March 14, 2017
If you've been following tech news over the last few weeks, you have probably seen several stories about Uber, all negative (bar this one about flying cars). I suspect that what is coming next will be prove to be a far bigger story than all of the other incidents so far.
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, and 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.
N.B. all of this article is sourced from filings and allegations that Alphabet has made. Uber will probably contest these claims in court.
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:
- Steal LiDAR and other self-driving component designs from Waymo
- Start Otto as a plausible corporate vehicle for developing the self-driving technology
- 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 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 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's 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 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). (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:
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 bonus?). (Filing 55)
- August 19, 2016 – Shortly after the final bonus 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 quick 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.
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, meaning they may have been talking about an acquisition before Otto had been publicly unveiled.
- 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 on 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.
- 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.
There is no smoking gun email (yet), but there is a strong implication that Uber and Otto planned this from the start.
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, "A billion here, a billion there, pretty soon, you're talking real money."
- 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 2.5x 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 looks like things aren't going to be getting better any time soon.
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.