Big revenues, huge valuations and major losses: charting the era of the unicorn IPO

We can make charts galore about the tech IPO market. Yet none of them diminish the profound sense that we are in uncharted territory.

Never before have so many companies with such high revenues gone public at such lofty valuations, all while sustaining such massive losses. If you’re a “growth matters most” investor, these are exciting times in IPO-land. If you’re the old-fashioned value type who prefers profits, it may be best to sit out this cycle.

Believers in putting market dominance before profits got their biggest IPO opportunity perhaps ever last week, with Uber’s much-awaited dud of a market debut. With a market cap hovering around $64 billion, Uber is far below the $120 billion it was initially rumored to target. Nonetheless, one could convincingly argue it’s still a rich valuation for a company that just posted a Q1 loss of around $1 billion on $3 billion in revenue.

So how do Uber’s revenues, losses and valuation stack up amidst the recent crop of unicorn IPOs? To put things in context, we assembled a list of 15 tech unicorns that went public over the past three quarters. We compared their valuations, along with revenues and losses for 2018 (in most cases the most recently available data), in the chart below:

 

Put these companies altogether in a pot, and they’d make one enormous, money-losing super-unicorn, with more than $25 billion in annual revenue coupled to more than $6 billion in losses. It’ll be interesting to revisit this list in a few quarters to see if that pattern changes, and profits become more commonplace.

History

It’s easy to draw comparisons to the decades-old dot-com bubble, but this time things are different. During the dot-com bubble, I remember penning this lead sentence:

“If the era of the Internet IPO had a theme song, it might be this: There’s no business like no business.”

That notion made sense for bubble-era companies, which commonly went public a few years after inception, before amassing meaningful revenues.

That tune won’t work this time around. If the era of the unicorn IPO had a theme song, it wouldn’t be nearly as catchy. Maybe something like: “There’s no business like lots of business and lots of losses too.”

I won’t be buying tickets to that musical. But when it comes to buying IPO shares, the unicorn proposition is a bit more appealing than the 2000 cycle. After all, it’s reasonably plausible for a company with dominant market share to tweak its margins over time. It’s a lot harder to grow revenues from nothing to hundreds of millions or billions, particularly if investors grow averse to funding continued losses.

Of course, the dot-com bubble and the unicorn IPO era do share a common theme: Investors are betting on an optimistic vision of future potential. If expectations don’t pan out, expect share prices to follow suit.

Zimbabwe’s government faces off against its tech community over internet restrictions

After days of intermittent blackouts at the order of the Zimbabwe’s Minister of State for National Security, ISPs have restored connectivity through a judicial order issued Monday.  

The cyber-affair adds Zimbabwe to a growing list of African countries—including Cameroon, Congo, and Ethiopia—whose governments have restricted internet expression in recent years.

The debacle demonstrates how easily internet access—a baseline for all tech ecosystems—can be taken away at the hands of the state.  

It also provides another case study for techies and ISPs regaining their cyber rights. Internet and social media are back up in Zimbabwe — at least for now.   

Protests lead to blackout

Similar to net shutdowns around the continent, politics and protests were the catalyst. Shortly after the government announced a dramatic increase in fuel prices on January 12, Zimbabwe’s Congress of Trade Unions called for a national strike.

Web and app blackouts in the Southern African country followed demonstrations that broke out in several cities. A government crackdown ensued with deaths reported.

“That began Monday [January 14]. A few demonstrations around the country become violent…Then on Tuesday morning there was a block on social media: Facebook, Twitter, and WhatsApp,” TechZim CEO Tinashe Nyahasha told TechCrunch on a call from Harare.

On January 15, Zimbabwe’s largest mobile carrier Econet Wireless confirmed via SMS and a message from founder Strive Masiyiwa that it had complied with a directive from the Minister of State for National Security to shutdown internet.

Net access was restored, taken down again, then restored, but social media sites remained blocked through January 21.

Data provided to TechCrunch from Oracle’s Internet Intelligence research unit confirm the net blackouts on January 16 and 18.

VPNs, government response

Throughout the restrictions, many of Zimbabwe’s citizens and techies resorted to VPNs and workarounds to access net and social media, according to Nyahasha.

Throughout the interruption TechZim ran updated stories on ways to bypass the cyber restrictions.

The Zimbabwean government’s response to the net shutdown started with denial—one minister referred to it as a congestion problem on local TV—to presidential spokesperson George Charamba invoking its necessity for national security reasons.

Then President Dambudzo Mnangawa took to Twitter to announce he would skip Davos meetings and return home to address the country’s unrest—a move panned online given his government’s restrictions on citizens using social media.    

The Embassy of Zimbabwe in Washington, DC and Ministry for ICT did not respond to TechCrunch inquiries on the country’s internet and app restrictions.

Court ruling, takeaways

On Monday this week, Zimbabwe’s high court ordered an end to any net restrictions, ruling only the country’s president, not the National Security Minister, could legally block the internet. Econet’s Zimbabwe Chief of Staff Lovemore Nyatsine and sources on the ground confirmed to TechCrunch that net and app access were back up Tuesday.  

Zimbabwe’s internet debacle created yet another obstacle for the country’s tech scene. The 2018 departure of 37–year President Robert Mugabe—a  hero to some and progress impeding dictator to others—sparked hope for the lifting of long-time economic sanctions on Zimbabwe and optimism for its startup scene.

Some of that has been dashed by subsequent political instability and worsening economic conditions since Mugabe’s departure, but not all of it, according to TechZim CEO Tinashe Nyahasha.   

“There was momentum and talk of people coming home and investing seed money. That’s slowed down…but that momentum is still there. It’s just not as fast as it could have been if the government had lived up to the expectations,” he said.  

Of the current macro-environment for Zimbabwe’s tech sector, “The truth is, it’s bad but it has been much worse,” Tinashe said

With calls for continued protests, Monday’s court ruling is likely not the last word on the internet face-off between the government and Zimbabwe’s ISPs and tech community.

Per the ruling, a decision to restrict net or apps will have to come directly from Zimbabwe’s president, who will weigh the pros and cons.

On a case by case basis, African governments may see the economic and reputational costs of internet shutdowns are exceeding whatever benefits they seek to achieve.

Cameroon’s 2017 shutdown, covered here by TechCrunch, cost businesses millions and spurred international condemnation when local activists created a  #BringBackOurInternet campaign that ultimately succeeded.

In the case of Zimbabwe, global internet rights group Access Now sprung to action, attaching its #KeepItOn hashtag to calls for the country’s government to reopen cyberspace soon after digital interference began.

Further attempts to restrict net and app access in Zimbabwe will likely revive what’s become a somewhat ironic cycle for cyber shutdowns. When governments cut off internet and social media access, citizens still find ways to use internet and social media to stop them.

Hola Code tackles the real migration crisis

After spending eight months in an immigration facility in the United States, Abimael Hernandez made the tough decision to return to Mexico.

He had spent 14 years in Florida and was leaving behind his wife and three children to return to Mexico so he could go through the process of returning to the United States legally.

Hernandez didn’t want to live in fear of being pulled over by police; he longed to own a car in his name and he didn’t want his immigration status to be illegal any longer.  

Upon his return to Mexico, Hernandez had worked in construction, call centers and sold CDs before finally being given an opportunity that made a return to the United States less appealing. Hernandez now works as a software developer at Ignite Commerce in Mexico and has integrated well into the country that he at first struggled to identify as home.

