Nvidia’s limited China connections

Another round of followups on Nvidia, and then some short news analysis.

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Nvidia / TSMC questions

Following up on my analyses this week on Nvidia (Part 1, Part 2) , a reader asked in regards to Nvidia’s risk with China tariffs:

but the TSMC impact w.r.t. tariffs doesn’t make sense to me. TSMC is largely not impacted by tariffs and so the supply chain with NVIDIA is also not impacted w.r.t. to TSMC as a supplier. There are many alternate wafer suppliers in Taiwan.

This is a challenging question to definitively answer, since obviously Nvidia doesn’t publicly disclose its supply chain, or more granularly, which factories those supply chain partners utilize for its production. It does, however, list a number of companies in its 10-K form as manufacturing, testing, and packaging partners, including:

To understand how this all fits together, there are essentially three phases for bringing a semiconductor to market:

  1. Design – this is Nvidia’s core specialty
  2. Manufacturing – actually making the chip from silicon and other materials at the precision required for it to be reliable
  3. Testing, packaging and distribution – once chips are made, they need to be tested to prove that manufacturing worked, then packaged properly to protect them and shipped worldwide to wherever they are going to be assembled/integrated

For the highest precision manufacturing required for chips like Nvidia’s, Taiwan, South Korea and the U.S. are the world leaders, with China trying to catch up through programs like Made in China 2025 (which, after caustic pushback from countries around the world, it looks like Beijing is potentially scrapping this week). China is still considered to be one-to-two generations behind in chip manufacturing, though it increasingly owns the low-end of the market.

Where the semiconductor supply chain traditionally gets more entwined with China is around testing and packaging, which are generally considered lower value (albeit critical) tasks that have been increasingly outsourced to the mainland over the years. Taiwan remains the dominant player here as well, with roughly 50% of the global market, but China has been rapidly expanding.

U.S. tariffs on Chinese goods do not apply to Taiwan, and so for the most part, Nvidia’s supply chain should be adept at avoiding most of the brunt of the trade conflict. And while assembly is heavily based in China, electronics assemblers are rapidly adapting their supply chains to mitigate the damage of tariffs by moving factories to Vietnam, India, and elsewhere.

Where it gets tricky is the Chinese market itself, which imports a huge number of semiconductor chips, and represents roughly 20% of Nvidia’s revenues. Even here, many analysts believe that the Chinese will have no choice but to buy Nvidia’s chips, since they are market-leading and substitutes are not easily available.

So the conclusion is that Nvidia likely has maneuvering room in the short-term to weather exogenous trade tariff shocks and mitigate their damage. Medium to long-term though, the company will have to strategically position itself very carefully, since China is quickly becoming a dominant player in exactly the verticals it wants to own (automotive, ML workflows, etc.). In other words, Nvidia needs the Chinese market for growth at the exact moment that door is slamming shut. How it navigates this challenge in the years ahead will determine much of its growth profile in the years ahead.

Rapid fire analysis

Short summaries and analysis of important news stories

Saudi Arabia’s Crown Prince Mohammed bin Salman. FETHI BELAID/AFP/Getty Images

US intelligence community says quantum computing and AI pose an ’emerging threat’ to national security – Our very own Zack Whittaker talks about future challenges to U.S. national security. These technologies are “dual-use,” which means that they can be used for good purposes (autonomous driving, faster processing) and also for nefarious purposes (breaking encryption, autonomous warfare). Expect huge debates and challenges in the next decade about how to keep these technologies on the safe side.

Saudi Arabia Pumps Up Stock Market After Bad News, Including Khashoggi Murder – A WSJ trio of reporters investigates the Saudi government’s aggressive attempts to shore up the value of its stock exchange. Exchange manipulation is hardly novel, either in traditional markets or in blockchain markets. China has been aggressively doing this in its stock exchanges for years. But it is a reminder that in emerging and new exchanges, much of the price signaling is artificial.

A law firm in the trenches against media unions – Andrew McCormick writes in the Columbia Journalism Review how law firm Jones Day has taken a leading role in fighting against the unionization of newsrooms. The challenge of course is that the media business remains mired in cutbacks and weak earnings, and so trying to better divide a rapidly shrinking pie doesn’t make a lot of sense to me. The future — in my view — is entrepreneurial journalists backed up by platforms like Substack where they set their own voice, tone, publishing calendar, and benefits. Having a close relationship with readers is the only way forward for job security.

At least 15 central banks are serious about getting into digital currency – Mike Orcutt at MIT Technology Review notes that there are a bunch of central banks, including China and Canada. What’s interesting is that the trends backing this up including financial inclusion and “diminishing cash usage.” Even though blockchain is in a nuclear winter following the collapse of crypto prices this year, it is exactly these sorts of projects that could be the way forward for the industry.

What’s next

More semiconductors probably. And Arman and I are side glancing at Yelp these days. Any thoughts? Email me at [email protected].

This newsletter is written with the assistance of Arman Tabatabai from New York

The nation-state of the internet

The internet is a community, but can it be a nation-state? It’s a question that I have been pondering on and off this year, what with the rise of digital nomads and the deeply libertarian ethos baked into parts of the blockchain community. It’s clearly on a lot of other people’s minds as well: when we interviewed Matt Howard of Norwest on Equity a few weeks back, he noted (unprompted) that Uber is one of the few companies that could reach “nation-state” status when it IPOs.

Clearly, the internet is home to many, diverse communities of similar-minded people, but how do those communities transmute from disparate bands into a nation-state?

That question led me to Imagined Communities, a book from 1983 and one of the most lauded (and debated) social science works ever published. Certainly it is among the most heavily cited: Google Scholar pegs it at almost 93,000 citations.

Benedict Anderson, a political scientist and historian, ponders over a simple question: where does nationalism come from? How do we come to form a common bond with others under symbols like a flag, even though we have never — and will almost never — meet all of our comrades-in-arms? Why does every country consider itself “special,” yet for all intents and purposes they all look identical (heads of state, colors and flags, etc.) Also, why is the nation-state invented so late?

Anderson’s answer is his title: people come to form nations when they can imagine their community and the values and people it holds, and thus can demarcate the borders (physical and cognitive) of who is a member of that hypothetical club and who is not.

In order to imagine a community though, there needs to be media that actually links that community together. The printing press is the necessary invention, but Anderson tracks the rise of nation-states to the development of vernacular media — French language as opposed to the Latin of the Catholic Church. Lexicographers researched and published dictionaries and thesauruses, and the printing presses — under pressure from capitalism’s dictates — created rich shelves of books filled with the stories and myths of peoples who just a few decades ago didn’t “exist” in the mind’s eye.

