Will MBS’s money ever become radioactive?

Yesterday, a Saudi news outlet broke the news that such Silicon Valley big wheels as Marc Andreessen, Sam Altman, and Travis Kalanick are advisors to a $500 billion megacity project being built by the country, which has pitched it as a model of what future cities will look like.

The announcement’s timing was not ideal for members of this 19-member list, who signed on to the project months ago in some cases. At the moment, there’s growing outrage over the weeklong disappearance of dissident Saudi journalist Jamal Khashoggi, who Turkish officials say was murdered last week in the Saudi Consulate in Istanbul on orders from the Saudi Royal family, then chopped into pieces with a bone saw and removed from the building. It’s graphic and upsetting to contemplate and, importantly, it has not been proven. But the widespread and growing assumption that Saudi intelligence agents did something to Khashoggi (there is no evidence to support that he left the building) has put Saudi Arabia’s Crown Prince Mohammed bin Salman Al Saud under the world’s glare. Indeed, the advisory board announcement seemed very much a way for the prince, known as MBS, to brandish his powerful American friends just as many in the U.S. are beginning to wonder exactly what he is capable of.

We might have wondered sooner, given that MBS has been fairly consistent about his lack of tolerance for either criticism or rivals since his rise to prominence was sealed by his appointment as crown prince in June of last year. Though MBS has been widely lauded for his reformist tendencies — he has “stood up to the religious elite to impose breathtaking social changes, including letting women drive and allowing concerts and cinemas,” as noted this summer in a WSJ opinion piece — he has also led air raids in Yemen that have killed many thousands of civilians (with White House support, to the dismay of lawmakers from both political parties).

Saudi Arabia also detained more than a dozen women’s rights activists over the summer. When Canada’s foreign ministry rebuked Riyadh for jailing them, saying it was “seriously concerned” with the arrests, Saudi Arabia expelled the country’s ambassador, suspended flights to and from Toronto, barred its citizens from receiving medical care in Canada, and froze new trade and investment with Canada worth billions of dollars. It also announced plans to move thousands of Saudi scholarship students out of Canadian schools.

Meanwhile, last year, MBS directed Saudi officials to lock up for several months more than 300 businessmen and royal family members in what was billed an anti-corruption campaign, one that led to MBS’s control of more than $100 billion in seized assets. As later reported by the New York Times, at least 17 of those detainees were “hospitalized for physical abuse and one later died in custody with a neck that appeared twisted, a badly swollen body and other signs of abuse, according to a person who saw the body.”

The maneuver was widely reported by U.S. outlets, yet MBS came to the U.S. just months after this high-profile sweep and he was welcome with open arms. Donald Trump invited him to the White House and has only worked to solidify that attachment, one characterized as “abnormal and unseemly” by international relations scholars.

Silicon Valley CEOs also embraced MBS on that spring tour. MBS visited with Google co-founder Sergey Brin and CEO Sundar Pichai; Magic Leap CEO Rony Abovitz; and Virgin Group founder Sir Richard Branson, among others who praised his social progressiveness. What they apparently liked even more: his ambitious plans to reduce Saudi Arabia’s dependence on oil, including by plugging more of the kingdom’s money into American companies.

In fact, looking the other way at MBS’s other goings-on hasn’t been all that hard, given the money at stake. Certainly, SoftBank doesn’t have qualms with it. In fact, SoftBank CEO Masayoshi Son has bragged the he convinced MBS to provide $45 billion for SoftBank’s massive $100 billion fund in just 45 minutes’ time. And just last week, MBS said he is committing $45 billion to a second Vision Fund.

If the alarming disappearance of Khashoggi, who was most recently working as a Washington Post columnist, changes the calculation in any way, no one is willing to say. Neither representatives from SoftBank’s Vision Fund nor roughly ten SoftBank-backed founders responded to requests for comment yesterday.

A number of venture capitalists whose companies have received funding from SoftBank were also either unresponsive when asked their opinion yesterday about SoftBank and whether Khashoggi’s disappearance might impact how startups think about their fundraising. In fact, just one, Pejman Nozad of Pear Ventures, who has seen two portfolio companies — DoorDash and newly public Guardant Health — raise later-stage funding from the Vision Fund, responded at all. “There is an overflow of capital in tech, from seed to pre IPO. Companies that need $500,000 in seed funding are ending up raising $3 million, and those who need $50 million raise $500 million. Only history will tell us if this is healthy or not,” said Nozad in an email.

Longtime VC Jeff Bussgang of Flybridge Capital Partners in Boston offered a slightly more nuanced view, noting that venture and private equity firms have been raising money from Middle East capital sources for many years and that “typically, entrepreneurs don’t like to focus on politics and historically have not cared very much where the money came from.”

Added Bussgang, “Yes, it would be great if all VC money came from poor widows and orphans, but that’s obviously not the case. And it is obviously a subjective process to determine whether the money is from a righteous source. Is Starbucks a righteous source?”

Bussgang was referring to a recent incident at Starbucks involving two black men who were arrested in a Philadelphia Starbucks after an employee called the police. Which isn’t really comparable with killing innocent civilians in Yemen, jailing human rights activists, or others of MBS’s alleged pastimes.

In fairness, many in the U.S. and elsewhere are waiting to see if Khashoggi materializes. While it seems less likely by the day that he will, never knowing what happened is undoubtedly the best possible outcome for those in tech and the White House, who would rather be affiliated with a reformer than a murderous despot. Let’s face it, a missing Washington Post columnist may look today like a miscalculation, but as these cycles go, Khashoggi may be yesterday’s news by tomorrow, if you’ll forgive the pun. Then everyone can get back to business.

It’s almost comical when one considers that many of these same people — especially Silicon Valley leaders — can muster outrage over a memo about gender diversity. Mostly, it’s just hugely depressing.

Divvy, an interesting new fractional home ownership startup, just raised a Series A round led by Andreessen Horowitz

Tech startups have found all kinds of ways to lend money to those hampered by either too little or not very good credit.

The approach of a nearly two-year-old, 15-person San Francisco-based startup called Divvy Homes is among the more creative we’ve seen, even while we question (for now) whether it’s good over the long term for potential customers.

How it works:  in Cleveland, Atlanta, and Memphis, where Zillow estimates that median home prices are $52,000, $82,00, and $242,000, respectively, Divvy will enable a person or family to select a home they’d like to someday own, then to buy that home with Divvy’s help. The family chips in at least two percent for a downpayment. Divvy pays for the rest, then it collects a monthly amount that includes both market-rate rent and an equity payment.

