Questions:

1)    Evaluate the three business models
(technology development, user growth, and monetization) that Waze
could develop. Please use the chart below to show your
evaluation:

2) If you were Bardin in March 2009, which model would you
choose for Waze? And why? What would be Waze’s worst-case scenario
under this analysis?

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 Waze’s 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 provider’s 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 Waze’s 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, Waze’s 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 Google’s 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 industry’s 800-pound
gorilla and consequently rescinded their offers for funding.

But now, in 2012, Waze’s 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 Waze’s 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 University’s 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 people’s 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
company’s 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 NAVTEQ’s 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 company’s 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, TomTom—a leading
global supplier of in-car location and navigation products and
services—announced 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 GPS’s to handheld portable receivers. PNDs
were often handheld or windshield/dashboard-mounted and were
powered by either a battery or a car’s power outlet. These devices
offered voice navigation and turn-by-turn guidance by using data
stored in a PND’s memory. This meant that a PND’s directions were
only as accurate as the information uploaded in the device’s 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 PND’s 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 segment’s growth and potential in the mobile digital mapping
space.

WAZE:
COMPANY
BACKGROUND

The Inspiration

Until Waze’s 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.  

Waze’s 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 NAVTEQ’s 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 company’s 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 map’s
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 company’s 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, California—the
location of Waze’s U.S. headquarters—in June 2009. This application
leveraged a user’s 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 application’s 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 Google’s 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 product’s
release, Garmin’s stock price dropped 16.4 percent and TomTom’s
fell by 20.8 percent.²⁰

Of particular concern to Bardin was
how this release affected the company’s 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 Google’s nearly infinite financial resources.
Investors felt Waze would eventually be pushed out of the market by
what would now be considered the industry’s 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
don’t want to take that risk. We don’t believe you can do this.
Your U.S. numbers are terrible. Perhaps there is something in
Israel that makes your product work, but we don’t 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 Waze’s
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 wasn’t 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 Google’s 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 Waze’s 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 company’s
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 company’s data would improve Waze’s maps and help it
attract users. This deal would also give Waze access to the
tech-giant’s 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 Google’s 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 Waze’s 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, Waze’s board and other
interested parties for Bardin to begin hiring aggressively. At the
time, Waze’s 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 company’s 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 Waze’s 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
Waze’s 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 company’s 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, Waze’s user base
grew to 10 million by January 2012. Customers began to use the
product more and, wishing to benefit from th

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