• Handcuffed to Uber

    uber-cuffsPlenty of people would give everything to be an early employee at seven-year-old Uber. But Uber employees who’ve been with the ride-share company for at least a few years have discovered a considerable downside to their ride with the transportation juggernaut. They can’t afford to quit. Startup employees have to exercise their options within 90 days of leaving a company or else lose them and at Uber, that cost is simply too high.

    A quick scan of LinkedIn for former employees underscores the point. Of Uber’s roughly 6,700 employees, only a tiny fraction have left, and in most cases, those hires weren’t around long enough to be worrying about vested options.

    Employees of privately held companies have long wrestled with this issue. (We wrote about it here last summer.) With valuations of many privately held tech companies having soared so dramatically in recent years, the amount of capital needed to buy employee options has escalated at an unprecedented pace for employees at a variety of places.

    Uber appears to be the most extreme example ever, however. In a completely hypothetical example, let’s say an early, top Uber engineer was given .5 percent of the company. Now let’s say this person was awarded options in 2011, when Uber raised $11 million in Series A funding at a reported $60 million valuation. His ownership stake at the time would have been $300,000. Yet today, that same stake (undiluted) would now be worth $300 million at Uber’s reported current post-money valuation of $60 billion. That’s a paper gain of $299,700,000.

    It’s very hard to cry about that, it’s true. But there is bad news: at a 40 percent tax rate for short-term gains, if the engineer opted to leave Uber, he’d confront a tax bill of $119,880,000, not including that earlier $300,000 needed to exercise the options. And leaving Uber would start the clock. He’d have just 90 days to come up with the $300,000, and he’d have to come up with the rest of the money for the much larger tax bill by the next April 15.

    Maybe Uber will be publicly traded by then. Maybe it won’t.

    Some highly valued companies have tried to ease this issue for employees by allowing them to sell some of their sales to preapproved secondary sellers at certain points. Not so Uber, which amended its bylaws in 2013 to restrict unapproved secondary sales. Not only does it not allow employees to sell their shares to secondary buyers, it also won’t allow them to use services like those offered by 137 Ventures, which makes loans to founders and early employees, using their stock as collateral. (Snapchat, Dropbox, and Airbnb have similar policies.)

    Our sense is that the company doesn’t mess around, either. Four secondary players have told us of employees who’ve tried to find ways around Uber’s regulations, only to be stymied. “We’ve been approached by big groups of early employees, and I know a lot has been written about loans or hypothetical products to get around its policies,” says one source. “But Uber’s position is that if it learns [of a sale or loan] that goes around its share-transfer restrictions, there will be consequences.”

    It may seem uncharitable on some level, but it’s very much by design, according to insiders, who say Uber CEO Travis Kalanick has two primary motivations for keeping his company’s shares on lockdown.

    More here.

    (Photo: Bryce Durbin)

  • A New Way to Fund Unicorns Starts to Look Less Magical

    unicornIf you haven’t heard of a fairly new twist on investing called special purpose vehicles (SPVs), you probably aren’t an institutional investor or a wealthy individual with direct ties to either a venture firm or a high-flying startup like Pinterest or Postmates.

    But don’t worry if you’ve missed the opportunity to invest in one. Investors may find they weren’t worth the risk if valuations of so-called unicorns — some given “haircuts” recently by their mutual fund investors — start to slip more broadly.

    The vehicles – essentially pop-up venture firms that come together quickly to make an investment in a single company – began surfacing around 2011, leading up to Facebook’s IPO, and they’ve been on the rise since. In April, the Wall Street Journal reported on several low-flying SPVs that have been used to connect investors with high-profile, still-private companies like the data analytics company Palantir Technologies and the grocery -delivery outfit Instacart.

    Another company that has raised money via numerous SPVs is the digital scrapbooking company Pinterest. When it set out to raise more than $500 million earlier this year, the venture firm FirstMark Capital raised a $200 million for a SPV to help fund it. In 2014, Pinterest separately raised $131.1 million through two SPVs organized as Palma Investments by SV Angel, the seed-stage fund founded by renowned investor Ron Conway.

    It’s no wonder that investors are drawn to the vehicles. In the case of Facebook, early access to the company produced big dividends for investors. Investor Chris Sacca similarly amassed an outsize stake in Twitter for investors Rizvi Traverse and J.P. Morgan by creating SPVs that paid off. (How richly depends on when they began cashing out. As of late September, Rizvi Traverse had sold more than 10 percent of the 15.6 percent of Twitter it owned at the time of its November 2013 IPO. Twitter’s shares peaked in January of 2014 at $69 per share; they’re now trading at roughly $26 apiece.)

