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The Weekend Pitch

September 27, 2020

Presented by Deloitte Private

Happy startups are all alike; every unhappy startup is unhappy in its own way.

Tolstoy didn't write about Silicon Valley. But his most famous line is as applicable to young companies as it was to Russian families. The annals of venture capital are full of startups that shot for the moon and missed. And for every one of them, the freefall back to Earth is a slightly different journey.

Welcome to The Weekend Pitch. I'm Kevin Dowd, and you can reach me at weekend@pitchbook.com. Nikola and Quibi were two much-hyped startups with sky-high ambitions. But for both, the bloom is off the rose, for two very different reasons. And that's one of 10 things you need to know from the past week:

Quibi co-founder Jeffrey Katzenberg shows off the service during happier times. (Daniel Boczarski/Getty Images)

1. Going downhill

Let's start with the similarities. Nikola and Quibi were both young companies led by charismatic founders rapidly rising to the top of somewhat established but still relatively nascent industries—electric vehicles in the case of Nikola, streaming and short-form video in the case of Quibi.

Both raised piles of cash to fund their early development, and both convinced some of their respective industries' biggest names to join the cause. For Nikola, that was a partnership with GM. For Quibi, it was drawing reported funding from Disney, Sony Pictures and other Hollywood heavyweights.

Just a few months ago, all their dreams were intact. In April, Quibi pulled off a high-profile launch against the backdrop of a global crisis. In June, Nikola went public through a reverse merger and became a day-trading darling, with its market cap at one point exceeding $34 billion.

But the good times didn't last for long.

Earlier this month, activist investor Hindenburg Research put out a scathing assessment of Nikola and its founder, Trevor Milton, alleging they perpetrated "an intricate fraud built on dozens of lies," misleading investors about the depth of Nikola's proprietary technology and the status of its electric trucks. The company and its founder denied the claims, but Nikola's stock has since dropped nearly 50%, and on Monday, Milton resigned as executive chairman.

Quibi, meanwhile, has been caught in a slow-motion disaster ever since its launch. Download and subscription numbers have fallen far short of expectations. Quibi hasn't produced a hit, nor much buzz on social media. It faces a patent-infringement lawsuit. And this week, The Wall Street Journal reported that the company is exploring a potential sale, a move that was gently described as "a sign of strain" for Quibi.

Precisely what happened at Nikola is still a mystery. Both the SEC and the Justice Department are investigating the matter. For now, I'll just say this: Milton's decisions to resign (reportedly forfeiting $166 million) and then delete his Twitter account don't inspire a ton of confidence.

If the allegations are true, then Nikola is the latest in a line of companies that took the concept of fake it 'til you make it a bit too far. There's a long history in Silicon Valley of trying to speak a new reality into existence. But it's one thing to get overly optimistic on sales projections or timelines for new product development. Blatant lies about intellectual property are another.

In one vivid example, Hindenburg alleged that a teaser video entitled "Nikola One In Motion" that purported to show an electric truck that "fully functions" was an elaborate ruse: The vehicle wasn't moving under its own power, but was instead simply rolling down a hill. In a statement earlier this month, Nikola admitted as much, offering this underwhelming defense: "Nikola described this third-party video on the company's social media as 'In Motion.' It was never described as 'under its own propulsion.'"

Perhaps Milton genuinely believed the breakthroughs he promised were right around the corner. But Nikola, like the augmented reality company Magic Leap before it, now finds itself hoping that new leadership will be able to salvage a successful business after a founder's pledges of game-changing technology haven't quite panned out.

It's a very different story at Quibi. Co-founders Jeffrey Katzenberg and Meg Whitman produced exactly what they promised. It's just that consumers didn't really care for movies and TV shows chopped up into 10-minute chunks that can only be watched on a smartphone.

Quibi pitched its shows and movies as something to watch during the downtime of everyday life—while commuting, or while waiting to meet a friend for drinks. The pandemic made that use case impossible, much to the chagrin of Quibi's executives. "I attribute everything that has gone wrong to coronavirus," Katzenberg told The New York Times in May.

There might be something to that. But I would argue Quibi's struggles suggest a simple misreading of the market.

By initially restricting its content to mobile devices, Quibi forced users to watch on a six-inch iPhone screen rather than a 60-inch flatscreen. They also made it extremely difficult to watch something with another person—because, again, the small screen. That was a tough way to break into a market packed with other, easier alternatives. Two months after the launch, Quibi reversed course and offered streaming capabilities for certain smart TV providers, but the early damage was done.

