Month: February 2020

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

As I write to you, SaaS and cloud stocks are busy setting fresh all-time highs and as we’ve seen, venture interest in modern software companies is pushing more money into the sector. But despite it appearing to be an incredibly good time to raise equity funding, venture debt and revenue-based financing appear to be having a moment.

So why are more folks talking about and raising debt to help power their startups, even when valuations are high and there is a lot of venture capital to be raised?

As with all explorations of complex, evolving trends, there’s no one answer. But, some data from a 2019-era survey on venture debt and a conversation I had with equity-free SaaS finance shop Element Finance’s John Gallagher (Element is a Scaleworks spinout) help explain what’s going on. Let’s start with how big the venture debt world is and how fast it is growing and then turn to what’s powering its expansion.

Rising debt

The data we’re going to discuss is directional and probably pretty accurate, which is just fine for what we want to do today: detail a general trend of rising venture debt volume over the past few years to confirm what we’ve presumed to be a trend for some time.

Thanks to a report from last year undertaken by Kruze (a startup accounting and HR consultancy), what the firm described as the “largest survey of the venture debt market” undertaken, including firms that “control well over half of the venture debt dollars in the United States,” here are estimated totals of domestic venture debt volumes for the past half-decade:

Source: Tech Crunch

Automated license plate readers, ALPRs, would be controversial even if they were responsibly employed by the governments that run them. Unfortunately, and to no one’s surprise, the way they actually operate is “deeply disturbing and confirm[s] our worst fears about the misuse of this data,” according to an audit of the programs instigated by a Californian legislator.

“What we’ve learned today is that many law enforcement agencies are violating state law, are retaining personal data for lengthy periods of time, and are disseminating this personal data broadly. This state of affairs is totally unacceptable,” said California State Senator Scott Weiner (D-SF), who called for the audit of these programs. The four agencies audited were the LAPD, Fresno PD, and the Marin and Sacramento County Sheriffs Departments.

The inquiry revealed that the programs can barely justify their existence and not seem to have, let alone follow, best practices for security and privacy:

• Los Angeles alone stores 320 million license plate images, 99.9 percent of which were not being sought by law enforcement at the time of collection.
• Those images were shared with “hundreds” of other agencies but there was no record of how this was justified legally or accomplished properly.
• None of the agencies has a privacy policy in line with requirements established in 2016. Three could not adequately explain access and oversight permissions, or how and when data would or could be destroyed, “and the remaining agency has not developed a policy at all.”
• There were almost no policies or protections regarding account creation and use and have never audited their own systems.
• Three of the agencies store their images and data with a cloud vendor, the contract for which had inadequate if any protections for that data.

In other words, “there is significant cause for alarm,” the press release stated. As the programs appear to violate state law they may be prosecuted, and as existing law appears to be inadequate to the task of regulating them, new ones must be proposed, Wiener said, and he is working on it.

The full report can be read here.

Source: Tech Crunch

Earlier this week, much was made of the e-commerce business Brandless deciding to shutter its doors. Industry observers found its fate particularly interesting, given that Brandless was only a few years old and had raised substantial funding, including $100 million from the SoftBank Vision Fund alone.

Still, Brandless is far from alone in having tried — and failed —  to break away from its many rivals and become the kind of juggernaut that make venture investors money. There are thousands of companies that have raised funding over the last decade that once looked like bigger opportunities or whose growth has slowed and for which follow-on dollars are harder to find.

Ravi Viswanathan of NewView Capital sums up what’s happening out there this way: “Firms and funds are generally coming back to market faster with bigger funds, and they’e investing a lot more, so you’re seeing portfolio bloat across the industry. But [limited partners, the outfits and people supplying money to venture funds] are investing for you to make money, and that means spending time on the needle movers.”

So what’s a startup with dwindling attention from its investors to do? There are numerous options, some of which are newer than others, and some of which are more desirable than others.

Naturally some — maybe most — of these companies will eventually decide, like Brandless, to close down the works. This is the least favorable scenario for everyone involved as it means lost jobs, lost dollars, and often an uncertain future for the founders who’ve poured their heart and soul into the company.

