Luis von Ahn, an entrepreneur who has dedicated his career to scaling free education, has probably annoyed you more than once. In fact, you’ve likely been annoyed by his work dozens and maybe hundreds of times over the years.

A decade before he co-founded the whimsical and language-learning app Duolingo, one of the most popular education apps in the world with over 500 million downloads and 40 million active users, he was building the technology that would become CAPTCHA, those human-annoying but bot-preventing little tests that pop up when registering or logging in to popular internet services like email.

It may seem like a radical pivot, but in fact, the lessons of how to create useful security tests at scale for consumers would one day offer the core DNA for building one of the most successful edtech companies in the world. The immigrant entrepreneur would soon learn himself that crowdsourcing, language and a willingness to adapt and ignore critics could change the face of an industry forever.

CAPTCHA’ing a market

Von Ahn grew up in Guatemala City, where he saw firsthand the wretched state of public schools in impoverished countries. His mother spent most of her income sending him to “fancy private school” as he puts it, and he estimates she spent over $1 million on his education over his lifetime. The price tag weighed on him, and he knew he wanted to broaden access to education in the future.

After attending Duke as an undergrad, von Ahn was an enterprising first-year computer science Ph.D. student at top-ranked Carnegie Mellon University when he attended a talk by Yahoo’s chief scientist about 10 of Yahoo’s biggest headaches. One issue stood out: hackers were creating bots that register thousands of email addresses to send spam.

Inspired and full of immigrant grit, von Ahn and a team led by his then-adviser Manuel Blum created a nifty little test that could distinguish between bots and humans. The test, called a CAPTCHA, presented squiggly, ink-blotted words whenever a user tried to log in. Computer vision at the time couldn’t read the obscured text, but humans easily could — creating a useful signal. The deceptively simple test worked, so von Ahn, then a 20-something student, gave it to Yahoo for free, not understanding the value it would one day have.

A fire was lit. With Yahoo as a distribution channel, CAPTCHA tests exploded in popularity, becoming an almost universally recognizable security checkpoint feature. At their peak, people spent 500,000 hours a day typing up to 200 million CAPTCHAs around the world. About 10% of the world’s population had recognized at least one word, von Ahn estimates.

For all the technology’s success, though, there was a downside. “During those 10 seconds while you’re typing in a CAPTCHA, your brain is doing something that computers can’t do, which is amazing,” von Ahn said. But the tests were annoying and pointless, so he wondered, “Could we get those 500,000 hours a day to do something useful for humanity?”

So in 2005, he launched reCAPTCHA. These new tests would have the same goal of CAPTCHA, but with a twist: the prompts would all be scans of books. Users would complete the security test while also helping to digitize books for the Internet Archive.

This time, von Ahn knew his nifty idea was worth something. In 2009, he sold reCAPTCHA to Google, a transaction conducted just a year after the internet giant had purchased a license to one of his other research projects, a game focused on image labeling.

The acquisition offered not just a monetary award (exact terms of the deal were not disclosed), but also suddenly garnered von Ahn serious clout in the industry just a few years after acquiring his Ph.D. Yet, instead of taking up tenure at the tech company, he stayed local in Pittsburgh and became a computer science professor at his alma mater.

Entering the world of education as a professor felt like an answer to his original dream of expanding access to education. What von Ahn didn’t know, though, was that his iconic work was simply foreshadowing. Carnegie Mellon, crowdsourced translation and even Google would all play a role in his next project as well, albeit in wildly different ways: incubation, failure and investment. For him, the success of two tools that used language as a barrier was the beginning of a long journey into discovering if, and how, language could instead be a bridge. It was an insight that would grow into a startup valued at $2.4 billion with the goal of making language learning fun: Duolingo.

Duolingo’s first words

In 2011, edtech startups such as Coursera and Codecademy were popping up — companies that today are valued as multibillion-dollar businesses. The rise of iPads and tablets in classrooms gave permission to founders who believed the future of education was on the internet. Enthusiasm was boiling, and virtual instruction felt like a nascent, but ambitious, place to bet on.

Duolingo CEO and co-founder Luis von Ahn was tired of the gray and dreary design aesthetic edtech companies used to emulate universities. Instead, he and the company’s early team sought inspiration from games like Angry Birds and Clash Royale, looking to build a class that screamed more cartoon anarchy than lecture hall. From that frenetic creativity came the company’s distinctive mascot: a childish and rebellious evergreen-colored owl named Duo.

Duolingo didn’t just throw out the old colors though — it wanted to completely rethink language learning from the bottom up for mobile. So it replaced top-down curriculums with analytics-driven growth strategies, becoming consumed by an ethos that has more recently been dubbed product-led growth.

