Generated Transcript

[00:00:16] Craig Syverson
Welcome to VentureCast 17. I’m Craig Syverson of Grunt Media.

[00:00:20] David Hornik
I am David Hornik, and it is August Capital. We’re sitting in.

[00:00:23] Craig Syverson
We’re sitting in August Capital again. Comfort zone.

[00:00:27] David Hornik
Exactly.

[00:00:27] Craig Syverson
A beautiful day. Stunning day here back in Silicon Valley. Did you go to a conference? Sense Demo?

[00:00:36] David Hornik
No, I’m on conference hiatus.

[00:00:38] Craig Syverson
You’re on hiatus?

[00:00:39] David Hornik
I don’t know. The week after next, I think.

[00:00:41] Craig Syverson
Yeah, that was fun. It was a good conference. We had our marathon show that we put up.

[00:00:46] David Hornik
I know exactly. I get a lot of crap from my wife when she hears me or actually sees me listening to our show. What you have to listen. But I need to know just what you cut out and what I didn’t.

[00:01:01] Craig Syverson
And what I did.

[00:01:02] David Hornik
Nothing. You don’t cut anything.

[00:01:03] Craig Syverson
I cut a few things. I cut a few things just. Just for the sake of our guests and for the sake of our own.

[00:01:09] David Hornik
To spare the guilty or something like that.

[00:01:12] Craig Syverson
And I have a little plug that I’ll just get out of the way now in that I’ve created a new audio blog for Grunt Media. And the idea is that I get a lot of people ask questions about how I do things and how things are produced and such. I’m a terrible typist, so I thought I’ll just create this very casual audio blog where I answer the questions that people send me so I can record it. I’m much faster actually recording stuff, typing long answers.

[00:01:37] David Hornik
Ask Grunt Media.

[00:01:39] Craig Syverson
Sort of like that. It’s called Regrunt, like re Grunt, and it’s on the itunes store. Now, the reason I bring it up is that in regret number five, I’m talking about what I did to produce Venture Cast, specifically a demo, because people have been asking me, how do you do it, what mics do you use, et cetera. So I’ll have a posting. By the time this one comes up, I’ll have a posting that will describe the mics we used and how I’m doing it.

[00:02:02] David Hornik
We bumped into a bunch of geeks at demo and they did ask those questions. In fact, we had a long conversation with Larry Maggot, who’s from cbs, and he does CBS radio and obviously very experienced in the production of audio. And he was there with a video camera kind of doing the video podcast along with the audio thing and feeling a lot more comfortable with the audio than the video.

[00:02:24] Craig Syverson
Right.

[00:02:25] David Hornik
But it was an interesting conversation and. And obviously I claim no expertise. I’m the. I’m the talking head. And then Craig makes me sound better. I don’t know if he makes me sound good, but it was an interesting conversation to listen to. You know, what is the microphone and how do you. What are you doing for compression and sound levelization, etc. Etc. And, and as you pointed out in our last podcast, the Level 8 Iter really is just like a godsend.

[00:02:48] Craig Syverson
It really is. Especially in I don’t necessarily use it for these shows when I have much more control over the sound. But for the conference shows it was really, really helpful because the difference of levels in that environment and even how I would hold the mic to our guests would vary. And so obviously then the levels vary and the levelator just kung Fu’d through all that really, really well, even with the background noise.

[00:03:09] David Hornik
Pretty cool.

[00:03:10] Craig Syverson
I did some tricks to make it work with the background noise because. And I can explain that later maybe.

[00:03:15] David Hornik
On a recent listen to the podcast, you gotta listen to the audiocast. Re grunt, Regrunt Ray grunt, Recolon grunt.

[00:03:22] Craig Syverson
Because there were certain things I had to do to make it not sound really, really weird, but it actually worked out really well. So I love the love later. And in certain cases it’s just because to do that manually would really, truly take so ugly. Would take a long, long, long time.

[00:03:36] David Hornik
Particularly since I’m always screaming and you’re always speaking like a normal human.

[00:03:42] Craig Syverson
It’s not always you though. It’s not always you because my, my voice doesn’t record all that great unless I mentioned. Well, unless I fix it, then I sound marvelous, darling. Absolutely marvelous.

[00:03:53] David Hornik
You know, someone complained I was reading a post. It was someone’s blog post that referenced venturecast said, you know, these are the three venture capital related podcasts I listened to as Venture cast, Venture Voice and I forget what the third one. And then it had a little description and said an interesting conversation, blah, blah, blah. Occasionally they’re a little goofy, but otherwise, you know, oh no, we like it.

[00:04:16] Craig Syverson
What a bad reputation.

[00:04:18] David Hornik
Anyway. And look at goofy. All we’ve done is talk about said nothing so far. How many minutes in and we all. We’ve been as goofy. So I apologize. Whoever’s blog that was, we apologize.

[00:04:29] Craig Syverson
No, we don’t.

[00:04:29] David Hornik
Goofy.

[00:04:29] Craig Syverson
No, you might. I don’t. All right, yeah, I say heck with you.

[00:04:34] David Hornik
We’re goofy.

[00:04:35] Craig Syverson
Well, you know, I mean, so it’s a serious thing. Yes, this is a serious business. It’s a serious thing.

[00:04:39] David Hornik
Let’s talk. Let’s choose. What’s the most serious thing we have to talk about. Let’s talk about that first.

[00:04:44] Craig Syverson
Okay.

