The Idea of ‘Blitzscaling’ May Be Losing Popularity in Silicon Valley

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In case you haven’t already overdosed on WeWork content (I’m close), the Wall Street Journal published a massive article titled, “The Money Men Who Enabled Adam Neumann and the WeWork Debacle,” which focuses on the financiers who enabled WeWork’s dramatic rise and fall.

Although it’s a lot of information we already know, there are still some fresh anecdotes. One such detail points to the notion that Neumann wasn’t shy about hiring and elevating friends and family. At an executive retreat in Montauk, for example, Neumann reportedly raised a glass in a toast “to nepotism.”

The story’s larger theme is about this notion of growing as fast you can in an effort to grab as much market share as fast as you can — all while throwing caution (and profitability) to the wind.

The idea of growth over profitability has truly defined the last decade. Last year, I interviewed Reid Hoffman, who has long been introducing founders to the concept of “blitzscaling,” which prioritizes speed over efficiency. “You are optimizing for growing your business and your customers at a fast rate, which means you’ll spend capital inefficiently and you will do it by taking risks in uncertain times,” he told me.

That mindset, however, might be losing popularity following the WeWork fiasco. As Fortune’s Alan Murray said in today’s issue of CEO Daily: “And the WeWork saga will likely be the high water mark of the ‘blitzscale’ era—an era when companies could raise untold amounts of cash to pursue growth at the expense of pretty much anything else, including profits, sound governance, and just plain common sense.”

2020 PRIVATE EQUITY OUTLOOK: Pitchbook’s private equity analysts just released their 2020 predictions and analysis for the PE industry. Here are several that caught my eye:

— We will see another acquisition of a major alternative asset manager: “On the heels of Brookfield’s $4.7 billion acquisition of credit-focused Oaktree and SoftBank’s $3.3 billion purchase of long-time private equity and private debt manager Fortress, other asset managers are gearing up to become full-service alternative asset platforms. Blackrock could buy credit-focused Ares or Centerbridge Partners. EQT—with a small lending operation and fresh IPO proceeds—could expand its US and credit presence by acquiring Antares or a similar middle- market-focused shop.”

— The big four public general partners (GPs) will expand their strategy offerings at twice the rate of comparable GPs: “The large public GPs have taken steps, including converting from public partnerships to C-Corporations, to boost the value of their shares. Expanding into new strategies not only helps these GPs grow AUM at a quicker pace, it also allows for a more diverse revenue stream that can weather all economic environments, potentially lifting share prices further.”

— Sovereign wealth funds and pension plans will become more sophisticated investors, increasing control over investments: “Many sovereign wealth funds (SWFs) and pension plans have become comfortable with their allocations to private markets and want to take the next step toward becoming sophisticated actors. These entities strive to maximize returns while minimizing fees, and many of them believe direct investments and co-investments are the best way to achieve this. Some high-profile actors, such as CPPIB and GIC, are already active in the direct space, perhaps encouraging others to join in.”

— VC-to-PE buyouts will continue to proliferate: “VC-to-PE buyouts are growing in prominence, with an ever-expanding group of GPs specializing in software buyouts. Between 2000 and 2018, the number of North American and European VC-to-PE buyouts has grown at a CAGR of 17.9%, compared to 9.4% growth for all buyouts. VC-backed companies are also more mature and abundant, increasing the number of viable candidates for PE firms to target. Tech companies continue to drive performance in both the public and private equity markets, pointing to heightened investment in the space.”

Read the full report here.

…SPEAKING OF PRIVATE EQUITY, pop star Taylor Swift had some strong words for the industry. In a speech at a Billboard Women in Music event Thursday night, she got specific. Swift said:

“Lately there’s been a new shift that has affected me personally, and that I feel is a potentially harmful force in our industry … And that is the unregulated world of private equity coming in and buying up our music as if it is real estate, as if it’s an app or a shoe line. This just happened to me without my approval, consultation, or consent. After I was denied the chance to purchase my music outright, my entire catalog was sold to Scooter Braun’s Ithaca Holdings in a deal I’m told was funded by the Soros Family, 23 Capital and The Carlyle Group.”

This is a result of a long-standing feud between Swift and music executive Scooter Braun, who bought her back catalogue when he purchased Swift’s former record label, Big Machine. Though the deal was not a result of a leveraged buyout, Swift blamed the private equity firms for “enabl[ing] this man to think … that he could buy me.” She added: “But I’m obviously not going willingly.”

Polina Marinova
Twitter: @polina_marinova
Email: polina.marinova@fortune.com

VENTURE DEALS

- CallMiner, a Waltham, Mass.-based provider of AI-fueled speech and customer interaction analytics, raised $75 million in funding from Goldman Sachs.

- Licious, an India-based startup that sells fresh meat and seafood online, raised $30 million in Series E funding. Vertex Growth Fund led the round, and was joined by investors including 3one4 Capital, Bertelsmann India Investments, Vertex Ventures Southeast Asia and India, and Sistema Asia Fund.

- Theatro, a Dallas-based enterprise mobile voice platform, raised $20 million in Series C funding from Sageview Capital.

- NeuroFlow, a Philadelphia-based digital health platform provider for enabling behavioral health access and engagement, raised $7.5 million in Series A funding. Builders VC led the round, and was joined by investors including Dreamit Ventures, Spring Point Partners, Red & Blue Ventures, and AWT Private Investments.

- Hemlane, a San Francisco-based modern property management solution that combines technology with local agents, raised $2.5 million in seed funding. Prudence Holdings led the round and was joined by investors including Aglaé Ventures and Stanford-StartX Fund.

PRIVATE EQUITY DEALS

- Ardian agreed to buy a majority stake in Audiotonix, a U.K.-based manufacturer of audio mixing console equipment, in a deal valued at almost €1 billion ($1.1 billion), according to the Financial Times. Read more.

- McCarthy Capital recapitalized Big Belly Solar, a Needham, Mass.-based provider of smart waste solutions for public spaces. Financial terms weren't disclosed.

- Arcline Investment Management agreed to acquire Fairbanks Morse, a Beloit, Wisc.-based maker of reciprocating engines, for $450 million.

- Thompson Street Capital Partners made an investment in Data Dimensions, a Janesville, Wisc.-based provider of business process automation solutions. Financial terms weren't disclosed.

- VirTrial, which is backed by Kinderhook Industries LLC, acquired SnapMD, a Glendale, Calif.-based provider of telemedicine tools and services. Financial terms weren't disclosed.

- Growth Street Partners made an investment in HR Acuity, a Florham Park, N.J.-based provider of software to manage, track and investigate employee issues. Financial terms weren't disclosed.

- NTI Connect, a subsidiary of ORIX Capital Partners, acquired Vertical Communications Inc, a Dallas-based in-house turnkey solutions for wireless, small cell and fiber providers. Financial terms weren't disclosed.

- Bruin Sports Capital will acquire Two Circles, a U.K.-based consumer data analytics, sports marketing, and technology practice. Financial terms weren't disclosed.

OTHER DEALS

- Charles River Laboratories International, Inc. (NYSE: CRL) agreed to acquire HemaCare Corporation (OTCPK:HEMA) for approximately $380 million in cash.

EXITS

- Apax Partners agreed to acquire Coalfire, a Westminster, Colo.-based provider of information technology audit and compliance services, from The Carlyle Group and The Chertoff Group. Financial terms weren't disclosed.