• Troubled Payday Lender Wonga Still Has a Chance, Insist Insiders

    wonga_2368090bIn the span of seven years, Wonga, a London-based online payday lender, managed to become one of the best known Internet brands in the U.K, with half the buses in London plastered with its ads, along with a good number of soccer players, through Wonga’s sponsorship of the English Premier League team Newcastle United.

    Then, late last week, the company disclosed that it was writing off some $350 million of debt – at a cost of roughly $56 million to the company — following a “voluntary agreement” between the company and the U.K.’s Financial Conduct Authority (FCA), which took over regulation of the consumer finance sector last year. Wonga’s implicit admission: That despite the more than 8,000 pieces of information that its algorithm takes into account when assessing a potential borrower, the company had lent money to people (330,000 of them) it should have declined.

    Andy Haste, an executive chairman who was installed at Wonga in July to rehabilitate the company, said that going forward, the company is committed to lending only to those who can “reasonably afford” a loan. Haste – who was hired into Wonga after it was caught sending bogus letters from nonexistent law firms to customers in arrears – also added that he “agreed with the concerns expressed by the FCA and as a consequence of our discussions we have committed to taking these actions.”

    So when did things go south at Wonga and can the company — which has raised roughly $145 million from Balderton Capital, Accel Partners, Wellcome Trust, Oak Investment Partners, Greylock Partners, Dawn Capital, Meritech Capital Partners, and Index Ventures over the years — ever recover? Unsurprisingly, it depends on who you ask.

    Insiders generally paint a picture of a company that’s been the victim of a changing regulatory environment. When Wonga was launched, its business was lightly regulated by the Office of Fair Trading (OFT), which was “not a banking oversight function that had a great deal of power or was intrusive,” observes one investor. Wonga suddenly faced a much more stringent set of checks and balances when the regulation of consumer credit was transferred last year from the OFT to the FCA.

    The FCA’s regulators have been overly harsh, too, insists another source, who suggests its cozy relationships with established players is primarily why the FCA almost immediately began poring over the fine print at Wonga. “Wonga’s business was always regulated,” says the insider. “From the first day, it was licensed; it had its own underwriting agents and was being reviewed by regulators. But becoming such a large brand so quickly was hurting the established banks, which are very influential in a country like the U.K.”

    Still, those who spoke with StrictlyVC also concede that Wonga made plenty of mistakes – not working earlier with financial services authorities, “running the business a lot looser than they should have,” and those threatening debt collection letters among them. (The latter proved an especially big embarrassment to the Church of England, which said it had unwittingly invested in Wonga through an investment fund; it ditched its stake in July.)

    The company’s once-renowned algorithm also appears to have failed the company – a lesson, possibly, to many newer lending companies that believe the sophisticated algorithms they’re developing are akin to impenetrable moats.

    As says one insider: “With algorithms, you always think you’re doing the right thing until the sh_t hits the fan. You ask the guys involved in Long Term Capital Management [the famous hedge fund that collapsed in the late ‘90s] whether they knew there was a ‘black swan’ in their algorithm; they didn’t.”

    The question now is whether Wonga stands any chance of surviving. Haste has said he believes Wonga, which serves 1 million customers, can succeed as a small company. Others close to the company aren’t so sure about its fate. Says one source: “Will Wonga be a big business again? I doubt it because of the damage to their brand reputation.”

    Say another: “If Wonga can afford to pay the penalty and stick around, they have a business to build. Consumers in the U.K. don’t have a lot of other good options. The banks are still doing a sh_tty job.”

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

    Connie

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  • StrictlyVC: July 29, 2014

    Happy Tuesday, everyone! (Web visitors, you can find an easier-to-read version of today’s newsletter here.)

    —–

    Top News in the A.M.

    Twitter is reporting its second-quarter earnings today, and industry observers will be listening to learn whether the company has solved its growth problem. They might be disappointed, reports Recode.

