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Limited partners or  LPs  — the pension funds, the university endowments, the family offices that largely provide venture firms with their spending money — are receiving a lot of attention from venture capitalists, some of it unwanted. VCs have begun knocking down their doors with requests for fresh capital commitments so they’ll have money to invest if the market cools down.

The problem is, many of these LPs are already over-allocated. LPs traditionally invest in many asset classes, such as public equities, and they allocate a small percentage of their portfolio to venture capital. Suddenly, they’re finding they’ve forked over more than they’d intended to VCs.

There are several reasons for this situation. First, VCs are returning to them ever faster for more capital  — sometimes in less than two years’ time  — because they are in vesting at such a furious pace.

Compounding the problem, not all LPs have received returns from their VC investments that they can recycle into new venture capital allocations. In some cases, this capital is still tied up in startups that are raising much more money than in the past and staying private longer. “We have some large exposures to blue chip names where IPOs have been rumored to be coming for a long time already, and now it’s maybe 2021, maybe 2022,” says one endowment manager who asked not to be named. In other cases where startups have gone public, falling prices have prompted VCs to hang on to their shares instead of distribute them.

The result is that LPs are having to cut back on the number of managers they can fund, and that could mean bad news for venture capitalists and startups alike. These LPs don’t have much choice. As the LP explains it, “We have a pretty structured allocation process, and we’re really trying to be creative,” she says. One venture manager who reappeared too quickly for more money was  “easy to walk away from,” says this person. “Others, we’re having to do financial backflips for them to remain strong partners.”

Either way, this LP adds, “We can’t add any new relationships right now,” meaning new venture teams in particular are out of luck. “When [VCs] shorten their fundraising cycle by nine months to a year, you can only squeeze the balloon so much.”

Backing up the truck

SoftBank’s $ 100 billion Vision Fund is one big reason LPs find themselves in their current predicament. From the moment SoftBank began waving money around several years ago, it launched a vicious cycle.  According to Chris Douvos, whose investment firm, Ahoy Capital, owns stakes in such venture funds as True Ventures and First Round Capital, “When Andreessen Horowitz hit the scene a decade ago, they changed the tempo of investing and everyone got more aggressive in their dealmaking as a response. Then SoftBank entered the picture in a big way, and it was like a16z on steroids.”

In order to compete with SoftBank’s money cannon, other funds supersized their own investment vehicles, and startup valuations soared. Uber and WeWork were prime examples. Uber went public, pricing below expectations, and its shares have been falling ever since. WeWork and its unconventional S-1 filing never made it past the starting gate.

Competitors are enjoying some schadenfreude: they can’t help but delight in SoftBank’s pain. But WeWork’s slow-motion implosion comes at an uncertain moment in time. If a second massive Vision Fund doesn’t come together — and that seems more than likely at this point — it would mean a sharp drop-off in startup funding. That alone might be fine. It might even be healthy for the ecosystem. But the world is also grappling with a U.S. administration that appears increasingly unhinged. More, a recession that seemed far away as recently as early July but could be around the corner.

Collectively, these elements could change the picture dramatically for LPs. Specifically, if LPs aren’t getting enough money back from VCs and their public holdings fall in value because the markets hit the skids, their commitments to venture funds could become even larger as a percentage basis of their overall portfolio. That would create even more imbalance in their asset allocation. Which would mean even less money for new funds. Which would translate into less money for startups. 

It’s a vicious cycle of another kind, in short.

Maybe it won’t happen. We aren’t there yet. But VCs of all sizes would be wise to take a lesson from their entrepreneurs and perfect their pitches. As is becoming clear, LPs can’t dole out capital at the same pace forever, especially without more money coming back to them. If VCs want to continue raising new funds, or raising funds as fast, they’d better have a very good story to tell.


TechCrunch

After erasing over $ 30 billion in projected shareholder value, Adam Neumann will walk away from the We Company with a $ 1.7 billion payout, according to a report in the Wall Street Journal

This is how the company will end, not with the pop of a successful public offering, but with a whimper from defeated investors probably tired after the months-long saga of trying to make sense of how a clever real estate plan ballooned into one of the greatest swindles in venture capital history.

Already ousted as the company’s chief executive, Neumann controlled shares of the company that gave him what amounted to significant control even after his removal.

The We Company drama has it all. Complacent directors, horrible management, rapacious greed — wrapped in a package of holistic spirituality and the invention of a new kind of conscious capitalism. Even if it was ultimately a capitalism that was conscious only of its ability to deceive.

