Online tax filing and accounting service, Contabilizei, has raised $20 million in a new round of financing led by Point72 Ventures, the early stage investment arm associated with hedge fund guru Steven Cohen’s Point72 Asset Management.
Smart money in both the venture and private equity space has been long Brazil for a bit, and the new investment provides even more firepower to the thesis that Brazil’s startup ecosystem is on the move.
“For the Brazilian ecosystem, the investment represents the trust and the opportunity that we have here in the Brazilian market. For quite some time it was difficult to attract this kind of investment from abroad,” says Contabilizei chief executive Vitor Torres. Even though we had a recession there are technology companies that are growing,” Torres says, saying that the company has already staved off acquisition offers and will eventually eye a potential public offering in U.S. or domestic markets.
Though it was only founded five years ago, the company already has 200 employees and more than 10,000 customers throughout Brazil.
Contabilizei has already audited more than 2 billion reals in customer revenue and saved its users over 500 million reals in taxes. For new companies, Contabilizei will also offer free business registration and formation filings. So far, the company has helped 5,000 new businesses get their paperwork done around the country.
“In Brazil, one of the greatest frictions for a small company is meeting its tax reporting requirements,” said Pete Casella, Head of Fintech & Financial Services Investments at Point72 Ventures. “By building an automated tax accounting service that can deliver services at a fraction of the cost of a traditional accountant, we believe that Contabilizei has established the high trust relationships that will enable it to serve customers in many new ways over the coming years.”
New investors also contributed to the round including the International Financial Corp., an investment arm of the The World Bank, and Quona Capital, Quadrant, and the Fintech Collective. They joined existing company backers Kaszek Ventures, e.Bricks, Endeavor Catalyst, and Curitiba Angels.
“Our goal is to simplify the entrepreneur’s routine so they can focus on their own business and not on bureaucracy. We are only at the beginning, and in three years we want to grow 15 times more,” said Vitor Torres, chief executiver and founder of Contabilizei, in a statement. “We were pioneers in the debureaucratization of accounting in the country and we managed to do it with a quality that surpasses 98% of our customers’ satisfaction.”
Brud, the company behind the virtual celebrity Lil Miquela, is now worth at least $125 million thanks to a new round of financing the company is currently closing. Meanwhile, new venture-backed companies like the superstealthy Shadows, SuperPlastic, and Toonstar are all developing virtual characters that will launch via social media channels like Snap and Instagram, or on their own platforms.
It’s all an effort to test whether audiences are ready to embrace even more virtual avatars — including ones that don’t try to straddle the uncanny valley quite as blatantly as Miquela and her crew.
The investors backing these companies say it’s the rise of a new kind of studio system — one that’s independent of the personalities and scandals which have defined a generation of Vine, YouTube, and Instagram stars and it’s attracting serious venture dollars.
“The way I look at it… a lot of it is going to be like any kind of content studio,” says Peter Rojas, a partner at the New York investment firm, Betaworks Ventures. “In 2019 and 2020 we’re going to see a lot of these… we’re going to see a lot of people putting out a lot of stuff.”
Los Angeles-based Brud is by far the most established of this new breed in the U.S. (at least in terms of the amount of money it has raised). Last year the company scored at least $6 million from investors including Sequoia Capital, BoxGroup, and other, undisclosed, investors.
And the company has done it again, and is in the process of closing on somewhere between $20 million and $30 million at a pre-money valuation of at least $125 million (pre-money) led by Spark Capital, according to people with knowledge of the round. Miquela “herself” teased that the “she” had something to “share” with her roughly 1.5 million followers. Brud declined to comment.
If Miquela is arguably the most successful U.S. version of this new breed of entertainer, the collective behind the account is far from the only one.
Experiments in avastardom have been percolating in popular culture since at least the rise of the Gorillaz — the Damon Albarn assembled musical supergroup that released their first EP “Tomorrow Comes Today” in late 2000. Or, depending on your definition, perhaps as early as Space Ghost Coast to Coast, the mid-90s Cartoon Network series featuring an animated superhero interviewing real celebrities.
And that success spawned imitators like Hatsune Miku who’ve capture the imagination and hearts of audiences globally. In November, a Japanese fan named Akihiko Kondo spent $18,000 to wed the avatar. And he’s not alone. Gatebox, the company that manufactures hardware to display holograms of various anime characters in homes, has issued at least 3,700 marriage licenses to fans like Kondo.
At Betaworks, the firm is exploring the popularity of these virtual characters — and the role that artificial intelligence and new content creation technologies will play in reshaping entertainment and social media platforms. The company’s Synthetic Camp, which launches in mid-February, is around what Rojas calls “synthetic reality” including the rise of avatar-driven media like Miquela.
“We’re looking more broadly at the issues around manipulated or faked content and how do you address that,” says Rojas. “Algorithmically generated content and how things like generative adversarial networks are being used to create and synthesize new photo and video content.”
For Rojas, the development of powerful new tools which enable the creation of new characters in minutes that, in the past, would have taken humans hundreds of thousands of hours, can unlock all sorts of possibilities for entertainment.
“The celebrity part comes into play where we’re now at a point where you can create these photorealistic avatars and put them into videos and have them wearing clothes without having to spend millions of dollars on CGI,” he says.
Betaworks is betting on the content studio aspect through companies like SuperPlastic, a new startup launched by Paul Budnitz the founder of the alternative social network, ello and Budnitz Bicycles. But the company also believes there are opportunities in backing the content creation toolkits that can power this new kind of media star, like its investment in the media creation tool, Facemoji.
“There’s no reason why you won’t see it across the board. Our appetite for fresh content and this stuff is kind of limitless,” says Rojas. “And I don’t see it as zero sum. YouTube didn’t kill television, it just became Netflix… Things can move in two different directions at the same time. More high brow and more complex and higher level and also more democratized and lowbrow and dumb. There’ll be avatar tools and apps and games and then we’ll see stuff that’s top of the pyramid stuff like Lil Miquela and Shudu.”
At Toonstar, co-founders John Attanasio and Luisa Huang went from developing a platform to developing a studio. The two met at the Digital Media Group within Warner Brothers and were tasked with trying to experiment with technologies at the intersection of media generation and distribution.
“Daily, snackable and interactive are the three things that you need to be successful in the world,” says Attanasio. “We saw the impact that the rise of mobile was having on linear. We sat through a lot of meetings where you looked at audience trends and you saw that going in the wrong direction in the wrong color.”
