Welcome back to this week’s transcribed edition of Equity, TechCrunch’s venture capital-focused podcast that unpacks the numbers behind the headlines.
This week, Crunchbase News’s Alex Wilhelm and Extra Crunch’s Danny Crichton connected from their respective sides of the States to run through a rash of news about Divvy, Cheddar, SoftBank’s Vision Fund and Andreessen Horowitz. Plus, they got into the WeWork IPO:
Alex: We should move on to a business that we’ve never talked about on the show before WeWork.
Danny: To be clear, it’s not WeWork. It is the WeCompany.
Alex: But you have to put in quotes because no one knows what that is.
Danny: Sounds like a rollercoaster manufacturing company. So give us the top line numbers cause I never get tired of hearing them.
Alex: No, no, no. First we have to tell them the news Danny, what is the news then I will do the numbers.
Danny: Okay so the news was, so they originally had filed privately with the SEC to do their S1 in December and they didn’t pull it right? Or are they sort of delayed it but you know these filings don;t just disappear from the SEC but they refiled their S1 earlier or according to, I believe the Wall Street Journal, on Monday and that means that they’re sort of ready to go public and probably updated it with their Q1 figures.
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Alex: Hello and welcome back to Equity. I am Alex Wilhelm of Crunchbase News and today I have the treat of chatting with Danny Crichton from both TechCrunch and Extra Crunch. Danny, welcome back.
Danny Crichton: Absolutely. It’s great to be here.
Alex: I feel like this is an old time recording, but just you and this feels like a very 2017 for some reason I can’t quite put a finger on it.
Danny: Exactly. It’s a small team, but we don’t have a guest today.
Alex: I know. I actually, it’s just the two of us, which is perfect because what we have is a lot of smaller things and I think well I don’t know Danny, like we’d been doing a lot of IPO coverage. So today we decided to look at some smaller stuff, some venture rounds and all that. And I’m honestly kind of excited about them.
Danny: I’m excited too. So let’s dive in. So I think the big news this week was Andreessen Horowitz has raised new funds.
Alex: Yes. As expected. So if you recall back to, gosh it was a Wednesday, Dan Primack over at Axios broke this story and we were very impressed by it. And then Andreessen themselves announced it, was it Thursday morning? I think they put out their blog post yeah. So two funds really quick, a $750 million general fund. And Danny, this is, there six general fund is that-
Danny: This is their 6th fund yeah.
Alex: Okay. And critically, here’s the fun news, a $2 billion late stage vehicle called like Late-Stage Fund one or something like that. No, it’s the most boring name in the world, but it’s enormous and it’s bigger than I thought honestly.
Danny: Actually and this is part of, I think a new strategy that they’re trying to actually separate the two funds. So in their fun five, which was 1.5 billion was it was a combined early stage and growth stage vehicle. And so it looks like they’ve sort of literally on paper now have two vehicles. Presumably there’s independent kind of structures in terms of decision making and culture and that sort of thing. Andreessen hired David George out of General Atlantic to go and run that growth fund earlier this year. It really looks like they’re trying to double down on growth.
Alex: So General Atlantic, for those of us who are more venture focused unless PE focus, what’s the thumbnail on that form?
Danny: So a very well-known and long-term growth investor. I believe they’re actually out of Connecticut. I want to say they’re actually based out of Greenwich, hopefully that’s right. Or I’m going to get emails, but they’ve long been investors. They were investors in Alibaba and a bunch of Chinese stocks, bunch of the major names that we know about in Silicon Valley. And so it’s sort of a rich pedigree and David was there since, I want to say 2012, he was a principal there. This was actually a promotion for him. I mean to go from principal at General Atlantic to full GP at Andreessen running your own $2 billion growth fund is good sign that things are going well.
