The Start-Up Industry Is Challenged by the Market`s Need for Profits

Since the dot-com bubble, a period in which companies made their growth out of the surplus of venture capital funding supporting their internet-based businesses, and the stock market crash that followed it, the start-up industry has faced many highs and lows. The New York Times recently compiled events suggesting that the current year is likely to be a tough one.

Back in 2008, the renowned venture capital firm Sequoia Capital gathered its start-ups to prepare them for a downturn in the industry. The slideshow presented by the firm, then titled “R.I.P. Good Times,” set the self-explained takeaway for entrepreneurs to incorporate into their businesses’ models: costs moderation.

Despite the hype caused by the formation of the largest venture capital fund in history (when the Japanese Conglomerate SoftBank raised a $100 billion Vision Fund), and by the biggest amount of venture capital investment made in the US history ($130.9 Billion raised in 2018 according to Pitchbook and National Venture Capital Association (NVCA)), recent events suggest that pursuing growth at the cost of profitability might not be a valid business plan anymore.

On January 9, 2020, Lime announced that after reaching more than 120 cities, the company is closing operations in twelve markets across the globe. The reason for this being the company’s new primary focus: profitability. Likewise, some trending “unicorns” have been underperforming: Uber and Lyft went through discouraging IPOs and are having yearly losses of billions of dollars. Uber made history by having the worst first-day dollar loss in the US IPO records. Not only did its stocks close down 6.7% on its opening day and amount to an aggregated loss of $655 million for the first public buyers, but its market capitalization of $69.7 billion was also almost half of the valuation predicted by bankers in 2018.

Another Softbank backed company, WeWork, withdrew its IPO, resigned its chief executive and suffered a valuation loss from $47 billion to $8 billion. This move was a consequence of investors’ cautiousness about young companies that have yet to prove their profitability in the following years.

Layoffs contribute to what might be the payback for the abundant decade lived by start-ups so far. Zume and Getaround – the robot pizza and the car-sharing start-ups – cut 500 jobs, among other businesses, such as 23andMe, Flexport, Firefox, Quora. Workers are thus prone to be skeptical about finding employment with start-ups.

The “venture” element inherent to investments raised for start-ups is the keystone to transforming ideas into lifechanging products and services. While businesses deepen their roots to compete in the open market, it is seen that their growth cannot impair the focus on its profitability, as the high availability of investment funds is not translated into guaranteed success as some optimistic players in the industry may believe.

The Start-Up Industry Is Challenged by the Market`s Need for Profits

 

The Global Economy Is Focusing on China After Coronavirus Outbreak

Prior to the end of January, the Chinese government confirmed the human-to-human transmission of coronavirus and alerted worldwide spreading with a rising death toll, following an extension of the Chinese New Year’s holiday to curb high prevalence rate of the epidemic. In the recent post by New York Times, it was reported that millions of employees have been confined to their homes, severely hindering the world’s shipping lines, causing drastic decline in almost every sector. Tedros Adhanom Ghebreyesus, the director of the World Health Organization (WHO), expressed his concerns on Twitter, “2019nCov spread outside China appears to be slow now, but could accelerate . . . in short, we may only be seeing the tip of the iceberg.”

Similar to what the Chinese experienced with the SARS outbreak seventeen years ago, fast-consumption and entertainment sectors will bear the brunt of the effect of coronavirus. The tourism industry will also be curtailed to an extremely low level due to travel restrictions and fight cancellations in the first quarter of the year. After many business hub closures in China, the fast-spreading virus has disrupted supply chains, pushing its counterpart, such as the US, to seek alternatives and bring back jobs to its home country. Secretary of Commerce Wilbur Ross said in a Fox Business Network interview: “it does give businesses another thing to consider when they go through their review of their supply chain.” This is not a positive sign for China’s economy.

The global economy’s reliance on the Chinese economy is being tested, considering it has become a bigger economic entity in terms of consumption, goods export and manufacturing. However, the China Economic Update issued by the World Bank last December indicated that Chinese consumption growth declined to 6.8% in the first three quarters of 2019 due, in part, to the household debt servicing burden and moderate wage growth. The World Bank revised the global growth forecast, which is expected to decelerate for at least the first part of 2020 due to coronavirus and its disruption of supply chains.

