@rafer direct #involvements

The MSFT + OpenAI partnership is a big bet on semiconductor physics. There's a significant chance that Azure won't be able to host ChatGPT3 as a consumer-quality service. The Azure people are great; we use them at Pantastic. It is simply not clear that our species yet has the compute technologies to host a deep learning model that large in a way that its raw data is updated and can learn. 

I’m not here to apologize for the horrific damage that Facebook has done to many countries’ political and social structures, including ours. Quite the opposite. Meta is a brilliant power grab by the oligarch formerly known as Facebook, and we all need to quit laughing at it. For reference, I got into the Facebook ecommerce ad business in the summer of 2007, weeks after it became possible, and have attached to it ever since. 

Most observers miss two things: 

Meta’s existing dominance in digital goods advertising and sales (outside of China). Next to AAPL and GOOG, META is the only game in town and has a number of systemic advantages relative to those two phone OS makers. AMZN doesn’t hold a candle to META in this area, and NFLX is only dipping a toe in the gaming waters now.

VR is BS and no one knows that as well as the owners of no-longer-called Oculus. Virtual Reality is just a marginal edge case of Augmented Reality (AR); it’s the intentionally private and public imagery laid onto our near-real life experiences that we will invest in. That Meta dystopia is designed from the start to be here in the “real world” -- AFK and physically social -- not in some virtual experience. 

Meta has missed neither of these things; they are just running their normal playbook of distraction and confusion. They are moving to control what we see and buy in the overlay through which we many of us will be viewing our daily routines in ~5 years. Instagram Stores are a natural dominator of AR digital goods, viewed and bought through upcoming generations of camera-glasses. 

The best-placed press (subscription) I’ve seen on Meta was in Business of Fashion. It is clearly just Meta’s PR department at work, but that’s exactly the audience that will invest in building and selling these digital goods as the rest of the fashion world goes pear-shaped. And those brands will get the buying and influencing started, all exactly as planned today.

Idiot Test #6A: Founder Data Theft for LPs

This is an update to Idiot Test #6: Target VC Fund Size. 

VCs broadly boast about both being data-driven and passing on 99%+ of the financings they consider. As I believe both of those data points, I do not regard VCs as investors. Also being data driven, I believe them to be Founder Data Thieves. Stealing founder data is what they do the huge majority of the hours in their work day, so I believe that is how they should identify. 

In the specific case that they insist on being “stage-agnostic” or wanting to be “the first check” in financings that are far less than 2% of their current funds, the data theft is for the purpose of impressing their LPs. Later stage VCs (e.g. a16z) are in a race to tell their LPs what the investment sectors will be 2-3 years out before their peers are able to. They can only do that by seeing the private presentations of very early stage startups. 

Quality early-stage investors will require you to scale a single revenue stream. If they ask about diversification, it’s to make sure that the answer is “no.” They are completely correct in this case. Diversification and fast scaling are incompatible. PG has a great metaphor for it:

Early stage capital raising is seasonal. To be most successful, start presenting either in September or (preferably) January, so that you have as long as possible before it is difficult for the partnerships to field a quorum for a full partner presentation. Getting a quorum generally becomes problematic in the US on July 1 and November 15. If you do not have a signed term sheet by those dates, the reasonable expectation is that you will need to re-start the process completely. And, you will be fundraising with a cloud hanging over your head. If you start late in the season (e.g. May 1), you set the upfront expectation that you are naive or desperate or both. 

Here in early October, I am already deep into supporting several CEOs for the January 2019 presentation cycle. If you do not have a deck outline and rough milestones sketched out by now, you are late and risk being less effective than the other CEOs with whom you are competing with for investor attention. Please pardon the formatting on the schedule below; I copied it out of a Google sheet for the startup I came to London this week to support. US-based startups may be able to shave a week or two off the schedule by limiting their presentation geography a bit.

