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How to prepare for an investment apocalypse

Unlike 2000 and 2008, everyone in the startup world is expecting a crash to come at any moment. But few are taking concrete steps to prepare for it.

If you’re running a venture-backed startup, you should probably get on that. First, go read RIP Good Times from Sequoia to get a sense for how bad it can get, quickly. Then take a look at the checklist below. You don’t need to build a bomb shelter, yet, but adopting a bit of the prepper mentality now will pay dividends down the road.

Don’t wait, prepare

The first step in preparing for a coming downturn is making a plan for how you’d get to a point of sustainability. Many startups have been lulled into a false sense of confidence that profit is something they can figure out “later.” Keep in mind, it has to be done eventually and it’s easier to do when the broader economy isn’t crashing around you. There are two complicating factors to keep in mind.

You’ll have to do it with less revenue

In a downturn, business customers skip investing in capital equipment and new software. Likewise, consumer discretionary spending goes way down. The result is you’ll likely have less revenue than you do now. War-game a variety of scenarios — what you’d do if you lost 20 percent, 50 percent or 80 percent of your revenue, and what decisions would have to be taken to survive.

Sometimes capital can’t be had at any valuation

When a downturn comes, capital markets don’t soften, they seize. Depending on how bad a hypothetical financial crisis got, there’s a good chance that investors would close up their checkbooks and triage. If you aren’t one of your investor’s favorite portfolio companies, there’s a decent chance you may be left in the cold. Don’t even assume you’ll be able to close a down round. Fortunately, showing a plan with a clear path to profitability will allay investors concerns that you’ll need their capital indefinitely and make it more likely you’ll be able to raise.

Planning around these three realities — the need for profits, while experiencing dropping revenue, in a world where capital can’t be had at any valuation — is going to lead to unpleasant conclusions. A dramatically diminished business, major layoffs, and a decisive drop in morale are likely outcomes. Thankfully, you can take steps now to help soften the landing, or if you’re really successful, avoid it entirely.

Avoid “growth at all costs” mentality

Getting acquisition costs under control will help you in two ways. First, it’ll lower your burn rate. Chasing growth for growth’s sake is always a short-sighted decision, but especially during the late part of the business cycle. Avoid this even if you’re VC is encouraging it. Second, by carefully analyzing the inputs to your acquisition cost, it will force you to examine the dynamics of your business. It gives you an opportunity to decide if a poorly performing channel or lackluster sales reps are actually smart investments. Even cutting your payback period from 12 months to nine will provide an increased measure of visibility and control.

Increase the hiring bar

Instagram took over the web with a team of a dozen. Craigslist is a pillar of the internet with a staff of 40 employees. WhatsApp supported hundreds of millions of daily users with fewer than 50 people. Chances are you need fewer people than you think.

In his new book, Scott Belsky shares an algorithm he used building Behance into a $100M company — automate, automate, then hire. His point was that founders should encourage teams to push hard on improving processes and other labor-saving tools before adding more FTEs.

Don’t institute a hiring freeze or take other actions that might spook the staff, but do send the message that new hires should be the last resort, not the first response to a challenge.

Preach discipline — build it into the culture

Founders often try to change spending habits, and in turn culture, when it’s too late. Is there a fair bit of business class flying among the executive team? Do your employees stretch your free dinner policy by staying just past the dinner hour to take advantage of free food? At most tech ventures, everyone is truly an owner. Try to help the entire team to internalize that they are spending their own money.

Get to know your potential acquirers

The week the market drops 50 percent is not the week to start a M&A conversation. You should be getting to know the five most likely buyers of your company, now. Find out who the decision makers at each of the companies are and build relationships. Make it a point to catch up with these people at conferences and even consider sending them regular updates about your company’s progress (but not too much data). You’re not running a formal sales process, but helping build up the internal desire to buy your company if the opportunity presents itself. It may not be the exit of your dreams, but it’s nice to have options if you need them.

Jettison expensive office space

If you’re coming to a T-juncture regarding office space, you may want to prioritize price and lease flexibility over quality and location. I remember one of our offices at my start-up was a twelve month lease with 6 months free. The landlords were desperate, and so were we!

Front-load revenue

If you’re in the kind of business that will support annual contracts, figure out a way to offer them. Pre-sell credits to consumers at a discount. More fundamentally, think about how you might be able to adjust your business model so you can get paid before you deliver services. Plenty of viable businesses are asphyxiated by delays in accounts receivable, don’t allow your ambitions to be thwarted by accounting.

