Equity Monday: When does a selloff become a rout?

Despite the advanced week, news is still coming in in hot and heavy, so strap in for today's busy episode: Cryptos have failed to recover from their weekend swoon, leading to most major crypto assets suffering from a double-digit decline in their value over the last week. Sensetime's Hong Kong IPO is set to raise less money than the AI company had hoped. BitMart got hacked, showing that even this deep into the crypto era we are still seeing embarrassing security lapses that deliver material consumer pain. Alibaba is reshuffling its leadership, though we are not sure at this juncture what the changes mean. Not to get speculative, but we're keeping an eye on the new leadership. A number of investors are considering pouring capital into Polygon, TradeDepot raised $110 million, and Stacked raised $35 million for its crypto-investing system. I would normally say that it's a holiday week, so let's relax, but instead I wonder if we're going to see a final push of news this week before things do calm down for the holiday period. Credits: Equity is produced by Theresa Loconsolo with editing by Kell. Bryce Durbin is our Illustrator. We'd also like to thank the audience development team and Henry Pickavet, who manages TechCrunch audio products. Learn more about your ad choices. Visit megaphone.fm/adchoices

• 0:09Speaker 00

  Hello everyone and good morning. Welcome to Equity Monday. This is Alex. It is December 6th. It is very, very cold here on the East Coast. It is definitely actually winter, which means everyone on the equity team is a little bit sad, but we are happy though, because the news is not slowing down, which means we are not bored. But before we get into all of that, a couple of quick notes. One, Asian stocks were generally lower today. European stocks are generally higher and the US stock market is set to open mixed, it appears. Also, if you were on the crypto front, you know that you had a very tough weekend with the flash crash in Bitcoin and other major crypto assets. I'll just note that there's been very little recovery. Bitcoin is still under the 50K mark. Ethereum is down to around, I don't know, 4K, give or take, but really it's still double digit declines for most major cryptos over the last seven days. Not a great sign for Coinbase and

• 0:54Speaker 00

  other exchanges and a very, very tough pill if you are long on many, many major coins. All right. So dialing into a couple of companies and a couple of sectors that I want you to understand this morning. The first thing up is SoftBank. SoftBank, of course, the famous Japanese conglomerate investing powerhouse and the current lead investor of the SoftBank Vision Fund II, which is writing quite a lot of checks out there. You might think they'd slow down a little bit, given issues recently with Didi and Arm. Didi, of course, in trouble with the Chinese government. Arms deal with Nvidia currently under fire from several governments, leading to declines in the share price of SoftBank. But the company does not seem to be slowing down. I saw deals from them this morning. So SoftBank's losing value, but not losing courage, you might say. More close to home, SaaS stocks are not set to gain ground here in the US. The sell-off is continuing. What

• 1:38Speaker 00

  does this mean? Well, it means that software companies are being repriced, multiples are being compressed, and that's bad news for the startup world in general, given how popular software is amongst startups. And then one more note for you this morning. The value of Metro Mile and Lemonade are set to fall again this morning. I just don't know what the bottom is for Neo Insurance companies, but I can say we did a little math this morning. Root, for example, an American Neo Insurance company focused on the automotive market, is now seeing its market cap land very close to its cash supply, which we think gives it an enterprise value of near zero. That's not good. So what does this all mean? Are we seeing kind of a blip, or is this the start to a change in temperature in the value of tech companies? I don't know, but welcome to the end of the year.

• 2:21Speaker 00

  Moving along, we are going to start with big technology news this morning because there was quite a lot, frankly. I was expecting there to be really kind of one or two small things that I would stretch out over about three minutes with you. But in fact, we actually had to cut. So let's dive right in. First up, SenseTime is going public in Hong Kong, but kind of bad news on that front. The company is going to raise around 768 million USD, which is great. You know, it's never a shame to raise three quarters of a billion dollars in one go, but the company was looking to raise 2 billion. So its actual raise is quite a lot lower than it had hoped for. Not a great sign. Here's a question that I was thinking about. Could SenseTime have raised more money by going public in the US? We'll never find out, given the rising divide between the Chinese and US markets, but not a great signal

