Digging into the Alkami Technology IPO

It appears that the slowdown in tech debuts is not a complete freeze; despite concerning news regarding the IPO pipeline, some deals are chugging ahead. This morning, we’re adding Alkami Technology to a list that includes Coinbase’s impending direct listing and Robinhood’s expected IPO.


The Exchange explores startups, markets and money. Read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.


We are playing catch-up, so let’s learn about Alkami and its software, dig into its backers and final private valuation, and pick apart its numbers before checking out its impending IPO valuation. After all, if Kaltura and others are going to hit the brakes, we must turn our attention to companies that are still putting the hammer down.

Frankly, we should have known about Alkami’s IPO sooner. One of a rising number of large tech companies based in non-traditional areas, the bank-focused software company is based in Texas, despite having roots in Oklahoma. The company raised $385.2 million during its life, per Crunchbase data. That sum includes a September 2020 round worth $140 million that valued the company at $1.44 billion on a post-money basis, PitchBook reports.

So, into the latest SEC filing from the software unicorn we go!

Alkami Technology

Alkami Technology is a software company that delivers its product to banks via the cloud, so it’s not a legacy player scraping together an IPO during boom times. Instead, it is the sort of company that we understand; it’s built on top of AWS and charges for its services on a recurring basis.

The company’s core market is all banks smaller than the largest, it appears, or what Alkami calls “community, regional and super-regional financial institutions.” Its service is a software layer that plugs into existing financial systems while also providing a number of user interface options.

In short, it takes a bank from its internal systems all the way to the end-user experience. Here’s how Alkami explained it in its S-1/A filing:

Image Credits: Alkami S-1

Simple enough!

#alkami-technology, #ec-fintech, #ec-news-analysis, #finance, #fundings-exits, #startups, #tc, #the-exchange

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As Compass downsizes its IPO, signs of weakness appear for high-growth companies

On the same day that Deliveroo’s IPO fizzled at the start of trading, Compass announced via a fresh S-1 filing that it will reduce the number of shares in its impending flotation and sell them at a lower price.

Taken together, the various market signs could point to a modest to moderate cooling in the tech IPO market.

The move by Compass, a venture-backed residential brokerage, to lower its implied public-market valuation and sell fewer shares is a rebuke of the company’s earlier optimism regarding its valuation and ability to raise capital. The company’s IPO is still slated to generate as much as a half-billion dollars, so it can hardly be called a failure if it executes at its rejiggered price range, but the cuts matter.

Especially when we consider several other factors. The Deliveroo IPO, as discussed this morning, was impacted by more than mere economics. And there are questions regarding how interested seemingly more conservative countries’ stock exchanges will prove in growth-oriented, unprofitable companies.

But added to the mix are recent declines in the valuation of public software companies, effectively repricing the value of high-margin, recurring revenue. The reasons behind that particular change are several, but may include a rotation by public investors into other asset categories, or an air-letting from a sector that may have enjoyed some valuation inflation in the last year.

In that vein, SMB cloud provider DigitalOcean’s own post-IPO declines from its offering price are a bit more understandable, as is a lack of a higher price interval from Kaltura, a video-focused software company, as it looks to list.

Taken together, the various market signs could point to a modest to moderate cooling in the tech IPO market. For a host of companies looking to debut via a SPAC, that could prove to be bad news.

#alex-wilhelm, #compass, #deliveroo, #ec-fintech, #ec-news-analysis, #fintech, #ipo, #spac, #tc

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Embedded procurement will make every company its own marketplace

In 2019, my colleague Matt Harris coined the term “embedded fintech” to describe how virtually all software-driven companies will soon embed financial services into their applications, from sending and receiving payments to enabling lending, insurance and banking services, an idea that quickly spread within the fintech community.

Vertical apps such as Toast for restaurants, Squire for barbershops and Shopmonkey for car repair shops will deliver financial services to businesses in the future rather than traditional, stodgy financial institutions.

Embedded procurement is the natural evolution of embedded fintech.

The embedded fintech movement has just begun, but there is already a sister concept percolating: embedded procurement. In this next wave, businesses will buy things they need through vertical B2B apps, rather than through sales reps, distributors or an individual merchant’s website.

If you own a coffee shop, wouldn’t it be convenient to schedule recurring orders for beans and milk from the same software portal where you process payments, manage accounting and handle payroll? The companies that figured out how to monetize financial services via embedded fintech are well positioned to monetize through procurement, too.

