Forbes - Crypto dealmaking runs wild

Kevin Dowd and Becca Szkutak

Staff Writers

We all know that 2021 was one crazy year in the crypto world. How crazy? The market for M&A deals in the crypto space swelled by nearly 5,000% last year, a stunning surge I examined in detail earlier this week.

Unsaid in that story is that a similar (albeit less severe) trend is also underway in the market for funding crypto startups.

Globally, companies in the sector raised some $34.3 billion in new funds last year, according to PwC’s recent report on the space—up 646% from 2020. That’s more capital than had been raised in the industry in every other previous year combined. The number of investments, meanwhile, rose 152%, topping 1,500—an average of more than four per day.

When I caught up recently with Joe Castelluccio, a partner at Mayer Brown who specializes in digital assets, our conversation centered on crypto M&A. But he also shared some thoughts on the state of the broader digital assets space, and how the industry is slowly starting to fulfill some of its plentiful hype. These days, there’s more steak to go along with all the sizzle.

“The technology is not going anywhere,” Castelluccio said. “It’s maturing. It’s being validated by very real use cases. And it’s being tested. Some of this stuff is not proven, and some of it will be tested and some will fail, but that’s part of market development."

Critics might say we’re caught up in a crypto bubble, and when it pops, the investors funding all these deals will be left holding the bag—as happened during the dotcom boom.

That may well be the case for many upstarts. But Castelluccio points out that in addition to its famous flops, the dotcom era was also the breeding ground for companies that went on to change the world.

“In the late ‘90s, there was Amazon,” he said. “And there was also Pets.com."

The maturation of the space is demonstrated by the types of deals that are getting done. In 2019, 57% of all crypto fundraisings were seed deals, per PwC. That figure dropped to 50% in 2020 and 42% in 2021. On the other side of the (bit)coin, Series A rounds have gone from 9% of activity in 2019 to 14% last year, and rounds at Series B or later have gone from 5% to 9%.

More than 3,200 different investors participated in a crypto funding round last year. As you’d probably expect, the vast majority of those were venture funds, incubators and other crypto-focused companies. But 4% of them—about 130 investors in total—were corporations or corporate VC arms.

There are different visions of what crypto’s future will look like. Some prognosticators see a landscape dominated by a new generation of companies rooted in the 21st century. Others think the current members of the Wall Street elite will transition into crypto titans. The more of these corporate investments that occur, the more likely the latter scenario becomes.

“I work a lot with large banks based outside the U.S.,” Castelluccio said. “And culturally, some of them are very risk-averse. So those types of small minority investments, while not financially lucrative, are important to them, because that’s how they pressure-test some of their ideas and contemplate bringing new products to market.” —K.D.

The U.S. v. UnitedHealth

Antitrust regulators in the U.S. have found their next target.

The Department of Justice sued today to block UnitedHealth’s planned acquisition of Change Healthcare for $13 billion, arguing the deal would give United access to data and technology it could use to reduce competition in the health insurance market. United is already a giant in that market, with $287.6 billion in 2021 revenue.

There’s drama in the air at UnitedHealth’s Minnesota headquarters. ASSOCIATED PRESS

The deal was first announced in January 2021, with a United subsidiary called Optum serving as the technical buyer. Now, it’s the latest multibillion-dollar transaction to run afoul of the Biden administration. Last week, Lockheed Martin called off a $4.4 billion acquisition of Aerojet Rocketdyne due to a challenge by the Federal Trade Commission. Earlier in the month, Nvidia cited regulatory difficulties when it walked away from a mega-deal for Arm. And last July, a DOJ lawsuit caused Willis Towers Watson and Aon to abandon their $30 billion merger.

In the short time since their respective appointments, attorney general Merrick Garland, FTC chair Lina Khan and DOJ antitrust watchdog Jonathan Kanter are making their presence felt in the world of M&A.

“The Justice Department is committed to challenging anticompetitive mergers,” Garland said in a statement. —K.D.

Series B for sushi grade

Investors have gone out to sea—well, kind of. Back in 2018, the soup du jour of alternative protein investing was backing companies looking to tackle beef and chicken substitutes, like Beyond Meat and Impossible Foods, but that trend has gone out with the tide. The focus is now on seafood.

