Generated Transcript

[00:00:15] Craig Syverson
Welcome to Venturecast number 13. I’m Craig Syverson of Grunt Media and.

[00:00:20] David Hornik
David Hornik from August Capital.

[00:00:23] Craig Syverson
Here for another feel good experience.

[00:00:25] David Hornik
Okay. You know, we’re really. We’re packing in all the content we can before the new year.

[00:00:31] Craig Syverson
Packing it in for all of you who have new computers and other means of playing media, welcome.

[00:00:39] David Hornik
That’s right. We’re in fact, frankly, if you got an ipod for, for the holidays, no better use than.

[00:00:47] Craig Syverson
No better use.

[00:00:48] David Hornik
Venture Cast.

[00:00:49] Craig Syverson
We were trying to work out a deal where it was preloaded on every ipod, but we just didn’t have the $16 billion to do that.

[00:00:56] David Hornik
So we nailed it down with Zune.

[00:00:59] Craig Syverson
We got a great deal on Zune distribution.

[00:01:02] David Hornik
So those six of you.

[00:01:04] Craig Syverson
Yeah. In fact, Zune doesn’t do podcasts, so it’s an even better deal for us. In some weird abstract universe, we own the Zune podcasting market.

[00:01:13] David Hornik
That’s right. Absolutely. Actually, I should be nice. It turns out a good friend of mine owns the Zune world. He’s the head of eHome at Microsoft. And I just found out that Zune is under him. Means that I can tell you with great certainty that the Zune will get better and more powerful over time.

[00:01:31] Craig Syverson
Good. I think a lot of us are perceiving it as a entry into the market.

[00:01:37] David Hornik
The beginnings.

[00:01:38] Craig Syverson
Yeah. Well, I say that’s, that’s just great.

[00:01:42] David Hornik
I was at. I was at Fry’s looking at all these media players and you know, there are other media players other than just the ipod. Who knew?

[00:01:52] Craig Syverson
No, there were several, really.

[00:01:55] David Hornik
SanDisk, it turns out, is massive.

[00:01:59] Craig Syverson
Yes. They have a thing. They’re the ones that are doing the thing with Rhapsody, if I’m not mistaken.

[00:02:05] David Hornik
They have a. They have a whole bunch of different options and Rhapsody is one of them. And they also. And so because they have this massive distribution channel, the second they launched an MP3 player, it was the second largest in the world.

[00:02:19] Craig Syverson
Yeah.

[00:02:19] David Hornik
Now I wonder whether Zune is in fact now the second largest behind the ipod. I don’t know for certain.

[00:02:24] Craig Syverson
I don’t think so. Not. Not from what I’ve seen in terms.

[00:02:27] David Hornik
Of reports, the reports, the adoption reports. So SanDisk still. Still number two.

[00:02:33] Craig Syverson
Yeah. The idea of SanDisk in a portable player with a subscription service is a nice idea, I must admit. And full disclosure, my wife did work at Rhapsody for a while and helped on the expanding that platform. But when she was there and we had the subscription, it was fun. It was really fun to just get stuff in and not necessarily have to Pay a lot for it.

[00:02:53] David Hornik
That’s great. Well, it’s funny. So Steve Jobs has talked about this a lot because people say, well, when are you going to have the Apple subscription service? And because Jobs always speaks in absolutes, I guess you would always speak in an absolute as required.

[00:03:09] Craig Syverson
He said no, right?

[00:03:11] David Hornik
He said, well, we believe that people want to buy their music. They do not want to rent it, which is a little ironic since itunes is really more like renting music than buying it. But in any event, let’s put that aside the fact that the licensing terms sort of have big controls in itunes. But Jobs position is we could have done that, and if we wanted to, we still could do that. But that’s really not what people want.

[00:03:35] Craig Syverson
And my take on it is that Apple doesn’t do subscriptions very well. That’s not. There doesn’t seem to be their passion. If I look at. Even at Mac, which I love, or, okay, I really, really like, and I think of the old, what did they have eat? Were they E World or they had some. Some old version of some old subscription thing. And every time they’ve done something subscription, it’s. It’s just sort of not. They don’t seem to have their soul into it. That’s sort of the model I’ve always thought of is that Apple just doesn’t do subscriptions in any form, shape or matter. So.

[00:04:11] David Hornik
Yeah, well, I mean, you know, itunes, ultimately, if you look at their software, their software is fabulous software, but it is. It serves a very clear purpose, which is to drive adoption of their hardware as opposed to their hardware driving adoption of their software. And that’s just a point of view. And so. And their hardware is absolutely beautiful. And so it’s. That’s. That’s great. On the other hand, it’s just a different point of view. Right. I mean, you know, whereas if you look at the Microsoft strategy, I think think it’s quite the opposite. Even with the Xbox 360 and the Zune and any. Even when they were producing and maybe still are producing peripherals, it really was about driving adoption of their software, not driving adoption of hardware, which, by the way, better business.

[00:04:54] Craig Syverson
Yeah.

[00:04:54] David Hornik
It just is.

[00:04:55] Craig Syverson
Right.

[00:04:55] David Hornik
Better business. So.

[00:04:56] Craig Syverson
Yeah. All right. So tell me about Paris. I heard a lot of weird stuff about Paris.

[00:05:03] David Hornik
Oh, you know, gosh, that.

[00:05:06] Craig Syverson
Those crazy bloggers.

