Solving the mystery of sleep

Below are excerpts from the most recent episode of the Flux podcast hosted by RRE Ventures principal Alice Lloyd George. 

AMLG: Welcome back to the pod. I’m excited to be here with Dr. Assaf Glazer. He is the co-founder and CEO of Nanit a leading human analytics company that uses computer vision to help parents navigate their child’s sleep.

Essentially it’s a baby data collector that every sleep-deprived geek parent has dreamed of. A little background on Assaf: He got his Ph.D. at the Technion in Israel and was previously at Applied Materials as well as Wales where he worked on solutions for missile defense systems. Nanit was born here in New York at Cornell Tech [disclosure — RRE is a long-standing investor in the company.] Welcome Assaf it’s great to have you. 

AG: Thank you for having me.

AMLG: I’ve got a stat here, that on average parents lose 44 days of sleep during the first year of their baby’s life and nearly 3 in 10 babies have problems sleeping at night. Those numbers sum up the nature of what you’re trying to solve, but can you lay out how you identified this problem and started the company?

AG: It started for me as a parent. You have your baby, you arrive home and you see that your life has changed. Pretty quickly you understand what your number one concern is — sleep. You’re tired, you’re sleep deprived. You wake up during the night and do everything necessary to go back to sleep. You’re going to Google and going to friends. This is where Nanit comes in. We are giving you the information that will allow you to make better decisions for your child. Six years ago I had my first child, Udi. He was born when I was at the Technion. I’m a computer vision guy. Before I was at the Technion I worked at Applied Materials in the semiconductor industry, on a camera that you put above the silicon slices, to see them from a bird’s eye perspective.

AMLG: So you were doing computer vision for chip manufacturing — on the assembly lines, you’d look for errors in the chips?

AG: Yes. And when my son was born I said, OK let’s do process control for my baby.

AMLG: As if the baby was on an assembly line like a chip, just run some computer vision on it. 

AG: Yeah. So I wrote a paper on background subtraction algorithms — how to find a foreground object differentiated from the background — and applied those algorithms to my baby. I went to my advisors at the Technion and told them, you know, I’ve found that my baby is moving 134 times on average at night. But what can you do with that? I was looking at this data and I said sleep, sleep is what we need to solve here. I went to sleeping labs to try to understand sleep science. Then I moved as a postdoc to Cornell University where I joined the Runway Program, which aims to commercialize science.

The Jacobs institute is a joint venture between Cornell and the Technion-Israel Institute of Technology, operating as an independent entity within Cornell Tech. The Institute emphasizes a trans-disciplinary view of science and encourages translational research to serves the common good, through a set of industry-focused “hubs” that address contemporary needs.

AMLG: So you moved from Israel.

AG: I moved from Israel to where the customers are, which is New York.

AMLG: We also have the most anxious parents on the planet.

AG: Haha yes. I would say that New York is very inspiring. In terms of the culture, the diversity, it’s a great place to be.

AMLG: Tell me about the program at Cornell.

AG: It’s a joint venture for Cornell and Technion University. We were six postdocs that started in this program. They really helped me. Peretz Lavie the president of the Technion, he’s a sleep expert, a sleep guru I would say. He helped us reach out to experts around the world in sleep development and cognitive development. Then we developed Nanit with them.

Dr Peretz Lavie is a world-renowned sleep expert and has been President of the Technion since 2009. Watch his interview on sleep research here

AMLG: Sleep science — as you got into that field, what did you discover and what were you surprised by as you engaged with the science for the first time — I imagine people have focused more on adults than babies?

AG: The development of infant sleep is fascinating. How we move between stages. How to differentiate between awake, asleep, deep sleep, REM sleep.

AMLG: Do babies have deep sleep and REM sleep as well?

AG: When they are born it’s a bit of a mix. They have two states, awake and asleep. And over time —

AMLG: Like an on off switch.

AG: Haha it’s a bit more, but I’m not sure that we fully understand all the processes during the first few weeks. They dream much more than adults. And you see their architecture developing. One of the first experts that I worked with is Professor Avi Sadeh. I reached out to him through Peretz Lavie, as he developed the gold standard of how to measure sleep. The hypothesis is that movement is an indication of asleep and awake states, and with a camera you know much more. You draw the silhouette of the baby, you can detect the eyes. You can track the different parts of the body and you have better resolution. Today we measure sleep better than the state of the art medical devices. When you do it with a camera it’s powerful because you can capture a lot of things around the sleep architecture. You build a picture. In our case we track the parent. When you look at this behavior — sleep and parent intervention patterns — you can give tips and recommendations for parents on how to improve, how to teach their baby to sleep on its own.

AMLG: As your user base gets bigger you’re going to have a lot of anonymized metadata that will give you insights—such as the more times you interrupt the baby’s sleep or the more times you leave it alone, this is the effect. So is it the parent-child insights that you’re looking to get?

Meet Nanit [on Youtube]

AG: If you look at studies on sleep, we’re talking about hundreds top. With Nanit you are exposed to thousands of babies sleeping in their natural environment. By looking at their behavior over time we learn new things. Sleep training is awareness and education. You’re building awareness with the data and the videos. We give parents information about how their week was in comparison to other babies of that age. There are no secrets — if you have the data you can use triggers to give tips to parents. For instance, I saw that your baby is capable of putting himself back to sleep during the night. Why don’t you wait one or two minutes before you enter the room.

AMLG: On the hardware side, can you share the journey there. You used to do manufacturing in the U.S. and you’ve moved that to China. What have you learned — how have margins improved? How did you scale up volume? What are your learnings about manufacturing?