    Whether investors in newer SPVs will see such rewards remains a question mark – and there a lot of investors in newer SPVs.

    More here.

  • StrictlyVC: March 24, 2015

    Hi, everyone! (Web visitors, click here for an easier-to-read version of this morning’s email newsletter.)


    Top News in the A.M.

    Here are the many companies that presented yesterday at Y Combinator‘s first (of two) demo days. Mattermark, the venture analysis company, looks at 10 of the fastest growing startups in the batch here.

    Facebook has reportedly been talking with at least half a dozen media companies about hosting their content inside Facebook.


    Did Pinterest Just Change the Game?

    In tech, employees often join startups with the idea that they might become millionaires if those companies go public or are sold. But even experienced startup veterans often underestimate the costs involved in exiting one’s stake. Purchasing equity that has appreciated can run into the hundreds of thousands of dollars — if not millions — and most startup documents only give employees 90 days to exercise their fully vested options once they move on.

    Pinterest is rejecting that age-old program. According to Fortune, the digital scrapbooking company has told employees that if they’ve been an employee for at least two years and leave the company — or are let go — they’ll have up to seven years to exercise their vested options.

    Presumably, Pinterest is trying to attract the best and brightest by offering them more freedom than a typical startup payment package would allow.

    Whether other startups follow suit anytime soon remains to be seen. There are plenty of reasons things work they way they do, after all, including that it’s often in a startup’s best interests to be able to reclaim equity if an employee can’t purchase his or her shares within 90 days of his or her exit. Machiavellian as it may seem, companies might also want to retain their leverage over talented employees to keep them right where they are.

    And there are other arguments to preserve the status quo. For example, you could imagine companies’ unwillingness to provide financial information to a lot of former employees who might be entitled to it under the law, yet who might have gone on to work at a competing company.

    There are also plenty of secondary buyers capable of providing employees with some liquidity.

    Of course, anyone who has been through a secondary sale can attest that they involve plenty of pros and cons. Demand and supply have to align. Many buyers want information rights that can give them assurance about the startups in which they’re investing, yet many companies don’t want to provide that information. Secondary buyers also tend to drive a very hard bargain because they know it’s not a liquid market.

    Our bet? As more companies take their time in going public and those golden handcuffs become more onerous for employees, something is going to give. Trying to maintain the same kinds of controls won’t remain feasible forever.

    Pinterest employees who wait to exercise their shares may face a much bigger tax bill years from now. But they’ll also have much more time to line up a secondary buyer or otherwise plan to raise the capital to buy their shares and deal with that tax hit.

    It’s going to be very hard for other startups to compete with that kind of advantage. Over time, it might prove impossible.


    New Fundings

    Aeglea Biotherapeutics, a two-year-old, Austin, Tex.-based biopharmaceutical company that’s developing therapies targeting tumor metabolism, has raised $44 million in Series B funding led by earlier backers Lilly Ventures and Novartis Venture Fund, with participation by earlier backer UT Horizon Fund and new investors OrbiMed, Jennison Associates, Venrock, RA Capital Management, Rock Springs CapitalAlly Bridge Group and Cowen Investments.

    Augmented Pixels, a 4.5-year-old, Palo Alto, Ca.-based company that produces sales platforms for real estate and retail customers using virtual and augmented reality technology, has raised $1 million in seed funding led by The Hive, a three-year-old, Palo Alto, Ca.-based incubator and accelerator

    BitReserve, a two-year-old, San Francisco-based company seeking to use bitcoin to transfer funds across borders and minimize exchange fees, now counts Mexican billionaire Ricardo Salinas-Pliego, the chair and CEO of Grupo Salinas, as its biggest investor, according to the startup. It hasn’t disclosed how much Salinas-Pliego, the fourth richest person in Mexico, has committed to the company. BitReserve was founded by CNet cofounder Halsey Minor, who famously ran into financial trouble after the 2008 financial crisis.

    Cadre, a six-month-old, New York-based startup that aims to connect institutional investors with opportunities in gateway markets, has just raised $18.3 million from Thrive Capital and General Catalyst Partners, with participation from some of New York real estate’s biggest players, including former Vornado Realty Trust CEO Michael Fascitelli. The company was founded by Jared and Joshua Kushner. (As readers will know, Joshua also cofounded Thrive Capital.) The Real Deal has much more here.

