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Lots of bloggers have written about a new tool that launched yesterday. Weatherbill allows businesses and high net worth individuals create contracts based on the possibility of bad weather. To find out more about the tool and get some questions answered from bloggers, I gave Weatherbill co-founder David Friedberg a call. David explains Weatherbill as removing the weather risk from your business. David also notes that 75% of businesses are affected by the Weather costing upwards of three trillion dollars a year. One important note that it seems most of the bloggers have missed; this service only is available for businesses with a net worth of $1 million or individuals with a net worth of $5 million or more.
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Click the start button below to begin the audio interview (19 minutes) (or download the mp3):
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Below is a full transcript of the interview.
Allen Stern: This is Allen Stern with centernetworks.com here today speaking with David Friedberg. David is the founder of a new tool called Weatherbill. Weatherbill offers weather contracts and they will pay you when weather conditions may impact your business. So they can pay you for rainy days that may keep your customers away, a heat wave that may impact the buying habits of the customers, or even a frost that may decrease the yield on your crop.
I thought it was kind of an interesting tool with an interesting algorithm and wanted to find out more, so I gave David a call. If you would like to find a transcript of this interview, visit Center Networks at www.centernetworks.com. Without any further ado let’s roll the interview with David.
Allen: David, why don’t we go ahead and get started. Maybe you could start by providing a brief background about yourself.
David Friedberg: Sure. I was most recently at Google where I was the business product manager for the Adwords product. I was part of the original corporate development team of the company. At Google I led a number of strategic projects and acquisitions that the company undertook over the last few years. I was at the company for between two and a half and three years. Prior to Google my background is more technical than what my role was. I have a degree from Berkeley in astrophysics and spent some time doing work at the Lawrence Berkeley Lab at Berkeley. My co-founder is also from Google; he was an engineer at the company.
Allen: All right, so let’s jump into Weatherbill. What is it and where did the idea come from?
David: Weatherbill is what we’re calling a financial services platform. We provide a contracts that can protect businesses or high net-worth individuals from the weather. We will pay out any specified amount for any sort of weather conditions to that buyer. For example, if you are a golf course, every day that it rains you have to shut down the golf course. Let’s say that you lose $2000. Now you can buy a contract from Weatherbill and every day that it rains we will pay you $2000. So you are effectively hedging yourself against the weather. You are removing the weather risk from your business.
These contracts can be bought for any of 200 U.S. cities. The interface in the site that we’ve created is completely self service and completely automated. So a business owner, manager or CFO can go to the site, specify the conditions that matter to him or her – and a contract can last anywhere from one day in length of coverage up to six months – and we will spit out a price. Then a contract can be purchased using a credit card, a wire transfer or a check right there on the site.
Contracts can be based on anything from precipitation to temperature. A contract can be customized for, say, a crop farmer that might want to protect against an unusually cool winter or an unusually cool summer, which is something we’ve been seeing in California this season. There are a lot of citrus farmers that are seeing 70% of their crop wiped out because of the coolness and the frost associated with this wave of coldness we’ve had over California. Those farmers, in theory, could buy a contract that would pay them out for every degree that the average temperature during a season is below a certain number, or they could get paid out a one time amount of $100,000 if there’s a couple days of frost in a row and so on. So the contract can be customized to suit the needs of pretty much any type of business.
The interesting stat that the Department of Commerce puts out is that over 70% of U.S. businesses are impacted by the weather every year. It has an effect on three to four trillion dollars in the U.S. economy. So it is a significant problem and we are trying to provide a significant solution to all these businesses.
Allen: OK, so on that $2000 contract you talked about at the golf course, how much would something like that cost?
David: That’s an interesting question; we get it a lot. It really is dependent on where your business is located. For example, if you wanted to buy a contract for the month of June in Phoenix to pay out $2000 for every day it rains that would probably cost you a hundred bucks. If you wanted to buy a contract that paid you out for every day it rains in Seattle during February or April that would probably cost you a lot more. The system also allows you to say, “only start paying me after X number of days.” So if you’re based in Seattle and you know you can handle 12 days of rain in a given month, you can buy a contract that only starts paying you out after 12 days of rain. So these contracts, again, can be customized to suit the needs of any business, and thus the pricing can be adjusted to meet the needs of any business.
Allen: So is it like an insurance policy then?
David: It can be like insurance if you were to set a high strike, which is what we call that when we talk about the number of days before payout begins. The difference between these contracts and insurance is that a) these contracts are not based on your demonstrated asset loss. You don’t have to come to us with a bunch of receipts and say, “Hey, here’s how much money I lost, pay me out,” and then we investigate and figure out if you actually lost that money. B) There is no claims process. We get automated weather settlement data every day. We take that settlement data and if you are owed money based upon the weather we pay you, regardless of what the impact was on your business. So you are buying contracts to protect yourself against weather risk, but the actual pay out is based upon what the weather conditions were.
