Travis Jarae [00:00:10] All right. Welcome, everybody, to the June investing and identity form. I’m your host, Travis Gray, founder, CEO here at Liminal. Joined by the typical cast and crew, Cameron Ambrosi and Dave Fields. Welcome, guys.

Cameron D’Ambrosi [00:00:25] Idaho. Exactly.

Travis Jarae [00:00:29] All right. Jumping right into it, obviously, it’s the beginning of summer. So do you guys have any fun plans?

David Fields [00:00:37] I’m planning to Google where it is that hidey ho came from. Beyond that, I’m kind of pretty booked the summer.

Travis Jarae [00:00:46] Cameron, any plans for you?

Cameron D’Ambrosi [00:00:50] You know, decided to become an independent app developer to recreate the club haunt app that I used to use that’s been pulled down from the app store, the ham horn app that is touted as the replacement. The quality of the sample is not up to my standards. So stay tuned for that.

Travis Jarae [00:01:07] All right. Well, bad. So that’s good. You guys got some good summer plans. Let’s jump into the content for this month. So obviously things are getting pretty interesting here in the identity market, both in a good way and a little bit of a scary way for some folks. We had some very notable news, though, coming to us from the Fido alliance. You know, we’re going to be breaking these things down one by one. But Fido, as well as the group of big tech companies with Apple, Google, Microsoft, all announcing what they’re doing with the Passwordless authentication. So we’re going to talk more about that here in a minute. And of course, one of the bigger things that impact this well beyond just the identity market is the Fed here in the U.S. and the increasing rates. So we’re gonna break down. What does that mean for entrepreneurs investors and how does that impact the digital identity community more specifically? And of course, we have some notable investments with Middesk and Incognia Middesk taking down $57 million co-led round between Canopy and Insight Partners. We talked a lot about Middesk desk here over the months, over the last couple of years. In fact, they’re their last funding. Last year we covered in depth as well as you can probably take that from the website if you’re interested in what we had to say back then. And then Incognita, one of our one of our startups that we watch here quite closely and at Liminal three think that they’re doing some very interesting stuff around location based risk taking in 15 and a half million dollars from Point72 Ventures. We’re going to talk a little bit more about Middesk here later in the episode, but we’re gonna try something different here, this episode where we’re going to break down each topic individually between Cameron, myself and Dave. So we’d love your feedback if you’re a longtime listener to the to the form. And so with that, I’m going to kick it over to to Cameron and Fido. Obviously, this is a really big announcement. A lot of people worked on this for a very long time. And this has been kind of, you know, I’ll believe it when I see it type of news. And then we saw it. So what are we talking about here?

