Month: December 2019

F5 got an expensive holiday present today, snagging startup Shape Security for approximately $1 billion.

What the networking company gets with a shiny red ribbon is a security product that helps stop automated attacks like credential stuffing. In an article earlier this year, Shape CTO Shuman Ghosemajumder explained what the company does:

“We’re an enterprise-focused company that protects the majority of large U.S. banks, the majority of the largest airlines, similar kinds of profiles with major retailers, hotel chains, government agencies and so on. We specifically protect them against automated fraud and abuse on their consumer-facing applications — their websites and their mobile apps.”

F5 President and CEO, François Locoh-Donou sees a way to protect his customers in a comprehensive way. “With Shape, we will deliver end-to-end application protection, which means revenue generating, brand-anchoring applications are protected from the point at which they are created through to the point where consumers interact with them—from code to customer,” Locoh-Donou said in a statement.

As for Shape, CEO Derek Smith said that it wasn’t a huge coincidence that F5 was the buyer, given his company was seeing F5 consistently in its customers. Now they can work together as a single platform.

Shape launched in 2011 and raised $183 million, according to Crunchbase data. Investors included Kleiner Perkins, Tomorrow Partners, Norwest Venture Partners, Baseline Ventures and C5 Capital. In its most recent round in September, the company raised $51 million on a valuation of $1 billion.

F5 has been in a spending mood this year. It also acquired NGINX in March for $670 million. NGINX is the commercial company behind the open source web server of the same name. It’s worth noting that prior to that F5 had no made an acquisition since 2014.

It was a big year in security M&A. Consider that in June, 4 security companies sold in one 3-day period. That including Insight Partners buying Recorded Future for $780 million and FireEye buying Verodin for $250 million. Palo Alto Networks bought two companies in the period: Twistlock for $400 million and PureSec for between $60 and $70 million.

This deal is expected to close in mid-2020, and is of course, subject to standard regulatory approval. Upon closing Shape’s Smith will join the F5 management team and Shape employees will be folded into F5. The company will remain in its Santa Clara headquarters.

Source: Tech Crunch

For many founders, building and selling a successful venture-backed company for cash is the ultimate goal. However, the reality is that some companies will instead receive an equity-funded acquisition proposal in which equity of another private venture-backed company, rather than cash, represents all or a significant portion of the purchase price.

Because all equity is not created equal, it is important for founders to understand how to negotiate for better equity in the context of such an acquisition proposal. This article explores what better equity looks like and some strategies founders can use to negotiate for that equity.

What is “better” equity?

To know what “better” equity is for the seller, it is necessary to understand what the “worst” and “best” stock is in the context an equity-funded acquisition by a private company buyer. The “worst” stock is plain common stock which does not enjoy any special rights and is subject to contractual restrictions which diminish its liquidity profile. Common stock sits at the bottom of the priority stack (after debt and preferred equity) in the event the company dissolves or is sold — thus, it is least valuable. Variations of transfer restrictions (e.g., a prohibition on private secondary sales) may further diminish the desirability of common stock by making it difficult or impossible for the holder to achieve liquidity outside of an M&A event or initial public offering (IPO).

In contrast, the “best” stock is (1) the acquirer’s most senior series of preferred stock, coupled with (2) additional contractual rights enhancing such stock’s liquidity profile. For our purposes here, we’ll call this “enhanced preferred stock.” All things being equal, founders and VCs should have a strong preference for enhanced preferred stock in an equity-funded acquisition for several reasons:

• Usually, the most senior series of preferred stock will enjoy a liquidation preference ensuring that a certain amount of proceeds (commonly equal to invested capital) from a sale of the company flow to stockholders of that series before proceeds are distributed to junior preferred and common stockholders.
• Unique contractual rights not shared by common stockholders, like special voting rights with respect to major events and transactions, unique information rights, pro rata investment rights with respect to future financings, rights of first refusal and co-sale rights, increase the stock’s relative value.
• Beyond the standard set of rights that are usually enjoyed by all preferred stockholders, additional contractual rights of and reduced restrictions on enhanced preferred stock make it more likely that the holder of such equity will achieve liquidity of some or all of its holdings prior to an M&A event or IPO. Such additional rights may include one or more of the following: time or event-based redemption rights (i.e., the right to force the acquirer to redeem equity at a specified price in the future), other liquidity rights tied to future financings or commercial transactions (e.g., the right to sell stock to the investors in the next equity financing), covenants of the acquirer to permit and support private secondary sales and registration rights (i.e., the right to force the acquirer to register stock with the SEC, thereby allowing for unrestricted resale by the holder).

