Axios Pro Rata: The scramble for cash

Plus: One startup's view | Saturday, July 16, 2022

Open in app View in browser   Presented By Fidelity   Axios Pro Rata By Kia Kokalitcheva · Jul 16, 2022 Happy Saturday morning, readers! Or really early Saturday, if you're on the West Coast like me.🙂 Today we're taking a look at how the venture capital funding crunch is affecting startups at various levels of the food chain. 🚨 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar. Today's newsletter is 856 words — a 3-minute read.     1 big thing: The scramble for startup cash Illustration: Aïda Amer/Axios   "Never waste a good crisis," goes the saying, but some investors are doing just that when it comes to the funding crunch in private tech companies. Driving the news: Coatue Management, Viking Global Investors and others have pulled together structure equity funds to provide cash to later-stage companies seeking to maintain their valuations. The big picture: Since the public market downturn began late last year, venture capitalists have been pinching pennies. It hit pre-IPO companies most immediately, but is now steadily spreading down the stack. While VCs have loads of unused cash (2021 was a record fundraising year), they're being more judicious in how they invest — in part because everyone's still trying to get a handle on the market. Between the lines: There's been an uptick in interest in structured equity, venture debt and other alternatives to traditional venture capital, all in the name of avoiding down rounds. "Both are commonly used at this point in the cycle even though VCs have a lot of dry powder and are keeping it for their best companies," says Runway Growth Capital founder and CEO David Spreng, whose firm specializes in venture debt for later-stage tech startups. "[Structured equity] is really just another way of saying, 'Fine, company, you can name the price and you can stay a unicorn if you want to, but I name the terms,'" he tells Axios. Zooming in: So far, venture debt terms haven't dramatically changed from the boom times, experts tell Axios. However, Spreng predicts they'll get a little less borrower-friendly by the end of the year. "The risk is going up in a number of ways," say Brex Asset Management CEO Benjamin Wu. "No. 1, it's harder to raise capital, and No. 2, companies are also seeing that their customers are more cash-conscious, so growth might not be the same." The bottom line: Startup financing may look quite different by the end of the year.     2. What they're saying: Haggling for the best price Illustration: Shoshana Gordon/Axios   In February, conversation automation startup PeopleReign decided to spring for venture debt. It started two months after closing a fresh round of venture capital, amid growing signs that the market downturn had legs. What they're saying: "We had just closed an equity round, so that's the time to do it," CEO Dan Turchin tells Axios. "We have funding for 18 months, and this gives us six more months to extend [annual recurring revenue]," he says of the startup's math. Of note: PeopleReign's bank at that time offered venture debt financing and gave the company a term sheet. Yet Turchin — who's raised venture debt for prior companies he's run — wasn't impressed by the terms. With venture debt becoming a more widely available funding product, the startup was able to shop around and get two more term sheets, but with much more attractive terms, he says. The big picture: "I would love to say that discipline never goes out of style, but it would be dangerously misleading," Turchin says of the pandemic's boom times. "We went through a period where valuations were astronomically high, and we got credit for every incremental dollar of revenue." But now, the tide has turned, and many companies are finding they may not meet investors' higher bar. The bottom line: More startups are getting comfortable with alternative financing, now that free venture cash is much less plentiful.     3. SBF to the rescue Photo illustration: Gabriella Turrisi/Axios. Photo: Tom Williams/CQ-Roll Call, Inc via Getty Images   Speaking of getting financially creative... the Economist (and Axios' Felix Salmon) recently compared FTX co-founder and CEO Sam Bankman-Fried to JP Morgan. After the panic of 1907, the famous banker worked with other financiers to keep the banking system afloat through cash infusions. Yes, but: Warren Buffett's actions after the 2008 crisis also offer an apt comparison. Between 2008 and 2011, Buffett invested in a number of blue chip companies like Mars, Goldman Sachs, Bank of America and Dow Chemical. By the fall of 2013, those investments had yielded profits of "$10 billion and counting," per the Wall Street Journal. He followed his own advice: "Be fearful when others are greedy, and be greedy when others are fearful." Between the lines: Buffett wasn't just throwing lifelines indiscriminately — he targeted companies he believed were fundamentally valuable and thus, were good bets. Bankman-Fried is taking a similar approach. FTX struck a deal with crypto financial services company BlockFi, largely to protect its customers and contain the fallout from spreading further into the market. But FTX reportedly walked away from a potential deal with Celsius because of a weak balance sheet and other red flags. What we're watching: Whether FTX Bankman-Fried's bets right now pay off as handsomely as Buffett's did.     A message from Fidelity You prep for your IPO — Fidelity has your back at every step     Fidelity Stock Plan Services can provide equity compensation and management solutions that keep your momentum going — to and through life as a public company. Why it's important: Together, you can create equity comp solutions that work throughout your company's journey.     📚 Due Diligence Venture debt growth reaching all areas of VC market (Pitchbook) Start-Up Funding Falls the Most It Has Since 2019 (NYTimes) King Street: Venture Debt Offers a Way Around Slowing Valuations (Institutional Investor) Alternative To Venture — Capchase Raises $400M In Debt (Crunchbase News)     🧩 In lieu of trivia... A question: If you're an entrepreneur, CEO or investor who has experiences with alternative startup financing, tell me about it — when, why, how it played out!     🧮 Final Numbers Data: PitchBook; Chart: Erin Davis/Axios Visuals     A message from Fidelity You lead the way through IPO — Fidelity backs you all the way     Fidelity Stock Plan Services can provide equity compensation and management solutions that support you through your company's journey. Why it's important: Together, you can create equity comp solutions that keep up your momentum — to and through life as a public company.   🙏 Thanks for reading! See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and venture lenders to sign up. Why stop here? Let's go Pro. Learn more about Axios Pro corporate subscriptions, and why hundreds of companies read Pro newsletters every day.   Axios thanks our partners for supporting our newsletters. 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