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VC Steve Westly on the election, the California exodus, and betting on electrification

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A former controller and CFO of the state of California, Steve Westly is passionate about government. The onetime eBay exec and early Tesla board member has also been a proponent of clean energy for roughly 30 years, so he’s feeling optimistic right now, with former U.S. VP Joe Biden amassing a growing number of electoral votes and widening his leading Donald Trump as he inches toward an election win.

We talked earlier today with Westly, who founded the venture firm The Westly Group 13 years ago and which is currently raising up to $250 million for a fourth fund, according to SEC paperwork filed earlier this week. We wanted to know whether he thinks Biden will be able to achieve any part of his climate plan in the likely scenario that Republicans continue to control the Senate. We also wondered what he makes of VCs leaving California, and where he sees the most opportunities right now. We kicked off our conversation with the news of the day. Our chat has been edited lightly for length.

TC: As we talk, Joe Biden looks to be on the cusp of winning the U.S. presidential election while Donald Trump continues to tweet about taking his claims about a rigged election to the Supreme Court. Are you concerned about that rhetoric, given that Republicans don’t seem to be pushing back against it?

SW: You have to be worried about such things, but I think most people are looking at the big picture. This is not going to be a 270 to 268 [electoral college] vote. Biden might get 290 to 306 [electoral votes]. It’s a decisive difference. He also received more than 4 million more [popular] votes than Trump. The people have spoken, and they’ve spoken loudly.

There are rules in most states that say if you aren’t within a percent or half a percent — i think [Biden has a] 1.6% [advantage] in Nevada and 1.4% [lead in] Arizona right now — there won’t be a recount. I think his lead in Pennsylvania will rise to 100,000, so the window [for a Trump win] is diminishing pretty quickly.

I am also seeing more Republican officials, like Senator Bob Toomey of Pennsylvania, saying that we count the votes, we follow the rules, what the president is doing is irresponsible, and it’s time to move on.

TC: You’re raising a fund that you’ve already told me you won’t talk about, citing SEC rules, but I’m wondering: has Westly Group’s mandate has changed over time? I remember when the firm was first formed that it was one of the only pure ‘cleantech’ venture firms, but it seems like it has broadened out a bit.

SW: Sustainable energy has become the new hot thing and it makes me laugh because I’ve been involved in energy for 30 years [including in government roles]. I wrote two books on the future of energy in the ‘80s, so I’ve been at this a bit.

Our thesis continues to be that there are revolutions occurring in smart energy, mobility and smart buildings, and they are being driven by renewable energy, which costs less than carbon-based fuels in virtually every part of the world today, from the U.S. to India to Africa. That’s not a political statement; it’s a fact.

Fully 70% of new energy coming online now is sustainable, so people are smart to pay attention to that. Because costs are going down and the cost of storage is going down precipitously — the cost of lithium ion batteries came down so much that we reached an inflection point in 2018, and the cost of a kilowatt per hour costs less than $150 now  — everybody is going electric.

Carmakers haven’t wanted to say this publicly because it freaks out shareholders, but we’re headed toward a world where the majority of energy will be sustainable in the near future and most of the cars will be electric and that will happen a lot faster than people think.

Buildings play a key role, too, because they’ve historically been dumb; now they’re digitized buildings with power storage, and soon every home, building, hospital, and university [will run off digitized energy] and you‘ll see arbitrage happening continuously between buildings, homes, and vehicles, where people won’t pay a penny for electricity or gasoline every again. A decade ago when I said this, people thought I was nuts, but now California requires that all newly constructed homes must have solar panels.

TC: With things moving more quickly in that direction, what does all this lost revenue mean for PG&E, the company that powers most of Northern California and whose infrastructure is already crumbling and causing wildfires?

They should follow the lead of smart utilities like Duke [a Westly Group investor] and European companies that are moving beyond traditional revenue streams to new revenue streams. Every utility today has a menu, and if yours only features electricity ions and gas molecules, that’s not a good menu. It’s like saying we have soup and meat, period. These companies should have a special menu for residential customers and a different menu for commercial and industrial customers and they should be thinking about installing power walls and putting solar on roofs; they should be thinking long-term contracts, like even financing electric vehicles.

TC: PG&E is in a bad spot, but California may be, too, as a lot of people leave the Bay Area, citing taxes, among other reasons. Are you worried about a broader movement out of the state and what it could mean?

SW: This is the big question of the next 10 years. California is about to face a wall of debt. We’ve gone from a surplus to what could be a $40 billion deficit in a very short period [because of COVID-19].

This year will be covered a little because there’s still an active IPO market [as capital gains are taxed the same as income, making the state heavily dependent on the stock market]. But there are 12.6 million Americans out of work, and a disproportionate number of them are in California, so likely a Democrat-controlled legislature will try and start to pass a series of taxes.

Prop 15 [which would have taxed properties based on their current market value rather than purchase price and would have increased property taxes on commercial properties] failed, so this will be an ongoing issue. Still, if we continue to raise taxes, we run the risk of losing entrepreneurs to other states. I know firsthand many friends who have moved to Austin. We need to have a balanced approach to managing out expenses without pushing people off to other states.