Raising capital at this level (<$20M or even higher) is also not about relationship building. It’s about showing that you know how to run a tight process that you will bring to the later rounds of financing -- and FOMO. Stop having coffees and catch-up calls with VCs now. That is just giving them free information that you have sweat and bled for and ruining the showmanship of your presentation. What they care most about is that you are also the CEO to raise the several rounds of capital after this one without forcing them to do much work. The best ones may be very energetic and very helpful after investing, but they avoid making investments where they have no choice but to put in that effort.

I just wrote this boilerplate for the CEO here to in response to inbound emails. Feel free to use it:  

Hi [xxxx],

Thank you for being so diligent in reaching out. We are gearing up to raise our Series A in Q1. All of our first partner pitches will be the week of January 7 in London and NYC and January 14 in California. Between that and the quickly ramping sales of the Super Widget, I am not going to have time to chat. We also are making sure that we target the firms we speak with pretty tightly. Obviously [your fabulous investing entity] has the sector expertise we need, but may I ask the current fund size, age, percent invested to date, and reserve policy? Thank you, [the demigod of execution]

Pichai’s Predicament

My guess is that Google has a bigger problem than is obvious with regard to its under-development, PRC-censored Chinese search engine. The announcement of Google’s $550M investment in JD.com in June 2018 talked up “personalization,” which means Machine Learning. I would expect the contract to include an obligation for Google to provide search services in JD’s most important region -- China. Search is a highly productive training component for ML which is a lot of what Google brings to the table for both JD and its conjoined twin Walmart. If I’m right, Pichai has already committed to shipping this service and has significant downside with both JD and Walmart against Amazon if he does not do so.

#conjoinedtwins !?!? 

Walmart Continues their Sad Trend

As with the Jet and Flipkart acquisitions, Walmart keeps buying market share and its associated consumer data but not the machine learning talent needed to turn it into a sustainable advantage. Building a world-beating tech team requires more than great online retail talent (all three acquisitions have that!), and more than throwing bodies at the problem. It requires the kind of leadership that Walmart can’t organically assemble. 

Statistically, VCs are not investors. They are analysts who steal founders’ information 99%+ of the time in order to use it elsewhere. As with most of the technology startup world, they “suck less” so they are by far the best we can produce. 

That all means that their workflow is optimized to pass, which is not in your interest. “Respect their time” and similar comments are exactly the wrong thing to obey if you want their investment. Be the exception. 

My apologies to the anonymous donor who sent me this email but: 

I know the deck is lame, and I know I’m not supposed to throw it “over the transom,” but it drives me crazy to see so many lame business models get funding when we have a real business that solves a real business problem and we can’t click with any VCs.

Don’t let it drive you crazy, just recognize that it’s secondary at best and irrelevant at worst. 

Instead, it is great fundraisers that get funded. It’s occasionally much easier if they have a great business, but it’s not the primary criteria. It is also nothing to get angry with the VC community over. No matter a VC’s personal goals, their very specific job is to buy private stock at a low price and get cash or a liquid public security for that same stock at a much, much higher price. If they can chase their pro rata several times in the interim, then they might make a good amount of money on the investment. 

In addition, the incredible volume of deal flow volume processed by professional venture capitalists nearly guarantees that they can not possibly understand the businesses they invest in until the fifth or sixth board meeting. That is especially if a fundraising was at all competitive for them to participate in. 

That means their first screen mental is, “Without a ton of coaching from me, can this CEO survive my fund’s partner meeting and, in a year-ish, comfortably raise money from the next set of investors? If so, she will raise stock price, open up a pro rata investment opportunity for our fund and maybe pay for my kids’ tuition in a few years.”

Every major technology wave changes distribution in some significant way. Machine learning (more popularly “AI”) is no different; having the largest relevant training set wins. It will prove powerful enough to drive vertical integration for the data set owners/managers. That means that “brand” is less important than data collection during the ~5-year land grab we are are now working through. Direct, branded paths to the consumer will re-emerge as the highest value, but that will just be the winners cleaning up maturing, consolidating markets.