Alex: Now going back to the combined versus separate point, I didn’t want to stick on Andreessen too long, but to me it’s interesting because Kleiner had late stage and early stage funds and then they split. So I’m curious if this could yield down the road some more internal divisions about economics and a decision making choices around which fund gets what deal. Do you think that could happen or do you think the split will remain pretty healthy for Andreessen?
Danny: I think it’s much more pragmatic to have separate funds. However, I think there’s always a lot of optimism between early stage and late stage funds. The idea is, the early stage funds are sourcing their meeting, the founders and those first attempts to talk to people. Maybe you miss it in the early stage round. But the idea is that that carries over to the late stage. If they’re sort of shared economics, the hope is everyone cooperates. The reality is just early in late stage investing is just different the metrics are different. The way you approach those investments are different.
Danny: The team sizes are different. And so, I think realistically the pragmatic approach is to have separate funds, different people working on it, maybe a little bit of cross economics. So you’re sort of incentivized to help each other. But you really want those teams to be separate.
Alex: Now let’s go ahead and scoot through the rest of the news on the Andreessen front because there’s the context here that they also have the larger crypto vehicle, I think now two bio funds, one that was like 200 and one that was like 450. So Andreessen has now had a host of funds. I mean they are now really, I mean, as established as Kleiner was 20 years ago, I feel, so they an established player. And finally now it seems to meet that mantle in my view and overshadowing stuff like Mary Meeker’s new fund, which is kind of an upstart now, ironically given where she came from.
Alex: But in perspective wise, the $2 billion Andreessen fund is much larger than the $1.25 billion bond fund that Meeker raised earlier this year. So any last thoughts Danny or are we scooting on to SoftBank?
Danny: Well, I think we need to talk about SoftBank because you think $2 billion is a big fund.
It turns out that is not a big fund. So we always talk about growth and startups growing, but we rarely get to talk about doubling at the venture scale. And so this week I think there’s just been this incredible news that Connie at TechCrunch followed up on and I think it was by a couple of publications. But the Vision Fund is going to double its employee count from 400 to 800 investment professionals, which just blows my mind having worked at venture firms that had 10 and 12 people.
You almost have to imagine that they’re going to rent out Oracle Park and just do partner meetings on Monday, like on the field and maybe Masa Son is sort of like an umpire and whoever hits the ball out of the park, that’s like the $400 million check that goes.
Alex: I was not going to stop that analogy until it ended. That was the best or worst, one of the two things I’ve ever heard in my life. I can’t decide if that is brilliant or terrible. But Danny, what would 800 people do at one firm? I mean that’s a lot of diligence. How many people does it take to write one check? Do they like pass off each letter of the check to a new person? What does that mean?
Danny: I think just there’s the scale of ambition and I think it also shows that they’re trying to paralyze a lot of these investment rounds. So if you’re trying to do 15 or 20 checks all at the same time, suddenly you’re 800 person team becomes, 40 each. Which is still a lot, but when you’re writing a half billion dollar check, you probably should check some boxes and make sure you’re crossing your Ts. I think it’s just we’ve heard many rumors about someone wanting to raise 300 billion bucks and so this is sort of a prelude to a much, much more ambitious fund coming soon.
Alex: Yeah. That’s the question. Does the Vision Fund two – if it is put together and when it might be finished – will it be 100 billion in size, like Vision Fund one or will it in fact be larger as they may wish or smaller if they’re stuck with it. I’m curious, but we’ve seen some stuff that is dicey. Wag, a vision fund recipient was in the Wall Street Journal and they were looking at some second measure data, kind of looking at the spin rates around the products and Wag hasn’t grown super fast since it raised a bunch of money from SoftBank’s Vision Fund.
So the question then becomes, is some of the money being invested inefficiently? And if so, by how much and is that driving down returns? And if so, that could impact the size of the next Vision Fund should it be put together. But withh 800 people. What can you not do?
