simonvc

Great session with the Simon School VC club discussing everything from evaluating a prospective deal to dissecting a term sheet. Thanks to all who attended for asking such great questions! Always a blast to back on campus #meliora.

Argentina’s startup scene is primed, but not yet firing on all cylinders

Thrilled to have this piece make it to TechCrunch


Over the last decade, Argentina’s public profile has been far from flattering. With a steady feed of headlines that have included, “Inflation”, “Corruption”, and “Political Instability”, the country has been shut off from most international tech investment since the “dot com” bubble. Since then, Argentina has had to overcome severe currency devaluation, a closed economy, and fourteen years of default that ultimately resulted in a $4.65B payment to US hedge funds. The country currently ranks 157th out of 189 countries in terms of the ease of doing business and has the highest youth unemployment rate in Latin America.

I recently spent a week in Buenos Aires to meet with entrepreneurs, investors, and government agencies to better understand the tech ecosystem and the new policies aiming to catalyze it.  At its core, I found a robust and enthusiastic community of highly technical operators who are devoted to developing the local ecosystem and betting heavily on the new pro-business regulations they have been promised. For context, roughly 60% of Argentines ages 18-24 say that they find entrepreneurship a favorable career path, and more than one in four say they intend on starting a business.

The election of pro-business President Mauricio Macri in December brought new plans for an open market and a slate of startup-centric reforms that have reenergized the entrepreneurial spirit of Latin America’s third largest economy.

Buenos Aires alone, houses three of the country’s most respected technical universities and a new crop of coding schools including Digital House, which saw class sizes grow five-fold last year. There has also been significant investment in co-working spaces around Buenos Aires’ trendy Palermo neighborhood that mirror the style and amenities you might find in downtown San Francisco. With arguably better coffee.

Moving in tandem, the government is rolling out mentorship programs, online libraries and support hotlines for budding entrepreneurs. Much of this is being championed by the founders and investors who were responsible for building the country’s most successful companies, including MercadoLibre and Globant.

Founded in 1999, MercadoLibre is an online marketplace providing e-commerce and online auctions similar to eBay. Boasting over 158 million registered users and an $8.5B market cap, it is the only Internet company from Latin America listed on the Nasdaq (MELI). Founded in 2003, Globant is an IT and software development company listed on the NYSE (GLOB) with a $1.4B market cap and operations across Latin America, Europe, and the United States.

The lack of meaningful exits has plagued emerging markets and often hindered the development of robust tech ecosystems. While still problematic, Argentina has bucked this trend on several notable occasions with the success of MercadoLibre and Globant. For context, only 76 emerging market companies have held public offerings on the Nasdaq and NYSE since 2007. Excluding Alibaba, the combined market cap of MercadoLibre and Globant represents approximately 6.5% of the current value of all emerging market companies who have gone public in the US during that time.

On the earlier side, there is an exciting wave of startups including Restorando, Nuvem Shop, and Avenida that have leveraged existing business models and adapted them to fit the intricacies of their local market. While many Argentinian success stories to date have focused on e-commerce and marketplaces, some of the most impressive entrepreneurs I came across were tackling larger regional pain points including clean water supply, agriculture, and renewable energy.

Taking aim at the funding environment, Argentinian officials were inspired by Israel’s success and are rolling out 1:1 matched funding incentives for accelerators and venture funds. There are also plans to create ten new venture funds over the next four years and establish the country’s first equity crowdfunding platform.

Fostering a stronger network of funding sources will be key. With the growing number of accelerators joining existing shops such as NXTP Labs and Wayra, a lack of follow-on capital for Series A and B rounds could be a harmful bottleneck to the country’s new agenda. The Series A funding community includes such sophisticated firms as Kaszek Ventures, which was founded by former MercadoLibre executives. But if the new policies correctly fall into place, there could be a sizeable increase in growth-stage investment opportunities for new regional and international investors alike.

However, while international investors are taking notice of Argentina, expect to see many remain on the sideline until there is proven traction from these incentives programs and the new political regime. The new government promises greater economic alignment with the rest of the world and appears to be taking the necessary steps to avoid the pitfalls that have impeded similar regional initiatives. Yet, as we’ve seen multiple times both domestically and abroad, creating such an environment requires more than just capital and optimism. It requires experienced mentorship, the capacity for innovation, and the availability of follow-on funding.

None of which develop overnight.

After more than a decade of being in the news for the all the wrong reasons, Argentina is beginning to rewrite its story. To say that country is the next source of global unicorns is likely overzealous. However, with a remarkable talent pool, devoted political support, and the growing availability of growth-stage funding, expect to see a greater number of strong regional businesses and hopefully a more active exit environment in the years to come.

The rise of open source in the enterprise IT stack

Developers, CIOs, and tech evangelists alike have fallen for open source. And rightfully so. The current development environment is one of unprecedented on-demand access to technologies that are molded, debugged, and stretched by a global community of developers around the clock.