    Coding, a 15-month-old, Shenzhen-based company whose cloud-based tools are used by developers to access and manage their projects, has raised roughly $10 million in Series B funding led by Lightspeed Venture Partners, with participation from IDG Capital.

    Cyanogen, the five-year-old, Palo Alto, Ca.-based custom Android software developer, has raised $80 million in Series C funding led byPremji Invest. Other new investors include Twitter VenturesQualcomm, Telefónica Ventures, Smartfren Telecom, Index VenturesAccess Industries and individual investors Rupert Murdoch and Vivi Nevo. Earlier backers Andreessen Horowitz, Benchmark, Redpoint Ventures and Tencent Holdings also participated in the round. The company has now raised $110 million altogether.

    Day1 Solutions, a three-year-old, McLean, Va.-based cloud services startup, has raised $2 million in funding from 10 unnamed investors.

    Dragonfly Technology, an eight-month-old, Bay Area company that’s operating in stealth mode (but relates to consumer electronics), has raised $4.5 million in funding, according to an SEC filing. Backers include iD Ventures America and the Tokyo-based investment firm UTEC.The company looks to be targeting $6 million altogether, shows the filing.

    Flower Orthopedics, a three-year-old, Horsham, Pa.-based company that designs and manufactures bone-fixation implants and instruments, has raised $4.5 million in Series C funding from undisclosed investors.

    Improbable, a three-year-old, London-based company that has developed an operating environment that makes building simulated worlds possible, just raised $20 million in funding from Andreessen Horowitz. Chris Dixon, who joins the board, writes about the investment here.

    Keywee, a two-year-old, New York-based company that analyzes marketing content and finds qualified audiences for it, has raised $9.1 million in Series A funding led by Innovation Endeavors and Marker, with participation from The New York Times Company and UpWest Labs.

    Lendio, a nine-year-old, South Jordan, Ut.-based small business lending marketplace, has raised a $20.5 million in funding led by the private equity firm Napier Park, with participation from Blumberg Capital, North Hill Ventures, Pivot Investment Partners and prior investors Tribeca Venture Partners, Runa Capital and Highway 12 Ventures. The company has now raised $33 million altogether.

    M.Gemi, a new, Boston-based e-commerce company that features new, limited edition styles of Italian shoes every week, has raised $14 million in seed and Series A funding General Catalyst Partners, Forerunner Ventures and Breakaway Ventures. The company was founded by Ben Fischman, founder of the flash sale fashion site Ruelala. Business Insider has more here.

    Mojio, a 2.5-year-old, Vancouver, Canada-based connected car platform, has raised $8 million in Series A funding led by Telekom Capital, the investment arm of Deutsche Telekom. Other participants in the round include Relay Ventures, the Business Development Bank of Canada, and AOL co-founder Steve Case. The company previously raised a $2.3 million seed round. TechCrunch has more here.

    Rubrik, a year-old, Palo Alto, Ca.-based company that offers live data access for recovery and application development, has raised $10 million in Series A funding led by Lightspeed Venture Partners, with participation from numerous high-profile individual investors, including Veritas’s founding CEO Mark Leslie.

    SecurityScorecard, a two-year-old, New York-based security risk assessment service for cloud-based information systems, has raised $12.5 million in Series A financing led by Sequoia Capital, with participation from earlier backers Boldstart and Evolution Equity Partners. The company has now raised a total of $14.7 million.

    Slack, the two-year-old, San Francisco-based company whose software helps people collaborate at work, is talking with investors about a new round that would value the company at more than $2 billion, according to Bloomberg. In October, the company raised $120 million in a round of financing co-led by Kleiner Perkins Caufield & Byers and Google Ventures that valued the company at $1.12 billion.

    ZipMatch, a two-year-old, Taguig, Philippines-based online property portal, has raised $2.5 million in Series A funding led by Monk Hill Ventures, with participation from earlier backer 500 Startups. The company had previously raised $1 million in funding. TechCrunch has more here.


    New Funds

    Accel Partners has raised its fourth India-focused fund with $305 million in commitments. Like the firm’s earlier funds, Accel India IV will focus on early-stage ventures, though a spokesman tells us it will also invest in “select” growth equity opportunities. Accel is among India’s most active investors, with bets that include the 7.5-year-old e-commerce giant Flipkart. The appeal, says the firm: India is one of the world’s fastest-growing economies, nearly doubling its GDP between 2003 and 2013; it has a large, growing middle class that’s expected to include 100 million households by 2020; and it’s home to 576 million people who are under the age of 25 (compared with the U.S., which is home to 106 million people aged 24 or younger).

