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Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.

From furloughs to a public listing in four months

George Arison, CEO of Shift

Hello and welcome to Pipeline. This week: SPAC secrets, email chain pitches, and a 2011 holiday party that people are still talking about.

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Overheard

  • Not the party guest you want. Former Kleiner Perkins partner Ellen Pao tweeted this week that Ghislaine Maxwell attended the firm's holiday party in 2011. (Another notable attendee: Al Gore.) It's a claim that Pao made in 2019, but this time she said that the firm "knew she was supplying underage girls for sex." Pao later clarified it was simply "suspected" rather than known, linking to a Daily Mail article from 2011. Pao didn't respond to an email request for comment, and Kleiner Perkins declined to comment.
  • Fwd: Fwd: The lucky pitch deck. A chain letter meant to unlock "good fortune" has circulated through 500 venture capitalists and firms like Andreessen Horowitz, SoftBank and Floodgate in the last two weeks. It's a clever way to pitch that rewards the forwarding investors with a link to a video promising good fortune and a way to sign up for a pitch meeting. And so far, it's worked: a dozen pitch meetings and counting. I talked to its creator, Danielle Baskin, and will share more on Monday on Protocol. (Oh, and if you were left off that chain letter but want more good fortune, refer 10 people to sign up for Protocol newsletters, and you can get a Protocol-branded mug.)
  • "We call it Mmhmm because I think it's important to have a name that you can say while eating." Former Evernote CEO Phil Libin has a new app, called Mmhmm, in beta that turns video calls into a "Weekend Update"-style presentation. I'm certainly on board with the naming idea.

Biz on Biz

What's so special about SPACs?

In March, online car sales startup Shift was in a precarious position. Its founder and co-CEO George Arison had to cut employees' pay and furlough many of them as he forecasted a revenue plunge.

  • "There's no sacred cow in this kind of scenario," he warned founders at the time. "The sooner you move, the better off you'll be."
  • Shift applied for and received a PPP loan to preserve jobs. "That really helped us as well because had that, let's call it a lifeboat, not been there, we would have been under a much deeper pressure in early April to make changes and would have probably hurt the business more," Arison said.
  • Then its business started to recover: After a month or two of depressed sales, people wanted to own cars again and, with dealerships largely shut down, Shift saw its online business return to pre-COVID levels, Arison said.

Now Shift has swung from furloughs to going public by the end of the quarter. And that's thanks to a SPAC.

  • A primer: SPAC stands for "special purpose acquisition company." These publicly traded companies raise money from investors, which is put in a trust for the specific purpose of finding private companies to buy. The SPAC then uses investors funds to purchase a company and, through a reverse merger, the company becomes publicly listed.
  • As a result, SPACs often sound kind of ridiculous on the surface. In Shift's case, it's going public through a reverse merger with Insurance Acquisition Corp. — not how you'd expect to hear about an online car sales company hitting the markets. But "SPACs have totally random names," Arison points out with a laugh.
  • Going public via a SPAC is gaining popularity, last year hitting the highest levels since 2007. In the last month, lidar startup Velodyne announced it was using a SPAC. Carmaker Fisker is considering a similar deal, following the success of Nikola's own SPAC listing. Bill Ackman's SPAC, the largest ever, is specifically going unicorn hunting, while Social Capital's Chamath Palihapitiya is looking to re-create his success with Virgin Galactic's debut with his other investment vehicles.

One reason companies like SPACs? They're often a faster route to going public — something important to a company like Shift that was looking to get a deal done.

  • "The time was so limited that you kind of had to pick the horse you were going to ride and then go in that direction," Arison said. It would've been hard to attract the growth stage venture capital he needed, as capital has tended to go to super-hot unicorns or companies doing exceptionally well during the time of COVID, and Shift wasn't among them. A direct listing was off the table, too, because Shift is the kind of business that needed cash to continue.
  • Arison thinks Silicon Valley is waking up to them now that there's a need for growth stage companies to raise capital on a condensed timeline — and the private money just isn't as available. "Even in Silicon Valley, SPACs are generally unknown as a phenomenon, probably because there's been so much money coming into the private companies that there has been less of a need to consider going public on a faster timeline," he said.
  • By choosing a SPAC, Arison got to skip the investor roadshow. But he did run a different kind of roadshow, to educate his existing investors on what a SPAC is and what it would mean for them. He even hired an investor counsel to help field existing investor questions about the deal. (One perk: He's been able to run the process from home, allowing him to teach his 9-month-old daughter how to say "SPAC.")

It could also mean a bigger payout for Shift compared to a traditional IPO, Arison said.

  • Adding to an acronym soup, Insurance Acquisition Corp. raised an extra $185 million in commitments in PIPE (private investment in public equity). That's combined with the over $150 million in the trust already,
  • "There's potential for over $300 million of proceeds for the business," Arison said. "And that gives a lot more capital for us to be able to execute our plan."

If plans stay on track, Shift should be publicly traded by the end of the quarter. Looking back, Arison says it feels more like three years have passed instead of just four months.