Quibi's launch also came just as another short-form video app was taking over the US market, one that caters much more effectively to the tastes of young consumers: TikTok. Quibi's decision to go mobile-only put it in competition with social media services in the battle for user attention. But nothing about Quibi is participatory—at first, the company even banned screenshots of its content, making it impossible for viewers to share it on social media or create memes that could have been vital to building early interest. The stars Quibi chose to showcase its content are another reflection of a misunderstanding of teenage tastes: Better to build a show around Charli D'Amelio, not Queen Latifah.

The stories of Nikola and Quibi are still very much unfolding—both companies may still snatch victory from the jaws of defeat. But for now, at least, they're looking like two of the latest cautionary tales of what can happen when a startup flies too close to the sun.

2. Gores goes big

A special-purpose acquisition company backed by The Gores Group lined up the largest reverse merger on record this week, agreeing to combine with mortgage lender United Wholesale Mortgage in a $16.1 billion transaction. The biggest winner from the deal may very well be Gores Group founder Alec Gores, whose reported 0.6% stake in the combined business will be worth about $96 million, equating to a profit of some $80 million.

3. Game theory

With an eye toward locking down content for its new Xbox consoles, set to launch in November, Microsoft struck a deal to pay $7.5 billion for the parent of Bethesda Softworks, a game developer behind wildly popular franchises such as "The Elder Scrolls" and "Fallout." The deal generated a six-fold return on investment for Providence Equity Partners, according to a person familiar with the move, a lucrative exit that was a long time coming: Providence first backed the business back in 2007.

4. Electric autos

California Gov. Gavin Newsom signed an executive order this week calling for a ban on the sale of all gas-powered cars in the state beginning in 2035, the latest move in the state's fight against climate change. Meanwhile, WM Motor, a Chinese electric vehicle startup, raised 10 billion yuan (about $1.47 billion) in new funding. Those two developments make it a good week to read PitchBook analyst Asad Hussain's latest look at how electric vehicles are poised to reshape the auto industry.

5. IPOs for KKR

Academy Sports + Outdoor, a sporting goods retailer backed by KKR since 2011, set initial terms this week for an IPO that could raise $250 million. Another of the firm's portfolio companies, German defense supplier Hensoldt, went public in Germany, pricing its IPO at the low end of its range. And KKR was also busy this week backing new businesses: It acquired a stake in India's Reliance Retail and agreed to pay a reported $3 billion to purchase 1-800-Contacts from AEA Investors.

Sometimes, the impetus for a $3 billion deal can fit on the tip of a finger. (jjpoole/Getty Images)

6. Kiddie fintech

Does your kid need a debit card? Greenlight Financial thinks so. And this week, the Atlanta-based startup raised $215 million at a $1.2 billion valuation to support its efforts, including a flagship platform that allows parents to manage and limit spending, pay allowances, and carry out a range of other tasks geared toward improving children's financial literacy. Another startup that aims to bring financial tools to younger (although still adult) users also brought in new backing this week, as stock-trading platform Robinhood added a $460 million extension to its Series G round.

7. Marketing mega-rounds

A startup called Attentive has a solution for retailers hurting for business during the pandemic: personalized text messages to potential customers. The New York-based company's platform got a big vote of investor confidence this week in a $230 million round led by Coatue. It was also a big week for a different kind of ecommerce company, as Mirakl, a French startup that helps retailers launch and manage their own marketplaces, raised $300 million at a $1.5 billion valuation.

8. Insurance mega-rounds

Two more of the week's biggest VC fundings went to startups in the insurance sector. Bright Health, which offers various health insurance products, hauled in $500 million from Tiger Global, Blackstone, NEA and other big names. And Next Insurance, which caters to small businesses, brought in $250 million in a round led by CapitalG.

9. Grabbing Grail

When Grail filed for an IPO earlier this month, it appeared the cancer detection startup might be the next well-funded unicorn to conduct a public debut. Not so fast, my friend: Genetic sequencing giant Illumina agreed this week to pay $8 billion for Grail, confirming earlier reports that a deal may be imminent. Illumina should be quite familiar with the company's operations: Grail launched in 2016 as a spinout from Illumina.

