Tag: EC News Analysis

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Brex leaving adrift some SMB customers roils corporate spend market

Brex’s decision to largely exit the SMB market has caught its customers, market observers, and even its competitors by surprise. And while the affected customers scramble to move their assets off Brex’s platform, its rivals are taking aim at the fintech and the market it’s leaving behind.

The decacorn’s decision puts a potentially material customer cohort into play, meaning that Brex’s rivals are likely gearing up to try and attract the accounts left adrift.

TechCrunch heard from a number of Brex rivals on the matter, providing us a feel for how the market views the company’s decision. Naturally, as we’re discussing competitors, they had quite a lot to say about their own products.

So to avoid being overly generous to the competing entities, we have bucketed their observations into two areas: notes on the business model and customer-related points. We’ve tried to only share observations that describe the corporate spend market more generally, and not why one particular company is better than any other.

Given how competitive the corporate spend world has proved (more here, here, and here from TechCrunch), Brex has kicked off an interesting strategic conversation in this well-funded fintech startup niche. Let’s talk about it.

Kicking the beehive

Interchange incomes usually mean low margins, so their ability to power corporate spend companies has been a point of debate for some time. Brex and Ramp started off by offering free services, while Airbase focused more on selling software. Divvy managed a huge exit on the back of just its cut of card spend fees.

Later, Brex rolled out paid software products and Airbase worked to attack the interchange model by remitting its own interchange incomes back to users as cash, more or less.

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Venture funding in Europe is declining faster than in the US — but causing much less panic

When venture funding started to decline globally in the first quarter, Europe initially looked like an outlier. The region recorded strong Q1 numbers and was one of the few markets to see quarterly growth over the end of last year. But since the market reached its peak in January — at least for now — Europe’s funding has actually declined at a faster rate than other regions.

Europe’s venture capital decline was initially buried under its own numbers. Due to a particularly strong funding environment in the region this January, the pullback was masked in Q1 totals. The pace of the decline was notable, with the region seeing $13 billion invested in January, $9.3 billion in February, and $8.9 billion in March, according to data from Crunchbase.

The slowdown continued in Q2 with April funding totals down 12.3% from March to $7.8 billion, and May down 16.7% from April to $6.5 billion. Based on figures from the first two months of the second quarter, June looks likely to continue the slide.

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Jumia’s venture into quick commerce could slow its path to profitability

Profitability has been an ongoing theme for Jumia since it went public in 2019. Each time the pan-African e-commerce platform releases its quarterly financials, investors and tech stakeholders dwell on its adjusted EBITDA and operating losses.

While the company’s financial results in the last couple of years have detailed slow and steady growth, Jumia’s continuous losses are a recurring cause for concern. A few investors that have spoken to TechCrunch believe the e-commerce giant is light-years from achieving profitability, and it’s not difficult to understand their perspective.

Jumia’s adjusted EBITDA throughout 2019 stood at a loss of €182.7 million (about $204.5 million). In its 2020 financials, the company said it had demonstrated meaningful progress on its path to profitability, improving its adjusted EBITDA deficit to a loss of €119.5 million that year (around a $136.3 million adjusted loss).

Co-CEO Jeremy Hodara reiterated this in an interview with TechCrunch referencing the company’s reduced losses in Q4 2020. “We’ll be trying to do so every quarter. We want to go about it by improving the efficiency of the business and opening new avenues for growth,” Hodara said. But by the end of 2021, Jumia’s adjusted EBITDA losses ended at $196.7 million, a 44% increase from the previous year.

Although the e-commerce company started 2021 on a good footing, reducing losses a bit in the first quarter, it reverted to its old method of executing aggressive advertising, which it had slowed during the pandemic. As the company grew its GMV, orders, quarterly active customers and revenue in the subsequent quarters, its losses compounded, particularly in Q4, when it reached $70 million, a 107% year-over-year increase.

Sacha Poignonnec, the company’s other co-CEO, told TechCrunch in an interview last month that Jumia plans not to exceed $70 million of losses in future quarters.

“We are stabilizing our level of marketing and investments,” he said. “There will be some fluctuations here and there, but we will reduce our losses below this peak we had in Q4.” Jumia anticipates a loss of not more than $220 million this year, which would surpass 2021’s numbers.

