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June 25, 2019
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Startups Weekly: There’s an alternative to raising VC and it’s called revenue-based financing

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Revenue-based financing is on the rise, at least according to Lighter Capital, a firm that doles out entrepreneur-friendly debt capital.

What exactly is RBF you ask? It’s a relatively new form of funding for tech companies that are posting monthly recurring revenue. Here’s how Lighter Capital, which completed 500 RBF deals in 2018, explains it: “It’s an alternative funding model that mixes some aspects of debt and equity. Most RBF is technically structured as a loan. However, RBF investors’ returns are tied directly to the startup’s performance, which is more like equity.”

Source: Lighter Capital

What’s the appeal? As I said, RBFs are essentially dressed up debt rounds. Founders who opt for RBFs as opposed to venture capital deals hold on to all their equity and they don’t get stuck on the VC hamster wheel, the process in which you are forced to continually accept VC while losing more and more equity as a means of pleasing your investors.

RBFs, however, are better than traditional debt rounds because the investors are more incentivized to help the companies they invest in because they are receiving a certain portion of that business’s monthly revenues, typically 1% to 9%. Eventually, as is explained thoroughly in Lighter Capital’s newest RBF report, monthly payments come to an end, usually 1.3 to 2.5X the amount of the original financing, a multiple referred to as the “cap.” Three to five years down the line, any unpaid amount of said cap is due back to the investor. When all is said in done, ideally, the startup has grown with the support of the capital and hasn’t lost any equity.

At this point, they could opt to raise additional revenue-based capital, they could turn to venture capital or they could tap a tech bank to help them get to the next step. The idea is RBF is easier on the founder and it allows them optionality, something that is often lost when companies turn to VCs.

IPO corner, rapid-fire edition

Slack’s direct listing will be on June 20th. Get excited.

China’s Luckin Coffee raised $650 million in upsized U.S. IPO

Crowdstrike, a cybersecurity unicorn, dropped its S-1.

Freelance marketplace Fiverr has filed to go public on the NYSE.

Plus, I had a long and comprehensive conversation with Zoom CEO Eric Yuan this week about the company’s closely watched IPO. You can read the full transcript here.

Second Chances

Silicon Valley entrepreneur Hosain Rahman, the man behind Jawbone, has managed to raise $65.4 million for his new company, according to an SEC filing. The paperwork, coincidentally or otherwise, was processed while most of the world’s attention was focused on Uber’s IPO. Jawbone, if you remember, produced wireless speakers and Bluetooth earpieces, and went kaput in 2017 after burning up $1 billion in venture funding over the course of 10 years. Ouch.

More startup capital

Funds!

On the heels of enterprise startup UiPath raising at a $7 billion valuation, the startup’s biggest investor is announcing a new fund to double down on making more investments in Europe. VC firm Accel has closed a $575 million fund — money that it plans to use to back startups in Europe and Israel, investing primarily at the Series A stage in a range of between $5 million and $15 million, reports TechCrunch’s Ingrid Lunden. Plus, take a closer look at Contrary Capital. Part accelerator, part VC fund, Contrary writes small checks to student entrepreneurs and recent college dropouts.

Extra Crunch

Our paying subscribers are in for a treat this week. Our in-house venture capital expert Danny Crichton wrote down some thoughts on Uber and Lyft’s investment bankers. Here’s a snippet: “Startup CEOs heading to the public markets have a love/hate relationship with their investment bankers. On one hand, they are helpful in introducing a company to a wide range of asset managers who will hopefully hold their company’s stock for the long term, reducing price volatility and by extension, employee churn. On the other hand, they are flagrantly expensive, costing millions of dollars in underwriting fees and related expenses…”

Read the full story here and sign up for Extra Crunch here.

#Equitypod

If you enjoy this newsletter, be sure to check out TechCrunch’s venture-focused podcast, Equity. In this week’s episode, available here, Crunchbase News editor-in-chief Alex Wilhelm and I chat about the notable venture rounds of the week, CrowdStrike’s IPO and more of this week’s headlines.

Want more TechCrunch newsletters? Sign up here.