Meanwhile, Chinese government and financial agencies have taken an array of actions to defend their economy and rebuild market confidence after being struck by coronavirus. On February 2, the People’s Bank of China (PBOC) announced a 1.2 trillion yuan ($173 billion)  reverse repurchase plan to increase liquidity and maintain a stable currency market, more than 900 billion yuan ($129 billion) in the same period last year. Twenty-eight financing projects have been registered with the Insurance Asset Management Association of China (IAMAC), with 50.8 billion yuan ($7.25 billion) invested into infrastructure last month, more than 79.8% in the same period last year. Projects were more carefully scrutinized with more stringent and onerous restrictions. On the other hand, loose monetary policy is leading to a rising fear of higher inflation rate among its populace, which has climbed up to a record high: 5.4% last month due to the soaring pork price.

Despite the precarious timing, the market is always ready for opportunity chasers. The US and China signed an “phase one” trade agreement, allowing China to open up its financial market, especially in distress debt sector. Oaktree Capital Management was granted license in Beijing on February 18 to invest in the distress debt market, becoming the first distress debt manager in China. Having gained prior experience in lucrative deals Goldman Sachs and BlackRock are also now attempting to seek opportunities.

Businesses started to resume partially this week in major business hubs like Shanghai, Beijing, Shenzhen and Guangdong. Nevertheless, employees are under meticulous scrutiny, including body temperature tests, fourteen day voluntary quarantine, and registration if they go to public places for tracking purposes, as the government encourages working from home and off-peak commutes to control virus spreading.

The Global Economy Is Focusing on China After Coronavirus Outbreak

U.S. Charges Four Members of Chinese Military in Connection with 2017 Equifax Hack

Earlier this month, the Department of Justice charged four Chinese hackers in the 2017 Equifax data breach. A federal grand jury charged the four named defendants with conspiracy to commit computer fraud, wire fraud, and economic espionage. The indictment also charged them with stealing Equifax’s trade secret information containing its compilations and database designs.

The Equifax breach affected nearly 150 million Americans and is one of the largest in history. According to a DOJ announcement, the four hackers exploited a vulnerability in the Apache Struts Web Framework software and obtained names, birthdates, and social security numbers of nearly half the country. Although in late 2017, Equifax announced that nearly 143 million customers were affected, by 2018 the company identified the toll to be closer to 150 million victims. According to Equifax, it has identified that as many as 209,000 customers’ credit card numbers were exposed and the personal information of 182,000 American consumers was compromised. Further, a staggering 10.9 million lost their drivers’ license data. Shockingly, the effects of the breach were not limited to U.S. consumers; British and Canadian consumers were also targeted.

The response to this monumental breach shows the U.S. government’s growing attention towards treating personal data with the utmost importance. The data is seen to have consumer and national security value and is classified as “proprietary business information.” The ongoing investigation into Chinese TikTok owner, ByteDance, also emphasizes the importance accorded to the national security value of personal data in the U.S.

The breach and the DOJ’s subsequent indictment of Chinese military officers may also have a strong impact on US-China relations. In a 2015 meeting with Presidents Xi Jinping and Barack Obama, it was agreed that China would not “conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive advantages to companies or commercial sectors.” This commitment was a consequence of the very first U.S. indictment of Chinese hackers in 2014. However, continued attempts at theft of commercial secrets with little censure has proven that the 2015 agreement is ineffective. This has also called for a growing need to meet these ex-post actions with a framework of mandatory cybersecurity policies for corporate entities.

The Equifax data breach resulted in tumultuous implications, including multiple congressional hearings and the dramatic exit of its then CEO, Richard Smith. Although the company has agreed to settle with regulators for $700 million, those truly affected by the breach have yet to be compensated. Of the 150 million affected, only 10% have filed for compensation. More egregious is the fact that the company has only set aside $31 million for the settlement option of up to $125 per consumer. This amounts to less than $7 a person. It is only fair to wonder whether data breaches like this are really being looked at with pressing importance by these huge corporate entities with nearly unlimited access to sensitive consumer data.