The nation-state itself was developed first in South America in the decline and aftermath of the Spanish and Portuguese empires. Anderson argues for a sociological perspective on where these states originate from. Intense circulation among local elites — the bureaucrats, lawyers, and professionals of these states — and their lack of mobility back to their empires’ capitals created a community of people who realized they had more in common with each other than the people on the other side of the Atlantic.

As other communities globally start to understand their unique place in the world, they import these early models of nation-states through the rich print culture of books and newspapers. We aren’t looking at convergent evolution, but rather clones of one model for organizing the nation implemented across the world.

That’s effectively the heart of the thesis of this petite book, which numbers just over 200 pages of eminently readable if occasionally turgid writing. There are dozens of other epiphanies and thoughts roaming throughout those pages, and so the best way to get the full flavor is just to pick up a used copy and dive in.

For my purposes though, I was curious to see how well Anderson’s thesis could be applied to the nation-state of the internet. Certainly, the concept that the internet is its own sovereign entity has been with us almost since its invention (just take a look at John Perry Barlow’s original manifesto on the independence of cyberspace if you haven’t).

Isn’t the internet nothing but a series of imagined communities? Aren’t subreddits literally the seeds of nation-states? Every time Anderson mentioned the printing press or “print-capitalism,” I couldn’t help but replace the word “press” with WordPress and print-capitalism with advertising or surveillance capitalism. Aren’t we going through exactly the kind of media revolution that drove the first nation-states a few centuries ago?

Perhaps, but it’s an extraordinarily simplistic comparison, one that misses some of the key originators of these nation-states.

Photo by metamorworks via Getty Images

One of the key challenges is that nation-states weren’t a rupture in time, but rather were continuous with existing power structures. On this point, Anderson is quite absolute. In South America, nation-states were borne out of the colonial administrations, and elites — worried about losing their power — used the burgeoning form of the nation-state to protect their interests (Anderson calls this “official nationalism”). Anderson sees this pattern pretty much everywhere, and if not from colonial governments, then from the feudal arrangements of the late Middle Ages.

If you turn the gaze to the internet then, who are the elites? Perhaps Google or Facebook (or Uber), companies with “nation-state” status that are essentially empires on to themselves. Yet, the analogy to me feels stretched.

There is an even greater problem though. In Anderson’s world, language is the critical vehicle by which the nation-state connects its citizens together into one imagined community. It’s hard to imagine France without French, or England without English. The very symbols by which we imagine our community are symbols of that community, and it is that self-referencing that creates a critical feedback loop back to the community and reinforces its differentiation.

That would seem to knock out the lowly subreddit as a potential nation-state, but it does raise the question of one group: coders.

When I write in Python for instance, I connect with a group of people who share that language, who communicate in that language (not entirely mind you), and who share certain values in common by their choice of that language. In fact, software engineers can tie their choices of language so strongly to their identities that it is entirely possible that “Python developer” or “Go programmer” says more about that person than “American” or “Chinese.”

Where this gets interesting is when you carefully connect it to blockchain, which I take to mean a technology that can autonomously distribute “wealth.” Suddenly, you have an imagined community of software engineers, who speak in their own “language” able to create a bureaucracy that serves their interests, and with media that connects them all together (through the internet). The ingredients — at least as Anderson’s recipe would have them — are all there.

I am not going to push too hard in this direction, but one surprise I had with Anderson is how little he discussed the physical agglomeration of people. The imagining of (physical) borders is crucial for a community, and so the development of maps for each nation is a common pattern in their historical developments. But, the map, fundamentally, is a symbol, a reminder that “this place is our place” and not much more.

Indeed, nation-states bleed across physical borders all the time. Americans are used to the concept of worldwide taxation. France seats representatives from its overseas departments in the National Assembly, allowing French citizens across the former empire to vote and elect representatives to the country’s legislature. And anyone who has followed the Huawei CFO arrest in Canada this week should know that “jurisdiction” these days has few physical borders.

The barrier for the internet or its people to become nation-states is not physical then, but cognitive. One needs to not just imagine a community, but imagine it as the prime community. We will see an internet nation-state when we see people prioritizing fealty to one of these digital communities over the loyalty and patriotism to a meatspace country. There are already early acolytes in these communities who act exactly that way. The question is whether the rest of the adherents will join forces and create their own imagined (cyber)space.

Okay, one final Form D note

Some more comments from readers on the changing culture around startups filing their Form Ds with the SEC, and then a short update on SoftBank and a bunch more article reviews.

We are experimenting with new content forms at TechCrunch. This is a rough draft of something new – provide your feedback directly to the authors: Danny at [email protected] or Arman at [email protected] if you like or hate something here.

Lawyers are pretty uniform that disclosure is no longer ideal

If you haven’t been following our obsession with Form Ds, be sure to read up on our original piece and follow up. The gist is that startups are increasingly foregoing filing a Form D with the SEC that provides details of their venture rounds like investment size and main investors in order to stay stealth longer. That has implications for journalists and the public, since we rely on these filings in many cases to know who is funding what in the Valley.

Morrison Foerster put together a good presentation two years ago that provides an overview of the different routes that startups can take in disclosing their rounds properly.

Traditionally, the vast majority of startups used Rule 506 for their securities, which mandates that a Form D be filed within 15 days of the first money of the round closing. These days though, more and more startups are opting to use Section 4(a)(2), which doesn’t require a Form D, but also doesn’t provide a “blue sky” exception to start securities laws, which means that startups have to file in relevant state jurisdictions and no longer have preemption from the SEC.

David Willbrand, who chairs the Early Stage & Emerging Company Practice at Thompson Hine LLP, read our original articles on Form Ds and explained by email that the practices around securities disclosures have indeed been changing at his firm and others:

We started pushing 4(a)(2) very hard when our clients kept getting “outed” thru the Form D and upset about it. In my experience, for 99% is the desire to remain in stealth mode, period.

[…]

When I started in 1996, Form Ds were paper, there was no internet, and no one looked. Now they are electronic and the media and blogs scrape daily and publish the information. It actually really is true disclosure! And it’s kind of ironic, right, which goes to your point – now that it’s working, these issuers don’t want it.

[…]

What I find is that the proverbial Series A is the brass ring, and issuers wants to call everything seed rounds (saving the title) until something chunky shows up, and stay below the radar too. So they pop out of the cake publicly for the first time with a big “Series A” that they build press around – and their first Form D.

Another piece of feedback we received was from Augie Rakow, the co-founder and managing partner of Atrium, which bills itself as a “better law firm for startups” that TechCrunch has covered a few times before. He wrote to us that in addition to the media concerns, startups also have to be aware of the broad cross-section of interested parties to Form Ds that hasn’t existed in the past:

Today, there is a bigger audience in terms of who cares about venture backed companies. Whether this spun off from the launch of the Facebook movie or the fact that over two billion people across the global have the internet at their fingertips via smartphones, people are connected and curious. The audience is not only larger but also encompasses more national and international interests. This means there are simply more eyes on trends, announcements, and intel on privately held companies whether they are media, investors, or your competitors. Companies that have a good reason to stay stealth may want to avoid attracting this attention by not making a public Form D filing.

