Happy Monday!
Monday Musings
Over the last week or so, there have been a couple of momentous developments globally that highlight the uneasy relationship between social media and authoritarian governments. In India, there is a battle brewing between WhatsApp and the government over new rules that would require tech companies to take down posts it deems to be unlawful. Meanwhile, in Nigeria, telecoms firms blocked access to Twitter following a regulatory directive from the government, two days after Twitter removed a post by Nigerian president Muhammadu Buhari that threatened to punish regional secessionists. Combined with the news about Agent Orange being banned from Facebook for a total of two years, this obviously brings up questions about the extent of the power that social media platforms should exert. However, there is an unexplored dimension to the problem – in our increasingly digital world, what are the tools that can be used by a censored populace to communicate and resist? Could a decentralised social media network be an answer? What would have to be done to govern these networks, because of the clear problem we have today with hate speech, cyberbullying and all of the negatives that come with social media?
Meanwhile, this week…
Fortune profiles Alfred Lin of Sequoia Capital, Calm Funds offer a new way of funding start-ups that is markedly different to the current VC model, and Yieldstreet, an alternative investment platform for retail investors, raises $100 million in its Series C funding. India’s start-up system is also growing quickly, and the Gojek-Tokopedia merger highlights the Super App ambitions of start-ups in the East.
Sequoia Capital is one of the most storied Silicon Valley VCs, and it is going from strength to strength amid the private capital boom of the last few years. 7 of its portfolio companies IPOed in 2020, and two of those (Airbnb and DoorDash) were the largest of the year. Fortune’s Michal Lev-Ram interviews Alfred Lin, a Sequoia partner who sits on the board of both Airbnb and DoorDash, and was at the forefront of their monster 2020. Before joining Sequoia, Lin had founded Zappos, an online shoe and clothing retailer, with his partner Tony Hsieh, which they sold to Amazon in 2009 for $1.2 billion. According to Lin, being exposed to the process of Hsieh ‘take a crazy idea from concept to reality’, and watch him fundraise and deal with rejection over and over again, helped define him as an investor and entrepreneur. Lin was also at the centre of Sequoia’s infamous ‘Black Swan’ memo last year, where the firm detailed the challenges businesses would face, the actions they needed to take to survive the pandemic and the necessity of fast and decisive adjustments to changing circumstances. Lin had already been through major crises, and was a major proponent of Airbnb raising debt, not equity in a potential down round, to get through the drop in sales. Airbnb delayed its IPO, took $2 billion in debt, and went public at the end of the year; Sequoia’s $375 million stake in Airbnb is now worth $15 billion.
“You learn a lot about people in a crisis,” says Chesky. “Alfred was everything I hoped he would be. He was optimistic and steady. He stood by us; he actually leaned in as a champion.”
With VCs like Tiger Global and SoftBank all aggressively pouring capital into scores of companies across the globe, it is easy to view the VC market as being all about volume and finding that one diamond in the rough. And, for a large part, that is the way in which the industry is structured, with the few ‘10x’ investments making up for all the failed ones. There is, however, a different type of funding method – Calm Funds (CFs) seek to work with entrepreneurs to build sustainable businesses that are ‘default alive’, meaning that they do not need regular capital injections to stay alive and do not risk survival for growth. CFs may not also directly compete with VCs for investment opportunities; they can serve the niche of the market that requires the flexibility to identify whether it wants to build a venture-scale business or something more modest. The profit-sharing part of the revenue model for CFs also mean that investors do not need to push for a sale to realise returns, and they do not earn out and lose interest. The emergence of CFs indicates the flexibility and range of growth options available to startups today, and highlights how there are a multitude of different business models that investment firms can deploy to earn returns from the hot private capital market today.
Not only does it translate into equity in the case of a liquidity event, giving access to venture-style upside, the profit-sharing mechanism means returns can be harvested faster, without needing an exit. Calm capitalists essentially get to lock in solid returns as soon as their portfolio company reaches real profitability while also getting a piece of future upside.