Jumia has expanded its results along many e-commerce metrics that matter since going public: orders, revenue, user base and GMV. The company has also improved its monetization outlook with JumiaPay (the fintech recently acquired licenses to process payments for third-party businesses in Egypt and Nigeria) and its logistics arm. Yet its path to achieving profitability remains arduous, perhaps even more so as it enters the quick commerce (q-commerce) space.

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What the wave of layoffs says about the value of crypto exchanges

The crypto sell-off of the last several days was preceded by staffing cuts at several companies in the business of facilitating the trading of decentralized assets and tokens. Reductions at Gemini and Crypto.com were superseded today by news that Coinbase is cutting more than 1,000 staff. Given that Coinbase and other crypto exchanges were high-flying success stories of 2021, the retreat may feel surprising.

How could companies like Coinbase, which reported massive growth and huge profits last year, now be in a position where they would need to slash staffing? This isn’t to overly focus our attention on exchanges; other companies in the larger web3 space are also under fire, including BlockFi, which also recently cut staff.

The answer to the sharp swap from rapid staffing to personnel cuts at exchanges, however, is something that we can actually understand with reasonable clarity. It boils down to this: Costs scaled at crypto exchanges as their revenues grew. Now, as their top lines contract due to falling trading volumes, those previously warranted costs have morphed into a burden.

Leaning on May data from consumer trading service Robinhood, Coinbase performance data and public layoff notices from crypto exchanges, let’s explore how things got so upside-down so quickly.

Booming revenues, costs

Coinbase had a simply excellent 2021. Its net revenues grew from $1.14 billion in 2020 to $7.36 billion last year, with its net income rising from $322 million to $3.62 billion over the same time frame. Growth and profitability like that impressed investors and potential employees alike, with both groups flocking to the company.

In its final earnings report of 2021, Coinbase indicated it had invested heavily to keep the revenue expansion coming, citing both hiring and its cash position as potential growth levers:

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A bunch of startups might be in better shape than you think

Earlier today, TechCrunch+ published an open letter to startups from Index Ventures partner Mike Volpi with advice for startups that have different levels of runway. In short, the more cash that a startup has, the more latitude it will have to be aggressive in the present downturn and the looming recession.

We caught up with Volpi last week to talk through his perspective on the market, the disconnect between venture performance and startup operating results, and what portion of startups might be in reasonable shape to attract capital and grow despite a risk-off investing environment.

Check out Volpi’s full note here, and read on for our founder-focused takeaways from our chat with the investor.

Cash rules everything

One claim stood out the most in the investor letter: “many companies are still hitting or exceeding operating plans.” Given that we’ve seen mixed results in the public market, that statement was a bit surprising.

We asked Volpi how many startups were hitting their plans, and while the investor was hesitant to put too fine an approximation on a venture market that he has limited visibility into, he did estimate that around 75% of startups are hitting — or exceeding — their plans.

Startup operating plans vary in their level of aggression, so the “around 75%” figure may not be as bullish as it reads, but that’s immaterial. What matters is that most startups are still able to sell their goods and services, and we are not seeing the kind of deceleration in startup growth that the public markets might lead us to expect.

More simply, startups are still able to sell in the current market even as asset prices fall.

If that’s the case, what should we make of the steady drumbeat of doom and gloom from investors on Twitter and elsewhere?

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Proposed bipartisan US crypto bill could be ‘sigh of relief’ for the industry

All around the world, regulators are trying to address the trillion-dollar elephant in the room: the digital assets market. Because crypto is a nascent industry that currently exists largely outside of legal frameworks, it’s still in murky waters, and those in the industry — and outside of it — seemingly want clear guidelines and clarity to move forward.

A proposed crypto bill, sponsored by U.S. Senators Cynthia Lummis, Republican of Wyoming, and Kirsten Gillibrand, Democrat of New York, aims to install guide rails around the digital asset space. The 69-page, bipartisan bill is comprehensive and addresses many corners of the crypto markets.