It does this until the newly installed residents have amassed a 10 percent stake in the home. The reason, says the company: by partnering with Divvy, tenants — some of whom have credit scores as low as 550, which is considered “very poor” by the consumer credit ratings agency Experian — can build their credit scores and eventually land a mortgage insured by the Federal Housing Administration, which requires a credit score of at least 580.

According to CEO Brian Ma — who cofounded the startup at the company creation studio HVF Labs — the idea is for this to happen within three years, at which point Divvy will sell and transfer the property over to them.

It’s easy to appreciate why this might be attractive to potential homebuyers who can’t secure a traditional mortgage in the current market — not all of whom suffer from poor credit but who are sometimes contract and self-employed workers without months of salary stubs to show nervous bankers. For example, Divvy says that it charge less in rent as a buyer’s equity begins to add up. That equity, it insists, can later turn into the person or family’s first mortgage payment.

For largely self-serving reasons, Divvy does what it can to ensure that the house isn’t a dud, too.  As Ma describes it, Divvy uses data science and algorithms to ensure that a property makes sense financially, meaning that it will likely appreciate and that the tenants aren’t paying so much that they can’t simultaneously build equity in their homes.

Divvy also works with inspectors to make doubly certain each home is “move-in ready and won’t have large unforeseen expenses during the lease, like major roof, structural, pest, or foundation issues,” says Ma, who previously cofounded three startups, as well as spent several years as a program manager with Zillow.

Still, it’s also easy to imagine that some of Divvy’s aspiring homeowners will never actually own their homes. Consider: While Divvy may help some percentage of them improve their credit score, roughly 62 percent of consumers with credit scores under 579 are “likely to become seriously delinquent (i.e., go more than 90 days past due on a debt payment) in the future,” says Experian.

Naturally, like any other property owner, Divvy will evict tenants who don’t pay, even if it does so reluctantly.

“If a rent payment is missed, we will follow up to see how we can help,” says Ma. “Most of the time, it’s immediately curable or curable within a couple days. If it’s been longer than a week and we believe the tenant is going through some hardship, we will work our best to offer alternatives, including allowing them to purely rent the property by dropping the equity payments to lower their monthly payment. If we can’t find a way to cure the situation, we will go through an eviction procedure.”

Divvy also establishes the buyback price at the time that it’s buying the home — which can work for, or against, the tenants who hope to own it someday.

Adena Hefets, another Divvy cofounder who worked previously in both VC and private equity, recently explained to us that Divvy has a back-end model that projects where the house would price three years down the line and it allows tenants to “buy it back at that price at any time.” Yet buying it back early would invariably mean overpaying. More, in the cities where Divvy is operating, housing prices don’t move around a lot, so a tenant could be overpaying at any buyback price that’s north of where the home sells today. (Home prices in Northeast Ohio were rising as of last spring, but they were still at 2004 levels.)

With the broader housing market poised for a slowdown, tenants wanting to buy their homes might decide it’s cheaper in the end to just move out of them and find something else. Where would that leave Divvy? We’d guess it would leave it looking more a modern residential real estate investment trust than a “rent-to-own innovator.”

That’s not a terrible thing for Divvy, even if it sounds a little less glamorous. In fact, the company — which says already buying one home a day — is today disclosing that it has raised $30 million in equity and debt from Andreessen Horowitz (a16z) and a commercial bank called Cross River Bank that notably is backed by a16z.

Ma declines to say how much of the round is equity and how much is debt. But he says that Alex Rampell, an a16z investor whose other real estate-related bets include a different fractional ownership startup, Point, has joined the company’s board.

Pictured above (at TC headquarters), left to right: Divvy founders Nicholas Clark, Brian Ma, and Adena Hefets.

Fitbit may have helped catch a killer, again

Fitbit data may have helped catch one of its customer’s killers, and not for the first time.

According to numerous media reports, a 90-year-old visited his stepdaughter at her home in San Jose, Ca. earlier this month, where he says he brought her pizza and visited briefly. But according to data provided to authorities by Fitbit, data from the stepdaughter’s Fitbit Alta wristband device — which tracks one’s heart rate and the number of steps taken during the day — showed a “significant spike” in her heart rate during the man’s visit, followed by a “rapid slowing.” Eight minutes after her heart had risen so rapidly, and five minutes after her stepfather left her home, it stopped.

A concerned coworker discovered the woman at her home five days later. She had a “gaping laceration” on her neck and wounds on the top of her head, say police, who arrested the stepfather based in part on a combination of video surveillance and assistance from Fitbit, which seems to have a less contentious relationship with law enforcement than some tech companies.

Indeed, Fitbit’s newest privacy policy states that the company “may preserve or disclose information about you to comply with a law, regulation, legal process, or governmental request; to assert legal rights or defend against legal claims; or to prevent, detect, or investigate illegal activity, fraud, abuse, violations of our terms, or threats to the security of the services or the physical safety of any person.”

As the New York Times notes, if convicted, the man won’t be the first assailant whose crime may have been revealed in part by a Fitbit. Last year, a Connecticut woman’s dying moments were recorded by her Fitbit in a case that strongly suggests her husband murdered her. According to local media, her wristband showed that her last movements were at 10:05 a.m. the day she died, nearly an hour after her husband told police she had been killed. The husband, who was discovered by first responders on the kitchen floor, still half-tied to a metal chair, later told investigators he had a pregnant girlfriend and that the pregnancy was not planned. He’s still awaiting trial.

David Ulevitch is now a general partner at Andreessen Horowitz — a big get and the firm’s fourth new GP since June

David Ulevitch has had some strange dealings with investors over the years. Now, Ulevitch is himself one of them. The founder of OpenDNS, a company that sold to Cisco in 2016, is disclosing today that he has joined the venture firm Andreessen Horowitz (a16z) as its newest general partner. He is the fourth general partner to be announced by the firm since it brought aboard former federal prosecutor Katie Haun back in June.

Asked today what these new additions mean in terms of fundraising, the firm declined to say, but certainly, Ulevitch looks like a very smart hire. For one thing, he hustles. In fact, he was the general manager of Cisco’s security business until just yesterday, though he suggests that he’d been preparing to leave throughout the summer, including “talking with lots of people, figuring out how to get close to entrepreneurs and spending more time with the team here.”

Ulevitch has also been through some public ups and downs, which makes him relatable to other founders. In fact, I first met Ulevitch back in 2008, when I was writing a profile of internet pioneer Halsey Minor for a short-lived spin-off of Vanity Fair called Portfolio. Minor had co-founded the media company CNET before becoming an investor, and though he had an undeniable eye for talent, he was overspending wildly at the time in his personal life, which frustrated co-investors, as well as put the founders in his portfolio, including Ulevitch, in a precarious position.

