The BNPL boom may be fading

Consumer lending provider Upstart Holdings reported its first-quarter results yesterday after the bell. In the wake of that particular set of data, shares of the company are off 53% in early trading today.

What caused such a catastrophic crash? The company cut its revenue growth forecast for the year and said rising loan rates appear to be hurting demand for its product. Slowing growth this year, potentially slipping net income, and a market in which interest rates are expected to rise even more have made Upstart an un-darling in investors’ eyes.

Upstart’s poor guidance isn’t just hurting its own shares. The value of Affirm’s stock also fell after Upstart’s results came out. After falling 17.5% during regular hours yesterday, shares of Affirm hit a 52-week low of $18.39 in early morning trading today. The company also suffered an analyst downgrade this morning.

Affirm’s stock recovered to a more modest 5% decline at the start of trading today, but it’s clear that investors are linking Upstart’s results to Affirm’s value, a reasonable move as both offer unsecured consumer credit even if their go-to-market motion is different.

The shocking decline in the value of the two companies is only part of the story. There are myriad startups in the BNPL market, meaning that a large piece of fintech was just heavily repriced. Startups pursuing a BNPL or similar consumer credit product now have a far lower present-day value, and their path to exit much steeper.

Market reaction aside, Upstart actually had a solid Q1. Let’s talk about the rest of the year, and just how worried we should be about BNPL startups looking ahead.

The costs of driver incentives are weighing on Lyft, Uber

Lyft’s shares lost nearly a third of their value yesterday after the ride-hailing company reported its Q1 2022 results, despite the company beating market expectations for revenue.

If you delve a little deeper, it seems the market was instead focused about something else entirely: Slightly soft guidance on revenue growth in Q2 2022 when compared to analyst expectations, as well as the cost of driver incentives — supply stimulants that impact the company’s economic profile.

During the Lyft earnings call, analysts focused on the cost of incentivizing drivers to participate in the company’s two-sided marketplace, and they were not assuaged by its CEO and CFO’s responses.

Uber’s shares also fell in the wake of its earnings report. To understand the driver-incentive issue, we’ll first explore Lyft’s situation, and then compare it to what Uber said. The two companies are related and share competitive territory, but market reaction to their current state was sharp and notable. Let’s talk about it.

Lyft’s warning

In its earnings call, Lyft CFO Elaine Paul said the company expects revenues between $950 million and $1 billion in the second quarter, in line with current street expectations of about $995 million. (It’s worth noting that before the company’s report was digested by analysts, that figure was $1.02 billion.)

But more worrisome were Paul’s comments on the company’s profitability. Per the above-linked transcript (emphasis ours):

In terms of profitability, we expect Q2 contribution margin will be approximately 56%, which reflects the impact of growth investments on our leverage. Post omicron, we feel the worst is behind us, and this coming quarter is an opportunity to invest in kick-starting the next year of growth. We will do so with a focus on drivers, the overall marketplace, and some additional brand marketing. As a result, we expect adjusted EBITDA of between $10 million to $20 million for Q2.

Lyft’s adjusted EBITDA came to $54.8 million in Q1, implying that the company is about to eat heavily into its limited adjusted profitability in the second quarter, partially thanks to investments in its driver supply.

In its earnings call, Lyft stressed that while demand for rides can change rapidly — COVID-19 made that plain during its various waves — shifting driver supply takes more time. CEO Logan Green said that “supply adjustments” to its marketplace “are like moving the Titanic.”

Unfortunate metaphor aside, it seems that Lyft is going to spend to boost driver supply in anticipation of future demand; the company expects to grow more quickly this year than the 36% it posted last year, a feat that will require more cars available for hailing.

Deliverr’s nearly flat exit price isn’t as bad as it looks

The leading story in technology-land this morning is the multi-billion dollar exit of Deliverr, a San Francisco, California-based e-commerce fulfillment startup, to e-commerce giant Shopify.

At first blush, the deal looks like a clear win. What startup wouldn’t want to exit for billions to a company growing as quickly as Shopify? But when we compare Deliverr’s exit price of $2.1 billion against its $2.05 billion final private price set early last year (Crunchbase data), the deal gets a bit more tricky to parse.

After all, no company wants to exit for a flat price, as it implies its most recent investors put their money to work for a period of time for no returns. Given the time-value of money, or the time-cost in this case, locking up funds at a time when interest rates and inflation are both rising for zero upside is actually a loss.

However, late-stage deals are nuanced in ways that we cannot grok just from the topline numbers. Perhaps Deliverr’s last round back in 2021 included provisions that ensured its most recent investors would receive a set minimum return in the event of a sale.

If so, the deal could squeeze earlier investors and minor shareholders, like employees, out of some of the value of their stock. If the deal had more fat on the bone, we wouldn’t need to speculate about late-stage terms and their possible impact.

