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August 19, 2018
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M&A

Cisco’s $2.35 billion Duo acquisition front and center at earnings call

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When Cisco bought Ann Arbor, Michigan security company, Duo for a whopping $2.35 billion earlier this month, it showed the growing value of security and security startups in the view of traditional tech companies like Cisco.

In yesterday’s earnings report, even before the ink had dried on the Duo acquisition contract, Cisco was reporting that its security business grew 12 percent year over year to $627 million. Given those numbers, the acquisition was top of mind in CEO Chuck Robbins’ comments to analysts.

“We recently announced our intent to acquire Duo Security to extend our intent-based networking portfolio into multi- cloud environments. Duo’s SaaS delivered solution will expand our cloud security capabilities to help enable any user on any device to securely connect to any application on any network,” he told analysts.

Indeed, security is going to continue to take center stage moving forward. “Security continues to be our customers number one concern and it is a top priority for us. Our strategy is to simplify and increase security efficacy through an architectural approach with products that work together and share analytics and actionable threat intelligence,” Robbins said.

That fits neatly with the Duo acquisition, whose guiding philosophy has been to simplify security. It is perhaps best known for its two-factor authentication tool. Often companies send a text with a code number to your phone after you change a password to prove it’s you, but even that method has proven vulnerable to attack.

What Duo does is send a message through its app to your phone asking if you are trying to sign on. You can approve if it’s you or deny if it’s not, and if you can’t get the message for some reason you can call instead to get approval. It can also verify the health of the app before granting access to a user. It’s a fairly painless and secure way to implement two-factor authentication, while making sure employees keep their software up-to-date.

Duo Approve/Deny tool in action on smartphone.

While Cisco’s security revenue accounted for a fraction of the company’s overall $12.8 billion for the quarter, the company clearly sees security as an area that could continue to grow.

Cisco hasn’t been shy about using its substantial cash holdings to expand in areas like security beyond pure networking hardware to provide a more diverse recurring revenue stream. The company currently has over $54 billion in cash on hand, according to Y Charts.

Cisco spent a fair amount money on Duo, which according to reports has $100 million in annual recurring revenue, a number that is expected to continue to grow substantially. It had raised over $121 million in venture investment since inception. In its last funding round in September 2017, the company raised $70 million on a valuation of $1.19 billion.

The acquisition price ended up more than doubling that valuation. That could be because it’s a security company with recurring revenue, and Cisco clearly wanted it badly as another piece in its security solutions portfolio, one it hopes can help keep pushing that security revenue needle ever higher.

News Source = techcrunch.com

Coinbase acquires Distributed Systems to build “Login with Coinbase”

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Coinbase wants to be Facebook Connect for crypto. The blockchain giant plans to develop a “login with Coinbase” identity platform for decentralized app developers to make it much easier for users to sign up and connect their crypto wallets. To fuel that platform, today Coinbase announced it has acquired Distributed Systems, a startup founded last year that was building identity standard for dApps called the Clear Protocol.

The five-person Distributed Systems team and its technology will join Coinbase. Three of the team members will work with Coinbase’s Toshi decentralized mobile browser team, while CEO Nikhil Srinivasan and one other co-founder are forming the new decentralized identity team that will work on the “Login with Coinbase” product. They’ll be building it atop the “know your customer” anti-money laundering data Coinbase has on its 20 million customers. Srinivasan tells me the goal is to figure out “How can we allow that really rich identity data to enable a new class of applications?”

Distributed Systems had raised a $1.7 million seed round last year led by Floodgate and was considering raising a $4 million to $8 million round this summer. But Srinivasan says “No one really understood what we’re building”, and it wanted a partner with KYC data. It began talking to Coinbase Ventures about an investment, but after they saw Distributed Systems’ progress and vision, “they quickly tried to move to find a way to acquire us.”

Distributed Systems began to hold acquisition talks, and the CEO tells me it was deciding between going to “Facebook, or Robinhood, or Binance or Coinbase”. Coinbase “were able to convince us they were making big bets, weaving identity across their products.” The financial terms of the deal weren’t disclosed.

Coinbase’s plan to roll out the “Login with Coinbase” platform is an SDK that others apps could integrate, says Srinivasan. That mimics the way Facebook colonized the web with its SDK and login buttons that splashed its brand in front of tons of new and existing users. This made turned Facebook into a fundamental identity utility beyond its social network.

Developers eager to improve conversions on their sign up flow could turn to Coinbase instead of requiring users to set up whole new accounts and deal with crypto-specific headaches of complicated keys and procedures for connecting their wallet to make payments. One prominent dApp developer told me yesterday that forcing users to set up the MetaMask browser extension for identity was the part of their signup flow where they’re losing the most people.