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    Meritech Capital Just Raised $500 Million; Here’s Why It Didn’t Raise More

    Meritech Capital Partners has just finished raising a fifth, $500 million fund, the firm tells StrictlyVC.

    That’s a lot of money, but the 15-year-old, Palo Alto, Ca.-based late-stage venture firm could have raised much more. Fully 38 of the firm’s portfolio companies have either been acquired or gone public since the second half of 2009. Among them: Facebook, which went public in 2012; the e-commerce company Zulily, which held its IPO last November; and the social networking network Yammer, acquired by Microsoft for $1.2 billion in cash in 2012. In fact, Meritech’s fourth, $425 million fund, closed just three years ago, has already reaped nearly as much as investors poured into it.

    So why didn’t Meritech collect more than it did, especially when startups are eschewing public markets longer and raising more of their capital from private investors? Because the firm’s five partners think the trend is temporary and not part of a permanent restructuring. Yesterday, I talked about it with Meritech’s cofounder and managing director, Paul Madera.

    You’ve had loads of exits over the last five years. What do you see happening over the next 6 to 12 months in terms of IPOs and M&A?

    I think we’ll continue to have a strong IPO market – which also helps M&A. A healthy IPO market means valuations are generally stable and increasing, and since acquirers rely on having stability and ever more valuable currency, it makes them more comfortable about reaching out and making acquisitions. It will also continue to be a great time to harvest liquidity from our venture portfolio.

    Interesting phrasing. Do you think it’s a better time for exits than new investments?

    It’s a wonderful time to harvest and a time to be very careful with new investments. I say that as someone who invests in later-stage companies, where the value is running ahead of the economic opportunity. Valuations are just horrific. Now is just not a great time to put a lot of money into later-stage companies. Now is a time to be cautious and slow and careful.

    How much have valuations jumped in the last year, would you say?

    I think they may be two or three times where they were a year ago, with similar performance parameters. Of course, that doesn’t apply to everything out there. But it does apply to a narrower group of companies that tend to be within certain sectors where you can show tremendous growth very quickly and that are backed by great, brand-name early-stage firms.

    Soaring valuations are obviously being driven, at least in part, by “outside” investors, including mutual funds and hedge funds. Do you have any sense that their days of offering sky-high valuations are numbered?

    A lot of groups pulled back from March through early June given the downturn in the public markets, but they’re back investing at full speed once again right now. They’re in a new sector of investing. It used to be early-, mid-, and late-stage investing. Now there’s this pre-IPO stage that’s growing dramatically in terms of the money going in, and it’s the functional result of companies staying private longer, which these private IPOs allow them to do and that companies have gotten quite smart about. They’re hiring agents and advisors who will let them get [in front of] these groups in an efficient way, and they’re running processes that let them get the best valuation and terms.

    Is this the new normal?

    I think it’s [part of] a cycle, that it’s transitory, and that’s why we didn’t raise more money. I think some of these groups are doing, and will do, fine. But the last time we saw firms doing pre-IPO stuff was in 1999 and 2000. And they aren’t doing it anymore.

    —–

    New Fundings

    Baifendian, a five-year-old, Beijing-based company that develops recommendation engines for e-commerce sites, has raised $25 million in Series C funding from undisclosed sources, according to China Money Network. Baifendian had previously raised at least $17.2 million, says the report. Its investors include Zhejiang Shinkansen Media Investment, IDG Capital Partners, and Mingxin China Growth Fund.

    BaubleBar, a 3.5-year-old, New York-based e-commerce company focused on “on-trend” fashion jewelry, has raised $10 million in fresh funding led by Chris Burch, co-founder of the Tory Burch company. Aspect Ventures, Triplepoint Ventures, Comcast Ventures, along with earlier investors Accel Partners and Greycroft Partners, also participated in the round. The company has now raised $15.6 million altogether. Dealbook has more here.