    Andreessen Horowitz, the six-year-old, Sand Hill Road firm, has raised a separate new venture fund called PinAH with $36.7 million in commitments, according to an SEC filing. (The firm hasn’t responded to questions about it; likely it has something to do with the firm’s investment in Pinterest, which is in the process of raising half a billion dollars.)

    Golden Gate Ventures, a 3.5-year-old, Singapore-based seed-stage fund, has raised its second fund, closing on $50 million, up from the $10 million it had been investing with its debut fund. The firm looks for investment opportunities in Southeast Asia; it will also reportedly begin shopping for startups in other parts of Asia, including in Hong Kong and Taiwan.

    Jerusalem Venture Partners, the 23-year-old, Jerusalem-based venture firm, has a new limited partner: Alibaba Group has joined the firm’s seventh fund as an LP, kicking in $15 million, says a source to the Wall Street Journal. Alibaba is reportedly interested in cyber security related deal flow, for which JVP is well-known. Apparently, it’s also interested in the firm’s storage and networks bets given that such technologies could ultimately help Alibaba reduce its operational costs.

    Joe Montana, the famous former football player, is close to wrapping up a new investment fund of between $20 million and $25 million, he tells Business Insider. The new fund will be called Liquid Two and won’t feature a specific area of focus, he says.

    Joint Polish Investment Fund Management, a new, Warsaw, Poland-based venture capital fund, has closed its debut fund with $42 million. It’s the first institutional venture capital fund operating out of Poland that is completely dedicated to life-science investments, says the outfit, which will fund early- and mid-stage companies with a close relationship to Poland.

    SVB Financial is raising what sounds like a late-stage venture fund, called the Venture Overage Fund. According to an SEC filing, it hasn’t begun fundraising yet, but it’s targeting $275 million for the effort.



    Blueprint Medicines, a seven-year-old, Cambridge, Ma.-based preclinical biotech developing kinase inhibitors for cancer and genetic diseases, has publicly filed to raise up to $100 million in an IPO. The company first filed confidentially last month. Its biggest shareholders are Third Rock Ventures, which owns 41.8 percent of the company, and Beacon Bioventures, which owns 13.43 percent.



    Edocr, an eight-year-old, Manchester, England-based document sharing company, has been acquired by Accusoft, a privately held, 24-year-old, Tampa, Fl.-based software business for document, content and imaging needs. TechCrunch has more here.

    Viralheat, a four-year-old, San Mateo, Ca.-based maker of enterprise-content marketing and social-media management software, has been acquired by the Chicago-based media intelligence company Cision for an undisclosed sum. Viralheat had raised at least $4.3 million from investors, shows Crunchbase. Its backers include Mayfield Fund and Idealab.



    CNBC is taking viewers inside the $70 million, Beverly Hills manse of “Minecraft” creator Markus Persson. (Appointments include a $200,000 wall filled with 25 types of candy.) More here.

    Ruth Porat, currently CFO at Morgan Stanley, will join Google‘s management team as CFO in May. Porat joined Morgan Stanley in 1987. She replaces Patrick Pichette, who has served as Google’s CFO since 2008 and who announced earlier this month that he was planning to retire this year.



    Johns Hopkins University is looking to hire an associate director to help enable to commercialization of the school’s technologies. The job is in Baltimore.


    Essential Reads

    Yesterday, payments startup Square introduced a tweak to its cash-transfer app allowing it to profit when businesses use the service.

    Twitter‘s quiet push into venture capital has officially begun.



    Life in the age of irrational parenting.

    When Elon Musk lived on $1 a day.

    A pretty serious marketing fail.


    Retail Therapy

    The Blackphone, for encrypted communications.

  • FirstMark Capital: Health Care Investor?

    stethoscope1FirstMark Capital, the early-stage, New York-based venture firm, is best-known for its consumer investments, including Pinterest, the mega-successful online bulletin-board network whose newest, $225 round of funding valued the company at $3.8 billion. (FirstMark participated in its $500,000 seed fund in early 2010.)

    Lesser known is FirstMark’s newer, self-imposed mandate to fund more healthcare IT companies, which its partners view as a giant opportunity that happens to be highly complementary to the firm’s existing skill set.