I arrived at this understanding anecdotally. I keep my focus entirely on ecommerce infrastructure and logistics, so I am only involved in three ML-at-scale startups. The founders of the two most mature both clearly have reasons to see B2B2C white-labeling as a reasonable and high value option to gather consumer data. Given my last 20+ years of internet experience, that was confusing at best and I started off biased against it for all the reasons that venture investors will be in terms of realizing shareholder value. Well, I was wrong; the head of the power law will be awarded to the systems that learn the most the fastest -- no matter where in their lifecycle the end-buyer becomes loyal to them. 

The big story for me is that Boxed would be the first major value created by a retailer that has made effective use of ML. The current cohort of quickly growing retailers are pursuing limited versions of the ML strategies of the 5 Global Ecommerce AIs. 

The Germans are making contingency plans for the collapse of Europe. Let’s hope we are, too | Paul Mason | Opinion | The Guardian

And,

https://techcrunch.com/2017/09/15/how-startups-can-avoid-bodegas-pr-disaster/

https://blogs.wsj.com/cio/2017/08/10/inside-darpas-push-to-make-artificial-intelligence-explain-itself/ That’s a lovely thought but unrealistic. Commercially, in every market where it is economic (and legal enough), new entrants will be willing to blindly trust ML systems if it gives them a sustained competitive edge. That edge will sometimes make them dominant. Many incumbents will spot this dynamic and react accordingly. Geopolitically, terrorists, isolated nations, and opposition parties will act similarly to commercial new entrants.

There are a few pieces of the partnership that are either undisclosed or have a very low probability of success (Wired, really?). As Google seemed to control the public messaging, my thesis is the latter for two main reasons.

Google Express has little volume.

It's nearly a restart. And, of their original retailers, 70%+ of SKUs came from Walgreens.

IF Google advertises Google Express and/or Walmart heavily via Adwords in ways that are not being disclosed here, then it will generate some volume. I don't see how else it can get to volume.

To execute on that promotion at sufficient scale, Google would have to risk their earnings. There may be an undisclosed billion-dollar Walmart media budget within the partnership, but I don't see how they could avoid disclosing it.

Wherever the ad budget (if any) comes from, Google ads could generate some level of profitable business but there's no way to know up front if it would be large enough for the partnership to succeed. Competitive response, which would lower Return on Ad Spend, from Amazon-WholeFoods, Aldi, etc. is also a significant factor.

if Google invests in the type and scale of promotion noted above, it's going to upset a significant number of their advertisers. Those advertisers have effectively nowhere to go to find equivalent promotion, but they will seek other solutions anyway, including possibly regulatory solutions. Facebook ads works differently for CPG/grocery and advertising on Amazon is no solution for CPG/grocery marketers. Those are the only platforms of significance in the English-speaking world.

Google's voice services do not to have any shopping volume either.

I can't say for sure, but it appears they are starting from scratch on that segment. So it is a completely ad-dependent situation again. And in a nascent segment where there's a ton of noise AND they are a distant #2 to Alexa, breaking through will be difficult. Additional competitive issues Google will need to contend with on voice are:

Facebook Messenger is a far better place to start from than Google Home and OK Google for shopping and they are putting a great team on it. http://www.businessinsider.com/facebooks-andrew-bosworth-to-lead-oculus-building-8-aloha-video-chat-device-details-2017-8?op=1 FB's video chat device is a kitchen counter appliance. I would expect a partnership with with Kroger or even a parallel partnership one with Walmart.

Alexa can be attached to whole foods/Instacart in no time if they haven't almost finished already. Instacart will agree to such a deal even though it is medium-term suicide. Relatedly, the revenue and profitability of the Amazon Ad Platform are not disclosed and easy to fudge.

The programmatic APIs for Siri are supposed to be expanding in a serious way later this calendar year.