Generated Transcript

[00:00:15] Craig Syverson
So, welcome to VentureCast. I’m Craig Syverson of Grunt Media.

[00:00:18] David Hornik
And I’m David Hornik from August Capital.

[00:00:20] Craig Syverson
And this, in a sense, is a resurrection of venturecast. I. I missed it, and David did a few months ago, and then he stopped. Why’d you stop?

[00:00:32] David Hornik
Well, you know, I guess I wasn’t driving up 280 enough without phone calls to make. I mean, VentureCast was the creation of the result of me having a little digital audio recorder that I had in my pocket. And if I had enough minutes and something to say, then I would record a little Venture Cast and then stick it on the computer when I got home. And I guess I got too busy driving on making phone calls.

[00:00:57] Craig Syverson
Right. Well, you wrote a nice theme song, too.

[00:00:59] David Hornik
Oh, yeah, absolutely. Welcome to venturecast.

[00:01:02] Craig Syverson
But we won’t do that. We won’t sing for you Never again. But so what we’re doing here, this is sort of, you know, Venture Cast 2.0. I’m just gonna say that once, say that ever again. But what I wanted to do was, was come in and take the stress of the production thing off of David’s hands and come into his office and every couple weeks or so we’re going to get together, I’m going to sit him down, and we’re just going to talk about stuff. Because I miss the venture capital thing or I miss sort of the new company thing, having kind of been immersed in that professionally for the past 12 years working at Frog Design and then Ideo. So I found myself like, oh, I don’t know what’s new anymore. So that’s one of my motives here, is to sort of keep abreast.

[00:01:47] David Hornik
Great. No, I mean, one of the great things about this job is that people come in and tell me the really new, cool stuff they’re working on.

[00:01:53] Craig Syverson
Yeah.

[00:01:53] David Hornik
And that’s my job. I mean, how good is that?

[00:01:56] Craig Syverson
I know. It’s a blast. So. And we’re kind of. We really haven’t spent a lot of time thinking about this. We just sort of decided we’d wing it and go with it. So we’re working on the format. I think we’re going to mostly just it’s going to be about a conversation about Venture, about what’s on David’s mind. I’m a complete newbie in this, so I’m going to be asking some really dumb questions now and again just to sort of get clear about what it means when you start talking technical. I wouldn’t say neutral, but just sort of a beginner’s perspective. And then we’ll see. We’ll let the audience, let us know what you think. Let us know if you want us to talk more about what’s in David’s brain, which can be very scary, or if you want to learn more about venture capital or how to get funding or whatever, we’re open to that.

[00:02:41] David Hornik
No, absolutely. I think the great thing, when I started Venture Blog, it’s almost, I guess, three and a half years ago when I was. The idea was, oh, gee, there are a bunch of things about venture capital that people don’t know, and there isn’t really a good way to find out about it. So maybe I’ll write about those things. And so early on I wrote, oh, here’s a term sheet. And what do you do when you present to a VC and all those things? Well, now they’re, you know, deep in the inner recesses of Venture Blog, and I don’t know who can find them. Maybe I should rewrite those things if people care. But, yeah, I’m happy to talk about any of that.

[00:03:11] Craig Syverson
Yeah. Yeah. Well, one day maybe we’ll do venture grunt, you know, that’ll do that.

[00:03:14] David Hornik
Exactly.

[00:03:15] Craig Syverson
I also want to say, in terms of, you know, for me, one of my early experiences of podcasting was the venture capitalist talking. So a huge thank you and kudos to John Ferrier and PodTech for all the work they’ve done in just really getting a lot of these people out there. And, you know, on Mike, it’s been great. Yeah.

[00:03:38] David Hornik
You know, in fact, I was. I had the good fortune of being one of those early, early conversations with John. And it’s great to see what’s. What’s happened with, With John and the company and now with Scoble joining them. So that’s awesome.

[00:03:50] Craig Syverson
Yeah. And also to Eric Olson for Venture Week. His. His. His weekly update on. On funds and just sort of the, the bigger picture. That was always very cool to hear. And Greg’s show, Venture Voice, which is also awesome.

[00:04:08] David Hornik
Yep.

[00:04:09] Craig Syverson
So we’re providing the Venture Voice of David.

[00:04:13] David Hornik
That’s right. Exactly. So if you don’t like it, this show will rot.

[00:04:19] Craig Syverson
It’s not our fault.

[00:04:20] David Hornik
We want another vc. Can you bring in another vc? Nope, sorry. It’s. Oh, this week David Hornik, and next week, David. Oh, man.

[00:04:30] Craig Syverson
So is Venture dead?

