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:

Apple’s 5G iPhone conundrum

Wednesday is Apple’s big product release day, where analysts expect the company to release the next edition of the iPhone. While the usual upgrades to the screen, CPU, and storage are expected as always, one major lingering question is how the company is going to handle 5G, the next-generation telecommunications standard.

The conventional wisdom among analysts is that Apple will ignore 5G in 2018 and 2019 just as it took extra time to rollout 3G and 4G chipsets in its phones. A typical example of this analysis comes from Chris Smith at BGR, who says that “We already saw what Apple did when 4G LTE came out. The company waited for carriers actually to offer decent coverage before launching the first 4G iPhone. That was the iPhone 5, by the way, which launched more than a year after the first Android-based LTE phones came out.”

I’m not nearly as convinced. There are many reasons for Apple to ignore the tech this year, which I will get to in a moment, but one major factor could drive an earlier discussion of 5G than expected: Apple’s growth markets, particularly in China.

China is becoming one of Apple’s most important markets for its smartphones, and particularly for its flagship iPhone X. It’s greater China revenue in the third quarter of this year was $9.6 billion, and its operating income from the region was just shy of Europe’s. More importantly, greater China is just slightly behind the Americas as the fastest-growing region for Apple’s sales.

That makes 5G a particularly challenging issue for the company. China has made 5G leadership a critical pillar of its industrial strategy, and many analysts believe the country will set the pace for 5G rollouts globally. Furthermore, Chinese consumers are deeply interested in buying premium products and experiences, and adoption for 5G is expected to be strong and rapid.

With the technical specifications around the 5G standard complete, companies are racing to build the chipsets and deploy the infrastructure necessary to enable this new standard in smartphones and other devices. Early networks are expected to be deployed in 2019, and chipset maker Qualcomm has publicly unveiled more than a dozen handset manufacturers who are partnering with it on 5G. For instance, Vivo, a Chinese smartphone manufacturer, announced today that it was developing its first “pre-commercial 5G smartphones” for launch next year.

The speed and timing of the 5G rollout is awkward for Apple, which has traditionally timed its iPhone events for September. It almost certainly will make no announcements this week, but its next iPhone launch would likely be September 2019 — giving Chinese handset manufacturers with early 5G devices nearly exclusive access to the local market for the first three quarters of next year.

Apple would find itself falling behind its competitors in a fast-moving and critical growth market. While the company has built a brand in the country with devoted fans, its place in the market is not nearly as secure as in the U.S., particularly as the trade war between the two nations reaches a fevered pitch.

There’s no doubt that the challenges for Apple to include the technology are immense. First is the patent licensing cost, which Jeremy Horwitz at VentureBeat put at roughly $21 per device, up from around $9 for 4G. Second, the leading American company in 5G is believed to be Qualcomm, which Apple has been fighting in a long-running patent war, to the point that the company has been actively trying to remove Qualcomm equipment from its phones. Apple’s name was notably absent from Qualcomm’s 5G partner list.

While some early chip designs are available, they are hardly ready for primetime, and certainly not for a flagship phone like the iPhone X. Nor do I expect that Apple will imply on Wednesday that the company will support 5G in future releases and dampen enthusiasm for its newly-released devices. No one wants to be told that next year’s devices are going to be better than one released just minutes ago.

Instead, I expect Apple will use smoke signals to clearly demonstrate that it intends to remain at the cutting edge of 5G deployment. That could include joining certain industry trade groups, testing the technology in a more public fashion, and potentially releasing a roadmap next year, say at its Worldwide Developers Conference, which is traditionally held in June and thus earlier in the year than its September iPhone events.

What would be concerning though is if we get to the end of 2018 and into 2019 with nary a peep from the company about its plans for the technology. Given its commitment to China, as well as its leading position within the smartphone market, the company has to engage on the technologies around 5G in a public manner in order to prevent a loss in its competitive position.

Ultimately, much will depend on China Mobile and other telcos in China as well as around the world on how fast they can deploy 5G infrastructure (sadly, it looks increasingly like the U.S. faces a bumpy road in that direction). Beyond gold iPhone rumors, 5G may well be the first time that China drives the company’s product roadmaps, and it should be wary of finding itself on the defensive.

LendingTree is the secret success story of fintech

For all of the excitement centered around fintech over the past half-decade, most venture-backed fintech companies struggle to acclimate to public markets. LendingClub and OnDeck have plummeted since their late 2014 IPOs after several years of darling status in the private markets. GreenSky, which went public in May of this year, has been unable to return to its IPO price. Square is the exception to the rule.

Sometimes we overlook the companies that hail from the era that precedes the current wave of fintech fascination, a vertical which has accumulated over $100 billion in global investment capital since 2010.

One of these companies is LendingTree, which got its start height of the Internet bubble, going public in mid-February of 2000, less than a month before the Dot-com bubble peaked.  LendingTree began in 1996 in a founding story that epitomizes the early Internet era. Doug Lebda, an accountant searching for homes in Pittsburgh, had to manually compare mortgage offers from each bank. So he created a marketplace for loans in the same way OpenTable helps you find your restaurant of choice or Zillow simplifies the home buying process. In the words of Rich Barton, iconic founder of Expedia, Zillow, and Glassdoor, this business is a classic “power to the people play.”

The marketplace business model has been the darling that has driven returns for many of the leading VCs like Benchmark, a16z, and Greylock. Network effects are a non-negotiable part of the explanation as to why. Classic success stories that have transitioned nicely into public markets include Zillow, OpenTable (acq.), Etsy, Booking.com, and Grubhub. LendingTree is often left off of this list, yet, the business sits in a compelling space as consumers and lenders continue to manage their financial lives online. 

