We could go on.

And then there are evergreen firms. In a nutshell, evergreen firms have open-ended fund structures with no termination date. As such, they are permitted to recycle capital from realized returns and aren’t bound by the same time constraints as a traditional VC firm. That means these investors are well-equipped to sit out sudden shifts or extended downturns in market cycles (such as the one we are potentially about to experience).

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The fact that evergreen firms can invest in a company through multiple stages means they aren’t as pressured to exit. Traditional venture funds often have less flexibility and may be pressured by their fund structure to cash out earlier than an evergreen fund might. Limited partnerships are typically family offices.

Recently, I happened to talk to two evergreen venture firms with the intention of getting a better understanding of what they do, and that got me thinking:�� What advantages might the evergreen structure provide in fast-changing market cycles?

To find out, I talked to partners from and , both of which are evergreen funds – there’s estimated to only be a handful of such firms.

I also talked with a startup founder who has been backed by one of these firms to learn why he went that route.

Let’s dive in.

Maverick Ventures

Maverick Ventures launched in 2015 as the venture arm of 25-year-old, $8 billion hedge fund . The firm currently has $382 million in capital commitments and in a short amount of time has built up an impressive portfolio.

For context, over time, Maverick Capital and Maverick Ventures combined have deployed $1 billion in 94 private companies, had 24 IPOs�� or acquisitions and helped create 11 unicorns. It was also among the first investors in . Rather than mixing public (hedge fund) investing and private investing, it launched Maverick Ventures.

The two entities have seen notable exits in DNA sequencing startup being by for $1.2 billion in 2018; going public in 2018; being acquired by for $4.4 billion in 2016. Another portfolio company, concierge medical services provider , recently went public.

Maverick has also invested in the likes of direct-to-consumer wellness brand (recently re-branded to hims and hers), Indian digital health care platform ; health benefits platform and India-based scooter startup .

I hopped on the phone with , managing director of Maverick Ventures, who told me that when the firm kicked off five years ago, evergreen funds were actually “very unheard of.”

The fact that Maverick has hedge fund roots, giving the firm a footing in both private and public markets, provided a unique perspective, he said. (Hedge funds are financial partnerships that use pooled funds and employ different strategies to earn active returns for their investors, according to .)

Maverick’s strategy has always been to invest in the series A-C stages, which is earlier than hedge funds in terms of venture.

As you can probably tell from some of the investments mentioned above, health care IT makes up nearly 60 percent of the firm’s portfolio. Software in general is big for Maverick Ventures and the remainder of its portfolio is split among B2B and consumer startups.

“We don’t have fund one, two and three,” Kinsella told me. “It’s one perpetual pool of capital.”

The fact that venture-backed businesses have been staying private longer is not always compatible with the seven- to 10-year fund life that typical funds currently have, said Kinsella.

“Most firms have not reserved enough to support a company through its private life. Sometimes, they need to force an exit and that is not always an optimal outcome for an LP or company,” he explained. “With us, there’s no end to the fund life. So how we invest is never based on the dynamics of the fund itself. It’s always an economically rational decision.”

He admitted, however, that evergreen structures are not for everyone when it comes to LPs.

“If you’re a pension fund or an endowment, your capital needs might be more near-term so you might be more apt to go with a closed-end fund to make sure you get your capital back at a certain point of time,” Kinsella told Crunchbase News.

As such, evergreen fund structures lend themselves well to family offices, which usually have a longer time frame when it comes to investing.

“They usually don’t want capital in the near-term for tax purposes,” Kinsella said. “They’re more focused on compounding their returns. That said, there are endowments that have invested in evergreen funds.”

Maverick’s model is based on that of . In fact, Sutter backed two of the companies that Maverick Ventures Managing Partner had started.

Founder perspective

I talked with , founder of newly branded, about his decision to take money from Maverick during his company’s seed round in the summer of 2017–just months before its launch. The company, formerly known as hims, shipped its first boxes to customers in late 2017 and saw $1 million in sales its first week.

Since then, the company has raised over $200 million with Maverick participating in nearly every round since. It also has grown to more than $100 million in revenue. The company , with over a $1 billion valuation, in early 2019.

For Dudum, acknowledgement by Maverick that health care-related businesses generally take longer to incubate was crucial in its decision to go with an evergreen firm as an investor.

“We were going after a really tangled complicated problem,” he told me. “So having an evergreen fund with that type of time horizon capability was really beneficial. The fund structure lent itself well to the nature of our business.”

Long-term committed capital was appealing to Dudum, who wanted investors “around the table at every stage of the company’s development.”

Additionally, Maverick’’s “unique” health care expertise has been valuable, with tactical advice through all the company’s stages, he said.

“We recently brought on a chief medical officer, who was at ,” Dudum told me. “Maverick was absolutely critical in making that happen.”

Thomvest Ventures

San Francisco-based Thomvest Ventures is another evergreen fund based in San Francisco. Thomvest Ventures is not a traditional fund that raises capital from limited partners (LPs). Instead, it is investing the capital of one individual, , whose family owns the majority of Thomson Reuters.

I talked with , a managing director, who told me that there’s been an increased prevalence of large family offices in the VC industry, which has in turn been increasing the number of evergreen funds.