#3 Yieldstreet Raises $100M As It Mulls Going Public via SPAC, Eyes Acquisitions
Yieldstreet, a platform for making alternative investments in areas like real estate, marine/shipping, legal finance, commercial loans and other opportunities that were previously only open to institutional investors, has raised $100 million in a Series C round. In yet another example of the democratisation of finance (I feel like I’m beating a pretty well-worn drum by now), Yieldstreet’s success highlights just how fertile and large the retail investment market is. The round was led by former CEO of E*TRADE, Mitch Caplan, and brought Yieldstreet’s total funding to $278.5 million since its 2015 inception. The company has funded nearly $1.9 billion on its platform, and has about 300,000 users signed up. Since February 2019, Yieldstreet has seen its investor base grow by 350%, and it expects 50% revenue growth this year. In today’s return-starved economic environment with rock bottom interest rates, passive, relatively non-risky income is extremely attractive to all sorts of investors – financing warehouses and distribution centres, auto loans, art investments, equipment finance all have varying risk levels, and Yieldstreet aims to fractionalise these investments and get them to retail investors. It will be interesting to see the extent to which the rise of digital assets (and security tokens) accelerates the growth of this market and the overall trend.
“Alternative investing has generally been restricted to very high net worth individuals. This is not just a U.S. problem, but a worldwide one. In Europe, especially, it is exacerbated by a negative interest rate,” he said. “So it’s even more compelling to them to tap into U.S. assets.” As such, Yieldstreet plans to expand into Europe and Asia as part of its growth strategy.
#4 Investors Race to Win Early-Stage Startup Deals in India
In the midst of a devastating second wave of COVID, the related rising unemployment, and an economy under pressure, the growth of the start-up ecosystem in India may seem surprising – if you haven’t been paying attention to the state of private capital and the hydra-like presence of velocity-focused investors like Tiger Global. While later-stage Indian start-ups have received heavy backing over the last few years (Oyo Rooms and Flipkart being prime examples), early-stage companies have been bereft of similar attention. This is changing now – more than 70 early-stage Indian startups are currently in various stages of talks to raise money, and firms like Sequoia Capital, Nexus, Tiger Global, Falcon Edge Capital and YCombinator are some of those that are investing in multiple companies across the country. 2021 has already seen 14 Indian unicorns, up from 11 last year and 6 in 2019. The maturing of the ecosystem and the increased attention on early-stage companies is a promising sign – more capital can theoretically jump-start their growth, and if there is a notable increase in survival of early-stage companies, the associated impact on the tech ecosystem and the way the economy recovers from COVID could be significant.
Bipin Shah, a partner at Titan Capital, which has invested in over 200 startups, said that two year ago there were only about 30-40 good stage companies that were getting funded. “Over the last year or so, we believe over 500 companies have gotten funded at the seed stages in India,” he told TechCrunch, adding that Titan Capital itself has invested in over 60 companies since the beginning of last year.
#5 The $18 Billion Gojek-Tokopedia Merger Sets the Stage for a FinTech Showdown
The Asian tech ecosystem seems to be following the Chinese model – Super Apps and consolidation of the customer experience onto one large platform that they never have to leave. In Indonesia, ride-hailing and delivery company Gojek and e-commerce platform Tokopedia announced a merger in May to become GoTo Group, that brings together ride hailing, food and grocery delivery, mobile gaming, financial services, and online retail, all underpinned by payment platform GoPay. It is increasingly obvious for large platforms and their investors that an all-inclusive platform that creates a ‘data flywheel’ is a certain path towards gigantic, market-leading valuations and 100x VC exits. GoTo, similar to Alibaba and Tencent’s WeChat, can use data from all the different interactions consumers have on its platform to provide lower prices and more bespoke, sticky offerings that ensure consumer loyalty. GoTo is not alone in the Super App race – a lot of mature industries globally have large, consolidated players that dominate the market and are challenged by new entrants, and GoTo is challenged by rivals Shopee and Grab, who are also trying to become the regional one-stop shops for consumers’ eyeballs and money. As these companies aim to achieve ‘too big to fail’ scale, it is possible that the market consolidates further and sees a flurry of M&A activity in the near to mid-term.
“Their aspiration now is to offer holistic services to their customer base, so their customers are always using one of their applications,” said Dewi Rengganis, payments industry analyst at Frost & Sullivan in Kuala Lumpur.
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