China continues to dominate U.S. electronics imports. Source: IHS Mark

AG: I’ll try to make it short. It’s really hard to build mass production lines in the U.S. for commodity consumer goods. From a labor perspective, prices in the U.S. are high. Over time it won’t exist in the U.S. as there is strong competition from China. But because it is a consumer product, having your designer, engineers and even the line close to you geographically is much more convenient. If you’re looking at the U.S. market, the engineers are also parents, which helps you explain the value proposition of your product. It’s important that even the engineer who designs the circuit board understands what it means to have an LED that is strong enough above the bed. In general every engineer needs to have the product in mind when he does the design. Once we reached a stage that we had a line in the right yield and capacity, we did the transition to China. But it is expensive to work in this way, to start in the U.S. then move to China. There is no one recipe. Nanit also has an R&D center in Israel. Which means that now I’m working in three time zones. It is crazy. Most of our R&D is on the software side and on the hardware side we try to outsource when possible. If I had to choose I would choose Israel and the U.S.

AMLG: How have you found pulling those resources together and acquiring talent. You’ve obviously got a strategic advantage with the connection to Israel, but any insights on how you attract and retain the top talent, especially in machine learning?

AG: Finding the right talent for your company is a search problem. The world is big and in different parts of the world there are different types of talent. In Israel there is great talent for backend engineers and computer vision, and we hire those people in Israel. In the U.S. there’s great talent in marketing, sales, business development, brand development, human centric design — for those, New York is a great place to be. In China you find talent related to manufacturing and they are very good at it. In the past it was hard to build a company in this way. But the world changed. The world changed in the sense of how we communicate. The only thing that hasn’t been solved yet is time zones. If everyone slept at the same time that would help. But besides the time zones, technology today can solve a lot of problems. Nanit couldn’t exist a couple of years ago when we didn’t have this.

AMLG: Right you wouldn’t have been able to do it all in Israel or all in New York or all in China. What about on the machine learning side — what is going on on a more macro level there?

AG: Deep learning and convolutional neural networks are amazing tools that help us do things we weren’t able to do before. Thanks to deep learning, today I can tell you the baby’s position in the crib better than the human eye. But what happened is that it was so disruptive that many other parts of the computer vision field, you started seeing them less and less at conferences. Add to this the fact that it generates lots of value for companies like Google, Amazon, Microsoft —

AMLG: So machine learning has become dominated by big platforms like Google and Apple, and perhaps research for research’s sake is a valuable thing and not just having it all steered towards revenue or commercial applications. You’re saying it’s important to have pure research?

AG: This is what research is about. It should be pure.

AMLG: Do you know Gary Marcus? He came on this podcast last year, and his point about these companies is that when you’re a hammer everything looks like a nail. When you have a ton of data — you’re Google or Facebook — everything looks like you should apply deep learning to it. But that’s their bias and perhaps it skews out other approaches to machine learning.

AG: Also I would say it becomes a commodity over time. I believe the next innovation will be around behavioral analysis, which is the next level of computer vision. We are working on research collaborations that study small twitches of a baby, which could be an indicator of neurological disorders. There is a next level of behavioral neuroscience, it’s a fascinating field that is going to develop over the next couple of years.

AMLG: So you have this background in Israeli defense where you worked on missile defense systems. Can you share anything about that or how it’s informed what you’re doing now? Working in that environment is quite different than having a startup in New York.

AG: I was in a foundational team in the Nineties for a new defense system. It took me a couple of years to understand that I was a beta tester. They used me to understand the human factor. How to communicate between operators, how to design the screens. I cannot explain how much this experience has helped me to go through the design phase for Nanit. How to do design sprints with parents, how to design the screens. The army is an amazing human resource filter that allocates hundreds of thousands of teenagers to specific positions and trains them in a short time and gives them practical experience. They are doing an amazing job. There are mistakes of course, but they took me and others and decided this is what you are going to do. They gave me tools for things that in the future were of great benefit to me.

AMLG: How does working on missile defense UX or chip manufacturing compare to baby monitoring?

AG: Ha well I continue to serve as a major in reserve. But in life I decided that I wanted to make a shift to deal with more human problems. What is nice about semiconductors is that they are designed by humans not by nature. Babies were designed by nature, which is more complex. When you have a blueprint you know exactly what you’re looking for, what kind of patterns. Then you can reach a level of analysis, of process control that is much higher. But the challenges with babies you know is —

AMLG: They’re more of a mystery.

AG: It’s a lot of mystery. But my philosophy is to build the scientific fundamentals, the building blocks, and on top of that you think about how to make it approachable for the consumer space and how to build a value proposition. You start with science not marketing statements. This is where you start.

AMLG: A world of more ambient data capture where you’re continually monitored. Which feeds into preventative medicine. Obviously there’s a lot of people that get nervous about that, though it’s the way the whole world is going, we’re going to more data and it’s going to serve us. But as you push that conversation forward, do you feel like there’s challenges in terms of getting people used to the idea?

AG: You need to do it in a responsible way. But we can live a much better life. We will have better parenting experiences, sleep better at night. Even know things about ourselves that we didn’t know before.

***

Further reading:

African experiments with drone technologies could leapfrog decades of infrastructure neglect

A drone revolution is coming to sub-Saharan Africa.

Countries across the continent are experimenting with this 21st century technology as a way to leapfrog decades of neglect of 20th century infrastructure.

Over the last two years, San Francisco-based startup Zipline launched a national UAV delivery program in East Africa; South Africa passed commercial drone legislation to train and license pilots; and Malawi even opened a Drone Test Corridor to African and its global partners. 

In Rwanda, the country’s government became one of the first adopters of performance-based regulations for all drones earlier this year. The country’s progressive UAV programs drew special attention from the White House and two U.S. Secretaries of Transportation.

Some experts believe Africa’s drone space could contribute to UAV development in the U.S. and elsewhere around the globe.

“The fact that [global drone] companies can operate in Africa and showcase amazing use cases…is a big benefit,” said Lisa Ellsman, co-executive director of the Commercial Drone Alliance.

Test in Africa

It’s clear that the UAV programs in Malawi and Rwanda are getting attention from international drone companies.

Opened in 2017, Malawi’s Drone Test Corridor has been accepting global applications. The program is managed by the country’s Civil Aviation Authority in partnership with UNICEF.

