A Rivian truck in New York City
Photo: Bing Guan/Bloomberg via Getty Images

Rivian’s IPO defies VC gravity

Protocol Pipeline

Hello and welcome to Pipeline. This week: The question of pricing, VC #firstworldproblems and pitching your services to Sequoia.

Defying VC gravity

2021 was the year price discipline went out the window for VCs. Valuations have been up and up but it's been easy to justify: Just look at the public markets! COVID-19 increased digital adoption by a bajillion! But there are signs that investor jitters are starting to creep in. Late-stage valuations have contracted slightly after quarters of nothing but up and to the right.

Every week seems to bring new — and sometimes conflicting — data points on the pricing question. Let's look at the latest batch.

Early-stage valuations are continuing to set records — and given the flood of supersized seed funds, I wouldn't be surprised if it continued.

  • The median early-stage startup valuation in Q3 hit $53 million for the first time, crossing the $50 million threshold and double what it was three years ago, according to a new report from PitchBook on startup valuations.
  • The average early-stage startup valuation this quarter also hit an all-time high of $138 million with fintech financings in particular driving it up.

But late-stage is where the market is seeing the first signs of a contraction, according to PitchBook's data.

  • Both the median and average valuation fell slightly quarter-over-quarter to $115 million and $736 million (respectively).
  • Valuations are still higher than in years past as megadeals have kept that measurement largely afloat.

So far, sky-high valuations haven't negatively impacted exit step-ups, which is why you see VCs willing to pay the price.

  • The valuation step-ups for both acquisitions and IPOs remain high. The IPO step-up was 1.8x in Q3, but more impressive, the median acquisition step-up was 2.8x — the highest value PitchBook has ever seen.

For the bull case of "pay whatever it costs," this week's proof was in Rivian's IPO.

  • The electric truck maker had zero revenue in 2020, projected at best around $1 million this quarter, and it still was the largest U.S. IPO since 2014 after it raised over $11 billion in its debut. Its market cap (for a company with practically no revenue) is now over $110 billion.
  • Rivian had raised $10.5 billion before going public, but those investors are now sitting on a mountain of cash. Ford's stake, on which it spent around $820 million, is now worth $10 billion.

But not everything in the public markets is rosy. Just ask most of the tech companies who reported earnings in the last few weeks.

  • SPACs acted as a further lift to the market. That exit path may be narrowing.
  • Insurance company Metromile had been a market darling championed by "SPAC King" Chamath Palihapitiya. But it fell from investor graces by 82% in public trading before it was rescued this week for $500 million by Lemonade.

So is the market finally going to slow down? Or is it up and to the right forever? Most of my conversations with VCs right now are just a recap of how uncomfortable they are with the pricing and pace of deals; they say they're begrudgingly accepting the market conditions because they don't want to explain to their LPs how they missed the next Rivian. This quarter's (minor) contraction at the late stage might be the first sign of a softening, but it's hard to know when in the same week a revenueless company also pulls off the biggest IPO since Alibaba. We're all reading the same tea leaves, and we're well outside the comfort zone.


#firstworldproblems for VCs in 2021: "One of the most bizarre feelings of being a VC is when I make a stupidly obscene amount of money for having done virtually nothing," tweeted investor Zach Coelius. "I don't know if I will ever get used to it."

What do founders and investors really think about Tiger Global? Sar Haribhakti has been collecting anonymous anecdotes about how Tiger runs its processes, and as one investor pointed out "they have incredible NPS among founders they turn down. That's pretty extraordinary. I can't think of (m)any other firms where that's true."

If you were looking for a recap of Q3 earnings, this Squid Game meme version will get you (horrifyingly) up to speed.

This week in bizarre venture firm marketing to founders: Foundation Capital hired the Island Boys (those viral TikTok stars with notable criminal records) to do a Cameo video saying it wanted to invest in founders at Solana Breakpoint. It sounded like the rappers' favorite part was giving a shoutout to Portugal.

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Inside track

In honor of Veterans Day, Eniac's Tim Young talked to (actual) veteran startup founders about how their military service was an advantage in starting a company.

If you've been thinking about quitting your job and starting a company, Twitch co-founder Justin Kan has four things you need to consider before you take the leap.

"...The eventual realization became clear — with only months of runway left, we weren't going to make it," wrote Sandbox VR founder Steve Zhaoin a retrospective on how his startup survived "against impossible odds."

Lux Capital's Deena Shakir and NEA's Ann Bordetsky get asked all the time about what it's really like to move from being an operator to VC, so they shared their list of the top 10 realities of what to expect if you make the switch.