[00:04:44] David Hornik
Do we have anything?

[00:04:46] Craig Syverson
What’s the difference between venture capital and private equity. This was a very interesting question raised on Ask the vc.

[00:04:53] David Hornik
Interesting.

[00:04:53] Craig Syverson
And I’ve always sort of wondered, being a newbie in this, it’s like, you know, people talk vaguely about it. So yeah, they wrote it down. But now I’m testing you. I got you on the spot, professor.

[00:05:03] David Hornik
This is a quiz.

[00:05:04] Craig Syverson
Yeah.

[00:05:05] David Hornik
All right. Well, this is serious. And so I’ll use my serious voice. Okay. Well, Craig.

[00:05:10] Craig Syverson
Yes.

[00:05:11] David Hornik
Venture capital is private investment. It’s investment in private companies, which means by their nature somewhat more risky. I can’t keep that up, actually.

[00:05:22] Craig Syverson
That was a voice.

[00:05:23] David Hornik
Yeah, that’s all I had.

[00:05:24] Craig Syverson
Okay. Okay.

[00:05:25] David Hornik
That’s all I got. So, you know, venture capital is. And there’s early stage and late stage venture capital. But basically the idea is you have a company, there is no public market for it, People want to raise money and so they sell, sell stock in the private market. In other words, they say, if you give me $10 million, I’ll give you a quarter of the quarter of my company. And there is no one else bidding in the sense of a public market where you say, okay, you know, here is the, here’s the market and how the market value is a share of the stock. And as a result, it’s a riskier bet. You’re investing in something. Now, interestingly, what happens in private equity is that these large funds take public companies and buy public company stocks. In many instances, it’s to take public companies private. So it’s here is a public company or a division of a public company and would be better off if we took it off of the public market, took it out from under the microscope of the public markets, and gave us opportunity to have more flexibility around building the business. So in the same instance, there’s a division of a public company and hey, you know, we have public company X. It also has this little group that does chips for a particular thing that isn’t necessarily related to the main company. Private equity firm will come in and will buy that piece out.

[00:06:40] Craig Syverson
I see.

[00:06:40] David Hornik
Take it private in exchange for cash and some interest possibly in that new private company.

[00:06:48] Craig Syverson
The parent company would exchange cash and potential interest in the new company.

[00:06:51] David Hornik
Exactly. So X Corp. Sells me their storage division and I give them $20 million and 10% of the new company.

[00:07:01] Craig Syverson
Yeah.

[00:07:02] David Hornik
And in exchange for that, I get all of the engineers that are building the storage devices, all of the inventory, all of the receivables and all the trademarks, et cetera, and then I have to then operate the business on A going forward basis.

[00:07:16] Craig Syverson
Okay, so private equities generally does that. Right.

[00:07:21] David Hornik
And so as a result, it’s generally quite a bit larger. Right. The things that we’ve been seeing in the private equity world recently have been very large. I mean, multibillion dollar deals, tens of billions of dollar deals. It’s sort of like for a long time there was a discussion about whether there was an opportunity to take sun private billions of dollars. And some of the companies that have gone private, for example, the ThinkPad business was bought out of IBM. IBM no longer wanted to engage in making ThinkPads. They had a conversation, and now Lenovo, the company, bought it. But they were also engaged in conversations with private equity firms about individual investors or investment companies. In this instance, very big private equity shops being the ones that bought it from IBM.

[00:08:05] Craig Syverson
I see, but instead they sold it to a. Was it a Chinese company?

[00:08:08] David Hornik
Right, exactly. Decided that they thought the business rationale made more sense to sell it to Lenovo, who Now operate the ThinkPad division.

[00:08:15] Craig Syverson
Okay, and who are the private equity companies you say? Are hedge funds a part of that or.

[00:08:21] David Hornik
No, they are their own thing. The big private equity firms are like tpg, Texas Pacific Group. Never heard of kkr, Kravis, Crevice and Crevice. No, that’s not it. But you know kkr.

[00:08:34] Craig Syverson
Yeah. Okay.

[00:08:35] David Hornik
Those are the two that have historically been in the business a long time, have monstrous funds. Silver Lake is a smaller fund and. But still in the billions. And so August was involved in a buyout. We were part of the group that took Seagate private. And it was very interesting and that we were a small participant compared to Silver Lake that put, you know, hundreds of millions of dollars into the. Into the buyout. And there are actually an increasingly large number of these private equity firms that are being created. And they raise many billion dollar funds in order to have the capacity to entertain big, big deals.

[00:09:11] Craig Syverson
So are they looking. Are they competing for the same money that the venture capital firms are in terms of institutional investors? Do you guys go to the same people? You’re just asking for less as a VC firm.

[00:09:21] David Hornik
Yeah, exactly.

[00:09:21] Craig Syverson
I mean, you know, because the risk is higher.

[00:09:24] David Hornik
So you go to these. So these investors and typical investor in a venture firm or a private equity firm, whatever, are pension funds or universities or foundations. And so they typically will say, gee, we want to manage a portfolio of risk. And that means that we want to have a certain amount of money that’s low risk and things like bonds. And then we want to have a certain amount of money that’s in somewhat higher risk. Maybe it’s index funds and hedge funds and those sorts of things. Then we want to put a certain amount of money in these risky things, and that’s where venture money falls and private equity and some of these real estate funds where they’re higher returns but riskier endeavors.