Hernandez’s struggle to adjust and adapt to life in a new country mirrors that of other migrants who are returning to Mexico. And ongoing U.S. government attempts to put an end to the DACA program instituted under President Barack Obama, an initiative which protected as many as 800,000 unauthorized migrants that had come to the United States as children, are pushing many others along the same path.

For the people facing an increasingly hostile environment for migrants who choose — or are forced — to return to Latin America, little support awaits.

What tends to lie in store for these deportees and returnees in Mexico is usually low-paying service employment. For those with an undocumented status especially, no collateral in Mexico leads to problems in accessing finances, whilst having spent the majority of their lives in the United States, barriers in the Spanish language mean some returnees fail to be accepted into the Mexican education system. 

Though there are some government initiatives aimed at supporting deportees by providing shelter and food, this usually bilingual cohort is prone to unemployment, as well as the mental struggle assigned to the frustrations of reintegrating into a country with which many can’t identify.

It is the hardship of reintegration that inspired the foundation of Hola Code, the only Mexican startup of its kind that currently runs in the country. Founded by CEO Marcela Torres just last year, Hola Code is coined as hackers without borders and is a startup that offers a coding bootcamp for migrants, ensuring that this young generation, new to Mexico, does not slip under the radar.

Geared at supporting the integration of deportees, the startup is prepping Mexicans to enter into a high-demand sector through an intensive five-month software development training program that gives the students qualification, even though many have started from scratch.

‘‘We don’t know of any social enterprises or even regular startups that are actually tackling migration in Mexico,’’ Torres recently told TechCrunch. Although migration and deportations continue to make headlines, it appears that Hola Code might be the only Mexican startup trying to do anything about it.

Backed by San Francisco-based Hack Reactor, the Mexican organization costs nothing until graduates have secured a full-time job, and pays their students a monthly stipend without any bureaucratic red tape.

Collectively venturing into Mexican society with peers in a similar position, most Hola Code students also don’t plan to return to the United States and want to use their skill set in the ever-growing Mexican tech ecosystems. For former student Hernandez, he remains grateful for the support network that Hola Code became for him.

‘‘If Mexico had more opportunities like Hola Code I think returnees would definitely think about not going back to the United States and other countries,’’ he said.

The question now remains as to how international policies will continue to affect Latin American families in the future.

‘‘You create the program in the hopes that one day that you will run out of work,’’ CEO and co-founder Marcela Torres ambitiously explained.

MISSION, TX – JUNE 12: A Central American immigrant stands at the U.S.-Mexico border fence after crossing into Texas on June 12, 2018 near Mission, Texas. U.S. Customs and Border Protection (CBP) is executing the Trump administration’s zero tolerance policy towards undocumented immigrants. U.S. Attorney General Jeff Sessions also said that domestic and gang violence in immigrants’ country of origin would no longer qualify them for political-asylum status. (Photo by John Moore/Getty Images)

The bittersweet reality is that Hola Code has, in fact, blossomed within the past year, with now more than 400 monthly applications from Mexicans and Central American migrants that are seeking refuge in the country. Although the organization celebrates the achievements of their alumni, who tend to quickly ascend into well-paid tech jobs across Mexico, the coding bootcamp is never short of work, and is now looking to open an office in Tijuana to be closer to the border.

The journey for the startup’s female founder, one of a small number of women in Mexican tech leadership, has also not been an easy feat.

‘‘It’s very difficult for a woman that has designed a business plan and has ideas to be taken seriously,’’ Torres explains. ‘‘It took me a long time to find the original investors that would believe in my idea and in my capacity, as well, to run the organization because this is the first startup that I have executed.’’

The cultural burdens that still exist in Mexico is a reality that deters many women from entering into the entrepreneurial scene within the country. From finding investors to promoting an idea, it is the issue of being taken seriously that is most effective at stalling Mexico’s female entrepreneurs.

‘‘I think that it’s important for younger women to start seeing us out there trying to take risks and thinking that they can do it as well. Even if they’re not successful, that it’s something that is available and achievable for them.’’

Confronted by her own hurdles in becoming the tech leader of Hola Code today, however, her organization does much more than just in-depth coding. From encouraging young Mexican women to leap into business and tech, to helping each student find a job, Torres speaks of the hope, security and routine that every Hola Coder gathers as they become immersed in Mexican life through this community.

‘‘Helping them navigate the expectations of how to start a career in tech is one of the things that we work on and therefore it means that they develop the right skill set, and once they finish the program, to be able to successfully jump into big areas such as banking.’’

MCALLEN, TX – JUNE 12: Central American asylum seekers wait for transport while being detained by U.S. Border Patrol agents near the U.S.-Mexico border on June 12, 2018 in McAllen, Texas. The group of women and children had rafted across the Rio Grande from Mexico and were detained before being sent to a processing center for possible separation. Customs and Border Protection (CBP) is executing the Trump administration’s “zero tolerance” policy towards undocumented immigrants. U.S. Attorney General Jeff Sessions also said that domestic and gang violence in immigrants’ country of origin would no longer qualify them for political asylum status. (Photo by John Moore/Getty Images)

Former student Miriam Alvarez is now a software engineer for SegundaMano. Growing up in the United States, Mexican Universities did not accept her U.S. documents and she too began working in a call center before hearing about the project, applying just days before the application deadline. ‘‘It’s OK to not know everything, but you should always be open to trying new things and learning something new,’’ Alvarez said, speaking of the broader messages that Hola Code delivers.

The overwhelming lessons that all Hola Code’s alumni praise is how the bootcamp delivers more than just coding, but also important life skills that allow for the transition to Mexico to be easier. Through reasoning and problem solving, many are grateful for the structure and direction that Hola Code provides Mexicans new to the country.

Though many of their students had joined Hola Code feeling “American,” the values that the group provides adds to the larger picture of Mexico’s growing tech scenes.

‘‘The biggest challenge for the tech sector in the country is access to human capital and the second one is retaining the talent.’’ By fine-tuning the country’s coding talent pools with bicultural young developers that speak English, Spanish and also JavaScript, the organization contributes to growing tech hubs such as Tijuana, Guadalajara and Mexico City, which are increasingly gaining global attention.

Hola Code is one of just a few life-changing organizations filling the gap in an immigration story that is seldom covered by the media.

Providing social mobility to people that have been forced to return through education, employment and exposure to tech pioneers, Hola Code’s alumni are spreading the message of integration through education far and wide across the globe.

As long as the fragility of migration continues to be tested, however, Torres and her team have work to do in their mission to produce Mexico’s next pioneering coding generation.

Why Silicon Valley needs more visas

When I hear protesters shout, “Immigrants are welcome here!” at the San Francisco immigration office near my startup’s headquarters, I think about how simple a phrase that is for a topic that is so nuanced, especially for me as an immigrant entrepreneur.

Growing up in Brazil, I am less familiar with the nuances of the American debate on immigration legislation, but I know that immigrants here add a lot of jobs and stimulate the local economy. As an immigrant entrepreneur, I’ve tried to check all of those boxes, and really prove my value to this country.

My tech startup Brex has achieved a lot in a short period of time, a feat which is underscored by receiving a $1 billion dollar valuation in just one year. But we didn’t achieve that high level of growth in spite of being founded by immigrants, but because of it. The key to our growth and to working towards building a global brand is our international talent pool, without it, we could never have gotten to where we are today.

So beyond Brex, what do the most successful Silicon Valley startups have in common? They’re also run by immigrants. In fact, not only are 57% of the Bay Area’s STEM tech workers immigrants, they also make up 25% of business founders in the US. You can trace the immigrant entrepreneurial streak in Silicon Valley from the founders of SUN Microsystems and Google to the Valley’s most notorious Twitter User, Tesla’s Elon Musk.