The primary purpose is to test UAV’s for humanitarian purposes, but the program “was designed to provide a controlled platform for… governments…and other partners…to explore how UAV’s can help deliver services,” according to Michael Scheibenreif, UNICEF’s drone lead in Malawi.

That decision to include the private sector opened the launch pads for commercial drones. Swedish firm GLOBEHE has tested using the corridor and reps from Chinese e-commerce company JD have toured the site. Other companies to test in Malawi’s corridor include Belgian UAV air traffic systems company Unifly and U.S. delivery drone manufacturer Vayu, according to Scheibenreif.

Though the government of Rwanda is most visible for its Zipline partnership, it shaping a national testing program for multiple drone actors. 

“We don’t want to limit ourselves with just one operator,” said Claudette Irere, Director General of the Ministry of Information Technology and Communications (MiTEC).

“When we started with Zipline it was more of a pilot to see if this could work,” she said. “As we’ve gotten more interest and have grown the program…this gives us an opportunity to open up to other drone operators, and give space to our local UAV operators.”

Irere said Rwanda has been approached by 16 drone operators, “some of them big names”—but could not reveal them due to temporary NDAs. She also highlighted Charis UAS, a Rwandan drone company, that’s used the country’s test program, and is now operating commercially in and outside of Rwanda.

UAV Policy

Africa’s commercial drone history is largely compressed to a handful of projects and countries within the last 5-7 years. Several governments have jumped out ahead on UAV policy.

In 2016, South Africa passed drone legislation regulating the sector under the country’s Civil Aviation Authority. The guidelines set training requirements for commercial drone pilots to receive Remote Pilot Licenses (RPLs) for Remotely Piloted Aircraft Systems. At the end of 2017 South Africa had registered 686 RPLs and 663 drone aircraft systems, according to a recent State of Drone Report.

Over the last year and a half Kenya, Ghana, and Tanzania have issued or updated drone regulatory guidelines and announced future UAV initiatives.  

In 2018, Rwanda extended its leadership role on drone policy when it adopted performance-based regulations for all drones—claiming to be the first country in the world to do so.

So what does this mean?

“In performance-based regulation the government states this is our safety threshold and you companies tell us the combination of technologies and operational mitigations you’re going to use to meet it,” said Timothy Reuter, Civil Drones Project Head at the World Economic Forum.

Lisa Ellsman, shared a similar interpretation.

“Rather than the government saying ‘you have to use this kind of technology to stop your drone,’ they would say, ‘your drone needs to be able to stop in so many seconds,’” she said.

This gives the drone operators flexibility to build drones around performance targets, vs. “prescriptively requiring a certain type of technology,” according to Ellsman.

Rwanda is still working out the implementation of its performance-based regulations, according to MiTEC’s Claudette Irere. They’ve entered a partnership with the World Economic Forum to further build out best practices. Rwanda will also soon release an online portal for global drone operators to apply to test there.

As for Rwanda being first to release performance-based regulations, that’s disputable. “Many States around the world have been developing and implementing performance-based regulations for unmanned aircraft,” said Leslie Cary, Program Manager for the International Civil Aviation Authority’s Remotely Piloted Aircraft System. “ICAO has not monitored all of these States to determine which was first,” she added.

Other governments have done bits and pieces of Rwanda’s drone policy, according to Timothy Reuter, the head of the civil drones project at the World Economic Forum. “But as currently written in Rwanda, it’s the broadest implementation of performance based regulations in the world.”

Commercial Use Cases

As the UAV programs across Africa mature, there are a handful of strong examples and several projects to watch.

With Zipline as the most robust and visible drone use case in Sub-Saharan Africa.

While the startup’s primary focus is delivery of critical medical supplies, execs repeatedly underscore that Zipline is a for-profit venture backed by $41 million in VC.

The San Francisco-based robotics company — that also manufactures its own UAVs — was one of the earliest drone partners of the government of Rwanda.

Zipline demonstration

The alliance also brought UPS and the UPS Foundation into the mix, who supports Zipline with financial and logistical support.

After several test rounds, Zipline went live with the program in October, becoming the world’s first national drone delivery program at scale.

“We’ve since completed over 6000 deliveries and logged 500,000 flight kilometers,” Zipline co-founder Keenan Wyrobek told TechCrunch. “We’re planning to go live in Tanzania soon and talking to some other African countries.”  

In May Zipline was accepted into the U.S. Department of Transportation’s Unmanned Aircraft Systems Integration Pilot Program (UAS IPP). Out of 149 applicants, the Africa focused startup was one of 10 selected to participate in a drone pilot in the U.S.– to operate beyond visual line of sight medical delivery services in North Carolina.    

In a non-delivery commercial use case, South Africa’s Rocketmine has built out a UAV survey business in 5 countries. The company looks to book $2 million in revenue in 2018 for its “aerial data solutions” services in mining, agriculture, forestry, and civil engineering.

“We have over 50 aircraft now, compared to 15 a couple years ago,” Rocketmine CEO Christopher Clark told TechCrunch. “We operate in South Africa, Namibia, Ghana, Ivory Coast, and moved into Mexico.”

Rocketmine doesn’t plan to enter delivery services, but is looking to expand into the surveillance and security market. “After the survey market that’s probably the biggest request we get from our customers,” said Clark.

More African use cases are likely to come from the Lake Victoria Challenge — a mission specific drone operator challenge set in Tanzania’s Mwanza testing corridor. WeRobotics has also opened FlyingLabs in Kenya, Tanzania, and Benin. And the government of Zambia is reportedly working with Sony’s Aerosense on a drone delivery pilot program.

Africa and Global UAV

With Europe, Asia, and the U.S. rapidly developing drone regulations and testing (or already operating) delivery programs (see JD.com in China), Africa may not take the sole position as the leader in global UAV development — but these pilot projects in the particularly challenging environments these geographies (and economies) represent will shape the development of the drone industry. 

The continent’s test programs — and Rwanda’s performance-based drone regulations in particular — could advance beyond visual line of sight UAV technology at a quicker pace. This could set the stage for faster development of automated drone fleets for remote internet access, commercial and medical delivery, and even give Africa a lead in testing flying autonomous taxis.

