How 6 top VCs are adapting to the new uncertainty

As the global economy grinds to a halt, every business sector has been impacted, including the linked worlds of startups and venture capital.

But how much has really changed? If you read VC Twitter, you might think that nothing has changed at all. It’s not hard to find investors who say they are still cutting checks and doing deals. But as Q1 venture data trickles in, it appears that a slowdown in VC activity is gradually forming, something that founders have anecdotally shared with TechCrunch.

To get a better handle on how venture capitalists are approaching today’s market, TechCrunch corresponded with a number of active investors to learn how their investment selection process might be changing in light of COVID-19 and its related disruptions. We wanted to know how their investing cadence in Q1 2020 compared to the final quarter of 2019 and the prior-year period. We also asked if their focus had changed, how valuations have shifted and what their take on the LP market is today.

We heard back from Duncan Turner of SOSV, Alex Doll of TenEleven Ventures, Alex Niehenke of Scale Venture Partners, Paul Murphy of Northzone, Sean Park of Anthemis and John Vrionis of Unusual Ventures.

We’ll start with the key themes from their answers and then share each set of responses in detail.

Three key themes for raising in 2020

The VCs who responded haven’t slowed their investing pace — yet.

There’s likely some selection bias at work, but the venture capitalists who were willing to answer our questions were quick to note that they wrote a similar number of checks in Q1 2020 as in both Q4 2019 (the sequentially preceding quarter) and Q1 2019 (the year-ago quarter). Some were even willing to share numbers.

SoftBank terminates $3BN tender offer for WeWork shares

SoftBank Group has pulled a $3 billion tender offer for WeWork shares — citing closing conditions not being met.

The investment behemoth had been rumoured to be getting cold feet, when the WSJ reported last month that it was using regulatory investigations as a way to back out of its commitment to buy $3BN in shares from existing WeWork shareholders.

Under the terms of the share buyback deal negotiated last year, WeWork founder Adam Neumann had been set to receive almost $1BN for his shares in the co-working company. The former CEO had already been forced out at that stage after public markets balked over his managerial acumen, as we reported it at the time.

In a press statement issued today SoftBank SVP and chief legal officer, Rob Townsend, writes:

SoftBank remains fully committed to the success of WeWork and has taken significant steps to strengthen the company since October, including newly committed capital, the development of a new strategic plan for WeWork and the hiring of a new, world-class management team. The tender offer was an offer to buy shares directly from other major stockholders and its termination has no impact on WeWork’s operations or customers. The tender offer closing was conditioned on the satisfaction of certain closing conditions the parties agreed to in October of last year for SoftBank’s protection. Several of those conditions were not met, leaving SoftBank no choice but to terminate the tender offer.

SoftBank lists the unfulfilled conditions that have led it to terminate the offer as:

  • The failure to obtain the necessary antitrust approvals by April 1, 2020;
  • The failure to sign and close the roll up of the China joint venture by April 1, 2020;
  • The failure to close the roll up of the Asia (ex-China and ex-Japan) joint venture by April 1, 2020;
  • The existence of multiple, new, and significant pending criminal and civil investigations that have begun since the MTA was signed in October 2019, in which authorities have requested information regarding, among other things, WeWork’s financing activities, communications with investors, business dealings with Adam Neumann, operations, and financial condition; and
  • The existence of multiple new actions by governments around the world related to COVID-19, imposing restrictions against WeWork and its operations.

A spokeswomen for WeWork declined to comment on SoftBank withdrawing the offer. But Reuters has reported that a special committee of WeWork’s board said it was “disappointed” by the development and is  considering “all of its legal options, including litigation.”

At the time of writing SoftBank had not responded to a request for comment.

Its press note makes a point of emphasizing that “Neumann, his family, and certain large institutional stockholders, such as Benchmark Capital, were the parties who stood to benefit most from the tender offer”.

“Together, Mr. Neumann’s and Benchmark’s equity constitute more than half of the stock tendered in the offering. In contrast, current WeWork employees tendered less than 10 percent of the total,” it writes, adding: “SoftBank previously worked with WeWork to complete an earlier phase of the tender offer that allowed over 4,000 employees to reprice out-of-the-money stock options at lower strike prices, delivering value in excess of $140 million to these employees in the form of reduced exercise prices (where such options would have been worth substantially less or nothing absent such repricing).”

