The IPO drought was worse than you thought
Klaviyo could break the unicorn IPO logjam
Last Friday, two venture-backed companies filed to go public. Grocery delivery service Instacart dropped its Form S-1 filing along with Klaviyo, a marketing software company from Boston.
We dug into Instacart’s filing on Friday but didn’t have time to also spelunk into Klaviyo’s IPO filing. We’re going to do that today, because Klaviyo’s IPO moment perhaps matters more than it would in another time.
Here’s an inside look at Klaviyo’s origins, how it’s grown over the years, the trade-offs it made, how email marketing is evolving, and more:
Sure, Klaviyo has raised hundreds of millions of dollars and was last valued at nearly $10 billion, but what this IPO does for other companies could prove more important than the money it raises for Klaviyo itself.
The American IPO market has been moribund and generally stuck in a quagmire for about 18 months now. Declining tech valuations on the stock market and changing investor sentiment put IPOs on hold. Meanwhile, the venture market contracted, especially the late-stage venture market, squeezing unicorns and leaving their investors unable to cash out.
To get things rolling again, everyone’s been saying that tech companies need a winning IPO to be inspired by. But given the significant uncertainty in the market, no one wanted to take the first step.
A champion was needed. A company with enough strength and fortitude to be the first to go public and pave the way so other companies could follow. Instacart fit the bill only partially since it’s more of a delivery company than a pure-play software business. Klaviyo, however, is a shockingly efficient software business that is profitable and growing quickly.
This company could be the torch bearer tech startups have been waiting for. Let’s dig into its IPO filing this morning to figure out how it’s grown.
How quickly is Klaviyo growing?
Yes, in my backyard
W
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Can startups help solve the U.S. housing crisis? BuildCasa thinks so. It raised a $3.5 million round of pre-seed funding to let California homeowners build new homes in their backyards. — Anna
Leveraging new zoning laws
There aren’t enough homes in the U.S., which would need another 3.8 million units of housing to fill the gap, Axios recently noted, citing data from Freddie Mac. And while causes and consequences are open to debate, it shouldn’t be too controversial to say that increasing housing supply is part of the solution.
What does this have to do with startups, you may ask? Quite a bit, it turns out: New business models have emerged as a result of recent laws that aim to solve the housing shortage.
OnlyFans’ profitability proves the creator economy boom was real enough
Like many sectors, creator-focused startups had an easy time of attracting funding in 2020 and 2021. But venture capital investment into this category slowed down significantly starting in the second half of 2022: going from 42 rounds worth $336 million in Q2 2022, to only 19 rounds worth $110.2 million in Q3 2022.
At the time, Nate O’Brien of Roadrunner VC said it best: “The creator bubble is popping.”
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As is often the case with hyped sectors, they end up deflating when the market isn’t favorable. And it gets worse if you’re in a category that depends on the fickle advertising market, which is strongly exposed to macroeconomic fluctuations. But more importantly, the rise of the creator economy was largely driven by factors that proved to be quite temporary.
“The growth in the creator space was fueled in two parts: by COVID and [by] the boom in e-commerce (the primary advertiser in the creator economy). People have largely returned to their ordinary lives, and e-commerce has reverted to its usual pace, so the slower growth of the creator space is not surprising,” Coventure partner Brian Harwitt told TechCrunch+ in a recent investor survey.
Sure, it isn’t surprising, but it still means that new startups hoping to solve problems for creators and help them generate revenue are today often struggling to raise money, and probably expand as well.
Venture rounds and younger startups form only part of the picture, though. There are many outliers to be found if you simply examine the set of companies that raised plenty of cash before the ad market started to cool down, and chief among them is OnlyFans. It’s actually one of the best companies in the space right now, period.
OnlyProfit
It’s often difficult to get a good picture of the state of some businesses, especially late-stage startups and large private tech companies, as we usually only have incomplete or delayed data to study. With OnlyFans, we have strong and complete information; it’s simply dated. Thanks to data from its British parent Fenix International, we have OnlyFans’ results for its fiscal year ended November 30, 2022, which is basically all of calendar 2022. Huzzah!
