Report: Uber raised a $1.6 billion convertible debt round

Uber clearly does not subscribe to the ‘mo money ‘mo problems theory. The company has raised another $1.6 billion dollars, this time in a convertible debt round from Goldman Sachs according to Bloomberg sources. It’s a loan that will turn into a stake in the company when Uber goes public, at a 20 to 30 percent discount on Uber’s IPO valuation. It adds to the company’s warchest, bringing its total funding up to more than $4 billion, with the company still working to raise another $600 million in the near future from hedge funds.

Xapo ups its bitcoin storage security by stashing a key in space

Bitcoin has had a messy start to 2015 when you consider the breach of the Bitstamp exchange alongside plummeting prices and miners going dark. But for Xapo CEO Wences Casares, it’s just growing pains as the infant cryptocurrency tries to build a more solid infrastructure and go mainstream. To do its part, bitcoin storage and wallet company Xapo plans to announce Thursday several new security features to further strengthen its vaults and make that storage free to use.

“When we talk to customers who have heard of bitcoin but are not yet using bitcoin or owning bitcoin, they always mention security as one of main hurdles of using bitcoin and its understandable,” Casares said. “That’s why we’ve from the beginning focused on security.”

Previously, Xapo customers paid a 0.12% annual fee to hold bitcoins in what the company calls its vaults (those customers will now be refunded). The five vault locations are underground in mountains, Casares said, including a main vault in Switzerland. Xapo uses “deep-cold” storage, meaning that account keys are created and kept in offline servers that has never touched a network.

Typically, “hot wallets” in bitcoin are on the network and therefore more susceptible to hacking and loss. For example, Bitstamp lost 18,000 bitcoin from its hot wallet in last week’s breach while the rest of the coins held in cold storage were spared. Compared to last year’s MtGox debacle in which 850,000 coins were lost from the exchange, bitcoin security has arguably made some strides forward.

As part of that push, Xapo is adding multiple-signature validation to its vaults. That means if someone wants to withdraw bitcoins, it must be signed off on by three of the five vaults worldwide. So if someone did break into one vault, no account could be compromised without having access to at least another two of locations, Casares said.

“Each one of these keys we keep in different private offline servers, in metal vaults, that are in deep underground bunkers,” Casares said. “If someone wanted your bitcoin, they would have to raid simultaneously into different vaults on different continents.”

And if hiding bitcoins in a mountain didn’t seem extreme enough, Xapo is also going to stash them in space. The startup is partnering with Satellogic, a satellite company where Casares serves as an adviser, to move a “digital fingerprint” of Xapo’s security system into space. If someone was to hack into Xapo’s software, the fingerprint of the system in theory wouldn’t match, denying access (unless you also physically change it in the satellite itself).

So-called “multi-sig” technology is pretty similar to two-factor authentication, and the idea of having multiple people, or keys, sign off on transactions is finally catching on in the bitcoin community. Bitstamp added it after their most recent breach by partnering with BitGo. Expresscoin, a bitcoin and other alt-currency retailer, also announced today that it is adding mult-sig tech to its exchange, courtesy of Gem.

What remains unclear, however, is how many people are actually storing their bitcoin in Xapo’s vaults. When asked how many users the company had, Casares declined to comment, citing confidentiality like a “Swiss bank.” The company has received criticism last year after touting a Mastercard-linked debit card in April, only to have it not linked to Mastercard at all and only available to overseas customers. Confusion over the card fees also drew the ire of its previous supporters, although the fees remain an important part of Xapo’s revenue stream now that the storage is free.

And amid a price crash, it also remains uncertain how large a market will remain of people needing to store bitcoins, especially as the hype cycle is now championing the miracles of blockchain technology compared to the volatile digital currency. Casares, though, said one doesn’t have to win over the other.

“I am a believer in both,” Casares said. “If you have a perfect public open ledger, one of the first things you’re going to want to use it for is money. That’s why bitcoin is first.”

On the way to $220M in funding, Instacart quietly changed its business model

In its early days, grocery store delivery startup Instacart made its money two ways: Through delivery fees and product markups. It charged customers more for individual groceries than their in-store price.

But in the last year, the company shifted its revenue strategy. It is allowing some grocery store partners to price their own goods on Instacart. In return, the grocers pay Instacart a fee to service their locations.  It explains why for some grocers the products cost the same on Instacart as they do in store, but for others the price is more (or, confusingly, less).

“We don’t want to be in the pricing game,” Instacart’s head of business Nilam Ganenthiran told me. “There’s exceptions, but that’s generally true. Retailers outsource their e-commerce to us for a fee.”

Although there’s variations in how each partnership is structured, Ganenthiran said the fee, charged to grocery store retailers, is now the company’s “primary model.”

