Questions:

1) Assume Bardin decides to accept the Series D round of financing. Evaluate the implications this would have on the following:

a. If Waze takes the money, what does it mean?

b. How would the product have to change?

c. What would the company need to strive to become?

WAZE: PRODUCT EVOLUTION AND FUNDRAISING

It was late 2012 and Noam Bardin, CEO of Waze, reflected on how far his company had come and how greatly its product had evolved. Waze had successfully developed a free smartphone mapping application that gave consumers turn-by-turn directions and real-time traffic data. This digital map compiled driver-generated data from Wazes community of users to relay constantly updated information on conditions such as traffic accidents, speeding-camera locations, and construction zones.

By September 2012, Waze had captured seven percent of the U.S. iOS¹ mapping market and had grown to serve over 28 million users. Due in part to a tailwind of positive publicity, the burgeoning digital map providers U.S. iOS market share grew to 10 percent by October 2012, with an expectation to serve over 100 million Wazers by 2015. Bardin recognized Wazes emergence as a leader in its space and understood that a fresh capital injection would be needed to lead the company through its next stage of development.

Unfortunately, Wazes previous fundraising attempts had been fraught with challenges. In October 2009, just one day before Bardin anticipated accepting a Series B term sheet, Google released Google Maps Navigation. The offering provided users with a higher quality database than that of Waze and was supported by Googles nearly infinite financial resources. At the time, investors felt Waze would eventually be pushed out of the market by what would now be considered the industrys 800-pound gorilla and consequently rescinded their offers for funding.

But now, in 2012, Wazes strong market position enabled Bardin to negotiate with potential investors from a position of strength. In December 2012, Bardin secured a $100 million Series D round of financing at a $700 million pre-money valuation. Prior to finalizing the terms of the agreement, however, the CEO hesitated. With the draft term sheet before him, Bardin thought, Have I exhaustively evaluated all of the changes that might ensue by taking this money?^[1]

Sitting in Wazes headquarters with pen and paper in hand, Bardin began listing the implications of accepting the proposed round of financing.

NOAM BARDIN

Noam Bardin was born in Jerusalem, Israel. After completing his compulsory military service in the Israeli army in 1992, Bardin enrolled in the Hebrew University of Jerusalem, where he received a Bachelor of Arts degree in Economics. In 2003, Bardin earned a Master of Public Administration from Harvard Universitys John F. Kennedy School of Government.

In 1996, Bardin co-founded deltathree, Inc., which provided integrated Voice over Internet Protocol (VoIP) telephony, VoIP products, and infrastructure solutions. These products provided an alternative to traditional telephone services and offered customers a cost-effective means to conduct international calls. During his ten years with deltathree, Bardin held a variety of positions, including Vice President of Operations, Chief Executive Officer, and Chairman.

In 1999, deltathree went public, listing itself on the NASDAQ at $15 per share and reaching nearly $29 at the end of its first trading day.³ By February 2000, these shares peaked at $60 per share. Unfortunately, in March 2008 the shares were delisted^[2] and by November 2013 they sold for a mere $0.06 per share.^[3] Bardin reflected on this experience:

Going public is a traumatic experience for any company. Employees, investors, and other interested parties begin monitoring the stock daily and, for the most part, their sentiment can be tracked by how well the stock is doing (especially since most peoples net worth is tied to it). When the stock starts tanking, it brings with it negative PR, criticism from investors, and depleted employee stockplans. Consequently, morale drops and the company begins to focus more on quarter-to-quarter performance and stock price than on product success. This is hard on everyone, especially the CEO, who is tasked with maintaining morale.

Bardin resigned as Chairman of deltathree in January 2007 to join Intercast Networks. Intercast offered a download-to-storage platform that optimized the capacity of networks to deliver heavy amounts of content to users and to leverage the inexpensive and increasingly high capacity storage available across devices. Assuming the role of CEO, Bardin was tasked with developing the companys strategy and helping raise a round of financing by the end of 2008/beginning of 2009. Unfortunately, the global financial crisis rendered a capital raise nearly impossible and the company went insolvent in December 2008. In March 2009, Bardin joined the digital mapping company Waze.