The late-stage venture market is crumbling
If you are a startup founder raising a venture round this year, you’ll get a lower valuation than you might have in 2021 or 2022. New data from CB Insights details that there have been sharp valuation declines across nearly every startup stage around the world.
But you probably know that already. A more interesting question to ask, then, is if deal volume is going to shrivel across stages, too. Sure, it’s useful to know what the new norm is for, say, seed-stage or Series B deals, but it’s far more important to understand how quickly the later stages of the venture market are contracting.
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A sharper decline in late-stage dealmaking may be a bad thing or not, depending on how large you think the startup market could grow before there are too many companies trying to scale at the same time.
On one hand, a more extreme decline in late-stage dealmaking would mean that startups past their youth — your Series B and C companies — will find it harder to raise pre-IPO capital from venture investors. On the other, startup stages are not only a way to segment the venture market into simple buckets, they also serve as a sort of filter to weed out companies that do not meet expectations for growth and scale.
From that perspective, a smaller late-stage market would imply that weaker startups would not be able to access capital that they couldn’t use efficiently. That’s brutal for startups stuck between rounds and stages, but it could be a good thing for the wider tech market — quick failures recycle human capital faster than overfunded startups that end up as expensive zombies.
This morning, let’s talk about new valuation norms and explore just how sharply the late-stage market is on pace to contract this year.
Falling valuations
Let’s get the obvious stuff out of the way: No matter which stage we are looking at, median valuations declined in the second quarter of 2023 compared to a year earlier, according to CB Insights. And it appears the later the stage, the sharper the decline: seed/angel deal valuations fell about 15%, while valuations for Series D rounds and later tanked by a whopping 60%.
But things aren’t as straightforward as they might seem: A closer look at more recent periods yields a slightly better picture. Median valuations improved slightly for seed/angel and Series B deals in Q2 2023 compared to Q1 2023. Startups that raised Series D rounds or later, however, still don’t seem to be doing well: their median valuation declined by 33% quarter-on-quarter.
TechCrunch+ Roundup: Monetizing generative AI, sex tech checkup, patents and IP
Several years ago, I was chatting with a friend who’d become an investor about an idea I had for a startup. It wasn’t a pitch: I just wanted to see what they thought of my premise.
“That sounds like a solid lifestyle startup,” they replied, “but most investors I know are only looking for billion-dollar companies.”
The fundamentals of venture capital explain why investors are on a perpetual unicorn hunt, but “even markets with a seemingly dominant player can support multiple winners,” writes Rebecca Szkutak.
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To learn more about the winner-take-all strategy that underpins tech investing, she interviewed:
- Marco Zappacosta, co-founder and CEO, Thumbtack
- Lily Shaw, investor, OMERS Ventures
- Logan Allin, founder/managing partner, Fin Capital
- Lia Zhang, investor, Makers Fund
Thanks very much for reading,
Walter Thompson
Editorial Manager, TechCrunch+
How any SaaS company can monetize generative AI
Generative AI often looks like a magic trick, but complex prompts can consume a great deal of resources.
And that makes usage-based pricing a “natural fit” for SaaS companies adding AI-powered products to their roster, says Puneet Gupta, a former AWS general manager who’s now the CEO and co-founder of Amberflo.io.
“Since the back-end costs of providing service are inherently variable, the customer-facing billing should be usage-based as well.”
VC Office Hours: Why the sex tech industry could benefit from today’s politics
Tech is set on disrupting nearly every aspect of human existence. Except for one, it seems.
Between 2020 and 2022, sex tech startups raised just a little over $1 billion in venture capital, reports Dominic-Madori Davis. She interviewed Coyote Ventures co-founder Jessica Karr to learn more about the state of the sector.
“Sex tech is an inclusive space — there are also many new products that are innovative for gender inclusivity as well as sexual wellness for men,” said Karr.
“While the new products address the true diversity of all people’s personal preferences, the taboo will remain for a long time.”
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How this VC evaluates generative AI startups
When OpenAI made its Chat Generative Pre-trained Transformer (ChatGPT) commercially available in November 2022, it kicked off a land run in tech. Nine months later, every startup is looking for ways to incorporate generative AI.