As Neumann leaves, Softbank will gain control of the company it had once valued at $ 47 billion, but at a far more modest $ 8 billion figure. Still, the bid was more attractive to We Company’s board of directors than a competing offer from JPMorgan Chase, according to the Journal’s reporting.

Under the terms of the deal, Softbank will buy nearly $ 1 billion in stock from Neumann, who was already forced out from the company he co-founded as public markets balked over his managerial acumen. The Japanese conglomerate, which had pushed up the private market valuation of WeWork through its $ 100 billion Vision Fund, will also stake Neumann $ 500 million in credit to repay a loan facility and give him a $ 185 million consulting fee.

Even with the Hindenburg-level catastrophe that Neumann piloted as the chief executive of the money losing real estate venture, the former chief executive will still retain a stake in the company and remain an observer on the board of directors.

In all, Softbank is putting in a tender offer for as much as $ 3 billion to go to the company’s employees and other investors. In fact, WeWork needs the money to be able to afford the layoffs it reportedly wants to make as it tries to right the ship.

People with knowledge of the company’s plans said the decision could be announced today, according to the Journal’s reporting.

Part of the reason for the $ 500 million loan was that Neumann’s removal from the executive role at the company risked putting him in default with his JPMorgan loans.

WeWork revealed an unusual IPO prospectus in August after raising more than $ 8 billion in equity and debt funding. Despite financials that showed losses of nearly $ 1 billion in the six months ending June 30, the company still managed to accumulate a valuation as high as $ 47 billion, largely as a result of Neumann’s fundraising abilities.

“As co-founder of WeWork, I am so proud of this team and the incredible company that we have built over the last decade,” Neumann said in a statement confirming his resignation last month. “Our global platform now spans 111 cities in 29 countries, serving more than 527,000 members each day. While our business has never been stronger, in recent weeks, the scrutiny directed toward me has become a significant distraction, and I have decided that it is in the best interest of the company to step down as chief executive. Thank you to my colleagues, our members, our landlord partners, and our investors for continuing to believe in this great business.”

 


TechCrunch

How funding rounds are classified these days has much more to do with positioning than any VC definitions, but it’s still true that nothing has quite the pizazz as the “strategic investment” celebrity party round.

Sandbox VR, a location-based virtual reality startup that capped off a huge $ 68 million Series A led by Andreessen Horowitz at the beginning of the year, is bringing on some new investors in a $ 11 million “strategic” round, let’s call this one the Series A-listers round.

Yeah, there were a couple Silicon Valley folks, David Sacks and the Andreessen Horowitz Cultural Leadership Fund led the round, but they joined the much glitzier names of celebs including Justin Timberlake, Katy Perry, Orlando Bloom and Will Smith. Other investors include Michale Ovitz, Honda Keisuke and Kevin Durant.  Some of the investors in this latest round don’t have much in common beyond being LPs in the Andreessen Horowitz Cultural Leadership Fund, which seems to be the glue holding these stars together.

topanga4

Sandbox VR operates physical spaces, generally in retail locations, that users can play multiplayer virtual reality games inside with friends. It’s a next-generation arcade of sorts that’s relying on expensive new technology to attract customers, but that formula hasn’t been a slam dunk for plenty of other VR startups, and it’s forced the leadership to get creative.

“It’s a difficult space to be in, because it’s one of those spaces where you have to be three startups in one,” Sandbox VR exec Siqi Chen told TechCrunch in an interview. “You have to build your own content, build your own technology and construct and operate retail locations.”

While most virtual reality startups that have raised substantial amounts of capital have had to dump it into R&D, Sandbox’s business is more focused on pinning virtual reality experiences to physical real estate giving the curious a hub to try out the technology.

Sandbox has plenty of obstacles ahead, the most dire of which will be building a content ecosystem that’s exclusive to the system. Even Facebook’s Oculus has struggled to court established studios to the system without bankrolling development, a process that could get very expensive very quickly for Sandbox. Consumer expectations are also quite high given the steep $ 48 ticket prices for the 30 minute experience. Sandbox recently partnered with CBS Interactive Studios to create a title based on Star Trek IP.

Sandbox will have to compete with consumer headsets like the Oculus Quest that are far cheaper and simpler than previous-generation at-home headsets. The startup will also have to find ways to deepen experiences while still relying on plenty of off-the-shelf consumer hardware. Sandbox’s success relies at least a bit on consumer VR headset adoption growing at a sluggish pace, something Facebook is still spending billions to accelerate.

