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The Exchange: Which VCs are the most popular, why enterprise startups are hot, and how patient are public investors?

Welcome to The Exchange, an upcoming weekly newsletter featuring TechCrunch and Extra Crunch reporting on startups, money and markets. You can sign up for it here to receive it regularly when it launches on July 25th, and catch up on prior editions of the column and newsletter here

It’s Saturday, July 18, and this is The Exchange. Today we’re wrapping our look at second-quarter VC, capping off the recent IPOs of some venture-backed startups, and digging into the hottest VCs while peeking at a new startup trend.

Venture capital activity by the numbers

As July rubs along we’re getting deeper into the third quarter of 2020, meaning it’s time to close the books on Q2. To that end The Exchange combed through all the second-quarter VC data that we could this week.

But, despite working to grasp the health of the global venture scene, the United States’ own venture capital totals, and diving more deeply into AI/ML startups and how women-founded startups fundraised in Q2, there’s still more data to sift.

Keeping brief as we are a bit charted-out, New York City-based venture capital group Work-Bench released a grip of numbers detailing the city’s enterprise-focused startups’ Q2 VC results. Given that Work-Bench invests in enterprise tech, the data’s focus was not a surprise.

The numbers, per the firm, look like this:

  • NYC enterprise tech startups raised 51 rounds in Q2 worth $1.5 billion, above Q1 totals of 44 deals worth $1.3 billion
  • Those quarterly results were the best recorded, according to a Work-Bench historical analysis of enterprise tech deals since at least the start of 2014
  •  Q1 and Q2 2020 were so active in the sector and city that the first half of this year saw nearly as many deals and dollars ($2.7 billion in 95 total deals) than the same cohort and metropolis managed in all of 2019 ($3.3 billion in 114 total deals).

The data is not surprising. B2B startups are raking in a larger share of venture capital rounds as time goes along, so to see NYC’s own enterprise-focused startups doing well is not shocking. (And if you add in the recent $225 million UIPath round, the Big Apple’s enterprise startups are even closer to their 2019 venture dollar benchmark, though the UIPath deal came in Q3.)

One last bit of data and we are done. Fenwick & West, a law firm that works with startups, released a report this week concerning Silicon Valley’s own May VC results. Two data points in particular from the digest stood out. Chew on these (emphasis TechCrunch):

The percentage of up-rounds declined modestly from 71% in April to 67% in May, but continued [to be] noticeably lower than the 83% up-rounds on average in 2019. […] The average share price increase of May financings weakened noticeably, declining from 63% in April to 43% in May. The results for both April and May were significantly below the 2019 average increase of 93%.

The Q2 data mix then shakes out to be better than I would have expected with plenty of highlights. But if you look, it isn’t hard to find weaker points, either. We are, after all, in the midst of a pandemic.

Going public in a pandemic

nCino and GoHealth went public this week. TechCrunch got on the blower afterwards with nCino CEO Pierre Naudé and GoHealth CEO Clint Jones. By now you’ve seen the pricing pieces and notes on their companies’ early performance, so let’s instead talk about why they chose to pursue traditional IPOs.

Our goal was to understand why CEOs are going public through initial public offerings when some players in the venture space have soured on traditional IPOs. Here’s what we gleaned from the leaders of the week’s new offerings:

nCino: Naudé didn’t want to dig into nCino’s IPO process, but did note that he read TechCrunch’s coverage of his company’s IPO march. The CEO said that his firm was going to have an all-hands this Friday, and then get back to work. Naudé also said that becoming a public company could help the nCino brand by helping others understand the company’s financial stability. The company’s larger-than-expected IPO haul (one point for the old-fashion public offering, we suppose) could provide it with more options, we learned, including possibly upping its sales and marketing spend.

  • The Exchange’s take: It’s very hard to get a CEO to say on the record that a different approach to the public markets than the one they took was enticing. Nothing that Naudé was off-script for a newly public company.