Allen: I was just going to say I think it sounds very interesting. I just envision the average person trying to understand how it works; it might be a little bit complicated I think.
David: Sure. Let’s think about eligibility for a second. The contracts really are designed for small to mid-sized business owners. Even large businesses can utilize these contracts. These contracts are regulated financial instruments, technically. So we have to limit our sale of these contracts to what are called “eligible counterparties”. An eligible counterparty is going to be a business that has a million dollars or more in net worth. If you’re an individual you have to have five million dollars or more in net worth. So it’s a pretty stringent requirement that is going to limit the access of these products to most individuals that want to come in and make a bet on the weather. They really are designed more to help people protect themselves against weather risk.
I can go through a lot of different examples to help illustrate. I think that the golf course example typically helps to get the point across. Maybe the example of the farmer that has a vineyard in Northern California. If there are two or three days of frost during the grape growing season then an entire season of wine is ruined. So he would want to get paid out $100,000 if there are two or three days of frost in his city.
If you think about it, there are a lot of businesses that have weather risk that is not catastrophic like I just mentioned. Movie theaters, for example, when it is rainy or cold outside movie theaters see a huge spike in ticket sales because people tend to go indoors and participate in indoor activities on cold and rainy days. So the movie theater will see some relative contribution during cold and rainy days that’s going to increase their revenue. So on very warm days, obviously, that movie theater is not going to do so well. People are going to tend to go outdoors and the guy that rents bicycles, the guy that rents boats and yachts, the golf courses, the amusement parks, etc., they do very well on the warm, sunny, happy day. So there are all these different businesses across industries, across regions, that have some different levels of sensitivity to the weather, that have some different levels of impact – some that lose a lot of money, some that lose a little money.
In addition to providing these contracts and underwriting these contracts, on our site we also have a number of automated free tools that businesses can use to figure out how they might be sensitive to the weather. We have one tool that will allow a business to upload their financial report or their QuickBooks report directly out of QuickBooks and type in their ZIP code and we will correlate their business to the weather. We’ll tell you your business is most sensitive to the temperature when the temperature is above 80 degrees you typically lose $200 a day and so on. So we’ve built this whole set of automated free tools, that we hope are pretty easy to use, that businesses can use to figure out how the weather might impact them.
Allen: Well I appreciate that. That certainly helps a lot and I think people listening to this will now better understand how the system works. Can you share some information about your funding? I read some information about it on TechWatch and I wonder if you could share some information about that.
David: We’re not going into too much detail about the size of the funding round. We have disclosed some of our backers. We have funding from NEA, New Enterprise Associates, which I believe is the largest venture firm in Silicon Valley to have some insane amount of money under management – nine, ten billion dollars – and Index Ventures. Index is the venture firm that funded companies like Skype, MySQL, Bestfares, Spotrunner, Zend – the guys that do PHP – a bunch of really good companies. They are a fantastic team and I’ve known them for some time, since my days at Google.
We also brought in a number of really useful angels; people that we thought would be helpful in helping us build out the business and thinking about how we can go to market from a number of different angles. Niklas Zennstrom, the founder of Skype, through his Atomico fund is an investor. Joshua Shachter, the founder of del.icio.us, is an investor. A little known fact about Josh is that before he founded del.icio.us he was actually an equity options trading programmer at Morgan Stanley. So he worked on a derivatives desk and has significant experience in this market. We also have funding from Howard Morgan of Idealab and First Round fame, and a number of folks from Wall Street, all of whom have requested not to have their names disclosed. They include folks that run risk management programs at very large banks and proprietary trading systems at some very large banks.
One of our largest angels is a guy named Sean Park. Sean writes a really interesting blog at parkparadigm.com. Sean’s whole thesis is that technology will have this convergence with markets and there will be this new emerging trend of digital markets for everything. Sean was most recently the head of all digital markets at Alleon, the large bank. He was also the head of the credit flow products team there. Sean was an investor in a number of these companies that are built around new and interesting markets and he’s been a great advisor to the company.
Allen: Well it sounds like you definitely have a great backing behind you, not just in the money sense, but in the business sense as well to help you get going, which is awesome.
David: Yeah, that was the idea. I’ve come to realize in my brief years on this earth and in Silicon Valley that whether someone puts in $50 or $50,000,000 into a company, they feel vested in that company and they try to take an active contributory role regardless of the size of their investment. I thought it would be helpful, if we could, to get access to some of these fantastic advisors and investors – really experienced people who could help us – and it was easy to make it happen.
Allen: So who are the competitors to Weatherbill are there any out there?