“Better” stock lies somewhere on the continuum between the common stock and enhanced preferred stock poles, with the type of stock and bundle of rights associated with such equity determining its precise location. Additional contractual rights and reduced restrictions may significantly improve the desirability of common stock and perhaps place the holder in a better position than it would have been as a preferred stockholder. For example, a seller able to negotiate the right to sell a certain amount of common stock to investors in the acquirer’s next preferred stock equity financing could be more favorably positioned than the holder of senior preferred stock without any enhanced preferred rights.

Negotiating for better stock. With a framework for understanding what better stock means, below are several strategies sellers can employ in M&A negotiations to obtain better stock than that initially offered by the buyer.

Avoiding dire situations and preserving leverage. Leverage matters in every negotiation and any strategy that ignores this reality is doomed to fail. To state the obvious, the first strategy to negotiate for better stock in an equity-funded acquisition is the first strategy in preparing for any M&A event: companies should do all they can to avoid being in a dire fire sale situation when a buyer comes knocking on their door. If the seller is a failing company seeking a sale as a last ditch effort to avoid shutting its doors, even the best strategies may be useless in negotiation since as soon as the buyer says “no”, the seller will likely fold its hand and agree to the deal offered.

Source: Tech Crunch

Coral is a company that wants to “simplify the personal care space through smart automation,” and they’ve raised $4.3 million to get it done. Their first goal? An at-home, fully automated machine for painting your nails. Stick a finger in, press down, wait a few seconds and you’ve got a fully painted and dried nail. More than once in our conversations, the team referred to the idea as a “Keurig coffee machine, but for nails.”

It’s still early days for the company. While they’ve got a functional machine (pictured above), they’re quite clear about it being a prototype.

As such, they’re still staying pretty hush hush about the details, declining to say much about how it actually works. They did tell me that it paints one finger at a time, taking about 10 minutes to go from bare nails to all fingers painted and dried. To speed up drying time while ensuring a durable paint job, it’ll require Coral’s proprietary nail polish — so don’t expect to be able to pop open a bottle of nail polish and pour it in. Coral’s polish will come in pods (so the Keurig comparison is particularly fitting), which the user will be able to buy individually or get via subscription. Under the hood is a camera and some proprietary computer vision algorithms, allowing the machine to paint the nail accurately without requiring manual nail cleanup from the user after the fact.

Also still under wraps — or, more accurately, not determined yet — is the price. While Coral co-founder Ramya Venkateswaran tells me that she expects it to be a “premium device,” they haven’t nailed down an exact price just yet.

While we’ve seen all sorts of nail painting machines over the years (including ones that can do all kinds of wild art, like this one we saw at CES earlier this year), Coral says its system is the only one that works without requiring the user to first prime their nails with a base coat or clear coat it after. All you need here is a bare fingernail.

Coral’s team is currently made up of eight people — mostly mechanical, chemical and software engineers. Both co-founders, meanwhile, have backgrounds in hardware; Venkateswaran previously worked as a product strategy manager at Dolby, where she helped launch the Dolby Conference Phone. Her co-founder, Bradley Leong, raised around $800,000 on Kickstarter to ship Brydge (one of the earliest takes on a laptop-style iPad keyboard) back in 2012 before becoming a partner at the seed-stage venture fund Tandem Capital. It was during some industrial hardware research there, he tells me, when he found “the innovation that this machine is based off of.”

Vankateswaran tells me the team has raised $4.3 million to date from CrossLink Capital, Root Ventures, Tandem Capital and Y Combinator . The company is part of Y Combinator’s ongoing Winter 2020 class, so I’d expect to hear more about them as this batch’s demo day approaches in March of next year.

So what’s next? They’ll be working on turning the prototype into a consumer-ready device, and plan to spend the next few months running a small beta program (which you can sign up for here.)

Source: Tech Crunch

Hello and welcome back to our regular morning look at private companies, public markets and the grey space in between.

Today, we’re weighing a standard bit of startup wisdom that recently reemerged against some surprising, contrasting evidence. Does too much money hurt a startup more than it helps, or is that standard view actually mistaken? We’ll start with the traditional view, which was re-upped this month by venture capitalist Fred Wilson, along with some supporting arguments proffered by a Boston-based venture firm.

Afterwards, we’ll dig into a grip of contrasting data that should provide plenty to chew on over the holidays. Ready?

Fit to burst

Union Square Ventures‘ Fred Wilson wrote earlier in December (citing an excellent Crunchbase News piece by occasional TechCrunch contributor Jason D. Rowley) that he was curious if startups that raise huge ($100 million and greater) early-stage rounds do better or worse than their cohorts that raised only smaller sums.

