Round of the Week – SpotHero

HUNGERgames

For all you parking “tributes” out there, SpotHero’s $4.5M Series A round will forever put the odds in your favor.  This On-Demand parking reservation company has the potential to revolutionize the antiquated parking garage business and as frequent drivers ourselves, we love the idea!

Name: SpotHero

Website: www.SpotHero.com

Funding to Date: $7.5M ($3M Seed, $4.5M Angel)

Deal Notables: SpotHero came out of Chicago’s Excelerate Labs/TechStars accelerator program and pivoted from a simple parking for Cubs games solution to the form they are today.  We love reading stories about successful accelerator graduates that originally started with a concept and then pivoted to find better product-market fit. Somewhere Eric Ries is smiling

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Introducing Term Sheet Madness!

march-madness-bracket

Do you find yourself wondering which terms and triggers in a term sheet or financing negotiation are most effective or powerful?  Losing sleep over whether or not to accept fully participating liquidation preferences with a full ratchet provision (hint: don’t)? Want to get a better understanding of the true power rankings of what is valuable and what is lawyer “boilerplate”?

If so, then you are in for a treat! In honor of “March Madness” we have decided to create our own version of the madness, C:V. style!  Over the coming days and weeks, we will be holding our first ever “Term Sheet Madness” where we will be matching up some of the key terms and triggers in a financing against one another and having them battle it out until a victor is crowned!

In the process, we will also give an explanation (as best we can, we are neither VC’s nor Lawyers…) on what the term means and why it is so often (or not often) used/in vogue/SAT word eligible.

Early “term-ologists” have Price and Liquidation Preference as early favorites, but Board Seats have made an impressive run in their conference tourney and is by far the hottest term in the field….

Term Sheet Central:

Full Field

Palo Alto Regional

Denver Regional

Boston Regional

Palo Alto Finals

Denver Finals

Boston Finals

Term Sheet Madness Finals

Round of the Week – Aquantia

To quote our favorite YouTube video “Series F. Where’s my IPO, Series G: Gettin Low”, whenever we see a later round investment we are always intrigued as to what the status of the company (and cap table) is.  In that light, we have given semiconductor company Aquantia and their $16M G round the honor of Round of the Week.

Name: Aquantia

Website: http://www.aquantia.com/

Funding to Date: $154M (too many to list!)

Deal Notables: Even with strong headwinds of VC’s movement away from semiconductor investments, Aquantia has raised yet another round and is apparently on an IPO path. Thankfully, they own about 70% of the market and are expecting phenomenal growth with  “large revenue opportunities”. So if anyone has the chops to go public amid all the chaos, they seem to fit the bill.  We just hope the founding members have some equity remaining to compensate them for their hard work all these years…

Dueling Valuations: Shape Security

Pianos

Dueling Pianos : Music Fans :: Dueling Valuations : Finance Nerds

The time has come for our first attempt at putting on our VC hat!

We have been on record here at C:V. about how HOT we think the Enterprise Security space is so we decided to dive even deeper and perform our first valuation on Shape Security.   We made this a type of “Dueling Valuations” post with our initial valuation thesis and then a rebuttal post from a guest writer and fellow VC fanatic.

Have a comment?  Think we were absolutely insane for valuing the way we did?  Think we were spot on and want to hire us?  Email us here or send us a comment on the Contact Us page.   We welcome all thoughts/feedback!

Confused?  Lost?  See our prior post on Shape’s $40M funding round to get caught up.

*Editor’s note:  We are not VC’s, we are simply fanatics about the space and want an outlet to post our musings on.  All our research was done from browsing the internet and applying a few concepts/spreadsheets from Grad School (CGSOM represent!). We are more than happy to share our findings with you. Seriously though, we built out a minimalist cap table and pro-forma’s to factor growth expectations and we would be glad to send them along (we promise, we DO have social lives too…)

C:V. ‘s Attempt:

Overview: Shape Security is an Enterprise Security company that has pioneered a revolutionary way to deflect cyber-attacks on websites.  With its flagship product, ShapeShifter, what was normal code on a website becomes polymorphic (think random number generator) to distract attackers from taking vital information.  This is done completely in the background with no impact on the operation of the website.polymorphism

Market: One Word:  MASSIVE. Gartner estimates that Security spending in 2012 alone was $62B and is expected to grow to $86B by 2016. This aggressive growth combined with the increasing mindshare that security is gaining inside Fortune 500 Board Rooms makes for a very compelling market sizing argument.

