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The biggest VC fund ever means startups can stay startups for much longer

VC firm NEA recently raised more than $3 billion for their latest fund, the largest amount ever raised in VC. Here's what it signifies in the lifecycle of late stage startups. 

For startup founders, more money can buy more of their most valuable commodity -- time.

On April 15, 2015, VC firm New Enterprise Associates (NEA) announced the raising of a new fund totaling $3.15 billion. The fund is split into two parts -- a $2.8 billion main fund and a separate $350 million fund for late-stage investments.

NEA's initial investments usually originate in the early stages of the startup lifecycle, at the Seed, Series A, or Series B funding rounds. Like many firms, after that initial investment, they invest, as needed, as the company grows and scales. However, they invest aggressively as not to lose equity shares as the investment lifecycle moves into later rounds.

"Over time, unlike a smaller fund, with a larger fund we can maintain, if not increase, our ownership of companies as they grow," said NEA partner Jon Sakoda.

Smaller funds tend to back off of their pro rata investment in follow-on investments, which means their equity share gets diluted as additional rounds happen. But, NEA has always maintained or increased their investment in order to maintain or increase their share.

The size of the latest fund raised by NEA (its 15th fund) is indicative or more than just the firm's investment strategy. Startups, as a whole, are staying private for longer periods of time. This means that valuations are getting larger and follow-on investment in the later stages carry a higher price tag. It's part of the reason why NEA raised its fund as two separate vehicles.

"The most exciting thing right now, for us, is the companies aren't desperate to sell," Sakoda said. "I think everyone looks at M&A as an extremely attractive way to create liquidity, and it can be. But, I think you're seeing a lot of the best companies, and the ones that have the most disruptive technology decide to go it alone."

For example, take a look at self-destructive messaging app Snapchat. The company was recently valued close to $20 billion dollars. It has almost any exit option a tech company could want, but it hasn't mentioned any plans for an IPO or an acquisition.

The obvious question is why? Why are startups staying private for longer? Brian O'Malley, a partner at Accel, said that understanding this recent trend starts with understanding why companies went public in the first place.

Historically, he said, IPOs helped startups do three things:

1. Raise capital
2. Provide liquidity
3. Announce that the company had "arrived" or "made it."

Nowadays, O'Malley said, it could be argued that all three of those things are easier to do as a private company. Ten years ago, companies had far fewer options, especially in terms of raising capital. Companies couldn't access capital so they had to do an IPO or get acquired to keep moving forward.

But, as some would say, money is "cheap" now and there is expanding capital in the private market.

"There seems to be expanding pools of capital for private companies to the point where people are even criticizing the fact that people are raising as much money as they are in the private market and staying private longer," Sakoda said. "I think that it's an unfair criticism to say that companies shouldn't stay private longer."

In addition to expanding capital through VC investments, other forms of financing are also more readily available. According to Hired CEO Matt Mickiewicz, debt financing and other forms of non-equity financing are cheap and easy to find now too.

There's been a culture shift in the startup world. There's not a lot of pressure anymore to take companies public, and it's not necessarily cool to sell.

"Ten years ago, being acquired by Google was the dream for a lot of entrepreneurs," Sakoda said. "I'm not sure that's the case now. I'm not sure that people say 'my dream is to be acquired by a Google or a Facebook.'"

In some ways, the life of a startup founder is easier if the company remains private. Ultimately, you have fewer people to answer to and more control of your vision.

On the financial side of things, you don't have to deal with quarterly meetings or earnings reports, and your worth is calculated differently than that of your public counterparts.

"You don't have a number that you have to look at everyday that you're being judged on, namely your stock price," Mickiewicz said.

After understanding the why, we have to look at how this trend shapes the startup market. Primarily, it's contributing to high valuations.

Last year, this was exemplified by Facebook's $19 billion acquisition of WhatsApp, which made headlines around the world. It was the premier piece of evidence that startup valuations are at a level previously unheard of in the tech space.

"If you look at the initial market caps of Microsoft, Yahoo, Google, and Amazon when they went public, those companies, for the most part, went public when their valuations were less than one billion dollars," Mickiewicz said. "That's almost unheard of now."

These increasingly high valuations can be great for the founders of the companies themselves, and we'll likely see M&A outcomes getting larger and larger as the years roll on. That's good for the founders and investors alike, but these high valuations can prove dangerous as well.

Access to more capital means startups can get going earlier and have more time to get things right, O'Malley said. However, it can draw out the time it takes to get liquidity and keeps investors more tied up in the health of the market. Still, that's not necessarily a bad thing, O'Malley said, as everyone can stand to be more successful in a bigger deal.

If a founder does decide to do an IPO eventually, though, staying private for longer can present other challenges as well, especially when it comes to over valuation.

"For example, with the Box IPO, the company went public below the price of its last private market valuation, so there's pros and cons to waiting that late," Mickiewicz said. "Not everybody is going to be a winner."

There are both risks and rewards when it comes to a startup holding onto its startup status for an extended period of time. While it affects the startup founder and investors heavily, O'Malley said that the employees of the company should also be considered.

"The real group that I worry about are the employees of these companies," O'Malley said. "Venture firms are set up for the long haul and have the benefit of a portfolio. Founders are getting money handed to them to "take chips off the table" and diversify. Unless the company reaches truly massive scale, employees can be left holding the bag while their leaders cash out and delay an IPO. If a company is going to stay private longer, it is critical for boards to look out for those not at the table; the people grinding away turning an idea into a reality."

Detroit's boxy bodies are winning a wave of small-business buyers

If you've ever watched TV, you've seen a Ford pickup commercial, with the gravel-throated narrator growling about toughness. Last spring, for the first time in 45 years, Ford pitched a van on TV. 

