Month: August 2018

As a former stock analyst turned VC, I still spend time thinking about public company investment opportunities. To that end, I recently read Seth Klarman’s Margin of Safety, a hard to find, but very insightful book about value investing. The book’s title, Margin of Safety, is a term borrowed from the godfather of value investing: Benjamin Graham. Warren Buffett’s investment philosophy is very much inspired by Graham; 85 percent as much, according to Buffett himself.

A margin of safety is room for error built into the price an investor pays for an asset to lower the risk that the investor might lose money. In other words, assets are usually quite difficult to price, so you try to pay some amount well below what you think an asset is worth to minimize the impact of various issues that might impact the value of that asset. One potential issue might be in the investor’s analysis of worth (i.e. the investor is wrong); another might be an unforeseeable market event, or a temporary problem specific to the company, etc.

While I was familiar with the margin of safety concept, I hadn’t thought about how it might apply to venture investing, and Klarman’s book sparked my imagination.

Can you fundamentally build a margin of safety into an early-stage venture investment? Can you fundamentally be “wrong” about your investment and still turn out alright?

The answer seems to be “sort of,” but it’s quite different than how you do it in the public markets. To figure it out, it’s worth considering price, market and team as the potential mechanisms.

Price

In the public markets, margin of safety is all about the price you pay for an asset. You’re looking for mispricings in the market primarily due to irrational downward assessments of other investors — usually places where emotion takes hold and logic gives way. Irrational upward assessments happen too, but those aren’t buying opportunities, and value investing is about buying, not shorting.

In the private markets, there may be the same amount of irrational upward assessment as reflected by some valuations that get ahead of themselves, but irrational downward assessment is rarer simply because such an assessment would mean the market thinks a company is not fundable and, without capital, it likely goes out of business. Therefore, it’s difficult for a private company mispriced to the downside to even exist. Even in down rounds at solid companies there doesn’t seem to be anything near a margin of safety that Klarman or Buffett would expect — nor do modest valuation negotiations create such a margin of safety for top venture firms that can pull off such negotiations.

We can comfortably say that price as a mechanism for margin of safety in venture doesn’t seem to work.

Market

A bigger market is always better, so if we only invest in huge markets, that’s a margin of safety, right? Unfortunately, no.

Bigger markets are usually better, but markets are extremely hard to predict, and it’s even harder to predict which market many startups even really fit into at the early stage. If you had to predict the market for people renting air beds on other people’s floors you probably would have missed the potential for the same platform to rent rooms and, ultimately, change the travel industry.

You might apply Klarman’s idea of conservatively estimating a company’s cash flows and the applicable discount rate in valuing a company as part of a margin of safety, but taking a conservative view of what the market may be for a venture investment is arguably even worse than overshooting it because it will probably lead you to miss out on some great opportunities, like Airbnb above.

Market doesn’t seem to be the margin of safety in venture either.

Team

That leaves us with team.

Fundamentally, the point of a margin of safety is to recognize that things are probably not going to go as planned. In a public investment, where value is a constant reflection of supply and demand, you can protect yourself from the unforeseen via price. In a private investment, where shares are illiquid and relationships more important, you can only protect yourself from the unforeseen via the team.

A great team is resourceful, dedicated, persistent, curious and flexible. Those elements reduce the risk of a negative outcome when things don’t go as planned, because a great team adjusts and fights through it. Fighting through a difficult time. Pivoting to something else. Pressing on with a commitment to suffering. Sometimes things go too far off the rails for even a great team to recover, but better to invest in a team that can correct setbacks than an average team that crumbles under even minor deviations.

It’s this reason that all VCs say they invest in team first. They are our margin of safety.

Close

To bastardize Warren Buffett’s bridge analogy regarding the margin of safety: We want to invest in founders that can lift the weight of the world, but really only need to lift the weight of one difficult startup business. We will almost certainly be fooled both positively and negatively by prices, products and markets, but we must do our best not to be fooled by teams, because they’re the only margin of safety we have. 

The great San Francisco scooter decision has been made. And Skip and Scoot have claimed the prize.

