Equity transcribed: Is the tech press too positive in its coverage of startups?

Welcome back the latest transcribed edition of Equity, the TechCrunch podcast that takes a closer look at the startup headlines from the week.

Kate Clark and Alex Wilhelm kick this week off by discussing comments on Twitter made by Y Combinator co-founder Paul Graham about the tech press. They then took a look at Uber’s first-quarter numbers, Brex raising, SoFi raising (and entering talks to buy the naming rights for the upcoming Los Angeles Rams stadium) and a lot more.

Here’s a sample:

Alex: Uber’s expectations were low. They had set, in their last S-1/A, these figures out and they came in the middle of revenue and loss expectations. I think the phrase is priced in, and that’s an odd place to be.

Kate: Yeah. It’s good that they came in on expectations. Lyft, you remember, had losses that were way, way, way higher than expected. But I would just say bottom line is, none of these companies, particularly I’m thinking of like Uber, Pinterest and Lyft, which are just recent unicorns to have gone public that are not enterprise software businesses. Is that they’re not profitable, and they’re not really showing clear paths to profitability yet. So, it’s just a little bit like, well, not looking so hot.

Alex: Just a little bit more about this. Because I know people aren’t going to go read the earnings reports because it’s boring. But if you dig into it, gross bookings rose 34% year over year. But adjusted net rev only grew 14%. Which means that of that new gross bookings, Uber’s take rate probably went down a little bit. Which implies that probably Uber Eats grew a lot and Uber’s percent cut of that revenue is smaller. So, the gross bookings growth looks great, but it doesn’t translate.

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Kate: Hello, and welcome back to Equity, TechCrunch’s venture capital focus podcast. I’m back this week with Crunchbase news Editor in Chief, Alex Wilhelm Hey Alex, how’s it going?

Alex: Things are good. It’s cold out in the East Coast. But I’m more excited to hear about things on your end because you are in the new TechCrunch podcast studio. What is it like?

Kate: Yeah, so TechCrunch moved into our brand new offices this week. We’re in a much larger office that’s connected to some other Yahoo businesses. Our new studio is in shambles at the moment, and we’re figuring out what we need and how we’re going to build a new home within this new space. But it is nice and warm in here. I’m happy about that.

Alex: Yeah, also the old podcast base was the back of the TechCrunch office, buried back in the old studio. I’m hoping for some more light and maybe just it not being so back of the cave.

Kate: It is much more like a cave than before. There’s no windows. Yeah, you’re going to be disappointed.

Alex: Equity is going to get sadder as a podcast now because we’re just going to be totally covered in gray and lack of light. But anyways, before we get totally off topic, there has been drama on the Twitter. Well, everyone knows Paul Graham, very well-known part of the Y Combinator universe, Kate. He did a tweet today, as we say, that picked up a lot of commentary from ourselves and a lot of other media people. We wanted to just riff on it for a second. So, Kate, why don’t you tell us how this kicked off?

Kate: Yeah, so let me just read the tweet word for words so everyone can develop their own opinion. But he said, when a startup is small, it seems cute and the press writes encouragingly about it. When it reaches the size where they can get attention by attacking it, they do that instead. In Paul Graham’s tweet, which like Alex said, kind of went viral on VC Tech, Twitter today. He’s insinuating that journalists sensationalize startup founder’s activity or behavior in order to get clicks without real justification to do so.

Kate: There were a lot of really great responses, I thought from the journalist community basically being like, “Yeah, you’re absolutely wrong, and you don’t understand what the purpose of our jobs is if you’re going to say something like that.” One of the responses was from the New York Times reporter, Aaron Griffith. She said, “Maybe it’s because those startups go from having no power to having a lot of it. What they choose to do with that power should be scrutinized.” I personally agree.

Alex: Exactly.

Kate: I personally agree with that, 100%. It’s definitely our jobs to draw attention and to scrutinize when appropriate companies when they’ve raised millions or hundreds of millions of dollars, and they have much more power than when they were some fledgling seed stage startup.