Venture capitalists don’t love closing down companies, either, as it  means writing down the holdings in their financial statements to their own investors, something they’d rather put off as long as possible — though external events can also impact the timing.

As Uncork Capital founder Jeff Clavier explains it, “We maintain a company’s valuation on our books until we decide to impair it.” But if a venture firm has a “big gain [because another company sold or went public], we might as well take advantage and sell the shares for $1 or forego them altogether,” minimizing its overall tax bill in the process.

Other companies that have grown more self-sufficient might look to buy back their shares from investors at a discount. Joel Gascoigne, the founder of a now six-year-old social media management company called Buffer, outlined his own process for saving up enough money to buy out the company’s main venture investors a couple of years ago.

It’s not easy to pull off. Gascoigne says it took more than a year to persuade the VCs to take the deal he was offering them and their relationship suffered as result. The reason, offers Clavier, is that in a buyback scenario, an “investor has to admit complete defeat, and that’s kind of the last stop on the road.” Unsurprisingly, what Clavier deems a far better approach if possible is to “get out sooner, when there’s more time for a proper exit. The best thing you can do is find a nice home” for the founders, including so they can “move one, get a new gig, join something, rather than toiling away for the next three to five years” on a company that might eventually fail anyway.

At least, in some cases where the investors have essentially written the deal down to zero, they’ll let the founders retain their intellectual property. “It’s worth something to him or her or them,” says Hunter Walk, cofounder of the venture firm Homebrew, “and it’s really not worth anything to the investors and maybe the founder wants to re-start it as a non-venture backed company.” Either way, Walk notes, this “usually occurs when they haven’t raised too much money.” (It’s a different story for those who’ve raised bigger rounds, as VCs need to wring what they can from accompany to fulfill their own fiduciary obligations. That mean selling off assets, from office chairs to IP.)

Thankfully, for startups going nowhere fast, there’s also a third option that’s picking up traction: private equity firms that have grown increasingly focused on tech. that of companies selling partly or entirely to private equity firms. The terms might not be ideal, but the founder gets to claim an “exit” while the private equity firm gets to roll up sub-scale properties or bolt a startup onto one of its core assets and re-sell the package to another buyer.

These deals can sometimes be a “bitter pill to swallow” for investors, notes Viswanathan, but the “sooner you do it, the faster you free up resources and show your LPs that you can manage your portfolio.” Other times, he notes, investors can hang on in case the PE firm is able to really fuel the company’s growth. Just last month, for example, Insight Partners, the New York-based private equity and venture firm, paid cash for Armis Security, a five-year-old company whose tech helps businesses secure their connected devices. Though terms of the deal weren’t disclosed, a number of Armis investors rolled their stakes into the new, Insight-controlled company.

A similar situation played out when the 13-year-old web content management company Acquia sold to Vista Equity Partners last fall.

What if such a deal never materializes? Well, there are other alternatives still for startups that are chugging along — just not as quickly as once expected. One is to try debt lenders. Debt is always a gamble, but one that sometimes pays off. Another is to use convertible notes, if one’s investors (or even outsiders) are open to the idea. These notes are structured as debt that convert into equity upon a specific event like a certain date or the closing of a priced investment round.

There’s always the hope, too, that a venture investor will let a bet ride. Jason Lemkin, who has invested as an individual and now as the founder of the SaaStr fund, says he’s open to doing this when he can.  “My view as a founder and investor has evolved over time, but if I think it’s a good team and the company is achieving a few million in revenue and doesn’t need to raise money and has high retention and recurring revenue but is no longer on a venture trajectory, I’ll wait,” says Lemkin, “I”ll wait because things can change.”

It’s true of SaaS startups in particular, he says, “because competitors get acquired, they quit, they take too much money and stumble. And if you’re the last man or woman standing, if you’re still out there fighting, you can win.”

Source: Tech Crunch

A sealed order from a judge today has halted the $10 billion, decade long JEDI project in its tracks until AWS’s protest of the contract award to Microsoft can be heard by the court.

The order signed by Judge Patricia E. Campbell-Smith of the US Court Federal Claims stated:

The United States, by and through the Department of Defense, its officers, agents, and employees, is hereby PRELIMINARILY ENJOINED from proceeding with contract activities under Contract No. HQ0034-20-D-0001, which was awarded under Solicitation No. HQ0034-18-R-0077, until further order of the court.

