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VC Garry Tan shares 3 ways founders screw up their startups

There are many painful ways for a startup to fail — including founders who ultimately throw in the towel and turn off the lights.

But assuming a founder intends to keeps moving forward, there are a few pitfalls that Garry Tan has seen during his career as a founder, Y Combinator partner and, lately, co-founder of venture firm Initialized Capital.

During a fun chat during last week’s TechCrunch Early Stage, he ran us through these avoidable mistakes; for those who couldn’t virtually attend, we’re sharing them with you here.

 1. Chasing the wrong problem

This sounds insane, right? How can you be blamed for wanting to solve a problem?

Tan says people choose the wrong problem for a wide variety of reasons: Founders sometimes choose a problem that isn’t problematic for enough people, he said, citing the example of a hypothetical 25-year-old San Francisco-based engineer who may be out of touch with the rest of the country. When founders target the wrong problem, it typically means that the market will be too small for a venture-like return.

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Hedge Fund’s Run at Tribune Publishing Ends, for Now, With a New Board Seat

Alden Global Capital seemed poised in recent days to take control of Tribune Publishing, the owner of The Chicago Tribune, The Baltimore Sun, The New York Daily News and many other dailies.

After a closed-door session on Wednesday, the New York investment firm ended up with a board seat for one of its founders, Randall D. Smith — and an extension of an agreement, struck last year, that allows it to pursue a majority stake in the Tribune chain next year.

Alden’s designs on Tribune Publishing, a publicly traded company, became clear in November when it revealed that it had become its largest shareholder, with a 32 percent stake. The news led to an outcry from reporters, many of whom have denounced the hedge fund’s habit of slashing newsroom costs at papers it owns through a subsidiary, MediaNews Group.

After this week’s negotiations, Alden agreed not to pursue a significantly larger stake in Tribune Publishing until after the newspaper company’s next annual shareholder meeting, which is scheduled to take place no later than June 15, according to a public filing Thursday.

“Tribune Publishing will continue to focus on our long-term strategy to drive digital growth and invest in high-quality content while reducing legacy costs,” said Philip G. Franklin, the chair of Tribune’s board and not an Alden member, in a statement.

An Alden spokesman did not reply to a request for comment Thursday.

Mr. Smith is the third executive from Alden or affiliated companies to join the Tribune Publishing board, which grew to seven seats, from six. The other Alden representatives are Dana Goldsmith Needleman and Christopher Minnetian.

Few newspapers have been immune to cost cuts since readers started getting their news from digital devices rather than printed pages. In that time, Alden has been aggressive in laying off newsroom employees in an effort to wring profits out of MediaNews Group, which operates roughly 200 publications.

Two years ago, journalists at The Denver Post, a MediaNews Group paper, blasted Alden in a special opinion section. “If Alden isn’t willing to do good journalism here, it should sell The Post to owners who will,” the Post’s editorial board wrote in the lead editorial.

Journalists at Tribune Publishing papers believed they saw fresh evidence of Alden’s cut-to-the-bone style when the company offered buyouts in January.

Then, in February, there was turnover: Terry Jimenez, the Tribune Publishing chief financial officer, replaced Timothy P. Knight as the company’s chief executive.

Weeks later, Mr. Jimenez announced a change in leadership at The Chicago Tribune: Bruce Dold, the publisher and editor in chief, was replaced by Colin McMahon, who had been Tribune Publishing’s chief content officer. Mr. Dold, a winner of a Pulitzer Prize, had worked at the paper for 42 years.

Tribune Publishing also imposed cuts when the coronavirus pandemic hit, including three weeks of furloughs for some employees and permanent pay cuts for others.

As Alden became a significant part of the company, the NewsGuild union teamed with several Baltimore-area benefactors to push for local ownership of The Sun. Matthew D. Gallagher, the chief executive of the Goldseker Foundation in Baltimore, said his group had been “in contact” with Tribune Publishing, but he declined to comment further.

Journalists have also sought new ownership for other Tribune Publishing papers. Among them, a pair of Chicago Tribune investigative reporters lobbied wealthy Chicagoans.

