Investing in Automotive Data With Otonomo Stock
The most credible bull case for Tesla right now involves big data. The race to capture the trillion-dollar autonomous vehicle opportunity will be won by the company with the most extensive training data set. Hundreds of thousands of Teslas are out there right now gathering big data to train their autonomous algorithms on. These connected cars are then able to share with one another so that they eventually become indistinguishable from the Borg.
Training data is just one type of big data that can be collected from connected cars. Driver safety has been a big focus for companies like Cambridge Mobile Telematics or Zendrive which both collect data on driver safety and use it to make people safer drivers. While these use cases will become less important once we reach full autonomy, there is plenty of other data cars can generate.
One of the companies dabbling in this space is Otonomo with their automotive data platform that’s connected to over 40 million vehicles. They’re now planning to go public with a SPAC called Software Acquisition Group Inc. II (SAII).
About Otonomo Stock
Founded in 2015, Israeli startup Otonomo has taken in around $89 million in disclosed funding from investors that include Avis, Bessemer Venture Partners, and the third-largest chaebol in South Korea, SK Group. The CEO and co-founder of Otonomo, Ben Volkow, already has one successful exit under his belt. In 2012, Traffix Systems, which was co-founded by Mr. Volkow was sold to F5 for $135 million. (Bessemer was also an investor in Traffix.) It’s comforting to know that the person making promises about future growth has a track record of building successful businesses.
A 2017 article by Globes covering Otonomo’s $25 million Series funding round led by $40 billion auto parts giant Delphi Automotive (now Aptiv) talks about how Otonomo’s connected car marketplace will be “integrated with Delphi products to offer a complete data acquisition and monetization solution for automakers.” It all sounds really promising, until you look at the only form of traction that matters in our book – revenue.
Where’s the Money?
We use revenues as a proxy for traction because we’re risk-averse investors who are willing to sacrifice some upside to avoid as many Theranos stories as possible. Many venture capitalists won’t even invest in pre-revenue companies, so expecting a publicly-traded company to show us the money isn’t asking for much. Say all you want about the progress you’re making but the proof is always in the revenues. For example, take a look at this slide in the Otonomo pitch deck.
Forty million cars look like some great traction, so we’re shocked to see they’re expecting only about $400,000 in revenues for 2020. That’s not a typo. If you’ve connected 40 million cars and you haven’t been able to monetize that data yet, that’s a serious concern from where we’re sitting. Like all SPACs, they’re on the cusp of revenue growth. After $400K last year the number is expected to jump to $3 million this year, and then skyrocket +700% to $24 million in 2022.
A 2018 article by InformationWeek talks about how Otonomo isn’t monetizing their data, they’re simply aggregating it and selling it as “alternative data” that can be used for any number of use cases. The article says “insurers were one of the earliest buyers of data on Otonomo’s marketplace,” and that Otonomo was “conducting trials with two ride-hailing companies.” So, where’s the money?
Otonomo isn’t alone in their quest to monetize automotive data. IBM, Microsoft, and Verisk all offer connected car platforms. In April 2017, we wrote about 10 Connected Car Technology Startups collecting data for everything from location to windshield wiper status. One startup called Smartcar (backed by Andreessen Horowitz) made some interesting claims in April 2019 with their CEO stating that Otonomo was “illegally cloning their product.” Whether or not those claims are true is left for the courts to decide, but it’s a good segue into something we’ve become increasingly concerned about when it comes to SPACS, especially foreign companies looking to back their assets up into shells.
The Elephant In The Room
Let’s take our Otonomo hats off for a second because there’s another elephant in the room we’re going to talk about that will piss some people off. SPACs make it very easy for anyone to go public without much scrutiny. Consequently, there will be companies going public that would never make the cut if they pursued a traditional IPO process. That’s not just because all they have is a team and a dream. It’s because eventually, companies going public will start to look and smell like over-the-counter (OTC) companies, where the reverse merger concept originally began. In other words, they throw off more red flags than a Chinese military parade.
Dozens of companies traded on the Nasdaq come from Israel. Some of the brightest minds on the planet can be found in Israel along with some of the most cunning scammers on this planet. For anyone who has no idea how bad the problem is, check out Mariana Van Zeller’s show Trafficked, Episode One. Then you’ll understand why we’re going to be extremely critical when it comes to investing in foreign companies with little or no revenues that fall under foreign jurisdictions which present an added layer of risk. Our recent discussion of Ali Baba’s VIE structure is a good example of risks that arise when you start to invest in foreign companies that back door their way onto major exchanges.
While Otonomo comes to the table with world-class investors on their cap table, there will be SPACs happening that have no business going public. Since the SPAC structure already screws retail investors, there’s no point in getting screwed even more by investing in a dud. We’ve only invested in one SPAC, and might consider Velodyne or Butterfly Network, but that’s it. You know what those three SPACs all have in common? Meaningful revenues and revenue growth. That’s mandatory before we open our wallets.
The volume of SPACs happening these days is overwhelming. One common theme seems to be miniscule revenues where hockey-stick growth is just around the corner. We strongly advise against investing in the promises of future growth and will only consider investing in companies that have already demonstrated they’re capable of meaningful revenue growth.
Should the deal go through as planned, shares will trade under the ticker OTMO.
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