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Hire faster, work happier: Startups target employment with AI and engagement tools

If you have a job today, there’s a good chance you personally reached out to your employer and interviewed with other humans to get it. Now that you’ve been there a while, it’s also likely the workday feels more like a long slog than the fulfilling career move you had envisioned.

But if today’s early-stage startups have their way, your next employment experience could be quite different.

First, forget the networking and interview gauntlet. Instead, let an AI-enabled screening program reach out about a job you don’t seem obviously qualified to do. Or, rather than talk to a company’s employees, wait for them to play some online games instead. If you play similarly, they may decide to hire you.

Once you have the job, software will also make you more efficient and happier at your work.

An AI-driven software platform will deliver regular “nudges,” offering customized suggestions to make you a more effective worker. If you’re feeling burned out, head online to text or video chat with a coach or therapist. Or perhaps you’ll just be happier in your job now that your employer is delivering regular tokens of appreciation.

Those are a few of the ways early-stage startups are looking to change the status quo of job-seeking and employment. While employment is a broad category, an analysis of Crunchbase funding data for the space shows a high concentration of activity in two key areas: AI-driven hiring software and tools to improve employee engagement.

Below, we look at where the money’s going and how today’s early-stage startups could play a role in transforming the work experience of tomorrow.

Artificial intelligence

To begin, let us reflect that we are at a strange inflection point for AI and employment. Our artificially intelligent overlords are not smart enough to actually do our jobs. Nonetheless, they have strong opinions about whether we’re qualified to do them ourselves.

It is at this peculiar point that the alchemic mix of AI software, recruiting-based business models and venture capital are coming together to build startups.

In 2018, at least 43 companies applying AI or machine learning to some facet of employment have raised seed or early-stage funding, according to Crunchbase data. In the chart below, we look at a few startups that have secured rounds, along with their backers and respective business models:

At present, even AI boosters don’t tout the technology as a cure-all for troubles plaguing the talent recruitment space. While it’s true humans are biased and flawed when it comes to evaluating job candidates, artificially intelligent software suffers from many of the same bugs. For instance, Amazon scrapped its AI recruiting tool developed in-house because it exhibited bias against women.

That said, it’s still early innings. Over the next few years, startups will be actively tweaking their software to improve performance and reduce bias.

Happiness and engagement

Once the goal of recruiting the best people is achieved, the next step is ensuring they stay and thrive.

Usually, a paycheck goes a long way to accomplishing the goal of staying. But in case that’s not enough, startups are busily devising a host of tools for employers to boost engagement and fight the scourge of burnout.

In the chart below, we look at a few of the companies that received early-stage funding this year to build out software platforms and services aimed at making people happier and more effective at work:

The most heavily funded of the early-stage crop looks to be Peakon, which offers a software platform for measuring employee engagement and collecting feedback. The Danish firm has raised $33 million to date to fund its expansion.

London-based BioBeats is another up-and-comer aimed at the “corporate wellness” market, with digital tools to help employees track stress levels and other health-related metrics. The company has raised $7 million to date to help keep those stress levels in check.

Early-stage indicators

Early-stage funding activity tends to be an indicator of areas with somewhat low adoption rates today that are poised to take off dramatically. For employment, that means we can likely expect to see AI-based recruitment and software-driven engagement tools become more widespread in the coming years.

What does that mean for job seekers and paycheck toilers? Expect to spend more of your time interfacing with intelligent software. Apparently, it’ll make you more employable, and happier, too.

Private equity buyouts have become viable exit options — even for early-stage startups

About 13 years ago I faced an excruciating decision: whether to sell my company, Pinnacle Systems, to a private equity firm or to another large public company. I felt that both suitors would treat my employees well (and I negotiated hard to make sure that was the case), and both offered a good asking price well above our value on NASDAQ.

After raising what at the time felt like my first child, born in my living room and nurtured into a publicly traded entity, I was ready for it to take its next step and for me to take mine. I ultimately opted for the strategic sale, but I left the process intrigued by what was already an evolving dynamic between private equity firms and tech exits.