“With drones, Africa is willing to take more bold steps more quickly because the benefits are there and the countries have been willing to move in a more agile manner around regulation,” said the WEF’s Reuter.

“There’s an opportunity for Africa to maintain its leadership in this space,” he said. “But the countries need to be willing to take calculated risk to enable technology companies to deploy their solutions there.”

Reuter also underscored the potential for “drone companies that originate in Africa increasingly developing services.”

There’s a case to be made this is already happening with Zipline. Though founded in California, the startup honed its UAVs and delivery model in Rwanda.

“We’re absolutely leveraging our experience built in Africa as we now test through the UAS IPP program to deliver in the U.S.,” said Zipline co-founder Keenan Wyrobek.

Everyday home gear made smart

Editor’s note: This post was done in partnership with Wirecutter. When readers choose to buy Wirecutter’s independently chosen editorial picks, Wirecutter and TechCrunch may earn affiliate commissions.

If you only have one smart home device, it’s likely something simple and fun like a voice-controlled speaker or color-changing LED light bulb. As you expand your smart home setup, you can begin to swap out gear that isn’t as flashy but you still use everyday.

Switching to connected locks, power outlets and smoke alarms are all simple installs that can improve your safety and comfort in your own home. We’ve pulled together some of our favorite essentials made smart for anyone looking to upgrade.

Smart lock: Kwikset Kevo Smart Lock 2nd Gen

The Kwikset Kevo Smart Lock 2nd Gen is the most versatile smart lock that we’ve tested. Whether you prefer to use a wireless fob, smartphone app or key, you’ll be able to control the lock with all of them. When we compared it to similar models, the Kevo’s Bluetooth-activated tap-to-unlock mechanism was the easiest to use.

The second generation of the Kevo improved on security and has all-metal internal components for better protection against forced break-in attempts. With the optional Kevo Plus upgrade, you’ll add the ability to control the lock remotely and receive status-monitoring updates.

Photo: Liam McCabe

Robot Vacuum: iRobot Roomba 960

If cleaning is neither your forte or preferred pastime, a robot vacuum will come in handy. Our upgrade pick, the iRobot Roomba 960, is one of the most powerful models that we tested. It can be controlled through the iRobot Home app and uses a bump-and-track navigation system that helps vacuum an entire floor without missing spots.

If its battery is running low during a session, it’ll return to its dock to power up before finishing the job. It’s easy to disassemble for maintenance and is equipped with repairable parts that make it worth its price over some of our less serviceable picks.

Photo: Rachel Cericola

Plug-in Smart Outlet: Belkin Wemo Mini

We tested 26 smart outlet models over more than 45 hours and chose the Belkin Wemo Mini Wi-Fi plug as our top pick. If you’ve ever thought it’d be nice to remotely turn on or off home essentials such as lamps, air conditioners and fans from your smartphone, plugging them into a smart outlet makes it possible.

The Wemo Mini has proven to be reliable throughout long-term testing, it doesn’t block other outlets on the same wall plate and it’s compatible with iOS and Android devices and assistants, including HomeKit/Siri, Alexa and Google Assistant. The interface of the Wemo app is intuitive and easy to use. You can view all of your connected devices on one screen, set powering timers and from anywhere power on or off a device plugged into the Wemo outlet.

Photo: Jennifer Pattison Tuohy

Smart Thermostat: Nest Thermostat E

For a smart thermostat that’s affordable and doesn’t require extensive programming, we recommend the Nest Thermostat E. After about a week, it creates a schedule after learning cooling and heating preferences that you’ve set. It isn’t compatible with as many HVAC systems as similar Nest models, but it’s easy to install and doesn’t lack any features we expect.

It does come with Eco Mode — an energy-saving geofencing feature that detects when your home is empty (or when your smartphone is nowhere near your house). The Nest app uses the same technology to set the thermostat to a preferred temperature when it senses you’re on your way home. If you don’t have your smartphone on hand, you can still operate the Thermostat E by turning its outer ring and pressing selections on its touchscreen.

Photo: Michael Hession

Smart Smoke Alarm: Nest Protect

A smoke alarm is one of the most relied-upon safety devices in every home. Nonetheless, it’s easy to forget to do routine checks to ensure it’s in tip-top shape and functioning properly. With a smart smoke alarm like the Nest Protect, we found that its simple app, self-tests, monthly sound checks and consistent alerts are enough to keep fire safety worries at bay.

It isn’t difficult to install, has a sleek design and integrates with other smart home devices like the Nest Cam (which can record video of a fire) and the Nest Learning Thermostat (which shuts down HVAC systems that may be the cause of a fire). It’s sensitive to fast- and slow-burning fires, plus it monitors homes for both smoke and carbon monoxide.

These picks may have been updated by Wirecutter. When readers choose to buy Wirecutter’s independently chosen editorial picks, Wirecutter and TechCrunch may earn affiliate commissions.

In VC fund creation, have we passed the peak?

In venture capital, a variant on the Glengarry Glen Ross mandate is most fund managers’ modus operandi: Always. Be. Raising.

And it seems like VCs have picked up on that. In the last few months, even casual readers of the tech press would notice many, many stories about VCs raising big new funds. So are venture investors spinning up new funds as often as they did in the past?

VCs are certainly raising tons of money, and Crunchbase News reported earlier this week that these huge funds are bending the shape of the VC fundraising curve upward. But is that the full story? Even though 2018 has been a banner year so far for venture fund origination on the highest end of the assets-under-management spectrum, what about the market as a whole?

Aggregated venture capital and micro VC fundraising data from Crunchbase suggests that U.S.-based firms are spinning up fewer new funds than they did just a couple of years ago. In other words, the peak might be in.

Let’s take a look at the numbers, which we’ve segmented by U.S. Census region.

There are a few trends to glean from the chart above, and it comes down to pace and scale.