Wildtype is bringing some disruption to the sushi space. Getty Images

The latest round comes from San Francisco-based Wildtype, a startup looking to develop lab-grown sushi-grade salmon. On Wednesday, the company announced a $100 million Series B round led by L Catterton with participation from a hodgepodge of investors including Singaporean state holding company Temasek, Jeff Bezos’ venture entity Bezos Expeditions and actor Leonardo DiCaprio.

Wildtype joins a group of startups looking to tackle the ocean floor. BlueNalu is trying to concoct multiple kinds of lab-grown fish, starting with mahi mahi, and Shiok Meats is using the same method to create a line of crustaceans. While cellular aquaculture is a growing trend, there are a number of plant-based seafood options in the works too coming from startups including Kuleana and Revo Foods.

If you are into this stuff, our food and agriculture-focused colleague Chloe Sorvino covers this space from time to time and, hey, she has a newsletter too! You can sign up instantly here. —B.S.

A PE spending spree

First, there was the $18.6 billion in buyouts. Then, there was the new $50 billion investment plan. It’s safe to say it was a busy week at Apollo Global Management.

On Monday, Apollo entered exclusive talks with Worldline over an acquisition that would value the French payments company at as much as €2.6 billion ($2.9 billion). On Tuesday, Apollo teamed up with Standard General on an agreement to buy local TV station owner Tegna at an enterprise valuation of $8.6 billion. Wednesday saw Apollo strike a $7.1 billion deal to acquire Tenneco, a major maker of auto parts. And on Thursday, the firm announced plans to invest $50 billion over the next five years through a new platform focused on clean energy and decarbonization, with the potential to deploy as much as $100 billion before the decade is up.

It's a lot to take in. The most interesting move of the bunch, though, might be the purchase of Tegna—a move that materialized after many months of merger talks, including a rival bid from TV tycoon Byron Allen. Standard General will control the vast majority of the company’s equity, with Apollo holding a non-voting stake. The takeover is the latest sign of Apollo’s ample media ambitions. —K.D.

$30 million for water startups

The global water industry is massive and ripe for innovation, but it’s also sprawling, fragmented and heavily regulated, says Tom Ferguson, whose venture firm has a new fund aimed at investing in it. While some estimates place the total value of water-based enterprises at $500 billion worldwide, the market hasn’t advanced at the same pace as adjacent industries like renewable energy.

“With the explosion of money going into climate tech, $40 billion [in 2021 alone], only $400 million is going into water, or 1%,” he says.

Indeed, water research analytics firm Bluefield Research found that about $5.2 billion has been invested through 625 early-stage opportunities in the industry since 2000. That’s pretty dismal compared to the climate tech figures from last year alone.

Ferguson’s Burnt Island Ventures hopes to help get some of these companies going with its new $30 million fund focused on seed-stage water startups, from scientific filtration solutions to wastewater assessment software. And while its name is a nod to the Scottish islands near where his grandparents lived, he doesn’t mind if it evokes the dire impact of climate change. —B.S.

They Said It

“You don’t trade lumber because you like lumber, you trade lumber because you love lumber. Lumber is the love of my life."

—Greg Kuta, a trader at Westline Capital Strategies, speaking to the Wall Street Journal about the surreal state of the lumber futures market

Just The Facts

— Good Culture, an Orange County, California-based cottage cheese startup—yes, you read that right—announced a $64 million Series C round on Wednesday. The financing included backing from actress and “superfan” Kristen Bell in addition to private equity firm Manna Tree.

— The insurance tech market has exploded over the last few years, as startups have piled into consumer auto insurance. Nirvana Insurance is coming to the saturated vertical from a new angle, raising a $22 million Series A round for its commercial fleet insurance. Lightspeed Venture Partners led the round.

— KKR agreed to take a majority stake in Refresco, with Bloomberg reporting the deal values the Dutch bottling giant at €7 billion ($7.8 billion). The company’s value has doubled since 2018, when current owners PAI Partners and British Columbia Investment Management bought Refresco in a take-private buyout worth €3.4 billion. The two firms will retain “significant” minority positions.

— Veritas Capital signed on to acquire Boston-based Houghton Mifflin Harcourt in a take-private buyout worth $2.8 billion, the second major bet by a private equity firm in the past several months on a publisher of textbooks and other education materials. Last August, Platinum Equity purchased industry rival McGraw Hill from Apollo Global Management for $4.5 billion.