DIGITAL MAPPING

A digital map was a virtual image of terrain, roads, and objects of interest created by compiling and formatting data stored electronically. These maps were displayed on a multitude of devices and, unlike paper maps, could be updated and accessed in real-time. Using a digital map, a consumer could calculate destination-to-destination distances and choose between virtual, satellite, and hybrid views.

Digital Map Data

Traditionally, digital map providers utilized digital map data gathered either through expensive in-house operations or by outside companies. This data was a digital representation of road transportation infrastructure and included real-time traffic information, street names, addresses, and turn-by-turn route guidance. Third-party companies developed navigation databases and licensed the information to the navigation and location-based product vendors that supplied products, such as in-dash automotive navigation systems, to the end consumer.

Until 2008, two providers dominated this market globally, NAVTEQ and Tele Atlas. This duopoly was in part due to the tremendous capital expense necessary to capture reliable mapping data. These companies employed thousands of people and dispatched hundreds of trucks to build their databases. Other companies had considered entering the market, but were deterred by the estimated $250 million it would cost to build a base map and $150 million per year to maintain it (just in the U.S.).

NAVTEQ

Founded in 1985 and based in Chicago, Illinois, NAVTEQ created, licensed, and distributed digital map data and other location-based content to suppliers of automotive navigation systems, mobile navigation devices, internet-based mapping applications, and government and business solutions. The majority of NAVTEQs revenues were generated from the licensing of its data in the EMEA (Europe, the Middle East, and Africa) and the Americas, primarily to manufacturers of self-contained hardware and software systems installed in in-dash vehicle systems, personal navigation devices, and mobile phones

NAVTEQ employed more than 3,000 people, including 700 geographic analysts in 168 offices worldwide. For the quarter ending July 1, 2007, NAVTEQ reached revenues of $202.3 million and net income of $40.9 million.^[4] By 2009, the company had achieved net sales of $975 million and an operating loss of $500 million (approximately 670 million and -344 million, respectively).^[5]

The companys main operating expense was the collection, validation, and enhancement of traffic data. NAVTEQ employed drivers using vehicles equipped with multi-view camera systems to capture and verify road-network and location-based content. These drivers drove millions of miles annually and collected more than 200 attributes per segment, allowing the company to offer navigable mapping data in 69 countries and territories. In the quarter ending July 1, 2007, this cost amounted to $66 million, with the same expense for the six months ending July 1, 2007 accounting for over $118 million of total operating costs.⁸

On October 1, 2007, Nokia announced its intention to purchase NAVTEQ for an aggregate purchase price of $8.1 billion.^[6] This transaction brought about vertical integration in the industry, with Nokia now owning the handsets, mapping platform, and map data itself.

Tele Atlas

Founded in 1984, Tele Atlas developed and licensed the digital maps used in navigation and location-based hardware, such as automotive Global Position Systems (GPS) navigation, Internet mapping applications, and mobile phones. Similar to NAVTEQ, Tele Atlas used personal drivers and vehicles to map and acquire navigational data. In 2007, Tele Atlas maintained over 3,600 full-time and contract employees.

In the quarter ending July 31, 2007, Tele Atlas achieved revenues of $100 million and a net loss of $1.6 million (approximately 72.8 million and -1.2 million, respectively).^[7] Much of this revenue was derived through its mapping functionalities for digital map coverage of over 27 million kilometers in over 200 countries and territories including the EMEA, the Americas, and APAC.^[8] In 2009, Tele Atlas earned revenues of $270 million (roughly 185 million).^[9]

On July 23, 2007, TomToma leading global supplier of in-car location and navigation products and servicesannounced its intention to purchase Tele Atlas for $2.5 billion (approximately 1.8 billion), representing a value of 28 times projected 2007 adjusted EBITDA.^[10] Due to a bidding war with Garmin Ltd., another leading GPS technology company, and regulatory scrutiny from the European Union, the transaction eventually closed in June 2008 for $4.3 billion (roughly 2.8 billion).^[11] With control of Tele Atlas database, TomTom now manufactured portable navigation devices and owned the digital map data used in its products.