"You put in four hours before the 9-to-5ers even show up," the voiceover said. "You don't commute every day—you commute every 15 minutes."

The message appears to have landed. Ford sold more vans last month than it has in any April in almost 30 years.

It may be boxy, boring, and at times kind of creepy, but the humble van is in high demand these days, and that’s a bullish sign for the economy at large. In the past five years, U.S. van sales by unit have more than doubled, easily outstripping the impressive pace set by the auto industry overall, according to data from Edmunds.com.

In the first quarter of this year, the segment’s sales shot up by another third. If that pace holds, Americans will buy roughly 475,000 vans this year.

Driving that demand is good old-fashioned commerce:  Web shoppers clicking for package deliveries, business travelers zipping from airports to hotels, and a resurgent housing sector full of electricians, carpenters, and other skilled workers hauling the tools of their trade from one busy job site to another. 

The Silver Moon Brewery in Bend, Ore., uses Fiat-Chrysler's new Ram ProMaster to ferry the kegs around. The vehicle even has a few taps on the outside, doubling as a bar on wheels. The cast of the History Channel's American Pickerszips from one junkyard to another in a new Ford Transit. If spending is the lifeblood of an economy, vans are the veins.

Indeed, an index of small-business optimism, compiled by the National Federation of Independent Business, mirrors van sales in recent years.

"We knew that as the industry bounced back, this segment would be on the forefront," said John Schwegman, director of commercial products at General Motors. Recently, the company's Chevrolet brand has won major orders from AT&T, U-Haul, and DirecTV, to name a few. In response, it added a third shift at the Wentzville factory where some 3,500 workers stamp out vans just west of St. Louis. "Right now, we’re selling everything that we can build," Schwegman said.

In addition to the economic recovery, vans are just a lot better than they used to be. The old formula was simple and crude: Take the chassis and engine of a pickup and bolt a big box on top. Daimler changed the game in 2001 when it started selling its Sprinter van in the U.S. The Sprinter was efficient. More important, it was tall. An electrician could walk upright down an aisle of shelves. A hotel-bound traveler no longer had to hunch and waddle to a seat like a reluctant spelunker. 

The Ram ProMaster comes with extra headroom.

Source: Fiat-Chrysler

Nearly every van these days has a hint of the Sprinter in it. The new van from Ram is a direct descendant of the Mercedes, since Chrysler and Daimler were in business together.

But the offering that's running away with the segment lately comes from Ford, which decided a few years ago to stop selling its midsize pickup truck in the U.S. and start making vans here that it has long hawked abroad.

Ford’s Transit comes in three different lengths and three different heights. With a number of different engines, there are 58 Transit configurations. "The big trend that we’ve seen is customers being able to right-size their vehicle for the job that they need," said Yaro Hetman, the brand manager for the Transit. "We had a show where we had the Mustang GT500 and the conversion van, and the van actually drew as much attention.”

Bloomberg Intelligence analyst Kevin Tynan said recent van sales are particularly impressive because increases have come despite a surge in giant SUV offerings. Driving that demand is the sense that vans are no longer boxes on wheels for hauling grade-schoolers on field trips and schlepping old appliances to the dump. Tynan said there's a booming industry in "upfitting" vans as luxury shuttles.

Space-shuttle seating in the swanky Ford Transit.

Source: Ford

Ford now markets a version of its Transit as "a private jet on wheels." It comes with a built-in bar, a 52-inch retractable movie screen, and interior lights that can be controlled with a smartphone.

Forget the Maybach and the Chevy Suburban, Tynan said. “If I was the CEO of a company, I’d be in a converted Sprinter." 

Amazon lures business buyers with launch of Amazon Business

Summary:The marketplace will offer features such as bulk pricing, free two-day shipping on orders worth more than $49, and access to products not available to typical retail consumers.

Amazon has made an official play for the booming B2B online sales market.

The ecommerce giant on Tuesday announced the launch of Amazon Business, a marketplace that tailors Amazon's shopping and shipping methods specifically to business users -- allowing Amazon to tap into the trillions of dollars businesses will spend online over the next five years.

Unlike Amazon Prime, Amazon Business will be free to verified business customers, offering features such as bulk pricing, free two-day shipping on orders worth more than $49, and access to products not available to typical retail consumers.

It will feature a range of products -- anything from IT equipment to paper napkins -- in addition to business-specific perks such as approval workflow, live customer support, corporate credit payment lines and a tax exemption program.

The effort is not Amazon's first push to capture business customers. The new marketplace is in a way an extension of the company's wholesale site Amazon Supply, except it will be much bigger, with hundreds of millions of products immediately ready for purchase.

Which brings up another point: In addition to targeting business buyers, Amazon is also marketing the platform to the bevy of sellers already operating in the Amazon ecosystem.

Amazon says sellers will not only gain access to a huge new customer base, but they will also have the ability to target certain businesses with special pricing and discounts based on the data businesses disclose upon signup.

Amazon Business VP Prentis Wilson said Amazon would continue to add new features to the platform as it garners feedback from the first wave of users.

"We're consistently listening to feedback from customers so we can innovate, deliver more value and set a new standard for B2B e-commerce with Amazon Business," Wilson said in a statement. "We think this is ... a great opportunity for manufacturers and sellers to reach registered business customers."

Combined with the enterprise cloud offerings from Amazon Web Services, Amazon Business certainly rounds out Amazon's efforts to dominate in both general ecommerce and B2B services. And given the sheer size of the B2B sales market, there's not much risk to Amazon, as only a fraction of the sales pie would make the venture profitable.