[00:04:33] David Hornik
Is Venture dead 7?

[00:04:34] Craig Syverson
Rosen thought it was dead, right?

[00:04:35] David Hornik
Man, oh, man. They seem to have thought it was dead, at least for the time being. So that’s. That’s something, isn’t it? Well, I don’t think so. And And I still come in. No, I wake up, right? I wake up in the morning and drop off the kids at school and then I go and do venture. So now, of course, that doesn’t really answer the question because we already have an existing fund, we’ve got some money to put to work, and I can invest in things and I can lose it as well as anyone else. So maybe that doesn’t answer it, but I don’t think so. I mean, my view of it is there are lots of interesting technologies. There will always be lots of interesting technologies. And so will there be winners in any given year, in any given market? You bet there will be. And technology is absolutely a monstrous mover of the economy. And so how can there not be a business in funding early stage technology businesses? There has to be. So now there are lots of open questions, and I give seven rows in that I think it’s a reasonable question to raise, which is there’s lots of money. There are lots of venture firms. It costs less to build Internet companies. It costs a lot less to build, say, a hardware business or a chip business. So they still are pretty capital intensive. But even given all those open questions, you bet I think that there will be opportunity fund youtubes and Facebooks and Skypes and Googles of this world. And when you do fund those companies early on and they become big important businesses, then you make a lot of money for your investors, right?

[00:06:09] Craig Syverson
Now, were they questioning more the idea of. Is the actual model of venture capital the problem? Not that there aren’t companies around, but that the model of venture is flawed, do you think?

[00:06:21] David Hornik
Yeah, no, absolutely.

[00:06:21] Craig Syverson
I mean, did they return the money back to the.

[00:06:25] David Hornik
So, you know, it’s a kind of a funny thing. I mean, here’s a little, you know, mini lesson on venture capital. But I mean, the way venture capitalists raise a fund, when you raise a fund is not to actually collect a bunch of money. What you do is you collect commitments to raise a bunch of money. So you say to your investors who are foundations or universities or big rich individuals, whatever you say to them, we’re raising a $500 million fund and we would like you to you, Yale university, to invest $100 million in our fund. And they say, okay, we’ll do that. That sounds great. And then you sign a contract that says that they have an obligation when you ask them to give you money up to $100 million.

[00:07:03] Craig Syverson
Okay.

[00:07:04] David Hornik
And then over a period of time, you write them, you know, a letter and say, hey, Yale, we, we’ve finished using the last bit you gave us. So can you send us another 10 million? So what, what 7 Rosen did was they were out in the process of getting those commitments. They were out saying to their existing investors and others, will you commit to invest a certain amount of money? And those investors had committed, I think, $400 million towards their existing fund. And what they gave back was the obligation. They said, you know what, we’ve changed our minds and we’re, and we’re ripping up the contract. You are no longer obligated to give us the $400 million over a period of time because we don’t know that there’s a way to put it to work.

[00:07:45] Craig Syverson
I see. So they didn’t start investing it yet either?

[00:07:48] David Hornik
Nope, they haven’t done anything. They, you know, you have. Informing, informing a venture partnership. First thing you do is you get together with a group of people and say, what is, who are the partners that are going to invest this money? And those are the general partners. So in my, in my partnership there are five investing general partners and I, and we sat around and said, okay, you want to, we’ll go raise a fund and the five of us will be the general partners who are investing this money. And then you go out to your limited partners, the folks who are your investors, and say, hey, we’re hoping to raise a fund of X million dollars, 500 million dollars. Are you interested? And then they come in and say, yes, we’re interested.

[00:08:27] Craig Syverson
And the limited partners are these cash rich things like university endowments or retirement funds, Right?

[00:08:34] David Hornik
Exactly. Insurance companies probably have, there are pension funds. There are, you know, so any entity, their fund of funds are actually funds that collect and that raise money from other investors and then invest their money into venture funds as well. So once you’ve collected up commitments for that fund, then you say, okay, we’re now going to collect the first piece. We’re going to put to work. So all of you who’ve committed, please give us the first 10% of the amount you said you’d give us. And now you have 50 million of your $500 million fund in your bank account. And then you talk with companies and find things to fund, and then you use that 50 million to fund them.

[00:09:17] Craig Syverson
Okay?

[00:09:18] David Hornik
So I think they had, as I understand it, they had commitments to raise the money. They had not collected the money. And they ripped up the contract and said, we’re not going to do this now because we don’t think that we can take your $400 million and make it into $401 million, never mind $800 million or billion seven or whatever.

