Record Funding for Climate Startups in Q2

August 17, 2022 tremendousblog 2 Comments

My appointment got cancelled, so I get to spend the afternoon with you guys! And we’ve got some big news…

As founders struggle with a down market, one corner of startupland is flush. Climate startups raised record funding in the second quarter.

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From a report out this morning on Bloomberg:

Carbon and climate startups have attracted record investments at a time when other industries are struggling to tap funds from venture capitalists.

Buoyed by corporate and government pledges to cut greenhouse gas emissions, a record $1.4 billion poured into climate and carbon-focused startups in the second quarter of this year. That’s in stark contrast to the broader market for venture funding, which faces its largest quarterly percentage drop in nearly a decade, according to CB Insights.

These startups have an incredible tailwind: $369 billion in government climate funding.

There are billions of dollars for batteries, reducing emissions, and reforestation. A small portion of one of these categories is enough to make a $1 billion startup.

I had a front row seat when huge government subsidies hit another part of tech — medical software. Before I became an investor, I worked on one of the leading platforms, Epic.

When the 2009 stimulus pumped $25 billion into the sector, everything went bonkers.

My phone started ringing off the hook with recruiters. And I started making a lot more money.

I wasn’t any better at the job than I was before the bill passed. But all that government money had to go somewhere.

Climate tech is about to be hit by the same kind of cash tsunami. And if you’re standing anywhere nearby, you’re going to get wet.

I favor SaaS products with a positive climate impact. Think software to reduce a truck fleet’s fuel economy, for example.

No scientific breakthrough needed, no messy and low margin “stuff,” just a proven business model applied to a new area. And it sells itself — even a climate change skeptic wants to save on fuel!

I actually just invested in a climate tech company a couple of months ago. (I’ll give you more details when the deal is announced.)

A great SaaS business is always yummy. A great SaaS business with a tailwind of government cash and regulation — chef’s kiss.

What do you think of climate tech? Leave a comment at the bottom and let me know!

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Photo: President Biden signs $369 billion in climate funding into law

Business, Technology

Angels Flocking to DTC Brands: Mistake or Opportunity?

August 16, 2022 tremendousblog 2 Comments

Angel investors are flocking to Direct to Consumer (DTC) brands, even as venture firms have pulled back. From a report out this morning in Business Insider:

A growing class of angel investors is now swooping in to write the early checks fledgling DTC-brand founders need to bring their products to market. While individual angel investors may not offer the large sums of cash or the pedigree and connections a blue-chip Silicon Valley VC can provide, they offer other advantages, DTC founders told Insider. Perhaps most importantly, they are willing to open their checkbooks to untested new brands as VCs analyze them more critically.

“If you think about the early floodgates of VC money going into DTC, it was because they were using a specific playbook,” Eunice Shin, a partner at Prophet, a DTC consultancy, said. “That playbook is broken.”

DTC brands like Peloton, Casper and Blue Apron used to be some of the best known names in tech. Now those companies are struggling and VC’s are wary.

So founders go where they can: to angels. Angels usually ask fewer questions and may be unaware of the headwinds DTC is facing.

Advertising, manufacturing and shipping costs have skyrocketed. Supply chains are a mess.

Things started to go very wrong for DTC last spring. Apple released an iOS update that let users stop ad tracking, and almost all did.

This meant apps like Facebook and Instagram had no idea who saw an ad.

The update was a gut punch for DTC brands. A woman’s underwear startup that only ships in the US could waste its precious ad dollars advertising to men in Germany.

Many startups saw their Customer Acquisition Cost (CAC) triple. What had been a solid business model no longer worked.

And it’s going to get even worse. Google also plans to limit ad tracking next year.

What happens when your advertising, manufacturing, and shipping costs skyrocket? You start bleeding red ink.

VC’s are usually familiar with these problems facing DTC. Unfortunately, many angels are not.

As scary as things may be in DTC land, a few companies have bucked the trend.

Eight Sleep, which produces a heating and cooling cover for mattresses, is one great example. The cooler surface can greatly improve your sleep.

Eight Sleep produces a highly differentiated and expensive product. Its mattress covers start at $1,845, and its mattresses are even more.

This is the kind of consumer product that can still be a great business.