Used by companies such as Calendly, Slack and Dropbox, product-led growth is a strategy in which a company iterates its product to create loyal fans-turned-customers who popularize the product with others, creating a viral growth loop. It’s an attractive route because it vastly lowers the cost of acquiring users while also increasing engagement and thus retention. Duolingo, for example, has taken this model and found ways to embed engagement hooks, pockets of joy and addictive education features within its core app.

With early venture capital in its pocket, Duolingo could afford to focus on product over profits.

In part one of this EC-1, we explored how von Ahn’s previous products around CAPTCHA led to Duolingo’s launch, the rise and fall of crowdsourced translation as a way to disrupt language learning, and the accidental iteration of a top education app by a pair of interns. The startups’ early signs of success gave it energy to focus on growth to accomplish two things: know what they’re doing works, and garner a lot of user data so it continued iterating the product into something that was ever more addicting to use.

Now, we’ll analyze how Duolingo used product-led growth as a lever to expand its consumer base, and how a company built on gamification tries to balance its whimsy with education outcomes.

From Angry Birds to an amusing and sometimes scowling owl

Tyler Murphy, having graduated from his intern position at Duolingo launching the company’s iOS app, noticed that the gaming world was rapidly innovating around him in the mid-2010s. Angry Birds was no longer the only popular game on mobile, and video games generally were getting more engaging, with in-app currencies, progress bars and an experience that felt creatively addictive. He suddenly saw connections between the entertainment that games provided and the patient learning required for languages.

“Wouldn’t it be cool if the skill got harder and harder, kind of like how a character in a game gets more powerful and powerful?” he remembers asking. Duolingo had taken early inspiration from Angry Birds as well as Clash Royale later, following that game’s launch in 2016. “Half the people at Duolingo were playing Clash Royale, at some point,” he said. “And I think that shaped our product roadmap a lot and our design language a lot.”

Games solved a problem that was acutely personal for Murphy. The employee, who would go on to become chief designer at Duolingo, had gone to college to teach Spanish to students, but ultimately left the field after struggling to inspire kids in a classroom setting. The realization that Duolingo could borrow from gaming instead of monotonous edtech companies gave an adrenaline rush — and permission — to the team to experiment with new approaches to learning.

Every game needs some form of experience points and leveling up, and for Duolingo learners, that progress comes in the form of skill trees.

These trees, which were conceived by a design agency during the company’s early development, are Duolingo’s core experience, a visual representation of language skills that are interconnected and get progressively more difficult and refined over time. Each skill is a prerequisite for another. Sometimes it’s just logic: in order to be able to speak about restaurants, you probably should be able to introduce yourself first. Sometimes, however, it’s a necessary building block: in order to speak about your routine, you should be able to speak about basic everyday activities.

In Duolingo, each unit has its own suite of skills, each of which is broken down into five lessons. Once you complete all five lessons, you can move to the next skill. Complete all skills and you can move to the next unit. Depending on the language, a user might encounter an average of 60 skills across nine different units within a course.

The growth power of a cartoon owl meme

Duolingo had its “leveling up” model figured out, but now it had to integrate gamification into every nook and cranny of its app. One of its first challenges was rebuilding the sort of teacher-student emotional bond that can help students stay motivated to learn. No one likes to fail, and Duolingo stumbled upon a scalable approach through its cartoon owl mascot Duo — also thought of by the design agency behind the skill trees.

Whenever users succeed or fail at their lessons today, they are likely to be encouraged or admonished by Duo’s presence. Designers sprinkled Duo throughout the product, looking at Super Mario Brothers as an example of how to use iconic art to create a friendly gaming experience. In early iterations of the app, Duo was present but static, more of an icon than a personality. That changed as the company increasingly pushed harder on engagement.

As its meandering route to monetization will demonstrate, Duolingo isn’t mission-oriented, it’s mission-obsessed.

Co-founders Luis von Ahn and Severin Hacker never wanted to charge consumers for access to Duolingo content, a purpose imbued throughout the company’s culture. For years in order to work at Duolingo, you had to be comfortable with joining a company in Pittsburgh that was in no rush to make money. The startup, filled with education enthusiasts and mission-driven employees, became “very college pizza vibes,” Gina Gotthilf, former VP of Marketing at Duolingo, described. Everyone was against making money and having structure — some employees even threatened to quit if Duolingo ever charged a cent to users.

“One thing that recruited me was this brilliance that we can kill two birds with one stone,” she said, referring to Duolingo’s original translation-service business model we talked about in part one of this EC-1. “It was obviously tied to Luis’ thinking and reCAPTCHA and it was magical and brilliant.”

