🔗 What StepStone’s $3.3B venture secondaries fund tells us about LPs’ current appetite for venture
#VentureNews

💻 StepStone raised the largest fund dedicated to investing in venture secondaries ever, the firm announced last week. This fundraise doesn’t just say a lot about StepStone’s venture secondaries investing prowess, but also about how LPs are thinking about the current venture market.

The fund, StepStone VC Secondaries Fund VI, raised $3.3 billion. This marks a big step up from the fund’s predecessor, which closed on $2.6 billion, a record size at the time, in 2022. Fund VI was raised from both existing and new LPs and was oversubscribed, according to StepStone.

Secondaries funds like StepStone’s buy existing investor equity stakes in both individual startups, known as direct secondaries, and LP stakes in venture funds. Direct secondaries allow LPs access to startup stakes in already successful companies nearing an exit, which means less risk and less time to reward.

💻 This record-setting fund comes at a time when venture fundraising is down sharply. In 2023, venture funds raised $66.9 billion, according to PitchBook data. That marks a 61% decrease from 2022 when funds closed on a record-breaking $172.8 billion.

💻 Venture secondaries activity is up this year compared to last. Javier Avalos, the co-founder and CEO of Caplight, told TechCrunch that its platform has tracked $600 million of transaction volume so far this year, which represents a 50% increase over yearly activity at this time in 2023.

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ℹ️ Databricks' Accelerating Growth
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© Databricks revealed some sensational growth this week, as they did last year. Exiting this quarter to $2.4 billion annual run rate, the company’s revenue growth is accelerated year-over-year by 10 percentage points.

© Net dollar retention is a major driver of growth at 140%, which is top decile. The table above shows the other data points that we’ve collected through their press releases in the last two years.

The fastest growing product category mentioned is the data warehouse revenue : 300% growth, now at $400m annually, nearing 20% of revenue. With these modest data points, we can build a basic linear regression model for what the company is worth. This model is rough with an R^2 of approximately 0.45.

© Assuming Databricks continues to grow at roughly 50%, that implies the company in the public markets would be worth approximately $54b. However, the company will likely trade at a premium to this. It is one of the few companies that provides significant exposure to AI software in the public markets.

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⬇️ Nobody Knows : Steel & Blockchains
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💻 Very few people know whether today’s apps are built with, just as they don’t consider the construction materials of their office building.

Which database did PayPal use to enable internet payments? Nobody knows. Venmo surged with social & mobile payments in the 2010s. Which database did they use? Nobody knows. Tomorrow, apps & software will have web3 components to them. Nobody will know.

The challenge today isn’t finding the applications for web3’s steel. If it works, developers will build with them.

💻 Already stablecoins, which enable rapid money movement, process as much as Visa transaction volume. Some games’ marketplaces use web3 technology. Reddit’s profile pics do too. Web3 social networks have flared up. Billions are traded on exchanges.Already stablecoins, which enable rapid money movement, process as much as Visa transaction volume.

Some games’ marketplaces use web3 technology. Reddit’s profile pics do too. Web3 social networks have flared up. Billions are traded on exchanges.

💻 The pace of innovation is hard to overstate. At the point that the benefits become clear, the pine trusses underpinning Instagram & Salesforce will be steel web3 infrastructure.

And no one will know.

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🍔 The Sudden Repricing of Startups in Early 2024
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👍 We’re entering a new pricing environment for software: AI vs non-AI. It’s only happened in the last few weeks. Recent earnings have pushed some of the most important companies to all-time highs.

This dynamic doesn’t favor everyone. Theory created a public market AI index to track software companies who have significant product plans or current AI businesses. AI companies trade at 2.5x the multiple of non-AI companies in the public market. This yawning difference should compound over time as the adoption of AI is still relatively early - we’re only 18 months into it. In addition, the productivity gains & the concomitant willingness to pay for them is just getting started.

👍 Microsoft & ServiceNow have reported 70% & 50% improvement in productivity in their organizations. This dynamic is permeating the early stage private markets just as rapidly with the return of the 100x ARR multiple for AI companies.

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🍔 What Happens When AI Performance Asymptotes?
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👍 In the past, the bigger the AI model, the better the performance. Across OpenAI’s models for example, parameters have grown by 1000x+ & performance has nearly tripled.

