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March 19, 2019
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Sebastian Thrun initiates aggressive plan to transform Udacity

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“I’m a fighter. I believe in our people, I believe in our mission, and I believe that it should exist and must exist.”

Sebastian Thrun is talking animatedly about Udacity, the $1 billion online education startup that he co-founded nearly eight years ago. His tone is buoyant and hopeful. He’s encouraged, he says over an occasionally crackly phone call, about the progress the company has made in such a short time. There’s even a new interim COO, former HP and GE executive Lalit Singh, who joined just days ago to help Thrun execute this newly formed strategy.

That wasn’t the case four weeks ago.

In a lengthy email, obtained by TechCrunch, Thrun lobbed an impassioned missive to the entire company, which specializes in “nanodegrees” on a range of technical subjects that include AI, deep learning, digital marketing, VR and computer vision.

It was, at times, raw, personal and heartfelt, with Thrun accepting blame for missteps or admitting he was sleeping less than four hours a night; in other spots the email felt like a pep talk delivered by a coach, encouraging his team by noting their spirit and tenacity. There were moments when he exhibited frustration for the company’s timidness, declaring “our plans are ridden of fear, of trepidation, we truly suck!” And moments just as conciliatory, where he noted that “I know every one of you wants to double down on student success. I love this about us.”

Thrun has sent spirited emails before. Insiders say it’s not uncommon and that as a mission-driven guy he often calls on employees to take risks and be creative. But this one stood out for its underlying message.

If there was a theme in the email, it was an existential one: We must act, and act now or face annihilation.

“It was a rallying cry, to be honest,” Thrun told TechCrunch. “When I wrote this email, I really wanted to wake up people to the fact that our trajectory was not long-term tenable.”

“I can tell you that I woke up the troops, that is absolutely sure,” he said later. “Whether my strategy is sound, only time can tell.”

Udacity founder Sebastian Thrun speaks onstage during TechCrunch Disrupt SF 2017 at Pier 48 on September 19, 2017 in San Francisco, California. (Photo by Steve Jennings/Getty Images for TechCrunch)

Thrun said the past month has been transformative for the company. “It was a tough moment when I had to look at the business, look at the financials, look at the people in the company,” Thrun said, adding, “And the people in the company are amazing. I really believe in them, and I believe that they’re all behind the mission.”

A tough year

Part of Udacity’s struggles were borne out of its last funding round in 2015, when it raised $105 million and became a unicorn. That round and the valuation set high expectations for growth and revenue.

But the company started hitting those targets and 2017 became a breakout year.

After a booming 2017 — with revenue growing 100 percent year-over-year thanks to some popular programs like its self-driving car and deep learning nanodegrees and the culmination of a previous turnaround plan architected by former CMO Shernaz Daver — the following year fizzled. Its consumer business began to shrink, and while the production quality of its educational videos increased, the volume slowed.

“In 2018, we didn’t have a single a blockbuster,” Thrun said. “There’s nothing you can point to and say, ‘Wow, Udacity had a blockbuster.’ “

By comparison, the self-driving car engineering nanodegree not only was a hit, it produced a successful new company. Udacity vice president Oliver Cameron spun out an autonomous vehicle company called Voyage.

Udacity CEO Vishal Makhijani left in October and Thrun stepped in. He took over as chief executive and the head of content on an interim basis. Thrun, who founded X, Google’s moonshot factory, is also CEO of Kitty Hawk Corp., a flying-car startup.

His first impression upon his return was a company that had grown too quickly and was burdened by its own self-inflicted red tape. Staff reductions soon followed. About 130 people were laid off and other open positions were left vacant, Thrun said.

Udacity now has 350 full-time employees and another 200 full-time contractors. The company also has about 1,000 people contracted as graders or reviewers.

An emphasis, when I rejoined, was to cut complexity and focus the company on the things that are working,” he said. 

One area where Udacity seemed to excel had also created an impediment. The quality of Udacity’s video production resulted in Hollywood-quality programming, Thrun said. But that created a bottleneck in the amount of educational content Udacity could produce.

Udacity’s content makers — a staff of about 140 people — released nearly 10 nanodegrees in 2018. Today, as a result of cuts, only 40 content creators remain. That smaller team completed about five nanodegrees in the first quarter of 2019, Thrun said.