It’s expensive enough to absorb a higher CAC. And it doesn’t have to fight it out with a dozen competitors.

Still, I prefer SaaS. You’re not dependent on online ads, customers tend to stick around, and your product is infinitely scalable without any messy “stuff.”

DTC brands are sexy.

A yummy steak from Blue Apron is a lot more exciting than a SaaS revenue retention product. And it’s a service you could use yourself, unlike most SaaS products.

But if we want to make returns, we have to focus on what’s financially viable, not just what’s exciting.

What do you think about the DTC industry today? Leave a comment at the bottom and let me know!

And now, I’m off to invest in some more boring SaaS companies. 🙂

P.S. There will be no blog tomorrow. I have an appointment. See you Thursday!

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Business, Technology

Will Adam Neumann Change Housing Forever?

August 15, 2022 tremendousblog 6 Comments

He’s baaaack! Adam Neumann, the controversial WeWork founder, has a new startup called Flow.

This time, Neumann plans to transform the home rather than the workplace. Details are scant, but Flow appears to be a sort of WeWork for apartments.

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Today, venture firm Andreessen Horowitz announced a $350 million investment in the startup. The deal values Flow at over $1 billion before it has even launched and is Andreessen’s largest check ever.

Neumann has bought over 3,000 apartments in Miami, Nashville and other Sun Belt cities. His plan may be to turn them into homes for digital nomads.

Imagine buying a Flow membership, just like WeWork. In return, you get access to a hip apartment in any city you want, for as long as you want.

No more taking chances on random Airbnb hosts and managing bookings. Who wouldn’t prefer a seamless, consistent experience?

Shoot, I might even move in myself!

Neumann’s strategy of buying up reasonably priced housing in the Sun Belt has succeeded before. Fundrise, through which I invest in real estate, has similar strategy and has made substantial returns.

Americans are flocking to the Sun Belt, providing a strong tailwind of demand. Cities like Miami are cheaper and warmer than places like New York.

So Neumann’s strategy seems sound — but is he the best person to execute it?

Neumann has a history of erratic and unscrupulous behavior. He trademarked the word “We” and sold it back to his own company for millions of dollars.

He also routinely bought buildings and leased them to WeWork, a huge conflict of interest. He even invested $13 million of company money into a wave pool startup.

Neumann was too aggressive and unfocused at WeWork — which is fine. All founders learn with time.

But I can’t excuse him for putting himself before his company, his employees and his investors. Unlike business strategy, ethics aren’t something you can learn.

You either have them or you don’t.

I wouldn’t invest in Flow given Neumann’s past. What’s more, a startup valued at over $1 billion before it launches is a major red flag.

Historically, most such companies implode.

However, Neumann has charisma and vision. He just might be the best salesman of his generation.

Andreessen Horowitz may just prove me wrong and make a killing here. One way or another, I can guarantee it won’t be boring.

What do you think of Neumann’s new startup? Leave a comment at the bottom and let me know!

More on tech:

Behind the Scenes of WeCrashed

The True Story Behind WeCrashed

What Can The Dropout Teach Investors?

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Photo: WeWork and Flow founder Adam Neumann

Business

Is Melvin’s Gabe Plotkin Headed to Prison?

August 12, 2022 tremendousblog 7 Comments

The SEC is investigating Melvin Capital Management for securities fraud. From a report that broke last night in The Wall Street Journal:

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The U.S. Securities and Exchange Commission is looking into Melvin Capital Management risk controls and investor disclosure after the hedge fund was crippled by the meme-stock rally last year, said people familiar with the matter.

The regulator has contacted investors in the hedge fund in recent months as part of an investigation into what Melvin founder Gabriel Plotkin and other senior executives told them following the meme-stock rally in January 2021 and whether it misled investors when it raised money last year.

If Plotkin and other top Melvin executives lied to investors in a fundraising presentation, they committed a very serious crime: securities fraud.

Securities fraud can be punishable by prison time, not to mention large fines. Of course, no one has proven anything yet against Plotkin or anyone at Melvin.

When Melvin raised money last year, it had already suffered massive losses. Its losses during the meme stock rally of January 2021 were $6.8 billion, or more than half its assets.