In years past, stigma often accompanied private equity sales. I know I felt that way, even under strong deal terms. Plus, private equity exits were only available to companies generating substantial annual revenues and often profits, making this exit option inaccessible for many startups. Today, private equity buyout firms can provide a solid (and on occasion excellent) exit route — as well as an increasingly common one, accounting for 18.5 percent of VC-backed exits in 2017.

Private equity firms are investing in a broad array of technology companies, including highly valued unicorns, but also early- to mid-stage profitable and unprofitable companies that a few years ago would have been unable to secure interest from these buyout firms.

In addition, the lines between venture capital and private equity are increasingly blurring, with more private equity investments in tech, and several-late stage VC firms creating large, billion-dollar plus late-stage growth funds. Further blurring the lines, some of the late-stage VC firms are taking controlling interests in startups, a strategy typically associated with private equity. Recently, one of our portfolio companies received an investment from a late-stage VC firm that acquired a majority stake by providing liquidity to some existing shareholders and investing in the company, utilizing a strategy typically associated with PE buyout firms.

The rise of private equity buyouts within the tech sector presents a viable exit option for founders, given the reality that most startups won’t ultimately IPO. (According to PitchBook, only 3 percent of venture-backed companies in the last decade eventually went public.)

If an IPO is not a realistic long-term option, the remaining primary exit option has typically been a sale to another company (a strategic buyer, in venture parlance). However, in the past few years, private equity firms have become aggressive buyers of private companies, sometimes bidding as high as or higher than strategic buyers. With one of my portfolio companies, a private equity buyer placed the second highest bid ahead of all but one strategic buyer and helped raise the final price from the strategic buyer just by being in the bidding process.

Founders who find themselves in negotiations with strategic buyers should also reach out to PE firms to optimize the outcome. Silver Lake, Francisco Partners, Thoma Bravo and Vista are a few technology-focused PE firms, and PitchBook’s annual liquidity report lists other firms. Vista has been especially active, acquiring many technology companies, including Infoblox, Lithium and Marketo. Not all PE firms are the same, just like not all VCs and strategic buyers are the same.

Years ago, when private equity buyouts were typically only large deals, new management teams were almost always brought in to tweak the edges of already successful companies. Today, each private equity firm has its own strategy — some only buy large profitable companies, others focus on mid-size acquisitions and some only buy early-stage (typically unprofitable) companies, which brings us to the next point.

Even early-stage startups can explore a PE exit, especially if things are not going well

While most readers are familiar with private equity buyers at later stages, what’s new is the emergence of PE activity at early stages. These firms acquire majority stakes in startups that have only raised early-stage investments but are having trouble scaling or raising the next round.

After a buyout, these private equity firms typically provide value by adding the missing elements, such as marketing or sales know-how, in order to kick-start the business and achieve scale. Their goal is to increase the value of the underlying asset by augmenting founder teams with the buyout firm’s own operational experts, sometimes combining newly acquired assets with already existing assets to create a stronger whole, or doubling-down on promising products (while shedding less promising offerings) to unlock potential.

Typically, these PE firms then sell the company to another company (usually a strategic buyer) for greater value. In some cases, these early-stage PE firms sell to another PE buyout firm further up market. In some of these acquisitions, founders can maintain minority ownership in the company (though not a controlling stake), which they can carry through to their “next exit.”

Unlike PE buyouts at later stages, PE buyouts at the earlier stages are not usually high-value exits; they are mostly an avenue to provide the founders some return for their hard work, rather than the disappointing returns they can expect from an acqui-hire or, even worse, a shutdown. If negotiated correctly, a private equity deal can give founders an opportunity to play another hand to the next exit.

Few founders create companies in order to flip them. Strong entrepreneurs create companies to transform their missions into reality and positively impact the world. Steve Jobs said, “I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.” An acquisition — particularly to private equity — may not have been the original goal, but it may fuel the continued pursuit of the founder’s mission. Or, perhaps it will enable the pursuit of a new and worthy mission.

Venture capital, global expansion, blockchain and drones characterize African tech in 2018

2018 saw Africa’s tech sector become more dynamic and international. VC firms on the continent multiplied. There were numerous investment rounds. And startups pursued acquisitions and global expansion. Here’s a snapshot of the news that shaped African tech over the last year.  