Alex: Yeah, when they’re that small, they have no power whatsoever. All they have is potential and a dream and that’s why they’re fun to write about when they’re small because they’re these kind of orthogonal bets against where the market is today. Then later on when they’ve scaled up and then revenue hits nine figures, and they may have a user base in the hundreds of millions, all of a sudden they are the establishment. To expect them to be treated the same is ridiculous. It makes no sense at all. Treating Facebook the same as we did when it was a couple of nerds in a dorm room versus now it has 2 billion plus people on its platform is silly. The impacts are larger, the responsibility is higher.

Alex: Literally, this is a quote from Spider Man, with great power, et cetera. It’s amazing that we have to keep re-litigating this. But somehow Paul Graham thinks that everyone’s being very mean to his rich friends. I just find it ridiculous.

Kate: Right? I know. After reading Paul Graham’s tweet, I thought for a moment about the way that I cover early-stage startups versus larger ones. Of course, when I’m covering a startup, like a true brand new company that’s maybe a year or two old. Still in the process of building its first product, of course, I approach it differently. Because it’s like you said, its founders who are inspired by an idea. They’re excited. They don’t have a lot to show for themselves, and therefore they don’t have a lot of control or power.

Alex: Right.

Kate: The same questions you might ask a much larger company just aren’t going to come up in the same way.

Alex: Yeah. As a company scales, it’s treated differently. It’s just like, eventually you go public and you do quarterly earnings reports. It’s just part of being a larger company with more influence and more power. I think there’s this perspective out there that the media exists, and wins in its own view when it tears people down, but that’s just not true. A lot of the business media, which is a generic term for the startup in Money World, Kate, that you and I write in, is ridiculously positive to the point it’s almost vomit inducing.

Alex: To me, we actually as a group, are too positive. We covered too much the nice stuff. Like oh, they raised some money, and we don’t do enough digging into the failures and the frauds and whatnot. In my view, actually, Paul Graham is not even close to right. I think we should be more negative on a chronic basis. I think there’s room for that as opposed to more room for niceness towards people that have both money and power.

Kate: I agree. You also had a good response to Paul Graham’s tweet. What happened after you tweeted that?

Alex: Paul blocked me, which is not a huge surprise. Really, I’m surprised that he hadn’t blocked me before. Because I’ve made I think, renewed comments about his tweets in the past. So, now I’m blocked. The next time Paul Graham tweets, Kate, you will have to take a picture and text it to me or something because I’m no longer allowed to view Paul’s tweets. I’ve only met Paul Graham once. So, it’s not like he and I were particularly close. I’m not going to cry over this, it’s fine.

Kate: Yeah, it’s not it’s not worth crying over. I agree.

Alex: This is one of those things that, this sounds like inside baseball, everyone. But here’s why this matters. Paul Graham is an extremely influential person. A lot of people really look up to what he says. His essays, his thoughts, his impact in the broader world of early stage companies. When he says something, people listen and internalize it. He is an influencer in the old school sense, if that makes sense.

Alex: When he said these things, the reason why the people in the media are like Aaron Griffith and myself and Kate and I think Alex Conrad from Forbes was in there too. I presume people from Fortune and [inaudible 00:06:18] everyone notes this is it’s not right. When someone influential is wrong so publicly, it’s frustrating, and especially when they essentially treat the media as a single entity that’s malicious and is always sensational is a negative sense.

Kate: Yes, I think it’s worrisome because it gives you an idea of how he thinks about the tech media and how he thinks about our role in covering startups and larger businesses. I think it’s important like you said, you’re trying to explain why this matters. For Paul to have blocked you and my assumption is he also blocked the other journalists who were critical of him. Damn, for someone with that much power to be that opposed to any kind of criticism on Twitter, which is an open forum to have these kind of discussions I think is a little bit disconcerting as well.

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Alex: But I want to move on. This was just one thing that happened today. There are big bits of news out there. Kate, one of which was something that I was very excited about, which is Uber’s very first earnings report as a public company.

Kate: It’s been about three weeks now since Uber went public. We all know how that went. It didn’t go so well. Its been about three weeks as well since Lyft posted their first earnings report since becoming public. Today it was Uber’s turn. Everything came out as expected, which is a nice change for Uber because I feel like they’ve become known as a company that’s full of surprises, especially after that disastrous IPO.

