Self-driving startups race down a narrowing road

DETROIT/SAN FRANCISCO (Reuters) – Lei Xu and Justin Song once worked at electric carmaker Tesla Inc (TSLA.O), one of the hottest companies in Silicon Valley. But with interest and investments in autonomous vehicles mounting, they left to pursue what they see as the next big thing.

Nullmax CEO Lei Xu drives a Lincoln MKZ sedan equipped with his company’s prototype self-driving hardware and software in Fremont, California, U.S. on October 9, 2017. REUTERS/Jane Lanhee Lee

Their company, Nullmax, is one of more than 240 startups worldwide, including 75 in Silicon Valley, attempting to design software, hardware components and systems for future self-driving cars, according to a Reuters analysis.

Xu and Song are bankrolled by corporate money, but unlike many of their fellow entrepreneurs, they skipped funding from Silicon Valley venture capitalists. Founded in August 2016, Nullmax got $ 10 million from a Chinese firm, Xinmao Science and Technology Co (000836.SZ).

By seeking corporate backing in China, the Nullmax founders managed to sidestep an issue facing other startups in the sector: While big automotive and technology companies are pouring billions into the autonomous vehicle space, Silicon Valley investors so far have been fairly restrained in increasing their bets.

Headlines have been dominated by old-line players such as General Motors Co (GM.N), which jolted the industry last year when it bought a tiny San Francisco software company called Cruise Automation for a reported $ 1 billion. Just this week, top-tier supplier Delphi Automotive PLC (DLPH.N) acquired Boston-based software startup nuTonomy for $ 450 million.

Now, “every startup thinks they will get a billion dollars” in valuation, said Evangelos Simoudis, a Silicon Valley venture investor and an advisor on corporate innovation.

However, investment in untested startup companies remains relatively modest despite all the buzz and lofty expectations. Total funding of self-driving startups from both corporate and private investors has barely topped $ 5 billion, the Reuters analysis of publicly available data shows.

With the notable exceptions of Andreessen Horowitz and New Enterprise Associates, few of the big Valley venture capital firms are heavily invested in the sector. Overall, only seven of the top 30 self-driving startups have received later-stage funding, the Reuters analysis shows, an indication that some venture capitalists are ambivalent about the industry’s potential.

(For a graphic of venture and corporate funding of self-driving startups, see: tmsnrt.rs/2xOX0jN)

Skeptics note that few of the startups are making money. And established auto and parts companies have not demonstrated a clear path to revenue and profitability in autonomous vehicles despite their big bets in the space.

Another sticking point: While the initial wave of self-driving vehicles is expected to begin commercial service in 2019-2020, experts expect the transition from human-driven to automated cars could take a decade or more to roll out.

Cautions Sergio Marchionne, chief executive officer of Fiat Chrysler Automobiles (FCHA.MI): “You can destroy a lot of value by chasing your tail in autonomous driving.”

CORPORATE INVESTMENTS

All told, U.S. automotive and technology firms likely have invested some $ 40 billion to $ 50 billion in self-driving technology in recent years, mainly through acquisitions and partnerships. The full extent is hard to know because big players such as Alphabet Inc (GOOGL.O), whose Waymo subsidiary is considered among the front-runners in the arena, have not revealed the full scope of their investments, although it is believed to be in the billions.

Among the top corporate investors in the sector are Samsung Group [SAGR.UL], Intel Corp (INTC.O), Qualcomm Inc (QCOM.O), Delphi and Robert Bosch GmbH [ROBG.UL]. Corporate investors also have backed five of the six self-driving startups with valuations of $ 1 billion or more.

(For a graphic on key players in the development of autonomous vehicles, see: tmsnrt.rs/2nYv7gc)

Whether the industry is poised to produce more such unicorns is now a topic of much debate. Two former investors in Cruise Automation, for example, are poles apart in their views of self-driving vehicles and technology.

Veronica Wu, managing partner in Palo Alto-based Hone Capital, said her company continues to invest in “quite a number” of self-driving startups, while acknowledging that the technology will take time to deploy.

“It’s a matter of when, not if,” she said. “We’re fairly optimistic.”

In contrast, Sunny Dhillon of Signia Venture Partners, another Cruise investor, said his firm does not see any attractive investments in the sector right now.

The hefty price paid by GM for Cruise, he said, “made the space very frothy, with every computer vision and robotics PhD student seemingly emerging with a new self-driving car startup.”

In addition, he said many established players “already have made their big investments (and) acquisitions” in the sector. That could limit investors’ potential returns and entrepreneurs’ payoffs down the road.

Quin Garcia, a partner in San Francisco-based AutoTech Ventures, concurs that the space is crowded and valuations are inflated. There may still be “a select few IPOs, but there will be many failures of autonomous vehicle startups” by 2021, he said.

NULLMAX IN CHINA

Those odds haven’t deterred Nullmax founders Xu and Song, who are looking to differentiate themselves.

With many self-driving startups looking to supply U.S. and European automakers, the Chinese-born entrepreneurs, whose specialties are camera-based vision systems and artificial intelligence, are focused on China. They expect to deliver the first partially automated systems to Chinese automakers by 2020.