Insight in a Sea of Ambiguity

The lending process has been defined by significant information asymmetry between borrowers and lenders. Lenders have a disproportionate amount of leverage in the relationship. And that’s not to say it should be different – it’s perfectly logical to require a borrower to prove their creditworthiness. However, aggregation, synthesis, and recommendations modernize a dated dynamic. 

Ironically, in an age where consumers are inundated with information, less than 50% of interested borrower’s shop for loans. Most consumers take the first offer they receive. The benefit of a marketplace, however, is price competition and transparency. The ability to shop the market and access the same information that lenders have is a luxury that didn’t exist twenty years ago. The borrowers who do shop through LendingTree reap significant benefits; on average, roughly $14,000 on mortgages and 570 basis points on personal loans. There’s certainly something to be said for comfortability and hand-holding, but at some point the metrics speak for themselves. 

LendingTree isn’t a marketplace in the purest sense because of the process that takes place after a borrower clicks “apply.” While a diner can reserve a table at any listed restaurant with OpenTable for dinner tomorrow tonight, she can’t simply take the loan she wants. LendingTree lacks the direct feedback loop between consumers and lenders that characterizes most marketplaces. Instead, the platform aggregates information from a network of over 500 lenders to provide options according consumer’s needs. LendingTree is effectively the onramp for interested borrowers, which necessitates the entry of lenders to fill the borrower’s needs.

As this “onramp” continues to serve a larger audience as more consumers conduct their finances online, banks and lenders intend to seize the opportunity. Digital ad spend in the financial services industry is going to continue to grow rapidly at an estimated 20% CAGR between 2014 and 2020, effectively tripling the size of LendingTree’s core market. 

Diversifying away from Mortgages

LendingTree’s revenue mix has change over the years.

For all intents and purposes, LendingTree has been in the mortgage business since its inception. The company experimented with a myriad of business models, including a foray into loan origination through their LendingTree Loans product line, which they ultimately sold off to Discover in 2011. Even in 2013, only 11% of their revenue originated from non-mortgage products.

LendingTree has expanded their platform in a few short years to build their non-mortgage products including credit cards, HELOCs, personal, auto, and small business loans. They have also pursued credit repair services and deposit accounts, with insurance in the pipeline. Whereas mortgage revenue made up roughly 60% of total sales in Q2 2016, it dropped to 36% as of this quarter. They wanted to diversify their product mix, but they realized they were also leaving money on the table. 

Through strategic M&A activity, LendingTree has acquired a number of leading media and comparison properties to expand into new products. Acquiring CompareCards, a leading online source for credit card comparisons, has allowed them to catch up to Credit Karma and Bankrate, who own a large part of the existing market. Additional acquisitions in tertiary products like student loans, deposit accounts, and credit services have enabled the company to expand their market share in markets that are both ripe for growth and sparse of competition. The inorganic growth strategy emulates that of two of LendingTree’s major shareholders: Barry Diller, who’s company IAC previously owned LendingTree before spinning them off in 2008, and John Malone, who owned 27% of shares as of November, 2017.

LendingTree has made significant acquisitions to expand and grow

Enhancing Customer Engagement

The potential scale and success of LendingTree’s business model is predicated on discovering prospective borrowers. If they’re repeat customers, that’s a big win because their promotional costs drop significantly once a customer is familiar with the platform.

My LendingTree, the company’s personal financial management (PFM) app launched in 2014, has 8.8 million customers and generates roughly 20% of the company’s leads. It offers free credit scores, credit monitoring, and goals-based guidance through a proprietary credit and debt analyzer. At the surface, it’s not especially different from any of the other leading consumer PFM apps. That’s been the issue with these apps: the service is valuable, but it’s very difficult to differentiate beyond UI/UX, which is far from a defensible moat.

However, the ability for LendingTree to lock in customers and accumulate customer data to personalize product recommendations is a breakthrough for both consumers and lenders. Consumers outsource the loan diligence process to their phone, which explores the universe of lending options in order to find the most suitable options. 

LendingTree’s new personal finance management app. (Photo by LendingTree)

The leader in this space is Credit Karma, and by a wide margin. They’re estimated to have around 80 million customers. Those numbers appear starkly different at first glance, but it’s important to keep in mind LendingTree is relatively new, launching in 2014. Credit Karma developed a more captive relationship with customers from their inception in 2007, beginning as a free credit score platform. They’re effectively in an arms race, trying to emulate each other’s primary value propositions in order to win over a larger share of customer attention. 

By all accounts, the My LendingTree product is still in its infancy. Personal loans make up nearly two-thirds of revenue generated through My LendingTree. Credit cards were integrated through CompareCards earlier this year; deposits will be integrated in the fourth quarter through DepositAccounts. As the platform more formally integrates mortgage refinancing and HELOCs, there are more channels to drive user engagement.

For the consumer, this app reinforces the aggregation and connection between interested borrowers and willing lenders. Arguably more significant, however, is the personalization of individual customer experience that will drive further engagement and improve the recommendation engine. With the continued migration to online and mobile for financial services, this product benefits from natural demographic tailwinds.

If LendingTree can successfully reengage with customers on a more recurring basis via My LendingTree, the app should be accretive to overall variable marketing margin because they’ll have to spend far less on promotional activities due to organic customer. The combination of a market-leading aggregator with a comprehensive PFM tool creates a flywheel effect where success begets success, particularly with a major head start in the lending aggregation business. 

Removing the Informational Asymmetry 

In LendingTree’s business model, customer demand drives the flow of ad dollars and ultimately origination volume. Lenders follow customer demand. LendingTree helps expedite that process. Lenders can expand their conversions by boosting the number of high-quality leads and reducing obstacles to the loan application process. LendingTree improves both catalysts. 