Some of the most notable aspects in the proposal include:

“This bill tries to do everything, which may be its biggest impediment.” Christopher LaVigne, co-chair of crypto practice, Withers

  • Making crypto transactions that are $200 or less tax-free.
  • Defining guidelines for differentiating cryptocurrencies as commodities or securities (most would fall under the commodity category, according to the bill).
  • Backing stablecoins with a 1:1 monetary currency, moving toward “100% reserve, asset type and detailed disclosure requirements for all payment stablecoin issuers.”
  • Granting the U.S. Commodity Futures Trading Commission exclusive spot market jurisdiction over cryptocurrencies defined as commodities.
  • Marking the U.S. Securities and Exchange Commission and CFTC as the main watchdogs over the digital asset industry.

“The bill matters as it is a step in the right direction for legislation and definition of ‘crypto,’ what a ‘crypto asset’ is and what regulation will look like,” Nick Donarski, the founder and CTO of ORE System, told TechCrunch.

“But at the same time, the bill, like other crypto-related bills, would be more likely to be split up to garner enough support to get it passed.”

Giving power to the CFTC

“There’s a lot of color here and it’s quite exciting,” Ken Goodwin, director of regulatory and institutional affairs at Blockchain Intelligence Group, told TechCrunch. By granting the CFTC oversight of most digital assets, it’s setting a precedent and giving the agency more validation, he said.

Goodwin worked on Wall Street for over 20 years and has spent the last eight years in the blockchain space. Even with his background in both traditional finance and crypto, he said he’s surprised by the positioning of the CFTC in the proposed bill.

“I would never suspect [CFTC] actually being on the forefront of this; I thought the SEC would be the regulator for this,” Goodwin said. “Even if this bill doesn’t pass, people will look to the CFTC to provide guidance.”

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Startups are on track to acquire more VC-backed companies than ever in 2022. Here’s why

Amid a venture funding decline and dearth of IPO activity, startups have found a new way to occupy their time: buying other startups.

The notion of startups acquiring other VC-backed companies is nothing new. Meta bought venture-backed Instagram a month before Facebook’s May 2012 IPO; food delivery company GrubHub merged with Seamless in 2013 when they were both still operating off venture funding. But up until the last few years, these transactions were mainly large and infrequent. Now, they are getting smaller and more frequent.

In 2021, 1,283 transactions involving startups on both sides of the table took place, according to data from Crunchbase. That compares to 689 in 2020 and 599 in 2019. So far this year, 663 startups have been acquired by other VC-backed companies, with more than half of 2022 left to go.

Why is this happening now, during a downturn? The venture funding bull market of the last decade has created a barbell of startups. Last year simultaneously saw a record number of startups crossing the billion-dollar valuation threshold while seed-stage funding broke its own record. Now that the funding fever has come to a screeching halt, the market is filled with late-stage companies with oodles of cash on hand — and no real exit opportunities — and a plethora of early-stage startups.

This has created a perfect storm for an increase in startups acquiring other VC-backed companies, Kyle Stanford, a senior analyst at PitchBook, said.

“There are over 7,000 venture-backed companies and a record number of seed deals,” Stanford said. “There will be a lot of companies that will struggle to raise this year that will be easy targets for companies looking to acquire.”

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Pro-rata is easier to get than ever today, but investors are thinking twice

Whenever pro-rata rights are involved, you can always smell some drama. When a company raises a financing round, new and old investors often battle it out for the largest stake they can get. While this process can be competitive enough to be considered cutthroat, during the last decade’s bull market, it’s become more or less predictable — new investors generally get their preferred share, while existing backers fight for what they can.

If you’re new to all this, here’s a short explainer: In investing, pro rata is a legal right that allows investors to maintain their ownership stake in a company when it raises capital after they’ve invested. This is critical for early-stage investors and smaller funds, as they can avoid dilution and keep meaningful stakes in their portfolio companies. Traditionally, it hasn’t always been easy for existing investors to exercise this right, as new investors often have the upper hand in fundraises and they can be hungry for a bigger piece of the pie. (If you want to learn more, here’s a more in-depth explanation.)

However, this year is starting to look very different.

These seed funds went from being told, ‘No, too bad, you aren’t getting your pro-rata’ to, ‘You better cough up some money.’ Loren Straub, GP at Bowery Capital

Venture funding has slowed, with many investors spooked by the current public market volatility or taking a breather after 2021’s funding frenzy. Some startups may still see the same excitement from new lead investors when they look to fundraise, but most won’t.

