Levandowski consulting for Uber

In that post I wrote:

… no funding appears to have been taken from Uber, or any other company (If there turn out to be payments from Uber to Otto prior to the acquisition then that would be Very Bad for Uber).

Not long after, Johana Bhuiyan at Recode posted a story which suggests that Uber CEO Travis Kalanick hired Otto CEO Anthony Levandowski as a consultant for Uber’s self-driving car around February-March 2016. Even after reading the article several times and sleeping on it, I still can’t quite believe it.

Now, sources are adding more to that claim. Kalanick hired Levandowski as a consultant to Uber’s fledgling self-driving effort as early as February 2016, six months before Levandowski publicly got his company off the ground, according to three sources.

If this was a legitimate business arrangement, the timing makes no sense at all. Levandowski had just left Waymo weeks earlier. While it might have been difficult for Alphabet to bring a lawsuit on these grounds, the optics for Levandowski advising Uber are terrible. Additionally, Uber and Otto are competitors in the self-driving vehicle space, and Uber is famously aggressive. That a CEO of one company would be advising one of their direct competitors within months of forming their own self-funded startup is truly strange.

If this wasn’t a legitimate business arrangement, then it also doesn’t make much sense purely because it looks so suspicious, especially in light of Alphabet’s trade secrets lawsuit. It brings the start of Uber’s direct involvement with Otto to within weeks of Otto being formed. If the plan all along was for Otto to join Uber, then it does make some kind of twisted sense for him to be advising the Uber self-driving car team.

A little birdie tells me that we haven’t seen the last on this particular thread of the story.

Naked Capitalism on Uber

Hubert Horan has just published another article in his series on Uber and whether it can ever increase overall economic welfare.

The answer is that Uber is attempting to implement an innovative and disruptive strategy for achieving market control — a strategy radical different from every prior tech oriented startup — but those disruptive innovations have nothing to do with technology or the efficient production of urban car services.

Otto purchased another Lidar company

A reader sent me a link to this article by Reuters discussing an acquisition of Tyto LIDAR. The title is “Uber’s self-driving unit quietly bought firm with tech at heart of Alphabet lawsuit”. The title isn’t accurate, as it was Otto that acquired Tyto (for an undisclosed sum) in May 2016. Uber then acquired Otto/Tyto in August 2016.

Levandowski: “We did not steal any Google IP”

Forbes published an article on 28 February, 2017 which contains part of an interview they did with Levandowski in October 2016.

Q: The question is, Google has been working on this for however many years. You guys (Otto) are a year old or something like that.

A: We started in January. How did we catch up?

We did not steal any Google IP. Just want to make sure, super clear on that. We built everything from scratch and we have all of the logs to make that—just to be super clear.

But this is my fourth autonomy stack. I did the DARPA Grand Challenge.

I wonder if “we have all of the logs” is also going to be Alphabet counsel’s opening argument?

N.B. all of this article is sourced from filings and allegations that Alphabet has made, as well as reading between the lines. Uber will probably contest these claims in court.

Update: I’ve published some updates on the lawsuit. You can keep track of all the posts related to the Alphabet lawsuit here.

In the last few weeks Alphabet filed a lawsuit against Uber. Alphabet and Waymo (Alphabet’s self-driving car company) allege that Anthony Levandowski, an ex-Waymo manager, stole confidential and proprietary information from Waymo, then used it in his own self-driving truck startup, Otto. Uber acquired Otto in August 2016, so the suit was filed against Uber, not Otto.

This alone is a fairly explosive claim, but the subtext of Alphabet’s filing is an even bigger bombshell. Reading between the lines, (in my opinion) Alphabet is implying that Mr Levandowski arranged with Uber to:

1. Steal LiDAR and other self-driving component designs from Waymo
2. Start Otto as a plausible corporate vehicle for developing the self-driving technology
3. Acquire Otto for $680 million

Below, I’ll present the timeline of events, my interpretation, and some speculation on a possible (bad) outcome for Uber. The timeline references section numbers from Waymo’s amended filing, so you can read the full context yourself. You can also read the original filing.

Timeline of events

The main timeline of important events is as follows:

• Summer 2015 - Anthony Levandowski told Pierre-Yves Droz, a colleague at Waymo, that he had talked with an Uber executive about forming a self-driving car startup and that Uber would be interested in buying that startup. (Droz 28)

• November 17, 2015 - Levandowski registers a domain for 280 Systems, the company that would later become Otto. 280systems.com can be linked to a public email sent February 4, 2016 from someone with a 280systems.com email address looking to do testing of a semi truck with “specialized equipment”. (Filing 41)

• December 3, 2015 - Mr Levandowski searched the Alphabet intranet for instructions on how to access Waymo’s design server on his work laptop. Based on Gary Brown’s deposition (a Google forensic security engineer) this was an SVN server. (Brown 15)