Those pushing for Tribune Publishing to sell its papers to local owners have found an ally in Mason Slaine, an investor who bought a roughly 7 percent stake of the company this spring.

“The newspapers should really be owned by the local communities,” Mr. Slaine, a former chief executive of Thomson Financial, said in an interview last month.

Mr. Slaine, who lives in Boca Raton, Fla., added that he had some interest in buying The Sun Sentinel of South Florida, a Tribune Publishing paper.

In 2018, Dr. Patrick Soon-Shiong, a medical entrepreneur, bought The Los Angeles Times, The San Diego Union-Tribune and other California papers from Tribune Publishing, then known as Tronc, for $500 million. Dr. Soon-Shiong is the second-largest shareholder in Tribune Publishing, with about a quarter of its shares.

Wall Street ownership of newspapers has become common, and Alden helped drive that trend since the Great Recession, when it started grabbing stakes in distressed media companies.

Last year, in a deal financed by the private equity firm Apollo Global Management, the newspaper chain Gannett was acquired by the parent company of GateHouse Media to form a giant that publishes more than 250 dailies. The resulting company, called Gannett, is controlled by another private equity fund, Fortress Investment Group, which is owned by the Japanese conglomerate SoftBank.

McClatchy, another chain, is likely to emerge from the bankruptcy it declared this year into the hands of its largest bondholder, the hedge fund Chatham Asset Management. Alden itself recently disclosed a significant stake in the newspaper chain Lee Enterprises.

Tribune Publishing fell into bankruptcy a decade ago, shortly after it was bought by the Chicago billionaire Sam Zell, who presided over a leadership culture that resembled a frat house.

In 2016, the fund Merrick Ventures became the largest shareholder in the company. Its chairman, Michael W. Ferro Jr., oversaw extensive job cuts before stepping down in 2018, after two women accused him of unwanted sexual advances. Alden then acquired Mr. Ferro’s shares.

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A reading guide to Reliance Jio, the most important tech company in the world

Over the past few months, COVID-19 has brought much of the fundraising community to a standstill. However, amidst it all India’s hyper0growth telco Reliance Jio Platforms has put its fundraising efforts into full gear.

Over the past three months, Jio has raised over $15.5 billion from a cohort of investors that include prominent financial institutions like KKR and Silver Lake Partners, massive sovereign wealth funds like Saudi Arabia’s Public Investment Fund, and some of the biggest names in tech including Facebook.

The recent deals have cemented Mukesh Ambani’s ambition to make his oil-to-retails giant Reliance Industries (India’s most valuable firm) a top homegrown internet giant.

On Friday, he said he plans to publicly list Reliance Jio Platforms and Reliance Retail, the largest retail chain in the country — also controlled by him — in the next five years.

As Reliance Jio Platforms, which has become the India’s top telecom operator with over 388 million subscribers in less than four years, continues its funding spree, at Extra Crunch we are doubling down on our focus on covering everything Jio from here and out.

As we’ve attempted to get up to speed on the company, we’ve compiled a supplemental list of resources and readings that we believe are particularly helpful for learning the story of Jio, which remains a mysterious firm to many.

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Brazil’s BizCapital raises $12 million for its online lending service

BizCapital, an online lender based in Brazil, has raised $12 million from a clutch of investors including the German development finance institution, the corporate venture capital fund of MercadoLibre and existing investors Quona Capital, Monashees, Chromo INvest and 42K Investments.

“This latest round reinforces investors’ confidence in BizCapital’s ability to innovate in the Latin American credit market amid challenging circumstances caused by Covid-19,” said Francisco Ferreira, the company’s chief executive, in a statement. “We have seen four times as many business credit inquiries on our site year over year, and we are ready to serve them.” 

Founded in 2016, the company pitches itself as a fast and reliable way to access financing for working capital. It already has more than 5,000 customers across 1,200 cities in Brazil, according to a statement.

The company said it would use the money to develop new products for Brazilian small and medium-sized businesses and will expand into new distribution channels.