On the lender side, My LendingTree fundamentally changes LendingTree’s value proposition. They used to be responsible for connecting lenders with warm leads to drive conversions. With an existing customer base, the lead generation suddenly gets easier. It also significantly reduces the customer acquisition cost for lenders, notoriously a major component of their expense profile.

Nearly 50% of all consumer interactions with banks and financial services companies occur online. It’s not controversial to say that figure is likely heading in only one direction. Currently, credit cards and personal loans are the most automated online application processes because the decisioning occurs relatively quickly. Of the expansive network of mortgage lenders on LendingTree’s platform, only 40 currently enable borrowers to continue their application online. As mortgages and small business loans become more automated through partnerships with third-parties like Blend and Roostify, LendingTree will benefit from more seamless integrations and likely, higher conversions. 

The real value proposition for the lender, however, is in the headcount consolidation. Just as the number of stock brokers and equity traders has diminished significant, the role of the loan officer will follow a similar trajectory. LendingTree initially supplemented loan officers in their borrower sourcing from a marketing perspective, which drove loan officer commissions down significantly.

Doug Lebda’s next conquest is to supplant the entire sales function. In response to a question about LendingTree’s impact on lender headcount, Lebda responded: “what will happen is [lenders will] be able to reduce commission. So the real competitor, if you will, to LendingTree…is the fully commissioned loan officer…In the future, you’re going to have LendingTree convincing the borrower through technology and then you’re going to have an individual lender just basically processing and getting it through.” 

The relationship between a loan officer and a prospective borrower is marred by informational asymmetry. Incentives aren’t aligned.  Soon enough, the pre-approval process launched through their new digital mortgage experience, “Rulo” will help to solve a problem that has plagued LendingTree since its inception: an exhaustive pursuit from loan officers.

With Rulo, LendingTree sorts and filters the list of offers and provides a recommendation based on the best option. Then, the app allows you to contact the lender directly, offering the consumer the freedom they historically haven’t had. Commenting on the early success of the new experience, Lebda said “[the conversion rate is] literally about triple what it is on the LendingTree experience.” LendingTree is streamlining a low value, yet operationally costly element of the lending business that has remained more or less stagnant for half a century. 

Seeing the Forrest through the Trees

The fawning over fintech companies has driven exorbitant amounts of global investment from venture capitalists and private equity firms who are ultimately looking for exit opportunities. Two things are happening: first, most of the major fintech companies aren’t going public, although that is beginning to change. Second, and perhaps more importantly, the ones that do go public don’t fare particularly well. 

The tried and true strategy of most emerging financial technology startups is to focus on user growth and monetize later. LendingTree did the opposite; they created a cash-flow generating platform that served a critical purpose, simplifying a historically complex landscape for consumers, while simultaneously driving directly attributable revenue for lenders. They have proved their original value proposition, connecting borrowers with lenders, and now they’re playing catch up to provide supplementary tools to add more value for customers. It’s a rare pathway, but a productive one that more fintech startups should consider.

Hate speech, collusion, and the constitution

Half an hour into their two-hour testimony on Wednesday before the Senate Intelligence Committee, Facebook COO Sheryl Sandberg and Twitter CEO Jack Dorsey were asked about collaboration between social media companies. “Our collaboration has greatly increased,” Sandberg stated before turning to Dorsey and adding that Facebook has “always shared information with other companies.” Dorsey nodded in response, and noted for his part that he’s very open to establishing “a regular cadence with our industry peers.”

Social media companies have established extensive policies on what constitutes “hate speech” on their platforms. But discrepancies between these policies open the possibility for propagators of hate to game the platforms and still get their vitriol out to a large audience. Collaboration of the kind Sandberg and Dorsey discussed can lead to a more consistent approach to hate speech that will prevent the gaming of platforms’ policies.

But collaboration between competitors as dominant as Facebook and Twitter are in social media poses an important question: would antitrust or other laws make their coordination illegal?

The short answer is no. Facebook and Twitter are private companies that get to decide what user content stays and what gets deleted off of their platforms. When users sign up for these free services, they agree to abide by their terms. Neither company is under a First Amendment obligation to keep speech up. Nor can it be said that collaboration on platform safety policies amounts to collusion.

This could change based on an investigation into speech policing on social media platforms being considered by the Justice Department. But it’s extremely unlikely that Congress would end up regulating what platforms delete or keep online – not least because it may violate the First Amendment rights of the platforms themselves.

What is hate speech anyway?

Trying to find a universal definition for hate speech would be a fool’s errand, but in the context of private companies hosting user generated content, hate speech for social platforms is what they say is hate speech.

Facebook’s 26-page Community Standards include a whole section on how Facebook defines hate speech. For Facebook, hate speech is “anything that directly attacks people based on . . . their ‘protected characteristics’ — race, ethnicity, national origin, religious affiliation, sexual orientation, sex, gender, gender identity, or serious disability or disease.” While that might be vague, Facebook then goes on to give specific examples of what would and wouldn’t amount to hate speech, all while making clear that there are cases – depending on the context – where speech will still be tolerated if, for example, it’s intended to raise awareness.

Twitter uses a “hateful conduct” prohibition which they define as promoting “violence against or directly attacking or threatening other people on the basis of race, ethnicity, national origin, sexual orientation, gender, gender identity, religious affiliation, age, disability, or serious disease.” They also prohibit hateful imagery and display names, meaning it’s not just what you tweet but what you also display on your profile page that can count against you.

Both companies constantly reiterate and supplement their definitions, as new test cases arise and as words take on new meaning. For example, the two common slang words to describe Ukrainians by Russians and Russians by Ukrainians was determined to be hate speech after war erupted in Eastern Ukraine in 2014. An internal review by Facebook found that what used to be common slang had turned into derogatory, hateful language.

Would collaboration on hate speech amount to anticompetitive collusion?