    Beyond Meat, a five-year-old, El Segundo, Ca.-based company that makes foods that look and taste like real meat but come from plants, has raised an undisclosed amount of Series D funding. New investors include DNS Capital, representing the interests of Gigi Pritzker Pucker and Michael Pucker; Taiwan’s Tsai Family, through its family office, WTT Investment; and S2G Ventures. Earlier investors Kleiner Perkins Caufield & Byers, Obvious Corporation, Bill Gates, Morgan Creek Capital and Honest Tea founder Seth Goldman also participated in the round.

    Bright Computing, a nearly five-year-old, San Jose, Ca.-based company that develops management software for clusters, grids and clouds for storage, big data and databases, has raised $14.5 million in Series B funding co-led by DFJ and DFJ Esprit. Prime Ventures and earlier investor ING Corporate Investments also participated.

    ChoiceStream, a 13-year-old, Boston-based programmatic media-buying company, has raised $7.5 million in new funding led by New York-based Fred Alger Management. The company has raised at least $73.8 million over the years, shows Crunchbase.

    Coub, a 2.5-year-old, Moscow-based company that enables users to create short-looped videos with sound, has raised $2.5 million fromVaizra Investment Funds. Last year, the company had raised $1 million in funding from Phenomen Ventures and Brother Ventures.

    Decision Lens, a 12-year-old, Arlington, Va.-based company that makes prioritization and resource optimization software, has raised $4.4 million in new funding led by Vision Thinkers. It raised an additional $2.1 million in debt from undisclosed sources. Altogether, the company has raised at least $6.9 million, shows Crunchbase.

    Easy Taxi, a three-year-old, Sao Paulo-based, Uber-like mobile application, has raised $40 million in Series D funding led by Phenomen Ventures, with participation from Tengelmann Ventures. The company has now raised $77 million to date, shows Crunchbase.

    Exchange Corporation, a six-year-old, Tokyo-based peer-to-peer lending service has raised $3.3 million led by Arbor Ventures, with participation from CyberAgent Ventures and Recruit Strategic Partners. Earlier investors 500 Startups and Cherubic Ventures also participated in the round. The company is using the funding to launch a new service called Paidy that will enable consumers to buy items on credit from their phones, using just their name and email address.

    Flipkart, the seven-year-old, Bangalore City, India-based e-commerce company, has confirmed an earlier report that it has raised $1 billion in new funding. The capital comes from existing investors Tiger Global, DST Global, Accel Partners, ICONIQ Capital, Morgan Stanley Investment Management and Sofina. The company now raised a whopping $1.7 billion altogether.

    Knowlarity, a two-year-old, Gurgaon, India-based cloud telephony startup, has raised roughly $15 million led by Mayfield Fund, according to the Economic Times. Earlier investor Sequoia Capital also participated. The company had previously raised at least $2 million in angel funding, says the report.

    Kontakt.io, a year-old, Krakow, Poland-based maker of Beacon hardware, backend, and software development services, has raised $2 million from Sunstone Capital. The company had previously raised $250,000 in seed funding. TechCrunch has much more here.

    Kurbo Health, a year-old, Palo Alto, Ca.-based company that has developed a subscription-based app around a weight loss program and platform, has raised $5.8 million Series A funding led by Signia Venture Partners. Other participants in the round included Data Collective, Bessemer Venture Partners, and Promus Ventures, along with YouTube CEO Susan Wojcicki and Greg Badros, a former VP of engineering and product at Facebook.

    Leanplum, a two-year-old, San Francisco-based mobile app analytics company, has raised $4.8 million in Series A funding from Shasta Ventures. According to Crunchbase, the startup had previously raised $825,000 in seed funding from TechStars, Kima Ventures, Alliance of Angels, VoiVoda Ventures and others.

    PaxVax, a seven-year-old, Menlo Park, Ca.-based company that develops candidate oral vaccines for key infectious diseases, including influenza, has raised $62 million in debt and equity, including to acquire a typhoid vaccine. The $12 million equity portion of the round comes from Blue Haven Initiative and Ignition Growth. The company has now raised roughly $130 million altogether, shows Crunchbase.