Why Axie Infinity’s co-founder thinks play-to-earn games will drive NFT adoption

The popular play-to-earn (P2E) crypto game Axie Infinity scaled to new heights in 2021, with huge spikes in transaction volumes and revenue and gaining millions of community members. But as we’re almost halfway through 2022, a question stands: Is Axie holding up to its hype?

Axie was launched by its parent company Sky Mavis in May 2018 but didn’t pick up steam until the second half of last year.

Its co-founder Jeff “Jiho” Zirlin told TechCrunch that “2021 was a year of growth and scaling,” while “2022 is a year of building, shipping products, and delivering better and more accessible gameplay experiences.”

Zirlin said he used to go to conferences and talk about Axie until he lost his voice. Now, it needs no introduction as one of the biggest and most well-known play-to-earn games in the crypto space, he said.

“We had this amazing growth cycle that put us on the map, got us resources to turn this into a decades-long journey,” Zirlin said. “Right now, I think we’re in the midst of building out the products that will get us to the next growth cycle.”

For the uninitiated, Axie Infinity is a crypto-focused gaming universe and platform with creatures, or Axies, that players can buy or collect as pets and then use to battle, breed and raise for crypto rewards.

At its peak, the fully diluted market capitalization (for Axie’s AXS token) was about $16.7 billion and its total revenue from in-game purchases and market fees paid was $364.4 million in August 2021, according to data on Token Terminal. From its apex, the market cap has dropped 19.76% to $13.4 billion and its total revenue has also fallen about 99% to $2.5 million in April 2022, the data shows.

“Crypto is very cyclical, and sometimes you’re in a growth cycle and other times are times when you have to build,” Zirlin said. “You can’t have exponential growth all the time; there is a refractory period.”

Earlier this year, Axie Infinity’s Ronin Network suffered an exploit valued at roughly $625 million at the time, making it the largest crypto heist to date, according to REKT Database. Shortly after the hack, Sky Mavis raised about $150 million in a round led by crypto exchange Binance to compensate victims.

“We made mistakes because we were going so fast, rushing for more adoption, and I think that the whole saga from last month will be seen as a badge of honor for those going through it,” Zirlin said. “It’s hard to think about counterfactuals, but the obvious answer here is to invest more in security for Ronin and prioritizing that [going forward].”

Even though its market cap and revenue have dropped drastically from their peaks, the company is still flying much higher than it was a year earlier — Axie’s market cap is up 228.3% and total revenue is up a whopping 50,950.8% from the same time last year, Token Terminal data shows.

The game is also bringing on new users. Last month, the company launched Axie Infinity: Origin, a free-to-play version of the game in an effort to appeal to more users who might want to take it for a test run first, Zirlin said.

Don’t worry about VC’s returns if you can exit your startup early

If you’ve been watching the recent wave of shows on disgraced startups (from Theranos to WeWork), you might be under the impression that startup founders have no sense of responsibility.

In my experience, however, the opposite is much more common: Entrepreneurs tend to feel guilty about things that are just part of startup life. For instance, many founders feel quite badly about merely admitting that they wouldn’t say “no” to a good enough acquisition offer, or telling their investors they’d do so.

Why does it matter if founders tell investors that they might take an exit before their company reaches IPO scale? I think the reasoning goes something like: “What’s good enough for me might not be good enough for my backers,” or a life-changing amount of cash for a founder might be too small an investment multiple for an investor.

And sometimes, these concerns is not just guilt rearing its head, but also the fear that VCs won’t let an acquisition go through if it happens too early in a startup’s lifecycle.

There are many reasons to stick it out at your startup, but if you’re worried about your investors when faced with an exit, here’s why you shouldn’t be.

Time is another element of VC math that founders don’t always consider — a 3x multiple in six months is not the same as a 3x multiple in three years.

In VC Land, 1 > 10

Letting people down is never pleasant, but that’s how it can feel to sell a startup early. Will investors be disappointed that your company never fulfilled its destiny? Well, yes, but only to a certain extent, and that’s where portfolio math comes into play.

Investors hedge their bets by making many investments, though they still hope that each of those bets pay off. However, they also know that it won’t happen. They’re in the game fully aware that that some of their investments will simply have to be written off, and a handful more will land somewhere in between success and outright failure.

But investing in startups still makes sense, because outliers will return their original investment value many times over.

In venture capital, big home runs have become a fixture. They have a name, too: “Fund makers,” and they signify an investment that generates more liquidity than the entire fund backing it.

In a 2014 post on TechCrunch, VCs John Backus and Hemant Bhardwaj coined a new term for these fund makers: “dragons.” They encouraged fellow investors to favor them over unicorns. “Unicorns are for show. Dragons are for dough,” they wrote.