[00:10:03] Craig Syverson
Sure. And private equity in general is considered less risky than venture capital.

[00:10:08] David Hornik
That’s an interesting question, and it’ll be interesting to see how it shakes out. But yes, I think that the belief is that they’ve done the work in these private equity shops to understand the capital structure of these companies that they’re taking private. And so they do have an expected lower rate of return, but it’s expected to be more predictably the correct outcome. So the interesting question will be, since they’re doing these multibillion dollar deals, it has to work, right? I mean, because you can imagine if I invest in 10 companies, but I invest $3 million a piece in the 10 companies and one of them fails, well, then I’ve lost $3 million, and that’s. I don’t want to lose $3 million. On the other hand, that’s not the end of the world compared to. Imagine a $3 billion deal that doesn’t work, and. And you end up losing $3 billion. It’s a pretty big hole that you have to climb back out of.

[00:10:56] Craig Syverson
But what if it’s a part of a $30 billion fund? Or are funds not that big?

[00:10:59] David Hornik
No, they are. Absolutely. And if everything else works predictably and makes interestingly large returns, it can make up the difference. But again, because these are more predictable, the likely returns are smaller, the return on my $3 million as a percentage growth basis will be vastly larger than the likely return on a private equity deal. On the other hand, the likelihood that I have that outcome in one of my companies is pretty low compared to the likelihood that you have a relatively good, but not exponential, return on one of these private equity deals.

[00:11:31] Craig Syverson
Got it. So what’s a hedge fund in all this? So hedge funds don’t invest in companies, they invest in something else.

[00:11:37] David Hornik
Well, it’s interesting.

[00:11:39] Craig Syverson
Are they arbitrageurs?

[00:11:40] David Hornik
Hedge funds? In theory. And look, what do I know? This is an interesting. You’re quizzing me. This is terrible. So experts write in and correct me. Hedge funds. So hedge funds, as a general matter, are investing in public markets. They’re investing in big chunks of stock. They’re investing in futures. They’re investing in options. They’re short, big shorts in stocks. So what? They’re Doing is measuring markets and they’re investing in markets.

[00:12:06] Craig Syverson
Okay.

[00:12:07] David Hornik
Again, I mean, it’s a little risky in the sense that you have to have a bunch of knowledge and hope that you’re correct about the direction of the stock and the direction of the company, but a little more predictable. Right. There’s a lot more information available about public companies. And so these hedge fund managers try and figure out what’s happening in the markets as a general matter, and they invest large amounts of money in big chunks of stock. So I’m going to buy $40 million worth of Apple stock because I anticipate that the iPhone will be a big success, et cetera. Now what’s interesting is hedge funds have started investing in late where late stage venture funds otherwise would invest. So there have been some recent instances where a company is doing pretty well. It has revenue that’s predictable and they’re looking for a late stage financing before they in theory go public or whatever. And in those instances, some of these entrepreneurs are going to hedge funds because hedge funds have large, large amounts of money and they’re willing to invest in some of these companies if they view them as predictable and can understand them in the context of what they do on a typical day. Right. So as these companies get closer to being public companies and they’re tracking their revenue and they’re tracking their earnings, and it’s a little more understandable and predictable in the context of a public market, Hedge fund managers are saying, I can understand that and I think that it’s undervalued and I’ll buy shares. And so they’re investing big chunks of money into these private companies in hopes that they’ll then be public companies and be able to have even more interesting returns than their typical returns on their public stocks.

[00:13:38] Craig Syverson
So they’re moving into private equity firms would also be in that same space. Right.

[00:13:43] David Hornik
Well, what’s happening in the private equity space is that a lot of them are having multiple funds. So you have the big buyout private equity fund and then you have a smaller fund that is either late stage venture fund or a mid market buyout fund where you’re going after smaller deals, where you’re chasing the several hundred million dollar buyouts, but it’s not the multi billion dollar buyouts. TPG had a venture fund for a period of time. So it wasn’t a private equity fund, it was a venture fund, but it was under the umbrella of a very large private equity organization. So it’s all, it’s getting all screwed up.

[00:14:18] Craig Syverson
It is, it seems Very closely related. I mean there’s overlapping little circles here in this chart.

[00:14:24] David Hornik
Right. I mean, you know, and the truth is the reason is it’s all about company building and finance. Company finance and you know, different firms have different expertise. Right. I wouldn’t pretend to know how to be a private equity analyst or frankly run a hedge fund. On the other hand, I think that there are hedge fund managers who probably would have a hard time picking a company. Yeah. Assessing a company that is or have time brand new, raw. What are you going to, you know, on what do you measure a company that has no revenue, in fact has no product.

[00:14:54] Craig Syverson
Right.

[00:14:54] David Hornik
I ask myself that a whole lot.

[00:14:56] Craig Syverson
You sure? Probably should.

[00:14:58] David Hornik
How shall I measure the.

[00:15:00] Craig Syverson
So from the entrepreneur’s point of view or the now the company’s established, so perhaps he’s no longer an entrepreneur by definition. Is there a difference who he or she would choose? Is there an advantage to choose a hedge fund to do the buyout money versus the private equity people from these different entities? Does it cost him or her less or is it just money’s money and whoever’s going to give it to them, they’re grateful for?