Earlier this week WeWork announced the sale of Meetup, a social networking platform designed to connect people in person, for an undisclosed sum that’s reportedly far less than the $156M acquisition price WeWork paid for it back in 2017.

The novel coronavirus has certainly brought disruption to the hipster white collar co-working and social networking business, as populations are encouraged do to the opposite of mingle. The near term prospects for co-working spaces in a new age of social distancing and encouraged (or enforced) home working look bleak.

Yet, outside Asia, WeWork has to date closed only a tiny minority of its locations globally as a result of the coronavirus pandemic.

Even in heavily affected cities in Europe, such as Madrid and Milan — where governments have imposed strict quarantine measures to try to stem the tide of COVID-19 deaths — WeWork has not taken the step of shuttering co-working spaces.

Instead, in Europe and the US, it has only been temporarily closing buildings or even just individual floors if infections are identified.

It’s a different story in Asia. Per an updated list of building closures on WeWork’s website, the company closed more than 30 locations across cities in India on March 23 — but only after the government imposed a three-week nationwide lockdown, instructing India’s 1.3BN people to stay at home.

Elsewhere, WeWork members may see little reason to break quarantine in order to travel to a shared workspace when, provided they have Internet at home, they can stay where they are and be just as productive without risking spreading or catching the virus — hence the Zoom videoconferencing boom.

WeWork’s handling of the coronavirus crisis has also caused some rifts with its membership, with press reports of members angry at it for refusing refunds for spaces they can’t (in good conscience) use.

It has also faced criticism from members angry it’s prioritizing rent collection from now very cash-strapped small businesses rather than closing down during a public health crisis. (We’ve heard similar stories from members who did not wish to be publicly identified.)

WeWork, meanwhile, has justified staying open in a pandemic by claiming its locations contain people doing essential work.

When we asked the company about its response to the coronavirus last month, it told us: “We are monitoring the coronavirus (COVID-19) pandemic closely and have implemented a number of precautionary measures” — saying then it had strengthened “on-site cleanliness measures” and suspended all internal and member events until further notice, as of March 12.

On the same date it had offered its own staff the option of working from home — though its doors remained open to keycard-holding, fee-paying members.

Addionics, a startup creating ‘next-gen’ batteries for electric cars and more, raises $6M

Addionics, an Israeli/U.K. startup that is developed next-generation rechargeable batteries for electric vehicles and other applications, has raised $6 million in funding. The round is led by Next Gear Ventures, and includes a $2.5 million grant as part of the European Union’s Horizon2020 innovation competition.

Founded by former Imperial College London academics, Addionics has created what it claims are improved rechargeable batteries through a redesign of chargeable battery architecture. It has developed a “patent-protected” and scalable 3D metal fabrication method that are said to enhance car battery performance, increase mileage and safety, and reduce cost and charging time.

Specifically, this new so-called “smart 3D structure” minimises internal resistance and improves the “mechanical longevity, thermal stability and other fundamental limitations and degradation factors” in standard batteries, says Addionics.

It also says its approach is different to other companies that are trying to improve batteries, which tend to focus on chemistry rather than on physics. Addionics’ chemistry agnostic approach means that it can still benefit from advances in chemistry, while bringing something additional to the table.

Addionics CTO Dr. Vladimir Yufit explains in a statement: “We are agnostic to the battery chemistry. Therefore, we can take existing or future batteries and enhance their performance by our smart 3D components. No matter what chemistry technology will win the electrification race, we will improve it even more”.

Or to put it more colourfully, Yufit says Addionics is “betting on the race, and not on the horse”.

To that end, the company is initially targeting the automotive market but also sees its technology finding a home in other products such as consumer electronics, medical devices, grid energy storage, drones, and more.

In terms of commercial traction, it’s still early days. However, Addionics says it is currently working with an unnamed tier-1 American automotive company on a proof-of-concept design and testing Addionics cells in vehicles.

Dr. Moshiel Biton, Addionics CEO, says that the goal is to have 3-4 major collaborations with “world-leading OEMs” over the next year.

Investors tell Indian startups to ‘prepare for the worst’ as Covid-19 uncertainty continues

Just three months after capping what was the best year for Indian startups, having raised a record $14.5 billion in 2019, they are beginning to struggle to raise new capital as prominent investors urge them to “prepare for the worst”, cut spending and warn that it could be challenging to secure additional money for the next few months.

