Building Blocks of the Future

8/7/2019 Building Blocks of the Future

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SPECIALISTS IN SATELLITE, TELECOM AND AEROSPACE INVESTMENT BANKING

Building Blocks of the Future

1998 just called, and it wants its technology frenzy back. All of asudden, the valuation and growth of the latest wave of digital mediastartups have been going through the roof unlike any time sincebefore the dot.com bust. Multi-billion dollar revenue-run rates, stockappreciation and glamorous movie portrayals of tech startupsmeans that venture capitalists have gone back to pouring $41million into pre-revenue, pre-launch startups, a fact that shoulddelight those who remember the good old days of about a dozenyears ago. This time around, however, a big part of the story is howmuch of the activity is not just located in Silicon Valley, but locatedhere in New York, an indicator of how much this latest wave islinked to this citys strengths commerce and media. Nowadays,its possible in just a span of a few weeks to witness dozens of startup pitches and tech demos in any number and variety of meetups, workshops and conferences dedicated to the black arts of entrepreneurship and venture investing. Many of these startups anddemos are hopping onto the latest wave of digital and social media.Being in the midst of it all is certainly a gratifying and educationalexperience, as long as it continues to last.

Ask entrepreneurs, VCs and angel investors about what is driving

this frenzy and they will invariably cite a new mode of entrepreneurship sweeping the digital world. Start-ups havebecome much cheaper to fund and they now scale virally throughsocial networks - some even garnering millions of users in a matter of weeks. Successful start-ups now achieve relatively quick exitsdue to the hyperactivity of the M&A departments of about twodozen or so of the top tech companies. Those in the mood to opineabout the macro trends in technology will cite the emergence andconvergence of a holy trifecta of mobile, social and local. App-enabled smartphones connected on the Facebook / LinkedIn /Twitter social graph enabled by GPS and the craze for check-ins

is creating a whole new set of angles from which to harnesscommerce and social attention.

While its hard to disagree with any of that, its equally noteworthyto point out the role that hardware has played in all of this. Withoutthe great advancements in storage capacity, processing power andbandwidth over the last decade, many of these achievementswould be unimaginable. The largest datacenters of the late 1990s

valuation andgrowth of the latestwave of digitalmedia startupshave been goingthrough the roof unlike any timesince before the

dot.com bust

Without the greatadvancements instorage capacity,processing power and bandwidthover the last

decade, many of theseachievementswould beunimaginable.


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could never have handled anywhere near the data that YouTube,Facebook, Hulu and other sites now demand, let alone the verymany cloud-based applications built along with them. Moderncommodity servers and an enormous datacenter infrastructuremake this happen. Modern smartphones too, depend on theadvancement of technology. Without abundant supplies of affordable high-capacity memory, high-powered processors, thincapacitive touch-screens, high-density Lithium-Ion batteries, as wellas cheap baseband and GPS chipsets, mere cell phones couldhardly have supported so many new ground-breaking applicationsas they would not be smart enough.

Not just technology but economic organization has made powerfulnew hardware cheap and available in mass quantities. The rise of Electronic Manufacturing Service (EMS) providers, enormousconfederations of mostly Asian-based electronics manufacturingfacilities, has helped Western design companies such as Apple,Motorola, Amazon, HP and many others to turn visions andrevisions of new designs intotheir millions of units of the latest andgreatest gadgets delivered to eagerly awaiting customers latest andgreatest gadgets out of mostly commoditized hardwarecomponents. Even bookstores can now offer their own e-reader and tablet designs and products because of the EMSs. Economicnativists may object that manufacturing has left America to gooverseas, but its hard to argue with the value proposition. Apple,

the industrial design and marketing company, is far more profitablethan any of its contract manufacturers. Add the hundreds of billionsof dollars in value added by the latest wave of digital media giants(Facebook, Groupon, Zynga, Foursquare, Twitter, etc) and onecannot escape the conclusion that theres more value in being thedesigner, brander and app programmer than it is to be thehardware maker.

Or is it? Perhaps building things shouldnt just be the domain of enormous EMSs in far-off lands and perhaps hardwaremanufacturing should be an integral part of the digital/social

revolution, not just a supporting pillar of it. Weve talked a lot aboutmachine-to-machine communications in these pages in the past,often about how the desire to connect anything, anywhere is drivingmore and more traffic onto the worlds wireless networks. But justas interesting as bandwidth demands are the multiplicity of devicesneeded to connect this everything. Large hardware developers canonly meet the needs of only the broadest of markets but the worldis filled with things of every imaginable size, shape, velocity and

economicorganization hasmade hardwarecheap andavailable in massquantities

Internet of Things mustleverage themarketsimagination toenable user-generatedhardware just as

much as modernsocial medialeverages user-generated content


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personality. If the Internet of Things is to really take off, it mustleverage the markets imagination to enable user-generatedhardware just as much as modern social media leverages user-generated content. We are seeing the beginning of this, as cheap,programmable and readily available smartphones, enabled bycustom apps are enabling sensing, tracking and locating functions,but that is just the beginning.

Ever wondered how the U.S. Air Force processes and sorts throughthe torrents of geospatial information coming down from camerasmounted on their multitude of unmanned aerial vehicles? Well, wehave, at least. A recent article about the Air Force Research lab inRome, NY discussed how researchers had created one of theworlds largest, fastest and, astoundingly, cheapestsupercomputers to process all that data. Their secret? Over 1700Playstation-3 game consoles linked together, the same devices thatanyone can buy off a shelf, only strung together with customdesign. It has all the power of a supercomputer at a tenth of thecost. How about how a father and son in Brooklyn builtding aweather balloon withcraft to take HD video payload to take picturesof the Earth from 110,000 thousand feet? This family achievementwas eEnabled by high definition cameras, transmitters and GPSdevices found in hobby shops and put together by athe do-it-yourself ethic.