    SkyKick, a three-year-old, Seattle-based company whose software makes it easy for IT Partners to move their customers to Microsoft’s Office 365, has raised $3 million in funding from unnamed strategic investors and angel investors. Altogether, the company has now raised $7.2 million, all from undisclosed funding sources.

    Spire, a two-year-old, San Francisco-based company whose satellites are roughly the size “of a good bottle of California red wine,” reports Venture Capital Dispatch, has raised $25 million in Series A funding to launch its fleet into space. The round was led by RRE Ventures. Moose Capital, Quihoo and Mitsui & Co. Global Investment also participated.

    ThetaRay, a year-old, Jerusalem-based company cyber securtity company, has raised $10 million in Series B funding from GE, Jerusalem Venture Partners, Poalim Capital Markets, a division of Bank Hapoalim, and other, unnamed, investors. The company had earlier raised an undisclosed amount of funding from GE and Jerusalem Venture Partners, shows Crunchbase.

    Thinknum, a year-old, New York-based platform that helps investors and financial analysts value companies, has raised $1 million in seed funding led by Pejman Mar Ventures. Dealbook has much more here.

    Voyat, a two-year-old, New York-based loyalty and e-commerce platform for hotels, has raised $1.8 million in seed funding from a long list of investors, including Metamorphic Ventures, Eniac Ventures, BoxGroup, and SecondMarket founder Barry Silbert.

    —–

    New Funds

    Former Microsoft executive Daniel Petre, along with Craig Blair, a former managing director of Expedia Australia, have officially launched a new venture firm called AirTree Ventures that aims to fund up to 15 Australia-based startups. The two were reported to be in the market back in March, with a $50 million target; they closed on $60 million. “We were surprised at how quickly it happened and how quickly we met the target,” Blair tells the outlet SmartCompany. “I think it is a function of investors realizing that technological disruption is not going away any time soon, we’re just starting, and that venture capital is not broken.”

    Binary Capital, a new venture fund cofounded by Jonathan Teo and Justin Caldbeck, has officially closed its new fund with $125 million in capital, much less than they could have raised, the pair told numerous outlets yesterday. Recode has much more on the story here, as does Dealbook.

    —–

    People

    A new University of California policy has opened the door for the university system to invest directly in companies, and a group of powerful VCs that includes Brook Byers of Kleiner Perkins Caufield & Byers and Fred Cohen of TPG Biotech will begin advising the school on how to identify startups beginning next month.

    For two years, a mysterious mole at Cisco has been interfering in the life of Cisco senior VP Surya Panditi. Now Panditi is now going after him or her with both barrels.

    Moshe Hogeg, the brains behind viral notification app Yo and CEO of Israeli communication startup Mobli, has launched a new app called Mirage that’s also a one-button messenger. Business insider has much more here.

    Amy Schulman has joined Polaris Partners as a venture partner. Schulman, who will be based in Boston, was most recently general counsel at Pfizer. Before joining Pfizer, Schulman was a partner and co-leader of DLA Piper mass tort/class action practice. Schulman, notes the Boston Globe, is the first female partner at Polaris, where she will serve on several portfolio companies’ boards, as well as serve as CEO of Aris Therapeutics, a months-old Cambridge, Ma., company cofounded by Polaris partner Alan Crane.

    —–

    Job Listings

    Lighter Capital in Seattle is looking for an associate. (We profiled Lighter Capital back in April, if you’re interested in learning more.)

    —–

    Data

    Andreessen Horowitz partner Chris Dixon, tweeting last night about the ever-shrinking percentage of developers who make all the money off iOS apps: “Apple app store will pay out >$10B this year to devs. Problem isn’t total amount – it’s concentration at the top. You can’t starve the long tail and still have a healthy developer ecosystem. “

    —–

    Essential Reads

    Airbnb is going after business travelers now, too.

