• 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.

  • AngelPad Elbows 13 Young Startups Into the World

    AngelPad Demo DayThe demo days of five-year-old AngelPad — an accelerator program run by married founders Thomas Korte and Carine Magescas – have become a hot ticket both in New York and San Francisco. Yesterday afternoon was no different. In downtown San Francisco, in a crowded co-working office space, 13 companies that had been groomed over the preceding four months pitched select investors, and they appeared to like what they heard.

    No doubt the investors were expecting big things. AngelPad works with two batches of roughly 12 companies twice a year – one on each coast—and nearly all of them have snagged seed funding from investors, with a handful of startups going on to raise tens of millions of dollars, including Vungle, Crittercism, and Postmates.

    AngelPad — which takes a 7 percent stake in each startup in exchange for $50,000 (plus another $4,000 per founder) — has even come close to a billion-dollar exit in MoPub, a mobile advertising startup that Twitter acquired for $350 million in stock in September 2013; the company was worth roughly $800 million when Twitter went public two months later.

    Whether AngelPad’s newest batch — its eighth — will prove as promising remains to be seen. But at least a handful of companies looked like strong contenders for follow-on funding.

    One of our favorites, for example, was CstorePro, a SaaS application that promises to help convenience store owners more easily track their sundry, disparate products, as well as assist them in buying what they need, in the right amounts, from the cheapest wholesalers.

    The company isn’t alone in the space. StoreTender and Retalix are just two other vendors trying to help owners streamline their store operations. The world of convenience stores is also highly fractured — which could be a challenge or an opportunity, depending on your vantage point. According to the research group IBISWorld, roughly 68.2 percent of convenience-store operators employ less than five people. Still, there’s a giant market to pursue here. According to IBIS, as of 2012, the U.S. convenience store and truck stop industry included about 120,000 stores with combined annual revenue of about $355 billion.

    A second company that piqued our interest is Allay, an easy-to-use online HR and benefits platform for the country’s 500,000 insurance brokers — many of whom are getting knocked around by the fast-growing health insurance broker Zenefits. Given those brokers stand to lose $32.5 billion in yearly commissions, you can bet there’s a big opportunity in helping them figure out a better way to pair buyers and sellers of health care, and quickly.

    We also really liked HelloSponsor, an online platform that helps brand advertisers find, buy, and track sponsorships at scale. Roughly $3 billion is spent yearly on consumer events, and anyone who has tried to raise money for one can tell you that it’s a pain in the neck. The big question is whether sponsors will be as eager to scour opportunities on the platform – including by industry and geography – as event organizers will be eager to be found.

    Of course, you’re the investors! If you’d like to form your own opinions about the startups that presented yesterday, you can find the full list on a tear sheet here. AngelPad has also made it simple to meet with any or all of them. Just click here.

  • Same-Day Delivery Takes One On the Chin

    oofOver the weekend, eBay took down a standalone app for its $5 same-day delivery service “eBay Now.” The company, which continues to make the service available online, is “rethinking how it wants to handle the high costs associated with running same-day delivery services,” reported TechCrunch.

    It would be a mistake to declare same-day delivery economically unfeasible because of eBay’s sudden ambivalence about it. It’s tempting, though.

    Despite the glut of same-day delivery services to materialize in recent years – from Google and Amazon to Deliv and PostMates – same day delivery services continue to face major challenges.

    The biggest hitch appears to be the limited base of customers who are willing to pay more for faster service. Bargain hunters on eBay may be especially averse to additional fees. (Only a fraction of a small retailer’s sales come from customers who also opt for same-day delivery, as Reuters noted last week.) The same seems true of Walmart, which launched its same-day delivery pilot program in 2011 and is still testing it in just three markets.

    But they’re hardly alone. According to a recent business intelligence report by Business Insider, only 2 percent of all shoppers living in cities where same-day delivery is offered have availed themselves of the services. Meanwhile, 92 percent say they’re willing to wait four days or longer for their e-commerce packages to arrive.

    Very possibly, not all of these consumers have been educated about the new offerings they could be using — dazzling applications through which workforces are now mobilized with a few taps of a smart phone. And same-day delivery margins are surely better than during the dot.com era, when companies like Webvan invested heavily in infrastructure.