Cameron D’Ambrosi [00:03:14] So you know the death of the password favorite hobbyhorse discussion point you know fulfill her of Betteridge is a lot of headlines where you know if you have to ask the question is this finally going to kill passwords, the answer is probably no, except for this time. I think we may finally be on that glide path towards getting rid of passwords once and forever. So Fido finally getting Apple, Microsoft and Google, you know, the big boys, if you will, on board with a passwordless standard. A lot of complexity and nuance to unpack here. Not going to burn my entire 5 minutes talking about the technical details. But in a nutshell, you know, you see the word passkey above replacing passwords which are fraught with all sorts of peril. Is everyone listening to this knows with the notion of pass keys that is similar to a password, but you never see it as a user. It is stored in your device’s secure enclave. So basically your phone becomes your password, you prove possession of your device. And then some second factor which can either be a facial biometric like face ID or a pin code or password. So there’s your your multiple factors for kind of secure multiple factor authentication. The stumbling block up until now has been to deploy this type of solution. There is no way to recover your accounts. If your phone goes kaput, you drop it in the toilet, it gets smashed by a cab and breaks. You needed either a second backup device that you already provisioned or you needed to write down and store your key like a six word phrase. And if you forgot that there was no recovering your account, you’d have to kind of start from scratch. This announcement lays out that they have been able to put together a solution that lets people through either their iCloud account or their Google account kind of recover and re provisioned new devices based on the account security for those kind of higher level super accounts, if you will. This is really exciting news because it paves the way for mass adoption of this technology because the average person is just not going to adopt a passwordless solution that requires them to rebuild everything from scratch if they smash their phone. How should companies be thinking about this opportunity that are in the passwordless space? You know, I think what is exciting about this opportunity is all of the companies that right now are reliant on traditional passwords are going to need, you know, implementation guides, Sherpas, if you will, to help lead them up this Passwordless mountain. Obviously, some larger companies are going to have engineering chops to kind of deploy this themselves. I think many are going to need Fido compliant integrators and solutions providers that help them get dialed into that ecosystem. So, you know, if if building your own password solution was prospecting for gold, I think this new business model is a bit more like selling blue jeans and pickaxes, which, as we know, maybe the people who made out best from that initial gold rush. Last but not least, what are the new business opportunities that we should be looking for just because we have gotten rid of passwords? That does not mean we’re getting rid of fraud. We are not destroying risk. I would argue we were reallocating it much like the destruction of matter. It can’t be destroyed. It just turns into a different form. You know, when I burn this piece of paper, it becomes some heat, it becomes some light, it becomes some smoke particles and ash. We are going to see a shunting of the risk of account compromised that previously, you know, stealing someone’s password, using credential stuffing was the low hanging fruit. That low point of account security, I think, is going to move to the endpoints. It’s going to move to the account recovery process. So a lot of pressure is going to be put on the mechanism for claiming that my phone is smashed and I need to provision a new device as the storage of my pass keys, making sure that Apple, Google and those folks are really thinking hard about how to protect those areas. Because now if I can convince Google or Apple to reposition a new device as that anchor of trust, I can own all of your accounts. And I think the other vector that’s really going to get some attention is social engineering. You know, if you can talk someone into unlocking their account for you and then wiring the money that you’re trying to steal yourself, it doesn’t matter how many factors of authentication are in place because the rightful owner of the account is going to walk through those and then do this malicious act on your behalf. So, you know, user, an entity, behavioral biometrics, other applications that can suss out, you know, we think you are being coached. These actions are incongruous with what we would expect you to do. Let’s throw some warning signs, some flags out there. I think those solutions are going to see a lot more adoption because those traditional channels for compromised credential stuffing, normal ATO type attacks are not going to fly in this new environment. Sorry, that’s 530. But, you know, pretty good for me, all things considered, I think.

David Fields [00:08:35] And Cameron, I have a question for you. Do you think there are do you think there are any businesses that will be reluctant to adopt passcodes just because they won’t want to be have their relationships intermediated by Google, Microsoft, Apple, etc.? Or do you see this being kind of like just a no brainer and everybody’s going to do it now?

Cameron D’Ambrosi [00:08:58] I mean, I hope I am the eternal optimist that I am. I would hope that the benefits of moving away from having to maintain kind of your own independent password and more critically password reset infrastructure is really going to be the driver here. I think there is a very clear dollars and cents business use case like cold, hard facts. This is going to save you money. It’s going to save you pain. It’s going to save you risk. And it’s going to massively increase the ability of folks you can bring through your sales funnel when they don’t hit, like create your account. You know, you throw a password recipe at them. They try their usual password that they’re using. You tell them it’s bad. It’s a whole you know, it’s a whole To-Do. And I think you’re you see a lot of people dropping out, getting frustrated and or trying to log in to transact, hitting a password, needing to do a reset and then just dropping out. So I think those reasons are going to carry the day in terms of why folks why platforms want to adopt this as opposed to concern around, you know, losing some of that touch point. Because I think the password is just such an initiator of frustration for the average consumer experience that this is going to offer some real tangible benefits.

Travis Jarae [00:10:19] Awesome. I think that’s that’s really amazing. I think we’re going to see a lot more of this right where we’ve been talking about password this companies on and off here for the past couple of years doing this this this form. So it should be really interesting to see what happens. But moving on to a pretty different topic actually with Dave here, we’re going to talk a little bit about the Fed. So not necessarily just an identity conversation. Obviously, some pretty big implications for everybody that listens to this webcast here. But you know, what happened? What does this mean? What does it mean when the Fed increases rates? I mean, tell us a little bit about this and how this is impacting businesses.