So the two founders began contemplating what a new, low-cost, high-touch media network might look like. “We looked at mobile and we saw the massive animation gap. Animation takes a long time and it’s expensive, the average season can cost $3 million to $5 million and bringing a new series to life can take three to four years.”
For Attanasio and Huang, those timelines were too slow to take advantage of the mobile content revolution. So the two built a platform which initially focused on letting user generated content flourish — a kind of YouTube for animated, avatar-driven storytelling that could be distributed on any social media platform or on Toonstar’s own site and app.
Since that launch, the company has refined its business model to become more of a traditional animation studio. “We do daily pop culture cartoons.. and partner with creators and influencers,” says Attanasio. “Our whole thing is driven by proprietary tech that allows us to do things really fast and at low cost… 50 times faster and 90% cheaper than typical animation.”
Attanasio also realized the importance of creative talent. “We had no shortage of content but it was shitty content,” Attanasio says. “That’s when you realize… what we’re doing… there’s three ingredients.. One is tech, one is process and the third is creative… if you have tech and process and you take away creative what you have is an ocean of shit.”
Now, they’re also experimenting with creating their own animated influencer. Leveraging the popularity of the Musical.ly app (now rebranded under its new owner, TikTok), Toonstar launched Poppy.tv.
“We launched a channel called poppy tv.. It was a blue chicken [and] she became musically famous,” Attanasio said. “Within three months Poppy had 300,000 followers and had an avid fanbase for Poppy and her cast of characters.”
The content was episodic and ranged from 15 seconds to 30 seconds — and it was based on cartoon music videos. “That validated the thesis of can you create a cartoon influencer and can you have a broad audience be super engaged… and the answer was ‘Yes,'” said Attanasio.
Then, taking a page from the early Cartoon Network playbook, Attanasio and Huang made the show interactive in a callback to the “Space Ghost” phenomenon. “We started doing cartoon livestreams and the founders of Musical.ly asked us to do a weekly show that they would feature,” Attanasio says. “It was Poppy the Blue Chicken and we would broadcast for an hour every week. Famous musers on musically come in with a facetime … And there were games and all of it was live, in real time.”
It’s hard to overstate the importance of working with virtual characters, according to Attanasio. “We understand how much money you can make from the IP. When we’re working with creators or influencers they understand that you have this shelf life as an influencer, but as IP, that can go on in perpetuity. There is something to be said about building a character. We’re all children of Saturday morning cartoons.”
And Toonstar is building an audience. Its show, the Danogs, has 4.5 million weekly viewers, and the company recently launched Black Santa — a show developed in partnership with the former NBA All-Star and tech investor, Baron Davis. The NBA star and studio analyst also committed capital to Toonstar’s recent seed funding; a round led by Founders Fund partner, Cyan Banister. In all, Toonstar said it has about 45 million weekly viewers for all of its shows.
Those kinds of numbers are music to the ears, fo Dylan Flinn, a former agent at the Los Angeles powerhouse Creative Artists Agency, who left to start his own company.
Flinn has partnered with the producers of BoJack Horseman on a new venture called Shadows, which has already launched two virtual avatars into the wild.
Flinn got exposure to the virtual media world while at Rothenberg Ventures, the now defunct fund that invested in virtual reality and augmented reality. “I still had that lens of looking at innovation and virtual worlds and I’ve always been fascinated by what social media is doing.”
For Flinn, the virtual element of what’s being created is vitally important to the success of these ventures. “We’re not trying to create humans,” he says. “We look up to the Mickey Mouse’s and Looney Tunes and the Bugs Bunnies of the world. When I look at these 3D, [computer generated] human-based characters it’s so close the uncanny valley. We want to develop characters and we want to tell fictional stories rooted in reality.”
Like Attanasio at Toonstar, Flinn sees the speed at which digital content can be created and brought to market as a critical component of its success. “When I was at CAA you see how much money is wasted on development every year. This was an approach which was like, ‘What if you can develop in public and the best content can win?'” Flinn says.
Shadows already has two virtual avatars out in the wild, but he declined to identify which ones they were. Ultimately, he said, the goal is to have 20 characters a year, because once a couple of characters come to market and get traction with an audience, new characters can be introduced to old ones and the universe becomes a discovery engine of its own. That’s a strategy that Miquela and her crew are also employing, with varying degrees of success.
Ultimately, these types of entertainments aren’t going to go away — at least according to the investors and entrepreneurs who are creating the companies that are building them.
“People are totally fine with things that are artificial,” says Rojas. “People totally connect with Mario from Super Mario Bros. We always tell stories and have characters in whatever medium are available to us [like] Instagram and Snapchat and YouTube and Twitter. Thirty to forty years ago it was television and radio and movies. People are going to express themselves and avatars end up being a form expression.”
Henrique Dubugras is the founder Brex, the billion-dollar corporate credit provider for startups.
When I hear protesters shout, “Immigrants are welcome here!” at the San Francisco immigration office near my startup’s headquarters, I think about how simple a phrase that is for a topic that is so nuanced, especially for me as an immigrant entrepreneur.
Growing up in Brazil, I am less familiar with the nuances of the American debate on immigration legislation, but I know that immigrants here add a lot of jobs and stimulate the local economy. As an immigrant entrepreneur, I’ve tried to check all of those boxes, and really prove my value to this country.
My tech startup Brex has achieved a lot in a short period of time, a feat which is underscored by receiving a $1 billion dollar valuation in just one year. But we didn’t achieve that high level of growth in spite of being founded by immigrants, but because of it. The key to our growth and to working towards building a global brand is our international talent pool, without it, we could never have gotten to where we are today.
So beyond Brex, what do the most successful Silicon Valley startups have in common? They’re also run by immigrants. In fact, not only are 57% of the Bay Area’s STEM tech workers immigrants, they also make up 25% of business founders in the US. You can trace the immigrant entrepreneurial streak in Silicon Valley from the founders of SUN Microsystems and Google to the Valley’s most notorious Twitter User, Tesla’s Elon Musk.
Immigrants not only built the first microchips in Silicon Valley, but they built these companies into the tech titans that they are known as today. After all, more than 50% of billion dollar startups are founded by immigrants, and many of those startups were founded by immigrants on H-1B visas.