Embedded procurement is the natural evolution of embedded fintech. The salon software company Fresha is a typical embedded fintech story. Fresha’s platform is an online and mobile platform specially designed for spas and salons, encompassing appointment scheduling, reporting and analytics, marketing promotions, and point-of-sale capabilities. The software is free for salons; Fresha monetizes through payment processing.

In the future, Fresha will undoubtedly turn to embedded procurement, becoming a logical place for business owners to order and manage inventory like shampoo, scissors, brushes and other supplies. In turn, Fresha can aggregate demand from thousands of spas to place orders with its suppliers, leveraging its scale to negotiate more favorable pricing on behalf of its customers. Borrowing a concept from the healthcare world, vertical software companies will become group purchasing organizations in every sector.

#business-management, #column, #ec-column, #ec-ecommerce-and-d2c, #ec-fintech, #ec-market-map, #ecommerce, #finance, #financial-services, #financial-technology, #payments, #procurement

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Steady’s Adam Roseman and investor Emmalyn Shaw outline what worked (and what was missing) in the Series A deck

When it comes to Steady, the platform that helps hourly workers manage their income, maximize their income, and access deals on things like benefits and financial services, the strengths of the business are clear. But it took time for founder and CEO Adam Roseman to clearly define and communicate each of them in his quest for fundraising.

To date, Steady has raised just under $30 million with investors that include Loeb.nyc, Recruit Strategic Partners, Propel Ventures and Flourish Ventures. In fact, Flourish’s Emmalyn Shaw sits on the board, having led the company’s Series A round in 2018.

As a partner at a $500 million fintech fund, her expertise in not only how fintech companies should think about fundraising but what it takes for them to be successful is invaluable. Lucky for us, we got the chance to sit down with both Steady CEO Adam Roseman and Emmalyn Shaw for a recent episode of Extra Crunch Live.

The duo were gracious enough to walk us through Steady’s Series A deck, explaining the importance of highlighting the strengths of the business. They went into detail on how Steady was successful in that during that fundraising process, and what the company could have done differently to be more effectively.

Shaw and Roseman also gave some fantastic advice for founders during the Pitch Deck Teardown, wherein speakers give their expert feedback on decks submitted by the audience. (If you’d like to have your pitch deck featured on an episode of Extra Crunch Live, hit up this link.)

Relationships first

Roseman shared that the best investors are ones that not only understand the business but understand you as a founder and a person. He explained that he and Shaw had plenty of time to get to know each other before the Series A deal.

“I’ve been a part of businesses in the past as an entrepreneur and on boards where it’s been the worst situation, especially when they don’t understand your business,” said Roseman. “Flourish took the time to understand it through and through and was entirely aligned. That makes for the best long-term partnership.”

While it’s a cliche, it remains true that investors often place bets based on a team and not an idea or a product. But what exactly makes a great team or founder? According to Shaw, it’s about vision and passion.

“In Adam’s case, he has a direction connection to what Steady is trying to do,” said Shaw. “That makes a huge difference in terms of commitment because you have ups and downs. They bring experience in terms of understanding the space, how to penetrate and scale and a deep understanding of fintech.”

#adam-roseman, #ec-fintech, #ec-how-to, #ecl, #emmalyn-shaw, #extra-crunch-live, #flourish-ventures, #jordan-crook, #pitch-deck, #steady, #tc, #websites

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Our favorite companies from Y Combinator’s W21 Demo Day: Part 1

It’s that time again! Today is Demo Day for Y Combinator’s latest accelerator batch — its largest to date, with more than 300 teams getting a minute each to pitch their companies to an audience of investors.

This is the third time YC has held its Demo Day via a Zoom livestream and the second time the entire program was entirely virtual. YC president Geoff Ralston outlined their thinking for this latest batch — and how/why they’ve expanded the program to over 300 companies — in a post this morning.

Want to see all of the companies? YC has a catalog of the entire Winter 2021 batch here (minus those that haven’t publicly launched), filterable by industry and region.

If you don’t have time to skim through it all, we’ve aggregated some of the companies that really managed to catch our eye. This is part one of two, covering our favorites from the companies that launched in the first half of the day.

As Alex Wilhelm put it last time we did one of these, “we’re not investors, so we’re not pretending to sort the unicorns from the goats.” But we do spend a lot of time talking with startups, hearing pitches and telling their stories; if you’re curious about which companies stood out, read on.

