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Lisbon’s startup scene rises as Portugal gears up to be a European tech tiger

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Almost four years ago I wrote a long deep dive into Lisbon’s tech scene. So it’s great to check back in with both Lisbon and Portugal for a slightly briefer update on where it’s at.

As well-outlined by Stephan Morais, founder and managing general partner at Indico Capital Partners, Portugal has a very high quality of engineering talent at a competitive cost; an extremely high level of English language proficiency (compared to Spain, France, Italy); and a preference for launching product globally from day one. Portuguese founders are highly qualified, with the majority of them holding at least a master’s degree.

However, the ecosystem is still in an “early phase” and there are few founders turned angel investors; there have been limited exits until recently; and there is limited available talent in sales and marketing fields. That said, there is still plenty of growth to come, as you will see below, and in the COVID-19 era, Lisbon — and Portugal generally — is becoming a magnet for digital nomads with talent.

Given the lack of a large home consumer market, startups in Portugal tend to err toward enterprise and SaaS over consumer applications, according to the Startup Portugal Ecosystem report. While the gap between domestic and foreign sources of funding is closing, there is still a gap in early-stage financing. According to government figures, in 2019 there was €285 million available for investment, and the top 25 later-stage companies raised a total of €117.8 million.

VCs in the country include Portugal Ventures, Indico Capital, Faber Ventures, Armilar Venture Partners, Bynd Capital, Semapa Next, Bright Pixel, EDP Ventures and Shilling Capital Partners. While Mustard Seed is a VC, it’s fashioned as an impact fund, only investing in startups that use technology to address social and environmental challenges inside the country.

Portugal is undergoing some changes. In particular, many British refugees from Brexit are relocating there (and everywhere else in Europe, but Lisbon has beaches and startup-friendly taxes). Non-EU residents are able to get a golden visa and tech entrepreneurs can get a startup visa. Meanwhile, Portuguese startups are starting to raise money internationally, so, therefore, punching out of their Portugal-shaped box.

Domestic VC capacity went through a period of great scarcity 2016-18, but this has greatly improved in the 2019-20 period. And international VCs, including nearby Spanish ones (K Fund, Kibo, Conexo Ventures, etc.), are taking an interest in the ecosystem, as explained by one here.

Due to the recent successes of Farfetch, Talkdesk, Outsystems, Feedzai and DefinedCrowd, among others, international investors are becoming interested in Portugal. According to investor Pedro Almeida in 2020, less than 40% of overall venture rounds had the participation of an international investor, but international investors account for over 30% of seed and pre-seed rounds.

This indicates that international investors will increasingly participate higher up the funding stack as the startups grow. Corporate VC has also become more active and professional during the period.

Key Government initiatives to stimulate the ecosystem include Startup Portugal and 200M, a 50:50 matched-funding initiative with a call option within 3-4 years at a low price point (3%-4% IRR); and the FIS social innovation fund with a 70:30 match funding initiative and a call option within 3-4 years also at a low price point.

Plus, “Portugal Tech” is the first-ever proper fund-of-funds initiative, market rules, owned by IFD (the development bank) but professionally managed by the European Investment Fund.

Unicorns emerging from the Portugal ecosystem include OutSystems; Talkdesk (which relocated its HQ to SF); and while Farfetch can claim Portuguese heritage via its founders, it’s better known as a London startup. On their way to bigger things are startups to watch like Feedzai, Codacy, BIZAY, Aptoide, Unbabel and Uniplaces.

Among the up-and-coming “new kids on the block” there are Rows, Didimo, Tonic App, SWORD Health, Barkyn, Utrust, Sensei, Vawlt, Lovys, StudentFinance, Nutrium, Reatia, LegalVision, Kitch, Rnters, kencko and YData.

Key accelerators/incubators include Beta-i, Bright Pixel, BGI (Building Global Innovators), Tec Labs, Startup Lisboa, Fábrica de Startups, Techstars Lisbon (run for two years, but now on a pause), Demium, EDP Starter, Maze X, Blue Bio Value and the Indico Pre-Seed Program.

Co-working spaces (Lisbon only) include LACS, Fintech House, Cowork Central, Second Home, Startup Lisboa, SITIO, Impact Hub and NOW_Beato. Then there is the giant “campus” style Factor Lisbon, which has happily rejiggered its plans ahead of launch to make the spaces COVID-safe.

Lisbon — and Portugal more generally — is emerging on the European and global stage as an increasingly fast-moving ecosystem that will benefit from its continued EU membership, international outlook, welcoming culture and can-do work ethic.

We talked with the following Portugal-based VCs:

Cristina Fonseca, partner, Indico Capital Partners

What trends are you most excited about investing in, generally?
Digitalization of supply chains and AI-powered decision-making processes.

What’s your latest, most exciting investment?
Digitizing beehives — honey production and pollination industry.

Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now?
IoT and AI will finally come to be with 5G; time to invest is now.

What are you looking for in your next investment, in general?
We are going deeper in founder personality analysis pre-investment.

Which areas are either oversaturated or would be too hard to compete in at this point for a new startup? What other types of products/services are you wary or concerned about?
Digital health, fintech in general, e-commerce.

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?
Portugal mostly, Spain a bit.

Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders?
B2B SaaS and marketplaces (sometimes a combination that creates the moat). Watch out for Barkyn, Nutrium, Unbabel, Zenklub, kencko, Consentio.

How should investors in other cities think about the overall investment climate and opportunities in your city?
Business as usual, great engineering, global ambition.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
For sure, already a reality in Portugal and Spain for some years and more to come.

Which industry segments that you invest in look weaker or more exposed to potential shifts in consumer and business behavior because of COVID-19? What are the opportunities startups may be able to tap into during these unprecedented times?
On the plus side more consumers moving to online for all needs. On the negative side startups that have SMEs as customers will continue to be impacted as will travel, proptech and fintech (because of bank reactions).

How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now?
Cash is king, make sure you don´t run out of money and prioritize that — cost reduction, fundraising and focus on positive margins, road to zero burn.

Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
Absolutely — consumer move to online shopping and interactions has benefited almost half of our portfolio directly.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
The end of home schooling.

Any other thoughts you want to share with TechCrunch readers?
We might be back to a 2008 situation or worse, but we are better prepared this time.

 

Pedro Ribeiro Santos, partner,  Armilar Venture Partners

What trends are you most excited about investing in, generally?
Having always invested in deep tech, we’ve been advocates of the low-code/no-code movement for more than a decade (e.g., through our early investment in OutSystems), and it’s really exciting to see all that not just becoming a reality but also expanding even further toward the “citizen developer,” with products such as dashdash, Airtable, etc.

What’s your latest, most exciting investment?
Our latest investment was in Didimo, a young company with very exciting tech to automate the creation of high-fidelity and fully animatable human avatars in just seconds and from just a photo taken with any handheld device. Traditional processes use a sequence of piecemeal technology, several hours of computer graphics artists and computational processing. Enormous range of applications, the most immediate in gaming/entertainment and retail.

Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now?
Teleportation 🙂
More seriously, while many T&H startups are enduring the impacts of COVID, the dramatic and long-enduring effect that it will have in change of habits (e.g., in business traveling) will likely open a world of new opportunities.

What are you looking for in your next investment, in general?
I’ll go with the general: Tech with strong defensibility (IP) with wide market applicability.

Which areas are either oversaturated or would be too hard to compete in at this point for a new startup? What other types of products/services are you wary or concerned about?

While there are obviously several marketplaces that I wish we had invested in, I’m generally wary of that type of investment at the early stage, due to the low barriers to entry/no tech defensibility. (Of course, at the later stage, scale itself and the network effects become evident and extraordinary barriers to entry.)

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?

While we’ve been investing globally since the beginning (20 years ago), we’ve been investing closer to home as the regional-to-local (European, Southern European, Portuguese) ecosystems really started to develop. Our current flagship fund V has a defined allocation to Portugal (not just Lisbon) of more than 50%, and we currently have a smaller fund 100% dedicated to Portugal.

Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders?
I’m biased, but I am a strong believer that Portugal is particularly well-poised to thrive in companies that are capital-light and engineering-heavy, that rely more on their proprietary tech (rather than deep pockets) to scale fast: deep tech B2B software companies. Software engineering/developer tools/DevOps/low-code tools/SW-based infrastructure spring to mind, as well as strongly grounded AI products. As Portugal still needs to fully close the loop of startup -> success -> exit -> liquidity -> reinvestment, I’m most excited about the companies that appear to be closer to that feat: OutSystems (our portfolio), Feedzai (our portfolio), Talkdesk (not our portfolio). I’m also really excited about companies less mature than those but with a very high potential, such as DefinedCrowd (not our portfolio), SWORD Health (not our portfolio), Codacy (our portfolio), dashdash (our portfolio), Didimo (our portfolio), among others that I’m surely and unfairly leaving out.
How should investors in other cities think about the overall investment climate and opportunities in your city?
Portugal is characterized by:
• Enormous talent (particularly technical) at a relatively low cost (versus most of Europe).
• A place where people want to live (security, climate, friendliness, infrastructure, languages … the list could go on).
• Where capital has historically been scarce (it has recently developed significantly, but it remains relatively scarce by any European measure), but with very meaningful local experience.
• Companies born with a global mindset (Portugal is, at best, a good pilot market) and a capital efficiency mindset (do a lot with a little).
• Resulting in a ratio of good companies (measured, e.g., in the number or value of unicorns, or any other measure) per (capita, GDP, local capital or other metric of choice) far above most European countries (OK, maybe not Romania).
The scarcity of capital has been opening up a lot of opportunities for international investors, attracted by all of the above.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
Not necessarily. Many founders come from outside Lisbon or Porto already, with the cities serving as a central focus point.
How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now?

After the first 4-6 weeks of uncertainty, no change in the investment strategy. Biggest concerns of founders revolve around delays in buying decisions from their customers/frozen budgets. Hang tight!

Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
Yes. In many cases (except for the most critically hit arenas such as travel and hospitality), there are signs of business going back to normal.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
Many businesses that had dramatically cut their plans for 2020 are now realizing that it won’t be as bad as they had initially thought.

Tocha, partner, Olisipo Way

What trends are you most excited about investing in, generally?
Looking for companies aiming at profitability that can become startups or businesses.

What’s your latest, most exciting investment?
Reatia.com and HunterBoards.com.

Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now?
Small niches that traditionally are not big enough markets for VCs.

What are you looking for in your next investment, in general?
Passionate founders that want to create businesses where they want to work for the rest of their life.

Which areas are either oversaturated or would be too hard to compete in at this point for a new startup? What other types of products/services are you wary or concerned about?
Marketplaces, crypto.

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?
100% local Portuguese only.

Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders?
Tourism, relocation.

How should investors in other cities think about the overall investment climate and opportunities in your city?
Great founders, great and affordable teams. Companies focused since day one in international markets.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
Yes.

Which industry segments that you invest in look weaker or more exposed to potential shifts in consumer and business behavior because of COVID-19? What are the opportunities startups may be able to tap into during these unprecedented times?
Tourism, restaurants and retail.

Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
Yes. All related to home delivery or remote work.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
General understanding that the pandemic is here to stay for the next 2-5 years. And it’s not a short-term issue.

Any other thoughts you want to share with TechCrunch readers?
Come to Portugal, create and invest in companies.

Adão Oliveira, investment manager, Portugal Ventures

What trends are you most excited about investing in, generally?
At this point in time, looking forward to e-commerce, cloud and remote work solutions.

What’s your latest, most exciting investment?
Barkyn, which delivers all products and services a pet needs, online and offline, with a subscription plan. Barkyn delivers a package with personalized food (Barkyn’s private label) among other articles and access to a dedicated vet, solving two regular needs of dog owners in one single service.

Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now?
It would be great to have a startup that would allow us all to keep eye contact during a video call by using software, but perhaps that’s more like a DIY project 🙂

What are you looking for in your next investment, in general?
In general? A good return on investment 🙂 Just being funny, but serious though. As a seed/early-stage investor we naturally thrive for having a successful exit, but we do have a big focus on assisting the startups in all their initial challenges and also in securing new rounds of funding for further growing and expansion.

Which areas are either oversaturated or would be too hard to compete in at this point for a new startup? What other types of products/services are you wary or concerned about?
At this point all areas that have a tiny and small opportunity window — even if the market is big — will be having difficulties in getting funding, more than in the past. Startups that are only “marginally” improving current processes, meaning that if they are not brand new nor bringing breakthrough disruptive innovation their probability of succeeding will be too small.

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?
Portugal Ventures is focused on Portugal only.

Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders?
Companies excited about in the portfolio:
Barkyn (founder: André Jordão), which closed a €5 million round during the pandemic and that is already present in two international markets (Italy and Spain) besides Portugal.
DefinedCrowd (founder: Daniela Braga), another company that has secured a round of fundraising in the amount of $50,5M during the pandemic.
Curiously, both founders have won the first two editions João Vasconcelos’ award for entrepreneur of the year, Daniela in 2019 and André in 2020. That’s two in a row for Portugal Ventures 🙂

How should investors in other cities think about the overall investment climate and opportunities in your city?
IMO, and on general terms, the main drivers for other investors to look into Lisbon but also to Portugal are the following ones:

DEVELOPED LOCAL MARKET

  • Allows for business model validation at a reduced cost.
  • Important entrepreneurial hubs (Lisbon, Porto, Braga and Coimbra).

AVAILABILITY OF LOW-COST TALENT AND ALSO CHEAP LIVING COSTS

  • High-capital efficiency but with needs of international talent, for instance in the sales and marketing fields.

RELATIVELY LOW VALUATIONS

  • Maturing ecosystem.
  • Buyers’ market, meaning supply exceeds demand, giving purchasers an advantage over sellers in negotiation.

PUBLIC INCENTIVES ON INNOVATION

  • Leverage the equity investment with long-term nondilutive state and regional grants, R&D tax breaks or even a matching fund like 200M.

MORE STARTUPS GROWING FASTER AND ACHIEVING HIGHER MULTIPLES

  • It contributes to the creation of a real ecosystem, where network effects start to be more tangible.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
In the case of Portugal and the Lisbon hub I think it works quite on reverse. What I mean is that I envision Lisbon (and Portugal) receiving digital nomads essentially for some of the reasons I mentioned above, and the weather, never forget the weather 🙂 Besides the quality life the country has to offer, other things will be contributing, IMO, for this inflow.

Which industry segments that you invest in look weaker or more exposed to potential shifts in consumer and business behavior because of COVID-19? What are the opportunities startups may be able to tap into during these unprecedented times?
On the downside, tourism-related ventures look definitely weaker under the current pandemic situation, which is easily understandable considering all the current restrictions. On the upper side, e-commerce as well as on-demand services have been experiencing a particularly good moment. In short, all businesses that can ride the trend of allowing a transition from the offline to the online world, preferably in untapped markets can benefit from a big window of opportunity.

How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now?
The investment strategy hasn’t changed as we are still looking for the best opportunities and the most promising ventures. What indeed happened during Q1 and Q2 2020 was that we needed to go through all our portfolio companies and assess their exposure to the pandemic situation — it’s like protecting the family first — then make decisions on further financing to sustain operations under the uncertain times of the pandemic. This put on hold the new opportunities we were looking into. But from Q3 2020 onward we got back on track with our deal sourcing as well as investing in new startups. The biggest worries of the founders of the portfolio was the impact of COVID on business activities in general and also to try to guarantee the biggest runway possible considering the uncertainty of the times ahead.
Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
As mentioned some of them take benefit from the pandemic situation, others don’t.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
During the pandemic I closed my first fully remote deal (Barkyn) — I still haven’t met the CEO (André Jordão) in person nor even anyone from the team actually (looking forward to that!). Also participated in the TNW 2020 Conference (fully remote) as a speaker on the topic of scaling up and expanding in the Iberian Peninsula. Both “moments” made me think how the things are indeed transforming and perhaps how this way of living, making business and sharing knowledge can speed up things rather than slowing them down and also how efficient they can be, at least IMO.