Butler has been working for Thomvest for two decades, and over that time he’s “not bumped into that many firms that look like us.”

With $500 million under management, Thomvest Ventures is one of the larger evergreen funds around. Its sweet spot is investing from seed to Series C.

Personally, Butler has backed nearly 60 companies, such as crowdfunding platform , as well as and small business loan provider . He saw a few exits late last year, including being to for about $750 million and for $150 million.

“It really does come back to the relationship with the principal sponsoring the fund,” Butler told Crunchbase News. “In some ways, corporate VCs could be quasi-evergreens because they too set aside funds and incentives. There’s that balance sheet of a corporate partner you could go back to.”

Over the past seven to eight years, Thomvest has become vertically focused, “which has been a tremendously good thing” for the firm, Butler said. The three verticals it’s focused on are fintech, cybersecurity and adtech/martech/salestech. Within that, it has a particular interest in real estate technology, believing that it “feels like where online credit was four years ago.”

“It’s really coming into its own,” he said.

Thomvest prides itself on deep research projects that it conducts twice a year for months at a time–taking inspiration from journalists (which makes sense given its origin), according to Butler. The company’s principals and associates focus on a specific vertical, and consider things such as where that industry is going, and whether they are at the right place at the right time.

“Then we go look for the right team,” Butler said. “I believe the best companies have all sorts of investors competing to become an investor. It’s insanely competitive.”

As we head into a challenging market cycle, it will be interesting to see what kind of role evergreen funds will play in supporting private companies and their ability to weather a potential (and likely) downturn.

Illustration:

Last night, Roku priced its IPO at $14 per share, the upper end of its $12 to $14 price range. The offering will raise up to $252 million, assuming underwriters exercise their option to purchase additional shares.

However, the firm’s haul thus far is lower than that number. Roku is expected to net around $126 million before the greenshoe option today, as some shares sold in its IPO came from other shareholders in the firm.

And the market has been kind. The stock opened at $15.78 and has since :

Roku was valued at roughly $1.3 billion at the time of its debut. No public-facing market cap markers are live yet, but at the above percentage delta, Roku is now worth just over $1.6 billion in this morning’s trading.

That sum is notable as Roku attempted but failed to earlier this year. This may be one of the incredibly rare times in recent history where public markets are proving more amenable to new valuation marks than their private counterparts.

Roku’s IPO is fun for a couple of reasons. First, it exists. IPO cadence remains low compared to historical norms, something that we find dull here at Crunchbase News. Two, and far more critically, the company was hard to price. It’s long-standing hardware business is shrinking, but produces no margin. It is being supplanted by a rising streaming business that does generate gross profit.

But how to value that sort of thing? Well, after going through all the numbers, the answer is $1.6 billion—at least for now.

One more unicorn IPO is in the books. We have updated our public spreadsheet here.

From The����

Roku prices IPO

• Let the fall tech IPO season begin!��, the streaming video device and service provider, priced shares for its initial public offering at $14 each, the top of the proposed range. The offering sets an initial public valuation of around $1.3 billion for the Los Gatos, Calif.-based company.

Toshiba to sell chip unit for $18B

• Culminating months of negotiations, Toshiba announced that it has signed an $18 billion deal to sell its chip unit to a consortium led by Bain Capital. The consortium also includes Apple, South Korean chipmaker SK Hynix, Dell, Seagate Technology and Kingston Technology.

Daimler buys carpool startup Flinc

• Daimler is acquiring��, a German peer-to-peer ridesharing service that had previously raised funding from General Motors and other backers. The purchase comes amid a period of��accelerating startup investment activity��by major automakers.

Startups aim to boost workplace diversity

• Several startups are developing tools for recruiting and hiring that aim to increase workplace diversity. To date, a Crunchbase News analysis��found nearly a dozen such companies��that have collectively raised over $66 million, with many aiming to increase tech industry employment for women and minorities.

It being Monday and with Disrupt underway, things are bit hectic in San Francisco. But that’s hardly a reason for us to repine, and Roku has no intention of letting us relax.

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The company released its��, bringing with it details regarding its impending public offer.

Now that the company has set a price range, here’s what you need to know about Roku’s upcoming IPO. We’ll move in bullet points and see if we can get them past the copy desk:

• Roku will raise far more than the $100 million it originally listed in its SEC filings. This was expected. As Crunchbase News reported previously��regarding Roku’s total IPO raise: “[T]he figure is a widely-recognized placeholder[.] The company could raise more or less in its IPO.” Bingo.
• By pricing between $12 and $14 per share, the company will raise up to $252.3 million. That would include Class A shares sold by the company; Class A shares sold by employees; the option to purchase Class A shares from the company; the option to purchase Class A shares from shareholders. (That’s a fancy way of saying that Roku won’t raise the full $252.3 million��itself. It will filter into several pockets; Roku is, however, the largest selling entity by far.)
• Roku will be worth around $1.3 billion if it prices at $14 per share, the high-end of its range.

So is $1.3 billion a good result? It’s better than the company’s rumored-to-be-expected $1 billion IPO valuation that we previously noted. It is also lower than the $1.5 billion valuation that Roku on the private markets before moving ahead with its IPO.

