The Stanford connections behind Latin America’s multi-billion dollar startup renaissance

The houses along the tree-lined blocks of Josina Avenue in Palo Alto, with their big back yards, swimming pools and driveways are about as far removed from the snarls of traffic, sputtering diesel engines, and smoggy air of South America’s major metropolises as one can get.

But it was in one of those houses, about a twelve-minute bicycle ride from Stanford University, that the seed was planted for what has become a renaissance in technology entrepreneurship in Latin America.

Back in 2010, when Adeyemi Ajao, Carlo Dapuzzo, and Juan de Antonio were students at Stanford’s Graduate School of Business they could not predict that they would be counted among the vanguard of investors and entrepreneurs transforming Latin America’s startup economy.

At the time, Ajao was negotiating the sale of his first business, the Spanish social networking company, Tuenti, to Telefonica (in what would be a $100 million exit). Carlo Dapuzzo was in Palo Alto taking a break from his job at Monashees, which at that time was a small, early-stage investment fund based in Brazil focused on investing in Latin America. Juan de Antonio had left a job as a consultant at BCG to attend Stanford’s business school on a Fulbright scholarship.

In just two years, Ajao would be a founding investor in de Antonio’s ride-hailing business, Cabify, focused on Latin America and Europe; and Dapuzzo would be seeding the ride-hailing service 99Taxis. Today, Cabify is worth over $1 billion and has focused its business primarily on Latin America while 99 was sold to the Chinese ride-hailing company Didi for $1 billion — making it one of the largest deals in Latin America’s young startup history.

The three men are now at the center of a vast web of startups whose intersection can, in many cases, be traced back to the house on Josina Avenue where Dapuzzo and de Antonio lived and where Ajao spent much of his free time.

“It’s the same dynamics as the PayPal Mafia,” says Ajao. “The new unicorn batches which started in Colombia, Mexico, and Brazil. Although they’re all trans-national, they all know each other and literally they are all friends and all co-investors in each other’s companies and they all have links to Silicon Valley… and… more importantly… to Stanford.”

Carlo Dapuzzo, Adeyemi Ajao, and Juan de Antonio at Stanford University

Stalled Economic Engines

If Ajao’s enthusiasm sounds familiar, that’s because it is. There was another wave of interest in Latin America that started surging nearly a decade ago, but crashed nearly five years into what was supposed to be the time of the region’s explosive growth in the global scene.

Back in 2008, as the U.S. was sliding into recession, global economists cast about for countries whose economic might could potentially provide some antidote to the toxic assets that were poisoning the global financial system in America and Western Europe. It was then that the concept coined by a Goldman Sachs economist back in 2001 (in the aftermath of another financial shock) baked Brazil, Russia, India and China into a BRIC — a group of nations that, as a bloc, could create enough growth to keep the global economy moving upwards.

All of them were growing at a rapid clip, albeit at different speeds and from different starting trajectories. But they were still all humming. Investment — from large financial institutions, private equity and venture capital firms — all began flowing into the four countries.

In Brazil and across Latin America, companies from the U.S. began to cast their eyes South for growth. That’s when Groupon began to make inroads into the region. When Groupon acquired the Chilean company ClanDescuento, it served as a starting gun for activity across multiple geographies.

Two years after that acquisition by Groupon, Redpoint’s Brazilian investment vehicle, Redpoint eVentures was able to close on a $130 million fund for Brazilian and Latin American investments in just under four months. While Brazil held the bulk of the capital, many of the largest startup companies were being launched out of Buenos Aires in Argentina.

Globant, Despegar, MercadoLibre, and OLX were all lucrative deals for the investors who made them. Today, they remain solid companies, but they didn’t create the ecosystem that both local investors and entrepreneurs were hoping for. Brazil’s Peixe Urbano was also a rising star at the time, but it too wound up selling, in its case to Chinese internet Baidu. Indeed, the Peixe Urbano funding gave investors like Benchmark’s Matt Cohler their first exposure to the region.

A 2012 default on Argentinian debt derailed the economy and Brazil’s economy began seizing up at around the same time. Then, in 2014, Brazil was hit by both an economic and political collapse that shook the country’s stability and ushered in a two-year-long recession.

Ultimately, the Brazilian component of the BRIC miracle, that would have potentially ushered in a brighter future for the broader region, didn’t materialize.

The next starting gun

Ajao began investing in Latin America as an angel investor during the beginnings of the downturn in Brazil and when Argentina was also seizing up. It’s also when Dapuzzo made the initial bet on 99Taxis — bringing Ajao in as an investor — and Cabify launched, eventually bringing its service to Mexico and seeing huge growth in the Latin American market.

500 Startups expanded to Mexico around the same period, in what turned out to be a prescient move. Because even as the broader economies were slowing, technology adoption — fueled by rising smartphone sales and new internet-enabled mobile services — was speeding up.

Groupon’s push into the region taught a new consumer market about the pleasures of venture-backed e-commerce, but it was ride-hailing that truly paved the way for Latin America’s future success. Many factors played a role, from the rise of smartphones to the stabilization and growth of economies in the region outside of Argentina and Brazil and the return of a generation of founders who gained exposure and experience in Silicon Valley.

Here again, the house on Josina Street and the friends that were made over the course of the two-year grad school program at Stanford would play a critical role.

“99 was the second start and this new generation of founders,” said one investor with a deep knowledge of the region.

A taxi driver uses the 99 taxi app for smartphones in Sao Paulo, Brazil, on October 11, 2018. (Photo via Nelson Almeida/AFP/Getty Images)

A herd of unicorns

Ajao also sees 99 as ground zero for the network that has spawned a unicorn stampede in Latin America. It’s a group of companies that covers everything from financial services, mobility and logistics, food delivery and even pet care.

In some ways it’s an extension and culmination of the American on-demand thesis, with allowances for the unique characteristics of the region’s varied economies and cultural experience, investors and entrepreneurs said.

“In my mind 99 had a lot to do with what is happening right now with the current PayPal mafia [of Latin America] because they became the first big new exit on the continent,” Ajao says.

Entrepreneurs from 99 spun out to form Yellow, a dockless scooter and bike-sharing company that was initially backed by Monashees, Grishin Robotics and Base10 Ventures — the venture firm that Ajao co-founded and which closed a $137 million venture fund just nine months ago.

Monashees and Base10 also co-invested in Grin, a Mexico City-based dockless scooter company. Together the two companies managed to raise over $100 million before merging into one company earlier this. That deal ultimately provided a challenger to the automotive-based ride-sharing businesses that were beginning to encroach on the scooter business.

The growth of 99Taxis and the rise of startups in Latin America ultimately convinced David Velez, a former venture investor with Sequoia Capital to return to Brazil and try his hand at entrepreneurship as well. A year behind Ajao, de Antonio and Dapuzzo at Stanford, Velez was also friendly with the group.

Velez worked at Sequoia Capital and saw the opportunity that Latin America presented as an investment environment. After starting Sequoia Capital Latin America he transitioned into an entrepreneurial role and became the co-founder of Nubank, which would be Sequoia’s first Latin America investment. Now a $4 billion financial technology powerhouse, the Nubank deal was yet another proof point that the Latin American market had come of age — and another branch on a tree that has its roots in Stanford’s business school and the Silicon Valley venture community.

