Tech Crunch?
Public tech stocks are in free fall. Private investing is booming. What is going on? Is it a bubble? Or are the markets disconnected?
Content
Editorial
Josh Elman?tweeted?today that:
“Public markets have been sending strong signals to the late stage private markets for a while now. But optimism still reigns on the private side!â€
This week’s newsletter bears that out. The title page shows the collapse in the value of Ark’s innovation ETF. It represents a basket of high-growth tech companies and is clearly witnessing the consequences of the sell-off of the underlying assets.
Fred Wilson wrote a blog post called?The Selloff. He said:
Even at these new “discount†prices, none of these stocks look cheap to me. Most are still trading well in excess of 10x revenues which has always been my baseline for a subscription-based software business. I don’t know where they will bottom out, but it certainly could be lower. Or the sector could have already bottomed out in this first week of 2022 blowout sale. One never knows where the bottom is until you are well on your way back up.
Combining a?belief that these stocks are over-valued with an honest appraisal of what will happen next that amounts to “I don’t knowâ€. I agree with the appraisal, I don’t know either.
What I do know is that public markets are very disconnected from private markets. I also suspect that this will not stop. Most growth in value is now happening during the private phase of a company.
Crunchbase did a stellar job of documenting 2021’s growth in private company investing.
Venture funding in 2021 broke records across the board, Crunchbase data shows, with investment last year up more than 10x what it was a decade earlier.
Global venture investment last year totaled $643 billion, compared to $335 billion for 2020 — marking 92 percent growth year over year.
The figures underscore a dramatic change in the startup funding environment in the past year. Consider that at the end of 2020, almost a year into the pandemic, global venture investment had grown?around 4 percent year over year.
and
Alongside this growth in overall funding,?the Crunchbase Unicorn Board?reached 1,000 concurrent private companies for the first time in 2021, then shot past that number. There are currently 1,148 companies on the Unicorn Board, which also added around $1.8 trillion in value in 2021 compared to its?value toward the end of 2020.
New unicorns joined our board at a dizzying pace, with 586 new entrants — averaging more than 10 new unicorn startups per week. For comparison, 2020 minted 167 new unicorn companies, averaging three per week.
These unicorn companies have now raised a total of $682 billion over time, and are collectively valued at $3.8 trillion — an all-time high for the Crunchbase Unicorn Board.
The disconnect between private and public markets is best understood by looking at the multiples of revenue paid to buy the stocks of those companies and by the returns those stock purchases produce. We have previously published work by Tomasz Tunguz showing how private valuations can get as high as 400x annual run rate for the best (fastest-growing) private companies with large addressable markets. Yet Fred Wilson says he thinks 10x revenue is a normal multiple for a public company.
Private valuations reflect the demand for growth in value. And the demand for value growth is predicated on real-world growth in revenues. The fact that private companies can grow by hundreds of % a year, and can do so quickly, is what drives capital to them. This possibility of rapid and scalable growth is not likely to decline. And capital on the sidelines is not likely to ignore the opportunity to ride those growth waves. So it is likely that private companies that successfully move from a seed round to a Series A round, and on through future rounds of financing will continue to deliver the best returns for investors. As that happens money will continue to flow into early-stage investing and growth venture investing. Institutional allocators, focused on public markets, will increasingly need to find pathways into the best private companies, and there will be more capital than the supply of opportunities. This will continue to drive private valuations. Public markets will not be able to compete in the growth game but will remain key to liquidity. In that sense, public offerings will continue to happen at a rapid rate.
So while I agree that public markets are shrinking the price paid for revenue for the best tech companies, I do not see that as any kind of signal to the private investment space. The two are disconnected and the gap may widen in the short term. There is no real Tech Crunch.
More in this week’s video.
Video
Tech Crunch?
The stock and crypto markets have started off the year in selloff mode, with the Nasdaq down almost 5% this week and the big crypto assets down almost 10% this week. But this selloff has been going on for a lot longer than one week. It has been going on since early November when the Nasdaq peaked at $16k and BTC hit $67k. Since then it’s been downhill and the biggest carnage has been in the highflying “cloud†stocks. The Gotham Gal and I own a few stocks that have been cut in half in the last two months. Yes, they lost half of their value in the last two months.