For startups, the obvious advice is to just consult your attorney and consider the tradeoffs of having a very clean safe harbor versus more work around regulatory filings to stay stealthy.

But the real message here is for journalists. Form Ds are no longer common among seed-stage startups, and indeed, startup founders and venture investors have a lot of latitude in choosing how and when they file. You can no longer just watch the SEC’s EDGAR search platform and break stories anymore. Building up a human sourcing capability is the only way to get into those early investment rounds today.

Finally — and this is something that is hard to prove one way or the other — the lack of disclosure may also mean that the fears around seed financing dropping off a cliff may be at least a little bit unfounded. Eliot Brown at the Wall Street Journal reported just yesterday that the number of seed financings is down 40% according to PitchBook data. How much of that drop is because of changing macroeconomic conditions, versus changes in filing disclosures?

Quick follow up on SoftBank

Tokyo Stock Exchange. Photo by electravk via Getty Images

Last week, I also got obsessed with SoftBank. The company confirmed today that it intends to move forward with the IPO of its Japanese mobile telecom unit, according to WSJ and many other sources. The company is targeting more than $20 billion in proceeds, and its overallotment could drive that above $25 billion, or roughly the level of Alibaba’s record IPO haul.

One interesting note from Taiga Uranaka at Reuters on the public issue is that everyday investors will likely play an outsized role in the IPO process:

Yet SoftBank’s brand name is still likely to draw retail investors long accustomed to using SoftBank’s phone and internet services. Many still see CEO Son as a tech visionary who challenged entrenched rivals NTT DoCoMo Inc ( 9437.T ) and KDDI, and brought Apple Inc’s ( AAPL.O ) iPhone to Japan.

Japanese households are commonly seen as an attractive target in IPOs with their 1,829 trillion yen in financial assets, even if they are traditionally risk-averse with over 50 percent of assets in cash and deposits.

More than 80 percent of the shares will be offered to domestic retail investors, a person with knowledge of the matter told Reuters.

Pavel Alpeyev at Bloomberg noted that “SoftBank is looking to tempt investors with a dividend payout ratio of about 85 percent of net income, according to the filing. Based on net income in the last fiscal year, that would work out to an almost 5 percent yield at the indicated IPO price.” A higher dividend ratio is particularly attractive to retired individual investors.

Despite SoftBank’s horrifying levels of debt, Japanese consumers may well save the company from itself and allow it to effectively jump start its balance sheet yet again. Complemented with a potential Vision Fund II, Masayoshi Son’s vision for a completely transformed SoftBank seems waiting for him in the cards.

Notes on Articles

Tech C.E.O.s Are in Love With Their Principal Doomsayer – Nellie Bowles writes a feature on Yuval Noah Harari, the noted philosopher and popular author of Sapiens. Bowles investigates the paradoxical popularity of Harari, who sees technology as creating a permanent “useless class” and criticizes Silicon Valley with his now enduring popularity in the region. Interesting personal details on the somewhat reclusive Israeli, but ultimately the question of the paradox remains sadly mostly unanswered. (2,800 words)

Why Doctors Hate Their Computers – Atul Gawande discusses learning and using Epic, the dominant electronic medical records software platform, and discovers the challenges of building static software for the complex adaptive system that is health care. His observations of the challenges of software engineering will be well-known to anyone who has read Fred Brooks, but the piece does an excellent job of exploring the balancing act between the needs of technocratic systems and the human design needed to make messy and complicated professions work. Worth a read. (8,900 words)

Picking flowers, making honey: The Chinese military’s collaboration with foreign universities – An excellent study by Alex Joske at the Australia Strategic Policy Institute on the hundreds of military scientists from China who use foreign academic exchanges as a means of information acquisition for critical scientific and engineering knowledge, including in the United States. China’s government under Xi Jinping has made indigenous technology development a chief domestic priority, and the U.S. innovation economy is encouraged to increasingly guard its intellectual property. (6,500 words)

The Digital Deciders – New America report by Robert Morgus who investigates the fracturing of the internet, which I have written about at some length. Morgus finds that a small group of countries (the “digital deciders”) will determine whether the internet continues to be open or whether nationalist interests will close it off. Let’s all hope that Iraq believes in freedom of expression and not Chinese-style surveillance. Worth a skim. (45 page report, but with prodigious tables)

Reading Docket

Why we lie to ourselves, every day

Human action requires motivation, but what exactly are those motivations? Donating money to a charity might be motivated by altruism, and yet, only 1% of donations are anonymous. Donors don’t just want to be altruistic, they also want credit for that altruism plus badges to signal to others about their altruistic ways.

Worse, we aren’t even aware of our true motivations — in fact, we often strategically deceive ourselves to make our behavior appear more pure than it really is. It’s a pattern that manifests itself across all kinds of arenas, including consumption, politics, education, medicine, religion and more.

In their book Elephant in the Brain, Kevin Simler, formerly a long-time engineer at Palantir, and Robin Hanson, an associate professor of economics at George Mason University, take the most dismal parts of the dismal science of economics and weave them together into a story of humans acting badly (but believing they are great!) As the authors write in their intro, “The line between cynicism and misanthropy — between thinking ill of human motives and thinking ill of humans — is often blurry.” No kidding.

Elephant in the Brain by Kevin Simler and Robin Hanson. Oxford University Press, 2018

The eponymous elephant in the brain is essentially our self-deception and hidden motivations regarding the actions we take in everyday life. Like the proverbial elephant in the room, this elephant in the brain is visible to those who search for it, but we often avoid looking at it lest we get discouraged at our selfish behavior.

Humans care deeply about being perceived as prosocial, but we are also locked into constant competition, over status attainment, careers, and spouses. We want to signal our community spirit, but we also want to selfishly benefit from our work. We solve for this dichotomy by creating rationalizations and excuses to do both simultaneously. We give to charity for the status as well as the altruism, much as we get a college degree to learn, but also to earn a degree which signals to employers that we will be hard workers.

The key is that we self-deceive: we don’t realize we are taking advantage of the duality of our actions. We truly believe we are being altruistic, just as much as we truly believe we are in college to learn and explore the arts and humanities. That self-deception is critical, since it lowers the cost of demonstrating our prosocial bona fides: we would be heavily cognitively taxed if we had to constantly pretend as if we cared about the environment when what we really care about is being perceived as an ethical consumer.

Elephant in the Brain is a bold yet synthetic thesis. Simler and Hanson build upon a number of research advances, such as Jonathan Haidt’s work on the righteous mind and Robert Trivers work on evolutionary psychology to undergird their thesis in the first few chapters, and then they apply that thesis to a series of other fields (ten, in fact) in relatively brief and facile chapters to describe how the elephant in the brain affects us in every sphere of human activity.

