A few days ago, I shared that Bessemer Venture Partners posts the deal memos of some of their most successful investments online. Along the same lines, I recently found an interview in which First Round Capital Board Partner Chris Fralic talked about the firm's thinking when it invested in Roblox. First Round Capital is a seed-stage venture capital firm and often writes the first institutional check into a company. Roblox is an online gaming and game-creation platform. Per Fralic, Roblox was one of the firm’s best-performing investments. 

A few interesting takeaways from the interview:

• In early 2009, First Round passed because the $10 million valuation was too high
• Chris watched his son and his son’s friends spend increasingly more time on Roblox throughout 2009
• Chris maintained a relationship with Roblox even though his firm had declined to invest
• Six months after declining to invest, the firm wrote a $500k check at a $14 million valuation
• In May 2011, the firm wrote a $3 million investment at a $40 million valuation
• Roblox was a company that was mostly substance, not hype, so it flew under the radar of many venture capital investors for many years
• First Round sold some of its shares along the way before Roblox went public
• First Round owned more than 5% when the company went public via direct listing in 2021

Roblox went public via direct listing in March 2021. Its market capitalization (i.e., valuation) was ~$35.5 billion when it began trading on the first day. According to Roblox’s S-1 filing (page 172), First Round owned 6.8% of Roblox when the company went public. Its position was worth ~$2.41 billion when shares began trading.

It was interesting to hear a VC firm partner recap how he decided to invest at the seed stage of what ended up becoming a very large company.

For those interested in learning more, Chris did a great job of detailing his reflections, lessons learned, and more about First Round’s partnership with Roblox in this blog post too.

Update: Chris' original blog post was taken down from Medium. You can now find the blog post on First Round's website here. You can also view this thread from Chris on X (formerly Twitter).

A few months back, I shared that 2021 was a gargantuan year for IPOs, with 1,035 of them—the highest number I could find in the last quarter century. 

In 2022, we saw just a fraction of that number of IPOs, 181 to be exact. As of the writing of this post, we’ve had 114 IPOs in 2023, which means we’re tracking for fewer than in 2022.

A few weeks ago, I shared my thoughts on the draft S-1 filings by Instacart and Klaviyo in anticipation of going public (see here and here). This week, both companies held their IPOs (NASDAQ: CART and NYSE: KNYO). Both offerings are complete, and the companies are now trading on public stock exchanges.

I suspect that venture capital investors and founders of late-stage tech companies will closely watch how both companies perform in the public markets over the next few weeks. If their stock prices are flat to up, we could see an increase in the number of technology companies filing to go public and maybe even see more IPOs in 2023 than in 2022. If their stock prices fall materially, I wouldn’t be surprised if 2023 is another year of declining IPO activity as companies elect to wait for better conditions in early 2024.

For better or worse, these companies will likely have a material impact on upcoming IPO activity and technology investor sentiment.

One thing I’ve noticed is lots of media reports about IPOs being priced at valuations below their most recent private fundraising round. Instacart is an example. A few founders and friends trying to make sense of this asked me about it. Why would you take a company public at a valuation materially below its valuation in your last VC fundraising round?

The answer can sometimes be related to needing to raise more capital but being unable to do so privately because of cap table complexity. I recently listened to Bill Gurley, a famous VC investor, articulate why IPOs can be the easiest way to raise capital when a company has a complex capitalization table.  

For anyone interested in understanding this topic better, Bill shares his thoughts in this clip and this one.

I received an email about a small SaaS business that’s for sale. It has a few hundred thousand dollars in revenue and is profitable. I was curious how the market is valuing small companies like this, so I read through the email. Here’s what I found:

• $594k revenue (I assume trailing twelve months)
• $39k monthly recurring revenue
• Revenue has declined since purchase by new owners in 2020
• 1500+ customers
• ~$600 customer lifetime value
• 4.8% revenue churn (I’m assuming annual)
• $240k seller’s discretionary earnings (SDE)
• $750k asking price (i.e., 3.1x multiple on SDE)

If I were in the market for something like this, I’d have lots of questions for the seller, especially about the quality of the revenue and profits.