Coinbase CEO Brian Armstrong confirmed this morning that it’s working on an identity SDK. When Coinbase investor Garry Tan of Initialized Capital wrote that “The main issue preventing dApp adoption is lack of native SDK so you can just download a mobile app and a clean fiat to crypto in one clean UX. Still have to download a browser plugin and transfer Eth to Metamask for now Too much friction”, Armstrong replied “On it :)”

In effect, Coinbase and Distributed Systems could build a safer version of identity than we get offline. As soon as you give your social security number to someone or it gets stolen, it can be used anywhere without your consent and that leads to identity theft. Coinbase wants to build a vision of identity where you can connect to decentralized apps while retaining control. “Decentralized identity will let you prove that you own an identity, or that you have a relationship with the Social Security Administration, without making a copy of that identity” writes Coinbase’s PM for identity. “If you stretch your imagination a little further, you can imagine this applying to your photos, social media posts, and maybe one day your passport too.”

Considering Decentralized Systems and Coinbase are following the Facebook playbook, they may soon have competition from the social network. It’s spun up its own blockchain team and an identity and single sign-on platform for dApps is one of the products I think Facebook is most likely to build. But given Coinbase’s strong reputation in the blockchain industry and its massive head start in terms of registered crypto users, today’s acquisition well positions it to be how we connect our offline identity with the rising decentralized economy.

News Source = techcrunch.com

Facebook buys Vidpresso’s team and tech to make video interactive

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Zombie-like passive consumption of static video is both unhealthy for viewers and undifferentiated for the tech giants that power it. That’s set Facebook on a mission to make video interactive, full of conversation with broadcasters and fellow viewers. It’s racing against Twitch, YouTube, Twitter and Snapchat to become where people watch together and don’t feel like asocial slugs afterward.

That’s why Facebook today told TechCrunch that it’s acqui-hired Vidpresso, buying its seven-person team and its technology but not the company itself. The six-year-old Utah startup works with TV broadcasters and content publishers to make their online videos more interactive with on-screen social media polling and comments, graphics and live broadcasting integrated with Facebook, YouTube, Periscope and more. The goal appears to be to equip independent social media creators with the same tools these traditional outlets use so they can make authentic but polished video for the Facebook platform.

Financial terms of the deal weren’t disclosed, but it wouldn’t have taken a huge price for the deal to be a success for the startup. Vidpresso had only raised a $120,00 in seed capital from Y Combinator in 2014, plus some angel funding. By 2016, it was telling hiring prospects that it was profitable, but also that, “We will not be selling the company unless some insane whatsapp like thing happened. We’re building a forever biz, not a flip.” So either Vidpresso lowered its bar for an exit or Facebook made coming aboard worth its while.

For now, Vidpresso clients and partners like KTXL, Univision, BuzzFeed, Turner Sports, Nasdaq, TED, NBC and others will continue to be able to use its services. A Facebook spokesperson confirmed that customers will work with the Vidpresso team at Facebook, who are joining its offices in Menlo Park, London and LA. That means Facebook is at least temporarily becoming a provider of enterprise video services. But Facebook confirms it won’t charge Vidpresso clients, so they’ll be getting its services for free from now on. Whether Facebook eventually turns away old clients or stops integrating with competing video platforms like Twitch and YouTube remains to be seen. For now, it’s giving Vidpresso a much more dignified end than the sudden shutdowns some tech giants impose on their acquisitions.

We’ve had a lot of false starts along the way . . . We finally landed on helping create high quality broadcasts back on social media, but we still haven’t realized the full vision yet. That’s why we’re joining Facebook,” the Vidpresso team writes. “This gives us the best opportunity to accelerate our vision and offer a simple way for creators, publishers, and broadcasters to use social media in live video at a high quality level . . . By joining Facebook, we’ll be able to offer our tools to a much broader audience than just our A-list publishing partners. Eventually, it’ll allow us to put these tools in the hands of creators, so they can focus on their content, and have it look great, without spending lots of time or money to do so.”

Facebook already has some interactive video experiments out in the wild. For users, it recently rolled out its Watch Party tool for letting Groups view and chat about videos together. It’s also trying new games like Lip Sync Live and a Talent Show feature where users submit videos of them singing. For creators, Facebook now let streamers earn tips with its new Stars virtual currency, and lets fans subscribe to donating money to their favorite video makers like on Patreon. And on the publisher side, Facebook Live has also built tools to help publishers pull in social media content. It’s even got an interactive video API that it’s developing to allow developers to launch their own HQ Trivia-game shows.