In a time when web-based products are being delivered to millions of users at a global scale, open source companies including Docker and MuleSoft have enabled organizations to develop, secure, and distribute technology with incredible fidelity and efficiency. Differing from their main-frame and XaaS predecessors, open platforms allow organizations ranging from Facebook to the Federal Government to build faster and integrate at a deeper level without being beholden to vendor roadmaps and support tickets. What’s more, the new wave of developers has bought into the ideology of open source and its intrinsic emphasis on collaboration, community, and transparency.

The world of software development and what constitutes the enterprise IT stack have fundamentally changed in the last decade. What used to include an IBM server cluster, Oracle database, and Microsoft applications now more likely consists of AWS, Cloudera, and custom developed web apps. Almost all of which rests on the shoulders of open source frameworks that heavily rely upon a tight-knit community of active developers. Developers that have grown up knowing, using, and contributing to open source projects.

A common misconception is that open source is a business model. But in fact, open source is a licensing, development, and distribution method. With that, today’s open source companies, now commonly referred to as Open Adoption Software (OAS) are organizations built around an open source project and charge subscription fees for related tools, services, and security protocols. Take for example Cloudera, an OAS provider of Apache Hadoop-based tools and services. Originally developed as an internal algorithm by Google, Hadoop is used to distribute and quickly calculate enormous volumes of complex data. When Google released the code as an open source project in 2004, other organizations including Facebook and Yahoo adopted, deployed, and improved the code to serve their data analysis needs as well as the open community. Seeing a clear opportunity to serve the rising needs of big data analysis, Cloudera was created with the mission of making Hadoop more readily available for enterprise clients.

While open source as a concept has become ubiquitous, the first generation of software companies leveraging community-led technologies largely failed to gain commercial traction. Think of it this way: if the entire world has access to the same underlying technology and assuming everyone is of roughly equal intelligence, it’s difficult to create meaningful product differentiation that can demand a higher price point. With that, open source companies have historically struggled to generate the cash flow necessary to reinvest in proprietary technology and services to build a successful monetization strategy. Because of this, revenue levels for first generation companies including MySQL plateaued in the $20-50M range. This in turn makes them prime acquisition targets for larger players like IBM and Oracle, who have multiple revenue channels to reinvest in both the underlying free community and proprietary pay-for-use products and services.

The one exception from this early cohort was Red Hat, which went public in 1999 and currently commands a market cap of roughly $13B. Since then, Cloudera has been the only other open source company to generate annual revenue exceeding $100M. Ultimately, the future of open source in the enterprise will depend on how well OAS companies can monetize. While many signs point to accelerated adoption and open source community development, there remain industry insiders who have their doubts. “People seem to take the free stuff and work around the paid stuff,” said RedHat CEO, Jim Whitehurst. “You have to recognize that the early adopters are the people who really want free. They’re working hard to work around you.”

However, there is evidence of growing traction. Among the current generation of open providers, there has been more than a 3x increase in those generating more than $20M in annual revenue. This growth can be attributed to a number of factors, the most important being that OAS companies have been far more disciplined in developing proprietary technology in their early stages. At its core, OAS as a model is a pure upsell play. Give away the basic infrastructure for free and then create a profitable business by selling products such as security protocols, toolkits, and advanced customer support packages. The growth of this segment can also be tied to the overall increase in adoption of open source software. A study from Black Duck found that 78% of enterprises run on open source and less than 3% reported that they do not leverage open source in any way. Finally, the ever-increasing demand for faster development, deployment, and scale has created an environment where companies require agility and flexibility that last generation’s tech stacks were not necessarily made to support.

Whether Cloudera and other private players can emulate the success of Red Hat on the public stage remains to be seen. As with any other burgeoning market, there will be fierce competition, plateauing revenues, and inevitable failures. Not to mention the impending fear of public cloud companies like AWS offering competing products at a fraction of the cost. Regardless, the current generation of open source can certainly be viewed as the new wave in software development. Given the combined strength of industry adoption, strong communities of developers, and continuously improving technology, the open source movement has strong tailwinds that could lead to truly massive scale.

Regulation throws a wrench in Indian Ecommerce

The battle to control India’s ecommerce market has become more complex. New foreign investment rules now allow 100% foreign direct investment in online retail businesses. However, the rules also ban discounts on listed items and require companies to follow a marketplace rather than inventory-based model. Most of the large ecommerce providers in India already operate as marketplaces. However, these companies cannot have more than 25% of their sales coming from any one vendor.

Although exact numbers are unavailable, analysts suspect that Flipkart subsidiary, WS Retail most likely breaches the 25% threshold. Additionally, Cloudtail India, a joint venture between Amazon and Catamaran Ventures, represents roughly 40% of Amazon’s Indian sales. Both Amazon and Flipkart have used subsidized discounts to fuel growth, but one could argue that a ban on discounting will prove more difficult for the local player.

