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.

WorldCover raises $6M round for emerging markets climate insurance

WorldCover, a New York and Africa-based climate insurance provider to smallholder farmers, has raised a $6 million Series A round led by MS&AD Ventures.

Y-Combinator, Western Technology Investment, and EchoVC also participated in the round.

WorldCover’s platform uses satellite imagery, on-ground sensors, mobile phones, and data analytics to create insurance options for farmers whose crops yields are affected adversely by weather events—primarily lack of rain.

The startup currently operates in Ghana, Uganda, and Kenya . With the new funding WorldCover aims to expand its insurance offerings to more emerging market countries.

“We’re looking at India, Mexico, Brazil, Indonesia. India could be first on an 18 month timeline for a launch,” WorldCover co-founder and chief executive Chris Sheehan said in an interview.

The company has served over 30,000 farmers across its Africa operations. Smallholder farmers as those earning all or nearly all of their income from agriculture, farming on 10 to 20 acres of land, and earning around $500 to $5000, according to Sheehan.

Farmer’s connect to WorldCover by creating an account on its USSD mobile app. From there they can input their region, crop type, determine how much insurance they would like to buy and use mobile money to purchase a plan. WorldCover works with payments providers such as M-Pesa in Kenya and MTN Mobile Money in Ghana.

The service works on a sliding scale, where a customer can receive anywhere from 5x to 15x the amount of premium they have paid.  If there is an adverse weather event, namely lack of rain, the farmer can file claim via mobile phone. WorldCover then uses its data-analytics metrics to assess it, and if approved, the farmer will receive an insurance payment via mobile-money.

Common crops farmed by WorldCover clients include maize, rice, and peanuts. It looks to add coffee, cocoa, and cashews to its coverage list.

For the moment, WorldCover only insures for events such as rainfall risk, but in the future it will look to include other weather events, such as tropical storms, in its insurance programs and platform data-analytics.

The startup’s founder clarified that WorldCover’s model does not assess or provide insurance payouts specifically for climate change, though it does directly connect to the company’s business.

“We insure for adverse weather events that we believe climate change factors are exacerbating,” Sheehan explained. WorldCover also resells the risk of its policy-holders to global reinsurers, such as Swiss Re and Nephila.

On the potential market size for WordCover’s business, he highlights a 2018 Lloyd’s study that identified $163 billion of assets at risk, including agriculture, in emerging markets from negative, climate change related events.

“That’s what WorldCover wants to go after…These are the kind of micro-systemic risks we think we can model and then create a micro product for a smallholder farmer that they can understand and will give them protection,” he said.

With the round, the startup will look to possibilities to update its platform to offer farming advice to smallholder farmers, in addition to insurance coverage.

WorldCover investor and EchoVC founder Eghosa Omoigui believes the startup’s insurance offerings can actually help farmers improve yield. “Weather-risk drives a lot of decisions with these farmers on what to plant, when to plant, and how much to plant,” he said. “With the crop insurance option, the farmer says, ‘Instead of one hector, I can now plant two or three, because I’m covered.”

Insurance technologyis another sector in Africa’s tech landscape filling up with venture-backed startups. Other insurance startups focusing on agriculture include Accion Venture Lab backed Pula and South Africa based Mobbisurance.

With its new round and plans for global expansion, WorldCover joins a growing list of startups that have developed business models in Africa before raising rounds toward entering new markets abroad.

In 2018, Nigerian payment startup Paga announced plans to move into Asia and Latin America after raising $10 million. In 2019, South African tech-transit startup FlexClub partnered with Uber Mexico after a seed-raise. And Lagos based fintech startup TeamAPT announced in Q1 it was looking to expand globally after a $5 million Series A round.

 

 

Singapore’s SalesWhale raises $5.3M to bring AI to sales and marketing teams

SalesWhale, a Singapore-based startup that uses AI to help marketers and salespeople generate leads, has announced a Series A round worth $5.3 million.

The investment is led by Monk’s Hill Ventures — the Southeast Asia-focused firm that led SalesWhale’s seed round in 2017 — with participation from existing backers GREE Ventures, Wavemaker Partners and Y Combinator. That’s right, SalesWhale is one a select few Southeast Asian startups to have been through YC, it graduated back in summer 2016.