The worst days saw losses of over $1 billion. A day.

If you’re raising funds and fighting for survival in a situation like that, you might be tempted to stretch the truth.

We don’t yet know which fundraising presentations the SEC is looking into. But we do know that Melvin raised $2.75 billion last year from Citadel and Point72 Asset Management.

Did Melvin lie in those presentations in order to secure the bag?

When you rob mom and pop, it’s hard for the victim to fight back. But if you rob some of the richest and most sophisticated investors in the world, they can hire an army of lawyers to make your life very difficult.

This investigation comes on top of a DOJ probe into Melvin’s short sales. That investigation too could result in prison time for insider trading if wrongdoing is found.

In all, it’s not hard to see why Melvin shut down. It had lost a fortune, couldn’t get any more performance fees, and feds were circling.

I don’t know whether Melvin did anything wrong. But I do know that today, I’m glad I’m not Gabe Plotkin.

Do you think Melvin is guilty? Leave a comment at the bottom and let me know.

Have a great weekend everyone! 👋

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Photo: Melvin Capital founder Gabriel Plotkin

Business, Technology

Seed Valuations Are…Up?

August 11, 2022 tremendousblog 2 Comments

It may be tough times in startupland, but one area is bucking the trend: seed stage. Median pre-money valuations are up 33% year over year, according to a report released yesterday by Pitchbook:

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Seed-stage investment has possibly held up better than any other stage to this point in the economic slowdown. Seed deal counts have remained elevated, and median deal sizes and valuations continue to grow. The median pre-money valuation for seed in 2022 has reached $12.0 million, 33.3% above 2021’s full-year figure of $9.0 million.

Seed is my playground. And seed investors are wise to continue doing deals.

Most companies at that stage won’t exit for ten years. By then, the economy and markets are likely to be completely different.

Late stage deals have also been surprisingly resilient. Although the median deal size has dropped slightly, valuations are actually up 10% over 2021.

This is harder to make sense of, because late stage startups are close to an IPO. That makes them more comparable to public tech stocks than a seed stage company.

And holy mole, have public tech stocks gotten hammered! The NASDAQ is down 21% from its peak last year, and many major companies like Shopify are down over 70%.

Yet somehow, it’s early institutional rounds that are struggling to get done.

Early-stage valuations have started to mirror broader economic uncertainty and show signs of decline. While select startups continue to find success fundraising amid headwinds, quarter-over-quarter median pre-money valuations saw their first decline in ten quarters. The Q2 median pre-money valuation for early-stage VC was $52.0 million, exhibiting a 16.1% decrease from the Q1 2022 median pre-money valuation of $62.0 million.

This is around Series A and Series B. The slowdown at this phase mirrors what I’ve heard from VC’s.

Seed will likely continue to outperform other stages, given how much time the companies have to grow before they hit the public markets. But I still expect a drop in valuations in the rest of the year.

Pitchbook’s report for the first half covers deals that closed in the first half, not deals that began then. Venture deals often take months to close.

So, many of the deals we’re seeing were agreed to in Q1 2022 or Q4 2021. I’ve seen the market cool substantially since then.

Founders should extend runway so they can get through this tough market. And investors should continue to fund great companies at reasonable valuations.

That’s what I’ll be doing!

What do you think of today’s funding market? Leave a comment at the bottom and let me know!

More on tech:

$500 Billion in Venture Capital is Sitting on the Sidelines

Hedge Fund Giant Tiger Loses Over $18 Billion — Long Fund Down 64%

The Startup Glossary

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Business, Technology

$500 Billion in Venture Capital is Sitting on the Sidelines

August 10, 2022 tremendousblog 2 Comments

Over $500 billion in venture capital is sitting on the sidelines, according to a report that broke this morning in The Wall Street Journal:

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Venture-capital firms are sitting on a record cash pile. Their so-called dry powder—money raised but not deployed—has increased by more than $100 billion worldwide since the end of last year, reaching almost $539 billion in July, according to data firm Preqin Ltd.

The buildup comes as many venture firms have slowed deal making amid the market pullback, a signal that investors ranging from stalwart firms to niche crypto investors are hoarding capital as they grow more picky about which startups to back.

