The TechCrunch Exchange: A Weekly Dive into Startups and Markets

Welcome to The TechCrunch Exchange, your weekly newsletter covering the worlds of startups and financial markets. This publication is an extension of the daily column found on Extra Crunch, offered freely for your weekend reading. To receive it directly in your inbox each Saturday, sign up here.

Are you prepared? Let's examine funding trends, emerging companies, and current speculation surrounding initial public offerings.

Scale AI's Impressive Growth

This week, Scale AI secured $325 million in Series E funding. As previously reported by TechCrunch, the company specializes in data labeling. Its fundraising success has been notable in recent years.

TechCrunch detailed in 2019 how the company’s CEO, then 22 years old, successfully completed a $100 million funding round. Subsequently, in December 2020, Scale AI raised $155 million, achieving a valuation of approximately $3.5 billion. Currently, the company’s valuation exceeds $7 billion.

A Booming AI Investment Landscape

This growth is certainly noteworthy. However, as discovered earlier this week, AI startups, generally, are experiencing a remarkably strong year. According to PitchBook data, from the beginning of 2021 through April 12th, 442 AI-focused startup deals occurred in the U.S., totaling $11.65 billion in investment.

Furthermore, the recent acquisition of Nuance by Microsoft may further accelerate this trend.

Venture Capital Activity in AI/ML

Jai Das of Sapphire Ventures provided insights into the AI venture capital market for The Exchange. He described investment activity in AI/ML startups during the first quarter as “absolutely insane” when asked about the level of competition.

According to Das: “AI/ML startups are routinely getting 5-6 term sheets from top-tier VC firms and they are able to raise their financings at 150-250X of current ARR.”

Consider this for a moment. While public software companies have seen their multiples increase recently, these figures represent exceptionally high valuations, even for aggressive startup funding rounds. For example, an AI startup generating $1 million in annual recurring revenue could be valued at $250 million. Remarkable.

Accelerated Investment Pace

What about the speed of AI investment? Reports indicate that the timeframe from the opening to the closing of funding rounds has been consistently shrinking for many startups. Das explained that “most firms are completing their due diligence way before the financing actually happens,” eliminating the need for due diligence during the financing process itself.

This makes logical sense. If funding rounds are largely preemptive – a point Das emphasized – then pre-diligence is essential. Otherwise, investors risk making uninformed decisions or missing opportunities due to competitors acting more swiftly.

Broader Venture Capital Trends

This week, The Exchange also analyzed the wider domestic venture capital market, focusing specifically on seed funding and the substantial late-stage investments that frequently capture headlines. Jeff Grabow, EY’s U.S. Venture Capital lead, offered a relevant observation that didn’t quite make it into our initial piece.

Regarding pre-seed, seed, and post-seed deals, Grabow made a noteworthy prediction:

This aligns with our internal projections. The first quarter of 2021 was exceptionally strong for American venture capital activity (with increased international coverage planned). It appears likely that the entire year will set new records in numerous areas. As long as momentum doesn’t significantly diminish, records will be surpassed. Grabow confidently anticipates a favorable venture capital climate following the resolution of the COVID-19 pandemic.

Therefore, records are expected to be broken. The key question remains: by what margin?

Further Observations Regarding Coinbase’s Direct Listing

While it may be unproductive to dwell excessively on past events, additional insights regarding the Coinbase direct listing are worth noting.

Public.com, a competitor to Robinhood in the consumer trading space, assisted The Exchange in gauging the level of retail investor engagement with the stock. According to their spokesperson, Mo, Coinbase was the most frequently traded stock on the platform on April 14th, based on transaction volume.

Significantly, on that same day, social media activity – quantified by the number of posts – experienced a 70% surge compared to the previous day.

The duration of the current consumer trading surge remains uncertain, but these figures are demonstrably strong.

Similarweb also provided relevant data, revealing that visits to coinbase.com peaked at 86.4 million in January. This is a substantial number.

Notably, during that month, the number of first-time visitors exceeded that of returning visitors. This information sheds light on the exceptional performance Coinbase achieved in its first quarter.

The key question now is whether Coinbase can sustain its growth trajectory, and whether consumer interest in cryptocurrency trading will endure beyond the current equities trading boom.

Tom Loverro, the lead investor in Coinbase’s Series D funding round – previously discussed in our podcast – posits that we are still in the early stages of cryptocurrency adoption, specifically the second inning.

Consequently, these discussions are likely to continue frequently in the future.

A Recap of Recent IPO Activity

In an effort to maintain a targeted word count, here’s a summary of key developments in the initial public offering (IPO) market from the past week.

The AppLovin IPO, unfortunately, did not perform as anticipated. Despite being priced at $80 per share, the midpoint of the projected range, the technology company specializing in mobile applications experienced a decline in its stock value during the initial two days of trading.

Currently, as of Friday’s market close, the stock is valued at $61 per share.

The Exchange engaged in a conversation with AppLovin’s CFO, Herald Chen, on the day of the IPO. Our assessment of the discussion suggests the company may now pursue acquisitions more aggressively, benefiting from its public status.

Possessing a readily tradable stock provides increased flexibility for acquisitions. AppLovin asserts its ability to integrate acquired companies into its operational framework and subsequently enhance their revenue streams, as detailed in its S-1 filing.

Should this strategy prove successful, the market’s current negative reaction may be unwarranted. It was somewhat unexpected to witness a software company encounter difficulties following its IPO in the present market conditions.

Mr. Chen also indicated to The Exchange that the company did not encounter resistance regarding its multi-class share structure during the pre-IPO roadshow. This structure, a topic previously covered by Ron Miller, has been a point of contention.

The CFO emphasized that no single individual holds absolute control of the company, despite the existence of multiple equity classes with varying voting rights. This distribution of power is a significant factor.

We will continue to monitor AppLovin’s performance in the market. (Previous analysis of the company’s financials can be found here.)

Additionally, this week saw the public debut of autonomous trucking firm TuSimple, and Similarweb submitted its S-1 filing for a potential IPO. We are also tracking UiPath, which is considering an increase to its price range.

Just before the week concluded, Squarespace filed its S-1 registration statement. Further analysis will be provided shortly.

Wishing you all the best,

Alex