Free may not have paid the bills, but it did come with a valuable upside: growth. By 2017, Duolingo would boast having 200 million users, which was double von Ahn’s goal when he first launched to the public on the TechCrunch Disrupt stage.

Duolingo launched saying it would never do advertisements, subscriptions or in-app purchases — approaches that now all exist on the platform. Today, Duolingo has a simple freemium business model that is remarkably unconventional. It has a free version with all of its learning content, and it charges a subscription of $6.99 per month for paywalled features such as unlimited hearts, no advertisements and progress tracking. It also has a number of other revenue streams it’s developing, such as language proficiency tests.

As we’ll explore, Duolingo’s route from anti-business rebel to conventional consumer subscription is complex, full of twists and turns. While Duolingo never wanted to look like other edtech companies, as we saw with its product strategy in part two, it turns out that evolving from college pizza vibes meant that it would have to take a page from its peers.

Business only speaks one language: Money

“They had users and in Silicon Valley, there was this notion that if you have users, you can turn anything into money,” said Bing Gordon, the Kleiner Perkins Caufield & Byers (KPCB) partner who led Duolingo’s $20 million Series C in 2014.

“This was not very controversial back then, at least with investors,” von Ahn said. “This became controversial for us once we raised a ton of money, and we still weren’t making more money.”

While the company’s investors were relatively lenient in the early years, patience was starting to run thin. In June 2015, Duolingo raised a $45 million Series D round led by Laela Sturdy of Google Capital (later rebranded CapitalG), valuing the company at $470 million. She invested because of Duolingo’s growth and engagement numbers, but confronted von Ahn with some direct advice.

“She said to me, ‘Look, it worked for you to continue getting bigger and bigger checks from venture capital,’” von Ahn said. “‘But this is the last time it works for you … if you’re trying to con people, you cannot con anybody bigger than us [at Google].’” Duolingo’s valuation wouldn’t just be at stake next time it went fundraising on Sand Hill Road — its very survival would be as well.

Looking back, Sturdy said that she always “had confidence that they would come up with a revenue model” because of Duolingo’s passionate and organic users.

When a startup chooses to raise venture capital, it sets itself on a heavily-prescribed course. Suddenly, success isn’t defined merely as cash-flow breakeven with a long-term sustainable business. It has to be an exit of some sorts, and a big one at that. While Duolingo used venture as a lifeline to fund its product development, venture also came with pressure to become a billion-dollar company, or more. And that meant making revenue, not just growing engagement.

Von Ahn says his conversation with Sturdy is what really changed his mindset about money. After the Google check hit Duolingo’s bank account, he and Hacker began thinking about ways to make Duolingo as much a monetary success as it had been an educational one.

Dr. Ahn or: How I learned to stop worrying and love the revenue(s)

“It was clear that Luis didn’t have commercial instincts, he had cultural instincts and a deep focus on learning,” said Gordon. “[When we invested] Duolingo predicted it was on the verge of revenue growth, and it turned out it was not on the verge of revenue growth.”

What Gordon is alluding to was a litany of monetization attempts in Duolingo’s past. Translation, which helped von Ahn’s previous two startups, didn’t work when applied to language-learning services, and the company only secured two customers before ending the service. Business partnerships, such as a relationship with Uber to certify and train drivers in Brazil to speak English, didn’t catch fire.

Duolingo has been wildly successful. It has pulled in 500 million total registered learners, 40 million active users, 1.5 million premium subscribers and $190 million in booked revenues in 2020. It has a popular and meme-ified mascot in the form of the owl Duo, a creative and engaging product, and ambitious plans for expansion.There’s just one key question in the midst of all those milestones: Does anyone actually learn a language using Duolingo?

“Language is first and foremost a social, relational phenomenon,” said Sébastien Dubreil, a teaching professor at Carnegie Mellon University. “It is something that allows people to make meaning and talk to each other and conduct the business of living — and when you do this, you use a tone of different kinds of resources that are not packaged in the vocabulary and grammar.”

Duolingo CEO and co-founder Luis von Ahn estimates that Duolingo’s upcoming product developments will get users from zero to a knowledge job in a different language within the next two to three years. But for now, he is honest about the limits of the platform today.

“I won’t say that with Duolingo, you can start from zero and make your English as good as mine,” he said. “That’s not true. But that’s also not true with learning a language in a university, that’s not true with buying books, that’s not true with any other app.”

While Dubreil doesn’t think Duolingo can teach someone to speak a language, he does think it has taught consistency — a hard nut to crack in edtech. “What Duolingo does is to potentially entice students to do things you cannot pay them enough time to actually do, which is to spend time in that textbook and reinforce vocabulary and the grammar,” he said.