SalesWhale — which calls itself “a conversational email marketing platform” — uses AI-powered “bots” to handle email. In this case, its digital workforce is trained for sales leads. That means both covering the menial parts of arranging meetings and coordination, and the more proactive side of engaging old and new leads.

Back when we last wrote about the startup in 2017, it had just half a dozen staff. Fast-forward two years and that number has grown to 28, CEO Gabriel Lim explained in an interview. The company is going after more growth with this Series A money, and Lim expects headcount to jump past 70; SalesWhale is deliberating opening an office in California. That location would be primarily to encourage new business and increase communication and support for existing clients, most of whom are located in the U.S., according to Lim. Other hires will be tasked with increasing integration with third-party platforms, and particularly sales and enterprise services.

The past two years have also seen SalesWhale switch gears and go from targeting startups as customers, to working with mid-market and enterprise firms. SalesWhale’s “hundreds” of customers include recruiter Randstad, educational company General Assembly and enterprise service business Unit4. As it has added greater complexity to its service, so the income has jumped from an initial $39-$99 per seat all those years ago to more than $1,000 per month for enterprise customers.

SalesWhale’s founding team (left to right): Venus Wong, Ethan Lee and Gabriel Lim

While AI is a (genuine) threat to many human jobs, SalesWhale sits on the opposite side of that problem in that it actually helps human employees get more work done. That’s to say that SalesWhale’s service can get stuck into a pile (or spreadsheet) of leads that human staff don’t have time for, begin reaching out, qualifying leads and sending them on to living and breathing colleagues to take forward.

“A lot of potential leads aren’t touched” by existing human teams, Lim reflected.

But when SalesWhale reps do get involved, they are often not recognized as the bots they are.

“Customers are often so convinced they are chatting with a human — who is sending collateral, PDFs and arranging meetings — that they’ll say things like ‘I’d love to come by and visit someday,’ ” Lim joked in an interview.

“Indeed, a lot of times, sales team refer to [SalesWale-powered] sales assistant like they are a real human colleague,” he added.

500 Startups Japan becomes Coral Capital with a new $45M fund

The 500 Startups Japan crew is going independent. The VC firm announced a $30 million fund in 2015, and now the follow up is a new $45 million fund called Coral Capital.

Helmed by James Riney and Yohei Sawayama, just like 500 Startups Japan, Coral will essentially continue the work the U.S. firm made in Japan, where it made more than 40 investments including Kakehashi, satellite startup Infostellar, SmartHR and Pocket Concierge, which was acquired by American Express.

“Coral provides a foundational role within the marine ecosystem, it’s symbolic about how we want to be in the Japanese startup ecosystem,” Riney told TechCrunch in an interview.

LPs in the fund include 500 Startups backers Mizuho Bank, Mitsubishi Estate, and Taizo Son — the brother of SoftBank CEO Masayoshi Son and founder of Mistletoe — and Shinsei Bank as well as other undisclosed institutional investors, who Riney said account for nearly half of the LPs. Riney said the fund was closed within two and a half months of fundraising and Coral had to turn some prospective investors away due to the overall interest shown.

Riney said that the scandals around 500 Startups — founding partner Dave McClure resigned in 2017 after admitting he’d been a “creep” around women — “wasn’t really a strong consideration” for starting Coral.

“It’s something we’d been wanting to do for a while,” he explained.

Coral Capital founding partners James Riney and Yohei Sawayama previously led 500 Startups Japan

Riney explained that Coral won’t mix in with 500 Startups Japan investments, and the team will continue to manage that portfolio whilst also running the fund.

Thesis-wise, the plan is to continue on from 500 Startups Japan, that means going after early stage deals across the board. Riney said that over the last four years, he’s seen more founders leave stable jobs and start companies which bodes well for Japan’s startup ecosystem.

“Now you’re seeing people more into their careers who see entrepreneurism as a way to fundamentally change their industry,” he said in an interview. “That bucks the trend of risk aversion in Japan which is commonly the perception.”