Any other thoughts you want to share with TechCrunch readers?

Portugal, the next 10 years, a VC perspective: I saw the evolution from the last 10 years, and I do think that if we are able to keep the current trajectory in Portugal we will continue to stand out and impress. I think it is a mix of being ambitious but also credible and the most recent wave of entrepreneurs and founders I have been talking with seem to be better prepared than their predecessors. The other thing I do expect is that we are able to create a real ecosystem in Portugal, true ecosystems are good if network effects could be activated and also deliver positive outcomes for everyone involved, and I think we have a journey ahead of us. Last but not least, I hope that successful entrepreneurs in 5-10 years time can be able to give back to the community and share their knowledge with new startups in that time. They can do this through becoming investors themselves, that is something we see in other more mature countries happening, or simply by acting as facilitators in any type of challenges that startups will face.

Alexandre Barbosa, partner, Faber

What trends are you most excited about investing in, generally?
Faber invests in teams transforming the world with emerging technologies and we believe data-centric startups are accelerating digital transformation and driving innovation in several industries.

We are excited about the technologies enabling resilience, intelligence, agility or automation in the enterprise world, including next-gen solutions around AI Engineering (e.g., DataOps, MLOps), NLP, explainable AI, data management, data privacy and cybersecurity. Additionally, we also see value in using proprietary data and innovative human-machine interfaces (e.g., neurotechnologies) to enable precision and/or personalization in several industries (e.g., digital health).

What’s your latest, most exciting investment?
Over the last few months we have completed four new investments out of our new AI/data-focused fund: SWORD Health, who are building the future of digital physical therapy, and three other investments (to be announced soon) around DataOps/synthetic data, neurotechnologies and explainable AI.

Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now?
A growing percentage of enterprise IT budgets is being allocated to accelerating digital transition by working with data-centric startups, so there’s still significant opportunity for next-generation startups to challenge and transform the tech stack in multiple industries. Our belief is that entrepreneurship is also a core engine for a sustainable future through a combination of new business models, technology innovation and positive impact. As we are seeing in digital health, we expect to see a growing number of startups on a mission to tackle pressing societal challenges, such as climate change, through innovative applications of AI/ML/robotics to Earth science or natural resource management.

What are you looking for in your next investment, in general?
We are typically the first local investor in early-stage (pre-seed/seed) B2B data-driven startups primarily starting from Southern Europe to scale globally.
We look for highly specialized tech teams on a mission to transform an industry, who aim to build a diverse, balanced and inclusive culture with an open mindset, endless curiosity and relentless ambition to capture a large opportunity and conquer the world.

Which areas are either oversaturated or would be too hard to compete in at this point for a new startup? What other types of products/services are you wary or concerned about?
Within our B2B focus, startups launching undifferentiated SaaS products or with too much exposure to stressed industries should rethink their priorities.

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?
Our stage/tech specialty focus and value-add approach fill a gap in Iberia and we believe that we are now well-positioned to be investors in the next vintage of data-driven successes from Southern Europe (that typically scale up to the U.S.). In this context, we are planning to invest most of our capital in companies starting from Iberia to become a world-class benchmark, and selectively co-invest in promising teams across Europe.

Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders?
We believe that some of the most valuable and innovative startups emerging from Southern Europe are working in the “intelligent enterprise” space and/or driving digital innovation in financial services, cybersecurity, healthcare, manufacturing, agro-food and retail industries.
We have been first local investors in companies like Unbabel, Codacy, Seedrs and EnjoyHQ, who have started their companies from Portugal and rapidly scaled up to become distributed and acknowledged innovators in their industries/market spaces (just like Feedzai, who started before Faber existed). We are obviously excited about their success and how strongly they reflect our thesis.

How should investors in other cities think about the overall investment climate and opportunities in your city?
Iberia has a solid track record of being a launch pad for a significant number of successful startups over the last 10 years. The region continues to be a magnet for talent from across Europe to blend with local talent and start a new venture, leveraging the growing maturity and specialization of the local ecosystem and its resources with a clear mindset from founders to start locally and scale up to the U.S.
Both Portugal and Spain have experienced pre-Series A investors who have historically co-invested with international VCs, a growing layer of later stage/growth capital (both local and international) and now more institutional LPs are following to get exposure to the asset class.
We strongly believe that Southern Europe will continue to produce a substantial number of innovative companies that will challenge and lead their industries at global scale, proving that the region is becoming the next emerging opportunity for venture in Europe.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
The ecosystem has been rapidly adapting and we expect to see a growing number of new companies starting with distributed teams, ready to work around market restrictions and more resilient in general.
This will hopefully lower the barriers for founders from outside major cities, but we also believe that the major hubs in the region will continue to offer a powerful combination of resources to power new companies. So we don’t see remote work and new work dynamics as detrimental to major cities, but as a facilitation of access to capital or talent and an amplification of the deal flow in the region.

Which industry segments that you invest in look weaker or more exposed to potential shifts in consumer and business behavior because of COVID-19? What are the opportunities startups may be able to tap into during these unprecedented times?
Although some industries are more exposed to the consequences of this pandemic (e.g., travel and hospitality), our investment strategy focuses on data-centric startups applying AI/ML/data science to enterprise digital transformation.
The immediate implications of C19 for business continuity, agility and performance open a realm of enterprise-grade opportunities for B2B data-driven startups that can help corporations adapt or drive innovation in their industries by leading “the new normal.”

How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now?
Our investment strategy hasn’t changed, if anything these times have validated our thesis and our focus on teams and companies challenging their industries with innovative solutions across the data stack that can help accelerate enterprise digital transformation.
The immediate priority of our portfolio was to work with us and our co-investors in ensuring solid runways, quickly adjusting go-to-market strategies to focus on less-exposed industries or longer sales cycles and, in general, review priorities and plan/prepare for uncertain times ahead. Fortunately the overall balance is currently positive, with the vast majority of our portfolio growing this year.

Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
Yes, so far the overall portfolio has been adapting and overcoming this challenge with a better performance than initially expected (in several cases with significant YoY growth), demonstrating that B2B/cloud/data-centric startups are more resilient and necessary.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
As in previous downturns, it is always invigorating and encouraging to see the audacity and the resolve of a new generation of entrepreneurs turning difficulty into opportunity and launching their ventures to challenge the status quo and build a better future.
Over the last months and despite these current times, we have been fortunate to witness this kind of long-term sight across a growing number of mission-driven founders and investors, alongside a vibrant momentum at technical universities and research institutions.
Together with the collective behavior and determination to adapt to and overcome this pandemic, we believe the entrepreneurial signs are strong enough to offer hope for the future.

Any other thoughts you want to share with TechCrunch readers?
Stay tuned for the next generation of startups arising from Southern Europe, the ecosystem is maturing fast and there’s a large number of new teams working around innovative applications of AI/engineering/deep tech in the region.

António Miguel, partner, Mustard Seed MAZE

What trends are you most excited about investing in, generally?
Sharing economy (more linked to circularity, like rental solutions); elderly care; skills development (requalification at scale post-COVID); female tech.

What’s your latest, most exciting investment?
Investment in a femtech business that is offering people who bleed with superior menstruation products and using a tech-enabled platform to be a full-spectrum companion across all period cycles.

Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now?
Elderly care is ripe for disruption despite being talked about for some years; I wish I would see more on specific female health topics (e.g., menopause); overlooked opportunities include areas like environmental footprint of e-commerce and online to offline solutions given that people are now craving more than ever for meaningful connections.

What are you looking for in your next investment, in general?
A strong impact thesis through a lockstep model where the creation of social/environmental impact is the driver of top line.

Which areas are either oversaturated or would be too hard to compete in at this point for a new startup? What other types of products/services are you wary or concerned about?
Sustainable consumption apps and carbon footprint personal tracking; urban mobility.

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?
50% in local ecosystem; 50% all Europe (EU and non-EU).

Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders?
Well-positioned to thrive: Blue economy ventures; elderly care ventures; food tech.
Not well-positioned to thrive: Consumer businesses.
Companies I’m excited about: Hopin; StudentFinance.

How should investors in other cities think about the overall investment climate and opportunities in your city?
Portugal is a great place to find price-competitive talent and an excellent location to be a first second-market for European businesses given its size, small distance between product and market (and therefore faster feedback loops) and sophistication of users.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
Definitely. Take Lisbon as an example: Every week I learn about a founder or investor moving to Lisbon as a way to move out of U.K./Germany/France/U.S. as a result of the pandemic. The local ecosystem has never been so cosmopolitan and diverse.

How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now?
Impact in our strategy: de minimis. Our strategy is focused on the belief that the most successful businesses are those that profit whilst solving social and environmental issues. COVID has only corroborated the need for such businesses. If anything, we have just invested more earlier tickets given the nature of fundraising in Q2 and Q3 of 2020.
Worries of founders: fundraising amidst uncertain times; how much of current traction is an indication of future traction versus a time-constrained trend (e.g., D2C revival as a distribution channel).
Advice: execution first and foremost; double down on stakeholder management, especially with super clients, partners and investors.

Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
Yes, especially because our portfolio is exclusively based on companies that generate revenues by solving social and/or environmental challenges. As a result, during and post-pandemic, demand for their solutions has increased.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
Hearing Michael Seibel saying that social impact is the biggest trend he has seen in the last YC batch.

Any other thoughts you want to share with TechCrunch readers?
Thanks for what you do for the venture ecosystem in general!

Jaime Parodi Bardón, partner, impACT NOW Capital

What trends are you most excited about investing in, generally?
Our focus is impact investing and social innovation. Startups tackling the challenges that are at the heart of the UN 2030 Sustainable Development Goals (SDGs).

What’s your latest, most exciting investment?
We are currently structuring our first VC fund, which hopefully will be up and running in the beginning of 2021.

Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now?
We expect to see an imminent development at the intersection between business, impact and technology … potentially through an emerging vertical: impact tech. It is still an immature field but it is rapidly gaining awareness and traction from entrepreneurs and investors.

What are you looking for in your next investment, in general?
We are looking for startups developing technology as a way to solve problems at the core of the UN SDGs agenda and/or using it as a channel to scale their solutions faster. These startups must create societal or environmental impact while producing financial performance. Personally, I want to see AI and blockchain as a force for good.

Which areas are either oversaturated or would be too hard to compete in at this point for a new startup? What other types of products/services are you wary or concerned about?
In the impact landscape there is still plenty of room to grow. There are many local initiatives that are not sustainable nor scalable. It is needed to professionalize the commercialization of these initiatives (through products and services) to make them sustainable (and profitable), and incorporate technology in order to make them scalable.

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?
Our plan is to invest 50% in Iberia (it includes Portugal, our local ecosystem, and Spain) and 50% between Europe and CPLP (Community of Portuguese Language Countries).

Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders?
The Portuguese government, through the Social Innovation Fund (SIF), is supporting social innovation and stimulating the impact economy. We are observing a significant development in areas such as healthcare and well-being (SDG #3), education (SDG #4), clean energy (SDG #7), and sustainable cities and communities (SDG #11). We have also seen great initiatives working in other fields such as responsible consumption and production, climate action and inequalities reduction. However, it is still not enough to meet the societal and environmental demands. We need to feel the sense of urgency and understand the dramatic consequences of not tackling these challenges on time.

How should investors in other cities think about the overall investment climate and opportunities in your city?
Lisbon is a vibrating startup ecosystem. Investors from other countries are conscious of that and keep a good relation with the city and its ecosystem. Lisbon holds relevant entrepreneurial and investment events with Web Summit at the forefront. In addition, the Social Innovation Fund is creating opportunities for foreign investors to invest in Portuguese impact startups.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
The increasing adoption of remote work tools during the pandemic has only accelerated the trend that was already in place. Lisbon was already a hub for entrepreneurs and digital nomads (not only working for Portuguese startups but global ones). It is possible that current big cities as startup hubs are losing people now while virtual communities are gaining ground. That would contribute to a more delocalized VC industry. However, in my opinion, the human touch is very important and physical events are a big part of building a community, so as soon as they are back, people will be attracted to them.

Which industry segments that you invest in look weaker or more exposed to potential shifts in consumer and business behavior because of COVID-19? What are the opportunities startups may be able to tap into during these unprecedented times?
The pandemic has aggravated some of the challenges already present in the UN SDGs agenda. Apart from the obvious devastating health outcomes, the COVID-19 pandemic has brought to the surface the weaknesses of the, until now, reducing inequalities efforts. On the other side, it is offering a great momentum and opportunity to review the concept of humanity through core values, population solidarity or global collaboration … all of them empowered by the digital transformation and adoption. The UN SDG agenda is not a choice but a must. Any startup that is able to implement a profitable and scalable business model addressing one of the challenges at the core of any of the SDGs will have a great opportunity to thrive in the medium and long term. In the short term, we can see a faster lane for these startups that keep a broader vision for the future while executing a narrower mission focused on solving problems related to COVID-19 itself.

How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now?
COVID-19 has brought even more sense of urgency in solving the problems already identified by the UN. Our investment strategy has not changed but has been reinforced by the current situation.

Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
Since we don’t have an official portfolio yet we can not answer completely this question. What we have seen so far, in our prospects, is the creation of new markets and extension of the existing ones thanks to the aforementioned digital transformation/adoption. In addition, the increasing awareness of the consumer about the societal and environmental challenges together with the sense of responsibility in its purchasing behavior has lead to new and revolutionary revenue streams.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
It might sound cliché but the recent birth of my baby girl gives me even more energy to help build a better future.

Any other thoughts you want to share with TechCrunch readers?
We would like to keep on encouraging entrepreneurs, investors, corporates, governments and the rest of the ecosystem stakeholders to work together in finding formulas that create significant impact and financial benefits.

Stephan Morais, partner, Indico Capital Partners

What trends are you most excited about investing in, generally?
SaaS solutions, AI applications, digital health, data monetization, IoT SaaS platforms, engineered biology, marketplaces.

What’s your latest, most exciting investment?
Nutrium, a digital health platform that serves 800,000 nutrition patients and aims to put together dietitians, patients and their appointments, including wellness data and products and supplements.

Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now?
Still many traditional areas and industries to digitize. AI is in its first stages in most industries so we need to address these traditional large opportunities.

What are you looking for in your next investment, in general?
We look for great founders that can actually be good leaders and CEOs. That’s a combination of vision, being able to take advantage of the market opportunity and having the necessary resilience to break the necessary barriers to create a success case. Additionally, teams need to be very good technically.

Which areas are either oversaturated or would be too hard to compete in at this point for a new startup? What other types of products/services are you wary or concerned about?
Food delivery, most e-commerce and SaaS for SMEs and startups. Given the saturation and competition in the advertising space, everything that depends on that to get off the ground is challenging.

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?
We are 100% focused on Portugal and Spain.

Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders?
B2B SaaS companies: Unbabel, InnovationCast, Infraspeak, Onalytics.
AI and deep tech: Feedzai, Smartex, Cleverly.ai, Sound Particles.
Digital health: Nutrium, Zenklub, SWORD Health, Tonic App.
Fintech: StudentFinance, Switch Payments.
Consumer: Barkyn, EatTasty, Pleasy Play.
Digitalization of traditional industries: BitCliq, Apis Tech.

How should investors in other cities think about the overall investment climate and opportunities in your city?
In regards to Portugal, the ecosystem still has room to evolve. Most of the opportunities are in the early stage and the majority of the rounds are below €1 million. International investors should partner with local players in the early stages.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
Portugal has been very attractive to international companies that have setup local offices in the past years to take advantage of the great technical talent available. The safety and lifestyle also makes the country attractive for nomads and remote workers, as well as senior executives that are willing to relocate here with their families. As more people work remotely, Portugal is expected to become even more of a destination for tech workers and startups.