[00:09:39] Craig Syverson
So what are they going to do? Isn’t that their business?

[00:09:41] David Hornik
Yeah, well, it’s an interesting question, right? I mean, they have existing funds that they’re investing and the typical life of a fund is a 10 year fund. So if you raised a fund in 2000, then you’re going to invest it between 2000 and 2010. And so, you know, they have a few years to continue to invest their existing funds. And I think, and they said they’re going to continue to manage the investments they’ve already made and perhaps in the future they’ll decide that the environment has changed enough to raise more, but for the time being, they’re not going to take more money in and do new investments.

[00:10:18] Craig Syverson
Got it. Now there’s management fees also involved. Is that true?

[00:10:23] David Hornik
That is true.

[00:10:24] Craig Syverson
Yeah. General partners or venture firms charge a management fee to. For the overhead of doing this. Right?

[00:10:31] David Hornik
Right. Well, yes, the overhead, you know, however you measure the overhead. But in reality, the way that management fees work, in most instances, it’s a percentage of the total amount of money that you have that, that you have commitments for. So it’s not the 50 million that you have in your bank account, it’s the 500 million that people have committed to invest. And so you collect, you know, a percent or two of that, that, that pays for operations, it pays for staff and flying around to board meetings and those sorts of things.

[00:11:05] Craig Syverson
Yeah, right. So then if I understand it, a few weeks ago they sort of made this announcement, it sort of created a buzz. And then like a few days later the YouTube thing happened. Is that right? Right after that. Wow. Okay, so, so is it dead or.

[00:11:21] David Hornik
Right, well, exactly. And that’s a great, and that’s a great example. Now of course, I think that people would say, gee, you know, if we all knew that we could find a you, it’d be a great business.

[00:11:29] Craig Syverson
Yeah.

[00:11:30] David Hornik
And so the challenge is how many YouTubes are there?

[00:11:32] Craig Syverson
Sure.

[00:11:33] David Hornik
And how many funds are there chasing after Those number of YouTubes or Skypes or whatever? And so a perfectly fair question, but I think the answer is that there’ll always be a number of them and there’ll always be a number of successes and there’ll be a number of big successes. And so the job of, you know that my job is to find a disproportionate number of those.

[00:11:59] Craig Syverson
Yeah, right, right.

[00:12:00] David Hornik
The venture capitalists that find a disproportionate number of those, they’re good, they’re good at their job and they will be able to raise more money and, and, and make, make more money and all of that. And those venture investors that do not, that find a disproportionate number of the things that fail will not raise more money, will not. And you know, and they will be the, the VCs who are not as good as. So I’m confident that August Capital has had a long period of time where it’s invested money and made money for its investors and found interesting companies. You know, and so I’m, I’m confident that we’ll continue to do that. So I, you know, when we finish investing this fund, then we’ll go raise another.

[00:12:42] Craig Syverson
Yeah.

[00:12:42] David Hornik
You know, and, and we’ll find interesting stuff to invest, invest in from that fund too.

[00:12:47] Craig Syverson
Were you surprised with the YouTube thing or the amount or anything like that?

[00:12:53] David Hornik
I guess no, no. I mean I think it was a really rational decision and I guess I congratulate Google because it was a great acquisition. Now I have one small caveat. I mean there’s this incredible open question about whether or not they will be able to avoid being sued over this copyrighted material that exists on YouTube. We all know it exists. It exists in, in great quantities. And looking back not too long ago, there was another company called Napster that had this very same issue. There was a, there were great quantities of, of copyrighted material that were being traded in a way that was not legal and they were unable to rely on the same exemption that YouTube is now relying on.

[00:13:39] Craig Syverson
Right.

[00:13:40] David Hornik
Which is this, you know, Digital Millennium Copyright Act. The DMCA says, gee, you know, as long as you agree to take stuff down when copyright holders tell you that they own it, then you’re, then you can’t be sued by the copyright holders because you’ve allowed that, you know, you’ve given them the opportunity to give you notice and take down. Yeah, so that was true when Napster existed as well, only it didn’t protect them. And so the interesting question is for YouTube, are they going to be able to enter into agreements with content companies quickly enough so that they don’t get sued by them? Yeah, right, it’s, and that’s a challenge.

[00:14:14] Craig Syverson
I’ve been impressed. They seem to have a real crack legal team there at YouTube because they’ve really done some things that have been pretty smart and kind of ridden this whole thing pretty well. And when they talked about, I think it was with Warner Brothers or you know, make a Deal if something shown Warner Music. Yeah, I thought that was really smart. They’ve done, you know, to deal with, with the issue, but make it, make it a win, win.