While it might sound counterintuitive, immigrants create more jobs and make our economy stronger. Research from the National Foundation of American Policy (NFAP) has shown that immigrant-founded billion-dollar companies doubled their number of employees over the past two years. According to the research, “WeWork went from 1,200 to 6,000 employees between 2016 and 2018, Houzz increased from 800 to 1,800 employees the last two years, while Cloudflare went from 225 to 715 employees.”
We’ve seen the same growth at Brex. In just one year we hired 70 employees and invested over $6 million dollars in creating local jobs. Our startup is not alone, as Inc. recently reported, “50 immigrant-founded unicorn startups have a combined value of $248 billion, according to the report [by NFAP], and have created an average of 1,200 jobs each.”
One of the fundamental drivers of our success is our international workforce. Many of our key-hires are from all over Latin America, spanning from Uruguay to Mexico. In fact, 42% of our workforce is made up of immigrants and another 6% are made up of children of immigrants. Plenty of research shows that diverse teams are more productive and work together better, but that’s only part of the reason why you should bet on an international workforce. When you’re working with the best and brightest from every country, it inspires you to bring forth your most creative ideas, collaborate, and push yourself beyond your comfort zone. It motivates you to be your best.
With all of the positive contributions immigrants bring to this country, you’d think we’d have less restrictive immigration policies. However, that’s not the case. One of the biggest challenges that I face is hiring experienced, qualified engineers and designers to continue innovating in a fast-paced, competitive market.
This is a universal challenge in the tech industry. For the past 10 years, software engineers have been the #1 most difficult job to fill in the United States. Business owners are willing to pay 10-20 percent above the market rate for top talent and engineers. Yet, we’re still projected to have a shortage of two million engineering jobs in the US by 2022. How can you lead the charge of innovation if you don’t have the talent to do it?
What makes matters worse is that there are so few opportunities and types of visas for qualified immigrants. This is limiting job growth, knowledge-sharing, and technological breakthroughs in this country. And we risk losing top talent to other nations if we don’t loosen our restrictive visa laws.
H1-B visa applications fell this year, and at the same time, these visas have become harder to obtain and it has become more expensive to acquire international talent. This isn’t the time to abandon the international talent pool, but to invest in highly specialized workers that can give your startup a competitive advantage.
Already, there’s been a dramatic spike in engineering talent moving to Canada, with a 40% uptick in 2017. Toronto, Berlin, and Singapore are fastly becoming burgeoning tech hubs, and many fear (rightfully) that they will soon outpace the US in growth, talent, and developing the latest technologies.
This year, U.S. based tech companies generated $351 billion of revenue in 2018. The U.S. can’t afford to miss out on this huge revenue source. And, according to Harvard Business School Professor William R. Kerr and the author of The Gift of Global Talent: How Migration Shapes Business, Economy & Society, “Today’s knowledge economy dictates that your ability to attract, develop, and integrate smart minds governs how prosperous you will be.”
Immigrants have made Silicon Valley the powerhouse that it is today, and severely limiting highly-skilled immigration benefits no-one. Immigrants have helped the U.S. build one of the best tech hubs in the world— now is the time for startups to invest in international talent so that our technology, economy, and local communities can continue to thrive.
In late October following a significant victory for Jair Bolsonaro in Brazil’s presidential elections, the stock market for Latin America’s largest country shot up. Financial markets reacted favorably to the news because Bolsonaro, a free-market proponent, promises to deliver broad economic reforms, fight corruption and work to reshape Brazil through a pro-business agenda. While some have dubbed him as a far-right “Trump of the Tropics” against a backdrop of many Brazilians feeling that government has failed them, the business outlook is extremely positive.
When President-elect Bolsonaro appointed Santander executive Roberto Campos as new head of Brazil’s central bank in mid-November, Brazil’s stock market cheered again with Sao Paulo’s Bovespa stocks surging as much as 2.65 percent on the day news was announced. According to Reuters, “analysts said Bolsonaro, a former army captain and lawmaker who has admitted to having scant knowledge of economics, was assembling an experienced economic team to implement his plans to slash government spending, simplify Brazil’s complex tax system and sell off state-run companies.”
Admittedly, there are some challenges as well. Most notably, pension-system reform tops the list of priorities to get on the right track quickly. A costly pension system is increasing the country’s debt and contributed to Brazil losing its investment-grade credit rating in 2015. According to the new administration, Brazil’s domestic product could grow by 3.5 percent during 2019 if Congress approves pension reform soon. The other issue that’s cropped up to tarnish the glow of Bolsonaro coming into power are suspect payments made to his son that are being examined by COAF, the financial crimes unit.
While the jury is still out on Bolsonaro’s impact on Brazilian society at large after being portrayed as the Brazilian Trump by the opposition party, he’s come across as less authoritarian during his first days in office. Since the election, his tone is calmer and he’s repeatedly said that he plans to govern for all Brazilians, not just those who voted for him. In his first speech as president, he invited his wife to speak first which has never happened before.
Still, according to The New York Times, “some Brazilians remain deeply divided on the new president, a former army captain who has hailed the country’s military dictators and made disparaging remarks about women and minority groups.”
Others have expressed concern about his environment impact with the “an assault on environmental and Amazon protections” through an executive order within hours of taking office earlier this week. However, some major press outlets have been more upbeat: “With his mix of market-friendly economic policies and social conservativism at home, Mr. Bolsonaro plans to align Brazil more closely with developed nations and particularly the U.S.,” according to the Wall Street Journal this week.
Based on his publicly stated plans, here’s why President Bolsonaro will be good for business and how his administration will help build an even stronger entrepreneurial ecosystem in Brazil:
Bolsonaro’s Ministerial Reform
President Temer leaves office with 29 government ministries. President Bolsonaro plans to reduce the number of ministries to 22, which will reduce spending and make the government smaller and run more efficiently. We expect to see more modern technology implemented to eliminate bureaucratic red tape and government inefficiencies.
Importantly, this will open up more partnerships and contracting of tech startups’ solutions. Government contacts for new technology will be used across nearly all the ministries including mobility, transportation, health, finance, management and legal administration – which will have a positive financial impact especially for the rich and booming SaaS market players in Brazil.
Government Company Privatization
Of Brazil’s 418 government-controlled companies, there are 138 of them on the federal level that could be privatized. In comparison to Brazil’s 418, Chile has 25 government-controlled companies, the U.S. has 12, Australia and Japan each have eight, and Switzerland has four. Together, Brazil-owned companies employ more than 800,000 people today, including about 500,000 federal employees. Some of the largest ones include petroleum company Petrobras, electric utilities company Eletrobras, Banco do Brasil, Latin America’s largest bank in terms of its assets, and Caixa Economica Federal, the largest 100 percent government-owned financial institution in Latin America.