The final piece of this intersecting web of investments and relationships is Rappi — the Colombian delivery service business that was also backed by Monazhees and Base10. The first company from Latin America to enter YCombinator and the first investment from the new Silicon Valley power player, Andreessen Horowitz, Rappi epitomizes the new generation of Latin American startups.

“The way we think about this part of the world is as a massive market with 700 million people living on the continent and really dense cities,” says Rappi co-founder and president, Sebastian Mejia. “And it’s a region where the tech stack hasn’t been built, which gives you an opportunity to solve problems and create digital champions that look more similar to China than the U.S.”

Mejia epitomizes what Ajao calls a new breed of startup entrepreneur that doesn’t necessarily look to other markets for inspiration or business models, but solves local problems for a local customer, rather than a global one.

“Being local was more of a competitive advantage than a disadvantage and we can solve problems in a better way than a Silicon Valley company or a Chinese company could,” says Mejia. “What we’re starting to see now is that those changes in perspective allow us to build bigger companies.”

In all, Monashees and Base10 have invested in companies operating in Latin America that have a combined valuation of over $6 billion between them. Through the extended network of Stanford connections and the startups that Velez has brought to the table that number is higher than $10 billion.

A bicycle courier working for Colombian online delivery company “Rappi”, rides his bike in Bogota, on October 11, 2018. (Photo via John Vizcaino/AFP/Getty Images)

The next $10 billion

If the Latin American market was once overlooked by venture investors like Sequoia Capital, Andreessen Horowitz, Benchmark or Accel, that’s certainly no longer the case.

Funds are pouring into the region at an unprecedented clip, driven by SoftBank and its interest on the continent following its commitment to launching a new $2 billion fund in the region and its subsequent $1 billion investment in Rappi.

“Latin America is on the cusp of becoming one of the most important economic regions in the world, and we anticipate significant growth in the decades ahead,” said Masayoshi Son, chairman and CEO of SBG, in a statement when SoftBank launched its fund.

“SBG plans to invest in entrepreneurs throughout Latin America and use technology to help address the challenges faced by many emerging economies with the goal of improving the lives of millions of Latin Americans,” he added.

Son is likely thinking about the 375 million internet users in Latin America and the 250 million smartphone users across the region. It’s also worth noting that retail e-commerce has been a huge driver of economic growth despite other economic obstacles. The region’s e-commerce has grown to $54 billion in 2018 up from $29.8 billion in 2015.

Even more critically, there are some key areas where innovation and new services are still sorely needed. Access to transportation isn’t great for the roughly 79% of the 700 million people across South America who live in cities. Then there are 400 million people across Latin America who are either unbanked or underbanked. Healthcare is another area where a lack of investment to date could create potential opportunities for new startups.

More generally, poor infrastructure remains a significant problem that companies like Rappi and another SoftBank investment, Loggi, are looking to make inroads into.

“Latin America was for many years, underinvested,” says de Antonio, whose Cabify business has managed to score a valuation of over $1 billion largely based on the opportunities ahead of it in the Latin American market. “You will see a bit more money to catch up. The market is big… and potentially huge… I’m a big believer that it’s a good moment now to invest.”

For de Antonio, Cabify, Rappi, and other startups are only now hitting their stride. In the future, they stand to enable a host of other opportunities, he believes.

“The entrepreneurial mindset is really ingrained in Latin America… the difference is maybe there wasn’t an ecosystem to help these ideas to scale.. .there are huge fortunes in the region but they typically… they have a lot of their assets invested in the region… but they need to diversify,” said de Antonio. “Until recently there hasn’t been an active funding market for all of these startups.”

For de Antonio and Ajao, one of the critical lessons that they learned from their time at Stanford and being exposed to the broader Silicon Valley ecosystem was the notion of collaboration.

“This is something we learned from San Francisco,” de Antonio said. “The way companies help each other is something that we haven’t seen people do before. And usually when you are a young company this can be the difference between being successful or a failure.

How did Thumbtack win the on-demand services market?

Earlier today, the services marketplace Thumbtack held a small conference for 300 of its best gig economy workers at an event space in San Francisco.

For the nearly ten-year-old company the event was designed to introduce some new features and a redesign of its brand that had softly launched earlier in the week. On hand, in addition to the services professionals who’d paid their way from locations across the U.S. were the company’s top executives.

It’s the latest step in the long journey that Thumbtack took to become one of the last companies standing with a consumer facing marketplace for services.

Back in 2008, as the global financial crisis was only just beginning to tear at the fabric of the U.S. economy, entrepreneurs at companies like Thumbtack andTaskRabbit were already hard at work on potential patches.

This was the beginning of what’s now known as the gig economy. In addition to Thumbtack and TaskRabbit, young companies like Handy, Zaarly, and several others — all began by trying to build better marketplaces for buyers and sellers of services. Their timing, it turns out, was prescient.

In snowy Boston during the winter of 2008, Kevin Busque and his wife Leah were building RunMyErrand, the marketplace service that would become TaskRabbit, as a way to avoid schlepping through snow to pick up dog food .

Meanwhile, in San Francisco, Marco Zappacosta, a young entrepreneur whose parents were the founders of Logitech, and a crew of co-founders including were building Thumbtack, a professional services marketplace from a home office they shared.

As these entrepreneurs built their businesses in northern California (amid the early years of a technology renaissance fostered by patrons made rich from returns on investments in companies like Google and Salesforce.com), the rest of America was stumbling.

In the two years between 2008 and 2010 the unemployment rate in America doubled, rising from 5% to 10%. Professional services workers were hit especially hard as banks, insurance companies, realtors, contractors, developers and retailers all retrenched — laying off staff as the economy collapsed under the weight of terrible loans and a speculative real estate market.

Things weren’t easy for Thumbtack’s founders at the outset in the days before its $1.3 billion valuation and last hundred plus million dollar round of funding. “One of the things that really struck us about the team, was just how lean they were. At the time they were operating out of a house, they were still cooking meals together,” said Cyan Banister, one of the company’s earliest investors and a partner at the multi-billion dollar venture firm, Founders Fund.

“The only thing they really ever spent money on, was food… It was one of these things where they weren’t extravagant, they were extremely purposeful about every dollar that they spent,” Banister said. “They basically slept at work, and were your typical startup story of being under the couch. Every time I met with them, the story was, in the very early stages was about the same for the first couple years, which was, we’re scraping Craigslist, we’re starting to get some traction.”

The idea of powering a Craigslist replacement with more of a marketplace model was something that appealed to Thumbtack’s earliest investor and champion, the serial entrepreneur and angel investor Jason Calcanis.

Thumbtack chief executive Marco Zappacosta

“I remember like it was yesterday when Marco showed me Thumbtack and I looked at this and I said, ‘So, why are you building this?’ And he said, ‘Well, if you go on Craigslist, you know, it’s like a crap shoot. You post, you don’t know. You read a post… you know… you don’t know how good the person is. There’re no reviews.’” Calcanis said. “He had made a directory. It wasn’t the current workflow you see in the app — that came in year three I think. But for the first three years, he built a directory. And he showed me the directory pages where he had a photo of the person, the services provided, the bio.”

The first three years were spent developing a list of vendors that the company had verified with a mailing address, a license, and a certificate of insurance for people who needed some kind of service. Those three features were all Calcanis needed to validate the deal and pull the trigger on an initial investment.