[00:14:38] David Hornik
Well, and that’s the thing. I mean, if there is that the challenge for a YouTuber or any of these companies. I’m an investor in A company called VideoEgg and VideoEgg is a video service provider for lots of the social networks. So when you put a video up on Bebo or on High five or untagged Video Egg is the service managing the back end. And for sure those services are going to get paid for by advertising that supports them. That’s true of, it’s true of YouTube and it’s true of all of these services because I haven’t seen to date one that’s, that’s a subscription service.

[00:15:11] Craig Syverson
Right.

[00:15:12] David Hornik
So if that’s the case, then can you make enough revenue to pay the content owners to pay and to, and to maintain the necessary economics to afford the bandwidth and all of those things? Right. So that’s what we’re all jostling with is figuring out how those economics work and how much money can you give to Warner for their music video and still have enough money to maintain operations and all of those things. But I, but I think we’ll get there. I mean, I think that media companies understand there’s a real new revenue source, there’s a real distribution source, it’s great publicity and that digital distribution is really the way, the thing they need to embrace and figure out how to make Money. And so YouTube’s really done a good job of leading the chase on that and you know, so more power to them. And I think congratulations to Google for having focused on that and realized that, you know, the, the curve is unbelievable where the number of videos they’re serving today is only going up tomorrow.

[00:16:08] Craig Syverson
Yeah.

[00:16:08] David Hornik
And you know, and I don’t think that’s slowing down anytime soon. I’ve been stunned at the migration of video. You look at something like Video Egg, which has gone from, you know, thousands of videos to tens of millions of videos being served a day in less than a year since I invested. So that’s, you know, that’s, that’s just an astonishing thing. It’s driven by the incredible desire for video content and also for the fact that we have video bandwidth, bandwidth that makes it possible and all. So I mean, you know, as, you know. Right. Your video grunt podcast, which is trying to teach us all how to make great stuff as opposed to mediocre stuff. Right, right. I mean, video is, video is important and it’s not going anywhere. And, and so, you know, I couldn’t be more enthusiastic about the space. And I think that Google, you know, did a good job of buying the leading company when they could.

[00:17:00] Craig Syverson
Sort of. The tide broke for me in realizing that there was a lot of opportunity here when the. When the bandwidth got to a certain level and when Apple started to make it a little bit easier with including videos in their podcast directory, all these things converged suddenly to, like, make it really possible. And as an independent producer, I’m stunned that, you know, a year or two ago I couldn’t have done what I’m doing now, which, you know, I sit at home and I’m thinking about, about to finish up my latest podcast. I think, you know, in 20 minutes, there’s going to be tens of thousands of people watching this video. And I’m sitting here eating my breakfast right now, but then, you know, suddenly it’s going to go out there because, you know, distribution is no longer an issue. So it’s.

[00:17:41] David Hornik
No, it’s stunning. And I mean, that was the same realization I had with blogging early on. The fact that RSS made blogs accessible to lots of people and that it was very simple to subscribe to. And, you know, now, despite the fact that I write Venture Blog infrequently and too infrequently, my apologies there, I have 40,000 RSS subscribers. And so to them, they don’t have to keep going back to a website and saying, oh, well, Hornick hasn’t written anything new. They just go to their aggregator and every so often, you know, oh, there’s something on Venture Blog. I can read it. And that’s fine. Then it’s fine, right? If there was no rss, the fact that I write every week and a half or two would be incredibly frustrating. And it would mean that I’d have three readers, not thousands. And so, I mean, these distribution technologies are just spectacular and I think getting better and getting more mainstream. So that’s great news.

[00:18:36] Craig Syverson
And also when we start to get movies online in a reasonable way, for me, I think that’s going to be the big shift in the general consensus of the population when they realize that every single piece of movie media that they can get is now coming through the computer. Whereas before there was always the exception of the movie, you had to get on DVD or go to the theater. And before it was television and, you know, I had to go to a TiVo or I had to tune at the right time. And now everything is completely time shifted and space shifted. I think once that gets firmly Going the download of movies that I think the general population is going to really then be open to all these other video sources and know alternative providers out there.

[00:19:17] David Hornik
No, absolutely. I mean, then these movie theaters better figure out how to make virtual reality movies quickly or something that you can’t experience in your home. You know, that said, the movie experience is still one that is different than when it’s viewed on a giant screen, than when it’s viewed in even the most beautiful of home theaters. So there is some advantage there. And the reality is that the economics for movies really aren’t about necessarily about theater distribution. They’re not about theatrical release as much as they are about all of the distribution channels after, after that. So I mean, I don’t think the theaters are going away, but I do think that the migration, I mean this is a challenge for the DVD business. It’s certainly obviously, you know, goodbye to Blockbuster, which we’re already seeing happening incredibly quickly. I mean, but, but I agree with you, I mean that, that everything for my children is about the computer.