GoHealth: Jones told TechCrunch that GoHealth’s IPO was oversubscribed, implying good pre-IPO demand. When it came to pricing, GoHealth worked through a number of scenarios according to the CEO, who didn’t have anything negative to share about how his company finally set its IPO valuation. He did bring up the importance of collecting long-term investors.

  • The Exchange’s take: GoHealth shares dipped after the company went public, so its offering won’t engender the usual complaints about mispricing. nCino, in contrast, shot higher, making it a better poster child for the direct-listing fans out there.

The method by which a company goes public is only a piece of the public-markets saga that companies spin. Once public, either through a direct listing or SPAC-led reverse-IPO, all companies become lashed to the quarterly reporting cycle. Even more common than complaints about the IPO process among Silicon Valley is the refrain that public investors are too short-term-focused to let really innovative companies do well once they stop being private.

Is that true? TechCrunch spoke with Medallia CEO Leslie Stretch this week to get notes on the current level of patience that public investors have for growing tech companies; are public markets as impatient as some claim? 

According to Stretch, there can be enough space in the public markets for tech shops to maneuver. At least that was his take a year after Medallia’s own 2019 IPO (transcript edited by TechCrunch for clarity; additions denoted by brackets):

[Our] partnership with public investors has been phenomenal. They really test you, you know? They really test your proposition, [and] they test your operational resilience in a way that just makes you better. And they give you feedback. Our philosophy is feedback always makes you better.

What people want to do is they want to crest the really big growth rate [that] is unassailable, it can’t be challenged. And then you come out in public, and it’s a no brainer. And some companies managed to do that. But of the [thousands of Series] A rounds that took place in early 2000s, you know, only 75 companies made it public. Right? We’re one of them.

I’m not fearful. I don’t think people should be fearful of [going public]. They should partner with public investors. The stock price, and the quarter-to-quarter, will be what it will be. Don’t worry about that. It’s what are you building for the long term, and make sure you have enough cash, of course, to meet your ambitions. [But] also a bit of fiscal discipline actually makes your products better, because you think how about how you invest, and harder about your priorities. That’s my view on [the] public piece.

Who wants to bet that unicorns keep putting off their IPOs anyways?

Odds & Ends: Popular VCs, extensions, and more

Let’s wrap with some fun stuff, kicking off with the TechCrunch List, a dataset that set out to figure out which VCs were the most likely to cut first checks. I’ve already used it to help put together an investor survey (stay tuned). It’s in front of the Extra Crunch paywall, so give it a whirl.

If you are part of Extra Crunch, Danny also pulled out an even more exclusive list that we built off the back of thousands of founder comments.

And I have two trends for you to think on. First, a wave of startups are trying to make our new, video-chatting based world a better place to be. It will be super interesting to see how much space is left in the market by the incumbent players currently battling for market leadership.

Second, some startups are raising extension rounds not only because they need defensive capital, but because they’ve caught a tailwind in the COVID era and want to go even faster. So, from a somewhat safe move, some extension rounds these days are more weapons than shields.

And that’s all we have. Say hi on Twitter if there’s something you want The Exchange to explore. Chat soon!

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nCino sharply raises its IPO price range, boosting possible valuation to $2.6B

As expected, fintech company nCino has raised its IPO price range. The North Carolina-based banking software firm now expects to sell its shares for between $28 and $29 per share, far more than its initial price range of $22 to $24 per share.

At its $28 to $29 per-share price interval, nCino is worth $2.50 billion to $2.59 billion, sharply more than its preceding $1.96 billion to $2.14 billion range.

The valuation makes more sense for the company, given its growth rate, revenue scale and how the market is currently valuing similar companies. As TechCrunch wrote earlier this week, concerning the SaaS company’s scale and value (emphasis ours):

Annualizing the company’s Q1 (the April 30, 2020 period) revenue results, nCino’s $178.9 million run rate would give it a revenue multiple of 11x to 12x at its expected IPO prices, a somewhat modest result by current standards.