    This is what tech’s ugly gender gap really looks like. “The most common thing I hear from other women is: ‘Oh the stories I’ll tell once I’m far enough along that I don’t have to worry about being shamed.’”

    —–

    Detours

    Who is your parents’ favorite kid? The Favorite Child Detector can quickly confirm your worst fears.

    A new study suggests that friends share genetic similarities.

    “I’m Ira Glass, and this is how I work.”

    —–

    Retail Therapy

    Sixteen toys of summer. Almost all involve horsepower. One is literally a big wheel for adults. (Do not that buy that one.)

    Connie

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  • Meritech Capital Partners Just Raised $500 Million; Here’s Why It Didn’t Raise More

    Paul MaderaMeritech Capital Partners has just closed on a fifth, $500 million fund.

    That’s a lot of money, but the 15-year-old, Palo Alto, Ca.-based late-stage venture firm could have raised much more than that. Fully 38 of the firm’s portfolio companies have either been acquired or gone public since the second half of 2009. Among them: Facebook, which went public in 2012; the e-commerce company Zulily, which held its IPO last November; and the social networking network Yammer, acquired by Microsoft for $1.2 billion in cash in 2012. In fact, Meritech’s fourth, $425 million fund, closed just three years ago, has already reaped nearly as much as investors poured into it.

    So why didn’t Meritech collect more than it did, especially when startups are eschewing public markets longer and raising more of their capital from private investors? Because the firm’s five partners think the trend is temporary and not part of a permanent restructuring. Yesterday, I talked about it with Meritech’s cofounder and managing director, Paul Madera.

    You’ve had loads of exits over the last five years. What do you see happening over the next 6 to 12 months in terms of IPOs and M&A?

    I think we’ll continue to have a strong IPO market – which also helps M&A. A healthy IPO market means valuations are generally stable and increasing, and since acquirers rely on having stability and ever more valuable currency, it makes them more comfortable about reaching out and making acquisitions. It will also continue to be a great time to harvest liquidity from our venture portfolio.

    Interesting phrasing. Do you think it’s a better time for exits than new investments?

    It’s a wonderful time to harvest and a time to be very careful with new investments. I say that as someone who invests in later-stage companies, where the value is running ahead of the economic opportunity. Valuations are just horrific. Now is just not a great time to put a lot of money into later-stage companies. Now is a time to be cautious and slow and careful.

    How much have valuations jumped in the last year, would you say?

    I think they may be two or three times where they were a year ago, with similar performance parameters. Of course, that doesn’t apply to everything out there. But it does apply to a narrower group of companies that tend to be within certain sectors where you can show tremendous growth very quickly and that are backed by great, brand-name early-stage firms.

    Soaring valuations are obviously being driven, at least in part, by “outside” investors, including mutual funds and hedge funds. Do you have any sense that their days of offering sky-high valuations are numbered?

    A lot of groups pulled back from March through early June given the downturn in the public markets, but they’re back investing at full speed once again right now. They’re in a new sector of investing. It used to be early-, mid-, and late-stage investing. Now there’s this pre-IPO stage that’s growing dramatically in terms of the money going in, and it’s the functional result of companies staying private longer, which these private IPOs allow them to do and that companies have gotten quite smart about. They’re hiring agents and advisors who will let them get [in front of] these groups in an efficient way, and they’re running processes that let’s them get the best valuation and terms.

    Is this the new normal?

    I think it’s [part of] a cycle, that it’s transitory, and that’s why we didn’t raise more money. I think some of these groups are doing, and will do, fine. But the last time we saw firms doing pre-IPO stuff was in 1999 and 2000. And they aren’t doing it anymore.

    Correction: The original version of this story stated that Meritech’s fourth fund had been nearly returned to investors already, but it hasn’t yet distributed all of its returns as of this writing.

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

    Connie

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