Market map: the 200+ innovative startups transforming affordable housing

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In this section of my exploration into innovation in inclusive housing, I am digging into the 200+ companies impacting the key phases of developing and managing housing.

Innovations have reduced costs in the most expensive phases of the housing development and management process. I explore innovations in each of these phases, including construction, land, regulatory, financing, and operational costs.

Reducing Construction Costs

This is one of the top three challenges developers face, exacerbated by rising building material costs and labor shortages.

Three keys to cultivating an effective product development culture

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Editor’s note: This guest post is a part of our latest initiative to demystify design and find the best brand designers and agencies in the world who work with early-stage companies — nominate a talented brand designer you’ve worked with.

Chances are you’ve heard one or more of the following statements at work (or some flavor of them):

  • “We’re an engineering-driven company.”
  • “We’re a product-driven company.”
  • “We’re a design-driven company.”

While at first glance the statements above may seem innocuous, what they really imply is a power dynamic where a particular perspective carries more weight and influence in decision-making than others. How did it get that way in the first place? Was the founder a PM in a previous company? Did the first hires all happen to be engineers? Or does the most vocal person happen to be from a particular discipline? These are some examples of how biases get institutionalized. They can get seeded early and compound over time, or happen quickly as new leaders get installed as the company grows.

Whether intentional or not, these imbalances can disempower other disciplines, create fiefdoms, and erode trust between colleagues. Over time, these divisions kill productivity and quality. Internal factions waste valuable time and energy jockeying for influence and control, while the product gets fragmented and confusing for users.

On the flip side, when disciplines and teams are aligned there is less value placed on which person or discipline “made the call.” Over time, teams move quickly, learn together, get through iteration cycles effortlessly, spend more time producing high-quality results that reach users, and less time infighting. It’s like being in a state of flow, but for teams. So what is it that these high-performing teams align on? You’ve probably heard it before, but it’s worth unpacking:

The user.

Ideally, the most important driver of decisions isn’t one person or discipline in your organization—it should be your user. Your job is to help them navigate. Everyone building the product or making decisions about it, regardless of discipline, should understand who they’re building for, and why what they’re doing is contributing to improving that user’s experience.

User-centric thinking is the hallmark of the world-class companies because they love and obsess about you—the user. Amazon calls this customer obsession. Ideo calls this human-centered design. During my time at Pinterest, the most important company value was to “Put Pinners first.”

By focusing on serving the user, it removes the pressure on any individual or discipline to always make the right call. Focusing on what is right for the user, rather than who is right removes ego from the equation. Users ultimately decide anyway—they vote with their behavior and attitudes.

Serving your users better is a goal with no finish line. Understand that the decisions you make will sometimes improve their experiences and sometimes degrade them. Nobody has 100% hit rate, and nobody can predict the future with complete certainty. In a culture of good decision-making, the goal isn’t to get any single decision exactly right (although that’s always nice), but to make consistently good (and better) decisions over time, especially the important ones.

So how do you get your company oriented around users? Consider three important factors: (1) people with the right mindset, (2) an approach to balanced decision-making that starts with users, and (3) the mechanics and properties of high-quality decisions.

1. Identify and empower T-shaped people

Differences in opinion are inevitable. But in order to have consistently productive discussions, debates, disagreements, and ultimately decisions, you’ll need T-shaped people. A T-shaped person refers to someone who has a deep domain expertise in at least one field (the depth of their T), as well as a strong ability to collaborate with people across other areas of expertise (the breadth of their T). Here’s some examples of T-shaped people, who might also happen to make a strong team:

T-shaped people tend to be the best teammates—they have deep knowledge that they are willing to share and explain to their counterparts, as well as a built-in curiosity that welcomes new perspectives. This is especially important in leadership and decision-making roles. What’s more, their curiosity and empathy doesn’t just apply to their colleagues, it naturally extends to users.

What T-shaped people realize is that no single person or discipline is more important than the other, nor should they strive to be. Sure, there are moments where one’s expertise makes their input more credible, but It’s how their collective talents serve the user that ultimately matter most. People (and hopefully T-shaped people) are the most basic ingredients of your culture. Choose wisely.