We’re able to see how the pace of venture fund creation varies by region. In the highly unlikely event you didn’t already know that the East and West coasts are responsible for the bulk of venture fund creation, the above chart makes that fact plainly obvious.

And at least when it comes to investors from Western and Eastern states, the difference is one of scale rather than direction. As the count of funds raised rises in the East, so it goes in the West.

Our data suggest that, in aggregate, new fund creation hit a local maximum in 2016. With more than 260 new funds announced that year, it’s a record that stretches back at least to the time of the first dot-com collapse — if it’s not an all-time record on its own.

Not all bad news

Even given historic patterns of when new funds are announced — which suggest fewer funds are announced in Q4 — matching 2017 levels of new fund creation is likely. Although nobody should hold their breath, it’s possible that 2018 will also break records for new fund creation and total capital raised.

To break the dollar volume record, VCs need to raise another $4.6 billion in new funds by the end of the year. Considering that approximately $40 billion has already been raised, this seems possible. But it’s important to remember that eighty percent of new funds are smaller than $250 million.

One of the things some might ignore about all the money currently going into venture capital funds (and, by proxy, into privately held tech startups) is that it is going to have to come back to limited partners with a hefty return.

The $45 billion U.S. VCs are on pace to raise in 2018 would have to net more than $135 billion in returns by 2028, presuming a 10-year term for the fund and a 3x realized multiple (the minimum threshold for venture scale returns).

That sounds unlikely, given that we are in the senescence of a bull cycle. But so long as public tech companies soar, SaaS booms and investors are so hungry for tech shares that middling Chinese firms can go public domestically twice in a week, there’s little reason to expect too much of a pullback in the short term.

Until the real correction comes, at which point we’ll see some far shorter bars added to our graph.

The funding mirage: How to secure international investment from emerging markets

Looking for funding as a startup in Latin America is a lot like looking for a watering hole in the middle of the desert. You know it’s out there, but finding it in time is a life or death situation.

Granted, venture capital investment in the region is at an all-time high, with leading firms like Andreessen Horowitz, Sequoia Capital and Accel Partners having made inaugural investments in markets like Colombia, Brazil and Mexico, respectively. But, at the same time, while startup founders might be tantalized by the news of big investments happening around them, as many of them get closer to the funding stage themselves, they often realize it’s nothing but a mirage.

And this isn’t just a problem in Latin America. All over the world, startups are struggling to find investment, as VCs are investing more money in fewer deals in the endless search for the next unicorn. Due to a dwindling number of VC deals in both the United States and Europe, even entrepreneurs in established ecosystems are having to look further afield for the resources they need to build their businesses, bringing many of them to emerging markets like Latin America.

Fortunately, whether you’re a local or foreign founder in an emerging market, there is a way to quench your thirst for the international investment that you need to scale your company. Here’s what we recommend to the startups that are part of our UTEC Ventures accelerator program in Peru, and what we’d recommend to you, too.

Find local seed money first

As a startup in an emerging market, the prospect of finding local investment can seem challenging. In fact, this is probably why you’re looking for international investment in the first place. But the truth is, finding local seed money to get started is really the first prerequisite for securing international funding later on.

Last year in Peru, for example, US$7.2 million of seed capital was invested in the country’s startups, with barely over US$1 million coming from international funds. This goes to show that international investors peeking into emerging markets are less active in seed rounds, and more interested in later-stage rounds once a company has better demonstrated its worth.

If you want to attract international investors, you need to be an international startup.

As such, we advise all startups to raise a first or second seed round locally in Peru, and then seek international investors. The same can go for other emerging markets, as well.

To raise these initial rounds, the most important thing is to show that you have a solid team, a business idea that works and has traction with clients chasing your product and that you’re better than any local competition. If you can demonstrate that you meet these requirements, finding local seed capital shouldn’t be too difficult; all you need is a good pitch deck and some patience when networking within local angel groups or at investor events.

Replicate success in a bigger, more competitive market

If you want to attract international investors, you need to be an international startup. In other words, you need to demonstrate that you can sell your product in a bigger, more competitive market before turning the heads of international investors. For startups in Peru and other emerging markets in Latin America, that means successfully expanding to the region’s most developed markets in Mexico, Brazil or Argentina.

Consider, for example, the Colombian courier service Rappi. It wasn’t until after the company expanded its operations to Mexico at the beginning of 2016 that it secured its first major international investment, led by Andreessen Horowitz. The company then went on to close a Series B round just one month later, in addition to a US$130 million venture round at the beginning of this year, led by a German food delivery service with participation from a number of U.S.-based investors.

The same idea goes for emerging markets outside of Latin America, too. In Eastern Europe, which lags behind its western counterpart in terms of VC funding, many entrepreneurs will either set up their businesses in Western European countries from the get-go, or expand there as soon as they’ve achieved product/market fit and demonstrated success in their home countries.

This is a clear demonstration of the broader fact that if you want to start raising money from more developed markets, you generally need to be based in those markets, or at least a market of comparable size. Accordingly, your primary focus when seeking international funding should be to first succeed locally, and then replicate that success in a more developed market — whether that be in the United States, Mexico, Western Europe or anywhere else.

Remember, not all international funding comes from international VCs

While it’s easy to be distracted by the glitz and glamour of securing a round from international VCs, startups have a number of other options at their disposal to secure international funding.

Foreign governments in emerging markets are increasingly stepping up their game with programs designed to bolster their local startup ecosystems as an engine for economic growth. As such, a number of foreign governmental programs have emerged, offering support in the form of equity-free cash to entrepreneurs who decide to set up shop in a given country.

Corporate capital has taken on a very important role in many emerging markets like Latin America.

There are plenty of examples in Latin America alone. Start-Up Chile, for example, offers entrepreneurs up to US$80,000 to launch their businesses in Chile as a launch pad to reach the rest of the world; Parallel18 in Puerto Rico offers entrepreneurs up to US$75,000 to do the same thing; and the Peruvian government plans to announce a similar program to help startups soft launch in Peru with up to US$40,000 at the upcoming Peru Venture Capital Conference.