Surge in VC funds

A notable 2018 trend was Africa’s VC landscape becoming more African, with an increasing number of investment funds headquartered on the continent and run by locals, according to Crunchbase data released in this TechCrunch exclusive.

Drawing on its database and primary source research, Crunchbase identified 51 viable Africa-focused VC funds globally with at least 7-10 investments in African startups from seed to series stage.

Of the 51 funds, 22 (or 43 percent) were headquartered in Africa and managed by Africans. Of those 22, nine (or 41 percent) were formed since 2016 and nine were Nigerian.

Four of the nine Nigeria-based funds were formed within the last year: Microtraction, Neon Ventures, Beta.Ventures and CcHub’s Growth Capital fund.

The Crunchbase study also tracked more Africans in top positions at outside funds and the rise of homegrown corporate venture arms.

One of those entities with a corporate venture arm, Naspers, announced a $100 million fund named Naspers Foundry to invest in South African tech startups. This was part of a $300 million (4.6 billion Rand) commitment by the South African media and investment company to support South Africa’s tech sector overall, as reported here at TechCrunch.

Another DFI came on the scene when France announced a $76 million African startup fund administered by the French Development Agency, AFD. TechCrunch got the skinny on how it will work here.

Investment and expansion

If African VC investment headlines were scarce a decade ago, in 2018 we became overwhelmed with them. This was largely a result of several recently closed Africa funds — TLcom’s $40 million, Partech’s $70 million, TPG’s 2 billion — beginning to deploy that capital.

In March, Nigerian consumer data analytics firm Terragon raised $5 million from TLcom. Kenyan business enterprise software company Africa’s Talking raised $8.6 million in a round led by IFC.

Investment startup Piggybank.ng closed $1.1 million in seed funding and announced a new product — Smart Target, for traditional savings groups. Trucking Logistics company Kobo360 raised two rounds, for a total of $7.2 million. Kenya-based agtech supply chain startup Twiga Foods raised $10 million. B2B retail supply chain Sokowatch closed a $2 million seed round led by 4DX ventures.

White-label lending startup Mines.io secured a $13 million Series A round. South African SME payment venture Yoco raised $16 million. Paga Payments added $10 million in fresh funding.

And then there were the three huge raises of the year. Kenyan digital payment company Cellulant hauled in $37.5 million in a Series C round led by TPG Growth. South African lending startup Jumo raised $52 million led by Goldman Sachs. And just this month, The Carlyle Group invested $40 million in Africa-focused online travel site Wakanow.com.  

Acquisitions and expansion

In 2018, African tech demonstrated it can travel, as several digital companies expanded on the continent and abroad. In May, MallforAfrica and DHL launched MarketPlaceAfrica.com, a global e-commerce site for select African artisans to sell wares to buyers in any of DHL’s 220 delivery countries.

Paga announced plans to expand in Africa and internationally, with an eye on Ethiopia, Mexico and the Philippines, CEO Tayo Oviosu told TechCrunch. Kobo360 is moving into in new markets — Ghana, Togo and Cote D’Ivoire.

On the back of its $52 million round, Jumo said it would expand in Asia and started by opening an office in Singapore.

On the acquisition front, Terragon bought Asian mobile marketing company Bizense in a cash and stock deal. The company is exploring greater growth opportunities in Latin America and Southeast Asia, CEO Elo Umeh told TechCrunch.

TPG Growth acquired a majority stake (of an undisclosed value) in Africa entertainment content company TRACE. After previous investments, Naspers acquired  96 percent of Southern African e-commerce venture Takealot.

And in December, California-based Emergent Technology Holdings acquired Ghanaian fintech payment company InterpayAfrica.

Partnerships

Collaboration between local tech firms and big global names continued in 2018. Liquid Telecom and Microsoft continued their partnership to offer connectivity cloud services such as Microsoft’s Azure, Dynamics 365 and Office 365 to select startups and hubs. This is part of Liquid Telecom’s strategy to go long on Africa’s startups as its future clients and the continent’s next big companies.