Why does a16z need its own Y Combinator?

For over a year, Andreessen Horowitz has quietly piloted its own take on an accelerator for early-stage entrepreneurs, and today, the firm announced the program’s official debut.

In exchange for an unannounced percentage of ownership, “a16z START” will offer early-stage founders up to $1 million in venture capital. The checks are backed by a $400 million seed fund, which closed in August 2021.

The remote-first program will accept founders on a rolling basis and wants to connect folks with partners for advice, potential customers or investors, and of course, other entrepreneurs.

On the relatively brief application form for START, a16z names six categories — American dynamism, consumer, enterprise, fintech, games or other. Investment terms will be discussed with final candidates, the form says.

This program extends Andreessen Horowitz’s stamp of approval to the earliest step of an entrepreneur’s journey: the idea stage, or the pre-quitting-your-day-job part of startup life. The company has invested in solo founders before their companies ever existed, but this program appears to be a more formal effort to bring folks into entrepreneurship. Notably, there is no mention of a diversity mandate or focus.

The list of early participants in this program shows that a16z is certainly interested in international entrepreneurs, similar to how Y Combinator has increasingly grown its global presence over the past few years. Some of START’s first entrepreneurs include executives from Rappi, a Colombian unicorn.

TechCrunch reached out to Bryan Kim and Anne Lee Skates, the two partners running the program, for comment, but has not yet heard back. Until then, let’s walk through my biggest question for the duo: Why does a16z need its own Y Combinator?

I know that it’s not entirely fair to compare the two institutions beyond their focus on empowering early-stage founders with capital, networks and advice in exchange for equity. In fact, over the years, a16z has often led some of the buzziest rounds coming out of Y Combinator, including Tandem, Queenly and Contra — essentially sourcing deal flow from the accelerator.

MLB forays into the future with new tech for the old ball game

Major League Baseball may have started in the 19th century and come of age in the 20th, but it is definitely no stranger to technology, whether it’s the cloud for storing and analyzing troves of data or figuring out how to customize and enhance fans’ experience.

To do all of that, MLB uses a range of technology from customized video search and Statcast for advanced statistics to streaming and mobile apps and games for its fans. The league is already welcoming NFTs and looking at AR and VR as it tries to take advantage of whatever tech is out there that makes sense for baseball.

I spoke to Vasanth Williams, the league’s head of engineering and chief product officer, to get a better sense of the technology being adopted and how it’s used.

Williams said baseball has its fingers in so many tech pies that there’s no such thing as a typical day for him.

“It’s hard to have a typical day, because the breadth of our portfolio products is quite large. But overall, the biggest priority for me is to drive fan engagement — leveraging all the new technologies and the data we have to help not just understand the game itself better or the data that we generate, but also create new and interesting experiences for fans in ways they can better connect to baseball, and also the community at large,” he said.

Williams was hired by MLB after stints at Microsoft, Facebook and Amazon, so he understands Big Tech and said he saw a chance to work in a place that is constantly trying to innovate and take advantage of available technology.

“MLB has a long history of leveraging data and technology, and being an early adopter of a lot of the technologies, which I love doing. I’m happy to join the journey to continue that and push the envelope in sports technology as a whole,” he said.

MLB's Film Room lets you find clips from games with extremely granular search tools.

MLB FilmRoom lets you search for video footage from across baseball. Image Credits: MLB

MLB briefly worked with AWS to build its cloud stack, but it has now gone all-in with Google Cloud. The league is now building a platform for creating applications, which individual teams can also take advantage of.

Why EV startups should’ve hit the brakes before merging with a SPAC

The blank-check boom that made real many electric vehicle manufacturers’ dreams of going public may be nearing a close.

One such company, Faraday Future, is even in danger of being delisted, according to a filing with the U.S. Securities and Exchange Commission last week.

Faraday Future, Lordstown Motors, Lucid Motors, Nikola and Canoo — nearly all the EV manufacturers that took a shortcut to an IPO by merging with a publicly traded shell company — have faced SEC scrutiny, sending their once sky-high valuations tumbling.

Faraday makes for a cautionary tale. The beleaguered seven-year-old EV company, which has yet to launch a vehicle, went public by merging with a special purpose acquisition company (SPAC) in July last year.

However, just months later, a report from activist short-seller Hindenburg Research led to an internal investigation that resulted in pay cuts for its top two executives and the dismissal of others. Hindenburg, a New York-based investment firm, has sounded alarm bells for several EV makers that took the SPAC route.

Chief among the investigation’s findings was Faraday had misled investors when it said it had received more than 14,000 deposits for its long-awaited FF 91 vehicle. In fact, many of those reservations were actually unpaid, passive indicators of interest.