Under U.S. antitrust laws, companies cannot collude to make anticompetitive agreements or try to monopolize a market. A company which becomes a monopoly by having a superior product in the marketplace doesn’t violate antitrust laws. What does violate the law is dominant companies making an agreement – usually in secret – to deceive or mislead competitors or consumers. Examples include price fixing, restricting new market entrants, or misrepresenting the independence of the relationship between competitors.

A Pew survey found that 68% of Americans use Facebook. According to Facebook’s own records, the platform had a whopping 1.47 billion daily active users on average for the month of June and 2.23 billion monthly active users as of the end of June – with over 200 million in the US alone. While Twitter doesn’t disclose its number of daily users, it does publish the number of monthly active users which stood at 330 million at last count, 69 million of which are in the U.S.

There can be no question that Facebook and Twitter are overwhelmingly dominant in the social media market. That kind of dominance has led to calls for breaking up these giants under antitrust laws.

Would those calls hold more credence if the two social giants began coordinating their policies on hate speech?

The answer is probably not, but it does depend on exactly how they coordinated. Social media companies like Facebook, Twitter, and Snapchat have grown large internal product policy teams that decide the rules for using their platforms, including on hate speech. If these teams were to get together behind closed doors and coordinate policies and enforcement in a way that would preclude smaller competitors from being able to enter the market, then antitrust regulators may get involved.

Antitrust would also come into play if, for example, Facebook and Twitter got together and decided to charge twice as much for advertising that includes hate speech (an obviously absurd scenario) – in other words, using their market power to affect pricing of certain types of speech that advertisers use.

In fact, coordination around hate speech may reduce anti-competitive concerns. Given the high user engagement around hate speech, banning it could lead to reduced profits for the two companies and provide an opening to upstart competitors.

Sandberg and Dorsey’s testimony Wednesday didn’t point to executives hell-bent on keeping competition out through collaboration. Rather, their potential collaboration is probably better seen as an industry deciding on “best practices,” a common occurrence in other industries including those with dominant market players.

What about the First Amendment?

Private companies are not subject to the First Amendment. The Constitution applies to the government, not to corporations. A private company, no matter its size, can ignore your right to free speech.

That’s why Facebook and Twitter already can and do delete posts that contravene their policies. Calling for the extermination of all immigrants, referring to Africans as coming from shithole countries, and even anti-gay protests at military funerals may be protected in public spaces, but social media companies get to decide whether they’ll allow any of that on their platforms. As Harvard Law School’s Noah Feldman has stated, “There’s no right to free speech on Twitter. The only rule is that Twitter Inc. gets to decide who speaks and listens–which is its right under the First Amendment.”

Instead, when it comes to social media and the First Amendment, courts have been more focused on not allowing the government to keep citizens off of social media. Just last year, the U.S. Supreme Court struck down a North Carolina law that made it a crime for a registered sex offender to access social media if children use that platform. During the hearing, judges asked the government probing questions about the rights of citizens to free speech on social media from Facebook, to Snapchat, to Twitter and even LinkedIn.

Justice Ruth Bader Ginsburg made clear during the hearing that restricting access to social media would mean “being cut off from a very large part of the marketplace of ideas [a]nd [that] the First Amendment includes not only the right to speak, but the right to receive information.”

The Court ended up deciding that the law violated the fundamental First Amendment principle that “all persons have access to places where they can speak and listen,” noting that social media has become one of the most important forums for expression of our day.

Lower courts have also ruled that public officials who block users off their profiles are violating the First Amendment rights of those users. Judge Naomi Reice Buchwald, of the Southern District of New York, decided in May that Trump’s Twitter feed is a public forum. As a result, she ruled that when Trump blocks citizens from viewing and replying to his posts, he violates their First Amendment rights.

The First Amendment doesn’t mean Facebook and Twitter are under any obligation to keep up whatever you post, but it does mean that the government can’t just ban you from accessing your Facebook or Twitter accounts – and probably can’t block you off of their own public accounts either.

Collaboration is Coming?

Sandberg made clear in her testimony on Wednesday that collaboration is already happening when it comes to keeping bad actors off of platforms. “We [already] get tips from each other. The faster we collaborate, the faster we share these tips with each other, the stronger our collective defenses will be.”

Dorsey for his part stressed that keeping bad actors off of social media “is not something we want to compete on.” Twitter is here “to contribute to a healthy public square, not compete to have the only one, we know that’s the only way our business thrives and helps us all defend against these new threats.”

He even went further. When it comes to the drafting of their policies, beyond collaborating with Facebook, he said he would be open to a public consultation. “We have real openness to this. . . . We have an opportunity to create more transparency with an eye to more accountability but also a more open way of working – a way of working for instance that allows for a review period by the public about how we think about our policies.”

I’ve already argued why tech firms should collaborate on hate speech policies, the question that remains is if that would be legal. The First Amendment does not apply to social media companies. Antitrust laws don’t seem to stand in their way either. And based on how Senator Burr, Chairman of the Senate Select Committee on Intelligence, chose to close the hearing, government seems supportive of social media companies collaborating. Addressing Sandberg and Dorsey, he said, “I would ask both of you. If there are any rules, such as any antitrust, FTC, regulations or guidelines that are obstacles to collaboration between you, I hope you’ll submit for the record where those obstacles are so we can look at the appropriate steps we can take as a committee to open those avenues up.”

Fall 2018 tech IPOs face myriad of headwinds

2018 has been an incredibly strong year for IPOs, particularly in the technology sector. Among the brand names this year that have made their public debuts are Dropbox, Xiaomi, Spotify (through a direct listing), DocuSign, Carbon Black, Zuora, among many, many others.