Danny: Well, I think the solution here is if you remember, there was this huge debate of how much money Vision Fund should put into WeWork. And I think the answer is, if you just hire enough people on your own team and you throw them all in a WeWork, you sort of get the economics on both sides. You just fund the company itself. So it’s a new approach to venture investing in the Valley today.
Alex: It’s definitely the latter, but if you tried, the former wouldn’t actually work. If you’re listening and think it was brilliant, that wouldn’t actually function. But going from the ephemeral to the real, Cheddar, everyone’s favorite sold for $200 million this week and I was surprised at the dollar amount and happy for the whole team.
It’s rare to see a media company exit at an up valuation that seems to be not a fire sale. So I want to applaud gently for the Cheddar team. There are lots of valuation was $160 million post. So not exactly the biggest exit up from their last funding round, but hey, you know what, it wasn’t a Mashable fire sale. It was a solid nine figure exit for people that I like. Danny this is something that rocks.
Danny: I think you’re absolutely right. We rarely see positive media outcomes. I mean it was rumored today in the Wall Street Journal that Tumblr is on the sale chop a chopping block, which is owned by our TechCrunch parent company, Verizon Media. But that’s not going to be a happy exit.
And most media companies are not happy exits. And so not only is it a $200 million exit, but they only raised, at least publicly from what we understand, $54 million. And so you’re looking at sort of four X on invested capital. I mean that, that’s a great exit. That’s what you want. You want every dollar going in, having $4 coming out.
Danny: That was a good sign and, and look, the revenues were quite strong. So according to Variety, the company had $27 million in revenue in 2018, $11 million in 2017. And so I think the story here is, they really figured out revenues early. They were disciplined with cash. They hit a segment that a lot of people want. And there’s a buyer, which happens to be a fairly large nationwide cable provider who is willing to buy.
Alex: Yup. And in terms of, is it spelt Altice? Is that how you pronounce that? I looked them up before the show, they’re a cable TV company, they’re in about 5 million homes and they’re worth about $16 billion. It was a moderately large deal for that company. It wasn’t half the value of the firm but it also wasn’t $5. So it was moderate to small on the size. But again, happy, fun, good.
Danny: It is fun. One other fun side nots of Cheddar which I learned today, Cheddar at some point bought ratemyprofessors.com as part of their CheddarU, university focused a news network.
Alex: Well good for everyone who rated their professors. You helped out with the only good media exit in the last 28 years. Thank you. Moving back towards our traditional fare this week, there was a round from a Utah company called Divvy.
They raised $200 million led by Scott Sandell at NEA, they had raised a quarter billion dollar credit facility earlier this year and it picked up about $15 million in venture capital in 2018, but let me tell you a story Danny. December 17 seed round, series A and series B in 2018 you kick out 2019 quarter billion dollar credit facility. You move into Q2 with a $200 million round. That smells like growth to me. What do you think?
Danny: I think it’s incredible. I mean when you think about it, this is a company that was founded in February of 2016. So just a little bit more than three years ago. Right? And so I think there are so many great angles here. One is if you look at Brex and a lot of these other companies that are still targeting credit card spend or just spend in general, there is such an opportunity here when we see the Brex became this billion dollar Unicorn overnight, Divvy is going down the same route.
Danny: I don’t want to say they overlap entirely. They sort of have a different customer base from my understanding, but they’re solving the same problem, which is companies spend a lot of money and have no insight and work arounds. We fill out expense reports, we fill out receipts. We get charged for LinkedIn accounts for employees that left us five years ago. There’s just complete chaos. When you’re going after a place which has a trillion in spend plus, it’s amazing how much money you can make really fast.
Alex: Yes. Now. A couple more notes about Divvy. So I got on the phone with them. I think it was Alex Bean the one of the co-founders and their model is a lot of fun. So they don’t charge for the service, but they do distribute credit cards and virtual credit cards to employees that you can set limits for.