“Nearly every pitch deck I’ve seen since December has had AI on the front two pages,” says Adam B. Struck, founding partner of Struck Capital.
“There are a few areas that we think are especially investable and others that are more challenging for a seed-stage company to compete in.”
In this TC+ column, Struck unpacks his thesis as it relates to each layer of generative AI’s tech stack and includes his “new comprehensive deal evaluation framework specific to AI.”
IP for startups: When (not) to patent your inventions
Acquiring a patent creates a myriad of benefits for a startup: It can open doors with investors, lead to joint partnerships, and even help immigrant founders in the U.S. obtain green cards.
But it’s complicated!
Haje Jan Kamps interviewed Michele Moreland, general partner at venture fund Aventurine, to learn more about the application process, how much to budget, and her tips for hiring effective counsel.
“If you are developing a cutting-edge new technology, the next evolution of X, your counsel should know X very well,” said Moreland.
“They need to know why it is better, why it solves the problems, and what the advantages are.”
The bear and bull cases for Arm’s IPO
Arm, the British chip design firm owned by SoftBank, filed to go public yesterday evening, following years of speculation around an IPO after the company’s plan to merge with GPU giant Nvidia fell apart a few years ago.
This morning, we’re perusing the company’s F-1 filing to better understand its business, with a focus on its profitability and growth. Unlike many other IPO candidates we’ve covered in recent years, Arm is quite profitable, but it hasn’t been growing much lately.
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This is an important IPO for SoftBank, which poured billions of dollars into Arm when it bought the company. It’s also an important IPO for the market in general, particularly for startups, even if Arm is not the usual venture-backed business that we usually cover.
Why? Venture capitalists and founders alike are currently enduring a liquidity drought, which this IPO could help resolve. If the listing is received well, it could bolster confidence in the public markets, which could in turn spur more companies to list. For the hundreds of unicorns currently stuck in the private markets, that could be big news.
On the other hand, if Arm stumbles on its way out the gate or is forced to sell its shares for far less than it expects to, the IPO could limit startups’ confidence in venturing out into the public markets and limit the number of subsequent listings. Quite a lot seems to be riding on this IPO.
Will investors be impressed with what Arm has on offer? Let’s find out.
An Arm-ful of potential
To put it simply, Arm designs computer chips and makes money from companies that use its designs to build semiconductors. In practice, this means that the company generates very high-margin revenue, spends a large fraction of that revenue on research and development, and has serious competition.
TechCrunch+ Roundup: Reaching $1M ARR, tech job market rundown, women-led VC firms
A recent PitchBook study that surveyed founders from top accelerators found that they are generally interested in just three things:
- Learning how to operate a startup
- Networking with potential customers
- Getting warm intros to VCs
But now that so many venture capital firms provide these services — along with marketing boot camps, personal coaching, founder/investor retreats, and other value-adding activities — is getting accepted into an accelerator still as important as it once was?
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“Starting a tech company today costs 99% less than it did 18 years ago when Y Combinator was started,” says Brett Calhoun, managing director and general partner at Redbud VC.
As a result, he says the accelerator model must evolve, as “nearly every early-stage VC will have a ‘platform’ component to support early-stage founders.”
Thanks for reading TC+ this week!
Walter Thompson
Editorial Manager, TechCrunch+
A growth framework for reaching $1M ARR
We don’t run many columns that promote basic best practices: Advice like “find product-market fit” and “nail down your messaging” is just not worth paying for.
Unless, of course, someone can explain exactly how to do it.
In his latest TC+ column, growth marketer Jonathan Martinez describes the process he used to lead his last startup from zero to $1 million ARR in Year One.
“I do not pretend to have a silver bullet,” he says, “but I do have a tried-and-true framework you can use to help you achieve your first million.”
Pitch Deck Teardown: DeckMatch’s $1M pre-seed deck
Using this slightly redacted 14-slide deck, the founders of DeckMatch raised a $1.1M pre-seed round to scale up their AI-powered platform that analyzes startup pitch decks for VCs:
- Cover
- Problem
- “Generative AI is part of the problem”
- “Who experiences this problem”
- Problem impact
- Solution
- Demo
- Market opportunity
- Go-to-market
- Moat
- Goals/milestones
- Team
- The Ask
- Closing
How to submit a guest column to TechCrunch
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Guest columns fall into two categories:
- TechCrunch+: Strategies and tactics for building and scaling startups.