It was an uncertain chapter for Ulevitch, whose popular company OpenDNS focused initially on consumers who wanted to block certain kinds of sites but later catered to enterprises, more of which had begun moving to “the cloud” and wanted to safely extend their service and content browsing policies to on-the-go employees. It also feels like a lifetime ago, suggests Ulevitch, whose sold the company for $635 million after raising less than $50 million altogether, including across a competitive funding that saw Sequoia Capital get involved with the company.

Interestingly, it was former Sequoia investor Michael Goguen — who was at the center of his own, separate drama a couple of years ago — who led the round, so during a call today with Ulevitch, we couldn’t help asking him how convinced he is that VCs are sane, let alone effective partners to founders. Laughing, he admitted to some “weird moments” in his career, but he also noted that he has been “able to work with great partners and board members” over the years and was “always lucky to keep at arm’s length the stuff that people read about and you write about.”

Ulevitch sounds especially excited to work closely with Martin Casado, who previously co-founded the a16z-backed company Nicera (which sold to VMware in 2012), then joined a16z as a general partner in 2016.

Casado has since led investments in an array of enterprise startups, including Yubico, a company behind a two-factor authentication key; the marketing activation platform ActionIQ; and the API marketplace RapidAPI.

Unsurprisingly, both paint a picture of a future that’s rife with opportunity for the two of them and the greater team, not to mention the entrepreneurs they hope to fund.

Ulevitch observed on our call that there are currently four SaaS enterprise software companies with valuations north of $100 billion: Salesforce, Adobe, Cisco, and Microsoft. “There will be so many more of these. We’re really at the earliest innings.”

Casado, who also joined the call, said the same. “We’re starting to see enterprise mirror consumer companies in terms of having network effects and hypergrowth.” He pointed to Slack, which received one of its first checks from Andreessen Horowitz and is now valued by private investors at roughly $7 billion. He also pointed to GitHub, the popular Git-based code sharing and collaboration service that sold to Microsoft for $7.5 billion in stock four months ago, and on which Andreessen Horowitz had also made an early, and very big bet.

Said Casado of this “consumerization of IT,” a “new generation of companies is following less of an enterprise go-to-market strategy and more of a consumer growth pattern.” With the help of its growing team of investors, a16z is aiming to be there as that playbook unfolds.

After much drama, LendingClub founder Renaud Laplanche gets a slap on the wrist by the SEC

In May of 2016, LendingClub CEO Renaud Laplanche faced the most embarrassing outcome imaginable for a founder. He was forced to resign from the peer-to-peer lending company he had created, just 18 months after taking it public in a splashy debut that saw its shares soar 56 percent and its market cap hit an a stunning $8.5 billion.

Laplanche, said LendingClub’s board at the time, had taken out loans on the platform for himself and family members without being transparent about them. Laplanche reportedly also did not disclose a personal stake in an investment firm in which LendingClub had considered making an investment.

It was a stunning turn of events as they unfolded. Today, however, it looks like the biggest victim was not Laplanche, but 12-year-old LendingClub, whose market cap now hovers around $1.6 billion. Not only has Laplanche moved on to a new funding startup called Upgrade that he founded soon after leaving LendingClub and for which he has already raised $142 million from investors, but a two-year-long SEC investigation concluded Friday with a settlement that saw Laplanche neither admit nor deny wrongdoing. Instead, he agreed to pay a $200,000 fine and to be barred from the securities industry for three years.

The last will not, as you might imagine, impact his role as CEO of Upgrade. Though, Jina Choi, the longtime head of the SEC’s San Francisco unit, has called “barring people from their industries” one of the SEC’s most impactful remedies, in Laplanche’s case, the move seems to serve mostly as a public deterrent. The reason: It bars him from securities activities in which he is not currently involved. Specifically, Laplanche cannot now serve as registered investment advisor or a broker dealer or as municipal bond trader, but he isn’t doing any of these things at Upgrade, which purely manages institutional capital.

The SEC wrung a tougher settlement out of LendingClub Asset Management, an investment management unit of LendingClub and a registered investment advisor, which must pay a $4 million fine. Carrie Dolan, LendingClub’s former chief financial officer, has also agreed to pay a fine of $65,000.

As noted in an earlier report by The New York Times, the charges announced by the SEC don’t address the accusations that LendingClub had made against Laplanche. According to the agency, for example, a division of LendingClub under Laplanche’s management had adjusted how the funds were managed without telling investors. A source familiar with the compliance issue says there was an imbalance between three-year and five-year loans in a since-shuttered fund that was among several dedicated to investing in notes originated by the platform.

Laplanche declined to talk with us today about the settlement, instead emailing a statement that reads:

I am pleased to have worked out a settlement with the SEC to put to rest any issues related to compliance lapses that might have occurred under my watch at Lending Club. Consistent with SEC policy, I have agreed not to admit nor deny the specific narrative of the events contained in the settlement order.

I am glad that we can now put these issues behind us and focus on the important goals of making credit more affordable to consumers and delivering attractive returns to investors through disciplined underwriting and exciting product innovation. With the benefit of my prior experience, I feel better equipped to establish a strong culture of compliance and effective internal controls under the supervision of capable professionals.

Laplanche did comment on the settlement that Tesla CEO Elon Musk reached with the SEC this past weekend, in which Musk agreed to step down as Tesla’s chairman and pay a $20 million fine after being charged with making “false and misleading statements” to investors on his Twitter account when he said he had secured funding to take the company private.

Musk, too, settled without admitting or denying the allegations of the complaint.

“I think it was the smart thing to do for him to take the settlement, rather than go through a long court battle,” said Laplanche. Seeming to draw a comparison between himself and Musk, Laplanche added: “He might have prevailed. But it could have taken another two to three years. Sometimes it’s better to settle, to admit no wrongdoing, and move on.”

Pulling back the curtain on how SoftBank’s massive Vision Fund works — including just how big a check it can write

Picture it. The scene is Silicon Valley. Suddenly an investment firm materializes on the scene and starts writing checks bigger than anyone is accustomed to seeing. Fellow investors start to privately complain. Its partners are poseurs, they say. The firm is driving up valuations, they continue. It’s going to ruin venture capital, they conclude.

It was said of Andreessen Horowitz when it burst onto the scene in 2009. (Remember its then jaw-dropping decision to hand GitHub a $100 million check in 2012?) Today, it’s being said even more widely about the SoftBank Vision Fund, and little wonder, given that SoftBank is fast plowing $100 billion into mostly venture-backed companies and that, according to its CEO, Masayoshi Son, more $100 billion funds are coming soon.