Across the market, fewer deals are getting done. Deals were down 24% in the second quarter, per Pitchbook.

That likely understates how cold the market is.

Venture deals routinely take months to close. Deals that were announced in Q2 were likely agreed to in Q1 or even before.

The slowdown really hit hard this spring, so I expect the Q3 numbers to be much worse.

I see this slowdown every day as an angel investor. One after another, VC’s and angels have retreated from the market.

Just this morning, a top VC pulled out of a deal I’m working on, citing market conditions. No matter — I’ll find them another firm.

Is this just a brief pause, given how much money is waiting to be deployed? Maybe not.

Just because limited partners (LP’s) have committed $539 billion to venture funds doesn’t mean it’ll ever go to startups. LP’s can ask the VC to slow down or stop deployment at any time.

Many have already done so, in all likelihood. And if a VC has a long term relationship with a major institutional investor, the VC will obey.

Why would these institutions pull back on their commitments? Target allocations, for one.

LP’s have taken big losses on their public stocks. If they wanted to allocate 15% of their total assets to venture capital, that would be $150 million of a $1 billion endowment.

But their stocks have fallen so much this year that their endowment might be down to $750 million. So, they can only allocate $113 million to venture.

Add the math of target allocations to general fear and wimpiness, and you’ve got yourself a venture slowdown.

What this means for founders is raising money now is going to be a lot harder than in the past. I expect the market will take a year or two to recover.

But if you keep your game tight and extend that runway, you’ll be fine.

I’m actually investing in startups faster than ever.

I’ve committed to 4 deals in the last two weeks, by far my fastest pace yet. I normally do about one deal a month.

Especially at the early stages, there are a ton of great deals out there now. And the prices are much better than during last year’s bacchanal!

This slowdown has pushed the weak companies out of the market, along with my competing investors. It’s go time!

What do you think about the venture slowdown? Leave a comment at the bottom and let me know!

More on tech:

Inside the Seed Funding Slowdown

Talking Startups and Today’s Fundraising Pullback

The Startup Glossary

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Business, Technology

The Startup Glossary

August 9, 2022 tremendousblog 2 Comments

I had wandered into a foreign land. The people spoke a strange tongue…CAC, LTV, SMB.

How could I join their tribe and learn their ways? I consulted the oracle: Google.

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The world of startups has a language all its own. When I started angel investing last spring, I found it nearly impenetrable.

Here are some of the terms I hear, and use, the most:

ARR = Annual Recurring Revenue. If you have subscription-based revenue, this is how much revenue you would make from those subscriptions in a year.

Burn Multiple = Measures capital efficiency by comparing how much money you’re losing to how much you’re growing. More here.

CAC = Customer Acquisition Cost. Measures what it costs to get a new customer. If you have 10 customers and spent $1,000 to get them, your CAC is $100. CAC is also measured by channel (Instagram, YouTube, etc.). More here.

Cohort = Customers who signed up at a particular time, usually a calendar month. You look at that group of customers over time and see how many stayed, how many left, etc.

Churn = Customers leaving you. Churn is often measured per cohort to understand which customers are leaving and which ones are staying.

D2C = Direct to Consumer. This is a type of startup that sells a physical product to consumers — think Peloton. It’s a tough business and is avoided by most investors today.

Gross Margin = Your profit margin on each additional sale. You take the revenue and subtract costs like customer support, CAC, etc. This gives you a sense of how much profit you could make as you scale and fixed costs become less of a burden.

Land and Expand = Doing more business with existing customers, like selling them more seats for your software. Closely related to NRR (below).

LTV = Lifetime Value. Measures how much money you can expect to make from a customer. This should usually be 3 times your CAC or more. More on LTV here.

MoM = Month over month. Let’s say you doubled ARR from 2020 to 2021. Your monthly growth would be 6% MoM.

MRR = Monthly Recurring Revenue. The monthly equivalent of ARR.

NRR = Net Revenue Retention. Measures how much new revenue you’re getting from existing customers minus what you lose in churn. Especially relevant for SaaS businesses. Also called Net Dollar Retention (NDR). More here.

PMF = Product Market Fit. Do customers want what you’re selling? If so, you have it.

SMB = Small and Medium Sized Businesses. This usually means businesses with 1,000 employees or less. The term is used to describe potential customers.