The judge was not taking this lightly, adding that Amazon would have to put up $42 million bond to cover costs should it prove that the motion was filed wrongfully. Given Amazon’s value as of today is $1.08 trillion, they can probably afford to put up the money, but they must provide it by February 20th, and the court gets to hold the funds until a final determination has been made.

At the end of last month, Amazon filed a motion to stop work on the project until the court could rule on its protest. It is worth noting that in protests of this sort, it is not unusual to stop work until a final decision on the award can be made.

This is all part of an ongoing drama that has gone for a couple of years since the DoD put this out to bid. After much wrangling, the DoD awarded the contract to Microsoft at the end of October. Amazon filed suit in November, claiming that the president had unduly influenced the process.

As we reported in December, at a press conference at AWS re:Invent, the cloud arm’s annual customer conference, AWS CEO Andy Jassy made clear the company thought the president had unfairly influenced the procurement process.

“I would say is that it’s fairly obvious that we feel pretty strongly that it was not adjudicated fairly,” he said. He added, “I think that we ended up with a situation where there was political interference. When you have a sitting president, who has shared openly his disdain for a company, and the leader of that company, it makes it really difficult for government agencies, including the DoD, to make objective decisions without fear of reprisal.”

Earlier this week, the company filed paperwork to depose the president and Secretary of Defense, Mark Esper.

The entire statement from the court today halting the JEDI project:

**SEALED**OPINION AND ORDER granting [130] Motion for Preliminary Injunction, filed by plaintiff. The United States, by and through the Department of Defense, its officers, agents, and employees, is hereby PRELIMINARILY ENJOINED from proceeding with contract activities under Contract No. HQ0034-20-D-0001, which was awarded under Solicitation No. HQ0034-18-R-0077, until further order of the court.

Pursuant to RCFC 65(c), plaintiff is directed to PROVIDE security in the amount of $42 million for the payment of such costs and damages as may be incurred or suffered in the event that future proceedings prove that this injunction was issued wrongfully.

As such, on or before 2/20/2020, plaintiff is directed to FILE a notice of filing on the docket in this matter indicating the form of security obtained, and plaintiff shall PROVIDE the original certification of security to the clerk of court. The clerk shall HOLD the security until this case is closed.

On or before 2/27/2020, the parties are directed to CONFER and FILE a notice of filing attaching a proposed redacted version of this opinion, with any competition-sensitive or otherwise protectable information blacked out. Signed by Judge Patricia E. Campbell-Smith.

Source: Tech Crunch

For two years running, Samsung played the same trick and front-loaded its annual event by announcing a new foldable.

Last year’s announcement of the Fold was a huge one — the first viable (relatively speaking, of course) foldable handset from a major manufacturer. Of course, some stuff has happened in the intervening months, taking a bit of the shine off the device and the category at large.

This week at Unpacked 2020, Samsung came out of the gate swinging once again, announcing the Galaxy Z Flip at the top of the event. As with last year, the move had the effect of taking some of the wind out of its flagship announcement, a sign of a company convinced that standing out from the pack and reversing flagging smartphone sales trends will require some bold decision-making.

That’s not to say the company’s not pushing the envelope on its flagships. Between 100x zoom on the Ultra and 8K video on all of the devices, Samsung is still duking it out on imaging. But it appears not to have any illusions about what really gets users excited in an era of smartphone ubiquity.

Source: Tech Crunch

GPS increasingly runs the entire planet. Supply chains, oceanic shipping, port docking, and even our daily movements in cars, on bikes, and walking around cities is dependent on a constellation of satellites hovering above us to make all this activity work in synchronicity.

Increasingly though, GPS is under attack. GPS spoofing, where the signals from GPS satellites are spoofed to send false data, can prevent devices from getting an accurate location or any location at all. One of our TechCrunch contributors, Mark Harris, wrote a great piece in the MIT Technology Review about a recent spate of spoofing incidents in Shanghai, where shipping vessels would suddenly jump around the harbor as different signals got picked up.