Kate: Uber posted losses of 1 billion on revenue of 3.1 billion for their first quarter of 2019. Gross bookings in that time period Rose 34% from the same time period last year to 14.6 billion. Both Uber Eats and some of their other bets like Uber Freight and Mobility, Micro Mobility that is continue to show a lot of growth. What did you think of their earnings report, Alex?

Alex: A lot of thoughts. The growth that the company put up was essentially 20% year over year. That’s from the top line number that, Kate, decided was 2.1 billion. If you drill down a notch into what they call adjusted net revenue, which is them putting up a more conservative revenue metric, the revenue only grew 14% year over year, which is not much frankly, for a company that’s been kind of dubbed a growth machine and valued as such throughout its life.

Alex: Another just a couple of points. They’re adjusted [inaudible 00:08:37], which is a very massaged profit metric that is less strict than gap operating income or gap net income grew … Well, it got worse. Sorry, from negative 280 million in the year ago quarter to negative 869 million in this most recent quarter.

Alex: Not only did their loss of operations double, just the [inaudible 00:09:00] effectively tripled, more than tripled, which is not good. Then I think they had cash burn in the quarter on an operating basis, like 700 and some million. A lot of this just doesn’t feel good to me. I was expecting the stock to take a ding, but as we record, it’s currently up 2%. I don’t know what to make of that. Kate, it’s not growing, it’s losing more money, and it’s worth more money than it was before. Can you square that in your head at all?

Kate: No, I can’t. But I was doing some reading as I was working on my story on the earnings report. Some of the analyst reports I was looking at were basically like, well, Uber has been performing so badly, they essentially were like, we think that it has to go up at this point. It has to start accumulating value. Honestly, I didn’t know, I truly think that people are at this point, just like well, there’s only one way to go and it’s up. That’s how I’m not justifying, but attempting to understand why the stock’s rising.

Kate: The thing is though, I just feel like when it comes to stock performance, like in the hours or the day even after earnings reports? I feel like it’s just bizarre, and it always seems meaningless to me. Because I’m always trying to understand why is stock going up when that company failed to make estimates? Or why is it going down when the company outperformed estimates? That happens all the time. I still haven’t really wrapped my head around why that is.

Alex: I think it’s usually there’s something else going on. The way that I do this, this may be too much inside baseball for people who don’t read earnings reports. But usually there’s a high level revenue metric that’s expected, and then there is a EPS metric, which is usually adjusted in tech. And then there’s their forecasts. I think that’s what people often don’t read. I’m sure you do, but some people don’t.

Alex: They just look at the single quarter’s performance compared to expectations and then expect us all to move based on that. But in a lot of companies cases, like I think Zora today, they had I think, some growth problems down the road and that really dinked their share price. I think there’s just a pantheon of possibilities about what can cause issues or benefits.

Alex: But in this case, you’re right. Uber’s expectations were low. They had set, in their last S-1/A, these figures out and they came in the middle of revenue and loss expectations. I think the phrase is priced in, and that’s an odd place to be.

Kate: Yeah. It’s good that they came in on expectations. Lyft, you remember, had losses that were way, way, way higher than expected. But I would just say bottom line is, none of these companies, particularly I’m thinking of like Uber, Pinterest and Lyft, which are just recent unicorns to have gone public that are not enterprise software businesses. Is that they’re not profitable, and they’re not really showing clear paths to profitability yet. So, it’s just a little bit like, well, not looking so hot.

Alex: Just a little bit more about this. Because I know people aren’t going to go read the earnings reports because it’s boring. But if you dig into it, gross bookings rose 34% year over year. But adjusted net rev only grew 14%. Which means that of that new gross bookings, Uber’s take rate probably went down a little bit. Which implies that probably Uber Eats grew a lot and Uber’s percent cut of that revenue is smaller. So, the gross bookings growth looks great, but it doesn’t translate.

Alex: If you look at the company’s cost of revenue, exclusive of depreciation and amortization in the year ago quarter, it was like 44.7%, according to my math. And then in this most recent quarter that had risen to 54%. So, the revenue quality went down in a sense because of, I presume, a rising percentage of gross bookings from Uber Eats.