Refreshingly, far from being polemicists, the authors are quite curious and investigatory about this pattern of human behavior, and they realize they are pushing at least some of their readers into uncomfortable territory. They even begin the book by stating that “we expect the typical reader to accept roughly two-thirds of our claims about human motives and institutions.”

Yet, the book is essentially making one claim, just applied in a myriad of ways. It’s unclear to me who the reader would be who accepts only parts of the book’s premise. Either you have come around to the cynical view of humans (pre or post book), or you haven’t — there doesn’t seem to me to be a middle point between those two perspectives.

Worse, even after reading the book, I am left completely unaware of what exactly to do with the thesis now that I have read it. There is something of a lukewarm conclusion in which the authors push for us to have greater situational awareness, and a short albeit excellent section on designing better institutions to account for hidden motivations. The book’s observations ultimately don’t lead to any greater project, no path toward a more enlightened society. That’s fine, but disappointing.

Indeed, for a book that arguably strives to be optimistic, I fear its results will be nothing more than cynical fodder for Silicon Valley product designers. Don’t design products for what humans say they want, but design them to punch the buttons of their hidden motivations. Viewed in this light, Elephant in the Brain is perhaps a more academic version of the Facebook product manual.

The dismal science is dismal precisely because of this cynicism: because as a project, as a set of values, it leads pretty much nowhere. Everyone is secretly selfish and obsessed with status, and they don’t even know it. As the authors conclude in their final line, “We may be competitive social animals, self-interested and self-deceived, but we cooperated our way to the god-damned moon.” Yes we did, and it is precisely that surprise from such a dreary species that we should take solace in. There is indeed an elephant in our brain, but its influence can wax and wane — and ultimately humans hold their agency in their own hands.

Translating startup-speak for the corporate buyer

Startups salivate at the prospect of entering the enterprise – and for good reason. The enterprise is rife with legacy systems and circuitous processes that frustrate employees and hinder results — and the startup has just the perfect product to fix the problem.

Too often though, the pitch to the enterprise falls flat or a promising pilot gets sidelined. Sometimes there’s a clear obstacle, like a mismatch between product and problem to be solved, an inability to scale, or the loss of an internal sponsor. But more often than one would expect, the startup’s value is simply getting lost in translation.

Even the most forward-looking enterprise leaders are operating in an environment what I like to call “GAAP-based digital strategy.” The budgeting process supports only certain kinds of purchases, like renewable software licensing fees and support contracts with fixed costs. New models, like variable costs for open source development, require workarounds and explanation in the budget process and cause even the most eager internal champion to lose time and energy.

So what’s a startup to do? The more you can help your internal sponsor translate the cost model to adhere to the established norm, the more traction they are likely to get from the hydra of procurement and finance. Once the project has momentum, your champion can work to change the budgeting process – but that’s a tall order before your pilot is launched and showing results.

The concept of GAAP-based digital strategy extends well beyond accounting practices. Consider internal reporting: large organizations spend an inordinate amount of time reporting up, across, and down in an effort to improve transparency and inspire shared ownership of outcomes. What are the KPIs for the department you are serving? How easily will your results translate into their storytelling? Spend some time up front with your client to ensure your results align with (and show up in!) the existing framework for reporting.

Corporations are aware of how hard it is to navigate these control systems, and so they are increasingly creating “innovation departments” with dedicated funding for one-off experiments using new technology. This is often the start of the relationship between a startup and a new client.

For startups, this can be a beneficial approach, since it offers the opportunity to deliver value before wrangling with cumbersome procurement or IT requirements. But too often these divisions lurch from pilot to pilot, and struggle to find line-of-business champions willing to absorb startup technology into their operations. The biggest challenge here is that there’s often no enterprise template for the handoff from the innovation setting – where experiments can operate in a “clean room” apart from procedures and regulations – to ongoing operations.

Here’s how one startup providing augmented reality headsets and software to a complex pharma manufacturing environment crossed over. Their pilot showed clear results: testing with four-five headsets, their AR software measurably helped workers on the floor by augmenting the workflow with voice recording and hands-free capabilities.

The startup team then came on-site, and they partnered with the workers testing the solution to document the improvements and discuss how to ensure the process complied with regulations. This direct interaction fed into their results reporting to make the case for the 30-40 headsets needed on the shop floor. Rather than wait for middle management, the startup developed a grassroots-fortified case for moving into operations.

Similarly, a startup piloting an analytics product in a CPG enterprise was immediately pigeonholed into the IT department’s analytics budget. Surrounded by a range of solutions from business intelligence dashboards to marketing technology tools, their pilot was getting lost.

By closely analyzing results, the startup saw promising early findings in the trade promotions area. They worked through their contacts to reach the executive in charge of trade promotions who took the pilot under her wing – and into her budget. They avoided being locked into a GAAP-based bucket (analytics), and were connected with an executive to unlock a whole different conversation.

In addition to finding your internal champion and changing the GAAP conversation, spend time understanding the larger enterprise backdrop: the initiatives and themes that are driving this quarter’s shareholder value. Help your client position the solution not only in the context of the specific problem to solve, but the overall enterprise goals.

The annual report is your friend here. The focus may be digital transformation or global collaboration or risk management, and aligning to this priority may enable your client to get buy-in internally. Make sure you are fluent in the visible, budgeted, CEO-led, cross departmental initiatives — and how your solution plays a role here.

Take heart: this translation won’t always be a one-way street. The deeper your engagement, the more your enterprise clients will benefit from your startup’s perspective, and change technology, process, and language to reflect that understanding. Ideally, GAAP-based digital strategy recedes as long-established protocols reduce structural lag with how business is conducted today. In the meantime, consider the art of translation as important as pitching the outcome.

In State Tectonics, an explosive ending for the future of democracy

An omnipotent data infrastructure and knowledge-sharing tech organization has spread across the planet. Global conspiracies to disseminate propaganda and rig elections are ever present. Algorithms determine what people see as objective truth, and terrorist organizations gird to bring down the monopoly on information.

Malka Older faces a problem few speculative science fiction authors face in their lifetimes: having their work become a blueprint for reality. The author, who began formulating her Centenal Cycle series just a few years ago, now finds that her plots have leapt off the page and have become the daily fodder for cable news programs and Congressional investigations. Her universe is set decades into the future, but history is accelerating, and decades into the future can now mean 2019.

So we arrive at the third and final volume of a trilogy that began as a single work called Infomocracy and has proliferated into Null States and now State Tectonics. Ending a trilogy is rarely easy, but State Tectonics does what Older has always done best with her works, smashing together ideas about the future of politics with a medley of thriller styles to deliver an ample helping of thought-provoking nuance.