But the last line of Vidpresso’s announcement above explains Facebook’s intentions here, and also why it didn’t just try to build the tools itself. It doesn’t just want established news publishers and TV studios making video for its platform. It wants semi-pro creators to be able to broadcast snazzy videos with graphics, comments and polls that can aesthetically compete with “big video” but that feel more natural.

Every internet platform is wising up to the fact that web-native creators who grew up on their sites often create the most compelling content and the most fervent fan bases. Whichever video hub offers the best audience growth, creative expression tools and monetization options will become the preferred destination for creators’ work, and their audiences will follow. Vidpresso could help these creators look more like TV anchors than selfie monologuers, but also help them earn money by integrating brand graphics and tie-ins. Facebook couldn’t risk another tech giant buying up Vidpresso and gaining an edge, or wasting time trying to build interactive video technology and expertise from scratch.

News Source = techcrunch.com

Patreon buys Memberful but keeps it indie as patronage consolidates

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Patreon is forming a patronage empire. Today it acquired white-labeled subscription membership platform Memberful, which lets creators sell exclusive access to content through their own site instead of a centralized platform like Patreon. Rather than being folded into a Patreon feature, Memberful will run as an independent brand maintaining its tiered pricing structure, though new sign-ups will get a rate closer to Patreon’s low 5 percent rake.

Terms weren’t disclosed for the deal that brings Membeful’s whole seven-person team aboard But Patreon clearly sees rolling up competitors and complements in the patronage space as a worthy use of its $60 million raise at a $450 million valuation late last year that brought it to $105 million in funding. In June, Patreon bought Kit to let creators bundle in merchandise with their perks for paying monthly subscribers. It also bought out competitor Subbable back in 2015.

By teaming up, Patreon and Memberful will be able to provide subscription patronage services for creators, whether they want their fan community to live on Patreon, or through Memberful on their own WordPress or website with integrations of Stripe and MailChimp. Patreon already has 2 million patrons paying an average of $12 each to a total of 100,000 creators, and it expects to pay out $300 million in 2018 alone. The acquisition could let Patreon move up market, recruiting comedians, illustrators, game developers, and vloggers that already have an established audience elsewhere.

“I think membership is on the up and is going to grow for the next decade” says Patreon VP of Product Wyatt Jenkins. “Our strategy is to be an open, neutral platform” as opposed to a focusing on one type of content like YouTube with videos or Twitch with streaming where you’re locked into that platform’s tools. Memberful, launched in 2013, has bootstrapped the creation of its white-labeled tools without the need for venture funding.

Memberful gives creators full control over branding with no Patreon chrome. But it’s more expensive and also requires more work since creators have to manage their own site, customer service, and payment processing. Memberful takes a 10 percent cut with no monthly fee for its limited basic tier, or $25 per month plus 4.9 percent for the full-featured pro version, though it also offers enterprise pricing. That pricing will remain for existing users, but “new customers will see a transaction fee closer to Patreon’s”, which is a flat 5 percent a Patreon spokesperson tells me. Patreon does basically everything for a creator, but it also ropes them into the Patreon-branded ecosystem that promotes other content makers too.

Sometimes Patreon handling everything can be a problem, though. Last week it experienced a higher-than-normal volume of declines from banks of charges to patrons. That left some creators without their expected income, and required patrons to deal with the chore of calling their bank to tell them paying $1, $5, or $20 per month to their favorite creator wasn’t fraud. Patreon now tells me that “as of Friday, we let everyone know that we were back to normal decline rates, and were going to continue retrying the rest of the cards like we normally do.”

It makes sense for Patreon to race to consolidate the patronage industry as it’s being invaded by giant incumbents. Twitch, YouTube, and Facebook all offer their own versions of paid subscriptions to creators that get patrons extra perks like exclusive content or badges so they stick out in chat rooms full of fans. While those platforms are all focused on video streamers, they still pose a threat to Patreon that needs to maximize the number of successful creators it hosts in order to earn enough from its tiny cut of payments. Facebook especially could muscle in, since many creators already run their own Facebook Pages.

Asked about competition from those platforms, Jenkins said “I think there’s a strong chance it’s a tailwind. The concept of membership is pretty new. If those big companies are going to drop millions of dollars into marketing the concept of membership I think that’s great. He stressed the question of “Do you want to own your fan base? On YouTube, those aren;t your fans, they’re YouTube users. YouTube is incentivized to keep them watching videos so it can show ads.”

That might lead fans to unsubscribe from a creator as YouTube promotes other similar ones they could watch instead. “You don’t own the relationship.” Facebook Page admins have found that out the hard way as algorithm changes prioritizing friends over public figures, making it tough to reach the followers they spent years begging to like them. If Patreon can offer creators audience growth through discovery on its interconnected network without cannibalizing anyone’s member counts, its neutrality and focus could make it a leader in this new wing of the digital economy.