[00:15:23] David Hornik
Well, that’s an interesting question. So a, it depends on whether the person in charge of the business believes that money is money and therefore the best price wins in that instance, best price and best terms. And so it’s why in some instances hedge funds are able to fund these private companies because they’ll pay a higher price in many instances than will a late stage venture investor. However, sometimes the question is who’s going to help you build the business, who’s going to be the most helpful in the process of getting your business public or those sorts of things. And when that’s the case, then there may be another, another investor who makes more sense. And so sometimes it’s based on relationships. Hey, they, you know, so for example, the Bain Capital guys have very interesting relationships around a set of companies that they’ve already taken private. So for example, if you’re a business that is interested in having access to the quick serve restaurant market, well, it turns out that Bain Capital owns Dunkin Donuts and so they can help you get introductions to Dunkin Donuts in an interesting way. So maybe that makes it more compelling to you. And so I think you do have to think about what are the, what is it that you’re trying to achieve? Do you want more help with the technology, do you want more help with partnerships, do you want the least dilution possible, etc.

[00:16:38] Craig Syverson
Excellent. Were we Serious enough there, man, that was serious.

[00:16:42] David Hornik
In fact, I got to go read Ask a VC and see how I did.

[00:16:45] Craig Syverson
You did pretty good. You want me. Do you want to hear what they said?

[00:16:48] David Hornik
Yeah.

[00:16:49] Craig Syverson
The definition of all these terms is getting more blurry. We did that.

[00:16:54] David Hornik
Check.

[00:16:54] Craig Syverson
Well, so the initial answer was. Okay, you caught us. Technically, VC is a subset of private equity. Private equity deals are simply deals that aren’t available for public participation. This includes vc, angel investing, hedge funds, buyout funds, et cetera. Then he says it’s getting more blurry as each of them has morphed a bit to play in each other’s sandbox.

[00:17:14] David Hornik
Okay, check.

[00:17:16] Craig Syverson
Traditionally, the term venture capital is used to designate investments in early startup companies. All this being said, the term private equity has the connotation of meaning everything but angel or vc.

[00:17:27] David Hornik
It’s a definition by exclusion. There’s some term for that anyway, so it’s good.

[00:17:32] Craig Syverson
It’s a good thing for those of us who are clueless, who are now slightly more clueless, slightly less clueless, less so. LinkedIn. LinkedIn raised some more money.

[00:17:43] David Hornik
More money. New CEO.

[00:17:45] Craig Syverson
New CEO. Related. Not related. Reed’s. Reed was saying he doesn’t want to be CEO. He’s a product guy, so he wants the company to grow.

[00:17:52] David Hornik
And, you know, I was chatting with Reed. Funny you should mention. Yeah, I was. I was chatting with Reed. I said, congratulations, and, you know, now you have time to play golf or whatever. And Reed said, no, you know, first of all, it was very tongue in cheek, but. But basically, Reed said, I’m excited to have someone who smart and has grown big businesses, and that’s, you know, great. But that he has every intention of being heavily involved in the business. And I know that to be the case. I mean, he. LinkedIn really was his brainchild. He has done a great job with it, and there’s just no way that he’s handing it over and then moving on to something else. So it’ll be interesting. I think that, in fact, Reid will focus more attention on what are the next steps with the product and how to manage that piece. And he’s incredibly good at that. And so I would expect that we’ll see some really cool new stuff as some of his time is freed up to focus on that.

[00:18:43] Craig Syverson
Now, we talked about this a few weeks ago that LinkedIn was saying they wanted to have a valuation of 250 million, and it looks like they hit it.

[00:18:50] David Hornik
Did they list the valuation?

[00:18:52] Craig Syverson
Venture capital. This is from VentureBeat, placed a value of more than 250 million in the Palo Alto company after the investment.

[00:18:59] David Hornik
All right, so that’s called the post Money valuation.

[00:19:01] Craig Syverson
The venture capitalist, Silicon Valley’s Bessemer Venture Partners and European Founders Fund placed a value of more than 250 million on the company.

[00:19:08] David Hornik
Well, there you go.

[00:19:09] Craig Syverson
So they play. See, I’m still confused about. They placed the value. This is what we. I know we talked about. Just the short version. They placed it because of the money they put in.

[00:19:20] David Hornik
Well, yeah, they say, I’m willing to buy X number of shares at such a price, and the price is determined by what’s the value of the company. So they say, let’s say the company is worth $250 million and I want to buy a fifth of it. So I’ll give you $50 million for 1/5 of your company. Now, they didn’t raise $50 million. That’s just an example. Okay, so that’s how you do it. So congratulations. That’s a big valuation, man. So the interesting thing. So, thing about valuation that’s interesting is, yes, it’s important because it impacts dilution, right? At a high price, you can take a lot more money and not sell as much of the company. On the other hand, it sets a certain expectation, right? So if someone today were to come to the company and say, hey, we’d like to buy your company for $250 million, the guys who just put in money will say, oh, no, no, no, no, no, no, no. We just invested at $250 million. We will get no return for our money. We’ll just get our money out. On the other hand, you know, if you’re the company and your people and say you’re Reid, who’s founded the company, you might think to yourself, a gee, at a $250 million valuation, I’m going to make a lot of money. I still own some X number percent of the company and that would be a good outcome. But because I took money at this high valuation, I can no longer sell the company rationally for $250 million, because the expectation is that I’m going to grow the business from there. So I think that by taking money at that high valuation, what they’re signaling is we have every intention of taking this company public, that we view this company as a billion dollar company. If you’re an investor, you don’t Invest at a $250 million valuation. If you think it’ll be worth 400, that’s just not enough of an outcome given the risk involved. So if you put money at a $250 million valuation. You’re probably saying, gee, I can see this company being a billion dollar company, so maybe someone will acquire it for a billion dollars, maybe it’s a public company and worth a billion dollars, but then at least I get a 4x return on my money. So what’d they put in?