Immigrants not only built the first microchips in Silicon Valley, but they built these companies into the tech titans that they are known as today. After all, more than 50% of billion dollar startups are founded by immigrants, and many of those startups were founded by immigrants on H-1B visas.

Photo courtesy of Flickr/jvoves

While it might sound counterintuitive, immigrants create more jobs and make our economy stronger. Research from the National Foundation of American Policy (NFAP) has shown that immigrant-founded billion-dollar companies doubled their number of employees over the past two years. According to the research, “WeWork went from 1,200 to 6,000 employees between 2016 and 2018, Houzz increased from 800 to 1,800 employees the last two years, while Cloudflare went from 225 to 715 employees.”

We’ve seen the same growth at Brex. In just one year we hired 70 employees and invested over $6 million dollars in creating local jobs. Our startup is not alone, as Inc. recently reported, “50 immigrant-founded unicorn startups have a combined value of $248 billion, according to the report [by NFAP], and have created an average of 1,200 jobs each.”

One of the fundamental drivers of our success is our international workforce. Many of our key-hires are from all over Latin America, spanning from Uruguay to Mexico. In fact, 42% of our workforce is made up of immigrants and another 6% are made up of children of immigrants. Plenty of research shows that diverse teams are more productive and work together better, but that’s only part of the reason why you should bet on an international workforce. When you’re working with the best and brightest from every country, it inspires you to bring forth your most creative ideas, collaborate, and push yourself beyond your comfort zone. It motivates you to be your best.

With all of the positive contributions immigrants bring to this country, you’d think we’d have less restrictive immigration policies. However, that’s not the case. One of the biggest challenges that I face is hiring experienced, qualified engineers and designers to continue innovating in a fast-paced, competitive market.

This is a universal challenge in the tech industry. For the past 10 years, software engineers have been the #1 most difficult job to fill in the United States. Business owners are willing to pay 10-20 percent above the market rate for top talent and engineers. Yet, we’re still projected to have a shortage of two million engineering jobs in the US by 2022. How can you lead the charge of innovation if you don’t have the talent to do it?

What makes matters worse is that there are so few opportunities and types of visas for qualified immigrants. This is limiting job growth, knowledge-sharing, and technological breakthroughs in this country. And we risk losing top talent to other nations if we don’t loosen our restrictive visa laws.

H1-B visa applications fell this year, and at the same time, these visas have become harder to obtain and it has become more expensive to acquire international talent. This isn’t the time to abandon the international talent pool, but to invest in highly specialized workers that can give your startup a competitive advantage.

Already, there’s been a dramatic spike in engineering talent moving to Canada, with a 40% uptick in 2017. Toronto, Berlin, and Singapore are fastly becoming burgeoning tech hubs, and many fear (rightfully) that they will soon outpace the US in growth, talent, and developing the latest technologies.

This year, U.S. based tech companies generated $351 billion of revenue in 2018. The U.S. can’t afford to miss out on this huge revenue source. And, according to Harvard Business School Professor William R. Kerr and the author of The Gift of Global Talent: How Migration Shapes Business, Economy & Society, “Today’s knowledge economy dictates that your ability to attract, develop, and integrate smart minds governs how prosperous you will be.”

Immigrants have made Silicon Valley the powerhouse that it is today, and severely limiting highly-skilled immigration benefits no-one. Immigrants have helped the U.S. build one of the best tech hubs in the world— now is the time for startups to invest in international talent so that our technology, economy, and local communities can continue to thrive.

Global VC market sees highest-ever concentration of supergiant dollar volume in Q4 2018

For the global VC industry, 2018 was a supergiant year. Crunchbase projects that 2018 deal and dollar volume surpassed even the high-water mark left by the dot-com deluge and the drought that followed.

As covered in Crunchbase News’s global VC report reviewing Q4 and the rest of 2018, projected deal volume rose by 32 percent and projected dollar volume jumped 55 percent since 2017. For all of 2018, Crunchbase projects that well over $300 billion was invested in equity funding rounds across all stages of the venture-backed company life cycle. (This figure includes an estimate of transactions that were finalized in 2018, but won’t be publicized or added to Crunchbase until later. More on how Crunchbase projects data can be found at the end of that report.)

Is the market mostly buoyed by the billions raised by the biggest private tech companies, or is a rising tide in this extended aquatic metaphor raising all ships? In other words, is the bulk of the capital going to only a handful of the largest rounds? That’s what the numbers show.

In the global VC pool, capital is definitely sloshing toward rounds totaling $100 million or more. In the chart below, you can see what percent of reported global VC dollar volume was raised in “supergiant” rounds versus deals of smaller size.

 

In the year, over 56 percent of worldwide dollar volume can be attributed to supergiant rounds. With 61 percent of reported capital coming from supergiants in the final quarter, Q4 2018 has the highest concentration of supergiant dollar volume of any single quarter on record.

Big money weighs on the market

Following that same theme, the calendar year 2018 is the most concentrated year on record. In the chart below, we show how much capital was raised in non-supergiant (<$100 million) venture rounds over the past decade. (It’s basically the bottom part of the first chart, with the data aggregated over a longer period of time.)

For the first time in at least a decade (and likely ever) supergiant, $100 million+ VC rounds accounted for a majority of reported capital raised. So in summary: Q4 2018 had the highest share of supergiant VC dollar volume on record, and 2018 was the most concentrated year on record.

On the one hand, the results are not surprising, considering that the biggest-ever VC round (a preposterously large $14 billion Series C raised by Ant Financial) and several rivals for that top spot were closed last year. That big round made a big splash. It was the year of multi-billion-dollar global growth funds, SoftBank and scooter CEOs worth supergiant sums, at least on paper. But was it good for the smaller players too?

Seed and early-stage deal and dollar volume were both up in 2018, but then again, so is everything toward the end of a bull market cycle. The question is, when the bottom falls out, between supergiant and more normal-sized rounds, which has the farthest to fall?

How open source software took over the world

It was just 5 years ago that there was an ample dose of skepticism from investors about the viability of open source as a business model. The common thesis was that Redhat was a snowflake and that no other open source company would be significant in the software universe.

Fast forward to today and we’ve witnessed the growing excitement in the space: Redhat is being acquired by IBM for $32 billion (3x times its market cap from 2014); Mulesoft was acquired after going public for $6.5 billion; MongoDB is now worth north of $4 billion; Elastic’s IPO now values the company at $6 billion; and, through the merger of Cloudera and Hortonworks, a new company with a market cap north of $4 billion will emerge. In addition, there’s a growing cohort of impressive OSS companies working their way through the growth stages of their evolution: Confluent, HashiCorp, DataBricks, Kong, Cockroach Labs and many others. Given the relative multiples that Wall Street and private investors are assigning to these open source companies, it seems pretty clear that something special is happening.

So, why did this movement that once represented the bleeding edge of software become the hot place to be? There are a number of fundamental changes that have advanced open source businesses and their prospects in the market.

David Paul Morris/Bloomberg via Getty Images

From Open Source to Open Core to SaaS

The original open source projects were not really businesses, they were revolutions against the unfair profits that closed-source software companies were reaping. Microsoft, Oracle, SAP and others were extracting monopoly-like “rents” for software, which the top developers of the time didn’t believe was world class. So, beginning with the most broadly used components of software – operating systems and databases – progressive developers collaborated, often asynchronously, to author great pieces of software. Everyone could not only see the software in the open, but through a loosely-knit governance model, they added, improved and enhanced it.