Which industry segments that you invest in look weaker or more exposed to potential shifts in consumer and business behavior because of COVID-19? What are the opportunities startups may be able to tap into during these unprecedented times?
Some industries like travel, hospitality and aviation are clearly suffering and some of our companies addressing these sectors have been impacted. We expect that to persist for the next couple of months.
Other sectors are booming like online deliveries, automation of processes and team sync and communication.

How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now?
We focused the last months in making sure our portfolio had enough runway for the next year. We know cash is king, companies need to balance that with executing on their vision, taking advantage of the current opportunities.

Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
Definitely. In some sectors, tech has been fundamental in keeping the society working and companies productive.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
Lots of successful companies in the U.S. were created by European founders, and some of them are returning to their home countries, which will generate a very positive impact! There will be a lot of interesting companies coming out of Europe in the coming years.

Any other thoughts you want to share with TechCrunch readers?
Europe has so much to do to catch up — severe lack of depth in the availability of capital still makes companies move to the U.S. after Series B.

Gavin Goldblatt, managing partner, Portugal Gateway

What trends are you most excited about investing in, generally?
Energy and fintech, particularly around mobile money.

What are you looking for in your next investment, in general?
A proven management team and proven product with international expansion potential.

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?
Less.

How should investors in other cities think about the overall investment climate and opportunities in your city?
Lisbon provides fantastic work-life balance and low startup and living costs as well as a good supply of skills. As a result it is likely to benefit from the recent COVID-inspired move away from more established startup hubs in less desirable locations.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
Yes.

Which industry segments that you invest in look weaker or more exposed to potential shifts in consumer and business behavior because of COVID-19? What are the opportunities startups may be able to tap into during these unprecedented times?
Too early to tell. Obviously tourism and many services have been negatively impacted, but even in these areas innovators are taking advantage of the disruption to position themselves well if there is a recovery (and a release of pent-up demand) post-vaccine.

How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now?
Surprisingly, the net result has been positive across our portfolio with significant opportunities arising. Turmoil and change bring opportunity,
Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
Yes.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
All of our investments are outperforming budget and expectations this year.

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Tesla refutes Elon Musk’s timeline on ‘full self-driving’

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What Tesla CEO Elon Musk says publicly about the company’s progress on a fully autonomous driving system doesn’t match up with “engineering reality,” according to a memo that summarizes a meeting between California regulators and employees at the automaker.

The memo, which transparency site Plainsite obtained via a Freedom of Information Act request and subsequently released, shows that Musk has inflated the capabilities of the Autopilot advanced driver assistance system in Tesla vehicles, as well the company’s ability to deliver fully autonomous features by the end of the year. 

Tesla vehicles come standard with a driver assistance system branded as Autopilot. For an additional $10,000, owners can buy “full self-driving,” or FSD — a feature that Musk promises will one day deliver full autonomous driving capabilities. FSD, which has steadily increased in price and capability, has been available as an option for years. However, Tesla vehicles are not self-driving. FSD includes the parking feature Summon as well as Navigate on Autopilot, an active guidance system that navigates a car from a highway on-ramp to off-ramp, including interchanges and making lane changes. Once drivers enter a destination into the navigation system, they can enable “Navigate on Autopilot” for that trip.

Tesla vehicles are far from reaching that level of autonomy, a fact confirmed by statements made by the company’s director of Autopilot software CJ Moore to California regulators, the memo shows.

“Elon’s tweet does not match engineering reality per CJ,” according to the memo summarizing the conversation between regulators with the California Department of Motor Vehicles’ autonomous vehicles branch and four Tesla employees, including Moore.

The memo, which was written by California DMV’s Miguel Acosta, states that Moore described Autopilot — and the new features being tested — as a Level 2 system. That description matters in the world of automated driving.

There are five levels of automation under standards created by SAE International. Level 2 means two primary functions — like adaptive cruise and lane keeping — are automated and still have a human driver in the loop at all times. Level 2 is an advanced driver assistance system, and has become increasingly available in new vehicles, including those produced by Tesla, GM, Volvo and Mercedes. Tesla’s Autopilot and its more capable FSD were considered the most advanced systems available to consumers. However, other automakers have started to catch up.

Level 4 means the vehicle can handle all aspects of driving in certain conditions without human intervention and is what companies like Argo AI, Aurora, Cruise, Motional, Waymo and Zoox are working on. Level 5, which is widely viewed as a distant goal, would handle all driving in all environments and conditions.

Here is an important bit via Acosta’s summarization:

DMV asked CJ to address from an engineering perspective, Elon’s messaging about L5 capability by the end of the year. Elon’s tweet does not match engineering reality per CJ. Tesla is at Level 2 currently. The ratio of driver interaction would need to be in the magnitude of 1 or 2 million miles per driver interaction to move into higher levels of automation. Tesla indicated that Elon is extrapolating on the rates of improvement when speaking about L5 capabilities. Tesla couldn’t say if the rate of improvement would make it to L5 by end of calendar year.

Portions of this commentary were redacted. However, Plainsite was able to copy and paste the redacted part, which shows up as white space on a PDF, into another document.

The comments in the memo are contrary to what Musk has said repeatedly in the public sphere.

Musk is frequently asked on Twitter and in quarterly earnings calls for progress reports on FSD, including questions about when it will be rolled out via software updates to owners who have purchased the option. In a January earnings call, Musk said he was “highly confident the car will be able to drive itself with reliability in excess of a human this year.” In April 2021, during the company’s first quarter earnings call, Musk said “it’s really quite, quite tricky. But I am highly confident that we will get this done.”

The memo released this week provided other insights into Tesla’s push to test and eventually unlock greater levels of autonomy, including the number of vehicles testing a beta version of “Navigate on Autopilot on City Streets,” a feature that is meant to handle driving in urban areas and not just highways. Regulators also asked the Tesla employees if and how participants were being trained to test this feature, and how the sales team ensures that messaging about the vehicle capabilities and limitations are communicated.

As of the March meeting, there were 824 vehicles in a pilot program testing a beta version of “city streets.”  About 750 of those vehicles were being driven by employees and 71 by non-employees. Pilot participants are located across 37 states, with the majority of participants in California. As of March 2021, pilot participants have driven more than 153,000 miles using the City Streets feature, the memo states. The memo noted that Tesla planned to expand this pool of participants to approximately 1,600 later that month.

Tesla told the DMV that it is working on developing a video for the participants and that the next group of participants will include referrals from existing participants. “The new participants will be vetted by Tesla by looking at insurance telematics based on the VINs registered to that participant,” according to the memo.

Tesla also told the DMV that it is able to track when there are failures or when the feature is deactivated. Moore described these as “disengagements,” a term also used by companies testing and developing autonomous vehicle technology. The primary difference worth noting here is that these companies only use employees who are trained safety drivers, not the public.

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Betting on upcoming startup markets

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Welcome back to The TechCrunch Exchange, a weekly startups-and-markets newsletter. It’s broadly based on the daily column that appears on Extra Crunch, but free, and made for your weekend reading. Want it in your inbox every Saturday? Sign up here.

Ready? Let’s talk money, startups and spicy IPO rumors.

Betting on upcoming startup markets

This week M25, a venture capital concern focused on investing in the Midwest of the United States, announced a new fund worth $31.8 million. As the firm noted in a release that The Exchange reviewed, its new fund is about three times the size of its preceding investment vehicle.

I caught up with M25 partner Mike Asem to chat about the round. Asem joined M25 in 2016 after partner Victor Gutwein spearheaded the effort with a small $1 million fund. Asem and Gutwein have led the firm since its first material, if technically second fund.

Asem said that his team had targeted a $25 million to $30 million fund three, meaning that they came in a bit higher than anticipated in fundraising terms. That’s not a surprise in today’s venture capital market, given the pace at which capital is both invested into VC funds and startups.

The investor told The Exchange that M25 has been investing out of its third fund for some time, including CASHDROP, a startup that I’ve heard good things about regarding its growth rate. (More here on the CASHDROP round that M25 put capital into.)