Ways to identify T-shaped people

  • Look for curiosity and empathy. Top quality execution and results are a given, but don’t stop looking there. What was the user problem they were trying to solve? How did they arrived at that solution? What were the insights that led them to take their projects in a particular direction? What promising directions did they decide not to pursue, and why? Were they involved in research and understanding the users? Can they clearly articulate the needs of the customer? Does it feel like they know them intimately and care?
  • Look for humility. On projects, what assumptions did they make that were completely wrong? How did the user or other disciplines show them a different and valuable perspective? Do they share the credit? Did they help others succeed? Individual talent is important, but building great products is a team sport.

2. Make balanced decisions that start with users

User-centered (aka customer-centric, human-centered) thinking is a way of framing problems with a clear starting point: understanding and empathizing with user needs. If T-shaped people are your basic ingredients, then the user-centered thinking is a recipe—a way to combine and enhance the ingredients to produce amazing results. Here’s what it looks like:

Have your team start by asking “what is the user problem we’re trying to solve?” It’s a deceivingly simple focusing mechanism. It may take some rigorous debate to align on the right problem, but once that happens, decisions from all disciplines have a clear tie back to driving user value first—making the product faster, cheaper, more efficient, more delightful, easier to understand—then orienting their collective effort around providing that value.

Less user-centric teams will do the opposite: look for ways to make their own work easier or more efficient, look to optimize their own sub-team metrics, or satisfy their own personal curiosities—and leave the user to orient themselves around their organizational efficiencies. If you’ve ever felt a broken sign-up flow or confusing onboarding experience, then you know what I’m talking about.

While user-centric thinking starts with users, no single lens is more important than the others. It’s entirely possible to satisfy a user completely, while simultaneously killing your business. That’s not a good decision. Or you could dream up amazing ways to delight your user, but in ways that aren’t achievable with today’s technology—that’s no good either. The overlap of  perspectives is what leads to effective decisions and great solutions. T-shaped decision-makers will know how to make those appropriate tradeoffs.

3. Make high-quality decisions

Evaluating decisions through multiple lenses is important to getting to consistently good, balanced decisions over time. What decision best satisfies your user’s needs, is good for the business (overall, not just for your sub-team or business unit), and technically sound? The overlap is where high-quality decisions are born. But there are additional mechanics and properties that make decisions high-quality.

In my experience, high-quality product decisions are:

  • User-centric. First and foremost, rooted in understanding and serving user needs. Not just listening to what users say or watching what they do, but understanding how they think and feel.
  • Considered. They proactively seek input from, and communicate with, relevant stakeholders and examine the possibilities through multiple lenses before making decisions. They anticipate immediate effects, but also secondary and tertiary effects as well.
  • Balanced. It’s good for the user, good for the business overall, and technically sound.
  • Timely. They don’t take too long, but they aren’t made in haste either.
  • Calculated. It’s important to take risks, but don’t bet the farm unless it’s absolutely necessary. Start small and learn. Double down when it works, readjust when it doesn’t.
  • Communicated before action. They are stated as clearly as possible up-front, before taking action. Their rationale is shared, citing intended effects and flagging major risks.
  • Humble. Good decisions focus on what is right, not who is right. They embrace failure as part of the process, so long as there is valuable learning. For example, a decision may yield a learning that helps you not to pursue a particular direction, saving valuable time and effort.
  • Monitored. They are tracked closely to manage both positive and negative effects.
  • Shared broadly. Their results and learnings are examined and shared broadly (and especially with affected parties), whether results are good or bad; intended or unintended—giving future decisions a stronger starting point.

The case for culture

Very few companies, and even fewer startups, stand the test of time. Products and services today are all dynamic, and expected to evolve with the changing landscape of fickle users and emerging technologies. With limited time and resources, I can already hear people saying, “this seems like a lot of work” and ask, “can we really afford to invest this much thought and energy into culture?”