Startups have another option, as well. Corporate capital, or startup investment from major corporations, has taken on a very important role in many emerging markets like Latin America. In fact, Qualcomm Ventures, the investment arm of U.S.-based tech giant Qualcomm, is the most active global corporate investor in Latin America. Naspers, American Express Ventures and other corporate funds have taken an active interest in the region’s startups, as well.

Together, the growing support of foreign governments and interest from international corporations highlights the fact that securing international funding is in fact possible, and not as hard as you’d expect. Knowing that there are options besides getting an international VC on board, you should take the time to find out which alternatives are available in the markets to which you’re hoping to expand.

So, no matter whether you’re a local or foreign entrepreneur in an emerging market, there’s no reason to give up hope on finding international funding. The key is to think globally and use technology to solve real-world challenges. Then, demonstrate success at home first, and duplicate it later in a bigger market. Resources are available to help you when taking your first step abroad, and if you do it well, you’ll find that the investment wells aren’t dry after all.

What would a blockchain patent war look like?

Blockchain is perhaps the most hyped technology of the past five years. The technology that allows us to create trustless immutable shared ledgers promises to bring transparency and honesty to commerce by disintermediating and decentralizing functions that rely on trusted third parties today. The promise and the potential are almost as big as the hype.

While still the early days, there are several applications that have already launched on blockchains — the first being the Bitcoin cryptocurrency payment protocol. Bitcoin is just a unit of account on blockchain. And more recently, with the implementation of smart contracts, code that is shared across the whole blockchain to execute conditionally with irrefutable results, we have the possibility to tokenize many new financial constructs on blockchains.

This has given rise to the ICO, a token-generation event whereby tokens are sold in order to raise financing for a blockchain project in which the tokens will serve some purpose. This innovation in finance changed the way startups raised funds in 2016, 2017 and 2018, with more than $18 billion dollars of funds pouring into blockchain startups in 2018 alone.

What has all this got to do with a patent war?

Everything. At the same time that the hype around blockchain has been growing, the number of patents filed has been growing, as well. What’s makes this technology different from past innovation explosions is that the startups are better funded than ever before.

Another very new factor is the ideology behind this innovation wave. A majority of these startups are founded on the basis of decentralization and open-source principals, meaning their code is open and they release it under the Apache 2.0 or similar open-source license. Philosophically, many project leaders are opposed to the very idea of intellectual property ownership such as patents.

This has several implications.

First, there are many technology startups working on cutting-edge innovations that are taking no precautions other than Apache Open Source licensing to protect their innovation. Many of these same startups have carried out ICOs and are now exceptionally well-funded with cash treasuries ranging from $10 million to $4 billion. There are several hundred young startup companies sitting on an average $25 million treasury that they are using to fund their development of open and freely accessible innovation.

Second, there is a small concentration of such well-funded startups that are patenting blockchain technology. That may be a precursor of future patent assertion entities (PAEs), commonly known as “patent trolls.”  Effectively, the modus operandi of some of these entities could be called “patent hoarding,” filing patents on any patentable aspect of blockchain that they can with the intent to become “patent trolls” in the future.

There has never been a case of so much free-floating cash being readily available in startups just waiting to be attacked.

Increasingly, large corporations are also patenting blockchain technology, although their patents tend to revolve around their core businesses; for example Visa, has filed patents on blockchain technologies related to payment services as they would relate to credit card usage, and UPS has filed patents for blockchain technology in shipping.

Finally, putting these together we have a very interesting patent battlefield shaping up.

There are large corporations that will defend their core business by asserting their patents against challengers who threaten their revenue streams. This is typical behavior and is often derided as the reason patents can hold back innovation.

The more interesting players are the new ones. On the one hand you have very well-funded startups that have taken little to no precaution to protect their innovation. On the other hand you have very clever and agile PAEs, patent trolls, that are also well-funded and will use these resources to attack any startup that could be remotely considered to be infringing on their patent portfolio.

There has never been a case of so much free-floating cash being readily available in startups just waiting to be attacked. This could become a boon for the PAEs, a slaughter for the idealistic and well-funded startups and result in a massive transfer of funds from startups to PAEs in the coming years. This would be a very sad outcome for innovation.

Everyone is, of course, entitled to their own views on the value of patents and whether their company should file for them. But regardless of your position, we, as a community, must acknowledge that there are others in this world who are obtaining blockchain patents purely for their own profit motives. For example, Erich Spangenberg of IPwe has stated publicly, “… It is a curious path how a collection of misfit trolls, geeks and wonks ended up here — but we are going to crush it and make a fortune…” You can read more about Erich’s intentions here.

Because of this, it is important to take intellectual property very seriously. Make an effort to identify and patent your innovations. To that end you can join LOT Network, a nonprofit founded to allow patent holders to jointly protect each other from the eventuality that their operating patents will fall into the hands of a PAE.  This will improve your protection and help protect fellow network members from PAEs. Think of it as your “patent troll flu shot.”

The more blockchain innovators join together to protect and nurture our innovation, the better for our ecosystem. We all agree that patents in the wrong hands will hurt our industry and the speed at which others embrace blockchain. We all must take responsibility and be good corporate citizens when it comes to IP. By removing the uncertainty that comes from PAEs, we can avoid the turmoil and costly litigation we saw play out in the smartphone and semiconductor industries. If we remove friction, we can accelerate the adoption of blockchain technology. This tide will raise all boats.

Whether you are an investor or an entrepreneur in blockchain projects, you should strongly consider the manner by which your projects handle their intellectual property and do careful diligence to ensure that your interests are not threatened by a potential patent battle.

Investors are waking up to the emotional struggle of startup founders

As the Gartner Hype Curve goes, from the peak of inflated expectations to the trough of disillusionment, so goes the founder’s emotional journey.

Most founders hit the trough sooner or later, the proverbial nadir of their startup life.

The company’s business model undergoes the dreaded pivot. Teams dissipate and the foundation starts to fall apart. Startups die. Investors cut their losses and move on to the rosier pastures of their portfolio.

