venture capital Archives

19 Jun 2017

Sticky Post By Matt Hottle Posted in Entrepreneurship, Funding, Start-ups With No Comments Permalink

Is Birmingham Shipt Out of Luck?: What Amazon’s Whole Foods Acquisition Means for Shipt

Sticky Post By Matt Hottle On June 19, 2017 With No Comments

Within 10 days of Shipt announcing it had secured an additional $40 million through series B funding, Amazon announced it had purchased Whole Foods for almost $14 billion, and Instacart announced it will become the only official partner of Publix in 2020 and offer delivery service through every Publix location, beginning in Shipt’s Birmingham backyard.

“Alexa, Bring Me a Dozen Bananas.”

Amazon has already been delivering on-demand grocery pickups through its AmazonFresh service in limited locations. With the addition of the 431 Whole Foods locations and the investment Amazon has already made in advanced logistics, it’s almost a given they will start offering pickup and delivery services in each of those locations. Shipt points to the 43 cities they’re currently servicing in the Southeast and Midwest markets as validation of demand and their ability to scale. Amazon likely agrees. With their new Whole Foods retail footprint, an estimated 65 million Amazon Prime subscribers already paying annual memberships to the online giant, and Amazon’s ability to recreate the basic architecture of Shipt’s app/ interface/ automation tech, what is really stopping them from supplanting Shipt?

Instacart Moving Into B and C Markets

Shipt specifically targeted smaller markets in the regions of the country where Instacart and others had a weak or non-existent presence. Last year, Instacart started offering delivery in smaller markets and found enough success to ink their recent exclusive deal with Publix. This is a big deal as Publix is a major partner for Shipt and has more than 1,100 locations in the Southeast—with 773 of those in Florida alone. Shipt will probably still be able to offer delivery from Publix locations but won’t be considered an official partner—which means any marketing fees, promotional consideration, or branding received from Publix will go away. If that’s the case, those shops become far less profitable and Shipt will either have to raise subscriber fees or eliminate popular Publix as an option for Shipt members.

Is the $60 Million in Funding a Problem for Shipt?

Instacart raised $400 million on a $3.4 billion valuation in March of this year. In total, they have raised $675 million over seven rounds. They currently offer service in more than 1,200 cities. That translates into $562,333 of investment per city. Shipt has raised $65.2 million over three rounds which translates into more than $1.5 million of investment per city. The bulk of that funding, $40 million, was announced just days before the Instacart/Publix deal and a week before the Amazon/Whole Foods deal. Is their future valuation now lower than what it was last week? Assuming they’ll need even more capital to compete against Amazon and Instacart, how will that affect future fundraising?

Don’t Forget About Walmart

Walmart has also been testing its own delivery service by paying their employees small fees for delivering products to customers that are on the employee’s way home. Time will tell if this becomes a meaningful segment for Walmart, but with a $219 billion market cap, Walmart can launch whatever service it wants in the same smaller cities Shipt already services.

What’s Next for Shipt

There is likely going to be some form of pivot coming from Shipt, and no one outside of their boardroom really knows what that will be. Anything is possible—from going after even more funding to compete in the space to aggressively shopping Shipt for acquisition. Bill Smith, the founder of Shipt, is a savvy and accomplished entrepreneur. From an outside perspective, he has built a solid team, and the culture within Shipt is reported to be strong. All of which will serve them well as they consider their options in this new landscape. Amazon may choose not to pursue delivery. Walmart may not enter the market. It’s entirely possible that Shipt finds a way of successfully competing with Amazon, Instacart, and Walmart even if they plan to pursue the same opportunities as Shipt. If they do pull off a successful competitive strategy, they will have cemented their reputation as the big startup “win” Birmingham has been hoping they are.

15 May 2017

Sticky Post By Matt Hottle Posted in Finance, Funding, Start-ups With No Comments Permalink

How Small-City Startups Can Get the Funds They Need

Sticky Post By Matt Hottle On May 15, 2017 With No Comments

Small cities can be uniquely positioned to help startups get up and running. With lower costs to operate, less competition for resources, and high levels of public interest in new companies spinning up, smaller markets can be great incubators. Despite those tailwinds, companies in smaller cities often struggle to find private investment funding. It’s not that there isn’t any money to be invested—quite the contrary. Most metropolitan areas have at least one anchor industry creating wealth that spans multiple generations. Economic development organizations bring public money to the table as well.