U.S. Charges Four Members of Chinese Military in Connection with 2017 Equifax Hack

Sprint and T-Mobile Merge: How Will The $26.5 Billion Transaction Impact You?

On February 11, 2020, U.S. District Court Judge, Victor Marrero, ruled that the $26.5 billion merger between Sprint and T-Mobile would not cause anticompetitive behavior or violate antitrust law.

Tensions escalated when attorneys general from thirteen states brought a lawsuit to block the deal arguing that the deal would limit competition and result in higher prices for consumers. The Judge rejected the states’ argument stating that they failed to convince the court that the merged party would pursue anticompetitive behavior that would yield higher prices or lower the quality of wireless services. Further, Judge Marrero noted that Sprint would not be able to continue surviving as an effective competitor in the mobile services industry without the merger.

The deal had already received approval from the Department of Justice (DOJ) and Federal Communications Commission (FCC) last year. T-Mobile and Sprint agreed to relinquish several components of their merged business to comply with antitrust law. Sprint agreed to sell Virgin Mobile, Boost Mobile, and other prepaid phone businesses, as well as some of its wireless spectrum to Dish for $5 billion. The merged companies also promised that they would deploy a 5G network covering 70% of the U.S. population by 2023.

After the District Court Judge’s ruling, the only hurdle remaining is the California Public Utilities Commission approving the transaction. T-Mobile and Sprint had spent years and made multiple attempts to join forces but had abandoned their shared vision fearing regulatory scrutiny. This ruling was a substantial win for the mobile network providers. In a recent statement T-Mobile CEO John Legere said, ″[N]ow we are finally able to focus on the last steps to get this merger done!”

T-Mobile and Sprint are aiming to close the deal as early as April 1, 2020. The merged entity will retain the name, T-Mobile. Sprint customers will transfer to T-Mobile plans, but T-Mobile plans will stay in place. The merging parties have both noted that they are not planning to raise prices, keeping them “the same or better [] for three years.”

Potential upsides of the merger are better services, a wider network, and rolling out a 5G network which is capable of letting users download massive files in seconds. The companies claim that their full 5G network would reach speeds up to five times faster than their current network in a few years, and 15 times faster by 2024. Additionally, they claimed that they are aiming to deliver their network to 99% of the U.S. within six years. T-Mobile’s website also promises that the merger will create 3,500 additional full-time jobs in the first year and 11,000 by 2024.

The Sprint and T-Mobile merger’s narrative brings the anticompetitive marketplace discussion to the forefront. Narrowing the market to AT&T, Verizon, and now the new T-Mobile, could have ramifications like price fixing. As the attorneys general argued, this could lead to a financial harm borne by U.S. consumers. Alternatively, preventing the mobile providers from combining could mean slowing the roll-out of a nationwide 5G network, rural areas continuing to have blotchy mobile services, and less American jobs. Perhaps allowing beneficial mergers to go through, while surveilling the merged parties to ensure ethical business practices, is the optimal way for the government to manage major private sector mergers.

Sprint and T-Mobile Merge- How Will The $26.5 Billion Transaction Impact You?

Apple Signals Coronavirus’s Threat to Global Businesses

Apple is one of the world’s largest tech companies, but as it sits amongst the world’s elite in the business, there are obstacles ahead for CEO Tim Cook to overcome. The coronavirus has hit the global economy by storm, and it doesn’t seem to be stopping any time soon. The growing epidemic has impacted the Chinese economy in manufacturing, banking, and other sectors and the government has imposed restrictions on travel for 150 million people in the country. Apple has strong ties to China due to the use of factories for production and many stores selling its products across the nation.

Apple detailed just how bad the forecast for the company was with the spread of this deadly disease. The New York Times highlighted concerns by saying, “[the virus] was cutting sales expectations for this quarter, which a month ago it had projected to be robust.” Forty-two of Apple’s stores were closed and many of them have yet to reopen due to the growing concern from medical officials and ongoing research concerning how the disease was spreading.