TC: Any bright ideas on that front?

SW: I was the CFO of California, and your option beside taxing more is spending less. Those are the choices.

Longer term, we need a major overhaul of the tax system so we aren’t aren’t so dependent on capital gains, which is a roller coaster system where when you hit a trough in the market, you have to go and lay off a bunch of teachers, then try to hire them back when the economy is better.

TC: It’s looking like Joe Biden is going to win the election, but there’s also a strong chance that he’ll be working with a Republican-controlled Senate. Meanwhile, climate change was not in the top five concerns for voters of either party. Does this can get kicked down the road again?

No, it just means they’ll have to work together and that he’ll have to go directly to the issues that are most popular to get them through.

Trump had no clue that sustainable energy is immensely popular today and that some of the states that used to block green initiatives — including Texas, North Dakota, and South Dakota — are increasingly becoming wind and solar powers, such that their senators who used to say, ‘natural gas forever’ are also saying that solar and wind are employing more and more people in their states.

What do you see as first steps?

SW: Biden will bring the U.S. back into the Paris climate agreement. You’ll also see him at the front of this global movement toward the electrification of everything, and there will be support for EVs and support for sustainable energy.

You’ll also see some sort of penalties or restrictions on carbon-based fuels because of the increased data we have that carbon in the atmosphere is causing public health problems, reducing air quality and that large insurance companies are having to pay for [these things]. Now that Munich Re and others say, ‘We pretty much know what the cost is, and we’re charging you back,’ the government can use that data to charge carbon producers appropriately.

TC: Traditional energy companies– the biggest carbon emitters — say they’ve resolved to address this problem. Do you think that’s mostly optics?

SW: A lot is optics, but it’s also a realization that you either change your business model or you go down with the ship. You don’t want to take the Kodak approach. You want to be Apple and reinvent yourself.

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YC-backed LemonBox raises $2.5M bringing vitamins to Chinese millennials

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Like many overseas Chinese, Derek Weng gets shopping requests from his family and friends whenever he returns to China. Some of the most wanted imported products are maternity items, cosmetics, and vitamin supplements. Many in China still uphold the belief that “imported products are better.”

The demand gave Weng a business idea. In 2018, he founded LemonBox to sell American health supplements to Chinese millennials like himself via online channels. The company soon attracted seed funding from Y Combinator and just this week, it announced the completion of a pre-A round of $2.5 million led by Panda Capital and followed by Y Combinator .

LemonBox tries to differentiate itself from other import businesses on two levels — affordability and personalization. Weng, who previously worked at Walmart where he was involved in the retail giant’s China import business, told TechCrunch that he’s acquainted with a lot of American supplement manufacturers and is thus able to cut middleman costs.

“In China, most supplements are sold at a big markup through pharmacies or multi-level marketing companies like Amway,” Weng said. “But vitamins aren’t that expensive to produce. Amway and the likes spend a lot on marketing and sales.”

Inside LemonBox’s fulfillment center

LemonBox designed a WeChat-based lite app, where users receive product recommendations after taking a questionnaire about their health conditions. Instead of selling by the bottle, the company customizes user needs by offering daily packs of various supplements.

“If you are a vegetarian and travel a lot, and the other person smokes a lot, [your demands] are going to be very different. I wanted to customize user prescriptions using big data,” explained Weng, who studied artificial intelligence in business school.

A monthly basket of 30 B-complex tablets, for instance, costs 35 yuan ($5) on LemonBox. Amway’s counterpart product, a bottle of 120 tablets, asks for 229 yuan on JD.com. That’s about 57 yuan ($9) for 30 tablets.

Selling cheaper vitamins is just a means for LemonBox to attract consumers and gather health insights into Chinese millennials, with which the company hopes to widen its product range. Weng declined to disclose the company’s customer size, but claimed that its user conversion rate is “higher than most e-commerce sites.”

With the new proceeds, LemonBox is opening a second fulfillment center in the Shenzhen free trade zone after its Silicon Valley-based one. That’s to provide more stability to its supply chain as the COVID-19 pandemic disrupts international flights and cross-border trade. Moreover, the startup will spend the money on securing health-related certificates and adding Japan to its sourcing regions.

Returnees adapt

Screenshot of Lemonbox’s WeChat-based store

In the decade or so when Weng was living in the U.S., the Chinese internet saw drastic changes and gave rise to an industry largely in the grip of Alibaba and Tencent. Weng realized he couldn’t simply replicate America’s direct-to-customer playbook in China.

“In the U.S., you might build a website and maybe an app. You will embed your service into Google, Facebook, or Instagram to market your products. Every continent is connected with one other,” said Weng.

“In China, it’s pretty significantly different. First off, not a lot of people use web browsers, but everyone is on mobile phones. Baidu is not as popular as Google, but everybody is using WeChat, and WeChat is isolated from other major traffic platforms.”