In addition to more direct attacks on GPS, the monopoly of the U.S. GPS system is also under increasing strain. China has launched its own satellite system known as Beidou, and other countries like Russia, Japan, and India as well as the European Union are increasingly attempting to augment America’s system with their own technology.

https://techcrunch.com/2018/12/21/the-gps-wars-have-begun/

GPS is one technology of a field known as Positioning, Navigation, and Timing services (PNT). GPS is perhaps best known for its ability to pinpoint a device on a map, but it is also crucial in synchronizing clocks, particularly in extremely sensitive operations where milliseconds are crucial.

The increasing economic importance of the technology, along with the increasing risk it faces from bad actors, has forced the Trump administration to act. In a new executive order signed yesterday, the administration created a framework for the Department of Commerce to take the lead in identifying threats to America’s existing PNT system, and also ensures that procurement processes across the government take those threats into account.

This process comes in the form of “PNT profiles,” which the executive order described:

The PNT profiles will enable the public and private sectors to identify systems, networks, and assets dependent on PNT services; identify appropriate PNT services; detect the disruption and manipulation of PNT services; and manage the associated risks to the systems, networks, and assets dependent on PNT services. Once made available, the PNT profiles shall be reviewed every 2 years and, as necessary, updated.

In other words, these profiles are designed to ensure that systems work in concert with each other and are authenticated, so that systems don’t have (obvious) security holes in their design.

That’s a good first step, but unlikely to move the needle in protecting this infrastructure. Booz Allen Hamilton Vice President Kevin Coggins, who runs the firm’s GPS resilience practice, explained to me last year that “In a system where you just blindly integrate these things and you don’t have an architecture that takes security into account … then you are just increasing your threat surface.” PNT profiles could cut down on that surface area for threats.

In a new statement regarding Trump’s executive order, Coggins said that:

As a next step, the federal government should consider cross-industry standards that call for system diversity, spectral diversity, and zero-trust architectures.

System diversity addresses the dependence on a single system, such as GPS – some PNT alternatives have a dependence on GPS, therefore will fail should GPS become disrupted.

Spectral diversity involves using additional frequencies to carry PNT information – such as in systems using eLORAN or multi-GNSS – rather than just having a single frequency that is easy to target.

Finally, zero-trust architectures would enable PNT receivers to validate navigation and timing signals prior to using them – rather than blindly trusting what they are told.

This area of security has also gotten more venture and startup attention. Expect more action from all parties as these emerging threats to the economy are fully taken into account.

Source: Tech Crunch

Undisclosed influencer marketing posts on social media should trigger financial penalties, according to a statement released today by the Federal Trade Commission’s Rohit Chopra. The FTC has just voted 5-0 to approve a Federal Register notice calling for public comments on questions related to whether The Endorsement Guides for advertising need to be updated.

“When companies launder advertising by paying an influencer to pretend that their endorsement or review is untainted by a financial relationship, this is illegal payola” Chopra writes. “The FTC will need to determine whether to create new requirements for social media platforms and advertisers and whether to activate civil penalty liability.”

Currently the non-binding Endorsement Guides stipulate that “when there is a connection between an endorser and a seller of an advertised product that could affect the weight or credibility of the endorsement, the connection must be clearly and conspicuously disclosed.” In the case of social media, that means creators need to note their post is part of an “ad”, “sponsored” content, or “paid partnership”.

But Chopra wants the FTC to consider making those rules official by “Codifying elements of the existing endorsement guides into formal rules so that violators can be liable for civil penalties under Section 5(m)(1)(A) and liable for damages under Section 19”. He cites weak enforcement to date, noting that in the case of department store Lord & Taylor not insisting 50 paid influencers specify their posts were sponsored, “the Commission settled the matter for no customer refunds, no forfeiture of ill-gotten gains, no notice to consumers, no deletion of wrongfully obtained personal data, and no findings or admission of liability.”

Strangely, Chopra fixates on Instagram’s Branded Content Ads that let marketers pay to turn by posts by influencers tagging brands into ads. However, these ads include a clear “Sponsored. Paid partnership with [brand]” and seem to meet all necessary disclosure requirements. He also mentions concerns about sponcon on YouTube and TikTok.