Again, you’re appointed by giving people insight into their spend. And because of the way interchange works, they pick up a couple of basis points on transactions, voila Revenue. So they can offer a free service to companies that helps the firms and they drive revenue through usage, not by taxing usage, by making people pay per receipt or per employee.
Alex: So it’s a pretty cool model that you would go, “well that would work or it won’t”. But according to the firm, they have quote “crazy product market fit”. And I think that’s the growth story that’s driving this really rapid fire venture cycle. And how they have so much access to credit and so much capital in the bank. It’s their race to lose, I feel. But one more thing on Brex. So Brex reinvented the corporate credit card and we’ve covered them extensively on the show because they did this ad push all across.
Danny: I’ve never seen so many ads on Caltrain in San Francisco and my life.
Alex: Brex is targeting a bit more of the Amex market, whereas I feel Divvy shooting a bit more for in between corporate cards and concur. So slightly different targets. I agree. There is some overlap. They disagree shockingly. But $200 million is a big ass round and it’s a Utah based company. So one more wind for the Silicon Slopes.
Danny: I always joke about Utah, but seriously the number of great companies, particularly on the enterprise side. You have Pordium and a bunch of others. I think we talked about Podium a couple episodes back but Utah is really becoming a base of operations for a lot of these great enterprise companies. I think to double down on this, the business model here is I think the future of a lot of enterprise software, which is you don’t charge for the software. The software is free. I mean we saw this I think first with Zenefits. Where you got this HR software, but then you got the revenues which came from being the broker of record for health insurance. And so there’s sort of this indirect way to get paid.
Danny: I think we’re going to see more and more of these. Someone should be doing this in procurement. Someone should be doing this in a bunch of other spaces that enterprise touch in terms of spend. There are a lot of that are going to get built and there’s nothing like selling some of those free. There’s nothing like selling free.
Alex: So actually building on that, I know we’re supposed to be quick here, but why not. Chime, a neo-bank, Acorn has a banking component to it and Divvy all are currently finding great ways to scale businesses by offering cheaper free services because they are finding ways to make money off interchange that percent they get at transactions. That bit of Dodd Frank that changed the way the laws are set up in our country to help this be more effective and more powerful for smaller businesses has been huge.
Alex: My only fear is what if the laws change and that gets taken away? That would be a platform risk via the federal government for any of these firms, but investors are not concerned and they’re pouring money into growth where they see it and they see it here. Anyways, we should move on to a business that we’ve never talked about on the show before WeWork.
Danny: To be clear, it’s not WeWork. It is the WeCompany.
Alex: But you have to put in quotes because no one knows what that is.
Danny: Sounds like a rollercoaster manufacturing company. So give us the top line numbers cause I never get tired of hearing them.
Alex: No, no, no. First we have to tell them the news Danny, what is the news then I will do the numbers.
Danny: Okay so the news was, so they originally had filed privately with the SEC to do their S1 in December and they didn’t pull it right? Or are they sort of delayed it but you know these filings don;t just disappear from the SEC but they refiled their S1 earlier or according to, I believe the Wall Street Journal, on Monday and that means that they’re sort of ready to go public and probably updated it with their Q1 figures.
Alex: Exactly. So my read of this was they started the process with the SEC in December. Got their first filing and kept working on it, got through Q1, updated the S1 to an S1/A. I want to see it now. So I’m really hoping that they will drop it onto the world. But I promised the top line numbers. Per our notes doc, in 2018 WeWork had $1.8 billion in revenue, a staggering amount of growth from 2017 however, it yielded $1.9 billion in net losses.
Danny: It’s very enjoyable.
Alex: They had $1.8 billion in revenue and $3.7 billion in GAAP expenses. They ended up with way less than that. A worse than negative 100% net margin on the year. So that’s like not selling a dollar for 50 cents but selling a dollar for like 48 cents.
Danny: Maybe they need better expense management.
Alex: Yeah. And just, I don’t know, different philosophies towards growth. I mean, WeWork as a company did find a crack in the market where they could change things and drive a lot of demand and a lot of revenue and really remake the face of coworking in America and around the world.