[00:05:08] David Hornik
Those crazy bloggers. Well, you know what? I’d feel a lot more comfortable if the people who are blogging about the web experience had been at LeWeb, you know, but. But my sense of it Is that the vast majority of people who are discussing what a complete failure and how, you know, how inappropriate it was to have these political speakers, etc, etc, weren’t there. So now I was there, Yes, I heard, you know, some of these speeches, they were unimpressive. But Shimon Perez, that’s totally different. Everybody who heard Perez’s speech was impressed and said he, that he was brilliant. It was a great conversation. Maybe not everybody, my apologies to the three of you that disagree, but the vast majority of people had no problem with that conversation. So really what it was about were these French politicians who came in and used the web conference as a platform for their, whether it was for their campaigns or whatnot. Those are the folks that people objected to. And I can say this with great certainty. They were clueless. They just had, their speeches were horrible. They were terribly clueless. You know, to listen to a politician talk about how the web is a dangerous place and we should be very careful and if we have to control the web in order to squash, you know, anti Semitism, that that’s what we’ll have to do. That the Web, you know, this wild frontier of the web needs to be tamed. I mean, just madness. It’s so backward thinking and foolish. On the other hand, this is a huge two day event with amazing amounts of content. And so I, I wrote a blog post about this where I just ignored the whole political stuff.

[00:06:45] Craig Syverson
Right.

[00:06:46] David Hornik
And then, you know, a friend of mine actually wrote a comment where he basically lambasted me for ignoring the, you know, ignoring the elephant in the room and also for not referencing the fact that I’m an investor in Six Apart and Six Apart played an important role in the conference and all. So let me just say this. I’m an investor in Six Apart and Six Apart was the primary sponsor of the event and Louis Lemur, who is the, you know, the head of Six Apart Europe, ran the conference and hosted it. And so to the extent that there are issues with the conference, you know, fair enough, they have, they, they fall squarely on the shoulders, not just of the conference itself, but on, on Six Apart on the other hand, you know, I was there, I enjoyed it, I participated in it. People where they are talking about technology, they were periodically or very infrequently disturbed and interrupted by some politicians. And then we got back to the matter at hand.

[00:07:40] Craig Syverson
Yeah, right.

[00:07:42] David Hornik
It was fun.

[00:07:42] Craig Syverson
The old adage that bad news travels more frequently than good news kind of thing.

[00:07:47] David Hornik
Yeah. Oh yeah, no, people were very happy to, but it was, but you know what, there were 1100 people or 1200 people and lots of startups and lots of entrepreneurs. There was a startup room that had 53 or something, startups that were presenting over the course of the time there and lots of excitement. You know, as I said on venture blog, Net Vibes was all the rage. It’s great European startup. And Tariq, who’s the CEO, is a great guy, and he was much praised by the community. And so, you know, spreadshirt equivalent of CafePress in Europe. That’s doing great stuff.

[00:08:25] Craig Syverson
They’re in Europe. They’re based in Europe, Yes. Oh, I didn’t know that.

[00:08:28] David Hornik
German.

[00:08:28] Craig Syverson
I know a lot of people who love them.

[00:08:30] David Hornik
Yeah, it’s great. It’s great. And smart guys. And so Zlio, which is doing these web shops where you create your own shop using their product catalog and phone, which is creating this WI fi network by giving away access points that include this phone software so you can become a hub for others. So there’s lots of activity, there’s lots of great stuff. And yes, there were some politicians there, but, you know, I suspect that Louis has taken note and will skip that part next year.

[00:09:00] Craig Syverson
Yeah, it’s kind of like. It reminds me of like a news event. You know, whenever I had an earthquake out in California, my people would say, oh, my God, the place is ruined. It’s destroyed. How are you getting around? And, you know, it’s the same one shot of that diner in Northridge, right, that had a broken window that keeps getting played over and over again. That’s what you think the entire, you know, civilization has come to, right?

[00:09:23] David Hornik
No, absolutely. So anyway, I’m not. I’m not trying to.

[00:09:27] Craig Syverson
Yeah. Were the speeches untranslated to where some people are saying, I don’t know, French headphones.

[00:09:33] David Hornik
We got a translation.

[00:09:35] Craig Syverson
Get your headphones in.

[00:09:37] David Hornik
Right, Exactly. Slightly less dynamic of English translation.

[00:09:41] Craig Syverson
Yeah.

[00:09:41] David Hornik
It’s like. And now there will be a great revolution of much revolutionists, you know? So that’s my French. Do you like my friends?

[00:09:55] Craig Syverson
That was tres bn, blah, blah, blah. Well, as Steve Martin says, those French, they have a different word for everything.

[00:10:02] David Hornik
Exactly.

[00:10:03] Craig Syverson
Just crazy. All right, well, we’re getting ready for a break. Holiday break, right?

[00:10:10] David Hornik
Yeah, it’s good.

[00:10:11] Craig Syverson
Any now, I was seeing some interesting news on LinkedIn. Can you talk about that?

[00:10:17] David Hornik
Oh, I don’t know. What? Oh, about the LinkedIn competition or LinkedIn’s financing.

[00:10:21] Craig Syverson
Yeah, LinkedIn’s financing.