This isnt just limited to building cheap supercomputers, homemadesatellites or custom sprinkler systems but is good for trackingdevices, home automation equipment, smart grid applications,security devices and any number of other machines that only thecollective creativity of several billion human minds can imagine. For more power users, there is beginning to emerge a class of OpenSource Hardware enabled by cheap, customizable microcontrollersand modules. Here in New York, a young venture-backed startupnamed Bug Labs ( www.buglabs.net ) is developing a line of interchangeable modules to allow universal hardwarecustomization. They are surely not the only part of this movement.

In colleges and home garages, hobbyists and entrepreneurs havebeen discovering the versatility of ready to use and programmablemicrocontrollers. Arduino ( www.arduino.cc ) boards, pictured below,were the creation of a student team in Italy in 2005 in an effort tomake hardware creation easier for all - not just to hobbyistelectronics engineers, but to the millions of software engineers.They have since shipped tens of thousands of boards and spawneddozens of variants and extensions. For those who want their

In colleges andhome garages,hobbyists andentrepreneurshave beendiscovering theversatility of readyto use andprogrammable

microcontrollers


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projects to have instant connectivity, another New York-basedstartup has introduced the Netduino ( www.netduino.com ), anArduino variant with built in .NET extensions ready to beprogrammed. Not a programmer and want a piece of the action?Were sure someone, somewhere is working on an interface thatmakes it as easy to make your own device as it is to grow your ownFarmVille.

The Arduino board cheap, simple, powerful and adaptable

What if users were able to make any item or device exactly howthey want, when they want, and in as small a quantity as theywant? As far as it may seems that we are from achieving thisatgoal, note that one of the most interesting devices to come downthe line recently are 3D printers, devices built on the sameprinciples as modern 2D printers, but designed to build objectsupwards from defined digital designs. Originally conceived as rapid

prototyping machines for engineers, architects and other professions, their rapidly decreasing price and increasingcapabilities are allowing amateurs to build miniature factories.Although there are a number of players in the sector offering a widevariety of 3D printing solutions, how could we resist mentioning(and showing below) yet another New York-based startupMakerBot ( www.makerbot.com ), who offers wood-paneled (!) 3Dprinters for only a couple thousand dollars? Decades since itstopped being a center of production and became a professionalservices hub, is this a new beginning for manufacturing in the BigApple? As both inhabitants and watchers of technology trends, we

certainly hope so.

rapidlydecreasing priceand increasingcapabilities areallowing amateursto build miniaturefactories


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The MakerBot Thing-O-Matic

Investment and adoption of new forms of media (including thislatest wave of digital/social media) are ultimately a play on thevalue generated from optimizing human social and commercialinteractions. Although we hardly believe that the efficiency of human interactions will reach a maximum anytime soon,advancements have a habit of coming in waves, usually followingthe introduction of a disruptive technology. While there should beenough energy in the current frenzy of digital/social media activityto last at least another couple of years, the astute and far-seeingventure investor should ask themselves what comes next. Althoughthey say that prediction-making is hard, especially about the future,we think theres an interesting lesson to be drawn from the lastdecade and a half.

The dot.com boom of the late 90s was one of the greatest loveaffairs investors had ever had with virtuality. It wasnt enough thatthe securities themselves were representations of a future potentialfor wealth (an inherent unreality) but that the underlying propertieswere as virtual as the investing public had ever seen, often beinglittle more than websites in search of a business model. When thedot.com asset inflation edifice collapsed, investors went in searchof tangibility. How better to invest in tangibility than to buy land,houses and other real estate? We saw where that tangibleinvesting frenzy went. Now virtuality is back in fashion and digitalmedia startups are the hottest thing on the investing circuit. Thependulum could swing all the way back, but why should it? Thelogical end of thesis and antithesis is not a return to thesis but tosynthesis. Open source hardware is a means to a new wave of

When the dot.comasset inflationedifice collapsed,investors went insearch of tangibility Nowvirtuality is back infashion


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value creation, where the digital/social media revolution crossedwith accessible commodity hardware is creating a new wave of devices.

Frequent readers of this newsletter will know that we are bigbelievers in a collection of sectors that many have long viewed ascapital intensive and thus underappreciated as private investmentopportunities these include satellite services, emerging wireless,geospatial systems, unmanned systems and commercialspaceflight as well as and the intersections between them. Whilethere will always be some part of these sectors that will be capitalintensive, the collective influence of commercial-off-the-shelf andopen source hardware, rapid prototyping and a lean entrepreneurialmindset ought to drive more capital-efficient, high value solutions inevery one of these sectors. We think that investors ought to viewthe ability to leverage these components as a key aspect tosuccess. After all, how can you win the future if you arent using itsbuilding blocks?

By Ian FichtenbaumNear Earth LLC

the collectiveinfluence of commercial-off-the-shelf and opensource hardware,rapid prototypingand a leanentrepreneurialmindset ought todrive more capital-efficient, highvalue solutions


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Near Earth, LLC ("Near Earth") has published this report solely for informationalpurposes. The report is aimed at institutional investors and investment professionals,and satellite, media and telecom industry professionals. This report is not to beconstrued as a recommendation or solicitation to buy or sell securities. The report waswritten without regard for the investment objectives, financial situation, or particular needs of any specific recipient, and it should not be regarded by recipients as asubstitute for the exercise of their own judgment. The content contained herein is basedon information obtained from sources believed to be reliable, but is not guaranteed asbeing accurate, nor is it a complete statement or summary of any of the markets or developments mentioned.

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Building Blocks of the Future

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