“With this new round of capital, we will continue to widen our product lineup, helping entrepreneurs during the entire lifecycle of their companies,” said Ferreira, in a statement. “There’s never been a more important time for innovation.” 

In a reflection of their American counterparts, Brazil’s venture capital firms had slowed down the pace of their investments, but now it seems like a slew of new deals are coming to market.

The investment reflects the longterm confidence that investors have in the increasingly central position e-commerce and technology-enabled services will have in the future of the Latin American economy.

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African payment startup Chipper Cash raises $13.8M Series A

African cross-border fintech startup Chipper Cash has closed a $13.8 million Series A funding round led by Deciens Capital and plans to hire 30 new staff globally.

The raise caps an event filled run for the San Francisco based payments company, founded two years ago by Ugandan Ham Serunjogi and Ghanaian Maijid Moujaled.

The two came to America for academics, met in Iowa while studying at Grinnell College and ventured out to Silicon Valley for stints in big tech: Facebook for Serunjogi and Flickr and Yahoo! for Moujaled.

The startup call beckoned and after launching Chipper Cash in 2018, the duo convinced 500 Startups and and Liquid 2 Ventures — co-founded by American football legend Joe Montana — to back their company with seed funds.

Two years and $22 million in total capital raised later, Chipper Cash offers its mobile-based, no fee, P2P payment services in seven countries: Ghana, Uganda, Nigeria, Tanzania, Rwanda, South Africa and Kenya.

“We’re now at over one and a half million users and doing over a $100 million dollars a month in volume,” Serunjogi told TechCrunch on a call.

Chipper Cash does not release audited financial data, but does share internal performance accounting with investors. Deciens Capital and Raptor Group co-led the startup’s Series A financing, with repeat support from 500 Startups and Liquid 2 Ventures .

Deciens Capital founder Dan Kimmerling confirmed the fund’s lead on the investment and review of Chipper Cash’s payment value and volume metrics.

Parallel to its P2P app, the startup also runs Chipper Checkout: a merchant-focused, fee-based mobile payment product that generates the revenue to support Chipper Cash’s free mobile-money business.

The company will use its latest round to hire up to 30 people across operations in San Francisco, Lagos, London, Nairobi and New York — according to Serunjogi.

Image Credits: Chipper Cash

Chipper Cash has already brought on a new compliance officer, Lisa Dawson, whose background includes stints with the U.S. Department of Treasury’s Financial Crimes Enforcement Network and Citigroup’s anti-money laundering department.

“You know in the world we live in the AML side is very important so it’s an area that we want to invest in from the get go,” said Serunjogi.

He confirmed Dawson’s role aligned with getting Chipper Cash ready to meet regulatory requirements for new markets, but declined to name specific countries.

With the round announcement, Chipper Cash also revealed a corporate social responsibility component to its business. Related to current U.S. events, the startup has formed the Chipper Fund for Black Lives.

“We’ve been huge beneficiaries of the generosity and openness of this country and its entrepreneurial spirit,” explained Serunjogi. “But growing up in Africa, we’ve were able to navigate [the U.S.] without the traumas and baggage our African American friends have gone through living in America.”

The Chipper Fund for Black Lives will give 5 to 10 grants of $5,000 to $10,000. “The plan is to give that to…people or causes who are furthering social justice reforms,” said Serunjogi.

In Africa, Chipper Cash has placed itself in the continent’s major digital payments markets. As a sector, fintech has become Africa’s highest funded tech space, receiving the bulk of an estimated $2 billion in VC that went to startups in 2019.

Image Credits: TechCrunch

Those ventures, and a number of the continent’s established banks, are in a race to build market share through financial inclusion.

By several estimates — including The Global Findex Database — the continent is home to the largest percentage of the world’s unbanked population, with a sizable number of underbanked consumers and SMEs.

Increasingly, Nigeria has become the most significant fintech market in Africa, with the continent’s largest economy and population of 200 million.

Chipper Cash expanded there in 2019 and faces competition from a number of players, including local payments venture Paga. More recently, outside entrants have jumped into Nigeria’s fintech scene.

In 2019, Chinese investors put $220 million into OPay (owned by Opera) and PalmPay — two fledgling startups with plans to scale first in West Africa and then the broader continent.