Prospa

Prospa is building a neobank for small companies in Nigeria. The startup charges customers $7 per month and has reached $50,000 in monthly recurring revenue. That’s some pretty darn good traction. We found Prospa notable because Nigeria’s economy and population are rapidly growing, neobanks have succeeded in a number of markets thus far, and the company’s clear business model and early traction stood out.

And Prospa isn’t targeting a small market. It said during its presentation that there are 37 million so-called “microbusinesses” in its target country. That’s a lot of scale to grow into, and it’s really nice to hear from a neobank that isn’t going to merely pray that interchange revenues will eventually stack to the moon.

— Alex

Blushh

Image Credits: Blushh

Blushh, built by a team of ex-Google, Amazon, Harvard and BCG professionals, is creating a directory of short, sensual audio stories for women in Asia. The startup believes that there is a massive unmet need for adult content created for women, instead of men, signing up 100 paying subscribers within its first month on the market.

During their pitch, co-founder Soy Hwang said Blushh wants to do for sexual wellness what “Spotify and Audible did for music and audio books.” This startup stands out because it is taking on an untapped market ridden with stigma and lack of innovation. It’s a risk on several levels, and considering the fact that many venture capitalists today still have a “vice” clause that prevents them from investing in sex tech, it will be key to see how Blushh funds itself to keep growing.

— Natasha

BrioHR

TechCrunch caught up with BrioHR a few weeks ago when the startup announced that it had closed a $1.3 million round. During its presentation, the company announced that it had reached $13,000 in monthly recurring revenue (MRR), or $156,000 in annual recurring revenue (ARR).

The company is building human resources software for companies in Southeast Asia, a market it considers fraught with old software and outdated business processes. The company is doing two things. First, building software to help manage and pay workers. The latter part of its work requires lots of localization, so it’s rolling out more slowly than the rest of its software.

If Southeast Asia is as fertile ground for modern HR software as the United States has been shown to be, BrioHR could find more than enough room to grow. I’m excited to see how far the company can scale its ARR with the round that we recently covered.

— Alex

Charge Running

Strava walked so Charge Running could, well, run. The startup, founded by a former Navy SEAL, app connoisseur and kinesiology specialist, is an app that offers live virtual running classes. The consumer play is being framed by the team as a “Peloton for running” with motivation and social engagement during the run.

#ec-cloud-and-enterprise-infrastructure, #ec-consumer-applications, #ec-fintech, #startups, #tc, #y-combinator

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Social+ payments: Why fintechs need social features

Social+ companies are upping the stakes for everyone by giving consumers multiple benefits at once: products that serve a purpose but also meet our need for belonging to a community.

But what exactly is a social+ company? One for which social engagement is an inextricable component of the product. That is to say: If you removed the social element, the product would cease to make sense. You can find plenty of examples in gaming (Fortnite), fitness (Strava, Peloton), commerce (Pinduoduo), audio (Clubhouse) and more. As noted in Andreessen Horowitz’s recent series Social Strikes Back, “The best version of every consumer product is the one that’s intrinsically social.”

Social+ products are seeing mass adoption because they marry community with functionality.

The benefits of a social+ company

Social+ products are seeing mass adoption because they marry community with functionality. Users form meaningful connections — and engage in value-adding conversations — within the context of the goal they’re trying to achieve. Whether it’s shopping for a deal or growing their assets, social+ products help users gain new knowledge, find motivation, garner status, form friendships and generally feel like they’re part of something.

Companies that base their business model on social+ products enjoy a variety of benefits:

Growth

When the social aspect of a product is integral to its function, users will often drive growth on their own steam, inviting their friends and family to join the community.

Members of highly engaged communities are inspired and fired up by their interactions with other members, and when they’re fired up about something, they talk about it. Participating in these communities makes users feel like they’re part of something, which can have a powerful effect on your growth.

Retention

Relationships matter. The relationship your users have with your brand is ultimately what will determine whether they stick with you or leave you for a competitor offering the same service — particularly at a more attractive price. If you provide your customers with access to a community they relate to and resources that make their lives easier, they’re more likely to be loyal.

The beauty of social+ is that embedding social interaction within your product or app allows you to own that conversation and build a community around your brand. In the absence of built-in communities, these users are forced to turn to places like Reddit or WhatsApp to discuss, among other things, the relative advantages of competitors’ apps.