When you fail to live up to your projections, you really get hammered. That’s when investors start filing lawsuits. John Loehr, managing director of automotive and industrial, AlixPartners

Last week, after the SEC subpoenaed several executives suspected of making other false claims, Faraday said the investigation could delay the filing of its 2021 annual report. Nasdaq said failure to comply with those guidelines puts the company in danger of being delisted from the stock exchange.

When boom goes bust

Over the past couple of years, a bevy of new EV companies — including startups yet to generate revenue or launch a commercial product — merged with SPACs to raise money to reimagine transportation and fulfill their visions of an electrified future. But analysts say that these once-promising businesses could soon be sold for parts — or fold altogether.

“Automotive manufacturing is not a business that’s friendly to new entrants,” said John Loehr, a managing director in the automotive and industrial practice at consulting firm AlixPartners. “You need significant production volumes to make money.”

After Anaplan, which SaaS company will private equity target next?

Last night, private equity firm Thoma Bravo said it agreed to acquire Anaplan for $10.7 billion. The financial planning software company’s stock has declined sharply in the last six months, which likely gave the PE firm a chance to pounce.

The stock market hasn’t been kind to SaaS companies in recent months, which makes us wonder if we’re seeing the beginning of a trend of private equity taking aim at vulnerable SaaS firms.

To answer that, let’s quickly unpack the Anaplan transaction and better understand if Thoma Bravo is paying a premium for this company. From there, we’ll be able to get an idea of how much private equity types are willing to shell out for modern tech companies.

Afterwards, we’ll apply what we’ve gleaned to a host of public SaaS companies that could find themselves answering inbound calls from other private equity concerns. Don’t forget that private equity is richer than it has ever been in terms of available dry powder, and that money could be looking for a target.

Private equity firms look for strong market positioning, and a large and valuable customer catalog with room for growth, all of which modern cloud companies have in surplus.

Inside the Anaplan-Thoma Bravo deal

Anaplan said fourth-quarter revenues rose about 33% to $162.7 million — of which $148 million came from subscription sources — from a year earlier. On a full-year basis, revenue rose just under 32%, meaning that its Q4 growth rate was similar to its full-year outcome.

If we convert the company’s Q4 revenue into run-rate revenues, we can apply that figure (about $651 million) against its $10.7 billion purchase price to get a revenue multiple of around 16.4x for the transaction.

Recall that we’ve seen declines in software company valuations to the point where SaaS companies growing at more than 30% today have had their revenue multiples cut to the 12x mark when we compare forward revenue projections against their present-day value. Compared to that number, the Anaplan deal price seems to be full-fat.

Indeed, with Thoma Bravo paying a roughly 46% premium ($66 per share) for the software company’s shares when compared to pre-deal prices, the PE firm is coughing up close to a Q4 2021 price for Anaplan. To be precise, Anaplan shares peaked at just over $66 a share over the past six months, right in line with the Thoma Bravo offer.

This provides a neat little framework for us to work with: Software companies that are trading at depressed prices today could perhaps sell to private entities for their Q4 2021 valuation high-water mark.

If that’s the case, we’re quite curious about who else could be in line to surrender their status as an independent company. And we have more than a few names in mind.

Zendesk’s latest problem is an activist investor

Zendesk has been having some issues with its investors lately.

Last month, it turned down a $17 billion takeover offer from a consortium of private equity investors, saying the deal undervalued the company. Later in the month, unhappy investors rejected the company’s $4.1 billion acquisition offer for the parent company of SurveyMonkey, Momentive.

That’s a lot of turbulence for any company to be dealing with in such a short time, but yesterday, activist investor Jana Partners, which owns 2.5% of the company’s stock, piled on with an SEC filing that wasn’t terribly friendly.

In a no-holds-barred filing, the firm put Zendesk management on notice that it wasn’t pleased at all, and said it was nominating four candidates for election to Zendesk’s board of directors at the company’s 2022 shareholder meeting.

“We believe the Zendesk Board of Directors’ (the “Board”) misguided attempt to acquire Momentive Global Inc. (“Momentive”) exposed the Board’s blatant disregard for stockholders and ongoing failures of oversight. Absent meaningful change to the Board, we believe Zendesk will fail to achieve its potential and suffer a persistent valuation discount – with stockholders left paying the price,” Jana wrote in the filing.

Jana’s filing comes after a slew of public letters and a presentation in which it questioned the Momentive deal and urged Zendesk management to cancel the acquisition.

At the time of the $17 billion takeover offer, we ran an analysis of Zendesk’s financials. Momentive, in spite of investor objections, would have sped up growth, but even without it, the company was on track to do just fine, so much so that $17 billion seemed like a low-ball offer.

Our argument was simple: The offer to buy the company was worth a somewhat-slim 30% premium on its market value, and with accelerating revenue growth in recent quarters, Zendesk had a credible growth story under its belt.