The process of privatizing companies is known to be cumbersome and inefficient, and the transformation from political appointments to professional management will surge the need for better management tools, especially for enterprise SaaS solutions.
STEAM Education to Boost Brazil’s Tech Talent
Based on Bolsonaro’s original plan to move the oversight of university and post-graduate education from the Education Ministry to the Science and Technology Ministry, it’s clear the new presidential administration is favoring more STEAM courses that are focused on Science, Technology, Engineering, the Arts and Mathematics.
Previous administrations threw further support behind humanities-focused education programs. Similar STEAM-focused higher education systems from countries such as Singapore and South Korea have helped to generate a bigger pipeline of qualified engineers and technical talent badly needed by Brazilian startups and larger companies doing business in the country. The additional tech talent boost in the country will help Brazil better compete on the global stage.
The Chicago Boys’ “Super” Ministry
The merger of the Ministry of Economy with the Treasury, Planning and Industry and Foreign Trade and Services ministries will create a super ministry to be run by Dr. Paulo Guedes and his team of Chicago Boys. Trained at the Department of Economics in the University of Chicago under Milton Friedman and Arnold Harberger, the Chicago Boys are a group of prominent Chilean economists who are credited with transforming Chile into Latin America’s best performing economies and one of the world’s most business-friendly jurisdictions. Joaquim Levi, the recently appointed chief of BNDES (Brazilian Development Bank), is also a Chicago Boy and a strong believer in venture capital and startups.
Previously, Guedes was a general partner in Bozano Investimentos, a pioneering private equity firm, before accepting the invitation to take the helm of the world’s eighth-largest economy in Brazil. To have a team of economists who deeply understand the importance of rapid-growth companies is good news for Brazil’s entrepreneurial ecosystem. This group of 30,000 startup companies are responsible for 50 percent of the job openings in Brazil and they’re growing far faster than the country’s GDP.
Bolsonaro’s Pro-Business Cabinet Appointments
President Bolsonaro has appointed a majority of technical experts to be part of his new cabinet. Eight of them have strong technology backgrounds, and this deeper knowledge of the tech sector will better inform decisions and open the way to more funding for innovation.
One of those appointments, Sergio Moro, is the federal judge for the anti-corruption initiative knows as “Operation Car Wash.” With Moro’s nomination to Chief of the Justice Department and his anticipated fight against corruption could generate economic growth and help reduce unemployment in the country. Bolsonaro’s cabinet is also expected to simplify the crazy and overwhelming tax system. More than 40 different taxes could be whittled down to a dozen, making it easier for entrepreneurs to launch new companies.
In general terms, Brazil and Latin America have long suffered from deep inefficiencies. With Bolsonaro’s administration, there’s new promise that there will be an increase in long-term infrastructure investments, reforms to reduce corruption and bureaucratic red tape, and enthusiasm and support for startup investments in entrepreneurs who will lead the country’s fastest-growing companies and make significant technology advancements to “lift all boats.”
Mike Volpi is a general partner at Index Ventures. Before co-founding the firm's San Francisco office with Danny Rimer, Volpi served as the chief strategy officer at Cisco Systems.
It was just 5 years ago that there was an ample dose of skepticism from investors about the viability of open source as a business model. The common thesis was that Redhat was a snowflake and that no other open source company would be significant in the software universe.
So, why did this movement that once represented the bleeding edge of software become the hot place to be? There are a number of fundamental changes that have advanced open source businesses and their prospects in the market.
David Paul Morris/Bloomberg via Getty Images
From Open Source to Open Core to SaaS
The original open source projects were not really businesses, they were revolutions against the unfair profits that closed-source software companies were reaping. Microsoft, Oracle, SAP and others were extracting monopoly-like “rents” for software, which the top developers of the time didn’t believe was world class. So, beginning with the most broadly used components of software – operating systems and databases – progressive developers collaborated, often asynchronously, to author great pieces of software. Everyone could not only see the software in the open, but through a loosely-knit governance model, they added, improved and enhanced it.
The software was originally created by and for developers, which meant that at first it wasn’t the most user-friendly. But it was performant, robust and flexible. These merits gradually percolated across the software world and, over a decade, Linux became the second most popular OS for servers (next to Windows); MySQL mirrored that feat by eating away at Oracle’s dominance.
The first entrepreneurial ventures attempted to capitalize on this adoption by offering “enterprise-grade” support subscriptions for these software distributions. Redhat emerged the winner in the Linux race and MySQL (thecompany) for databases. These businesses had some obvious limitations – it was harder to monetize software with just support services, but the market size for OS’s and databases was so large that, in spite of more challenged business models, sizeable companies could be built.
The successful adoption of Linux and MySQL laid the foundation for the second generation of Open Source companies – the poster children of this generation were Cloudera and Hortonworks. These open source projects and businesses were fundamentally different from the first generation on two dimensions. First, the software was principally developed within an existing company and not by a broad, unaffiliated community (in the case of Hadoop, the software took shape within Yahoo!) . Second, these businesses were based on the model that only parts of software in the project were licensed for free, so they could charge customers for use of some of the software under a commercial license. The commercial aspects were specifically built for enterprise production use and thus easier to monetize. These companies, therefore, had the ability to capture more revenue even if the market for their product didn’t have quite as much appeal as operating systems and databases.
However, there were downsides to this second generation model of open source business. The first was that no company singularly held ‘moral authority’ over the software – and therefore the contenders competed for profits by offering increasing parts of their software for free. Second, these companies often balkanized the evolution of the software in an attempt to differentiate themselves. To make matters more difficult, these businesses were not built with a cloud service in mind. Therefore, cloud providers were able to use the open source software to create SaaS businesses of the same software base. Amazon’s EMR is a great example of this.