Diversify your customer base

One lesson learned in the 2000 bubble was that startups that serve other startups tend to be hit hardest. It’s important to think about how a downturn will impact your customer base. If more than 30 percent of your revenue comes from one industry (perhaps start-ups!), or heaven help you, a single customer, start thinking about managing risk by diversifying your customer base.

Raise a pre-emptive round (AND DON’T SPEND IT)

Topping up your balance sheet at this point isn’t a bad idea, provided you have the discipline to treat it as a rainy day fund. Communicate this rationale to your investors. It’s also important to use this moment to reflect on valuation. An eye-popping valuation will feel good when you sign the term sheet, but it’s going to feel like a millstone if the economy turns, and the market for blue-chip tech stocks drops precipitously.

Consider venture debt

Many VCs discourage venture debt. They’ll say “if you need more money, we’ll backstop you.” The problem is when things ugly, they may not be there. Debt providers are a good way to extend the runway. The thing is that it’s best to raise debt capital when you don’t need it. Venture debt can add ⅓ to ½ of additional capital to some funding rounds with minimal dilution and relatively modest interest rates. Do note that when things get bad, some debt funds can get aggressive so do your homework before taking the notes.

Don’t panic

It’s tough to predict the top of the market. CNN, Time, The Atlantic, The Wall Street Journal, and many others argued Facebook paying $1 billion for Instagram was a sure sign of a bubble — in 2012. Reputable commentators have claimed that we’re in a bubble every year since, see 2013, 2014, 2015, 2016, 2017, and 2018. Going into survival mode in any of those years would have been a serious mistake for most startups.

Still, we’re only two quarters away from marking the longest economic expansion in US history. The good times have got to end at some point. Venture capital is a hell of a drug and withdrawal can be painful. Keep in mind that there’s no correlation between how much a company raised and how well they did on the public markets. If you’re struggling to make your startup’s economics work, read up on dozens of “invisible unicorns” who show that you can get big without relying on outsized amounts of venture capital.

If your house is in order when the downturn hits, you may actually be able to grow through it. As unprepared competitors go out of business, you’ll find that talent is more plentiful and customer acquisition costs plummet. Some of the best companies have been founded and thrived in the worst of times — if you’re prepared.

Africa Roundup: Zimbabwe’s net blackout, Partech’s $143M fund, Andela’s $100M raise, Flutterwave’s pivot

A high court in Zimbabwe ended the government’s restrictions on internet and social media last month.

After days of intermittent blackouts at the order of the country’s Minister of State for National Security, ISPs restored connectivity per a January 21 judicial order.

Similar to net shutdowns around the continent, politics and protests were the catalyst. Shortly after the government announced a dramatic increase in fuel prices on January 12, Zimbabwe’s Congress of Trade Unions called for a national strike.

Web and app blackouts in the southern African country followed demonstrations that broke out in several cities. A government crackdown ensued, with deaths reported.

On January 15, Zimbabwe’s largest mobile carrier, Econet Wireless, confirmed that it had complied with a directive from the Minister of State for National Security to shutdown internet.

Net access was restored, taken down again, then restored, but social media sites remained blocked through January 21.

Throughout the restrictions, many of Zimbabwe’s citizens and techies resorted to VPNs and workarounds to access net and social media, as reported in this TechCrunch feature.

Global internet rights group Access Now sprung to action, attaching its #KeepItOn hashtag to calls for the country’s government to reopen cyberspace soon after digital interference began.

The cyber-affair adds Zimbabwe to a growing list of African countries — including Cameroon, Congo and Ethiopia — whose governments have restricted internet expression in recent years.

It also provides another case study for techies and ISPs regaining their cyber rights. Internet and social media are back up in Zimbabwe — at least for now.

Further attempts to restrict net and app access in Zimbabwe will likely revive what’s become a somewhat ironic cycle for cyber shutdowns. When governments cut off internet and social media access, citizens still find ways to use internet and social media to stop them.

Partech doubled its Africa VC fund to $143 million and opened a Nairobi office to complement its Dakar practice.

The Partech Africa Fund plans to make 20 to 25 investments across roughly 10 countries over the next several years, according to general partner Tidjane Deme. The fund has added Ceasar Nyagha as investment officer for the Kenya office to expand its East Africa reach.

Partech Africa will primarily target Series A and B investments and some pre-series rounds at higher dollar amounts. “We will consider seed-funding — what we call seed-plus — tickets in the $500,000 range,” Deme told TechCrunch for this story on the new fund. Partech is open to all sectors “with a strong appetite for people who are tapping into Africa’s informal economies,” he said.