Daniel Ives, Managing Director of Equity Research at Wedbush Securities stated, “Apple is heavily exposed. It confirms the worst fears that the iPhone impact was going to be more dramatic than expected.” China is Apple’s second largest market after the U.S. and has played a major role in the stock price continuously rising after previous quarterly earnings reports. Apple’s concerns are valid, as one of its most sought-after products is assembled in China, although not in the same province where the outbreak of the virus started. Apple is not the only company being affected by the coronavirus, as world leaders such as Starbucks, General Motors, and Ikea have been impacted as well. Many people travel to China for business, vacation, and other important events, but major airlines like American, Delta, and United have halted trips to the region due to growing fears of the disease spreading.

Tim Cook responded to Apple’s large sales forecast range by stating, “the company provided investors with a wider than expected estimate range because it was uncertain about the rapidly spreading coronavirus.” The company is working on plans to mitigate the impact but will face more challenges when the factories are back to normal operations and the government conducts inspections and tests for current workers.

Apple Signals Coronavirus’s Threat to Global Businesses

Trump’s $4.8 Trillion Budget Would Cut Safety Net Programs and Boost Defense, Highlighting an Ever-Growing Ideological Divide

The New York Times, in a recent article, outlined the budget cuts and spending initiatives advanced by President Trump in his $4.3 trillion budget proposal. The budget cuts include those relating to loan assistance, affordable housing efforts, food stamps, and Medicaid. The proposed cuts fall in line with President Trump’s efforts to cut government spending in the midst of his second presidential campaign. According to the proposal, the biggest reduction is an annual two percent decrease in spending on discretionary domestic programs, like education and environmental protection.

As for tax cuts and defense spending, the budget proposal extends the individual income tax cuts that were set to expire in 2025 and provides for additional spending for the military, veterans, national defense, and border enforcement. Key areas for military spending include $3.2 billion allocated for the development of a hypersonic missile system and $18 billion for the newly established U.S. Space Force.

In terms of the federal deficit, the budget proposal estimates that the deficit will be wiped out by 2035. Notwithstanding this projection, the budget proposes adding $3.4 trillion to the national debt by 2024. Currently, the U.S. deficit for the fiscal year of 2020 alone stands at $1.08 trillion, and as of February 2020, the total U.S. debt stands at $23 trillion. As stated in the U.S. Treasury’s report in November 2019, foreign governments are the largest holders of the U.S. debt at $6.7 trillion. Accordingly, it appears that the Trump Administration is heavily relying on borrowings to sustain this level of expenditure, which directly contradicts the policies promulgated by prominent Democratic candidates. Many Democrats recently outlined detailed plans for raising liquidity by raising taxes for corporations and the rich and expanding government efforts to provide health care, education, affordable housing, and aid for the poor. Despite the proposed policies to increase liquidity, critics argue that Democrats do not have an articulable solution for lowering the federal deficit or national debt.

The differences in the budget proposal put forth by President Trump and his Democratic rivals highlight the key ideological differences among Republicans and Democrats. In terms of the Republican Party, the laissez-faire economic theory, championed by Adam Smith and further advocated for by Ronald Reagan, rejects the practice of government intervention in the economy. The Democratic Party, on the other hand, largely believes in modern liberalism, advanced by John Rawls and John Fitzgerald Kennedy. Under this theory, the government is an active participant in reducing inequality, providing education, ensuring access to healthcare, regulating economic activity and protecting the natural environment.

While the ideological underpinnings of the Democratic and Republican Parties are clear, the solution for significantly reducing the U.S. deficit and national debt is not. In a practical sense, what would be prudent here is to close the ever-growing partisan gap, which would in turn set the U.S. economy on a long journey of achieving a budget surplus.

Trump’s $4.8 Trillion Budget Would Cut Safety Net Programs and Boost Defense, Highlighting an Ever-Growing Ideological Divide

The Space Race: Countries to Billionaires?