Older’s world is built on two simple premises. First, through a project called microdemocracy, the world has been subdivided into 100,000 person governing units known as centenals, and every citizen in the world has the right of migration to choose the government they want. This creates strange artifacts — for instance, in dense areas like New York City, citizens can change governments from a corporate-backed libertarian paradise to a leftist environmental oasis in as quick as a subway stop.

Second, to ensure that citizens can make the best choices for themselves, a global organization called Information (a hybrid Google, United Nations, and BBC) tirelessly works to provide objective information to citizens about politics and the world, verifying claims about everything from election promises to the taste of items on a restaurant menu.

Together, they allow Older to explore a world of information manipulation and electoral strategy while meditating on the meaning of objective truth. Across the trilogy, we follow a crew of Information staffers as they uncover political plots and intrigue around a series of global elections. This structure allows Older to create paced thrillers without losing the intellectual spirit of speculative fiction.

While in her last work Null States, the focus was on inequality and lack of access to information, in State Tectonics, Older interrogates the meaning of Information’s monopoly on … information itself. In this microdemocratic world, it is a crime to provide unverified information to people, and yet, Information hardly has infinite knowledge about the world. A shadowy group starts to purvey local information about cities and people outside the normal Information channels, and that raises profound questions — who ultimately “owns” reality? How do we decide what objective truth even is?

In the background of this central question is a trial for an Information staffer accused of the crime of algorithmic bias, of adjusting reality to suit her own ends. Sound familiar?

As a work of speculative fiction — particularly about a subject as complex as the future of democracy — State Tectonics is superlative. Older is striking in her frenetic ability to weave together idea after idea into vignettes that caused this reader to constantly stop and wander in thought. In just this book, we have discussions on the future of politics, mental health, infrastructure finance, transportation, food, nationalism, and identity politics. The dynamic range here is exhilarating.

Unfortunately, that enormous range forces Older to sacrifice depth, not only in the sophistication of some of these topics, which are often only conceived in slight brushstrokes, but also in the characters themselves. After three reasonably hefty books, I still don’t feel as if I truly know the characters I’ve spent so much time with. They are like friends in a transient city such as New York City, people to hang out with on weekends, but not worth a followup once they move on.

More pejoratively, the book feels constantly weighed down by extraneous details that at times can feel more like Wikipedia than assiduous worldbuilding. In this regard, Older has actually matured as a writer from her earlier works, as the detailed digressions are fewer and far between, but they remain as distracting from her core plot, and take time away from the needed work of fleshing out her characters further.

State Tectonics, like its earlier siblings, is the best and worst of fusion cuisine: the brilliant items on the menu can inspire us to think radically beyond our traditional categories and beliefs, but the vast majority of the dishes end up being mishmashes that are ultimately ephemeral and forgotten. The novel is brilliant in discoursing on the future of democracy, and if that is a topic of keen interest, few books will satisfy that urge like this one will.

Upwork pops more than 50 percent in Nasdaq debut

Upwork, the rebranded merger of oDesk and Elance, debuted on Nasdaq this morning, after dropping its S-1 about four weeks ago. Shares opened at $23.00, which represents a 53% jump — shares were priced at $15 before the opening bell by investors, a significant uptick from the company’s revised projection of $12 to $14, which was already an increase from its original $10 to $12 target. The stock trades under the ticker UPWK, and the company will fundraise approximately $102 million of new cash for its balance sheet ($187 million total with existing shareholders).

Shares are still currently up 40% compared to their original price.

I talked with Upwork CEO Stephane Kasriel this morning about the IPO road show, in which he said he took approximately 160 meetings with investors. Investors were engaged on the “combination of the strengths of the business and the strengths of the mission,“ and he was clearly excited about the engagement the offering received.

Upwork, whose antecedent companies go back almost two decades, is a positive cash flow business, albeit one growing top line revenue only about 27.6% year over year. Kasriel said that the company should be able to “compound at that rate for decades” due to the growing number of workers who freelance around the world in order to have flexible work arrangements. “When you think about which jobs are being created in the global economy, in most countries it is these knowledge jobs,” he said.

Upwork CEO Stephane Kasriel (Photo from Upwork)

In addition, “When you really take a long term view, what really matters is to be good stewards of capital,” Kasriel noted, and said that the company was very focused on areas like sales and marketing ROI. His goal is to continue to grow the company with limited dilution to shareholders, a message that apparently has been well-received.

As for Kasriel himself, he becomes a public company CEO. He was elevated to the CEO role in 2015 from SVP of Engineering – a somewhat unusual path, even in tech-obsessed Silicon Valley. He emphasized that “we are a tech company,” and noted that every day is a learning experience. “I was just on CNBC, and for introverts, what really scares me is to be on live broadcast TV,” he said.

A huge part of Upwork’s business today is focused on the enterprise, particularly complex workflows that require multiple types of talent. The company’s platform not only handles talent management, but the long array of tasks to manage people: HR, legal, procurement, information security, and others.

According to the company, it will host $1.5 billion worth of gross sales value across two million unique projects. The company estimates that its products are used by 30% of the Fortune 500.

Upwork, which has offices in Mountain View, San Francisco, and Chicago, has 1,500 employees – and as is to be expected – roughly 1,100 of them are freelancers. Kasriel said, “We use our own product, which we call drinking our own champagne.”

Among the major VC investors behind the company are Benchmark, which owned 15%, Sigma Partners, which owned 14.2%, and Globespan, T. Rowe Price, and FirstMark. The company is offering 6,818,181 new shares as well as 5,658,512 shares from existing shareholders. Citigroup, Jefferies, and RBC jointly led the book.

Now that the company has debuted, Upwork wants to refocus once again on its business following weeks of talking to investors. “We need to build this company for the ages,” Kasriel noted, and said that his message to employees was to “focus on the mission.”

Understanding Renaud Laplanche’s next Upgraded act

Renaud Laplanche spent ten years building LendingClub. In the process, he created an industry from scratch. Circumventing conventional banking channels for consumer credit began in 1996 when Chris Larsen started E-LOAN, which ultimately led to Prosper Marketplace. But LendingClub, which Laplanche founded in 2007, was and remains the poster child for the business of marketplace lending. The industry’s short history has been volatile, characterized by both triumphant hype and utter lack of confidence.

History of the Marketplace Lending Industry, CB Insights

While LendingClub has struggled in the public markets since their late 2014 IPO, they have managed to propel their industry into significance, while rapidly expanding their share of the personal loan market to 10%.

After his well-publicized departure in May 2016, Laplanche got started on his next venture in a hurry. Just a few months later he started Credify, ultimately renamed to Upgrade, a company that bears a striking resemblance to LendingClub. In just two years Upgrade has raised $142 million in funding, while originating more than $1 billion in loans since August 2017.