The latest evolution came when entrepreneurial developers grasped the business model challenges existent in the first two generations – Gen 1 and Gen 2 – of open source companies, and evolved the projects with two important elements. The first is that the open source software is now developed largely within the confines of businesses. Often, more than 90% of the lines of code in these projects are written by the employees of the company that commercialized the software. Second, these businesses offer their own software as a cloud service from very early on. In a sense, these are Open Core / Cloud service hybrid businesses with multiple pathways to monetize their product. By offering the products as SaaS, these businesses can interweave open source software with commercial software so customers no longer have to worry about which license they should be taking. Companies like Elastic, Mongo, and Confluent with services like Elastic Cloud, Confluent Cloud, and MongoDB Atlas are examples of this Gen 3. The implications of this evolution are that open source software companies now have the opportunity to become the dominant business model for software infrastructure.
The Role of the Community
While the products of these Gen 3 companies are definitely more tightly controlled by the host companies, the open source community still plays a pivotal role in the creation and development of the open source projects. For one, the community still discoversthe most innovative and relevant projects. They star the projects on Github, download the software in order to try it, and evangelize what they perceive to be the better project so that others can benefit from great software. Much like how a good blog post or a tweet spreads virally, great open source software leverages network effects. It is the community that is the source of promotion for that virality.
The community also ends up effectively being the “product manager” for these projects. It asks for enhancements and improvements; it points out the shortcomings of the software. The feature requests are not in a product requirements document, but on Github, comments threads and Hacker News. And, if an open source project diligently responds to the community, it will shape itself to the features and capabilities that developers want.
The community also acts as the QA department for open source software. It will identify bugs and shortcomings in the software; test 0.x versions diligently; and give the companies feedback on what is working or what is not. The community will also reward great software with positive feedback, which will encourage broader use.
What has changed though, is that the community is not as involved as it used to be in the actual coding of the software projects. While that is a drawback relative to Gen 1 and Gen 2 companies, it is also one of the inevitable realities of the evolving business model.
Linus Torvalds was the designer of the open-source operating system Linux.
Rise of the Developer
It is also important to realize the increasing importance of the developer for these open source projects. The traditional go-to-market model of closed source software targeted IT as the purchasing center of software. While IT still plays a role, the real customers of open source are the developers who often discover the software, and then download and integrate it into the prototype versions of the projects that they are working on. Once “infected”by open source software, these projects work their way through the development cycles of organizations from design, to prototyping, to development, to integration and testing, to staging, and finally to production. By the time the open source software gets to production it is rarely, if ever, displaced. Fundamentally, the software is never “sold”; it is adopted by the developers who appreciate the software more because they can see it and use it themselves rather than being subject to it based on executive decisions.
In other words, open source software permeates itself through the true experts, and makes the selection process much more grassroots than it has ever been historically. The developers basically vote with their feet. This is in stark contrast to how software has traditionally been sold.
Virtues of the Open Source Business Model
The resulting business model of an open source company looks quite different than a traditional software business. First of all, the revenue line is different. Side-by-side, a closed source software company will generally be able to charge more per unit than an open source company. Even today, customers do have some level of resistance to paying a high price per unit for software that is theoretically “free.” But, even though open source software is lower cost per unit, it makes up the total market size by leveraging the elasticity in the market. When something is cheaper, more people buy it. That’s why open source companies have such massive and rapid adoption when they achieve product-market fit.
Another great advantage of open source companies is their far more efficient and viral go-to-market motion. The first and most obvious benefit is that a user is already a “customer” before she even pays for it. Because so much of the initial adoption of open source software comes from developers organically downloading and using the software, the companies themselves can often bypass both the marketing pitch and the proof-of-concept stage of the sales cycle. The sales pitch is more along the lines of, “you already use 500 instances of our software in your environment, wouldn’t you like to upgrade to the enterprise edition and get these additional features?” This translates to much shorter sales cycles, the need for far fewer sales engineers per account executive, and much quicker payback periods of the cost of selling. In fact, in an ideal situation, open source companies can operate with favorable Account Executives to Systems Engineer ratios and can go from sales qualified lead (SQL) to closed sales within one quarter.
This virality allows for open source software businesses to be far more efficient than traditional software businesses from a cash consumption basis. Some of the best open source companies have been able to grow their business at triple-digit growth rates well into their life while maintaining moderate of burn rates of cash. This is hard to imagine in a traditional software company. Needless to say, less cash consumption equals less dilution for the founders.
Photo courtesy of Getty Images
Open Source to Freemium
One last aspect of the changing open source business that is worth elaborating on is the gradual movement from true open source to community-assisted freemium. As mentioned above, the early open source projects leveraged the community as key contributors to the software base. In addition, even for slight elements of commercially-licensed software, there was significant pushback from the community. These days the community and the customer base are much more knowledgeable about the open source business model, and there is an appreciation for the fact that open source companies deserve to have a “paywall” so that they can continue to build and innovate.
In fact, from a customer perspective the two value propositions of open source software are that you a) read the code; b) treat it as freemium. The notion of freemium is that you can basically use it for free until it’s deployed in production or in some degree of scale. Companies like Elastic and Cockroach Labs have gone as far as actually open sourcing all their software but applying a commercial license to parts of the software base. The rationale being that real enterprise customers would pay whether the software is open or closed, and they are more incentivized to use commercial software if they can actually read the code. Indeed, there is a risk that someone could read the code, modify it slightly, and fork the distribution. But in developed economies – where much of the rents exist anyway, it’s unlikely that enterprise companies will elect the copycat as a supplier.
A key enabler to this movement has been the more modern software licenses that companies have either originally embraced or migrated to over time. Mongo’s new license, as well as those of Elastic and Cockroach are good examples of these. Unlike the Apache incubated license – which was often the starting point for open source projects a decade ago, these licenses are far more business-friendly and most model open source businesses are adopting them.
When we originally penned this article on open source four years ago, we aspirationally hoped that we would see the birth of iconic open source companies. At a time where there was only one model – Redhat – we believed that there would be many more. Today, we see a healthy cohort of open source businesses, which is quite exciting. I believe we are just scratching the surface of the kind of iconic companies that we will see emerge from the open source gene pool. From one perspective, these companies valued in the billions are a testament to the power of the model. What is clear is that open source is no longer a fringe approach to software. When top companies around the world are polled, few of them intend to have their core software systems be anything but open source. And if the Fortune 5000 migrate their spend on closed source software to open source, we will see the emergence of a whole new landscape of software companies, with the leaders of this new cohort valued in the tens of billions of dollars.
Clearly, that day is not tomorrow. These open source companies will need to grow and mature and develop their products and organization in the coming decade. But the trend is undeniable and here at Index we’re honored to have been here for the early days of this journey.
