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SPEAKER_01: In today's episode, filmed at Launch Festival 2016,

SPEAKER_02: it's the state of investing with seasoned VCs Hunter Walk of Homebrew, Jed Katz of Javelin Venture Partners, and Aileen Lee of Cowboy Ventures.

SPEAKER_04: Just because a company does layoffs doesn't mean that they're going to become, like, that they're going to go to zero or that they're not.

SPEAKER_06: I mean, there are a lot of companies that we admire, like, greatly, and we aspire to be in terms of, like, titans of the internet

SPEAKER_07: that have had very bumpy roads over the past decade.

SPEAKER_01: Then Kurt McMaster of Cyanogen shows us his new platform mod.

SPEAKER_09: See, the fact is, we control the operating system, so we can do things with SuperServe, the operating system, that simply aren't possible today. Like, I can extend a plug-in to a game development platform, and developers can publish directly to the lock screen. So I can be paid. I can, I don't even, without opening my phone up, I can pull it out and go right into Candy Crush, swipe up, and go right into another game, completely bypassing Google Play. That kind of thing is just not possible today, right?

SPEAKER_14: I'm really excited about our first Fireside Chat. Aileen Lee, come on out. Aileen Lee is with Cowboy Ventures, and she's phenomenal, you all know. Give her a big round of applause. You sit this chair here. Thank you. Yeah, right here. Jed Katz is joining us as well from Javelin Venture Partners. We're in a couple of deals together. We've done incredible. And everybody is a huge fan of Hunter Walk. He's just such a great blogger and such a great supporter of entrepreneurs.

SPEAKER_18: Okay, thanks for coming, everybody. As you probably heard.

SPEAKER_20: Yeah, this is awkward, right? It's a little too far away from each other.

SPEAKER_14: I feel like we're on this set of Gattaca or something. All right, people are in a little bit of a panic. We have choppy waters the last six months. Let's get that out of the way.

SPEAKER_18: Aileen. And by the way, it's Aileen, everybody, not Aileen. Thank you. Aileen. People call you Aileen all the time.

SPEAKER_14: Yeah. We're constantly correcting them. Are you going to invest more money this year, less money this year, or the same amount of money as you did last year? And what do you think the market holds for all these entrepreneurs? Yep.

SPEAKER_06: So I think it is getting pretty tough out there for both follow-on rounds for existing companies and then both, I think, cautiousness or hesitation on the part of seed investors to lean into what seems like kind of a potentially that we're still heading downwards. And so I think like the investor mentality for the most part right now, especially thinking about the first half of 2016, is like maybe I'll hold my powder dry, see when things are going to bottom out, and then kind of start to invest when valuations have kind of settled out. So we do plan, we meet with tons of companies every week, and we're kind of actually excited. I'm not excited about how tough it may be for some existing companies who have good businesses and good people and will do layoffs and really have to give hard looks at burn rates and other things. But I think for starting a company, I think kind of the toughest, most missionary entrepreneurs with big ideas who know that it's going to take a long time to build a big company are going to be the ones who get funded this year and next year.

SPEAKER_28: And so I'm excited about that, and we'll be very active, I think.

SPEAKER_14: Jed, are you going to invest more, less, or the same in 2016? And your team must be talking about this. Yeah, yeah, sure. What is that strategy meeting like at Javelin? What do you guys do? You sit around and say, this is a great time for us to take advantage of lower valuations,

SPEAKER_35: or are you guys scared?

SPEAKER_34: So I'll tell you a few things.

SPEAKER_36: Because we've seen some of the best deals we've seen in a long time just in the last couple months. I don't know if we're going to invest more or less this year, but we're probably going to put more into each company that we do invest in. Because I think they have to make it a little further. They have to reach more milestones, be able to become that much more of an obvious yes for the Series B investors down the road. Great.

SPEAKER_41: What's going on at Homebrew? Yeah.

SPEAKER_42: So we typically make about eight to ten investments per year. We're playing a leadership role in a sort of institutional seed round. And whether the market is up or market is down, we try to make eight to ten investments a year. I think that one of the ways that early stage VCs can sort of stab themselves to death is by trying to time market cycles. We're long-term investors. And because we're also institutionally backed, we have plenty of capital to follow on and support our companies ongoing. So for us, it's business as normal. I think there's certain verticals that maybe have gotten, you know, we're in the back end of innovation on those verticals. And you always have to be careful about investing into the back end of innovation. Maybe local consumer marketplace, on-demand services are being looked at a little bit differently. But at the same time, you have areas that are in the front end of innovation. We're doing a lot in the enterprise internet of things space, starting to look more at healthcare and biotech. So business as usual.

SPEAKER_35: And what are you seeing inside each of your portfolio companies?

SPEAKER_14: Aileen, you mentioned before that, hey, belt-tightening layoffs. Is that across the board in your companies that everybody's saying, let's plan for the worst?

SPEAKER_35: Or are people just taking 10% to be cautious? What's the conversation like in these board meetings?

SPEAKER_46: I think it's in between 10% and plan for the worst. So it's not 10%.

SPEAKER_06: It's like, you know, it has been actually. It's not just here. I think a lot of the companies that we work with started last year doing scenario planning, thinking, like, it's been really good, or we have product market fit. Maybe we should raise it earlier than we were planning. It's a really good time to raise capital. So fortunately, we're working with a number of companies that have capital, but we're basically kind of like what Jed said. We're telling them, like, hey, maybe make it last longer than you were planning. We're having that conversation or expect that the bar may be higher when you go out. And so plan that it's going to take longer. Plan that you will have to accomplish more. And, you know, like, and internally, make sure you're sending the messages. It's a great time to kind of focus on maybe whittling priorities, focusing on culture and leadership and development, and really using this time as a time to make sure everyone

SPEAKER_28: is, like, really clear on the mission and why we're doing this and the right people are around the table.

SPEAKER_52: Is that similar for you, Jed? Yeah. I'll add to that.

SPEAKER_36: The ones that raised a decent-sized round in the last six months are feeling really good that they did so. And they feel like they're in a great position, not just for themselves, but vis-a-vis their competitors. Probably referring to Thumbtack. That's one of them, yeah.

SPEAKER_54: Yeah, which we were both early investors in.

