Tech Brew Ride Home - The State of Venture and "MegaRounds" with Crunchbase's Jason Rowley - 4/11/19, 4.57 PM

Episode Date: April 13, 2019

 While I talk about big round raises and startups and venture all the time, we haven’t really done a deep dive into where venture is at at the moment. So, who better to talk to than Crunchbase, and in this case, Crunchbase’s Jason Rowley. Today… the state of venture in 2019, and we especially get into the modern world of megarounds, even hypergiant rounds… raises of $250 million or more. Those never used to happen. They happen all the time now… we just talked about one this week… Softbank contributes to them all the time. How has that changed the landscape, and how has that created or influenced the unicorn ecosystem that is currently being harvested, as it were. Sponsors: Capterra.com/ride Flatironschool.com/techmeme Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to a weekend bonus episode of the TechMeme Right Home. I'm Brian McCullough. Thank you all for indulging my quick vacation, as it were last weekend. But let's get right back into it. While I talk about big round raises and startups and venture all the time, we haven't really done a deep dive into where venture is at at the moment. So who better to talk to than CrunchBase. And in this case, CrunchBases Jason Rowley. the state of venture in 2019, and we especially get into the modern phenomenon of mega rounds, even hyper-giant rounds, raises of $250 million or more.

Those never used to happen, and they happen all the time now. We just talked about one of those just this week. SoftBank contributes to them all the time. How has that changed the landscape, and how has that created or influenced the unicorn ecosystem that is currently being harvested, as it were. My thanks to Jason Raleigh for a great conversation. So let's just start with where venture is at the moment. I think like 2018 broke like all-time records in terms of, I guess, maybe dollar figures and things like that.

And deal figures. Sorry? And deal volume as well. Deal volume and dollar figures. But because I get your guys' newsletter every more. morning. I believe that at least in Q1 for 2019, we're down a little bit. Yeah, it kind of depends on which end of the market you're looking at. I had some numbers. I would love to show you. But so like at the end of, so Q4 2018, you know, we saw about

$92.5 billion or thereabouts invested globally in private technology-enabled. companies with high growth potential. And in Q1 of 2019, we saw about $75 billion. So still a whole lot of money, but still off by about $18 billion. So I mean, I guess that's just natural if, you know, you can't hit all-time records every single year. Correct. Is there any sort of carryover from like the China thing, like the slowdown and China tech and stuff like that, is that having any kind of effect on the numbers? Certainly on, so I mean, at crunch-based news, we're very interested in this phenomenon that we've sort of described as like super giant venture capital rounds. And we call them that. It's a reference to like super giant stars, which are very massive and they

shine extremely brightly, you know, sort of more brightly than all their other sort of stellar neighbors. And similarly, these sort of super giant venture capital rounds shine, you know, brightest in the media and in the minds of, you know, folks who consume and use these services. But these rounds make up a very, very small percentage of the overall deal count. So the fact that we've seen slightly less or fewer super giant rounds doesn't really have any effect on deal volume, but it does have a lot of effect on dollar volume. And yeah, we've seen a really massive drop-up in these really, really big deals in China. And that is likely correlated in some way with the economic difficulties or growth constraints that that economy is looking at going

forward. Let's try to, um, let's try to define that term a little bit. These mega rounds, these hypergiant rounds or whatever you just said you're calling them. Um, there, there are VC rounds that are like more than $250 million or something like that. Yeah. So we've, so perhaps, uh, perhaps unwisely, we, uh, we've, we've broken this in, for our analysis, we've broken these into like two different size classes. Um, and what we've sort of referred to as the, um, we've, we've sort of referred to as the, super giant rounds are this $100 million to about $250 million. There was a time when we could have reported on all of them, you know, as they occur. But now like these super giant VC rounds are

literally an everyday or multiple, you know, round per day event. Right. I've got a number exactly from your site. There were 103 super giant VC rounds raising $100 million or more reported in Q1 of 2019 averaging more than one per day. Yes, exactly. And in order to get a more constrained view on the, you know, on this part of the market, you know, this very high-end, high valuation, high dollar sets of deals, we ended up somewhat arbitrarily decided to cover these rounds that are $250 million and above. And those have primarily been in very capital-intense businesses.