They also discovered a way to do that while consuming all the money in the world. And that’s where the story is slightly less compelling. However, if Uber can go public, why not WeWork, right? I mean it doesn’t make sense to me.
Danny: I think it will make a little bit more sense to me. It’s interesting that WeWork makes no sense. You don’t have the network effects. It’s very easy to build a real estate. I think more and more landlords are figuring out how to do coworking. They may not be very effective at it. Maybe they’re just never going to have the brand that the WeCompany has sort of put together. But, it blows my mind to think that, at the end of the day they’re selling real estate.
Now that said, a bunch of smart investors have wanted to put an enormous amount of money and nothing less than SoftBank which almost destroyed the fund over trying to invest in WeWork. And so when you see these VCs really doubling down and we don’t have the access to all the numbers, this is always my thing is to just withhold judgment because who knows what the lease structures are for those early office buildings in Manhattan.
Danny: If they’re making $5 for every dollar they’re spending on those early leases, then yes, maybe it’s all growth. It’s all marketing. And there’s a huge opportunity here in five, six years, we’re all going to be laughing when they’re making $10 billion in revenue and it’s the largest unicorn on the planet. But I’ve never had a company so polarizing though. if you think about it, this company’s been around a long time and it’s the largest landlord in Manhattan.
Danny: It employs tens of thousands of people. All the office managers, all the people, all the cleaners, everyone for these buildings. When you get that right on down to it, we’re at the IPO, were like weeks away presumably from having all the numbers and I’ve never heard of a new opinion, it’s like this is the worst company in the world or the best company in the world and everything in between.
I just never see this. Uber, I feel like people had very strong opinions but they all sort of lined up. And no one thought that Uber worth was zero, but I feel like there are here, I feel like there’s a lot of it. Yeah.
Alex: I tried to write that story back in 2014 I brought it up in the show before I wrote a post about the bear case for Uber and Ryan Lawler made fun of me. Anyways, WeWork is a polarizing company because it is still a bet Danny.
Danny: It’s still a bet. We’ve been complaining how long it takes for companies to come out publicly, right? It takes longer and longer. They’re more rounds. There’s mezzanine capital. Public market investors don’t have an opportunity there. It’s interesting because I think if you’re a public market investor and you’re a retail investor at home, you actually can make a real bet here.
You can look at the numbers, you could do some work. Maybe you will investigate with cities it’s launching in or does its office structures. Or maybe you can get some stuff from real estate sources or whatever. And you could really make a bet and something we are going to make a lot of money on and a lot of people going to lose money. I just don’t know which one is which. Maybe it’ll be random. Maybe it’s gambling.
Alex: Jokes aside, to give people a bit of a thought into how we’re considering this company. When the S1 drops we will be very fascinated by the sequential quarterly revenue growth, especially in the second half of 2018, if you recall Uber’s numbers on a year over year basis comparing 18 to 17 it looks pretty good. But when you drilled into the second half of 2018 there was a dramatic revenue deceleration into the second half of the year, despite still having billion dollar plus losses.
Alex: That is why Uber is probably struggling to get the valuation that it wanted. And so if WeWork had, a similar deceleration in revenue growth, the growth story falters, the losses remain and that’s when you get sticky. So that’s what we’d be looking for. I’d love to have that S1 as early as tomorrow. It’ll probably not be tomorrow, but you don’t tell the whole world you’ve refiled your S1 if you’re not getting ready to go. So that’s the shake. Oh, and Danny, do you think it will be a direct listing?
Danny: No.
Alex: No.
Danny: They need to raise a little bit of capital. Interestingly, they did some analysis that the IPO capital, will probably go out the front door in like four to six months. This is bad. I mean, it’s just burning down whatever they raise, it’ll go out in like weeks.