One thing that got me thinking was that this business was purchased in the last three years or so and has seen the revenue decline. I wonder about the cause—is this a case of customers seeing less value in its solution, or is it less-than-stellar management by the current owners? Not an easy question to answer until you dig into the business, but depending on the answer, the business could be a great investment opportunity or a less than ideal one.

I wonder how many small businesses have been purchased in the last three years and have been declining since then? How many have turnaround potential and will be put up for sale in the short or medium term? 

Today kicks off what I believe will be a memorable fundraising period for technology in public and private markets. With private companies going public through IPOs, start-ups raising venture capital, and venture capital funds raising from limited partners, we’re likely to see a lot of activity between now and the holidays.

I’m curious to see how receptive investors are to these varying investment opportunities and how much capital is raised.

Instacart’s largest revenue segment is its marketplace and delivery business connecting buyers and sellers and facilitating delivery of purchased items. Instacart gets a percentage of every transaction as revenue; i.e., a take rate. Let’s hypothetically say that Instacart’s take rate is 5%. For every $10 purchase on its marketplace, Instacart generates $0.50 in revenue. The take rate can be charged to the buyer, seller, or both.

The take-rate revenue model allows companies to increase their revenue as the value they provide increases. This is good, but this revenue has an overlooked downside. As a former customer of various marketplaces and software companies that used take-rate revenue models, I’ve experienced it firsthand, and I’ve watched other entrepreneurs have a similar experience.

As a customer’s merchandise volume on the marketplace or software platform grows, the take-rate dollars become larger, even if the percentage is flat. The larger the take-rate fees become, the more visible they are to the customer’s internal decision-makers. Five percent of $1,000 is $50 and may be an overlooked expense. But 5% of $1,000,000 is $50,000, which is less likely to be overlooked.

Imagine that a customer reviews its P&L, and someone asks, why are we paying XYZ Company so much money every month? That amount could materially boost our margins or support growth plans. They do some forecasting and start thinking about ways to replace the marketplace or software provider (if possible) or reduce its fees. The customer’s perspective changes. It no longer views XYZ Company as a partner that provides more value than it charges for. Instead, it sees XYZ as a company whose cost exceeds its value. The customer wants the cost it incurs to better align with or be less than the value it feels it’s receiving.

When the customer’s perspective changes, the relationship and interactions change. When the dollars at stake are high, the relationship can become adversarial. If your biggest customers are constantly fighting you, it takes a toll on your team and in extreme cases can affect the culture of your company. 

The various lawsuits over the years against Visa and Mastercard by retailers, Block, and other partners over take-rate fees are great examples of what I’m describing.

Take-rate revenue models work, but this dynamic is something founders considering them should be aware of. The good news is that take-rate revenue models can be crafted in various ways that prevent some of this tension with your largest customers.

Klaviyo is a marketing automation software company. Its SaaS platform allows businesses to market to customers via SMS text and email. It’s been a private company since it was founded in 2012 and has raised over $770 million in funding. In 2021, Klaviyo raised $320 million at a $9.5 billion valuation. Friday it filed its draft S-1 IPO filing to become a public company.

Here are a few things I noticed in the S-1:

• SaaS platform that “enables business users of any skill level to harness their data in order to send the right message at the right time across email, SMS, and push notifications, more accurately measure and predict performance, and deploy the specific actions and campaigns that drive the highest impact” (page 1)
• 1,548 employees (page 22)
• 77.5% of annual recurring revenue (ARR) derived from customers who use Shopify’s platform (page 24)
• Transitioning from majority month-to-month SMB customers to enterprise customers with longer contractual revenue agreements (page 28)
• Federal and state net operating loss carryforwards of $199.2 million and $118.6 million, respectively (page 39)
• Customer counts (page 77):
  -2014: surpassed 100 customers 
  -2016: surpassed 1,000 customers
  -2018: surpassed 10,000 customers
  -2023: surpassed 130,000 customers
• 1,458 customers each generating over $50,000 ARR (page 78)
• Dollar-based net revenue retention rate of 119% as of June 30, 2023 (page 79)
• Sold 2.9 million shares for ~$100 million to Shopify on July 28, 2022 (page 156)
• Fees paid to Shopify per revenue sharing agreements (page 157):
  -2020: $5.2 million
  -2021: $7.8 million
  -2022: $16.2 million
• 7-year collaboration agreement signed July 28, 2022, with Shopify: Klaviyo is recommended email provider for all “Shopify Plus Merchants” (page 157)
• Shopify issued warrants to purchase an additional 15.7 million shares at $0.01 per share, or $157,000 total—25% vested when collaboration agreement signed, 25% vests when IPO is completed, remainder vests quarterly (page 157)
• Equity ownership (page 164):
  -Andrew Bialecki (CEO/Co-founder/Chairman): 38.1%
  -Ed Hallen (CPO/Co-founder): 13.9%
  -Summit Partners: 22.9%
  -Shopify: 11.3%
  -Accomplice Fund: 5.7%
• Cash, cash equivalents, restricted cash as of June 30, 2023: $439 million (page F-3)
• Accumulated deficit as of June 30, 2023: $2.2 billion (page F-3)
• Revenue (page F-4):
  -2021: $290 million
  -2022: $472 million
  -2023 (through June 30): $320 million
• Net profit/loss before tax provisions (page F-4):
  -2021: $79 million loss
  -2022: $49 million loss
  -2023 (through June 30): $16 million profit
• Free cash flow (pages F-7, F-22, and 94)
  -2021: $36.7 million consumed
  -2022: $41.7 million consumed
  -2023 (through June 30): $53.4 million generated

This is a draft S-1, so some information is missing and will be added before it’s finalized.

Klaviyo is growing quickly, has become free cash flow positive, and is generating a profit. The company fortunes are heavily tied to Shopify. The concentration risk related to Shopify could affect public market investors’ appetite for Klaviyo. I’m curious to see how receptive public market investors are to this IPO and what valuation public markets settle on for Klaviyo.

Instacart is a well-known grocery marketplace and delivery company. It’s been a private company since it was founded in 2012 and has raised almost $3 billion in funding since inception. It recently filed its draft S-1 IPO filing to become a public company.

Instacart is a high-profile tech company that’s raised a large amount of venture capital, so I was curious about its S-1. Here are a few things that caught my attention:

• “Grow the pie” core value focuses on growing their partners’ businesses so entire ecosystem benefits from network effects (pages v and 15)
• Began as a marketplace but now focuses on “powering the future of grocery through technology” (page 2)
• Estimates grocery retailers have spent $14.2 billion on enterprise IT—~1% of their revenue (page 5)
• In addition to being a marketplace, Instacart Enterprise Platform is an end-to-end solution that includes these solutions (page 8):
  -eCommerce allows retailers to have online storefronts
  -Fulfillment API and staffing helps retailers fulfill online orders
  -Connected Stores helps retailers unify online and in-store
  -Ads enable brands to advertise on retailer-owned storefronts and apps
• 3,486 full-time employees (page 54)
• Revenue is made up of transaction revenue (retailer fees, customer fees, etc.), advertising revenue, and fees paid to use Instacart’s technology (page 105)
• Gross transaction volume (page 121)
  -2019: $5.1 billion
  -2020: $20.7 billion
  -2021: $24.9 billion
  -2022: $28.8 billion
  -2023 (through June 30): $14.9 billion
• 590% revenue growth and 4x gross transaction volume growth year-over-year in 2020 due to COVID-19 (pages 131 and 132)
• Gets 74% of online grocery orders that exceed $75 and 56% of orders for less than $75 (pages 134 and 135)
• Cash, cash equivalents, and marketable securities of $1.9 billion (page F-4)
• Revenue (page F-5)
  -2020: $1.4 billion
  -2021: $1.8 billion
  -2022: $2.5 billion
  -2023 (through June 30): $1.4 billion
• Net profit/loss before tax provisions (page F-5)
  -2020: $70 million loss
  -2021: $72 million loss
  -2022: $71 million profit
  -2023 (through June 30): $306 million profit
• Net cash provided by operating activities (page F-12)
  -2020: $91 million consumed
  -2021: $204 million consumed
  -2022: $277 million generated
  -2023 (through June 30): $242 million generated
• PepsiCo, Inc. is purchasing $175 million of stock via a private placement (pages F-66 and 313)