Product Offerings

In its infancy, the digital map market offered navigation products that were limited to either webbased services, like MapQuest, or Portable Navigation Devices (PNDs), like a GPS. As smartphones became more prominent, location-based services rapidly expanded to mobile communication devices. By 2009, four main navigation services and products existed: portable navigation devices, smartphones, in-dash automotive navigation systems, and website services.

Portable Navigation Devices (PNDs)

Portable navigation devices ranged from in-car portable GPSs to handheld portable receivers. PNDs were often handheld or windshield/dashboard-mounted and were powered by either a battery or a cars power outlet. These devices offered voice navigation and turn-by-turn guidance by using data stored in a PNDs memory. This meant that a PNDs directions were only as accurate as the information uploaded in the devices most recent update. More advanced PNDs, however, offered wireless connectivity that allowed them to access dynamic content and provide higher quality directions.

In 2009, portable navigation devices represented over 90 million of the total 150 million turn-byturn systems worldwide. Whereas this market initially appeared attractive to prospective entrants due to its size, it began to experience stress from the increasing prevalence of in-dash navigation systems and navigation-enabled smartphones. Furthermore, by the end of 2008 there were more than 100 brands of PNDs in Europe and North America. This created a business environment with lower margins, heavy competition, and, consequently, industry consolidation.^[12]

Smartphones

Smartphones quickly became the do-it-all electronic accessory of the early twenty-first century. With these hand-held devices, users could place calls, deliver e-mail, text friends or family, take pictures, and obtain directions. In regard to navigation, applications installed on smartphones were able to redirect a traveler in real-time and did not require user-maintained updates. Navigation applications were often free to download and were equipped with options similar to those of a personal navigation device, such as voice recognition and GPS integration.

Initially, smartphones posed little threat to portable navigation device companies, as they did not have the battery life, signal strength, or widespread presence to challenge a PNDs quality and longevity. With the evolution of the smartphone market, however, these issues became less relevant and navigation-enabled smartphones began to strain PND shipment rates. By 2009, there were 28 million navigation-enabled smartphones with GPS worldwide.^[13]

In-dash Automotive Navigation Systems

In-dash automotive navigation systems provided similar functionality to that of PNDs but, unlike PNDs, were built into the dashboard of a vehicle. These systems were often integrated with CD/DVD players, Bluetooth technology, and satellite radio. Unfortunately, map data was traditionally transferred via a compact disc, rendering the units useless if not consistently updated.

In-dash navigation units emerged in the 1990s, became prominent in luxury cars by 2000, and were commonly available as either standard or optional equipment in a broad range of vehicles sold in developed markets by 2009. These systems (both factory and aftermarket) accounted for 35 million of the more than 150 million turn-by-turn navigation systems worldwide in 2009.^[14]

Online Web Mapping Services

In 2009, the two largest web-mapping services were Google Maps and MapQuest. These services allowed users with personal computers and Internet access to obtain and print directions by inputting starting- and ending-points into a website

Since these interfaces were predominately accessed through a personal computer at the time, consumers could not interact with them while mobile. The increasing prevalence of GPS devices due to greater affordability and user-desire for real-time information, as well as the increasing popularity of smartphone mapping applications, severely hampered this segments growth and potential in the mobile digital mapping space.

WAZE: COMPANY BACKGROUND

The Inspiration

Until Wazes founding, there was no dominant free digital map provider in the mobile device market. The few providers that did exist were often dependent upon database companies such as NAVTEQ and Tele Atlas, who had significant influence over which map producers they licensed their data to. Accordingly, producers were often subject to extremely rigid and unfavorable licensing terms. This created a tremendous pain-point in the industry and provided an opportunity for a disruptive technology to enter the market and ease the financial burden of data acquisition on map producers.

Wazes founders sought to capitalize on this opportunity by creating a community of social engagement that automated the map-building process. The vision was to build a map of the world, essentially for free, without having to employ thousands of people or maintain hundreds of trucks. This platform would aggregate turn-by-turn information, route details, and locationdependent data through users personal navigation devices and smartphones. In theory, over time, the crowd-sourced data and driver-sourced maps would become more accurate than other maps due to the utilization of real-time traffic data updates and re-routing information.