In an open letter to startup founders in India, ten global and local private equity and venture capitalist firms including Accel, Lightspeed, Sequoia Capital, and Matrix Partners cautioned that the current changes to the macro environment could make it difficult for a startup to close their next fundraising deal.

The firms, which included Kalaari Capital, SAIF Partners, and Nexus Venture Partners — some of the prominent names in India to back early-stage startups — asked founders to be prepared to not see their startups’ jump in the coming rounds and have a 12-18 month runway with what they raise.

“Assumptions from bull market financings or even from a few weeks ago do not apply. Many investors will move away from thinking about ‘growth at all costs’ to ‘reasonable growth with a path to profitability.’ Adjust your business plan and messaging accordingly,” they added.

Signs are beginning to emerge that investors are losing appetite to invest in the current scenario.

Indian startups participated in 79 deals to raise $496 million in March, down from $2.86 billion that they raised across 104 deals in February and $1.24 billion they raised from 93 deals in January this year, research firm Tracxn told TechCrunch. In March last year, Indian startups had raised $2.1 billion across 153 deals, the firm said.

New Delhi ordered a complete nation-wide lockdown for its 1.3 billion people for three weeks earlier this month in a bid to curtail the spread of COVID-19.

The lockdown, as you can imagine, has severely disrupted businesses of many startups, several founders told TechCrunch.

Vivekananda Hallekere, co-founder and chief executive of mobility firm Bounce, said he is prepared for a 90-day slowdown in the business.

Founder of a Bangalore-based startup, which was in advanced stages to raise more than $100 million, said investors have called off the deal for now. He requested anonymity.

Deepinder Goyal, co-founder and chief executive of food delivery firm Zomato, said in January the startup would close a round of up to $600 million by the end of the month. Two months later, Zomato has only raised $150 million.

Many startups are already beginning to cut salaries of their employees and let go of some people to survive an environment that aforementioned VC firms have described as “uncharted territory.”

Travel and hotel booking service Ixigo said it had cut the pay of its top management team by 60% and rest of the employees by up to 30%. MakeMyTrip, the giant in this category, also cut salaries of its top management team.

Beauty products and cosmetics retailer Nykaa on Tuesday suspended operations and informed its partners that it would not be able to pay their dues on time.

Investors cautioned startup founders to not take a “wait and watch” approach and assume that there will be a delay in their “receivables,” customers would likely ask for price cuts for services, and contracts would not close at the last minute.

“Through the lockdown most businesses could see revenues going down to almost zero and even post that the recovery curve may be a ‘U’ shaped one vs a ‘V’ shaped one,” they said.

Join the FirstMark Capital squad for a live Q&A on Zoom tomorrow at 9am PDT

Working from home?

JK! I know you are! You’re not alone.

FirstMark Capital partners Rick Heitzmann, Amish Jani, Matt Turck and Beth Ferreira are also working from home. But neither distance nor virus can truly keep us all apart.

That’s why I’m thrilled to announce that tomorrow at 12pm EDT/9am PDT, we will be joined by these wonderful FirstMark partners for a live Zoom chat.

We’ll ask how they’re advising their portfolio companies during this challenging times, how Covid-19 has changed their investment thesis (if at all) and what trends are exciting to them. More importantly, guests of the Zoom will also be able to ask questions and have them answered live on the call.

FirstMark has an impressive portfolio that includes Shopify, Airbnb, InVision, Pinterest, DraftKings, Discord, and many, many more. The NYC-based firm is on its fourth early stage fund and second growth-stage fund, with $480 million between the pair. (TechCrunch covered FirstMark’s latest funds here.)

I’m amped to talk to Heitzmann, Jani, Turck and Ferreira and hope you’ll join us. Interested? Hit up this Zoom link at 12pm EDT/9am PDT to take part! (Please observe normal human manners: Wear clothes, don’t screenshare, generally be polite.)

We’ll publish a lightly edited audio recording and transcript to Extra Crunch on Thursday for folks who miss out! But for everyone who can make it, we’ll see you tomorrow at Noon Easter. West Coast folks can dial in over breakfast.

