FAANG vs the World

In venture, our job is to swing for grand slams because venture returns follow a power law function where your biggest winner is going to provide the majority of your return. Base hits do not add up to a grand slam, even if they let you score a run.

Enough baseball.

In a way, the same observation applies to the public markets. We all know the power of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), but it’s even more apparent when we put it into context with numbers. As of June 6th, those five stocks totaled over $3.25 trillion in market cap. By comparison, the 610 other stocks in the Technology sector total $5.6 trillion in value (excluding any FAANG stock in the Technology sector).

And FAANG dwarfs the unicorn market too — the 65 known US-based unicorns as of the end of May total just about $340 billion in value, a tenth of FAANG. Certainly, some of these unicorns will continue to grow, but is there one we can justifiably argue will be big enough to insert itself into the FAANG conversation? Maybe Uber or Airbnb. Maybe Magic Leap if it delivers on its vision. Maybe some company that figures out artificial general intelligence.

Whatever the next FAANG-type company might be, it has to do something grand. Facebook and Google have transformed information consumption, Apple gives us products to interact with that information, and Amazon lets us have anything we want delivered to our door. They’ve meaningfully changed the world. Perhaps grand slam is too common to describe this occurrence. The FAANG companies are really quadruple doubles. Who plays baseball any more anyway?

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

XPONENTIAL 2018 – The State of The Drone Industry

Last week, we attended the AUVSI XPONENTIAL trade show in Denver, the largest global gathering of unmanned systems providers, robotic software developers, and industry experts. We spent time with 15 executives from some of the leading commercial drone companies and thought leaders in the space and, as we did last year, asked them a set of six questions to better understand the trends driving (and holding back) the commercial drone industry.

Similar to last year, the executives we surveyed believed regulatory policies remain the biggest headwind holding back the industry while challenges related to sense-and-avoid and battery endurance are the biggest technical challenges. In addition, the industry is still in need of an Unmanned Traffic Management (UTM) system to unlock the true potential of drones, but the timeline to commercial integration remains uncertain. While we left the conference believing it will likely take longer for the drone market to reach its full potential as we work through these headwinds, we came away incrementally more upbeat about the long-term market opportunity for drones: The drone market will be a multi-billion dollar industry opportunity that benefits both early-stage start-ups as well as multi-billion dollar tech companies.

Below is additional color on the responses to our six survey questions:

What’s the biggest limitation holding back the industry? Almost identical to the responses we heard at least year’s conference, the majority of drone executives highlighted regulation as the primary industry headwind. While favorable drone regulation has been introduced over the past few years, the industry needs more clarity on beyond-visual-line-of-sight (BVLOS) flights, as well as flights over populated areas. Product understanding, technological hurdles, such as battery life, and lack of understanding around aircraft certification requirements were also common answers.

What U.S. government regulation is holding back the commercial drone industry the most? The key regulation holding back the industry is around beyond-visual-line-of-sight (BVLOS) flights, which was indicated by seven executives. This compares to five in last year’s survey (also 15 participants). Pushback on Section 336, which limits the FAA from regulating hobbyists, was also identified as a piece of legislation causing the industry headaches.

When will flights beyond visual line of sight be broadly allowed with US government oversight? Almost everyone agrees that BVLOS flights will not be made commonly permissible in the next year or two. On average, most experts think the industry will see broad BLVOS allowance in 2020, which was in-line with last year’s result. That said, there is some early progress on BLVOS flight. PrecisionHawk announced the first Beyond Visual Line of Sight (BVLOS)-enabled drone platform at the conference. After 3 years of research, the company was able to develop an FAA-approved drone system to operate BVLOS. While the industry still has a ways to go for broad BVLOS flight deployment, this announcement marks a major step forward.

When will a UTM system go live in the US? An Unmanned Traffic Management system is critical to allowing routine BVLOS flight applications and key to enabling the true potential of drones. NASA, Amazon, Google, and a handful of start-ups are leading the initiative to build various UTM systems. We asked when the executives in our survey expect a UTM system to be commercially available in the US, and unfortunately, most were pessimistic about this occurring in the next 12 months. The majority expect UTM to be integrated between 2020 and 2022. However, once again we heard several people indicate they are unsure, and implementation is largely in the FAAs hands. For a deep dive into UTM, see our research note here.

What is the biggest technical challenge you need to solve? While drone tech has advanced significantly over the last 12 months, industry leaders identified several areas that need improvement. Those specifically identified were remote identification, sense-and-avoid in GPS denied environments, battery endurance, real-time data processing, and command-and-control communication links. The executives in the survey went on to highlight that many of these technologies also need to be certified to be used in advanced applications.

What is the biggest untapped market or use case for drones? The drone market is still far from being mature, and most executives still see the largest market opportunities in traditional industries such as agriculture, utility inspection, and security. However, once BVLOS flights are allowed regularly, drone delivery and air taxis are also seen as large market opportunities, although don’t expect to see either of those use cases broadly deployed in the next several years.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Google I/O: The Pendulum Swings

The pendulum has swung. Perhaps this is a product of being 10+ years into the smartphone cycle. In the past, we walked away from developer conferences with lots of new products and features. Now, there is a greater focus on privacy, user controls, and awareness of the time we spend on our devices. We saw this at Facebook’s F8 and Microsoft Build, we got some of it at Google I/O today, and we anticipate more of it at Apple’s WWDC on June 4th.

Heading into Google I/O we were anticipating announcements and commentary around a few key themes: device usage, AI, and privacy. Here are announcements relevant to those themes along with our key takeaways.

Device usage (aka smartphone addiction):

  • Shush and Wind Down modes for Android users to limit distractions
  • “Pretty please” mode for Google Assistant to encourage good manners
  • Android P focuses on simplicity, intelligence, and digital wellbeing
  • Android Dashboard tells users how much time they have spent on their phone and on which apps.
  • Takeaway: Google is taking smartphone addiction seriously, as evidenced by these new features that increase awareness and control of your device usage. Impressive additions.

AI: 

  • Six new voices for Assistant (John Legend coming soon!)
  • Food ordering for pickup and delivery with Starbucks, Dunkin Donuts, and Door Dash, and, presumably, more to come.
  • Photos API allowing apps to search libraries based on image content
  • TPU 3.0 (tensor processing unit) to better train machine learning systems
  • Smart Displays for Google Assistant to compete with Echo Show
  • Conversation support to avoid saying “OK Google” before every voice query
  • Google Duplex allowing Google Assistant to make phone calls on a user’s behalf
  • Takeaway: Google is living up to its AI-first mantra with 7+ AI-related announcements. While none of them is a breakthrough, Google continues to remove friction from our lives. Collectively, these announcements help Google retain its pole position in AI.

Privacy: 

  • Takeaway: Noticeably absent from I/O was any measurable announcement regarding privacy; Google appears to be treading carefully around the topic.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Comforting Confirmation around Separation of Google’s Search and Privacy

  • Google reported Mar-18 results effectively in-line with the Street. The company does not provide guidance.
  • Most notable on the earnings call was CEO Sundar Pichai’s comment that search (90% of Google’s revenue) relies heavily on keywords and less on private data, reassuring that in a stricter privacy environment, Google’s core business should largely be safe.
  • The company did not comment if they expect a stricter privacy oversight environment in the future.
  • Google stayed heavy on the AI theme for the sixth consecutive quarter, mentioning it 25 times vs. 18 last quarter.
  • While AI can be an abstract concept, it’s currently used in almost every Google product and service today and will be increasingly in the future.

Net revenue growth continues at impressive clip. While investors have largely viewed the Mar-18 quarter as a mixed bag, we believe the key takeaway is that the company continues to defy the law of large numbers when it comes to revenue growth. Specifically, net revenue growth of 23% is in line with growth over the previous six quarters (21-24% range), despite the fact that Google’s revenue run rate has increased by about 73% during that time.

The elephant in the room, GDPR. The anticipation around Google’s earnings call was centered on the company’s reaction to concerns about the use of personal data in the wake of Facebook and, more importantly, how data privacy will impact the Google brand and monetization going forward. The company indicated on the call that they will be fully compliant with GDPR which they have been working toward for the past 18 months. They stopped short of speculation regarding potential changes.

Search as a safe haven. Our biggest takeaway was Sundar confirming that search relies less on personal data and more on keywords. The reason for this is, rather than relying on tracking personal data and inferring, the user offers a query that determines intent. This perspective should provide some insulation to Google’s earnings multiple as investors will continue to brace for a stricter privacy regulatory environment over the next year.

Moving AI from abstract to concrete. Google, more than any other company, throws around the term “AI.” It’s for good reason, given that artificial intelligence enhances almost all of their products and services. Take, for example, a simple search – AI can tie in the location of the search query to yield a more contextually aware answer. What is trending on Google search can influence recommendations on Youtube. Some more obvious AI use cases are natural language processing with Google Home and Assistant, Google Photos’ computer vision that is able to recognize your friends and pets, and Waymo’s self-driving software that can safely operate a vehicle on public roads. In the future, more advanced AI will improve the quality and ubiquity of all of these experiences. At the end of the day, we’re delighted that Google can’t stop talking about their progress in AI.

We believe Waymo will eventually be Google’s third largest business. Google reported respectable progress in the race for autonomous vehicles with its recent disclosure of Waymo’s 5 millionth mile on public roads, with the last million coming in the Mar-18 quarter. It’s hard to quantify who the number two player is in miles driven, but safe to say Waymo’s lead is sizable. We think this lead will eventually translate into a full-scale business of an autonomous ride-hailing network and an operating system that can be used across other platforms. Apparently, Cloud is their third largest business and accounts for about 5% of revenue. While we expect healthy (35-45%) growth over the next several years, we anticipate the Waymo opportunity will surpass Cloud in terms of gross revenue over the next decade. It’s too early to determine how Waymo will stack up in terms of profitability. This suggests that in 2028, Google’s four largest segments will be Search, YouTube, Waymo, and Cloud.

Tracking Google’s AI focus. Over the past six quarters, we have tracked how many times presenters and analysts have made comments about AI including instances of words like AI, artificial intelligence, machine learning, natural language processing, or Tensor Flow.

Over the same timeframe, we have noted Sundar’s opening remarks and the urgency with which he brings up Google’s efforts in AI. In each of the last six quarters, AI is mentioned in the first several sentences. Below is a look at his opening remarks over time.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Seeing The Road Ahead: The Undervalued Self-Driving Asset of Data

This is the 4th in a series of notes based on our deep dive into computer perception for autonomous vehicles. Autonomy is a question of when? not if? In this series, we’ll outline our thoughts on the key components that will enable fully autonomous driving. See our previous notes (Computer Perception Outlook 2030What You Need To Know About LiDAR, The Importance of Cameras To Self-Driving Vehicles).

A self-driving car will only be as strong as the data it trains on.

The importance driving data will play in developing fully autonomous vehicles is often understated, and companies that possess large and high-quality driving data sets are much further ahead of their peers than some may think. Driving data is key because it is the core input that will train the artificial intelligence models that operate autonomous vehicles. The more data these models have, the more scenarios they can prepare for, and, in turn, the stronger the entire system becomes. However, obtaining good driving data is not an easy task, and it is virtually impossible to gather data on every single driving scenario in all types of weather conditions. Due to improvements in computer graphics technology, many are relying on simulated data to train their self-driving models.  In the paragraphs below, we dive deeper into the pros and cons of using simulated data versus real data and identify who are the data leaders among self-driving car companies.

Simulation vs. real data. We recently spoke to a computer vision expert at the University of Michigan about the difference between using simulated data versus real-world data. He believes that simulated training data is valuable because most of the data collected during on-road driving is innocuous. Real-time driving data is only very interesting when there is a critical event or an unusual scenario. Simulation data lets you test on critical events constantly. However, he also noted the AI in simulated data is still programmed by a human and those AI tend to act differently than humans on the road. All autonomous systems will train with some simulated data and will therefore require fine tuning to factor in the difference between human and machine driving styles. That said, we do not want to underestimate the value of real data and believe capturing non-programmed scenarios will play a key role in preparing AVs for all situations that may arise.

Waymo’s large data lead.  The more miles an autonomous vehicle drives, the more real data the system can capture, the more robust the system can become. Companies that are approved to test autonomous driving in California are responsible for recording and publishing the number of autonomous miles driven. As of April 1st, 52 companies have been issued permits to test autonomous vehicles in California, and as shown in the graph below, Waymo has driven 352,545 as of November 30th, 2017. As of February 2018, Waymo had announced they have driven over 5 million miles in total. This announcement came only ~3 months after they announced crossing the 4-million-mile mark. While testing takes place in many states other than California, these data points suggest that Waymo has a very large data lead over their peers, which may translate to a large lead in the race to full autonomy.

Tesla lurking in the shadows. While Tesla is one of the 52 companies approved to test autonomous vehicles in California, Tesla did not test on state roads in 2017. However, the company acknowledged in the report they filed with California DMV that Tesla conducts testing to develop autonomous vehicles via simulation, in laboratories, on test tracks, and on public roads in various locations around the world. Tesla also highlighted that they have a fleet of hundreds of thousands of customer-owned vehicles that test autonomous technology in “shadow-mode” during their normal operation. Shadow mode is a feature that runs in the background without actuating vehicle controls in order to provide data on how the features would perform in real-world and real-time conditions. This has allowed Tesla to gather billions of miles of passive real-world driving data to develop its autonomous technology. This data is extremely valuable in training autonomous vehicles to interact with the real world, and, in our eyes, makes Tesla one of the top contenders in the race for full autonomy.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.