In the hedge fund world and in the drama surrounding Cambridge Analytica’s harvesting of personal data, as well as Facebook’s year-long fall from grace, there have been few voices of conscience. David Magerman is one of them.
He’s the quantitative hedge fund guru who made headlines last month when it was revealed that he was the initial donor of an advocacy effort to convince regulators to break up Facebook. Overall, he contributed $400,000 to Freedom from Facebook, making it a powerful voice in the debate over Facebook’s size and influence amid federal investigations into whether the social media behemoth violated a 2011 consent agreement with the Federal Trade Commission over the sharing of user data with third-party companies. Facebook struck back by hiring Definers Public Affairs, a GOP-linked firm that distributed opposition research and tried to link the group with another Facebook critic, George Soros, the billionaire philanthropist who’s become the bogeyman of the right.
This isn’t Magerman’s first high-profile tangle. Last year, he made waves when he butted heads with the boss of his long-time employer, Renaissance Technologies. He spoke out publicly in several interviews about his concerns over the political views of the company’s then-CEO Robert Mercer, who was a major donor to the Trump campaign and a funder of right-wing sites like Breitbart News. Mercer also helped create Cambridge Analytica, pressuring the Trump campaign to use the data analytics firm, which was later disbanded amid revelations that it misled Facebook by harvesting data on over 85 million Facebook users to help the campaign better target likely voters. After Magerman spoke out, he was fired by the hedge fund. (He sued the firm, but later dropped the suit amid a settlement of his claims.)
Now, Magerman has joined Differential Ventures, an early-stage venture capital firm that invests in “future of data” enterprise technology solutions–those companies that have innovative ways of collecting, analyzing, and securing data. Or, as Magerman puts it more bluntly: the companies that are trying to “fix the internet” amid an explosion of data breaches, an erosion of privacy, and major anxieties about our digital future. He described his new role and his views on Facebook, data, campaign finance, and his departure from RenTech in an extended interview with Fast Company.
This interview has been condensed and edited for clarity and brevity.
Fast Company: What attracted you to Differential Ventures and its business model?
David Magerman: I was really looking around after leaving Renaissance and agreeing not to work in quantitative finance. I really wanted to go back to my roots of artificial intelligence and machine learning research and see if I could find young companies that could benefit from my experience, both academic experience and also my real-world experience deploying data science models at Renaissance. And I went and spent a couple of weeks in Israel looking around, getting to know their startup culture and meeting with some people who represent and engage with the entrepreneurs in Israel. And one of them said, I’ve got this great team that you should look to join. The only thing is, they’re not in Israel, they’re back home in Philadelphia. And so, I met Alex, who is one of the managing partners of Differential, and we really hit it off and they share my interest in helping young companies.
I’m more of a pure technologist. They’ve got more of a general background in venture capital. And so it’s a good fit: I need the support that they provide to help me understand how best to help the young companies and they’re benefiting from my technology experience and my data science work to help inform their decision-making on the kinds of companies to invest in.
FC: What’s your role at the firm?
DM: I’m considered a founder. They’re a fledgling company. Two of the partners, Nick Adams and Alex Katz, have been together for around six months. They’ve been talking about doing this and we just now publicly launched it but they’ve been working behind the scenes preparing to launch it. And they have a few strategic seed investors and they made a few investments in companies that are ready, one of which I’m visiting tomorrow. The companies we invest in so far tend to be data management companies, data privacy, some data security and encryption or basically trying to safeguard data and help manage the organization of data so that it can be used and monetized.
FC: Tell me what Differential Ventures seeks to do differently than other firms?
DM: Well, for one thing, we’re looking to holistically support companies. Alex is a CPA and a lawyer and was a CFO at ff Venture Capital before he became a managing partner. And he brings to the table a lot of financial and regulatory support, helping with the kind of things that young companies typically can’t afford to do and typically tend to neglect, sometimes to their failure. So by offering some accounting services and some guidance on what legal issues and what financial issues are really important to worry about for their particular business, we can prevent failures that have nothing to do with companies’ core mission but simply because they didn’t spend enough on accounting or legal. And Nick has a lot of experience with marketing and sales. For a small fund like ours with three principals, we bring a lot of strength to the table to provide a good foundation for the companies to succeed.
“We’re going have to bite the bullet”
FC: Now obviously there have been so many breaches lately, like the Marriott breach. What are companies not doing that they should be doing when it comes to collecting and securing data?
