Intel VC arm plugs its disruptive vision

Intel has seemingly learned a lesson from the woes of stumbling giants, announcing it has invested $117 million in ‘disruptive’ start-ups at its annual VC conference.

There is a very good reason investors are so keen to pump cash into the likes of Google and Amazon, despite recent criticism and the threat of regulatory reform; these are companies which never sit still. The likes of Jeff Bezos and Sundar Pichai are constantly pushing the boundaries, expanding the business into new segments. It should be viewed as a lesson for every CEO around the world.

However, this is seemingly a lesson which has only recently been added to the management curriculum. In generations gone, some of the worlds’ leading technology companies have climbed further than any other before, and then stopped exploring. IBM, Oracle and Microsoft are three examples of companies which sat still for years, and the industry moved on without them. They have since recovered, but it took a lot to bridge the chasm.

“Intel Capital is continuing that legacy of disruption with these investments,” said Wendell Brooks, President of the VC arm, Intel Capital.

“These companies are shifting the way we think about artificial intelligence, communications, manufacturing and health care – areas that will become increasingly essential in coming years as the linchpins of a smarter, more connected society.”

One of the oldest phrases in the technology industry is often forgotten, but it seems Intel is attempting to resurrect it; disrupt or be disrupted.

Google and Amazon are the perfect embodiment of this statement. If you look at the acquisitions made over the years, they are incredibly intelligent bets. Google bought YouTube, Android and DeepMind for huge sums at the time, but now they look like bargains. Amazon didn’t make a profit for years, instead re-investing and now has AWS as a profit machine. These companies could have collected profits, paid more dividends and rewarded management with more bonus’, but look at what the end result is.

As it stands, Intel is in a relatively healthy position. Looking at the financials for 2018, revenue was $17.1 billion for the fourth quarter and $62.8 billion for the 12 months. These figures are 8% and 9% up year-on-year respectively, with data-centric revenue up 21% compared to Q4 in 2016. Share price declined on the news, investors were concerned over a conservative forecast, but the warning shot has seemingly been heeded.

If growth is not satisfying investors, something needs to change. The status quo is unlikely to reap more rewards tomorrow than today, therefore investment is required. Some of this will be directed inwards, though through the investments in Intel Capital the firm is welcoming disruption; it wants to be in on the ground floor of these potential booming enterprises.

“Our continued goal is to leverage the global resources and expertise of the world’s greatest engineering company, and its ecosystem of customers and partners, to help these founders accelerate growth and innovation,” said Brooks.

Looking at the investments, AI features heavily. Cloudpick is a smart retail technology provider with proprietary computer vision, deep learning, sensor fusion and edge computing technologies to enable cashier-free stores. SambaNova Systems is building an advanced systems platform to run AI applications. Zhuhai EEasy Technology is an AI system-on-chip (SoC) design house and total solution provider.

The team is also investing in the edge computing hype with Pixeom, mobile content streaming with Polystream, digital healthcare with Medical Informatics and Reveal Biosciences and also smart manufacturing.

The lessons of sitting still are incredibly obvious. Oracle founder CEO Larry Ellison dismissed the cloud and look where that has landed the firm. IBM refused to respond to the evolving PC market and it resulted in a colossal overhaul. Microsoft was another which ignored market trends, with former CEO Steve Balmer making some very off-target predictions in 2006. All of these companies have learned a lesson on disruption, but it came at a cost which took years to fix.

With its VC arm, Intel is promising to invest $300 to $500 million a year in disruptive technologies. It is taking a page out of the Amazon and Google playbook; if you want to remain on top, you can never sit still.

Thiel’s new investment demonstrates the importance of security

Valar Ventures, the venture capitalist firm run by Peter Thiel, has pumped an additional $30 million into Petal, a credit card company which vets individuals’ digital-self during applications.

As a business, Petal is certainly an interesting one. Most credit companies assess an individual’s credit history before agreeing to lend any cash or offer financial products, however this potentially creates a problem; how do people get credit when they’ve never had it? The most fiscally responsible person might not be able to get a loan because they have not applied for credit services in the past.

Instead, Petal using various artificial intelligence applications to assess an individual’s digital financial profile, not simply a credit score. This is likely to give a much more complete picture of said person as it assesses the flow of cash in and out of the persons life. In theory, some people who have been turned down credit would now be applicable.

Although this idea is not necessarily mainstream, the concept is not new. Orange is another example of a company which is taking an alternative approach in finance. Using data collecting through its core telco business, the new banking venture can paint a picture of customers. For example, the ability to consistently pay mobile phone or broadband bills on time and in full, could contribute to understanding the risk associated with an individual applying for a personal loan.