• 3:04Speaker 00

  for Chinese companies that do have to go public in Hong Kong if they're shooting to raise several billion dollars. So what is SenseTime? Why do we care? TechCrunch reports that the company was founded in 2014, so about seven years old. So not a young company, not an old company. But what matters is SenseTime was christened as one of China's four AI dragons, along with MegVee, Cloudwalk, and Y2. So essentially, this is a key AI IPO for China in Hong Kong, and early signals, not great. The company raised quite a lot of money, including capital from the aforementioned SoftBank, and we pulled up its IPO filings this morning just to take a look at it, get a feel for it. The company is growing very quickly, very impressive. It's also losing more money than we thought was possible. So the IPO will be an interesting test of demand on the Hong Kong market for unprofitable

• 3:49Speaker 00

  high-growth companies from mainland China. Watch this one. "Over the weekend, we learned that BitMart got hacked, causing a either 150 million or 196 million dollar exfiltration of coins. This is not good. Hacks like this really don't paint the larger crypto economy in a mature light. And given that crypto enthusiasts really do think that the decentralized world is the future, you want to have some good PR. And seeing this much money get stolen is pretty much the opposite of that." According to BitMart CEO Sheldon Zia, "We have identified a large-scale security breach related to one of our ETH hot wallets and one of our BSC hot wallets." Our take on this is that it's yucky. This is gross. This should not be happening in 2021. Not with the amount of time that the crypto world has had to mature and grow some better

• 4:34Speaker 00

  security. It makes us doubt kind of what we're seeing here. On the other hand, one thing to keep in mind, hot wallets, cold wallets, cold wallets are things that are essentially unremovable. Hot wallets are what crypto exchanges use to move currencies around quickly. Essentially, a hot wallets are less secure but easier to use. Cold wallets are the opposite. So to see a hot wallet hacked, not a huge surprise compared to a cold wallet. If you saw a cold wallet get hacked, oh, boy, are we in trouble. And finally, from the world of big tech Alibaba. Now, we haven't really talked about Alibaba in a positive light for some time because the news hasn't been good. And this morning, well, we're sticking to theme. Alibaba is reshuffling its leadership, including a CFO succession that we didn't actually expect. Now, why do we care? Well,

• 5:16Speaker 00

  think about the climate in China. Think about what Alibaba has gone through on the regulatory front. Think about the rising influence of the Chinese government inside the broader Chinese technology ecosystem. And you have to wonder, what do these moves mean? Now, we don't know. It's still too early. We don't actually have a lot of leaks yet about why these changes are being made and why now and so forth. But just given how under the spotlight Alibaba has been the last couple of years by the Chinese government's regulatory lens, well, we're pretty curious. We don't want to get too speculative, but I'll just say this, we are watching carefully.

• 5:49Speaker 00

  All right, ladies and gentlemen, it is now time to talk about startups, the best part of the show, the funnest part of the show, when we talk about the future and who is building it. First up, news from the crypto world and the VC world at the very same time. Our own Minnie Singh reports that a number of investors, including Sequoia Capital India and Steadview Capital, are in talks to back Polygon, which operates a framework for building and connecting Ethereum compatible blockchain networks by way of tokens purchased. Three sources familiar with the matter told him. So they're looking to do a nine-figure token purchase, which is quite a lot of money. They would get a discount on the tokens. About 20% seems to be the average. So what is Polygon? Why do we care? Well, it's an L2 on top of Ethereum. And what that means is it lives in the Ethereum world, but operates slightly separately, but interacts with the Ethereum

• 6:34Speaker 00

  chain, allowing people to execute transactions, perhaps more quickly, perhaps more cheaply than they can on the Ethereum. Main net and this matters because if you've tried to do anything on Ethereum in the last, I don't know, four, five, six, 12 months, it's cost you an arm, a leg, a firstborn and deed to your house. Pretty rough, frankly. So solutions like Polygon are a way to kind of stay on a central source of truth like Ethereum while also not dealing with the baggage that it brings. The source of truth point matters because Ethereum is a place where a lot of developer activity is bringing NFTs and games and so forth, kind of to the fore of consumer consciousness. And it's becoming, I think, the place to build and the place to own things, if you will, in the crypto world. So Polygon might allow the source of truth to stay put while also avoiding all the gas fees. Kind of a cool idea. Let's see when this