“That’s when I figured out my personal thesis of angel investing,” Calcanis said.

“Some people are market based; some people want to invest in certain demographics or psychographics; immigrant kids or Stanford kids, whatever. Mine is just, ‘Can you make a really interesting product and are your decisions about that product considered?’ And when we discuss those decisions, do I feel like you’re the person who should build this product for the world And it’s just like there’s a big sign above Marco’s head that just says ‘Winner! Winner! Winner!’”

Indeed, it looks like Zappacosta and his company are now running what may be their victory lap in their tenth year as a private company. Thumbtack will be profitable by 2019 and has rolled out a host of new products in the last six months.

Their thesis, which flew in the face of the conventional wisdom of the day, was to build a product which offered listings of any service a potential customer could want in any geography across the U.S. Other companies like Handy and TaskRabbit focused on the home, but on Thumbtack (like any good community message board) users could see postings for anything from repairman to reiki lessons and magicians to musicians alongside the home repair services that now make up the bulk of its listings.

“It’s funny, we had business plans and documents that we wrote and if you look back, the vision that we outlined then, is very similar to the vision we have today. We honestly looked around and we said, ‘We want to solve a problem that impacts a huge number of people. The local services base is super inefficient. It’s really difficult for customers to find trustworthy, reliable people who are available for the right price,’” said Sander Daniels, a co-founder at the company. 

“For pros, their number one concern is, ‘Where do I put money in my pocket next? How do I put food on the table for my family next?’ We said, ‘There is a real human problem here. If we can connect these people to technology and then, look around, there are these global marketplace for products: Amazon, Ebay, Alibaba, why can’t there be a global marketplace for services?’ It sounded crazy to say it at the time and it still sounds crazy to say, but that is what the dream was.”

Daniels acknowledges that the company changed the direction of its product, the ways it makes money, and pivoted to address issues as they arose, but the vision remained constant. 

Meanwhile, other startups in the market have shifted their focus. Indeed as Handy has shifted to more of a professional services model rather than working directly with consumers and TaskRabbit has been acquired by Ikea, Thumbtack has doubled down on its independence and upgrading its marketplace with automation tools to make matching service providers with customers that much easier.

Late last year the company launched an automated tool serving up job requests to its customers — the service providers that pay the company a fee for leads generated by people searching for services on the company’s app or website.

Thumbtack processes about $1 billion a year in business for its service providers in roughly 1,000 professional categories.

Now, the matching feature is getting an upgrade on the consumer side. Earlier this month the company unveiled Instant Results — a new look for its website and mobile app — that uses all of the data from its 200,000 services professionals to match with the 30 professionals that best correspond to a request for services. It’s among the highest number of professionals listed on any site, according to Zappacosta. The next largest competitor, Yelp, has around 115,000 listings a year. Thumbtack’s professionals are active in a 90 day period.

Filtering by price, location, tools and schedule, anyone in the U.S. can find a service professional for their needs. It’s the culmination of work processing nine years and 25 million requests for services from all of its different categories of jobs.

It’s a long way from the first version of Thumbtack, which had a “buy” tab and a “sell” tab; with the “buy” side to hire local services and the “sell” to offer them.

“From the very early days… the design was to iterate beyond the traditional model of business listing directors. In that, for the consumer to tell us what they were looking for and we would, then, find the right people to connect them to,” said Daniels. “That functionality, the request for quote functionality, was built in from v.1 of the product. If you tried to use it then, it wouldn’t work. There were no businesses on the platform to connect you with. I’m sure there were a million bugs, the UI and UX were a disaster, of course. That was the original version, what I remember of it at least.”

It may have been a disaster, but it was compelling enough to get the company its $1.2 million angel round — enough to barely develop the product. That million dollar investment had to last the company through the nuclear winter of America’s recession years, when venture capital — along with every other investment class — pulled back.

“We were pounding the pavement trying to find somebody to give us money for a Series A round,” Daniels said. “That was a very hard period of the company’s life when we almost went out of business, because nobody would give us money.”

That was a pre-revenue period for the company, which experimented with four revenue streams before settling on the one that worked the best. In the beginning the service was free, and it slowly transitioned to a commission model. Then, eventually, the company moved to a subscription model where service providers would pay the company a certain amount for leads generated off of Thumbtack.

“We weren’t able to close the loop,” Daniels said. “To make commissions work, you have to know who does the job, when, for how much. There are a few possible ways to collect all that information, but the best one, I think, is probably by hosting payments through your platform. We actually built payments into the platform in 2011 or 2012. We had significant transaction volume going through it, but we then decided to rip it out 18 months later, 24 months later, because, I think we had kind of abandoned the hope of making commissions work at that time.”

While Thumbtack was struggling to make its bones, Twitter, Facebook, and Pinterest were raking in cash. The founders thought that they could also access markets in the same way, but investors weren’t interested in a consumer facing business that required transactions — not advertising — to work. User generated content and social media were the rage, but aside from Uber and Lyft the jury was still out on the marketplace model.

“For our company that was not a Facebook or a Twitter or Pinterest, at that time, at least, that we needed revenue to show that we’re going to be able to monetize this,” Daniels said. “We had figured out a way to sign up pros at enormous scale and consumers were coming online, too. That was showing real promise. We said, ‘Man, we’re a hot ticket, we’re going to be able to raise real money.’ Then, for many reasons, our inexperience, our lack of revenue model, probably a bunch of stuff, people were reluctant to give us money.”

The company didn’t focus on revenue models until the fall of 2011, according to Daniels. Then after receiving rejection after rejection the company’s founders began to worry. “We’re like, ‘Oh, shit.’ November of 2009 we start running these tests, to start making money, because we might not be able to raise money here. We need to figure out how to raise cash to pay the bills, soon,” Daniels recalled. 

The experience of almost running into the wall put the fear of god into the company. They managed to scrape out an investment from Javelin, but the founders were convinced that they needed to find the right revenue number to make the business work with or without a capital infusion. After a bunch of deliberations, they finally settled on $350,000 as the magic number to remain a going concern.

“That was the metric that we were shooting towards,” said Daniels. “It was during that period that we iterated aggressively through these revenue models, and, ultimately, landed on a paper quote. At the end of that period then Sequoia invested, and suddenly, pros supply and consumer demand and revenue model all came together and like, ‘Oh shit.’”

Finding the right business model was one thing that saved the company from withering on the vine, but another choice was the one that seemed the least logical — the idea that the company should focus on more than just home repairs and services.

The company’s home category had lots of competition with companies who had mastered the art of listing for services on Google and getting results. According to Daniels, the company couldn’t compete at all in the home categories initially.

“It turned out, randomly … we had no idea about this … there was not a similarly well developed or mature events industry,” Daniels said. “We outperformed in events. It was this strategic decision, too, that, on all these 1,000 categories, but it was random, that over the last five years we are the, if not the, certainly one of the leading events service providers in the country. It just happened to be that we … I don’t want to say stumbled into it … but we found these pockets that were less competitive and we could compete in and build a business on.”

The focus on geographical and services breadth — rather than looking at building a business in a single category or in a single geography meant that Zappacosta and company took longer to get their legs under them, but that they had a much wider stance and a much bigger base to tap as they began to grow.