Harnessing the creativity of your users

User-generated content (UGC) is the lifeblood of any social+ product, driving user engagement and fostering connections among users. UGC means the company can harness the creativity and popularity of its users and doesn’t have to expend as many resources creating content users find valuable. Plus there’s the added bonus that authentic UGC — whether it’s a screenshot or a meme — lends the product far greater credibility than any marketing initiatives you could launch.

#api, #column, #ec-column, #ec-consumer-applications, #ec-fintech, #finance, #payments, #social, #tc, #user-generated-content

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No taxation without innovation: The rise of tax startups

In New York City, if you order a toasted bagel with cream cheese at a deli, you have to pay sales tax. Ask for that same bagel unprepared? You won’t. In Illinois, candy is subject to sales tax, but candy with flour is considered a regular grocery item. Meaning: A Kit Kat is tax-free, but M&Ms will cost you extra. And in Colorado, your daily coffee cup is considered essential packaging, while the lid is not, making it subject to a nonessential packaging tax.

These examples may seem trivial, but they illustrate the idiosyncrasies of sales tax — a fee consumers pay on their purchases that must ultimately be reconciled with the appropriate jurisdictions. Though sales tax is arguably the most complex type of indirect tax, businesses must also contend with other indirect taxes such as use tax, property tax and value-added tax (VAT).

Given the market needs for tax compliance, it’s somewhat shocking how poorly companies are being served by the majority of legacy software companies.

Such taxes may be easy to understand conceptually, but their calculation is convoluted in practice — particularly for sales tax, which is governed by more than 11,000 unique jurisdictions in the U.S. alone. There is no reliable methodology businesses can use to calculate annual remittances based on previous years’ accounting formulas because local tax code changes as much as 25% every year.

For large corporations, sales tax compliance drives sky-high financial planning and analysis spending, and small businesses face an even worse predicament because they can neither afford outsourced tax preparation nor have the expertise to handle this filing. No matter a company’s size, failure to pay the correct amount of sales tax can result in severe penalties and even bankruptcy.

Now, a new legion of startups is emerging to help companies manage the intricacies of indirect taxes, including TaxJar, Taxdoo and Fonoa.

Why does this matter now?

Smaller businesses have, until fairly recently, managed to limp through tax season by selling goods and services locally, and thus operating within relatively consolidated tax jurisdictions. But e-commerce changed this in at least two profound ways.

The first is that even the smallest businesses have transformed from simple brick-and-mortar ventures to complex entities transacting in multiple places online, including via their own storefronts and websites, third-party vendors such as Amazon and Etsy, and wholesale channels. Previously, a small business may have calculated a single type of sales tax — traditionally for storefront enterprises. Now, they may have to calculate different taxes across an increasing number of channels and their resulting tax codes.

Second, e-commerce expanded companies’ geographic reach, allowing them to sell across state and country lines. Until recently, this was an unqualified advantage to small businesses, which benefited from outdated laws requiring most businesses to pay taxes only where they had established nexus, or physical presence. But the 2018 Supreme Court case of South Dakota v. Wayfair put an end to that, with the court ruling that businesses with digital revenue levels above a certain threshold must pay taxes in all states and municipalities in which they sell.

To a large extent, businesses have met the resulting increase in their tax obligations either sloppily or not at all. But the economic fallout from the pandemic is making such noncompliance far less tenable as state and local governments face fiscal shortfalls. With states traditionally relying on sales tax as a primary source of revenue (second only to federal receipts), local governments are beginning not only to enforce their tax codes more vigilantly but also to create new laws that broaden the scope of taxable goods and services.

Given that the financial losses of the pandemic are projected to extend for years, it is unlikely states will revert to their previously relaxed standards of enforcement. Instead, it is far more plausible that COVID-19 will prove an opportunity for states to find new ways to capitalize on sales taxes related to e-commerce.

Small and medium businesses need more options for tax compliance

#column, #e-commerce, #ec-column, #ec-fintech, #ec-market-map, #ecommerce, #finance, #online-marketplaces, #startups, #tax, #tax-policy, #tc

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Five takeaways from Coinbase’s S-1

The Coinbase S-1 is out! And hot damn, did the company have a good fourth quarter.

TechCrunch has a first look at the company’s headline numbers. But in case you’ve been busy, the key things to understand are that Coinbase was an impressive company in 2019 with more than a half-billion in revenue and a modest net loss. In 2020, the company grew sharply to more than $1.2 billion in revenue, providing it with lots of net income.


The Exchange explores startups, markets and money. Read it every morning on Extra Crunch, or get The Exchange newsletter every Saturday.