  • "It's such a crazy time that it makes this tough to fully appreciate the magnitude of what this means for us," he said.
  • And while SPACs may be in vogue, there's still a dearth of knowledge when it comes to educating tech investors. Now Arison has a new piece of advice for founders: "Be prepared to do a lot of education of your investors and your board, because I think most people in Silicon Valley don't really know this process at all. For my shareholders, for most of them ,it was the first time they had even engaged with a SPAC, let alone done one."

A MESSAGE FROM DYNDRITE

Dyndrite

Watch replay here.

Inside track

  • There's a new type of investor who's a growing threat and more than just a super angel: a sole GP that can invest toe-to-toe against traditional venture firms, writes former Shasta Ventures partner Nikhil Basu Trivedi. Meet the "Solo Capitalists."
  • The exclusiveness of Clubhouse or 👁👄👁 is a hack, not a product, says Canaan's Laura Chau. Instead, she says, the next great app will win by becoming an inclusive cult.
  • On the rise: "superpower tech." No-code may be popular, but the Weekend Fund's Vedika Jain says it is just part of a larger theme of "tools that give knowledge workers superpowers."
  • Greylock's Reid Hoffman was one of the investors to answer my question two weeks ago about how the class of 2020 startups will be different to startups built before. On Greylock's podcast and blog, Hoffman decided to elaborate on the idea: While it's easy to say everything has changed, "actually, more is the same than different, and to improve the world significantly will require a lot of hard work."

Need to know

  • Postmates sold to Uber for $2.65 billion, making it a big week for Spark Capital, which invested in Postmates' Series B round at a $73 million valuation. Plus, Spark had another exit with fitness startup Mirror selling to Lululemon and follow-on rounds for Anduril, Discord, and Luminar.
  • It's not just Kanye West. Peter Thiel is also reportedly backing away from Trump's reelection campaign and doesn't plan to speak at the RNC this year.
  • Quibi's audience is not sticking around. After hoping to have 7.5 million subscribers in its first year, one analyst pegged its paying subscriber count at 72,000 as its free trials begin to end.
  • Making moves: It may be "embryonic stage" but Axios reports Chelsea Clinton is thinking about forming a venture firm. Ron Conway and Pharrell Williams are working together on a venture fund, according to The Information. Magic Leap named former Microsoft exec Peggy Johnson as its new CEO. And Sleeping Giants co-founder Nandini Jammi is leaving the group after she claimed her co-founder gaslit her and kept her out of the company's narrative.
  • From Protocol: The pandemic has changed health care for good. We put together a Manual on how, from talking to Andreessen Horowitz's Vijay Pande on the future of health tech investing to what it's like to pivot your startup in a pandemic.
  • This week in VC history: GitHub raised its first round of outside funding: $100 million from Andreessen Horowitz in 2012. Microsoft would buy it six years later for $7.5 billion.
  • And your weekend reading: If you're looking for a place to start understanding some of the tech vs. tech media debate that boiled over on Twitter, I recommend Casey Newton's breakdown on how it's about managers vs. employees and The New Yorker's deep look into how Slate Star Codex "became a mascot and martyr in a struggle against The New York Times."

Five questions for…

Lux Capital's Peter Hébert

What's one of your new quarantine habits?

Giving my sweet, adorable young children the Heisman as they repeatedly seek to violate my Zoom space during work calls. The first several hundred times were precious, but, um, hello … boundaries?

What's one startup that failed or was shut down that you wish was still here today?

Kozmo.com. Where else could you get $3.99 toothpaste at 9 p.m. with a free T-shirt and a hot chocolate-chip cookie? And then an hour later get a $1 bottle of water with another free T-shirt and cookie? Of course they went bust, but ahh, those were the days.

What's your favorite piece of advice to give to first-time founders?

Do your best to maintain balance and manage the high highs and low lows. It's never as good as it seems nor as bleak as you may feel.

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

I confidently told a New York Times reporter that Facebook was absurdly overvalued at $50 billion when Goldman Sachs made a $450 million investment. Whoops. Fortunately that particular quote was left on the cutting room floor.

What's a startup area that's over-hyped right now? What's under-hyped?

Over-hyped: The new breed of VC-backed insurance companies (seeking tech multiples) strikes me as overblown given [the] industry structure and federally regulated reserves.

Under-hyped: The transformation of the American workforce from the surging wave of automation (physical via robotics, digital via AI/ML). If the rise of Trump is due in part to the revolt from the working class suffering from global trade and manufacturing automation, what will the vulnerability of the white collar professionals (whose jobs are being increasingly taken by machines) lead to?

A MESSAGE FROM DYNDRTIE

Dyndrite

Watch replay here.

Thanks for reading this week's Protocol Pipeline. If you like what you're reading, sign up here to get it in your inbox. Send story tips and newsletter feedback to biz@protocol.com.

Clarification: This article was updated to change the language relating to changes to Shift employees' pay. Updated July 11.

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