Just this week, the firm led a $1 billion round in the India-based hotel chain and room aggregator Oyo. It also participated in two other enormous deals,  leading a $450 million round for the real estate tech platform Compass, which creates tools for residential real estate agents and more recently launched a commercial brokerage division. Separately, it led a $400 million round in the home-buying startup Opendoor.

What might be the longer-term impact of so much capital getting jammed into still private companies? How does SoftBank decide who to fund, and who to steer around? On Tuesday night, at a StrictlyVC event in San Francisco, we had the chance to talk with two of its investors, Vision Fund Managing Director Jeff Housenbold and Anna Lo, a director with SoftBank Investment Advisors, to learn more about how the whole thing works — and to run past them some of the criticisms that their fellow investors have been whispering to us.

In addition to some basic stats (SoftBank’s Vision Fund is run by 86 people, including nine managing directors, across offices in Tokyo, London, and San Carlos, Ca.; it has a 14-year investing period), you’ll learn what SoftBank won’t touch, how big a check it can write before asking for permission from its own investors, and what happens to companies that say they are in talks with the Vision Fund when they are not.

Also, spoiler alert: the Vision Fund has vice clauses that prevent it from funding tobacco, firearms and certain other companies, as do most venture firms. (We’d asked in the context of discussing whether SoftBank might ever fund the e-cig company Juul, which also appeared at the event.)

You can watch the chat for yourself below. In the meantime, some outtakes from that conversation follow, edited lightly for length:

TC: Walk us through how you decide on which companies to approach.

AL: Definitely leaders in their respective markets and geographies. Excellent, rock star teams. We are very friendly and collaborative with our founders, so we need to see eye to eye on their vision. The criteria isn’t so different from a lot of VCs here in the audience.

TC: More specifically, what do you want to see?

JH: In the continuum of venture capital, we’re late-stage growth. Our minimum check size is $100 million. We’re looking for product-market fit [meaning] some revenue and some traction before we typically come into a deal. It depends on which industry and which company. It could be GMV. It could be revenue. If it’s in enterprise software, it could be how many clients do they have and the diversification of the revenue and what the repeats and retention rates [are].

But we’re looking for companies that are growing very quickly and could deploy a lot of capital in a differentiated way to either capture new customers, market share, enter into new geographies, expand their product portfolio, or move into adjacent markets.

TC: How do you think about making that first call? I would imagine when companies get a call from you, it’s both exciting and nerve wracking, because you’re clearly looking at a certain sector and probably not just talking to that one company. 

JH: First, we’ll do landscape studies, and have strategic hypotheses around certain sectors and how technology is impacting that sector and driving innovation. So, let’s say, in the real estate sector: we took a scan and looked at over 80 different companies across different aspects of the value chain. So we’ve already mapped out which are the incumbents, who are the up-and-coming startups, who is differentiating themselves, who’s getting traction. And then we have a thesis [about] where can money be made in those value chains. And then we go and approach those companies.

The other thing, often the phone rings when you have a large fund. People call us opportunistically. So sometimes it’s like, ‘Oh, you know, we looked at that eight months ago; maybe we should take another look.’ Because now a new player entered, or this company has gotten more traction, or they completed that merger they told us about, where they move from $20 million in [annual recurring revenue] to now $100 million. And we’ll come back to that because they called us. So it’s a combination.

AL: We’re also looking for successful e-commerce models in emerging markets that are beginning to display characteristics such as in China in terms of rising income and the adoption of mobile internet.

JH: Also, half of what you read in the press, as you can imagine, is fake news. So companies are now using our name to create competitive tension in a term sheet, where we’ve never even met with the company. So I’ll read in the press, ‘Oh, we’re investing a billion in so and so company,’ and I log in and no one has ever met the company.

TC: Is that company then permanently off your screen?

JH: It doesn’t go [over] well internally.

TC: What does the decision-making process look like inside the Vision Fund? There are five managing directors in the Bay Area. You’re one of them. Is it a majority-rules situation?

JH:  So, for example, my team looks after consumer and real estate [opportunities], so if it’s a deal in consumer and we’re intrigued by it, we’ll do a bunch of work. We’ll meet with the management team. We’ll do some outside-in and inside-out research, and we’ll come up with an investment thesis.

If we have conviction internally, we then take it to managing partners and we ask the management team to come back and meet all of us. If there are no major objections, then we bring [the deal] to a global deal call, where partners around the world come together once a week, and we walk through our investment case. And Masa is on that call often, and he’ll say, ‘I’m intrigued. Bring the entrepreneur to Japan.’ So Masa meets every single entrepreneur who we invest in, which is phenomenal because he’s brilliant . .  . he has amazing pattern recognition. But what’s really amazing is, he’s fearless. He’ll sit with an entrepreneur and go, ‘I really love that concept. Have you thought about what if we remove barriers?’ Or, ‘What if capital wasn’t a restriction?’ Or, ‘What if we could land you a CFO, a CMO, and a CPO tomorrow. What would you do different?’ And it’s just fun to be in that environment.

And so if Masa says, “Yes, I’m intrigued, move forward,’ then we go to our formal investment committee to do confirmatory due diligence, then we close the deal.

TC: There was a story in the WSJ recently that talked of Masa’s brilliance but also painted a picture of his being impulsive. It said he can get excited about a company and rough out the deal terms and not leave much for everyone else to do. Does that happen often and either way, does it drive you crazy? 

AL: All companies still come through the wringer, [including] the due diligence process, the investment committee meeting, sometimes lots of follow-up questions, and regulatory approvals.

JH: Sometimes where that changes is: we never bring a company to see Masa that we haven’t already kind of outlined what the deal terms will look like. But sometimes in that exploration, Masa says, ‘What if you went bigger, quicker, faster?’ Then instead of putting $300 million [into the company], he says, ‘Could you deploy $500 million? What would your business plan look like?’ And that’s where sometimes, the deal terms change. Because in the moment, he helps to think about, ‘Well, what if we bought your competitor and we move quickly in doing that? What if we took you to Japan quickly?’ And so the deal terms often change because of that more expansive worldview and the challenge to the management team of what they could do if we remove some of the perceived barriers to building a great franchise quickly.

TC: I’m curious if you want something that Masa doesn’t want, if he can be persuaded, or if he wants something that you don’t want, he can be persuaded.

JH: Masa is a man of action. But he’s also a man of facts and wisdom. So I’ve had several deals where at first blush, he goes, ‘Yeah, I don’t really get it.’ And I’ll say, ‘Well, then I didn’t do a good enough job of explaining why we had such conviction around this investment.’ And so he’ll say, ‘Okay, come back. Take me through it so I can understand these aspects of it.’