Underpinning his question is Wilson’s belief that “performance of VC backed companies is inversely correlated to how much money they raise.” This makes good sense. And if anyone has enough anecdotal evidence to support the view, it’s Wilson who has been a venture capitalist since the late 1980s.

The idea that too much money is bad for startups isn’t hard to understand: startups need to focus and run fast; too much money can lead to both bloated operations, diffuse product direction and useless dalliances in cruft.

Startups also die when they have too little money, of course. But the concept that there is a midpoint between insufficient funds and an ocean of capital that is optimal has lots of credibility amongst the venture class. (I believe this is my favorite phrasing of the concept, that “more startups die of indigestion than starvation.”)

A 2016-era TechCrunch article written by some of the folks from Founders Collective makes the point plainly:

By examining the technology IPOs of the past five years, we found that the enriched (well capitalized) companies do not meaningfully outperform their efficient (lightly capitalized) peers up to the IPO event and actually underperform after the IPO.

Raising a huge sum of money is a requirement to join the unicorn herd, but a close look at the best outcomes in the technology industry suggests that a well-stocked war chest doesn’t have correlation with success.

In the spirit of fairness, I’ve long agreed with the above views.

My views on the question of too much money ruining organizations came from a different field, but are worth sharing for context. My father once told me an analogous story about a small poetry magazine, a publication that operated on the proverbial shoestring and was always weeks away from shutting down. But it limped along, barely keeping the lights on as it produced brilliant work.

Then, someone died and left the magazine a pile of money in their will — but the sudden influx of capital wrecked the publication and it eventually shut down.

In many cases, raising too much money too early can hurt a team or cause it to lose track of its mission. But for tech startups, on average, is that really correct?

Maybe not

Source: Tech Crunch

The Daily Crunch is TechCrunch’s roundup of our biggest and most important stories. If you’d like to get this delivered to your inbox every day at around 9am Pacific, you can subscribe here.

1. Facebook acquires Madrid-based cloud gaming startup PlayGiga

Facebook is building out its gaming business — earlier this year, the company added its Gaming hub to the main navigation menu. And last month, it agreed to buy Beat Games, developer of popular virtual reality title Beat Saber.

PlayGiga, meanwhile has been working with telcos to create streaming game technology for 5G. It also developed a gaming-as-a-service platform, using Intel’s Visual Cloud platform, that will enable telcos and communication service providers to offer streaming games to their customers.

2. TiVo merges with technology licensor Xperi in $3 billion deal

Earlier this year, TiVo said it was preparing to split itself into two — a product and IP business — in order to make itself more attractive to buyers. Today, the company announced those plans have been put on hold as it has instead merged with technology licensor Xperi Corporation, in a $3 billion deal.

3. Spotify prototypes Tastebuds to revive social music discovery

Tastebuds (discovered by reverse engineering master Jane Manchun Wong) is designed to let users explore the music taste profiles of their friends. It will live as a navigation option alongside your Library and Home/Browse sections.

4. Uber’s ride-hailing business hit with ban in Germany

In Germany, Uber’s ride-hailing business works exclusively with professional and licensed private-hire vehicle companies — so the court ban essentially outlaws Uber’s current model in the country.

5. Snackpass snags $21M to let you earn friends free takeout

Sending people Snackpass rewards became a new way to flirt or show gratitude at Yale. And through the Venmo-esque Snackpass social feed, users could keep up with a fresh form of gossip while discovering restaurants.

6. PayPal completes GoPay acquisition, allowing the payments platform to enter China

Though China’s payment market today is led by local players, including eWallet providers like AliPay and WeChat Pay, there’s room for PayPal to grow in a market where digital payments per year are counted in the trillions, not billions, of dollars.

7. Tesla’s record stock price shows its investment in energy storage is finally paying off

A little over a year after sparking a legal firestorm for musing that he would take Tesla private for $420, Elon Musk is probably glad he didn’t. (Extra Crunch membership required.)

Source: Tech Crunch

Apple has released an open-source version of the HomeKit Accessory Development Kit. You can now fork it on GitHub and play around with it to integrate smart home devices in the Home app and beyond.

Today’s news is related to the Connected Home over IP effort, an industry-wide effort to build an open-source standard for the internet of things. Essentially, Apple, Amazon, Google, the Zigbee Alliance and smart home manufacturers want to work together so that accessories work everywhere.

HomeKit is lagging behind, although Apple arrived early in the connected home space. A ton of accessories now work with Amazon Alexa and Google Assistant, but you can control very few accessories with Siri, as HomeKit adoption has been slow.