Over the next several years, expect to see market events — such as fails, acquisitions, or IPOs — determine how well funded fintech startups, including Chipper Cash, fare in Africa’s fintech arena.

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The complicated calculus of taking Facebook’s venture money

Facebook is reportedly getting into the venture capital game, but for young entrepreneurs working in social media, ignoring or deleting that particular friend request could be the right call.

According to a report in Axios, the company is building up a corporate fund under the auspices of its “New Product Experimentation” team, which launched last year. The company posted a job opening looking for a “head of investments” for the new division and now has new job openings in the group for two “founder” positions in New York City and Menlo Park, California. 

Axios reported that the role would “manage a multimillion dollar fund that invests in leading private companies alongside top venture capital firms and angel investors,” according to a now-deleted post. The new hire will join Shabih Rizvi, a former partner at the Alphabet-backed corporate venture firm, Gradient Ventures, who began his career in venture at KPCB.

While Facebook said that the new investment arm would complement the work that the company already does to support startups through accelerators and hackathons, investors at some of Silicon Valley’s venture capital firms were skeptical. Perhaps with good reason, since the group that houses Facebook’s new investment team is hiring its own “founders” and has already developed a few apps that could compete with existing startups.

“[Money] of last resort,” one investor wrote in a text. Another said it would be a way for Facebook to spot potential acquisitions early enough to avoid triggering antitrust concerns, which may be good for Facebook, but bad for startups. “[Facebook] can’t buy 100 million-user apps any more,” this investor wrote in a direct message. “It needs to buy them closer to 10 million.”

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India’s richest man built a telecom operator everyone wants a piece of

Reliance Jio Platforms secured $10.3 billion in recent weeks from Facebook and others

As investors’ appetites sour in the midst of a pandemic, a three-and-a-half-year-old Indian firm has secured $10.3 billion in a month from Facebook and four U.S.-headquartered private equity firms.

The major deals for Reliance Jo Platforms have sparked a sudden interest among analysts, executives and readers at a time when many are skeptical of similar big check sizes that some investors wrote to several young startups, many of which are today struggling to make sense of their finances.

Prominent investors across the globe, including in India, have in recent weeks cautioned startups that they should be prepared for the “worst time” as new checks become elusive.

Elsewhere in India, the world’s second-largest internet market and where all startups together raised a record $14.5 billion last year, firms are witnessing down rounds (where their valuations are slashed). Miten Sampat, an angel investor, said this week that startups should expect a 40%-50% haircut in their valuations if they do get an investment offer.

Facebook’s $5.7 billion investment valued the company at $57 billion. But U.S. private equity firms Silver Lake, Vista, General Atlantic, and KKR — all the other deals announced in the past five weeks — are paying a 12.5% premium for their stake in Jio Platforms, valuing it at $65 billion.

How did an Indian firm become so valuable? What exactly does it do? Is it just as unprofitable as Uber? What does its future look like? Why is it raising so much money? And why is it making so many announcements instead of one.

It’s a long story.

Run up to the launch of Jio

Billionaire Mukesh Ambani gave a rundown of his gigantic Indian empire at a gathering in December 2015 packed with 35,000 people including hundreds of Bollywood celebrities and industry titans.

“Reliance Industries has the second-largest polyester business in the world. We produce one and a half million tons of polyester for fabrics a year, which is enough to give every Indian 5 meters of fabric every year, year-on-year,” said Ambani, who is Asia’s richest man.

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KKR to invest $1.5 billion in India’s Reliance Jio Platforms

Mukesh Ambani’s Reliance Jio Platforms has agreed to sell 2.32% stake to U.S. equity firm KKR in what is the fifth major deal the top Indian telecom operator has secured in just as many weeks.

On Friday, KKR announced it will invest $1.5 billion in the top Indian telecom operator, a subsidiary of India’s most valued firm (Reliance Industries), joining fellow American investors Facebook, Silver Lake, Vista Equity Partners, and General Atlantic that have made similar bets on Jio Platforms.