The U.S.-educated entrepreneurs, both 35, now work out of a small shop in Fremont, Calif., not far from Tesla’s sprawling home factory. Xu once worked at Tesla as a senior engineer while Song specialized in supply chain and quality engineering. Tesla declined to confirm their prior employment.

Xu said the company employs about 50 people, most of them in a larger office in Shanghai. He said the company wants to keep a foot in California, which is a hub of U.S. tech talent, and where regulators have smoothed the way for testing of self-driving vehicles.

As for how Nullmax plans to cash out, Xu navigated around that question.

“We’re pretty busy,” he said. “We don’t much time to think about an IPO right now.”

Reporting by Paul Lienert in Detroit and Jane Lanhee Lee in San Francisco; Editing by Joe White and Marla Dickerson

Our Standards:The Thomson Reuters Trust Principles.

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The Race to Secure Voting Tech Gets an Urgent Jumpstart

Numerous electronic voting machines used in United States elections have critical exposures that could make them vulnerable to hacking. Security experts have known that for a decade. But it wasn’t until Russia meddled in the 2016 US presidential campaigns and began probing digital voting systems that the topic took on pressing urgency. Now hackers, researchers, diplomats, and national security experts are pushing to effect real change in Washington. The latest update? It’s working, but maybe not fast enough.

On Tuesday, representatives from the hacking conference DefCon and partners at the Atlantic Council think tank shared findings from a report about DefCon’s Voting Village, where hundreds of hackers got to physically interact with—and compromise—actual US voting machines for the first time ever at the conference in July. Work over three days at the Village underscored the fundamental vulnerability of the devices, and raised questions about important issues, like the trustworthiness of hardware parts manufactured in other countries, including China. But most importantly, the report highlights the dire urgency of securing US voting systems before the 2018 midterm elections.

“The technical community … has attempted to raise alarms about these threats for some years,” said Frederick Kempe, president and CEO of the Atlantic Council, in a panel discussion. “Recent revelations have made clear how vulnerable the very technologies we use to manage our records, cast our votes, and tally our results really are … These findings from the Voting Village are incredibly disconcerting.”

Fortunately, the past few months have seen signs of progress. The Department of Homeland Security is moving forward with its critical infrastructure designation for voting systems, which frees up resources for helping states secure their platforms. The Texas Supreme Court is currently considering a lawsuit challenging the state’s use of digital voting machines. And in Virginia, state officials are converting voting systems to use paper ballots and electronic scanners before the November 7 elections. They say the change was motivated by the findings at DefCon’s Voting Village.

Susan Greenhalgh, an elections specialist for the vote-security group Verified Voting, which worked with Virginia officials this fall, applauded the “transition into real-world change” that had transpired in just the last few months.

Virginia and Texas represent important progress, but plenty of work remains. Five states still rely solely on digital voting machines without paper backups, and at least 10 states have mixed voting infrastructure, with certain counties that use digital voting without paper. These systems are the most vulnerable to manipulation, because you can’t audit them afterward to confirm or dispute the digital vote count in the case of suspected tampering.

“The one core point that election security experts and others have been making about why our votes are safe was that the decentralized nature of our voting systems, the thousands and thousands of voting offices around the country that administer the election, is what kept us safe,” Jake Braun, a DefCon Voting Village organizer and University of Chicago researcher said. “Because Russians [or other attackers] would need to have tens of thousands of operatives go get physical access to machines to actually infiltrate the election. We now know that’s false.”

With only a handful of companies manufacturing electronic voting machines, a single compromised supply chain could impact elections across multiple states at once. The Voting Village report emphasizes that there is a huge amount of change required in the US to address security issues at every point in the election workflow, from developing more secure voting machines to sourcing trustworthy hardware, and then actually setting up voting system devices and software for use in a secure way. DefCon founder Jeff Moss says that the goal for next year’s Voting Village is to have a full election network set up so hackers can evaluate and find weaknesses in a complete system, not just individual machines.

The Department of Homeland Security recently confirmed that Russia infiltrated various election-related systems in 21 states during 2016, and access to a full voting-system setup would give security researchers additional real world insight into defending US voting infrastructure. But as was the case with acquiring real voting machines for last summer’s conference, Moss says it has been extremely difficult to gain access to the third-party proprietary systems that states use to coordinate voting.

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“I would love to be able to create any kind of a complete system, that’s what we’re aiming for,” he said during the panel. “The part that’s really hard to get our hands on is the backend software that ties the voting machines together to tabulate and accumulate votes, to provision voting ballots, to run the election, and to figure out a winner. And boy do we want to have a complete voting system for people to attack. There’s never been a test of a complete system—it’s just mind boggling.”

DefCon’s voting village and interdisciplinary partnerships are certainly raising awareness about election security and motivating change, but with some elections just a few weeks away and the midterms rapidly approaching, experts agree that change may not be coming quickly enough.

“We’ve got a lot to do in a short period of time,” said Douglas Lute, a former national security advisor to President George W. Bush and former US ambassador to NATO under President Barack Obama. “In my over 40 years of working on national security issues I don’t believe I’ve seen a more severe threat to American national security than the election hacking experience of 2016. Russia is not going away. This wasn’t a one shot deal.”

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