Instacart never made any official announcements about its change in business strategy. I didn’t find out until questioning Ganenthiran about its profit margins. As a result, earlier this week when Instacart received its spate of news coverage over its $220 million funding and reported $2 billion valuation, some outlets misreported Instacart’s business model.

“There has been a perception of the markup model being our primary economic engine due to how we started 2.5 years ago,” Ganenthiran told me. “Our model actually has been evolving.”

Most publications didn’t realize that. The Wall Street Journal went so far as to write an additional story, separate from its funding brief, breaking down a potential Instacart profit on a typical grocery store transaction. The numbers didn’t look good, suggesting Instacart might make as low as $1.40 on an order of 15 basic items.

But since Instacart’s revenue isn’t primarily tied to product markups anymore, that may not be representative of its profit margins.

Instacart wouldn’t tell me whether its grocery store partner fee is calculated per item, per order, per customer, per month, or some other variant. It also wouldn’t disclose how much that fee is. Neither would Whole Foods when I reached out to them for comment, and Safeway didn’t respond. Without knowing what grocery stores are paying Instacart, it’s hard to deduce the company’s potential profit margins on each delivery. “There’s different strategies with different partners,” Ganenthiran explained.

In theory, it’s much smarter for Instacart to charge grocery stores a fee than for it to eke out profits on product markups. That kind of partnership makes grocery stores more amenable to improving Instacart’s efficiency (like offering the company its own personal checkout line). It also shields Instacart from the risk of variable food prices. Ganenthiran said, “Most grocers are past the tipping point where they understand consumers want this service.”

Uber just cut prices in 48 markets

This hasn’t happened in awhile. Uber just slashed its cost in 48 of its U.S. markets. The last time it started giving such big discounts was half a year ago, at the start of summer.

The discounts will apply to the newer cities that didn’t seen the boon of the first round of cuts (sorry, San Francisco – you’re already a beneficiary). Miami, Tucson, Baltimore, Dallas and many other places are the new recipients. The percentage of the price cut varies depending on market.

This time, Uber is so confident that the cuts will result in more rides taken, and therefore more money for drivers, that it’s guaranteeing driver earnings.

Here’s how: It analyzed company data to determine average driver earnings in each city during slow, normal and busy times of the day (pre–price cuts). That number varies across the country, as you might imagine. If a driver makes its app available, accepts at least one trip, and has an acceptance rate of 90 percent while its app is on, then Uber says it will automatically give the driver the average hourly rate in wages if they don’t automatically earn it.

It’s telling its drivers in each market what that fare is, so the drivers themselves can track whether Uber is carrying through on its promise.

The reason Uber feels comfortable taking that financial risk is because it has the data from its more mature markets to support its theory. It cut prices in other cities over summer and never had to return them to pre-cut levels, because the number of rides people took increased. “This is really a move to replicate the success we’ve seen in other markets,” Andrew Macdonald, Uber’s regional manager for central parts of the U.S. and Canada, told me.

He explained that although cities may have cultural and transportation infrastructure differences, Uber still believes it can make more money and drive usage by lowering fares in all types of locations, from more rural to urban. “What you see as a city develops is that as Uber expands its presence and the system becomes more efficient, people rely on the system more,” Macdonald said. “People start to ditch their cars. That’s a common thread you see across markets.”

In its blog post announcing the changes, Uber pointed to Chicago as one such example. Drivers’ average hourly wages increased from $19.10 an hour to $21.34 an hour from December 2013 to December 2014, despite the fact that the company rolled out permanent price cuts for passengers during that time.

According to Uber, price cuts in Chicago led to increased driver earnings per hour

According to Uber, price cuts in Chicago led to increased driver earnings per hour.

Flywheel has finally figured out its secret weapon against Uber

A few weeks before New Year’s, I received a pitch from Flywheel that I’ve been waiting for since I started using the service in 2013. It said, “Flywheel Battles Uber with #FairFare.” The email inside proclaimed “Flywheel is the no-surge pricing alternative to get a ride around town.”

flywheel email to me

It looks as if Flywheel, the booking app for taxis, has finally figured out its secret weapon against the likes of Uber and Lyft: Reliable pricing. It’s not a new feature for the company. From its inception in 2009 Flywheel has never had surge pricing in the cities it operates in — now SF, LA, Seattle, Sacramento, and San Diego. But for the longest time, the company didn’t seem to understand that this was the best way to lure people back to the taxi system. Instead, it touted Flywheel’s legality, its use of regulated taxis, the number of car companies on its app. None of those were big enough draws.

At the end of the day, people vote with their wallets, and if there’s anything that will get people to move to Flywheel, it’s cost.

Is price part of reliability?

Town car ride-hailing Uber

Uber and Lyft argue that surge pricing makes their services more reliable because it gets more drivers on the road during a time they might not otherwise drive — like New Years or a hostage crisis. There’s truth to that.