When President John F. Kennedy launched a national effort to put astronauts on the Moon within a decade, Americans were inspired and ultimately met his challenge.  The coordinated effort of the NASA Apollo Program, which successfully landed humans on the moon, took place in the context of the Space Race between the United States and the Soviet Union.  As Neil Armstrong and many historians have suggested, the Cold War served as an impetus for human exploration into space.

However, today’s space exploration efforts are taking place in a much different context.  It’s true that the United States, Russia, China, and India view space exploration as important to their geopolitical interests.  And some American politicians including Vice President Pence have suggested that there’s a new space race between the United States and China.  But the most important feature of current space efforts is the transformation of JFK’s national aspirational effort into a space race of billionaires.

As the founder of SpaceX, Elon Musk is pursuing the colonization of Mars and the development of cargo missions into space for the U.S. military and others.  Jeff Bezos, founder of Blue Origin, desires to build a lunar base and create a space tourism industry.  Virgin Galactic founder Richard Branson is also interested in developing space tourism.

The three billionaires desire to beat the others in their space ambitions.  Litigation may serve as a tool to gain an edge over the others.  Therefore, the business law community should prepare itself for the litigation that will occur between the companies.  SpaceX has sued the US government because of a $2 billion agreement to build rockets which the Air Force granted to Blue Origin (and other companies).  Now Blue Origin wants to defend its deal by intervening in the lawsuit.  In addition, the two companies were previously engaged in a ruthless patent dispute over a way of landing rockets on vessels.  SpaceX prevailed.

If the billionaires succeed in their space ambitions it will pose novel legal issues regarding space travel and human life in space.  Also, litigation between their companies will likely increase if they are still in competition.  Therefore, it is crucial that space law, business law, and intellectual property law regimes currently begin to transform in a manner that will encourage the betterment of humanity in space.

The Space Race- Countries to Billionaires?

Preventing Foreign Influence in Democracy

Foreign influence in democracy through the use of misinformation on social media has been a widely discussed topic since Russia’s interference in the 2016 U.S. Presidential Election. One prominent tactic used by Russia in 2016 was to use fake social media accounts to spread misinformation with the goal of tilting the election in favor of Trump.  Social media companies were caught off-guard and were unprepared for such a campaign.  Yet, social media companies have not made enough progress to halt such activities, which have a corrosive effect on the integrity of democracies.

Recently, Russian misinformation campaigns aimed at influencing African politics have been uncovered.  The campaign spread misinformation about local elections and promoted policies that were favorable to Russia.  The platforms used in Russia’s efforts were Facebook, Instagram, WhatsApp, and Telegram. The targeted countries included Sudan, Libya, Madagascar, Mozambique, Democratic Republic of Congo, Central African Republic, Cameroon, and Côte d’Ivoire.  In response, Facebook suspended the related accounts for foreign interference.  It is important to note that these Russian misinformation efforts have evolved in sophistication as they partly relied on authentic domestic accounts in conjunction with their efforts.  Although Facebook has added fact-checking features, it is unlikely that the feature itself will be enough to protect the integrity of democratic elections and prevent the spread of misinformation.

Russia’s and other countries’ use of social media misinformation campaigns is a troubling trend.  Social media companies have created security teams to prevent against election meddling through misuse of their networks.  Further, data gained from these efforts will help the companies develop stronger defense mechanisms.  However, the number of countries engaged in disinformation campaigns has increased and will continue to do so.  Although social media companies have made some progress in trying to prevent and uncover these campaigns, it will not be an easy task for these companies to maintain the integrity of their networks given that foreign influence tactics will evolve as a result of any defensive mechanisms that tech companies put in place.

Preventing Foreign Influence in Democracy

Hong Kong Stock Exchange Drops Nearly $37 Billion Bid for London Rival

The Hong Kong Stock Exchange (“HKEX”) recently pulled out of its $36.6 billion bid to acquire the London Stock Exchange (“LSE”). The merger would have created the largest trading entity with a combined value of over $70 billion.