The software was originally created by and for developers, which meant that at first it wasn’t the most user-friendly. But it was performant, robust and flexible. These merits gradually percolated across the software world and, over a decade, Linux became the second most popular OS for servers (next to Windows); MySQL mirrored that feat by eating away at Oracle’s dominance.

The first entrepreneurial ventures attempted to capitalize on this adoption by offering “enterprise-grade” support subscriptions for these software distributions. Redhat emerged the winner in the Linux race and MySQL (thecompany) for databases. These businesses had some obvious limitations – it was harder to monetize software with just support services, but the market size for OS’s and databases was so large that, in spite of more challenged business models, sizeable companies could be built.

The successful adoption of Linux and MySQL laid the foundation for the second generation of Open Source companies – the poster children of this generation were Cloudera and Hortonworks. These open source projects and businesses were fundamentally different from the first generation on two dimensions. First, the software was principally developed within an existing company and not by a broad, unaffiliated community (in the case of Hadoop, the software took shape within Yahoo!) . Second, these businesses were based on the model that only parts of software in the project were licensed for free, so they could charge customers for use of some of the software under a commercial license. The commercial aspects were specifically built for enterprise production use and thus easier to monetize. These companies, therefore, had the ability to capture more revenue even if the market for their product didn’t have quite as much appeal as operating systems and databases.

However, there were downsides to this second generation model of open source business. The first was that no company singularly held ‘moral authority’ over the software – and therefore the contenders competed for profits by offering increasing parts of their software for free. Second, these companies often balkanized the evolution of the software in an attempt to differentiate themselves. To make matters more difficult, these businesses were not built with a cloud service in mind. Therefore, cloud providers were able to use the open source software to create SaaS businesses of the same software base. Amazon’s EMR is a great example of this.

The latest evolution came when entrepreneurial developers grasped the business model challenges existent in the first two generations – Gen 1 and Gen 2 – of open source companies, and evolved the projects with two important elements. The first is that the open source software is now developed largely within the confines of businesses. Often, more than 90% of the lines of code in these projects are written by the employees of the company that commercialized the software. Second, these businesses offer their own software as a cloud service from very early on. In a sense, these are Open Core / Cloud service hybrid businesses with multiple pathways to monetize their product. By offering the products as SaaS, these businesses can interweave open source software with commercial software so customers no longer have to worry about which license they should be taking. Companies like Elastic, Mongo, and Confluent with services like Elastic Cloud, Confluent Cloud, and MongoDB Atlas are examples of this Gen 3.  The implications of this evolution are that open source software companies now have the opportunity to become the dominant business model for software infrastructure.

The Role of the Community

While the products of these Gen 3 companies are definitely more tightly controlled by the host companies, the open source community still plays a pivotal role in the creation and development of the open source projects. For one, the community still discovers the most innovative and relevant projects. They star the projects on Github, download the software in order to try it, and evangelize what they perceive to be the better project so that others can benefit from great software. Much like how a good blog post or a tweet spreads virally, great open source software leverages network effects. It is the community that is the source of promotion for that virality.

The community also ends up effectively being the “product manager” for these projects. It asks for enhancements and improvements; it points out the shortcomings of the software. The feature requests are not in a product requirements document, but on Github, comments threads and Hacker News. And, if an open source project diligently responds to the community, it will shape itself to the features and capabilities that developers want.

The community also acts as the QA department for open source software. It will identify bugs and shortcomings in the software; test 0.x versions diligently; and give the companies feedback on what is working or what is not.  The community will also reward great software with positive feedback, which will encourage broader use.

What has changed though, is that the community is not as involved as it used to be in the actual coding of the software projects. While that is a drawback relative to Gen 1 and Gen 2 companies, it is also one of the inevitable realities of the evolving business model.

Linus Torvalds was the designer of the open-source operating system Linux.

Rise of the Developer

It is also important to realize the increasing importance of the developer for these open source projects. The traditional go-to-market model of closed source software targeted IT as the purchasing center of software. While IT still plays a role, the real customers of open source are the developers who often discover the software, and then download and integrate it into the prototype versions of the projects that they are working on. Once “infected”by open source software, these projects work their way through the development cycles of organizations from design, to prototyping, to development, to integration and testing, to staging, and finally to production. By the time the open source software gets to production it is rarely, if ever, displaced. Fundamentally, the software is never “sold”; it is adopted by the developers who appreciate the software more because they can see it and use it themselves rather than being subject to it based on executive decisions.

In other words, open source software permeates itself through the true experts, and makes the selection process much more grassroots than it has ever been historically. The developers basically vote with their feet. This is in stark contrast to how software has traditionally been sold.

Virtues of the Open Source Business Model

The resulting business model of an open source company looks quite different than a traditional software business. First of all, the revenue line is different. Side-by-side, a closed source software company will generally be able to charge more per unit than an open source company. Even today, customers do have some level of resistance to paying a high price per unit for software that is theoretically “free.” But, even though open source software is lower cost per unit, it makes up the total market size by leveraging the elasticity in the market. When something is cheaper, more people buy it. That’s why open source companies have such massive and rapid adoption when they achieve product-market fit.

Another great advantage of open source companies is their far more efficient and viral go-to-market motion. The first and most obvious benefit is that a user is already a “customer” before she even pays for it. Because so much of the initial adoption of open source software comes from developers organically downloading and using the software, the companies themselves can often bypass both the marketing pitch and the proof-of-concept stage of the sales cycle. The sales pitch is more along the lines of, “you already use 500 instances of our software in your environment, wouldn’t you like to upgrade to the enterprise edition and get these additional features?”  This translates to much shorter sales cycles, the need for far fewer sales engineers per account executive, and much quicker payback periods of the cost of selling. In fact, in an ideal situation, open source companies can operate with favorable Account Executives to Systems Engineer ratios and can go from sales qualified lead (SQL) to closed sales within one quarter.

This virality allows for open source software businesses to be far more efficient than traditional software businesses from a cash consumption basis. Some of the best open source companies have been able to grow their business at triple-digit growth rates well into their life while  maintaining moderate of burn rates of cash. This is hard to imagine in a traditional software company. Needless to say, less cash consumption equals less dilution for the founders.

Photo courtesy of Getty Images

Open Source to Freemium

One last aspect of the changing open source business that is worth elaborating on is the gradual movement from true open source to community-assisted freemium. As mentioned above, the early open source projects leveraged the community as key contributors to the software base. In addition, even for slight elements of commercially-licensed software, there was significant pushback from the community. These days the community and the customer base are much more knowledgeable about the open source business model, and there is an appreciation for the fact that open source companies deserve to have a “paywall” so that they can continue to build and innovate.

In fact, from a customer perspective the two value propositions of open source software are that you a) read the code; b) treat it as freemium. The notion of freemium is that you can basically use it for free until it’s deployed in production or in some degree of scale. Companies like Elastic and Cockroach Labs have gone as far as actually open sourcing all their software but applying a commercial license to parts of the software base. The rationale being that real enterprise customers would pay whether the software is open or closed, and they are more incentivized to use commercial software if they can actually read the code. Indeed, there is a risk that someone could read the code, modify it slightly, and fork the distribution. But in developed economies – where much of the rents exist anyway, it’s unlikely that enterprise companies will elect the copycat as a supplier.

