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2016-12-07-1

Term Sheet — Monday, February 27

Feb 27, 2017

MONEYBALL FOR STARTUPS

Crowdfunding watch: Is it fair to say the realities of equity crowdfunding have not lived up to the category’s promises? Most action in this once-hyped market has been limited to helping same institutional investors and high net worth individuals that could always invest in private companies, not the “average Joe” investors that get shut out of the "unicorn" investing action. To expand, crowdfunding platform AngelList now operates its own fund, and consumer packaged goods-focused CircleUp focuses more on institutional investors.

Since 2012, CircleUp has helped 233 companies raise $315 million in capital. (Of those, five have failed, none have exited, but they carry and unrealized IRR of more than 40%.) Today the company announces an important next step in its evolution as a "marketplace" company: A Moneyball-style set of algorithms that predicts the next breakout hit in consumer packaged goods called Helio. It uses “a web of algorithms and data sets meant to mimic the investor’s mind,” says CEO Rory Eakin. It analyzes a company’s financial performance, competitors’ performance, brand, distribution, and team. The company has been building this for several years and views the product as deeply central to its future.

"Moneyball for startups" isn’t a new idea. (Steve Blank has been big on this concept for years.) But Eakin says that Silicon Valley’s system for investing in tech startups is less suited to this type of data crunching. For one, startup investing is fairly efficient, with the capital and startups clustered around a handful of innovation hubs in the country.

But the consumer packaged goods industry does not have a Sand Hill Road, making it difficult for investors to surface fast-growing companies with less than $15 million in revenue. Further, it’s easier for algorithms compare business models in consumer goods because they are essentially the same across all categories, but with tech startups, every business model (if they even have one) is its own special snowflake. Lastly, unlike with opaque tech startups, the data points are plentiful in the consumer world. Retailers and third parties make inventory, distribution and sales data publicly available.

In the beginning, Helio identified companies with strong financials, but whose brands would not pass an investor’s "eye test," Eakin says. But after taking customer data into account—from social media and review sites—Helio can now accurately identify when an off-brand or copycat product’s success is short-lived. (One example: Companies that say “Send us a direct message” on Twitter three times more than average are not likely to have long-term success.)

Helio has sourced a handful of deals so far, including REBBL, a line of coconut-milk beverages, nutpods, a dairly alternative snack, and Supergoop, a sunscreen brand. It charges private equity and venture capital firms 5% of the investment for surfacing the deals. In other cases, retailers looking for up-and-coming brands to carry offer a discount on shelf space as compensation for introductions made by CircleUp.

CircleUp has 55 employees. The company recently laid off six employees from its business operations side as a result of the “evolution” brought about by Helio. CircleUp has teams of people working with companies on its platform, but now it can be “more efficient” on tasks like verifying financial information, Eakin says.

Unicorn watch: SoFi, a San Francisco online lending startup, raised $500 million in new funding led by Silver Lake with participation from existing investor SoftBank Group, and GPI Capital, confirming a Wall Street Journal report from earlier this month. The round reportedly values SoFi at $4.3 billion, up from the company’s last valuation of $3.2 billion. SoFi CEO Mike Cangey would not confirm the valuation, but said $4.3 billion was “in the right zip code.” A couple of notes:

1.Why does it need $500 million? SoFi raised $1 billion from SoftBank Group in September 2015, and it has been “off and on” profitable for the past few years. This money isn’t going toward its actual loans. SoFi currently has 250,000 members and originates $1 billion in credit per month.

Cagney says the round was “opportunistic.” SoFi will use the money to speed up its expansion from student loan consolidation into asset lending, banking, and geographically into Australia. Earlier this month the company acquired Zenbanx, which has a relationship with a deposit bank in Delaware. SoFi plans to take over that bank’s charter and banking license so its users can have deposit accounts. “We want to be the central point of your financial life,” Cagney says.

2. It’s an ambitious plan. What makes SoFi uniquely positioned to pull it off? “Well we’ve got a billion-nine in capital,” Cagney jokes. (Also the fact that we’ve been able to execute and create investor confidence, and people understand the vision we’re trying to deliver.”)

3. “At least one” of the big banks have tried to acquire SoFi, but the company isn’t interested in selling. The potential acquirer saw SoFi as a source of lead generation, since it has attracted younger customers that distrust traditional banks. But Cagney does not want to be a lead generation tool for a bank. “The problem [at banks] isn’t the lead generation, it’s the product offering,” he says. “People want speed, transparency and alignment.”

4. Why Silver Lake? The buyout firm has looked at several of SoFi’s past funding rounds, but it was too small for Silver Lake to invest—until now. The firm presents SoFi with a unique benefit: Silver Lake’s limited partners are taking an active role, and some large sovereign wealth fund LPs are buying up some of SoFi’s loans.

Venture watch: Brian Pham left Sherpa Capital in December to build his own startup, Term Sheet has learned. The startup is currently in stealth mode and will focus on what Pham is calling “consumable AR” (think more Pokémon Go than Hololens). He has not yet raised any capital. A principal at Sherpa, Pham was the firm’s first hire by founders Shervin Pishevar and Scott Stanford. He worked with portfolio companies PillPack, Luka, Cymmetria, Munchery, and Cue Health but did not take board seats. Sherpa noted that Stacey Leanos joined the firm as director of investor relations Alex Fayette as an investment associate. A firm representative said:

Brian was our first associate hire in 2013 when we started Sherpa. Entrepreneurship is in our DNA and has been a core part of Sherpa’s mission from the beginning. We encourage our team to start their own companies when bitten by the entrepreneurial bug. We are excited by Brian's entrepreneurial endeavors and wish him the best in his new venture. We look forward to supporting him on his exciting journey ahead.