10. Buying the scrip

GoodRx, a private equity-backed company that helps patients find the best prices for and fill their prescriptions, raised more than $1.1 billion in an IPO this Wednesday. Its shares climbed even higher the rest of the week, giving GoodRx a market cap of nearly $20 billion by the week's end. Another prescription management company was also in the news, as Bloomberg reported that UnitedHealth is in talks to purchase startup DivvyDose for some $300 million.

View the full list online

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A message from Deloitte Private

How family-owned businesses' unique traits can help them thrive

Dire headlines abound when it comes to small businesses during 2020 to date. Many have closed their doors forever after the sustained blows from the COVID-19 pandemic; others are still struggling to find their footing. Family-owned businesses make up much of this ecosystem, and much like any other enterprise have been under significant pressure to respond to the general health, safety and welfare challenges introduced by the COVID-19 pandemic, not to mention operational disruptions.

However, the same traits that distinguish family-owned businesses from the general market could also help them survive, among which include unique governance, longer-term horizons and overall purpose.

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Health equity

Giant medicaments, or tiny doctors? (UnitoneVector/Getty Images)

The world has spent most of 2020 in the grips of a once-in-a-generation (fingers crossed) global health crisis. So it makes sense that, for many, there's a new emphasis on taking care of both body and mind. Private-market investors are no exception.

Private equity investments in healthcare have outpaced broader deal activity for the past decade: The sector grew its share of the PE pie from 8.9% to 14% between 2009 and 2019, according to PitchBook data. As Stephen-George Davis writes in his latest analyst note, some of the reason for the spike is surely a history of healthcare-focused PE funds outperforming their peers.

Venture capitalists, meanwhile, have been busy this year pumping new funding into telehealth providers and other companies using technology to reshape the healthcare industry. Kaia Colban, our emerging technology analyst focused on the space, published a new piece of Emerging Tech Research this week diving deep into how VCs are approaching retail health and wellness tech during the pandemic: Check out the free preview version.

Phi beta unicorn

(tommy/Getty Images)

I am a graduate of the University of Washington. I am not, however, one of the 456 former Huskies who have gone on after graduation to found a company and raise venture capital funding. And I am certainly not Christophe Bisciglia, the Washington alumnus who co-founded Cloudera, the software giant that raised $1 billion in venture funding before going public in 2017.

Why do I bring this up? Because PitchBook this week released its annual rankings of the universities that produce the most venture-backed founders—including a ranking of the five most prolific fundraisers that have sprung from each school's alumni.

So whether your preferred shade of red is Cardinal or Crimson, whether you're a Wolverine, a Longhorn, a Boilermaker or a Yellow Jacket, take a look and see where (and if) your alma mater lands on the list.

Double feature

(mariya_rosemary/Getty Images)

The pandemic has been an extraordinarily disruptive event, placing new pressures and stresses on companies and investors across a wide array of industries. This week, in a pair of stories from the upcoming edition of PitchBook's Private Market PlayBook, our writers examine two particular sectors that have been upended in the past six months.

In the early days of the coronavirus crisis, meat processing plants emerged as worrisome hotspots where the virus could easily spread. As Priyamvada Mathur writes, that could present an opportunity for lab-grown meat startups—except that for many in the space, full-scale commercialization may still be years in the future.

In the UK, meanwhile, safety lapses amid the pandemic have been just the latest in a series of struggles for nursing homes backed by private equity firms. Leah Hodgson writes about what at least one lawmaker sees as the "fundamental flaws" that come with the idea of profit-driven care.

Startup name of the week

(Antonio Alba/Getty Images)

In 1957, the Soviet Union plucked a stray dog off the streets of Moscow and launched the poor pooch into space. I say "poor" because the dog, named Laika, died of overheating on her journey, an ethically dubious sacrifice on the altar of science. But her place in history is secure: Laika became the first living creature to orbit the Earth.

I don't know how much that has to do with information security and compliance, which are the domain of Laika, a startup that raised a $10 million Series A round this week. But I do know that the company is canine-friendly: The final employee listed on the "About" section of its website is a miniature poodle named Milo, who belongs to co-founder and COO Eva Pittas. His title? Information security intern.

Quote of the week

"What the United States has done to TikTok is almost the same as a gangster forcing an unreasonable and unfair business deal on a legitimate company. ... China has no reason to give the green light to such a deal, which is dirty and unfair and based on bullying and extortion. If the US gets its way, it will continue to do the same with other foreign companies."

—An editorial from China Daily, an English-language newspaper owned by the Chinese Communist Party