But these companies miss the fact that for many non-wealthy customers, stable price is one of the factors in determining reliability. Without the assurance of a fixed fee, people will turn to other services for backup.

Although people have been complaining about surge pricing for years, this New Years showed the first sign that they are willing to stop using Uber and Lyft as a result. The SF Examiner found that on New Year’s Eve in San Francisco there was little to no surge pricing, because of either low demand or too much supply.  The lack of surge upset drivers who gave up their New Year’s to make money.

Tweets from passengers suggest that people planned ahead, deciding to walk, take public transit or flag taxis to avoid the ridesharing surge. Ironically, that resulted in little to no Uber or Lyft surge pricing because there wasn’t enough demand to drive it there. “It was an incredible sight to see all the cabs full and the rideshare cars empty,” one driver told The Examiner. “I was laughing and crying at the same time.”

Another potential reason there was no surge pricing on New Year’s Eve in San Francisco is because so many drivers took to the road in the hopes of making money. With such a flood of supply, there wasn’t enough demand to cause surge pricing.

It’s worth noting the story isn’t bulletproof — it’s based on anecdotal evidence. When I asked, neither Uber nor Lyft would confirm specific SF surge rates in 2014 compared to previous years.

In other parts of the country, where the Uber service is still relatively new, surge pricing was common, according to this CNN data.

Passengers wise up and avoid the surge

The difference between SF and other cities suggests that over time, passengers get smarter about using ridesharing services. Although they may put up with surge pricing initially, they eventually expect and avoid it. As a result, Uber and Lyft could lose customers, and the resulting profit, on some of the biggest travel nights of the year.

It’s clearly not hurting Uber at the moment — the company saw 2 million rides on New Years Eve alone. But the service is new in a lot of places, so passengers are just starting to feel the pain of unpredictable surge pricing. By New Years Eve next year, will Uber users in other places get smart about avoiding the surge, the same way San Francisco residents did?

I suspect surge-avoidance will slowly trickle down to day-to-day travel. I live near Union Square in San Francisco, so I’ve already learned I can’t rely on Uber and Lyft from a pricing perspective, because they’re nearly always operating with surge pricing here. Without that reliability, I prepare alternative options for travel and develop new habits, lessening my ridesharing addiction. That’s where a competitor like Flywheel or Sidecar could come in and do really well.

There’s been plenty written about how surge pricing is a broken system, but there hasn’t been much ado about the fact that it’s also Uber and Lyft’s biggest weakness. It’s the one area where other companies can easily beat them.

Will Pinterest prove its worth in 2015?

The next year will be the most important one of Pinterest’s life. Until now, the company has focused on its application and its audience, to the detriment of its coffers. It had the luxury to ignore money because it raised a nosebleed $764 million in venture funding to sustain itself. Like most adventurous startups, the money was raised on an unrealized, untested, uncertain premise: That advertising on a visual inspiration application would be highly lucrative.

Come New Year’s Day, that hypothesis will be put to the test for the first time on a large scale. After endless preparation, Pinterest’s year of reckoning has arrived.

In 2015, any brands will be able to do native advertising on Pinterest by paying to promote pins that appear alongside regular Pinterest content. Companies can use Pinterest’s reservation-based system, paying set prices to make sure their ads appear in people’s feeds. The auction-based system, where advertisers bid against each other, is still in beta.

Pinterest has been beta testing reservation-based promoted pins with a select group of partners since September 2013, moving slowly to make sure it nailed its advertising process and didn’t scare off users. According to Pinterest’s blog post about the wider-scale release, the beta test was hugely successful. Like regular pins, promoted pins are shared an average of 11 times, resulting in additional free impressions for advertisers (they only cough up money for the initial impression). These pins continue to be seen and shared after the advertiser stops paying to promote them.

The quiet social company decided to herald its big advertising news when the least amount of people would see it: Over the holiday break. It broke the story by publishing a blog post that ran at the same time as a New York Times feature on the news.

This is par for the course for Pinterest. The company regularly holds big parties at its office to celebrate the introduction of new product features, but when it comes to its revenue stream it prefers not to raise a fuss.

It’s possible that Pinterest is nervous about its reckoning moment and wants to experiment with advertising outside the prying eyes of the public. It’s hard to get to a $5 billion valuation in Silicon Valley without having brought in a cent of revenue. At this point, the stakes are high for Pinterest’s investors and the path is risky.

In the next twelve months, we’ll learn for the first time whether investors overvalued Pinterest or if the company is worth the war chest of funding it’s sitting on. If it’s the latter, [company]Google[/company] better look out. It has another rival creeping up to compete in the category of search.

Pinterest’s image-heavy application may give it a distinct advertising edge in the visual web.