How to value a startup in a downturn

The value of technology companies has fallen as the broader public markets have repriced themselves in light of COVID-19-related market and economic disruptions.

And as the public markets sort out the new value of a huge piece of global business, private companies are being shaken as well.

What happens in the public markets trickles into the private markets, so if we’re seeing the value of public tech companies fall, startups are going to take a hit. To understand that dynamic, we spoke with Mary D’Onofrio, an investor with Bessemer Venture Partners. She’s the right person to chat with about the links between private valuations and public share prices as she not only helps put capital into growing startups, she also helps run the Bessemer cloud index (now a partnership with Nasdaq, and trackable on a day-to-day basis).

As she’s versed on both sides of the public-private divide, we asked her how she values startups in normal market conditions and in more turbulent times like today. We also dug into how founders are reacting to the changing world that may no longer be as amenable to their business plans. Pulling from our conversation, D’Onofrio told TechCrunch that startups want to be valued like companies were a few months ago, while investors want to pay today’s market prices.

But enough introduction, let’s get to the conversation. This interview has been edited for length and clarity; thanks to Holden Page and Walter Thompson for help with the transcription.

TechCrunch: During our last conversation, we discussed how to value startups. You explained a method in which you consider the future value of cash flows. How do you value startups today versus how much you think they’ll be worth down the road?

Mary D’Onofrio: I think what’s important to know is that outside of a market disruption, which I think was the the nature of the question to begin with, cloud software tends to trade on revenue and revenue growth. Companies should fundamentally be valued on the present value of their future free cash flows. But I think with cloud software, in particular, there’s a prioritization of taking [market]share, and then applying a very long term healthy margin structure on a very massive revenue base once you get there, and generating cash then.

And so I think in bull markets, when capital is readily available, prioritizing growth makes a lot of sense because you want to capture as much share as you can. And then losses are also tolerable because the capital is available to fund that massive growth. And there are actual measurable metrics that validate that structure, with CLTV to CAC [customer lifetime value to customer acquisition costs] being one of them.

Palo Alto Networks to acquire CloudGenix for $420M

Palo Alto Networks announced today that it has an agreement in place to acquire CloudGenix for $420 million.

CloudGenix delivers a software-defined wide area network (SD-WAN) that helps customers stay secure by setting policies to enforce compliance with company security protocols across distributed locations. This is especially useful for companies with a lot of branch offices or a generally distributed workforce, something just about everyone is dealing with at the moment as we find millions suddenly working from home.

Nikesh Arora, chairman and CEO at Palo Alto Networks, says that this acquisition should contribute to Palo Alto’s “secure access service edge,” or SASE solutions, as it is known in industry parlance.

“As the enterprise becomes more distributed, customers want agile solutions that just work, and that applies to both security and networking. Upon the close of the transaction, the combined platform will provide customers with a complete SASE offering that is best-in-class, easy to deploy, cloud-managed, and delivered as a service,” Arora said in a statement.

CloudGenix was founded 2013 by Kumar Ramachandran, Mani Ramasamy and Venkataraman Anand, all of whom will be joining the company as part of the deal. It has 250 customers across a variety of verticals. The company has raised almost $100 million, according to PitchBook data.

Palo Alto Networks has been on an acquisitive streak. Going back to February 2019, this represents the 6th company it has acquired to the tune of over $1.6 billion overall.

The acquisition is expected to close in the fourth quarter, subject to customary regulatory approvals.

Venture capital isn’t escaping the downward spiral of the global economy

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

This morning we’re looking at what venture capitalists got up to in the first quarter of the year and how they are really responding to the current global crisis.

It’s easy to find mixed signals on Twitter, with some VCs noting that they have slowed their investing cadence or tightened criteria as the markets shed value. Others claim to be as active as before. Founders are reporting new, higher standards that private capital deals now appear to require. TechCrunch compiled a number of reports from entrepreneurs which described an either slowed, more conservative or utterly frozen venture capital scene.

It seems very likely, then, that the United States’ venture capital results for Q1 will be somewhat weak. The full impact of the COVID-19 pandemic, however, may show up more acutely in Q2 2020. Why? Because venture data is famously — and annoyingly — laggy. Rounds are announced weeks or months after they are completed, and the timing of their announcements is impacted by news cycles.

