Forbes - Stage’s approach to saving startups

Kevin Dowd and Becca Szkutak

Staff Writers

Most startups fail. That’s the sad truth of Silicon Valley. But what if some of the ones that look like they will could be saved?

Krista Morgan thinks they can.

I spoke this week with Morgan, a general partner at Stage, an investment firm based in Denver with a strategy that melds traditional venture capital with private equity. Stage finds companies from other venture portfolios that have seen slowing growth or encountered other problems that make them unlikely candidates to raise future funding. It then acquires those companies, helps clean up their balance sheets and tries to pivot their operations away from the move-fast-and-break-things ethos of venture capital toward a more sustainable style.

Morgan joined Stage in 2020 after her own journey as a startup founder went painfully awry. You can read my article for the full story of how she got here—and why she thinks her firm’s style of investing could become more effective than ever in the months to come.

You can also keep reading here for more insights from her work as a startup turnaround specialist that didn’t make it into my story.

Morgan knows firsthand that every founder thinks their startup is destined for success. But she suggests entrepreneurs always have an idea of what they might do if things go south. Once clients start to leave and revenue dries up, it might be too late.

“One thing that I say to founders is, look, you have your Plan A,” Morgan says. “But maybe start thinking about a Plan B a little sooner. Because with a tech company, as soon as you’re at a place where your customers start to suffer, that’s where we worry."

Sticky revenue is one thing Stage looks for in potential targets. Another is a passionate management team that’s willing—and in fact eager—to do the hard work required to turn things around. In other words, she says: “Do they have something to prove?"

Even for the feistiest of founders, maintaining that attitude can be difficult when things take a left turn. Part of Stage’s work is readjusting founders’ expectations: A business can still succeed without following the traditional venture capital pathway.

“If you don’t raise another round, it’s like you don’t matter. You kind of disappear,” Morgan says. “And our point is, you created something valuable. It’s not the exit that you thought it would be, or it’s not where you thought it would go, but that doesn’t mean you can’t go somewhere that’s still going to be good for you, good for your employees, and good for your early investors."

Stage wants to make money for itself and its investors. It wants to help founders salvage their dreams. And in the process, it wants to save promising ideas and technologies from the dustbin of history.

“We’ve had all this money pouring into early-stage funding, which means we’ve created the opportunity for so much more innovation than we’ve had before,” Morgan says. “And yet if we don’t have funds like ours coming in, helping more of those companies be successful in some way, we’re just writing off that investment—we’re going to lose all that potential innovation.” —K.D.

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$5 billion for Boring

Elon Musk has been busy. When he hasn’t been drumming up the financing for his potential tender offer for Twitter, he’s been helping one of his upstarts, Boring Company, secure new funding—a $675 million Series C round that values the Austin, Texas-based startup at $5.68 billion. The round was co-led by Sequoia Capital and Vy Capital and included a plethora of investors like Valor Equity Partners, Founders Fund and 8VC.

The company, which aims to create a system of underground tunnels for cars and freight in an effort to avoid traffic, has been pretty, well, boring thus far—especially if you compare its progress to the image of someone wielding a Boring Company-branded flamethrower on the website.

The startup currently has one operating loop that contains a fleet of Teslas taxiing people around the sprawling Las Vegas Convention Center. While the company has lofty visions of hyperloop systems moving people underground at rapid speeds, it currently operates a fleet of human-driven cars topping out at 50 mph.

Maybe VCs' willingness to back a startup that doesn’t have much going on yet at a multibillion valuation isn’t dead after all. —B.S.

Blackstone’s land grab continues

Blackstone agreed this week to buy American Campus Communities, the largest publicly traded owner of student housing in the U.S. The deal comes at an enterprise value of $12.8 billion, making it one of Blackstone biggest bets yet in a recent run of major real-estate deals and indicating the firm’s confidence that rents will keep rising in densely populated university neighborhoods and beyond.

Students in college towns from Eugene, Ore., to Tallahassee, Fla., will soon be living in Blackstone’s buildings. Getty Images

Between December and February, the firm lined up $13.1 billion worth of acquisitions of various multifamily real estate assets in the U.S. Last summer, it paid $6 billion for Home Partners of America, which buys and rents single-family homes. Blackstone also last year paid $10 billion for QTS Realty, which owns more than 7 million square feet of data center assets. And in 2020, the firm conducted a $14 billion recapitalization of BioMed Realty, a major owner of life sciences real estate.

None of this comes as any huge surprise. Blackstone maintains a $280 billion real estate business that was the source last year of nearly half the firm’s earnings, driving the firm ever closer to its $1 trillion goal. But this sort of spending spree stands out. “In my 30-year career, I’ve never seen real estate fundamentals in the sectors where we are focused as strong as they are today,” firm president Jon Gray said on an earnings call earlier this year. I call this latest deal putting your money where your mouth is. —K.D.

They Said It

“I usually enjoy being right, but not in this instance. I didn’t want to be right on so many things in this movie."

—Andrew Stanton, the writer and director of Wall-E, speaking to Bloomberg about the beloved film’s unfortunate prescience

Just The Facts

— Sweden’s EQT has set a hard cap of €21.5 billion ($23.3 billion) for its latest flagship buyout fund, its 10th. If it reaches that mark, the vehicle would become the largest buyout fund in European history, surpassing a €21.3 billion effort from CVC Capital Partners in 2020. EQT closed its previous fund precisely a year ago with €15.6 billion in commitments.