All that’s fine, but what makes M25 an interesting bet is that the firm only invests in Midwest-headquartered startups. Often when I chat to a fund that has a unique geographical focus, it’s merely that, a focus. As opposed to M25’s more hard-and-fast rule. Now with more capital and plans to take part in 12-15 deals per year, the group can double down on its thesis.

Per Asem, M25 has done about a third of its deals in Chicago, where it’s based, but has put capital into startups in 24 cities thus far. TechCrunch covered one of those companies, Metafy, earlier this week when it closed more than $5 million in new capital.

Why does M25 think that the Midwest is the place to deploy capital and generate outsize returns? Asem listed a number of perspectives that underpin his team’s thesis: The Midwest’s economic might, the network that his partner and him developed in the area before founding M25, and the fact that valuations can prove to be more attractive in the region at the stage that his firm invests. They are sufficiently different, he said, that his firm can generate material returns even with exits at around the $100 million mark, a lower threshold than most VCs with larger capital vehicles might find palatable.

M25 is not alone in its bets on alternative regions. The Exchange also chatted with Somak Chattopadhyay of Armory Square Ventures on Friday, a firm that is based in upstate New York and invests in B2B software companies in what we might call post-manufacturing cities. One of its investments has gone public, and the group’s latest fund is a multiple of the size of its first. Armory now has around $60 million in AUM.

All that’s to say that the venture capital boom is not merely helping firms like a16z raise another billion here, or another billion there. But the generally hot market for startups and private capital is helping even smaller firms raise more capital to take on less traditional spaces. It’s heartening.

On-demand pricing, and grokking the insurance game

This week The Exchange chatted with Twilio CFO Khozema Shipchandler about his company’s earnings report. You can read more on the hard numbers here. The short gist is that it was a good quarter. But what mattered most in our chat was Shipchandler riffing on where the center of gravity at Twilio will remain in revenue terms.

Briefly, Twilio is best known for building APIs that allow developers to leverage telecom services. Those developers and their employers pay for as much Twilio as they used. But over time Twilio has bought more and more companies, building out a diverse product set after its 2016-era IPO.

So we were curious: Where does the company stand on the on-demand versus SaaS pricing debate that is currently raging in the software world? Staunchly in the first camp, still, despite buying Segment, which is a SaaS service. Per Shipchandler, Twilio revenue is still more than 70% on-demand, and the company wants to make sure that its customers only buy more of its services as they sell more of their own.

Startups, then, probably don’t have to give up on on-demand pricing as they scale. Twilio is huge and is sticking to it!

Then there was Root’s earnings report. Again, here are the core numbers. The Exchange is keeping tabs on Root’s post-IPO performance not only because it was a company we tracked extensively during its late private life, but also because it is a bellwether of sorts for the yet-private, neoinsurane companies. Which matters for fellow neoinsurance player Hippo, as it is going public via a SPAC.

Alex Timm, Root’s CEO, said that his firm performed well in the first quarter, generating more direct written premium than anticipated, and at better loss-rates to boot. The company also remains very cash-rich post IPO, and Timm is confident that his company’s data science work has lots more room to improve Root’s underwriting models.

So, faster-than-expected growth, lots of cash, improving economics and a bullish technology take — Root’s stock is flying, right? No, it is not. Instead Root has taken a bit of a public-market pounding in recent months. The Exchange asked Timm about the disparity between how he views his company’s performance and future, and how it is being valued. He said that the insurance folks don’t always get its technology work and that tech folks don’t always grok Root’s insurance business.

That’s tough. But with years and years of cash at its current burn rate, Root has more than enough space to prove its critics wrong, provided that its modeling holds up over the next dozen quarters or so. Its share price can’t be great for the yet-private neoinsurance companies, however. Even if Next Insurance did just raise another grip of cash at another new, higher valuation.

Corporate spend’s big week

As you’ve read by now, Bill.com is buying corporate-spend unicorn Divvy for $2.5 billion. I dug into the numbers behind the deal here, if that’s your sort of thing.

But after collecting notes from the CEOs of Divvy competitors Ramp and Brex here, another bit of commentary came in that I wanted to share. Thejo Kote, the corporate spend startup Airbase’s CEO and founder did some math on Divvy’s results that Bill.com shared with its own investors, arguing that the company’s March payment volume and active customer account implies that the company’s “average spend volume per customer was $44,400 per month.”

Is that good or bad? Kote is not impressed, saying that Airbase’s “average spend volume per customer is almost 10 [times] that of Divvy,” or around “$375,000 per month.” What’s driving that difference? A focus on larger customers, and the fact that Airbase covers more ground, in Kote’s view, than Divvy by encompassing software work that Bill.com itself and Expensify manage.

I bring you all of this as the war in managing spend for companies large and small is heating up in software terms. With Divvy off the table, Ramp is now perhaps the largest player in the space not charging for the software it wraps around corporate cards. Brex recently launched a software product that it charges for on a recurring basis. (More on Brex at this link, if you are into it.)

Various and sundry

Two final notes for you, things that should make you either laugh, grimace, or howl:

  1. The Wall Street Journal’s Eliot Brown tweeted some data this week from the Financial Times, namely that amongst the roughly 40 SPACs that completed deals last year, a dozen and a half have lost more than half their value. And that the average drop amongst the combined entities is 38%. Woof.
  2. And, finally, welcome to peak everything.

More to come next week, including notes on the return of the Kaltura and Procore IPOs, and whatever it is we can suss out from the Krispy Kreme S-1 filing, as donuts are life.

Alex

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Extra Crunch roundup: How Duolingo became an edtech leader

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The pandemic has just pushed edtech mainstream, but language-learning startup Duolingo had already spent the past decade figuring out how to build a successful edtech app.

In our latest installment of the EC-1 series, Natasha Mascarenhas goes deep with the company to understand how it found product-market fit, then figured out how to grow like a consumer tech startup and monetize like a SaaS startup. After a record 2020, the Pittsburgh-based company also opened up about its plans for the future, including a focus on speaking a new language (in addition to listening, reading and writing).

Here’s more from Natasha about what’s inside:

Want this kind of coverage on a different company or sector. Check out our ever-growing list of EC-1s, which include recent profiles of Klaviyo, StockX, Tonal and more.

Thanks for reading!

Eric Eldon
Managing Editor, Extra Crunch (subbing in for Walter again)

Amid the IPO gold rush, how should we value fintech startups

Fairy dust flying in gold light rays. Computer generated abstract raster illustration

Image Credits: gonin / Wikimedia Commons

If there has ever been a golden age for fintech, it surely must be now.

As of Q1 2021, the number of fintech startups in the U.S. crossed 10,000 for the first time ever — well more than double that if you include EMEA and APAC. There are now three fintech companies worth more than $100 billion (Paypal, Square and Shopify) with another three in the $50 billion-$100 billion club (Stripe, Adyen and Coinbase).

Yet, as fintech companies have begun to go public, there has been a fair amount of uncertainty as to how these companies will be valued on the public markets. This is a result of fintechs being relatively new to the IPO scene compared to their consumer internet or enterprise software counterparts. Furthermore, fintechs employ a wide variety of business models: Some are transactional, while others are recurring or have hybrid business models.

And fintechs now have a multitude of options in terms of how they choose to go public. They can take the traditional IPO route, pursue a direct listing or merge with a SPAC. Given the multitude of variables at play, valuing these companies and then predicting public market performance is anything but straightforward.

How to attract large investors to your direct investing platform

Image Credits: princessdlaf (opens in a new window)/ Getty Images

Many fintech startups have tried to become a market-maker between investors and investment opportunities.

However, the challenge with this two-sided market is: How do you get the investors to show up?

It’s hard enough to get retail investors, but family offices and other large check writers are even more challenging to lure.

Analytics as a service: Why more enterprises should consider outsourcing

Image Credits: anyaberkut (opens in a new window) / Getty Images

With an increasing number of enterprise systems, growing teams, a rising proliferation of the web and multiple digital initiatives, companies of all sizes are creating loads of data every day.

This data contains excellent business insights and immense opportunities, but it has become impossible for companies to derive actionable insights from this data consistently due to its sheer volume.