With Upgrade, Laplanche has the opportunity to start fresh with the benefit of hindsight. The initial promise of LendingClub and their competitors was unbundling the banks. Now, to persist and grow, marketplace lenders have realized they need to rebundle, providing an array of bank-like services to better serve their end customers. This post explores what Laplanche is doing differently this time with Upgrade.

Total Addressable Market ≠ Value Capture

There has been a general recognition across many fintech businesses that marketplace business models aren’t enough. The mutually-beneficial arrangement of marketplace lending is a perfect example. Superior customer experience, expedited loan decision, quick receipt of funds, and lower operational costs without legacy infrastructure were the selling points. Charles Moldow famously called it a “trillion-dollar opportunity” in 2014.

He may still be right, but in order to realize the opportunity, marketplace lenders need to capture a larger, more regular share of borrower’s attention. Loans may be high-volume purchases, but they’re not high-frequency transactions. So when a platform like LendingClub facilitates a loan so someone can refinance their outstanding credit card debt, is there really a relationship with the customer there? Capital is provided, customer service is available, and monthly payments are made. That’s all there is to it.

Total addressable market (TAM) is frequently used to assess opportunity. A critical part of the TAM estimation process might have been overlooked in the early assessments of the alternative lending industry. The large numbers in the figure below reflect an alluring market that LendingClub, Prosper, Avant, Upstart, OneMain, Best Egg and others have attempted to capitalize upon.

The notion of a replacement cycle, which I’ll borrow from Michael Mauboussin, is an important consideration here, particularly in a high volume, low frequency transaction relationship such as consumer lending. Just because a borrower refinances their credit card debt with a loan from LendingClub, there’s little guarantee that all of the money spent on acquiring that customer will lead to future transactions with that customer. Yet, in order for these companies to succeed, the average revenue per user (ARPU) is going to have to rise through some combination of repeat customers and complementary services to deepen the relationship and create new revenue channels.

The market opportunity for marketplace Lenders, LendingClub Investor Day 2017

With this realization in mind, fintech players across the board have focused on deepening relationships with customers to drive sales and lower SG&A costs. Customer acquisition is a major component of the income statement for these companies. The more engagement a lender has with their end customer, the greater the chance they stand to not only be called upon when a borrower needs to borrow again, but ultimately pinpoint opportunities for product recommendations.

And that’s exactly what Upgrade is doing. In many ways, they’re quite similar to LendingClub. Upgrade offers personal loans between $1,000 and $50,000 over three-to-five-year repayment periods at rates competitive with major banks. LendingClub varies a bit in the principal amount offerings and APRs, but they essentially do the same thing. Loans are originated through WebBank, the partner bank that also works with LendingClub. Operationally, there’s a blockchain component for data remediation and security purposes. However, the extent and value of this application are unclear.

Marrying Credit with Financial Wellness

The notion of financial wellness is increasingly popular among consumer fintech companies, as well as incumbent financial institutions. It reflects a transition away from a purely transactional relationship to a fiduciary one, as we’ve also seen in the wealth management industry. The tricky thing about this is that although it may be the right thing to do, late fees and overdraft penalties make up a sizeable portion of traditional bank revenue.

Where Upgrade differs from LendingClub is in their customer engagement model. Upgrade provides several features to customers that resemble a conventional personal financial management (PFM) app. Their Credit Health service offers free advice and monitoring tools, personalized recommendations, and customized updates for individual credit scores and underlying rationale. Additionally, they offer a financial education tool open to the public called Credit Health Insights, which offers tips and tricks for debt management and financial wellness. At the surface, there’s little differentiation here. A free credit score is becoming table stakes for any financial institution, and personalized insights are to be expected.

Upgrade’s borrower value proposition, LendIt 2018 Conference

In Upgrade’s case, however, the framing of the dual service is compelling. Typically, online lenders only approve 10-15% of applicants. While the credit underwriting models are looking for the most compelling borrower profiles who will pay back their loans, the majority of interested borrowers are sent back to the drawing board.

A major focus of Upgrade is to build the credit of the other 85-90% of applicants who are typically rejected so that they improve their profile and obtain a loan in the future. Credit repair and financial wellness are underserved markets today, although companies like Bloom Credit are working to change the record. This product combination helps to unify the interests of Upgrade and borrowers, both approved and rejected.

Reinventing Consumer Credit?

At the LendIt Conference in 2017, Laplanche concluded his presentation with a reference to the Wright Brothers. He discussed how he was enamored with their ability to combine two things to create something entirely new, which in their case was “wheeling and flying.” A year later, he returned to LendIt with a new product release that borrowed from the innovation strategy of Orville and Wilbur.

Upgrade launched a first of its kind product, a Personal Credit Line, a hybrid of a credit card and an unsecured loan. Here’s how it works: customers get approved for up to $50,000 in credit, from which they can draw down as needed. They only pay interest on what’s borrowed, over the course of a 12-60-month timeframe. The interest rate is also fixed over the term of the loan.

Upgrade’s Personal Credit Line, a hybrid of a personal loan and a credit card, Upgrade

The product is built on the premise that the level of innovation in the origination of consumer credit has been somewhat limited. Laplanche attempted to reinvent it once with the creation of LendingClub. In some ways, it worked. Personal loans originated by fintech lenders account for roughly a third of outstanding consumer loans according to Transunion. Now he’s trying to do it again.

First Mover Disadvantage in Consumer Fintech

When I first read the press release for the Personal Credit Line, I thought it was a very compelling way to expand the menu of options to qualified consumers. It puts more control in the hands of the borrower, so they can avoid the vicious cycle of consumer debt. I was also reminded of a comment made by Josh Brown, CEO of Ritholtz Wealth Management, after Wealthfront released their “Portfolio Line of Credit” product in April 2017. He said that while it might sound flashy, there’s nothing holding Schwab or Fidelity back from offering the same product tomorrow.

What’s so challenging about consumer-facing fintech companies is that customers are expensive to acquire, they’re difficult to keep, and products are easy to replicate. Providing a free credit score is easily accessible through a partnership with Equifax or Experian. It’s commoditized. The situation is similar with personal financial management tools. This Personal Credit Line seems awfully similar. What’s to stop Chase or Goldman’s Marcus from offering an identical product, perhaps with even better rates? U.S. Bank just launched a similar product, albeit for a different use case, called Simple Loan. It’s a $100 to $1,000 loan marketed as a payday lending alternative, with a roughly 20% lower interest rate than typical payday lender offers.

There is something to be said for being first to market, but ease of replication limits the defensibility of that position. There is a clear interest in an expansion into new products, which will continue to help Upgrade to differentiate the value proposition to consumers, and maybe one day small businesses. The unfortunate reality is that bigger players with an existing customer base and a lower cost of capital are on their tail.