Partech Africa joined several Africa-focused funds over the last few years to mark a surge in VC for the continent’s startups. Partech announced its first raise of $70 million in early 2018 next to TLcom Capital’s $40 million, and TPG Growth’s $2 billion.

Africa-focused VC firms, including those locally run and managed, have grown to 51 globally, according to recent Crunchbase research.

Andela, the company that connects Africa’s top software developers with technology companies from the U.S. and around the world, raised $100 million in a new round of funding.

The new financing from Generation Investment Management (an investment fund co-founded by former VP Al Gore) puts the valuation of the company at somewhere between $600 million and $700 million—based on data available from PitchBook on the company’s valuation.

The company now has more than 200 customers paying for access to the roughly 1,100 developers Andela has trained and manages.

With the new cash in hand, Andela says it will double in size, hiring another thousand developers, and invest in new product development and its own engineering and data resources. More on Andela’s recent raise and focus here at TechCrunch.

Fintech startup Flutterwave announced a new consumer payment product for Africa called GetBarter, in partnership with Visa.

The app-based offering is aimed at facilitating personal and small merchant payments within and across African countries. Existing Visa  cardholders can send and receive funds at home or internationally on GetBarter.

The product also lets non-cardholders (those with accounts or mobile wallets on other platforms) create a virtual Visa card to link to the app.  A Visa spokesperson confirmed the product partnership.

GetBarter allows Flutterwave  — which has scaled as a payment gateway for big companies through its Rave product — to pivot to African consumers and traders.

The app also creates a network for clients on multiple financial platforms to make transfers across payment products and national borders, and to shop online.

“The target market is pretty much everyone who has a payment need in Africa. That includes the entire customer base of M-Pesa,  the entire bank customer base in Nigeria, mobile money and bank customers in Ghana — pretty much the entire continent,” Flutterwave CEO Olugbenga Agboola told TechCrunch in this exclusive.

Flutterwave and Visa will focus on building a GetBarter user base across mobile money and bank clients in Kenya, Ghana, and South Africa, with plans to grow across the continent and reach those off the financial grid.

Founded in 2016, Flutterwave has positioned itself as a global B2B payments solutions platform for companies in Africa to pay other companies on the continent and abroad. It allows clients to tap its APIs and work with Flutterwave developers to customize payments applications. Existing customers include Uber, Facebook,  Booking.com and African e-commerce unicorn Jumia.com.

Flutterwave added operations in Uganda in June and raised a $10 million Series A round in October The company also plugged into ledger activity in 2018, becoming a payment processing partner to the Ripple and Stellar blockchain networks.

Headquartered in San Francisco, with its largest operations center in Nigeria, the startup plans to add operations centers in South Africa and Cameroon, which will also become new markets for GetBarter.

And sadly, Africa’s tech community mourned losses in January. A terrorist attack on Nairobi’s 14 Riverside complex claimed the lives of six employees of fintech startup Cellulant and I-Dev CEO Jason Spindler. Both organizations had been engaged with TechCrunch’s Africa work over the last 24 months. Condolences to  family, friends and colleagues of those lost.

More Africa Related Stories @TechCrunch

African Tech Around The Net    

How business-to-business startups reduce inequality

When considering the structural impact of technology companies on our economy and society, we tend to focus on questions of scale and monopoly.

It’s true that the FAANG companies and more recent winners (Airbnb, Uber) have surfed a combination of network effects, preferential access to capital and classic efficiencies of scale to generate tremendous value for their shareholders—to the detriment of new entrants who attempt to unseat them.

At their high water mark in mid-2018, FAANG alone made up 11% of the total market cap of the S&P 500 and 38% of the index’s year-to-date gain, representing a doubling in their influence in only five years. The question of regulating technology companies—to the point of instituting anti-trust actions—has even become a rare point of relative concord between Democrats and Republicans in Congress.

But is the narrative of tech companies in the 2010s only a story of economic consolidation and growing inequality? Many of the most successful B2B startups of the last decade are aligned by a theme that paints a different picture. By transforming the nature of the costs required to start a business, these startups are reducing the influence of capital and leveling the playing field for new entrants to share in the surplus generated by the secular shift to a tech-mediated economy.

Source: Getty Images/MIKIEKWOODS

A Path To Equal Opportunity: Turning Fixed Costs Into Variable Costs

What do AWSWeWorkStordGusto and RocketLawyer have in common? They provide cloud computing services, office space, warehouse storage, payroll management and access to legal templates, respectively—at first glance, not a particularly congruent set of services.

But they are alike in the economic purpose they serve for their customers. Each of these services takes a fixed cost—a bank of servers, a lease, a legal retainer—and transforms it into a variable cost. As a refresher, a fixed cost stays constant regardless of output, and variable costs scale with the output of a business.