[00:20:12] Craig Syverson
Yeah.

[00:20:13] David Hornik
That they go to their, their lapt, all media types and they truly do. I mean, you know, I have one son, a nine year old who wakes up early every morning. He just doesn’t seem to need to sleep. And when I go in his room, he’s very quiet. Why is he quiet? Because he’s sitting at his computer, he’s looking at skateboarding videos, checking out, you know, his E Commerce or whatever, you know, or, you know, skateboards for sure.

[00:20:36] Craig Syverson
Yeah, right. Cinema’s always had this challenge and they’ve always overcome it. Like in the 50s when television came about, you know, there was this big hue and cry that, you know, people wouldn’t go to movies and, and they figured it out. I mean, they went widescreen. But in the end it’s also, it’s a social experience and it’s a, you know, we’re apes and we, you know, we want to be out in the world now and again. We’re not all hermits. And so for me the idea if the cinemas are going to. The part that they can leverage is the fact that it is a social experience. And for many people that’s the reason they don’t want to go is because of the badness of that social experience. So I really feel if there’s a way that cinemas can come up with ways that make that whole experience social and pleasurable. Serving food or changing the seating or something. I think, I think there’s a real shot at it to keep it viable.

[00:21:23] David Hornik
Now look at these. You know, I guess it was Byrne, one of the guys over at Six Apart, who blogged about going taking his new baby to a movie theater that allowed babies and they have baby night and it became this community event. Because who goes, well, they’re new parents, right, that go to this movie. And so they all are in sort of this shared social space. They all are new parents. They used to watch lots of movies, now they can’t watch movies. And they show up with their babies and they put up with sort of the noise of babies to experience the movie, but also to like hang out with a bunch of people who would take their babies to the movies.

[00:21:57] Craig Syverson
Yes, right.

[00:21:58] David Hornik
And that’s so, that’s great. I mean, you know, I’m a monstrous fan of Broadway and I think you can’t replace Broadway. It is this live theater experience. Now there are all sorts of things that have happened in Broadway to try and make it this more cinematic, more, you know, immersive experience. And yet I went to see this show relatively recently called the Drowsy Chaperone. And the Drowsy Chaperone is the most traditionally sort of sweet, sweet, non cinematic, non extravaganza like show, and just immensely entertaining. So I think that for, for all of time, entertainment will trump production value.

[00:22:36] Craig Syverson
Right?

[00:22:36] David Hornik
And, and so I think that will. And so I don’t think all things will become an experience that you live in your virtual reality glasses or whatever. But, but in other ways I’m really pretty pleased that things that digital media, that analog media is making its way to digital media and becoming available when you want it, when you need it, all that stuff, and it’s great news.

[00:22:57] Craig Syverson
And it opens up different types of media. Podcasting has opened up this short form video like what I do that really wasn’t possible or very practical before, but now it makes a lot of sense to do a five minute video, whereas before it never would. And it, and now we can do a 20, 30, 60 minute audio show. We don’t care about time. You and I aren’t caring about time right now, which is wonderful. You know, we don’t have to hit a spot, you know, or a 28 minute thing. It’s really opening up formats and different ways in which different stories to be told in different ways.

[00:23:29] David Hornik
Right? No, absolutely. And I mean, you know, God forbid we should get through our first reborn venture cast without saying long tail. But I mean, you know, the reality is there are all sorts of audiences for all sorts of content. And you know, how many, how many people would Be listening to a venture capital radio show driving down the road. Would you really get 8am 7:40 to be venture capital talk? No, you wouldn’t. But there’s certainly at least seven people who want to hear this.

[00:23:59] Craig Syverson
That’s fine with me.

[00:24:00] David Hornik
Right. And if they could all just comment on the thing, let us know what you want to hear about, that’d be great. We’re catering to you, at least six of you. I think the seventh of you is my mother. And mom, get a grip. This is not for you. This is very boring for you.

[00:24:15] Craig Syverson
Brings up a thought that I’ve been thinking about with back to YouTube and that is, is there room for the second tier players? It seems like it’s kind of becoming a winner take all. I sort of think of MySpace. I think of certainly YouTube where there’s a lot of other video sharing companies out there. Obviously they got traction and they weren’t necessarily first. But you know, as an investor, how do you feel about that? You know, these huge deals like this one and then what happens with the second tier companies?