So what we see in Q1 2020 venture data will contain deals that took place in the latter days of 2019; Q2 2020 data, in contrast, will feature mostly 2020 deals and will include a reporting period in which a lot of later Q1 deals would have been completed. This does not mean that there’s no use in looking at Q1 results — we’re looking for early signals, not complete answers in the data.

So let’s dig up what information we can on our own, mix in some data from other reports and see what the tea leaves are saying about Q1 venture results so far.

Dining and takeout startup Allset raises $8.25M as it adapts to life under lockdown

Even though this might seem to be the absolute worst time to try to round up funding for a restaurant-related startup, Allset is announcing that it’s raised an $8.25 million Series B.

It was not, to be clear, an easy process. CEO Stas Matviyenko (who founded the company with COO Anna Polishchuk) admitted that when he set out to fundraise, the goal was actually $12 million. And at one point, it looked like he might even raise more than that — but as he finalized the round in the week before widespread social distancing measures started to take effect around the United States (effectively ending dine-in options in some cities), he said, “A few investors just disappeared.”

Still, Matviyenko said he feels “lucky” to have closed out the round at all. And he pointed to signs that consumers and restaurants are still turning to Allset during the COVID-19 pandemic.

The company started out with a focus on delivering a quick dining experience in restaurants, allowing diners to make a reservation, order ahead and then pay directly through the Allset app. Over time, Matviyenko said, the app also began to offer personalized, healthy recommendations at each restaurant.

At the same time, Allset has added takeout options — and most recently, a feature that allows restaurants to offer contactless takeout, akin to the contactless option offered by many restaurant delivery apps. In fact, Allset is waiving its 12 percent commission fee for restaurants offering this option. (It’s also been promoting usage by offering a daily $4 discount for takeout orders.)

Allset

Image Credits: Allset

And while Matviyenko said that orders dropped by around 60 percent as social distancing measures went into place, they’ve apparently they’ve bounced back (by 10 percent as Allset signed up new partners — usually in more residential neighborhoods, away from the office-heavy areas where the companies had previously focused. Matviyenko said the startup has added more than 200 new restaurants in the past couple weeks.

He also emphasized the distinction between AllSet and the various delivery apps. He didn’t rule out adding a delivery option to Allset in the future, but since delivery requires such an investment in logistics, he’d likely to do it by partnering with a company already working in this area. Conversely, he suggested that for most delivery apps, takeout is usually an afterthought (assuming they support it at all), while Allset is trying to offer “the best [takeout] experience” possible.

The new round brings Allset’s total funding to $16.6 million. It was led by led by EBRD (the European Bank for Reconstruction and Development), with participation from Andreessen Horowitz, Greycroft, SMRK VC Fund and Inovo Venture Partners.

“The Allset team is building a great product and their effective execution yields strong unit economics with sustainable growth,” said EBRD’s Maria Barsuk in a statement. “We’re excited to partner with them in their next phase, as well as proud to support their efforts in serving local businesses and customers during this unprecedented time for the restaurant industry.”

Leading VCs discuss how COVID-19 has impacted the world of digital health

In December 2019, Extra Crunch spoke to a group of investors leading the charge in health tech to discuss where they saw the most opportunity in the space leading into 2020.

At the time, respondents highlighted startups in digital therapeutics, telehealth and mental health that were improving medical practitioner efficiency or streamlining the distribution of care, amongst a variety of other digital health markets that were garnering the most attention.

In the months since, the COVID-19 crisis has debilitated national healthcare systems and the global economy. Weaknesses in healthcare systems have become clearer than ever, while startups and capital providers have struggled to operate while wide swaths of the market effectively shut down.

Given significant volatility and the rapid changes seen in the worlds of healthcare, venture and startups broadly, we wanted to understand which inefficiencies might have been brought to light, what new opportunities might exist for founders looking to reduce friction in healthcare systems, how digital health startups have been impacted and how health tech investing as a whole has changed.

We asked several of the VCs who participated in our last digital health survey to update us on how COVID-19 is impacting digital health startups and broader healthcare systems around the world:

Annie Case, Kleiner Perkins

Our current unprecedented global crisis has put a spotlight on digital health. In the last few weeks alone, we have seen what feels like a decade’s worth of societal and regulatory changes that require digital health companies to step up and embrace new challenges and opportunities.