Friday, May 19, 2023

Germany proposes higher startup stock ownership incentives / 50% startups have 12 months+ cash runway / Fivetran secures $125M debt

Plus, Pioneer Square Labs raises $20M fund for startup studio

Inside Startups

For May 19, 2023

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The ruling coalition parties in Germany proposed raising the annual tax-free allowance for employee stock ownership in startups from €1,440 ($1,556) to €5,000 ($5,408). Additionally, the coalition has also proposed creating shares with multiple voting rights. The moves aim to create a conducive environment for startups in the nation.

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The multiple voting rights amendment is aimed at retaining the influence of startup founders over their company once it has gone public.
With the increase in tax-free allowance, the nation hopes to provide startups with more leverage to entice and reward employees.
Other proposed changes include simplifying access to capital markets, strengthening Germany's role as a financial center, and removing barriers to technology.
The German government is evaluating the feedback from its state authorities and lobby group, aiming to approve the law in the cabinet over the summer.

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Germany's Startup Association has welcomed the changes.
The Association's CEO Christian Miele added that the "improvements are therefore urgently needed," considering that Germany sits last in stock ownership programs amidst other European nations, which weakens its prominence as a startup location.

What the numbers say: Nearly 50% of the startups surveyed by Pilot had more than 12 months of cash runway. A third of the respondents expect the funding environment to recover by Q2 2024, giving them sufficient cash to sustain their business until then. However, the funding slowdown may concern 21% of the surveyed startups, which had less than six months of cash reserves and may have to take action to preserve cash.

Where to see the impact: Startups in the survey were able to extend their cash reserves by cutting down on business travel, marketing, and office space. While cutting expenses was a priority, a third of the respondents bolstered their sales division, with another 33% keeping R&D a top priority to sustain operations during the downturn.

Relevance: Most startup founders were optimistic about prospects in 2023, although many were concerned about growth due to a tough economic environment. Despite the challenging macroeconomic conditions, 57% of surveyed startups said they were extremely unlikely to conduct layoffs this year. Mid-sized startups were more likely to consider layoffs than smaller startups, per Pilot.

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Data startup Fivetran availed a $125M delayed-draw term loan facility from Vista Credit Partners. Fivetran's co-founder and CEO, George Fraser, never previously considered taking debt. However, the firm chose debt due to the prevailing market conditions, as neither equity fundraising nor IPO listing was an option. Fraser said, "Who knows what the right multiples are in this market?"

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Fivetran was most recently valued at $5.6B.
The new financing arrangement is structured in such a way that it delivers Fivetran cash in stages at predetermined time intervals.
Fraser referred to the loan as an insurance policy to avoid being driven "into a corner" the next year or the year after.
When the market conditions improve, Fivetran will consider a possible IPO listing.

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The fallout of prominent venture debt lender, Silicon Valley Bank, has made it even more difficult for startups to secure loans.
However, financiers are still providing debt to late-stage companies with strong metrics.

Seattle-based startup studio Pioneer Square Labs secured $20M for its third fund. The studio incubates startup ideas and recruits executives to lead them. PSL already has multiple app ideas that use generative AI for the finance and healthcare sectors.

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PSL will use the fund to back generative AI startups emerging from its startup studio.
The firm also backs entrepreneurs that come to the studio with a startup idea.
PSL also has a separate venture fund division that invests in startups.
Ideas originating from the startup studio can also tap into the venture fund for additional funding.
PSL's VC division last raised a $100M fund in 2021.
To date, 33 startups have emerged from PSL's startup studio, a majority of which raised subsequent funding.
Palvi Mehta, PSL's CFO and operating partner, said that one of the biggest challenges of the studio was finding founders for its startups.

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Nevin Shetty, the former CFO of e-commerce startup Fabric, was indicted by the U.S. District Court in Seattle over wire fraud charges. After Fabric informed him of his impending dismissal due to his performance, Shetty reportedly moved $35M of the company's funds into a crypto firm he owned.

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He reportedly transferred the sum into HighTower Treasury to invest the funds into the decentralized finance (DeFi) sector.
Shetty was supposedly planning to pay a 6% interest on the investments back to Fabric, with the remaining profits to be retained by HighTower.
By mid-May of 2022, the firm's $35M investment had become worthless due to the drop in crypto prices.
Fabric informed the FBI about the matter as soon as it learned about the missing funds, triggering an investigation.
If convicted, Shetty could face a maximum sentence of 20 years in prison.

Battery component maker Anovion Technologies has selected Decatur County in Southwest Georgia to build its 1.5 million-square-foot manufacturing plant. Georgia was one of the 15 states that fit the company's profile for the plant. The company zeroed in on Georgia due to existing rail infrastructure, access to renewable energy power sources, and accessibility to battery suppliers.

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Anovion, which manufactures synthetic graphite for batteries, predicts that the plant will cost $800M to build.
The firm will divert a significant portion of the $117M grant it received from the U.S. Department of Energy's Bipartisan Infrastructure Law towards the facility's construction.
Anovion aims to begin production at the new facility in Q4 2025, slowly ramping up production to reach peak output in 2026.
The peak production capacity for the plant is estimated to be 40,000 metric tons of products.

Quick Hits:

SoftBank launched a new $150M Opportunity Growth Fund to back Black and Latino-led startups. The fund was rebranded as an Open Opportunity Fund, indicating that it is opening access for others to invest in.
Lagos-based B2B e-commerce startup Sabi secured $38M in Series B funding at a $300M valuation. CommerzVentures, Norrsken22, Fluent Ventures, Proof VC, CRE Venture Capital, and Janngo Capital backed the funding round.
Real estate insurance technology startup Obie raised $25.5M in Series B funding led by Battery Ventures.
Odyssey, an end-to-end solution provider for renewable energy companies, closed its Series A funding round at $15M. Union Square Ventures led the round with additional participation from Equal Ventures, Twelve Below, Transition, MCJ Collective, and others.
Auction software developer Auction.io acquired real estate tech platform startup Doorsey for an undisclosed sum.