Last year, it took between 10 to 12 people, and more than $1 million, to build one nanodegree, Thrun said. “Now it’s less than 10 percent of that.”

The company was able to accomplish this, he said, by changing its whole approach to video with taping, edits and student assessments happening in real time.

Udacity, under Thrun’s direction, has also doubled down on a technical mentorship program that will now match every new student with a mentor. Udacity has hired about 278 mentors who will work between 15 and 20 hours a week on a contract basis. The company is targeting about 349 mentors in all.

Students are also assigned a cohort that is required to meet (virtually) once a week.

Thrun described the new mentor program as the biggest change in service in the entire history of Udacity. “And we literally did this in two weeks,” he said. 

The strategy has met with some resistance. Some employees wanted to test the mentorship program on one cohort, or group of students, and expand from there. Even since these recent changes, some employees have expressed doubts that it will be enough, according to unnamed sources connected to or within the company.

Even Thrun admits that the “fruit remains to be seen,” although he’s confident that they’ve landed on the right approach, and one that will boost student graduation rates and eventually make the company profitable.

“If you give any student a personalized mentor that fights for them, and that’s the language I usually use, then we can bring our graduation rate, which is at about 34 percent to 60 percent or so,” he said. “And for online institutions 34 percent is high. But we have programs in that graduate more than 90 percent of our students.”

Udacity doesn’t share exact numbers on post-graduation hiring rates. But the company did say thousands of Udacity alumni have been hired by companies like Google, AT&T, Nvidia and others in the U.S., Europe, India and China.

In the U.S. and Canada, graduates with new jobs reported an annual salary increase of 38 percent, a Udacity spokesperson shared.

Indeed, Udacity has had some successes despite its many challenges.

Bright spots

Udacity has continued to increase revenue, although at a slower rate than the previous year-over-year time period. Udacity said it generated $90 million in revenue in 2018, a 25 percent year-over-year increase from 2017.

Udacity had informally offered enterprise programs to clients like AT&T. But in September, the company made enterprise a dedicated product and hired a VP of sales to bring in new customers.

Udacity has added 20 new enterprise clients from the banking, insurance, telecom and retail sectors, according to the company. There are now 70 enterprise customers globally that send employees through Udacity programs to gain new skills.

It continues to expand its career services and launched 12 free courses, built in collaboration with Google, with nearly 100,000 enrollments. It has also funded more than 1.1 million new partial and full scholarships to its programs for students across North America, Europe, the Middle East and Asia. About 21% of all Udacity Nanodegree students in the Grow with Google program in Europe have received job offers, according to Google.

The company also has a new initiative in the Middle East, where it teaches almost a million young Arab people how to code, Thrun said, an accomplishment he says is core to his mission.

Udacity isn’t profitable yet on an EBITDA basis, Thrun shared, but the “unit economics per students, and on a gross margin basis, are good.”

Now, it comes down to whether Thrun’s push to become faster, more efficient and nimble, all while investing in student services and its enterprise product, will be enough to right the ship.

“I really believe if you can get to the point that students come to us and we bend over backwards to ensure their success, we will be a company that has a really good chance of lasting for a lifetime,” he said. 

And if it doesn’t work, then we’ll adjust, like any other company. We can always shift.”

News Source = techcrunch.com

On-demand logistics startup Lalamove raises $300M for Asia growth and becomes a unicorn

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Lalamove, a Hong Kong-based on-demand logistics startup, has closed a $300 million Series D round as it seeks expansion across Asia. In doing so, the company has officially entered the unicorn club.

Founded in 2013 by Stanford graduate Shing Chow, Lalamove provides logistics and delivery services in a similar style to ride-hailing apps like Uber but it is primarily focused on business and corporate customers. That gives it more favorable economics and a more loyal customer base than its consumer-focused peers, who face discount wars to woo fickle consumers.

This new round is split into two, Lalamove said, with Hillhouse Capital leading the ‘D1’ tranche and Sequoia China heading up the ‘D2’ portion. The company didn’t reveal the size of the two pieces of the round. Other investors that took part included new backers Eastern Bell Venture Capital and PV Capital and returning investors ShunWei Capital — the firm founded by Xiaomi CEO Lei Jun — Xiang He Capital and MindWorks Ventures .