“Because of naivete and this dreamy ambition that we’re going to do it all. It was really nothing more strategic or complicated than that,” said Daniels. “When we chose to go broad, we were wandering the wilderness. We had never done anything like this before.”

From the company’s perspective, there were two things that the outside world (and potential investors) didn’t grasp about its approach. The first was that a perfect product may have been more competitive in a single category, but a good enough product was better than the terrible user experiences that were then on the market. “You can build a big company on this good enough product, which you can then refine over the course of time to be greater and greater,” said Daniels.

The second misunderstanding is that the breadth of the company let it scale the product that being in one category would have never allowed Thumbtack to do. Cross selling and upselling from carpet cleaners to moving services to house cleaners to bounce house rentals for parties — allowed for more repeat use.

More repeat use meant more jobs for services employees at a time when unemployment was still running historically high. Even in 2011, unemployment remained stubbornly high. It wasn’t until 2013 that the jobless numbers began their steady decline.

There’s a question about whether these gig economy jobs can keep up with the changing times. Now, as unemployment has returned to its pre-recession levels, will people want to continue working in roles that don’t offer health insurance or retirement benefits? The answer seems to be “yes” as the Thumbtack platform continues to grow and Uber and Lyft show no signs of slowing down.

“At the time, and it still remains one of my biggest passions, I was interested in how software could create new meaningful ways of working,” said Banister of the Thumbtack deal. “That’s the criteria I was looking for, which is, does this shift how people find work? Because I do believe that we can create jobs and we can create new types of jobs that never existed before with the platforms that we have today.”

The formula behind San Francisco’s startup success

Why has San Francisco’s startup scene generated so many hugely valuable companies over the past decade?

That’s the question we asked over the past few weeks while analyzing San Francisco startup funding, exit, and unicorn creation data. After all, it’s not as if founders of Uber, Airbnb, Lyft, Dropbox and Twitter had to get office space within a couple of miles of each other.

We hadn’t thought our data-centric approach would yield a clear recipe for success. San Francisco private and newly public unicorns are a diverse bunch, numbering more than 30, in areas ranging from ridesharing to online lending. Surely the path to billion-plus valuations would be equally varied.

But surprisingly, many of their secrets to success seem formulaic. The most valuable San Francisco companies to arise in the era of the smartphone have a number of shared traits, including a willingness and ability to post massive, sustained losses; high-powered investors; and a preponderance of easy-to-explain business models.

No, it’s not a recipe that’s likely replicable without talent, drive, connections and timing. But if you’ve got those ingredients, following the principles below might provide a good shot at unicorn status.

First you conquer, then you earn

Losing money is not a bug. It’s a feature.

First, lose money until you’ve left your rivals in the dust. This is the most important rule. It is the collective glue that holds the narratives of San Francisco startup success stories together. And while companies in other places have thrived with the same practice, arguably San Franciscans do it best.

It’s no secret that a majority of the most valuable internet and technology companies citywide lose gobs of money or post tiny profits relative to valuations. Uber, called the world’s most valuable startup, reportedly lost $4.5 billion last year. Dropbox lost more than $100 million after losing more than $200 million the year before and more than $300 million the year before that. Even Airbnb, whose model of taking a share of homestay revenues sounds like an easy recipe for returns, took nine years to post its first annual profit.

Not making money can be the ultimate competitive advantage, if you can afford it.

Industry stalwarts lose money, too. Salesforce, with a market cap of $88 billion, has posted losses for the vast majority of its operating history. Square, valued at nearly $20 billion, has never been profitable on a GAAP basis. DocuSign, the 15-year-old newly public company that dominates the e-signature space, lost more than $50 million in its last fiscal year (and more than $100 million in each of the two preceding years). Of course, these companies, like their unicorn brethren, invest heavily in growing revenues, attracting investors who value this approach.

We could go on. But the basic takeaway is this: Losing money is not a bug. It’s a feature. One might even argue that entrepreneurs in metro areas with a more fiscally restrained investment culture are missing out.

What’s also noteworthy is the propensity of so many city startups to wreak havoc on existing, profitable industries without generating big profits themselves. Craigslist, a San Francisco nonprofit, may have started the trend in the 1990s by blowing up the newspaper classified business. Today, Uber and Lyft have decimated the value of taxi medallions.

Not making money can be the ultimate competitive advantage, if you can afford it, as it prevents others from entering the space or catching up as your startup gobbles up greater and greater market share. Then, when rivals are out of the picture, it’s possible to raise prices and start focusing on operating in the black.

Raise money from investors who’ve done this before

You can’t lose money on your own. And you can’t lose any old money, either. To succeed as a San Francisco unicorn, it helps to lose money provided by one of a short list of prestigious investors who have previously backed valuable, unprofitable Northern California startups.

It’s not a mysterious list. Most of the names are well-known venture and seed investors who’ve been actively investing in local startups for many years and commonly feature on rankings like the Midas List. We’ve put together a few names here.

You might wonder why it’s so much better to lose money provided by Sequoia Capital than, say, a lower-profile but still wealthy investor. We could speculate that the following factors are at play: a firm’s reputation for selecting winning startups, a willingness of later investors to follow these VCs at higher valuations and these firms’ skill in shepherding portfolio companies through rapid growth cycles to an eventual exit.

Whatever the exact connection, the data speaks for itself. The vast majority of San Francisco’s most valuable private and recently public internet and technology companies have backing from investors on the short list, commonly beginning with early-stage rounds.

Pick a business model that relatives understand

Generally speaking, you don’t need to know a lot about semiconductor technology or networking infrastructure to explain what a high-valuation San Francisco company does. Instead, it’s more along the lines of: “They have an app for getting rides from strangers,” or “They have an app for renting rooms in your house to strangers.” It may sound strange at first, but pretty soon it’s something everyone seems to be doing.

It’s not a recipe that’s likely replicable without talent, drive, connections and timing.

list of 32 San Francisco-based unicorns and near-unicorns is populated mostly with companies that have widely understood brands, including Pinterest, Instacart and Slack, along with Uber, Lyft and Airbnb. While there are some lesser-known enterprise software names, they’re not among the largest investment recipients.

Part of the consumer-facing, high brand recognition qualities of San Francisco startups may be tied to the decision to locate in an urban center. If you were planning to manufacture semiconductor components, for instance, you would probably set up headquarters in a less space-constrained suburban setting.

Reading between the lines of red ink

While it can be frustrating to watch a company lurch from quarter to quarter without a profit in sight, there is ample evidence the approach can be wildly successful over time.

Seattle’s Amazon is probably the poster child for this strategy. Jeff Bezos, recently declared the world’s richest man, led the company for more than a decade before reporting the first annual profit.

These days, San Francisco seems to be ground central for this company-building technique. While it’s certainly not necessary to locate here, it does seem to be the single urban location most closely associated with massively scalable, money-losing consumer-facing startups.

Perhaps it’s just one of those things that after a while becomes status quo. If you want to be a movie star, you go to Hollywood. And if you want to make it on Wall Street, you go to Wall Street. Likewise, if you want to make it by launching an industry-altering business with a good shot at a multi-billion-dollar valuation, all while losing eye-popping sums of money, then you go to San Francisco.