Given the strength of these numbers through the first eight months of this year, the key question for the public markets is whether the year will close out just as strongly or die in a whimper.

It’s a decidedly mixed picture right now. The positives for the tech industry are an extremely robust pipeline of unicorns and growth-stage companies as well as soaring stock prices and strong economic data encouraging investors to seek additional risk in new issues in order to drive returns.

Yet, there are serious headwinds operating against new issues that could increase friction for startups for the remainder of the year. The first is that there doesn’t look like there will be a marquee startup debuting this fall to drive excitement. China trade tensions could complicate the picture for Chinese tech companies, which have been major drivers of the IPO pipeline this year. And then there is the on-going questions of alternatives — direct listings and potentially wider usage of private investment with new rules being discussed by the SEC.

Lyfting up the IPO picture

One major question hovering over the fall is whether any of the largest private tech companies by valuation will decide to go public. So far, Eventbrite and SurveyMonkey have filed their S-1s with the SEC to debut, but the two are targeting low billions for their market caps.

While companies generally demur on questions around their IPO schedules, both Uber and Airbnb look ill-prepared to do a public debut in the short run. Uber just hired a CFO — it’s first in years — a little more than a week ago. Airbnb has been more blunt, commenting that it is targeting 2019 or 2020 for a public launch. Other highly-valued companies like SpaceX, WeWork, and Palantir also don’t look set to IPO in the short term. Lyft has recently hired a new advisor, and could target a launch early in 2019, beating Uber in the process.

This is all a bit shocking considering the robust economic picture of the public markets. These advantageous windows don’t stay open for long, and it’s a bit surprising how few of these large companies are prepared to take advantage of the environment. That could leave companies like Dropbox in March and Xiaomi in June as the largest tech issues of 2018.

It’s certainly been received wisdom in the Valley for the past decade that tech startups should delay going public as much as private investors will allow it. But the fact that executive teams haven’t been rounded out and revenues and expenses aren’t ready for scrutiny should be a note of caution for startup founders and venture capitalists to work harder to better prepare their companies.

The China challenge

Chinese IPOs are facing tough policy challenges. Photo by ANTHONY WALLACE / AFP/Getty Images

Chinese IPOs had been expected to be a major force in the IPO pipeline all year. Now, with trade tensions flaring and the Chinese Communist Party changing its policies, that robust pipeline is staring to look significantly less rosy.

The tariffs are easy to understand. The Trump administration has said recently that it intends to put tariffs on another $200 billion of Chinese goods. Given the constantly changing scale and scope of these tariffs, the resulting uncertainty has clouded Chinese capital markets and made public debuts much more complicated.

The debut of Chinese Depository Receipts (CDRs) earlier this year was also expected to drive attention to Chinese tech stocks by allowing mainland Chinese investors to invest in companies traded on overseas exchanges like NASDAQ.

Yet, policy shifts by Beijing have undermined that surge of interest. The country is in the midst of a video game and entertainment crackdown, causing Tencent to face a profit drop for the first time in more than a decade, and creating a cascade of concern for other high-flying Chinese consumer tech companies. Other policies around corporate control and governance are complicating the picture as well.

We will quickly learn how the markets perceive these challenges when NIO, a Chinese automotive startup, and Meituan-Dianping, a consumer Yelp and Groupon-like platform, go public in the next few weeks. NIO is targeting a valuation of $8 billion, and Meituan is targeting a whopping $55 billion in its debut.

Given the rout around Xiaomi’s IPO earlier this summer, a strong performance by either one of these companies would put some wind in the sails of other Chinese unicorns and could help them overcome some of the policy changes that are dampening the enthusiasm in the equity markets.

Further public delays

The last macro wrinkle for the fall is around a circulating discussion at the SEC of expanding access to private companies to the general public. SEC chairman Jay Clayton recently asked whether ownership rules could be expanded for later-stage private companies so that retail investors could have access to pre-IPO issues.

Like Spotify’s direct listing process earlier this year, expanding the pool of capital that can invest in private companies reduces the need to conduct a classic IPO. It may not literally “kill” the IPO, but it could certainly dampen enthusiasm for the public markets, which are already lacking excitement for many CEOs in the first place.

Any changes to ownership rules would likely take significant time to complete. Nonetheless, rule changes could affect the the major tech companies who are delaying to late 2019 or 2020 and allow them to stave off the public markets for just a bit more.

Altogether, the economic environment couldn’t be more robust for companies to go public, but a diverse set of macro factors are clouding the picture, and that could make the rest of 2018 much less robust for IPOs than the first eight months.

When battery life saves human life

Few would equate human life with battery life, but for many migrants escaping war or famine, a single percentage point of battery can mean getting the right information at the right time – or not surviving at all.

Smartphones today have become an integral part of a forced migrant’s journey. From navigating mountains in Central Asia using Google Maps to staying connected with family back home via WhatsApp, smartphones have transformed the migrant experience – though not always for the better.

No electron spared

In Eastern Europe, many migrants pushed back from Hungary stay along the border on the Serbian side in abandoned buildings. Volunteers visit these sites to bring supplies, including repurposed car batteries that migrants use to charge their phones.

At one abandoned building less than a mile from the Hungarian border, migrants huddle around one car battery to charge their phones, and they all agree about the importance of battery life to them. Many asked for a power bank to enable them to charge their phone when outlets are not available. Between each other, they constantly compare notes on what apps use up the most battery power, and remind each other to close apps when not in use.

Nashid, a migrant from Pakistan taking shelter in this building, says one of his primary needs at this remote outpost is for a way to charge his phone. With no regular access to electricity, he depends on the visits of volunteers to be able to charge his battery, concocting all sorts of ways to keep it alive until their next visit. Some of his strategies include making sure his phone is turned off when he sleeps at night or if he naps during the day, as well as using the lowest brightness level possible. He swears that taking out a dead battery and shaking it repeatedly provides him with a few extra minutes of phone use.