Carbon Engineering, a Canadian company developing technology to remove carbon dioxide from the atmosphere and process it for use in enhanced oil recovery or in the creation of new synthetic fuels, has locked in financing from two big industry backers — Chevron and Occidental Petroleum — to bring its products to market.
The undisclosed amount of capital Carbon Engineering raised from the investment arms of two of the world’s largest oil and gas companies — Oxy Low Carbon Ventures and Chevron Technology Ventures — will be used to commercialize its technology at a time when legislation in California and British Columbia are making low carbon fuels more economically viable, according to a statement from the company’s chief executive, Steve Oldham. The company had already managed to nab Microsoft co-founder Bill Gates as an investor.
Gates is one of several big-name backers to be drawn to renewable energy technologies in the face of a steadily warming planet that’s rapidly approaching a tipping point-of-no-return when it comes to global climate change. Together with a group of other multi-billionaires including Marc Benioff, Jeff Bezos, Michael Bloomberg, Richard Branson, Jack Ma, Masayoshi Son, and Meg Whitman, Gates launched a $1 billion fund called Breakthrough Energy Ventures last year to back companies that are developing things like new energy storage and water production technologies.
The Squamish, B.C.-based Carbon Engineering isn’t in the Breakthrough portfolio, but is one of several companies working on making a technology called “direct air capture” of carbon dioxide economically viable.
At the company’s pilot plant in Squamish air gets hoovered up by giant fans into a processing facility where it is treated with potassium hydroxide, which captures and holds the carbon dioxide. Then more chemicals and heat are added to the mix to create millions of smell white pellets — which contain higher concentrations of the carbon dioxide.
After that, the pellets are heated again to create a gas which is almost pure carbon dioxide. That gas can be either sequestered underground (a proposition with no economic benefit for Carbon Engineering at the moment) or converted back into fuels, chemicals, or used in enhanced oil recovery.
Carbon Engineering and competitors like ClimeWorks or Global Thermostat claim that they can remove carbon dioxide from the atmosphere for roughly $100 per ton or a bit less once they can get to scale. To make money though, they’ll need to refine that carbon dioxide into some sort of product — likely a fuel, which will return that carbon to the atmosphere.
Other companies tackling carbon capture like Newlight Technologies and Opus12 convert the carbon into plastics or chemicals while companies like CarbonCure aim to turn the captured carbon into a cement replacement.
While these products from carbon emissions are available, they’re not yet commercially viable at a significant scale. Oldham told National Public Radio that the fuel which Carbon Engineering manufactures is roughly 20 percent more expensive than regular gasoline.
That’s why states like California are putting incentives in place to offset the added costs of using these low carbon products.
Carbon Engineering has already spent $30 million to develop its process, while Climeworks raised $31 million last year to develop its own version of this carbon capture technology.
Not all climate watchers are convinced that these kinds of negative emission technologies are the answer. They argue that it’s less expensive to use renewable energy and other carbon-free energy sources than to take carbon dioxide out of the air.
At this point, though, emission reductions may not be enough. Given the dire reports coming out of the Trump Administration and the Intergovernmental Panel on Climate Change, it’s going to take pretty much a combination of everything that humanity’s got to avoid a pretty catastrophic fate for a pretty large portion of the world’s population.
Even the companies that have been notorious for their contributions to the climate crisis that the world faces are waking up to the need for decarbonization (even if it’s an open question of whether they’re being dragged to the table or sitting down of their own free will).
Oxy Low Carbon Ventures is a good example. Reading the writing on the wall the firm has invested not just in Carbon Engineering, but another company called NET Power, which purports to have developed a power plant with zero emissions.
“It is a very important time for the air capture field right now,” said Oldham in a statement. “We’re seeing leading jurisdictions, like California and British Columbia, creating markets for low carbon fuels and technologies like DAC, through effective climate policy. These efficient market-based regulations, and action from energy industry leaders like Occidental and Chevron, show the power of policy in driving innovation and achieving emissions reductions while delivering reliable and affordable energy.”
2018 saw a spate of major cyber attacks including the hacks of British Airways, Facebook and Marriott. Despite growing emphasis on and awareness of cyber threats, large organizations continue experiencing massive data breaches. And as the world becomes increasingly connected (cars and medical devices, among others), attack vectors are evolving and exposures multiply.
The Israeli cybersecurity industry has long been recognized as a hotbed for innovative solutions, and 2018 to be yet another strong year. Early stage companies raised more money than ever before to tackle emerging security threats like protecting the proliferating number of internet-connected devices and enabling blockchain technologies to thrive in more secure environments.
In 2018, the total amount of funding for Israeli cybersecurity companies across all stages grew 22 percent year-over-year to $1.03B. This closely matched the funding trends of 2016 and 2017 that each saw 23 percent year-over-year growth in funding amount. At the same time, 2018 saw 66 new companies founded, an increase of 10 percent over 2017, which represented a rebound after a dip last year (60 new companies in 2017 vs. 83 in 2016). Notably, average seed round increased to $3.6M in 2018 from $3.3M in 2017. 2018 marked the fifth consecutive year the size of Israeli cyber seed rounds grew. Since 2014, the average seed round size has increased 80 percent.
With industry growth metrics of Israeli cybersecurity up across the board in 2018, 2017’s dip in new cyber startups appears to have been an outlier. Not only does entrepreneurial interest in cyber look to be on the rise, investor enthusiasm, especially at the early stages, signals a market brimming with opportunity. Growing round sizes are interesting, but more revealing is following where this capital is flowing.
The top emerging fields among new startups in 2018 included new verticals within IoT security, security for blockchain and cryptocurrencies, cloud-native security and SDP (Software Defined Perimeter). These nascent verticals drew considerably more attention than more “traditional” cyber sectors such as network security, email security and endpoint protection. Of all the emerging sectors, IoT drew the most investment with funding reaching $229.5M across all stages. What makes IoT particularly interesting is its continual branching into various new sub-domains including automotive, drones and medical devices.
Shai Morag, CEO and co-founder of Secdo, an Israeli cybersecurity firm acquired for $100M by Palo Alto Networks in mid-2018, sees these trends accelerating. “Innovation is going to keep happening in these areas for the next few years. We’ll also see innovation in third-party supply-chain risk assessment and management. Another wide-open field for innovation is SMBs. They are an underserved market hungry for full-stack solutions. These emerging fields are where I’m seeing the most excitement.”