    Whether they’re good enough appears to be an open question. For example, even with an extremely efficient fulfillment system, the same-day delivery company Instacart marks up its goods meaningfully over standard grocery store prices.

    Someone seems likely to figure out how to bring the various pieces together at scale. Uber, whose logistics system grows more sophisticated by the day, may be the strongest candidate for the job.

    EBay has piles of data at its fingertips, too, though. That it’s cooling to same-day delivery after two years of experimentation — and planning to focus more on helping shoppers buy items online that can be picked up in stores — is worth slowing down to consider.

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  • Demo Day for AngelPad: The Anti Y Combinator

    OLYMPUS DIGITAL CAMERAToday, AngelPad, the San Francisco-based incubator, is hosting an invitation-only “demo day” for 150 to 200 angels and VCs, and you can bet these investors are going to bring their checkbooks.

    In four years’ time, AngelPad has become one of the most reliable hit machines in Silicon Valley. And it’s done it largely by operating as a kind of anti-Y Combinator, even while the famed incubator was its inspiration.

    There’s the cosmetic difference, for starters. While Y Combinator is located in sunny Mountain View, Ca., AngelPad, which also has offices in New York, rents out space on a gritty block of San Francisco’s Tenderloin neighborhood. (It’s a little too gritty for its demo day; AngelPad is hosting its event today at an upscale restaurant roughly a mile away.)

    AngelPad isn’t as widely known as Y Combinator, and intentionally so. Founder Thomas Korte, who spent seven years as an international product manager at Google, likes to keep things intimate, stressing the importance of community to the startups that pass through AngelPad as well as the network of investors with which he works. (Even the press who can attend its demo day is tightly restricted.)

    In another departure from Y Combinator’s mode, AngelPad tends to focus on enterprise companies, typically admitting just one or two consumer-facing startups into each of its “cohorts.” For Y Combinator, working with startups that cater to businesses is a much newer development.

    Perhaps the biggest difference, though, is that while Y Combinator looks to grow even bigger, adding ever more partners to work with its startups, AngelPad is, in a sense, shrinking. Korte once relied heavily on former Google colleagues to help mentor startups at AngelPad. Today, he and his wife and AngelPad partner, Carine Magescas, coach all of the startups themselves.

    (Korte does make one notable exception. He still arranges for each startup passing through the program to meet once with one of his trusted advisors — friends like Wesley Chan, currently an entrepreneur-in-residence at Google Ventures. It’s a kind of “reality check. You need outside input once in a while,” says Korte.)

    Clearly, AngelPad’s approach is working. AngelPad startups in the news include Storefront ($7.3 million Series A led by Spark Capital), Crittercism ($30 million Series C), and Boxbee ($2.3 million seed round), and Korte tells me that another AngelPad company, the mobile advertising startup MoPub — acquired by Twitter for $350 million in stock last fall — will be worth roughly one billion dollars when Twitter’s lock-up expires in the next couple of weeks.

    So how does the AngelPad process work? Twice a year, Korte and Magescas stage an open application process that usually attracts about 2,000 applicants who are asked to submit a two-minute video, along with an essay, about their company. The couple then whittles the list down to between 100 and 200 of the most promising teams, interviews each for 25 minutes over a two- to three-month period, then chooses a dozen of them to coach over the following 10 to 12 weeks.

    Each team receives $60,000 in exchange for 6 to 7 percent of their company. (AngelPad uses capped convertible notes.) At the end of the program, a demo day is staged, and Korte and Magescas then spend the next six weeks or so working with the startups to secure seed funding.

    Most of the money is coming from the couple’s bank account. (Korte was among the first couple of hundred of Google employees.) Korte says “several individuals also participate in each cohort,” and that AngelPad also raised a $7 million fund last year to help fund its startups.

    As for what he’s looking for, he mentions numerous things, including “mobile-enhanced” businesses that do things in a way that we’ve always done them but in a more efficient way. (He points to the delivery service PostMates, another AngelPad startup that has gone on to raise significant funding.)

    Korte says he doesn’t rule out applicants that are entering well-covered terrain, either, a lesson he learned at Google. “Apart from self-driving cars, Google has almost never been the first in anything, honestly,” he notes. “What they’ve done is be significantly better at every single one of those,” he adds.

    Seemingly, the same could be said for AngelPad itself.

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