Forget about Democratization

Renaud Laplanche rings the bell with his team at LendingClub (DON EMMERT/AFP/Getty Images)

The real insight that distinguishes Upgrade from LendingClub is the profile of the users. On the supply side of the marketplace, Upgrade only welcomes institutional investors. LendingClub was, and still is, marketed to individuals and institutions.

The peer-to-peer model turned out to be a little too idealistic to serve as the foundation for a business. The concept of a marketplace is really attractive – the ability to invest in others, as cliché as that may sound, has a philanthropic twist to it that even implies a social good. Or, at the very least, an alignment of interests. Except interests aren’t aligned because of the mercurial nature of retail investors, which makes for unstable sources of capital.

LendingClub’s original business model, in the pure P2P form, was reliant on the ability to create a new asset class. The notion of investing in consumer credit may sound compelling, and return prospects may be even more appealing. But, you can’t bootstrap an asset class and base a business model around retail adoption. LendingClub had to solve for distribution of their service, as well as the dissemination of the broader concept of unsecured consumer lending as an asset class.

On Laplanche’s second go around with Upgrade, there’s no more promise of democratization of a new asset class. Instead, large multi-billion-dollar credit investors own the supply side of the marketplace. As a result, there’s a more stable capital base of institutional investors who know what they’re investing in and the reason why they’re investing in it.

What Laplanche did this time around was base his business model around stability. In this market it can pay to be a follower. LendingClub touts the notion that they have “brought a new asset class to investors,” but that education campaign came at a serious cost. It also invited boiler room-like sales behavior from competitors. Upgrade is stepping in after a decade of marketing to scale an untested industry to the masses. Fortunately, a lot of the work has already been done for them.

How Different Can You Be?

Upgrade is led by as experienced and forward-thinking of a leader as they come in the marketplace lending industry. They expect to originate over $2 billion loans in 2018 and hit profitability by year-end as well. They’re redefining convention when it comes to consumer credit products.

The question, however, remains: how long can the novelty last? Consumer fintech is fiercely competitive. It’s also increasingly occupied by incumbents with far lower costs of capital, large existing customer bases, and the ability to experiment in a way that a startup cannot. The unsecured consumer lending space has attracted mountains of capital in the past five years, but the opportunity is clearly defined. The number of lenders issuing more than 10,000 personal loans per year has more than doubled since 2011.

There’s a network effect component to marketplace lending businesses, particularly as lenders are able to maintain more connected relationships with consumers. But when it comes to standing apart from the rest of the pack, a differentiated product offering isn’t a very wide moat.

In Bad Blood, a pedestrian tale of heuristics and lies

In a world where thousands and thousands of startups are started in the Bay Area every year, becoming a name that everyone recognizes is no small feat.

Theranos reached that summit, and it all came crashing down.

The story of the fraudulent rise and precipitous fall of the company and its entrepreneur, Elizabeth Holmes, is also the singular story of the journalist who chronicled the company. John Carreyrou’s tenacious and intrepid reporting at the Wall Street Journal would ultimately expose one of the largest frauds ever perpetrated in Silicon Valley.

Bad Blood is the culmination of that investigative reporting. The swift decline of Theranos and its protective legal apparatus has done this story a lot of good: many of the anonymous sources that underpinned Carreyrou’s WSJ coverage are now public and visible, allowing the author to weave together the various articles he published into a holistic and complete story.

And yet, what I found in the book was not all that thrilling or shocking, but rather astonishingly pedestrian.

Part of the challenge is Carreyrou’s laconic WSJ tone, with its “just the facts” attitude that is punctuated only occasionally by brief interludes on the motivations and psychology of its characters. That style is appreciated by this subscriber of the paper daily, but the book-length treatment suffers a bit from a lack of charisma.

The real challenge though is that the raw story — for all of its fraud — lacks the sort of verve that makes business thrillers like Barbarians at the Gate or Red Notice so engaging. The characters that Carreyrou has to work with just aren’t all that interesting. One could argue that perhaps the book is too early — with criminal charges filed and court trials coming, we may well learn much more about the conspiracy and its participants. But I don’t think so, mostly because the fraud seems so simple in its premise.

At the heart of this story is the use of heuristics by investors and customers to make their largest decisions. Theranos is a story of the snowball effect blown up to an avalanche: a retired and successful venture capitalist seeds the company, leading to other investors to see that name and invest, and onwards and upwards for more than a decade, eventually collecting a cast of characters around the table that includes James Mattis, the current Secretary of Defense, and Henry Kissinger.

Take Rupert Murdoch, the billionaire owner of News Corporation (and by extension the Wall Street Journal), who invested $125 million into Theranos near the end of the company’s story. He met Holmes at a dinner in Silicon Valley:

During the dinner, Holmes came over to Murdoch’s table, introduced herself, and chatted him up. The strong first impression she made on him was bolstered by [Yuri] Milner, who sang her praises when Murdoch later asked him what he thought of the young woman.

….

But unlike the big venture capital firms, he did no due diligence to speak of. The eighty-four-year-old mogul tended to just follow his gut, an approach that had served him well …

He made one call before investing $125 million.

To some readers, that might be a breathtaking sum, but it really is something of a pittance for Murdoch, whose reported net worth today is roughly $17 billion. In the denouement of the Theranos story, Carreyrou notes that, “The media mogul sold his stock back to Theranos for one dollar so he could claim a big tax write-off on his other earnings. With a fortune estimated at $12 billion, Murdoch could afford to lose more than $100 million on a bad investment.”

For Murdoch, a bad heuristic around the company cost him roughly 1% of his net wealth, and with the tax loss, may not have cost him much of anything at all.

That’s the challenge of the book: for all the fraud committed by Theranos and its founder, its financial losses were ultimately borne by the ultra-rich. This is not the 2008 Financial Crisis, where millions of people are thrown out of their homes due to the chicanery of Wall Street fat cats.

If there is a lesson in all of this, it is that the right heuristics would have helped these investors to an extraordinarily degree. Take for example the rapid turnover of Theranos’ workforce, which could have been checked on LinkedIn in minutes and would have signaled something deeply wrong with the company’s culture and leadership. It doesn’t take many questions to discover the fraud here if they are the right questions.

Beyond the investors and workers though, the harm is even hard to track to patients. There are perhaps no more serious consequences around Theranos’ fraud than for patients, who took tests on the company’s proprietary Edison machines and received inaccurate and at times faked results. Yet, Carreyrou strangely hasn’t compiled a compelling set of patients for whom Theranos caused morbidity. If any industry comes out positively in this book, it is the doctors of patients who reorder tests and ask additional questions when results didn’t make sense.