Breaking out data on seed round funding into cyber startups targeting emerging vs. traditional markets reveals an even more pronounced growth trend. 2018’s aggressive early stage funding rounds disproportionately focused on companies pursuing emerging fields within cybersecurity. Of the 33 seed rounds raised in 2018, 20 (61 percent) went to companies in emerging fields. Even more striking, the sum of all seed rounds for emerging tech companies in 2018 was $79M, a 76 percent year-over-year increase. The numbers are clear, there is overwhelming investor interest in emerging cyber tech.
For example, the two largest seed funding rounds this year were in the IoT security domain. VDOO, founded by ex-Cyvera entrepreneurs (acquired by Palo Alto Networks in 2014 for $200M) and which develops security solutions for IoT vendors, raised an abnormally high seed round of $13M. Toka Cyber has secured $12.5M seed funding from Andreessen Horowitz and others, to develop and expand their IoT cybersecurity platform for governmental agencies. Twistlock, a pioneer developer of cloud-native security solutions raised $33M series C this year. BigID which protects sensitive data in light of GDPR and other privacy regulations raised both A ($14M) and B ($30M) rounds during 2018.
As the more traditional cybersecurity markets continue to consolidate and mature, prospects dim for “me too” cyber startups. We see that the industry still faces pressing problems in need of innovative solutions. Looming labor shortages, GDPR and other global data privacy legislation and the IoT explosion, are major challenges presenting substantial opportunities to incumbents able to provide relief. Investors and entrepreneurs sense greenfield opportunities on the horizon and are racing to plant their flags before the competition. This new divergent ecosystem is more selective of sophisticated, savvy investors and specialized, seasoned entrepreneurs.
Greenfields, not green founders
In 2018, 60 percent of founders had more than a decade’s worth of experience in the private sector–a 28 percent increase from 2017. The experience of these more seasoned founders came mostly from working in startups either as an executive or as an entrepreneur. Although Israel’s cybersecurity ecosystem relies heavily on the technical training potential entrepreneurs receive during service in the Israeli Defense Forces (IDF), in 2018, the proportion of founders coming straight out of the IDF fell to 2 percent, dropping from 10 percent the year before.
While nearly all Israeli founders leverage the skills and know-how acquired in the IDF’s various technological units, the need for experience from the private sector, either as an executive or an employee, seems to be more prevalent. Larger seed checks and larger ambitions are fuelling this push for more mature, veteran founders. Rising founders are not simply looking to build a novel technology and score a lucrative acquihire exit from an existing giant–they want to push into greenfield territory and stake a market-leading claim all their own.
Amichai Shulman, co-founder & former CTO of Imperva and a Venture Advisor at YL Ventures, gives such founders aiming to “own a market” the following advice: “Make sure you’re able to explain – primarily to yourselves – how your offering and product becomes something bigger than what it inherently is in the beginning. Be able to articulate how you expand (in the future) further into organizations, not just by ‘selling more’ but by solving bigger and more general problems.”
Cyber exits continue to overperform
Beyond general trends, 2018 also had many exciting individual exits. Checkpoint-Dome9 and CyberArk-Vaultive were notable because both acquirer and acquiree were Israeli — a mark of true market maturity. The acquisition of Sygnia by Singaporean holding giant Temasek also was remarkable because it shows that the Israeli cyber market continues to attract new classes and kinds of global strategic players each year. In addition, Thoma Bravo’s $2.1B acquisition of Israeli cyber firm Imperva made waves throughout the industry.
Tsahy Shapsa, co-founder of Cloudlock, which was acquired by Cisco in 2016 for $293M, reflected on the potential he sees coming from growing global investment. “From an entrepreneurial perspective, there is a constant dilemma between short-/mid-term exits and building a legacy company. As funding floods into Israel from around the world, temptation to sell early only increases. But all these exits have an advantage. They grow the pool of experienced, ‘repeat’ entrepreneurs and set the stage for more legacy companies to originate locally.” Zohar Alon, CEO and co-founder of Dome9 Security, which was acquired by Checkpoint in 2018 for $175M added the following guidance: “Israeli entrepreneurs should establish and maintain a constant communication channel with the local corporate development leaders, same as most do with the VC community focusing on product and go-to-market synergies.”
Israeli cybersecurity maintaining momentum
In 2018, investors became more domain-focused and preferred emerging fields. With traditional cybersecurity consolidating, emerging greenfields signal much stronger potential. Furthermore, growth continued both in cybersecurity startups as well as their fundraising across all stages, indicating rising confidence in the Israeli cybersecurity market.
The 2018 Israeli cybersecurity market boasted an excellent exit climate, highlighted not only by Imperva’s large-scale acquisition but also by the diversity in the types of players in the space. As such, the local cybersecurity market signals its ability to create and nurture large-scale security vendors, thereby attracting variety of both international and local players which continue identifying and capitalizing opportunities in this domain. For 2018, as has been the case for many years past, the state of the cyber nation is strong–and 2019 appears to promise more of the same.
Signs that the Federal Reserve could hold off on further interest rate hikes coupled with a booming jobs report sent stocks on Wall Street surging to close a volatile first trading week for the New Year.
After yesterday’s Apple-induced slide, and in the face of economic indicators that signaled a potential slowdown in global and domestic growth, the chairman of the Federal Reserve, Jerome Powell, said that the central bank would be “patient” when it comes to raising interest rates.
That news, coupled with a strong jobs report, sent stocks rocketing up. The Dow Jones Industrial Average climbed 746.9 points, or roughly 3.3 percent, while the Nasdaq shot up 4.3 percent, or 275.4 points.
It wasn’t just the Fed chairman’s observations about the potential for rate hikes in 2019 that had investors buying, but assurances about Powell’s job security in the face of increasing pressure from President Trump.
Speaking at a panel discussion of the American Economic Association alongside former Federal Reserve chairs Janet L. Yellen and Ben Bernanke, Powell said that he would not resign if asked by the president.
Immediately after Powell’s comments stocks began surging.
“With the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves,” Powell was quoted as saying in The Washington Post. “We’re always prepared to shift the stance of policy and to shift it significantly if necessary.”
The up to $818 million deal between Locus Biosciences and Janssen Pharmaceuticals (a division of Johnson & Johnson) that was announced yesterday points toward a new path for CRISPR gene editing technologies and (potentially) the whole field of microbiome-targeted therapies.