That’s been the key focus for the company since the beginning. “I said this when we started Duolingo and I still really strongly believe it: The hardest thing about learning a language is staying motivated,” von Ahn said, comparing it to how people approach exercise: it’s hard to stay motivated, but a little motion a day goes a long way.

With an enviable lead in its category, Duolingo wants to bring the quality and effectiveness of its curriculum on par with the quality of its product and branding. With growth and monetization secured, Duolingo is no longer in survival mode. Instead, it’s in study mode.

In this final part, we will explore how Duolingo is using a variety of strategies, from rewriting its courses to what it dubs Operation Birdbrain, to become a more effective learning tool, all while balancing the need to keep the growth and monetization engines stoked while en route to an IPO.

“Just a funny game that is maybe not as bad as Candy Crush.”

Duolingo’s competitors see the app’s massive gamification and solitary experience as inherently contradictory with high-quality language education. Busuu and Babbel, two subscription-based competitors in the market, both focus on users talking in real time to native speakers.

Bernhard Niesner, the co-founder and CEO of Busuu, which was founded in 2008, sees Duolingo as an entry-level tool that can help users migrate to its human-interactive service. “If you want to be fluent, Duolingo needs innovation,” Niesner said. “And that’s where we come in: We all believe that you should not be learning a language just by yourself, but [ … ] together, which is our vision.” Busuu has more than 90 million users worldwide.

Duolingo has been the subject of a number of efficacy studies over the years. One of its most positive reports, from September 2020, showed that its Spanish and French courses teach the equivalent of four U.S. university semesters in half the time.

Babbel, which has sold over 10 million subscriptions to its language-learning service, cast doubt on the power of these findings. Christian Hillemeyer, who heads PR for the startup, pointed out that Duolingo only tested for reading and writing efficacy — not for speaking proficiency, even though that is a key part of language learning. He described Duolingo as “just a funny game that is maybe not as bad as Candy Crush.”

Putting the ed back into edtech

One of the ironic legacies of Duolingo’s evolution is that for years it outsourced much of the creation of its education curriculum to volunteers. It’s a legacy the company is still trying to rectify.

The year after its founding, Duolingo launched its Language Incubator in 2013. Similar to its original translation service, the company wanted to leverage crowdsourcing to invent and refine new language courses. Volunteers — at least at first — were seen as a scrappy way to bring new material to the growing Duolingo community and more than 1,000 volunteers have helped bring new language courses to the app.

Hello and welcome back to Equity, TechCrunch’s venture capital-focused podcast where we unpack the numbers behind the headlines.

This is Equity Monday, our weekly kickoff that tracks the latest private market news, talks about the coming week, digs into some recent funding rounds and mulls over a larger theme or narrative from the private markets. You can follow the show on Twitter here and myself here.

This morning was a notable one in the life of TechCrunch the publication, as our parent company’s parent company decided to sell our parent company to a different parent company. And now we’re going to have to get new corporate IDs, again, as it appears that our new parent company’s parent company wants to rebrand our parent company. As Yahoo.

Cool.

Anyway, a bunch of other stuff happened as well:

Flywire, a Boston-based payments company filed to go public. More on the site about this shortly.Earnings this week are coming from Uber and Lyft and PayPal and Square and more.Dell is offloading Boomi to private equity as it wants to de-lever. Again.Cloud market share numbers are out, but what matters is that the growth of the cloud market helps explain the growth that we’re seeing in the startup game. (Our own Ron Miller dug into some rival cloud metrics here.)The Chinese government’s crackdown on its tech giants continues. And it’s impacting valuations.And Wealthsimple raised an epic CAD$750 million round, while Ohio-based Path Robotics just raised a $56 million Series B. Super cool.

We’re back Wednesday with something special. Chat then!

Equity drops every Monday at 7:00 a.m. PST, Wednesday, and Friday at 6:00 AM PST, so subscribe to us on Apple Podcasts, Overcast, Spotify and all the casts!

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Welcome back to The TechCrunch Exchange, a weekly startups-and-markets newsletter. It’s broadly based on the daily column that appears on Extra Crunch, but free, and made for your weekend reading. If you want it in your inbox every Saturday morning, sign up here. Ready? Let’s talk money, startups and spicy IPO rumors.

TechCrunch isn’t a public-market-focused publication. We care about startups. But public tech companies can, at times, provide interesting insights into how the broader technology market is performing. So we pay what we might call minimum-viable attention to former startups that made it all the way to an IPO.