[00:10:22] David Hornik
Oh, you know what? If I had any good knowledge, I was actually involved in an online debate today. An online debate in Which I was taking the position that it was not a bubble, that this was on the Wall Street Journal site. So if you look@wallstreetjournal.com, they’ll be posting it. An east coast investor was taking the position that this is a web bubble and I was taking the position that it wasn’t. And one of his pieces of evidence was this idea that LinkedIn had done a financing at a $200 million pre money valuation. So that was the first I’d heard of it. So I don’t know if LinkedIn is, is talking about this, but if that’s the case, well, you know, wow, good for them.

[00:11:02] Craig Syverson
Just seeing that they’re seeking a value of more than 200 million.

[00:11:07] David Hornik
Seeking it, yes. Now this, Me too.

[00:11:09] Craig Syverson
Well, yeah, in fact, I feel I’m seeking. Right. So this is brought up a question for me then because I’m reading this from Venture Beat and they were saying that wants to be valued at $250 million afterwards. So they’re trying to raise, looking to raise 13 million in its latest venture capital round and wants to be valued at 250 million afterward, reports Market Watch.

[00:11:33] David Hornik
Okay, so $237 million pre money valuation.

[00:11:38] Craig Syverson
So they’re saying values are negotiated with venture capitalists and the higher the value, the more the VC has to invest in order to own a certain percentage of the company.

[00:11:46] David Hornik
No, that’s just wrong.

[00:11:47] Craig Syverson
Well, that’s what I was going to ask you about.

[00:11:49] David Hornik
Is that what it says?

[00:11:50] Craig Syverson
Yeah.

[00:11:50] David Hornik
Okay. No, okay. It’s always the same, right? I mean, what happens is the VC because now we’re in the technical, here’s what VCs do. Portion of the program.

[00:12:01] Craig Syverson
The technical section.

[00:12:02] David Hornik
Technical section. We should have technical. Is that, you know.

[00:12:06] Craig Syverson
I’ll see if I can put that in this week.

[00:12:08] David Hornik
Throw that in there. So, you know, I, I, I do an early stage financing, I invest a certain amount of money and I, and I purchase let’s say 20% of the company.

[00:12:19] Craig Syverson
Right.

[00:12:19] David Hornik
So let’s say for $2 million, I buy 20% of the company at an 8 million pre money valuation, $10 million post money. I own $2 million worth of it or 20% of the company.

[00:12:31] Craig Syverson
Right by me again.

[00:12:33] David Hornik
Okay.

[00:12:33] Craig Syverson
Slow, slowly.

[00:12:36] David Hornik
8 million dollar pre money valuation.

[00:12:38] Craig Syverson
Now the valuation is, that’s how much.

[00:12:41] David Hornik
The company is worth when you buy your shares.

[00:12:44] Craig Syverson
This is the first time they’re being traded outside of the, outside of, let’s.

[00:12:48] David Hornik
Just say, let’s just say this is the first financing.

[00:12:50] Craig Syverson
Yes.

[00:12:51] David Hornik
And I invest two million dollars so now there was eight million dollar valuation. Now there are two million dollars in the company. So the aggregate value of the company is now $10 million.

[00:12:59] Craig Syverson
But the 8 million was, was the existing.

[00:13:03] David Hornik
Right. Existing shares. The value around the existing shares, value.

[00:13:06] Craig Syverson
Determined by the shareholders through a conversation.

[00:13:10] David Hornik
Through a conversation with investors.

[00:13:12] Craig Syverson
So, okay, so that everyone agrees, we think this company is worth $8 million. And that’s the pre, that’s called the pre.

[00:13:19] David Hornik
Money valuation.

[00:13:20] Craig Syverson
Pre money evaluation.

[00:13:22] David Hornik
So then you have the money, you put in the money. So I buy $2 million worth of shares in the company, and so you add that 2 million to the 8 million dollar valuation. Now the company is worth $10 million.

[00:13:33] Craig Syverson
Right.

[00:13:33] David Hornik
And that’s called the, that’s the post money valuation.

[00:13:36] Craig Syverson
Okay, See, you got the pre and the post, right? And they’re getting cash.

[00:13:40] David Hornik
They’re getting, they get the cash. I get shares in the company. And now because I’ve put in 2 of the $10 million worth of the value, I get 2/10 of the company.

[00:13:51] Craig Syverson
Right.

[00:13:52] David Hornik
So I buy 20% of the equity in the company. Got it. Now you move along and the company does well and you do a future financing and you raise more money.

[00:14:01] Craig Syverson
Right?

[00:14:02] David Hornik
I have a right to buy 20% of the future financing. In most instances, the way it’s described is to maintain my interest. Ah, see, so if they’re going to raise another $10 million, then I have the right to invest $2 million.

[00:14:21] Craig Syverson
Kind of a right of first refusal.

[00:14:23] David Hornik
It’s a, it’s a right to maintain interest. Okay, so if they’re raising $20 million, then I have the right to, to $4 million invested in order to maintain my interest. So it’s not about the valuation. Right. I mean, if they’re raising $10 million at $100 million valuation or a $400 million valuation, in order for me to maintain my, my interest in the company, I’m, I have to participate my 20% of the aggregate shares that are being purchased right now. The amount of the company that, that new $2 million buys varies depending on the valuation. If it’s a $10 million valuation, it buys quite a bit. If it’s $100 million valuation, it buys very little. But once I’m an investor, the thing that I’m doing is trying to keep my percentage so that I still own 20% of the company after the financing. So it’s not about how much money you have to invest as an investor with respect to the valuation. It is a question with respect to how much money the company is going to raise. So if the company was going to raise $50 million, then suddenly my piece of it to keep my 20% of the company is 10 more million dollars. So imagine I’ve put in $2 million initially, purchased 20% of the company, and now I put in $10 million more just to keep my percentage at 20%.