People:  If you read our Round of the Week on Shape, you know how impressed we were by the caliber of talent they have at their disposal (See here for full post).  Their team of Board members, Investors, and Executives is easily one of the best in the Enterprise Security space. Don’t believe us? The proof is in the funding.  We don’t know of many Enterprise Security companies that can raise over $25M while STILL in stealth…

Product:  First Mover advantage?  Check.  20 customers in the Fortune 200? Check.  Appliance/Subscription business model with 7 figure price point? Check.  If an Enterprise Security startup had a wish list for creating a quality product, we are pretty sure these would be at the top of it.

Threats:  The opportunity is clearly there for Shape, yet it is not without significant risks.  The cybersecurity game is one where the good guys are always playing catch up and the attackers are always finding new ways to extract the data they need.  In this ever-changing model, there will continually be new prevention techniques and if Shape cannot capitalize on its current opportunity while continuing to invest for the future, it will have a very tough time remaining competitive.

Valuation:  We placed a $130M pre-money valuation on this round.  We feel this is a fair valuation at this point in time given numerous factors and have highlighted the key points below.

  • C Round: Given this is a C round ($6M A, $20M B), we feel that 24% is an appropriate balance of ownership at this stage for the investors and employees.  We think it stays in line with what earlier rounds offered, as well as provides enough incentive (re: hurdle rate, same or better as prior)  for the investors to depart with their capital.
  • Ability to Scale/Cash Burn:  This funding should provide Shape with enough resources to scale their enterprise offering and sales team.  Additionally, based on our estimate of Shape’s Cash Burn, we feel they should have enough cash for at least 12-18 months depending on revenue growth.  These factors should allow Shape to become laser focused on disrupting the market and greatly contributes to their value.

Guest Valuation/Rebuttal:

While I share your optimism for the company, I’d like to take a look three hurdles they face. Maybe after seeing those, we’ll see if a fair value emerges – and just as Shape emerges from the shadows of stealth.

Threats:

  • Replication and Replacement: While their polymorphic approach is certainly novel, especially considering their hardware approach, it is not the end-all be-all — and many other solutions exist under $1,000,000. Take Cross-Site Request Forgery (listed on their “Product” page as a sample attack). In many cases, a simple CSRF token can be a viable option which might only take one developer a couple of weeks to roll out across the board. While ShapeShifter offers a suite of solutions, the price tag may convince larger firms to devote developers’ time towards matching their capabilities. Where there’s money to be made or saved, people will flock.
  • Outrunning the Other Campers: I liked the analogy of “you don’t have to outrun the bear; just don’t be the slowest one running,” for deflecting attacks. Many hackers will no doubt go after weaker, easier targets. But where the analogy comes up short is when one camper is already dripping in honey, where’s the bears focus going to be? If you’re sitting in, say, Amazon’s shoes, do you really expect to pass off all threats to other smaller competitors? You’re going to be too valuable of a catch.
  • Constantly Changing Landscape: This iteration of ShapeShifter technology will not be the company’s last. To truly offer the “comprehensive defense,” they will have to innovate at the same rate as a world of thousands of hackers who have big paydays on the line. They were able to roll out the technology in apparently as short as two years, and that development time may decrease with a higher headcount, but I worry that they’ll end up just like Randy Marsh playing Heroin Hero.

Wildcard Prediction: I’m not all pessimism, guys. Here’s an upside you might not have seen coming. One source of funds I didn’t see backing Shape could become of one of their biggest customers: the Department of Defense. Given CEO Sumit Agarwal’s time spent at the Pentagon, he must have a sense of what the government needs as the U.S. becomes vulnerable to threats beyond trench warfare and the Redcoats (Russia is apparently still on the table, though). While nothing has been announced, it seems that massive DoD grants could have provided some easy non-dilutive funding – except for that pesky caveat of nonexclusive, irrevocable, royalty-free licenses… This leads me to believe they see them as a target customer, and boy, are they a big one.