It's performance review season! Former Airbnb PM Lenny Rachitsky shares how managers can use performance reviews to accelerate an employee's career, not their path out the door.

Need to know

SoftBank stumbles. The net value of its assets took a $54 billion beating after the crackdown in China and the implosion of Zymergen. "It is a time of severe trials for China's high-tech stocks," Masa Son said. "We are right in the middle of a storm."

Marc Benioff bets on a new search engine. After holding the You.com domain since 1996, Benioff's found a new use for it with a search engine to challenge Google.

Sam Lessin is trying a new kind of venture capital: investing directly in people. He's signed a 30-year contract with YouTube star Marina Mogilko, but is already having to defend that it's a new kind of venture and "def not indentured servitude."

Even VCs need upfront cash. Pipe and AngelList struck a deal to advance management fees.

Expensify went public and turned its employees into paper millionaires. But like anything related to a stock grant, there's of course a complicated catch.

This week in Theranos: The prosecution is nearly done arguing its case and expects to rest next week. No word on whether Henry Kissinger or Rupert Murdoch will be called as witnesses.

On Protocol: Meet Angelina. She got job interviews at top tech companies. She's also not real.

Also on Protocol: NFT games are fun (and increasingly popular), but filing taxes afterward is going to be a nightmare.

Your weekend reading: "Discord is not just a communication platform, it's a hidden world," writes Packy McCormick, who teamed up with The Generalist for a deep, deep dive on Discord.

Five questions with…Fifth Wall's Greg Smithies

Fifth Wall partner Greg Smithies' path into climate tech investing is as unusual as his love for Caterpillar steel-toe work boots (more on that below). Smithies started investing at Battery Ventures in enterprise technology, but left to work for Elon Musk and run finance and operations for the Boring Company and Neuralink. He then led sustainability investing for BMW iVentures before joining Fifth Wall as a partner who leads its climate tech investing practice.

What was your first job, and what's a skill you still use from it?

I worked at an ammonium nitrate explosives plant in South Africa. It was far less glamorous than it sounds. I took away one skill and one learning that I use almost every day.

[My] skill [is] being able to understand the realities of scaling up technologies to truly massive, industrial scale. For example, hard-tech startups might be proud to move their process from producing a few grams of something to a few hundred kilograms (and they should be proud of that) — but there is still a LONG way to go to get to full industrial scale that involves factories the size of small towns, and producing millions of tons of material. [My] learning: I thrive in entrepreneurial environments vs. large corporate industrial conglomerates.

What product or service are you totally, even irrationally, loyal to?

Caterpillar steel-toe work boots. My dad once walked through a puddle of hydrochloric acid at an industrial site and almost lost his foot. You see horrific accidents in the construction and industrial world; I don't go onto a site without them. They look strange in board meetings, but if the tradeoff is "look dumb, but be able to walk," I'll take that trade off.

What problem do you want to see a startup solve?

Can we just say climate change? Haha, but seriously — finding something useful, and economically viable, to do with CO2. A major reason why we're in this whole climate mess is that CO2, to date, has been essentially useless. But at the heart of it, we have carbon (one of the most useful atoms out there), which makes up a myriad of products, from plastics, to fuels, to food. If we had economically viable ways to turn CO2 into those valuable products, then we'd see what would essentially amount to a gold rush to pull that CO2 out of the air, or the smokestacks, to make them. You worry if the whole world could get their act together to decarbonize? Well, we very happily band together to spend trillions of dollars in industries if they are useful (e.g. the oil and gas industry). What if CO2 could become the new oil because it was valuable and useful? Then just watch how fast we would solve the pickle we've gotten ourselves into.

What's one of the worst predictions you've ever made?

That bitcoin wasn't going to be a thing. The Coinbase team pitched me for their seed round and sent me 5 bitcoin during the pitch. I passed on the round and never accepted the bitcoin. Now, I think it's still up in the air as to what sort of a thing bitcoin and the myriad other cryptocurrencies might end up being, but they are definitely now a thing.

Since we're approaching Thanksgiving, what's one thing you're grateful for this year?

Be grateful that, even if the politicians didn't manage to make much headway towards climate solutions at COP26 (yet), it looks like business and industry are stepping up at an unprecedented pace. So, there is still hope, but it's by no means going to be easy. We need to spend something like $50 trillion to decarbonize over the next 30 years, and that money has to come from somewhere. If governments can't pony up, hopefully business can get us a significant part of the way there.

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