The Founding

With this in mind, Ehud Shabtai, Amir Shinar and Uri Levine founded Waze in Israel in 2008. The company grew from an open-source project that compiled data gathered from users mobile devices to map the country. Volunteer-drivers drove roads with personal navigation devices and sent raw data back to the founders. The founders then merged the data and sent updates to consumers who used the product. Funding for this project was derived through a $12 million Series A financing round raised in March 2008.

When Waze was first launched in Israel in January 2009, its business model was to sell its database to start-up navigation companies at a discount relative to NAVTEQ and Tele Atlas. The founders felt that by undercutting NAVTEQs and Tele Atlas prices they would disrupt the market and inhibit these companies abilities to compete. Moreover, with the inevitable advent of free digital map data, the paying consumer market would shrink, but the personal navigation device and automotive navigation device markets would continue to expand.

Due to the dearth of users uploading information to Waze at its inception, it was difficult for the company to achieve a recurrently updated and high-quality map. To account for this, Waze boosted consumer acquisition and retention by offering the product to users for free. This model proved incredibly successful in Israel and, with an eye on global expansion, the founders brought in Noam Bardin to lead the charge.

The Product Strategy

Upon arriving at Waze in March 2009, Bardin set out to craft the companys long-term strategy and steer the organization in a direction consistent with what he wanted the product to become. In his mind, this involved navigating three potential business models, each with a different focus: technology development, user growth, and monetization. As he mulled over these options, Bardin examined financials for various market players that were potential models for Waze

Technology Development Platform

Under this model, Waze would build an infrastructure upon which a community could crowdsource map data. Bardin estimated that roughly one percent of a digital maps user base would spend time to update and work on the map. The other 99 percent, Bardin felt, would use the map and create data passively. If Waze could capture the hardcore users, Bardin believed the company would be considered a technological success. Ultimately, Waze could monetize the data it acquired through these users. Waze could build this platform at a fraction of the cost spent by NAVTEQ and Tele Atlas, which Bardin believed would be valuable to many industry players.

User Growth Platform

This model involved building a community of consumer-users. People would spend time using the product, helping build the companys brand and monetization potential. Bardin felt that the number of Waze users would scale with the speed of the mobile phone market and viewed Twitter as the most accurate comparable for companies in this stage.

Monetization Platform

In the third platform, Waze would build a revenue model and monetize its consumers. This model assumed user growth, adoption, and revenue. Bardin viewed Facebook as the most relevant comparable in this stage.

The Initial Product (United States)

Waze first launched an alpha version of its product for the popular operating system Android in

San Francisco, Californiathe location of Wazes U.S. headquartersin June 2009. This application leveraged a users GPS to crowd-source data on driving patterns, accidents, and traffic. The offering then aggregated data points from multiple phones to create drivergenerated, navigable maps informing drivers of the best, real-time routes available. Whereas the data were captured passively, active users could also report in information. All users were ranked on a points system, with those who provided credible and accurate data receiving more points than those who did not. Ultimately, users with more points had a greater influence over map creation.^[15]

In September 2009, Waze launched its beta version to Android users nationwide. The product was free to download and Waze did not charge any subscription or add-on fees. In addition, Waze became available as a free download for iPhone, with an updated version released one month later. Similar to its launch in Israel, the applications quality was poor at first, but progressively improved as more users began passively uploading data. Unfortunately, when it appeared as if Waze was gaining traction in the U.S., Google dropped a bombshell: Google Maps Navigation.

SERIES B

Google Maps Navigation

Google Maps Navigation was released in October 2009 and was built on a similar premise to that of Waze: provide a navigable, turn-by-turn, and consistently up-to-date map to consumers. The application enabled users to input address information using voice guidance and provided 3D and aerial views via satellite at the touch of a button. Moreover, Google Maps Navigation integrated Googles industry-leading search engine to allow customers to find their destination using a search box. Among its other features, the application also offered automatic re-routing, live traffic data, and current business listings.^[16]

Google initially offered this product for free to Android users in the United States. This, in confluence with customers never having to purchase map upgrades, made the product an extremely dangerous competitor not only for Waze, but also for others in the industry. Upon the products release, Garmins stock price dropped 16.4 percent and TomToms fell by 20.8 percent.²⁰