Of course, an idea is only good as its success, and Petal has had a strong start in the FinTech world. There are currently more than 100,000 potential applicants, users who signed up during the beta test, while this $30 million fuel from Valar Ventures is the second funding round. Thiel’s firm also led the company’s $13 million series A round last year. With the new cash Petal’s CEO Jason Gross hopes to expand the customer base, hire new talent and bring new features to the product.

“Over the past two years, we’ve focused on building both an amazing team and a special product,” said Gross. “Now, with new funding and new leaders onboard we’re ready to meaningfully scale our business and team. We’re thankful for the support of our investors and partners and look forward to helping millions of people build credit with Petal.”

But over to the security element. This is where security breaches could start to make an impact on the world. The more personal information on an individual which is cruising the digital highways, the greater the likelihood of identity fraud. The world might be suffering from a bit of data-breach fatigue, but many are ignoring the issue because there hasn’t been any significant consequence.

As soon as stories about identity theft start emerging, the world will become much more aware and sensitive to the threat. In this case, when Petal is assessing the worthiness of a person the AI might come to some incorrect conclusions. We’re really starting to use this data effectively and now we just need to be sure we can protect it.

As an industry, it is important that this point is never realised, but this means proactive investment in security research and products. Security cannot no longer be considered an afterthought or a bolt-on as the implications are starting to become real. As long as Joe Bloggs is living in ignorance of the dangers of the digital economy, the industry is doing its job.

VCs are spending more on less, how will that impact innovation?

CB Insight has released its latest quarterly report on venture capitalist funding claiming new records are being spent in terms of total cash, but trends are leaning towards the bigger players.

Over the course of the last 12 months, US venture capitalists spent a total of $99.5 billion funding businesses, though the number of deals stood at 5,536, the lowest since 2013. Later-stage mega-deals pushed annual funding to its highest level since 2000, though you have to wonder whether there will be any material impact on innovation, a worrying though when you consider the emerging potential of 5G for disruption.

Although the majority of the segments are relatively stable, as you can see from the graph below seed-funding has been gradually eroding for some time.

CBI Graph 2For those with the cash to spend, these trends make a lot of sense. Why would you take a risk on a start-up which might fail in the next couple of months when you could invest in a company which has scaled, secured customers and revenues and has a stable foundation? There are so many medium sized technology companies out there looking for financial fuel to go to the next level makes perfect sense.

However, the impact on the future might be damaging for the US on the whole if it wants to maintain its position at the top of the technology rankings table.

Here’s our point; not all innovation comes from start-ups or garages hidden away in suburbia, but a notable number of the significant disruptions do. If funding is being more prominently directed towards the established players, is a trick being missed?

Let’s dissect that point for a second. The larger companies certainly do search for innovation, but the search is for a purpose. Nokia, for instance, wouldn’t allow their researchers to run wild without any tethers whatsoever as there are limited R&D funds available and commercial considerations have to be factored in. The search for innovation is almost certainly tied to a current commercial objective or with specific ambitions to exploit an emerging segment.

This is not a bad way to do business of course. R&D has to be conducted with a purpose; these organizations have a responsibility to investors and shareholders to spend money reasonably, with the objective of making more money in the future. It certainly is sensible, but it is a restricted approach to innovation. Start-ups don’t necessarily have these burdens of responsibility, they can explore the unknown.

5G has been billed as a revolution. It will change the ways businesses operate and open a host of new connectivity possibilities to everyone in society. But like 4G, the best ideas are ones we haven’t thought of yet. They are probably businesses which do not exist. How many people would have thought of an idea such as Uber before 4G was a reality. This idea only came to be because the right conditions were in place and a creative inventor thought of it. Throughout the 4G era many of the better ideas emerged from start-ups which either scaled or were bought by one of the major players.

The world of 5G is not upon us quite yet, therefore it is a bit of a pre-emptive point right now. Innovation needs to be encouraged at every level if the US is to hold off the Chinese challenge to its technology leadership position. The trends are currently leaning away from seed-funding, which is certainly sign.

A more streamlined VC approach could hinder the US in the 5G race

With US venture capitalists increasing their total investments, but reducing the number of start-ups being funded, you have to wonder whether the US is priming itself properly for the 5G bonanza of tomorrow.

According to data from Pitchbook, the total amount invested by VCs in US firms is set to exceed $100 million across a 12 months period for the first time, but the number of completed deals is actually decreasing. So far across 2018, VCs have invested $84.3 billion, already exceeding the total from 2017, though the number of deals has dropped to 6,583 compared to 9,259 last year. These numbers are correct to September 30, still leaving time in 2018, but you have to wonder what impact this will have on the innovators of tomorrow.