So a lot of stuff in transportation and urban mobility. So big ride-hailing services like Grab and GoJack have raised billions of dollars recently. Obviously, there's all the scooter companies as well. And then there's also this other dimension of companies in the like real estate space. So there's been a lot of companies including, let me pull up my notes, including like open door and offer pad that have very recently raised, you know, over $250 million in rounds such that they can go out and buy houses,

which they hold and then in turn sell those back to consumers rather than simply like brokering the deal themselves. So I guess what we're seeing is is very, capital-intense business models, you know, among upstarts, finding fund, they're being able to find funding still in private markets. Right. So, I mean, that makes sense. So there's certain things where it's like, well, this, what we're trying to do is super capital-intensive. So, you know, we need to raise 30, 50, 100. 50, 100. Right. Right. But at the same time, like, there didn't used to be rounds this size for a very good reason because there wasn't money sloshing

around to this scale. So the fact that we exist in this universe now of these mega rounds and super giant rounds and things like that, is it solely because of things like sovereign wealth funds and basically soft bank? I wouldn't say solely, but I would say that that the interest from sovereign wealth funds, you know, investing in in funds like the SoftBank Vision Fund is definitely a contributing factor. Because I mean, especially in the case of sovereign wealth funds, you're seeing a lot of money come from countries that were formally dependent on, on like oil extraction as their primary means of like economic development and their source of national wealth. But as the, you know, broader political and, you know, economic tide sort of

shift away from, you know, really carbon-intense industries, you know, these countries need to find other means to generate, you know, outsized returns from their funds that they've set aside. and it turns out that a lot of them are making bets on high-growth technology businesses as that alternative to their previous economic models. So the money has to go somewhere. And I guess maybe it's – so there's just that. There's just that basic fact. It's got to go somewhere.

The interest rates around the world are crazy low. So people have pointed that out. It's like it's sort of an accident of history that this is the time period that we're But is it also a function of, I guess the model has been proven enough that, like, you know, enough people now in the two decades since the bubble bursts are like, well, this internet stuff is for real, and it's a tidal wave of history, and let's get in front of it. Is that also part of it? Because, again, like, it's not just, you used to, well, I'm going to invest 30 million with an M dollars in this company that might become the next Facebook and be worth half a trillion dollars. But no, I'm going to go ahead and invest. invest 250 million. Like, so is it just like it? Well, it's, I'm sorry, I don't mean to interrupt, but it's like, I'm going to invest $250 million into a business that might peek out at like, you know, $10 billion or $15 billion or

$20 billion in market cap. Like a lot of the businesses that are being funded today are these like really, really really capital intense, you know, sorts of, sorts of organizations and sorts of business models. And, you know, there's a, there is reason to question whether, you know, investors today are going to be able to see, you know, Facebook scale returns from businesses that have a very, very different cost structure from, you know, than something like Facebook. Well, not to pick on Facebook. Right, right. Yeah, I'm just using them as like the most prominent example of maybe the previous generation. that kind of touches on something that I've been poking around out on the show, the idea that these unicorns, this class of unicorns that is coming to market now, because of the nature of companies can stay private for much, much longer, and again, people are willing to throw gobs of money at them so they don't need to go to public markets to raise capital.

So this notion that now these unicorns, they're coming to market at almost their fully mature stages. I mean, I didn't report on it today, but, you know, Lyft's prices has been dropping since its IPO and things. So, like, the idea that investors are maybe getting wise to the fact that, well, we, there's no, there's no piece of the pie for us left. Like, it's all the, all the upside has been captured by, by the private market investors. Yeah, I mean, I think that there might be something to that. I've been, you know, thinking a lot about that as well, although I don't think I've really written much about it publicly. But I still think that there's lots of room for,

there's lots of room for upside, especially in these, in smaller sort of like software as a service or like business-to-business-oriented companies that are going public, Zoom, for example. I just, I'm doing a segment on them today. This is Wednesday, by the way, for the screen listening, yes. Yeah, so, I mean, Zoom is, well, there's all sorts of puns that can be made about its name and all the rest. But, you know, Zoom is, it's a company that is, you know, very profitable and growing, you know, at a hundred percent year over year, yeah.