When my father started his software consulting business in the early 1990s, I remember the giant boxes of AIX servers that arrived at our apartment, and tagging along to office tours in central New Jersey before he decided to run the company out of our spare bedroom. Back then, starting almost any kind of business was hard because of high fixed costs. Without AWS or WeWork, you shelled out up front for hardware and a lease.

Access to capital, whether in the form of a bank loan, savings, or friends and family was a prerequisite for entrepreneurship.

Today, startups make it possible to start and scale almost any kind of business while incurring few fixed costs. Want to found an ecommerce store? Start with a free Shopify account and dropship your inventory. Want to become a freelance designer? Put a shingle up on Fiverr and meet clients at a Breather you rent by the hour.

Whether software or hardware or labor, building a business is way easier when overhead is transformed into a string of flexible microservices that you only pay for as you grow.

Image courtesy of Getty Images

Lower Fixed Costs Means Capital Matters Less

Taken together, startups that turn fixed costs into variable costs make it less capital intensive to start a business. This decreases the influence of gatekeepers and aggregators of capital—an impact evident in the way entrepreneurs think about starting businesses today.

It’s no coincidence that the rise of B2B startups fitting this theme has coincided with the bootstrap movement, in which tech entrepreneurs with major ambitions demur from raising venture funding because—well, they don’t need the money anymore.

It has also coincided with a renaissance in freelance entrepreneurship: 56.7 million Americans freelanced in 2018. Beyond the economic benefits of working for yourself—the fastest growing segment of freelancers earns over $75,000 a year—freelancers can access the lifestyle and health benefits of owning their destiny, which aren’t directly captured but play a role in the economic picture. 51% of freelancers said no amount of money would lure them into a traditional job, and 64% reported feeling healthier and happier.

When capital plays a reduced role in new business formation, access to capital plays a smaller role in determining who will succeed. More companies are founded, and the economy becomes more likely to birth new Davids that will unseat the Goliaths. Economics 101: lower barriers to entry create markets that converge on perfect competition instead of oligarchic concentration.

Sourlce: Getty Images/ERHUI1979

Variable Costs Don’t Scale, But That’s OK

Variable costs have their downsides. A startup with a relatively higher proportion of fixed costs—the profile of the classic high-tech software business—can achieve higher profit margins as it scales. Compare Microsoft or Google, which pay high fixed costs in the form of salaries and servers but few costs in delivering their services and achieve operating margins of 25-30%, to Costco, which takes in more than $100B of annual revenue but earns an operating margin in the single digits.

That’s OK. Neither type of cost is “better” or “worse,” but having the option to decide how to structure costs through a company’s lifecycle can meaningfully impact an entrepreneur’s ability to execute a business idea.
Founders investigating startup ideas—and politicians debating the impact of technology—would do well to pay attention to how B2B companies have democratized access to entrepreneurship.

Equality of outcome arrives from equality of opportunity—and a future where millions of people can start businesses, differentiate, and succeed on the basis of their ability and value proposition, rather than their access to capital, sounds like a promising representation of the egalitarian ethos Silicon Valley wants to bring to pass.

Starting with data centers, Carbon Relay is slashing energy costs and emissions using AI

Taiwanese technology giant Foxconn International is backing Carbon Relay, a Boston-based startup emerging from stealth today that’s harnessing the algorithms used by companies like Facebook and Google for artificial intelligence to curb greenhouse gas emissions in the technology industry’s own backyard — the data center.

Already, the computing demands of the technology industry are responsible for 3 percent of total energy consumption — and the addition of new technologies like Bitcoin to the mix could add another half a percent to that figure within the next few years, according to Carbon Relay’s chief executive, Matt Provo.

That’s $25 billion in spending on energy per year across the industry, Provo says.

A former Apple employee, Provo went to Harvard Business School because he knew he wanted to be an entrepreneur and start his own business — and he wanted that business to solve a meaningful problem, he said.

Variability and dynamic nature of the data center relating to thermodynamics and the makeup of a facility or building is interesting for AI because humans can’t keep up.

“We knew what we wanted to focus on,” said Provo of himself and his two co-founders. “All three of us have an environmental sciences background as well… We were fired up about building something that was true AI that has positive value… the risk associated [with climate change] is going to hit in our lifetime, we were very inspired to build a company whose technology would have an impact on that.”

Carbon Relay’s mission and founding team, including Thibaut Perol and John Platt (two Harvard graduates with doctorates in applied mathematics) was able to attract some big backers.