This is a chart of many recent AI models’ performance according to a broadly accepted benchmark called MMLU. 1 MMLU measures the performance of an AI model compared to a high school student.

What happens when Facebook’s open-source model & Google’s closed-source model that powers Google.com & OpenAI’s models that power ChatGPT all work equally well? Computer scientists have been challenged distinguishing the relative performance of these models with many different tests. Users will be hard-pressed to do better.

👍 At that point, the value in the model layer should collapse. If a freely available open-source model is just as good as a paid one, why not use the free one? And if a smaller, less expensive to operate open-source model is nearly as good, why not use that one?

👍 The rapid growth of AI has fueled a surge of interest in the models themselves. But pretty quickly, the infrastructure layer should commoditize, just as it did in the cloud where three vendors command 65% market share : Amazon Web Services, Azure, & Google Cloud Platform.

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⭐️ What If LLMs Change the Business Model of the Internet?
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💡 Last week, Reddit filed their S-1 to go public. At least 10% of their revenue - about $60m - comes from selling data to train Large Language Models. Reddit’s data sales revenue will likely be much more than 10% by the end of the year.

LLMs need data. They compress this it & reconstitute it to answer user queries. At Reddit, like many sites on the Internet, the content changes often. Users want to search the data for product reviews, travel recommendations, facts, & fun (the latest memes). Google isn’t the only one after this data : OpenAI & other providers are also brokering direct deals with Internet publishers.

💡 Because the data needs to be fresh, Google & others will continue to pay for access & potentially increasingly more for exclusivity, low-latency, or data of a particular kind that improves the accuracy of their models.

Data sales invert the business model of the Internet.

Instead of Reddit building product experiences that create good advertising data to earn more on ads, Reddit will launch product experiences that produce more valuable data to feed to LLMs. The LLM vendors should pay more for better data.

💡 One day, we may visit websites that have fewer ads or none at all. The revenue model of the Internet will have changed. Publishers’ sell the data directly to the search companies.

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🍔 Brex’s compliance head has left the fintech startup to join Andreessen Horowitz as a partner
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👍 Ali Rathod-Papier has stepped down from her role as global head of compliance at corporate card expense management startup Brex to join venture firm Andreessen Horowitz (a16z) as a partner and compliance officer, TechCrunch has exclusively learned.

Rathod-Papier and a16z declined to comment on the move.

👍 According to her LinkedIn profile, Rathod-Papier now “oversees a16z’s foreign expansion and policy efforts, supporting the government affairs team, managing financial crime and national security risk, as well as overseas operations.” She was at Brex for a total of 2 ½ years, serving in a variety of roles including head of financial crime compliance before joining a16z in May.

Brex CFO Ben Gammell told TechCrunch that her departure was “amicable,” adding that Rathod-Papier “made invaluable contributions to financial management and compliance during her time at Brex” and that she helped position the startup “well for growth” in its next chapter.

👍 Rathod-Papier shared the decision with colleagues in April, according to a Slack communication viewed by TechCrunch. A Brex spokesperson told TechCrunch this week that the startup is currently hiring a backfill for her role. In the meantime Bruce Wallace, a long-term advisor to Brex who has previously served as COO at Silicon Valley Bank and head of risk & fraud ops at Wells Fargo, has taken on the role of interim head of compliance.

Angela Strange and Anish Acharya in 2022 about the firm’s strategy in the space. The firm’s non-crypto high-profile fintech investments include Wise, Affirm, Deel and Greenlight, among others.

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⬇️ Materia looks to make accountants more efficient with AI
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💻 The U.S. is facing an accountant shortage. Fewer first-time candidates took the CPA exam in 2022 than in 2006, according to the American Institute of Certified Public Accountants. One possible reason people aren’t as interested in the field is the large amount of drudge work involved:

Accountants have to rifle through large amounts of unstructured data to perform audits or even just to find answers to their questions. Kevin Merlini, the co-founder and CEO of Materia, left the field for that very reason and is now working to reduce that burden for other accountants.

💻 Materia integrates into a firm’s existing workflow software and applications like Microsoft Excel and Teams to help break down the silos that exist in accounting firms’ troves of unstructured data.