Of particular concern to Bardin was how this release affected the companys financial condition. Waze had anticipated accepting a Series B term sheet the day after Google Maps Navigation was made available. Unfortunately, investors understood that Waze would now compete with a higher-quality database and Googles nearly infinite financial resources. Investors felt Waze would eventually be pushed out of the market by what would now be considered the industrys 800-pound gorilla and consequently rescinded their term sheets. Bardin described the situation:

We had a very difficult time raising capital. We could only raise money at a low valuation because investors would look at us and say, You compete with Google. We dont want to take that risk. We dont believe you can do this. Your U.S. numbers are terrible. Perhaps there is something in Israel that makes your product work, but we dont believe it is a big enough story to capture the global market.

Bardin felt an urgent need to protect the company from the Google Maps Navigation release and immediately downsized the organization and refocused Wazes go-to-market strategy on Latin America, then Western Europe, and lastly Asia. The CEO felt that Google would follow its traditional path of entering the United States, followed by Western Europe, Asia, and Latin America, and that cultivating a strong consumer base in the latter would help him establish Waze as a viable market leader. Bardin stated:

At this point we felt that our whole model had fallen apart. What we thought would immediately happen was Google would take its traditional playbook and make Google Maps Navigation free for every user on every platform. We thought it would destroy us. Google had built the application using street-view cars and, with its advanced search system, offered a higher-quality map than Waze did. From a product focus, this was the first point where we considered changing things. Giving Waze away for free wasnt going to be enough anymore.

Business initially went well in Latin America, specifically in Argentina and Ecuador, and the company began to achieve strong traction in the region. Bardin felt this success would provide him with leverage to raise capital, but was once again met by investor hesitancy due to Googles continued presence in the market. One firm, however, expressed interest in acquiring Waze.

An Acquirer Emerges

In 2010, Waze was approached by a large, multi-national technology company interested in acquiring the small start-up. At the time, Bardin felt that Wazes maps were improving too slowly and that as a consequence the company was losing market share in the United States. Consumer acquisition and attrition numbers in the U.S. were grim, and Bardin knew Waze needed a fresh injection of capital to help correct the companys internal systems and operations. Moreover, Bardin knew Waze would need a strong ally if it intended to compete with Google.

Over time, this acquisition interest evolved into an investment opportunity. The large technology company offered to invest capital in Waze if Waze agreed to utilize an established open source digital map data platform called Open Street Maps. The investing company felt that implementing the third-party companys data would improve Wazes maps and help it attract users. This deal would also give Waze access to the tech-giants product portfolio, including aerial imagery and search functionality. By utilizing the third-party platform, however, Waze would relinquish ownership of the data that was ultimately acquired from its users.

Bardin and his executive team were presented with a difficult situation. On the one hand, Waze had been unable to raise capital due to Googles entrance into the market. On the other hand, Bardin knew there was value in retaining ownership of the data Waze acquired. Furthermore, although in some places Open Street Maps data was better, the rapidity of change of data derived through Wazes model was significantly faster. This was true even in the United States, where Waze had poor traction. Bardin knew he also needed to factor into his decision the overhead and resource needs associated with the integration and adoption of the third-party provider.

On December 8, 2010, after much negotiation with the technology giant, Waze closed a $25 million Series B fund raise at a $100 million valuation. This round was led by the large technology company and was furthered by the addition of Blue Run Ventures, Magma, Vertex, and Qualcomm Ventures.^[17]

SERIES C

With the Series B round of financing came tremendous pressure from investors, Wazes board and other interested parties for Bardin to begin hiring aggressively. At the time, Wazes user growth had slightly accelerated, but cumulative usage, as measured by total active users or kilometers driven, had remained flat. This implied that the company was churning users as fast as it was acquiring them.

Thus, Bardin needed to make a decision: should he hire additional engineers and use their time to build customer features, or should he use current engineers to build analytics reports and conduct consumer testing to determine why customer attrition was so high?

Despite outside pressure, Bardin froze hiring and shifted the companys focus solely to the U.S. He took all employees off the products and projects they were tasked with and ordered them to spend six weeks researching U.S. user data. Engineers ran analytics reports, met with users, conducted surveys, and interviewed both users who stayed with Waze and those who left.