Generating venture-sized returns will undoubtedly involve more than jacking up ticket prices for more immersive games, though we haven’t heard much of a grand vision from the young startup yet. Whatever Sandbox does, the team is going to have to walk in the same footsteps of many VR companies before it all while improving perceptions of the technology, something the company’s executives hope their new celebrity investor friends can help with.

For Sandbox, gathering attention from celebrities like Kanye West has already been part of the strategy. “Part of it is brand, in that VR is not perceived as a cool thing to do,” Chen says. “So having influential people onboard helps with that perception a bit.”

Sandbox has 16 locations planned by the end of 2020. The company has now raised a whopping $ 82 million.


TechCrunch

India said on Monday that it is moving ahead with its plan to revise existing rules to regulate intermediaries — social media apps and others that rely on users to create their content — as they are causing “unimaginable disruption” to democracy.

In a legal document filed with the country’s apex Supreme Court, the Ministry of Electronics and Information Technology said it would formulate the rules to regulate intermediaries by January 15, 2020.

In the legal filing, the government department said the internet had “emerged as a potent tool to cause unimaginable disruption to the democratic polity.” Oversight of intermediaries, the ministry said, would help in addressing the “ever growing threats to individual rights and nation’s integrity, sovereignty and security.”

The Indian government published a draft of guidelines for consultation late last year. The proposed rules, which revise the 2011 laws, identified any service — social media or otherwise — that have more than 5 million users as intermediaries.

Government officials said at the time that modern rules were needed, otherwise circulation of false information and other misuse of internet platforms would continue to flourish.

The Monday filing comes as a response to an ongoing case in India filed by Facebook to prevent the government from forcing WhatsApp to introduce a system that would enable revealing the source of messages exchanged on the popular instant messaging platform, which counts India as its biggest market with more than 400 million users.

Some have suggested that social media platforms should require their users in India to link their accounts with Aadhaar — a government-issued, 12-digit biometric ID. More than 1.2 billion people in India have been enrolled in the system.

Facebook executives have argued that meeting such demands would require breaking the end-to-end encryption that WhatsApp users enjoy globally. The company executives have said that taking away the encryption would compromise the safety and privacy of its users. The Supreme Court will hear Facebook’s case on Tuesday.

India’s online population has ballooned in recent years. More than 600 million users in India are online today, according to industry estimates. The proliferation of low-cost Android handsets and access to low-cost mobile data in the nation have seen “more and more people in India become part of the internet and social media platforms.”

“On the one hand, technology has led to economic growth and societal development, on the other hand there has been an exponential rise in hate speech, fake news, public order, anti-national activities, defamatory postings, and other unlawful activities using Internet/social media platforms,” a lower court told the apex court earlier.


TechCrunch

Global retail e-commerce is expected to be a $ 25 trillion business this year, and today one of the companies that has built a set of tools to help larger enterprises to sell to consumers online has raised a large growth round to meet that demand. Commercetools, a German startup that provides a set of APIs that power e-commerce sales and related functions for large businesses, has raised $ 145 million (€130 million) in a growth round of funding led by Insight Partners, at a valuation that we understand from a close source is around $ 300 million.

The funding comes at the same time that commercetools is getting spun out by REWE, a German retail and tourist services giant that acquired the startup in 2015 for an undisclosed amount.

The route the company took after that is a not-totally-uncommon one for tech startups acquired by non-tech companies: commercetools had been acquired by REWE as part of a strategy to take some of its own e-commerce tech in-house, but commercetools had always continued to work with outside clients and has been growing at about 110% annually, CEO and co-founder Dirk Hoerig said in an interview.

Current companies include Audi, Bang & Olufsen, Carhartt, Yamaha and some very big names in retail products and services (including major telco/media brands in the USA that you will definitely know). Ultimately, the decision was taken to bring in outside funding and spin out the businesses as an independent startup once again to supercharge that growth. REWE will remain a significant shareholder with this deal.

Hoerig said that commercetools had raised only around $ 30 million in outside funding when it was a startup ahead of getting acquired.

Although e-commerce has grown over the last couple of years with slightly less momentum than in previous years given wider economic uncertainty, it continues to expand, and in that growth, we’ve seen a swing back to individual retail brands looking for ways of connecting more directly with customers outside of the third-party marketplaces (like Amazon) that have come to dominate how people spending money online.