News Source = techcrunch.com

Washington hit China hard on tech influence this week

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After months of back-and-forth negotiations, Washington moved rapidly this past week to fend off the increasing transcendence of China’s tech industry, with Congress passing expanded national security controls over M&A transactions and the Trump administration heaping more pressure on China with threats of increased tariffs.

We’ve been following the reforms to CFIUS — the Committee on Foreign Investment in the United States — since the proposal was first floated late last year. The committee is charged with protecting America’s economic interests by preventing takeovers of companies by foreign entities where the transaction could have deleterious national security consequences. The committee and its antecedents have slowly gained powers over the past few decades since the Korean War, but this week, it suddenly gained a whole lot more.

Through the Foreign Investment Risk Review Modernization Act of 2018, which was rolled into the must-pass National Defense Authorization Act and passed by Congress this week, CFIUS is gaining a number of new powers, more resources and staff, more oversight, and a charge to massively expand its influence in any M&A process involving foreign entities.

Lawfare has a great summary of the final text of the bill and its ramifications, but I want to highlight a few of the changes that I think are going to have an outsized effect on Silicon Valley and the tech industry more widely.

One of the top priorities of this legislation was to make it more difficult for Chinese venture capital firms to invest in American startups and pilfer intellectual property or acquire confidential user data.

Congress fulfilled that goal in two ways. First, the definition of a “covered transaction” has been massively expanded, with a focus on “critical technology” industries. In the past, there was an expectation that a foreign entity had to essentially buy out a company in order to trigger a CFIUS review. That jurisdiction has now been expanded to include such actions as adding a member to a company’s board of directors, even in cases where an investment is essentially passive.

That means that the typical VC round could now trigger a review in Washington — and in the fast timelines of startup fundraising, that might be enough friction to keep Chinese venture capital out of the American ecosystem. Given that Chinese venture capital (at least by some measures) has outpaced U.S. venture capital in the first half of this year, this provision will have huge ramifications for startups and their valuations.

The second element Congress added was requiring that CFIUS receive all partnership agreements that a company has signed with a foreign investor. Often in a transaction, there is a main agreement spelling out the overall structure of a deal, and then side agreements with individual investors with special terms not shared with the wider syndicate, such as the right to access internal company data or intellectual property. By requiring further disclosure, CFIUS will have a more holistic picture of a deal and any risks it might add for national security.

It’s important to note that Congress was keen on balancing the need for investment with the need of national security. Through oversight provisions, including allowing CFIUS decisions to be contested in the DC Court of Appeals, Congress has designed the reform to be fairer, even as it takes a harder line on certain transactions.

It will take many months for the provisions to come in full force, so some of the effects of this bill won’t be felt until the end of next year. Nonetheless, Congress has sent a clear message of its intent.

Congress’ national security concerns in financial transactions are also crossing the Atlantic. British Prime Minister Theresa May and her government are spearheading new controls over foreign investment transactions, and the EU has also launched more screenings to ensure that transactions are in the best interests of the continent. All of these legislative moves are a response to Chinese foreign direct investment, which has skyrocketed in Europe while almost disappearing in North America.

President Trump signed tariffs on China earlier this year. Now, the administration wants to more than double them.

That disappearance is a function of the on-going trade dispute between the U.S. and China, which crescendoed this past week. The Trump administration said it is considering increasing tariffs from 10% to 25% on $200 billion worth of Chinese goods, significantly heightening the tariffs it had put in place earlier this year.

That threat got a swift response from China overnight, with the Chinese Commerce Ministry saying that it would put tariffs on $60 billion worth of American goods in retaliation if the U.S. followed through with its threat.

So far, the tech industry appears to have been more insulated from the back-and-forth than expected, although the increasing scope and intensity of tariffs could change that calculus. Apple updated its quarterly filing this week to include a new risk around trade disputes, saying that “Tariffs could also make the Company’s products more expensive for customers, which could make the Company’s products less competitive and reduce consumer demand.” Legal boilerplate for sure, but it is the first time the company has included such a provision in its filing.

The tariffs drama is going to continue in the weeks and months ahead. But this week in particularly was a watershed for U.S. and China technology relations, and a busy week for tech lobbyists and policy officials.

For startups, most of this news basically boils down to the following: the U.S. is one market, and China is another. Cross-investing and cross-distribution just aren’t going to be easy as they were even a few months ago. Pick a market — one market — and focus your energies there. Clearly, it’s going to be tough times for anyone caught in the middle between the two.

News Source = techcrunch.com

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