Protocol Index: Startups better watch out for sharks
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Today: Conditions look great for sharks to start sniffing at startups, banks take a look at what's happening to IT spending, and some advice for venture backed companies looking to apply for the paycheck protection program.
What Matters Today
- Around 5 p.m. PDT: Samsung will report its earnings guidance for the last quarter. Memory chip sales are expected to have risen from WFH-demand, but weak smartphone sales mean analysts expect its profit to remain the same as a year ago.
- Coming up this week: Tomorrow, euro area ministers will (virtually) meet to discuss a stimulus package; on Wednesday, the Fed will release meeting minutes from its interest rate decision; Thursday is expected to bring more terrible unemployment data; and Friday sees the release of inflation numbers.
- Tesla is reportedly laying off hundreds of contractors from its factories in California and Nevada.
- Online design platform Minted laid off 147 employees.
As of 4 a.m. PDT: Nasdaq Futures: 3.76% | Euro 600: 2.96% | Nikkei: 4.24% | Hang Seng: 2.21%
- Niantic has the fastest growing revenue in the U.S., according to the Financial Times.
- Tech lobbyists are using coronavirus chaos to push for change.
- Tencent is planning to take its music streaming app Joox to Africa, after a recent surge in demand.
- Most VC-backed startups are still excluded from the SBA stimulus loans.
- Amazon is reportedly planning to delay Prime Day to August, and could lose as much as $100 million from excess devices it may be forced to sell at a discount. (But it does forecast a $100 million revenue boost to video on demand.)
- The EU is looking at whether Facebook's Marketplace is hurting online classified ads.
- Arsonists are targeting U.K. cell towers, seemingly thanks to a conspiracy theory linking 5G to coronavirus.
- Apple bought natural language processing app Voysis. Terms weren't disclosed.
- Apple's also reportedly in the process of buying NextVR, which owns video upscaling patents.
- U.K. lawmakers are asking the government to intervene over Imagination Technologies' takeover by China Reform Holdings, which reportedly wants to redomicile the company in China.
- Insight raised a $9.5 billion fund, and plans to use it to support portfolio companies.
A great time for sharks to come out to play
We've talked a lot about how this crash will affect startup fundraising, with a bunch of research and forecasts saying that it's not looking good. But what are things actually like on the ground? Spoiler: also not good.
Graham Gintz, a fundraising associate at Techstars' Social Impact program in Atlanta and founder of Knightley, told me that he's seeing angel investors fall into two camps.
- "One side is completely business as usual," he said.
- "The other side is: 'I had all my angel money tied up in the market and there's no way that I'm taking a loss to go place high risk bets.' So I think a large number of angels have benched themselves, some for a month, some for the rest of the year."
For those that are willing to fund, Gintz said the market's shifted in their favor.
- "I think definitely investor-led terms is going to be the trend, and the number of companies that have really great leverage right now is really, really small," Gintz said.
- That might bring out the worst in people. "I think it's gonna be really interesting to see across the industry as a whole how sharky investors want to get, because there's a lot of really good companies that are going to need capital — or die."
It's not all gloom though. Gintz said things might recover quicker than expected:
- "California seems to be doing pretty okay [with the virus] … And because half the money in VC is coming from California, I think that [funding] may actually resume more quickly than one might expect."
- For now, investors are branching out. Gintz said he'd spoken to one "well known fund" in New York, that typically only invests in the north-east because its thesis is "very relationship driven." Now, though, it's looking to expand to other regions: "It's effectively the same whether you're in the Lower East Side or down here in Atlanta."
Mostly, the mood seems to be one of figuring out how to survive.
- "I've heard through other founders and other investors of board meetings where basically, the investors were like: 'Any acquisition offer you've ever gotten? Reach out,'" Gintz said.
Do you work at a startup trying to raise, or a fund figuring out what to do? Let me know what you're seeing: email@example.com
- "Video game publishers have fared relatively well amid a downturn for the broader markets." — Piper Sandler says its group of video game stocks has increased 1.6% this year, compared to an 18% drop in the Nasdaq. SuperData research suggests there's been an uptick in gaming demand.
- "For startups that have seen drastic reductions in revenues, two months of payroll may not be able to provide the runway needed … the loans may simply prolong the inevitable when they will need to go back to investors to raise more capital." — PitchBook VC Analyst Kyle Stanford doesn't think loans can solve every problem.
- "I urge everyone who is running a venture backed company with a lot of money in the bank and limited COVID-19 impact to think twice about applying for PPP." — Union Square Ventures' Albert Wenger thinks startups should let the money go to mom-and-pop businesses instead. Bedrock founder Geoff Lewis, meanwhile, thinks many startups might find themselves ineligible.
- "The large U.S. technology companies, such as Alphabet and Facebook, are currently demonstrating that they can play a positive role … which could possibly lead to incremental leniency in the ongoing FTC and DOJ antitrust and privacy investigations." — Goldman Sachs, citing a recent call with Andrew Lipman, a partner at law firm Morgan Lewis.
- "In this kind of environment, we have halted proactive investment. We also will not be providing needless support to our portfolio companies." — An anonymous SoftBank executive, speaking to the Financial Times.
Everyone's Talking About
What's happening to IT budgets
Towards the end of last week, banks spent a lot of time talking to people about IT spending budgets. Here's what they had to say.
- "Across all of our checks ... we'd estimate that 80%+ have already begun to cut and/or begin evaluating what projects will be deferred."
- "One sign that this pending IT spending downturn is worse than normal is the number of customers citing plans to negotiate price discounts (of perhaps 10%) from their technology vendors by accelerating contract renewals (and in return perhaps adding another year to deals)."
- "Hardware refresh cycles are getting extended and … back-office (ERP, HR, Financials) IT projects are getting put on hold." Oracle, SAP, and Workday are being hit hard, Deutsche said.
- Citing its flash survey in late March, the bank found "52% [of respondents] had cut IT budgets, by an average of 2.6% – with Professional Services hit hardest (down 4.8%), followed by Software (down 3.6%), then Hardware (down 2.8%)."
- "Collaboration Software, VPN/Remote Access and Desktop Virtualization see positive spending impacts."
- "We believe that enterprise hardware spend is falling … conversely, cloud demand (and the stress on cloud infrastructure) appears to only be increasing."
- "We believe cloud adoption was already weighing considerably on spend for on-premise architecture before COVID-19 and that recent shifts may only accelerate enterprise's move towards the cloud."
- "Anecdotally, many customers have begun re-evaluating 2020 IT and advertising budgets."
- The bank looked at IT companies' performance in past recessions to spot some trends. "IT spending during the prior two recessionary periods, 2001 and 2007-2009, was more affected than other areas of the global economy," it wrote.
- "The 2007-09 data suggest the back office suppliers (i.e., ERP/Financials and IT-centric companies) held up best during periods of economic distress." Human capital management software suppliers, however, didn't do great.
Quibi's splashy entrance into a world in turmoil
Two things happened on September 15, 2008. One: The artist Damien Hirst sold over $200 million worth of art in the most expensive single-artist auction ever. Two: Lehman Brothers collapsed. Looking back, the two were obviously linked, and there was a certain poetry in such an obvious signifier of the boom's peak coming on the same day as the start of the bust.
Flash forward 12 years, and I have this pet theory that Quibi — which launched yesterday — is tech's version of the Damien Hirst auction. Here we are, with an app that's raised $1.8 billion based almost entirely on its founders' names which is getting reviews that are … middling at best? I think we could look back on this as another high-water mark of decadence and questionable decisions that marked the end of an era. Hirst's art is nicer to look at, though.
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