Then there are instances where he says, ‘I was at this conference and met this entrepreneur and think they are really amazing. I want to invest in them.’ That’s not a mandate to go invest. That’s the permission to go explore. It’s our job to then go vet that [person’s company] and put it through the rigor and analytics and then come back to Masa. And there have been plenty examples where he was excited about something, and we say, ‘You know, the tech really doesn’t scale.’ Or sometimes it’s, ‘This is a great company and it’s number one, but we’ve found a much better, smaller company with better tech, a better management team, a better go-to-market strategy, better execution. We think we should [bet] on number two because they will pass number one in 14 months.’ And Masa if very open to [this]. If you know your stuff and it’s fact-based, he’s very open to changing his opinion.

TC: How much of the Vision Fund is being deployed in the U.S. versus elsewhere, and how mapped out is that in advance? 

AL: It’s quite in line with how private equity gets deployed. If you think about the biggest venture and private equity ecosystems in the world, the two biggest being the U.S. and China, I think we do have 50-50 U.S and non-U.S investments across 30-plus companies. Based on what we’re seeing, I’d say Southeast Asia and the Middle East are next frontiers for us. But the check size would not be as large as in China, where it takes a lot more capital to build at scale.

TC: And how much are you looking to own of a company? I’ve read 15 to 20 percent, but it’s confusing, given the size checks you are writing.

JH: We don’t have targets. We’re late stage, so we like to have meaning minority stakes . . . so we don’t go in [thinking] we have to have 15 or 20 [percent ownership] . . .  [though] 20 percent to 35 percent [ownership], is what I’d say if there was a normal distribution.

You can check out the rest of our interview below.

Juul, the popular e-cig startup under growing FDA scrutiny, says removing flavors is “on the table” among other things

Juul has been on an incredible, and in some ways, nightmarish, ride this year. The three-year-old, San Francisco-based company has handily won 75 percent of the e-cigarette market in the U.S., thanks in large part to the sleek design of its nicotine vaporizer. It is reportedly on track to see at least $1 billion in revenue this year. And the company has capital to invest in its business, having sealed up a $1.2 billion round that it began raising in summer. Much of that money will be spent internationally, and no wonder. Roughly 95 percent of the world’s billion smokers live outside of the U.S.

Against the backdrop of this supercharged growth, dark clouds have gathered around the company as parents and regulators have grown concerned by its adoption by teenagers, many of whom might never even consider smoking a cigarette but are taking up nicotine vaping and “Juuling” specifically. In fact, FDA Commissioner Scott Gottlieb told an audience in New York yesterday that his agency is releasing data in November that will show year-over-year use among high schoolers has risen by at least 80 percent and that middle-school usage has grown, too. Gottlieb further warned that the agency might also eventually ban the sale of e-cigarettes online out of concern that they are being bought in bulk and acquired by minors.

Last night, at an industry event hosted in San Francisco by this editor, I sat down with Juul’s founders, Adam Bowen and James Monsees, who met while at Stanford and have teamed up to develop numerous vaporizer products over the years, including the popular Pax cannabis vaporizer and, more recently, to develop Juul, where they are currently CTO and chief product officer, respectively. Over the course of 30 minutes, we talked about the future of the company (they have secured more than 100 patents between them and have applied for many more), whether they would consider an acquisition offer from a tobacco company (the answer seemed to be yes), and why they don’t drop the most controversial feature of the Juul product: its variety of flavored e-cigarette liquids, which critics argue are attracting children but that Juul has long insisted is imperative to getting its target customer — adult smokers —- to switch to Juul.

We’ll have video of our conversation available at a later date. In the meantime, here are outtakes from our conversation, edited lightly for length.

TC: You see Juul as a technology company focused on harm reduction. But your product has been adopted by high school students in part, which has parents pissed and regulators worried, and this firestorm seems to grow worse by the day. How are you dealing with all of this on a personal level?

JM: Man, this is quite an experience, one that we never really knew if it was going to come to fruition or not, though I think we always expected that if this was going to work, it was going to be really hard. As smokers ourselves, we were really passionate about ending the combustible cigarette once and for all. There are a billion smokers globally, and the U.S. has 38 million smokers. We don’t see them as much here in the Valley. But I’m from St. Louis, and when I grew up, I was exposed to cigarettes and I think the story was somewhat the same for Adam. Half of long-term smokers will die of smoking-related diseases if we don’t do something about this. Unfortunately, along with that comes a lot of challenges . . . I think what we really didn’t expect was the unfortunate level of adoption by underage consumers, and that is definitely something that we now take on as our mantle to own.

TC: Before we get into this issue and the surrounding controversies, I hoped to pull back the curtain on your company, which is fascinating from a business perspective. How many employees do you have, and are they mostly in San Francisco?

JM:  We’re changing very rapidly. At the beginning of this year, we had about 225 employees and today we have about 1,100.

AB: Our biggest offices are in San Francisco, with offices in multiple cities in multiple countries, including in Israel. We just launched in Canada recently. And we’ll be launching several more [offices] this year.

TC: Didn’t Israel ban Juul?

AB: No. Israel imposed a restriction on the nicotine strength allowable for e-cigarettes, so that includes the 5 percent version of our product, which we currently sell in the U.S.,  but we have since switched to a reduced strength that is compliant with the now-effective limit [there].

TC: 1,100 is a lot of employees. What do they do?

JM: This is an incredibly complicated company, perhaps the most we’ve ever seen and perhaps the most that most of our investors have ever seen. I’m sure there are people in this room who either invest in or have started hardware companies, and [who know that] hardware is just hard.

We are a hardware company. We’re a hardware company that makes and sells millions of products a week. We’re a hardware company that has produced those products at incredibly high volume, all five of them, all of which we manufacture on equipment and tools that we built from scratch. We have to work with contract manufacturers and vendors that are selling us parts in the tens or hundreds of millions on a weekly or monthly basis. We have to do that in multiple countries around the world. We have to comply with regulatory guidelines in many, many different countries. We have to market our products as carefully and effectively as possible. We have to communicate publicly in as grown-up and responsible a fashion as possible.

I could keep going, but the point is we have an incredible diversity of employees. There’s just an amazing amount of cross-functional work that happens at the company.

TC: A story came out in Inc. today where an unnamed employee said the morale is actually very high, that employees really do believe that you never marketed to minors, and that they believe you’ll find a way to stem adoption by underage people. They also said they were ‘making money hand over fist.’ What do you think of those comments?