The deal takes Lalamove to over $460 million raised to date, and it follows a $100 million Series C that closed in late 2017. Lalamove isn’t disclosing a valuation but Blake Larson, the company’s head of international, told TechCrunch that it has been “past unicorn mark for quite some time [but] we just don’t talk about it.” That figures given the size of the round and the fact that Lalamove was just shy of the $1 billion mark for that Series C.

The Lalamove business is anchored in China where it covers over 130 cities with a network of over two million drivers covering vans, cars and motorbikes.

Beyond China, Lalamove is present in its native Hong Kong — where Uber once briefly tried a similar service — Taiwan, Vietnam, Indonesia, Malaysia, the Philippines and Thailand, where it works with popular chat app Line. All told, it covers 11 cities outside of China and this new capital will go towards expanding that figure with additional city launches in Southeast Asia and entry to India.

“If we do this well, then we are in countries that are more than half the world’s population,” Larsen said in an interview, although he didn’t rule out the potential for Lalamove to expand beyond Asia in the future.

There are also plans to grow the business in mainland China in terms of both geography and new services. Already, Lalamove has begun to offer driver services, starting with financing packages to help drivers with vehicle purchasing, and it is developing dedicated corporate offerings, too.

Lalamove CEO Shing Chow started Lalamove in late 2013, his past roles have included time with Bain & Company, a number of startup ventures — including a Hong Kong-based skin center — and a stint as a professional poker player

Overall, the business claims to have registered 3 million drivers to date and served more than 28 million users across all cities. With its headquarters in Hong Kong, it employs some 4,000 people across its business.

Rival GoGoVan exited through a merger with China-based 58 Suyun in 2017, at a claimed valuation of $1 billion, but Lalamove has remained independent and stuck to its guns. Larson said that already it is profitable in “a significant amount” of cities and typically, he said, the blueprint is to reach profitability within two years of opening a new location.

“The focus has always been on sustainable growth and we’re very strong on the cash flow front,” the former Rocket Internet executive added.

Larson and Lalamove have been very forthcoming in their desire to go public in Hong Kong, noting so publicly as early as 2017 at a TechCrunch China event in Shenzhen. That desire is still evident — “we’re very proud to be from Hong Kong and Hong Kong would be a good place for an IPO,” Larson said this week — but still the company said that it has no particular plan on the cards, despite its consumer-focused peers Uber and Lyft lining up IPOs in the U.S. this year.

“We don’t spend maybe even five minutes a year talking about it,” Larsen told TechCrunch. “The discussion is really ‘Let’s make sure we’re IPO ready’ because sometimes there are macroeconomic conditions you can’t control.”

Clearly, investors are bullish and it is notable that Lalamove’s new round comes at a time when many Chinese companies are downsizing their staff, with the likes of Didi, Meituan and JD.com announcing cuts and refocusing strategies in recent weeks.

“[Lalamove CEO and founder] Shing is a role model for Hong Kong’s new generation of innovative entrepreneurs,” said Sequoia China founder and managing partner Neil Shen. “Raised in Hong Kong and educated at Stanford University, Shing returned and plunged himself in the entrepreneurial wave of ‘Internet Plus,’ becoming a figure of entrepreneurial success.”

News Source = techcrunch.com

WeWork could challenge Starbucks in China with new on-demand service

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The rise of Starbucks in China, like that in the west, is closely linked to its function as a “third space” for people to hang out between home and work. In recent years, a bevy of coffee entrepreneurs are trying to topple the American giant’s dominance in China and lately, an unexpected contender — WeWork — has joined their camp.

This month, the office tenant and workplace service provider launched WeWork Go, a new feature that allows China-based users to rent a desk by the minute so they are no longer tied to long-term leases. While Starbucks provides free accommodation and charges for coffee, WeWork flips the equation to offer free coffee and paid space. Starbucks is already being squeeze in China by emerging rival Luckin Coffee, a well-funded startup that explicitly pledges to take on the Seattle-based giant with a model that focuses on coffee delivery.

