Contrary Research Rundown #45
The state of startup acquisitions, plus new memos on Glean, Homebound, and more
Research Rundown
At Contrary Research, we have dozens of Research Fellows, a handful of collaborative writers, and the broader team at Contrary including engineers, data scientists, writers, investors, and more. Across that team, we’re constantly sharing what we’re reading and that’s what makes up some of the links that we share below.
However, this week there were three common news items that spoke to a larger trend going on. First, cyberinsurance startup Coalition acquired Jumbo, a mobile app for online privacy. Second, Crowdstrike is in talks to acquire Bionic.ai, a security posture management platform. And finally, Upgrade, a personal credit platform acquired Uplift, a BNPL startup. Several of these acquisitions were priced at ~$100 million - $300 million.
With the market correction we’ve seen over the course of the last 18 months, a lot has been said about the immense slowdown in tech M&A activity. PwC recently published a report highlighting the drop off.
While the last 18 months have certainly seen a decline in the number of deals, but trends in the size of potential deals have even bigger implications for how the venture landscape is changing. Obviously, there are still mammoth acquisitions on the horizon like Adobe’s $20 billion acquisition of Figma, or Microsoft’s $69 billion acquisition of Activision. But those are exceptions, rather than the rule. And that may increasingly be the case. The same could be said about companies like Snowflake and Cloudflare trading at 15x forward revenue (or more). Exceptions, not the rule.
Sam Lessin, an investor at Slow Ventures, made an important point on this idea of adjusted expectations for how big company outcomes can be (whether through M&A or IPO). In May 2022, Lessin published an essay explaining how capital is effectively a supply chain. Early-stage investors invest in what later-stage investors want to buy, and later-stage investors want to buy what they buy because they believe that is what public market investors want to buy. But what happens when nobody knows what the other wants to buy?
This week, Lessin published another essays on the impact it has on seed investing when the public markets have decided that the average run-of-the-mill tech company isn’t worth very much. When I look at acquisitions from this week, like Bionic or Uplift, at $100 million - $300 million, you have to realize that those valuations fall in a typical Series B valuation range, even today after a lot of valuation correction. In 2021, Series B rounds were getting done at $300 million or even $1 billion valuations.
What about “run-of-the-mill” tech companies that went through IPO? Companies like Braze, Amplitude, or Expensify saw valuations in 2021 as high as $4 billion - $8 billion. Others like Asana were as high as $26 billion. Today? All four companies are between $600 million and $5 billion in market cap.
Of all the venture-backed startups out there, only ~11% go public or get acquired. So for early-stage investors, the math becomes a lot more difficult to make work if only 1 in 10 of your bets will make it, and of those bets that do make it the size of the outcome is, on average, probably $500 million to $1 billion outcomes. Those smaller outcomes mean investors need lower entry valuations, and higher ownership to justify the returns they’ve promised to LPs.
Will the exceptions continue to exist, like Databricks’ $1.3 billion acquisition of MosaicML? Definitely. But more outcomes may look like X1’s acquisition for $95 million, Mode Analytics’s acquisition for $200 million, Berbix’s for $70 million, or Paperspace for $111 million. Don’t get me wrong, those can be exceptional outcomes. But not if investors are investing at those prices to begin with. That’s why we may see big changes in which companies get funded, and at which prices.
Citizen is trying to create a digital safety network that leverages real-time information on crimes to increase the public’s awareness of safety issues. To learn more, read our full memo here.
Homebound is a tech-enabled custom homebuilder that seeks to make building the perfect home simple, transparent, and human. To learn more, read our full memo here.
Glean is a productivity startup that has developed a smart enterprise search assistant by indexing and understanding the context of documents from dozens of products through the use of 100+ APIs. To learn more, read our full memo here.
Motive offers a full-suite, vertical-specific application which consolidates many software tools required for running a trucking and logistics business, including vehicle tracking, telematics, compliance, trucker safety, maintenance, spend management and more. To learn more, read our full memo here.
Anduril recently announced its partnership with the U.S. Space Force in integrating the company’s software with space surveillance sites. Just in time for U.F.O.s to become common topics of discussion!
In other Anduril news, John Coogan, YouTuber and EIR at Founders Fund, produced a 42 minute video overview of the history of Anduril, and Lucky Palmer’s journey.
Arjun Mahadevan, the CEO of Doola, shared some words of advice from Michelle Zatlyn, the co-founder, president, and COO of Cloudfare. “I think if you’re a founder and you’re not sure, that’s OK. There are lots of ways to be successful. If you talk to a hundred successful founders, you will get a hundred different ways.”
Christian Klein is the CEO of SAP, a company with 400K customers across 130 countries. He believes companies will gladly pay more for products leveraging generative AI. He cited one retailed who saw “15% better inventory management, a 20% decrease in waste and even an uptick in total sales due to having the right products on shelves.”
Alessio Fanelli, CTO-in-residence at Decibal Partners, published a piece called “LLaMA2 isn't "Open Source" - and why it doesn't matter.” The core argument is that Meta is still implementing certain limitations on the model that make it not truly open. For more on open source in AI, check out our deep dive.
Evan Miller, a statistics engineer at Eppo, shared a post unpacking the math behind the Transformer architecture, and its core component: Attention.
Jack Naglieri, the CEO of Panther, sat down with David Schneider, the former President of ServiceNow, to talk about the impact that AI will have in the security industry.
Endpoints News shared an interview with Josh Wolfe from Lux Capital, where he unpacks AI hype, biotech markets, and his take on
TwitterX.Eliot Horowitz, the former CTO and co-founder of MongoDB, and the current CEO and co-founder of Viam Robotics, went on the Open Source Startup Podcast to talk about building general purpose software, and why more founders should build with hardware.
Amit Bendov, the CEO of Gong, shared that the company had reached 4K customers on its platform, including names like ADP, Indeed, LinkedIn, Snowflake, and Zillow.
CarbonBrief shared its most recent report on The State of The Climate. Most people are certainly feeling it, this year saw the hottest June and July on record, with 2023 very likely to be the hottest year ever recorded.
Eric Newcomer published a list of the venture firms that have most slowed down. Comparing the last 6 months of activity to the prior 12 months, Newcomer found that Tiger, Index, and Insight had slowed their pace the most, while YC and Sequioa were the most resilient.
Jim Farley, the CEO of Ford shared the complexity of the auto supply chain, and why becoming a software company is so difficult—which is why Tesla is so unique in the industry.
Building on the comments from Jim Farley, Dharmesh Shah, the co-founder and CTO of Hubspot, shared why Hubspot chose to hand-craft its CRM platform as opposed to building it through a number of acquisitions.
Contrary Research Fellowship
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