• 7:18Speaker 00

  deal closes. Another one of TechCrunch's best reporters, our own Taj Kenai Okafor, reports this morning that TradeDepot, a Nigeria and US-based company that connects consumer goods brands to thousands of retailers, helps out with distribution and other things, including BNPL and other consumer credit options, has raised $110 million in new equity and debt funding. It's a lot of money, but it's a split. The company wouldn't tell us exactly what the divide was. So we went spelunking through the SEC filings and we think the equity portion of the $110 million is about 42 million. So a lot of equity, to be clear, but also a lot of debt. The company will then be able to finance things without having to dip into its checking account, which makes good sense. TradeDepot works with emerging markets, but

• 8:00Speaker 00

  we do think that it does have an Africa focus, something to keep in mind. Now, TradeDepot is an interesting firm. It's a B2B marketplace that connects small shops, kiosks and retailers with wholesalers of global consumer brands, and it also owns warehouses, a fleet of its own drivers, and has a BNPL solution for consumers. So it's a bit of a B2B marketplace, logistics company, e-commerce, fintech thing, which means that it's kind of like, what? An Amazon equivalent? Starts to feel that way. Regardless, seeing TradeDepot raise nine figures at once should not be a surprise. Of course, e-commerce has been doing rather well in recent quarters, and anything involving BNPL or buy now, pay later, has been raising infinite money. So perhaps we should not be surprised that TradeDepot managed the same. Maybe we should have been expecting this earlier. And finally, from the world of startups,

• 8:45Speaker 00

  we have Stacked. Stacked is a web-based platform that provides passive Investment tools for retail investors who are interested in crypto and it just raised a $35 million Series A co-led by two firms, one Alameda Research and the other one FTX. FTX, of course, is a well-known cryptocurrency exchange. If you're an F1 fan, you can see it literally on the cars. It's right there next to where their hands go. So I see FTX every single weekend. Regardless, Stacked is kind of cool. Look, there's a lot of exchanges out there, a lot of people making money from trading fees, letting people buy and sell crypto, taking a cut along the way. But Stacked is kind of building what I think are the equivalent of crypto-focused index fund type things. You give Stacked a risk profile. For example, I'm high risk or I'm low

• 9:29Speaker 00

  risk and it helps you buy a stack or a collection of crypto assets in one go, giving you exposure to the asset class without making you do all the research. I love this. Index funds are great. They're popular for a reason around the world. And so why not have them in crypto? An even more volatile, hard to understand, quickly moving market. It's a place where people probably want help. So I love this. And as a journalist, I can't own individual assets. And so, you know, my crypto exposure is essentially like maybe 50 bucks worth of coins in different places from experiments that I ran, trying to buy an NFT, trying to play with this, trying to play with that. You get the idea. But, you know, I can't really own any of it. With an index fund, maybe I could. Maybe that's a way to unlock more purchases. I don't know. But Stacked is really, really cool. Keep an eye on this one.

• 10:14Speaker 00

  And closing out this morning, what am I thinking about? Well, aside from the fact that I want it to stop raining and that I want someone to bring me a very, very, very hot Americana to my desk, which is sadly not going to happen on both accounts, I am thinking about the value of technology companies, especially in the context of the last week. Now, last week, if you were not paying attention, SaaS stocks dropped. And by that, I mean the value of software revenue was revalued by the public markets, compressing the multiples of these high-growth firms that startups are valued against. Not a good week, really. I mean, DocuSign got absolutely massacred, Salesforce took a pounding. Basically, it appears that investors had anticipated that growth from a lot of companies was going to stay high. But some companies like DocuSign are seeing buying patterns revert to a more

• 10:56Speaker 00

  normal level, which is to say closer to the pre-pandemic stuff that we saw. Toss in what appears to be a deceleration in e-commerce growth and we are actually somewhat circling back towards the old normal. Not that we'll get there. We're never going to go back to the way things quote, quote, "were." We're still going to see a new normal eventually, but perhaps the future looks a little bit more like the past than we had expected. And if so, the valuation reversions that we are seeing makes sense, which means that the multiples compression that we are enduring in the public space might translate back to the private markets. And if so, huh, it's gonna be a little bit tough. But more of that to come on the site.

• 11:33Speaker 00

  That is our show, ladies and gentlemen. It is Monday and we really do hope you have a good week. We are back on Wednesday. We are back on Friday. Of course, you can follow Equity in the meantime over on Twitter where we tweet under the handle EquityPod. My name is Alex and I tweet under the handle Alex. We'll talk to you soon. Bye.