David Fields [00:10:59] Yeah. So yeah, so there’s a couple of different kind of like questions that we have in here. So, you know, the Fed, the Federal Reserve is responsible for controlling the monetary supply. It has a dual mandate here in the United States. That’s one to maintain stable prices, but also keep the economy as close as possible to full employment. So for the last decade or so, we’ve had historically low interest rates, largely because we were trying to figure out why we were below full employment coming out of the financial crisis. Right. So the Fed kept rates low for a very long time, was just really starting the hiking cycle when ultimately COVID hit. And so rates were cut through a bunch of other sort of stimulative actions that the Fed took, which basically meant reduced rates to increase borrowing activity to both improve both, sorry, to to boost and stimulate consumptive behavior by consumers, but then also to lower the cost of capital for corporations in the hopes that then that would spur greater investment activity, which will lead to both, you know, greater CapEx, but would also boost, you know, sectors like housing, manufacturing, etc.. So now for for I think there’s some if you listen to political discourse, I think people want to attribute it will make certain arguments. But I think a lot of what we’re experiencing right now is, is some of it’s from COVID stimulus and the Federal Reserve’s the actions that the Federal Reserve took to both fiscal and monetary stimulus. A lot of it’s also just the result of the kind of war between Russia and Ukraine. So gas prices are up 75% since Russia, Ukraine, Russia, Ukraine provides something like 30% of the world’s wheat supply. So for consumers, they’re really feeling the pinch right now, both at the gas pump and for food. Combine that with still challenged supply chains and, you know, throughout the world and we’re getting huge increases in consumer prices. And so now to start to dampen some of that activity, the Federal Reserve is trying to raise interest rates, reduce some of the monetary funds, some of the monetary stimulus that’s in the economy, and reduce both kind of like consumer behavior, or at least slow and slow activity in some of the other sectors of the economy. So that’s kind of very broadly the actions that the Federal Reserve is taking now. You know, why does it matter for private markets? You know, the biggest answer is simply that a higher interest rate or a higher cost of capital just reduces discounted cash flow valuations. Right. So that’s why we’ve seen valuation multiples compress pretty significantly. Right. So I think in private markets last year, we were talking about companies sometimes raising at 50 or 100 times revenue, whereas now, you know, we’re we’re talking about companies on the high end earning something more like ten or 15 times revenue. Right. And that’s because most series A, B, C, even growth startups aren’t really expected to become cash flow positive for at a minimum, five years in many years in many times ten years plus. So if that discount rate goes up just 2% per year, the present value of those cash flows is going to compress incredibly. So that’s kind of the the economics 101 of what’s going on right now. Now, I think, you know what industries and markets are most impacted by rate increases to try to make this more digital identity specific? You know, I would probably draw a distinction between sort of stimulus, you know, pro stimulus or tech enabled services versus, you know, sort of disinflationary technology. And what I mean by that is sort of tech enabled services. I would put just to kind of put some names to it. I would include, you know, companies like, say, DraftKings, Robinhood or or Coinbase, right? So in 2020 or 2021, you know, that was kind of like the rise of meme stocks or we saw all this hilarious hijinx going on with things like AMC. It’s obviously the big one, but there were some other stocks as well. We also saw the big run up in things like dogecoin and crypto prices and we had a big explosion in people sitting at home kind of betting on on DraftKings. And a lot of that was people were getting checks in the mail. They didn’t have a lot to do. And so, broadly speaking, there is a lot of money going into entertainment and also very speculative investment activity and for certain identity companies who are responsible for onboarding people. Right. We had to you know, if you’re 18, you have to make sure you’re 18. Plus, we are who you say you are if you’re going to open a sports betting account or Robinhood or crypto. But these are all what I would consider tech enabled services, right? You could certainly do all these things. It’s not clear that technology was really something new. There is it was taking advantage of the mobile phones interface, but like was this truly disinflationary tech on the other side of that. So anyway, so that was why we saw I think a huge run up for a lot of sort of onboarding companies and KYC companies. A distinction I would then make is, is putting more like, you know, in disinflationary tech. I would put things like anything that sort of like cloud more on the enterprise, more B2B style technologies where we have a new technology trend and it’s actually enable people to take a lot of cost out of their cost structure. So rather than just making something more convenient to do through a mobile phone, you actually are somebody who’s actually fundamentally transforming the nature of how we do work or perform certain compute operations, ultimately in a way that offers cost benefits at scale, right? So that’s disinflationary to produce the same good or product. It now is going to cost less to do so. So anybody who’s wed to disinflationary trends, I think is going to be it’s going to have some tailwinds very soon, whereas kind of the more tech enabled services I think is going to be really, really challenging. So when we say like what opportunities are available to investors in natural resources time like now, I think, you know, I’m not a macro trader or a stock trader per se, so I’m very reluctant. I’m not making a call on where the S&P 500 is right now and whether we found a bottom or it’s going to go it’s going to go up, continue to go down or not. But like, we have had a very broad market sell off. Right. So it’s the proverbial this is time we have, you know, the proverbial babies being thrown out with the bathwater. Right. And so I think there are certain types of businesses that have been very well funded for the last couple of years because they were able to show incredible user growth. And I think those businesses are going to be really challenged. But I think companies that actually have a strong disinflationary story, strong unit economics, where they can actually show that they’ve got a very identifiable path to profitability, I think those companies are going to be served very, very well. And so the last kind of like the last concluding comment that I would remind and I talk about this, that I talk about this often, which is that, you know, identity is an intermediate good. It’s not something that end users actually consume directly. You know, when people say, you know, identity is is an enabler of inclusion, like that’s actually what we mean. Like inclusion is this high ideological, aspirational work. But really what that means in economic sense is that like identity fundamentally enables all these things. It’s an input to all of these things. And so understanding what the end market is and what that industry or market looks like in a rising interest rate environment is really going to determine how different companies perform over the next 3 to 5 years. And so I think, you know, there are some companies that because of the sectors they’ve been using, are going to be really challenged now because those sectors are going to have some real strong tailwinds. But I think there are some others that over the next 12 to 24 months are going to come out looking very, very well. And, you know, kind of like last year, I would just point to as a company like off, I believe just had an earnings beat and outperformed on revenue. And so a company like that is still showing strong performance. Now, valuation is is a different is a different conversation, but there are companies that are going to continue to do very, very well. I think it’s driven by ultimately the fundamental dynamics of that market. Is it true economic tailwinds or was it something that was just being driven by low interest rates? And I think those are two different things.