SaaS = Software as a Service. Software that customers pay for by subscription. SaaS usually refers to business software, but consumer SaaS is also an important category. These are consumer subscription companies like Calm.

YoY = Year over Year (similar to MoM above).

If you know these terms, life in startupland gets a lot easier! They also provide you with helpful ways to understand a business.

What did I leave out? Leave a comment at the bottom and let me know!

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Business, Technology

Top Executives of China’s State Semiconductor Fund Arrested

August 8, 2022 tremendousblog 1 Comment

A major state-backed investment fund in China is in shambles as several top executives have been arrested. From the MIT Technology Review:

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China’s chipmaking industry descended into chaos last week, with at least four top executives associated with a state-owned semiconductor fund arrested on corruption charges. It’s an explosive turn of events that could force the country to fundamentally rethink how it invests in chip development, according to analysts and experts.

On July 30, China’s top anticorruption institution announced that Ding Wenwu, the chief executive of the China Integrated Circuit Industry Investment Fund, nicknamed the “Big Fund,” had been arrested for “suspected serious violations of the law.” Ding is not the only person in trouble. Two weeks ago, Lu Jun, a former executive at the Big Fund’s management institution, was also taken into custody, along with two other fund managers, according to the Chinese news outlet Caixin.

‘Made in China’

Let’s back up a bit. In 2014, China’s government created the China Integrated Circuit Industry Investment Fund (CICF) to invest in domestic chip making. Becoming self-sufficient in these critical components is a top priority of the Communist Party.

At that time, China could only make about 10% of the chips it needed. Its goal was to get to 70% by 2025.

The fund made over $30 billion in investments, with $20 billion more planned. But those investments have started to go sour.

The ‘Big Fund’ Takes Big Losses

One of its biggest investments, Tsinghua Unigroup, went bankrupt last year. Unigroup executives are under investigation and CICF’s $2 billion investment is likely up in smoke.

Riven by bad bets and likely self-dealing, CICF has failed to make China self-sufficient in chips. Today, China can only make about 20 or 30% of the chips it needs — well below target.

A Critical Moment

For China, being able to make semiconductors has never been more important. The US and its allies Taiwan, Korea and the Netherlands make virtually all the chips China imports.

The Trump Administration cut major Chinese telecom Huawei off from critical tech in 2019. Now, the US is pressuring Dutch chipmaker ASML not to sell certain chipmaking machines to China.

China is dependent on chip imports and cut off from the latest tech. Its efforts to develop its own industry have been mired in incompetence and corruption.

China’s Missed Opportunity

What should China have done differently?

Rather than giving government bureaucrats a mountain of state money to invest, use real investors!

With the right tax breaks, chipmakers and technology investors would’ve been eager to set up Chinese fabs. Perhaps TSMC would’ve built more plants in China and China would already be self-sufficient.

The Empire Strikes Back

Turns out another country is doing exactly this: the United States.

The recently passed CHIPS Act offers huge tax breaks for making semiconductors in America. Already, Intel, Samsung, and TSMC are setting up plants.

Worse yet for China, the CHIPS act bars companies that get those incentives from investing in cutting edge chipmaking in China.

I don’t think China will succeed in creating a major domestic semiconductor industry any time soon.

Its poor relations with other countries cut it off from foreign help. And China’s politicized investment climate results in little besides bankruptcies and prosecutions.

As much as we Americans complain about our government, turns out they’re actually doing a few things right.

What do you think the future holds for Chinese tech? Leave a comment at the bottom and let me know.

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Business, Health, Technology

Male Contraception with One Simple Shot

August 5, 2022 tremendousblog Leave a comment

For generations, preventing pregnancy has fallen mostly on women. Men have few ways to help, aside from often ineffective condoms.

With abortion now illegal in many states, the need for contraception is the greatest in 50 years.

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So I was excited to learn today about an amazing new male contraceptive called Contraline.

Contraline is an injectable gel that blocks sperm before they’re ever released. It has no effect on hormones and ejaculation happens as normal.

The roughly 30 minute procedure happens in an outpatient clinic and remains effective for at least a year.

The gel, called ADAM, is set to enter clinical trials this year.