— Chipotle is getting into the corporate venture capital game. The Denver-based fast-casual chain announced a $50 million venture fund, Cultivate Next, to target early-stage restaurant tech and guest experience startups. The fund will be managed by Chipotle’s CTO Curt Garner.

— A group led by KKR offered on Wednesday to pay $14.9 billion for Ramsay Health Care, the biggest hospital operator in Australia, proposing what could be one of the biggest buyouts yet in 2022. KKR has conducted a dozen deals in Australia since the start of 2021, per PitchBook, but if this one materializes, it will be the biggest yet, topping a takeover of Spark Infrastructure worth A$5.2 billion ($3.8 billion).

— A $30 million Series A round for … air? New York-based Air Company raised the financing to help expand the use cases for its technology that turns carbon dioxide and water into alcohol. The company currently produces vodka, hand sanitizer and perfume. The round was led by Carbon Direct with participation from JetBlue Technology Ventures, Toyota Ventures and Parlay.

— Insight Partners and Partners Group both agreed to make investments in Precisely, joining a growing roster of private equity firms that back the provider of data software. Clearlake Capital bought Precisely (then known as Syncsort) in 2015 and sold it to Centerbridge Partners two years later. Last year, Clearlake teamed with TA Associates to buy back a controlling interest, with Centerbridge staying on as a minority investor.

— The global talent pool is your oyster, according to the HR tech startup with the same name. Charlotte, North Carolina-based Oyster helps companies hire employees in other countries and provides the infrastructure to pay them and provide local benefits. It raised a $150 million Series C led by Georgian with participation from Salesforce Ventures, LinkedIn and Base10 Partners, among others. The round makes the company one of the few B Corp unicorns.

— London-based Gravity Sketch raised a $33 million Series A round for its tools that help users create 3D visualizations and models for—you guessed it—the metaverse. The round was led by Accel with participation from GV, Kindred Capital and Point Nine, among others.

Charted

VCs piled into mental healthcare startups last year after demand for such care surged during the pandemic, but VC interest seems to be waning, data from CB Insights suggest. Funding for mental healthcare startups in the first quarter of 2022 was at its lowest level in five quarters. More than $790 million was invested into the healthtech startups in the first quarter of 2022, down 60% from Q4 2021, and down 24% from Q1 2021.

While deal count didn’t drop as drastically in the first quarter—it was down 12% from Q4 2021 and 3% from Q1 2021—the three largest deals in the first three months of this year accounted for more than half of the quarter’s total funding. In the fourth quarter of 2021, 42% of the quarter’s funding came through the top three deals.

What We're Reading

Venture capitalists have been saying we’re in a startup bubble for more than a decade now. But so far, at least, it’s a bubble that’s proved very resistant to bursting. (New York Times)

It looks like the recent flood of startup layoffs is just a preview of what’s to come. (The Information)

Proof of Love, a new crypto dating show, is a lot like investing in the next hot meme coin: You might make some money or it might end in disaster, but either way, it certainly won’t be boring. (Vulture)

Jackie Robinson is best known for breaking the color barrier in professional baseball. He was also a successful businessman who championed Black entrepreneurship. (Forbes)

What’s the difference between a good hedge fund and a bad one? Whatever your preferred metric, the gap seems to be getting bigger. (Institutional Investor)

Former NBA star Al Harrington has built a cannabis company worth more than $100 million. He’s one of few Black entrepreneurs in the industry, and his goal is to change that. (Forbes)

After a very funny week in pursuit of the #VanLife dream, a writer came to a realization: It’s all a lot better in the photos. (New York Times)

Another nugget about this newsletter’s favorite burrito chain: Roblox players can now work for virtual Chipotles in the metaverse by rolling and delivering burritos. (Insider)

Many of Russia’s billionaires are now in precarious positions. But it’s possible none has more to lose than steel magnate Alexey Mordashov. (Wall Street Journal)

U.S. farms are experiencing a labor shortage, but hiring migrant workers isn’t always easy. Seso looks to make onboarding and securing visas for them easier and more transparent. (Forbes)

What To Watch For

We may be entering a new phase of the streaming era. Netflix shares sank 36% on Wednesday after the industry giant reported that it lost subscribers during the first quarter of the year; other streaming stocks like Spotify, Disney and Warner Bros. Discovery also fell several percentage points, as some investors reassessed their long-term outlook on the space. A day later, Warner Bros. Discovery announced the closure of CNN+—which was surprising in the sense that the streaming platform had only launched a month ago, but unsurprising in the sense that its viewership numbers had been rather abominable. CNN CEO Chris Licht described it to staff as a “uniquely shitty situation."

The CNN+ shutdown is due in part to M&A. Warner Bros. Discovery was created last year by the mega-merger of WarnerMedia and Discovery. Former Discovery CEO David Zaslav, who now runs the combined company, wasn’t the one who greenlit the service’s launch, which surely makes it easier to close up shop. And Netflix’s very bad week might help inspire some M&A of its own. If years of steady growth for streaming services come to an end, companies in the space might very well turn to consolidation as a way to keep adding new users and please their shareholders. We went from a world with one real distributor of TV-type content—cable TV—to one with so many that it’s difficult to keep count. Will things once again swing in the other direction?

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 - Stage’s approach to saving startups

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