Then there are the Big Tech companies. In the United States the list is well-known: Facebook, Alphabet, Microsoft, Apple and Amazon. And, in a series of results that could indicate a hot market for startup growth, they had a smashingly good first quarter of 2021. You can read our notes on their results here and here, but that’s just part of the story.

Yes, the Big Tech financial results were good — as they have been for some time — but lost amid the usual earnings deluge of numbers is how shockingly accretive Big Tech’s recent performances have proven for their valuations.

Microsoft fell as low as the $135 per-share range last March. Today it’s worth $252 and change. Alphabet traded down to around $1,070 per share. Today the search giant is worth $2,410 per share.

The result of the huge share-price appreciation is that Apple is now worth $2.21 trillion, Microsoft $1.88 trillion, Amazon $1.76 trillion, Alphabet $1.60 trillion and Facebook $0.93 trillion. That’s around $8.4 trillion for the five companies.

Back in July of 2017, I wrote a piece noting that their aggregate value had reached the $3 trillion mark. That became $4 trillion in mid-2018. And then in the next three years or so it more than doubled again.

Why?

Myles Udland, a reporter at our sister publication Yahoo Finance, has at least part of the puzzle in a piece he wrote this week. Here’s Udland:

And while it seems that almost every earnings story has sort of followed this same arc, data also confirms that this is not just our imagination: corporate earnings have never been this far out of line with expectations.

Data out of the team at Refinitiv published Thursday showed the rate at which companies were beating estimates and the magnitude by which they were beating expectations through Thursday morning’s results were the best on record.

So earnings are beating the street’s guesses more frequently, and at a higher differential, than ever? That makes recent stock-market appreciation less worrisome, I suppose. And it helps explain why startups have been able to raise so much capital lately in the United States, as they have in Europe, and why private-market investors are pouring so much capital into fintech startups. And it’s probably why Zomato is going public and why we’re still waiting for the Robinhood debut.

This is what a market feels like when the underlying businesses are firing on all cylinders, it appears. Just don’t forget that no business cycle is unending, and no boom is forever.

An insurtech interlude

Extending The Exchange’s recent reporting regarding fintech funding, and our roundup from last week of insurtech startup rounds, a few more notes on the latter startup niche, which can be broadly viewed as part of the larger financial technology world.

This time we’ll hear from Accel’s John Locke regarding his investments in The Zebra — which recently raised even more capital — and the insurtech space more broadly.

Asked why insurtech marketplaces like The Zebra have been able to raise so very much money in the last year, Locke said that it’s a mix of “insurance carriers […] finally embracing marketplaces and willing to design integrated consumer experiences with marketplaces,” along with more consumer “comparison shopping” and, finally, growth and revenue quality.

The Zebra, Locke said, is “still growing north of 100% at ~$120M+ revenue run-rate.” That means it can go public whenever it wants.

But on that matter, there has been some weakness in the stock market for some public insurtech companies. Is Locke worried about that? He’s neutral-to-positive, saying that his firm does not “think all the companies in the market will work but still thinks ‘insurtechs’ will take market share from incumbents over the next decade.” Fair enough.

And Accel is still considering more deals in the space, as are others. Locke said that the venture market for insurtech investments is “definitely more aggressive” this year than last.

Various and sundry

Closing today, a few notes on things that we didn’t get to that matter:

Productboard closed a $72 million Series C. First, that’s a huge round. Second, yes, Tiger did lead the deal. Third, the product management software company has around 4,000 customers today. That’s a lot. Add this company to your two-years-from-now IPO list.Chinese bike-sharing startup Hello is going public in the United States. We are going to get back to this on Monday, but its F-1 filing is here. The company turned $926.3 million worth of 2020 revenues into $109.6 million in gross profit, and a net loss of $173.7 million in net losses. Yowza.Darktrace went public this week. I know of it because it sponsors an F1 team that I adore, but it enters our world today as a recent U.K.-listed company. And after Deliveroo went kersplat, the resounding success of the Darktrace listing could make the U.K. a more attractive place to list than it was a week ago.And, finally, drone delivery is, maybe, coming at last? U.K.-listed venture capital group Draper Esprit led the $25 million round into Manna, which wants to use unmanned drones in Ireland to deliver grub. “Manna sees a huge appetite for a greener, quieter, safer, and faster delivery service,” UKTN reports.

A long, weird week. Make sure to follow the second denizen of The Exchange’s writing team: Anna Heim. Okay! Chat next week!

Alex

My mom cuts to the chase when she is describing my beat to others. In her words, I cover companies like Uber before they become companies like Uber. And honestly? I can’t exactly disagree with the description. The best feeling in tech journalism is telling a story about a startup before it becomes a household name. As an early-stage reporter, I honestly bet a lot on the potential of a savvy edtech founder or creative marketplace play. And when I’m doing my job right, I point to the unique insight that will make the startup successful or challenged in the future.