[00:24:48] David Hornik
Right? Well, you know, as an investor, you never view your investments like the second tier company. Like your children are never ugly.

[00:24:56] Craig Syverson
Exactly.

[00:24:56] David Hornik
Right, so, but it is true, right? There are market leaders and then is there a premium over the next ones? And is the premium so great that it’s hardly worth owning the second one versus the next one?

[00:25:08] Craig Syverson
Right, right.

[00:25:09] David Hornik
So for me as an investor, I invest so early that who knows what’s the winner, right? So at the time that, that MySpace was getting funded, Friendster had already been funded and everybody thought Friendster was the winner, right? Like, oh my God, Friendster is the hands down winner. It’s growing so quickly. And then they had technical problems, they had other issues. And Meanwhile, you know, MySpace sort of quietly grew its user base, which the nice thing about social networks is they’re exponential. For each person who connects, they connect to a bunch of other people who then connect to a bunch of people. And so, so yeah, there is certainly a premium in the online space on being the biggest because you get bigger quick, more quickly, right? As long as you have some, some percentage growth, right? The percentage, if it’s the same percentage, but the base is bigger, then you’re, then you’re doing better. Now that said, you know, look at Facebook, right? I mean, Facebook is, let’s say Facebook is the second, you know, it’s the second rate, you know, property behind MySpace. Well, Facebook is a really interesting company. It’s a really interesting network for college students. It is the Network, Right. You get there and everybody is on it, and it’s the way you communicate. It really has created this, this new communications platform for a whole swath of the. The American population.

[00:26:25] Craig Syverson
Right.

[00:26:26] David Hornik
And so incredibly valuable and, and clearly valuable because they’re as. As has been rumored, I think, you know, people are talking about an acquisition a billion plus dollars, and the company’s saying, you know what? We’re not ready to be acquired for a billion dollars like that. You know, if they were offered $10 billion, would they be acquired? You know, maybe, you know, but no one’s offered 10 billion. But at a billion, they don’t seem ready to. To sell. Right? So Facebook’s interesting because it hits a particular demographic, it’s appealing at high frequency. It’s a very understandable demographic. But, you know, then even Facebook says, gee, we’re going to open up to a larger market. We’ open up to teenagers, we’re going to open up to the bigger world.

[00:27:06] Craig Syverson
I thought that was not a good idea.

[00:27:08] David Hornik
No. You don’t think so? Well, it’ll be interesting to watch, right? I mean, I can assure you that the folks at Facebook had a lot of heartburn over whether to do that, and it’ll be interesting to see. But, you know, then you look at these other social networks. Look at, you know, Dogster and Catster, right? You know, they now have 400,000 registered animals on Dogster and Catster, which is a lot of users. And now presumably the users are actually the owners of the pets, but they’re in the form of, you know, my dog Charlie and his. And not my dog Charlie, but if I had a dog Charlie, I’d put him up on Dogster because I love Dogster, and these guys are fanatical about it. They have their puppy pals and they love it, and they like talking about their life in the context of their pets. And so these are a group of people who are a great vertical. They’re, they, they. And if you’re a purina dog chow or a pet insurance company or a dog grooming company or, you know, these are the folks you want to get to. So they’re valuable audience. Are they as big as MySpace? No. And so, you know, would it make sense to have, you know, $200 million investment in a Dogster? Probably not, but still a valuable company and, and going to grow and I believe make money for its investors and, and be. Be valuable resource for the.

[00:28:33] Craig Syverson
Yeah. My comment about Facebook wasn’t based on any deep knowledge or insight because that’s not my Business. But my feeling was that it was this really strong vertical and it had a loyal vertical audience and it was almost a club, so it had a quality container around it. And when I heard that they wanted to go wider. I understand increasing numbers is a good thing, but it just seemed like it was going to dilute this. What I thought was their primary leverage point was that controlled audience.

[00:29:03] David Hornik
And it may well. Right.

[00:29:04] Craig Syverson
We don’t know yet.

[00:29:05] David Hornik
I mean, the question is, will college students be less inclined to join Facebook and have large amounts of their online communications take place through Facebook by virtue of the fact that anyone can get on.

[00:29:18] Craig Syverson
Right, right.

[00:29:20] David Hornik
The only reason I could get on before was because I had a Stanford Edu address, because I teach over at the B school, which didn’t seem to qualify me. Oh, great, the professor can get on whatever. But now I could use my Yahoo account.

[00:29:35] Craig Syverson
Right. I got a basic venture question then. In terms of Facebook, I’m assuming they’re venture funded.

[00:29:42] David Hornik
Yeah.