Valuation: 

With those, I tried to reverse-engineer the deal as best as I could. I think the deal was for 30% of the company (Series C, but with pro-rata follow-ups from GV, KPCB, etc.), and with that we’re looking at a pre-money valuation right around $95M. This would put their EV/Revenue multiple more in the realm of 3-5x, depending on what those early customers were willing to pay. This indicates some serious growth potential, but nothing’s a lock in the ever-evolving battle waged against cybercriminals.

I expect that this company could surpass $1B in value by 2020. With an exit at that, to one of the big guns who truly can offer a comprehensive security package, the VC’s would be looking at a 40%+ return – not bad for getting in at a Series C.

And when the team is this strong, you trust in their judgment of the market needs.

So there you have it.  Both our takes on Shape.  More to come!

Round of the Week – Spritz

Pretty neat how this actually works without giving us a headache…

spritz

Finally coming out of stealth this week, Boston based speed-reading technology company Spritz has raised a $3.5M Seed round.   Check out the technology behind the faster reading tool here.  They plan to license their technology to app and web developers, which should be a good way to test new channels indirectly and inexpensively (free downstream R&D!).

Given that Spritz has the ability to disrupt so many MASSIVE markets (Email, Education, Business, etc.), we wonder if they are only using the licensing model initially for feedback loops to find product-market fit and then will pivot to a more vertical approach?  Either way, it will be fun to read about what happens (hopefully much faster than average!)

Name: Spritz

Website: http://www.spritzinc.com/

Funding to Date: $3.5M Seed

Deal Notables:  This was a tranched deal ($1M, $2.5M).  When we see tranches, we see it as our duty to at least guess what the terms of it were…

C:V.’s guess:  Initial funding went for development and since they are all about User adoption, we think they hit their User growth goal which triggered the final piece. Simple. Actionable. Desirable for all.

Round of the Week – DocuSign

And the award for the most crowded Cap Table of the week goes to…

crowded table

DocuSign board meeting?

Electronic signature platform DocuSign raised a whopping $85M this week (rumored at a valuation of $1.6B) to expand growth and innovation. This brings their total funding to $210M and their investor count to about the same… Seriously though, they did not name the investors this round, but according to their Crunchbase profile, they have at least 10 different investors in the round (holy syndicate Batman!).  What we would give to see the evolution of the Cap Table since inception…

Name: DocuSign

Website: https://www.docusign.com/

Funding to Date: $210M (reports vary, but had main rounds of $27M, $55M, and $85M among other smaller ones)

Deal Notables:  CFO Mike Dinsdale is on record as saying they are not a takeover target but rather an IPO candidate.  He claimed they couldn’t be valued properly because they span so many verticals. He definitely has a point given that they have the ability to disrupt almost every market in existence (i.e. anything that requires a signature…). Makes us wonder that if $1.6B was the value for the round, what was the associated TAM for E-signatures and DocuSign’s corresponding market share expectation?  $16B and 10%, $8B and 20%??

Enterprise Security: So Hot Right Now!

IT Security = Hansel?  We think so!

hansel

With the recent onslaught of Enterprise Security investments (25 in February alone!), we decided to turn to our friends at Crunchbase to see just how hot this market really was.  Let’s just say, the numbers did not disappoint. Below are the key takeaways from the study:

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Rising Round Size:   Average round sizes are up almost 50% since this time last year which we hope translates into companies receiving higher valuations (and not higher founder dilution…).

The Rich Get Richer:  Follow on funding rounds have been increasing in both size and quantity in the past year. This bodes well for the industry because it means more firms are putting good use to earlier rounds and leveraging that success into future investment.

If You Can’t Beat Them, Buy Them:  There have been 10 acquisitions this year alone so there seems to be a theme of consolidation at work (Looking at you Bit9…).

Finally, we couldn’t write an entire piece about Enterprise Security and NOT mention the darling of 2013; FireEye. After their successful IPO last fall and recent purchase of Mandiant (bonus points for it being a majority stock deal and limiting the cash impact!), they have clearly revealed their plans on how to take share in this market.  Now if only they would do the same for profitability