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 a
sudden, the valuation and growth of the latest wave of digital media
…valuation and startups have been going through the roof unlike any time since
growth of the latest before the dot.com bust. Multi-billion dollar revenue-run rates, stock
wave of digital appreciation and glamorous movie portrayals of tech startups
media startups means that venture capitalists have gone back to pouring $41
have been going million into pre-revenue, pre-launch startups, a fact that should
through the roof delight those who remember the good old days of about a dozen
unlike any time years ago. This time around, however, a big part of the story is how
since before the much of the activity is not just located in Silicon Valley, but located
dot.com bust here in New York, an indicator of how much this latest wave is
linked to this city’s strengths – commerce and media. Nowadays,
it’s 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 and
demos are hopping onto the latest wave of digital and social media.
Being in the midst of it all is certainly a gratifying and educational
experience, 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 have
become much cheaper to fund and they now scale virally through
social networks - some even garnering millions of users in a matter
of weeks. Successful start-ups now achieve relatively quick exits
Without the great due to the hyperactivity of the M&A departments of about two
advancements in dozen or so of the top tech companies. Those in the mood to opine
storage capacity, about the macro trends in technology will cite the emergence and
processing power convergence of a holy trifecta of mobile, social and local. App-
and bandwidth enabled smartphones connected on the Facebook / LinkedIn /
over the last Twitter social graph enabled by GPS and the craze for “check-ins”
decade, many of is creating a whole new set of angles from which to harness
these commerce and social attention.
achievements
would be While it’s hard to disagree with any of that, it’s equally noteworthy
unimaginable. to point out the role that hardware has played in all of this. Without
the great advancements in storage capacity, processing power and
bandwidth over the last decade, many of these achievements
would be unimaginable. The largest datacenters of the late 1990s
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could never have handled anywhere near the data that YouTube,
Facebook, Hulu and other sites now demand, let alone the very
…economic many cloud-based applications built along with them. Modern
organization has commodity servers and an enormous datacenter infrastructure
made hardware make this happen. Modern smartphones too, depend on the
cheap and advancement of technology. Without abundant supplies of
available in mass affordable high-capacity memory, high-powered processors, thin
quantities… capacitive touch-screens, high-density Lithium-Ion batteries, as well
as cheap baseband and GPS chipsets, mere cell phones could
hardly have supported so many new ground-breaking applications
as they would not be “smart” enough.

Not just technology but economic organization has made powerful

new hardware cheap and available in mass quantities. The rise of
Electronic Manufacturing Service (EMS) providers, enormous
confederations of mostly Asian-based electronics manufacturing
facilities, has helped Western design companies such as Apple,
Motorola, Amazon, HP and many others to turn visions and
revisions of new designs intotheir millions of units of the latest and
greatest gadgets delivered to eagerly awaiting customers latest and
greatest gadgets out of mostly commoditized hardware
components. Even bookstores can now offer their own e-reader
and tablet designs and products because of the EMSs. Economic
nativists may object that manufacturing has left America to go
overseas, but it’s hard to argue with the value proposition. Apple,
the industrial design and marketing company, is far more profitable
than any of its contract manufacturers. Add the hundreds of billions
of dollars in value added by the latest wave of digital media giants
…“Internet of (Facebook, Groupon, Zynga, Foursquare, Twitter, etc…) and one
Things” must cannot escape the conclusion that there’s more value in being the
leverage the designer, brander and app programmer than it is to be the
market’s hardware maker.
imagination to
enable user- Or is it? Perhaps building things shouldn’t just be the domain of
generated enormous EMSs in far-off lands and perhaps hardware
hardware just as manufacturing should be an integral part of the digital/social
much as modern revolution, not just a supporting pillar of it. We’ve talked a lot about
social media machine-to-machine communications in these pages in the past,
leverages user- often about how the desire to connect anything, anywhere is driving
generated content more and more traffic onto the world’s wireless networks. But just
as interesting as bandwidth demands are the multiplicity of devices
needed to connect this everything. Large hardware developers can
only meet the needs of only the broadest of markets but the world
is filled with things of every imaginable size, shape, velocity and
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personality. If the “Internet of Things” is to really take off, it must

leverage the market’s imagination to enable user-generated
hardware 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 by
custom 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 through
the torrents of geospatial information coming down from cameras
mounted on their multitude of unmanned aerial vehicles? Well, we
have, at least. A recent article about the Air Force Research lab in
Rome, NY discussed how researchers had created one of the
world’s largest, fastest and, astoundingly, cheapest
supercomputers to process all that data. Their secret? Over 1700
Playstation-3 game consoles linked together, the same devices that
anyone can buy off a shelf, only strung together with custom
design. It has all the power of a supercomputer at a tenth of the
cost. How about how a father and son in Brooklyn builtding a
weather balloon withcraft to take HD video payload to take pictures
of the Earth from 110,000 thousand feet? This family achievement
was eEnabled by high definition cameras, transmitters and GPS
devices found in hobby shops and put together by athe do-it-
yourself ethic.