Of course, these highflying stocks have only given up some of their gains over the last two years. In the case of a few of our public stock holdings, they went up 10x in the last two years and are now “only†up 5x. Easy come, easy go.
Even at these new “discount†prices, none of these stocks look cheap to me. Most are still trading well in excess of 10x revenues which has always been my baseline for a subscription-based software business. I don’t know where they will bottom out, but it certainly could be lower. Or the sector could have already bottomed out in this first week of 2022 blowout sale. One never knows where the bottom is until you are well on your way back up.
At its low of the day on Thursday, ARK Innovation was down more than 48% from its February 2021 52-week high.
Cathie Wood’s flagship fund?ARK Innovation?is caught in the epicenter of tech selling this week and some analysts see the stocks behind her strategies dropping even further before bottoming.
At its low of the day on Thursday, the innovation-focused exchanged-traded fund was down more than 48% from its February 2021 all-time intraday high. That is a drop worse than the one the fund saw in March of 2020 during the low of the pandemic market rout.
“This is worse than March of 2020 for that segment of the market,†said Josh Brown, co-founder and CEO of Ritholtz Wealth Management, on CNBC’s?“Halftime Report.â€?“That is remarkable to me.â€
Venture funding in 2021 broke records across the board, Crunchbase data shows, with investment last year up more than 10x what it was a decade earlier.
Global venture investment last year totaled $643 billion, compared to $335 billion for 2020 — marking 92 percent growth year over year.
The figures underscore a dramatic change in the startup funding environment in the past year. Consider that at the end of 2020, almost a year into the pandemic, global venture investment had grown?around 4 percent year over year.
Table of Contents
Financial services?was the leading sector for venture investment in 2021?with $134 billion invested, marking a whopping 177 percent year-over-year growth. That compares with overall global venture capital investment, which grew by a still astonishing 92 percent.
With fintech emerging as the leading sector for startup sector investment, here are three trends worth watching in 2022 — plus a few words of caution from investors we spoke with.
Fintech apps
“The desire for personal financial stability and security, amidst all of the economic uncertainty unfolding in the world right now,†is a core focus for San Francisco-based venture firm?SignalFire, said principal and creator economy expert?Josh Constine. “People want to have a better sense of not just how much they’re saving, but how much they need to save to be able to reach the milestones that could really change their life.â€
Capital from hedge funds, mutual funds, private equity, and sovereigns is driving enormous growth in VC, overshadowing traditional venture funds.
The past year was record-breaking for U.S. venture capital.
In 2021, U.S. investments in venture capital exceeded $300 billion for the first time, nearly doubling 2020’s $166.6 billion figure, according to an early look at PitchBook’s fourth-quarter venture monitor. PitchBook analysts also noted an “exceptionally robust†year for VC mega-deals — deals valued at $100 million or more — which produced $190.8 billion in deal value.
“What’s really driving both of these [trends] is increased interest…from nontraditional investors — hedge funds, mutual funds, private equity funds, sovereign wealth funds,†Kyle Stanford, CAIA senior analyst, told?Institutional Investor. “They just have an enormous amount of capital, much more than a traditional venture fund.â€
In fact,?last year proved incredibly fruitful for nontraditional investor participation in VC deals. PitchBook recorded a 64 percent year-over-year growth among nontraditional investors from 2020 to 2021.
“The way that [nontraditional investors] have jumped headfirst into venture…is driving many of the data trends we’re seeing,†Stanford said. “Companies are able to raise these $100 million rounds much easier than they have in the past because there’s so much of this extra-large capital trying to get stakes in these companies before they go public.â€
That startup founders are in the driver’s seat has been plain for a while now. Consider the extent to which funding has soared, with investors reportedly plugging a record?$93 billion?into early-stage U.S. startups last year — triple what they raised five years earlier. Consider that the median valuation for seed- and early-stage startups doubled over the same period.
Consider also the?continued rise?of dual-class shares that provide founders with outsize voting power. Almost?30%?of IPOs between 2017 and 2019 had dual-class structures, and that number likely increased between 2019 and the end of last year.