DM: When you talk about the breaches, you’re talking about the breaches that we’ve learned about. The idea that these are times that your data’s been breached is, I think, just naive. I basically come to this assuming that my Google inbox on my laptop is in possession of anyone who, you know, will pay enough to buy it because I don’t have enough security on my home network, and the places that I connect to. There’s so many ways in which you can get hacked and so much sophistication out there that you have to assume that your data’s been compromised unless you are taking maximal efforts to secure it.
FC: Or you’re living in a cave.
DM: Right. Well, I think they have good access to caves now. But I think there’s also the idea that once you’ve aggregated enough data, like half a billion users, a 100 million users, aggregation of a lot of valuable private data. Once you’ve aggregated enough data, even if you try your hardest, I don’t think you can really succeed in safeguarding it in the current environment.
And so I think that you obviously have to make your best efforts and hope that if you do get compromised, you get compromised by the kind of people that aren’t going to damage your customers and your core market. Some people steal data just because they want data. They might want to monetize it themselves but they’re not going to hurt the people they’re stealing from. Whereas some people can steal data and then use it to victimize the people it’s stolen from. So you hope that that doesn’t happen.
But ultimately, one of the reasons why I’m getting into this whole area is to see if we can find solutions to fix the internet, to create pathways to the internet that are safe. I’ve had an email account since 1986. I’m an early adopter of the internet and an early engager with it. And back when, when it started, you know, we were reading technical papers and academics were sharing information in usenet groups, but it really was not a professional environment. Now we’re transacting international diplomacy and international finance and passing along legal contracts and doing banking and all that on an internet that was not designed for professional activity.
So, at some point we’re going have to bite the bullet and and do the heavy lifting to reform the structure of the internet. And even before I joined Differential, I’ve seen entrepreneurs with ideas of how to go about doing that, and hopefully some smart people will come along now with good ideas and then we’ll be able to fund them to see them have an impact on the internet landscape.
FC:: For investors and also for consumers, it definitely seems like data is becoming more of an issue–its security, its privacy. Do you expect that to continue to increase in importance?
DM: I’m glad people are starting to pay attention to the importance of data privacy. But in some sense, in the current environment, privacy is dead. With everyone having a video camera on their phone, you really can’t expect a certain level of privacy to exist. But the things that you thought that you find valuable, the things that you find important, you ought to be able to protect them. And you want to be able to communicate them to a small circle of trusted people without everyone being able to see them. And so there were a lot of companies that were formed in the last 10 or 15 years who are basically monetizing the flaws in the internet and almost leveraging the flaws in the internet to give themselves room for profit.
And, you know, I think that game is coming to an end. We’re going to have to start fixing the problems with the internet, which are going to make those kinds of companies less valuable. As a simple example: anti-virus software. Well, if we got rid of the viruses, then we wouldn’t need it. And so if someone found a solution to eliminate the ability for you to transmit viruses without accountability, then anti-virus companies would not be worth it.
FC: What are your thoughts on some of the data privacy legislation that is being considered? Obviously California passed their bill and now it’s being debated in D.C. and other states. What are some good reforms that you recommend?
DM: Well, I think in America it’s going to be really hard because there’s so much of a strong profit motive. And a lot of this legislation is going to be so damaging to the valuations of companies like Facebook and Amazon and Google. I think the real innovation is coming from Europe, GDPR being one of the prime examples. Their appetite for protecting citizens’ privacy at the expense of a financial value is admirable. Luckily for Americans, when Europe decides to make a sea change in their data privacy rules, international companies have to comply and they comply for all their users. So we’ve seen a whole slew of changes that have been made since the GDPR.
But I think that ultimately within the construct of the existing internet, I don’t think that there are any real privacy rules that will be effective. Because people are too careless with their data and it only takes one contact. You’re only as strong as your weakest link when it comes to security and if you are communicating with a circle of people and any one of them is promiscuous with his or her data, then the whole group becomes compromised.
Fighting to break up Facebook
FC: Obviously you’ve been in the news recently due to Freedom from Facebook. What kind of changes would you like to see Facebook make, for example, in terms of how they handle data and use it?
DM: I think the big problem with Facebook is that… there’s always been the joke that the customers of Facebook aren’t its users. Its users are its product. But I think it’s actually worse than that. Its users are its unpaid employees. And all of us are neglecting our own full-time jobs by spending our time creating content for Facebook and creating reasons for other people to be on Facebook, including advertisers and particularly motivated bots. But the main change that I would make to Facebook to ameliorate the problem is to break Facebook up into two pieces. One piece which is solely a social media company whose customers are the users. An entity that defended its users’ interests and whose profit motive and profitability model was based on making its users happy, presumably because they’re paying for the service, which I think is a necessity. And then the other piece of Facebook at arm’s length, trying to monetize in the way that they’re doing it now, trying to monetize Facebook users but doing it in a way that is on a level playing field with other people trying to do the same thing, and not being able to compromise data that Facebook isn’t allowed to use.