Alex: These are just not things you expect to see in a company that’s going to crush it. So, I don’t know how it’s valued. But you know what, Kate, this is why I’m not an investor and all my money is an index funds. Good luck, everyone with that.

Alex: All right, but putting Uber aside and going back to our main affair, if you will, the private markets. Let’s talk about SoFi. Kate, social finance has been a unicorn for forever, I feel, and they raised a fresh $500 million plus this week. Which took me a little bit by surprise. Had this been on your radar before it was announced?

Kate: No, definitely not. I think the reason and you’ll get to this, of course is because of the investor. When it’s an investor like this, I think we have a lot harder of time, and hearing VC’s gossip about it on the streets of San Francisco.

Alex: Or just in our DMs. VCs can be chatty. They’ll just share.

Kate: Oh, VCs love to gossip. Are you kidding? I think they like to gossip more than anyone in any other profession.

Alex: Yeah, that’s probably right. Anyway, it was the Qatari Investment Authority which apparently has been eyeing SoFi since 2017. Led the round. There’s just a lot of weird stuff with this one. Dan Primack over at Axios pointed out that it’s a down round. Quote, “Not only from the Series G infusion in 2017, but also from the Series F round in 2015.” I couldn’t independently fact check that, but this is based on a Delaware stock authorization filing that was uncovered by the “Prime Unicorn Index”.

Kate: What is the latest valuation?

Alex: Oh gosh, it was 4.3 billion pre-money. I’d bet you $1 that my memory is correct there. So, just over 4.8 billion post.

Kate: That’s exactly what I’m seeing and just a fact check Primack, that actually doesn’t seem right based off the data I’m looking at. So, that’s interesting that he said that. I wonder where he’s getting that.

Alex: I thought the Series G was 3.8 plus five hundreds. So, 4.3. To me, it looked exactly like a step function. But Dan, to his credit, smart man. Somewhere in there is the truth. We’ll note it down and put into a story. Sorry about that. But it’s weird because SoFi had 1.7 billion in cash on its books. So, it didn’t need this money, but it took it on anyways. Now, it has about 2.3 billion in cash and Anthony Noto, the former Twitter CRO and COO or maybe CFO, one of the two. Tweeted out, they had like 2.3 billion leftovers.

Alex: They had a bunch of money. They haven’t spent a lot of the money they’ve raised, and they raised a bunch more. Why is a good question. They now have more money than God, but they do have one particular plan for some of the money that was strange. So, Kate, can you explain to me why the LA Rams are part of our show this week?

Kate: Yeah. Interestingly, SoFi announced that they were going to buy the naming rights to the LA stadium. I already forget the name of the team, Alex, do you remember the name of the team?

Alex: The Rams.

Kate: You just said it, didn’t you?

Alex: I did.

Kate: Yep, I instantly forgot. Well-

Alex: Sports only.

Kate: I don’t follow sports closely as is probably obvious. SoFi basically raised a bunch of money and turned around and instantly purchased naming rights to a stadium. To me, that looks like they took that Qatari money and were like, why don’t we just use it to buy a stadium. I’m wondering, given what they do, I understand why they want that kind of widely seen consumer branding. It’s kind of like how Brex pays for all those billboards. People have to know who they are and what they’re doing. Okay, sure, but I thought it was pretty funny and there was a lot of commentary about like, oh damn, like their investors are probably pissed at them using that much money to do that.

Alex: If I recall my notes correctly, it’s a 20-year deal at $20 million per year, so that’s 400 million. Maybe the Rams will still be good in the future. For non-sports fans, the Rams were pretty good last year, better than my poor Eagles. That was a bummer. But when you are the naming or title sponsor of a stadium, they say it a lot. You get a lot of ad stuff for that. If you want to build consumer mindshare, maybe it’s a smart way to go about it. But it does feel a little bit odd to raise 500 you didn’t need and then promise away 400 of that to a stadium naming rights. It feels bubbly to me, Kate. I’m sorry, it feels extravagant.

Kate: Right. Of course, I feel the same way, but companies in Silicon Valley are going to raise money if it’s available. I imagine the Qatari investment fund is anxious to invest in SoFi and was just readily available with that cash. One of those things were a way of saying no to the money. Why not just put it in the bank and be smart and scale intelligently. I’m not saying that SoFi will do that. I don’t really know what their leadership is like and how they might use that kind of money. But the Brex, which we’re going to talk about soon, also is raising a whole bunch more money despite having or claiming to have a bunch of money in the bank already.

