Tag: IPO

Robinhood’s startup fund stumbles in NYSE debut

Posted on by faz_business


Retail investors are famously locked out of the startup world. Robinhood is attempting to change that by allowing the general public to invest in a portfolio of what it calls “some of the most exciting private companies operating today.”

To do this, the company that pioneered the commission-free brokerage model has secured access to eight startups—including Databricks, Stripe, Mercor, and Oura—grouping them into a vehicle called Robinhood Ventures Fund I. The fund, which also includes Ramp, Airwallex, Revolut, and Boom, set out last month with an ambitious $1 billion target, but demand for this novel way of investing in private companies was lower than expected.

On Thursday, Robinhood announced the fund had raised $658.4 million — which could reach $705.7 million if underwriters exercise their full allotment. The shares, priced at $25 in the offering, began trading on Friday and closed the day at $21, a 16% decline.

RVI’s reception on Wall Street stands in stark contrast to another attempt to give individual investors exposure to buzzy startups. When Destiny Tech100 — a publicly traded, closed-end fund holding stakes in 100 venture-backed companies including SpaceX, OpenAI, and Discord — direct-listed on the NYSE in March 2024, its shares surged from a reference price of $4.84 to an opening trade of $8.25, eventually closing its first day at $9.00.

Destiny Tech100 has kept climbing since its public debut. The fund closed trading on Friday at $26.61, a 33% premium to its net asset value of $19.97, meaning its shares trade well above the actual value of its underlying holdings.

So what explains why retail investors aren’t nearly as excited about Robinhood’s fund as they are about Destiny Tech 100? The most likely explanation is RVI’s lack of exposure to the companies widely expected to go public at enormous valuations: OpenAI, Anthropic, and SpaceX.

Robinhood is looking to address this. RVI intends to add more startups to the fund, eventually aiming to hold what Robinhood Ventures President Sarah Pinto described to TechCrunch as “15 to 20 of the best late-stage growth companies out there.”  The company’s CFO, Shiv Verma, told Axios Pro on Friday that Robinhood is eyeing exposure to OpenAI.

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But securing access to these high-profile companies is far from straightforward. Robinhood is aiming to get directly onto their cap tables directly through primary capital raises or secondary share sales — and that’s difficult even for a firm with deep roots in Silicon Valley.

A cap table — the official record of who owns equity in a company — is closely guarded at most high-profile startups, and winning a spot on one requires either being invited by the company or purchasing shares from existing investors with the company’s blessing.

“It’s very difficult to get into any of these companies, and the investment rounds are very expensive,” acknowledged Pinto.

That is just one of the reasons democratizing private markets is easier said than done, and why the companies most retail investors actually want to own remain, for now, out of reach.

Forerunner’s long game: As startups stall before IPO, all options are on the table

Posted on by faz_business


Thirteen years ago, Forerunner Ventures began helping to usher in a new era of consumer startups, including Warby Parker, Bonobos, and Glossier. None has gone through a traditional IPO process. Warby Parker was taken public through a special purpose acquisition vehicle. Bonobos was acquired by Walmart. Glossier is still privately held, along with many other design-forward brands in Forerunner’s portfolio. 

That’s not a failure, according to Forerunner founder Kirsten Green. In today’s landscape, nearly every alternative to the traditional IPO has become the new norm.

Consider that companies like fintech Chime and smart ring outfit Ōura, founded in 2012 and 2013, respectively, were also early bets for Forerunner and have achieved valuations north of $5 billion, proving their staying power in crowded markets. But while Chime has confidentially filed to go public, Ōura’s CEO has said there are no immediate plans for an IPO. 

At TechCrunch’s StrictlyVC evening late last week, Green made it clear she doesn’t mind. Asked specifically whether she is bothered by Ōura’s CEO, Tom Hale, repeatedly telling the media the company is not preparing an IPO anytime soon despite strong sales, she called the outfit an “off-the-charts phenomenal company,” adding that “we haven’t even gotten to the thought around our table about selling, because we’re here for the growth that’s happening.”

She suggested instead that investors long ago adapted to a world with fewer conventional public offerings, including by turning increasingly to the once-secondary secondary market to manage liquidity and exposure.

“We’re engaged in the secondary market, buying and selling,” Green said of Forerunner’s team, characterizing the shift as both practical and strategic. “Companies are waiting so long to go public. The venture model is generally 10-year fund lifecycles. If you now need to be a double-digit billion-dollar company to [stage] a successful IPO or [become traded] in the public markets, it takes time to get there.” The secondary market is “continuing to drive the industry” and allowing “people to unlock returns and liquidity.”

For longtime industry watchers, it’s a remarkable shift. In the past, firms could expect a major liquidity event within a few years: an acquisition, a classic stock market debut. Yet the growing reliance on the secondary market isn’t just a response to public markets that reward scale and favor already high-performing companies.

Another major benefit, Green suggested last week, is that price discovery is more efficient when there are more participants involved — even if it ultimately means a discount to one of her deals.

Green addressed, for example, Chime, the neobank that became a household name during the fintech boom. Its valuation has zigzagged wildly in recent years, from $25 billion in 2021 when it last closed a primary round of funding from a small group of venture investors, down to a reported $6 billion valuation last year on the secondary market, which typically features many more participants. More recently, it reportedly climbed again to $11 billion.

“In terms of the prices,” Green said, “if you think about it, the round that gets done, the Series D, that was a negotiation between the company and an investor. With the secondary market, you’ve got more people in the mix, right? And then when you [eventually] go to the public markets, you’ve got everybody” setting the price for what they perceive to be the value of a company.