Creating a minimally viable product and proving market traction are normally required before a startup lands sizeable investment money. Building that MVP and proving market validity takes time and money that many new ventures don’t have.

When founders decide to take on a funding partner, they often think in terms of securing $500k or more. That kind of investment falls in a gap that normally goes unfunded—too small for institutional investment and too big for individual investors. Pre-revenue startups who want to raise a year’s or more worth of runway in a single round are often left without any dance partners.

The fragmented nature of private individual investors, relatively finite size of public money offering, and the follow-on investment plays of institutional funds perpetuate this seed funding gap.

Overcoming this gap requires founders to change their thinking.

Step 1: Take a strategic look at what it will take to create the MVP. Consider what kind of money and resources it requires, and strip out anything that isn’t absolutely crucial.

Step 2: Determine how you’ll prove market traction. Whether that includes landing the first customer, attracting users, or building models around credible survey data, plan for this before you ever determine how much money you’ll need to raise and how quickly you’ll need to raise it.

Step 3: Complete the financial projections to determine the amount you absolutely need to pull off Steps 1 and 2. Decide how much equity you’re willing to give up (hint: it will be more than you want to give up).

Operating under the assumption that this seed funding won’t get you very far—only to the point of launching an MVP and proving market validity—the new funding number is likely far smaller than $500k. If the numbers fall between $50k and $120k, you could very well find an individual investor or small group of investors who shares your vision and is willing to risk cash in exchange for a sizeable chunk of equity.

Once you’ve launched the MVP and proved market traction, the size and options for investment funding expand. Not only will local sources of investment be more readily available, but investors from other cities, areas, or regions may be more approachable as well. Closing the funding gap is something pre-revenue startups can do for themselves as long as they tailor their timeline, product development, and overall approach to the funding sources available.

20 Jul 2016

Sticky Post By Matt Hottle Posted in Funding, Start-ups With No Comments Permalink

Venture Capital May Stop Unicorn-Hunting

Sticky Post By Matt Hottle On July 20, 2016 With No Comments

A few months ago, Oscar Williams-Grut wrote a great piece in Business Insider talking about the shift in investing interest from “unicorns” to what he coined “cockroaches.” His definition of a cockroach was a company that could survive anything. These were companies that were more interested in profits, self-funding, minimizing costs, and measured growth. Certainly a departure from the kinds of pre-revenue VC darlings that received massive funding in 2014 and 2015.

I was surprised that his article didn’t gain more traction and that #cockroaches didn’t become a thing.

At present, he is looking prophetic.

Theranos has all but imploded. Twitter is looking a lot less shiny than it once did. Zenefits is worth half what it was a year ago. Tesla cars are driving themselves into other objects at high speed.

During last year’s $4.2 billion spike in private investment deals, 59% of that total went to just three companies: Airbnb, Spotify, and Zenefits. There were 39 other “tech” deals in that same period for the remaining 41% of the $4.2 million. That’s a lot of investment money living in only 42 companies.

With this kind of concentration in private investment, fund-raising that used to be an incredible long-shot for the average non-valley-based startup just became impossible. At some point, the money is all spent.

Theranos, Twitter, and Zenefits could turn it around. With that much investor money involved, the sunk cost fallacy should encourage investors to pour in more cash if things get dire. If, however, these companies improve PE and VC rationalizations in value and fund-raising, that could be a very good thing for the rest of us.

Potential, rather than probability, has been favored for a long time among the millionaires providing VC cash to build various funds. The biggest of gambles were worth it because it only required 1 in 15 startup investments to actually make it. Now that ratio seems to be slipping further and private investment may find incremental growth far sexier than it did in the past. Risk mitigation, at some point, becomes a basic fiduciary responsibility and cockroach companies could benefit from that shift in investment theory.

Here are three fundamental shifts I predict could happen in the next 18 months:

VCs start putting together “balanced” funds that act more like low-risk securities. Filled with smaller investments across more “bets,” these funds start to look for companies that exhibit clear paths to profits. This would also create a way to attract lower net worth investors to a fund.
VC money will shelve tech-for-consumer concepts in favor of tech-for-business solutions. Private investment money isn’t willing to put down the app develop crack pipe just yet, but they will look more closely at those companies creating B2B applications as that market is, historically, less capricious.
PE firms will be increasingly interested in finding opportunities in non-traditional hotbeds. GE Capital just partnered with Lamppost Group on their new logistics accelerator, Dynamo, in Chattanooga, Tennessee. There is a concentration of capital in a handful of places in the US, but ideas and innovation are not landlocked. The return on invested capital will be far greater in less expensive locales.