[00:15:44] Craig Syverson
Right.

[00:15:44] David Hornik
Decidedly different financing.

[00:15:46] Craig Syverson
Right. Okay.

[00:15:48] David Hornik
Does that make sense?

[00:15:48] Craig Syverson
It does make sense. Now, what is it that when a company says they want to be valued at 250 million, is that because it’s a nice round number or they think that’s what they’re worth?

[00:15:57] David Hornik
I don’t know how any. First of all, I don’t think companies.

[00:16:01] Craig Syverson
Yeah.

[00:16:01] David Hornik
As a general matter, say that.

[00:16:03] Craig Syverson
Okay, how is it.

[00:16:04] David Hornik
And they certainly don’t announce that to the press. I seeking a $73 million valuation and weighing in at 110 pounds, you know, so I think that the press that, you know, Venture Beat is probably extracting this from conversations that have been had with investors where the investors have proposed financings. And perhaps the company has said, well, we think that the company is worth X. Right.

[00:16:29] Craig Syverson
Right. We checked in with LinkedIn and they confirmed the valuation sought is more than 200 million, but said no investment has been finalized.

[00:16:37] David Hornik
Valuation sought, well, that just seems wacky to me. But anyway, you know, look, if you’re a company and you want to talk about how much you think the valu. How much you think your company is wor. That’s a little bit like chest thumping. Like the valuation sought is the same thing as saying, my company is worth More than $200 million. So, you know, more power to read. And the LinkedIn team, if they not only think that the company’s worth more than $200 million, but they can get individuals to. Or institutions to invest at that kind of valuation, then that’s. That’s great for the existing shareholders because they’re not diluted. They can raise a lot of money and not be diluted as much. But I always think it’s kind of silly because basically the valuation is set by the investors.

[00:17:16] Craig Syverson
Right.

[00:17:16] David Hornik
It’s a market. If there are two firms that are competing, then the price goes up by virtue of the fact that they’re likely trying to get the deal and competing on price. If it’s one firm and they propose a price, and then that’s sort of the price. If you don’t want to do it at that price, then you have to go find someone else to do it because there is no market.

[00:17:34] Craig Syverson
Right. Prices only exist in the context of a market.

[00:17:37] David Hornik
So anyway, so good for them if they can, if they can raise money at a two hundred and something million dollars valuation.

[00:17:43] Craig Syverson
Well, how is that different from, say, Facebook saying, turning down an offer for x hundred million dollars when they think they’re worth more? I guess because they don’t come out and say, oh, we think we’re worth 1.654 billion.

[00:17:57] David Hornik
Well, you know, so apparently Peter Thiel, in a recent interview did say that he believed Facebook was worth, I think he said, $8 billion. Eight billion, yeah. So now, you know, look, in most instances, you’d say, what? Where’s that number coming from? You know, $8 billion. On the other hand, Peter is such a smart guy and he’s so. Such a technician. I mean, he runs. I don’t know how much you know about Peter Thiel, but Peter was the founder of PayPal.

[00:18:25] Craig Syverson
Right.

[00:18:26] David Hornik
Drove that company to a successful IPO and then sale. You know, great outcome for the company and for Peter. He then put his money, he founded it, I guess he may have already had a hedge fund, but in any event, he then focused on his hedge fund and has driven the growth in that hedge fund in hundreds of percentage points. And I’ve spent time talking with him about it. And he thinks in incredibly interesting ways, just very, very smart, very technically smart. He takes lots of extrinsic factors and formulates theories that tend to be. Right. Now he, I’m sure, brought those things to bear when he says, as a board member and investor in Facebook, while The company’s worth $8 billion, based on what he anticipates to be the economics of the company and the growth, et cetera, et cetera. On the other hand, until someone is saying, I’ll give you $8 billion either in the public market or in an acquisition offer, the company is not worth that. Right? Right. What is the company worth? Who knows? Right. The last financing they did was, I forget, there was rumored some round with an advertising agency where they bought in at maybe as high as a billion dollar kind of valuation. But it was this hybrid thing where they put in some money and they had the ability to put ads from their clients into Facebook, etc. So these corporate deals don’t really set the true economics of the value of a company because they’re associated with business relationships.

[00:19:49] Craig Syverson
Right? Right.

[00:19:50] David Hornik
The last purely financial investment was by David Z at Greylock, and it’s rumored, and again, I don’t think it was ever reported specifically, but rumored to be at a $500 million valuation. So you know, maybe that’s the last independent, truly independent financial valuation of the company. On the other hand, I think it’s safe to say that the rumors of Facebook turning away offers in excess of a billion dollars seem to be well documented. So they clearly believe that the company is worth more than a billion dollars or will be worth more than a billion dollars and are willing to give it a shot, which is a bold, It’s a bold move. On the other hand, Google had lots of opportunities to be acquired as well, and look at where it is now. So when you’re doing really well in as many ways as tricky and risky as when you’re, you know, not doing as well and you need to, need to be acquired, these things are, these things are hard decisions and they have to be made based on whatever information you have at hand and your sense of how it’s going to go in the future and your sense of the market and all those things.

[00:20:54] Craig Syverson
So. Well, speaking of information at hand, I’m curious when you were saying we’re not sure if there was this round or not or this funding or not. So because they’re a private company, these don’t have to be reported, right?