On that note, one of my favorite renewed series at TechCrunch is an EC-1 (Extra Crunch subscription required), a story series that goes through the nitty-gritty of a startup’s story, from its original days to its pivots along the way. I’ve spent the past few months on one of these projects — and mine is coming out next week! In the meantime, you’ve read packages about StockX and Tonal, and our latest just came out: the Klaviyo EC-1:

How Klaviyo transformed from a lifestyle business into a $4.15B email titan (2,600 words/10 minutes)How Klaviyo used data and no-code to transform owned marketing (3,000 words/12 minutes)Marketing in 2021 is emotional and not just transactional (2,200 words/9 minutes)Drama and quirk aren’t necessary for startup success (1,900 words/8 minutes)

Enjoy this long-form read and big thanks to Danny Crichton, my Equity co-host and managing editor here at TechCrunch, who has been managing and editing all of these projects.

In the rest of this newsletter we’ll get into All Raise data, the new Miami and a new lineup you don’t want to miss. Follow me on Twitter @nmasc_ for updates throughout the week.

All (aren’t) Raise(d)

All Raise, a nonprofit dedicated to increasing the footprint of women founders and funders, has released its annual report for 2020. The whole thing is honestly worth a read, but we especially paid attention to how funding has dropped for female founders:

Round sizes for women + non-binary founders were up to 49% lower than males85% of venture funding goes to all-male teams64% of VC firms still don’t have a single female partnerBlack + Latinx female founders receive only 0.64% of VC funding, a slight uptick from the year prior.

Here’s what to know: On Equity, we talked about how these abysmal metrics were both a predicted but still surprising effect of Zoom investing. This disconnect is the conversation no one has during an upmarket — and metrics are one way we can benchmark progress.

Let’s talk about gaslighting and fundraisingMen, don’t do thisHow to fundraise over Zoom more effectively Founders who don’t properly vet VCs set up both parties for failure

Internet is the new Miami

To quote Winnie CEO and co-founder Sara Mauskopf, “Internet is the new Miami.” The networks made online — either through the rise of meme culture or Substack spice — can be a competitive advantage in the world of investment, as two new funds this week showed us.

Here’s what to know: Ryan Hoover and Vedika Jain announced Weekend Fund 3, which will include a $1 million community raise. And Chief Meme Officer Turner Novak finally debuted Banana Capital’s debut fund launched with $9.99 million in funding.

Novak explained how being internet-first impacts his investments:

“It just kind of happens where [my investments] are people who understand the culture of the internet, to understand memes and understand wit and humor and appreciate that a little bit more,” he said. “Those are probably the people that are more naturally intuitive investments, so it definitely does skew that direction.”

While Novak didn’t share explicit targets or mandates around investment in diverse founders, he pointed to his track record at Gelt VC, in which 41% of capital went to woman CEOs. To date, 65% of Banana Capital’s portfolio founding teams include non-white founders and 50% of the teams include more than one gender.

And in the little-known capital lender space, Shopify is using machine learning to lend money to startups. Shopify Capital has a nice strategic ring to it, no?

Around TechCrunch

Announcing the Agenda for TC Sessions: Mobility 2021Sydney Thomas is coming to judge startups at DisruptAnd, as this clip will tell you, we’re losing the Webby’s, so vote for Equity!

Across the week

Seen on TechCrunch

The AWS for blockchain

Atlassian launches a Jira for every team

CES will return to Las Vegas in 2022

Microsoft’s new default font options, rated

Seen on Extra Crunch

Hacking my way into analytics: A creative’s journey to design with data

How Brex more than doubled its valuation in a year

And finally

India is in crisis. It is devastating and heartbreaking to watch this unfold and impact our family and friends and colleagues and people. My colleague Manish Singh, who is based there, wrote up the different ways you can donate to help out.

I’ll end by quoting Singh:

With several major industries, including film and sports, going about their lives pretending there is no crisis, entrepreneurs and startups have emerged as a rare beam of hope in recent days, springing to action to help the nation navigate its darkest hours.

It’s a refreshing change from last year, when thousands of Indian startups themselves were struggling to survive. And while some startups are still severely disrupted, offering a helping hand to the nation has become the priority for most.

Until next week,

N

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Tech companies in Silicon Valley, the geography, have had an incredible year. But one indicator points to longer-term changes. The internal rate of return (IRR) for companies in other startup hub cities has been even better. A big new analysis by AngelList showed aggregate IRR of 19.4% per year on syndicated deals elsewhere versus 17.5% locally. A separate measure, of total value of paid-in investment, revealed 1.67x returns for other hubs versus 1.60x in the main Silicon Valley and Bay Area tech cities.