— Insight Partners raised more than $20 billion for its latest slate of funds to focus on investing in software and internet startups throughout the capital stack. For context, the average venture fund size in 2021 was $188.1 million, according to PitchBook.

— CalPERS, America’s biggest pension fund and a major LP for private equity, has hired a new CIO. The California fund tapped Nicole Musicco for the role after a long search that kicked off when Yu “Ben” Meng resigned in August 2020 due to some conflicting stock holdings.

— This one was announced nearly a week ago, but it’s big enough to earn a belated mention: Chemicals and materials giant Celanese agreed to pay $11 billion to buy DuPont’s mobility and materials business, which makes a range of nylons, polyesters and other polymers. It’s far and away the biggest acquisition in Celanese’s history.

— Bobby Flay seems pretty good at making food for people. What about for cats? Made by Nacho, a cat-food startup cofounded by the celebrity chef, raised a $14 million Series A round this week led by CAVU Venture Partners. The company takes its name from Flay’s cat, Nacho, who’s also listed as a cofounder.

— In the latest sign of Blackstone’s belief that profits are to be had in residential real estate, the private equity power announced the launch of a new portfolio company focused on low-income housing. Called April Housing, the company will initially manage more than 90,000 housing units, almost all of which are rent-regulated through the Low Income Housing Tax Credit program.

Charted

Source: Crunchbase

Unicorn companies have been breaking a lot of records. The number of startups valued at more than $1 billion hit 1,000 this month for the first time, after last year set new highs for unicorn creation and funding.

But what about exits? Unsurprisingly, that also hit a new record in 2021. According to data from Crunchbase, 142 unicorn companies exited in 2021—more than twice as many as in 2020.

There are a number of unicorns rumored to be planning to go public this year, including Reddit (valued at $10 billion), Chime ($25 billion) and Klarna ($45.6 billion). But so far this year, last year’s thriving exit environment appears to have largely dried up—even more so for SPAC and IPO prospects. Seven unicorns have exited in 2022 thus far, compared to 12 by this time last year.

What We're Reading

Sex toys have started showing up on shelves in unlikely places like Bloomingdale’s and Sephora. The trend is driven by venture-backed sexual wellness startups that offer branding and packaging that match the aesthetics of those stores more than the traditional products. (New York Times)

What do you get when you mix Kim Kardashian with private equity? In the case of Olaplex, a $10 billion buyout bonanza. (Bloomberg)

BlackRock and Warner Music Group are putting a diversity-themed twist on the trend of buying up song catalogs. (Wall Street Journal)

The Information’s latest diversity index shows that venture capital has made solid progress in promoting and hiring women and people of color into check-writing roles since 2018, but 53% of those positions are still held by white men. (The Information)

NewView Capital raised $544 million to invest in what it calls “orphaned startup stakes,” which the rest of the industry just calls secondaries. (Forbes)

Some of the world’s biggest private equity firms are duking it out for the chance to invest in France’s top soccer league. (Financial Times)

Five weeks after a devastating tsunami, the nation of Tonga is back online. (BBC)

What To Watch For

War is underway in Ukraine, a deeply sad and disquieting development that made it a little difficult this week for us to focus on startups and buyouts. Russia’s invasion will cause a cascade of side effects around the globe—chief among them death and destruction among the Ukrainian people.

The human toll comes first. But the conflict will also wreak economic havoc, and is in fact already doing so—energy markets and Europe’s IPO market are showing serious signs of strain. In many ways, 2021 was a perfect environment for dealmakers, leading to a flurry of annual records. This year is looking much more stormy.

Kevin Dowd

Staff Writer

I am a staff writer at Forbes. I previously wrote for PitchBook, where I created The Weekend Pitch, a weekly newsletter about the private markets. Before that, I covered high school sports in the Pacific Northwest, and I graduated from the University of Washington with a degree in journalism and creative writing. I live in Seattle, where I read a lot of books and play a lot of golf.

Follow me on Twitter.

Becca Szkutak

Staff Writer

I'm a New York-based reporter covering venture capital, startups and investors. I was previously a reporter at the Venture Capital Journal and Private Debt Investor. I graduated from Emerson College in 2017 with a degree in journalism.

Follow me on Twitter at @rebecca_szkutak or send me an email at rszkutak@forbes.com.

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Forbes - Crypto dealmaking runs wild

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