Investing in frontier technology is (and isn’t) cleantech all over again

I entered the world of venture investing a dozen years ago.  Little did I know that I was embarking on a journey to master the art of balancing contradictions: building up experience and pattern recognition to identify outliers, emphasizing what’s possible over what’s actual, generating comfort and consensus around a maverick founder with a non-consensus view, seeking the comfort of proof points in startups that are still very early, and most importantly, knowing that no single lesson learned can ever be applied directly in the future as every future scenario will certainly be different.

I was fortunate to start my venture career at a fund specializing in funding “Frontier” technology companies. Real-estate was white hot, banks were practically giving away money, and VCs were hungry to fund hot startups.

I quickly found myself in the same room as mainstream software investors looking for what’s coming after search, social, ad-tech, and enterprise software. Cleantech was very compelling: an opportunity to make money while saving our planet.  Unfortunately for most, neither happened: they lost their money and did little to save the planet.

Fast forward a decade, after investors scored their wins in online lending, cloud storage, and on-demand, I find myself, again, in the same room with consumer and cloud investors venturing into “Frontier Tech”.  The are dazzled by the founders’ presentations, and proud to have a role in funding turning the seemingly impossible to what’s possible through science. However, what lessons did they take away from the Cleantech cycle? What should Frontier Tech founders and investors be thinking about to avoid the same fate?

Coming from a predominantly academic background, I was excited to be part of the emerging trend of funding founders leveraging technology to make how we generate, move, and consume our natural resources more efficient and sustainable. I was thrilled to be digging into technologies underpinning new batteries, photovoltaics, wind turbines, superconductors, and power electronics.

To prove out their business models, these companies needed to build out factories, supply chains, and distribution channels. It wasn’t long until the core technology development became a small piece of an otherwise complex, expensive operation. The hot energy startup factory started to look and feel mysteriously like a magnetic hard drive factory down the street. Wait a minute, that’s because much of the equipment and staff did come from factories making components for PCs; but this time they were making products for generating, storing, and moving energy more renewably. So what went wrong?

Whether it was solar, wind, or batteries, the metrics were pretty similar: dollars per megawatt, mass per megawatt, or multiplying by time to get dollars and mass per unit energy, whether it was for the factories or the systems. Energy is pretty abundant, so the race was on to to produce and handle a commodity. Getting started as a real competitive business meant going BIG: as many of the metrics above depended on size and scale. Hundreds of millions of dollars of venture money only went so far.

The onus was on banks, private equity, engineering firms, and other entities that do not take technology risk, to take a leap of faith to take a product or factory from 1/10th scale to full-scale. The rest is history: most cleantech startups hit a funding valley of death.  They need to raise big money while sitting at high valuations, without a kernel of a real business to attract investors that write those big checks to scale up businesses.

How are Frontier-Tech companies advantaged relative to their Cleantech counterparts? For starters, most aren’t producing a commodity…

Frontier Tech, like Cleantech, can be capital-intense. Whether its satellite communications, driverless cars, AI chips, or quantum computing; like Cleantech, there is relatively larger amounts of capital needed to take the startups the point where they can demonstrate the kernel of a competitive business.  In other words, they typically need at least tens of millions of dollars to show they can sell something and profitably scale that business into a big market. Some money is dedicated to technology development, but, like cleantech a disproportionate amount will go into building up an operation to support the business. Here are a couple examples:

  • Satellite communications: It takes a few million dollars to demonstrate a new radio and spacecraft. It takes tens of millions of dollars to produce the satellites, put them into orbit, build up ground station infrastructure, the software, systems, and operations needed to serve fickle, enterprise customers. All of this while facing competition from incumbent or in-house efforts. At what point will the economics of the business attract a conventional growth investor to fund expansion? If Cleantech taught us anything, it’s that the big money would prefer to watch from the sidelines for longer than you’d think.
  • Quantum compute: Moore’s law is improving new computers at a breakneck pace, but the way they get implemented as pretty incremental. Basic compute architectures date back to the dawn of computing, and new devices can take decades to find their way into servers. For example, NAND Flash technology dates back to the 80s, found its way into devices in the 90s, and has been slowly penetrating datacenters in the past decade. Same goes for GPUs; even with all the hype around AI. Quantum compute companies can offer a service direct to users, i.e., homomorphic computing, advanced encryption/decryption, or molecular simulations. However, that would one of the rare occasions where novel computing machine company has offered computing as opposed to just selling machines. If I had to guess; building the quantum computers will be relatively quick; building the business will be expensive.
  • Operating systems for driverless cars: Tremendous progress has been made since Google first presented its early work in 2011. Dozens of companies are building software that do some combination of perception, prediction, planning, mapping, and simulations.  Every operator of autonomous cars, whether they are vertical like Zoox, or working in partnerships like GM/Cruise, have their own proprietary technology stacks. Unlike building an iPhone app, where the tools are abundant and the platform is well-understood, integrating a complete software module into an autonomous driving system may take up more effort than putting together the original code in the first place.

How are Frontier-Tech companies advantaged relative to their Cleantech counterparts? For starters, most aren’t producing a commodity: it’s easier to build a Frontier-tech company that doesn’t need to raise big dollars before demonstrating the kernel of an interesting business. On rare occasions, if the Frontier tech startup is a pioneer in its field, then it can be acquired for top dollar for the quality of its results and its team.

Recent examples are Salesforce’s acquisition of Metamind, GM’s acquisition of Cruise, and Intel’s acquisition of Nervana (a Lux investment). However, as more competing companies get to work on a new technology, the sense of urgency to acquire rapidly diminishes as the scarce, emerging technology quickly becomes widely available: there are now scores of AI, autonomous car, and AI chip companies out there. Furthermore, as technology becomes more complex, its cost of integration into a product (think about the driverless car example above) also skyrockets.  Knowing this likely liability, acquirers will tend to pay less.

Creative founding teams will find ways to incrementally build interesting businesses as they are building up their technologies. 

I encourage founders, and investors to emphasize the businesses they are building through their inventions.  I encourage founders to rethink plans that require tens of millions of dollars before being able to sell products, while warning founders not to chase revenue for the sake of revenue.

I suggest they look closely at their plans and find creative ways to start penetrating, or building exciting markets, hence interesting businesses, with modest amounts of capital. I advise them to work with investors who, regardless of whether they saw how Cleantech unfolded, are convinced that their $$ can take the company to the point where it can engage customers with an interesting product with a sense for how it can scale into an attractive business.

By keeping its head in the cloud, Microsoft makes it rain on shareholders

Thanks in part to its colossal cloud business, Microsoft earnings are drenching shareholders in dollars.

For the quarter ending March 31, 2018, the tech ringer from Redmond saw its revenue increase to $26.8 billion (up 16 percent) from $23.2 billion, with operating income up 23 percent to $8.3 billion, up from $6.7 billion.

Income was a whopping $7.4 billion (up from $5.5 billion) and diluted earnings per share were 95 cents versus analyst expectations of 85 cents per share, according to FactSet.

Despite the earnings beat, shares of the company stock fell as much as 1 percent in after-hours trading on the Nasdaq stock exchange.

Floating much of Microsoft’s success for the quarter was the continued strength of the company’s cloud business, which chief executive Satya Nadella singled out in a statement.

“Our results this quarter reflect the trust people and organizations are placing in the Microsoft Cloud,” Nadella said. “We are innovating across key growth categories of infrastructure, AI, productivity and business applications.”

The company also returned $6.3 billion to shareholders in dividends and share repurchases in the third quarter 2018, an increase of 37 percent.

The company notched wins across the board. In addition to the growth of its cloud business — led by Azure (which grew 93 percent) — Microsoft also recorded strong growth from LinkedIn, which saw revenue increase 37 percent to $1.3 billion and hardware revenue from the Surface increasing 32 percent.

Even the move of Microsoft office into a hosted business seems to have stanched the flow of bleeding from the company’s former cash cow. The company counts 135 million business users on Office 365, and 30.6 million consumer subscriptions for the service.

The Surface numbers are notable because it’s perhaps the first indication that its hardware successes aren’t necessarily limited to the Xbox (insert Zune joke here).

Four MIT students have launched DeepBench to democratize access to expert networks

Frederick Daso
Contributor

Frederick Daso is a Master’s candidate in Aerospace Engineering at MIT writing about college students and recent college graduates pursuing entrepreneurial opportunities.

New European financial regulations requiring fund managers at investment firms to pay banks for research and trading services separately could open the door for new entrants in the professional advisory services marketplace.

The rules, which were approved in 2014, but only took effect in January, are proving to be a boon for four MIT students who launched a company last year to try to grab some of the market.

DeepBench, founded by Devin Basinger, Yishi Zuo, Derek Hans and Nikhil Punwaney, is proposing some novel business model solutions to address what the MIT students see as flaws in the existing market — particularly around the use of expert networks in financial advisory services.

DeepBench co-founders Devin Basinger, Nikhil Punwaney, Derek Hans and Yishi Zuo

Expert networks are communities of experienced professionals in a given field. Fortune 500 companies, hedge funds, private equity firms and other entities rely on individuals from these groups for their insights and expertise. The biggest company in the expert network industry, Gerson Lerman Group (GLG), has nearly 50 percent market share and was on track to reach $400 million in revenue in 2016.

But GLG has had its share of troubles. The company played an integral role in providing the expert that passed confidential information to an SAC Capital trader, which was used as evidence in an insider trading case against the firm and its owner, Steven A. Cohen. The hedge fund ended up paying a record $1.8 billion in fines to the SEC (they did not admit wrongdoing in the case).

There is a significant opportunity to disrupt the expert networking space. As more experienced workers retire, some may want to continue putting their skills to use, albeit in a reduced capacity. Being a part of an expert network allows them to be available for clients who request their expertise in a flexible, convenient capacity. Facilitating this specialized knowledge sharing is a billion-dollar market for the taking.

Aside from established players like GLG and its European competitors, AlphaSights and Third Bridge, other startups like Clarity, Slingshot Insights, Catalant (formerly known as HourlyNerd) and Dūcō are also looking to transform the way expert networking is done. GLG is known to charge a group of four within a firm $100,000 for basic access to their network for a year. In comparison, these startups have different approaches and business models to improving the way clients access the expertise they need. Their efforts reflect two main segments within the expert network market: expert calls and project-based work.

DeepBench and Slingshot Industries are focusing their efforts on expert calls. DeepBench launched its current service in March 2017, which uses its “technology-driven, human-assisted” platform to connect individual clients with available experts for a 30 to 60-minute conversation at an agreed-upon rate. In addition, the startup does not require “learners” to sign long-term contracts or prepay, unlike other firms, allowing for greater client flexibility. Slingshot Industries matches groups of clients with similar interests to an expert to answer their questions. The group would crowdfund the cost for chatting with the expert.

Catalant and Dūcō have aimed for matching clients that need long-term projects completed with the relevant experienced contractor. These clients are looking for experts who are interested in extended-duration work. Catalant leverages its algorithms to quickly match prospective clients with the experts they are looking for based on the former’s search criteria.

Their goal is to make this process seamless, so more experts and clients will feel enabled to collaborate outside of a conventional consulting framework or contracting arrangement. Dūcō appears to take a more conventional approach to connecting clients and experts. The D.C.-based startup vets its pool of experts before offering them up to potential clients. Like Catalant, Dūcō uses matching algorithms to match clients with project work needs to experts ready to assist them.

As investors seek information to keep their competitive edge, and firms need outside help in solving internal problems, on-demand access to expert networks will become necessary. DeepBench currently has more than 1,000 registered experts for their closed beta platform. Currently, more than 20 clients are using the service. Most are top consulting companies, investors and product designers.

“We are focused on finding quality high-fit advisors right now instead of increasing the volume we can have available for clients,” Basinger said.

With a shift in E.U. financial regulations, expert networks are using their momentum in the Asian and U.S. markets to establish themselves in Europe. This specialized knowledge sharing can be shaped by startups like DeepBench as competition between firms continues to intensify.

Seattle’s new venture firm, Flying Fish, holds a first close on its targeted $80 million fund

The founding partners of the new Seattle-based venture firm Flying Fish met as angel investors deploying capital in the talent-heavy, cash-light region around Amazon and Microsoft’s corporate headquarters.

“We’ve underperformed relative to the talent pool,” is how Heather Redman, one of the firm’s three founding partners describes the region.

Well, now Flying Fish has held a first close of $23 million on a targeted $80 million fund to bring some much needed institutional capital at the seed and Series A stage to a geography that’s seen a number of successful exits and a wealth of talented engineers crop up, but little in the way of regional investor talent to support it.

Seattle’s success extends beyond Microsoft’s Redmond, Wash. headquarters and Amazon’s downtown death star. There’re travel behemoths like Expedia, real estate riches pouring from Zillow and Redfin, titans of visualization and business intelligence software like Tableau, and up and coming success stories like Avalera.

All of those companies are bringing in talent from elsewhere to complement Seattle’s growing reputation as a hub for artificial intelligence and machine learning research and engineering talent thanks to programs at the University of Washington .

Joining Redman, a former executive at AtomShockwave, Inc., Getty Images, Inc., and PhotoDisc, Inc.; are two former Microsoft employees Geoff Harris, who served as General Manager for the Speech and Natural Language team, and Frank Chang. Harris and Chang met while working on natural language processing and machine learning for the gargantuan that Gates built before Chang absconded to Jeff Bezos’ Amazonian environs.

With its $28 million first close, Flying Fish is well on its way to joining a host of other investment firms that have launched or closed new investment funds in the Pacific Northwest since the beginning of the year. In all, at least $140 million in new capital has been committed to venture firms in the region like PSL Ventures, the venture capital firm started by development studio Pioneer Square Labs, and Founders Co-op, a longtime early stage investor on the Seattle scene.

“What we believe is that with the additional VC [firms] beginning to be formed here… that is going to increase the number of company starts geometrically,” says Redman. “The talent is here, the entrepreneurial spirit is here and the use is here… but [entrepreneurs] want to do it where there is the capital to support them.”

The firm is targeting around 25 investments for its $85 million first fund with a focus on machine learning, artificial intelligence and software services. Investments will range between $500,000 and $5 million, according to the firm’s partners.

Already, Flying Fish has put money to work in seven new deals.

  • Ad Lightning – Provides publishers a tool to manage bad ads on their sites
  • Otto Robotics – Robotic automation for the fast food industry. (still in stealth – no website)
  • MessageYes (Sold to Nordstrom) – Developers of an ecommerce chatbot over SMS, Facebook messenger etc.
  • Element Data – Developers of a decision engine that takes into account human emotion in the decision-making process
  • Tomorrow – Providing financial planning services such as wills, trusts and insurance 
  • Finn.ai – Pitching a financial services chatbot to engage with banks over Facebook messengers and other like platforms
  • Streem – Offering an augmented reality application connecting consumers with professionals in the home improvement and maintenance market

To win back consumers, big brands should invest in R&D and innovation

Ryan Caldbeck
Contributor

Ryan Caldbeck is the founder and chief executive of the consumer and retail investment marketplace CircleUp.

The world of consumer goods is changing. Consumer tastes are becoming more and more fragmented and big incumbents continue to lose market share to upstart brands. It’s often difficult for these incumbents to figure out how to respond. CPG is full of smart people but many of the biggest brands have seen their sales stagnate or decline over the past several years.

Consumer companies can increase profit and deliver shareholder value by either growing in revenue or cutting costs, but the strategies these companies have taken to try to turn the tide just aren’t working. When they innovate, they only make incremental changes to products (like reducing the fat of a potato chip), instead of offering consumers new products that they actually want.

Or they spend billions on advertising to convince consumers that they should buy already existing products. If they can’t increase revenue, they’ll cut spending by stripping out valuable business teams or merging with other consumer companies to slash costs (à la Kraft-Heinz). These strategies do not position Big CPG for long term success, I’d like to suggest a few that might.

Before I dig in here, I want to say upfront that I don’t have all the answers (or even most of them). I’m the CEO of a startup with 65 employees — not a massive corporation with 30,000 employees. The insights I hope to share are gathered from over a decade working in consumer investing and helping consumer companies grow, but they’re ultimately insights from the outside looking in.

Replace “Kellogg’s” with the name of PepsiCo, Estee Lauder, Nestlé, Kraft -Heinz or countless other big brands and the observations should still resonate. This isn’t about just one company, it’s about the dynamics that exist for virtually all CPG incumbents.

What I would do differently

On day one as CEO of Kellogg’s, I would take a hard look in the mirror and I would ask myself which Kellogg’s brands are still relevant and can grow. I recently had a conversation with a former VP of a major CPG company and he said that Big CPG is guilty of thinking that everything can be relevant if they bring the right news to it. I agree. As CEO, I would acknowledge up front that we have certain brands and products that are cash cows now-but are slowly dying.

An uncomfortable but proactive step would be to sell the legacy cash cows that are dying and invest the cash windfall into innovation. This week I was in another discussion with a 20 year veteran from a Fortune 100 consumer company who said “I think in 10 years our company will no longer exist. It will be broken up.” Conversations about selling legacy brands will make a lot of consumer executives squirm, but they are conversations that need to happen. Cutting the dying cash cows is the hardest but probably most important step in righting the ship.

After deciding which of our legacy brands to divest, my next step would be to publicly announce that we will shift focus away from cutting costs and towards investing in a culture of innovation to actually grow the business. This will likely cause our stock price to go down in the short term, but in the medium to long term this will help our company tremendously.

Simply put, we can’t survive by cutting costs forever. We need to grow. Our culture of innovation will be built and promoted in a variety of ways. What follows isn’t a sequential list but rather initiatives that should be pursued in parallel:

1)  Research and Development. We will signal to Wall Street that we are going to focus on growth and innovation, not cost-cutting. We’re going to go through a rehaul of the R&D process and pipeline and we will dare to dream bigger. In 2017, Kellogg’s spent $148 million  (1.1% of net revenue) on R&D. This may at first sound like a lot, but for comparison, Google spent $16.6 billion (15% of net revenue) on R&D during the same time period. The dichotomy between tech and consumer spending on this front is highlighted in the chart below.

R&D Spending as a Percentage of Annual Net Revenue

Source: Company 10-Ks for 2017

It’s no wonder that one of these companies has been making Frosted Flakes the same way for over 60 years (with goofy TV commercials for most of that time) while the other started as a search engine and now builds phones, maps, and self-driving cars. Imagine how comical it would be for a tech company to sell the same product for 5 years, let alone 50. R&D is not just about coming up with a new flavor or lowering the fat content of an existing product.

As one big CPG veteran told me recently – “consumers don’t care about ‘whiter whites’” anymore”. It involves building an adaptive infrastructure that truly listens to what consumers want and then relays that information to development teams in a way that allows them to be agile and effective. We need to have an R&D team that is focused on the category and consumer, not the product. Instead of Pepsi thinking about a lower fat potato chip, they need to be rethinking the snack category as a whole.

Why is it insane to imagine AB InBev developing a beer that doesn’t cause hangovers, but it isn’t crazy to imagine Elon Musk sending people to Mars? Why is it laughable for Clorox to invest a billion dollars into developing a non-toxic, safe substitute for bleach, but it’s normal to imagine investing $15 billion into Uber – a company that is trying to replace all taxis in the world and rethink transportation? Those comments are meant to push public CPG CEOs, not to degrade SpaceX or Uber.

Good R&D also involves keeping your ear to the ground for great ideas that may already be out there. There could be a toothpaste in India that would revolutionize the way we think about toothpaste in America, but we’ll never know if we aren’t listening. For an example of what can happen without this R&D infrastructure, look no further than the pharmaceutical industry where Big Pharma companies are now having to pay to outsource innovation because they can’t foster it in house. CPG is becoming Big Pharma.

2)  Incubation. In addition to investing in and partnering with great consumer companies, we will provide space and expertise in house to help them grow. Kellogg’s recently partnered with Conagra Brands and the City of Chicago to invest in a $34 million food incubator that is expected to support around 75 companies, 80% of which will be in the snack category. This is definitely a step in the right direction, but I’d want us to go bigger and take the operation in house. I’d like to incubate 100+ companies per year from a wide variety of categories and become the Y Combinator for consumer. This will be a win-win. We get to help great consumer companies grow and these companies get to leverage our expertise and infrastructure.

3)  Venture capital. Too many CPG companies only invest in brands once those brands are 5+ years old and end up paying a huge sum as a result. I would change our mandate to invest in companies that will be interesting 10 years out – not just companies that we think are going to contribute immediately to our revenue or existing product strategy. We need to take the long view here and data plays a big role. Kellogg’s will not identify innovation just by sending a dozen people to Expo West. We need a non-commoditized data and technology solution that can help us identify breakout brands early by looking at their growth potential- not their Expo sales booth. Kellogg’s is actually ahead of most CPGs when it comes to venture in that they have a venture arm of $100 million. But this is still too small.

I would start by having our venture arm manage assets of $500 million (less than 4% of net revenue but still 50x the AuM of many CPG corporate venture arms) and tell them that they are going to invest in 200-300 companies, focusing on early stage companies with less than $10 million in revenue over the next 2-4 years. If that sounds insane, look at Google’s GV for some inspiration. They build a diverse portfolio to foster innovation from many and sometimes unexpected angles. If tech VCs can have a portfolio of hundreds of companies, so can we. A venture arm in consumer is nothing new. Many large CPG companies have launched venture arms, but most of these consumer VCs only plan to invest around $5-$10 million across 3 to 4 companies. Then the CEO loses his or her nerve, succumbs to the pressure of short-term cost cutting, and bails on the strategy. We will dare to take the long view.