A less discussed proof point that underscores how far founders can currently push their investors — and eventually bankers — centers on lock-up periods. Typically a 90- to 180-day window after a company begins to trade publicly — time during which founders, investors and employees agree not to sell their shares to show their faith in the company and instill confidence in new shareholders — lock-ups are starting to disappear, and somewhat quickly.?According to new research?from Renaissance Capital, which manages IPO-focused exchange-traded funds, early lock-up provisions “exploded†last year.
Tiger Global’s mix of fast cash and a hands-off approach with startups changed the venture-capital landscape in 2021.
- Tiger Global went on a dealmaking tear with 335 investments in 2021, Crunchbase showed.
- The firm’s aggressive investing strategy mixed fast cash and a hands-off approach, founders said.
- There are no signs that its venture investing will slow down in 2022.
Creators Raise $ billions
Streaming subscribers and revenues hit new heights this past year. Label valuations climbed. Song catalogs from artists including Bruce Springsteen and Neil Young were purchased for record sums. Yet in the midst of this booming music economy, many artists felt that they were not receiving their fair share of the rewards.
In 2022, that will change. As pressure mounts from fans and rival services that offer a different model for payment, streaming music stalwarts will begin to change how the billions in streaming revenues get divvied up to benefit emerging musicians and bands with the most dedicated fans.
If you thought that the $10 you pay each month for Spotify or Apple Music flows to the artists you listened to most, you’d be wrong. The money each user pays for streaming goes into one big pot. A major portion of those dollars go to rightsholders to cover the use of the recording music and compositions thus establishing the revenue pool for the month.
That pool is then divided up on a “pro-rata†basis using the collective listening history of all users. If half of all plays this month were Adele songs, then Sony Music would receive 50% of the record label share of the pool and would pay her based on their mutual contract terms. The “bottom line†(pun intended) is that the amount of money paid for each play is a result of an algorithm. It varies from month-to-month based on usage patterns. An emerging band unknown to virtually all the hundreds of millions of streaming subscribers might have 100 devoted fans who listen to their songs and only their songs repeatedly. Under the current system, that band would receive almost none of the thousands of dollars their fans pay annually because their listening is outweighed by the billions of plays from all the other users. If every subscriber found this month’s Netflix movies boring and decided to listen to more music instead, that emerging band’s per-play rate would decline.
In October, we predicted that investments in U.S. creator economy startups would?hit $5 billion?by the end of last year. It turns out we were spot on. More than 140 U.S. companies in this sector raised at least $5.07 billion in funding last year, according to data from The Information’s?Creator Economy Database.
That caps off a whirlwind year for the creator economy, which saw a frenzy of new startups launching products from banking to personalized creator coins to Patreon-type subscriptions. Big tech companies jostled to win creators,?rolling out?pools of cash incentives, features to accept tips and other money-making opportunities.
LinkedIn?has been working on a Clubhouse-style live audio room feature since at least?last March. It’s now set to roll that out this month as part of a new events platform.
The plan is to let organizers host virtual round tables, fireside chats and other kinds of discussions as they see fit, LinkedIn told?TechCrunch. Hosts will be able to moderate discussions, while attendees will be able to speak with each other during events and afterward. Events will run on in-house tools that LinkedIn has built.
At the outset, LinkedIn is hoping members of its thriving?creator community?(those who develop and share content on topics like career development) will host events. Down the line, LinkedIn is aiming to get larger organizations involved in running events.
The New York Times Co has agreed to acquire subscription sports site The Athletic in a deal valued at around $550 million, according to a person familiar with the situation. The deal is a major acquisition for the Times, giving it a new pocket of subscription customers to the New York Times, …
Tim O’Reilly on Web3
The failure to think through and build interfaces to existing legal and commercial mechanisms is in stark contrast to previous generations of the web, which quickly became a digital shadow of everything in the physical world — people, objects, locations, businesses — with interconnections that made it easy to create economically valuable new services in the existing economy. The easy money to be made speculating on crypto assets seems to have distracted developers and investors from the hard work of building useful real-world services.
With the summer of Defi behind us and a new year for web3, I wondered which categories of web3 startups generate the most revenue. L1s or blockchains, the public databases that record transactions, dominate the revenue share across the top projects producing 78% of revenue. Exchanges place second. Right behind, NFT exchanges rank third. Defi Protocols, which include lending, perps, farming, and swaps, slot in fourth. Gaming, Wallets, Infrastructure, Consumer Apps, Insurance and Asset Management chart negligible share.