For many migrants traversing Eastern Europe to get to Western Europe, the Hungarian-Serbian border presents the final frontier. Once in Hungary, migrants will have entered the Schengen Area, the 26 EU-member zone with no border controls, making their destination countries in Western Europe significantly easier to reach. Increased security though has made this border crossing significantly harder – with many migrants being beaten and pushed back into Serbia dozens of times before they eventually make it across.

Nashid has been trying to cross into Hungary from Serbia for the past eight months. He left his family, including a wife and two kids, back in Pakistan before setting out to Europe. He says he uses WhatsApp to keep in touch with them and to stay connected to his cousin in Paris – his ultimate destination. He admits, battery constraints aside, that his phone also provides him with a reprieve from long hours spent idly waiting every day. He tries to sneak a song or two, or watch a couple of Urdu-language videos on YouTube.

One journey, a million apps

Over the last few years, Serbia has taken on the role of a major transit point for migrants trying to make it to Western Europe. The Refugee Aid Miksalište Center in the Serbian capital Belgrade, a drop-in center open 24 hours a day, is staffed by NGOs that provide services to migrants in transit. As soon as you enter the Center, you again see migrants gathered around extension cords, charging their phones and using the Center’s free Wi-Fi to access their social media and Skype with friends and family back home.

Migrants in Serbia huddle around a power strip to charge their smartphones (Photo by Ziad Reslan)

The same scene seems to repeat wherever migrants congregate. The nearly 70 million forced migrants across the world today have had to travel thousands of miles to get to a place of refuge. More than half of these migrants come from just three countries: Syria, Afghanistan, and South Sudan. Syrians, the single largest forcibly displaced population, have to traverse on average more than 1,400 miles just to get to Serbia’s border with Hungary on their long trek from Aleppo to Western Europe.

From getting directions, to learning languages, to simply accessing entertainment, smartphones have become vital for migrants on these grueling journeys that can last for months – if at the very least to get some emotional support by talking to loved ones they leave behind.

At the height of the European refugee crisis in the summer of 2015, when nearly a million Syrian refugees crossed into Europe to escape a brutal civil war, Facebook and WhatsApp chat groups sprung up to let migrants know of real-time developments on the road, which smugglers to trust, and what rates to negotiate. Dropped GPS pins and Google Maps turn directions into practical routes migrants can take. In some cases, migrants on sinking boats in the Mediterranean have helped coast guards find them by sending GPS signals from their smartphones.

Migrants download German, French, English, and other language learning apps on their phones to aid them in acculturating to their eventual destination while they’re still on the move. They use Google Translate to understand road signs in Bulgarian, Serbian, and Hungarian. And with migrant journeys breaking up families, smartphones have become migrants’ only way to stay connected.

In recognition of the importance of connectivity to forcibly-displaced migrants, the United Nations Refugee Agency (UNHCR) – launched “Connectivity for Refugees” in mid-2016. The initiative advocates for migrants’ right to connectivity; enables access through negotiated data rates for refugees, subsidized device prices, and internet access centers; and provides training to ensure migrants are able to fully take advantage of their smartphones. Two years in, the UNHCR plans to increase the initiative’s staffing and roll out connectivity programs beyond the current pilot countries of Jordan, Greece, Chad, Malawi, Tanzania, and Uganda.

Startups, for their part, have also been ramping up efforts to help migrants. Two Columbia architecture students, Anna Stork and Andrea Sreshta, cofounded LuminAid. A startup that makes the PackLite Max 2-in-1 Phone Charger, a solar-powered phone charger and light source that the cofounders have given away to displaced migrants. With the UNHCR estimating that up to a third of a forced migrant’s income is spent on connectivity, Phone Credit for Refugees has taken on providing migrants with free data access. Others, like GeeCycle, have instead focused on collecting used smartphones from around the world and distributing them to refugees fleeing conflict.

The challenge of misinformation

NGOs like Save the Children Serbia operate out of the Refugee Aid Miksalište, a drop in center with free WIFi and available plugs. (Photo by Ziad Reslan)

For all of their benefits though, smartphones have not always improved the journeys of forced migrants. The reliance on anonymous sources on social media to navigate routes has left migrants vulnerable to smugglers and traffickers looking to take advantage of their misfortune. Even information obtained from relatives can turn out to be erroneous – with heart-wrenching consequences.

Jelena Besedic, an Advocacy Manager for Save the Children Serbia, says that the spread of misinformation has been part of the reason for the rise of unaccompanied children traversing the Balkans from Afghanistan. Parents of kids as young as eight now stuck in Serbia were falsely told that, if their kids arrive safely in Western Europe, they’re entitled to bring their parents.

Misinformation of this sort about the ease of the asylum process can lead migrants to take on increasingly dangerous journeys, only to be disappointed with the reality once they reach their destination countries. This misinformation has led organizations, like the International Organization for Migration, to start information campaigns at source countries to better educate would be migrants about the dangers of setting out west. In addition, increasingly nationalist governments, like Hungary and Italy, have started campaigns targeting the smartphones of migrants with text messages and online ads to dissuade them from coming to their countries in the first place.

Familial pressure on migrants may have always been a reality, but access to smartphones has made that pressure incessant and instantaneous. Stuck at the border between Serbia and Hungary, Nashid says he would never have made the trek if he knew what he would have to face on his more than 4,000-mile journey from Pakistan to France. But while he was still in Pakistan, he had received messages non-stop from his cousin in Paris telling him how easy it was for him to get there and how plentiful jobs are in France. Once Nashid left Pakistan, messages from his wife and two kids constantly asking whether he’d arrived in Paris have made the idea of going back home impossible.