It works by setting up a barrier in the vas deferens. This barrier blocks the sperm from leaving the body.

When the gel has reached the end of its lifespan, it liquefies, removing the barrier.

Development of male contraceptives has long been stifled by a lack of research funding. Government grants have gone mostly to contraceptive options for women.

But as more federal dollars and venture capital pour into male contraceptive development, things are beginning to change.

University of Minnesota researchers have developed a male birth control pill that’s 99% effective in mice. They hope to begin human trials this year.

A contraceptive gel for men is also in development. But that too is likely five years or more from market.

Should Contraline or another male contraceptive come to market, couples would have more options than ever. Many women find IUD’s painful and birth control pills fraught with side effects.

What’s more, men have had to trust their partners to handle contraception. If men could do it themselves, society may look much different.

John Reynolds-Wright, a male contraceptive researcher at the University of Edinburgh, may have said it best:

“Maybe I’m overstating how exciting it is, but I always think of it like the iPhone. We couldn’t have imagined how the iPhone would impact on our lives until it was invented. And actually, this is something that’s got the potential to completely, radically change how we talk about family planning, about relationships, about sex.”

I hope the awesome team at Contraline can get their product to market and change the lives of couples worldwide. If men and women can share the contraceptive burden more equally, we’ll have a better world!

What do you think the future holds for male contraceptives? Leave a comment at the bottom and let me know!

Have a great weekend everyone! 👋

More on tech:

Male Contraception With an Ultrasound Device?

Inside the Seed Funding Slowdown

The Top 5 Things I’ve Learned from Angel Investing

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Business, Technology

Hedge Fund Giant Tiger Loses Over $18 Billion — Long Fund Down 64%

August 4, 2022 tremendousblog 5 Comments

Note: This is not financial advice.

Hedge fund colossus Tiger Global Management is fighting for its life. Its public stock funds have lost between 50 and 64% this year, vaporizing billions.

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From a report that broke last night in the Financial Times:

Chase Coleman’s hedge fund Tiger Global ended the second quarter nursing heavy losses amid a tech stock rout that has caused performance across one of the world’s largest hedge funds to plummet.
A long-only fund the firm manages ended the second quarter down 63.6 per cent after fees, according to a letter sent to investors seen by the Financial Times, while the firm’s flagship fund ended the first half of the year down 50 per cent after fees.

Tiger’s public stock funds managed $35 billion at the end of last year, per the Financial Times.

This puts the firm’s losses in stocks for the year at a bare minimum of $18 billion. Those losses could be much larger depending on the relative size of the flagship and long-only funds, which is not publicly reported.

This comes in addition to massive losses in private tech startup shares:

A “crossover” strategy fund, which blends Tiger’s publicly traded and privately held investments, shed nearly 37 per cent on a net basis in the first half of 2022.

After huge losses like this, the brutal math sets in. Hedge funds have to make back all of their losses before they can start charging performance fees again.

Hedge funds generally charge a 2% management fee and take 20% of all investment gains. That 20% performance fee is how hedge fund billionaires are made.

Without those juicy fees, it’s hard to keep talent.

Tiger’s long-only fund will have to triple before it can charge a performance fee again. Even if it posts solid 10% annual returns, that will take 11 years.

Even the flagship fund has to double its capital before those fat fees kick in. How many aspiring masters of the universe want to wait that long?

Worse yet, Tiger has cut its management fee to just 1% through December 2023. It also cut its performance fee to just 10% until it not merely makes up all its losses but posts significant gains.

This lack of fees will make it hard to get and keep good people. Why not just jump ship to a fund that isn’t so far underwater, or start your own?

I expect Tiger will close the long-only fund. It’s just too far gone.

As for the flagship fund, perhaps they’ll fight their way back to even with a skeleton crew. I wish them luck — it won’t be easy.

Tiger’s massive losses show the risk of heavily concentrated bets. Going all-in on a single sector with a small number of stocks can result in disaster.

Tiger’s investors would’ve done better to buy a low-fee index fund like the Vanguard ones I own. It’s hard to outsmart the market.

What do you think the future holds for Tiger and other hedge funds? Leave a comment at the bottom and let me know!

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An angel investor's take on life and business