[00:21:06] David Hornik
Absolutely. There’s no reporting, no reporting for private companies. At some point you have enough shareholders. If you sell to enough people, then you can become what’s known as a de facto reporting company, which means that you have so many individual shareholders that you have an obligation to do some public reporting of your finances. But until that time, unless you go public, your finances, the economics of your company are strictly private. And for you to disclose or not.

[00:21:37] Craig Syverson
The thing about the de facto public company are those audited figures. They have to give out.

[00:21:41] David Hornik
Absolutely. So once you.

[00:21:42] Craig Syverson
Same.

[00:21:43] David Hornik
Yeah, once you get into the point, once you get to the point, in fact, it was rumored that one of the reasons that Google finally did go public was that the number of shareholders had exceeded that number. And in the new year, it was going to be required to report as a public, publicly reporting company. In any event, again, this seems like the show where I say rumored a lot, you know, but I’m happy to pass on rumors as long as I say it is rumored.

[00:22:06] Craig Syverson
Right. So then on to the second part. So there’s no. So how do you as an investor deal with that? I mean, how. You know, let’s say you’re, let’s say you’re considering Facebook. I mean, do you talk to them and do they, if they realize you’re a serious person, they will, they will.

[00:22:20] David Hornik
Show you their financials yeah, yeah, no, absolutely. I mean, you know, the, and this is the tricky piece. I think it is challenging for entrepreneurs because it’s a little bit. The expression often is open the kimono.

[00:22:31] Craig Syverson
Yeah, I know, I didn’t want to say it.

[00:22:32] David Hornik
Well, it is the expression which is sort of like, okay, what’s under here? I’m going to show you now. Right, be gentle. Yes, but entrepreneurs, they come before venture investors or investors generally, and they’re asked to tell all sorts of things that are proprietary and delicate in many ways, partially about their technology. How are they doing it? If you pitch August Capital on some interesting technology and you say, you know, we’re going to do X, Y and Z, and we say, oh, so how do you do that? Then you’re faced with a question. Do you explain how it’s done, potentially making your. Making yourselves vulnerable, the fact that now someone knows how you’re doing these things? Or do you say, well, I’m really, I’d rather not talk specifically about how it’s done now with us. If you say, I’d rather not talk specifically with. About how it’s done, then we say, perfectly fair, it’s your choice, but we will not finance you if we don’t understand how you do what you do. On the other hand, I do think you do think that you need to be sure that you’re talking with investors that have reputations that make clear that they’re not going to do anything with your proprietary information. When you look at it, I meet with hundreds of companies over the period of a year, and I can’t be in the business of using that information for the purposes of my own companies or potentially new companies, et cetera. I mean, I do learn all sorts of things. In fact, I credit entrepreneurs with educating me about everything. Right. I mean, you know, it’s incredible. It’s like being in a classroom every day where someone comes in and says, okay, well, let me explain to you this business model or this technical model or whatever. So you learn a lot. On the other hand, no reasonable venture capitalist will then go to a board meeting and say, you know, what I heard about today was X or whatever.

[00:24:19] Craig Syverson
Right. Well, there goes your credibility for future.

[00:24:22] David Hornik
Yeah, and it should, it should. I mean, I think if we, if, if people are doing that and they’re discovered to be doing that, then, you know, entrepreneurs should make it very clear because it’s, it’s just, it’s a black mark on the venture business and it’s just, it’s bad idea. So, but, and then the second piece that you talked about was we do have these financials and you do have to talk about the performance of your company if you want to, if it’s a later stage financing event. And again, you don’t want that information out there necessarily. You want to make sure that you’re controlling who knows how well the company’s doing, what kind of earnings, losses, et cetera. But if you don’t reveal those pieces of information, you’re certainly not going to raise money at a high price. So it’s a tricky process.

[00:25:06] Craig Syverson
Is there any liability you’re open to by learning these things? Like I know with an NDA, you know, some people, sometimes people don’t want to hear, like don’t tell me because if it does leak out, I’ll be known as one of the people who knows or.

[00:25:18] David Hornik
Right, exactly.

[00:25:19] Craig Syverson
Is an NDA as common thing or.

[00:25:21] David Hornik
Is it just, it doesn’t happen, it.

[00:25:23] Craig Syverson
Doesn’T happen in the venture business.

[00:25:24] David Hornik
It’s a little bit like, you know, Disney corporations don’t send it to us. Yes, we’ll send it back. We don’t want it. We don’t want.

[00:25:30] Craig Syverson
You don’t hear about it when we.

[00:25:31] David Hornik
Ask you, then you’ll tell us. Now obviously in the venture business you hear stuff all day and night. Periodically, entrepreneurs will ask for an NDA and non disclosure agreement which specifies what you can and can’t say and what you heard and how you treat the information you receive. But the truth is, a venture business as a general matter doesn’t. Venture capitalists generally don’t like to sign NDAs not because they intend to misuse your information. But on the other hand, the typical NDA says you will not use information that you’ve been handed or that you retain in the back of your brain.

[00:26:03] Craig Syverson
I know, right.