The investment from KKR, which has written checks to about 20 tech companies including ByteDance and GoJek in the past four decades, values Reliance Jio Platforms at $65 billion.

The announcement today further shows the appeal of Jio Platforms, which has raised $10.35 billion in the past month by selling about 17% of its stake, to foreign investors that are looking for a slice of the world’s second-largest internet market.

Ambani, the chairman and managing director of oil-to-telecoms giant Reliance Industries that has poured over $30 billion to build Jio Platforms, said the company was looking forward to leverage “KKR’s global platform, industry knowledge and operational expertise to further grow Jio.”

In recent years, India has emerged as one of the biggest global battlegrounds for Silicon Valley and Chinese firms that are looking to win the nation’s 1.3 billion people, most of whom remain without a smartphone and internet connection.

Amazon, Google, Facebook, Microsoft, Xiaomi, and TikTok-parent firm ByteDance among several others already count India as one of their most important overseas markets. In the past decade, nearly half a billion Indians came online for the first time, thanks in large part to Reliance Jio, which has amassed over 388 million subscribers.

An advertisement featuring Bollywood actor Shah Rukh Khan for Reliance Jio (Image: Dhiraj Singh/Bloomberg via Getty Images)

Launched in the second half of 2016, Reliance Jio upended India’s telecommunications industry with cut-rate data plans and free voice calls, forcing incumbents such as Airtel and Vodafone to significantly revise their prices to sustain customers and many to consolidate and exit the market.

Jio Platforms, a subsidiary of Reliance Industries, operates the telecom venture, called Jio Infocomm, that has become the top telecom operator in India.

Reliance Jio Platforms also owns a bevy of digital apps and services including music streaming service JioSaavn (which it says it will take public), on-demand live television service and payments service, as well as smartphones, and broadband business.

“Few companies have the potential to transform a country’s digital ecosystem in the way that Jio Platforms is doing in India, and potentially worldwide. Jio Platforms is a true homegrown next generation technology leader in India that is unmatched in its ability to deliver technology solutions and services to a country that is experiencing a digital revolution,” Henry Kravis, co-founder and co-chief executive of KKR, said in a statement.

“We are investing behind Jio Platforms’ impressive momentum, world-class innovation and strong leadership team, and we view this landmark investment as a strong indicator of KKR’s commitment to supporting leading technology companies in India and Asia Pacific,” he added. This is the single-largest investment (in equity terms) made from KKR’s Asia private equity business to date.

The new capital should also help Ambani, India’s richest man, further solidify his last year’s commitment to investors when he pledged to cut Reliance’s net debt of about $21 billion to zero by early 2021 — in part because of the investments it has made to build Jio Platforms. Its core business — oil refining and petrochemicals — has been hard hit by the coronavirus outbreak. Its net profit in the quarter that ended on March 31 fell by 37%.

In the company’s earnings call last month, Ambani said several firms had expressed interest in buying stakes in Jio Platforms in the wake of the deal with Facebook. Recent investments also pave the way for an initial public offering of Jio, which could happen within five years.

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Kenya’s Apollo Agriculture raises $6M Series A led by Anthemis

Apollo Agriculture believes it can attain profits by helping Kenya’s smallholder farmers maximize theirs.

That’s the mission of the Nairobi based startup that raised $6 million in Series A funding led by Anthemis.

Founded in 2016, Apollo Agriculture offers a mobile based product suit for farmers that includes working capital, data analysis for higher crop yields, and options to purchase key inputs and equipment.

“It’s everything a farmer needs to succeed. It’s the seeds and fertilizer they need to plant, the advice they need to manage that product over the course of the season. The insurance they need to protect themselves in case of a bad year…and then ultimately, the financing,” Apollo Agriculture CEO Eli Pollak told TechCrunch on a call.

Apollo’s addressable market includes the many smallholder farmers across Kenya’s population of 53 million. The problem it’s helping them solve is a lack of access to the tech and resources to achieve better results on their plots.

The startup has engineered its own app, platform and outreach program to connect with Kenya’s farmers. Apollo uses M-Pesa mobile money, machine learning and satellite data to guide the credit and products it offers them.