The San Francisco Municipal Transportation Agency (SFMTA) issued one-year permits to Skip and Scoot on Thursday, a decision that ends months of waiting for 12 companies that applied to operate within the city. JUMP, which Uber acquired in April, as well as Lyft, Skip, Spin, Lime, Scoot, ofo, Razor, CycleHop, USSCooter and Ridecell all applied for permits in San Francisco.

The permits will allow a maximum of 625 scooters for each company in the first six months. Scoot and Skip may have the potential to increase their number of scooters in months seven to 12 to a cap of 2,500, at the SFMTA’s sole discretion.

“The SFMTA’s decision is based on the strength of the proposals submitted by the two companies, combined with their experience of owning, operating and maintaining a shared mobility service in the public right-of-way. The agency looked for applications that prioritized the city’s concerns around safety, disabled access, equity and accountability,” the agency said.

The SFMTA noted in its decision that Skip and Scoot had the strongest applications. The agency seemed particularly interested in safety measures these companies planned to take. Scoot, which has been managing a fleet of shared electric mopeds in San Francisco since 2012, proposed mandatory instructional videos for users, helmets included in rentals and free in-person training.

Scoot also proposed using swappable batteries instead of manually taking the scooters off the street for regular recharging.

“This method could help the city reduce the number of vehicle miles traveled on San Francisco streets, which helps reduce traffic congestion and greenhouse gas emissions,” the SFMTA said in its decision.

Scoot said it will soon introduce an electric kick-style scooter to its line-up of electric motor scooters and electric bicycles in response to the decision.

Unsurprisingly, the companies that lost out have expressed dismay with the decision.

“Jump both submitted a strong application and has a track record of successfully working with the city on our bike pilot,” an Uber spokesperson wrote in an email. “Granting only two scooter permits unnecessarily limits mobility options in San Francisco, and we plan to follow up with the SFMTA to share our concerns,”

Bird, a scooter startup that has $2 billion valuation, said it will continue to work with San Francisco officials, partners, community organizations and advocates in hopes of bringing Bird back to the City by the Bay, a spokeswoman said in an email.

Bird, which has a goal of operating in 50 cities globally before the end of the year, noted that residents have sent nearly 30,000 emails to city officials in support of bringing Bird to San Francisco.

The pilot program is the city’s solution to handling the scooter chaos of 2018. Bird, and soon after, Lime and Spin, released their fleet of scooters into the city in March without permission. They became an instant hit among city residents seeking fast and cheap ways to get around town. They also soon became a pariah as scooters inundated sidewalks and rights of way.

The SFMTA put a temporary ban on all scooters in May and initiated a permit process as part of a 24-month pilot program that would allow up to five scooter companies to operate in the city.

Bird, Lime, Lyft and JUMP didn’t completely lose out Thursday. The city of Santa Monica’s Shared Mobility Device Selection Committee officially awarded Bird, Lime, Lyft and JUMP Bikes permits to operate both electric scooters and/or bikes in the city as part of its 16-month pilot program beginning September 17.

Lyft, which remains hopeful that it will have the chance to offer scooters in San Francisco in the future, is now focused on Santa Monica.

VNTANA CEO Ashley Crowder calls the company’s technology, “the world’s first scalable, affordable and interactive hologram.” The startup’s tech hasn’t certainly wowed crowds in recent recent years.

In 2016, it collaborated with Microsoft on HOLLAGRAM, beaming in a live hologram of MS executives during a HOLLAGRAM for a keynote at HackSC. The company’s technology has also been embraced by Intel. The chipmaker deployed VNTANA’s tech during its own keynote at Computex that same year.

Crowder cofounded the VNTANA in 2012, along with fellow USC grad (and current COO) Ben Conway. Before VNTANA, she worked at Gulfstream, Northrop Grumman and BP, utilizing her experience in manufacturing to help design the new company’s early offerings.

In 2013, the team sent a video of a hacked Kinect to Microsoft, demonstrating how the company’s popular hands-free controller could be used for gesture tracking and control with VNTANA’s holographic images. It was enough to gain the startup a place in Microsoft’s Early Developer and BizSpark programs.

These days, the company is focused on augmented and mixed reality experiences, topics Crowder will discuss at TC Sessions: AR/VR on October 18 at UCLA. The one-day event combines onstage conversations about augmented and virtual reality with in-person demos and networking.

Purchase your Early Bird tickets here for just $99 and you’ll save $100 before prices go up!

Students get a special rate of just $45 when they book here.

With a census just two years away, the Census Bureau has a cybersecurity problem.

That’s a key takeaway from the congressional watchdog, the Government Accountability Office, which oversees the government’s spending. In a new report published Thursday, the non-partisan agency said that the government’s Census Bureau has only a few months to fix thousands of security vulnerabilities that may put personal citizen data at risk.

The census, conducted by the federal government decennially, provides the government data on the population.

Ahead of the 2020 census, the Bureau began testing all 44 key systems necessary to support the new option of allowing citizens to send their responses over the internet, a scheme that will save the government billions of dollars.

The two-year test, set to complete in April 2019, has found close to 3,100 security issues and weaknesses, the report said.

In total, 43 security issues were classified “high” or “very high” risk, which reflect cases where an unpatched system has a vulnerability for a known exploit, for example.

“Because the 2020 Census involves collecting personal information from over a hundred million households across the country, it will be important that the Bureau addresses system security weaknesses in a timely manner and ensures that risks are at an acceptable level before systems are deployed,” said the report.

According to the report, 33 of the 44 key systems have so far been authorized to operate in the 2020 Census, but eight systems will need to be reauthorized after extensive changes were made. Three systems that are integral for census work are not yet authorized to operate.

These authorizations are granted after officials evaluate a system’s security, and are necessary for government operations. Once an authorization is granted, those systems are monitored to ensure that the risk level remains “acceptable.”

But the Bureau is running out of time to get these issues fixed ahead.

“The Bureau is facing system development and testing challenges that are delaying the completion of milestones and compressing the time available for security testing activities,” the report said. “It will be important that the Bureau provides adequate time to perform these security assessments, completes them in a timely manner, and ensures that risks are at an acceptable level before the systems are deployed.”

The Government Accountability Office said the Census Bureau has implemented 61 of its 93 recommendations, and has made initial progress on 32 recommendations.

A spokesperson for the Census Bureau did not respond to a request for comment.

The city of Santa Monica’s Shared Mobility Device Selection Committee officially awarded Bird, Lime, Lyft and JUMP Bikes, which Uber acquired in April, permits to operate both electric scooters and/or bikes in the city as part of its 16-month pilot program beginning Sept. 17. 

The city will allow Bird to manage 750 scooters, as well as Lime. Lyft and JUMP were granted permission to release 250 scooters each, as well as 500 bikes. In San Francisco, which is similarly launching a scooter pilot program this fall, city leaders chose Skip and Scoot as their official scooter providers.

Earlier this month, the committee had officially recommended that only Lyft and JUMP receive permits to David Martin, the city’s director of planning and community development. Lime and Bird, however, followed up immediately with a protest, asking their riders to speak out against the recommendations in hopes of reversing course. Looks like that strategy was successful.

In addition to a leak showing off photos of the new iPhone XS models, 9to5Mac also got a hold of a photo of the upcoming Apple Watch Series 4. The new Watch, which now sports an edge-to-edge display, is expected to be revealed on September 12, at the just-announced Apple press conference, along with the iPhone XS.

The photos of the forthcoming Apple Watch (which 9to5Mac notes are “not a render”) show off a watch that’s clearly different from the existing editions. The display now stretches to the edge of the watch face, confirming earlier rumors that said Apple was planning to give the Apple Watch its first big redesign since its launch in 2015.

Analysts have been predicting the new watch would sport a 15% larger display, offer extended battery life, and include upgraded health monitoring features.

Image credit: 9to5Mac

Apple is apparently taking advantage of the bigger screen area with a new watch face that packs in a lot more complications.

In the image 9to5Mac published (see above), there’s an analog face that’s practically cluttered with extra complications, including the temperature, stopwatch, weather, activity rings, date, music, calendar updates, and even a UVI index. These are both spread around the outside of the clock itself, and inside the clock, underneath the hands.