David: We’re not really aware of anyone that’s got a similar model to us right now. You can buy weather derivative contracts on the CME, the Chicago Mercantile Exchange, today. But the Chicago Mercantile Exchange only trades weather derivative contracts called heating degree day and cooling degree day contracts for 18 U.S. cities. A heating degree day contract pays you out for every degree below 65 in a particular city, summed up over the period of a month and a cooling degree day contract pays you out for every degree that the average daily temperature is above 65, summed up over the period of a month. The reason 65 is the threshold is because these contracts were born out of the energy industry and are still traded by only energy companies. 65 degrees is the low point for the price of energy. When the temperature is below 65 people tend to turn on their heaters, when it’s above 65 they tend to turn on their air conditioners. 65 degrees is where the heating degree and cooling degree day contracts were born. The CME trades these contracts. Almost all of the liquidity today, almost all of the volume traded is by energy related hedge funds and energy companies themselves that are hedging the price of energy.
The real value that we bring to the table is we open up access to this important financial instrument to a whole swath of businesses that have never had access to this type of protection before. It’s unfortunate that there are a number of regulatory issues in the U.S. that prevent this from being easier. We have done what we can to create a technology platform that allows a business to come to a web site completely customized with the contracts that it makes sense for them, and buy a contract for as little as a dollar, up to any amount. There is no real cap on how much we can provide coverage for today. It’s a way of providing liquidity and access to financial instruments that were previously unobtainable to anyone that is not an energy company.
Allen: Let me ask you a couple of kind of interesting questions. One of my friends who I was talking to about this interview said, “Ask him if your system expected it to be this warm this winter.”
David: There are a number of providers of short-, mid-, and long-range weather forecasts. Our system, the pricing system and the risk system incorporates not only the short but also the medium and long range forecasts from a number of different providers. We adjust our dependence upon those different forecasts based on the historical success of those forecasts. That’s the first step in adjusting our pricing models beyond just using historical weather. We incorporate these weather forecasts feeds. That’s done on an ongoing basis. It’s a pretty dynamic system because we are constantly getting these forecasts.
The next step in our system, which also helps mitigate this point that a lot of people have been saying, “Aren’t you going to get wiped out if there is a crazy cold or crazy hot season?” is that or system automatically adjusts pricing based upon demand for products. It’s almost like a self adjusting marketplace. If people are buying a lot of rainy day contracts our system will raise the price, raise the premium for rainy day contracts and it will decrease the premium for dry day contracts. If people are buying a lot of hot day contracts in Philadelphia, we will start to raise the price of hot day contracts in Philadelphia and drive down cold day contracts in Philadelphia. In addition to incorporating all these short-, mid-, and long-range forecasts, we also incorporate where the market in headed in adjusting our prices.
Allen: It certainly sounds like a very complex algorithm which is probably very much needed for a system like yours. Now for my last two questions, I did a lot of research about you guys and read a lot of blog entries. One of the things I noticed from a lot of the commentors is whether this system is considered gambling. I wonder what you thoughts are there.
David: I read an interesting blog comment yesterday which really resonated, and I really liked it. The comment was that not buying one of these instruments is gambling, because if you are a business owner and you are sensitive to the weather, you are basically gambling on the fact that the weather is going to work out in your favor. If you buy one of our instruments protecting yourself from bad weather, you are essentially locking in some chunk of your revenue by removing that risk or uncertainty from your business. In essence, our contracts can almost be considered the opposite of gambling. You are a business owner buying these contracts to protect yourself from weather risk. You are essentially removing that risk from your business and removing the gambling, the uncertainty from your revenue stream.
These contracts can only be bought by businesses with a million dollars of more net worth, or individuals with five million of more net worth, so speculative gamblers that want to bet on whether the weather is going to be 78 degrees tomorrow, and bet ten bucks that don’t meet those definitions are not eligible to buy the contract in the first place. Just like any other financial market, you are buying a financial instrument with an expectation of where that instrument is headed. Just like any other derivative instrument you are buying a financial instrument with an expectation of what the underlying asset is going to do, in this case what the weather is going to do. We view our contract as being risk mitigation or removal of risk from a business and provide that function versus make a bet on what you think the weather is going to do.
Allen: Well I appreciate the clarification. All right, last question, now that you guys are live, what’s next?
David: There is a huge opportunity out there as I have outlined in my comments and stats and so on, and it’s important for us to get out there, to access the right clientÃ¨le, to get the word out, and to line up some great partners. If there is anyone out there listening that has an audience, that owns a website, that sells a product to customers and users that might be weather sensitive, there are great ways that we can package our services into what you are providing today to allow you to provide weather-guaranteed or weather-free products or services. We are open to those discussions with any partners that might be out there, and we are working on all fronts. We are selling to customers, we are working with partners, and we are doing what we can to get our product out.
Allen: All right David, that basically all the questions I had for you. Is there anything else you would like to add?
David: No, I think that’s it. I encourage people to check out the site, use the tools. Everything is free. Everything is open, complete access. You don’t need to register to do any of the stuff. The only thing you need to register to do is to actually buy contracts. We encourage people to provide feedback and we are looking for great engineers, great marketers, and great biz.-dev. People. If there is any one out there that might have an interest in joining the team and trying to help us accomplish these audacious goals, please send your resume to firstname.lastname@example.org. Thank you Allen, appreciate it. Take care.