Nashid ends our conversation by asking me to confirm a rumor he’s heard on WhatsApp. Is it true, he asks, that there are now personal battery banks that one can charge like a phone that extend a smartphone’s battery life by up to 100 hours? A charger like that, he stresses, would make a world of a difference to him out here miles away from the nearest plug.

For Labor Day, work harder

Labor Day is a holiday that just doesn’t fit Silicon Valley. It’s purported purpose is to celebrate working men and women and their — our — progress toward better working conditions and fairer workplaces. Yet, few regions in recent times have supposedly done more to “destroy” quality working conditions than the Valley, from the entire creation of the precarious 1099 economy to automation of labor itself.

My colleague John Chen offered the received wisdom on this discrepancy this weekend, arguing that Valley entrepreneurs should take the traditional message of Labor Day to heart, encouraging them to create more equitable, fair, and secure workplaces not just for their own employees, but also for all the workers that power the platforms we create and operate every day.

It’s a nice sentiment that I agree with, but I think he misses the mark.

What Silicon Valley needs — now more than ever before — is to double down on the kind of ambitious, hard-charging, change-the-world labor that created our modern knowledge economy in the first place. We can’t and shouldn’t slow down. We need more technological progress, not less. We need more automation of labor, not less. And we need as much of this innovation to happen in the United States as possible.

The tech industry may have become a dominant force by some metrics, but we are only just getting started. Entire industries like freight have little to no automation. Several billion people lack access to the internet, to say nothing of critical, basic infrastructure. Our drug pipeline is anemic, and costs for education, health care, construction, and government are continuing to skyrocket.

In short, we have barely scratched the surface of what we can achieve with software, with hardware, with better business models and better automation. These aren’t table scraps, but trillions dollar opportunities lying in wait for entrepreneurs to seize them.

And yet, we keep hearing persistent claims that overwork is a problem in the Valley. Discussions of work-life balance are practically de rigueur for startups these days, as are free meals and massages and unlimited vacation time. These demands are coming at a time when some of the most fertile opportunities for innovation in areas as diverse as robotics, space, biotech, cancer, and construction remain ripe for the taking.

It’s a hustlers world out there, and the message that those who want to shape that world should be hearing this Labor Day is simple: work harder. Hell, work today.

Certainly that’s the message ingrained in most places competing with the Valley these days. Mike Moritz wrote a column in the Financial Times earlier this year, comparing the hard-charging work ethic of Chinese tech entrepreneurs and workers with their Silicon Valley brethren. He didn’t mince words, and the piece ignited a firestorm of criticism.

But he’s right, and not just about Chinese founders. Entrepreneurs in developing and middle-income countries from India and South Korea to Brazil and Nigeria now have access to the same tools that top Valley startups use, with experience to boot. And they are hungry to transform their lot in life into something much more ambitious, much more grand.

We need to re-inject their level of urgency back into the Valley ethos and compete ferociously. We can’t rest on companies from the 1990s like Google, or the 1970s like Apple and Microsoft as the final wave of innovative companies. We need the next massive tech companies to be built, and they’re not going to be created 20-hour workweeks at a time.

Entrepreneurship is a rough and solitary life. Hustling isn’t fun, losing deals isn’t enjoyable, and working around the clock under intense pressure is not for the faint of heart. For those who want the easy road, there are many, many pathways today in the modern American economy that will guarantee it, whether that is a big tech giant, or some other Fortune 100 company.

Yet, the spirit of America is always choosing the bigger gamble, the bolder vision. And it is the people who stand up and demand that we make huge strides today — not tomorrow — that are going to own the future.

Of course, founding a company has to be a voluntary choice. No one should have to work for a pittance, or feel coerced into a high-pressure lifestyle when they aren’t ready and willing. No one should be locked into an economic system where they can’t improve their own income and status through tenacity and strategy. Our tech companies should absolutely be more diverse, and fairer to all people. Equity can and should be more widely distributed.

But when it comes to the true meaning of Labor Day in the American sense, we should celebrate the hard-working founders and entrepreneurs who are taking on the biggest challenges and focusing all of their talents on solving these critical human problems. That’s what made Silicon Valley what it is, and it’s the meaning of Labor Day that every founder and dreamer should center on.

It’s time for Facebook and Twitter to coordinate efforts on hate speech

Since the election of Donald Trump in 2016, there has been burgeoning awareness of the hate speech on social media platforms like Facebook and Twitter. While activists have pressured these companies to improve their content moderation, few groups (outside of the German government) have outright sued the platforms for their actions.

That’s because of a legal distinction between media publications and media platforms that has made solving hate speech online a vexing problem.

Take, for instance, an op-ed published in the New York Times calling for the slaughter of an entire minority group.  The Times would likely be sued for publishing hate speech, and the plaintiffs may well be victorious in their case. Yet, if that op-ed were published in a Facebook post, a suit against Facebook would likely fail.

The reason for this disparity? Section 230 of the Communications Decency Act (CDA), which provides platforms like Facebook with a broad shield from liability when a lawsuit turns on what its users post or share. The latest uproar against Alex Jones and Infowars has led many to call for the repeal of section 230 – but that may lead to government getting into the business of regulating speech online. Instead, platforms should step up to the plate and coordinate their policies so that hate speech will be considered hate speech regardless of whether Jones uses Facebook, Twitter or YouTube to propagate his hate. 

A primer on section 230 

Section 230 is considered a bedrock of freedom of speech on the internet. Passed in the mid-1990s, it is credited with freeing platforms like Facebook, Twitter, and YouTube from the risk of being sued for content their users upload, and therefore powering the exponential growth of these companies. If it weren’t for section 230, today’s social media giants would have long been bogged down with suits based on what their users post, with the resulting necessary pre-vetting of posts likely crippling these companies altogether. 