[00:21:16] Craig Syverson
25 million bucks raises 12.8 million.

[00:21:19] David Hornik
12.8. So 12.8, I mean, you know, if it gets to a billion dollar company, it means that you’ve turned your 12.8 into $50 million. Right. So it’s just an interesting thing. Right. I think it’s important for venture investors and entrepreneurs and alike to look at when you raise more money that it changes the expectations. And we’ve talked about this in the context of startups that are just considering raising money. The Delicious or Flickr or, you know, others that have been at a point where they could easily have raised money and yet they chose to sell at that point in time because by raising money they changed the expectations and they changed the requirements for making the same amount of money in a future sale. So big valuation. I look forward to the ipo.

[00:22:03] Craig Syverson
Now, if you say that they’re looking for at least a 4X, is there a time period for that? Generally, like if you were, if you were this late stage investor, if you were these two guys and you just did this, and let’s say you’re feeling pretty confident about a forex, how long are you willing to wait for that forex to happen? Is that.

[00:22:18] David Hornik
Well, I should start with, I made that up.

[00:22:21] Craig Syverson
The forex.

[00:22:22] David Hornik
The forex.

[00:22:22] Craig Syverson
Okay, it’s fine.

[00:22:23] David Hornik
But you know, people have different expectations and it is the case that you expect, as I said earlier, you expect lower returns, lower, lower multiples, later stage financings where it’s less risky.

[00:22:35] Craig Syverson
Yes.

[00:22:35] David Hornik
So then they must have been looking at how much revenue the company had last year and how much revenue they anticipated having this year. And, and think to themselves there is a reasonable likelihood that the company is a public company in some reasonable period of time. And so what you’re saying to me is, well, what’s a reasonable period of time? I think that’s a good question. It depends on the investor. We’re super early investors, so that’s not your thing. I’ve been an investor in a company called Paycycle for five years now. The business is doing great.

[00:23:05] Craig Syverson
This is the payroll company.

[00:23:06] David Hornik
Yeah. Small business payroll. Www.paycycle.com.

[00:23:10] Craig Syverson
Thank you, thank you very much.

[00:23:11] David Hornik
An online payroll solution. So you, you go there and you do your payroll and click a button and it pays payroll taxes, et cetera.

[00:23:18] Craig Syverson
Right?

[00:23:18] David Hornik
And when I invested in these guys, they were building the product. It was a smart group of people, an exciting idea. Zero customers, you know, so obviously I had to have a much longer time frame. And now five years out, you know, they have tens of thousands of customers. It’s a good business, they’re making a lot of money. The question is, you know, how much longer will it take till liquidity, a public offering, someone acquires it? And you know, from my perspective, as long as it’s a good, interestingly large outcome, I’m patient about how long it takes. That’s not my metric. For the later stage guys, it may be different, maybe that they have certain expectations of lower returns over a shorter period of time. And therefore what’s called the irr, the internal rate of return is higher. In other words, you make more money per year than if it had taken a long time. So I think, and I think that’s the case, the later stage guys expect to have a shorter period of time before liquidity. Is it two years, is it three years, or is it one year? I think it sort of depends on a case by case basis. I think that the shorter period of time anticipated and the larger the anticipated outcome, the higher the valuation. So this suggests expectations of a pretty good outcome, pretty impressive outcome in a relatively short period of time.

[00:24:29] Craig Syverson
Are any of these expectations or needs for return based on the fund from which you as the venture capitalist pulled the funds to pay for it? Like what stage of your fund? Do you know what I’m saying? Am I making sense?

[00:24:42] David Hornik
Yeah, and the answer is it depends on the fund itself. So what you’re saying is if you’re just at the beginning of the fund, then it taking a long time is probably not a big deal. And if you’re towards the end of the fund, if it takes a long time, well, the fund’s going to be, the fund’s going to finish and you’ll still have stuff that hasn’t resolved itself. And so the question is twofold in that respect. One, are you going to raise another fund?

[00:25:04] Craig Syverson
Right.

[00:25:05] David Hornik
And if so, then throw the money there. It doesn’t matter. You have companies that you’re managing from your last fund and then you’re investing in new companies from this fund. And so there’s always this continuum of new young companies and older companies and closer to liquidity and further from liquidity. So that’s the first one. The second one is sort of related, which is how many funds did you have before, because if you’ve had a number of funds before and a track record of success, it will be no problem to raise that next fund because the investors will say, well, over time, these investments have worked in such and such a way. So even though David just invested in a company today that won’t likely have an outcome for six years, the expected outcome is one of a high return. On the other hand, if you’re a new fund and you haven’t had a bunch of outcomes, right. And you’re hoping to go raise another fund to invest in a company towards the end of the fund, that won’t likely have an outcome for many years, won’t help you in any way to market than raising in the next fund. And so you’re more likely to invest in later stage things towards the end of that fund so that you can get to some interesting outcomes to raise the next one.

[00:26:09] Craig Syverson
I see. Interesting. I had another question in here.

[00:26:12] David Hornik
This has been the least frivolous venture capital.

[00:26:14] Craig Syverson
Well, you know, I thought we should balance it out.