As such, LemonBox is looking to diversify beyond its WeChat store by launching a web version as well as a store through Alibaba’s Tmall marketplace.

“There’s a lot of learning to be done. It’s a very humbling experience,” said Weng.

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Health tech venture firm OTV closes new $170 million fund and expands into Asia

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OTV (formerly known as Olive Tree Ventures), an Israeli venture capital firm that focuses on digital health tech, announced it has closed a new fund totaling $170 million. The firm also launched a new office in Shanghai, China to spearhead its growth in the Asia Pacific region.

OTV currently has a total of 11 companies in its portfolio. This year, it led rounds in telehealth platforms TytoCare and Lemonaid Health, and its other investments include genomic machine learning platform Emedgene; microscopy imaging startup Scopio; and at-home cardiac and pulmonary monitor Donisi Health. OTV has begun investing in more B and C rounds, with the goal of helping companies that already have validated products deal with regulations and other issues as they grow.

OTV focuses on digital health products that have the potential to work in different countries, make healthcare more affordable, and fill gaps in overwhelmed healthcare systems.

Jose Antonio Urrutia Rivas will serve as OTV’s Head of Asia Pacific, managing its Shanghai office and helping its portfolio companies expand in China and other Asian countries. This brings OTV’s offices to a total of four, with other locations in New York, Tel Aviv and Montreal. Before joining OTV, Rivas worked at financial firm LarrainVial as its Asian market director.

OTV was founded in 2015 by general partners Mayer Gniwisch, Amir Lahat and Alejandro Weinstein. OTV partner Manor Zemer, who has worked in Asian markets for over 15 years and spent the last five living in Beijing, told TechCrunch that the firm decided it was the right time to expand into Asia because “digital health is already highly well-developed in many Asia-Pacific countries, where digital health products complement in-person healthcare providers, making that region a natural fit for a venture capital firm specializing in the field.”

He added that OTV “wanted to capitalize on how the COVID-19 pandemic has thrust the internationalized and interconnected nature of the world’s healthcare infrastructures into the limelight, even though digital health was a growth area long before the pandemic.”

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WH’s AI EO is BS

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An executive order was just issued from the White House regarding “the Use of Trustworthy Artificial Intelligence in Government.” Leaving aside the meritless presumption of the government’s own trustworthiness and that it is the software that has trust issues, the order is almost entirely hot air.

The EO is like others in that it is limited to what a president can peremptorily force federal agencies to do — and that really isn’t very much, practically speaking. This one “directs Federal agencies to be guided” by nine principles, which gives away the level of impact right there. Please, agencies — be guided!

And then, of course, all military and national security activities are excepted, which is where AI systems are at their most dangerous and oversight is most important. No one is worried about what NOAA is doing with AI — but they are very concerned with what three-letter agencies and the Pentagon are getting up to. (They have their own, self-imposed rules.)

The principles are something of a wish list. AI used by the feds must be:

lawful; purposeful and performance-driven; accurate, reliable, and effective; safe, secure, and resilient; understandable; responsible and traceable; regularly monitored; transparent; and accountable.

I would challenge anyone to find any significant deployment of AI that is all of these things, anywhere in the world. Any agency claims that an AI or machine learning system they use adheres to all these principles as they are detailed in the EO should be treated with extreme skepticism.

It’s not that the principles themselves are bad or pointless — it’s certainly important that an agency be able to quantify the risks when considering using AI for something, and that there is a process in place for monitoring their effects. But an executive order doesn’t accomplish this. Strong laws, likely starting at the city and state level, have already shown what it is to demand AI accountability, and though a federal law is unlikely to appear any time soon, this is not a replacement for a comprehensive bill. It’s just too hand-wavey on just about everything. Besides, many agencies already adopted “principles” like these years ago.

The one thing the EO does in fact do is compel each agency to produce a list of all the uses to which it is putting AI, however it may be defined. Of course, it’ll be more than a year before we see that.

Within 60 days of the order, the agencies will choose the format for this AI inventory; 180 days after that, the inventory must be completed; 120 days after that, the inventory must be completed and reviewed for consistency with the principles; plans to bring systems in line with them the agencies must “strive” to accomplish within 180 further days; meanwhile, within 60 days of the inventories having been completed they must be shared with other agencies; then, within 120 days of completion, they must be shared with the public (minus anything sensitive for law enforcement, national security, etc.).

In theory we might have those inventories in a month, but in practice we’re looking at about a year and a half, at which point we’ll have a snapshot of AI tools from the previous administration, with all the juicy bits taken out at their discretion. Still, it might make for interesting reading depending on what exactly goes into it.

This executive order is, like others of its ilk, an attempt by this White House to appear as an active leader on something that is almost entirely out of their hands. To develop and deploy AI should certainly be done according to common principles, but even if those principles could be established in a top-down fashion, this loose, lightly binding gesture that kind-of, sort-of makes some agencies have to pinky-swear to think real hard about them isn’t the way to do it.

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