Instead, in the more than twenty years since its enactment, courts have consistently found section 230 to be a bar to suing tech companies for user-generated content they host. And it’s not only social media platforms that have benefited from section 230; sharing economy companies have used section 230 to defend themselves, with the likes of Airbnb arguing they’re not responsible for what a host posts on their site. Courts have even found section 230 broad enough to cover dating apps. When a man sued one for not verifying the age of an underage user, the court tossed out the lawsuit finding an app user’s misrepresentation of his age not to be the app’s responsibility because of section 230.

Private regulation of hate speech 

Of course, section 230 has not meant that hate speech online has gone unchecked. Platforms like Facebook, YouTube and Twitter all have their own extensive policies prohibiting users from posting hate speech. Social media companies have hired thousands of moderators to enforce these policies and to hold violating users accountable by suspending them or blocking their access altogether. But the recent debacle with Alex Jones and Infowars presents a case study on how these policies can be inconsistently applied.  

Jones has for years fabricated conspiracy theories, like the one claiming that the Sandy Hook school shooting was a hoax and that Democrats run a global child-sex trafficking ring. With thousands of followers on Facebook, Twitter, and YouTube, Jones’ hate speech has had real life consequences. From the brutal harassment of Sandy Hook parents to a gunman storming a pizza restaurant in D.C. to save kids from the restaurant’s nonexistent basement, his messages have had serious deleterious consequences for many. 

Alex Jones and Infowars were finally suspended from ten platforms by our count – with even Twitter falling in line and suspending him for a week after first dithering. But the varying and delayed responses exposed how different platforms handle the same speech.  

Inconsistent application of hate speech rules across platforms, compounded by recent controversies involving the spread of fake news and the contribution of social media to increased polarization, have led to calls to amend or repeal section 230. If the printed press and cable news can be held liable for propagating hate speech, the argument goes, then why should the same not be true online – especially when fully two-thirds of Americans now report getting at least some of their news from social media.  Amid the chorus of those calling for more regulation of tech companies, section 230 has become a consistent target. 

Should hate speech be regulated? 

But if you need convincing as to why the government is not best placed to regulate speech online, look no further than Congress’s own wording in section 230. The section enacted in the mid-90s states that online platforms “offer users a great degree of control over the information that they receive, as well as the potential for even greater control in the future as technology develops” and “a forum for a true diversity of political discourse, unique opportunities for cultural development, and myriad avenues for intellectual activity.”  

Section 230 goes on to declare that it is the “policy of the United States . . . to encourage the development of technologies which maximize user control over what information is received by individuals, families, and schools who use the Internet.”  Based on the above, section 230 offers the now infamous liability protection for online platforms.  

From the simple fact that most of what we see on our social media is dictated by algorithms over which we have no control, to the Cambridge Analytica scandal, to increased polarization because of the propagation of fake news on social media, one can quickly see how Congress’s words in 1996 read today as a catalogue of inaccurate predictions. Even Ron Wyden, one of the original drafters of section 230, himself admits today that drafters never exempted an “individual endorsing (or denying) the extermination of millions of people, or attacking the victims of horrific crimes or the parents of murdered children” to be enabled through the protections offered by section 230.

It would be hard to argue that today’s Congress – having shown little understanding in recent hearings of how social media operates to begin with – is any more qualified at predicting the effects of regulating speech online twenty years from now.   

More importantly, the burden of complying with new regulations will definitely result in a significant barrier to entry for startups and therefore have the unintended consequence of entrenching incumbents. While Facebook, YouTube, and Twitter may have the resources and infrastructure to handle compliance with increased moderation or pre-vetting of posts that regulations might impose, smaller startups will be at a major disadvantage in keeping up with such a burden.

Last chance before regulation 

The answer has to lie with the online platforms themselves. Over the past two decades, they have amassed a wealth of experience in detecting and taking down hate speech. They have built up formidable teams with varied backgrounds to draft policies that take into account an ever-changing internet. Their profits have enabled them to hire away top talent, from government prosecutors to academics and human rights lawyers.  

These platforms also have been on a hiring spree in the last couple of years to ensure that their product policy teams – the ones that draft policies and oversee their enforcement – are more representative of society at large. Facebook proudly announced that its product policy team now includes “a former rape crisis counselor, an academic who has spent her career studying hate organizations . . . and a teacher.” Gone are the days when a bunch of engineers exclusively decided where to draw the lines. Big tech companies have been taking the drafting and enforcement of their policies ever more seriously.

What they now need to do is take the next step and start to coordinate policies so that those who wish to propagate hate speech can no longer game policies across platforms. Waiting for controversies like Infowars to become a full-fledged PR nightmare before taking concrete action will only increase calls for regulation. Proactively pooling resources when it comes to hate speech policies and establishing industry-wide standards will provide a defensible reason to resist direct government regulation.

The social media giants can also build public trust by helping startups get up to speed on the latest approaches to content moderation. While any industry consortium around coordinating hate speech is certain to be dominated by the largest tech companies, they can ensure that policies are easy to access and widely distributed.

Coordination between fierce competitors may sound counterintuitive. But the common problem of hate speech and the gaming of online platforms by those trying to propagate it call for an industry-wide response. Precedent exists for tech titans coordinating when faced with a common threat. Just last year, Facebook, Microsoft, Twitter, and YouTube formalized their “Global Internet Forum to Counter Terrorism” – a partnership to curb the threat of terrorist content online. Fighting hate speech is no less laudable a goal.

Self-regulation is an immense privilege. To the extent that big tech companies want to hold onto that privilege, they have a responsibility to coordinate the policies that underpin their regulation of speech and to enable startups and smaller tech companies to get access to these policies and enforcement mechanisms.