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The data is based on a sample of 2,500 companies that have used AngelList to syndicate deals from 2013 through 2020. Which is just one snapshot, but a relevant one given how hard it can be to produce accurate early-stage startup market analysis at this scale. I believe we’ll see more and more data confirming the trends in the coming years, especially as more of the startup world acclimates to remote-first and distributed offices. You can increasingly do a startup from anywhere and make it a success. Not that Silicon Valley is lacking optimism, as you’ll see in a number of the other stories in the roundup below!

Eric Eldon
Managing Editor, Extra Crunch

(Subbing in for Walter today as he’s enjoying a well-deserved break and definitely not still checking the site.)

Optimism reigns at consumer trading services as fintech VC spikes and Robinhood IPO looms

With the Coinbase direct listing behind us and the Robinhood IPO ahead, it’s a heady time for consumer-focused trading apps.

Mix in the impending SPAC-led debut of eToro, general bullishness in the cryptocurrency space, record highs for some equities markets, and recent rounds from Public.com, M1 Finance and U.K.-based Freetrade, and you could be excused for expecting the boom in consumer asset trading to keep going up and to the right.

But will it? There are data in both directions.

After going public, once-hot startups are riding a valuation roller coaster

A short meditation on value, or, more precisely, how assets are valued in today’s markets.

Long story short: This is why I only buy index funds. No one knows what anything (interesting) is worth.

Should you give an anchor investor a stake in your fund’s management company?

Raising capital for a new fund is always hard.

But should you give preferential economics or other benefits to a seed anchor investor who makes a material commitment to the fund? Let’s break down the pros and cons.

2021 should be a banner year for biotech startups that make smart choices early

Last year was a record 12 months for venture-backed biotech and pharma companies, with deal activity rising to $28.5 billion from $17.8 billion in 2019.

As vaccines roll out, drug development pipelines return to normal, and next-generation therapies continue to hold investor interest, 2021 is on pace to be another blockbuster year.

But founder missteps early in the fundraising journey can result in severe consequences.

In this exciting moment, when younger founders will likely receive more attention, capital and control than ever, it’s crucial to avoid certain pitfalls.

Two investors weigh in: Is your SPAC just a PIPE dream?

The fundamental thing to remember about the SPAC process is that the result is a publicly traded company open to the regulatory environment of the SEC and the scrutiny of public shareholders.

In today’s fast-paced IPO world, going public can seem like simply a marker of success, a box to check.

But are you ready to be a public company?

There is no cybersecurity skills gap, but CISOs must think creatively

Those of us who read a lot of tech and business publications have heard for years about the cybersecurity skills gap. Studies often claim that millions of jobs are going unfilled because there aren’t enough qualified candidates available for hire.

Don’t buy it.

The basic laws of supply and demand mean there will always be people in the workforce willing to move into well-paid security jobs. The problem is not that these folks don’t exist. It’s that CIOs or CISOs typically look right past them if their resumes don’t have a very specific list of qualifications.

In many cases, hiring managers expect applicants to be fully trained on all the technologies their organization currently uses. That not only makes it harder to find qualified candidates, but it also reduces the diversity of experience within security teams — which, ultimately, may weaken the company’s security capabilities and its talent pool.

To be frank, we do not know how to value Honest Company

We do not know how to value Honest Company.

It’s outside our normal remit, but that the company is getting out the door at what appears to be a workable price gain to its final private round implies that investors earlier in its cap table are set to do just fine in its debut. Snowflake it is not, but at its current IPO price interval, it is hard to not call Honest a success of sorts — though we also anticipate that its investors had higher hopes.

Returning to our question, do we expect the company to reprice higher? No, but if it did, The Exchange crew would not fall over in shock.

How Brex more than doubled its valuation in a year

Brex, a fintech company that provides corporate cards and spend-management software to businesses, announced Monday that it closed a $425 million Series D round of capital at a valuation of around $7.4 billion.

The new capital came less than a year after Brex raised $150 million at a $2.9 billion pre-money valuation.

So, how did the company manage to so rapidly boost its valuation and raise its largest round to date?

TechCrunch spoke with Brex CEO Henrique Dubugras after his company’s news broke. We dug into the how and why of its new investment and riffed on what going remote-first has done for the company, as well as its ability to attract culture-aligned and more diverse talent.

Founders who don’t properly vet VCs set up both parties for failure

There’s a disconnect between reality and the added value investors are promising entrepreneurs. Three in five founders who were promised added value by their VCs felt duped by their negative experience.