The company — which was a TechCrunch Startup Battlefield Africa 2018 finalist — has served over 40,000 farmers since inception, with 25,000 of those paying relationships coming in 2020, according to Pollak.

Apollo Agriculture co-founders Benjamin Njenga and Eli Pollack

Apollo Agriculture generates revenues on the sale of farm products and earning margins on financing. “The farm pays a fixed price for the package, which comes due at harvest…that includes everything and there’s no hidden fees,” said Pollak.

On deploying the $6 million in Series A financing, “It’s really about continuing to invest in growth. We feel like we’ve got a great product. We’ve got great reviews by customers and want to just keep scaling it,” he said. That means hiring, investing in Apollo’s tech, and growing the startup’s sales and marketing efforts.

“Number two is really strengthening our balance sheet to be able to continue raising the working capital that we need to lend to customers,” Pollak said.

For the moment, expansion in Africa beyond Kenya is in the cards but not in the near-term. “That’s absolutely on the roadmap,” said Pollak. “But like all businesses, everything is a bit in flux right now. So some of our plans for immediate expansion are on a temporary pause as we wait to see things shake out with with COVID.”

Apollo Agriculture’s drive to boost the output and earnings of Africa’s smallholder farmers is born out of the common interests of its co-founders.

Pollak is an American who who studied engineering at Stanford University and went to work in agronomy in the U.S. with The Climate Corporation. “That was how I got excited about Apollo. I would look at other markets and say “wow, they’re farming 20% more acres of maize, or corn across Africa but farmers are producing dramatically less than U.S. farmers,” said Pollak.

Pollak’s colleague, Benjamin Njenga, found inspiration in his experience in his upbringing. “I grew up on a farm in a Kenyan village. My mother, a smallholder farmer, used to plant with low quality seeds and no fertilizer and harvested only five bags per acre each year,” he told the audience at Startup Battlefield in Africa in Lagos in 2018.

Image Credits: Apollo Agriculture

“We knew if she’d used fertilizer and hybrid seeds her production would double, making it easier to pay my school fees.” Njenga went on to explain that she couldn’t access the credit to buy those tools, which prompted the motivation for Apollo Agriculture.

Anthemis Exponential Ventures’ Vica Manos confirmed its lead on Apollo’s latest raise. The UK based VC firm — which invests mostly in the Europe and the U.S. — has also backed South African fintech company Jumo and will continue to consider investments in African startups, Manos told TechCrunch.

Additional investors in Apollo Agriculture’s Series A round included Accion Venture Lab, Leaps by Bayer, and Flourish Ventures.

While agriculture is the leading employer in Africa, it hasn’t attracted the same attention from venture firms or founders as fintech, logistics, or e-commerce. The continent’s agtech startups lagged those sectors in investment, according to Disrupt Africa and WeeTracker’s 2019 funding reports.

Some notable agtech ventures that have gained VC include Nigeria’s Farmcrowdy, Hello Tractor — which has partnered with IBM and Twiga Foods, a Goldman backed B2B agriculture supply chain startup based in Nairobi.

On whether Apollo Agriculture sees Twiga as a competitor, CEO Eli Pollak suggested collaboration. “Twiga could be a company that in the future we could potential partner with,” he said.

“We’re partnering with farmers to produce lots of high quality crops, and they could potentially be a great partner in helping those farmers access stable prices for those…yields.”

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The Coronavirus Pandemic Helped Topple J. Crew and Neiman Marcus. So Did Private Equity.

J. Crew and Neiman Marcus were each facing a host of issues before the coronavirus pandemic forced them to close their stores and eventually file for bankruptcy, including trouble adjusting to the rise of e-commerce and a lack of connection with a new generation of shoppers.

But they also shared one increasingly common problem for retailers in dire straits: an enormous debt burden — roughly $1.7 billion for J. Crew and almost $5 billion for Neiman Marcus — from leveraged buyouts led by private equity firms. Like many other retailers, J. Crew and Neiman over the past decade paid hundreds of millions of dollars in interest and fees to their new owners, when they needed to spend money to adapt to a shifting retail environment. And when the pandemic wiped out much of their sales, neither had anywhere to go for relief except court.