SPEAKER_36: Yeah, Thumbtack, it's obviously they have a lot of cash in the bank. Their business is going well. They're feeling really good. Other companies are, you know, watching their burn extremely carefully and making sure

SPEAKER_34: they can make it last a lot longer.

SPEAKER_57: Look, you're an irresponsible investor if you're not having conversations with the companies

SPEAKER_42: in the portfolio that need to watch their burn. But I'd say on the flip side, you know, what nobody's talking about is, you know, there's a handful of companies that we're having conversations with to make sure they don't get too freaked out. Like, we don't want you to step on the brakes. We don't want you to change the plan. In fact, there might be an opportunity to put a little bit more capital in now and, you know, higher talent that's going to be set free from these companies. Take customers when your competitors aren't going to be innovating as quickly. So I think the message shouldn't be taken as, it's scary out there. Everybody needs to cut, cut, cut. It's just, you know, where do you turn the dial from 1 to 10? I think there's companies that are, you know, accelerating into the uncertainty.

SPEAKER_14: One thing that I've noticed is the deluge of high quality companies that are being referred to me. In other words, companies that have product market fit, they have some level of traction. I can't keep up with the number of amazing companies. The companies, these companies have more traction in some cases and more product market fit than

SPEAKER_61: some of the unicorns we all invested in years ago, but we can't keep up with it. Are you having a similar experience that you're drowning in opportunities, Aileen?

SPEAKER_62: I wish I was drowning in opportunity.

SPEAKER_63: No? I mean, I think, one thing we do think about, and I don't mean to be like super dim and gloom,

SPEAKER_06: but I do think the exits are going to be much tougher in the next five years than they have been in the past five years. And so, like, the bar does continue to get raised. Like, before it was like get downloads or get engaged users, and now it's like get more, and now it's kind of like get monetization. The next hurdle is, like, what, not obviously in the next two to three years if you're a young company, but especially in the consumer space, a lot of, like, you know, IPOs are, as we all know, being a public company is really challenging and more challenging than it was 10 years ago, and companies are waiting way longer to go public. And so, you know, the expectation has been that M&A and acquisitions will be the exit strategy for a lot of companies. And in the past five years, we've been living in a world where there are a lot of acquirers with very high valuations, so they could be very aggressive with acquiring companies at pretty high prices. And as those companies suffer challenges in their valuations, their interest, their appetite, and their currency, like, decreases significantly. And so I do think that, like, high quality companies, product market fit, that's kind of, you know, the first block, but then the next block is also even, if you're thinking about investing in companies that are at that stage, you have to think about, like, how are the employees and the founders and the investors going to get, have a liquidity event in the future? And I think that that's a more challenging thought process than it was before.

SPEAKER_68: Jason, to your point, look, some of the very best companies in the world were founded and funded during trying times, right? So I don't know if it's a coincidence or not, but I think, yes, the innovation we're seeing

SPEAKER_36: at the seed stage right now is pretty amazing. Yeah, I mean, Google, Facebook, Uber, these were all down market companies.

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SPEAKER_14: Is the theory that there's less competition for talent, less competition for customers, which one of those do you think drives that sort of down market? Or is it just that you have harder people who come into entrepreneurship during those times

SPEAKER_18: maybe are just a little bit harder? They're a little bit more cutthroat.

SPEAKER_78: They're a little bit more strong. What do you think, Hunter?

SPEAKER_41: I mean, certainly when the perceived net present value of being an entrepreneur falls or when

SPEAKER_42: it's not the sexy thing to do, you clear some degree of noise out of the market. So I think there's really two aspects to it. Some of it is in that, the quality of the start. And then I think the other part is the quality of when they hit the uptick in the business cycle. So if you started in a downturn three, five, seven years down the road, if you're performing, you're probably hitting the upturn. There's public capital available to you, businesses, consumers are spending again. And so if you're well positioned, if you're in the knee of your curve, if you're in the hyper growth phase hitting that, it can be a real accelerant. So I think it's not just how does it start, but I think it's where do they end up when that business cycle turns? Are they ready for it?

SPEAKER_68: We're also still in this unique cycle where there is just a ton of seed capital. There's lots of seed investors.

SPEAKER_36: It's pretty easy to get your first, you know, 250, 500 to get started and try something. Starting is easy.

SPEAKER_83: Finishing is hard. Yeah.

SPEAKER_14: Let's talk a little bit about exits. It doesn't make sense to me that we're not seeing massive M&A because Apple, Google, Facebook, even Twitter, a lot of those companies have a ton of cash on hand, but they're not being very acquisitive. What is going on here? Are the big companies not interested in startups anymore? Do they have indigestion? What are you hearing from the M&A people?

SPEAKER_86: That's a tough question.

SPEAKER_89: It's confounding, right? Yeah. I mean, I think you're going to see it go in waves. Sometimes those big companies focus so hard on some really large things they're working on that they just kind of stop doing small things for a while, and then they kind of

SPEAKER_36: go back to it later. Maybe that's what's happening. It's hard to tell.

SPEAKER_57: I think the most, you know, it's interesting. Microsoft has been, I think, one of the most interesting acquirers of talented small companies

SPEAKER_42: on the upswing. Sunrise. Sunrise. The Outlook team. Yeah, the Outlook team. Wunderlist. I mean, a bunch of different components. High-quality products.

SPEAKER_41: Compare and contrast that to maybe Yahoo's strategy, which was bringing in talent and

SPEAKER_42: trying to get them to work on new projects. Sachin Del at Microsoft said, we need to make this transition to mobile, so let's buy the mobile client that's, you know, winning the space and also has the team that can lead not just that mobile into the future, but can take ownership for the desktop. So I think when you look at, you know, who's likely to be more acquisitive in the next year or two, it's a company like Microsoft, actually, more than a company like Google. Somebody who has a legacy business they need to transform.

SPEAKER_06: I agree. Yeah, I mean, I think on the enterprise side, you have a lot of companies that have road map holes. And so on the enterprise side, people will continue to, like, in security, for example, right? Like, those companies will continue to be quite acquisitive. It's the consumer side, I think. A lot of the players that were acquisitive five years ago, like, let's say, Yahoo or AOL. I think that's where the landscape has changed quite a bit.

SPEAKER_100: And it's going to be interesting to figure out, like, kind of who are, like, I think Microsoft is a great example.