He sees the arrival of Coral as an opportunity to continue to push startup culture in Japan, a country well known for massive corporations and company jobs with an absence of early stage capital options for founders.

“There’s a lot of work we can do and the impact we can make in Japan is much higher than in somewhere like Silicon Valley,” Riney said.

“Pretty much every corporate has a startup program, but few of them are strong leads within seed or early stage deals, they tend to feel more comfortable in later stage investments. There have been investors investing on behalf of corporations who got the courage to spin out and go alone… but it is still much much fewer than other countries,” he added.

Investors are still failing to back founders from diverse backgrounds

The large majority of venture dollars are invested in companies run by white men with a university degree, according to a new report by RateMyInvestor and Diversity VC.

This new data reveals that despite the lip service investors have paid to backing founders from diverse backgrounds, much, much, more work needs to be done to actually achieve the industry’s stated goals. It also shows the vast gulf that separates the meritocratic myth that Silicon Valley has created for itself from the hard truths of its natural nepotistic state.

In 2017, venture capital investment reached $84.24 billion, a height not seen since the dot-com bubble of the early 2000s. The data from RateMyInvestor and Diversity VC covers a survey of the seed to Series D investments made during that year from what the two organizations selected as the top 135 firms by deal activity. Those firms invested in 4,475 companies, which collectively included 9,874 co-founders, according to the report.

Of those co-founders only 9 percent were women, while 17 percent identified as Asian American, 2.4 percent identified as Middle Eastern, 1.9 percent identified as Latinx and 1 percent identified as black.

“VCs should make more of a deliberate effort to spend quality time with communities of color that are otherwise unfamiliar,” said Suzy Ryoo, a venture partner and vice president of technology at Cross Culture Ventures . “Another tactical suggestion would be to co-host salon dinners community events with the growing group of early-stage venture funds managed by diverse investors, such as Cross Culture Ventures, Backstage Capital, Precursor Ventures, etc.”

The data compiled by Diversity VC and RateMyInvestor contains some other staggering statistics. Ivy League-educated founders captured 27 percent of all the dollars invested in venture capital startups, while all graduates from all other universities across the U.S. represented 50 percent of venture funding. Founders who graduated from international institutions had nearly 16 percent of venture funding. Founders without a university degree accounted for around 6 percent of the total capital invested.

Finally, investors are still wildly reluctant to leave Silicon Valley to look for new deals, according to the survey. This despite skyrocketing prices for real estate and talent and the emergence of big technology ecosystems in cities across the U.S.

“Silicon Valley has done a poor job of fostering diversity of all forms, especially diversity of thought,” said DCM partner Kyle Lui. “VCs and founders tend to back/hire people who are in their existing network who most likely share the same views as them, went to the same school as them, and shared similar life experiences as them.”

Investors are still failing to back founders from diverse backgrounds

The large majority of venture dollars are invested in companies run by white men with a university degree, according to a new report by RateMyInvestor and Diversity VC.

This new data reveals that despite the lip service investors have paid to backing founders from diverse backgrounds, much, much, more work needs to be done to actually achieve the industry’s stated goals. It also shows the vast gulf that separates the meritocratic myth that Silicon Valley has created for itself from the hard truths of its natural nepotistic state.

In 2017, venture capital investment reached $84.24 billion, a height not seen since the dot-com bubble of the early 2000s. The data from RateMyInvestor and Diversity VC covers a survey of the seed to Series D investments made during that year from what the two organizations selected as the top 135 firms by deal activity. Those firms invested in 4,475 companies, which collectively included 9,874 co-founders, according to the report.

Of those co-founders only 9 percent were women, while 17 percent identified as Asian American, 2.4 percent identified as Middle Eastern, 1.9 percent identified as Latinx and 1 percent identified as black.

“VCs should make more of a deliberate effort to spend quality time with communities of color that are otherwise unfamiliar,” said Suzy Ryoo, a venture partner and vice president of technology at Cross Culture Ventures . “Another tactical suggestion would be to co-host salon dinners community events with the growing group of early-stage venture funds managed by diverse investors, such as Cross Culture Ventures, Backstage Capital, Precursor Ventures, etc.”