[00:26:16] David Hornik
Yeah. You know, all right.

[00:26:18] Craig Syverson
Just, just like get back into the. What’s this stuff about?

[00:26:22] David Hornik
All right. Hey, I feel good about it, but.

[00:26:25] Craig Syverson
I had another question. Darn it. Ah, I remember. So what if you get. We might have talked about this. What if you get tired of a company, you’ve got someone on your books for 12 years and, you know, you want to close the fund officially or whatever, however you guys do that. But what happens then? Do you go to a private equity firm and say, do you want to buy this? Hey, you want to buy a company? Or what do you guys do then?

[00:26:48] David Hornik
Yeah, you can do that. You might find a buyer. Hey, we’re willing to go longer. And so obviously at a discount, we’ll buy the shares that you hold in the company and you can get liquid before the company is technically liquid sometimes, if you get tired of. Again, I shouldn’t use that phrase.

[00:27:06] Craig Syverson
Right.

[00:27:06] David Hornik
I mean, you know, the truth is that there are different reasons why companies might. Why investors might need liquidity or they. They’re no longer investing in that sector or whatever. But if there’s a reason that you need to divest of that particular company, one of the things that you can do is to distribute the shares that you hold in that company to your investors. Oh, okay.

[00:27:27] Craig Syverson
Let them deal with it.

[00:27:28] David Hornik
You have a million shares, right? And you say, okay, I have a million shares in this private company. I have 20 investors here. You 20 investors are going to get your proportion of my shares in that company and Then depending on what happens with it, you’ll get the return directly. But I’m no longer going to warehouse them in my finances and my books.

[00:27:47] Craig Syverson
And if that fund closes, you’ll no longer manage that fund. So there’s no more management fees for that fund.

[00:27:51] David Hornik
Right? Right. Management fees tend to fall away after a period of time. Typical fund is a 10 year fund. And so you have management fees of some size over the 10 years. Although again, it also tends to be that towards the end of those funds you have smaller fees and more fees in the beginning when you’re more actively managing, which makes, makes some good sense. So by 10 years out, you’re no longer receiving fees. You’re still managing portfolio companies because you believe that there is a potential outcome. And if you distribute those shares of stock to your investors, then you can say, okay, we’ve liquidated that entire portfolio. We’re no longer investing out of Fund 2 or we no longer manage August Capital 2. We are only managing August Capital 3 and 4.

[00:28:34] Craig Syverson
Good. Okay. Now that we’ve bored everybody.

[00:28:37] David Hornik
That’s right. Wake up.

[00:28:38] Craig Syverson
Oh, hell. Thank you for pegging my meter there. See, I’m trying to set these levels and you go and shout like that.

[00:28:44] David Hornik
Wake up. Better.

[00:28:45] Craig Syverson
That’ll be better. We’ll see. We’ll see. What’s going on. What did you find interesting this week? Did you find anything? You do any research? Did you prep?

[00:28:52] David Hornik
Did I prep? I’ll tell you.

[00:28:54] Craig Syverson
So besides being jealous of me going.

[00:28:57] David Hornik
To French laundry, I am jealous. I have never been to French.

[00:29:03] Craig Syverson
Yeah.

[00:29:03] David Hornik
Was it as good as it’s supposed to be?

[00:29:05] Craig Syverson
Yes, it was quite, quite stunning.

[00:29:08] David Hornik
It really was, yeah.

[00:29:09] Craig Syverson
Dinner for a friend of mine who turned undisclosed age. And so it was a private dinner, wasn’t a business thing, but it was really quite nice, I must say. Each, each dish came out. It was just like what, you know, is very artfully delivered, of course, and on 16 plates, stacked up and it.

[00:29:28] David Hornik
Is, it’s, I mean, 15 courses, right? Or something.

[00:29:30] Craig Syverson
Nine courses.

[00:29:31] David Hornik
Nine courses. Nine courses. I mean, just. That’s just a lot of courses.

[00:29:34] Craig Syverson
It was. And just each one had this, you know, just new moments of gastronomic intensity and subtlety and beauty. So it was fun. It was a great crowd. I was with. And we had a blast just realizing that we were looking at a second mortgage. There was a mortgage broker in the restaurant, which was helpful.

[00:29:52] David Hornik
The resident.

[00:29:52] Craig Syverson
The resident mortgage broker. So we filled out the forms.

[00:29:55] David Hornik
So, Craig, I was on my way home from the StumbleUpon anniversary party and I hadn’t eaten dinner. And so I stopped at the, the Jack in the Box near my house and got a large milkshake.

[00:30:08] Craig Syverson
You did? That’s excellent.

[00:30:11] David Hornik
And you know what?

[00:30:11] Craig Syverson
On the same night, I’m sure it was delicious.

[00:30:14] David Hornik
It was a delicious milkshake and that’s all I’m saying. But speaking of the Stumble upon anniversary party, I was there, it was a great crowd.

[00:30:26] Craig Syverson
This is their first anniversary.

[00:30:27] David Hornik
This is their fifth.

[00:30:28] Craig Syverson
No way.