The company’s Q4 2020 was about as big as its entire 2019 in revenue terms, albeit much more profitable because the sum was concentrated in a single quarter instead of spread out over four.

However, beyond the top-level numbers are a host of details to explore. I want to dig more deeply into Coinbase’s user numbers, its asset mix, its growing subscription incomes, its competitive landscape and who owns what in the company. At the end, we’ll riff on a chart that discusses the correlation between crypto assets and the stock market, just for fun.

Sound good? You can read along in the S-1 here if you want, and I will provide page numbers as we go.

Inside Coinbase’s direct listing

To make things simpler, we’ll frame our digging in the form of questions, starting with: How many users did Coinbase need to generate its huge 2020 revenue gains?

The answer: not as many as I expected. In 2019, Coinbase generated $533.7 million from what it describes as 1 million “Monthly Transacting Users” (page 14). That works out to $533.7 million in revenue per MTU for the year.

In 2020, Coinbase generated $1.28 billion in revenue off of 2.8 million MTUs, which works out to around $457 apiece during the year. That’s a bit lower, but not terribly so. And given that the company’s transaction margins ranged in the mid-80s percent during much of 2020, each Coinbase active trader was still quite valuable, even at a lower revenue point.

As we noted in our first look at the company’s economics, Coinbase’s metrics are highly variable. Its MTU figure is no exception. Observe the following chart from its S-1 filing (page 95):

Coinbase’s Q1 2018 was nearly as popular in MTU terms as its final quarter of 2020. And from that point in time, the company’s MTUs fell 70 percent to its Q1 2019 nadir. That’s a lot of variance.

The company itself notes in its filing that “MTUs have historically been correlated with both the price of Bitcoin and Crypto Asset Volatility,” though the company does point out that it expects such correlations to diminish over time.

The answer to our question is that it only takes a few million MTUs for Coinbase to be a huge business. But the other side of that point is that Coinbase has shown twice in two years (2018, 2019) that the number of traders on its platform can decline.

What assets do Coinbase users hold? This is a question that I am sure many of you crypto enthusiasts have. But first, what does the Coinbase user asset base look like? Like this, historically (page 96):

Holy shit, right? The chart shows two things. First, the rapid appreciation of cryptocurrencies overall, which you can spy in the upward kick of the black line. And then the blue bars show how the assets on Coinbase’s platform grew from $17 billion at the start of 2020 to $90 billion by year’s end.

#a16z, #coinbase, #cryptocurrencies, #direct-listing, #ec-column, #ec-fintech, #finance, #fundings-exits, #startups, #tc

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Creating a prediction machine for the financial markets

Artificial intelligence and machine-learning technologies have evolved a lot over the past decade and have been useful to many people and businesses, especially in the realm of finance, banking, investment and trading.

In these industries, there are many activities that machines can perform better and faster than humans, such as calculations and financial reporting, as long as the machines are given the complete data.

The AI tools being built by humans today are becoming another level more robust in their ability to predict trends, provide complex analysis, and execute automations faster and cheaper than humans. However, there has not been an AI-powered machine built yet that can trade on its own.

There are many activities that machines can perform better and faster than humans, such as calculations and financial reporting, as long as the machines are given the complete data.

Even if it was possible to train such a system that could replace human judgment, there would still be a margin of error, as well as some things that are only understandable by human beings. Humans are still ultimately responsible for the design of AI-based prediction machines, and progress can only happen with their input.

Data is the backbone of any prediction machine

Building an AI-based prediction machine initially requires an understanding of the problem being solved and the requirements of the user. After that, it’s important to select the machine-learning technique that will be implemented, based on what the machine will do.

There are three techniques: supervised learning (learning from examples), unsupervised learning (learning to identify common patterns), and reinforcement learning (learning based on the concept of gamification).

After the technique is identified, it’s time to implement a machine-learning model. For “time series forecasting” — which involves making predictions about the future — long short-term memory (LSTM) with sequence to sequence (Seq2Seq) models can be used.

LSTM networks are especially suited to making predictions based on a series of data points indexed in time order. Even simple convolutional neural networks, applicable to image and video recognition, or recurrent neural networks, applicable to handwriting and speech recognition, can be used.

#artificial-intelligence, #artificial-neural-networks, #banking, #column, #cybernetics, #ec-column, #ec-fintech, #gamestop, #machine-learning, #private-equity, #venture-capital

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