Alex: It’s a hilarious period of time in which we live, when startups can accidentally have over a billion in cash before they go public. It’s weird. But I want to throw in one quick note about the Qatari Investment Authority. If you don’t know Qatar, the country it’s a theocratic monarchy that has a history of poor treatment of foreign workers. It’s all very Googlable. It’s another example of money that isn’t … I don’t know what the right word here is, Kate, squeaky clean, going into tech companies and large blocks.

This actually was also in the news, thanks to WeWork. I think Adam Newman, what the hell did he say? He said something about he was going to stop taking Saudi money now?

Kate: Yeah, WeWork’s Adam Newman actually said, “global companies need to start taking a stand on what’s right and wrong. Not just for the sake of paying less taxes or getting in favor with the government of the country they want to enter. Actually, for the sake of humanity.” And then he went on to say that, he was going to be a lot more thoughtful about where he took money from. But like you just mentioned, he’s already accepted hundreds of millions from, like you said, not squeaky clean money. A lot of people just call it dirty money. That might be extreme, depending on where it’s coming from. But Newman has already taken a lot of this money. For him to turn around and say that now, I would say is a little too late.

Alex: After robbing 35 banks, that’s it. We shouldn’t rob banks. It’s bad. Don’t do it. Put the guns down. Come on. Anyways, it appears that technology companies have yet to find their moral backbone on this as the money keeps flowing. But let’s move to another big round, Brex is in the process of raising a lot of money right now at a shiny new valuation. Kate, what is the latest?

Kate: It’s always funny when we start hearing pretty early on when a company is “fundraising.” Because you don’t know if that means they spoke to one investor, if they have commitments from 15 investors. You don’t really know. That’s the case for Brex. Brex is absolutely, definitely fundraising. I have confirmed that with sources. I don’t know the amount, but my guess is somewhere between $100 million and $200 million. Bloomberg is saying it’s that evaluation of around $2 billion.

I talked to a source who is considering investing, and they said that they actually had heard several numbers and nothing really had been nailed down. I think we need to wait and see on that. But Brex’s last valuation is $1.1 billion. We are looking at them potentially doubling that. That does not surprise me, given the fact that Brex has seen extremely rapid growth. Brex is only two years old. We’ve talked about this a lot. They graduated from Y Combinator in the winter, about two years ago. They released their first product less than a year ago, which was a corporate card for startups.

In the last few months, they’ve been working really hard to put all the money they’ve raised to work by releasing their second product, which is an e-commerce card or a card for e-commerce startup specifically. I think we’re going to see a lot more from them in a few years to come. At this point, we don’t know a ton, we don’t have the details. The only really big detail that we do have confirmed is that Kleiner Perkins is leading the round via a former general partner there, Mood Rowghani.

He’s no longer at Kleiner. He’s actually now at Bond, which is the venture capital fund that Mary Meeker launched. She just closed her debut fund on $1.25 billion of maybe a month ago?

Alex: Give or take, yeah.

Kate: The reason that Mood is investing via Kleiner is because Mood, Mary Meeker and Noah and I think maybe one or two others that were at Kleiner were responsible for this fund they had at Kleiner. When they left, they were still general partners not fund. So, they were still responsible for actually deploying that capital. We’re seeing that happen now, and that’s why we’re seeing people who are at Bond actually invest like they’re at Kleiner, still.

Alex: Okay. That was my point of confusion between those. Because I thought the last Mary Meeker team investment out of the KP portfolio had already been announced. When I saw that, I got twisted. But the way you explained it makes sense to me.

Kate: Yeah, it’s difficult to explain. I’m sorry if I’m not doing a good job. But like I said, they were responsible for investing it. Someone close to that group has told me that they are done investing, but they haven’t completed announcements, that’s why it seems like they’re still actively writing checks. But as far as I know, they are done.