And what is often left is a depressed broken founder, dealing with the consequences of ‘crushing it’. But too often, its the founders psyche that gets crushed. Not much can be done about it but that’s changing.

Gartner Hype Curve: No emotional support needed

Several venture capitalists have now stepped in to address this challenge. The Felicis Ventures pledge to set 1% of investments aside to support founders development is a start. Brad Feld has been writing about his journey for years. Former investor Jerry Colonna founded Reboot to find a way to help founders establish their own path of radical self inquiry.

When I reached Jerry to discuss founders emotional challenges, he invoked the compassionate kindness of a zen monk who has been dealing with wayward children for way too long. “A lot can be done but we need to start with changing the language around this subject,” he said.

From depression to dark angels

A prominent VC told me that “we are a blend of the dark and the light’ and we need to respect both parts. I was not quite sure what he meant till I dug around and found the works of Carl Gustav Jung. Jung describes these are forces inside us – the light being the benevolent and the dark forces of greed, arrogance, self-delusion and hubris.

Jung pointed out that “the word “happy” would lose its meaning if it were not balanced by sadness.” As we are forced to face our dark side, we begin to come to terms with our challenges. And it’s only then we can build our own compassion.

Those who have experienced the dark nights are able to emotionally empathize with founders, and help them become resilient. Just as a founder who has taken a company public can help a startup scale their business. Because Jung correctly said that “Knowing your own darkness is the best method for dealing with the darknesses of other people.”

 

This man of matter ……rose up too far in the world….(image and caption by Carl Jung. Source: “The Red Book”, circa 1930)

When we start to change the language around this subject, it can become safer and easier for founders to discuss their situation. Instead of saying “I am depressed” a different way could yet be “I’m facing dark times”. The goal is to not trivialize the magnitude of the problem, but to make it gentler in self expression and social acceptance. We are too sold on sunshine, but that’s only half of the equation.

With co-author (and friend) Brad Feld’s guidance, I am working on my third book tentatively titled “Depression: A Founders Companion” and am looking at ways of how (a) founders reflect and identify their dark nights (b) how founders endure these times and (c) how can society respond and serve them when they are at their emotional nadir.

Only if we understand these issues can we can serve each other well. If you know any founders who can share their anonymized insights with dark nights, please request them to fill this survey. It will take less than 10 minutes and can help us to collectively address these challenges.

So far, several founders have shared that the primary cause of concern is social stigma. VCs will abandon the investment, team members will see the CEO as a weak person or worse, they will try to behave differently. Even if someone musters up the courage to discuss their mental health, we as a society do not know how to handle this information. We run, hide or escape.

Often, we try to cheer up people with lame sentences or hijack the conversations by discussing our own stories. (Hint: Neither of these are effective). Not only do we need a new language, we need a new social framework. In this case, the overused VC cliche of “how can I help” is like a doctor asking the wounded patient, “so how can I treat you today”. I’ll let you guess how effective that approach can be.

Feel those feels – be vulnerable

Catherine Shu wrote in a post  that asking for help when you are depressed is one of the bravest things you can do. Asking for help makes you vulnerable, but it does not mean you are weak. It does not mean you are deficient.

Brad Feld writes that  “I encourage you to let yourself feel the emotions you are feeling.”

It’s a line his wife Amy uses with him all the time: “Brad, feel your emotions. Don’t suppress them. Just feel them. Process them. And then reflect on what you are feeling. Any, more importantly, explore why you felt them. It’s probably uncomfortable. But it’s part of being human. And, while tragic, we can learn from it to help ourselves, and help others.”

And Sam Altman, the former head of Y Combinator  has weighed in on the subject, writing:

“… a lot of founders end up pretty depressed at one point or another, and they generally don’t talk to anyone about it.  Often companies don’t survive these dark times.

Failing sucks—there is no way to sugarcoat that.  But startups are not life-and-death matters—it’s just work.

Most of the founders I know have had seriously dark times, and usually felt like there was no one they could turn to.  For whatever it’s worth, you’re not alone, and you shouldn’t be ashamed.

You’ll be surprised how much better you feel just by talking to people about the struggles you’re facing instead of saying “we’re crushing it”.  You’ll also be surprised how much you find other founders are willing to listen.”

These struggles are not unique, but they are individual. That said, the best way to overcome them is as a community and these early steps from investors should go a long way toward building that community.

Commons Clause stops open-source abuse

There’s a dark cloud on the horizon. The behavior of cloud infrastructure providers, such as Amazon, threatens the viability of open source.

During 13 years as a venture investor, I have invested in the companies behind many open-source projects:

Open source has served society, and open-source business models have been successful and lucrative. Life was good.

Amazon’s behavior

I admire Amazon’s execution. In the venture business we are used to the large software incumbents (such as IBM, Oracle, HP, Compuware, CA, EMC, VMware, Citrix and others) being primarily big sales and distribution channels, which need to acquire innovation (i.e. startups) to feed their channel. Not Amazon. In July 2015, The Wall Street Journal quoted me as saying, “Amazon executes too well, almost like a startup. This is scary for everyone in the ecosystem.” That month, I wrote Fear The Amazon Juggernaut on investor site Seeking Alpha. AMZN is up 400 percent since I wrote that article. (I own AMZN indirectly.)

But to anyone other than its customers, Amazon is not a warm and fuzzy company. Numerous articles have detailed its bruising and cutthroat culture. Why would its use of open source be any different?

Go to Amazon Web Services (AWS) and hover over the Products menu at the top. You will see numerous open-source projects that Amazon did not create, but runs as-a-service. These provide Amazon with billions of dollars of revenue per year.

For example, Amazon takes Redis (the most loved database in StackOverflow’s developer survey), gives very little back, and runs it as a service, re-branded as AWS Elasticache. Many other popular open-source projects including, Elasticsearch, Kafka, Postgres, MySQL, Docker, Hadoop, Spark and more, have similarly been taken and offered as AWS products.