Because of that, it can automate and augment the mundane and tedious parts of an accounting audit so accountants can focus more on high-risk areas that need special attention. It also offers a way for accountants to easily search across their firm’s data and documents to get answers.

“Accounting professional services has been interesting because it is almost underlooked, and has been underserved, so there is a pretty compelling story to tell there,” Merlini told TechCrunch.

💻 The company is emerging from stealth with $6.3 million in funding. The round was led by Spark Capital with participation from Haystack Ventures, Thomson Reuters Ventures, Exponent Capital and the Allen Institute for AI, among others.

The company takes security and accuracy really seriously, Merlini said. Its agreements with OpenAI and other AI companies restrict the LLMs from learning off of Materia’s customer questions.

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ℹ️ Ex-HubSpot exec builds an AI-powered CRM that learns for you, with $4M seed led by Sequoia
#VentureNews

© Unlike modern CRMs, which are essentially giant spreadsheets that somebody needs to populate and keep updated, Day learns everything about a person from conversations they had with the company, emails and public records such as LinkedIn.

O’Donnell knows CRMs. He was responsible for creating one of the most popular ones out there, HubSpot’s.

© O’Donnell spent more than 10 years at HubSpot, initially turbocharging the company’s marketing automation solution, and was later tapped by the founder and former CEO Brian Halligan to build HubSpot’s customer relationship management tool. That CRM later became the product HubSpot is best known for, which eventually helped earn O’Donnell the title of chief product officer.

While O’Donnell enjoyed being an executive at HubSpot, which now has a market capitalization of nearly $30 billion, he missed building new software. So in 2021, he left HubSpot to work on Arianna Huffington’s Thrive. He was also simultaneously involved with ProfitWell, a bootstrapped business he co-founded that sold to Paddle for $200 million in 2022.

O’Donnell didn’t see himself at Thrive long-term, so it came to a point when he asked himself, “Should I retire?” he said. “I wasn’t really sure what to do.”

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⭐️Paris-based VC Breega hits first close of $75M Africa fund to back pre-seed and seed startups
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💡 Paris-based VC firm Breega has observed Africa’s tech ecosystem mature over the years. From receiving less than a billion dollars in venture capital per year to a record-high $6 billion, there’s also been an increase in high-growth companies, from one unicorn to seven within the span of three years.

⭐️ Now the VC wants to put some of its own money behind what it sees, with a $75 million fund to invest in early-stage startups in Africa. It’s secured commitments for around 70% of the capital in the first close, the firm revealed to TechCrunch.

Since entering the VC scene in 2015, Breega has fully raised four funds: a first seed fund (€45 million), a second seed fund (€110 million), a first venture fund (€106 million), and a second venture fund (€250 million). In under a decade, the French investor, with a portfolio of over 100 startups across 15 countries, has reached $700 million in assets under management.

💡 Marrel notes that this approach, coupled with a dedicated scaling and portfolio support team, has propelled Breega to become one of the fastest-growing VCs in Europe. The intention is to replicate this success in Africa.

As such, launching a fund for early-stage startups stemmed from a desire to tap into the continent’s opportunities. Larger Africa-focused firms with European roots, such as Partech and Norrsken22, operate a similar strategy.

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🔔 Lawyer-in-the-loop’ startup Wordsmith wants to bring AI paralegals to all employees
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💻 Wordsmith, a fledgling Scottish legal tech startup, has somehow managed to attract the backing of two well-known venture capital firms. The startup targets in-house legal teams and law firms with an AI platform that they can configure to help other workers in the company.

This way, anyone in the company can solicit help with legal tasks such as reviewing contracts and answering specific questions about a document.

Incorporated in October last year, the Edinburgh-based company is the handiwork of former senior TravelPerk executives Ross McNairn (CEO) and Robbie Falkenthal (COO), alongside CTO Volodymyr Giginiak, who served in various engineering roles at Microsoft, Facebook, and Instagram. Six months after leaving their previous positions, Wordsmith already claims notable customers, such as Trustpilot, while it’s partnering with at least one major law firm — DLA Piper.