AB: I think morale is very high. People are energized and galvanized to continue working on this cause, which is providing smokers with a satisfying alternative and address the challenges that we face head on. People are really energized to address the issues like youth usage. So that is an accurate reflection of the vibe at the office right now.

TC: You already have more than 100 patents to your names. Does Juul become a holding company for much more than what is on the market currently? What’s next?

JM: The technologies that we’ve been building are incredibly powerful and could be deployed in other markets, there’s no doubt about that. Some of our patent filings cover some bases outside of the core areas that we’re really focused on right now, which is the elimination of smoking from the face of the earth. But the mission of this company is exactly that, to eliminate smoking. The reason that it is the mission is that smoking is the leading cause of preventable death in the world. And we’re very interested in that, I think, conceptually, intellectually, and it’s just kind of a fun mission to work on.

TC: You’ve already raised $1.2 billion, including from Tiger Global and Fidelity. Where do you go for future funding, given that VCs have vice clauses that preclude them from backing the company? Would you consider an IPO?

AB: Sure. Listing the company is certainly a possibility [as is] continuing to grow it privately. These are tactics that we can that we can employ. But really, we’re just focused on growth, both domestically and abroad. So that’s the primary use the proceeds from the most recent round raised. I mean, we have a ways to go just here in the U.S. We’re 75 percent of the e-cigarette market, which sounds like a lot, but we’re only 4 to 5 percent of the U.S. cigarette market. And that’s what we’re really out to displace. So we’re really just getting started here, and we’ve just scratched the surface outside of the U.S., where 95 percent of smokers live.

TC: And where you’re not dealing with the same regulatory issues as here, although I wonder if it’s going to be sort of a contagion, where people in other countries worry about their teenagers based on what they’re reading in the U.S. In fact, you’re reportedly embroiled right now in three lawsuits, including by a family who says their kid is addicted to your products. You didn’t market [to underage users], as far as you’re concerned. Do you feel at all culpable?

JM: Any under-age use of this product or any nicotine product is strictly unacceptable. And that is the challenge that we are more than happy to take on, and we’re excited to take them on. Frankly, I think this has been way too longstanding of an issue in the market.

And things are changing. We’re moving away from a stick that you light on fire and beginning to have the ability to apply technology solutions to a massive problem has existed for a really long time.

TC: At TechCrunch’s Disrupt event a couple of weeks ago, you talked about connecting Juuls to people’s phones, so that if someone were to leave their Juul behind but had their phone with them, someone else, a minor, couldn’t pick up that Juul and use it. But that seemed like a very unlikely scenario to me.

JM: That’s one of many examples of technologies we can use to deploy to reduce or eliminate these problems. We’ve been using that as sort of an illustrative example of many things because, look, we’re in the midst of conversations with the FDA. We believe very strongly that some of these technology solutions will be huge steps ahead of how this industry has been able to tackle these challenges in the past. But I don’t think at this moment, we’re ready to really talk about specific things.

TC:  I don’t know if Juul has suggested it, or it’s merely been suggested that Juul this, but what about creating geofences around schools so that kids can’t vape there? That seems like a no-brainer.

JM: Yeah, there was there was an article that speculated about this. That is one of many, many patents that have been filed publicly, and if you dig even further, you’ll see a whole bunch of exploration that we’ve done because we’ve been working on this issue for a long time. Unfortunately, the U.S. is unlikely at this moment to be the ground zero for the deployment of some of these youth prevention technologies because there’s a moratorium on new product introductions, but obviously that’s changing very rapidly, so if the opportunity for potentially the U.S. to move even more quickly [arises] . . . that would be tremendous.

TC: Do you feel like the FDA has been fair to you? It seems like you’ve been telling your story to the public, and the FDA has meanwhile been suggesting that it’s not getting the information that it needs from you.

AB: We’re trying to solve the same problem as the FDA actually. Our interests are really aligned in that they want to see smokers move to reduced risk products while minimizing the uptake by youth and other unintended consequences, and so do we. So it’s really a question of, how do we get there collectively. And we need to work with them.

TC: As you point out, you’re staring at a huge opportunity. Why don’t you just get rid of the flavored e-cigarette liquids, which is what the FDA hates the most? There’s much more evidence to suggest that flavor profiles entice children to use your product versus help adults switch over to your products.

JM: All options around the table. And that’s one of them.

Look, this issue has to be resolved. We mean that. We have absolutely no interest in any underage consumer ever using these products. It is detrimental to the mission of the company. We are not a major tobacco company. We have not saturated this market. We are less than 0.5 percent of the global tobacco market. And all of this upside will only be achieved if we create goodwill and stand out in contrast to the way tobacco companies have traditionally behaved.

Removing flavors is certainly on the table. But we have not seen evidence that there’s causation necessarily for flavors being a lead-in for underage consumers. Cigarettes have been a major problem for underage consumers for some time. What we do see strong evidence of internally is a much stronger correlation for adult consumers staying away from cigarettes as they move further from everything that reminds them of cigarettes in the first place, which includes the taste of cigarettes.

TC: How are you tracking the reasons that smokers are gravitating toward your products and staying? How can you say that it’s because of the flavors, versus them wanting to quit traditional cigarettes?

JM:  That is evidence that is amongst the many many many things that we will be sharing with the FDA.

TC: In the meantime, have you talked to the tobacco companies? Have you fielded any offers?

AB:  We know many folks in the tobacco industry but we’re very proudly independent and continue to grow the company independently.

JM: Obviously, the big concern for pretty much anyone, including us, is what does that mean to the mission of the company, to consider partnering with, working with, the major tobacco companies. We’ve done that in the past. Many, many years ago, we had a partnership with the third largest global tobacco company [which bought the trademark and IP for Monsees’ and Bowen’s earliest vaporizer, called Ploom]. Then we bought them out of the deal; we parted ways.

Look, if a partnership with a major tobacco company — if, frankly, any number of things that we could do, will accelerate the decline of adult smoking and improve the lives of consumers around the world, we would certainly consider it. We’re not necessarily convinced at this moment that that’s the move that would make that happen.

TC: Before you go, the FDA today also said it’s considering banning the online sale of e-cigarettes. How much would that impact your business?

AB: The majority of our sales are actually offline, though we still think that online is a an important route of access for adult smokers to get the product. Fortunately, there are very strict age-verification technologies you can employ, and we have the strictest in place, so it’s a matter that we think should be addressed just by employing very rigorous age verification, on our own site and by requiring that any e-commerce resellers we work with use those strict controls, as well.