By open-sourcing HomeKit, Apple hopes that more smart home manufacturers will try to integrate HomeKit in their prototypes. Everything has been released under the Apache 2.0 license.

As Next INpact noticed, if you want to release a HomeKit-compatible accessory, you still have to work with Apple to get a certification. And of course, manufacturers that work with Apple directly could potentially access unreleased features before they’re unveiled at WWDC.

Developers have already reverse-engineered HomeKit to add HomeKit compatibility to more devices with the Homebridge project. Now let’s see if it leads to more cool projects to make it easier to control your connected objects from your iPhone, iPad and other Apple devices.

Source: Tech Crunch

Your expanding global business is leaving money on the table if its systems aren’t compatible with web addresses that have extensions such as .世界 or .ОНЛАЙН (.world and .online in Chinese and Russian, respectively). This missed opportunity has been growing for some time; a 2017 study concluded that an ecommerce market worth nearly $10 billion dollars annually is up for grabs — and that is a conservative estimate.

To understand why, consider these two facts:

First, the version of the Latin alphabet you are reading now is used by just more than a third of the world population. That number is dwarfed by the billions of people who read and write every day in Chinese, Arabic, Cyrillic, Devanagari or other scripts. These are being used in regions where population growth, economic growth and internet adoption all outpace global averages.

Second, recent innovations in how we navigate the internet have made domain names in diverse alphabets available to the majority of the world who use them. In 2012, there were only 22 so-called generic domain names (with familiar extensions like .com or .edu). That number now stands at more than 1,500.
Such innovation effectively brings an end to the era in which, say, a Japanese web surfer needs to toggle their keyboard to type a “www” or “.com,” because the entire domain name can now be written in Japanese.

This change is a big deal across rapidly growing markets worldwide, but particularly in Asia, where multilingualism is not widespread and new users on smartphones are key drivers of digital and economic growth. Even today, only a tiny percentage of all web addresses are expressed in Chinese characters, though Mandarin Chinese speakers make up nearly one-fifth of the world’s internet user population.

Even more relevant for the next wave of online consumers is that along with new domain names come email addresses in different scripts. A growing online population is using these addresses to sign up for services or sign into platforms.

This is why smart, global companies — and companies with global aspirations — are taking action to eliminate a major blind spot. Many software developers and corporate leaders reside in the English speaking or “Latin alphabet” parts of the world and the internet works pretty smoothly for them; therefore, they have not taken the important step of upgrading their software applications to accept all domain names equally. This step is a best practice referred to as “Universal Acceptance” of domain names and email addresses.

When systems are not Universal Acceptance ready, people using domain names or email addresses in different scripts cannot successfully use these systems, because the domain names and email addresses are not recognized as “valid.” This means lost business opportunities. Code libraries already exist in programming languages like Java and Python, often making this task the equivalent of a “bug fix;” however, it is a fix with huge implications.

To get a sense of the importance of Universal Acceptance, consider India. It has one of the fastest growing internet user populations on the planet and provides an illuminating case study.

As fast as internet adoption may be in India, in rural India it is faster still. The internet user base in India recently exceeded 500 million and is likely to reach 627 million by 2020. Two-fifths of users are located in rural areas. Consider also that India has 22 official languages and most users are on mobile devices.

In the Indian state of Rajasthan, the state government recently offered each of its 69 million residents free email addresses in both Hindi and English, while directing online public services to be Universal Acceptance ready (i.e. 100% available in Hindi). This required an intensive, 30-day push by developers to be compliant, and now residents can use their same Hindi email addresses to access an array of online platforms and services. Are some of these residents of Rajastan your future customers?

Microsoft is among the companies in the forefront of such compatibility. Last year it announced Email Address Internationalization (EAI) across most of its email platforms in an impressive 15 languages spoken across India. As Meetul Patel, COO of Microsoft India said:

“Ensuring that language is not a barrier to the adoption of technology is key for digital inclusion and growth. Making email addresses available in 15 languages is an exciting step to making modern communications and collaboration tools more accessible and easier to use for all – something we have been relentlessly working towards. We’re making technology use the language of people, and not requiring people to first learn the traditional language of technology.”

Despite such advantages, there is still a lot of work ahead. A recent review of the top 1,000 websites around the world found that only about five percent accepted all of the email address variations now in use.

Bringing systems up to date with Universal Acceptance is an easy way to make the internet more accessible for the billions of people whose languages are written in different scripts, making it a treasured cause of digital inclusion advocates. However, for any business seeking new global markets, it is a key competitive differentiator in an era of global online platforms, from direct e-commerce to the sharing economy. This is one first-mover advantage that may be worth billions.

Source: Tech Crunch