FC: Are you still involved with Freedom from Facebook, like giving them money?
DM: I still support them in principle. They haven’t asked me for money in a while. They have a coalition of people who are supporting them. I certainly would continue. People know Freedom from Facebook. I’ve supported a lot of different groups in the political realm but none of them have become quite as high-profile as Freedom from Facebook. And that’s the one that I was the most concentrated on, the other ones I didn’t originate. I just heard about them and thought they were worthy investments. But I still think Freedom from Facebook is a useful investment and if they did come around for more money, I would give it. Even though it was designed as a way of dealing with a particular problem being Facebook, it’s really more of a general problem of data aggregators around the internet.
It’s not just Facebook. Even beyond Twitter and Instagram and LinkedIn. Go into like Amazon and Google and any company really that aggregates a lot of data that the users kind of mindlessly expect is private, but which is extraordinarily valuable but for the annoying data privacy agreements that they make with their customers. And so the profit motive pushes these companies really hard to find ways to get around their agreements to monetize the data. And I think, to an unfortunate degree, they succeed.
“An obligation to inform the public”
FC: When you left Renaissance, about a year and a half ago, you mentioned maybe working with Elizabeth Warren, if I remember right, and maybe getting into politics. Is that something that you’ve been doing?
DM: No, that was kind of a careless reference that I made back then, partly out of disappointment in the way I was being treated. But really I’ve never been a politically engaged person in terms of a partisan person and the political things that I’ve engaged in in the last year or so have really been focused on nonpartisan efforts to kind of help democracy, not so much to help one party.
Personally, there was a day when I was actually hoping for a strong right of center government. This time around, feeling like we need some balance on some issues that I’m more kind of centrist about. And I’m disappointed that we ended up electing an administration that has no hopes of being effective and that really is not a good representation of conservative politics or conservative economic policies.
FC: Do you believe in campaign finance reform?
DM: Oh yeah [laughs]. But I mean, as long as we have the current structure, the reform needs to go back to one man one vote, not $1 one vote. And both sides of the aisle, no matter what the rhetoric is, the Democrats understand that the current landscape is a great way for them to accumulate a war chest as much as Republicans do. So even though each side’s going to snipe at the other side for their fundraising tactics, no one currently in office seems to want to do anything about it because they take advantage of it as much as anybody.
FC: Have you talked at all to Robert Mercer recently or no?
DM: Who? [He laughs.] Obviously, we’ve said our piece to each other. I don’t think we have a whole lot to talk about. But no, I haven’t been in contact with him.
FC: Do you know what he’s up to these days? What he’s funding or who? Who’s the new Cambridge Analytica? It feels like there’s a lot of murkiness on that topic.
DM: I didn’t know what was going on before all that came out. Most of what I’ve learned about, I learned from the press. I’m not exactly a great investigator of behind-the-scenes goings-on in the political world or Robert Mercer’s world. If you ever learn, I’d be happy for you to let me know.
FC: Certainly. There are a lot of unanswered questions. Why did you drop your lawsuit against Mercer and Renaissance?
DM: I worked for Renaissance for over 20 years. They’re the one place that I ever worked in my professional life up until now. And you know, it was unfortunate that we got involved in the situation. We found a way to resolve it without pursuing legal action to its conclusion. And I’m very happy with the way we settled things. My dispute was never with Renaissance Technology and it really wasn’t with Robert Mercer personally. The issue had to do with some political activism that was going on that I felt like, just as a citizen of America, I had an obligation to inform the public about. And I did so. And that was the end of it, as far as I’m concerned, except that I got suspended and fired.
But I feel very good about where I am now mentally and personally. And I wouldn’t quite go as far to say there’s no hard feelings. But, you know, I’ve definitely moved on. And I think that it was resolved in a in a very satisfactory way, so there’s absolutely no reason to continue legal action.
FC: Like a financial settlement?
DM: It was really just a restoration of, I can’t talk about the details, but it was the restoration of what was commensurate with what I’d earned as an employee for 20 years. I basically retired, which was fine with me. I was on the verge of being ready to retire anyway. I wouldn’t characterize it as a financial payoff as much as it a restoration of retirement benefits.