Additional targets of the FTC’s review will be use of fake or incentivized reviews. It’s seeking public comment on whether free or discounted products influence reviews and should require disclosure, how to handle affiliate links, and whether warnings should be posted by advertisers or review sites about incentivized reviews. It also wants to know about how influencer marketing affects and is understood by children.

Chopra wisely suggests the FTC focus on the platforms and advertisers who are earning tons of money from potentially undisclosed influencer marketing, rather than the smaller influencers themselves who might not be as well versed in the law and are just trying to hustle. “When individual influencers are able to post about their interests to earn extra money on the side, this is not a cause for major concern” he writes, but “when we do not hold lawbreaking companies accountable, this harms every honest business looking to compete fairly.”

While many of the social media platforms have moved to self-police with rules about revealing paid partnerships, there remain gray areas around incentives like free clothes or discount rates. Codifying what constitutes incentivized endorsement, formally demanding social media platforms to implement policies and features for disclosure, and making influencer marketing contracts state that participation must be disclosed would all be sensible updates.

Society has enough trouble with misinformation on the Internet from trolls to election meddlers. They should at least be able to trust that if someone says they love their new jacket, they didn’t secretly get paid for it.

Source: Tech Crunch

Last year, Microsoft launched a preview of Project xCloud, its ambitious game streaming service that aims to deliver games to any screen — console, PC, or mobile. However, the service until now has only been available to mobile users on Android. Today, that changes as Microsoft is bringing the Project xCloud preview to iOS devices by way of Apple’s TestFlight program.

Microsoft had already been testing xCloud on iOS internally, but had yet to open it up to the public.

Unfortunately, the iOS test will be limited. As is standard with Apple’s TestFlight platform, the new build will be limited to only 10,000 testers.

That won’t likely be enough spots to meet demand, Microsoft admits, and says invitations will be distributed on a first-come, first-serve basis. To work around the limitation, Microsoft plans to boot out some early testers to make room for new testers during the course of the public beta.

“Those who are accepted into the iOS TestFlight preview may not necessarily participate for the full duration of the preview,” the company explains via blog post. “As noted earlier, there are limited spaces available, so for testing purposes we may need to cycle through registrants in order to best utilize the available testing audience. This also means that even if you miss out on the initial allocation, you might receive an invitation to participate later in the preview,” it says.

The iOS preview will also be limited to only one game: “Halo: The Master Chief Collection.” In addition, this particular test won’t include the preview of Xbox Console Streaming as the Android test currently does.

To qualify, testers will need a Microsoft account associated with their Xbox gamertag; an iPhone or iPad running iOS 13.0 or higher and Bluetooth v. 4.0; a Bluetooth-enabled Xbox Once Wireless Controller; access to a Wi-Fi or a mobile data connection that supports 10 Mbps-down bandwidth; and optionally, a third-party controller mount for phone-based games (like this one).

The move to bring console-quality games to smartphones represents a shift in Microsoft’s gaming strategy. The company understands that it can only sell so many consoles, for starters, but mobile phones are everywhere. In addition, people today want to play games on any available screen — not just the big TV screen at home. And for some users, mobile is their only screen.

Meanwhile, cross-platform gaming is becoming increasingly popular, thanks to titles like Fortnite, Minecraft, Roblox, PUBG, and others, which proved that mobile experiences can match consoles.

Project xCloud aims to make it easier for developers to build games that work everywhere. This is no small task, as it required Microsoft to architect a new customizable blade that hosts the component parts of multiple Xbox One consoles, as well as the associated infrastructure needed to support it. It also needs to ensure the technology can deliver games at console speeds with low latency, so mobile users don’t feel like they’re getting a second-rate experience.

Instructions on how to join the TestFlight are available here.

Source: Tech Crunch

A lawsuit filed by the Massachusetts attorney general includes new details about how the company intentionally marketed illegally to teens, including advertising on websites for Seventeen Magazine, Cartoon Network, Nickelodeon and Nick Jr.

The suit from Attorney General Maura Healey makes good on the 2018 announcement from her office that she would investigate the company’s marketing and advertising campaign for illegally targeting children.