Green can afford to be a little less invested, so to speak, in those later valuations. While it’s always nice to be associated with eye-popping numbers, the firm’s strategy of partnering as early as possible with startups gives it more wiggle room than other venture firms might enjoy. “We try to be early,” Green said, pointing to the firm’s framework of identifying major shifts in consumer behavior and pairing them with emerging business models. 

It worked in the early 2010s, when DTC brands like Bonobos and Glossier rode the mobile-social wave to breakout success. It worked again with subscription-first plays like another Forerunner company, The Farmer’s Dog, which sells gourmet dog food and is reportedly both profitable and seeing $1 billion in annualized revenue. And it’s what the firm is betting on now, with a focus on the intersection of invention and culture, as Green describes it.

Great companies, Green noted, need time to develop and not all growth paths look the same. Venture capital, once eager for exits, is learning to wait and, when necessary, to trade.

(You can listen to our conversation with Green from this same sit-down right here, via the StrictlyVC Download podcast; new episodes are published each Tuesday morning.)

ServiceTitan could be the first of many ‘dirty’ term-sheet IPOs, VCs believe

Posted on by faz_business


When ServiceTitan filed documents last week for its IPO, hoping to have its debut before the end of 2024, the tech world wondered if a stuck IPO market was unlocking at last.

Alas, probably not.

But ServiceTitan could actually be a harbinger of something else entirely: a series of late-stage companies being forced to IPO or revealing other ugly terms they agreed to after the VC fundraising market tanked in 2022 and valuations plummeted. 

“Yes, we will see much more of this as the ZIRP companies start to IPO. You can’t hide these details in an S-1, even if they’re hard to understand in the legalese writing that exists in S-1’s,” VC Alex Clayton tells TechCrunch, referring to companies that raised lots of money during the zero interest rate policy period that ended in 2021. Clayton is general partner at late-stage firm Meritech Capital, known for its IPO analysis. He and his Meritech colleagues, Anthony DeCamillo and Austin Wang, pointed out a wild term, disclosed in ServiceTitan’s S-1 documents, in an analysis post that went viral over the weekend. 

To recap, as TechCrunch previously pointed out, with ServiceTitan’s November 2022 Series H raise, the company agreed to grant those investors a “compounding IPO ratchet structure.” 

An IPO ratchet structure means that if a company goes public at a stock price that is less than what the venture investor paid, the company will cover the loss by granting the investor more shares, as if the VC bought at the lower price. If the IPO is priced above what the investor paid, there’s no problem.

In ServiceTitan’s case, as Meritech’s crew pointed out, it agreed to a  “compounding” IPO ratchet structure. For every quarter ServiceTitan delayed going public after a deadline of May 22, 2024, the company would owe the Series H investors even more stock: 11% annually, compounding quarterly. 

The stock price for that November 2022 round was $84.57 a share. Currently, Meritech calculates that ServiceTitan would have to debut at above $90 per share to negate paying its Series H investors more stock. The S-1 did not disclose which investor(s) hold this term. 

Furthermore, the Meritech crew – who are stock pricing experts – believe that ServiceTitan’s financials currently justify closer to about $72 a share. This given its revenue (on pace for $772 annually, based on its last quarter, the company says) and growth rate (implied at 24%, based on the last quarter). That’s if the IPO prices around the mid-range of its comparable to other software companies.

More delay, no matter what’s going on in the market, would mean that ServiceTitan has to price even higher to avoid the gotcha with the Series H investors. This would also further dilute the holdings of the other major investors.

VC Bill Gurley, who was famously a partner at Benchmark and has been an IPO-process hawk for years, commented on the situation on X. “A ‘compounding ratchet’ sounds painful (it is!). Looks like company agreed to ‘dirty’ term sheets,” he wrote. “Best to steer WAY, WAY clear of investors asking for compounding ratchets.”

Clayton says he doesn’t quite agree with the “dirty term sheet” characterization, which implies a founder getting duped by an investor. Chances are ServiceTitan’s lawyers knew and understood the term and executives were willing to take the risk. ServiceTitan had agreed to ratchet terms (albeit not compounding) twice before, and got caught with lower share prices, the S-1 disclosed.

Founders typically agree to such terms because it gets them a higher valuation and/or avoids a valuation cut, also known as a down round. After all, the company is agreeing to protect the investor from overpaying. Down rounds can be damaging in all sorts of ways – employee morale, future investing rounds, media headlines.

But such terms are a kick-the-can-down-the road tactic.

“You can call it ‘dirty,’ which is the cliche term, but it’s an agreement between two parties with lengthy legal discourse and is just likely about risk the founders were willing to take,” Clayton said.

All of this means a few things. For founders, Gurley said on X, it’s better to just take a down round if that’s what a company is really worth, rather than play valuation term-sheet games. 

Had ServiceTitan done that, it might not even be going public now – and taking on the future quarterly financial scrutiny that comes with that. 

“I agree. This IPO seems to be about incentives,” Clayton says, adding that ServiceTitan “has also burned a ton of money, so they might have needed the cash too.”

It also means that the IPO window isn’t necessarily opening. Because 2022 saw a lot of founders struggling to maintain their previously high valuations, Clayton believes we’ll likely see more such things buried in S-1 disclosures.

Then again, if retail investors go wild for the stock, this debut might open the IPO window. But some financiers remain doubtful. As Miles Dieffenbach, Managing Director of Investments for Carnegie Mellon’s endowment posted on X,

“ServiceTitan isn’t going public because of the IPO window being ‘open’, but because they have a compounding ratchet from their last round. If they could’ve raised clean private capital, I bet they’d stay private!” he wrote.

ServiceTitan did not respond to a request for comment.