[00:29:43] Craig Syverson
So someone offers them a billion dollars and they say no. Do their venture investors have a say in that? Could they say, hey, yes, or does it depend on the equity position? How does that work?

[00:29:56] David Hornik
No, it absolutely. It depends on when you buy stock in a company, then you get certain rights that are associated with the stock that you buy. And it’s really just a contract. Right. It says that I’m going to buy 20% of your company, 25% of your company, and along with that, I get the following rights. I get to sit on the board of your company. I get to decide whether we raise debt, those sorts of things. And one of the things that you talk about is an acquisition. Should the company be acquired or not?

[00:30:27] Craig Syverson
Yeah.

[00:30:27] David Hornik
And. But it’s usually in the negative form. It’s any acquisition must be approved by me, which is different from any acquisition can be forced by me.

[00:30:37] Craig Syverson
Okay.

[00:30:37] David Hornik
And so in reality, unless venture investors, or, you know, investors as a whole, own a majority of the. Of the company and therefore can control the decisions of the. Of both the board and the. And the shareholders, it’s rare that investors have the opportunity to say, we need to do this deal despite management not thinking it’s a good idea.

[00:30:56] Craig Syverson
I see.

[00:30:57] David Hornik
So now I can say from my perspective, that all of those rights, the right to say you can do it or can’t do it, are sort of meaningless in the face of a management team that hasn’t a particular objective. Right. So if you have a management team that wants to take the company public and would rather not be acquired, telling them to go sell that company is a bad idea because they’re not. That is not their objective. It’s not their, you know, they’re not going to optimize for selling the company just because you tell them. Likewise, if someone comes to the company and says, we’d like to buy this company, and after conversations with the potential acquirer and with you about the upside and downside, etcetera, and they come back and say, as a management team, we want to sell the company, it’s hard to envision the circumstance where you say, you know, well, okay, I don’t think that’s a good idea. So, no, go build the company. Right. These are the folks who have to build the company. So, sure, there are circumstances, but by and large, I think really it’s a question of collectively coming to a decision with the management. Is there more to be gained in the future? And are we willing to take on the risk of potentially gaining nothing versus, gee, a billion in the hand or 2 billion in the bush? Well, there are risks associated with moving on. So I think it tends to be a collective decision. I don’t know what it is at Facebook. It could be driven either by the entrepreneurs or it could be driven by the investors, or both. We’ll have to wait until that book is written, right?

[00:32:20] Craig Syverson
Exactly. One other thing I’ve been thinking about too, is I’m sure this is a thing you balance all the time is the getting in early, the value being first, and holding on to something. Thinking. Like in the photo space with Ofoto, which you’re familiar with, you’re their legal counsel.

[00:32:34] David Hornik
I was their counsel and then an advisor and big fan.

[00:32:37] Craig Syverson
Right. And then all the other Shutterfly, which went public recently, just got public.

[00:32:42] David Hornik
And so that’s pretty exciting. I mean, it was a long ride, but they built a great company.

[00:32:47] Craig Syverson
You’re right. So. So how does that work? How does the ophoto thing versus the Shutterfly thing work? Where ophoto got acquired. Acquired. Right. By Kodak. Somewhat early, some people say for not much. And Shutterfly wrote out the. The dark period and.

[00:33:02] David Hornik
Yep.

[00:33:03] Craig Syverson
And came out on top. So how does. I mean, maybe that’s the big mystery question everyone wants to know is how do you know what to do?

[00:33:09] David Hornik
Sure. And. And, you know, me too included.

[00:33:12] Craig Syverson
Right.