This isn’t just limited to building cheap supercomputers, homemade

satellites or custom sprinkler systems but is good for tracking
In colleges and devices, home automation equipment, smart grid applications,
home garages, security devices and any number of other machines that only the
hobbyists and collective creativity of several billion human minds can imagine. For
entrepreneurs more power users, there is beginning to emerge a class of Open
have been Source Hardware enabled by cheap, customizable microcontrollers
discovering the and modules. Here in New York, a young venture-backed startup
versatility of ready named Bug Labs (www.buglabs.net) is developing a line of
to use and interchangeable modules to allow universal hardware
programmable customization. They are surely not the only part of this movement.
microcontrollers In colleges and home garages, hobbyists and entrepreneurs have
been discovering the versatility of ready to use and programmable
microcontrollers. Arduino (www.arduino.cc) boards, pictured below,
were the creation of a student team in Italy in 2005 in an effort to
make hardware creation easier for all - not just to hobbyist
electronics engineers, but to the millions of software engineers.
They have since shipped tens of thousands of boards and spawned
dozens of variants and extensions. For those who want their
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projects to have instant connectivity, another New York-based

startup has introduced the Netduino (www.netduino.com), an
Arduino variant with built in .NET extensions ready to be
programmed. Not a programmer and want a piece of the action?
We’re sure someone, somewhere is working on an interface that
makes it as easy to make your own device as it is to grow your own
FarmVille.

…rapidly The Arduino board – cheap, simple, powerful and adaptable

decreasing price
and increasing What if users were able to make any item or device exactly how
capabilities are they want, when they want, and in as small a quantity as they
allowing amateurs want? As far as it may seems that we are from achieving thisat
to build miniature goal, note that one of the most interesting devices to come down
factories the line recently are 3D printers, devices built on the same
principles as modern ‘2D’ printers, but designed to build objects
upwards from defined digital designs. Originally conceived as rapid
prototyping machines for engineers, architects and other
professions, their rapidly decreasing price and increasing
capabilities are allowing amateurs to build miniature factories.
Although there are a number of players in the sector offering a wide
variety of 3D printing solutions, how could we resist mentioning
(and showing below) yet another New York-based startup
MakerBot (www.makerbot.com), who offers wood-paneled (!) 3D
printers for only a couple thousand dollars? Decades since it
stopped being a center of production and became a professional
services hub, is this a new beginning for manufacturing in the Big
Apple? As both inhabitants and watchers of technology trends, we
certainly hope so.
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The MakerBot Thing-O-Matic

Investment and adoption of new forms of media (including this

latest wave of digital/social media) are ultimately a play on the
value generated from optimizing human social and commercial
interactions. 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 following
the introduction of a disruptive technology. While there should be
enough energy in the current frenzy of digital/social media activity
to last at least another couple of years, the astute and far-seeing
venture investor should ask themselves what comes next. Although
they say that prediction-making is hard, especially about the future,
When the dot.com we think there’s an interesting lesson to be drawn from the last
asset inflation decade and a half.
edifice collapsed,
investors went in The dot.com boom of the late 90s was one of the greatest love
search of affairs investors had ever had with virtuality. It wasn’t enough that
tangibility … Now the securities themselves were representations of a future potential
virtuality is back in for wealth (an inherent unreality) but that the underlying properties
fashion were as virtual as the investing public had ever seen, often being
little more than websites in search of a business model. When the
dot.com asset inflation edifice collapsed, investors went in search
of tangibility. How better to invest in tangibility than to buy land,
houses and other real estate? We saw where that “tangible”
investing frenzy went. Now virtuality is back in fashion and digital
media startups are the hottest thing on the investing circuit. The
pendulum could swing all the way back, but why should it? The
logical end of thesis and antithesis is not a return to thesis but to
synthesis. Open source hardware is a means to a new wave of
 SPECIALISTS IN SATELLITE, TELECOM AND AEROSPACE INVESTMENT BANKING

value creation, where the digital/social media revolution crossed

with accessible commodity hardware is creating a new wave of
devices.
the collective
influence of Frequent readers of this newsletter will know that we are big
commercial-off- believers in a collection of sectors that many have long viewed as
the-shelf and open capital intensive and thus underappreciated as private investment
source hardware, opportunities – these include satellite services, emerging wireless,
rapid prototyping geospatial systems, unmanned systems and commercial
and a lean spaceflight as well as and the intersections between them. While
entrepreneurial there will always be some part of these sectors that will be capital
mindset ought to intensive, the collective influence of commercial-off-the-shelf and
drive more capital- open source hardware, rapid prototyping and a lean entrepreneurial
efficient, high mindset ought to drive more capital-efficient, high value solutions in
value solutions every one of these sectors. We think that investors ought to view
the ability to leverage these components as a key aspect to
success. After all, how can you win the future if you aren’t using its
building blocks?

By Ian Fichtenbaum
Near Earth LLC
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