The company has raised $6 million from industry giants like Foxconn and Boston-based angel investors, including Dr. James Cash — a director on the boards of Walmart, Microsoft, GE and State Street; Black Duck Software founder, Douglas Levin; Karim Lakhani, a director on the Mozilla Corporation board; and Paul Deninger, a director on the board of the building operations management company, Resideo (formerly Honeywell).

Provo and his team didn’t just raise the money to tackle data centers — and Foxconn’s involvement hints at the company’s broader goals. “My vision is that commercial HVAC systems or any machinery that operates in a business would not ship without our intelligence inside of it,” says Provo.

What’s more compelling is that the company’s technology works without exposing the underlying business to significant security risks, Provo says.

“In the end all we’re doing are sending these floats… these values. These values are mathematical directions for the actions that need to be taken,” he says. 

Carbon Relay is already profitable, generating $4 million in revenue last year and on track for another year of steady growth, according to Provo.

Carbon Relay offers two products: Optimize and Predict, that gather information from existing HVAC devices and then control those systems continuously and automatically with continuous decision making.

“Each data center is unique and enormously complex, requiring its own approach to managing energy use over time,” said Cash, who’s serving as the company’s chairman. “The Carbon Relay team is comprised of people who are passionate about creating a solution that will adapt to the needs of every large data center, creating a tangible and rapid impact on the way these organizations do business.”

Entrepreneur First eyes further Asia growth to build its global network of founders

British startup venture builder Entrepreneur First is eyeing additional expansion in Asia, where its operation is now as large as it is in Europe, as it expands its reach in 2019. But despite serving a varied mixture of markets, the company said its founders are a fairly unified breed.

The Entrepreneur First (EF) program is billed as a “talent investor.” It matches prospective founders and, through an accelerator program, it encourages them to start and build companies that it backs with financing. The organization started in London in 2011, and today it is also present in Paris and Berlin in Europe and, in Asia, Singapore, Hong Kong and (soon) Bangalore. To date, it says it has graduated more than 1,200 founders who have created more than 200 companies, estimated at a cumulative $1.5 billion on paper.

Those six cities cover a spread of unique cultures — both in general life and startup ecosystems — but, despite that, co-founder Matthew Clifford believes there’s actually many commonalities among its global founder base.

“It’s really striking to me how little adjustment of the model has been necessary to make it work in each location,” Clifford — who started EF with Alice Bentinck — told TechCrunch in an interview. “The outliers in each country have more in common with each other and their fellow compatriots… we’re uncovering this global community of outliers.”

Despite the common traits, EF’s Asia expansion has added a new dimension to the program after it announced a tie-in with HAX, one of the world’s best-known hardware-focused accelerator programs, that will see the duo co-invest in hardware startups via a new joint program.

“We saw early that hardware was a much more viable part of the market in Asia than it is traditionally seen in Europe [and] needed a partner to accelerate the talent,” Clifford said.

Already, the first four beneficiaries of that partnership have been announced — AIMS, BIOPSIN, Neptune Robotics and SEPPURE — each of which graduated the first EF cohort in Hong Kong, its fourth in Asia so far. Going forward, Clifford expects that around three to five startups from each batch will move from EF into the joint initiative with HAX. The program covers Asia first but it is slated to expand to EF’s European sites “soon.”

Entrepreneur First held its first investor day in Hong Kong this month

Another impending expansion is EF’s first foray into India via Bangalore, which starts this month, and there could be other new launches in 2019.

“We’ll continue to grow by adding sites, but we are not in a rush,” Clifford said. “The most important thing is retraining quality of talent. It may be six months until we add another site in Asia, but there’s no shortage of places we think it will work.

“We operate a single global fund,” he added. “We’re a talent investor and we believe there are strong network effects in that. The people who back us are really betting on the model… [that it’s] an asset class with great returns.

While it appears that its global expansion drive is a little more gradual than what was previously envisaged — backer and board member Reid Hoffman told TechCrunch in 2016 that he could imagine it in 50 cities — Clifford said EF isn’t raising more capital presently. That previous investment coupled with management fees is enough fuel in the tank, he said. The organization also operates a follow-on fund, but it has one major exit to date, Pony Technology, the AI startup bought by Twitter for a reported $150 million.

Still, with hundreds of companies in the world with EF on the cap table, Clifford said he is bullish that his organization can target an international-minded breed of entrepreneur worldwide. The impact he sees is one that will work regardless of any local constraints placed on them.

“With our global network of capital, we always want capital, not talent, to be the limiting factor. Our goal is to make being ‘an EF company’ more relevant to your identity as a startup regardless of your location,” he told TechCrunch.