The data compiled by Diversity VC and RateMyInvestor contains some other staggering statistics. Ivy League-educated founders captured 27 percent of all the dollars invested in venture capital startups, while all graduates from all other universities across the U.S. represented 50 percent of venture funding. Founders who graduated from international institutions had nearly 16 percent of venture funding. Founders without a university degree accounted for around 6 percent of the total capital invested.

Finally, investors are still wildly reluctant to leave Silicon Valley to look for new deals, according to the survey. This despite skyrocketing prices for real estate and talent and the emergence of big technology ecosystems in cities across the U.S.

“Silicon Valley has done a poor job of fostering diversity of all forms, especially diversity of thought,” said DCM partner Kyle Lui. “VCs and founders tend to back/hire people who are in their existing network who most likely share the same views as them, went to the same school as them, and shared similar life experiences as them.”

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.  

Stock markets suffer their worst Christmas Eve trading day

Twas the last trading day before Christmas, and on the trading floor,
Most stocks were falling, and then falling some more,
Treasury Secretary Steven Mnuchin all the banks had called,
In hopes that full coffers were still in their vaults.

The analysts were shaken by news of the call,
which initially caused the stock market to fall,
Then President Trump took to Twitter, to blame the Federal Reserve,
Which was something the Fed chairman just didn’t deserve.

So banks and traders rushed to their phones with a clatter,
Causing stock market value further to shatter,
Markets don’t like decisions made in a flash,
And criticizing sound economic policy can exacerbate a crash.

Mnuchin made his call with banks from a tropical isle,
and analysts criticized his decision’s lack of guile,
They were more concerned with policy stupidity,
Since there’s already enough administrative volatility.
Like threatening to oust the chairman of the Federal Reserve,
Someone whose position it would be better to preserve.

So now the Dow has fallen some 653 points,
And doctors may advise traders to light up their joints,
Because U.S. indices are on track for their worst December,
Since the 1930s, which almost no one alive remembers.

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.

Chinese investment into computer vision technology and AR surges as U.S. funding dries up

Last year 30 leading venture investors told us about a fundamental shift from early stage North American VR investment to later stage Chinese computer vision/AR investment — but they didn’t anticipate its ferocity.

Digi-Capital’s AR/VR/XR Analytics Platform showed Chinese investments into computer vision and augmented reality technologies surging to $3.9 billion in the last 12 months, while North American augmented and virtual reality investment fell from nearly $1.5 billion in the fourth quarter of 2017 to less than $120 million in the third quarter of 2018. At the same time, VC sentiment on virtual reality softened significantly.

What a difference a year makes.

Dealflow (dollars)

What VCs said a year ago

When we spoke to venture capitalists least year, they had some pretty strong opinions.

Mobile augmented reality and Computer Vision/Machine Learning (“CV/ML”) are at opposite ends of the spectrum — one delivering new user experiences and user interfaces and the other powering a broad range of new applications (not just mobile augmented reality).

The market for mobile AR is very early stage, and could see $50 to $100 million exits in 2018/2019. Dominant companies will take time to emerge, and it will also take time for developers to learn what works and for consumers and businesses to adopt mobile AR at scale (note: Digi-Capital’s base case is mobile AR revenue won’t really take off until 2019, despite 900 million installed base by Q4 2018). Tech investors are most interested in native mobile AR with critical use cases, not ports from other platforms.

Computer vision and visual machine learning is more advanced than mobile AR, and could see dominant companies in the near-term. Here, investors love  startups with real-world solutions that are challenging established industries and business practices, not research projects. Firms are investing in more than 20 different mobile augmented reality and computer vision and visual machine learning sectors, but there is the potential for overfunding during the earliest stages of the market.

What VCs did in the last 12 months

Perhaps the most crucial observation is the declining deal volumes over the last year.

