Inside the Deal: Tikhon Bernstam’s Investment in Cruise
This is the first post in a new series called Inside the Deal, where we interview the syndicate leads behind some of the most high-profile, invite-only deals on AngelList.
In this interview with Tikhon Bernstam, we go inside one of the largest exits from an equity fundraising platform to learn:
- Why he invested in Cruise
- How he pulled their invite-only deal together on AngelList
- What he thinks of GM’s reported $1B+ acquisition in March
- Why he thinks he can’t lose money investing in autonomous transportation
Julie Ruvolo: Tikhon, how did you start investing?
Tikhon Bernstam: I started Scribd in 2007, then in 2011 I started Parse, a platform that helped make mobile apps faster and easier. Parse sold in two years to Facebook for $85M.
Since then I’ve been investing pretty much full-time and working on a few hard technical projects that might evolve into startups. A lot of investors don’t do much but write checks, but I try to spend a lot of time with the companies if they want help. From buying domain names to GitHub and Twitter handles, key hires and recruiting.
Zach Coelius led a $100K investment on AngelList as part of the $12.5M Series A led by Spark Capital last September. You then led another $100K investment on AngelList in the next round. How did you get into the Cruise deal?
I was one of the first investors in Cruise. I put in $25K at the first cap of $10M in 2014. I’m close with [Cruise founder and CEO] Kyle Vogt and [co-founder] Daniel Kan; they’re both longtime friends. I met Kyle when he dropped out of MIT to start Justin.tv with Emmett [Shear], Justin [Kan], and Michael [Seibel]. He built the camera Justin wore on his head. Justin.tv later pivoted to Twitch, which sold for $1B to Amazon. So Kyle has had two of the largest Y Combinator exits to date.
Zach has also known Kyle since the Justin.tv days. Kyle told him randomly over coffee he was raising another round for Cruise, which is when Zach put his deal together.
I follow the Drew Houston rule — you always invest in what your friend is doing, because if they are successful and you don’t, you feel like a punk. We all wish we had invested in Dropbox. I tried to put in $10K, my first angel investment, but I only had $20K in the bank, and at the end of the conversation, Drew was like, “I have more money than you, so you can’t invest.”
For Cruise, I had helped Kyle a bit with the strategy for the Series A and wanted to invest more than my initial $25K. I wanted to put more into Cruise in the Spark round in 2015, but I didn’t know about AngelList at that time. Then I was talking with Naval, who I had co-invested with in the past, he and Jake were supportive of the idea of an AngelList syndicate of $100K. That’s how I started working with AngelList. Since then I have done quite a few deals. It’s been a lot of fun!
What’s the advantage to working with AngelList?
I tend not to write large checks as an angel investor, but sometimes there’s more allocation than I can take. Getting AngelList investors involved is so helpful. I would do it again without the carry, but don’t tell them that.
For example, there have been a lot of cases where I had an allocation of $250K but won’t do that personally. I’ll do $50K, and AngelList will help raise the rest.
How do you bring your deals to the funds on AngelList? You’ve had Maiden Lane and CSC Upshot invest in most of your deals on the platform.
I’ll reach out to Naval, Jake or Tom at AngelList and say, “There’s an interesting deal you might want to check out with extra allocation…”. They have wanted to every time because I’ve had some good ones recently. Sometimes I also bring in other LPs.
How do you look at the self-driving // future of transport space?
It’s just beginning. With a company like Cruise, worst case scenario, especially for a seed round, is that you are going to 5X your money because there are so many acquirers. You just have to hope they don’t want to sell too early because they’ll likely be getting a lot of M&A offers along the way — not just from the usual suspects like Apple, Google, Tesla, Uber, but also all the car manufacturers.
BMW spends roughly $4B a year on research, and how much do they have to show for it? GM also spends several billion a year on research, and their market cap is roughly $50B. Does acquiring Cruise make GM worth 2% more by helping turn it into more of a software company? Absolutely, I’d say.
Regarding the valuation on the Cruise deal, GM’s stock went up something like 1% on the announcement, which you could argue would represent roughly half the acquisition price right there. GM plus Cruise is certainly worth more than GM alone, with another billion in the bank.
More importantly, what’s the cost of falling behind in the transformation of the auto industry into software companies? Those who are unable to transform into software companies risk playing in a low-margin commoditized hardware game. It’s better to be Microsoft than a Dell or Gateway PC manufacturer.