“Much of the difficulty that the retail sector is experiencing has been aggravated by private equity involvement,” said Elisabeth de Fontenay, a professor at the Duke University School of Law who specializes in corporate finance. “To keep up with everybody’s switch to online purchasing, there really needed to be some big capital investments and changes made, and because these companies were so debt strapped when acquired by private equity firms, they didn’t have capital to make these big shifts.”

The filings by J. Crew and Neiman Marcus followed a wave of retail bankruptcies in the past few years, and came as numerous chains, including J.C. Penney, teetered on the brink because of the pandemic.

In July, a report from the Center for Popular Democracy, a progressive advocacy group in Brooklyn, said 10 of the 14 largest retail chain bankruptcies since 2012 involved companies that private equity firms had acquired.

Barneys New York went into liquidation in November, and Zac Posen, owned by Yucaipa Companies, closed the same month. In March 2019, the North American operation of the Italian brand Roberto Cavalli declared bankruptcy when its private equity owner, Clessidra, failed to sell its stake. In early April, the British department store chain Debenham’s filed for protection for the second time in less than a year.

“You need so much money to keep the stores open, so much money to keep the inventory flowing — an average department store will have 2,500 brands — you need to invest in building, you need to invest in staffing, and most P.E. firms don’t want to make investment before they start seeing the return,” said Marigay McKee, founder of MM Luxe Consulting and a former president of Saks Fifth Avenue.

Private equity firms have been involved with retailers for decades. But the collapse of Toys “R” Us in 2017 put a spotlight on how major buyouts by the firms could go sideways. The chain had been burdened with $5 billion in debt from a 2005 leveraged buyout by the private equity firms Bain Capital and Kohlberg Kravis Roberts and the real estate firm Vornado Realty Trust, and it did not have sufficient funds to invest in its stores and e-commerce business during a crucial period of growth for Amazon and Walmart.

It was eventually liquidated, and more than 30,000 workers were laid off. The workers were not paid severance — even as creditors, bankruptcy lawyers and consultants received payments — until they lobbied pension funds, which invest heavily in funds managed by private equity firms. The situation galvanized politicians and union activists and spurred public outrage.

Image
Credit…Justin Lane/EPA, via Shutterstock

J. Crew, which owns Madewell, and Neiman Marcus, which owns Bergdorf Goodman, have vowed to stay in business, but bankruptcies inevitably raise questions about what the future holds for employees, stores and vendors.

The bankruptcies have also shown how running retail companies requires a specific skill set, particularly when it comes to fashion.

Clothing is an almost entirely discretionary purchase, dependent not just on cycles within the economy but on consumer taste and the images of the brands themselves. Private equity funds often find themselves “seduced a little by the hypified names,” said Sandeep Dahiya, an associate professor of finance at Georgetown University.

Private equity has been flirting with fashion retail since at least 1987, when the Bahrain-based Investcorp began buying shares in the beleaguered family-run Italian brand Gucci, turning the loss-making company around. It cashed out in an initial public offering in 1996, setting a model for the industry and paving the way for such deals as TPG’s 1999 purchase of Bally, Permira’s 2007 acquisition of Valentino Fashion Group and the triple flip of Jimmy Choo from Equinox to Lion Capital to TowerBrook.

Carlyle acquired 48 percent of the Italian fashion brand Moncler in 2008, right as its puffer jackets exploded in popularity. It exited in 2014, the year after Moncler went public. Other private equity deals had mixed results, but Carlyle’s success — combined with a booming luxury sector, especially in Asia, and the lure of real estate embodied by store networks — enticed private equity investors. They saw retail as a cash-generating business, with management often composed of founders or families that could be shaken up and streamlined.

“Retail used to be kind of a golden goose for private equity firms, because in order for an LBO to work, the company has to be fairly mature with fairly regular cash flows,” Ms. de Fontenay said. “Under normal conditions, that’s kind of the definition of retail.”