💻 This early traction has garnered the attention of global VC firm Index Ventures, which has led a $5 million seed investment into Wordsmith alongside General Catalyst and Gareth Williams, founder and former CEO of Scottish tech unicorn Skyscanner.

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🚀 General Catalyst merges with Venture Highway in India push
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The Silicon Valley venture capital group plans to invest from $500 million to $1 billion in India over the next three years, it told TechCrunch

📱 General Catalyst, a Silicon Valley-based venture capital group, is expanding its presence in India by joining forces with local venture firm Venture Highway and earmarking $500 million to $1 billion for investments in the country.

📱 Venture Highway’s investments include social commerce startup Meesho and B2B industrial marketplace Moglix. TechCrunch reported in January that the two venture firms were discussing a tie-up.

The deal will see the combined entity plot a multi-stage investment strategy for General Catalyst in India, spanning early- and growth-stage startups across industries, Venture Highway’s founder, Neeraj Arora, and General Partner Priya Mohan told TechCrunch in an interview.

📱 Venture Highway, which raised $78.6 million for its second fund in 2020, has traditionally focused on early-stage investments. As part of the General Catalyst team, it will expand its remit to incubating startups. “Our vision is to be part of building a number of companies that will not only go public but also be needle-moving for the economy,” said Mohan.

General Catalyst, which manages over $25 billion in assets, plans to invest between $500 million to $1 billion in India over the next three years, said Arora, who previously served as chief business officer at WhatsApp and played an instrumental role in the instant messaging app’s sale to Meta.

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ℹ️ Prosus zeroes out its 9.6% stake in Byju’s
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© Prosus, one of Byju’s largest investors, on Monday said its once-$2.1 billion worth stake in the Indian edtech startup is now worth nothing, but it is still hopeful that the formerly most-valuable Indian startup can be salvaged.

The largest external investor in Byju’s with a 9.6% stake, Prosus said in its quarterly report that its stake in the startup is now worth zero “due to the significant decrease in value for equity investors.” Prosus Group CIO, Ervin Tu, said on an earnings call that the firm is still hopeful about Byju’s outlook, but improving governance at the Indian firm will be key.

The Indian edtech giant has had a difficult couple of years as it grappled with a series of financial and governance setbacks that have tarnished its reputation and imperiled its future. The startup’s woes were amplified last year when it failed to meet financial reporting deadlines and ultimately reported revenues well below its own projections.

© The financial stumbles were compounded by the sudden departures of its auditor and board members, including a Prosus executive, and scuttled a potential $1 billion fundraising effort. In a desperate bid for capital, the startup raised $200 million this year, but at a drastically reduced valuation of about $225 million to $250 million. This lifeline has also been entangled in legal disputes with some of Byju’s largest backers, including Prosus.

© The South African-Dutch investor, whose portfolio includes high-profile companies like Tencent, Delivery Hero, Swiggy and Stack Overflow, has invested more than $570 million in Byju’s over the years. It has never sold any shares in the Indian edtech startup, whose valuation climbed to a peak of $22 billion in early 2022. Prosus on Monday said its stake in Byju’s now represented a fair value loss of $493 million, after the adjustment, in its current financial year.

Prosus has also cut down the value of its other investments: It reduced the value of its stake in Stack Overflow, which it bought for $1.8 billion in 2021, by 39%, and has lowered the worth of its stake in Indian online pharmacy, PharmEasy, by 35%.

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✅ What Vinod Khosla says he’s ‘worried about the most’
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💻 Vinod Khosla is more popular than ever right now. The Sun Microsystems co-founder turned prominent investor — first at Kleiner Perkins and, for the last 20 years, at his venture firm Khosla Ventures — has always been sought after by founders thanks to his no-nonsense advice and his firm’s track record, including bets on Stripe, Square, Affirm, and DoorDash.

But a $50 million gamble on OpenAI back in 2019 — when it was far from clear that the outfit would succeed on the scale that it has — put Khosla Ventures, and Khosla himself, squarely in the spotlight.

He’s thoroughly enjoying himself. I sat down with Khosla this past week in Toronto at the Collision conference, and ahead of our stage appearance, he told me that he’s been appearing in public — either onstage or on podcasts or television interviews — several times a week lately. Asked if he was exhausted by the schedule — for example, he flew into Toronto just hours before our sit-down — he shrugged off the suggestion.