    Not only is the health care IT market “gigantic” and the “cost curves unsustainable,” as managing director Amish Jani recently noted to me, but thanks to numerous trends — like cloud platforms that connect practitioners and patients in new ways — it has also become accessible to investors who might not have PhDs but who know their way around platform technologies.

    For example, FirstMark has backed Gravie, a consumer marketplace for healthcare insurance; Greenphire, a company that makes Web-based payment software that’s marketed to the clinical trial industry; and Superior Access Insurance Services, an online insurance exchange that’s used to connect carriers with insurance agents.

    Its investment in BioDigital is another example of a health care company that FirstMark seems well-suited to help. The 11-year-old medical visualization firm already develops 3D animations of the human anatomy for drug makers and medical device makers; with the help of FirstMark — which led a $4 million Series A round for the company in September — BioDigital is working toward new, freemium models, too, including with consumer Web companies that want to augment their content with its technology.

    Still, not everyone thinks the strategy of FirstMark — or other Internet investors like Social+Capital Partnership that are suddenly focusing more on healthcare IT — makes sense. Bijan Salehizadeh, for one, a longtime PhD and managing director at NaviMed Capital in Washington, D.C., recently wrote a thoughtful piece about how easy it is to underestimate the complexities of healthcare investing, not least because healthcare is a “slow-to-evolve industry with powerful and durable relationships.”

    Domain expertise matters, Salehizadeh had argued.

    Maybe so. Then again, the right health care investment could reframe the way that FirstMark is viewed by entrepreneurs and investors alike. As Pinterest illustrates, sometimes it takes just one savvy bet to change everything.

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

  • Venture Heavyweights Sit Back as Deal Sizes Soar

    Hanging Boxing GlovesIt’s been a banner week for a number of Internet companies.

    Last Wednesday, social network Pinterest acknowledged closing on a $225 million round that valued the company at $3.8 billion. Shortly thereafter, AllThingsD reported that Snapchat, the messaging app, is now weighing a $200 million investment round that would value the company at $3.5 billion. And just yesterday, NextDoor, a social network for neighbors, raised $60 million in fresh capital.

    But the reality is that some of today’s biggest venture heavyweights have pulled back dramatically on late-stage deals.

    Two weeks ago, during a visit to Andreessen Horowitz, Marc Andreessen told me his firm has “done almost no growth investments in the last year and a half.”

    Yesterday, Ravi Viswanathan, who co-heads New Enterprise Associates’ Technology Venture Growth Equity effort, told me much the same. “If you chart our growth equity investing over the last few years, it’s been very lumpy,” said Viswanathan. “Last year, I think we did four or five growth deals. This year, I don’t think we did any.”

    That’s saying something for a firm that is right now investing a $2.6 billion fund that it raised just a year ago.

    Andreessen attributes his firm’s reluctance to chase big deals to an influx of “hot money.” The partnership is “way behind on growth [as an allocation of our third fund],” Andreessen told me, “and that’s after being way ahead on growth in 2010 and 2011, because so many investors have come in crossed over into late stage and a lot of hedge funds have crossed over, which is traditionally a sign of hot times, hot money.” He added, “What we’re trying to do is be patient. We have plenty of firepower. We’re just going to let the hot money do the high valuation things while it’s in the market. We’ll effectively sell into that.”

    That’s not to say later-stage deals don’t have their champions right now. At this week’s TechCrunch Disrupt conference, venture capitalist Bill Gurley of Benchmark told the outlet that “a global reality is that some of these companies have systems, they have networks in them, that cause early leads to always play out with really huge platforms.” People “laugh or write silly articles about the notion of a pre-revenue company having a very high valuation,” added Gurley.  But “if you talk to some of the smartest investors on Wall Street, or go talk to guys like Lee Fixel or Scott Shleifer at Tiger, they’re looking for these types of things. They’re looking for things that can become really, really big.”

    Still, Viswanathan’s concerns sound very similar to Andreessen’s when I ask him why NEA has pulled back so markedly from later stage investments.

    “It’s an amazing tech IPO market, and that drives growth,” Viswanathan observed. “But I’d say the growth deals we saw last year [were] elite companies getting high valuations. There are still great opportunities out there. But right now, it feels like there are high valuations even for the lesser-quality companies.”

    Photo courtesy of Corbis.

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

StrictlyVC on Twitter