Deal Volume (number of deals by category)

(Source: Digi-Capital AR/VR/XR Analytics Platform)

Deal volume (the number of deals) declined steadily by 10% per quarter over the last 12 months, and was around two-thirds the level in Q3 2018 that it was in Q4 2017. Most of the decline happened in the US and Europe, where VCs increasingly stayed on the sidelines by looking for short-term traction as a sign of long-term growth. (Note: data normalized excluding HTC ViveX accelerator Q4 2017, which skews the data)

Deal Volume (number of deals by stage)

The biggest casualties of this short-termist approach have been early stage startups raising seed (deal volume down by more than half) and some series A (deal volume down by a quarter) rounds. This trend has been strongest in North America and Europe, but even Asia has not been entirely immune from some early stage deal volume decline.

Deal Value (dollars)

(Source: Digi-Capital AR/VR/XR Analytics Platform)

While deal volume is a great indicator of early-stage investment market trends, deal value (dollars invested) gives a clearer picture of where the big money has been going over the last 12 months. (Note: investment means new VC money into startups, not internal corporate investment – which is a cost). Global investment hit its previous quarterly record over $2 billion in Q4 2017, driven by a few very large deals. It then dropped back to around $1 billion in the first quarter of this year. Since then deal value has steadily climbed quarter-on-quarter, to reach a new record high well over $2 billion in Q3 2018.

Over $4 billion of the total $7.2 billion in the last 12 months was invested in computer vision/AR tech, with well over $1 billion going into smartglasses (the bulk of that into Magic Leap) . The next largest sectors were games around $400 million and advertising/marketing at a quarter of a billion dollars. The remaining 22 industry sectors raised in the low hundreds of millions of dollars down to single digit millions in the last 12 months.

A tale of two markets

Deals by Country and Category (dollars)

American and Chinese investment had an inverse relationship in the last 12 months. American investors increasingly chose to stay on the sidelines, while Chinese investor confidence grew to back up clear vision with long-term investments. The differences in the data couldn’t be more stark.

North American Deals (dollars)

North American investment was almost triple Asian investment in Q4 2017, with a record high of nearly $1.5 billion dollars for the quarter. Despite 2018 being a transitional year for the market (Digi-Capital forecast that market revenue was unlikely to accelerate until 2019), North American quarterly investment fell over 90% to less than $120 million in Q3 2018. American VCs appear to have taken a long-term solution to a short-term problem.

China Deals (dollars)

Meanwhile, Chinese VCs have been focused on the long-term potential of the intersection between computer vision and augmented reality, with later-stage Series C and Series D rounds raising hundreds of millions of dollars a time. This trend increased dramatically in the last 12 months, with SenseTime Group raising over $2 billion in multiple rounds and Megvii close behind at over $1 billion (also multiple rounds).

Smaller investments (by Chinese standards) in the hundreds of millions have gone into companies Westerners might not know, including Beijing Moviebook Technology, Kujiale and more. All this saw Chinese quarterly investment grow 3x in the last 12 months. (Note: some recent Western opinions about market investment trends were based on incomplete data)

Where to from here?

With our team’s investment banking background, experience shows that forecasting venture capital investment is a fool’s errand. Yet it is equally foolish to ignore hard data, and ongoing discussions with leading investors along Sand Hill Road and China indicate some trends to watch.

American tech investors might continue to wait for market traction before providing the fuel needed for that traction (even if that seems counterintuitive). While this could pose an existential threat to some early stage startups in North America, it’s also an opportunity for smart money with longer time horizons.

Conversely, Chinese VCs continue to back domestic companies which could dominate the future of computer vision/augmented reality. The next 6 months will determine if this is a long-term trend, but it is the current mental model.

If mobile AR revenue accelerates in 2019 as critical use cases and apps emerge (as in Digi-Capital’s base case), this could become a catalyst for renewed investment by American VCs. The big unknown is whether Apple enters the smartphone tethered smartglasses market in late 2020 (as Digi-Capital has forecast for the last few years). This could be the tipping point for the market as a whole (not just investment). However, Apple timing is hard to predict (because Apple), with any potential launch date known only to Tim Cook and his immediate circle.

Steve Jobs said, “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something – your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.”

Chinese investors embraced a Jobsian approach over the last 12 months, with Western VCs increasingly dot-connecting (or not). It will be interesting to see how this plays out for computer vision/AR investment over the next 12 months, so watch this space.