth profile is impressive.

How long it can keep up this sort of growth if the public markets ever get dull is a different question. But at today’s numbers and today’s market, the valuation is probably in line with a norm or two. And that makes Robinhood an even more fun IPO candidate. Who doesn’t want to see these numbers?

How to get what you want in a term sheet

One of the most exciting moments in the life of every newly christened founder is the sweet relief of seeing a term sheet come in from an investor. After weeks, perhaps months (but hopefully not years!), of work fundraising and pitching, there is nothing like getting that email with a PDF attached to it laying out the terms and conditions of the VC relationship going forward.

Of course, that rejoicing dampens quickly as all the specific nuances of the deal suddenly come to the forefront. It’s one thing to get the valuation you want, or the amount of capital you are seeking, but what about the setup of the board of directors? What should you do about deal terms that may shape your startup for a decade or more?

The reality of term sheets, as our guest Lior Zorea discusses, is that the terms you agree to early on at a startup tend to be the terms that will carry through for the life of the company. That means getting that first term sheet right is critical for ensuring the financial and capital success of your business.