This is a draft S-1, so some information, such as equity ownership, is missing and will be added before it’s finalized.

Instacart has built a massive business that benefited tremendously from COVID tailwinds. In the last eighteen months, it appears to have focused on profitability. Growth appears to be slowing.

In early 2021, the company raised $265 million at a $39 billion valuation. In late 2022, it reportedly was internally valued at $13 billion. I’m curious to see how Instacart is received by public market investors and how they value the business.

Over the last few weeks, I’ve chatted with several emerging VC fund managers who are preparing to raise their first or second funds. They’ve seen the headlines about established mega funds cutting their fundraising targets. And they’ve chatted with their peers who went to market in 2022. There’s lots of uncertainty about what to expect if they go out to raise in the second half of this year.  

The fundraising environment for emerging VC fund managers has been difficult for the last eighteen months for several reasons. But one of the variables has changed, I think: the NASDAQ stock index. In 2022, the index was down over 30%. It declined most of the year and no one knew when it would bottom. The sentiment toward tech (and public equities in general) was negative in 2022, with many potential LPs reluctant to make new investments in emerging funds. Through the end of July of this year, though, the NASAQ is up ~35%. I wouldn’t call sentiment in 2023 optimist, but so far it’s better than it was in 2022.

I’m not sure what the NASDAQ will do—or what fundraising environment emerging VC fund managers will face—the rest of this year. If the NASDAQ rises further or at least stays in positive territory, I wouldn’t be surprised if LPs are more receptive to pitches from emerging VC fund managers than they were in 2022. I’m curious to see how the fundraising environment for emerging managers shapes up for the rest of the year.

I was at a social event where aggressiveness in deal negotiations was discussed. The main questions being asked were how aggressive should a party be in negotiations and when have they taken it too far.

This gathering was attended by founders (early-stage and mature), VC investors, people in the start-up ecosystem, people not involved in start-ups, and a few non-start-up lawyers. The perspectives were diverse, which made for an interesting conversation.

After a while, people mostly ended up in one of two camps:

• There’s a point in deal negotiations where you can be too aggressive and jeopardize the long-term viability of a deal. Negotiate to that point but don’t take it further (even if you have the leverage to do so), because it will have negative consequences down the road.
• Deal negotiating is an example of what has applied to humans for a long time: survival of the fittest. You must fiercely negotiate for your best interest in any deal. Not doing so leaves an opening for others to take advantage of you. Negotiate like your survival depends on it.

The conversation was much more involved than that, but I’ve tried to simplify it. I really enjoyed hearing the different perspectives. At the end of the conversation, most agreed that how people thought about aggressiveness was influenced by their upbringing and professional experiences.

I don’t think there’s a right or wrong way to think about aggressiveness. I’ve come to believe that the answer to how aggressive one should be in negotiations is it depends. It depends on the dynamics at the time, on what you’re negotiating, on what leverage you have, and on the parties you’re negotiating with.

One thing holds true in all negotiations. Be mindful of this when deciding how aggressive to be: no one will look out for your interest more than you will. If you don’t look out for yourself, don’t expect the other party to do so.