[00:26:05] David Hornik
So that’s a little tricky, right? I mean, I retain a whole lot of information in the back of my brain. In fact, I’m not sure I retain any information in the front of my brain. It’s all in the back. So it’s hard to get a VC to sign an NDA merely because look at, I’m investing in all sorts of web businesses and if I signed an NDA about a particular web business that you, you’re building, what are the chances that something I invest in touches on some piece of what you’re working on? You know, it’s pretty high and has nothing to do with the fact that I’m sharing anything you’re doing. It just has to do with the fact that there Are certain things that are. That are naturally associated with businesses that are services that are run on the web. So.

[00:26:45] Craig Syverson
I have a blank battery signal.

[00:26:48] David Hornik
Oh, no. We interrupt this program to change the batteries.

[00:26:56] Craig Syverson
There ain’t no plugs here at.

[00:26:57] David Hornik
These ain’t no plugs. I mean, now, are those IKEA batteries?

[00:27:00] Craig Syverson
Oh, yeah.

[00:27:01] David Hornik
Look at that. I like ikea batteries because they’re fashionable.

[00:27:04] Craig Syverson
They are fashionable. As a friend of mine once said, they look like mints for my robot. I just love that one.

[00:27:14] David Hornik
Exactly.

[00:27:15] Craig Syverson
It’s a perfect image program. We’re back on our program. Not that you’ve noticed, because I’ve edited this so expertly.

[00:27:24] David Hornik
Genius. You’re so prepared. I’m so unprepared.

[00:27:30] Craig Syverson
I’m not prepared. Oh, this is not. Am I here? Yes. I only saw this because of a Ticketmaster. That’s TicketMaster Pours want 13.3 million into I like.

[00:27:46] David Hornik
I like.

[00:27:47] Craig Syverson
I like. Have you heard of I like Me like?

[00:27:50] David Hornik
No. I don’t know.

[00:27:51] Craig Syverson
It’s a.

[00:27:51] David Hornik
What is I like?

[00:27:52] Craig Syverson
Well, if I’m not mistaken, I think it’s a.

[00:27:57] David Hornik
This is the thing that gives you additional information about your itunes songs.

[00:28:00] Craig Syverson
In a way. It’s like a social networking aspect of itunes. It looks at your friends music and your music and what you like and creates sort of a reputation thing.

[00:28:10] David Hornik
You remember back in the day, the day being before yesterday. Back in the day, there was a company called kik.kik.com and they were doing this really cool stuff precisely like this that associated with your MP3 player. It was before itunes, so it was like winamp or sonic, and it would associate it and you play, and it would give you some information about the song that was playing. And it was just very clever. And, you know, it was too early. It was backed by Sony, and I don’t actually know whatever happened to it, but there are a bunch of these things that made sense in the late 90s, early 2000. Couldn’t get traction for one reason or another. Now reemerging in different forms. This. This company, Leo, that I was talking about, European, I guess it’s an Israeli company that allows you to make these shops of selling things that you like, and then you can promote it yourself and they just manage the back end. And there was a company called Affinia, which. Which got a lot of exposure in the late 90s. People were very excited about, raised money from great investors and just didn’t go anywhere. And it was entirely based on this idea that there were these affinity sites. Yeah, I’m an Expert on cell phones. So Affinio was going to allow you to sell cell phone accessories and stuff off your site. Well, the back end just didn’t exist. But now you have the cell phone accessory blog. Not a site, a blog. And you add a widget, you know, and suddenly you can sell cell phones or accessories or ads or whatever. So it’s just, it, it’s very interesting to watch how these things are reemerging and working better through no fault of the entrepreneurs. I mean, timing is everything in the venture business and the entrepreneur business. So anyway, so I like it sounds to me like a kick experience. And they did not raise $13 million from Ticketmaster.

[00:30:00] Craig Syverson
They did pours 13.3 million into. I like nice strategic agreement.

[00:30:07] David Hornik
Smart. Well, you know, I’m sure that Ticketmaster’s interest is that not only when you’re listening to music do you find out other people who like it, but when they’re coming to town.

[00:30:16] Craig Syverson
Yes, exactly.

[00:30:18] David Hornik
Which by the way, I mean, as early as 2001, Ticketmaster did not have a system by which it could keep track of the tickets you’d bought and send you an email when the band was coming back to town. Right. So that’s quite, quite the progress.

[00:30:37] Craig Syverson
Quite the progress there, guys.

[00:30:38] David Hornik
Now you can actually know.

[00:30:39] Craig Syverson
Yeah. Okay, the moment has arrived. Everyone wants to know what you’re looking to.

[00:30:47] David Hornik
Oh, man.

[00:30:47] Craig Syverson
Invest in in 2007.

[00:30:50] David Hornik
This is what, like the prediction portion?

[00:30:52] Craig Syverson
No, it’s not. No, this isn’t a prediction. This is the what you’re actually going to be investing in.

[00:30:58] David Hornik
What am I excited?

[00:30:59] Craig Syverson
Yeah, exactly.

[00:30:59] David Hornik
I don’t, you know, look, I’m going to, I can tell you this with 100% certainty.

[00:31:03] Craig Syverson
You’re like, things that are going to do well.

[00:31:05] David Hornik
I am going to invest in people who I perceive to be excellent. Now, it turns out, you know, that’s all I could say I’m looking for, you know, incredibly smart, energetic, articulate entrepreneurs who are doing things that they’re enthusiastic about. And that makes sense. Yeah. And I think that that’s a reasonable description of everything that I’ve invested in, despite the fact that they range from, you know, Splunk, which is doing this enterprise search stuff for your data center, and Nomis, which is doing price optimization for big banks versus six Apart in video egg in the consumer facing two new media space and pay cycle in the payroll space. You know, pretty broad set of things. But I can tell you in every instance, the people, when they came and told me about what they were, what they were working on, Just blew me away. Yeah, Great, exciting people. So now you say, so what, what does that tell us? That doesn’t tell us anything, David. So that’s a crappy, boring answer. That’s fair. Totally fair.