Decentralized autonomous organizations, or?DAOs, have recently formed to try to buy the?U.S. Constitution?and?a professionally certified golf course.
Now they are organizing to deploy capital into cryptocurrency startup companies, potentially disrupting the venture capital funding model that has financed waves of new technologies for generations.
Crypto investment-focused DAOs have become the new arena for sourcing deals, meeting company founders and cutting checks — all functions that were typically done by well-heeled venture capitalists who prided themselves on their industry-insider status.
2022 Predictions (continued)
Sometimes the centre of gravity in tech is very clear — everything is about PCs, or the web, or smartphones. But at other times, there are lots of things going on and none of them are The Thing, and all of them are full of questions. Of course, for some crypto people crypto is the only question and the only answer, but as we enter 2022 there are lots of areas where trillion dollar questions are wide open. These are the questions I wonder about at the moment — there are others. ….
“Plans are worthless, but planning is everything.â€
— Dwight D. Eisenhower
Making predictions is a shitty business. The events leading up to the realization of any prediction make it seem less extraordinary. And when you get it wrong, you’re an?insufferable numbskull. The value of a prediction is in the?act of making it, not the prediction itself. Contemplating what may happen encourages us to take responsibility for decisions we make in the present. Also, revisiting a prediction and asking why it did/didn’t come to fruition provides insight into the machinations of our world and whether we are progressing or regressing.
“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.â€
— Laurence J. Peter, Canadian writer & educator
So let’s review last year’s predictions to hold ourselves accountable. 2021 was a good year (maybe our best yet) in terms of understanding the world we might live in…..
As is my custom here at AVC, I like to end the year looking back and start the year looking forward.
This post will be the look back and I started by revisiting?my look forward into 2021 that I wrote on New Year’s Day 2021.
In my typical optimist fashion, I was dead wrong about how quickly the pandemic would fizzle out. I predicted that vaccines plus immunity from those who had been infected would end the pandemic by mid-year 2021. That was obviously totally wrong and I am sitting here isolating with my own Covid case (seven days in now). I can’t imagine a more appropriate “punishment†for getting that one wrong.
I got the rest mostly right and when I look back at 2021, what I see is a world that is changing before our very eyes; becoming more digital (leading to metaverse fever in tech), less tethered to a job and place to work (and live because of work), warmer, more prone to natural disasters, and tribalizing along different dimensions than what has divided us in the past.
In truth 2021 was a deeply troubling year and no wonder that mental health issues abound among all of us, but particularly our young. Nothing seems right anymore. We must face that and then fix it.
Of course, 2021 was a great year for the financial markets, both stocks and blockchain assets. Even with a big year-end selloff, which I believe was mostly tax-driven (we will see soon if I am right about that), investors who owned tech stocks and blockchain assets saw huge gains in 2021. USV was no different. We had a banner year.
Azeem Azhar?sets out his vision for 2022 and shares the trends he thinks will change our world this year. Some changes are hurtling down the pike, like the growth of Web 3.0 and the metaverse, while others are rumbling along more slowly: the continued dominance of Big Tech, and the tireless march of artificial intelligence.
Azeem’s discussion touches on:
- Why we should differentiate between “tech crypto†and “money crypto.â€
- Why the metaverse is so much more than Meta.
- Why the “climate tech†tag might become obsolete.
Startup of the Week
NFT marketplace OpenSea has raised $300 million at a $13.3 billion valuation in a Series C funding round that shows the rapid growth of the market for?non-fungible tokens.
The startup, founded in 2017, has capitalized on the massive interest in crypto in general and in particular NFTs, which have become popular as digital art, as well as a variety of other uses such as online games, collectibles and even music. The company’s transaction volume grew more than 600 times in 2021, the company said.
The round was led by crypto-focused venture firm Paradigm and hedge fund Coatue.
Also participating in the funding round was a new venture fund headed by Kathryn Haun, a former key figure in Andreessen Horowitz’s crypto efforts. The firm said the fund currently has a placeholder name of KRH.
Correction: This story was updated to correct the spelling of Andreessen Horowitz. This correction was made Jan. 5, 2022.
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