The analytics-as-a-service (AaaS) market is expected to grow to $101.29 billion by 2026. Organizations that have not started on their analytics journey or are spending scarce data engineer resources to resolve issues with analytics implementations are not identifying actionable data insights.

Through AaaS, managed services providers (MSPs) can help organizations get started on their analytics journey immediately without extravagant capital investment.

MSPs can take ownership of the company’s immediate data analytics needs, resolve ongoing challenges, and integrate new data sources to manage dashboard visualizations, reporting and predictive modeling — enabling companies to make data-driven decisions every day.

Will fintech unicorn Flywire’s proposed IPO reach escape velocity?

Flywire, a Boston-based magnet for venture capital, filed to go public Monday.

Flywire is a global payments company that attracted more than $300 million as a startup, according to Crunchbase, most recently raising a $60 million Series F last month. We don’t have its most recent valuation, but PitchBook data indicates that the company’s February 2020, $120 million round valued Flywire at $1 billion on a post-money basis.

So what we’re looking at here is a fintech unicorn IPO. A great way to kick off the week, to be honest, though we thought that Robinhood would be the next such debut.

Fintech venture capital activity has been hot lately, which makes the Flywire IPO interesting. Its success or failure could dictate the pace of fintech exits and fintech startup valuations in general, so we have to care about it.

First, what does Flywire do and with whom does it compete? Then, a closer look at its financial results as we hope to get our hands around its revenue quality, aggregate economics and growth prospects.

After that, we’ll discuss valuations and which venture capital groups are set to do well in its flotation.

As Q2’s lull fades, unicorn IPOs are revving up

If it feels like IPO news slowed for a few weeks at the start of the second quarter, your gut is correct. Investors previously told The Exchange that the first, third and fourth quarters of 2021 would be hot periods for public debuts, but that Q2 would be slower. Their argument revolved around reporting cadences and how long it takes for certain periods of accounting work to be completed.

So we weren’t surprised when the second quarter’s IPO cycle began to feel a bit soft compared to the rapid-fire first quarter. And, as we’ve all heard in recent days, the great SPAC rush is slowing.

But that hasn’t stopped a number of firms from defying expectations and going public all the same.

SAP CEO Christian Klein looks back on his first year

SAP CEO Christian Klein

Image Credits: SAP

SAP CEO Christian Klein was appointed co-CEO with Jennifer Morgan in October 2019. He became sole CEO just as the pandemic was hitting full force across the world last April.

He was put in charge of a storied company at 39 years old. By October, its stock price was down and revenue projections for the coming years were flat.

That is definitely not the way any CEO wants to start their tenure, but the pandemic forced Klein to make some decisions to move his customers to the cloud faster. That, in turn, had an impact on revenue until the transition was completed. While it makes sense to make this move now, investors weren’t happy with the news.

There was also the decision to spin out Qualtrics, the company his predecessor acquired for $8 billion in 2018. As he looked back on the one-year mark, Klein sat down with TechCrunch to discuss all that has happened and the unique set of challenges he faced.

Forerunner’s Eurie Kim and Oura’s Harpreet Rai discuss betting on consumer hardware

Image Credits: Forerunner Ventures / Oura

Forerunner General Partner Eurie Kim and Oura CEO Harpreet Rai joined us on Extra Crunch Live to discuss the process of taking Oura to the next level — and beyond — as the product found a second (or third) life during the pandemic through partnerships with sports leagues like the NBA.

And as we’re wont to do, we asked the pair to take a look at a handful of user-submitted pitch decks.

How to break into Silicon Valley as an outsider

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Domm Holland, co-founder and CEO of e-commerce startup Fast, appears to be living a founder’s dream.

His big idea came from a small moment in his real life. Holland watched as his wife’s grandmother tried to order groceries, but she had forgotten her password and wasn’t able to complete the transaction.

He built a prototype of a passwordless authentication system where users would fill out their information once and would never need to do so again. Within 24 hours, tens of thousands of people had used it.

Shoppers weren’t the only ones on board with this idea. In less than two years, Holland has raised $124 million in three rounds of fundraising, bringing on partners like Index Ventures and Stripe.

Although the success of Fast’s one-click checkout product has been speedy, it hasn’t been effortless.

For one thing, Holland is Australian, which means he started out as a Silicon Valley outsider.

Holland talks about how he built his network, why it’s important — not just for fundraising but for building the entire business — and how to avoid the mistakes he sees new founders make.

Revel’s Frank Reig shares how he built his business and what he’s planning

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It’s only been three years since they hit the streets, but Revel’s blue electric mopeds have already become a common sight in New York, San Francisco and a growing number of U.S. cities.

However, Revel founder and CEO Frank Reig set his sights far beyond building a shared moped service.

In fact, since the beginning of 2021, Revel has launched an e-bike subscription service, an EV charging station venture and an all-electric rideshare service driven by a fleet of 50 Teslas.

We caught up with Reig to talk about what he learned from building the company, how Revel’s business strategy has evolved and what lies ahead.

Brex, Ramp tout their view of the future as Divvy is said to consider a sale to Bill.com

Credit cards, computer illustration.

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Divvy, a Utah-based corporate spend unicorn, is considering selling itself to Bill.com for a price that could top $2 billion. For the fintech sector, it’s big news.

Corporate spend startups including Ramp and Brex are raising rapid-fire rounds at ever-higher valuations and growing at venture-ready cadences. Their growth and the resulting private investment were earned by a popular approach to offering corporate cards, and, increasingly, the group’s ability to build software around those cards that took into account a greater portion of the functionality that companies needed to track expenses, manage spend access and, perhaps, save money.

It makes sense to see Bill.com decide to take on the yet-private corporate spend startups that are playing the field; why not absorb a growing customer base and fend off competition in a single move?

To get a better handle on how the startups that compete with Divvy feel about the deal, TechCrunch reached out to both Ramp CEO Eric Glyman, and Brex CEO Henrique Dubugras.

4 strategies for building a digital health unicorn

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It’s an entrepreneur’s market in digital health today, with startups raising record-breaking funding at soaring valuations and debuting on public markets to eager investors.

The massive influx of capital to healthcare should not be surprising; the pandemic has made it starkly clear that digital health is the future of healthcare.

To that end, we should anticipate additional healthcare exits worth more than $1 billion in the near term. Which again, is great for entrepreneurs — as long as they understand how hard it is to build a unicorn in healthcare. Today, becoming a unicorn requires founders who are long on vision and operational experience.

During the pandemic, lots of investors jumped in to invest in digital health for the first time. But we’ve been investing for more than a decade.

Here are four instrumental strategies to building a unicorn in digital health that we know work.

One CMO’s honest take on the modern chief marketing role

A CMO's role

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There’s no shortage of commentary around the chief marketing officer title these days, and certainly no lack of opinions about the role’s responsibilities and meaning within a company.

There’s a reason for that. CMO is the shortest tenured C-suite role — the average tenure of a CMO is the lowest of all C-suite titles at 3.5 years.

That’s because the chief marketing officer’s role is increasingly complex. Qualifications require broad, strategic thinking while also maintaining tactical acumen across several functions. There’s a big disparity in what companies expect from CMOs. Some want a strategist with an eye for go-to-market planning, while others want a focus on close alignment with sales in addition to brand awareness, content strategy and lead generation.

Other companies want their CMO to emphasize product marketing and management. Ask 10 CMOs how they define their role and you’ll get 10 different answers.

Here, a tenured CMO shares his honest take on what the role actually means, plus the key attributes of today’s modern CMO.

Despite gains, gender diversity in VC funding struggled in 2020

People have been discussing the importance of expanding opportunities for women in venture capital and startup entrepreneurship for decades. And for some time it appeared that progress was being made in building a more diverse and equitable environment.

The prospect of more women writing checks was viewed as a positive for female founders, a cohort that has struggled to attract more than a fraction of the funds that their male peers manage. All-female teams have an especially tough time raising capital compared to all-male teams, underscoring the disparity.