Alex: I mean, I want to work for our company someday that has that approach to spend because I would like to fly business class.
Alex: We’re going to move on to Slack now so we don’t get any more trouble with the WeWork PR people who are going to call me again. Alright so Danny, you did some very important work on the slack direct listing S1, and you found over a hundred million missing dollars. And I read your piece over on Extra Crunch with a lot of the excitement. So tell us the top line here.
Danny: What I want to focus on is, so now that we have Slack’s S1, we know how every round progressed in the company’s history. So the company has raised 15 rounds, series A through H, including some multi-tranche rounds. I wanted to compare how the tech press performed in covering those rounds compared to the reality of the company’s fundraise.
And for the most part, everything was fine. TechCrunch, Bloomberg, Re/code, a bunch of others. We all got the numbers sort of ballpark right, some were off by a little bit, but you can imagine that these rounds may have fluctuated a little bit late or they closed with some extra investors. But the one that was strange as the series G which was widely reported at $250 million bucks. This was the round led by SoftBank and the final number was actually more like $463 million.
Danny: The discrepancy was that it looked like Accel actually put an enormous amount of money into the first close of the series G, and so when that round was sort of percolated by Slack. There’s $250 million, of which I want to say $90 or so million of that was actually from Accel. And then the Vision Fund, actually a month or two later closed on another $150 million investment into the company.
The total round was significantly wider than was ever reported up until today. When I went through the S1, I was surprised to find that we just had totally missed this. There’s just no coverage anywhere I could find, that there was $163 million that got plowed to into slack without any of us knowing.
Alex: That’s because they just didn’t tell anybody and maybe we didn’t see a form D that we can then decipher to get closer to the truth. Don’t forget people listening, a lot of the news that we get about funding is self-reported.
You often don’t have regulatory filings to fact check. If our producer, Christopher Gates says, I just raised $100 million, you often don’t have the ability to call it BS unless of course it smells wrong and you can do more investigative work. But most of the time company X actually raises $11 million from investor Z is actually where it comes from. So that’s why this money went missing. But Danny, what do you think about the amount that was invested? Are you surprised needed the capital or not surprised?
Danny: I don’t think they don’t need the capital, right? I mean they’re losing money but they don’t need the capital in the same way that WeWork needs the capital. I think the question here was, the capital is available, SoftBank wants to put an enormous amount, and it looks like Accel Growth really wanted to write a huge check in.
And they took the money and the valuation was right. The valuation for that round on a per share basis was nine bucks, which was up from $7.80 in the last round. It was a sort a % increase from the previous round. And so Slack took the easy money to delay the IPO.
Alex: This has been Equity Rewind with Danny Crichton and Alex Wilhelm. What matters here is that Slack, a solid company, took on more capital than we thought, giving SoftBank a larger stake in it, heading into the direct listing, making a bet behind the company and therefore the liquidity event a bit larger and therefore more important. This also goes to show us that we don’t always have the best view into companies even when we think we have what you could call, I don’t know full clarity?
Danny: Actually, for Slack – I mean I’ve complained bitterly for a while that more and more companies are not filing their form D’s which are required – they’re not literally required – but there a safe harbor. So the best practice is a filing with the SEC every time you raise a venture round, but Slack has never filed. The S1 was the first filing that Slack has ever had with the SEC. So they’ve raised 15 rounds and then it never filed a form for any of them from what I can see.
Alex: That’s cause Stuart is just too cool for the SEC.
Danny: He’s too cool for school.
Alex: That’s the joke that I was shooting for.
Danny: Yes. Thanks Alex.
Alex: Okay. Well, on that note Danny, this is where we tie it off. So Danny, thank you as always for lending us your voice and your time. We’ll be back in seven days and everyone stay. Cool.
Danny: Thanks Alex.
Alex: Alright, everybody, thank you for listening and a big thank you to our producer, Christopher Gates, our executive producer Henry Pickavet, and we will see you all right here next week.