A key enabler to this movement has been the more modern software licenses that companies have either originally embraced or migrated to over time. Mongo’s new license, as well as those of Elastic and Cockroach are good examples of these. Unlike the Apache incubated license – which was often the starting point for open source projects a decade ago, these licenses are far more business-friendly and most model open source businesses are adopting them.

The Future

When we originally penned this article on open source four years ago, we aspirationally hoped that we would see the birth of iconic open source companies. At a time where there was only one model – Redhat – we believed that there would be many more. Today, we see a healthy cohort of open source businesses, which is quite exciting. I believe we are just scratching the surface of the kind of iconic companies that we will see emerge from the open source gene pool. From one perspective, these companies valued in the billions are a testament to the power of the model. What is clear is that open source is no longer a fringe approach to software. When top companies around the world are polled, few of them intend to have their core software systems be anything but open source. And if the Fortune 5000 migrate their spend on closed source software to open source, we will see the emergence of a whole new landscape of software companies, with the leaders of this new cohort valued in the tens of billions of dollars.

Clearly, that day is not tomorrow. These open source companies will need to grow and mature and develop their products and organization in the coming decade. But the trend is undeniable and here at Index we’re honored to have been here for the early days of this journey.

Four ways to bridge the widening valley of death for startups

Many founders believe in the myth that the first steps of starting a business are the hardest: Attracting the first investment, the first hires, proving the technology, launching the first product and landing the first customer. Although those critical first steps are difficult, they are certainly not the most difficult on the arduous path of building an iconic company. As early and late-stage funding becomes more abundant, founders and their early VC backers need to get smarter about how to position their companies for a looming valley of death in-between. As we’ll learn below, it’s only going to get much, much harder before it gets easier.

Money will have the look, and heft, of dumbbells as the economic cycle turns. Expect an abundance of small, seed checks at one end, an abundance of massive checks for clear, breakout companies at the other, and a dearth of capital for expanding companies with early proof points and market traction. Read more on how to best prepare for this inevitable future. (Image courtesy Flickr/CircaSassy)

There will be an abundance of capital at the two ends of the startup spectrum. At one end, hundreds of seed and micro VCs, each armed with dozens of $250,000-$1 million checks to write every year, are on the prowl for visionary founders with pedigrees and resumes. At the other end, behemoths like SoftBank, sovereigns, as well “early-stage” firms raising larger funds are seeking breakout companies ready for checks that are in the mid-tens to hundreds of millions. There will be a dearth of capital to grow companies from a kernel of a business, to becoming the clear market-defining leader. In fact, we’re already seeing deal volume decreasing significantly as dollars increase, likely evidence of larger checks going into fewer companies.

Even as the overall number of deals decrease below 2012 levels, the overall dollars invested into startups continue to soar. The 200+ “seed-stage” funds formed since 2012 will continue to chase nascent companies. Meanwhile, the increasing number of mega-funds will seek breakout companies into which to make $100 million+ investments. Companies with early traction seeking ~$20 million to grow will be abundant and have difficulty accessing capital.

Founders should no longer assume that their all-star seed and Series A syndicates will guarantee a successful follow-on financing. Progress on recruiting and product development, though necessary, are no longer sufficient for B-rounds and beyond. Founders should be mindful that investors that specialize in leading $20-50 million rounds will have a plethora of well-funded, well-mentored, well-staffed startups with slick presentations, big visions and some early market traction from which to choose.

Today, there is far more capital chasing fewer quality companies. Fewer breakout companies and fear of missing out is making it easy to raise growth rounds with revenue growth, which may not be scalable or even reflective of an attractive business. This is creating false realities and prompting founders to raise big rounds at high prices — which is fine when there is an over-abundance of capital, but can cripple them when capital later becomes scarce. For example, not long ago, cleantech companies, armed with very preliminary sales, raised massive financings from VCs eager to back winners toward scaling into what they characterized as infinite demand. The reality is that the capital required to meet target economics was far greater and demand far smaller. As the private markets turned, access to cash became difficult and most faltered or were acquired for pennies on the dollar.

There is a likely future where capital grows scarce, and investors take a harder look at the underpinnings of revenue, growth and (dis)economies of scale.

What should startup leadership teams emphasize in an inevitable future where the $30 million rounds will be orders of magnitude harder than their $5 million rounds?

A business model representative of the big vision

Leadership teams put lots of emphasis on revenue. Unfortunately, revenue that’s not representative of the big vision is probably worse than no revenue at all. Companies are initially seeded with the expectation that the founding team can build and sell something. What needs to be proven is the hypothesis that the company can a) build a special product that b) is inexpensive to convince customers to pay for, and c) that those customers represent a massive market. It should be proven that it is unattractive for customers to switch to the inevitable copycats. It should be clear that over time, customers will pay more for additional features, and the cost of acquiring new customers will go down. Simply selling a product to customers that don’t represent that model is worse than not selling anything at all.

Recruiting talent that’s done it

Early founding teams are cognitively diverse individuals that can convince early investors that they can overcome the incredible odds of building a company that until now, shouldn’t have existed. They build a unique product, leveraging unique tools satisfying an unmet need. The early teams need to demonstrate the big vision, and that they can recruit the people that can make that vision a reality. Unfortunately, more founders struggle when it comes to recruiting people that have real experience reducing a technology to practice, executing on a product that customers want and charting the path to expand their market with improving unit economics. There are always exceptions of people that do the above for the first time at startups; however, most of today’s iconic startups knew what kind of talent they needed to execute and succeeded in bringing them on board. Who’s on your team?

Present metrics that matter

The attractive SaaS valuation multiples behoove all founders to apply its metrics to their businesses even if they aren’t really SaaS businesses. Sophisticated later-stage investors see right past that and dismiss numbers associated with metrics that are not representative. Semiconductors are about winning dedicated sockets in growing markets. Design tools are about winning and upselling seats in an industry that’s going to be hooked on those tools. Develop a clear understanding of how your business will be measured. Don’t inundate your investor with numbers; present a concise hypothesis for your unfair advantage in a growing market with your current traction being evidence to back it.

Find efficiencies by working in massive markets

“Pouring fuel on the fire” is a misleading metaphor that leads some into believing that capital can grow any business. That’s just as true as watering a plant with a fire hose or putting TNT in your Corolla’s gas tank: most business models and markets simply are not native to the much-sought-after venture growth profile. In fact, most later-stage startups that fail after raising large amounts of capital fail for this reason. Most markets are conducive to businesses with DIS-economies of scale, implying dwindling margins with scale, which is why many businesses are small, serving local, fragmented markets that technology alone cannot consolidate. How do your unit economics improve over time? What are the efficiencies generated by economies of scale? Is there a real network effect that drives these economies?

Image courtesy Getty Images

I expect today’s resourceful founders to seek partners, whether it’s employees, advisors or investors, to help them answer these questions. Together, these cognitively diverse teams will work together to accelerate past any metaphoric valley and build the iconic companies taking humanity to its fantastic future.  

Facebook is not equipped to stop the spread of authoritarianism

After the driver of a speeding bus ran over and killed two college students in Dhaka in July, student protesters took to the streets. They forced the ordinarily disorganized local traffic to drive in strict lanes and stopped vehicles to inspect license and registration papers. They even halted the vehicle of the chief of Bangladesh Police Bureau of Investigation and found that his license was expired. And they posted videos and information about the protests on Facebook.