To be clear, this is not illegal. But we think it is wrong, and not conducive to sustainable open-source communities.

Commons Clause

In early 2018, I gathered together creators, CEOs or chief counsels of two dozen at-scale open-source companies, some of them public, to talk about what to do. In March I spoke to GeekWire about this effort. After a lot of constructive discussion the group decided that rather than beat around the bush with mixing and matching open-source licenses to discourage such behavior, we should create a straightforward clause that prohibits the behavior. We engaged respected open-source lawyer Heather Meeker to draft this clause.

In August 2018 Redis Labs announced their decision to add this rider (i.e. one additional paragraph) known as the Commons Clause to their liberal open-source license for certain add-on modules. Redis itself would remain on the permissive BSD license  —  nothing had changed with Redis itself! But the Redis Labs add-on modules will include the Commons Clause rider, which makes the source code available, without the ability to “sell” the modules, where “sell” includes offering them as a commercial service. The goal is to explicitly prevent the bad behavior of cloud infrastructure providers.

Anybody else, including enterprises like General Motors or General Electric, can still do all the things they used to be able to do with the software, even with Commons Clause applied to it. They can view and modify the source code and submit pull-requests to get their modifications into the product. They can even offer the software as-a-service internally for employees. What Commons Clause prevents is the running of a commercial service with somebody else’s open-source software in the manner that cloud infrastructure providers do.

This announcement has  — unsurprisingly, knowing the open-source community  — prompted spirited responses, both favorable and critical. At the risk of oversimplifying: those in favor view this as a logical and positive evolution in open-source licensing that allows open-source companies to run viable businesses while investing in open-source projects. Michael DeHaan, creator of Ansible, in Why Open Source Needs New Licenses, put one part particularly well:

We see people running open source “foundations” and web sites that are essentially talking heads, spewing political arguments about the definition of “open source” as described by something called “The Open Source Initiative”, which contains various names which have attained some level of popularity or following. They attempt to state that such a license where the source code is freely available, but use cases are limited, are “not open source”. Unfortunately, that ship has sailed.

Those neutral or against point out that the Commons Clause makes software not open source, which is accurate, and that making parts of the code base proprietary is against the ethos of open source; and Redis Labs must be desperate and having trouble making money.

First, do not worry about Redis Labs. The company is doing very, very well. And Redis is stronger, more loved and more BSD than ever before.

More importantly, we think it is time to reexamine the ethos of open source in today’s environment. When open source became popular, it was designed for practitioners to experiment with and build on, while contributing back to the community. No company was providing infrastructure as a service. No company was taking an open-source project, re-branding it, running it as a service, keeping the profits and giving very little back.

Our view is that open-source software was never intended for cloud infrastructure companies to take and sell. That is not the original ethos of open source. Commons Clause is reviving the original ethos of open source. Academics, hobbyists or developers wishing to use a popular open-source project to power a component of their application can still do so. But if you want to take substantially the same software that someone else has built, and offer it as a service, for your own profit, that’s not in the spirit of the open-source community.

As it turns out in the case of the Commons Clause, that can make the source code not technically open source. But that is something we must live with, to preserve the original ethos.

Apache + Commons Clause

Redis Labs released certain add-on modules as Apache + Commons Clause. Redis Labs made amply clear that the application of Commons Clause made them not open source, and that Redis itself remains open source and BSD-licensed.

Some rabid open-source wonks accused Redis Labs of trying to trick the community into thinking that modules were open source, because they used the word “Apache.” (They were reported to be foaming at the mouth while making these accusations, but in fairness it could have been just drool.)

There’s no trick. The Commons Clause is a rider that is to be attached to any permissive open-source license. Because various open-source projects use various open-source licenses, when releasing software using Commons Clause, one must specify to which underlying permissive open-source license one is attaching Commons Clause.

Why not AGPL?

There are two key reasons to not use AGPL in this scenario, an open-source license that says that you must release to the public any modifications you make when you run AGPL-licensed code as a service.

First, AGPL makes it inconvenient but does not prevent cloud infrastructure providers from engaging in the abusive behavior described above. It simply says that they must release any modifications they make while engaging in such behavior. Second, AGPL contains language about software patents that is unnecessary and disliked by a number of enterprises.

Many of our portfolio companies with AGPL projects have received requests from large enterprises to move to a more permissive license, since the use of AGPL is against their company’s policy.

Balance

Cloud infrastructure providers are not bad guys or acting with bad intentions. Open source has always been a balancing act. Many of us believe in our customers and peers seeing our source code, making improvements and sharing back. It’s always a leap of faith to distribute one’s work product for free and to trust that you’ll be able to put food on the table. Sometimes, with some projects, a natural balance occurs without much deliberate effort. But at other times, the natural balance does not occur: We are seeing this more and more with infrastructure open source, especially as cloud infrastructure providers seek to differentiate by moving up the stack from commodity compute and storage to higher level infrastructure services.

Revisions

The Commons Clause as of this writing is at version 1.0. There will be revisions and tweaks in the future to ensure that Commons Clause implements its goals. We’d love your input.

Differences of opinion on Commons Clause that we have seen expressed so far are essentially differences of philosophy. Much criticism has come from open-source wonks who are not in the business of making money with software. They have a different philosophy, but that is not surprising, because their job is to be political activists, not build value in companies.

Some have misconstrued that it prevents people from offering maintenance, support or professional services. This is a misreading of the language. Some have claimed that it conflicts with AGPL. Commons Clause is intended to be used with open-source licenses that are more permissive than AGPL, so that AGPL does not have to be used! Still, even with AGPL, few users of an author’s work would deem it prudent to simply disregard an author’s statement of intent to apply Commons Clause.

Protecting open source 

Some open-source stakeholders are confused. Whose side should they be on? Commons Clause is new, and we expected debate. The people behind this initiative are committed open-source advocates, and our intent is to protect open source from an existential threat. We hope others will rally to the cause, so that open-source companies can make money, open source can be viable and open-source developers can get paid for their contributions.