[00:32:15] Craig Syverson
Well, I know, I believe you. You know, you’re the business guy, so you can vet out what’s a good business thing, but if someone comes in who’s just a schmo about it, they’re not going to be successful.

[00:32:26] David Hornik
So, see, now this is the portion of the program where my mother goes, he’s a business guy.

[00:32:32] Craig Syverson
What? Who?

[00:32:33] David Hornik
Have you met him? All right. It turns out actually my mother does not have, you know, this kind of old world accent.

[00:32:40] Craig Syverson
No, she doesn’t. But. But you do have to spy cam here in the office hidden in your golf putter over there so your mom can see every. I know she vets every deal for you.

[00:32:49] David Hornik
She does not vet every deal, but she does listen to these podcasts and then she. And then she comments. What are you talking me about? Talking about me again and again. Like I said, she, she, despite growing up in, in Lawrence, Massachusetts, where she could have easily had a most unenviable accent, no accent, very, very, quite, quite benign. There’s no accent even despite that, you know, hardcore Eastern European Jewish upbringing in Massachusetts.

[00:33:18] Craig Syverson
It could have gotten.

[00:33:20] David Hornik
It could have gotten bad. Could have gotten ugly on the accent.

[00:33:22] Craig Syverson
Could have gotten ugly. All right. David’s investing in really cool people.

[00:33:27] David Hornik
I’m gonna. So I’ll tell you what, I don’t. I can tell you this.

[00:33:30] Craig Syverson
I’m not trying to give you a hard time.

[00:33:31] David Hornik
No, it’s totally fair. And you know, actually I had this question at the web.

[00:33:35] Craig Syverson
It’s. Yeah, hey, you said it right.

[00:33:38] David Hornik
Web, there’s only one of them. Leweb I. Because this was raised. So what do you. What do you think? What are you excited about? What do you think? And here’s what I said there, that I continue to believe that is just one small piece of how I’m looking at the world and the web and, and how. And how things are evolving. But what I said was, I think because there’s so much economic advantage to be had from gaming search engines, right? Huge traffic, unquestionable economic power in these search engines. The actual search engine results are growing less and less. Good. Right. And as a result of that, I think there’ll be alternative opportunities to find things on the web, to think about things. And so I certainly am paying attention to that. I’m paying attention to the fact that there are opportunities to look at things on the web and how you may or may not be manipulating these strong economic incentives. And then are there alternatives to the classic search engines to help you get information? Because these search engines are growing less and less useful.

[00:34:46] Craig Syverson
Yep, I hear you. Two ideas I think of off the top of my head are StumbleUpon and Wikipedia. Wikipedia is almost could theoretically be the first your first stop in terms of a search anymore because it’s just really rich and robust and has links that have already been vetted a bit that aren’t economically based.

[00:35:07] David Hornik
My partner Vivek was just commenting this past week about that precise fact that he’s starting at Wikipedia in a lot of respects. He and I were having this conversation about Hanukkah and he was trying to get me to reveal all the important nuggets of information, information about Hanukkah. I was demonstrating what an ignoramus I was. And he said, ah, don’t worry about it. I’ll just code a Wikipedia.

[00:35:31] Craig Syverson
Your mother’s listening, David.

[00:35:34] David Hornik
Right. And I completely agree with you. I mean, yeah, it’s an. It’s an astonishing thing. If Wikipedia were a commercial endeavor, it would be incredibly valuable.

[00:35:45] Craig Syverson
Right? But would it be as good? Always the question for the hippie.

[00:35:48] David Hornik
That is an interesting question.

[00:35:50] Craig Syverson
Yeah.

[00:35:50] David Hornik
Would it be as good? I would venture to guess that it would have the capacity to be as good despite being commercial. But in Amit, we need not delve into this because it is not.

[00:35:58] Craig Syverson
It is not. Could it be Interesting question for your students? Maybe. Well, here’s what I want. If I can get one thing out of 2007, it would be microtransactions happening totally seamlessly and groovily on the web. That’s all I want out there. Just like because I want to sell my stuff. I want to sell my shows in pieces, in little pieces that it’s absolutely easy, safe.

[00:36:25] David Hornik
I gotta tell you, the technology landscape is littered with carcasses of micropayments companies. It’s really sad. I’m sort of picture I’ve been watching have you seen the show Everest on the Discovery Channel where they teams climbing.

[00:36:43] Craig Syverson
Everest, they drop all their.

[00:36:45] David Hornik
And they drop, they drop their canisters. That’s my, you know, walking up and down the mountaintops of commerce on the web. And all those canisters are the dead carcasses of e commerce companies trying to do micropayments. I’m not saying it’s not a great idea. I know it’s a great idea, fabulous idea. We need to solve it in some respect. And you know, frankly, PayPal is really serving that purpose. It’s just not serving it. The difficulty of a quick, small, you know, sub dollar kind of transaction is still, is still tough. And you know, itunes is probably as close as anyone to solve.

[00:37:22] Craig Syverson
Exactly. And they’re not going to do it for the little guy.