The fatal road accident that led to these protests was hardly an isolated incident. Dhaka, Bangladesh’s capital, which was ranked the second least livable city in the world in the Economist Intelligence Unit’s 2018 global liveability index, scored 26.8 out of 100 in the infrastructure category included in the rating. But the regional government chose to stifle the highway safety protests anyway. It went so far as raids of residential areas adjacent to universities to check social media activity, leading to the arrest of 20 students. Although there were many images of Bangladesh Chhatra League, or BCL men, committing acts of violence on students, none of them were arrested. (The BCL is the student wing of the ruling Awami League, one of the major political parties of Bangladesh.)

Students were forced to log into their Facebook profiles and were arrested or beaten for their posts, photographs and videos. In one instance, BCL men called three students into the dorm’s guest room, quizzed them over Facebook posts, beat them, then handed them over to police. They were reportedly tortured in custody.

A pregnant school teacher was arrested and jailed for just over two weeks for “spreading rumors” due to sharing a Facebook post about student protests. A photographer and social justice activist spent more than 100 days in jail for describing police violence during these protests; he told reporters he was beaten in custody. And a university professor was jailed for 37 days for his Facebook posts.

A Dhaka resident who spoke on the condition of anonymity out of fear for their safety said that the crackdown on social media posts essentially silenced student protesters, many of whom removed from their profiles entirely photos, videos and status updates about the protests. While the person thought that students were continuing to be arrested, they said, “nobody is talking about it anymore — at least in my network — because everyone kind of ‘got the memo,’ if you know what I mean.”

This isn’t the first time Bangladeshi citizens have been arrested for Facebook posts. As just one example, in April 2017, a rubber plantation worker in southern Bangladesh was arrested and detained for three months for liking and sharing a Facebook post that criticized the prime minister’s visit to India, according to Human Rights Watch.

Bangladesh is far from alone. Government harassment to silence dissent on social media has occurred across the region, and in other regions as well — and it often comes hand-in-hand with governments filing takedown requests with Facebook and requesting data on users.

Facebook has removed posts critical of the prime minister in Cambodia and reportedly “agreed to coordinate in the monitoring and removal of content” in Vietnam. Facebook was criticized for not stopping the repression of Rohingya Muslims in Myanmar, where military personnel created fake accounts to spread propaganda, which human rights groups say fueled violence and forced displacement. Facebook has since undertaken a human rights impact assessment in Myanmar, and it also took down coordinated inauthentic accounts in the country.

UNITED STATES – APRIL 10: Facebook CEO Mark Zuckerberg testifies during the Senate Commerce, Science and Transportation Committee and Senate Judiciary Committee joint hearing on “Facebook, Social Media Privacy, and the Use and Abuse of Data” on Tuesday, April 10, 2018. (Photo By Bill Clark/CQ Roll Call)

Protesters scrubbing Facebook data for fear of repercussion isn’t uncommon. Over and over again, authoritarian-leaning regimes have utilized low-tech strategies to quell dissent. And aside from providing resources related to online privacy and security, Facebook still has little in place to protect its most vulnerable users from these pernicious efforts. As various countries pass laws calling for a local presence and increased regulation, it is possible that the social media conglomerate doesn’t always even want to.

“In many situations, the platforms are under pressure,” said Raman Jit Singh Chima, policy director at Access Now. “Tech companies are being directly sent takedown orders, user data requests. The danger of that is that companies will potentially be overcomplying or responding far too quickly to government demands when they are able to push back on those requests,” he said.

Elections are often a critical moment for oppressive behavior from governments — Uganda, Chad and Vietnam have specifically targeted citizens — and candidates — during election time. Facebook announced just last Thursday that it had taken down nine Facebook pages and six Facebook accounts for engaging in coordinated inauthentic behavior in Bangladesh. These pages, which Facebook believes were linked to people associated with the Bangladesh government, were “designed to look like independent news outlets and posted pro-government and anti-opposition content.” The sites masqueraded as news outlets, including fake BBC Bengali, BDSNews24 and Bangla Tribune and news pages with Photoshopped blue checkmarks, according to the Atlantic Council’s Digital Forensic Research Lab.

Still, the imminent election in Bangladesh doesn’t bode well for anyone who might wish to express dissent. In October, a digital security bill that regulates some types of controversial speech was passed in the country, signaling to companies that as the regulatory environment tightens, they too could become targets.

More restrictive regulation is part of a greater trend around the world, said Naman M. Aggarwal, Asia policy associate at Access Now. Some countries, like Brazil and India, have passed “fake news” laws. (A similar law was proposed in Malaysia, but it was blocked in the Senate.) These types of laws are frequently followed by content takedowns. (In Bangladesh, the government warned broadcasters not to air footage that could create panic or disorder, essentially halting news programming on the protests.)

Other governments in the Middle East and North Africa — such as Egypt, Algeria, United Arab Emirates, Saudi Arabia and Bahrain — clamp down on free expression on social media under the threat of fines or prison time. And countries like Vietnam have passed laws requiring social media companies to localize their storage and have a presence in the country — typically an indication of greater content regulation and pressure on the companies from local governments. In India, WhatsApp and other financial tech services were told to open offices in the country.

And crackdowns on posts about protests on social media come hand-in-hand with government requests for data. Facebook’s biannual transparency report provides detail on the percentage of government requests with which the company complies in each country, but most people don’t know until long after the fact. Between January and June, the company received 134 emergency requests and 18 legal processes from Bangladeshi authorities for 205 users or accounts. Facebook turned over at least some data in 61 percent of emergency requests and 28 percent of legal processes.

Facebook said in a statement that it “believes people deserve to have a voice, and that everyone has the right to express themselves in a safe environment,” and that it handles requests for user data “extremely carefully.”

The company pointed to its Facebook for Journalists resources and said it is “saddened by governments using broad and vague regulation or other practices to silence, criminalize or imprison journalists, activists, and others who speak out against them,” but the company said it also helps journalists, activists and other people around the world to “tell their stories in more innovative ways, reach global audiences, and connect directly with people.”

But there are policies that Facebook could enact that would help people in these vulnerable positions, like allowing users to post anonymously.

“Facebook’s real names policy doesn’t exactly protect anonymity, and has created issues for people in countries like Vietnam,” said Aggarwal. “If platforms provide leeway, or enough space for anonymous posting, and anonymous interactions, that is really helpful to people on the ground.”

BERLIN, GERMANY – SEPTEMBER 12: A visitor uses a mobile phone in front of the Facebook logo at the #CDUdigital conference on September 12, 2015 in Berlin, Germany. (Photo by Adam Berry/Getty Images)

A German court in February found the policy illegal under its decade-old privacy law. Facebook said it plans to appeal the decision.

“I’m not sure if Facebook even has an effective strategy or understanding of strategy in the long term,” said Sean O’Brien, lead researcher at Yale Privacy Lab. “In some cases, Facebook is taking a very proactive role… but in other cases, it won’t.” In any case, these decisions require a nuanced understanding of the population, culture, and political spectrum in various regions — something it’s not clear Facebook has.

Facebook isn’t responsible for government decisions to clamp down on free expression. But the question remains: How can companies stop assisting authoritarian governments, inadvertently or otherwise?

“If Facebook knows about this kind of repression, they should probably have… some sort of mechanism to at the very least heavily try to convince people not to post things publicly that they think they could get in trouble for,” said O’Brien. “It would have a chilling effect on speech, of course, which is a whole other issue, but at least it would allow people to make that decision for themselves.”

This could be an opt-in feature, but O’Brien acknowledges that it could create legal liabilities for Facebook, leading the social media giant to create lists of “dangerous speech” or profiles on “dissidents,” and could theoretically shut them down or report them to the police. Still, Facebook could consider rolling a “speech alert” feature to an entire city or country if that area becomes volatile politically and dangerous for speech, he said.