With a war chest of venture capital and the proliferation of Indian smartphone use, FlipKart has boasted consistent annual GMV growth of over 200%. Unfortunately, a substantial driver of that growth has been steep discounts on smartphones. With discounting now banned, the company will need to shake up its strategy to remain competitive with Amazon, which despite working within the same regulatory conditions, can still win market share with its world-class logistics, customer service, and technology.

While in the short-term, these regulations are a big blow to retailers, it brings clarity to what has been a bitter dispute over the legality of foreign-owned online shopping sites. It also serves as a reminder to investors to proceed with caution in international markets, as stark and sudden changes in regulatory conditions can have an enormous impact on the business environment.

Mobile messaging is starting to look a lot like SaaS

With SMS costs many times higher than in the United States, 96% of Brazilian smartphone owners use WhatsApp.

Already the world’s largest mobile messaging app, WhatsApp has taken on a much broader position in Brazil as a major communications solution for entities ranging from SMBs to government agencies. For example, the city of Rio is using a WhatsApp channel to answer questions about the status of construction work affecting the city in preparation for this summer’s Olympic Games. Procter & Gamble uses WhatsApp to promote its Head & Shoulders line of shampoo through short videos of Brazilian soccer coach Joel Santana discussing the brand and using the latest products.

This success is being replicated elsewhere. In Hong Kong, for example, mobile messaging is being used to book reservations at restaurants and send news tips to local publishers. Later this year, the company announced that it will begin its first enterprise rollout by offering banks, airlines, and other businesses one-way messages to customers. Why is this important? First, consider the outsized levels of user engagement in mobile messaging relative to other mediums. 98% of mobile messages are opened. And it is estimated that over 3.6B people (half of the world population) will be using messaging apps in the next few years. For context, email open rates hover around 22%. Additionally, WhatsApp allows users to send messages for free regardless of their mobile carrier, making it a desirable tool for businesses looking to provide real-time customer support without investing in costlier SaaS offerings.

What does the future for mobile messaging look like? We believe that many of the most successful will become platforms for e-commerce, media and marketing. In order to reach this stage, artificial intelligence will be crucial.

Tacobot: Proof that bots are the next frontier

While the proliferation of mobile apps has paved the way for nearly a decade of innovation, many consider chatbots to be the next burgeoning software ecosystem.

With substantial support and investment from tech heavyweights including Facebook, Slack, and Microsoft, chatbots have already found their way into processes as varied as scheduling meetings and booking hotel accommodations. A chatbot is an AI-powered program that simulates a conversation with a human being via messaging services or social platforms.

Over the last two months Facebook and Microsoft have made waves with the release of their own chatbot SDKs. However, it can be argued that few have catalyzed the bot revolution as much as enterprise messaging platform, Slack. Slack provides users with a “Slackbot” that can be easily customized to respond to a variety of prompts and command strings. Leveraging that framework and an API, developers have taken bots from playful replies and simple actions to new extremes.

Take for example tacobot, a Slack-enabled chatbot which enables users to place orders to their nearest Taco Bell. More practical bots have also been developed that can integrate with a user’s calendar, CRM, and other third party apps.

At a time where 20 developers capture 50% of app store revenue, chatbots could represent a new frontier for developers to shake up what has become an app-centric model. There have already been a steady stream of startups focusing in this space including Telegram, Chatfuel, and Pana. However, expect to see significant investment from enterprise players like Facebook. With 900M people using Facebook Messenger and bots already integrated with Expedia and CNN, chatbots have created one more way to keep users entrenched within the Facebook platform, increasing engagement and eventually creating a new revenue channel.

An AI victory we should applaud

With more possible variations than there are atoms in the universe, mastering the game of Go has often been considered the “Holy Grail” of artificial intelligence (AI).

A game of unrivaled complexity, even the world’s elite players suggest that the game requires as much instinct as it does intellect. Which is why the recent 4-1 victory by Google’s artificial intelligence program, AlphaGo, over professional player Lee Sedol, was not only unexpected, but groundbreaking. It was an impressive display of both experienced and imaginative maneuvers by a machine that left the world’s most renowned player speechless, frustrated, and captivated.

While the intricacies of the matchup are worthy of their own review, the key takeaway is not the ability for AI to conquer Go, but rather its ability to conquer anything else less complicated than Go – which amounts to a lot. It is overwhelmingly likely that AI will displace human labor to at least some extent. As a result, the debate on the ethics of artificial intelligence and how societies will adjust to it, is important.

While investment and development in robotics and AI has reached an all-time high, equal attention must now be placed around creating guidelines to steer technology’s future role in everyday society in addition to considering alternative income programs to support those subject to rising job displacement. In the near term however, AlphaGo’s victory should be applauded rather than feared, as it accomplished a feat many believed was still a decade out of reach.