Of course, I could be completely wrong. Money can be inherently dumb and illogical. Companies who’ll champion the moniker of “cockroach” will focus on the things that make them hard to kill. Their survivalist mindset will lead to different decisions than one betting on run-rates, future value, and traffic monetization.

28 Mar 2016

Sticky Post By Matt Hottle Posted in Funding, Start-ups With No Comments Permalink

Read this Before Taking on Investors

Sticky Post By Matt Hottle On March 28, 2016 With No Comments

There comes a point for all startup businesses where they have to consider taking on investors versus bootstrapping their operations to grow the company. For a lot of founders, they wrestle with this decision several times in the first few years.

While I do think bootstrapping is sexy as hell, I’m not opposed to investors. Some startups can’t even take a business idea off paper without significant seed investment and many investors are absolute rock stars that will do anything they can to help an investment succeed.

With that stated, there are a few things to consider before taking on investors. For the sake of this article, I’m going to consider accelerators, incubators, venture capital and any other scenarios where equity is exchanged for cash or subsidies as an “investment.”

A VC fund is considered successful if 10% of their investments do well while you could 100% fail like any of the other 90% of their plays that don’t pan out. Don’t believe the hype; succeeding as a company is way better than “learning from failing.”What is it about that VC fund that makes sense for you- other than their stacks of cash? A typical VC probably only has about 2% of their capital invested in your company while you may have every credit card maxed out, loans from friends and family due and employees to pay at the end of the week. The stakes for you are ALWAYS much higher than your VC investors. Choose wisely.
Who is actually managing that accelerator or incubator? Are they a subject matter expert in the markets their incubated companies are competing in or are they just a big name in the startup world? Name recognition can be a huge asset as long as it’s big enough. Minor celebrities in those communities are probably not driving enough value if they aren’t also providing super-relevant industry experience.
Be careful not to fall for the “easy” country-club deal. Raising money among friends and acquaintances can be a legit way to generate capital but they require much of the same structure, governance and construction as a VC/ PE deal.For example, I found one deal where a minority owner provided capital in exchange for equity but then expected their investment to be paid back first before any other owners could receive any distributions of profit. That’s a pretty crappy provision considering this came with a measly $20k investment.
Pick your startup competitions with care. As I have previously pontificated, startup competitions can be a total waste of time when they are poorly conceived, executed or judged.There was a competition recently announced here in Birmingham where the contestants have to pay $50 to enter, compete in three rounds over a 6 month time frame, 50 companies could enter and the prize was only $10k.The lost-opportunity cost alone is higher than $10k and the contestants are actually subsidizing 25% of the prize money through their own “application fees.” By winning, you would be doing so on the backs of other start-ups. That just seems crappy and it a massive waste of time and resources.

Capital, or the lack thereof, is always a primary concern for a company wanting to start, grow or innovate. Every founder needs to seriously consider their individual opportunities for outside investment. It should not be an easy question to answer and the more thought expended when considering funding options, the higher the likelihood that a company finds investors that are passionate, supportive and truly helpful. If the total value of what they offer is measured in decimal places, you may need to consider other options.

28 Dec 2015

Sticky Post By Matt Hottle Posted in Entrepreneurship, Funding, Strategy With No Comments Permalink

2016 Will be the Year Successful Startups Get Real

Sticky Post By Matt Hottle On December 28, 2015 With No Comments

Growing up in the ’80s and ’90s, I got a front row seat to the explosion of pop-culture as entertainment. Not the least of which was MTV’s first season of The Real World. That show can be blamed for the proliferation of reality TV with its promise of high viewership, low production cost and questionable entertainment. It also created a pop-culture meme of its time with the tagline, in part, being “What happens when people stop being polite and start getting real?”

For years, it seems, we have collectively gone out of our way to be polite when discussing startups that have spent millions and returned little profits. We have excused companies who have clearly focused more on their planned exits than building an actual enterprise. Company perks like free food, ping-pong tables and dedicated napping stations were celebrated as signals of an organization’s greatness.