[00:37:25] David Hornik
We need an open commerce system, like the equivalent of an open ID system for commerce.

[00:37:31] Craig Syverson
Right. I’ve been talking with some of my friends about it. For instance, with iStockphoto, they have a point system. And for me that works in some odd way because we’re also talking about Microsoft’s point system with the Zune. And like, oh God, it’s rather confusing and I can see the value in it and there are certain advantages to it. But on the other hand it’s confusing and then it’s yet another place where I have this pocket of money that’s not very liquid. You know, it’s sort of stuck there. And I was trying to figure out why. I don’t mind with iStockphoto and the reasons I came up with is one, it really works well and two, it’s the only one I actually need to go to for getting what I want. It seems like I’ve always eventually found what I wanted there. So while it’s a closed system, it’s a rather wide open system for me because it serves my needs.

[00:38:20] David Hornik
It reminds me of E Z Pass, right?

[00:38:22] Craig Syverson
I mean, yeah.

[00:38:23] David Hornik
Why would you give the transit authority $50? Because then you can zoom through the bridge and that’s so valuable that it’s almost a no brainer. So if the experience that it’s enabling is incredibly valuable to you, like an istock photo, then you’re willing to engage in some alternative system, Right? For example, if you’re sitting on Second Life or you’re World of Warcraft or whatever, there are certain exchanges and those are the only exchanges you’ve got. And so maybe it’s not the easiest thing in the world to use those particular currencies. On the other hand, if you’re sufficiently devoted to those particular economies, then you don’t think twice about it, Right?

[00:39:09] Craig Syverson
But why can’t there be? Why can’t PayPal have something where I can put in 100 bucks? It’s sort of that way now, isn’t it? I could put in 100 bucks, then I could spend it the way I want to without incurring these massive fees. I mean, if the cost to PayPal is the visa charge or the surcharge or the 2 or 3%. I don’t understand why that just simply, that’s not working.

[00:39:31] David Hornik
Well, you know, you have to, you have to get out that 2 or 3% charge. Right. It’s too much money in a transaction, in a microtransaction that is too much money. So. And it’s too little money. Right? It’s too much money because it’s too big of a chunk of some little transaction and it’s not enough money to justify the infrastructure necessary to support that transaction. Right. We have this problem, it’s being solved right now around purchases at McDonald’s and Burger King or whatever with your credit card. It’s just an uneconomic transaction, it turns out. But if they can convince you to use your debit card, well, it turns out the debit network is a lot less expensive now. Why is that? Well, because they’re different networks with different players and different participants and different fee structures. So I think as we do evolve, these particular economic models in particular pieces of infrastructure will be able to facilitate smaller and smaller transactions with less and less transaction cost either both in terms of economics but also in terms of friction. And that’ll be great, but it just takes time. So I mean, no one envisioned a PayPal and using your email address as your identifier, and yet now it’s a no brainer. So I think we’ll get there eventually. It’s a tricky thing because involves a whole lot of transaction or involves a whole lot of infrastructure costs and there just isn’t any particular content that is driving the model. Right. If there was something that was at such massive scale that people were excited about it, that they deposit their appropriate amount of money to engage in those things, then littler businesses with smaller demand could draft. But until itunes becomes that thing and we get to use the itunes Apple back end to facilitate transactions of video grunt, there’s nothing driving it. So it’s just an interesting, it’s an interesting problem of incentives.

[00:41:25] Craig Syverson
That’s true. If I do think about it, outside of the realm of media, there aren’t a whole lot of other drivers for micropayments on the web.

[00:41:32] David Hornik
How are you going to move a physical good and make it worthwhile at a fraction of a dollar? Remember those old penny candy stores? I remember going to a penny candy store. It was pretty exciting and you could pick a bunch of stuff and it was a penny a piece and whatever. Then it became a dime a piece and now it’s by weight, you know, like, you know, I think a gummy bear cost you $0.72 by weight or something, you know, but it’s by weight because they’ve got to aggregate a bunch of these little transactions into a single transaction or it won’t make economic sense.

[00:42:02] Craig Syverson
Right.

[00:42:03] David Hornik
That’s it. There it is. The gummy bear theory, The Swedish fish theory of economics.

[00:42:09] Craig Syverson
Swedish fish? I don’t know it.

[00:42:11] David Hornik
You never had a Swedish fish? Those delicious red gooey fish?

[00:42:14] Craig Syverson
No.

[00:42:15] David Hornik
Oh, my God. Get a grip. You know what? I’m, I Now listen, I can’t have Swedish food.

[00:42:21] Craig Syverson
It doesn’t go down well.

[00:42:22] David Hornik
It’ll be fine. I, I For the, for the holidays, I’m gonna get you some Swedish.

[00:42:27] Craig Syverson
Ah, okay. Thank you, everybody, for listening so far this year. We will be back in the new year with more fish.

[00:42:40] David Hornik
That’s it. Happy New Year, everybody.

[00:42:42] Craig Syverson
Happy New Year.

[00:42:46] David Hornik
Fish are livestock, the same as poultry.

[00:42:49] Craig Syverson
Or cattle, and require constant care the year around. This important work is entrusted to our fish culturists who have had many years of practical experience.

[00:42:59] David Hornik
Special care must be given each stage of the egg and the growing fish.

[00:43:03] Craig Syverson
If a good trout suitable for planting.

[00:43:05] David Hornik
In Pennsylvania waters is to be.