[00:30:29] David Hornik
Anniversary. Can you believe this? So these guys were. Started the company in Canada. They’re Canadian guys, you bet. And we’re building, building the service and, and moved to the Bay Area, I guess about a year ago and raised some angel money and they had their fifth anniversary party and it was a great fun party and like those guys and like, and lots of really smart people there. And they were showing this cool thing. I mean, so they have this thing called Stumble Video. You can go to Stumble Video and, and say, hey, show me the next cool video. And it’ll show you a video and you can pick like I want videos on music or I want videos on animals or on cars or whatever and it’ll show you a video that other people have said is awesome. And you go, I like that or I don’t like it. And then based on whether you liked it or not, show you a different video. So I’m a big fan of Stumble video and you can waste just near infinite amount of time on Stumble video. So now they have ported Stumble video for the Wii. So they had a Wii, you know, with that cool kind of handheld controller that senses tilt and stuff. And so you can pull up, you know, Stumble using your Wii and then you can rate, you know, give it, literally give it a thumbs up or a thumbs down with your hand and that’ll rate the video and then you can click and watch the next video. And it was totally cool. If you have a Wii, you can go get Stumble video for the Wii.

[00:31:45] Craig Syverson
Interesting. Is it like a plugin or is it a. How does it work?

[00:31:48] David Hornik
Well, it’s a piece of software that runs on the Wii on the way the Wii has actually has the Opera browser on it which, you know, so now all these, it’s interesting. These gaming platforms now are these connected devices and they come with either connect to purpose built communities that are broadband communities or they have the ability to be connected to other things. And so the Wii has a browser, proper browser built in. So I don’t know how you get it. Maybe you can go to stumble.com and stumbleupon.com and get it. But it runs on the Opera browser that runs on the Wii machine. And then you can watch video on your. On your tv.

[00:32:23] Craig Syverson
Cool.

[00:32:23] David Hornik
That’s cool. So I actually was on a. I was on a radio show, a proper radio show.

[00:32:27] Craig Syverson
Radio today. Really?

[00:32:29] David Hornik
Have you heard of this thing? Radio?

[00:32:31] Craig Syverson
Yes.

[00:32:32] David Hornik
Right. It’s in your car. It’s funny. So I’m just never actually on time. I’m not very. I’m not terribly not on time, but I am not necessarily on time.

[00:32:44] Craig Syverson
Okay. And this is sort of important for maybe a live show.

[00:32:48] David Hornik
That’s what I’m saying.

[00:32:48] Craig Syverson
Right.

[00:32:49] David Hornik
I was chatting with someone across the office, and the receptionist came and said, you know, there. I’ve got the radio show on hold. And I looked at my watch and sprinted back to my office. And I picked up the phone and I got connected. And they said, david, you’re being introduced now. And then it was, I have David Hornik here from August Cap. Whoa. What would have happened? What if I had been, like, you know, in the bathroom or something? I mean, think about radio. Like, what would have happened?

[00:33:17] Craig Syverson
Such pressure.

[00:33:18] David Hornik
And then I had to, you know, talk about things to be eloquent. Boom. I had to go, like, right there.

[00:33:22] Craig Syverson
Right.

[00:33:25] David Hornik
So I talked about Stumble upon We. Okay.

[00:33:29] Craig Syverson
Hence it’s fresh in your mind.

[00:33:30] David Hornik
Exactly. No. Well, they were asking me about connected life. The connected life. And this idea of the, you know, digital meeting, the home and all that, which I’m rather fond of. And I thought that this was a great example.

[00:33:42] Craig Syverson
Mm.

[00:33:43] David Hornik
So there you have it.

[00:33:44] Craig Syverson
Cool. What radio program?

[00:33:46] David Hornik
Oh, that’s a fine.

[00:33:47] Craig Syverson
That’s a good question. What city? Another good question.

[00:33:50] David Hornik
City. Do they actually do it by city?

[00:33:52] Craig Syverson
Well, because they’re local. They’re local. They’re not. They’re not distributed over the Internet.

[00:33:56] David Hornik
Yeah. See, you know, this is the problem with radio. I mean, you know, we have such. We have such a broader reach and whatever the heck it was.

[00:34:03] Craig Syverson
Maybe we’ll get to your radio program and we can post it somewhere. Yeah, if they let us.

[00:34:07] David Hornik
Forget it.

[00:34:08] Craig Syverson
We just talked about it. Here is good enough.

[00:34:10] David Hornik
Yeah. Whatever it was.

[00:34:12] Craig Syverson
No. Yeah. But connected home, it’s definitely an interesting thing right now. Everyone’s crowding around a bit. Apple’s, Apple TVs, I think, coming out real soon, if not this week, should be. Which is sort of a first flat.

[00:34:25] David Hornik
Mini.

[00:34:25] Craig Syverson
Yeah. And a first stake in the ground. I’m not sure. It needs to be opened up a little bit more to have, I think, to have real impact.

[00:34:34] David Hornik
Hey, we could talk about that speaking of opened up, you see this Steve Jobs statement that it caused a real storm in the blog sphere and everywhere else.

[00:34:43] Craig Syverson
I suppose it actually surprised me. We talked about this on another show I do this week in media. But I was surprised because I was always thinking that from Apple’s point of view, DRM was sort of a two headed hydra. The music company’s forced us to it. But gosh, it’s really great. We have this control over itunes and you know, the ipod that people won’t want to move away because of the drm. So we really, really kind of really, really like it. And Steve came out and said nope. I thought, yes, that was very, I thought it was very cool.

[00:35:11] David Hornik
Yes.

[00:35:11] Craig Syverson
And it’s confidence, it’s.

[00:35:12] David Hornik
Do you believe it?