O’Brien says that social media companies could consider responding to situations where a person is being detained illegally and potentially coerced into giving their passwords in a way that could protect them, perhaps by triggering a temporary account reset or freeze to prevent anyone from accessing the account without proper legal process. Some actions that might trigger the reset or freeze could be news about an individual’s arrest — if Facebook is alerted to it, contact from the authorities, or contact from friends and loved ones, as evaluated by humans. There could even be a “panic button” type trigger, like Guardian Project’s PanicKit, but for Facebook — allowing users to wipe or freeze their own accounts or posts tagged preemptively with a code word only the owner knows.

“One of the issues with computer interfaces is that when people log into a site, they get a false sense of privacy even when the things they’re posting in that site are widely available to the public,” said O’Brien. Case in point: this year, women anonymously shared their experiences of abusive co-workers in a shared Google Doc — the so-called “Shitty Media Men” list, likely without realizing that a lawsuit could unmask them. That’s exactly what is happening.

Instead, activists and journalists often need to tap into resources and gain assistance from groups like Access Now, which runs a digital security helpline, and the Committee to Protect Journalists. These organizations can provide personal advice tailored to their specific country and situation. They can access Facebook over the Tor anonymity network. Then can use VPNs, and end-to-end encrypted messaging tools, and non-phone-based two-factor authentication methods. But many may not realize what the threat is until it’s too late.

The violent crackdown on free speech in Bangladesh accompanied government-imposed internet restrictions, including the throttling of internet access around the country. Users at home with a broadband connection did not feel the effects of this, but “it was the students on the streets who couldn’t go live or publish any photos of what was going on,” the Dhaka resident said.

Elections will take place in Bangladesh on December 30.

In the few months leading up to the election, Access Now says it’s noticed an increase in Bangladeshi residents expressing concern that their data has been compromised and seeking assistance from the Digital Security hotline.

Other rights groups have also found an uptick in malicious activity.

Meenakshi Ganguly, South Asia director at Human Rights Watch, said in an email that the organization is “extremely concerned about the ongoing crackdown on the political opposition and on freedom of expression, which has created a climate of fear ahead of national elections.”

Ganguly cited politically motivated cases against thousands of opposition supporters, many of which have been arrested, as well as candidates that have been attacked.

Human Rights Watch issued a statement about the situation, warning that the Rapid Action Battalion, a “paramilitary force implicated in serious human rights violations including extrajudicial killings and enforced disappearances,” and has been “tasked with monitoring social media for ‘anti-state propaganda, rumors, fake news, and provocations.’” This is in addition to a nine-member monitoring cell and around 100 police teams dedicated to quashing so-called “rumors” on social media, amid the looming threat of news website shutdowns.

“The security forces continue to arrest people for any criticism of the government, including on social media,” Ganguly said. “We hope that the international community will urge the Awami League government to create conditions that will uphold the rights of all Bangladeshis to participate in a free and fair vote.”

10 key lessons about tech mergers and acquisitions from Cisco’s John Chambers

John Chambers, chairman emeritus of Cisco (now founder of JC2 Ventures), knows a thing or two about tech acquisitions: he bet his career on a first one in ’93, and went on to complete 180 M&As during his 20 years tenure.

His latest message for large corporations is an alarm bell. In a fireside chat at the HAX M&A Masterclass that followed the publication of his book: Connecting the Dots: Lessons for Leadership in a Startup World, Chambers issued a clear warning: learn about tech M&As or the future might happen without you.

Here are the key lessons to take away (video and transcript are here):

1. M&As Are A Vaccine Against Irrelevance

When stepping down from Cisco in 2015, John Chambers said that 40% of companies will be dead in 10 years. And 10 years might now be conservative.

It took about 20 years to Amazon to challenge WalMart, barely 10 to Airbnb with hotels and to Uber with taxis and car ownership. The next wave might just take 4–5 years. Since no company can invent everything — even Apple or Google buy startups routinely — you’ll need to either buy or partner seriously with startups (more on that later).

2. Tech Is Entering Every Sector

‘Every company you’ll acquire over this next decade will probably be indirectly or directly a tech company’, said Chambers.

Non-tech companies need to get up to speed on how to work with tech, and startups. Many of the corp dev executives who attended our last event were not from tech.

I met recently power tool companies from US and Europe . They had just set up CVC arms. They were looking into acquisitions, saying ‘we don’t know software’. They’d better tackle that M&A learning curve quickly!

Where do you fit the software?

3. Your Customers Can Tell You What To Buy

There was only one Steve Jobs, who just knew what to build. For others, your customers will might you what to buy. Listen to them and pay special attention to market transitions to buy next generation products.

Like Chambers experienced early in his career at IBM with mainframes, and at Wang Laboratories with mini-computers, missing a critical shift might be the end of you! The corollary for startups is: do something cool for key customers of a corporate, and you’ll get on their radar in no time!

4. Pick The Right Match

“When you buy a company, everything is negotiable except strategy and culture”said Chambers.

Oracle has mastered takeovers but for most others, acquisitions can fail due to a poor alignment of vision for the industry and each company’s role, cultural mismatch, geographic distance or lack of integration of systems (once you scale your number of acquisitions, having different divisions or subsidiaries use different software will make your CFO insane).

There is generally more than one possible M&A target, and Cisco often walked away from potential buys for the above reasons. It also developed efficient processes‘I used to view process at bureaucracy, but process done right can give you speed that others cannot match’, Chambers added.

Are they customer-focused and share their success with their employees?

5. Build Your Playbook(s)

Back in the 90’s tech M&As were often failures. Chambers and his team researched why and built Cisco’s playbook, then tweaked it for 2 decades. According to Chambers, most of it can apply to other companies. So save yourself some time and costly attempts by getting his book 😉

Interestingly, they approached the leadership transition in the same way: they studied what made them work or fail, and made it as smooth as could be when John stepped down in 2015.

6. Do Your Homework

One common trait of experienced corp dev teams is the amount of work they put in before they approach a startup.

Not only are they aware of many through their own research, their customers, business units, CVC arms or the media, but also via extensive networks, including with VC firms.

Like investors, you’re only as good as your deal flow. Corp devs then model the value a startup might bring, and pay the right price for it (more on this below).

7. Pay For What The Value Is To You

A hot startup can command a high price, but is it worth it for you?

If it offers no complementarity or synergies, it might in fact be of negative value. On the opposite, the current revenue of a startup might be irrelevant if you can blow their product through your channels and make it 10x or 100x.

The company Chambers bought in ’93 for close to US$100million only had US$10 million in revenue. It paid off in droves.

8. Keep The Talent

When you buy a tech company, you must try and keep the talent — especially founders, emotional leaders and engineers.

Understand ‘Leaders Currency: Track record, Trust and Relationships. So involve your HR team to answer key questions and help define attractive career paths within your organization for the acquired teams. If you fail to do so, people will leave or underperform, and you will not get the new products you hope for.

At Cisco, about 1/3 of the top leadership came from internal promotions, 1/3 from recruiting and 1/3 from acquisitions. At peak it likely had about 100 former CEOs on payroll!

9. Expect Some Failures

Despite its stellar track record, about 1/3 of Cisco’s were failures. Reasons may vary, and some might be caused by market changes. When it decided to shut down Flip Video within 2 years after its $590 million acquisition: Apple had just added cloud video capabilities, it was game over.

Expect them, learn from them, and be ready to cut losses and, ideally, redeploy people.