💻 Certainly, there are things he prefers to talk about, and the art of deal-making is not among these things. “Frankly, the investor side is much less interesting to me,” he said when I asked him about something I heard recently, which is that he hasn’t taken a dollar in management fees since starting Khosla Ventures, despite that it now has $18 billion in assets under management. (He confirmed this, but he said that’s only true of himself and not a corporate-wide policy.)

💻 He’s much more passionate about the startup opportunities he spies in a landscape being changed daily by advances in AI, so we talked about some of this white space.

We also talked about what concerns him the most about AI’s ripple effects; FTC Chair Lina Khan; and why, in his view, the “Europeans have regulated themselves out of leading in any technology area.”

We talked first about Apple’s splashy new deal with OpenAI, which allows Apple to integrate ChatGPT into Siri and its generative AI tools. Apple may be striking similar deals with other AI models, including with Meta, but naturally, as an OpenAI investor, Khosla is bullish on the tie-up, which is the only one Apple has announced publicly so far.

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💬 Deal Dive: Sir Jack A Lot returns with a startup for retail traders
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When former YouTube product manager Kevin Xu, known as “Sir Jack A Lot” on Reddit, turned $35,000 into $8 million trading stocks between 2020 and 2022, many people thought his fortunes, and his way of investing, had peaked, just like 2021’s memestock craze had.

📱 Xu doesn’t agree, though, and he’s now building a startup for retail investors that aims to bring the good-natured investing advice and community that people used to enjoy on platforms like the WallStreetBets subreddit, but with a layer of accountability that discourages scammers and grifters.

📱 Launched in April 2022, AfterHour lets users link to their stock brokerage accounts and, under a username of their choosing, post their investments to a social feed. “The only reason people trust me and Roaring Kitty is that we are transparent,” Xu told TechCrunch. “Why not show your actual positions or prove you are actually in something? [AfterHour] brings back a level of credibility and trust. You connect your brokerage and share real verified positions and screenshots.”

The company currently has more than 23,000 users, and while that’s not an eye-popping number by any means, its user base is growing, and early adopters seem dedicated — Xu said that more than 70% of its users are on the app every single day. The company is currently focused on growth, Xu said, but has plans for how to monetize in the future.

📱 “Monday to Friday, 9:30 a.m. to 4 p.m. is the game,” Xu said. “When we started, I was so scared that it would be quiet on the weekends, but on Monday, people just come back. We don’t do any scammy push notifications to get people back on Mondays, but they naturally come back.”

The startup recently raised a $4.5 million seed round led by Founders Fund — Keith Rabois’ last investment at the firm — and General Catalyst. Pear VC, Daybreak Ventures and F4 Fund also participated, among several others. Xu said AfterHour is now focusing on growing its user base and its team

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🐵 Seizing the Moment: Strategies for Startups to Outmaneuver Competition in a Turning Economy
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👍 The Fed no longer predicts a recession. Economic data is turning more positive, eg housing starts exceeded forecasts. 80% of public companies beating earnings estimates - three percentage points higher than the 5 year average.

This is the moment startups with big balance sheets’ advantage will shine.

👍 On the other hand, enough uncertainty permeates the market to depress prices. Public software companies’ share prices have fallen 10% on average in the last 30 days dotted with positive notes like the stabilization cloud growth rates for Microsoft & Google.

Efficiency has been the watchword for the last 3-4 quarters. Most companies have trimmed excess costs to drive go to market sales efficiency & burn ratios. For those companies with hundreds of millions on the balance sheet, they have two strategic options to evaluate.

👍 First, acquisitions. Many startups will look to raise starting in September. The fundraising market, while active, isn’t fully thawed. The metrics for Series As remain unclear, which provides an opening for selective technology & team acquisitions at reasonable prices.

👍 Second, scaling the marketing, then the sales spending as unit economics justify. Startups with bigger balance sheets will be able to ramp much more quickly than those needing to raise capital before scaling the GTM once more. Responding faster to market pull will increase their market share.

The right strategic bet on either of these options can provide a startup with significant advantage into this next economic cycle.

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