Based in Research Triangle Park, N.C., Locus is commercializing research initially developed by scientists at North Carolina State University that focused on Cas3 proteins, which devour DNA Pac-Man-style, rather than edit it like the more well-known Cas9-based CRISPR technologies being used by companies like Caribou Biosciences, Editas Medicine, Synthego, Intellia Therapeutics, CRISPR Therapeutics and Beam Therapeutics.
While the Cas9 CRISPR technologies can edit targeted DNA — either deleting specific genetic material or replacing it with different genetic code — Cas3 simply removes DNA strains. “Its purpose is the destruction of invading DNA,” says Locus chief executive, Paul Garofolo.
The exclusive deal between Janssen Pharmaceuticals and Locus gives Janssen the exclusive license to develop, manufacture and commercialize CRISPR-Cas3-enhanced products targeting bacterial pathogens for the potential treatment of respiratory and other organ infections.
Under the terms of the deal, Locus is getting $20 million in upfront payments and could receive up to $798 million in potential future development and commercial milestone payments and any royalties on potential product sales.
A former executive at Valiant Pharmaceuticals and Paytheon, Garofolo was first introduced to the technology that would form the core of Locus as an executive in residence at North Carolina State University. It was there that he met Dr. Chase Beisel and Rodolphe Barrangou, whose research into Cas3 proteins would eventually be productized by Locus.
The company spun out of NC State in 2015 and raised its first cash from the North Carolina Biotech Center a year later.
Locus is already commercializing a version of its technology with bacteriophages designed to target e coli bacteria to treat urinary tract infections. The company is on target to begin its first clinical trials in the third quarter of the year.
The focus on bacterial infection and removing harmful bacteria while ensuring that the rest of a patient’s microbiome is intact is a huge step forward for treating diseases that scientists believe could be linked to bacterial health in a body, according to Garofolo.
“Most microbiome companies are about adding probiotics to your body,” says Garofolo, representing a thesis that introducing “good” bacteria to the body can offset any harmful pathogens that have infected it.
“Things you’re exposed to are creating the groundwork for an infection or disease, or exacerbating an existing disease,” says Garofolo. And while he believes that the microbiome is the next big field for scientific discovery, the approach of adding probiotics to a system seems less targeted and effective to him.
Already, Garofolo has managed to convince investors of his approach. In addition to the initial outside investment from the North Carolina Biotech Center, Locus has attracted $25 million in financing from investors, including Artis Ventures and the venture capital arm of the Chinese internet giant, Tencent.
Meanwhile, investors have spent millions backing alternative approaches to improving human health through the manipulation of the microbiome.
Companies like Second Genome, Viome and Ubiome are all using approaches that identify bacteria in the human body and try to regulate the production of that bacteria through diet and probiotic pills. It’s an approach that allows these companies to skirt the more stringent requirements the Food and Drug Administration has put in place for drugs.
That doesn’t mean that extensive amounts of research haven’t gone into the development of these probiotics. Seed, a Los Angeles-based startup that launched last year, has recruited as its chief scientist George Reid, the leading scientist on microbial health and the microbiome.
Founded by Raja Dhir, a graduate from the University of Southern California and a leading researcher on microbiotics in his own right, and Ara Katz, the former chief marketing officer of BeachMint and an MIT Media Lab fellow, Seed focuses on developing probiotic treatments using well-established research.
“Foundational to our approach is that it’s not which microbes are present in your gut… It’s based on looking at what specific microbes can do to a healthy individual to improve that status of health independent of what is already present,” Dhir said in an interview around the company’s launch last June. “It’s a little bit less exciting from a tech perspective, but it’s hardcore grounded in basic science… The question is, does this have changes and effects in validated bio-makers in a controlled and placebo setting?”
Dhir said that a basic understanding of how different bacteria can influence health is necessary before getting into the benefits of personalization.
“These things can dance between drugs and nutrition,” Dhir said. “Probacteria are an additional lever that people should pull… like diet and exercise and cessation of smoking… In every correspondence we always have been and need to be clear that this should never be seen as a replacement of therapies.”
By contrast, the tools that Locus is developing are very much therapies with potentially far-reaching implications for illnesses, from irritable bowel syndrome to gastrointestinal cancers and even neurological disorders.
“The science [around the microbiome] is early, but it is very well-known that a potentially deadly pathogen should be removed from your body,” Garofolo said.
Investors erased some $75 billion in value from Apple alone… an amount known technically as a shit ton of money. But stocks were down broadly based on Apple’s news, with the Nasdaq falling 3 percent, or roughly 202.44 points, and the Dow Jones Industrial Average plummeting 660.02 points, or roughly 2.8 percent.
Apple’s news from late yesterday that it would miss its earnings estimates by several billion dollars thanks to a collapse of sales in China was the trigger for a broad sell-off that erased gains from the last trading sessions before the New Year (which saw the biggest one-day gain in stocks in recent history).
Apple’s China woes could be attributed to any number of factors, D.A. Davidson senior analyst Tom Forte said. The weakening Chinese economy, patriotic fervor from Chinese consumers or the increasingly solid options available from domestic manufacturers could all be factors.
Sales were suffering in more regions than China, Forte noted. India, Russia, Brazil and Turkey also had slowing sales of new iPhone models, he said.
Investors have more than just weakness from Apple to be concerned about. Chinese manufacturing flipped from growth to contraction in December and analysts in the region expect that the pain will continue through at least the first half of the year.
“We expect a much worse slowdown in the first half, followed by a more serious and aggressive government easing/stimulus centred on deregulating the property market in big cities, and then we might see stabilisation and even a small rebound later this year,” Ting Lu, chief China economist at Nomura in Hong Kong, wrote in a report quoted by the Financial Times.
U.S. manufacturing isn’t doing much better, according to an industrial gauge published by The Institute for Supply Management. The institute’s index dropped to its lowest point in two years.
“There’s just so much uncertainty going on everywhere that businesses are just pausing,” Timothy Fiore, chairman of ISM’s manufacturing survey committee, told Bloomberg. “No matter where you look, you’ve got chaos everywhere. Businesses can’t operate in an environment of chaos. It’s a warning shot that we need to resolve some of these issues.”
The index remains above the threshold of a serious contraction in American industry, but the 5.2-point drop from the previous month in the manufacturing survey is the largest since the financial crisis, and was only exceeded one other time — following the September 11, 2001 terror attacks on the U.S.