Arguably, it’s a bit much. But the image is likely showing off all the possible complications that could be added to a customizable face at the user’s discretion, rather than a suggestion that one should – well – add them all at once.

Of course, we’ve already begun debating the look, with some more enthusiastically in favor of the new face and all its accompanying accoutrement, and others – let’s say, more cautiously optimistic.

The photo also shows a new hole underneath the Digital Crown, which seems like an extra mic, the report notes.

Other changes, including whatever hardware upgrades and watchOS software features may arrive, aren’t yet known.

Get ready for a leaked look at the new iPhone XS. 9to5Mac has gotten its hands on an image of Apple’s next generation of iPhone hardware and the future looks pretty swanky.

The leaked image showcases the new sizing of Apple’s soon-to-be-unveiled flagship bezel-less devices which will likely have 5.8-inch and 6.5-inch screens respectively. The two sizes of phones which will be called the iPhone XS according to the report. The pictured devices represent the higher-end OLED screen models, not the cheaper rumored notch LCD iPhone.

The device will feature a new gold color shell. The iPhone X is currently available in space gray and silver.

Image credit: 9to5mac

A picture is worth a thousand words but there are still a lot of details we’re waiting on here obviously. Apple is expected to show off the new phone hardware as well as a new version of the Apple Watch at a hardware event on September 12.

The growth of cloud services — with on-demand access to IT services over the Internet — has become one of the biggest evolutions in enterprise technology, but with it, so has the threat of security breaches and other cybercriminal activity. Now it appears that one of the leading companies in cloud services is looking for more ways to double down and fight the latter. Amazon’s AWS has been working on a range of new cryptographic and AI-based tools to help manage the security around cloud-based enterprise services, and it currently has over 130 vacancies for engineers with cryptography skills to help build and run it all.

One significant part of the work has been within a division of AWS called the Automated Reasoning Group, which focuses on identifying security issues and developing new tools to fix them for AWS and its customers based on automated reasoning, a branch of artificial intelligence that covers both computer science and mathematical logic and is aimed at helping computers automatically reason completely or nearly completely.

In recent times, Amazon has registered two new trademarks, Quivela and SideTrail, both of which have connections to ARG.

Classified in its patent application as “computer software for cryptographic protocol specification and verification,” Quivela also has a Github repository within AWS Labs’ profile that describes it as a “prototype tool for proving the security of cryptographic protocols,” developed by the AWS Automated Reasoning Group. (The ARG also has as part of its mission to share code and ideas with the community.)

SideTrail is not on Github, but Byron Cook, an academic who is the founder and director of the AWS Automated Reasoning Group, has co-authored a research paper called “SideTrail: Verifying the Time Balancing of Cryptosystems.” However, the link to the paper, describing what this is about, is no longer working.

The trademark application for SideTrail includes a long list of potential applications (as trademark applications often do). The general idea is cryptography-based security services. Among them: “Computer software, namely, software for monitoring, identifying, tracking, logging, analyzing, verifying, and profiling the health and security of cryptosystems; network encryption software; computer network security software,” “Providing access to hosted operating systems and computer applications through the Internet,” and a smattering of consulting potential: “Consultation in the field of cloud computing; research and development in the field of security and encryption for cryptosystems; research and development in the field of software; research and development in the field of information technology; computer systems analysis.”

Added to this, in July, a customer of AWS started testing out two other new cryptographic tools developed by the ARG also for improving an organization’s cybersecurity. Tiros and Zelkova, as the two tools are called, are math-based techniques that variously evaluate access control schemes, security configurations and feedback based on different setups to help troubleshoot and prove the effectiveness of security systems across storage (S3) buckets.

Amazon has not trademarked Tiros and Zelkova. A Zelkova trademark, for financial services, appears to be registered as an LLC called “Zelkova Acquisition” in Las Vegas, while there is no active trademark listed for Tiros.

Amazon declined to respond to our questions about the trademarks. A selection of people we contacted associated with the projects did not respond to requests for comment.