Typo watch: Yes, I meant to say inequality, not equality, in Friday’s link to this story about Google’s $11.5 million donation to racial justice groups.

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VENTURE DEALS

WeWork, a New York City-based office-sharing startup, is close to raising more than $3 billion in funding from SoftBank Group (TSE:9984) at a $20 billion valuation, according to CNBC. Read more at Fortune.

SoFi, a San Francisco online lending startup, confirmed it has raised $500 million in a funding. Silver Lake Partners led the round, which reportedly values the company at $4.3 billion, and was joined by SoftBank Group and GPI Capital. Read more at Fortune.

Cordial, a San Diego developer of software that tracks user behavior online to generate targeted marketing emails, raised $6 million in Series A funding, according to TechCrunch. Upfront Ventures led the round. Read more.

Uponit, a Tel Aviv ad recovery platform for publishers, raised $2.3 million in funding. Jerusalem Venture Partners led the round, and was joined by the KDC Media Fund.

Drizly, the Boston developer of an on-demand alcohol delivery app, raised an additional $2 million in Series B funding, according to TechCrunch, which brings the round’s total to $17 million. Read more.

Roadmunk, a Toronto provider of visual roadmap software for product management, raised $1.5 million in a seed funding. Golden Venture Partners led the round, and was joined by Felicis Ventures and Garage Capital.

Kinnos, a New York City startup developing technologies to prevent surface-transmitted infections, raised $1 million in seed funding. Georgica Advisors led the round, and was joined by New York Angels, VentureWell, and angel investors.

Keriton, a Philadelphia provider of a pumped breast milk management system for neonatal ICUS, raised $1 million in funding. BioAdvance led the round, and was joined by Dreamit Ventures, Penn Medicine, Amerihealth, Wharton, Dorm Room Fund, and Steve Barsh.

HEALTH + LIFE SCIENCES DEALS

Arrakis Therapeutics, a Waltham, Mass. biopharmaceutical company, raised $38 million in Series A funding. Canaan Partners led the round, and was joined by Advent Life Sciences, Pfizer (NYSE:PFE), Celgene Corporation, Osage University Partners, and Henri Termeer.

Xenex Disinfection Services, a San Antonio maker of disinfection systems for the healthcare industry, raised $38 million in funding. Essex Woodlands led the round, and was joined by Piper Jaffray Merchant Banking, Malin Corporation, and Tectonic Ventures.

Pharma Two B, a specialty pharmaceuticals company focused on developing treatments for Parkinson’s disease, raised $30 million in funding. Israel Biotech Fund led the round, and was joined by aMoon, JVC, JK&B, and Generali Financial Holdings FCP-FIS SF2.

Congenica, a British provider of clinical genome analysis technology, raised £8 million ($9.9 million) in Series B funding. Investors include Cambridge Innovation Capital, Amadeus Capital Partners, and Parkwalk Advisors.

PRIVATE EQUITY DEALS

• Goldman Sachs (NYSE:GS) sold Daesung Industrial Gases, South Korea’s second-largest producer of industrial gases, to MBK Partners. The sale price was not disclosed, but media reports value the deal at around $2 billion. Read more.

Cherwell Software, a Colorado Springs provider of IT service management services for enterprises, raised $50 million in funding from KKR (NYSE:KKR).

• Global Software, a Raleigh, N.C. provider of Excel automation and reporting software backed by Thompson Street Capital Partners, acquired Globe Software Pty., a Perth, Australia-based creator of data analytic software.

• KKR (NYSE:KKR) invested in Gambol Pet Group, a Chinese provider of pet food. Financial terms weren’t disclosed.

• Dermatology Associates, a Dallas provider of dermatology care backed by ABRY Partners, has rebranded as U.S. Dermatology Partners.

IPOS

• KKR (NYSE:KKR) is preparing to take Milwaukee-based industrial machinery manufacturer Gardner Denver public in an offering that could value the company at between $6 billion and $7 billion including debt, according to Reuters. Read more.

EXITS

• AES Corporation (NYSE: AES) and Alberta Investment Management Corporation agreed to acquire FTP Power, a Salt Lake City operator and developer of utility scale solar assets, from Fir Tree Partners for $853 million in cash.

Stayzilla, an Indian online hotel booking and reservation platform, is shutting down its service. Stayzilla raised $34 million from investors including Matrix Partners and Sequoia Capital. Read more.

FIRMS + FUNDS

Formation Group, a Palo Alto, Calif. principal investment firm, raised $121.3 million for its debut fund, according to an SEC filing. That's in addition to a previous filing for a special purpose vehicle fund with $232 million in commitments, bringing the firm's total assets under management to $357 million. This item has been updated to note the prior filing.  

• Aliter Capital, a new firm whose four founders all have ties to H.I.G., raised £90 million ($111.8 million) for its first fund, according to Private Equity News. Read more (subscription required).

PEOPLE

• Marc Boughton is stepping down as chairman of CVC Credit Partners to focus on his role as co-head of the firm's strategic opportunities platform, according to Private Equity News. Read more (subscription required).

• Edward Beckley has joined TPG, where he will source global infrastructure investments, according to Private Equity International. Beckley is the former European head of Macquarie Infrastructure and Real Assets. Read more (subscription required)

• Chris Peyser has joined Harvest Partners SCF as a senior associate on the investment team. Previously he was at Kelso & Company.

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