Now is the time for the next stage of the game: Does Roku price above range? Bear in mind our closing words from our trip through the firm’s then-fresh S-1:

What Roku is worth, however, is beyond me. With one revenue stream in decline, persistent losses, but big potential, the firm is going to be a fun one to price.

And now we have some more context. However, as implied above, we lack public comps to measure Roku against. Unlike SaaS and other more common businesses that make it to the billion-dollar threshold, perhaps Roku really is a unicorn.

The filing indicates that the company intends to raise $100 million in its debut. The figure is a widely-recognized placeholder number. The company could raise more or less in its IPO.

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As a private company, Roku .

The firm, whose IPO was widely anticipated at a , is set to test the market’s waters when indices trade near record highs, video reigns supreme in the media landscape, and some tech offerings have done well. Others have struggled.

Before the weekend impends, let’s slice through how Roku makes money, how much money it makes, and what to make of it all.

How Roku Makes Money

Roku sells TV-focused streaming hardware to consumers, and it also works with content players to get their material in front of consumers. It also has an ad business. The latter two efforts fall under what Roku calls “platform revenue.”

The company’s mix of top-line sources is described in its S-1 in the following fashion:

We generate player revenue from the sale of streaming players and platform revenue primarily from advertising and subscription revenue share on our platform. We earn platform revenue as users engage with content on our platform and we intend to continue to grow platform revenue by monetizing our TV streaming platform.

Over time, Roku has increased the percent of its total revenue that comes from its platform business. In practice, it looks like this ( of ):

As we’ll see shortly, the mix shift in Roku’s revenue matters as one of the two sources has a far higher gross margin.

Driving the change, it seems, is that Roku drives more usage of its streaming service through partnered-hardware (TVs that run its software) instead of selling hardware over time. This means it can still drive new, active users and engaged hours while not being beholden to selling low-margin hardware.:

So Roku sells hardware for its streaming service, partners with TV manufacturers to sell Rock-powered hardware, drives revenue from partnered streaming companies, and sells ads.

Simple enough, really. How big is Roku? Let’s find out.

How Much Money Roku Makes Loses

Before we dive into the guts of the company, here are the big numbers.

The following chart from Roku’s S-1 shows its 2016 and 2015 fiscal years, and the results of the first half of 2017 compared to the first half of 2016 (calendar). Bear in mind that everything is in units of thousands, so a result of “$119,116” means $119,116,000. Let’s go:

The company’s revenue is expanding while its net losses fall thus far in 2017. The firm’s growth in the 2017 fiscal year came with slightly increased losses.

Roku grew 23 percent in the first two quarters of calendar 2017 compared to the year-ago period. That’s partially due to the company changing up how it brings in revenue. As such, the soft 23 percent figure is more nuanced than it might seem.

Mix Shift

The above-mentioned revenue mix shift makes Roku’s revenue a bit harder to track than it otherwise might be. The firm posted sequential-quarter declines in hardware sales, for example, from the first quarter of this to the second. And, in the second quarter, the firm also posted year-over-year declines in hardware income.

Suffice it to say that the company’s hardware business is in decline. Its platform revenue has grown consistently, however. Going back a few quarters (calendar), here are its results:

As you can see, that is steady revenue growth from Roku’s platform business, aside from the slight Q4 to Q1 dip. Holiday quarters for companies that sell advertisements often see a decline in certain incomes after the close of the holiday-focused fourth quarter. The decline for Roku was modest and quickly offset by growth in the second quarter.

How investors will read that remains to be seen, but the firm has shown dramatic growth of its platform revenue—nearly 100 percent year-over-year.

More broadly, in the quarter ending June 30, 2017, Roku put up $99.62 million in revenue,��less than its $100.09 million derived from its first quarter and under its fourth quarter result of $147.34 million. The company, despite its sequential-quarter declines, grew compared to its year-ago periods in each of the last four quarters.

If investors are willing to give more credence to Roku’s growing platform incomes as indicative of its corporate future, the sequential declines may not matter.

And why might investors care a bit more about Roku’s platform revenue than its hardware incomes? Because the company generates the vast bulk of its gross margin from its platform revenue. Turning , the following chart shows precisely how the platform business is more gross profit than the hardware business for Roku:

That’s sharp. What should we make of the above?

What To Make Of Roku’s Finances

Roku must want out of the hardware business, at least as a leading revenue driver. It makes no money in that game. Notably, that makes it in a future-sense a nearly all-in OTT service that doesn’t generate its own content.

That isn’t a model that I would not have thought possible given the incredibly stiff arena of competition for content on the Internet today. Facebook is that Netflix is , Amazon is , Apple is , and Microsoft .

I wonder if that fact might help Roku. It has distribution and content providers want access to audiences. That confluence could be, in part, why Roku’s ARPU is doing this:

That bodes well for the firm that, as we saw before, has a history of active user accretion. Quickly growing high-margin businesses are worth something after all.

What Roku is worth, however, is beyond me. With one revenue stream in decline, persistent losses, but big potential, the firm is going to be a fun one to price.

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