Dec
30
2019
--

Seed investors favor enterprise over consumer for first time this decade

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

It’s the second to last day of 2019, meaning we’re very nearly out of time this year; our space for repretrospection is quickly coming to a close. Before we do run out of hours, however, I wanted to peek at some data that former Kleiner Perkins investor and Packagd founder Eric Feng recently compiled.

Feng dug into the changing ratio between enterprise-focused Seed deals and consumer-oriented Seed investments over the past decade or so, including 2019. The consumer-enterprise split, a loose divide that cleaves the startup world into two somewhat-neat buckets, has flipped. Feng’s data details a change in the majority, with startups selling to other companies raising more Seed deals than upstarts trying to build a customer base amongst folks like ourselves in 2019.

The change matters. As we continue to explore new unicorn creation (quick) and the pace of unicorn exits (comparatively slow), it’s also worth keeping an eye on the other end of the startup lifecycle. After all, what happens with Seed deals today will turn into changes to the unicorn market in years to come.

Let’s peek at a key chart from Feng, talk about Seed deal volume more generally, and close by positing a few reasons (only one of which is Snap’s IPO) as to why the market has changed as much as it has for the earliest stage of startup investing.

Changes

Feng’s piece, which you can read here, tracks the investment patterns of startup accelerator Y Combinator against its market. We care more about total deal volume, but I can’t recommend the dataset enough if you have the time.

Concerning the universe of Seed deals, here’s Feng’s key chart:

Chart via Eric Feng / Medium

As you can see, the chart shows that in the pre-2008 era, Seed deals were amply skewed towards consumer-focused Seed investments. A new normal was found after the 2008 crisis, with just a smidge under 75% of Seed deals focused on selling to the masses for nearly a decade.

In 2016, however, a new trend emerged: a gradual decline in consumer Seed deals and a shift towards enterprise investments.

This became more pronounced in 2017, sharper in 2018, and by 2019 fewer than half of Seed deals focused on consumers. Now, more than half are targeting other companies as their future customer base. (Y Combinator, as Feng notes, got there first, making a majority of investments into enterprise startups since 2010, with just a few outlying classes.)

This flip comes as Seed deals sit at the 5,000-per-quarter mark. As Crunchbase News published as Q3 2019 ended, global Seed volume is strong:

So, we’re seeing a healthy number of deals as the consumer-enterprise ratio changes. This means that the change to more enterprise deals as a portion of all Seed investments isn’t predicated on their number holding steady while Seed deals dried up. Instead, enterprise deals are taking a rising share while volume appears healthy.

Now we get to the fun stuff; why is this happening?

Blame SaaS

As with many trends long in the making, there is no single reason why Seed investors have changed up their investing patterns. Instead, there are likely a myriad that added up to the eventual change. I’m going to ping a number of Seed investors this week to get some more input for us to chew on, but there are some obvious candidates that we can discuss today.

In no particular order, here are a few:

  • Snap’s IPO: Snap went public in early 2017 at $17 per share. Its equity quickly spiked to into the high 20s. By July of that same year, Snap slipped under its IPO price. Its high-growth, high-spend model was under attack by both high costs and slim gross margins. Snap then went into a multi-year purgatory before returning to form — somewhat — in 2019. It’s not great for a category’s investment pace if one of its most prominent companies stumble very publicly, especially for Seed investors who make the riskiest bets in venture.

Dec
13
2019
--

Grading the final tech IPOs of 2019

As the holiday slowdown looms, the final U.S.-listed technology IPOs have come in and begun to trade.

Three tech, tech-ish or venture-backed companies went public this week: Bill.com, Sprout Social and EHang. Let’s quickly review how each has performed thus far. These are, bear in mind, the last IPOs of the year that we care about, pending something incredible happening. 2020 will bring all sorts of fun, but, for this time ’round the sun, we’re done.

Pricing

Our three companies managed to each price differently. So, we have some variety to discuss. Here’s how each managed during their IPO run:

How do those results stack up against their final private valuations? Doing the best we can, here’s how they compare:

So EHang priced low and its IPO is hard to vet, as we’re guessing at its final private worth. We’ll give it a passing grade. Sprout Social priced mid-range, and managed a slight valuation bump. We can give that a B, or B+. Bill.com managed to price above its raised range, boosting its valuation sharply in the process. That’s worth an A.

Performance

Trading just wrapped, so how have our companies performed thus far in their nascent lives as public companies? Here’s the scorecard:

  • EHang’s Friday closing price: $12.90 (+3.2%)
  • Sprout Social’s Friday closing price: $16.60 (-2.35%)
  • Bill.com’s Friday closing price: $38.83 (+76.5%)

You can gist out the grades somewhat easily here, with one caveat. The Bill.com IPO’s massive early success has caused the usual complaints that the firm was underpriced by its bankers, and was thus robbed to some degree. This argument makes the assumption that the public market’s initial pricing of the company once it began trading is reasonable (maybe!) and that the company in question could have captured most or all of that value (maybe!).

Bill.com’s CEO’s reaction to the matter puts a new spin on it, but you should at least know that the week’s most successful IPO has attracted criticism for being too successful. So forget any chance of an A+.

Image via Getty Images / Somyot Techapuwapat / EyeEm

Dec
13
2019
--

Chicago’s Sprout Social prices IPO mid-range at $17 per share, raising $150M

On the heels of Bill.com’s debut, Chicago-based social media software company Sprout Social priced its IPO last night at $17 per share, in the middle of its proposed $16 to $18 per-share range. Selling 8.8 million shares, Sprout raised just under $150 million in its debut.