A Lime scooter rider died this morning in Washington, D.C., marking the second fatality this month

Lime, the 18-month-old, San Francisco-based company whose bright green bicycles and scooters now dot cities throughout the U.S., launched a pilot program in Tacoma, Washington, today, but that tiny victory might have felt short-lived. The reason: on the opposite side of the country, a Lime rider was killed today by an SUV while tooling around Washington D.C.’s DuPont neighborhood. The local fire department shared video of the rescue, which shows that the victim, an adult male, had to be pulled from the undercarriage of the vehicle.

It’s the second known fatality for the company following a death earlier this month in Dallas, when a 24-year-old Texas man fell off the scooter he was riding and died from blunt force injuries to his head.

On the one hand, the developments, while unfortunate, can hardly come as a surprise to anyone given how vulnerable riders or e-scooters are. E-scooter use is on the rise, with both Lime and its L.A.-based rival Bird, announcing this week that their customers have now taken north of 10 million rides. At the same time, city after city has deemed their use on sidewalks illegal out of fear that fast-moving riders will collide with and injure pedestrians. That leaves riders sharing city streets with the same types of giant, exhaust-spewing machines that they hope to increasingly displace. In fact, sales of traditional SUVs has continued to surge, thanks in part to low unemployment, high consumer confidence, and Americans’ enduring love with gigantic vehicles.

One solution to the issue, and one for which the e-scooter companies and their investors have been advocating, are protected lanes that would allow e-scooters to be operated more safely. Bird has even publicly offered to help fund new infrastructure that keeps cyclists and scooter riders safer.

Another possible answer would appear to be mandating the use of helmets with e-scooters, though California evidently disagrees. On Wednesday, Governor Jerry Brown signed a bill into a law that states Californians riding electric scooters will no longer be required to wear helmets as of January 1.

The bill was reportedly sponsored by Bird.

Mithril Capital Management, cofounded by Ajay Royan and Peter Thiel, is leaving the Bay Area

From its glass-lined offices in San Francisco’s leafy Presidio national park, six-year-old Mithril Capital Management has happily flown under the radar. Now it’s leaving altogether and relocating its team to Austin, a spot that, among others the firm had considered, has “enough critical mass of a technical culture, an artisanal culture, an artistic culture, and [is] not necessarily looking to Silicon Valley for validation,” says firm cofounder Ajay Royan.

The move isn’t a complete surprise. Royan, who cofounded the growth-stage investment firm in 2012 with renowned investor Peter Thiel, hasn’t done much in the way of public relations outside of announcing MIthril’s existence. Thiel and Royan — who’d previously been a managing director at Clarium Capital Management, Thiel’s hedge fund — largely travel in social circles outside of Silicon Valley.

The firm has always prided itself on finding startups that don’t fit the typical ideal of a Silicon Valley startup, too. One of its newer bets, for example, is a nine-year-old dental robotics company in Miami, Fla. that says it performs implant surgery faster and more effectively, which is a surprisingly big market. More than 500,000 people now receive implants each year.  “It was a hidden team, because it’s in Miami, and it was a field that was under invested in,” says Royan, noting that one of the few breakthrough companies in the dental world in recent years, Invisalign, which makes an alternative to braces, caters to a much younger demographic.

Even still, Mithril’s departure is interesting taken as a data point in a series of them that suggest that Silicon Valley may be losing some of its appeal for a variety of reasons. One of these is so-called groupthink, which had already driven Thiel to make Los Angeles his primary home. An even bigger factor: the unprecedentedly high cost of living. As The Economist recently reported about the Bay Area’s narrowing lead over other tech hubs,  a median-priced home in the region costs $940,000, which is four-and-a-half times the American average. “It’s hard to imagine doing another startup in Silicon Valley; I don’t think I would,” said Jeremy Stoppelman, who cofounded the search and reviews site Yelp, took it public in 2012, and continues to lead the San Francisco-based company, to The Economist.

Late last week, to learn more about Mithril’s move out of California and to get a general sense of how the firm is faring, we sat down with Royan at the space the firm will formally vacate next year, when its lease expires. We talked for several hours; some outtakes from that conversation, lightly edited for length, follow.

TC: You and I haven’t sat down together in years. When did you start thinking about re-locating the firm?

AR: In 2016. I started seeing a lot more correlation in the companies that we were seeing; they were looking more similar to each other than before, and the volume was going up as well. So to put that in context, 2017 was our largest volume in the pipeline, meaning the number of companies coming through the system. And it was also the year that we did the least number of investments. We made one investment, in Neocis [the aforementioned dental robotics company].

TC: You don’t think this owes to a lack of imagination by founders but rather serious flaws in the overarching way that startups get funded. 

AR: The problem is what I call time horizon compression. So a pension fund is supposed to invest on a 30-year time horizon, but if you look at the internal incentives, the bonuses are paid on an annual basis [and the investors making investing decisions on behalf of that pension] are evaluated every six months or every quarter. So you shouldn’t be surprised when people do really short-term things.

There are very short-term versions of investing in the private markets, as well. It’s the 15th AI company, or the 23rd big data company, or the 256th online-to-offline services company. A lot of the people making these investments are very smart. The question is: why are they funding these companies? And why are people starting them? I would suggest it’s because both are under tremendous time pressure, and pressure not to take real risk. If you’re really smart, and you’re told that you’ve got to make returns tomorrow and you can’t take a lot of risk, then you do a me-too company and you look for momentum funding and you try to get out as quickly as possible. It’s a perfectly rational response to bad incentives, and that’s part of what we started to see a lot of in Silicon Valley. I think you have a lot of it going on right now.

TC: It feels like the “getting out” part has become a problem. The IPO market has picked up, but it’s not exactly vibrant. Do you buy the argument that going public limits what a team can do because of public shareholder expectations?

AR: I think that’s fake. Private investors are maybe even more demanding than public investors, because we have material amounts invested generally. Certainly, we do at Mithril. When it comes to governance at our companies, it’s pretty tough, and we get a lot of insight into their activities. It’s not like a public board, where you get a quarterly meeting and a pretty presentation and then people go home.

I do think it’s risk budget and time horizon, bottom line. So the ability to take risks in ways that are not supported by historical models would be: if it goes well, people are happy; if it goes south, the public markets I don’t think will forgive you.

TC: What about Amazon, which went out early, lost money for years, was hammered by analysts, yet is now flirting with a $1 trillion market cap? 

AR: Amazon is like the sovereign exception that proves the rule. It’s like [Jeff Bezos] was structured to basically not care both in terms of governance, or he cared in the way that was actually constructive to building Amazon, which is, ‘I’m just going to keep reinvesting all my profits into things that I think are important, and you all can just wait,’ right? And not a lot of people have the intestinal fortitude to do that or the governance structure to sustain it.