Actually, one interesting thing I learned in my reporting of just this Brex deal is that just based off whatever may be contractual obligations of some kind. Bond is actually not allowed to participate in the rounds that Kleiner is investing in out of that fund that they had, the digital growth fund that Meeker was responsible for. Bond actually can’t. I think that’s kind of an interesting little footnote.

Alex: I’m not surprised. You can’t play that on both teams, if you will. But can you go back a second, Kate and talk about how fast Brex is growing? Because I know they’re growing quickly from a capital-in and valuation perspective. But I have not heard yet from anyone, any notes about revenue scale, revenue growth. These are things that have yet to percolate into my hearing. To be clear, I live half time in Providence, which is not Silicon Valley. So, I could be missing some things. But have you heard any notes about actual revenue or revenue growth or anything along those lines as it pertains to Brex?

Kate: I haven’t heard a lot. The CEO, he told me that they do have a lot of money in the bank. So, they’re being really cautious about their spending. Then I think you may have told me this, but Brex is pretty open about how much money they’ve saved startups. There are some people who have managed to back calculate that in a way that somehow exposes how many customers they have.

There are people who have tried to discover how Brex is doing, but this is why it’s complicated when a two-year-old startup is already raising a Series D, because when you’re at that point, you expect them maybe to share some figures like you’ve mentioned; revenue growth, customers something. But if this were a two-year-old startup raising a Series A, which is extremely normal, you wouldn’t have those same expectations. You’re left in this odd middle ground where you’re like, okay, well, if you’re really this late stage, then tell us more, tell us why you’re raising at this valuation. How could you be worth $2 billion? I would love to get a look at Brex’s books.

Alex: One last thing, we’re running a little bit late. So, I’m going to jump to our last topic really quick. But I think in your TC article about this, you mentioned how they’ve been brilliant, Brex, has been brilliant about getting into the YC world, quickly getting everyone signed up, driving a lot of growth for itself that way. That trick doesn’t duplicate. If you move into e-commerce, you start from zero. You don’t have that built-in native advantage that lets you scale very quickly and all that.

I’m curious if the same network effects of people referring to Brex and different startups and so forth will be replicable in other verticals? And if growth will be as torrid as we presume it is given these external signals like evaluation that we’re seeing.

Kate: I do think it’s going to be a lot more difficult when Brex moves into things like the fortune 500 sector, which they’ve said on the record that that is their plan. Like you were just referencing, I had said in my story that, Brex has been really successful because it tapped into a space that there just weren’t existing solutions. It’s worked really well for them. And then like you mentioned as well, tapping into the YC network of customers has benefited them so much. Because yes, they’re YC grads, so they instantly had that network, they’ve been able to sell to so many YC graduates, there are hundreds of startups within that network.

And then those startups tell their other friends and those entrepreneurs tell their friends and it’s this ripple effect that has also worked really well for companies like Stripe and Atrium, which is like a digital law firm for companies, startups. Gusto, Triplebyte. It’s this new trend in which these companies are tapping into that YC network and really, really benefiting from it.

I don’t know how Brex will scale. Because like you said, that’s not something that’s going to work in every single new product that they come out with.

Alex: Yeah, and to be clear there, this is not a knock against Brex. Every Y Combinator company leverages the Y Combinator family and network to grow and get their first customers. It’s fine. It’s totally okay. But the question is how fast can they replicate this in other places?

Anyways, Kate, I promised I’d be really brief about this. So, let’s see how fast I can do it. But CrowdStrike filed an S-1/A since our last episode, and they are going to sell 18 million shares at $19 to $23 per share on a non-diluted basis, that’s evaluation between $3.7 and $4.5 billion. I believe they had a $3.0 billion valuation at the end of 2018.

Alex: They essentially doubled their revenue. According to the expectations for the most recent quarter, they put out ranges, and their operating loss fell in the same period compared to the year ago quarter. Essentially, they have falling operating losses, doubling rev, give or take. They also posted rising SAS efficiency. On the whole, the CrowdStrike offering looks like it’s going to take off, and we will have more notes about that when we get a final price in the first day’s trading.

Alex: But Kate, I think that wraps up.

Kate: I think that sums it all up. So, thanks for joining me again, and I’ll see you next week, Alex.

Alex: All right, see you in the studio. Bye.