[00:33:12] David Hornik
I mean, I would love the. The crystal ball. And I think you just have to sit down. I wrote this post on Venture blog about Deal or no Deal, that goofy show where you open a bunch of suitcases and then the banker up in the closet or whatever offers you. All right. Stop opening cases and I’ll give you $20,000. And you look at the cases and go, no, I’ll keep going. And it really is, I mean, in any given point in time, if someone comes and offers, you know, a legitimate company that has, has stock or cash, that makes sense. And you can, you know, you could get liquid, you could sell the company and, and be able to move on, make, make the money that’s available at that time. Does it make sense? You just have to look at the prospects for the business, right? And some of the time it makes sense, and some of the time it doesn’t. I mean, look at PayPal is a really great example where ebay tried to buy PayPal, I don’t know, three or four times. And you know, each time ebay would come in and say, okay, we’ll give you $300 million. And PayPal would say, no, give us $500 million. And they’d say, no, we don’t want to give you $500 million. And PayPal would say, well, all right, then we’ll keep going, right? And then the next time they rolled around, they’d say, okay, we’ll give you $500 million. Fine. And they’d say, nah, now it’s $700 million. By the time push came to shove, eBay went, PayPal went public. It was offered out of public price, so the price that they had to pay for it was on top of the public price that was available in the public market. And so they paid, I don’t know, a billion and a half dollars for the company that they could have paid 500 million for if they had been willing at the time. Now, the flip side of that is that there were a number of companies in, in the late 90s that were offered big dollar amounts, you know, 150 million, $250 million. And the entrepreneurs and investors said, no, this is a billion dollar company. And look, look what’s happening in the space or whatever. And then the floor fell out and advertising revenue went away. And you know, they sold for $20 million or they went out of business, right? Look at Excite at Home. I mean, you know, holy cow. I mean, Excite and At Home were both high flying companies, big exciting companies. And I mean, who would have guessed that a stock could go to zero, right? I mean, you know, yeah. I mean, that’s, that’s so low. How much blacker can it get?

[00:35:29] Craig Syverson
Exactly. Stockholder owe us money.

[00:35:32] David Hornik
Exactly. I’m gonna have to pay you because I hold your stock. So it’s it’s an interesting question, and it’s a big question. And you know, if you’re, if you’re lucky enough to have it.

[00:35:43] Craig Syverson
Right.

[00:35:45] David Hornik
The thing is, most startups don’t even have that chance. They don’t have anyone come to them and say, I want to buy you.

[00:35:49] Craig Syverson
Right. You say funds have a certain life. So is there a time, if a fund starts to dry up, do you have to do something with your investments in companies or how does that mechanism work?

[00:35:59] David Hornik
So it’s a period of time over which you’re supposed to manage that money. And in theory, you’re supposed to have investments come to fruition over that period of time. And often that’s not the case. And when it’s not the case, then you essentially just extend the life of the fund for purposes of managing it. So it’s not, you’re not extending it and your investors aren’t paying you more money to continue to manage. But it’s to say, we don’t want to distribute the stock to our existing investors. We’re going to hold on to this. I mean, my. The predecessor fund to August Capital was a firm called Technology Venture Investors, and they were investors in Jamba Juice, among other really interesting technology companies. And TVI had stock in Jamba Juice well past the 10 year mark, maybe not well past. And it was only recently that, that a group bought out the company and there was liquidity and they were able to distribute the money. But for a period of time past the 10 years, our partnership was continuing to manage the investment in Jamba Juice. And the same sort of holds true now. If the firm shuts its doors after 10 years, there’s no one left and there’s no money to pay people, and they say, oh, we’re out. Then the logical thing is to distribute the stock. So you have 100,000 shares and you have 10 investors and you split it up, whatever the math is. But, but that’s not what tends to happen on Sandhill. What tends to happen is, oh, so it’s been 12 years. Boy, we wish it had been resolved by now. But, you know, we’re out of here. We’re gonna, we’re gonna go, we’re gonna give it a run and hopefully in 14 years, it’s worth something.

[00:37:34] Craig Syverson
Okay. Any other, any other issues you want to talk about or something on your mind?

[00:37:38] David Hornik
I don’t know. So, you know, exciting time. I’m pretty, pretty excited about the YouTube business. That’s great. And, and, and you know, it’s great for Chad and the crew over there, and it’s great for the investors. And so, you know, I’m a total cheerleader. I’m a Silicon Valley cheerleader. I believe that startups still work and that it’s a good idea to be an entrepreneur, even though there are long odds, if you do a great job and you invent something that is meaningful and changes people’s lives, that it ends up being worth a lot of money. It ends up being incredibly valuable. And maybe that’s not why people do it, right? I mean, people may have started a YouTube because they really want a better mechanism for sharing video, et cetera, but. But the fact that there is an outcome and that there is this whole economy that’s based on the capacity to put money in early and put in equity and time and energy in early and have it pay off in a big way is what drives Silicon Valley. And so I think the area thrives on YouTube. So I’m excited about it. I think that, you know, I look forward to each of these events because I think they’re good news for the economy and they’re good news for the area.

[00:38:41] Craig Syverson
Excellent. All right, well, our plan is to be somewhat fortnightly with our programs. We’re thinking every couple weeks. I also want to send out a big thank you to Cash Fly for providing bandwidth for this show. They’re great service and very reliable, and so I’m very pleased that they’re. They’re going to be providing it for us. And until next time, we’ll see you later. Thanks, David.

[00:39:05] David Hornik
All right, thanks. Appreciate it.

[00:39:12] Audio Clip
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