Facebook teamed up with Nigerian tech hub CcHub to launch its NG_Hub high-tech incubator.

Blockchain

As crypto fever gripped many leading economies in 2018, Africa was shaping its own blockchain narrative — one more grounded in utility than speculation. 500 Startups-backed SureRemit launched a crypto token product aimed at disrupting Africa’s multi-billion-dollar remittance market and raised $7 million in an ICO. South African payments venture Wala and solar energy startup Sun Exchange also had ICOs.

For blockchain as a platform, agtech startups Twiga Foods and Hello Tractor partnered with IBM Research to use the digital ledger tech to advance small-scale farmers and agriculture on the continent.

Ride-hail boda bodas

Ride-hail tech expanded into the continent’s frequently used motorcycle taxi market. Uber entered the three-wheeled tuk tuk moto taxi market in Tanzania in March and Uber and Taxify launched motorcycle passenger services in East Africa, including Kenya and Uganda.

Fails

Last year saw Y Combinator-backed VOD startup Afrostream shutter. In February 2018, Nigerian e-commerce startup Konga — backed by VC — was sold in a distressed acquisition. There were high expectations for Konga and its much-liked founder Sim Shagaya. I made the case that Konga’s acquisition was one of Africa’s first big startup fails that flew under the radar.

Drones

TechCrunch did a deep dive into Africa’s drone scene, talking to several experts and looking at emerging use cases across delivery services, agtech and surveying. On the regulatory side, several countries — Rwanda, Tanzania, South Africa, Zambia and Malawi — are doing some interesting things around regulation and creating drone-testing corridors for global players.

TechCrunch and Africa

In 2018 TechCrunch did more with Africa than any previous year. In addition to more content, there was a market engagement trip to Ghana and Nigeria, with meet-and-greets at Impact Hub, MEST Accra and Lagos, and CcHub.

TechCrunch also had its first Africa panel on Disrupt SF’s main stage, an Africa session at Disrupt Berlin and held the second Startup Battlefield Africa in December in Nigeria.

Fifteen startups competed in Lagos in front of a Pan-African and global crowd. South African virtual banking startup Bettr was runner-up. Ultra-affordable ultrasound startup M-Scan from Uganda was the winner.

More Africa-related stories @TechCrunch

African tech around the ‘net  

Why your startup shouldn’t rush to $1 million in revenue

There is a prevailing belief that the magic formula for early-stage tech startups hinges on how quickly they achieve $1 million in annual recurring revenue (ARR). Investors in SaaS companies, in particular, are very guilty of pushing this or its equally loaded corollary, “When will you sign your first six-figure deal?”

But in the rush toward these numbers, too many startups lose sight of their primary intent: These metrics are supposed to be an indicator of product/market fit. We’ve seen companies reach $1 million in ARR in less than a year, yet not have enough market momentum to get their next million easily. We’ve seen early-stage companies so concerned about getting those first sales, they don’t validate the market and if they’re building the right product. We’ve also watched a focus on new logos make companies forget about keeping existing customers happy, introducing unexpectedly high churn — something startups can’t afford.

Those first customers and that first million are supposed to be the bedrock on which the rest of the business grows. Founders must constantly ask what they’re learning about their market, product and go-to-market approach — in that order! — so the business becomes a flywheel.

Revenue is a lagging indicator of sales success, so must likewise be prioritized accordingly. That’s not to say revenue isn’t vitally important and that there isn’t a great deal of urgency to it, but focusing on it too much too early can mask big problems that will hurt startups later when the stakes are higher.

Here are a few lessons we’ve learned by watching our early-stage companies go through this crucial phase. Every early-stage company needs to do them well.

Customer and market discovery is job No. 1

We talk about product and knowing customers a lot, but that is insufficient. Startups must understand the market, as well. How do customers do this today? Is there urgency around the problem? What is the community saying? An early investor in PagerDuty went onto Reddit and Quora and just looked at who people were talking about. It made his decision easy.

To be really successful, it is as important to understand market dynamics as it is to deliver a great product. This also helps zero in on all the aspects of your ideal customer profile; it needs to be more specific than you think! This also then helps qualify customers for future sales.