This means the less lucky startups will likely rely on their existing backers to exercise more or all of their pro-rata allocation. But will their investors even want to do that? It will depend on who they are.

For firms like pre-seed and seed-focused Hustle Fund, which is still deploying capital as usual despite the market’s woes, it’s a welcome change. Eric Bahn, a co-founder and general partner at the firm, said Hustle Fund is glad to be able to increase its share in its predicted winners, which it wasn’t frequently able to do prior to this year.

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Should Oracle or Alphabet buy VMWare instead of Broadcom?

As expected, the Broadcom-VMware deal is a go. The chip giant intends to snap up the virtualization software company for $61 billion in cash and stock, along with taking on $8 billion in VMware debt.

It’s not an inexpensive transaction, but thanks to a “go-shop” provision that gives VMware 40 days to “solicit, receive, evaluate and potentially enter negotiations with parties that offer alternative proposals,” there’s market speculation that another bidder could enter the fray.

After chewing through analyst notes on the deal, Ron and Alex wound up on opposite sides regarding whether a higher price or another bidder would make sense. Ron’s view is that the company’s value is higher than its recent financial results may imply, while Alex feels the company is not sufficiently performative to deserve a higher price.

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We’ve long speculated who might buy VMware, and after Dell spun out the company, TechCrunch listed Amazon, Alphabet, Oracle, Microsoft and IBM as potential acquirers. The fact that we did not foresee Broadcom as a potential suitor underscores our view that we don’t fully grok if it’s the correct buyer for VMware.

So let’s talk about the pros and cons of the matter, ask what VMware is worth, and how it may have value over and above its recent quarterly results. Ron is taking point!

Ron’s take:

With $61 billion on the table, it’s hard to imagine anyone paying more, and research firm Bernstein agrees with the perspective. Before we put the idea to bed, though, it’s worth taking a moment to think about the value of VMware.

VMware’s value goes beyond what its balance sheet or its profit and loss statement tells us at the moment. While the company might not have had a perfect first quarter, it has a particular set of skills that could fit nicely with any of the big cloud infrastructure providers.

In fact, cloud infrastructure-as-a-service exists today only because the early crew at VMware figured out virtualization at scale in the early 2000s. Until then, people used servers, and if a server was underutilized, well, too bad. Virtualization lets you divide a computer into multiple virtual machines, paving the way for cloud computing as we know it today.

While cloud computing has changed some since its early days, virtualization remains a core tenet of the market. Imagine for a moment if one of the three or four cloud vendors — think Amazon, Microsoft, Google or even IBM (although this deal is a bit rich for its blood) — brought VMware into its fold.

VMware brings more to the table than virtualization, of course. Over the years, it has gained various capabilities by acquiring companies like Heptio, a containerization startup launched by Craig McLuckie and Joe Beda, two of the people who helped create Kubernetes.

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Sequoia is the latest VC firm telling you to take the downturn seriously

Sequoia takes things seriously. The storied venture firm is known to react to macroeconomic events with grand memos aimed at portfolio companies and sometimes the entrepreneurship scene at large.

Most recently, Sequoia created a 52-slide deck, first reported by The Information, titled “Adapting to Endure.” The document reads like a follow-up course to its infamously ill-timed “Coronavirus: The Black Swan of 2020” memo of March 2020.

The firm is not always right in its prognostications — maybe why it stuck to internal musings instead of a Medium post this time — but it does do a service in providing a snapshot of how one of the most weathered, and successful, VC firms of all time thinks about a looming downturn.

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“Our intention in gathering today is not to be a beacon of gloom,” the deck reads. “But we also believe that winning in the years ahead is going to depend on making hard, decisive choices confronting uncomfortable challenges that may have been masked during the exuberance and distortions of free capital over the past two years.”

Sequoia’s advice largely followed the same script that other venture firms have been using: extend runway, focus on sustainable growth and recognize that an economic recovery may be a ways away. There were, however, some tidbits that stood out, such as a subtweet that I’m guessing is meant for Tiger Global and a precise explanation of how founders should define fluff these days.

The capital provider blames capital itself — capitalism, huh?

One of the clearest subtweets within the deck is Sequoia’s commentary on cross-over funds. The firm says that “cheap capital is not coming to the rescue” at this moment: