iPhone 8 Launch Lines Short as Expected

Short line at the Apple Uptown Store in Minneapolis, MN on launch day at 11am.

Lines for Apple products are short, as expected. This year’s iPhone 8 launch line at Apple’s flagship 5th Avenue store in NYC was 275 people vs 400 for the iPhone 7, 650 for the iPhone 6S,  and 1,880 for the iPhone 6. Overall, this line count is as to be expected for two reasons:

  1. Consumers continue to trend toward pre-ordering new devices to avoid long launch day lines.
  2. This year’s iPhone upgrade is split between the iPhone X and iPhone 8.

Remain comfortable with Street iPhone estimates for FY18. These shorter lines don’t change our expectation that iPhone unit growth for this next cycle will be 9% versus 3% for FY17. The reason we remain optimistic about the step up in iPhone growth over the next year is the large pool of old iPhones that need to be upgraded. Specifically, we estimate the number of active iPhones that will be three years old or older to exceed 300M over the next year. This is greater than the ~245M iPhone units currently modeled by the Street in FY18.

iPhone 8 Launch Day Line Recap. We have counted iPhone launch day lines since the launch of the iPhone 3G in 2008. In the US, we visited five stores including the 5th Avenue store in NYC, and four in Minneapolis. For stores where we have y/y data, the iPhone 8 lines were down 32% on average vs iPhone 7 lines last year with the 5th Avenue store down 31% y/y (table below). As a point of reference, last year for the iPhone 7 launch, lines were down 23% from the iPhone 6S launch.

Surprise of the day – people waiting for Apple Watch + LTE. Excluding the 5th Avenue store, we found about half of the people in line were waiting for the Apple Watch + LTE. This surprise mix of Apple Watch buyers in today’s lines is likely attributed to the long (3-5 week) lead times for Apple Watch + LTE. Despite the negative reviews around Watch + LTE (battery life and network connectivity) we remain comfortable in our estimates that the Watch + LTE will add 10M Watch units over the next year (accounting for 38% of our Watch estimates for FY18). We did not interpret the greater number of people waiting in line to buy Apple Watch as a sign that demand for Watch is greater than our model reflects.

Noise in this year’s data. Our line data is less comparable to previous years because Apple Watch buyers accounted for 19 of 42 survey respondents. We did not conduct surveys at the 5th Ave. store, so we don’t have color on the largest line sample.

Details on this year’s line survey.  The biggest takeaway in our survey is the rebound in the percentage of iPhone 8 Plus buyers, accounting for 57% of survey responses. This compares to 46% of iPhone 7 launch day buyers opting for the larger form factor.

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.

Posted in Apple  • 

Survey Suggests Higher Demand for iPhone 8 and X; but Brace for Short Lines

Survey suggests better than expected demand for iPhone X and iPhone 8, but lines will be shorter tomorrow.  This week we surveyed 388 consumers in the U.S. across all demographics and found that of those planning to buy an iPhone in the next year, 25% plan on purchasing an iPhone X and 39% and iPhone 8 and 8 Plus. We are modeling for iPhone X to be 20% of units over the next year, and iPhone 8 and 8 Plus to be 25% of units over the next year. Said another way, the survey suggested 64% of iPhones in the next year will be either the iPhone X, iPhone 8, or 8 Plus, compared to our current model of 45%. While we are encouraged by this survey, we are keeping our iPhone mix estimates unchanged to err on the side of conservatism.

Expect shorter lines this year. We will be making our annual pilgrimage to a handful of Apple retail stores to count lines and more importantly, survey people regarding their intended purchases. The lines have been declining over the past two years. For example, the line at the 5th Avenue New York store declined from 1,880 people in 2014, to 650 in 2015, and 400 last year. Given the most current version of the iPhone is split between the iPhone X and iPhone 8, and more people are purchasing their phones online or through the iPhone upgrade program, our best guess is that lines will be less than half as long as we observed in 2016. In addition, the 5th Avenue New York store is undergoing major renovations, and has been moved to an adjacent building which will likely impact the 5th Avenue line count. These shorter lines don’t change our expectation that iPhone unit growth for this next cycle will be 9% versus 3% for FY17.

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.

Do You Have What It Takes to Be a Great Founder?

Every VC says they only invest in great founders, but the majority of venture-backed business still end in relative failure. Does that mean we as VCs are just bad judges of founders or do we not know what great founders look like? This is a question we’ve obsessed over since we started Loup Ventures — trying to define what makes a great founder and how to test for it. It’s hard. Great founders come from a host of different backgrounds, educations, genders, ethnicities. We’ve identified 10 traits across two categories that make great founders at the seed stage: Innate and Dynamic.

Innate Qualities of a Great Founder

Innate traits are character elements that are difficult to impossible to learn — either the founder has them or they don’t. Regardless of the type of business a founder starts, there are five imperative innate traits for all great founders:

  • Intelligence
  • Integrity
  • Commitment to suffering
  • Focused curiosity
  • Resourcefulness

Warren Buffett has talked about a few of these traits as things he looks for in his managers. Naval Ravikant has also talked about a few of them, so they shouldn’t come as much of a surprise. Intelligence is probably the most obvious of the innate traits. To start a valuable company, a founder must have some kind of smarts because intelligence leads to interesting insights about a market (see the next section). These insights translate into vision, which is the only truly defensible element and most important asset of any startup business. Vision is how an entrepreneur attracts talent and creates strategy.

 

Pure book smarts matter, but emotional intelligence is important too. A founder has to deeply understand his or her customers to deliver products they want, not just products the founder wants to build. A founder also has to deeply understand his or her employees and what motivates them to sustain high levels of productivity.

Integrity is the current buzz word in the startup world. We used to think about integrity as honesty, but doesn’t seem to fully encompass the spirit of the trait. Honesty is a requirement because it means the founder learns from his or her mistakes. Dishonesty assumes problems are someone else’s fault, which means it’s impossible to learn. Ownership is a popular modern term for honesty – taking responsibility for things that happen whether they’re purely in your control or not.

The interesting component about integrity as it relates to startups is that great founders need to be willing to break rules to build valuable businesses. However, there’s a line between what’s acceptable and what’s not, and sometimes it’s blurry. Salesforce.com hired fake protestors to disrupt a Siebel conference in its early days. Clever guerilla marketing. The cases of Hampton Creek, Theranos, and Zenefits are clearly in the unacceptable camp. The ride sharing legal disputes are blurrier, although we agree that the laws are outdated and ride sharing is a significant net positive to the world. In any case, dishonesty and unethical behavior are contagious, so integrity must come from the top and be a guiding light for any startup.

The third quality of great founders is a commitment to suffering for at least five years. This might sound more extreme than necessary, but starting a company is a rollercoaster of suffering. You need to be comfortable with hearing no over and over and not let that destroy your will. You need to be able to withstand low periods that are inevitable — unexpected customer or employee losses, investor rejections, tax bills, fights with cofounders. Entrepreneurs don’t necessarily need to revel in difficulty, but it helps. We like to track the number of times we hear no during the week to reduce the negative reinforcement of it.

Why five years of suffering? It usually takes at least two years before you have any reasonable traction to show that your business might be working, then another few years of driving growth to create something that looks like a moat. Then you can afford to breathe. A little.

Focused curiosity might seem like an oxymoron, but curiosity that is targeted at a specific market leads to a commitment to testing new things. Testing new things leads to new business opportunities and products. Curiosity may be particularly necessary for seed stage founders (our focus) because their businesses are so nascent and require constant iteration. A lack of curiosity at the early stage leads to stagnation, which leads to death.

An early stage startup is an unending series of challenges. This is doubly true for first time founders who not only have to figure out how to deliver their specific offering to market, but how to operate a business in general. The final innate trait, resourcefulness, gives founders the ability to thrive in the face of persistent tests. A great founder is not one that says he or she couldn’t do something because they didn’t have enough capital or it was too difficult. They figure it out and keep figuring it out.

Dynamic Qualities of a Great Founder

Where the innate traits are binary and fixed, the dynamic traits of a great founder are five qualities that exist on a spectrum and evolve over time:

  • Market insight
  • Operational capability
  • Product sense
  • Growth
  • Leadership

Market insight is our term for the popular “founder/market fit.” What we want to see from a founder is that he or she has spent a lot of time thinking about and experimenting on a problem they’ve identified. In that sense, market insights are a byproduct of the innate intelligence trait being applied to a specific problem over a length of time. Founder/market fit to us implies that the founder has spent time involved in a market, thus the fit; however, prior market experience isn’t necessary for great founders. Jeff Bezos didn’t have founder/market fit when he started Amazon. He never ran a bookstore before, but he had a market insight about the Internet changing the way people shopped. The founders of Uber never worked in the livery business, but they had an insight about mobile changing the way people arranged transport. Airbnb is another example, and there are many others.

The other four traits are relatively straight forward business-related qualities. Operational capability is the founder’s ability to deliver their product or service and serve customers. Product sense is the founder’s ability to create a product or service that unexpectedly delights consumers. Product sense is what enables a founder to reach product/market fit. Growth is the founder’s ability to market and sell the product or service. Leadership is the founder’s ability to organize his or her team to meet objectives.

All five of these traits work in conjunction with one another, and all five are necessary for an early stage founder to possess in some degree. However, numerous factors influence the relative importance of the dynamic qualities of a founder. In other words, some of the dynamic traits need to be more developed depending on type of the founder’s company. For example, in a highly social company, a founder’s product sense seems to matter more because user growth will be organically rapid and immediate experience will be what keeps them engaged. An enterprise founder should require stronger growth capabilities to directly sell their B2B product, software or otherwise. Hardware companies tend to need stronger operational capability given the manufacturing requirements of their product.

The above observations were specific to seed stage companies, but stage of the investment also impacts the relative importance of the dynamic qualities in a founder. At the A/B round, product should be somewhat established, so market insights and growth might matter more as the founder tries to leverage his or her unique vision into some sort of durable advantage. In a pre-IPO or public company, the importance of leadership matters significantly more because of the likely larger number of employees at the company.

If You’ve Got It, Go for It

It’s boring to hear every VC say they only fund great founders, but it really is true, and their criteria probably isn’t much different from ours. Early stage companies are extremely fragile. VCs obsess over the quality of founders because it’s one of the few variables we can control. Recognizing these qualities in oneself is also an important variable an entrepreneur can control. Whether you’re running a small business or hoping to build the next Google, you must have all the innate traits and the correct balance of dynamic traits to be great. If you know you have them, then focus on your goal and be great. Hopefully we can help you along the way.

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.

Tesla’s Building Blocks to Reengineering the Future

Tesla is not (just) an automaker. Nor is it (just) a battery, solar, or software company. Tesla is an agent of change. Its mission is to accelerate the transition to sustainable energy – and its story is about engineering a different future. Each move the company makes lends itself to a higher-order goal, and, as you zoom out, the picture becomes clearer.

It is fairly common knowledge that Tesla does more than make cars. Though the company has garnered a powerful media presence, primarily based on its work in the electric vehicle space, we think the bulk of this attention is misguided, focusing on too narrow a scope and too short a timeframe.

The Master Plan. In a 2006 blog post entitled The Secret Tesla Motors Master Plan (just between you and me), Elon Musk outlines most of this vision. In it he writes, “the overarching purpose of Tesla Motors (and the reason I am funding the company) is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy, which I believe to be the primary, but not exclusive, sustainable solution.” The master plan, which was actually written as a bulleted list in the 2006 post and extended ten years later in Master Plan, Part Deux, goes something like this:

  • First – build an indisputably excellent, fast, and expensive electric sports car to kill the existing stigma around EVs (Roadster & Model S).
  • Then – use that money to create an affordable, high-volume, EV that is fundamentally better than the average consumer car (Model 3).
  • In the meantime – while demonstrating the superiority of electric vehicles, provide zero emission power generation and storage options (solar & battery) to power those vehicles and all other activity.
  • Later – widespread implementation will only be possible at a reasonable cost to consumers, so operations must be vastly scaled up to apply economies of scale (Gigafactory).
  • Eventually – help power the globe with energy that is generated from renewables and stored in batteries for optimal deployment.

Musk concludes the first post by saying, “Don’t tell anyone.” And he’s only half kidding. At least early on, Tesla seems fine with investors and the public thinking they are an automaker. Musk knows that his ambitions to manufacture electric vehicles, develop autonomous driving software, double the world’s output of lithium-ion batteries, be the largest solar panel installer in the U.S., and modernize energy production, storage, and consumption, must be executed in steps, each building on the last.

The Silicon Valley approach. Tesla, like others in technology today (e.g., Amazon), is attacking non-tech sectors with a thoughtful, albeit unconventional, commercialization plan. If your goal was to accelerate the world’s transition to sustainable energy, you might get a degree in chemistry or electrical engineering, go on to study environmental engineering or law, assert yourself as an expert in the field, create an interest group, lobby congress, get approved to test a project; you get the picture. Tesla, however, figured that most efficient way to exact the greatest change is with a consumer-facing, product-focused approach. Maybe people would drive an electric car if it were faster, safer, and sleeker than the one they owned. Maybe people would put solar roofs on their homes if they looked great and were more durable than traditional materials. People are drawn to better products; not to intangible environmental and sustainability benefits.

“The future has already arrived – it’s just not evenly distributed.” – science fiction author William Gibson. This quote applies broadly to many themes within tech, but is particularly pertinent to Tesla’s situation today. Right now, using Tesla products, you are able to consume energy in an entirely sustainable manner. With a Solar Roof and Power Wall, you can generate and store enough energy to power your home and your Model S, effectively removing you from the grid and reducing your carbon footprint to zero. Further, Tesla Energy has embarked on a handful of projects around the world. Some of these include building the world’s largest battery storage facility in South Australia, powering the entire Samoan island of Ta’u with solar and batteries, relieving the grid during peak demand in California, and several others. Unfortunately, these solutions are few and far between, and the technology is not accessible to everyone because of the upfront cost. The uneven distribution, however, is largely an issue of manufacturing scale.

A word on scale. Scaling their operations is perhaps both Tesla’s largest hurdle and the single most important determinant of their success. Their goal is not to help the rich save on their energy bill or give them a fun car to drive. In a recent interview, CTO J.B. Straubel said, “we work incredibly hard every chance we can to reduce cost. Most of our effort is focused on how do we reduce cost so that we can grow volume and reach a broader customer base.” There is no agenda or desire to sell to wealthy customers only – it is a necessary step in the economics of scaling up operations. Scale is currently Tesla’s core focus. While the Nevada Gigafactory will effectively double the world’s output of lithium-ion battery cells, Musk has said he wants to build 10 or 20 of them, and that to power the globe, we would need 100 Gigafactories (begs the question if there is enough lithium in the world to supply 100 Gigafactories). Tesla has focused on creating “the machine that builds the machine,” and thinks of the factory as a product, carefully crafting and optimizing it like they would a Model S. We suspect that people will be shocked by Tesla’s manufacturing output ability in the coming years.

From paper to practice. The concept is simple on paper; we have, as Musk says, “this handy fusion reactor in the sky called the sun,” and enough of its energy hits the earth every hour to meet the world’s energy demands for an entire year (MIT Tech Review). So how can Tesla accelerate the process of capturing, storing, and utilizing this energy?

  • Grid-scale energy storage – in our current system there is virtually no storage, so power plants that feed the grid are constantly adjusting output to perfectly meet demand. In most cases they fire up extremely dirty and expensive “peaker plants” to meet peak demand each day. By adding batteries to the grid, which are essentially an infinitely scalable, plug-and-play technology, Tesla could smooth out production and deploy stored energy as needed. This idea has come to life in several locations, most notably in Mira Loma, CA, where Tesla has installed 396 Power Packs to assist the over-stressed grid in meeting peak demand each day.
  • Renewables + batteries – energy storage enables mass adoption of renewables of all kinds because it solves a core issue; there is a disconnect between when solar and wind power is generated and when it needs to be deployed. Batteries can be charged during the day when the sun is shining, then deploy energy at peak demand and throughout the night. Tesla is currently installing a battery storage facility tied to a wind farm in South Australia that, when finished, will be the world’s largest by a factor of 3.
  • Microgrids – whether it’s a single-family home, a rural community in Brazil, or an entire Pacific island, the combination of solar and battery storage offers the unique opportunity to create smaller, self-contained power networks and spread clean energy to new areas. Rural areas will be able to leapfrog traditional infrastructure, and urban areas can reduce the burden on the existing grid. Tesla has built a microgrid in American Samoa that powers the entire island of Ta’u, able to capture and store enough solar energy to meet demand even if the sun doesn’t shine for 3 days.

The faster Tesla reaches economies of scale in its existing businesses, the sooner we could see Tesla tackle these important issues, extend its operations to their fullest potential and, most importantly, further accelerate the transition to sustainable energy.

Special thanks to Will Thompson for his work on this note.

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.

Posted in Tesla  • 

Little Change in iPhone 8 & Watch Lead Times Over Weekend

Friday morning (Sep 15) Apple started taking pre-orders for the iPhone 8 and 8 Plus. At around 11AM ET we spot checked availability of those phones in the U.S. At the time, Apple was quoting 1-2 week lead times for most configurations. On Sunday afternoon (Sep 17th) we took a closer look at the lead times and found little change from Friday. Our Sunday afternoon lead time checks in other countries quoted similar 1-2 weeks shipping expectations. See details below.

Comparing iPhone 8 & 8 Plus Lead Times to Past Launches. The pre-order lead times are playing out as we expected with similar to the lead times as the smaller size iPhone’s over the past three years, but shorter lead times than the larger Plus sizes. For the smaller screen sizes, last year we found that average iPhone 7 lead times of 1-2 weeks with five days to launch (same days to launch window as our checks today), which compares to 7-10 days for the iPhone 6 and iPhone 6S. We note the 6S had a slightly longer time between announcement and launch, thus more time to build inventory to handle initial demand. For the Plus sizes, last year we measured the iPhone 7 Plus lead times 5 days before launch at 2-3 weeks on average compared to 3-4 weeks for both the iPhone 6 Plus and iPhone 6S Plus. Separately, we expect the iPhone 8 & 8 Plus will account for about 25-30% of iPhone units over the next year and expect the iPhone X to account for about 20% of units, so the demand for the next iPhone cycle is more or less equally split between two models which would likely lowers lead times.

 

Watch + Cellular Lead Times. We did similar Watch + Cellular spot checks on Friday morning and noted little change on our detailed Sunday, Sep 17 checks.  All models quoted 3-4 week lead times with the one exception (Silver Aluminum Case with Seashell Sport Loop which was 4-5 weeks). Apple Watch accounts for 3% of Apple’s overall sales, but we believe adding cellular (despite the $10 per month up data up charge) will add about 2% to Apple’s overall revenue growth rate for FY18. We’re modeling for 15% revenue growth in FY18, inline with the Street.

Posted in Apple  •