While this feels like a letdown by investors, in reality, it shows fault on both sides. Due diligence isn’t a one-way street, and founders must do their homework to make sure they’re not jumping into deals with VCs who are only paying lip service to their value-add.

Looking into an investor’s past, reputation and connections isn’t about finding the perfect VC, it’s about knowing what shaking certain hands will entail — and either being ready for it or walking away.

Fifth Wall’s Brendan Wallace and Hippo’s Assaf Wand discuss proptech’s biggest opportunities

What is the biggest opportunity for proptech founders? How should they think about competition, strategic investment versus top-tier VC firms and how to build their board? What about navigating regulation?

We sat down with Brendan Wallace, co-founder and general manager of Fifth Wall, and Hippo CEO Assaf Wand for an episode of Extra Crunch Live to discuss all of the above.

SaaS subscriptions may be short-serving your customers

Software as a service (SaaS) has perhaps become a bit too interchangeable with subscription models.

Every software company now looks to sell by subscription ASAP, but the model itself might not fit all industries or, more importantly, align with customer needs, especially early on.

What can the OKR software sector tell us about startup growth more generally?

In the never-ending stream of venture capital funding rounds, from time to time, a group of startups working on the same problem will raise money nearly in unison. So it was with OKR-focused startups toward the start of 2020.

How were so many OKR-focused tech upstarts able to raise capital at the same time? And was there really space in the market for so many different startups building software to help other companies manage their goal-setting? OKRs, or “objectives and key results,” a corporate planning method, are no longer a niche concept. But surely, over time, there would be M&A in the group, right?

Internal rates of return in emerging US tech hubs are starting to overtake Silicon Valley

Tech innovation is becoming more widely distributed across the United States.

Among the five startups launched in 2020 that raised the most financing, four were based outside the Bay Area. The number of syndicated deals on AngelList in emerging markets from Austin to Seattle to Pittsburgh has increased 144% over the last five years.

And the number of startups in these emerging markets is growing fast — and increasingly getting a bigger piece of the VC pie.

Fund managers can leverage ESG-related data to generate insights

Almost two centuries ago, gold prospectors in California set off one of the greatest rushes for wealth in history. Proponents of socially conscious investing claim fund managers will start a similar stampede when they discover that environmental, social and governance (ESG) insights can yield treasure in the form of alternative data that promise big payoffs — if only they knew how to mine it.

ESG data is everywhere. Learning how to understand it promises big payoffs.

 

Dear Sophie: What’s the latest on DACA?

Dear Sophie,

My company is looking to hire a very talented data infrastructure engineer who is undocumented. She has never applied for DACA before.

What is the latest on DACA? What can we do to support her?

—Multicultural in Milpitas

Zomato juice: Indian unicorn’s proposed IPO could drive regional startup liquidity

The IPO parade continued this week as India-based food-delivery unicorn Zomato filed to go public. 

The Zomato IPO is incredibly important. As our own Manish Singh reported when the company’s numbers became public, a “successful listing [could be] poised to encourage nearly a dozen other unicorn Indian startups to accelerate their efforts to tap the public markets.”

So, Zomato’s debut is not only notable because its impending listing gives us a look into its economics, but because it could lead to a liquidity rush in the country if its flotation goes well.

Investment in construction automation is essential to rebuilding US infrastructure

With the United States moving all-in on massive infrastructure investment, much of the discussion has focused on jobs and building new green industries for the 21st century.

While the Biden administration’s plan will certainly expand the workforce, it also provides a massive opportunity for the adoption of automation technologies within the construction industry.

Despite the common narrative of automating away human jobs, the two are not nearly as much in conflict, especially with new investments creating space for new roles and work.

In fact, one of the greatest problems facing the construction industry remains a lack of labor, making automation a necessity for moving forward with these ambitious projects.

How to fundraise over Zoom more effectively

Even though in-person drinks and coffee walks are on the horizon, virtual fundraising isn’t going away.

Now, it’s imperative to ensure your virtual pitch is as effective as your IRL one.

Not only is it more efficient — no expensive trips to San Francisco or trouble fitting investor meetings into one day — virtual fundraising helps democratize access to venture capital.

Hacking my way into analytics: A creative’s journey to design with data

There’s a growing need for basic data literacy in the tech industry, and it’s only getting more taxing by the year.

Words like “data-driven,” “data-informed” and “data-powered” increasingly litter every tech organization’s product briefs. But where does this data come from?

Who has access to it? How might I start digging into it myself? How might I leverage this data in my day-to-day design once I get my hands on it?

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