• December 11, 2015 - Anthony Levandowski installed TortoiseSVN and downloaded 9.7 GB of data from the SVN repository. (Brown 17)

• December 14, 2015 - A USB card reader was attached to the laptop for eight hours. Google doesn’t appear to have logged what the laptop did over that time, but the implication is that data was copied from the laptop to a memory card. (Brown 18)

• December 18, 2015 - Levandowski reformatted his work laptop from Windows to Goobuntu (Google’s custom version of Ubuntu). This laptop wasn’t used again after December 21. To be fair, it was only used three times between March and November 2015. Presumably, he was still doing work during this time, just on another computer? (Brown 19, 20)

• January 4, 2016 - Levandowski downloaded five confidential technical Waymo documents from Google Drive to a personal device. (Brown 22)

• January 5, 2016 - Levandowski took a walk with Droz. In Pierre-Yves’ deposition, he claims that Levandowski “told him that he planned to ‘replicate’ Waymo’s technology at a new company he was forming.” (Droz 27)

• January 11, 2016 - Levandowski downloads another file from Google Drive relating to Waymo’s self-driving car development schedule and timeline. (Brown 23)

• January 14, 2016 - Levandowski was seen meeting at Uber’s headquarters and the news travelled back to Droz. Droz asked Levandowski about this, and he admitted he had met with Uber and was looking for investors for his new company. (Droz 29, Filing 48)

• January 15, 2016 - Levandowski officially forms 280 Systems (in stealth mode). Note that this was one day after his meeting with Uber. (Filing 49)

• January 27, 2016 - Levandowski resigns from Waymo without notice. (Filing 49)

• February 1, 2016 - Levandowski forms Otto Trucking (this is also in stealth mode). (Filing 49)

• Spring (March-May) 2016 - “Kalanick began courting Levandowski this spring, broaching the possibility of an acquisition … The two men would leave their offices separately—to avoid being seen by employees, the press, or competitors.” - Bloomberg. Update: I forgot about this article, but was reminded by hammock on Hacker News.

• May 17, 2016 - Otto launches out of stealth mode. As far as I can tell, they never took on any venture funding, instead self-funding (emphasis mine):

  Many of Otto’s founders have done well for themselves over the years, and it shows: the company is entirely self-funded right now without any external investment. (In the wake of the reported $1 billion Cruise Automation sale to General Motors, I ask Ron if the plan is to get acquired, but he’s insistent that they’re focused on bringing a product to market.) Even George Hotz’s scrappy upstart Comma.ai has recently taken on venture funding from Andreessen Horowitz. - The Verge

  In the photo for their announcement I count 35 people. By the time Otto was acquired, they had 91 employees. This seems like a lot of salary commitment to take on via self-funding by Otto’s four co-founders (all ex-Google). On the other hand, depending on the incentive pay they received at Google, they may have had plenty to cover several years of salaries between them.

• August 2016 - Levandowski received his final multi-million dollar payment from Google (presumably a deferred bonus?). (Filing 55)

• August 19, 2016 - Shortly after the final payment was awarded, Uber announced a deal to acquire Otto for $680 million. (Filing 55)

• Summer 2016 - Levandowski’s sudden resignation, Otto’s quick launch, and Uber’s subsequent acquisition of Otto caused Waymo to suspect that their IP had been misused. Waymo investigated this and discovered Levandowski’s actions prior to leaving. (Filing 57)

• December 13, 2016 - A Waymo employee was accidentally copied on an email from one of its LiDAR-component vendors titled OTTO FILES. The email contained a drawing of what appeared to be an Otto circuit board that resembled Waymo’s LiDAR board and shared several unique characteristics with it. (Filing 59)

• December 2016 to February 2017 - Waymo tried to obtain further information on whether Uber was using their LiDAR designs. This is also known as “Getting your ducks in a row”. (Filing 60)

• February 9, 2017 - A Nevada public records request turned up a filing Otto/Uber made that they were using an “in-house custom built 64-laser” LiDAR system. This was enough to confirm to Waymo that they Uber was using a LiDAR system with the same characteristics as Waymo’s. (Filing 61)

• February 23, 2017 - Alphabet makes their first filing against Uber.

• March 10, 2017 - Alphabet amends their filing, and asks for an injunction against Uber’s self-driving car program.

Implications

From Waymo’s filings, it seems that they have Levandowski dead to rights on stealing their LiDAR designs. That alone should be enough to bring Uber’s self-driving car program to a halt and cause some big problems for Levandowski. California’s Trade Secrets law is weaker than other states, but if successful, Waymo will be able to seek an injunction, damages, and attorney’s fees. Because all law is securities law, the SEC may also be able to bring a case against Uber (similarly to their case against Theranos).

I’m guessing, but I think the reason that Alphabet hasn’t directly accused Uber of conspiring with Levandowski is that they don’t have enough evidence. When they get to discovery, they will be looking for it. You would think that no-one would be dumb enough to send emails like that, but you would be wrong.