More generally, cryptography is a central part of how IT services are secured: Amazon’s Automated Reasoning Group has been around since 2014 working in this area. But Amazon appears to be doing more now both to ramp up the tools it produces and consider how it can be applied across the wider business. A quick look on open vacancies at the company shows that there are currently 132 openings at Amazon for people with cryptography skills.

“Cloud is the new computer, the Earth is the motherboard and data centers are the cards,” Cook said in a lecture he delivered recently describing AWS and the work that the ARG is doing to help AWS grow. “The challenge is that as [AWS] scales it needs to be ever more secure… How does AWS continue to scale quickly and securely?

“AWS has made a big bet on our community,” he continued, as one answer to that question. That’s led to an expansion of the group’s activities in areas like formal verification and beyond, as a way of working with customers and encouraging them to move more data to the cloud.

Amazon is also making some key acquisitions also to build up its cloud security footprint, such as Sqrrl and Harvest.ai, two AI-based security startups whose founding teams both happen to have worked at the NSA.

Amazon’s AWS division pulled in over $6 billion in revenues last quarter with $1.6 billion in operating income, a healthy margin that underscores the shift that businesses and other organizations are making to cloud-based services.

Security is an essential component of how that business will continue to grow for Amazon and the wider industry: more trust in the infrastructure, and more proofs that cloud architectures can work better than using and scaling the legacy systems that businesses use today, will bolster the business. And it’s also essential, given the rise of breaches and ever more sophisticated cyber crimes. Gartner estimates that cloud-based security services will be a $6.9 billion market this year, rising to nearly $9 billion by 2020.

Automated tools that help human security specialists do their jobs better is an area that others like Microsoft are also eyeing up. Last year, it acquired Israeli security firm Hexadite, which offers remediation services to complement and bolster the work done by enterprise security specialists.

Lenovo’s going all-in on IFA this year. The company announced a new Chromebook, a Snapdragon powered Windows laptop and some smart home devices, among others. The most compelling bit from the bunch, however, has to be the Yoga Book C930.

The laptop follows in the footsteps of the Yoga Book A12, the convertible that was all the rage at IFA back in 2016. That device swapped the standard keyboard for a touchscreen, so the surface could double as a drawing pad. It wasn’t particularly conducive for typing, but it certainly was innovative.

The C930 takes things even further, swapping the Halo keyboard for E Ink. It’s an interesting application for the technology, which has largely been relegated to the world of e-readers. The secondary display servce the same function as on the A12, doing triple duty as a keyboard, notepad and e-reader.

That functionality certainly makes the device a compelling proposition for students who are more intent on taking notes by hand than typing. Of course, like the A12, you’re sacrificing the tactility of a traditional keyboard and trackpad for the diversity of a secondary display. Typing on a flat surface is something that certainly takes some getting used to.

I haven’t had the opportunity to try the product out, so I can’t speak to the responsiveness of the on-board E Ink tech, but as anyone who’s ever used a Kindle can tell you, refresh rates can be killer on these sorts of devices.

The C930 will be available in October, starting at $1,000.

Lenovo’s got its hands in basically everything else at this point, so why not extend that reach into smart home devices? Today at IFA, the company announced the upcoming release of smart lightbulb, plug and connected security camera, all tied together by the company’s new Link app.

The play here is pretty clear, honestly. The company recently released the first (and best looking) Google Smart Display last month, and now it’s looking to provide even more of that connected smart home tissue. You’ve already got a Lenovo product in your home, so why not go all in, right?

After all, fragmentation has been an issue with smart home early adopters. The idea of a different app for every single new device in the home is a bit of a headache, though the likes of Apple, Amazon and Google are all working to close the loop with their own solutions.

Lenovo’s trying to circumvent that a bit here with Link, while providing users “the ultimate starter pack for a smart home,” which can be be controlled with Alexa or through Google Assistant, if you’ve got the new Smart Display.

There’s probably something to the sentiment of lowering the barrier of entry for users, but for most of us, the idea of mixing and matching across brands, while using a catchall software solution like the Apple Home app is a bit more appealing.

Whatever the case, the Smart Plug and Smart Bulb will both be available in November for $30, while the Smart Camera is shipping early next year, priced at $100. No word yet on bundles with the Smart Display, though that’s probably a no brainer.