Beyond just capital, I would create a structure that provides these companies resources and support to help them be successful. We will create a program to allow for externships between Kellogg’s (and possibly our partners) and the portfolio companies we invest into. Hardly a week goes by that I don’t receive an email from a brand manager, marketer, supply chain expert, or others at one of these public CPGs who are looking to move to a smaller company. This externship program will be an asset for the smaller brands while also acting as a retention tool and bringing innovation back to Kellogg’s.

4)  M&A. I’m not against M&A, but I am against M&A for the sole purpose of stripping cost as a strategy to deliver long-term shareholder value. My belief is that in 10 years the revenue from the core existing products of many consumer companies will be much smaller than it is today. These products won’t be replaced by 1 or 2 new products, they’ll be replaced by hundreds – or thousands. That is the fragmentation of the consumer or what we have called in the past the Personalization of the Consumer. Big CPG can either buy these products (at an earlier stage) or lose to them. I would want our company to ingest a lot of smaller brands rather than forking out hundreds of millions (or billions) of dollars once these brands are already big. We will need to also invest in the infrastructure necessary to work with many more brands and benefit from their growth. The brands will join the Kellogg’s family rather than threatening it.

5)  Partnerships and joint ventures. Every now and then you will hear about a joint venture or partnership in consumer but they are few and far between. Why? I think a lot of times big consumer companies fear that partnering with another company will mean splitting profits which can negatively impact bottom line. This is not a productive attitude.  You see examples of successful partnerships in almost every other industry- whether it’s Google teaming up with Walmart to offer Walmart products on Google Express, or Chrysler teaming up with Waymo to work on driverless cars, partnering with a variety of stakeholders can often help foster the best innovation. I also think there is a big opportunity to partner with other consumer companies to foster education in the sector itself. We could host conferences that bring together the best consumer entrepreneurs and the brightest ideas and we would all benefit as a result.

Why this matters

If my plan as CEO were effectively implemented, I think we would see three powerful effects.  Firstly, by making more small bets on more emerging brands and building a culture of innovation, Kellogg’s would become a dominant player in consumer goods. They will no longer fear being displaced. They will be the ones creating and harnessing the disruption. Secondly, this roadmap would ensure that the best products make it into the hands of consumers and that everyone has access to a wider variety of foods and healthier options.  Finally, by building this infrastructure, Kellogg’s would be able to assist entrepreneurs with their distribution, brand, supply chain, and team. As these companies grow and succeed, this will also result in increased value for shareholders. Consumer is an extremely inefficient market, but Kellogg’s can be the public company that helps change that.

Again, it’s easy for me to suggest strategies like this. It’s much harder to implement them when you’re on the inside looking out. I think a lot of Big CPG CEOs probably do have bold ideas that would help their companies in the long run, they are just unable to pursue them in an environment that obsesses on the short term –  a board that demands immediate cost cuts and a market that demands immediate stock value.

So these CEOs are hamstrung and left to rearrange chairs on the deck of the Titanic while the whole ship is sinking. They fear that if they do too much to try to save the ship they won’t last long. Gates, Musk, and Bezos are free to be visionary and push their companies to the cutting edge of innovation while Cahillane (CEO of Kellogg’s), Hees (Kraft-Heinz), and Quincey (Coke) have to work within the box they are put in. I truly hope that big consumer companies will begin to innovate, be creative, and listen to what consumers want- and that corporate boards and Wall Street will realize the long-term value of these things. If the industry doesn’t evolve, you never know, Google might just step in with the next big breakfast cereal.

This robot can build your Ikea furniture

There are two kinds of people in the world: those who hate building Ikea furniture and madmen. Now, thanks to Ikeabot, the madmen can be replaced.

Ikeabot is a project built at Control Robotics Intelligence (CRI) group at NTU in Singapore. The team began by teaching robots to insert pins and manipulate Ikea parts and then, slowly, began to figure out how to pit the robots against the furniture. The results, if you’ve ever fought with someone trying to put together a Billy, are heartening.

From Spectrum:

The assembly process from CRI is not quite that autonomous; “although all the steps were automatically planned and controlled, their sequence was hard-coded through a considerable engineering effort.” The researchers mention that they can “envision such a sequence being automatically determined from the assembly manual, through natural-language interaction with a human supervisor or, ultimately, from an image of the chair,” although we feel like they should have a chat with Ross Knepper, whose IkeaBot seemed to do just fine without any of that stuff.

In other words the robots are semi-autonomous but never get frustrated and can use basic heuristics to figure out next steps. The robots can now essentially assemble chairs in about 20 minutes, a feat that I doubt many of us can emulate. You can watch the finished dance here, in all its robotic glory.

The best part? Even robots get frustrated and fling parts around:

I, for one, welcome our Ikea chair manufacturing robotic overlords.

A minor cryptocurrency partners with a major porn network. What could go wrong?

Yesterday brought some interesting news in the cryptocurrency space. In a move that is at once sleazy and ridiculous, PornHub and its tech arm MindGeek announced a partnership with the creators of VergeCoin (XVG), an anonymized cryptocurrency in the vein of Monero that is currently trading at 7 cents, down from an all-time high of about 26 cents during a recent pump.

XVG is an epitome of a coin driven by mania. Originally billed as DogecoinDark in 2014, the currency has had some ups and downs but has always displayed the “move fast and break things” mentality that gives cryptocurrencies a bad name. The product is so hapless it can’t even get their Wikipedia entry right.

The currency developers recently beseeched its rabid fans — many of whom have been waxing confused on Reddit — to raise $2 million to build a secret partnership. Weeks of speculation followed as Vergins speculated about partners, including eBay and Amazon. The price went up and down and has settled below 10 cents, placing it at position 23 on the CoinMarketCap list. It’s doing well, but not great.

Yesterday the big announcement came, as it were. I received a few emails from PornHub PR announcing a crypto partnership but they refused to announce the currency. Now that the currency is officially announced, I’m sure there are some folks who are upset they bought a load of Titcoin.

Verge has partnered with PornHub to allow users to pay with the currency. Why? And why would you want to? This is unclear. Presumably the currency allows you to pay completely anonymously but you still have to acquire Verge to pay with Verge and associating a currency with porn pretty much gives the game away as to why you’d spend it. Further, the extensive marketing efforts make PornHub look far more interesting than Verge, especially since Verge shares the same name with the Verge tech site, something that is bound to confuse average buyers. Finally, you get no real benefit from paying with Verge and, in fact, you can’t get your Verge refunded if you decide you no longer want to pay $9.99 a month for premium PR()N.

Ultimately this is better for porn than it is for cryptocurrency. PornHub gets a little bit of a media boost and cryptocurrencies — including Bitcoin, Ether and ICO tokens — look like the only source for porn. While VHS and the internet grew out of porn, cryptocurrencies are already well-established and they don’t need any more “sin” associated with them. You can also pay for a number of services with crypto, including Flirt4Free, a cam girl site associated with LiveJasmin. Given that a series of stars in big trucks will be rolling through the U.S. over the next few months promoting cryptocurrencies — that $2 million had to go somewhere — it could be positive for crypto uptake but very bad for crypto perception.

While I agree that crypto needs a shot in the arm and a sense of mission, I doubt making it easier to see naked people is quite it. I’d like to see real remittances, real real estate transactions and even real voting systems put in place. Until then, however, stunts like this do little to help.