Prior to HKEX’s failed LSE acquisition bid, LSE publicly questioned “the sustainability of HKEX’s position as a strategic gateway in the longer term.” This statement is likely in response to the widespread protests in Hong Kong surrounding its political relationship with mainland China. Thus, LSE’s statement highlights a lack of investor confidence in the Asian giant amidst rising political instability.

As for M&A trends more broadly, external factors, such as politics, often play a role in deal making, and HKEX’s dropped bid is just one example. Earlier this year, the U.S. Treasury Department proposed an amendment under the Foreign Investment Risk Review Modernization Act that would give the Committee on Foreign Investment in the United States (“CFIUS”) greater authority to halt or scrutinize Chinese and other foreign investments. Under the proposed amendment, this authority would extend to investments the U.S. deems to be “protected.” Similarly, with respect to the bid made by HKEX, officials from the Bank of England had previously advised the U.K. Treasury that the LSE-operated clearing house constituted “critical market plumbing.” Therefore, the deal, if materialized, would have been subject to U.K. scrutiny. Accordingly, M&A lawyers advising clients with cross-border deals need to factor in this increased regulatory scrutiny, especially when dealing with acquirers from politically unstable regions.

With HKEX’s bid out of the picture, LSE may now proceed with its deal to acquire Refinitiv Holdings Limited, a portfolio company of the Blackstone Group. LSE claims that the deal would put it at the forefront of the financial data sales industry. In addition, earlier this year, LSE mentioned that it would like to proceed with the deal since it made more “strategic sense” than the proposed merger with HKEX. Thus, while the political instability in Hong Kong likely attributed to HKEX’s change of heart, LSE is now able to move forward with its strategic business goals unhindered by HKEX. It remains to be seen whether HKEX will be successful with future acquisitions if the political climate does not dramatically shift soon.

Hong Kong Stock Exchange Drops Nearly $37 Billion Bid for London Rival

 

 

 

 

Siri, Google Assistant, and Amazon Alexa can be Hijacked with Light

Researchers have recently found that voice assistant technology is vulnerable to hijacking by cheap lasers.

Researchers from Tokyo’s University of Electro-Communications and the University of Michigan have almost bested inbuilt security mechanism in voice-controlled devices, including popular smartphones. A mere shining of a bright laser at the devices’ microphone is interpreted as a sound by their system.

Researchers have concluded that by producing electrical signals in the light beam on microphones hijackers may control a device because the system will interpret it as a genuine command. For this test, the cheap laser pointers used was around $13.99 to $17.99. This was coupled with a sound amplifier to direct speakers with a specific instruction cost of $27.99. A laser device was also connected to control the Lasers intensity. This was the most expensive tool of all, costing $339.

The team ran a test on voice control speakers and smartphones of renowned major tech firms, such as Google’s Assistant, Amazon’s Alexa, and Apple’s Siri. The list is not exhaustive, but includes Google Home, various Amazon Echo models, the Apple Home Pod, and Facebook’s Portal speaker, which runs Alexa. They also tested an iPhone XR, a Samsung Galaxy S9, and a Google Pixel 2.

Relying on inbuilt security layers in the gadgets is now in question. The varying degree of vulnerability in tablets, phones, and speakers is another issue discovered by the researchers after shining the laser from some distance, including through windows. Out of all devices tested, Google Home was hijacked from 110 meters away.

But it may relieve anxieties to consumers using iPhone, iPad, and a few Android smartphones that these devices require extra layers of authentication or a “Wake Word” to activate a device before the hijackers trick the system. This additional authentication of preventing a system against an invasion requires a system hacker to use a wake-up a command such as “Hey Siri” or “OK Google. Unfortunately, these additional security measures are missing in the smart speakers.

Researchers went to great lengths to explain in their paper the prospective chance that lasers could also be used to unlock smartphones and devices connected with it. This could expose consumers credit card information and even result in the ability to unlock tech-driven cars which are connected to a victim’s Google account

Since the paper’s publication, it is clear that tech giants such as Amazon need to update their gadgets security software to protect against any foreign invasion. Unfortunately, the research has already shaken consumers trust.

Siri, Google Assistant, and Amazon Alexa can be Hijacked with Light