Elevate Security stood out in their super-crowded security space because they carved out a unique position around people-powered security. They used their early sales process to carefully qualify who would help them best develop their products. Their first product got shout-outs on social media from users who loved it — a rare occurrence in security — and were indicators they had found good initial customers and were creating something unique.

Build a product that sells itself

You’ll always find smart people saying, “I love what you’re doing.” Some things are so broken even a mediocre improvement is worth a change. But this is why revenue can be a false indicator for scalable success: Founders find enough early adopters to get that first million, which leads them to believe the product is enough. The company starts chasing more revenue, not investing in a product-based growth engine. If sales keeps hitting their numbers, everyone believes things are fine. Until they’re not. And then it’s usually a really heavy lift, with 6-12 months of product, sales or team upgrades.

What startup doesn’t want a growth curve like this? Zoom had triple-digit growth for the last four years in a crowded, mature video conferencing category. Janine Pelosi, Zoom’s head of marketing, said the reason they were so successful before and after she arrived was they have a great product. It’s reliable, easy to use, and the founder, Eric Yuan, was selling it every day. Yuan knew the market really well coming out of Webex, and always touching customers meant he could adjust company strategy accordingly. Zoom embodied the real magic formula: know your market + build great product.

Pay attention to customer engagement and delight

Customer satisfaction is simple: It comes from the perception that people get value from their purchase; it’s much less about how much they paid. It’s also always cheaper to make an existing customer happy than it is to acquire a new one, so make sure even in the early days that you’re investing in making current customers happy advocates.

Aquabyte uses computer vision to identify sea lice in the $160 billion aquafarming market. When they showed customers FreckleID (think racial recognition for fish) to uniquely identify fish in a pen of 200,000, fish farmers loved the idea. The price they were willing to pay was 3x what the CEO thought possible. They’re likewise investing heavily in making sure their initial customer is successful with the product and are delighting them in unexpected ways (handwritten holiday cards). They have more prospects in their pipeline than they have capacity, which means they don’t need to expand sales to grow revenue fast.

Your startup may have the coolest tech, be in the biggest market and have the smartest team. No matter what your board says, remember revenue is NOT the primary indicator; it is simply an indicator. To become a breakout success, you need to read the tea leaves of all aspects of your market and build a product and customer experience that is truly superior.

Four ways to bridge the widening valley of death for startups

Many founders believe in the myth that the first steps of starting a business are the hardest: Attracting the first investment, the first hires, proving the technology, launching the first product, and landing the first customer.  Although those critical first steps are difficult, they are certainly not the most difficult on the arduous path of building an iconic company. As early and late-stage funding becomes more abundant, founders and their early VC backers need to get smarter about how to position their companies for a looming valley of death in between. As we’ll learn below, it’s only going to get much, much harder before it gets easier.

Money will have the look, and heft, of dumbbells as the economic cycle turns. Expect an abundance of small, seed checks at one end, an abundance of massive checks for clear, breakout companies at the other, and a dearth of capital for expanding companies with early proof points and market traction. Read more on how to best prepare for this inevitable future. (Image courtesy Flickr/CircaSassy)

There will be an abundance of capital at the two ends of the startup spectrum.  At one end, hundreds of seed and micro VCs, each armed with dozens of $250k-$1M checks to write every year, are on the prowl for visionary founders with pedigree and resumes.  At the other end, behemoths like Softbank, sovereigns, as well “early-stage” firms raising larger funds are seeking breakout companies ready for checks that are in the mid-tens to hundreds of millions.  There will be a dearth of capital to grow companies from a kernel of a business, to a becoming the clear market-defining leader.  In fact, we’re already seeing deal volume decreasing significantly as dollars increase, likely evidence of larger checks going into fewer companies.

Even as the overall number of deals decrease below 2012 levels, the overall dollars invested into startups continue to soar. The 200+ “seed” stage funds formed since 2012 will continue to chase nascent companies. Meanwhile, the increasing number of mega-funds will seek breakout companies into which to make $100M+ investments. Companies with early traction seeking ~$20M to grow will be abundant and have difficulty accessing capital.