The bottom line is building great products is hard work. And it’s work that never ends, if you’re doing it well. Over time, your product will morph in small and big ways with each new version, to the point where it may be unrecognizable from your starting point. So what will persist, and why? Your culture—the people, their shared attitudes, values, goals, practices, and decisions—will determine that. So isn’t that worth investing in as much as the product itself? In the end, they’re one in the same.

The next great debate will be about the role of tech in society and government

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The Industrial Revolution dramatically re-ordered the sociology of politics. In the US, the Populist Party in the United States was founded as a force in opposition to capitalism, wary of modernity. In the UK, the profound economic changes reshaped policy: from the Factory and Workers Act through to the liberal reforms of David Lloyd George, which ultimately laid the ground for the welfare state, the consequences were felt for the whole of the next century.

Today, another far-reaching revolution is underway, which is causing similar ripple effects. Populists of both left and right have risen in prominence and are more successful than their American forebearers at the turn of the 19th century, but similarly rejecting of modernisation. And in their search for scapegoats to sustain their success, tech is now firmly in their firing line.

The risk is that it sets back progress in an area that is yet to truly transform public policy. In the UK at least, the government machine looks little different from how it did when Lloyd George announced the People’s Budget in 1909.

The first politicians who master this tech revolution and shape it for the public goodwill determine what the next century will look like. Rapid developments in technologies such as gene-editing and Artificial Intelligence, as well as the quest for potential ground-breaking leaps forward in nuclear fission and quantum computing, will provoke significant changes to our economies, societies and politics.

Yet, today, very few are even asking the right questions, let alone providing answers. This is why I’m focusing on technology as the biggest single topic that policymakers need to engage with. Through my institute, I’m hoping to help curate the best thinking on these critical issues and devise politically actionable policy and strategy to deal with them. This will help put tech, innovation and investment in research and development at the forefront of the progressive programme. And we do so in the belief that tech is – and will continue to be – a generally positive force for society.

This is not to ignore the problems that surfaced as a result of these changes, because there are genuine issues around privacy and public interest.

NEW YORK, NY – APRIL 23: Monitors show imagery from security cameras seen at the Lower Manhattan Security Initiative on April 23, 2013 in New York City. At the counter-terrorism center, police and private security personel monitor more than 4,000 surveillance cameras and license plate readers mounted around the Financial District and surrounding parts of Lower Manhattan. Designed to identify potential threats it is modeled after London’s “Ring of Steel” system. (Photo by John Moore/Getty Images)

The shifts that have and will occur in the labour market as a result of automation will require far more thinking about governments’ role, as those who are likely to bear the brunt of it are those already feeling left behind. Re-training alone will not suffice, and lifelong investment in skills may be required. So too does a Universal Basic Income feel insufficient and a last resort, rather than an active, well-targeted policy solution.

“The first politicians who master this tech revolution and shape it for the public goodwill determine what the next century will look like.”

But pessimism is a poor guide to the future. It ends in conservativism in one form or another, whether that is simple statism, protectionism or nationalism. And so the challenge for those us of who believe in this agenda of harnessing the opportunities, while mitigating its risks is to put this in a way that connects with people’s lives. This should be a New Deal or People’s Budget type moment; a seismic change in public policy as we pivot to the future.

At the highest level this is about the role of the state in the 21st century, which needs to move away from ideological debates over size and spend and towards how it is re-ordered to meet the demands of people today. In the US, President Obama made some big strides with the role of the Chief Technology Officer, but it will require a whole rethinking of government’s modus operandi, so that it is able to keep up with the pace of change around it.

Photo courtesy of Shutterstock/Kheng Guan Toh

Across all the key policy areas we should be asking: how can tech be used to enable people to live their lives as they choose, increase their quality of life and deliver more opportunities to flourish and succeed?

For example, in education it will include looking at new models of teaching. Online courses have raised the possibility of changing the business of learning, while AI may be able to change the nature of teaching, providing more personalised platforms and free teachers to spend their time more effectively. It could also include new models of funding, such as the Lambda School, which present exciting possibilities for the future.