SPEAKER_42: I think that the cynic side would say it's not the companies that are holding up the M&A. It's the founders and the investors. So you have a bunch of corp dev guys who said, I'm not paying VC markups. And, you know, the last round investor, the founders are still anchoring off of what somebody

SPEAKER_101: told them their company was worth two years ago. We'd love to bring them on board, but not at the price they're asking. Right.

SPEAKER_84: It's kind of like a stalemate that you see in the real estate market.

SPEAKER_14: When the real estate market cracks, you have people who are, they want to get what they think their house is worth. And then there's people who are like, well, I'm not going to catch the dropping knife. This is crazy. Absolutely. Let's talk a little bit about disruption and maybe things coming off the wheels a little bit. Benefits, which, full disclosure, I'm an investor in, seems to have turned into a complete and utter disaster and business school case for the ages. Is anybody here an investor in it? Just to get that disclosure out. What are your candid thoughts on what occurred there from, based on what you read, Aileen? I mean, people creating, or the CEO creating an app or a macro to basically get you through licensing quicker than you're supposed to.

SPEAKER_21: And I don't mean to lay into the company, but I do think that it's something we need to address as a group.

SPEAKER_63: I'm not, I mean, all I know is what I read. Right. Well, speak to the bigger picture.

SPEAKER_06: To credit, I would say to, you know, just a lot of the mid to late stage investors who have been doing diligence in some of these companies over the past year or two. I have heard over the past year, when I talked to some of the mid to late stage folks, like, hey, you know, what's your take on these companies? And they'll say, like, I did a bunch of diligence, and I found that there was not revenue quality, or like, I found that there were issues.

SPEAKER_113: What does revenue quality mean?

SPEAKER_06: So basically, high churn, the customer base was a lot of small companies that if there was a downturn, they would go out of business, and things like that. And so like, smart investors, I think, are like, looking under the hood and figuring out what's going on. And then they passed on a lot of these rounds in the past year. And, you know, we just we lived in an environment the past couple years where founders would be like, oh, I'm raising this round, I'm oversubscribed, you have a week to decide whether you're in or not. And I think that just, unfortunately, just doesn't give you time to actually do real diligence. And so like that, it kind of created this big stink, like big hole or crater that we are going to be climbing out of for the next couple years for a bunch of companies.

SPEAKER_14: What do you think, Jed? I mean, we also saw Theranos, which to me doesn't feel like a Silicon Valley company exactly, because they had no Silicon Valley investors, except for maybe Tim Draper at the beginning, and then it seemed to be all people outside of our industry. What are your thoughts on the lessons we might take from Theranos, from Zenefits? Were we going too fast? Were people getting reckless?

SPEAKER_35: Or is it just there's some percentage of cheaters in every group?

SPEAKER_36: I can speak to Zenefits more than Theranos. We didn't see that one. Your point is great, though. I mean, back then, things were being funded so quickly on so little information. And if you saw red flags for whatever reason, and we saw some, we just decided not to do it.

SPEAKER_89: But I think David's in a good position.

SPEAKER_126: What did you think the red flags were in this case?

SPEAKER_89: Cultural things. Culture. Yeah. But I think David is in a good position now to turn it around.

SPEAKER_36: I think he's taken the exact right steps to do so. And I think that's probably still going to be a great business.

SPEAKER_18: Yeah. I mean, ironically, even with all this apparent, from the outside, malfeasance, and the jury's out, and let's give them a little bit of the benefit of the doubt, but some of the stuff is pretty horrific, obviously. It does feel like they got to $60 million in revenue or something, whatever the whisper number is. I mean, I wish all companies could get there, but I wish they wouldn't get here in this way.

SPEAKER_134: Yeah. Yeah, that's a good point.

SPEAKER_04: Yeah, I think Jed's point, which is just because a company does layoffs doesn't mean that they are going to become, like, that they're going to go to zero or that they're not.

SPEAKER_06: I mean, there are a lot of companies that we admire, like, greatly and we aspire to be

SPEAKER_07: in terms of, like, titans of the internet that have had very bumpy roads over the past decade.

SPEAKER_06: And so I would not count out a lot of these companies just because they wind up doing layoffs or they do a down round.

SPEAKER_41: I also think that, look, you know, there you can say, you know, choices were made because

SPEAKER_42: there was a period of hyper growth or there's a lot of money on the table or whatever. It's true, but those are all excuses. At the end of the day, you know, the culture is a set of choices that are made in the moment from leaders on down, and you, it's always, you know, there's always a path you can take just this once, but you do that too many times and you've created a culture where that becomes the norm. I tend to be a technology optimist, so I look and say, well, who are the role models who are going to inspire founders? And, you know, look at just from, you know, the growth that somebody like Mark Zuckerberg has made from the, you know, the role modeling of, you know, when he got started, what we associated him with, and now 10 years later, speaking out against, you know, Facebook employees who might have been crossing out, you know, the Black Lives Matter, you know, learning Mandarin and delivering a message with, you know, his kid on his lap in Mandarin on Lunar New Year.

SPEAKER_41: You know, I think that there's a lot of positive role models to look to in the tech community.

SPEAKER_18: I think what you're saying is, like, Zuckerberg had a pretty sordid first couple of years there. I mean, the lawsuits were piling up. He screwed over his, you know, co-investors. There was a lot of shenanigans. He got a $20 million fine from the FTC and a $20 million audit.

SPEAKER_141: And now he's turned out to be, like, a head of state.

SPEAKER_41: Yeah, you watch the social network and you get, you know, one, you know, retelling of the early years.

SPEAKER_42: But then you look at what these people are actually doing. And so I'm excited by people like, you know, Mark Zuckerberg, Jack Dorsey, people who are early in their careers and getting involved in politics, getting involved in causes, getting involved in philanthropy. And so, you know, not to sweep aside problems at one company or another company, but I think overall the moral compass of tech is hopefully moving in the right direction.

SPEAKER_14: I kind of feel like when things were getting a little out of control there, you know, Y

SPEAKER_18: Combinator companies with $15 million valuations and six weeks of traction and, oh my God, if you don't close now, you'll never get in. I kind of walked away from the whole thing.

SPEAKER_88: I just said, like, you did two. Yeah, we walked away. We've only done one of those and it wasn't in that style at all. You walked away from these kind of crazy demo day pressures?

SPEAKER_42: I think if we don't have the chance to get to know a founder, it doesn't work for us. We're not the right investor. And so whether it's a demo day or somebody who wants to shoot me an email and say, hey, we've heard great things about you or, you know, I'm glad we talked six months ago. The round's closing in three days. We'd really love to get you involved, you know, it would be a bad use of their time for me to jump in at that point. And so what we basically say is if we can't, sorry, if we can't get up, you know, and think that it's not just a place to put our capital, but if we can't get up each morning and put sweat and reputation behind a founder, that it's not a good investment for us.

SPEAKER_149: Aileen, you walked away from this high pressure demo day culture.

SPEAKER_06: I totally agree. I think that, you know, founders, I think in the past three or four years have, there's been a bit of a coaching about, like, make it fast, create scarcity, create a sense of urgency and get it done. And I think that that does a disservice to a lot of people. Like, obviously you want to get it done, but especially given how long it takes to get to a liquidity event, like you are getting married to your investors and in particular your board member for potentially a decade. You know, that should not be a rush process. The entrepreneur should have a chance to get to know their options and who's going to be a great fit for them. And investors should have a chance to do a real diligence process.

SPEAKER_42: The flip side on the, you know, the investor side, I think entrepreneurs, you know, should manage that process. Entrepreneurs, when an investor wants another meeting or investor wants to do some type of diligence, it's perfectly fine for the entrepreneur to, you know, to ask and understand what is that investor trying to learn. So I call it sort of understanding like a transparent path to conviction. What are you trying to learn that's going to get you on board or not? Because it's also unfair to founders to have a bunch of investors, you know, circling the drain, looking for social proof. It's like, you know, we are happy being contrarian and we're happy being early. And so that means that sometimes we might co-invest with the folks I'm sitting next to, but sometimes we don't care who else is going to put down a check because we believe that if we have conviction, we can pull that round together and close it for the entrepreneur.

SPEAKER_36: John Wooden used to have a great phrase about this. You know, the famous coach, John Wooden. And I'm probably going to get it wrong, but it was something like, be quick, but don't hurry. And so, you know, for entrepreneurs, it's okay to move quickly and to try to put your investor group together, you know, and keep focused on the business. But if you move too quickly, you're going to end up with partners that you aren't happy with and that aren't the right investor for you or the right board member for you. And you might end up with a valuation that screws you later. Yeah. It becomes too high. And then when you need to raise the series A, you're in a tough place already right from the start.

SPEAKER_35: That was the thing that I found particularly weird.

SPEAKER_18: I don't know if you found it weird, but the last like three or four, and I don't want to single out Y Combinator, but they are the sort of extreme case of this. I mean, I requested to like meet with one of the companies. They sent me a DocuSign for $100,000 and then a follow-up email and said, let us know, you know, if you have any questions. And I said, yeah, I'm CCing my assistant. She'll set up coffee and you can come by the office. It's going to be two or three weeks. And they said, oh, we'll be closed by then. And I just wrote back, okay.

SPEAKER_160: Good luck. Yeah.

SPEAKER_18: And then they wrote back, oh, no, that's fine.

SPEAKER_21: Of course. And I was like, but I told you to send people a DocuSign.

SPEAKER_163: I mean, it was kind of weird. I'm hoping that mentality changes now.

SPEAKER_166: Ah, just think about all the time and effort and money you spend going to meetings, going

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SPEAKER_170: What is the right valuation for a pre-revenue enterprise or consumer startup?

SPEAKER_18: If we think these 8 to 15 million ones were just a little bit silly, what do you think normalcy is? Because I'm seeing a completely different story all over the place right now.

SPEAKER_126: What's your number for pre-revenue, first-time entrepreneur, or maybe, you know, they're not Hinkus or Ev Williams, right? Right. Enterprise or consumer.

SPEAKER_06: I don't think we have a number, right? I think it all depends on what they've done before. But I will say, last week, I was telling Hunter this, and we saw our first pre-revenue, pre-launch venture where the entrepreneur was like, I'm thinking I want to raise one on three.

SPEAKER_162: It's back to the future. It's five years ago, four years ago.

SPEAKER_06: That was a standard. And I feel like that's the world that we are now living in, where seed ventures used to be seven, eight, nine free. And even we met a company recently that raised a note last summer at nine. And they realized that the valuation now is probably five.

David Friedberg: What do they do, Aileen, when you've made a mistake like that and the market has whipped you around? What do you do?

SPEAKER_06: I mean, they've adjusted. Also, the other thing is people raised a lot more when the valuation was nine at seed, right? So now you have to get even scrappier because the dilution that you're going to face if you still raise that three, but it's at five instead of at nine, is different. So I think we are living in a different valuation kind of framework right now.

SPEAKER_36: This is kind of like the Donald Trump phenomenon. This is an animal that the seed investors made themselves. Okay. I mean.

SPEAKER_180: And venture investors, by the way. Like a lot of venture firms were doing. Oh, that's true. Right?

SPEAKER_36: And venture firms that just, you know, threw $250, $500 at anything at high valuations and it was such a small percentage of their fund, they didn't even care what the deal terms were.

SPEAKER_182: That's created to the problem.

SPEAKER_18: Got it. So because they all watched The Apprentice, now you've created this monster who knows how to manipulate the media. Since we're on politics, Apple and the FBI, I'm just curious, Hunter, what's your take

SPEAKER_185: on, you know, encryption, privacy, and Silicon Valley's relationship with the Obama administration, et cetera, specific to this case?

SPEAKER_93: Yeah, as I was driving over this morning, I was listening to CNBC and heard Aaron Levy

SPEAKER_42: from Box talking about this. And I thought he had, you know, his point of view matched mine, which was, you know, we don't want to compel companies to make wholesale changes to their products that, you know, weaken their business worldwide, set a precedent for global leaders, and are, you know, based off assumptions of, you know, laws that were created in 200 years ago. That said, you know, there needs to be some collaboration amongst the tech sector to come up with a consistent point of view to put forth thinking, not just, you know, protest. And so, you know, in this case, I, you know, I'm siding with Apple. I'm happy that they've been pronounced, pronounced before they had sort of the coalition of support from other technology companies. So they definitely stuck themselves out there ahead of others. And I'd like to see cases like this continue to update the laws and frameworks as opposed to, you know, play out in a court of public opinion.

SPEAKER_187: Great. And who are you all voting for?

SPEAKER_40: Eileen, you can start.

SPEAKER_188: Really?