Image

Credit…Stephen Speranza for The New York Times

It “works out just fine as long as the economy and sector you’re invested in continues to grow,” she added. “If the sector is shrinking, it has been bad news.”

Neiman Marcus was first taken off the market for about $5.1 billion in a 2005 leveraged buyout by TPG and Warburg Pincus. The company was then sold in 2013 to a group led by the private equity firm Ares Management and the Canada Pension Plan Investment Board in a $6 billion deal.

Steve Dennis, founder of SageBerry Consulting and a Neiman Marcus strategy executive from 2004 to 2008, said he knew of at least one firm that backed away from the price tag of the second sale “based on the significant amount of growth to justify it.”

“Anything that would take more than a trivial amount of capital and have a longer payout time doesn’t generally fit with a private equity model,” Mr. Dennis said.

Neiman Marcus filed to go public in 2015, but an I.P.O. never materialized. The company, which said in court filings that it employed about 13,200 people, including 9,500 full-time staff, has spent much of the last two years trying to restructure its roughly $5 billion in debt, on which it has paid hundreds of millions of dollars in interest. Its revenue was $4.9 billion in its last public annual report, which was for the year that ended in July 2018.

Moody’s said last May that Neiman Marcus’s debt levels had reached “unsustainable levels.”

One of Neiman Marcus’s most valuable assets — the luxury e-commerce retailer MyTheresa — was not part of the bankruptcy filing. A group of bondholders have been arguing since 2018 that MyTheresa’s assets were improperly transferred to the company’s owners, leaving little to protect holders of the company’s unsecured debt.

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Credit…Bryan Anselm for The New York Times

Marble Ridge Capital, a hedge fund that holds some of Neiman’s bonds, wrote in a public letter to the owners last month that “you have left a carcass of a company for the remaining stakeholders and have put both Neiman’s storied franchise and thousands of jobs at risk.”

Alex Yankus, a representative for Ares, declined to comment. Darryl Konynenbelt, a representative for the Canada Pension Plan Investment Board, declined to comment.

Amber Seikaly, a spokeswoman for Neiman Marcus, said that since 2014, the company had “invested over $1 billion of capital into our business,” including in new and existing stores, technology and its digital presence.

J. Crew has also faced a rocky road after its $3 billion leveraged buyout by TPG and Leonard Green & Partners in 2011. It weathered fashion missteps, management changes, quality complaints and a general identity crisis. But its debt and related expenses also ate up cash that hurt the company’s ability to reinvest in its products, supply chain and e-commerce platforms.

Americans for Financial Reform, a consumer advocacy group, estimated that J. Crew had paid more than $760 million in dividends and fees to its ownership group since 2011. Those distributions are shared with investors in funds managed by the private equity firms.

Before it began furloughs during the pandemic, J. Crew had 13,000 employees worldwide, with 4,000 full-time workers, according to court documents.

Luke Barrett, a representative for TPG, said that the bankruptcy was “a significant disappointment for everyone” and that the investment “ultimately created loss for both TPG and our investors.”

“When Covid-19 forced the closure of the company’s entire store operations, we worked quickly to modify the capital structure and create a new ownership structure that will serve the long-term interests of J. Crew, its employees and its customers,” he said.

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Credit…Haruka Sakaguchi for The New York Times

A representative for Leonard Green declined to comment.

“One of the defenses of private equity right now is, they’re saying these are structurally declining businesses already, and, look, that is a part of it,” said Andrew Park, a senior policy analyst at Americans for Financial Reform. “But again, having to service that debt makes these businesses hard, and when you see these companies blatantly taking money away, that’s the element that has really led to criticism.”

Mr. Dahiya, the Georgetown professor, said he expected more bankruptcies from retailers backed by private equity firms given the current environment and that he thought it could potentially become a political issue.

“If there is a big retail bankruptcy or liquidation with a lot of job losses and P.E. is involved,” he said, “that would be like catnip to politicians, because retail is something that touches you and me, unlike, say, chemicals.”

Peter Eavis contributed reporting.

Contact Sapna Maheshwari at sapna@nytimes.com or Vanessa Friedman at vanessa.friedman@nytimes.com.

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