Similarly with health, the use of technology in diagnostics is well-documented. But it can be transformative in how we deploy our resources, whether that is freeing up more front-line staff to give them more time with patients, or even in how the whole model currently works. As it stands a huge amount of costs go on the last days of life and on the elderly. But far more focus should go on prevention and monitoring, so that people can lead longer lives, have less anxiety about ill health and lower the risks of illnesses becoming far more serious than they need to be. Technology, which can often feel so intangible, can be revolutionary in this regard.

In infrastructure and transport too, there are potentially huge benefits. Whether this is new and more efficient forms of transport or how we design our public space so that it works better for citizens. This will necessitate large projects to better connect communities, but also focus on small and simple solutions to everyday concerns that people have about their day to day lives, such as using sensors to collect data and improve services improve every day standard of living. The Boston Major’s office has been at the frontier of such thinking, and more thought must go into how we use data to improve tax, welfare, energy and the public good.

Achieving this will better align government with the pace of change that has been happening in society. As it stands, the two are out of sync and unless government catches up, the belief and trust in institutions to be seen to working for people will continue to fall. Populism thrives in this space. But the responsibility is not solely on politicians. It is not enough for those in the tech world to say they don’t get it.

Those working in the sector must help them to understand and support policy development, rather than allow misunderstandings and mistrust to compound. Because in little more than two decades, the digital revolution has dramatically altered the shape of our economies in society. This can continue, but only if companies work alongside governments to truly deliver the change that so many slogans aspire to.

India’s state gas company leaks millions of Aadhaar numbers

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Another security lapse has exposed millions of Aadhaar numbers.

This time, India’s state-owned gas company Indane left exposed a part of its website for dealers and distributors, even though it’s only supposed to be accessible with a valid username and password. But the part of the site was indexed in Google, allowing anyone to bypass the login page altogether and gain unfettered access to the dealer database.

The data was found by a security researcher who asked to remain anonymous for fear of retribution from the Indian authorities. Aadhaar’s regulator, the Unique Identification Authority of India (UIDAI), is known to quickly dismiss reports of data breaches or exposures, calling critical news articles “fake news,” and threatening legal action and filing police complaints against journalists.

Baptiste Robert, a French security researcher who goes by the online handle Elliot Alderson and has prior experience investigating Aadhaar exposures, investigated the exposure and provided the results to TechCrunch. Using a custom-built script to scrape the database, he found customer data for 11,000 dealers, including names and addresses of customers, as well as the customers’ confidential Aadhaar number hidden in the link of each record.

Robert, who explained more about his findings in a blog post, found 5.8 million Indane customer records before his script was blocked. In all, Robert estimated the total number affected could surpass 6.7 million customers.

We verified a sample of Aadhaar numbers from the site using UIDAI’s own web-based verification tool. Each record came back as a positive match.

A screenshot showing the unauthenticated access to Indane’s dealer portal, which included sensitive information on millions of Indian citizens. This was one dealer who had 4,034 customers. (Image: TechCrunch)

It’s the latest security lapse involving Aadhaar data, and the second lapse to embroil Indane. Last year, the gas and energy company was found leaking data from an endpoint with a direct connection to Aadhaar’s database. This time, however, the leak is believed to be limited to its own data.

Indane is said to have more than 90 million customers across India.

The exposure comes just weeks after an Indian state leaked the personal information of more than 160,000 government workers, including their Aadhaar numbers.

Aadhaar numbers aren’t secret, but are treated as confidential and private information similar to Social Security numbers. More than 90 percent of India’s population, some 1.23 billion citizens, are enrolled in Aadhaar, which the government and some private enterprises use to verify identities. The government uses Aadhaar to enroll citizens in state services, like voting, or applying for welfare or financial assistance. Some companies also pushed customers to enroll their bank accounts or phone service to their Aadhaar identity, but this was recently struck down by the country’s Supreme Court. Many say linking their Aadhaar identities to their bank accounts has led to fraud.

The exposure is likely to reignite fresh concerns that the Aadhaar system is not as secure as UIDAI has claimed. Although few of the security incidents have involved a direct breach of Aadhaar’s central database, the weakest link remains the companies or government departments that rely on the data.

We contacted both Indane and UIDAI, but did not hear back.

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