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If you’d like to contribute, we’ve just updated our editorial guidelines.
As unicorns grow rarer, maybe it’s time to look toward revenue, not valuations
Just two years ago, unicorns roamed the earth in herds so large, they shook the earth from Palo Alto to San Francisco.
Since then, an ice age has decimated the ranks of these majestic, delicate creatures.
In 2021, “some months saw more than 60 unicorns being minted — more than two per day,” writes Alex Wilhelm.
Today? “Only two new unicorns were minted in July, according to Crunchbase.”
Women-led firms are a bright spot in 2023’s fundraising slump
Are women making real progress when it comes to raising VC funds, or is the overall slowdown in deal flow creating an optical illusion?
In light of recent successes by firms like Supply Change Capital, Cake Ventures and Adverb Ventures, Rebecca Szkutak looked into whether these wins have kicked off a sustainable trend in venture fundraising.
“It is probably standing out because there are only so many funds being raised and there aren’t 10 funds being closed every day,” said Kyle Stanford, a senior venture capital analyst at PitchBook.
“But it doesn’t negate the fact that women are coming to the table from an investor standpoint.”
The tech jobs market is as strong as it ever was
When an automobile factory lays off thousands, it can send economic ripples through a community for years as people retrain and relocate to seek new employment.
When digital workers are laid off, however, the impacts are felt differently: “IT still remains the fastest-growing job category by a fair amount,” reports Ron Miller.
6 fintech investors sound off on AI, down rounds and what’s ahead
Fintech fundraising and valuations are down and the industry is crowded, which means many companies are looking for AI-powered solutions that will save money and help them differentiate their products in the marketplace.
Mary Ann Azevedo asked six investors about how their portfolio companies are adding AI to the mix, what they’re looking for at the moment, and whether more down rounds are on the horizon:
- Mark Goldberg, partner, Index Ventures
- Aditi Maliwal, partner, Upfront Ventures
- Hans Tung, managing partner, GGV Capital
- Lizzie Guynn, partner, TTV Capital
- Ed Yip, partner, Norwest Venture Partners
- Lauren Kolodny, co-founder and partner, Acrew Capital
Amplitude’s CEO feels his company would be “in a world of hurt” if it hadn’t gone public in 2021
The CEO of Amplitude is glad that his company went public in 2021, despite a sharp contraction in the value of tech shares since its IPO.
In a wide-ranging conversation on TechCrunch’s Equity Podcast, Spenser Skates, who also co-founded Amplitude, told me that going public was the “totally correct” move for the digital analytics company at the time.
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“If we were still private now we would be in a world of hurt,” he said. “There would be all this pressure to go public, but then there wouldn’t be an appetite for it. And so [it would] be harder to get out,” he added, going on to detail how delaying the IPO would have harmed Amplitude’s ability to operate, grow and acquire.
Skates’ clear answer is notable, because while Amplitude had an incredibly strong run when it was still privately owned, it has been forced to endure the same sharp correction in tech valuations that every public technology company has suffered. Moreover, the company was early to tell the market about its concerns around the macroeconomy, and swallowed a lot of the bitterness of that repricing in a single gulp.
To see the CEO staunchly in favor of running a public company at a time when the market is this volatile makes me suspect other unicorns’ decisions to not go public during 2021. In hindsight, you could argue that it was smart to hunker down and wait out the storm given how things have been since the bubble popped, but what was their logic when things were fine and dandy?
Let’s dig deeper into Skates’ decision to go public, and why he stands by it even now.
Why go public 101
Companies have a bunch of good reasons for doing a public offering. Besides the headlines and public image that doing an IPO gets you, usually, going public lets you show customers that you’re financially healthy (BigCommcere’s CEO has stressed this point several times to this column), capital is easier to raise, your market position is clearer to your customers and competitors, and you become part of a bigger cohort of large companies that are supposedly really good at what they do.