Looking at the data, the number of deals which are valued at $50 million or more is significantly on the increase, while the bottom three categories (which you can see in the table below) are decreasing. This is not necessarily a bad sign, innovation can come from larger companies and more established SMEs, though some of the brightest ideas over the last two decades have come from companies which didn’t exist in the 20th century.

VC Deals 1

Think of the likes of Facebook, Uber, AirBnB, Shopify, Android and Netflix, these are all organizations which have risen through the ranks in recent years and are defining their respective segments. All were powered by the democratization of the internet, in particular mobile internet, and the emergence of a new form of economics. They are companies which succeeded because they thought and operating differently from the status quo, leaving many traditional businesses playing catch-up today.

In short, the start-ups are an excellent source of innovation and, in many cases, a completely under-utilised resource for national economies. However, with the upcoming 5G bonanza promising fortunes for those who seize the opportunity, is a more streamlined focus from the VCs creating the right, nurturing environment?

5G is going to create a completely different playing field, though we’re not entirely sure how at the moment. Those who think they can accurately predict where future fortunes will come from are nothing but blowing hot air. They might well be right, but this is likely more to be luck than judgment. For example, back in 2005 who would have thought a relatively unknown networking website designed for university students would become one of the most powerful companies on the planet, influencing elections, stimulating fake news and completely revolutionising how companies communicate with their customers?

The point is there is a ‘build it and they will come’ attitude with 5G. If you create the right technology environments, underpin them with supportive regulations, open doors to new markets and fuel them with seeding funds, the next great idea will emerge. We don’t know what it is just yet, but that was the exciting thing about 4G and will be the exciting thing about 5G.

Another consequence of a lack of available funding for the smaller players is the risk of acquisition. Without the fuel to grow their own ideas, some entrepreneurs might be tempted to sell their business and product to an established company. This in turn would direct innovation into the acquirers main focus area. Perhaps this will leave potential usecases and the dark corners of what is possible unexplored?

The issue here is whether VCs are putting enough cash into the early stage start-ups to nurture this innovation and create the blockbuster idea of tomorrow. Fuelling companies which are already out there is not a bad idea, but it is likely going to get you a better version of what exists today. This is a perfectly acceptable approach to business and will reap rewards, but are these trends going to create a landscape in the US which will dominate the 5G world of tomorrow? We are sceptical.

VC Deals 2

Softbank is now more of a VC than a telco group

Back in 2016 when Softbank CEO Masayoshi Son announced plans for the $100 billion Vision Fund it looks like a ludicrous plan, but with such incredible growth perhaps we should ask whether Son has been missing his calling for decades.

Looking at the financials for the first half of 2018, the most interesting story aspect is linked back to the Softbank Vision Fund (SVF) and Delta Fund (DF) investment bodies. Over the first six months, net sales for the Softbank Group came in at roughly $41 billion, with the team collecting an operating income of roughly $12.5 billion. The operating income attributable to the SVF and DF is $5.7 billion, roughly 45%.

45% might sound like a good number, but it becomes even more impressive when you consider how the funds are accelerating. In the first three months of 2018, the funds accounted for approximately 33% of operating income, but this ratio increases to 55% when you look at the second quarter alone. As you can see from the table below, the cash being generated by the funds is quickly racking up.

Q3 2017 Q4 2017 Q1 2018 Q2 2018
Gain on investments for SVF and DF $530 million $860 million 2.18 billion 3.55 billion
Realized gain on investments NA NA NA 1.29 billion
Unrealized gain on valuation of investments $490 million $830 million $2.24 billion $2.27 billion
Interest and dividend from investments $33 million $20 million $12 million $10 million

(Approximate values after currency conversion)

The fund itself, which has come under pressure recently due to involvement from Saudi Arabia, has consistently been consistently questioned by investors, though perhaps monstrous profit is a language which they will be more familiar with. Son has prioritised artificial intelligence in a portfolio which contains investments in Uber, Nvidia, Arm, GM Cruise, Doordash and Compass. The only one which doesn’t really fit into the family is WeWork, a shared office business which would be more comfortable inside a real-estate investment portfolio. That said, few will argue with the results.

Looking at the rest of the business, the story is pretty positive if less glamorous next to these monstrous profits. Total revenues and profits are up in the Softbank telco business, while the net gain on customer subscriptions is up approximately 1.2 million in comparison to the same period of 2017. Churn was also at a healthy 0.93% for the quarter and ARPU is flat. Not a bad return for the period. Sprint in another which is performing surprisingly well. Although subscription numbers are down sequentially, year-on-year Sprint managed to find 520,000 subscriptions from somewhere.

Son’s traditional stomping ground is looking very healthy, though with the acceleration of the VCs you really have to wonder whether the audacious businessman has been in the wrong industry all these years.