SPEAKER_189: Yeah. Are you going to go there?

SPEAKER_40: Of course we're going to go there.

SPEAKER_189: I'm a Hillary supporter.

SPEAKER_40: Of course.

SPEAKER_14: Well, not of course. Well, I say of course because you're picking the most qualified person. Go ahead, Jim.

SPEAKER_183: Of the candidates that are currently listed that are running? I'm being a little bit facetious here. No, I'm a Hillary supporter as well.

SPEAKER_41: Hillary supporter. Hillary, with always having my fingers crossed that Bloomberg was going to throw a hat in.

SPEAKER_14: I am a Bloomberg fan as well. And so this is where it gets interesting. What's that? This is where it gets interesting. Yeah. Bloomberg joins the race this week. Who are you voting for?

SPEAKER_52: If, look, I can't make that decision today.

SPEAKER_183: I would have to hear them go at it a little bit. And I would have to feel that Bloomberg really had a chance to win. Okay. So. It would be interesting. I haven't heard enough of his platform. You're open to it. I'd be open to it for sure.

SPEAKER_197: So you would reconsider your Hillary allegiance?

SPEAKER_52: I would be open to that for sure.

SPEAKER_197: Eileen, would you reconsider your Hillary allegiance?

SPEAKER_52: Would you be open to Bloomberg?

SPEAKER_06: I'm open to it. I'm obviously, I probably, most of us are very concerned with the state of the world and America's role in what's going on in the world. And I think we need someone who's not just going to focus on our domestic policy, but someone who's going to help solve some of the problems we have globally. I don't have a good sense of where Bloomberg sits on those things, but I think that's really important. And that's one of the reasons why I think Hillary's a great candidate. Okay.

SPEAKER_202: There you go. Okay.

SPEAKER_18: So let's thank Eileen, Jed, and Hunter. What an amazing job, you know, just giving us an update of where the industry's at.

SPEAKER_14: And we'll look forward to following you all on Twitter and on podcasts and watching your investments. A big round of applause for our opening. Thank you. Thank you. Thank you.

SPEAKER_206: Well done. Thank you. Thank you, sir. Thank you, sir.

SPEAKER_196: Okay. All right. Let's keep the train moving. Kurt McMaster is here from Cyanogen. Cyanogen. Come on out.

SPEAKER_210: Please welcome Kurt. Nice to see you.

SPEAKER_211: Good to see you, Jeff. How are you?

SPEAKER_210: Okay. So for the people who don't know, have a seat. Explain what Cyanogen is and why it's important. Sure.

SPEAKER_215: And we'll pull up the deck for you.

SPEAKER_217: There we go. That is the... Here we go.

SPEAKER_219: Okay. Good. So we're the largest aftermarket distribution of Android on Earth. Essentially, the company began in 2009 as an open source project.

SPEAKER_11: And we started iterating on Android, adding new features, etc. People started flashing their devices with our version of Android. In 2013, we decided to start a company, which is when we raised our Series A round of financing. And the whole idea was, you know, we believe Android is a super platform. The scale of Android by 2020-ish will be unprecedented. So the notion of opening it up to some extent and democratizing the operating system for other third parties, we thought was a very powerful thing. Because today, you really have Apple and Google running the game, right? Series does not power Spotify, etc. So there's obviously premium placement on platforms when you own the OS, right? As an example, Apple Maps launched. People laughed at it. Google Maps is still quite a bit better than Apple Maps. Yet today, Apple Maps is the dominant mapping service on iPhone because it's integrated and it's integrated through all these other services, right? So we felt that the opportunity to open up the platform and give those capabilities to application developers around the world would be very, very powerful. And we can talk a little bit about that in a bit. So Cyanogen OS, as I mentioned, has a bunch of different features that we've added, etc. Things like privacy and security, really, really, really potent. Themes and personalization, etc. In fact, we've had things on Android 18 to 24 months before Android and Google. Things like swipe to remove notifications, incognito mode in browser. Their privacy guard features often appear at 18 to 24 months. And Google and Apple have actually looked to our open source project and copied some of these features, right, over time. Nice. You know, an Android enthusiast love this kind of thing. But we're introducing a new platform that enables us to, I believe, usher in the new era of a post-app ecosystem that can really change the game. So as we mentioned, right, we believe by 2020 Android's going to be well over 4 billion users. iOS plus Windows PC plus Facebook Daily Mobile Active users on aggregate will be around that size, right? So if you look at next generation platforms, you know, we don't think it's going to be VR. I agree with Andy Rubin that it's going to be AI. AI requires sockets. And there's no platform on Earth that will have as many sockets as Android. So we think that the next computing platform will arise on Android. It's as simple as that, right? And most of the IoT devices and what we see in cars, et cetera, will be powered by Android. So we view ourselves as a gateway to the super platform. And the question we often ask third parties that we work with is what if you had your own operating system, right? So this new platform we announced last week at Mobile World Congress is called Mod. And it is the platform that enables these deeper integrations within Android. So what comes after apps? Mods come after app. And what is a mod? Mod is a service that's integrated into the framework of Android. So as an example, when Apple launched Apple Music, they showed the Siri integration. Play me some Hawaiian music. And Apple Music plays you some Hawaiian music. But it certainly doesn't work for Spotify, et cetera. So, you know, we were working very closely with Microsoft and some of their services, as well as many other service providers around the world. We'll integrate Kryptana into the platform. We can extend natural language to everything. To the dialer or to the camera, and I'll show an example of the camera. We can extend it to Spotify or Pandora. We can extend it to Uber, et cetera. So all of a sudden, there's an SDK and an API. Let's show it.

SPEAKER_226: Yeah.

SPEAKER_11: Let's take a walk over to the MO. We can show you a few examples of what a mod is.

SPEAKER_227: Do people choose between Google's Android and Cyanogen?

SPEAKER_229: Or is it now people are going to take the Google flavor of Android and Google's not going to

SPEAKER_210: allow people to pick Cyanogen?

SPEAKER_11: So Cyanogen OS is CTS compliant. So when you're an OEM, you sign MADA with Google, which is the Mobile Application Distribution Agreement. Any device you ship must pass CTS, Compatibility Test Suite, which means that device must be able to run the Google Play Store, et cetera. So all of our stuff is CTS compliant and MADA compliant, right? We don't fork Android. And that's why guys like Amazon and Facebook, et cetera, when they try to fork Android, they

SPEAKER_09: fail because you're not tying into an existing ecosystem that consumers expect to be there from day one.

SPEAKER_236: Is the CTS a way for Google to keep people from competing against them? You know, it stands for certify. What does it stand for?

SPEAKER_239: Compatibility Test Suite.

SPEAKER_240: Because it sounds to me like it's a compatibility test suite makes it sound like they're making

SPEAKER_236: sure the consumer experience works. But my understanding of it is the real sinister actual reason to do it is so that they never

SPEAKER_240: have competitors and that Google Maps, Gmail, and everything else is preserved and not replaced by better options. Let's put it this way.

SPEAKER_219: Listen, iOS is fundamentally closed. So something like the mod platform could never arise on iOS, right?

SPEAKER_09: Android is more open. And to some extent, OEMs have been creating mods for a long time. So Samsung S Pen, Samsung S Voice, what Samsung had to do with Facebook to integrate Oculus to create Galaxy Gear. These require framework level access to Android, right? But the problem is OEMs are terrible at software, number one. And building an ecosystem, you can't do that with a single OEM, right? So, you know, we know Android as well as, and in some cases better than Google. We are a software company and we're attempting to do this at scale across every OEM in the world. What about my question, though? So, you know, we believe that the existence of mods will pull new high value users back to the Android ecosystem. In other words, we think that as the mod ecosystem gets more deployed and robust, iOS users for the first time will be attracted to Android. So we think it expands the opportunity. We think that's good for Google and good for everyone else.

SPEAKER_247: I'm not sure you answered my question, though.

SPEAKER_248: Google wants to, I'll try one more time. Google wants to control their operating system.

SPEAKER_09: Listen, everybody wants to control the operating system. It's why, you know, Amazon wanted to create an OS. When you're the OS, you have the ability to have observations that are impossible as an application.

SPEAKER_210: Let me ask you this way. How do they feel about the existence of Cyanogen?

SPEAKER_229: And when they see you in the store, do they get nervous that you're going to take away their search and their maps and they're going to lose customers?

SPEAKER_09: So seven of the top 10 apps on Android or Google services, and there's a reason for that because they're integrated into the platform, right? They would obviously like to hold on to that. I mean, who wouldn't as the creator of an operating system?

SPEAKER_11: But, you know, we think that under Sundar, Google will be a little more open than they have in the past. Google, we believe, is somewhat neutral on Cyanogen right now, and we have some very powerful partners around the world, like Telefonica, et cetera, that want guys like us to exist so we can bring more diversity and innovation to the ecosystem and to consumers, right?

SPEAKER_253: So I do not anticipate issues there.

SPEAKER_248: What do you think is going to happen with the antitrust stuff in Europe with Google?

SPEAKER_240: Because they seem to think that maybe Google isn't acting in the best interests.

SPEAKER_256: You know, Europe isn't very happy with some of Google's movements. But I think Google will get better.

SPEAKER_240: In a way, it's an opportunity for you, isn't it? If the EU says, hey, you know, you've got to open up the operating system a little bit

SPEAKER_257: for Android, that is an opportunity for you to exist. And it's good for Google, to a certain extent, to have you there.

SPEAKER_231: Here's the thing to keep in mind, right? A platform at almost 5 billion users.

SPEAKER_09: So if you talk about machine intelligence and AI being the next computing platform, right? Nobody recognizes the power that Google could potentially wield in five to six years because of the sheer scale of Android. And it will be so far beyond Microsoft and Facebook and Apple

SPEAKER_11: to the extent that, you know, we think that they have to open it up. They have to allow guys like us to exist.

SPEAKER_09: Otherwise, scrutiny will get even worse for Google. But listen, as a company, we like Google, right? I mean, we use Google services, we're super Google-friendly, etc.

SPEAKER_259: But you do things Google doesn't allow with their operating system natively.

SPEAKER_260: I'm sorry? You allow things that Google is not allowing partners to do natively.

SPEAKER_231: Yeah, we enable things with mod that are just simply impossible today on an operating system.

SPEAKER_09: Let's see one, yeah. And we'll show you guys a few examples. I mean, we're over-indexed on Microsoft. Microsoft is one of our launch partners. But you'll see many more services coming from other, you guys in India and Indonesia and, you know, larger domestic service brands, etc. So this example I'll show you guys today is just an example of Cortana. So Cortana, when they launched as an application, had a lot of problems, particularly around the Hey, Cortana stuff. Things like natural language, we view these things as framework mods

SPEAKER_11: and they can extend to everything. So they really have to be embedded into the OS. So as an example, Hey, Cortana.

SPEAKER_219: Hey, Cortana. Cortana died. Hold on a second, guys. Oh, there she is. Take a selfie.

SPEAKER_09: So the simple thing, right? If you say, Siri, hey, take a selfie, it'll open the camera up, but it won't take a forward-facing picture. So we can enable Cortana to do all kinds of things. Take a selfie, make me look beautiful. It'll apply a filter, right? Play some Hawaiian music. It knows that Spotify is my music engine, and it'll just work with Spotify, right? At that point, we don't even need a Spotify mod. You can just download the app, and there's a hook. Into the mod framework that Spotify enables. So all of a sudden, they have natural language.

SPEAKER_236: Now, and to do this, I just have to have Cyanogen's mod platform installed, or do I have to have the Cyanogen operating system?

SPEAKER_231: We've launched a program called the Mod Ready Program at Mobile World Congress, and we're working with OEMs around the world.

SPEAKER_11: Micromax and Intex in India, they're two of the dominant OEMs over there. John Sculley, the ex-CEO of Apple, just launched a new mobile phone called Obi. We're working with them. We've launched a new brand with Lenovo called ZUK, and many brands around the world,

SPEAKER_09: and you'll see some really exciting stuff coming from us this year. So what I'm going to show you guys is an example of the Skype mod. What we've done is we've integrated the Skype telephony piece directly into the dialer. And just an interesting statistic, Truecaller mod. You know, Truecaller does spam number blocking, right? So Truecaller as an app bundled on Samsung Galaxy devices has take rates of less than 17%. Truecaller as a mod integrated directly into the dialer had take rates of greater than 70%. So if you're an app developer, the biggest problem today is just discovery in app stores, right? We can do things when it's a mod like contextual nudges. The first time you open up the dialer, we know, hey, you might want telephony. If you're in a Wi-Fi network and you're overseas. So that gives an opportunity to give them a nudge to do the Skype mod. Hey, do you want to do spam number blocking? Boom, right away you can enable that. So this example is a Skype example. I can call Vic, who's our global head of partnerships right here. As you can see in the dialer, there's an option to go right into Skype. But in this case, I don't agree.

SPEAKER_272: And Google has no interest in having Skype built into the dialer.

SPEAKER_09: Well, they have no interest in having Bing built into the operating system or Microsoft Satori graph, etc.

SPEAKER_11: So, you know, and nor does Satya and others want to share that data with Google as well. So we're sort of viewed as a neutral third party that enables us to do these things.

SPEAKER_09: So let's give Vic a call here. And in this case, I'm just giving him a regular mobile call.

SPEAKER_277: And... Do you have Verizon or who do you have? I have no idea what this phone is running. Okay, there we go.

SPEAKER_09: Hey, Vic, are you there? There we go. So something simple like you can go in, click the one-note thing, take a little note while you're doing a call. Completely integrated. Check. Pick up some lemons. I can jump right into a Skype call.

SPEAKER_11: It will switch over and connect. And you'll see the video come up with...

SPEAKER_236: So you're pretty integrated with the folks over at Microsoft.

SPEAKER_277: Right. But again, they are one partner of many, right? Right. But it is interesting.

SPEAKER_283: Microsoft doesn't have a mobile platform. There are a lot of big companies that have incredible services that don't have mobile platforms. Like IBM with Watson.

SPEAKER_284: I think they have a mobile platform. It's not at scale, though. What's that?

SPEAKER_240: They have a mobile platform that's not really at scale, right? It never what? Microsoft's mobile platform just isn't at scale.

SPEAKER_09: Listen, they don't have a mobile platform. Yeah. So there's a lot of people that don't have mobile platforms that if they did, they could do really amazing things. Like IBM's Watson. We can enable cognitive capabilities and extend that to developers so that you could do sentiment analysis. I can look at a user and I can see what they're typing and I know if they're happy or sad. From an advertising standpoint, that's really awesome.

SPEAKER_11: From a banking standpoint, it helps you to review risk profile, et cetera. In this case, we just went directly into a Skype call from a dialer. I'll end that call. Anyway, this is just an example of the deeper native integration that's possible when you're a mod. And over the course of the next 12 to 18 months, you're going to see many more of these services.

SPEAKER_09: Great. Like an Uber mod or a Lyft mod. Today, they can't access the calendar. So you can be booking your calendar appointment. I have a meeting from 2 to 3. The meeting ends at 3. Click. I want a Lyft. I want an Uber. Uber and you're sitting in that meeting. Five minutes, you get something appear on the lock screen.

SPEAKER_11: It says, hey, we're about to summon the Uber. Do you need to snooze that? Or do you want to summon it right now? It just seamlessly happens, right?

SPEAKER_70: Okay. So let's talk a little bit about the overall ecosystem. There was a rumor that Microsoft was going to either buy you or invest in your company. No, it's not going to happen. They're not going to buy the company.

SPEAKER_229: What about the investment thing? Because that seemed like it was very close. And it seemed to people that, hey, this makes sense. Since Microsoft hasn't won the mobile space, you guys have this incredibly innovative platform that kind of infects and levels the playing field on Android, which is going to $4 billion. This would be an amazing hack for them. And then I see in the demo here, hey, Outlook, Skype, a lot of familiar Microsoft products. Word getting integrated. Are they an investor in the company? Are they going to invest in the company?

SPEAKER_112: And what's the relationship here?

SPEAKER_291: No, listen, Microsoft, they had the opportunity to invest in the C-Round. We were oversubscribed.

SPEAKER_11: And to be honest, I mean, when we first met with Satya, it wasn't about money. It was about technology. Yeah. Right? Microsoft, make no mistake, there's only three companies in the world that have really powerful graphs. It's Google, Microsoft, and Facebook, right? And Microsoft's SatoriGraph is incredibly potent. Cortana is way better than Siri and to some extent is better than Google now. So there's a lot of great technologies that Microsoft has that, as a startup, to have these technologies available are incredibly valuable, right?

SPEAKER_09: So they've just been a really good partner.

SPEAKER_11: And they have a need to continue to press into other mobile platforms. I mean, they're supporting iOS in a very meaningful way. They're making a lot of-

SPEAKER_210: I have to say, the Outlook products and Sunrise, a lot of these products on iOS are pretty phenomenal.

SPEAKER_296: Yes.

SPEAKER_229: And it looks like they're infecting Android pretty well, and some of those products are looking beautiful. Do you think they'll eventually come out with a Surface phone or something that'll run Cyanogen or Android, essentially?

SPEAKER_210: And they'll actually embrace the Android operating system and Cyanogen as, like, sort of their way to get into mobile?

SPEAKER_09: Anything's possible, man.

SPEAKER_210: Anything is possible.

SPEAKER_09: Anything's possible. But, you know, we're launching phones around the world.

SPEAKER_229: And so will I make a decision to buy a Cyanogen phone or an Android phone? And what would the difference be to me as a consumer if I go into the Verizon store and I pick one or the other? Is that something that'll be a store-level decision? Or will it be a decision that I make when I get the phone home, I decide to put Cyanogen on it?

SPEAKER_11: So we'll have some more announcements later this year, early next year, about some of our U.S. plans with Tier 1 carriers. But ultimately, if you walked into a Verizon store or an AT&T store or a T-Mobile device,

SPEAKER_09: and there was a device running Cyanogen OS, and it was a mod-ready device, we want to have consumer experiences that are not possible on stock Android and not possible on iOS. I mean, that's what's going to get people excited about the devices, right? Just, like, natural language using Spotify. It's like most people are Spotify customers. They're not Apple Music customers. Those are fun interactions that I wish I could have as a consumer. That's enough to make a purchase decision, I believe. It's like, hey, would you buy a C-Class or AMG if you could do it at the same price? That's essentially what we offer.

SPEAKER_302: Is your big challenge going to be, because you have millions of people who run Cyanogen now, right?

SPEAKER_229: But they're enthusiasts. Is the big challenge for you to become mainstream? Is that what you have to accomplish as a business? Or can you become mainstream just with the mods?