That is giving a boost to those providing essentially non-tech businesses the tools to build e-commerce activity by offering “headless” tools that are attached to front-end systems designed by others.

Shopify — coincidentally, also backed by Insight when it was still a private company — focuses more on providing e-commerce tools by way of APIs to medium and smaller customers, and it has ballooned to some 800,000 customers. Commercetools, in contrast, focuses more on companies that typically generate revenues in excess of $ 100 million annually, Hoerig said.

Commercetools has no plans to expand to smaller companies — “We have no plan to compete against Shopify,” Hoerig said. Nor is there any strategy in place to extend into logistics, another important component of e-commerce services.

That’s not to say that commercetools doesn’t have a crowded field when it comes to competition, though. Hoerig noted that companies like SAP, Oracle and IBM are typical competitors and are more often already the incumbent provider to large enterprises. Then, there are others like Microsoft, in hot competition with Amazon for cloud customers, also expanding their commerce services for business. Companies typically make the change to replace them with something like commercetools, he said, when they decide they need a “more modern” approach.

In all (if that list alone wasn’t a strong enough hint), the wider market for e-commerce tools is very fragmented.

“Even SAP has only something like a 2% share,” he added.

Today, commercetools offers a range of services, starting at APIs to power the basics of webshops and mobile sites, along with IoT services (“machines buying from machines,” Hoerig noted), powering chatbots, the architecture for running marketplaces, social commerce services (for example, powering selling through Instagram), and augmented reality. It currently integrates with Adobe, Frontastic, Bloomreach and Magnolia.

Commercetools plans to use the funding to continue expanding its business in North America and other parts of the world, as well as to continue building up its B2B2B offering — that is, tools for businesses to sell to other businesses. This is an area that companies like Alibaba are very strong in (and Amazon has been also growing its business), and the idea is to provide tools to let companies sell on their own sites either as a complement to, or to replace, third-party marketplaces.

Another area where it will continue to figure where it can play better is in the development of better online-to-offline technology.

Richard Wells and Matt Gatto of Insight are both joining the board with this deal.

“With a strong track record of investing in retail software leaders, we are excited to have the opportunity to invest in commercetools and help them scale up internationally,” said Wells in a statement. “In our opinion commercetools represents the next wave of enterprise commerce software and has the potential to unlock powerful innovation and growth within the e-commerce sector.”


TechCrunch

Facebook is willing to reverse course on its plans to tie its digital currency project to a synthetic currency tied to a basket of global currencies.

Reuters is reporting that Facebook’s head of the Libra project, David Marcus, told a group of bankers that the company’s main goal was to create a better payments system and was open to alternative approaches to the original structure of the project.

Facebook and its partners had intended to create its cryptocurrency by pegging it to a basket of national currencies whose holdings would be set by the Libra Association.

National banks considered the plan part of a dangerous end-run around their regulatory authority and have been holding up the project until they could assume tighter control over how the Facebook-architected cryptocurrency and payment technology would operate.

The scrutiny from regulators proved too much for some of Facebook’s largest, and earliest, partners in the Libra Association, whose members would determine how the cryptocurrency would operate.

In the past month seven of the Libra Association’s founding members dropped out including: PayPal, Mastercard, Visa, Ebay, and Stripe. Those seven represented a big chunk of the strategic value and commercial heft of the planned association, with Stripe, Mastercard, Visa, and Ebay standing in for a huge number of payment processors and merchant touchpoints that the new cryptocurrency would need were it to dramatically scale to the size Facebook wanted right out of the gate.

Now, in another strategic reversal, Marcus is conceding the synthetic currency in favor of stablecoins tied to the local currency in each market that Libra would operate.

 

“We could do it differently,” Reuters quoted the Libra Association chief as saying. “Instead of having a synthetic unit … we could have a series of stablecoins, a dollar stablecoin, a euro stablecoin, a sterling pound stable coin, etc.”

All of this is happening against the backdrop of Facebook’s stated launch date of June 2020 for the Libra cryptocurrency. Marcus told Reuters that the June launch was still the goal, but that the association would not move forward unless it had addressed the concerns of regulators and received the proper approvals.

Those approvals are becoming harder to come by as the regulators who overseen global monetary policy cast a more skeptical eye at on stablecoins as well.

Reuters reported that the G-20 financial overseers wrote in a statement that money laundering, illicit finance and consumer protection need to be evaluated before any stablecoin projects can “commence operation.”