10. In The Future, M&As Might Not Be Enough

As the pace of innovation accelerates, and top talent joins startups rather than large companies, startups might become threats faster than you can buy them.

Chambers suggested that the next-level skill to develop is the ability to form strategic partnerships very early on with startups, such as this recent JV between Boeing and the much smaller 5-year-old A.I. startup SparkCognitionfor urban aerial mobility.

Joint Ventures Between Startups And Corporates Might Become More Common

Thanks to speakers, participants and supporters of this Masterclass series, in particular: Natasha Ligai (Logitech), Todd Neville (IBM), Christina LaMontagne(Johnson & Johnson), Anne Samak de la Cerda (former CFO, Withings), Dan Fairfax, (former CFO, Brocade), Amanda Zamurs and Larry Chu (Goodwin), Kate Whitcomb and Ethan Haigh (HAX).

A long and winding road to new copyright legislation

Back in May, as part of a settlement, Spotify agreed to pay more than $112 million to clean up some copyright problems. Even for a service with millions of users, that had to leave a mark. No one wants to be dragged into court all the time, not even bold, disruptive technology start-ups.

On October 11th, the President signed the Hatch-Goodlatte Music Modernization Act (the “Act”, or “MMA”). The MMA goes back, legislatively, to at least 2013, when Chairman Goodlatte (R-VA) announced that, as Chairman of the House Judiciary Committee, he planned to conduct a “comprehensive” review of issues in US copyright law. Ranking Member Jerry Nadler (D-NY) was also deeply involved in this process, as were Senators Hatch (R-UT) Leahy (D-VT), and Wyden (D-OR). But this legislation didn’t fall from the sky; far from it.

After many hearings, several “roadshow” panels around the country, and a couple of elections, in early 2018 Goodlatte announced his intent to move forward on addressing several looming issues in music copyright before his planned retirement from Congress at the end of his current term (January 2019).  With that deadline in place, the push was on, and through the spring and summer, the House Judiciary Committee and their colleagues in the Senate worked to complete the text of the legislation and move it through to process. By late September, the House and Senate versions had been reconciled and the bill moved to the President’s desk.

What’s all this about streaming?

As enacted, the Act instantiates several changes to music copyright in the US, especially as regards streaming music services. What does “streaming” refer to in this context? Basically, it occurs when a provider makes music available to listeners, over the internet, without creating a downloadable or storable copy: “Streaming differs from downloads in that no copy of the music is saved to your hard drive.”

“It’s all about the Benjamins.”

One part, by far the largest change in terms of money, provides that a new royalty regime be created for digital streaming of musical works, e.g. by services like Spotify and Apple Music. Pre-1972 recordings — and the creators involved in making them (including, for the first time, for audio engineers, studio mixers and record producers) — are also brought under this royalty umbrella.

These are significant, generally beneficial results for a piece of legislation. But to make this revenue bounty fully effective, a to-be-created licensing entity will have to be set up with the ability to first collect, and then distribute, the money. Think “ASCAP/BMI for streaming.” This new non-profit will be the first such “collective licensing” copyright organization set up in the US in quite some time.

Collective Licensing: It’s not “Money for Nothing”, right?

What do we mean by “collective licensing” in this context, and how will this new organization be created and organized to engage in it? Collective licensing is primarily an economically efficient mechanism for (A) gathering up monies due for certain uses of works under copyright– in this case, digital streaming of musical recordings, and (B) distributing the royalty checks back to the rights-holding parties ( e.g. recording artists, their estates in some cases, and record labels).  Generally speaking, in collective licensing:

 “…rights holders collect money that would otherwise be in tiny little bits that they could not afford to collect, and in that way they are able to protect their copyright rights. On the flip side, substantial users of lots of other people’s copyrighted materials are prepared to pay for it, as long as the transaction costs are not extreme.”

—Fred Haber, VP and Corporate Counsel, Copyright Clearance Center

The Act envisions the new organization as setting up and implementing a new, extensive —and, publicly accessible —database of musical works and the rights attached to them. Nothing quite like this is currently available, although resources like SONY’s Gracenote suggest a good start along those lines. After it is set up and the initial database has a sufficient number of records, the new collective licensing agency will then get down to the business of offering licenses:

“…a blanket statutory license administered by a nonprofit mechanical licensing collective. This collective will collect and distribute royalties, work to identify songs and their owners for payment, and maintain a comprehensive, publicly accessible database for music ownership information.”

— Regan A. Smith, General Counsel and Associate Register of Copyrights

(AP Photo) The Liverpool beat group The Beatles, with John Lennon, Paul McCartney, George Harrison and Ringo Starr, take it easy resting their feet on a table, during a break in rehearsals for the Royal variety show at the Prince of Wales Theater, London, England, November 4, 1963. (AP Photo)

You “Can’t Buy Me Love”, so who is all this going to benefit?

In theory, the listening public should be the primary beneficiary. More music available through digital streaming services means more exposure —and potentially more money —for recording artists. For students of music, the new database of recorded works and licenses will serve to clarify who is (or was) responsible for what. Another public benefit will be fewer actions on digital streaming issues clogging up the courts.

There’s an interesting wrinkle in the Act providing for the otherwise authorized use of “orphaned” musical works such that these can now be played in library or archival (i.e. non-profit) contexts. “Orphan works” are those which may still protected under copyright, but for which the legitimate rights holders are unknown, and, sometimes, undiscoverable. This is the first implementation of orphan works authorization in US copyright law.  Cultural services – like Open Culture – can look forward to being able to stream more musical works without incurring risk or hindrance (provided that the proper forms are filled out) and this implies that some great music is now more likely to find new audiences and thereby be preserved for posterity. Even the Electronic Frontier Foundation (EFF), generally no great fan of new copyright legislation, finds something to like in the Act.

In the land of copyright wonks, and in another line of infringement suits, this resolution of the copyright status of musical recordings released before 1972 seems, in my opinion, fair and workable. In order to accomplish that, the Act also had to address the matter of the duration of these new copyright protections, which is always (post-1998) a touchy subject:

  • For recordings first published before 1923, the additional time period ends on December 31, 2021.
  • For recordings created between 1923-1946, the additional time period is 5 years after the general 95-year term.
  • For recordings created between 1947-1956, the additional time period is 15 years after the general 95-year term.
  • For works first published between 1957-February 15, 1972 the additional time period ends on February 15, 2067.

(Source: US Copyright Office)

 (Photo by Theo Wargo/Getty Images for Live Nation)

Money (That’s What I Want – and lots and lots of listeners, too.)

For the digital music services themselves, this statutory or ‘blanket’ license arrangement should mean fewer infringement actions being brought; this might even help their prospects for investment and encourage  new and more innovative services to come into the mix.

“And, in The End…”

This new legislation, now the law of the land, extends the history of American copyright law in new and substantial ways. Its actual implementation is only now beginning. Although five years might seem like a lifetime in popular culture, in politics it amounts to several eons. And let’s not lose sight of the fact that the industry got over its perceived short-term self-interests enough, this time, to agree to support something that Congress could pass. That’s rare enough to take note of and applaud.

This law lacks perfection, as all laws do. The licensing regime it envisions will not satisfy everyone, but every constituent, every stakeholder, got something. From the perspective of right now, chances seem good that, a few years from now, the achievement of the Hatch-Goodlatte Music Modernization Act will be viewed as a net positive for creators of music, for the distributors of music, for scholars, fans of ‘open culture’, and for the listening public. In copyright, you can’t do better than that.