Bardin found that people understood the product, user interface, and Wazes vision, but felt the product did not work well enough. Consumers stopped using Waze because there were not enough users in the area to submit information, rendering the service less reliable than other offerings on the market. More importantly, interviews with those who left Waze suggested users were confident that Waze could deliver a better product, but were too impatient to wait for it to happen. At this point, Waze had fewer than 10 million users worldwide.

Equipped with a to-do list from Wazes six-weeks of research, Bardin used the next six months to resolve consumer pain-points. Over this period, Waze released almost one new version per month, constantly iterating to address the issues raised during the companys research. The most important metric to Bardin during this period was long-term retention, which he defined as any user retained for over three months. At the onset, this figure was as low as eight percent.

Building Momentum and Managing Interests

In October 2011, Waze released version 3.0. This version was equipped with a redesigned user interface, an upgraded search function, and a wall feature that allowed members to interact with each other. The upgraded version also integrated Foursquare and Yelp (location-based social networking websites that provided information and reviews on restaurant, entertainment, and other services) and resolved a plethora of reported bug issues.^[18]

With this release, Wazes user base grew to 10 million by January 2012. Customers began to use the product more and, wishing to benefit from the bargaining power accompanying this success, Waze began negotiating with investors. Several of Wazes founders had grown anxious to capitalize on their equity appreciation and felt that putting money aside would make it easier to focus on the companys future. Bardin reflected on this dynamic:

At the time, we were spending conservatively. We didnt necessarily need the money, but the founders wanted to take some cash off of the table. Part of the dilemma was that the founders in Israel were dealing predominantly with the products and operations side and only saw the less attractive aspects of the company. In sum, they felt the product wasnt working. Conversely, I was in the U.S. and saw the positive perception shift the product had achieved. I could see and feel the market accepting Waze. Ultimately, I approached the founders and said, Look, if I raise more money, are you fine with burning more cash?

On October 18, 2011, Waze raised $30 million at a $250 million valuation from Horizons Ventures Hong Kong and the Kleiner Perkins Caufield & Byers Digital Growth Fund and iFund. A portion of this funding went to the founders, and the remainder went into the operations of the company. This brought Wazes cumulative funding to over $50 million and brought with it several revered board members and observers.^[19]

SERIES D

On September 19, 2012, Apple was scheduled to release iOS 6, complete with built-in Apple Maps. This turn-by-turn navigation application was seen as the next big hurdle for Waze as it threatened to cripple Wazes grip on iOS users. By September 2012, Waze had held seven percent of the U.S. iPhone market, a sizable share when compared with the small amounts maintained by other mapping applications

Quickly, however, Bardin assessed Apple Maps actual threat to his company. In his interview with BGR on September 18, 2012, Bardin stated:

Apple went out and partnered with the weakest player (TomTom). Theyre now coming out with the lowest, weakest dataset and theyre competing against Google, which has the best dataset. Whats going to happen with the Apple Maps is that youre literally not going to find things. When you do find them, they might be in the wrong place or position geographically. And if you do have it, the route to it may not be the optimal route.²⁵

Shortly after, industry sentiment aligned with Bardins and on September 28, 2012, Tim Cook, CEO of Apple, issued a letter to Apples customers stating, At Apple, we strive to make worldclass products that deliver the best experience possible to our customers. With the launch of our new Maps last week, we fell short on this commitment. This comment was followed by a suggestion to try alternatives by downloading map apps from the App Store like Bing, MapQuest, and Waze, or use Google or Nokia maps.^[20] With this mention, Waze was put into the national spotlight.

By October 2012, Wazes share of the U.S. iOS market had grown to 10 percent.^[21] Bardin knew the continued publicity and subsequent consumer growth due to Cooks comment, along with Wazes intention to implement several new internal initiatives, would require that he and his team raise additional capital. Accordingly, at the end of 2012, the company arranged a $100 million Series D round of financing at a $700 million pre-money valuation.

As Bardin sat in his office at Wazes headquarters, he mulled over the implications of taking this investment and how raising such a substantial sum would affect the company and its product.