Underwriters have the option to purchase an additional 1.3 million shares if they so choose.

The IPO is a good result for the company’s investors (Lightbank, New Enterprise Associates, Goldman Sachs and Future Fund), but also for Chicago, a growing startup scene that doesn’t often get its due in the public mind.

At $17 per share, not including the possible underwriter option, Sprout Social is worth about $814 million. That’s just a hair over its final private valuation set during its $40.5 million Series D in December of 2018. That particular investment valued Sprout at $800.5 million, according to Crunchbase data.

So what?

Sprout’s debut is interesting for a few reasons. First, the company raised just a little over $110 million while private, and will generate over $100 million in trailing GAAP revenue this year. In effect, Sprout Social used less than $110 million to build up over $100 million in annual recurring revenue (ARR) — the firm reached the $100 million ARR mark between Q2 and Q3 of 2019. That’s a remarkably efficient result for the unicorn era.

And the company is interesting, as it gives us a look at how investors value slower-growth SaaS companies. As we’ve written, Sprout Social grew by a little over 30% in the first three quarters of 2019. That’s a healthy rate, but not as fast as, say, Bill.com . (Bill.com’s strong market response puts its own growth rate in context.)

Thinking very loosely, Sprout Social closed Q3 2019 with ARR of about $105 million. Worth $814 million now, we can surmise that Sprout priced at an ARR multiple of about 7.75x. That’s a useful benchmark for private companies that sell software: If you want a higher multiple when you go public, you’ll have to grow a little faster.

All the same, the IPO is a win for Chicago, and a win for the company’s investors. We’ll update this piece later with how the stock performs, once it begins to trade.

Dec
19
2018
--

Sprout Social nabs $40.5M on an $800M valuation, doubles down on social tools for businesses

Sprout Social, a social media monitoring, marketing and analytics service with 25,000 business customers that helps these organizations manage their public profiles and interact with customers across Twitter, Facebook, Instagram, LinkedIn, Pinterest and Google+ (soon to RIP), has raised $40.5 million in funding in order expand its business internationally and add more functionality to its platform.

The money — a Series D led by Future Fund with participation from Goldman Sachs and New Enterprise Associates — brings the total raised by Sprout to $103.5 million to date. We’ve confirmed directly with the CEO Justyn Howard that the valuation is now around $800 million. For some context, Sprout last raised in 2016 — $42 million also from Goldman Sachs and NEA — and at the time it had a post-money valuation of $253 million, according to PitchBook, so this is a very healthy leap.

But between then and now, there have been some interesting developments that could have shifted that price in either direction.

On one side, multiple sources have told us that social media platforms were being courted by Microsoft for acquisition at one point (Microsoft declined to comment on the rumor when we looked into it).

On the other, one of Sprout’s biggest competitors, Hootsuite (with 15 million users, paid and free), has been rumored to be shopping itself for about $750 million, or potentially going public, while smaller competitors have moved in on some consolidation to bulk up their own presence in the field.

In the meantime, Sprout itself has been growing. The company’s 25,000 customers are up from 16,000 two years ago, with current users including Microsoft, NBCUniversal, the Denver Nuggets and Grubhub and MTV.

One of the reasons for the growth is the larger shift we’ve seen in how businesses interact with the outside world.

Social media is today perhaps the most important platform for businesses to communicate with their users: not only has social media helped customers circumvent the often frustrating spaghetti that lies behind the deceptive phrase “contact us” on websites, but social media has become a spotlight, which businesses have to watch lest a sticky situation snowballs into a public relations disaster.

Platforms like Twitter and Facebook, to grow their revenues, have ramped up their efforts to work on social media campaigns and interactions directly with organizations. But there is still a place for third parties like Sprout Social to manage work that goes across a number of social sites, and to address services that the social platforms themselves do not necessarily want to invest in building directly.

“I think there are a bunch of reasons why we don’t build bot experience ourselves,” Jeff Lesser, who heads up product marketing for Twitter Business Messaging, told me when Sprout launched a “bot builder” to be used on Twitter, and I asked him why Sprout shouldn’t worry about Twitter cannibalizing its product. “There are millions of types of businesses that can use our platform, so we’re letting the ecosystem build the solutions that they need. We are focusing on building the canvas for them to do that.”

In other words, while Sprout (and competitors) should always be a little wary of platform players who may decide to simply kick them off in the name of business, there are always going to be opportunities if they have the resources double down on more tech to solve a different problem, or simply execute on fixing an existing problem better.

“Social marketing and social data have become mission-critical to virtually all aspects of business. Sprout’s relentless focus on quality and customer success have made us the top customer-rated platform in every category and segment,” said Justyn Howard, CEO of Sprout, in a statement. “In many ways, social is still in its infancy, and we’re fortunate to help so many great customers navigate this evolving set of challenges.”

Jan
25
2015
--

Social Customer Service Firm Sparkcentral Locks Up A $12M Series B

Screen Shot 2015-01-25 at 11.36.17 AM Sparkcentral, a company that provides tools to help businesses conduct customer support over social channels, has raised a $12 million Series B round of funding, led by Split Rock Partners. The company previously raised a total of $5.6 million, including a $4.5 million Series A round of capital in October of 2013, or around 15 months ago. That places the company’s Series B round inside of… Read More

Powered by WordPress | Theme: Aeros 2.0 by TheBuckmaker.com