Founders should no longer assume that their all-star seed and Series A syndicates will guarantee a successful follow-on financing. Progress on recruiting and product development, though necessary, are no longer sufficient for B-rounds and beyond.  Founders should be mindful that investors that specialize in leading $20-50M rounds will have a plethora of well-funded, well-mentored, well-staffed startups with slick presentations, big visions, and some early market traction, to choose from.

Today, there is far more capital chasing fewer quality companies.  Fewer breakout companies and fear of missing out is making it easy to raise growth rounds with revenue growth which may not be scalable or even reflective of an attractive business. This is creating false realities and prompting founders to raise big rounds at high prices- which is fine when there is an over-abundance of capital, but can cripple them when capital later becomes scarce. For example, not long ago, cleantech companies, armed with very preliminary sales, raised massive financings from VCs eager to back winners towards scaling into what they characterized as infinite demand. The reality is that the capital required to meet target economics was far greater and demand far smaller. As the private markets turned, access to cash became difficult and most faltered or were acquired for pennies on the dollar.

There is a likely future where capital grows scarce, and investors take a harder look at the underpinnings of revenue, growth, and (dis)economies of scale.

What should startup leadership teams emphasize in an inevitable future where the $30M rounds will be orders of magnitude harder than their $5M rounds?

A business model representative of the big vision

Leadership teams put lots of emphasis on revenue.  Unfortunately, revenue that’s not representative of the big vision is probably worse than no revenue at all.  Companies are initially seeded with the expectation that the founding team can build and sell something.  What needs to be proven is the hypothesis that the company can a) build a special product that b) is inexpensive to convince customers to pay for, and c) that those customers represent a massive market. It should be proven that it is unattractive for customers to switch to the inevitable copycats.  It should be clear that over time, customers will pay more for additional features, and the cost of acquiring new customers will go down. Simply selling a product to customers that don’t represent that model, is worse than not selling anything at all.

Recruiting talent that’s done it

Early founding teams are cognitively diverse individuals that can convince early investors that they can overcome the incredible odds of building a company that until now, shouldn’t have existed.  They build a unique product, leveraging unique tools satisfying an unmet need. The early teams need to demonstrate the big vision, and that they can recruit the people that can make that vision a reality.  Unfortunately, more founders struggle when it comes to recruiting people that have real experience reducing a technology to practice, executing on a product that customers want, and charting the path to expand their market with improving unit economics. There are always exceptions of people that do the above for the first time at startups; however, most of today’s iconic startups knew what kind of talent they needed to execute and succeeded in bringing them on board.  Who’s on your team?

Present metrics that matter 

The attractive SaaS valuation multiples behoove all founders to apply its metrics to their businesses even if they aren’t really SaaS businesses.  Sophisticated later-stage investors see right past that and dismiss numbers associated with metrics that are not representative. Semiconductors are about winning dedicated sockets in growing markets.  Design tools are about winning and upselling seats in an industry that’s going to be hooked on those tools. Develop a clear understanding of how your business will be measured. Don’t inundate your investor with numbers; present a concise hypothesis for your unfair advantage in a growing market with your current traction being evidence to back it.

Find efficiencies by working in massive markets

“Pouring fuel on the fire” is a misleading metaphor that leads some into believing that capital can grow any business.  That’s just as true as watering a plant with a firehose water or putting TNT in your Corolla’s gas tank: most business models and markets simply are not native to the much-sought-after venture growth profile.  In fact, most later-stage startups that fail after raising large amounts of capital, fail for this reason.  Most markets are conducive to businesses with DIS-economies of scale, implying dwindling margins with scale, which is why many businesses are small serving local, fragmented markets that technology alone cannot consolidate.  How do your unit economics improve over time? What are the efficiencies generated by economies of scale? Is there a real network effect that drives these economies?

Image courtesy Getty Images

I expect today’s resourceful founders to seek partners, whether its employees, advisors, or investors, to help them answer these questions.  Together, these cognitively diverse teams will work together accelerate past any metaphoric valley and build the iconic companies taking humanity to its fantastic future.