 


TechCrunch

Welcome to TechCrunch’s China roundup, a digest of events that happened at major Chinese tech companies and what they mean to tech founders and executives around the world.

The talk about U.S.-China relationships over the past two weeks has centered heavily on the NBA controversy, which has put the interest of some of China’s largest tech firms at stake. Last week, Houston Rockets general manager Daryl Morey voiced support for Hong Kong protests in his since-deleted tweet, angering China’s NBA fans and prompting a raft of local tech companies to sever ties with the league. But some businesses seem to be back on track.

Tencent, which is famous for a slew of internet products, including WeChat and its Netflix-like video service, has been NBA’s exclusive streaming partner since 2009 and recently renewed the deal through the 2024-25 season. As many as 490 million fans in China watched NBA programming through Tencent in just one season this year, the pair claims.

The basketball games are clearly a driver of ad revenue and subscribers for Tencent amid fierce competition in China’s video streaming market, but following Morey’s statement, the company swiftly announced (in Chinese) it would suspend portions of its broadcast arrangements with the NBA. Popular smartphone brand Vivo and Starbucks’s local challenger Luckin also promised to pause collaboration with the NBA.

It was a tough call for businesses having to choose between economic interest and patriotism, and Tencent was tactful in its response, pledging only to “temporarily” halt the streaming of NBA “preseason games (China).” As public anger subsided over the week, Tencent resumed airing NBA preseason games on Monday. After all, the content partnership reportedly cost Tencent a heavy sum of $ 1.5 billion.

Entertainment giant turns to education

tiktok edutok

TikTok is probably the Chinese Internet service being most closely watched by the world at the moment. Its parent firm ByteDance, last reportedly valued at $ 75 billion, has ambitions beyond short videos.

This week, more details emerged on the upstart’s education endeavors through a WeChat post by Musical.ly founder Lulu Yang, whose short-video startup was acquired by ByteDance and subsequently merged with TikTok. Yang confirmed he was helping ByteDance to develop an education device in collaboration with phone maker Smartisan’s former hardware team, which ByteDance has absorbed. The product, which leverages ByteDance’s artificial intelligence capabilities, will be a “robotic learning companion” for K-12 students to use at home.

The news arrived in the same week that ByteDance’s flagship video app TikTok announced producing educational content for India, where it’s used by 200 million people every month. The move is designed to assuage local officials who have vehemently slammed TikTok for hosting illicit content, as my colleague Manish Singh pointed out.

Diving into education appears to be a sensible move for ByteDance to build relationships with local authorities, which can at times find its entertainment-focused content problematic. The multi-billion-dollar online education industry is also highly lucrative. ByteDance, with 1.5 billion daily users across TikTok, Douyin (TikTok for China), Toutiao news aggregator and other new media apps, is in a good position to monetize the enormous base by touting new services, whether they are educational content or mobile games.

Also worth your time

  • A total of 53 major video streaming services in China have introduced a “safe mode” for teenagers as of this week, state media reported (in Chinese). During the controls mode, underage users won’t be able to search for content, send real-time comments or private messages, upload or share videos, or reward live streaming hosts with virtual gifts. It’s part of China’s national effort to protect young people from consuming harmful digital content and internet addiction, which has also spawned age checks processes in Tencent games. 
  • Xiaohongshu, a fast-growing social commerce app in China, is back in Android app stores nearly three months after it was banned by the government for undisclosed reasons. Rumors had it that the service, which was reportedly valued at more than $ 2.5 billion last year, was used to spread pornography and fake reviews. It’s hardly the first tech company hit by media regulation, and it can probably learn a thing or two from ByteDance, which has aggressively ramped up its content moderation force following a sequence of crackdowns by the government.
  • Meituan will partner with 1,000 vocational schools in the country to train as many as 100 million workers from the service industry over the next ten years, the Hong Kong-listed company announced (in Chinese) this week. Food delivery makes up the bulk of the on-demand services giant’s business but its footprint spans a wide range. The classes it provides to prepare workers for a digital era will also touch upon skincare, hair styling, manicure, plastic surgery, hospitality and parenting, a program highlighting the extensive reach of technology into Chinese people’s every life.
  • Chinese workers turn out to be big advocates for the application of AI. According to a survey by Oracle and research firm Future Workplace, workers in India (60 percent) and China (56 percent) are the most excited about AI. Japan, where the labor force is shrinking, ranks surprisingly low (25 percent), and the U.S. has an equally mild reaction (22 percent) toward the technology.


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