Yeah, at an incredibly rapid clip. And I think that, you know, if, you know, I'm not a. I'm not an active day-to-day investor, but if I was, I would be looking at opportunities, you know, where, like, the markets themselves haven't been quite so, you know, well-developed yet. So transportation, it's a known, you know, it's a known entity, you know, these large ride-hailing services, I guess, are ultimately competing against car ownership itself, you know, and so in theory, they have a really giant addressable market, but they're the path to getting to you know, a place where we don't own cars or where all the cars drives themselves, or in the case

of these scooter and bike companies where cities don't have cars and everybody gets around on scooters, bikes, or some sort of combination thereof. Like, that's all sort of long and far in the distance. But, you know, trends like remote work, you know, to use Zoom as an example, you know, I work remotely from Chicago. And at CrunchBased News, we organize all of our meetings on Zoom. And I don't see this remote work thing really dying out anytime soon. And so, you know, companies like Zoom, companies like Slack, other, you know, similar types of services, I think that those organizations have a lot more room to grow as they sort of

develop their own market over time. Yeah, it's almost like you've got to categorize it as, you know, the almost cloud computing or software as a service. I think Allison Griswold sort of wrote recently about like describing Zoom, making it more akin to other SaaS companies and cloud computing companies. And then getting those sorts of multiples is I guess what Zoom is going for. So the, one of the other side sort of things that happens by these unicorns being able to raise

gobs of money and stay private for so long that you guys have written about recently is because this is so key and people overlook this to the whole ecosystem in tech is that they can acquire, start becoming acquirers themselves long before they're established, long before they go public, long before anything like that. Like if you've got, if you've been able to raise two and a half, ten, twenty billion dollars, like you can go out and be an acquirer. And so these companies are starting to become acquirers much earlier in their life cycles as well. Yeah, and I think that, I mean, so I've done a fair bit of analysis on this. Actually, one of the first articles that was published on crunch-based news was an analysis

of when unicorns, you know, these billion-dollar nominally private companies start a acquiring competitors or, you know, whatever. And, yeah, we have found that companies that are founded in more recent years also start making their first acquisitions earlier. And this, I think, is part of a broader sort of strategic push toward being able to scale your business incredibly quickly or being able to scale your, in the case of like an aqua hire sort of situation, being able to scale your product or your or your technical team, you know, really quickly. And, and yeah, like this M&A has become just another tool in the toolkit for for executives of these most successful private companies to sort of cement their position in the market, you know, both in the present and sort of,

position themselves to be the sort of like big dominant player in the future. And this could have some sort of risk going forward depending on, you know, the regulatory situation and how all that stuff unfolds. Right, because there's all this talk about, you know, when they talk about Elizabeth Warren specifically, like, you know, unwinding old acquisitions, they're talking like almost literally about like, you know, Facebook acquiring Instagram and what's that. So, like, it used to be that we would think, well, young companies, not yet public companies, get a pass on this sort of thing because there's no way that it could be any competitive

because they're not even established yet and things like that. Right. But you're saying that now because of that, because these companies have so much money behind them, even when they're still what we would think of as nascent and in the startup stages, like maybe the government will start to look closer at a, what, we would consider to be a completely young and unproven company making suddenly a $250 million acquisition or something like that. I'm floating it as a possibility. Obviously, there is a, I'm not going to make any predictions about, you know, what ends up happening in 2020, one way or the

other, because, well, it's a long time between now and then. But yeah, there's a non-zero chance that, There will be a president in the White House that is much more mindful of antitrust and anti-competitive issues going forward. And that would reflect in their regulatory regime.