TC: You’ve made some big bets on companies that have been around a while, including the surveillance technology company Palantir, which I recall is one of your biggest bets. How patient are your own investors?

AR: Palantir is still doing extremely well as a company. What’s interesting is 80 percent of our capital in [our first of three funds] is concentrated in, like, 10 companies. Our two biggest investments were Palantir and [the antibody discovery platform] Adimab [in New Hampshire], and I’d argue that Adamab is even bigger than Palantir. We actually helped them not go public in 2014 when they were thinking about it.

TC: How, and why was it better for the company to stay private? 

AR: Adimab was founded in 2007, so it was already seven years old when we encountered them. And I was looking for a company that would be not a drug company but instead [akin to] a technology company in biotech, and Adimab is that. The’ve built a custom-designed yeast whose DNA was redesigned based on the inputs from a multi-year study of about 120 human beings, I think at Harvard, where they assessed the immune responses of the humans to various diseases, then encoded what they understood about the human immune system into the yeast. So the yeast essentially are humanized proxies for the immune system.

TC: Which means . . . .

AR: You can attack the yeast with disease, and the antibodies the yeast produces are essentially human antibodies. Think of it as a biological computer that responds to disease vectors. We now have a database of 10 billion antibodies that we can use to figure out how best to interrogate the yeast for the next generation of diseases that needed an immunotherapy solution.

TC: Is the company profitable?

AR: It is. They don’t need any new money. We’ve just begun a program to help them restructure their cap table so they can take out early investors.

TC: An 11-year-old company. What about employees who are waiting to cash out?

AR: They want more stock, so we’ve created the equivalent of stock options that are tied to value creation.

A lot of biotech companies go public very early on. If Adimab had, they would have been under tremendous pressure to actually build a drug company. People would have said, ‘Hey, if you’re discovering all these antibodies and they’re empowering other people’s drugs, why don’t you just make your own drug?” But the founder, Tillman Gerngross, who’s also the head of bioengineering at Dartmouth, he doesn’t want to be in the position of having to sell or be under tremendous pressure [to create a drug company] when he thinks the full impact of what Adimab is building won’t be realized for another decade.

TC: In Austin, you’ll be closer to this company and some of your other portfolio companies. But are you really certain you want to leave sunny California?

AR: The cost of trying is what I’m worried about [here]. It’s that simple. That applies to people who are starting jobs in someone’s company, or trying to start a company themselves. If it’s expensive for the company to take risk, it’s going be expensive for you to take risk inside the company, which means your career will take a different path than than otherwise

After [I was an] undergrad at Yale, New York was a natural place to go, but I never worked there. It just felt like a place that was externally very pressurized. You had to conform to the external pressures that dictated your daily life. Your rent was $4,000 to $6,000 a month for craziness for like a walk-up in Hell’s Kitchen. Social structures were fairly set, like, you had to go to the Hamptons in the summer or something. There were these weird things that felt very dictated and you had to fit and you had to climb the pyramid schemes that people had established for you. Otherwise, you were out.

What made [Silicon Valley] really attractive was it was a one giant incubator as a society, with a lot of pay-it-forward forward culture and a low cost of trying. Now I’m worried about all three of those.

I’m not saying that just by moving, that gets fixed. That’s facile. But if you conclude that this is an issue that you need to think through, and try to find thoughtful ways to get around, you have to enlist every ally you can. And one of those allies might be reducing unidirectional environmental noise, and having more voices that you can listen to and being exposed to more lived experiences that are varied. . . It builds your capacity for empathy, and I think that’s important for good investing and being a good founder.

TC: What are your early impressions of Austin?

AJ: It’s a great town. Everyone’s been super friendly. I get to wear my cowboy boots. You can actually do a four-hour tour of food trucks without running out of food trucks. Also, most of the people I’ve met are registered Democrats and like, half of them own really nice guns. And these are not considered contradictory at all.

A Tesla investor says he was recently questioned by U.S. regulators about that infamous “funding secured” tweet

Last week, on stage at TechCrunch Disrupt, regulator Jina Choi, who heads the SEC’s wide-reaching San Francisco unit, declined to confirm or deny that the SEC is investigating Tesla CEO Elon Musk for possible fraud.

Said Choi, “I can’t tell you about any particular investigation in our office. And I can’t confirm or deny the existence of investigations that are in our office. I can say that we are very diligent about covering the issuers in our region and some of the more high-profile issuers in our region. We try to stay on top of that, but that’s about all I can say.”

Now, investor James Anderson of the global asset manager Baillie Gifford tells Reuters that, as a shareholder, he was recently questioned by U.S. securities regulators about Musk’s famous  — and possibly fateful  —  early August tweet that he was thinking of taking Tesla private and that he had “funding secured.”

Said Anderson to Reuters, “I don’t know what they’ll do with [Musk], but there’s no implication that we’ve done anything wrong . . . I think quite naturally they wanted to know whether major shareholders had any lead indication or knowledge of the tweet about ‘funding secured.’”

Because it isn’t talking, it’s impossible to know how seriously the SEC is looking into the chain of events that led to the tweet or what followed. As industry watchers likely know, days after making his surprising announcement, Musk elaborated on why he made it, writing in a post that he’d left a late July meeting with Saudi Arabia’s sovereign-wealth fund that gave him the impression that a deal to take Tesla private could close.

tick-tock account by the WSJ of what happened behind the scenes during this period —  it was published shortly after Musk abandoned his take-private idea – said officials in the kingdom were “rankled” by the suggestion that the Saudis, who have quietly acquired up to 5 percent of Tesla’s shares this year,  had made any kind of formal proposal.

Bruised feelings aside, Musk, it’s now plain, may be dealing with regulatory fall-out, too. And interestingly, much of what happens next may center not just on interviews with shareholders and Musk’s other communications, but on plain-old psychology.

On stage, we asked Choi if, typically speaking, false statements are enough to prove fraud or whether there needs to be an accompanying scheme. “When you talk about fraud,” she answered, “you’re talking about a state of mind, you’re talking about mens rea. We call it scienter. You have to do something with intentionality. The idea of just making a misstatement doesn’t necessarily rise to the level of fraud. I think that’s what makes our investigations so challenging. I think the idea of trying to understand what’s in people’s heads can be very difficult.”

Misstatements can “be the first step to fraud,” Choi had added. “But generally, when we talk about fraud the F word, I think we are talking about a state of mind that’s a little bit higher than that.”