Filed in Suffolk Superior Court today, the lawsuit reveals that Juul rejected an initial marketing plan that would have focused on adult smokers, instead choosing to use younger models and pitch its product to youth-oriented websites and in targeted campaigns on social media.

Juul did not respond to a request for comment.

“Juul is responsible for the millions of young people nationwide who are addicted to e-cigarettes, reversing decades of progress in combating underage tobacco and nicotine use,” said AG Healey. “Our lawsuit sheds new light on the company’s intent to target young people, and we are going to make them pay for the public health crisis they caused in Massachusetts.”

According to new allegations in the lawsuit, Juul bought ads for its Vaporized Campaign on websites including: Nickelodeon, Nick Jr., The Cartoon network, Seventeen Magazine — along websites designed to help children with math and social studies skills like coolmath-games.com and socialstudiesforkids.com.

Massachusetts’ attorney general also pointed to the company’s use of social media stars and celebrities who had a large following among tweens and teens. These were stars like Miley Cyrus, Cara Delevingne, Kristen Stewart, Luka Sabbat and Tavi Gevinson.

The company even ignored the age verification tools it put in place when distributing marketing materials, according to the attorney general’s allegations. Indeed, Juul sent marketing emails to 40,000 individuals who failed to complete the company’s age verification process. Another 83% of the 420,000 emails the company collected couldn’t be matched to a record associated with someone 18 years old or older.

Glaringly, the company allowed individuals to set up more than 1,2000 accounts using email addresses associated with high schools in Beverly, Malden and Braintree, Mass.

The suit also alleges that Juul’s customer service representatives advised potential customers on how to evade minimum legal sales restriction requirements.

In Massachusetts, the results of the marketing campaigns and tactics from Juul and other e-cigarette companies are more than 50% of high school students saying they’ve tried e-cigarettes, with another 30% saying they’ve used e-cigarettes in the past 30 days.

For Juul that has meant $3.3. billion in U.S. retail sales between September 2018 and August 2019 — and a roughly 75% market share of the electronic cigarette market.

Source: Tech Crunch

In-orbit manufacturing startup Made in Space has tapped Colorado’s Blue Canyon Technologies (BCT) to help support its Archinaut One demonstration mission contracted by NASA, which is currently set to take place in 2022. The mission will see Made in Space show off the assembly of two ten-meter solar arrays on orbit, which will then be used to power an ESPA-class satellite, providing up to five times more power than is available via power sources used for those satellites not assembled in orbit.

BCT will be providing development of the spacecraft platform (along with Northrop Grumman) that Made in Space will use to delver its Archinaut manufacturing platform, which employs additive manufacturing and robotic assembly to be able to build structures while in orbit. The Colorado company, founded in 2008, has developed a number of spacecraft for a variety of projects including JPL’s first-ever operational CubeSat project, the Asteria space telescope.

I spoke to BCT Systems Engineer Brian Crum about the Made in Space project, and he said that it’s representative of the kind of work they’ve been doing, which mainly concentrates around interesting demonstration missions and initial operations of novel space technologies that could have tremendous impact on how work is done in space.

“Given the size of spacecraft that we develop and specialize in, and at that price point, it really lends itself to these Demonstration Missions that are follow-on to operational concepts,” he said. “We are a good solution for testing out concepts, and we get approached quite a bit for that […] we get a lot of interesting ideas of people wanting to try things, and this is definitely one of them.”

BCT is actually in the process of building more than 60 spacecraft, and it doubled in size over the past year. Next, the company plans to open a new combined headquarters and production facility that spans over 80,000 acres, which should be opening sometime later this year. That growth is directly driven by an uptick in business – something Crum says is the result of a boom in experimentation and technology demonstrations coming from all vectors, including government and private industry.

“There are definitely more people that have more appetite for risk,” he said. “We we are growing because the demand for the spacecraft is growing, that’s the simple answer. We’re we’re hiring the right people to support these programs, and the the number of programs is greatly increasing. Along with that, as we grow larger in size, and the spacecraft grow larger and size, they become more complex which means they need a little bit more effort. So there’s there’s a little bit more engineering that goes into them as well.”

 

Source: Tech Crunch