Then COVID-19 arrived and scrambled the venture and startup scene, creating a risk-off environment during the end of Q1 and the start of Q2 2020. Following that, the venture world went into overdrive as software sales became a safe harbor in the business world during uncertain economic times. And when it became clear that the vaunted digital transformation of businesses large and small was accelerating, more capital appeared.

But data indicate that the torrent of new capital has not been distributed equally — indeed, some of the progress that female founders made in recent years may have eroded.

How to make sure your legal team is M&A ready

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When it comes to acquiring or merging a business with another, it’s imperative that decision-makers know why they’re pursuing a deal and its potential impact on the company, good and bad.

Mergers and acquisitions (M&A) may indeed be the best route to success, but there’s a lot of room for problems, and many leaders underestimate the role in-house legal teams can play in mitigating these problems and facilitating progress until they’re locked into a deal.

And that’s when issues become much more difficult to resolve and plans unravel.

While a CEO and board might fully appreciate in-house counsel, it’s equally important the team is supported across a company — from marketing to product development — in order to ensure an efficient closing and successful integration. The best way to do that is by bringing in-house counsel into the process early and often.

Beyond the fanfare and SEC warnings, SPACs are here to stay

The rise of SPACs

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The number of SPACs in the deep tech sector was skyrocketing, but a combination of increased SEC scrutiny and market forces over the past few weeks has slowed the pace of new SPAC transactions.

The correction is an inevitable step on the path to mainstreaming SPACs as an alternative to IPOs, but it won’t cause them to go away.

Instead, blank-check vehicles will evolve and will occupy a small and specialized — but important — part of the startup financing landscape.

Uber’s mixed Q1 earnings portray an evolving business

Uber Drivers Win Supreme Court Appeal To Be Considered Workers

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Uber followed Lyft in reporting its Q1 2021 earnings this week. And like its rival, its results take a little bit of work to understand.

We parsed them as a pair so that we understand what’s going on at the ride-hailing and food-delivery giant.

Let’s start with the big numbers: Uber’s revenue missed sharply, while its profitability beat expectations.

How did investors vet Uber’s performance? The company’s stock is off around 4% in after-hours trading.

Surprised by the revenue miss? Shocked by the profit beat? Startled by the sharp drop in the value of Uber’s stock? Let’s unpack the numbers.

How much product room will fintech giants leave for startups?

Let’s examine the buy now, pay later (BNPL) market, mostly through the lens of PayPal’s first-quarter results.

PayPal’s BNPL results are impressive — and not just to your humble servant, but to other fintech watchers as well — which begs the question: Can the platform effect that the PayPals of the world bring to bear suffocate a growing slice of the startup market?

Freemium isn’t a trend — it’s the future of SaaS

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As the COVID-19 lockdowns cascaded around the world last spring, companies large and small saw demand slow to a halt seemingly overnight. Enterprises weren’t comfortable making big, long-term commitments when they had no clue what the future would hold.

Innovative SaaS companies responded quickly by making their products available for free or at a steep discount to boost demand.

But these free offerings didn’t go away as lockdowns loosened up. SaaS companies instead doubled down on freemium because they realized that doing so had a real and positive impact on their business. In doing so, they busted the outdated myths that have held 82% of SaaS companies back from offering their own free plan.

AI is ready to take on a massive healthcare challenge

AI in genome sequencing

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Shortening the diagnostic odyssey of rare diseases and reducing the associated costs was, until recently, a moonshot challenge, but is now within reach.

About 80% of rare diseases are genetic, and technology and AI advances are combining to make genetic testing widely accessible.

Whole-genome sequencing, an advanced genetic test that allows us to examine the entire human DNA, now costs under $1,000, and market leader Illumina is targeting a $100 genome in the near future.

Why did Bill.com pay $2.5B for Divvy?

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As expected, Bill.com is buying Divvy, the Utah-based corporate spend management startup that competes with Brex, Ramp and Airbase. The total purchase price of around $2.5 billion is substantially above the company’s roughly $1.6 billion post-money valuation that Divvy set during its $165 million, January 2021 funding round.

Per Bill.com, the transaction includes $625 million in cash, with the rest of the consideration coming in the form of stock in Divvy’s new parent company.

Bill.com also reported its quarterly results: Its Q1 included revenues of $59.7 million, above expectations of $54.63 million. The company’s adjusted loss per share of $0.02 also exceeded expectations, with the street expecting a sharper $0.07 per share deficit.

The better-than-anticipated results and the acquisition news combined to boost the value of Bill.com by more than 13% in after-hours trading.

Luckily for us, Bill.com released a deck that provides a number of financial metrics relating to its purchase of Divvy. This will not only allow us to better understand the value of the unicorn at exit, but also its competitors, against which we now have a set of metrics to bring to bear.

Let’s unpack the deal to gain a better understanding of the huge exit and the value of Divvy’s richly funded competitors.

 

5 investors discuss the future of RPA after UiPath’s IPO

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Robotic process automation (RPA) has certainly been getting a lot of attention in the last year, with startups, acquisitions and IPOs all coming together in a flurry of market activity. It all seemed to culminate with UiPath’s IPO last month. The company that appeared to come out of nowhere in 2017 eventually had a final private valuation of $35 billion. It then had the audacity to match that at its IPO. A few weeks later, it still has a market cap of over $38 billion in spite of the stock price fluctuating at points.

Was this some kind of peak for the technology or a flash in the pan? Probably not. While it all seemed to come together in the last year with a big increase in attention to automation in general during the pandemic, it’s a market category that has been around for some time.

RPA allows companies to automate a group of highly mundane tasks and have a machine do the work instead of a human. Think of finding an invoice amount in an email, placing the figure in a spreadsheet and sending a Slack message to Accounts Payable. You could have humans do that, or you could do it more quickly and efficiently with a machine. We’re talking mind-numbing work that is well suited to automation.

 

Twitch UX teardown: The Anchor Effect and de-risking decisions

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Built for Mars CEO Peter Ramsey tears down Twitch’s UX, asking how Twitch rakes in cash and the psychology used within its app to encourage users to keep spending.

Ramsey describes Twitch’s protocol of asking users if they want to subscribe to a streamer before seeing their stream “unnecessarily boolean,” which would be a great band name.

But that’s neither here nor there. Ramsey notes: “Often it’s at the point of clicking, not the final stage of a process, meaning the user decides to buy the item when they click ‘check out now,’ not when they’ve entered their card details and click ‘complete purchase.’
Ramsey argues Twitch shouldn’t make users choose between doing nothing and subscribing: “Instead, if they changed the text to, say, “learn more,” the user could click it without having to internalize the decision.”

To buy time for a failing startup, recreate the engineering process

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In non-aerobatic fixed-wing aviation, spins are an emergency. If you don’t have spin recovery training, you can easily make things worse, dramatically increasing your chances of crashing. Despite the life-and-death consequences, licensed amateur pilots in the United States are not required to train for this. Uncontrolled spins don’t happen often enough to warrant the training.

Startups can enter the equivalent of a spin as well. My startup, Kolide, entered a dangerous spin in early 2018, only a year after our Series A fundraise. We had little traction and we were quickly burning through our sizable cash reserves. We were spinning out of control, certain to hit the ground in no time.

All spins start with a stall — a reduction in lift when either the aircraft is flying too slowly or the nose is pointed too high. In Kolide’s case, we were doing both.

Kolide had a lot going for it that enabled me to recover the company, but by far the most important was that we recognized we were in a spin very early, and we had enough cash remaining (and therefore sufficient time) to execute a recovery plan.

What Square’s smashing earnings tell us about consumer bitcoin demand

Shares of Square are up more than 6% after the American fintech company reported a staggering $5.06 billion in revenue in its Q1 2021 earnings report, far ahead of an expected tally of $3.36 billion.

By posting the huge revenue beat, Square grew 266% compared to its year-ago Q1. Because that’s the sort of growth that we generally expect to see from early-stage startups instead of maturing public companies, some exploration is in order. In short, bitcoin revenues from Square, and how they fit into its accounting, are responsible for much of its outsized growth.

And that’s something we need to talk about.

 

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