[00:35:14] Craig Syverson
Do I believe that he feels that way personally? Well, he’s kind of put a big stake in the ground, don’t you think?

[00:35:19] David Hornik
Well, it’s big. Making a bunch of noise and makes other people, makes us be oh yay, yay. And yet the media companies are saying, what do you mean? First you force us to charge less than we want to charge and then you insist on us being on this specific platform and now you want us to make it open. So anyway, I don’t know, I thought it was interesting. I don’t know what outcome will result and I don’t know precisely what Jobs was aiming for truthfully because I don’t think that the media companies are just going to say, oh, okay, we’ll open up our drm. I will say it would be really great to have all my itunes, music that I’ve bought be transferable to other machines and be transferable to non ipod devices. And you know, as I think I’ve said here before, I have to decommission one Apple machine because I’ve already got five that are on and I want to listen. You know, that’s just, that’s a whole lot of drm. But it was very interesting and it was. But so listen to this. I was sitting down with some Hollywood guys that have a new company and we’re talking about their company. But then I got to chatting about this about Steve Jobs announcement and they were angry. These are like former heads of programming from big networks and former heads of big media companies and they said, you know, where does he get off telling us what to do to give away? Basically they thought it was the tantamount to saying give away your stuff for free.

[00:36:43] Craig Syverson
But that’s crazy.

[00:36:44] David Hornik
Well, I understand that and you understand that, but it gives you a sense of what the media world still thinks, which is, hey, if there is no drm, it will be stolen by its nature and we will no longer get paid for the stuff that we rightfully have created, which they should be.

[00:37:00] Craig Syverson
But they got to realize, guys, that most of your stuff being sold isn’t DRM’d. I mean, Steve talked about this. The point is, I think in the online music market at this stage right now, it’s matured enough to a point where it’s. There’s momentum behind it. There’s momentum in terms of sales of the ipod, and the numbers of them out there in terms of online sales of music is clearly moving forward. So by this time, anyone who’s going to create pirated music has done it. Because you just buy the cd.

[00:37:32] David Hornik
Yes.

[00:37:33] Craig Syverson
So of all this stuff that has DRM protection, there’s also a CD out there that one can buy and very easily rip and put it out there. So every one of these pieces of music that is DRM’d, if people care enough to pirate it, it’s already out there now, today. So this market that you have of people who are legitimately buying music and want to, it’s not going to suddenly shift. They’re not going to suddenly start pirating. They’re going to continue the same behavior. In fact, they’ll probably be a lot happier about it because they’ll have more freedom with devices. So I can imagine that it would increase piracy because I think piracy is at its lowest maximum level right now.

[00:38:11] David Hornik
How much more piracy can there be? How can I. None.

[00:38:14] Craig Syverson
None.

[00:38:14] David Hornik
None. More piracy.

[00:38:15] Craig Syverson
We have. We have. We have fulfilled the piracy maxima quota.

[00:38:18] David Hornik
Exactly.

[00:38:19] Craig Syverson
Yeah.

[00:38:19] David Hornik
We’re at the zenith. Well, there was a re. There was actually a study that just came out talking about the music industry did a careful study to try and determine to what degree music sales were being diminished by the pirated music traveling in these P2P networks. And the conclusion of that particular study was that the amount of music that was not being sold as a result of it being available for free was de minimis. That essentially we were talking about some number of hundreds of albums, CDs that aren’t being sold now because they’re available for free on the pirated networks, which just completely supports what I believe, which is there are people with more time than money and there are people with more money than time. The ones with more money than time will always choose to buy it more conveniently.

[00:39:05] Craig Syverson
More conveniently.

[00:39:06] David Hornik
And the people who have more time.

[00:39:08] Craig Syverson
Than money will always find a way.

[00:39:10] David Hornik
They’Ll always steal it because it’s more convenient for them and otherwise they won’t own it. So they’re not buying it anyway. So you’re not replacing a sale.

[00:39:19] Craig Syverson
That’s exactly it. We’re in accord.

[00:39:21] David Hornik
We are.

[00:39:22] Craig Syverson
Figure it out, guys, come on already. I mean, look at software, you know, look at Adobe. That’s always a model that I think.

[00:39:32] David Hornik
I agree. Early days, the software guys all figured it out.

[00:39:35] Craig Syverson
They figured it out and, you know, it’s somewhat being reflected now with the open source world in its own way where they’re finding value in other ways other than just selling the product. They’re finding it in support and et cetera.

[00:39:48] David Hornik
I hear you, Craig.

[00:39:49] Craig Syverson
Okay, well, we’ve done our rant and we’ve done our show. We’re at a good time.

[00:39:54] David Hornik
I do think that this is the most serious show we’ve done ever.

[00:39:56] Craig Syverson
I think. I think it’s just a reaction to our last show. It was kind of goofy having edited it and all right.

[00:40:03] David Hornik
You know, that’s the problem. You send me out to chat with.

[00:40:06] Craig Syverson
People, you just go. You just go out of control. But that’s what I do. No, it’s good. It’s good. We bring a balance. We bring back to the roots.

[00:40:15] David Hornik
Right back to our roots. Well, it’s been a pleasure.

[00:40:17] Craig Syverson
Thank you. And thank you to Cashfly for providing bandwidth the show. And we will see you in a couple of weeks.

[00:40:30] David Hornik
You will grow up someday. You will get a job. You will be working.

[00:40:47] Craig Syverson
What do you want to be when you grow up?