Now imagine for GM — They might arguably have best self-driving technology and team, overnight. It’s a brilliant acquisition by them. I would have paid more than $1B easily.
Cruise refocused on cities and urban driving about a year ago — the opposite of Tesla, which focused on the highway. I have driven in Cruise car, and I just sat there while it went across the city. It was amazing. I think it’s how Kyle closed his investors. He showed them the product, and they invested. Who needs a deck when the product pitches itself?
In 20 years, I think it may even be illegal for a human to drive a car on many public roads. It will be too dangerous. You won’t just be endangering yourself, and you’ll be endangering everyone around you.
There are 50K casualties a year in the US alone on the roads (almost double the number of deaths caused by firearms). In 2010, the World Health Organization estimated there were 1.25 million driving-related fatalities. These cars will drop that to close to zero. Just like you can’t go running around with an assault rifle.
What will happen to motorcycles, if driving your car becomes illegal?
I think you’ll see more 1-seater cars that are very skinny so that you can have three per lane, and they will have wifi, and you can just work in them. You probably won’t even own them — it will be more like an Uber model.
Car ownership is going away. There are more than 800 cars in the USA per 1000 people, and occupancy rates are something horribly inefficient like 1.6 passengers per vehicle. The typical car is parked 95% of the time. A shocking percentage of urban real estate is dedicated to parking spaces for these giant steel contraptions. I saw an estimate that something like 40% or 45% of traffic in cities might be caused by folks driving around in search of parking spaces.
This is a real threat to companies like Uber, by the way, because most of the cost of the Uber ride is the driver. If someone else comes out with a dramatically cheaper fleet of autonomous vehicles before Uber, which one would you use? Whoever has the cheapest fleet of autonomous cars will win. It’s very hard to displace the incumbents in marketplace industries, but this is how you do it in the Uber/Lyft space. Owning the best, cheapest, and widespread supply can topple even a goliath like Uber. Just look at how fiercely Uber and Lyft have been fighting over drivers. They get it.
Uber paid a fortune to get all that talent from CMU and is putting tons of effort in Arizona into autonomous vehicle technology. Everyone sees the writing on the wall and is desperately trying to build this technology. It’s rumored that engineers who leave Tesla to join Apple get a $250K bonus. Google is rebooting their effort. But Google has so much to lose, by potentially endangering their cash-cow ad business with any expensive mistakes here, that it’s hard to imagine they’ll be the first to market here.
You’d be hard-pressed to lose money investing in this space right now because there is going to be tens or even hundreds of billions in M&A and IPOs going forward. Cruise at $1B may look very cheap one day. Acquirers think about how much value the acquisition adds to their long-term market cap. If you’re really thirsty, sometimes you suck it up and pay $3 for a bottle of water if you’ve got no other options. Value and cost aren’t the same things. If Google pays $20 million to acquire an analytics company that might look expensive at the time, but that deal could increase the value of its ad business by an order of magnitude, they’d be insane not to do it.
What will happen to traffic when humans stop driving? How much of it is actual road capacity versus human behavior?
There are already studies on this. Most traffic is caused by humans driving poorly. If we all had smart software driving our cars, we wouldn’t have a lot of the traffic jams. I think it will become much less of a problem.
Think about decreasing the cost of deliveries for UPS and FedEx, who they famously do four right turns because it’s faster than making one left turn. But when they start doing deliveries without people, whether it’s pizza or Amazon, they’ll throw it in the trunk, it will come to your house, and you’ll get it out. Or you’ll have some SaaS for a human, like your doorman, to get and take it for you.
In addition to self-driving cars, there is going to be a significant trend to replace last mile logistics, which is potentially a much bigger opportunity than self-driving cars. What happens to FedEx and UPS when you don’t need them anymore?
In the future, the last mile delivery will be done by these conservative robots. With a lower cost of last mile delivery, you’re going to have a whole bunch of apps made for these roaming bots. Just wait till FedEx or UPS starts buying these startups, like GM just bought Cruise. They’re going to realize soon the real value is in last mile delivery, and the rest is commoditized, and they are going to freak out.
*This interview has been edited for clarity.
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Originally published at blog.angel.co on April 11, 2016.