Several things suggest Otto’s intent to be acquired by Uber:

• Levandowski told Droz in the summer of 2015 that he had talked to an Uber executive about forming a self-driving car company and Uber acquiring them. This is a pretty clear signal!
• Levandowski formed 280 Systems the day after meeting with Uber executives and two weeks before leaving Waymo. He claimed he was talking to them about funding, but no funding appears to have been taken from Uber, or any other company (If there turn out to be payments from Uber to Otto prior to the acquisition then that would be Very Bad for Uber). The timing of Levandowski’s actions suggests certainty about something, and if it wasn’t funding, then what was it?
• According to a Bloomberg article in August 2016, Travis Kalanick and Anthony Levandowski started talking about an acquisition in the Spring of 2016. Spring is usually defined as March-May, which sounds like they may have been talking about an acquisition before Otto had even been publicly unveiled. I’m a bit skeptical about Uber’s statements for this article, given Alphabet’s allegations, but it seems like a weird kind of detail to make up.
• That Otto hadn’t received funding from any VC’s is unusual. With 91 employees, getting paid $150k/year (this might even be too low given they are working on self-driving cars, one of the hottest spaces in tech right now), they would have had a $13.6 million/year burn rate just for salaries. Otto always aimed to get to market quickly, but getting to profitability without funding seems like it would have been very hard, especially on the accelerated timescale they were working towards and the need to likely hire many more people to get to production. All of Otto’s public self-driving car and truck competitors have taken venture funding. However, as someone working on a bootstrapped SaaS application, I’m sympathetic to wanting to self-fund. Update: Counterbalancing this point, it looks like Levandowski had previously sold three startups to Google for nearly $500 million. Those facts are somewhat in dispute, and it’s not clear how much he personally made from the sales. However it does seem plausible that he would have had enough cash to self-fund Otto with his co-founders.
• Otto was acquired only four months after their public launch. While it’s not that unusual for companies to be acquired quickly, it is still very quick, and for a lot of money.
• Uber has considerable internal self-driving car expertise. I’m speculating, but it seems likely that Uber would have found out (or should have found out) during due diligence, that Otto’s LiDAR system could not have been built and developed independently in the six months the company was operating. Updated: Otto purchased Tyto Lidar in 2016, so they may argue that their Lidar system came from Tyto.

There is no smoking gun email (yet), but there is a strong implication that Uber and Otto planned this from the start.

(Possible) Consequences

If this is true and can be proved in court, then it would be a massive blow to Uber. The worst case for Uber would be:

• Uber gets dealt an injunction on their self-driving car project. They have to start again, a long way behind other companies.
• Uber’s name is mud, they struggle to raise more money from investors, especially on good terms. Uber has raised at least $15 billion at a $68 billion valuation.
• Uber is currently losing money at $2-3 billion/year. Uber passengers only pay 41% of the cost of trips, with investor capital making up the difference. Update: I was wrong about Uber passengers only paying 41% of the cost of trips. I can’t find a publicly available number on how the trips are subsidised. Regardless, “Lose a billion here, a billion there, pretty soon, you’re talking real money.” Update 2: See the appendix for more details on this.
• With significant negative margins, no way to become profitable in sight, and a terrible media narrative after the Alphabet lawsuit, sexual harassment, aggressive/illegal behaviour, e.t.c., they cannot IPO.
• Because their self-driving car plans are still so far off, they can’t lower their costs to become revenue neutral.
• I suspect that a large part of Uber’s appeal is their low pricing. If they were to raise prices to cover their driver costs (not even covering the significant costs of their own operations), demand would dry up.
• Without any way to raise more money or reduce their costs, Uber runs out of money and folds.

This is admittedly the very worst case scenario for Uber, and there are lots of places along this downward trajectory that they could pull up from. If it’s proven that Uber intended to acquire Otto while Levandowski was at Google (this might be established more concretely in discovery), then it’s hard to see how Uber’s CEO Travis Kalanick could keep his job. Uber has had a bad month, and it doesn’t look like things are going to be getting better any time soon.

Postscript

This post is made up of a mix of filings from Waymo, reading between the lines, and some speculation. Keep in mind these are all allegations and haven’t been proven in court. Please let me know if I’ve made any mistakes, and I’ll correct them.

I’d encourage you to go over the filings yourself, as they are very readable, and give a lot more context to the story than I was able to here.

Appendix

I originally posted that Uber was only charging 41% of the cost of the trips, based on this article which I misread. The 41% number is the total cost of the trip including driver compensation as well as corporate expenses.

Alyssa Vance sent me the calculations you would make to work out the farebox ratio:

Farebox ratio = fares / total cost of operations Total cost of operations = fares - profits Farebox ratio = fares / (fares - profits)

For 1H2015: Farebox ratio = 3,661 / (3,661 - -987) = 3661 / 4648 = 78.8%.