SPEAKER_291: So mod is our mainstream push, but really it's about the ecosystem of services.

SPEAKER_11: I think that Android enthusiasts are excited about what we've done historically with theming and customization and security and all these basic features to Android that we offer. I think that the consumers are excited about new experiences, right? I mean, that's why they got excited about iPhone. It was because Apple introduced completely new experiences with iOS. And the apps that we see around the world today have enabled those experiences. With mods, and what mod enables are a whole new class of experience once again. And I think these are the things that are going to get people excited.

SPEAKER_70: Let's take a little departure here and talk about security, because I know that's a big focus for you.

SPEAKER_229: What are your thoughts on the Apple case with the FBI? Clearly, encryption is here already.

SPEAKER_236: I'm going to take a guess that you are going to side with Apple in that no backdoor should be built for the FBI.

SPEAKER_291: Listen here, Cyanogen, obviously, with a large hacker community, et cetera, we've been patching

SPEAKER_09: Android quicker than Google. We have security updates brought to Cyanogen OS quicker than Google. We've been all about giving consumer privacy, right? So even with mods, you'll be able to go through and enable permissioning across the entire platform in a way that Google can't. I mean, in fact, Google with Android has copied some of our privacy guard stuff. So we believe that privacy is a right, and you should be able to shut it down.

SPEAKER_236: So, if the FBI needs information from Cyanogen on a terrorist phone, and they have encrypted it, you're not making a backdoor because privacy is important.

SPEAKER_303: We shouldn't compromise anybody's privacy. That's your position, yeah?

SPEAKER_11: Listen, man, people die, you should give some information. It's as simple as that. I think that's the noble thing to do, to be honest.

SPEAKER_273: Is that the noble thing?

SPEAKER_313: I think it's the noble thing to do. People blow people up, they should go down. End of story. So you would unlock the phone, you'd create a backdoor.

SPEAKER_09: Personally, I probably would. You would. I probably would give, but we would not do it in a way that would compromise everyone else. Got it. But here's the thing, we probably wouldn't have any backdoors, like Apple is attempting to set up today, so it would just make it challenging. We create privacy scenarios that would put us in a situation that we would not be able to give that information simply because we would not have access to it.

SPEAKER_273: Right. Which seems to be aligned with Apple. So if you could get into a terrorist phone... But Apple's trying to do it after the fact.

SPEAKER_232: Right. They're trying to go backwards and say, hey, we're not going to brute force this. So in their situation, they should...

SPEAKER_09: So would we ever want to have backdoors? Absolutely not. That's not something we would ever enable, right? Right.

SPEAKER_272: But if you could just dump the phone, of course, with a cord ore, you'd dump the phone. That makes sense.

SPEAKER_321: If it was possible, I think... But you don't want to give a backdoor to the FBI.

SPEAKER_291: This is just not something that's available on our platform now and probably wouldn't even be possible, right?

SPEAKER_09: So this is sort of a theoretical question. My personal belief? Yeah. I think people kill people. They should not have the right to any privacy.

SPEAKER_227: Of course. Yeah.

SPEAKER_229: So do you think they can, right now, the FBI can dump the phone and they're just doing this for posturing reasons? Because you know the hacker community really well. Is it possible for them to get the information they need without Apple giving them... I don't it. You don't know enough?

SPEAKER_325: Yeah. I highly don't it. Yeah.

SPEAKER_328: It's hard to know. Yeah. I don't it.

SPEAKER_332: I kind of feel like you know, though. What? I kind of feel like you know.

SPEAKER_229: I feel like you know more than you're letting on. Hey, if people want to start creating mods, what's the best way for them to get started in this? Because you're going to have a mod app store in a way?

SPEAKER_09: We'll have a mod shop at some point. A mod shop. A mod shop. So I can sell my mods. Well, that's how you can discover. But the beauty of a mod is it's integrated into the framework of the OS, so we can do things like contextual nudges. We can give you a nudge while you're interacting with the camera. There might be a Snapchat or an Instagram mod.

SPEAKER_232: But you see it as something that could be monetized. I can make a set of mods and sell them as a developer for a dollar or something like the apps. Right. Yeah.

SPEAKER_338: Is it just going to be more like if this, then that kind of scripts where like they're not for sale? Well, listen.

SPEAKER_09: See, the fact is we control the operating system, so we can do things with Surface or the operating system that simply aren't possible today. Like I can extend a plug-in to a game development platform and developers can publish directly to the lock screen. So I could be paid. I don't even, without opening my phone up, I could pull it out and go right into Candy Crush, swipe up, go right into another game, completely bypassing Google Play. That kind of thing is just not possible today. Right.

SPEAKER_229: What does Google think of you all, candidly? What do they think about Cyanogen's existence? Are they a little bit perturbed by you or are they just, they don't think about you all that much? What's the perception there?

SPEAKER_291: You know, I think they're somewhat neutral at present. Again, we have some really amazing partners that, you know, don't want, you want us to exist,

SPEAKER_09: right? Every mobile operator on earth and OEM wishes there was a third viable platform, right? Right. And Cyanogen isn't the third viable platform. We extend and evolve Android, which means if we can bring new users to Android, Google benefits

SPEAKER_291: from that. Right. Right?

SPEAKER_232: Except when I am HTC or whatever and I load Cyanogen and I'm partners with you and I just

SPEAKER_240: take out the entire suite of Apple, of Google products and I put in Bing Maps and other people and do business deals with them.

SPEAKER_09: Consumers should have a choice, right? Yeah, of course. If I'm a Spotify user, I don't want to have Google Play Music rammed down my throat every time I talk to my phone. It's ridiculous. Right. Really.

SPEAKER_229: Is there like a consortium now of people who just want to kind of get control of Android out of Google's hands?

SPEAKER_240: China seems to be doing their own thing, right?

SPEAKER_11: So listen, China is doing their own thing and Google has no meaningful presence in China and they won't for maybe a hundred years. But, you know, we think that there's a unique opportunity for us.

SPEAKER_09: Like Tencent is one of our investors, right? So they love Mod and that platform. You know, we're very friendly with Baidu and Alibaba. So we believe there's an opportunity for us to be the first global Android platform in China and external to China. So that's a unique opportunity. Awesome. Yeah.

SPEAKER_272: All right, Kurt. Thanks for coming. We're going to be watching and looking forward to that Cyanogen mods and everything. Okay.