Travis Jarae [00:19:49] I think that’s something that’s very, very interesting. And, you know, when we are talking to clients, obviously here at Liminal, we we talk to probably equal parts private equity clients as well as, you know, entrepreneurs and vendors in the space building, building products and solutions. And the questions that are coming in have changed from, you know, what is the big market growth strategy opportunity to very tactically, you know, how do we break into this market? And here, of course, we have two practices that are focused on both growth strategy and go to market and just kind of seeing the switch over to. All right, no, let’s we got to actually go execute against the plans. Let’s go resize this market and not look at the TAM, but actually look at our SCM and see what we can add to it. So I think that we’re already seeing kind of the fundamental changes as well, just in terms of how businesses are starting to respond to this. But very, very interesting, Dave, I’m going to keep us moving here, but I’m sure we can have some more conversations about that offline. And the last topic here is really about Middesk. I thought that this $57 million series B was a phenomenal sign for for the Middesk team collab between Incyte and Canopy with Excel Sequoia adding on there, obviously it’s a big series B, but Middesk is kind of in a league of their own. Interesting to see how they’ve continued to build new products and a lot of those products don’t actually fit on our landscape directly, so they have additional services that go well beyond just the identity side. But you know, as I kind of look at their existing landscape, I’m really dropping them in this this Quibi, this this business in any verification space is their core primary function segment. But extending that beyond just the crab piece into data aggregation, credit, financial identity and KYC and document verification. But, you know, really, I’m more interested in what do they get spend that 57 billion, $57 million on. And obviously it’s about growth and it’s about continuing to expand their offerings. But I really see them moving into these three other areas fraud detection, risk prevention, regulatory compliance, transaction monitoring, and Kyle’s background, which is in background screening. So I really see them kind of owning this bottom left section of our landscape for specifically businesses and helping support businesses on all sides of that platform, both for the business as well as for any merchant or platform relying on this information to make decisions, whether that’s a credit decision for underwriting purposes or if that is a decision for fraud mitigation purposes. So I think Middesk here has some really cool opportunities. This is where I expect them to to land over the next year plus. So you can go back and look at our old videos here from a year ago when they raised last time and talk about what they were doing. But this is where I’m going to put my put my bet on. And I know we are running out of time here, but I wanted to quickly talk about our latest research, which is our outside in report on identity networks. And so very interesting outside and report identity networks or something that are still semi defined. We have existing identity network frameworks and then what we perceived to be the future identity network frameworks, including a lot of what we’re seeing out of Europe with ID structures and frameworks, both from a private sector as well as a public sector. So if you’re a member and you’re listening to this, check out your research catalog with the new outside and report on identity networks and then what’s coming up. We have our liminal summer networking event for our members. That will be a night out at the ball games at Yankee Stadium. And our next member content report will be on the personal identity ecosystem conditions as it is five conditions we talk about quite a bit the commerce, reputation, data protection, privacy and inclusion. So breaking those down, what are those conditions mean and how to actually look at those from a product perspective? And if you’re an investor, how do you make sure that you’re not investing in something that’s a little too stretched out across those five conditions from a consumer perspective? And so with that, I want to thank everybody for joining this month’s Investing in Identity Form, and we’ll catch you next month.