WeWork Go works a bit like other shared services, with an app that lets users check the occupancy of a list of offices in real time before they travel over. Upon arrival, users scan a QR code at the gate, pop the door open, get seated in the common area and the billing begins.

wework go china

WeWork Go available through a WeChat mini program. Screenshot: TechCrunch

The firm says it monitors traffic flow closely so the common space isn’t flooded with fleeting users. Booking private rooms require additional fees. Go claims to have picked up 50,000 registered users so far after piloting for three months across an inventory of 18 locations in Shanghai, where WeWork nestles its China headquarters.

Made for China

Instead of building a native app, WeWork Go operates via a WeChat mini program, a form of a stripped-down app that works within China’s largest social network. Mini programs are an increasingly popular way for startups to trial ideas thanks to their relative ease to develop. “[Go] is a key development of our China localization,” a WeWork spokesperson told TechCrunch.

Go is tailoring to the so-called “part-time users.” “These people would not purchase the monthly membership. They would work at home or a coffee shop, restaurant, or library,” Dominic Penaloza, who heads innovation and technology at WeWork China, told TechCrunch. He first conceptualized the on-demand workplace service at Naked Hub, a smaller local rival WeWork China bought out for $400 million last year. After the merger, the executive alongside his tech team joined WeWork and continued with the project that would later become Go.

The pay-as-you-go feature is also getting rolled out stateside at a new Manhattan location last week.

Penaloza admits Go could be competing with coffee shops for it offers “an alternative type of the third space for freelancers, mobile workers, business travellers or those who want to briefly step aside from their offices for a mental break.” The obvious target is Starbucks, which commands a whopping 51 percent share of the country’s booming coffee market.

Made for WeWork

For WeWork, Go serves as a trial for those deciding whether to sign on monthly subscriptions. What they are weighing is the 1,830 yuan ($271) price tag for a hotdesk in downtown Shanghai. By comparison, Go starts at 15 yuan and goes up to 30 yuan an hour at more prime locations, offering the same perks as the full-time hotdesking plan, which includes access to common spaces, beverages and wifi.

Users can do their math. “If you started as a WeWork Go member, and if you use our service quite a lot, you will realize it’s much more economical to purchase monthly subscriptions. WeWork Go enables WeWork to reach an entirely new market segment,” suggests Penaloza.

The flexible pricing may help WeWork — which generates the bulk of its revenues from large corporations — reach a wider user base. The shared office industry in China has entered what real-estate researcher Jones Lang LaSalle calls the “second phase,” with big firms moving into premium workplaces like WeWork and local player Soho 3Q. Cash-strapped startups, on the other hand, increasingly turn to government-backed incubators for lower costs.

wework china

Photo: WeWork China

Several early users of Go told TechCrunch they found the service delivering a “quieter” and “more comfortable” vibe than most cafes, but distance is key when they are in a rush. WeWork currently has about 60 locations across a dozen major Chinese cities, whereas Starbucks reaches a dense network of 3,330 stores and is shooting for 6,000 by the end of 2022. WeWork China got a boost for locations with the Naked Hub acquisition last year and says it’s open to adding third-party spaces such as restaurants into its inventory, though it has not taken a solid step towards that vision.

“There is a very interesting opportunity in the really downtown area, where WeWork locations and Naked Hub locations are quite full starting from after lunch until 5 pm,” notes Penaloza. “What’s amazing is that restaurants around those locations are quite empty at exactly the same time, so there’s a fascinating opportunity there but we haven’t done anything about it yet.”

News Source = techcrunch.com

How open source software took over the world

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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.

Fast forward to today and we’ve witnessed the growing excitement in the space: Redhat is being acquired by IBM for $32 billion (3x times its market cap from 2014); Mulesoft was acquired after going public for $6.5 billion; MongoDB is now worth north of $4 billion; Elastic’s IPO now values the company at $6 billion; and, through the merger of Cloudera and Hortonworks, a new company with a market cap north of $4 billion will emerge. In addition, there’s a growing cohort of impressive OSS companies working their way through the growth stages of their evolution: Confluent, HashiCorp, DataBricks, Kong, Cockroach Labs and many others. Given the relative multiples that Wall Street and private investors are assigning to these open source companies, it seems pretty clear that something special is happening.

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 discovers the 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.

The Future

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.

News Source = techcrunch.com

A look back at the Israeli cyber security industry in

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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.

Growing seed rounds chasing greenfield opportunities

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.

Emerging fields supplanting “traditional” technologies

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.

News Source = techcrunch.com

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