Indeed, as nCino grew about 50% from Q1 2019 to Q1 2020, it feels light. The firm’s GAAP losses are slim compared to revenue as well for a SaaS business, though the company’s operating cash burn did grow from $4.6 million in its fiscal year ending January 31, 2019 to $9 million in its next fiscal year. Its numbers are mostly good, with some less-than-perfect results. Still, given its growth rate, an 11x-12x revenue multiple feels modest; that figure rises, of course, if we use a trailing revenue figure instead of our annualized number.

It would not be a shock, then, if nCino targets a higher price interval for its shares before it formally prices.

With its new IPO price range, nCino’s implied revenue multiple is now 14x to 14.5x, figures that seem far closer to present-day norms.

Now the question for nCino, which is expected to price and trade next week, is whether it can price above its raised range. Given some recent historical precedent, a $1 per-share price beat above its raised interval would not be a shock.

nCino is one of two companies we’re currently tracking on its way to the public markets. The other is GoHealth, which is expected to go public around the same time. Expect next week to be chock-full of IPO news. Heading into earnings season no less!

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Fintech startup nCino targets ~$2B valuation in impending IPO

As IPO season continues, another venture-backed tech company is moving closer toward going public. This week nCino filed an updated S-1 filing, providing an initial price range for its equity of $22 to $24 per share.

Indeed, nCino, a fintech startup that provides operating software to banks, intends to sell 7.625 million shares in its debut, worth $167.75 million to $183 million at those prices. Including shares offered to its underwriters, its haul grows to between $192.9 million and $210.5 million.

Discounting the extra shares, nCino is worth between $1.96 billion to $2.14 billion at its current price range.

The startup’s software is what nCino calls a “bank operating system,” providing banking software to help financial entities with lending, customer resource management, account opening and more. It’s a rich space for innovation, given the banking industry’s complexity and wealth. Smaller startups are also working along related lines.

Normally at this point in an IPO process we compare the debuting company’s valuation range with its final private valuation. However, it’s hard to find out what nCino was worth. PitchBook and Crunchbase are bare regarding its last private round, as are other data sources we checked.

Notably, nCino has no preferred stock, so spelunking through different series of preferred equity sourced from S-1 data wasn’t possible. However, the company was healthy — and therefore, valuable — enough to raise more than $130 million across two rounds in 2018 and 2019, including an $80 million round from last October led by Chip Mahan and T. Rowe Price.

Regardless of where nCino priced toward the end of its life as a private company, its IPO is a likely win for both Salesforce and Insight Partners. The corporate venture arm of Salesforce and the well-known venture group own 13.2% and 46.6%, respectively, of nCino’s equity before IPO shares are counted; expected ownership for the two groups falls to 12.1% and 42.6%, respectively, when including anticipated IPO equity.

According to Crunchbase data, Insight Partners led nCino’s Series B and C in 2014 and 2015, while Salesforce Ventures led its $51.5 million 2018 round; Salesforce also took part in several of the company’s early rounds, helping to explain its double-digit stake in the firm.

So what?

Modern software companies, often called SaaS firms, set new valuation records this week on the public markets following earlier highs set in Q2. Their performance hints that nCino could find warm welcome from public investors.

Does that fact fit with the valuation that the above-detailed pricing indicates that nCino may achieve? Annualizing the company’s Q1 (the April 30, 2020 period) revenue results, nCino’s $178.9 million run rate would give it a revenue multiple of 11x to 12x at its expected IPO prices, a somewhat modest result by current standards.

Indeed, as nCino grew about 50% from Q1 2019 to Q1 2020, it feels light. The firm’s GAAP losses are slim compared to revenue as well for a SaaS business, though the company’s operating cash burn did grow from $4.6 million in its fiscal year ending January 31, 2019 to $9 million in its next fiscal year. Its numbers are mostly good, with some less-than-perfect results. Still, given its growth rate, an 11x-12x revenue multiple feels modest; that figure rises, of course, if we use a trailing revenue figure instead of our annualized number.

It would not be a shock, then, if nCino targets a higher price interval for its shares before it formally prices. The firm is expected to price next Tuesday and trade the next day, the same time frame as GoHealth. More when we have it.

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