For those who work within or closely follow the startup community, you can see increasing calls for companies to get real. While startup companies still hold a highly desirable reputation among the media, venture capitalists and the millennial workforce, there were some warning signs that all was not well. We started to see some high-profile examples of how the promise and excitement of some companies may be more sizzle than steak.

Theranos was very publically lanced (pun intended) by the Wall Street Journal when it cited some research showing questionable reliability in the screening tech it promotes. It also cited what could be called revisionist story telling on the part of their founder Elizabeth Holmes. Both the WSJ and Theranos have doubled-down on their versions of the story.

Because Theranos is trying to make health care screening and monitoring less costly and more widely available, they have been appropriately celebrated for years. Unfortunately, the actual application of their efforts is drawing worthwhile scrutiny and the intoxication with their story is starting to transition into a nasty hangover.

Twitter laid off 336 people this year; about 8% of its workforce at that time. This number is dwarfed by the thousands of people laid off in heavy industries like steel production and coal mining but it sent shivers through the tech world as people realized even a brand behemoth like Twitter had to accept a certain level of financial and market reality.

Layoffs, in general, are on the rise among tech companies of all sizes. The number of people hired and fired in the same fiscal year is growing and those recently short-termed employees are less likely to accept tales of explosive growth and dedicated investors at face value when considering employment at that â€œnextâ€ startup.

Square has demonstrated the ability to lose hundreds of millions of dollars in the last few years as burn rates in the tech sector continue to expand even as investor money starts to tighten. I’m not intentionally targeting Jack Dorsey by using two of his companies as example in this article but Jack is now trying to perform two turnarounds simultaneously at companies that are supposed to be in growth mode, not survival mode. By all accounts, Jack is just as capable of pulling this off as anyone and is certainly showing the dedication needed to get it done.

There are currently 140 companies with a valuation of $1 billion or more. The key word here is valuation. The simple way of illustrating how ridiculous valuations have become is to remind everyone there are only 51 US companies currently listed by Inc Magazine generating $1 billion in annual revenue. Before you send me a bunch of hate mail for comparing revenue and valuation without considering exit values, assets or goodwill payments, recognize that valuations are largely a conspiracy between start-ups looking for cash and VCs looking to attract more Limited Partners. VCs with a paltry 10% success rate routinely attract more private money every year. Valuations are works of fiction.

Whether its inflated valuations or global instability in public markets, private investment money is drying up at a statistically-material rate. VCs saw a decline in funds raised by 34% in Q3 when compared to Q2 this year. It also represented the slowest period for raising money since 2013. IPOs also under-delivered in 2015. As published by the International Business Times, “According to PitchBook, this money (IPOs) amounted to about $64 billion on 860 deals during the first 11 months of this year and about $94 billion on 994 deals over all of last year.”

As we close out 2015, it has become increasingly important for the tech and startup communities to become more self-aware, transparent and start getting real with everyone. Whether those communities are willing to pull back the proverbial kimono or not, there will be a reckoning with investors, employees and customers if they continue to paint their worth in endless streams of run-rates and growth trajectories.

Employees who were once more attracted to the name or promise of a startup are now more inclined to consider how stable a company is and whether they will be back on the job market within a few months chasing the next unicorn-in-valuation-only. Many of the Twitter employees laid off were rehired within literal minutes of becoming unemployed but that not likely to happen in perpetuity.

Investors who became VC LPs because they were tired of the 7% – 8% annual return for their public stocks and equities are now reassessing their risk-tolerance as the public markets have fluctuated significantly in Q4. The play-money investors were spending on longshot startup seed investments just won’t be as plentiful in the next 18-24 months as most pundits believe we have passed the peak of private investing for the current cycle.

People have already started to stop being polite about the performance of startups and established tech companies. Questions about profitability and long term viability are being asked with less guarded phrasing and with expectations they can be credibly answered by founders who have taken millions in private funding.

The companies that get real and are willing to not only tell us about the warts in their startup business but actively work on solutions for those imperfections will stand out from the crowd and attract the best employees, most dedicated investors, highest-value board members and loyal customers. When they make a mistake, they will own it immediately and without equivocation. They will build a company more focused on growth and durability than maximizing its exit offers. In 2016, the companies that are willing to get real will win while their competitors hope everyone continues to be polite about their lack of success.