Ultimately, Bad Blood is a complete book about an important story. I’m reminded a bit of the 2012 documentary The Act of Killing, in which the filmmakers travel to Indonesia to have the killers of the 1965 communist genocide recreate the murders they perpetrated. The director’s cut is long and at times remarkably tedious, and yet, that is in many ways precisely the point. As a viewer, you become inured to the murder, bereft of emotion while waiting for the ending credits to roll.

Bad Blood is the same: its direct, to the point, and relatively sparing in any deep thrills. And that is its point. The book gives us a pinprick in our belief that Silicon Valley’s vaunted investors and founders are immune to stupidity. If you didn’t already know that before, you certainly now have a one-word household name of a startup to reference.

Spearhead is transforming founders into angel investors

Becoming an angel investor is simple in principle: have money and invest. Unfortunately for many of the smartest founders in the startup ecosystem, that requirement can prove a complete block on investing in the companies they see day after day, since early liquidity can be hard to find for founders.

Spearhead was launched earlier this year with a mandate to identify promising startup founders and give them cash to invest in startups autonomously. The brainchild of AngelList’s Naval Ravikant and Accomplice’s Jeff Fagnan, the program identifies promising startup founders and provides them with $200,000 of investible capital, and potentially $1 million. It also sets them up with the right legal entities to invest.

It selected its first cohort — a group of 19 founders selected from 1,500 applications — earlier this year, and the program announced that its second cohort is open for applications today.

Ravikant explained to me that Fagnan and him designed Spearhead to be very different from the scout programs offered by venture firms. “This is the first program that is trying to turn you into a capitalist, and not a laborer,” he explained. “Unlike a traditional scout program, we are not training scouts, we are building full-fledged VCs … [The founders] are not getting a slice of carry in a fund, they are getting carry in their own funds.” He emphasized that “this is really about teaching, learning, and scaling the craft of investing.”

Training founders to be angels is a competitive space, with First Round offering an “Angel Track” program that teaches founders and emerging investors the ropes of investing. What makes Spearhead unique is the program’s capital commitment — you don’t just learn to make investments, you actually get a pool of capital by which to invest from.

Since Spearhead creates independent funds for its members, the founders in Spearhead are free to raise additional capital from outside investors and expand their funds beyond Spearhead’s initial seed capital.

Founders investing in founders

Fagnan noted he had some “sleepless nights” as he and Ravikant designed Spearhead. “Just because we put people in this program, we didn’t know if they are going to write a check,” he said. That was particularly true since “we definitely skewed toward people who didn’t consider themselves angels.” Being an operator and being an angel investor require very different skillsets and knowledge, and it wasn’t clear at all that founders could context-switch easily.

The good news: they can. So far, the first cohort has made roughly 50 seed investments into startups, mostly at the pre-seed and seed stages.

One major surprise with the first cohort is that the founders were much more sophisticated about venture capital dynamics than expected. “What we got wrong, we thought we would spoon-feed venture 101,” Fagnan said. But instead, during office hours, “it’s almost the same level of discussion as the principals and partners at Accomplice.”

I talked with six of the founders in the program about their experience. One pattern that came up consistently in my chats is that these founders have all had to go through their own venture capital fundraises, and they wanted to share their lessons learned with other founders to help them succeed and be the kind of venture capitalist that they needed for their own businesses.

For instance, Alice Zhang at Verge Genomics explained that she hoped to use her angel fund to bridge the gap between traditional life sciences investors and a new wave of healthtech startups that are led by computer scientists. “I have a thesis that there will be an explosion of companies that are going to be at the intersection of technology and the life sciences,” she said, but venture capitalists targeting the industry don’t fully see that emerging pattern yet. “I’m spending a lot of time on weekends helping founders in this space.” So far, she has invested in two companies.

That intention to help other founders in a focused industry also applied to Noah Ready Campbell at Ready Robotics, who says that when it comes to robotics investing, “a lot of things that were impossible five years ago are possible now.” He saw an opportunity to use his fund to “help participate in the robotics community in the Bay Area” and accelerate the industry. He’s invested in four companies so far, typically with $50k checks.

For others though, it’s less about industry and more about who they know. Alex MacCaw, a well-known JavaScript developer, former Stripe engineer, and founder of Clearbit, told me that a large component of his dealflow is “a bunch of ex-Stripes which I call the Stripe mafia.” He invests very early, and “sometimes there isn’t even a domain name, but I do it based on the fact that I know the founder pretty well.” He’s done five deals so far.

Building an affinity network

The founders of Spearhead (Image from Spearhead)

Beyond investing in other startups, the founders in the program also emphasized that they are learning from each other. Spearhead hosts a variety of in-person get-togethers, and also holds regular office hours to allow the founders to ask questions and get feedback on their deals from Ravikant and Fagnan, as well as Accomplice’s Cack Wilhelm and AngeList’s Jake Zeller.

Prasanna Sankar, who was director of engineering at Zenefits and left with Zenefits co-founder Parker Conrad to create Rippling, said that one of the biggest things he has had to learn is the difference between angel investing and stock market investing. “We don’t make an investment for the price, so it is like the opposite of the stock market,” he said. “If you are a new angel, it would take five years to have these experiences… but these guys can fast-track your exposure to these things.” He has invested in five startups, mostly at $25k checks and with one at $50k.

Ankur Nagpal at Teachable emphasized that learning from the other founders in the cohort didn’t just train him on being a better angel investor, but also how to operate his business better. “Everyone operates so differently,” he said, and talking with others helped him learn “not just what you should be doing, but also about how you are different from other businesses.”

Fagnan noted that a large priority in the first cohort was geographical representation, and he expected that Spearhead would design its next cohort to have “fewer people taking deeper accountability to each other.”

The next-generation of venture capitalists?

For Ravikant and Fagnan, the dream of their program was to create the next-generation of competent and committed angel investors scattered around the country. They have certainly gotten that plan underway, but the question is how far will these cohort members go in their investing careers?

Many founders I talked to insisted that their focus remains 100% on their companies, and that angel investing as just a side passion. Outside of MacCaw at Clerabit, almost no one was intending to scale up their funds beyond the initial seed capital, and even MacCaw was just looking to have a little more cash to invest since he has already invested his whole fund.

Ultimately, that might play well for Spearhead, since one of the challenges of traditional venture capital funds is their increasing scale. Ravikant noted that the sort of pre-seed checks that these investors are writing are hard for venture capital firms to do given their size.

Sankar said that “I always thought that Silicon Valley startup as an asset class is one of the most undervalued and underrated.” That seems to match Ravikant’s entire mantra, who told me that “I want to quintuple down on [Spearhead].” He hopes that more of his founders can build distinguished track records, and become the leading angel investors of their generation. We hope that they are “going to be bigger than Naval and Jeff sometime, and if not, then we have failed.”

Spearhead’s first cohort of 19 founders included: