Generated Transcript

[00:00:15] David Hornik
Hello and welcome to VentureCast. I am David Hornik from August Capital.

[00:00:19] Howard Hartenbaum
And this is Howard Hartenbaum, also from August Capital.

[00:00:22] Jeff Clavier
And our special guest, Jeff Clavier. Not from August Capital, from Softech vc.

[00:00:27] David Hornik
Our only guest. Actually, we have.

[00:00:29] Jeff Clavier
That’s true. You had guys. Yes, well, Andrew is from the firm.

[00:00:33] David Hornik
How much did we have?

[00:00:34] Jeff Clavier
No, you had two dudes. You had two dudes sometime there and you made fun of me, and that’s why I was sort of really angry at you guys.

[00:00:41] David Hornik
So then you rescheduled. Get back here. Well, we’re glad to have you, Jeff. You’re our favorite guest. You used to be our only guest, but you are absolutely our favorite guest.

[00:00:52] Howard Hartenbaum
And we’re on location today in Howard’s office. Normally we do this in David’s office.

[00:00:56] David Hornik
That is true. However, they’re building a giant building right next to my office, taking over my view because the gentleman upstairs at Benchmark Capital decided they needed more space.

[00:01:08] Jeff Clavier
And the view is going to be pretty ugly for the next couple of years.

[00:01:11] David Hornik
Yeah, it’s going to be the benchmark, guys. How dare you. I guess I’m just going to have to live with that. It’s a very interesting cautionary tale. Right.

[00:01:21] Howard Hartenbaum
How much would it be worth to you to buy my office?

[00:01:24] David Hornik
Not that much, truthfully.

[00:01:26] Howard Hartenbaum
That’s okay. I wouldn’t take it. Oh, okay.

[00:01:28] David Hornik
Yeah, so. But it is great. It is very interesting to know that in your lease there’s nothing that says if some. If they decide to. If your own landlord decides to build a giant building next to you and create incredible disruption for the next year and a half, you have literally no recourse. How is that at all possible?

[00:01:48] Jeff Clavier
And you’re a lawyer, so you could actually have gone through the contract.

[00:01:51] David Hornik
I should have.

[00:01:52] Howard Hartenbaum
So that’s a lesson to learn when you’re doing your contract.

[00:01:54] David Hornik
Yeah, right. Control your quiet. Your quote unquote quiet enjoyment, as they say in the law of your space.

[00:02:02] Howard Hartenbaum
Paul Bragiel at IO Ventures and his partners own their building up in the city. And next to them was a parking lot, which is now becoming a building. And in the process of putting up the building, for one thing, it’s cutting into their light quite a bit. And the other thing is they’ve caused some foundation problems and now they can’t open and close their doors on that side of the building. The whole building has sunk a little bit there. So it’s actually quite a serious problem.

[00:02:25] David Hornik
That’s an interesting. Like, who do you go to? Yeah, I love this. Own your own building. Buy a building. You know, we should own the whole thing.

[00:02:36] Howard Hartenbaum
Like Zynga.

[00:02:37] David Hornik
Yeah, that’s their best asset. It’s like.

[00:02:40] Jeff Clavier
It is.

[00:02:41] Howard Hartenbaum
It’s a hard asset. It can’t go down in value.

[00:02:43] David Hornik
Well, good, but probably not that much.

[00:02:45] Jeff Clavier
You mean the trade at cash in building?

[00:02:47] David Hornik
Yeah, that’s right. They do. Basically, they’re trading below cash and assets or something. You know, the Facebook lockup just came off. All these people. All these people. Partial, partially, but a bunch of people got. Were able to sell and had no impact on the stock price. I think the stock price bounced around.

[00:03:07] Howard Hartenbaum
It’s going to have an impact on the real estate value. A lot of those people want to think, hey, let’s go buy some houses. And they bid the price of that. They bid against each other, and they bid the houses up.

[00:03:17] David Hornik
I don’t know. So Mark Zuckerberg lives in Palo Alto, and my daughter went trick or treating in his neighborhood, and he was. He opened the door in a wizard outfit and gave out Pop Rocks. I have to tell you, that gave me. I have so much respect for Zuck. Like, that’s just awesome. The kids were psyched. He had fun. Pop Rocks are better than your typical crappy, you know. Mm. Little mini packet of M&M’s.

[00:03:44] Howard Hartenbaum
Is there like, one pop rock for child?

[00:03:46] David Hornik
Yeah, Pop rock package. You know, there’s a rumor this will kill you. You gotta love that, though, right? Zuck standing there handing out candy.

[00:03:57] Jeff Clavier
That was one of my first Yukon Valley moments years and years ago where. So I was at home waiting for the kids to show up, and I had Jerry Yang showing up with his little two daughters at my doorstep and was like, I know that dude. But if, like, let’s forget the costume. Where did I see him?

[00:04:18] David Hornik
Yeah, it’s Jeremy Yang. That’s kind of.

[00:04:20] Jeff Clavier
Who’s a Nelson guy, by the way.

[00:04:21] David Hornik
He is a great guy. He’s a great guy. Lived up the hill for me, I guess, at the time. Hey, speaking of homes, you were just referenced in, like, some New York Times article for your new modern home.

[00:04:31] Jeff Clavier
Yeah, the record.

[00:04:33] David Hornik
Well, people, you know, like, people. Is that what that was supposed to be? No, he’s not telling you where his house is.

[00:04:38] Howard Hartenbaum
That’s like, I want to come see.

[00:04:41] Jeff Clavier
Well, I’d be happy to tell you of. Of the record of the program, but just your comment around the market, it was very weird because before the Facebook IPO, there was this sort of ramp in sales, and people sort of either wanting to buy before the Facebook IPO or not wanting to Sell. Because they wanted to wait for the Facebook ipo. And so we had the opportunity to buy a house which was being built before it got built, and. And very happy with it. Ended up realizing that all the guys actually bidding on these were friends of ours.

[00:05:15] David Hornik
Seriously, you were bidding against everybody you knew?

[00:05:18] Jeff Clavier
It was kind of interesting to figure out who were the other guys.

[00:05:20] Howard Hartenbaum
Oops.

[00:05:22] Jeff Clavier
And then as we put ours on the market, then the market sort of fell off a cliff because the Facebook IPO cooled down the entire market, and so it was actually picked back up again. It’s been very. I mean, it’s gone in Los Alamos, Mountain View.

[00:05:36] Howard Hartenbaum
It’s way up. So there must be less inventory there.

[00:05:39] Jeff Clavier
Not in Palo Alto. So I was talking to a friend, Ken Gladwell, who helped us sell the house. And basically the market has been really weird where there were pockets of activity, but overall it was very flat. So we’ll see if the partial lockup expiry. And the final, which is in two weeks, I think mid November, is when BM shares sort of come to the market. We’ll see what that, I think, in the end, does.

[00:06:04] David Hornik
Yeah, it’ll probably have a bigger impact on the. On the housing market than it will on the mark Facebook stock price because it’s, you know, look, it’s basically bouncing around a price that, you know, is it really going to go below 20? Because some people. Because people want to sell. I think the trading volume is already high enough, I can tell you. It already trades at almost 40 million shares. You know, so it’s. What’s the chance that it’s. I mean, it might go down a little, but it’s not going to have a big, big direction.

[00:06:32] Jeff Clavier
Well, it’s interesting because. Okay, so what do you guys do when your shares come out of lockup? Do you sort of drop them that day? Do you sort of get a broker involved so you can get them sold and then distribute your LPs? You distribute the shares to your LPs? Can I actually ask the question?

[00:06:48] David Hornik
Yeah. No. As a general matter, we think our LPs would rather have shares, and so we distribute the shares to them and let them make the decision. What we have learned is that a set of our LPs sell as a matter of course, as a matter of policy, a set of them tend to hold, and then some make ad hoc decisions based on what they think of the business. So we are not a firm that is in the business of saying we’re going to make more value by trying to understand or game the Market. So we basically, when there’s an opportunity to give our investors liquidity, we do.

[00:07:22] Jeff Clavier
Reason why I’m asking is that as I was on my way to your office, I got ripped a new one by one of my LPs about our Groupon shares. We got out of lookup around 10, and I said, oh, I think it could sort of go back up. And so maybe we should sort of.

[00:07:38] Howard Hartenbaum
Hold a little bit.

[00:07:40] Jeff Clavier
And they busted down to 3 something today.

[00:07:44] David Hornik
383.

[00:07:45] Jeff Clavier
Lowest. Lowest trading value ever.

[00:07:48] Howard Hartenbaum
Yes. I think the point on that lesson is that if you hold them and they go up, you get a little bit of a pat on the back. But if you hold them and they get down, you get beat in the head.

[00:07:57] Jeff Clavier
Yes.

[00:07:58] Howard Hartenbaum
And so the argument would be let them make their own decision, what they wanted.

[00:08:02] David Hornik
And you don’t even get much of a pat on the head when it goes up because it’s sort of like they say, well, we could have held two. Yeah, right. If we wanted to hold.

[00:08:10] Jeff Clavier
And it’s exactly what he told me. So, you know, lessons for fellow VCs listening who don’t know what to do with the first, you know, IPO shares. Sell them or distribute them, but don’t hold.

[00:08:22] David Hornik
Yeah.

[00:08:23] Jeff Clavier
Because I’ve learned the very hard way how much it costs.

[00:08:27] David Hornik
Well, remember, I mean, you know, in the early days with Ron Conway’s fund, he held. He had a bunch of shares in ask.com and it was worth a ton. And this is true of lots of these companies where in 96, I mean, 98, 99 was worth a ton. But, man, you held it another year and they go. And they go way down. And so it’s just not worth. That’s a game. If you. Look, if we were wanted to be hedge fund managers, we’d be hedge fund managers. That’s the last thing I want to be. So I’m happy to give you shares and let you make your choice.

[00:09:02] Jeff Clavier
I don’t know, I guess it’s the. Unfortunately, in our business, I feel that the only way to learn a lesson is to lose a bunch of money. And we didn’t lose money. We just lost potential profits. Right. So we haven’t lost money. But yeah, you can keep saying that to yourself.

[00:09:20] David Hornik
So you sold a company, Groupon, because you guys didn’t invest. What’d you sell on?

[00:09:24] Jeff Clavier
We sold good Rec. So that was an early mobile recommendation Play, which built a really interesting product. Never got to the scale it took to actually raise a Series A. And we actually didn’t even try to raise a Series A, we tried, tried to find a soft landing and Groupon was actually a great soft landing. And on paper, we made a lot of money. Unfortunately didn’t work out.

[00:09:50] David Hornik
Well, sometimes it works, sometimes it doesn’t.

[00:09:51] Howard Hartenbaum
Right.

[00:09:52] David Hornik
Look at Blogger, which was not a particularly. It was an okay outcome when it was sold to Google and then Google went through the roof. It became a big win for EV and everybody involved. Right.

[00:10:03] Jeff Clavier
Well, we had that with Geo API when we sold it to Twitter. Right timing. And we made a, I mean a very, very, very good multiple for a company which wasn’t working out. So.

[00:10:14] David Hornik
So. But you’ve had a pretty good, you’ve got a pretty good run this year. You’ve had 10 companies get sold.

[00:10:19] Jeff Clavier
Yeah.

[00:10:20] David Hornik
And you know, of those 10, you know, so obviously some, sometimes you sell companies because they’re. You need to find some outcome for them. But my sense is some of these companies have been great, have been great outcomes where people have been willing to bet ahead of the curve for you. So how’s that? What’s your sense of, you know, has your thinking changed at all about how you think about M and A with respect to your portfolio, or is it just on a company by company basis?

[00:10:44] Jeff Clavier
No, I think, you know, like you guys, we try and find great teams that will build big companies and we just get in very early, taking potentially higher risk and paying a lower price. I would say that there’s definitely a number of companies that had an exit because we sort of needed an exit. And in some cases those were really good outcomes or good saves as we call them. And in a couple of other cases, like, you know, Wildfire is a good example where I wasn’t anticipating us to sell at all because the business was going extremely strong in terms of growth. We just happened to be in a sector, social media marketing that within three months completely consolidated with Buddy Media being acquired for a bunch of money by Salesforce and then Vitro being acquired by Oracle. So number one, number three in the market, get acquired, suddenly have much deeper pockets to do marketing against Wildfire. And Wildfire goes, that means they will have to go and raise a big $50 million round because they have done extremely well in terms of revenue, in terms of growth, but they had to be able to compete. And at that time, Google sort of knocked on the door with a pretty damn good offer for everyone involved, especially the founders who still own the vast majority of the company. And so when I got the text from Victoria Ransom, who’s just an awesome CEO, and I really wish I hope I will work with her again.

[00:12:15] Howard Hartenbaum
That depends on how good it goes post acquisition.

[00:12:19] Jeff Clavier
Not because I got a cash. No.

[00:12:21] Howard Hartenbaum
I thought you said you hope to.

[00:12:22] Jeff Clavier
Work with her again. Yeah, well, given what I’ve seen, I will work with her on anything she does. She’s awesome.

[00:12:30] David Hornik
Except for the part where she decided because she was busy incorporating her business into Google that she couldn’t make it to this year’s lobby, which, you know, I’m just saying.

[00:12:40] Howard Hartenbaum
David, did she pay?

[00:12:43] David Hornik
Yeah, she.

[00:12:44] Jeff Clavier
I will say this, unfortunately, our friends at Google have sort of taken over the management of her agenda and I’ve had the hardest time to get her to come to our first portfolio summit that you, David, were very kind to sort of chat at. And really the crowd was pleased to have you. And so we got her for like 20 minutes and it was great. But it was so hard to get Google to sort of agree with it.

[00:13:10] David Hornik
To let her have some of her done.

[00:13:13] Jeff Clavier
So. But anyway, they weren’t planning to sell. Google made the right offer at the right time and they’ve been very, very smart. Because today Wildfire is one of two acquisitions that is independent, as in Wildfire division of Google.

[00:13:29] David Hornik
The other one’s YouTube or. You don’t treat that that way.

[00:13:33] Jeff Clavier
No, it’s not. Well, I’m not sure whether YouTube is actually treated in bungee. Anyway, so it was a great outcome, but it’s one where my first reaction was, oh, wait, too early, I’m not happy. And I sort of bitched about it in the first reaction. That could have been one of those.

[00:13:53] Howard Hartenbaum
Billion dollar companies, but taken away too early.

[00:13:56] Jeff Clavier
Yeah, I think they had. But you know what, it was an awesome, awesome outcome for them.

[00:14:02] Howard Hartenbaum
I’m convinced if we never sold any companies and we just let them all run freely, returns would be better.

[00:14:11] David Hornik
Well, this is, I mean, the problem is this points to the challenge that.

[00:14:15] Howard Hartenbaum
You have, which is your best companies get bought sometimes.

[00:14:17] David Hornik
Well, no, the challenge is that from a venture perspective, the returns would potentially be greater on aggregate for entrepreneurs. All of the return would aggregate around very few entrepreneurs who made a lot more, a lot more money. And far fewer would make money. Right?

[00:14:35] Howard Hartenbaum
There’d be more Bill Gates, but a lot less people that made 5, 10, 10, $15 million.

[00:14:40] David Hornik
And if you’re Victoria, you say, look, we could, I could double this amount of money, but it’s already more money than I probably can spend. And so, you know, I think it’s a very tricky thing, right? You have, you have a company, you have a Zuckerberg who Says no, you.

[00:14:55] Howard Hartenbaum
Have, you know, he said yes until Yahoo messed up with the offer and it ended up becoming a no.

[00:15:02] David Hornik
Well, which is interesting.

[00:15:04] Howard Hartenbaum
They almost bought it for a billion, but they tried to change the price that Terry Semmel lowered the price to 850 and Zuckerberg walked. That’s the way I heard it from my rumor mill.

[00:15:15] Jeff Clavier
Well, which is.

[00:15:15] Howard Hartenbaum
And would have been a different outcome.

[00:15:18] Jeff Clavier
When I see them actually buying Instagram for 1% of Facebook, which is nothing in the masking of things. And Instagram being sort of the only really credible potential threat as a mobile social network that was growing really, really fast. That’s where I think it’s been smarter than the others. Because, you know, Yahoo didn’t get Google, didn’t get Facebook. There was a lot of potential ma that could have happened, but the first real credible threat to Facebook that happens, he picks it up for nothing. So that, I mean, that shows nothing. 1% of Facebook is nothing.

[00:15:55] David Hornik
Well, if you think it’s a legitimate threat, then it’s nothing. And in fact, he clearly did. And so you look at it and go, well, that’s a great outcome. You know, from a investment standpoint, always, you know, does that mean we should invest in a bunch more potential Instagrams? Yeah, except for the part where you have no ability to know which one’s the potential Instagram. Right. So it’s like that. That’s great that they were the lottery ticket. But that doesn’t change. It certainly doesn’t change my investing. I see, Jeff, you’re shaking your head like, no, I’m not gonna.

[00:16:27] Jeff Clavier
It’s just because I’ve been seeing an increase in the number of photo sharing companies that come to our office. That’s normal.

[00:16:34] Howard Hartenbaum
Whenever there’s a purchase of the company, like five other guys go, I can do that better. And then they do it too.

[00:16:39] David Hornik
It’s normal.

[00:16:40] Howard Hartenbaum
And maybe one of them will be better.

[00:16:43] David Hornik
Yeah.

[00:16:43] Jeff Clavier
There is so much more to do in PhotoShare.

[00:16:46] David Hornik
Well, so, you know, we were going to talk about this. This idea of that anytime you see something new. Not anytime. Oftentimes in the venture business, when someone comes in and they tell you about something and you go, huh, that’s kind of interesting. It’s an interesting take. The next day or two days later or three days later, someone else comes in with the exact same thing. And, you know, it’s. Originally I was surprised by this in year one or two of being a vc, and I was like, oh, I can’t believe it. What a coincidence. And then a dozen Years later, whatever, you look and you go, well, I guess it makes sense, right? You have a bunch of smart people, they’re experiencing the Web the same way we are, they’re experiencing the same challenges. And so some reasonable number of them are going to come to the same conclusion that, gee, there’s a better way to do X, Y or Z, Right?

[00:17:36] Howard Hartenbaum
Well, the result now is you see something that’s new and innovative, and you say to yourself, I may not have seen them and I may not see them, but I know there’s others out there out there that are very similar and we’ll find them later.

[00:17:47] David Hornik
But that’s a tricky thing. Then how do you ever fund anything? There’s too much decision when you don’t even know it.

[00:17:52] Howard Hartenbaum
So I think the point on that is when you do see something that you really like and it’s kind of interesting and it’s new and innovative, if you decide to fund it. Generally I don’t publicize the funding. I keep it quiet because I worry if we publicize it and there is another one out there who somebody is looking at, they might go, hmm, other VCs are funding. And I guess it’s a new space and we should fund it too. And it actually works against you to publicize it. And we’ve been calling that venture fratricide.

[00:18:23] Jeff Clavier
Which is rich, the trademark of Howard, because he’s the first one to ever mention it to me. But as I think about it, I definitely think it’s interesting to just bury your funding for as long as you.

[00:18:33] Howard Hartenbaum
Can, because then you get two companies who are both potentially good, and now they’re competing with each other with venture money. You’d rather be in one that was competing against another company that didn’t have any financing. So why help out your competitors? And it seems like publicizing sometimes leads to you helping out your competitors.

[00:18:51] Jeff Clavier
And I see very often pitches where the competitors that are referenced on the big companies that show the potential of the market. It’s, you know, so and so was funded for 15 million by, you know, this firm, and so and so got 10 million from this other firm. And you say, well, it doesn’t prove anything. You just found some schmucks to actually put some money.

[00:19:10] David Hornik
We should know. We’re the schmucks.

[00:19:12] Howard Hartenbaum
So look at the kind of Uber, get Taxi, halo, cabulist market. You can go poke around on the web and find seven or eight direct competitors who have raised a minimum of $25 million a piece. And I think anytime one of them says, we just raised 25 more. Then somebody else goes, oh, I better go raise more, because some of my competitors are raising more.

[00:19:37] David Hornik
We’re in relay rides. And there was just another one announced. I just saw some new competitor to relay rides that had allegedly raised money that started in the college market or whatever.

[00:19:49] Howard Hartenbaum
So that one was. Yeah, wheels funded by Zipcar. Zipcar needed a play. They needed a play. They got scared of relay rides and decided we better have something in that market. And so they made an investment. So, yeah, now we have one more.

[00:20:06] David Hornik
So another three, arguably credible, although relay rides is the only credible one.

[00:20:13] Howard Hartenbaum
I could argue if we never had announced the relay rides financing, it’s less likely that wheels would have been funded.

[00:20:19] David Hornik
Yeah, I mean, the flip side of that, of course, is my voice is changing. The flip side of that is that oftentimes people like to announce these things to help attract talent. Talent and get some good PR and whatever else, which I think there’s a reasonable argument for. But on the other hand, it’s probably not going to change the planet. And when you’re out trying to get people, you’ll certainly say, oh, we’re funded by soft tech VC and, you know, whatever. You want to talk to Jeff, he’ll be happy to get on the phone with you, but there is some utility in letting know that you’ve raised a chunk of money.

[00:20:55] Howard Hartenbaum
I have a company in the enterprise space which we funded about a year ago, and they just did a follow on financing and they still don’t have a website and they have customers who are paying them and they’re selling the solution and they always, oh, we got to announce it. We got to tell everybody. And I just keep saying, why? You’re getting customers, You’ve got your hands full. Just keep quiet and keep going.

[00:21:16] David Hornik
This financing is so stealth that this is the first I’ve heard of it.

[00:21:21] Jeff Clavier
Yeah.

[00:21:23] Howard Hartenbaum
Even my partners don’t know.

[00:21:25] David Hornik
Yeah, exactly. That’s, you know, that is classic Howard right there. I’ll let you know.

[00:21:30] Jeff Clavier
So Howard just wrote the name of the company on a piece of paper and showed it to David, who still looks surprised, I must say.

[00:21:39] David Hornik
No, I mean, I’m not surprised the company raised money. They’re a great company. Usually we kind of have a sense they’re fundraising.

[00:21:47] Howard Hartenbaum
I did tell you two months ago or so when they got term cheap.

[00:21:51] David Hornik
That’s good.

[00:21:51] Howard Hartenbaum
You just don’t remember.

[00:21:52] Jeff Clavier
So how do you guys. So in this environment where you have hundreds of companies knocking on your door to try and get your attention for Series A, how do you guys sort of do it like you sort of roll the dice and go, oh, no, no, no, no. Okay, altogether. No, no, no. Or you do based on the recommendation or what’s interesting to you, given that, like Howard said, you see one, there’s three, you see three, there’s 10 out.

[00:22:19] David Hornik
Of. It’s twofold. Although, really, you know, if you had to, you know, if you had to take A and B, A is probably 90% of it, and B is 10. The introduction is 90% of it. It’s. If you send me a company, you say, I think this is interesting, I will meet with them. There’s no, you know, that’s just a given. Right. You being Jeff Clavier, if you know, depending on who the person is, then you say, oh, what’s the measure? And, you know, how well do they know me? How well do they think, how interesting is it? Et cetera. But by and large, the best filter is here’s someone who’s telling you about something that’s interesting, who you trust. The 10% is. I do still kind of read through and say, well, it’s kind of interesting or it’s not, or even though it’s someone I generally think is interesting, I don’t think it’s an idea I’m likely to pursue. And so that becomes a filter. But by and large, I look for people who say, oh, this is interesting. And then you look at it and go, oh, that’s plain plausible. I’ll hear the story. Right?

[00:23:15] Howard Hartenbaum
Yeah. I would say if it’s something that sounds like a compelling value proposition and it’s not in a crowded space, then usually take the meeting. But if it’s another ad tech company doing ad optimization, or it’s another consumer company that has no tech and they haven’t really built it or launched it yet, it’s going to help you curate content on the web better, and it’s just not that different and interesting. And it’s hard to get market share when you sound like a lot of other people. And every now and then a company contacts us and they actually have real technology.

[00:23:50] David Hornik
That is bold.

[00:23:51] Howard Hartenbaum
We know how to do something, and we’re the smartest people in the world who have educated and worked on this at another company. And now we’re starting this. And it’s not just a piece of software that anybody could code. And they say, we can build this, and if our competitors see it, they can’t copy us. That usually catches our attention quite a bit.

[00:24:06] David Hornik
By the way, I just read, I don’t know if you guys have seen this yet, but I just read, I guess, on Facebook that Chris Anderson, the editor of Wired, stepped down to focus all of his attention on his robotics company.

[00:24:18] Howard Hartenbaum
We were talking about robotics here first.

[00:24:21] David Hornik
We have. We have made very clear that we are the fans of the robotics. And then we got all excited about Kiva, a really awesome robot, and they went and sold it to Amazon before we could fund them. I hate that.

[00:24:35] Jeff Clavier
Yeah, but I heard that there were actually issues with those key vault robots where. Because, you know, Fab has a lot of warehouse, you know, sort of issues.

[00:24:43] Howard Hartenbaum
Don’t get me going on Fab.

[00:24:44] Jeff Clavier
And so.

[00:24:47] David Hornik
This is unbelievable. No, but listen, this is un. My wife, in fact, saw Howard’s post in Facebook today. I ordered something from Fab and I still haven’t got it. Wan wah wah. Meanwhile, Fab sends out this email. We’re underwater. We had a hurricane. Give us a break. And Howard’s wah wah. I haven’t gotten my.

[00:25:04] Howard Hartenbaum
I ordered some.

[00:25:05] David Hornik
Something that.

[00:25:07] Howard Hartenbaum
September 19th. That’s a long time. And they promised it within four weeks. And now it’s been six weeks.

[00:25:12] Jeff Clavier
What is it? Case cover for my iPhone.

[00:25:16] Howard Hartenbaum
And the reason I’m pissed is my new iPhone, just from wear in my pocket, is getting scratched.

[00:25:20] David Hornik
I know the new iPhones have that.

[00:25:21] Jeff Clavier
So send me the reference and I’ll send it to you.

[00:25:27] Howard Hartenbaum
I’m done with Fab. I’m currently doing social media against them now.

[00:25:31] David Hornik
Yeah, don’t encourage Howard to rally against people for their.

[00:25:36] Jeff Clavier
But I would say, you know, from Fab, you know, in no time. This is a Casetagram.

[00:25:40] Howard Hartenbaum
That’s because you’re an investor.

[00:25:41] Jeff Clavier
So that’s why you get Instagram pictures that sort of.

[00:25:43] David Hornik
On your case.

[00:25:44] Jeff Clavier
On my case.

[00:25:44] David Hornik
Thank you.

[00:25:45] Howard Hartenbaum
I’m gonna take it because I need a case.

[00:25:47] David Hornik
Those are his pictures.

[00:25:48] Jeff Clavier
Don’t break it.

[00:25:49] David Hornik
Anyway, so Fab was using the Kiva robots.

[00:25:54] Jeff Clavier
Because it was sort of. He was good for lateral, so sort of moves. But there was an issue with.

[00:25:59] David Hornik
Oh, yeah, you can’t use super high. Interesting.

[00:26:04] Jeff Clavier
So what’s interesting is that. So you have this environment where you have hundreds of startups that are trying to get a series A as opposed to tens, which was in the past. And VCs therefore have less time to figure out what you should do or what they want to do. And what I’ve seen very recently, I was sharing that with you. Offline is one of my really sort of good companies. I would categorize them as a hot company that had a lot of interest from Multiple Firms and, you know, tier one firm, not that far away from here, sort of put down terms after, like, very limited due diligence.

[00:26:38] David Hornik
So be preemptive. Said, okay, great, we need to get in. Here’s a term sheet.

[00:26:42] Jeff Clavier
And so we said no to them, and then they forced the term sheet on us. And we signed because it was a good offer from good people and we had to say no to everyone else.

[00:26:52] Howard Hartenbaum
Right.

[00:26:53] Jeff Clavier
And then they say, ah, send us, you know, some matrix and everything, forward files. And then they looked at, you know, the due diligence and they found some mysterious sort of weakness in numbers, which was bullshit, by the way. And they backed out, which is the first time this happens to me. And so they backed out.

[00:27:13] Howard Hartenbaum
And where did they leave the company by doing this? Well, they left them, like, having rejected another term sheet that they had that.

[00:27:20] David Hornik
They had to go back. It’s sort of like saying, I won’t marry you. I found someone prettier. And then that person leaves you at the altar and you have to go back. Remember when we were gonna get married? It’ll be a great wedding.

[00:27:32] Jeff Clavier
Yeah.

[00:27:33] David Hornik
And that person was. And that firm, I’m sure, was like, look, I’m still sort of in love with you, but, man.

[00:27:39] Howard Hartenbaum
So not using names. I would say any firm that gets a reputation for giving out term sheets, signing them and backing out afterwards, is not the type of firm any entrepreneur should deal with hands down. So any firm. You should be wary as an entrepreneur. If you get a term sheet before a firm has done any work at all, have made calls, have looked at your numbers, have met with your team, have visited your office, have tried your product, I mean, I could go through the list, but if you’re getting some great term sheet from somebody and you’re like, this is awesome, and you sign it, you reject everybody else, and then they back out on you, it’s your fault, because you should do the work to understand that you’re going to be, you know.

[00:28:23] David Hornik
Well, it’s funny, actually, you know, I don’t know if you remember this, Howard, but when we were. We worked very quickly when Rocket Lawyer came in to get up to speed, to determine if we wanted to give him a term sheet. And in a period of a week and a half or something, gave him a term sheet. And then the CEO got on the phone with me, I guess it was the founder at the time, and he said, you know, David, I love you, and this is. And it’d be great to take your term sheet, but I don’t know that you’ve done, you know, the company well enough. And so I’ve been working with someone else. They know us really well. And I said, no, I’ve done the work. I’ve just done it really quickly. He said, yeah, but how am I gonna. You know, my board is concerned. And then I said. So I said, all right, let me tell you what I’ve learned. Here’s what I. Here’s what I know about you, here’s what I know about your. Your other executives. Here’s what you know, here’s my concerns, whatever. I just laid it all out there. And when he. When we finished the conversation, he said, wow. Like, okay, never mind. You obviously. You obviously mean it. But amazingly, I literally had to, the next day, get on the phone with one of his board members and.

[00:29:27] Howard Hartenbaum
And.

[00:29:27] David Hornik
And promise my love before they would take my term sheet for exactly this reason. And then what was interesting is there was a. We were involved in a set of conversations that held that term sheet at bay for something like four months. And at the end, and in the interim, the economy got pretty tough, and things looked worse than they had looked when I gave them the term sheet. And then we got to the point we closed the funding, and I got a call. It was like, hey, thanks so much for closing the financing. We are a little surprised you didn’t renegotiate based on the economy. And my answer was, we’ve never done it. As a firm, if we give you a term sheet, unless there’s been fraud or you have, something has changed that you had control of. We close the term sheet because that’s our commitment to you.

[00:30:14] Howard Hartenbaum
The terms are set on the day.

[00:30:16] David Hornik
Of the term sheet. That’s it.

[00:30:17] Howard Hartenbaum
Day of the closing? Yeah. I had a case about a year ago where I saw a company that was very interesting, and they pitched a bunch of firms, and I was doing calls on customers, and three days later, they had a term sheet from another firm. And they told me who it was, and I called up the other vc, who was a friend of mine, and I said, did you guys do customer calls yet? You won the deal, you gave them the term sheet, and they’re signing it. And his response was, we haven’t called anybody yet. We felt it was moving quickly, so we gave them a term sheet, and then we’ll do all of our work now before closing. And I called back the entrepreneur, and I said, you might want to be a little bit careful, because they haven’t done any work yet, and there’s some risk that maybe the deal doesn’t close. And he said, no, no, it’ll all be fine. And then the deal closed and it was no problem. And I called up the VC buddy of mine and said, well, I’m curious what happened on your reference calls? And he said, I got busy, I didn’t do them. So he made the investment, he didn’t do the reference calls, and the company went okay for six or eight months and then it got in trouble. And then the founder and the VC started fighting because he didn’t understand the business. They hadn’t gotten to know each other, there hadn’t been reference calls. And the end of the story was because the guy hadn’t done the work. He wasn’t really comfortable with kind of the risks and everything. And it ended up being a bad relationship. Better. And you know, maybe our style is a little bit more old school, but I would say before you get on the altar and marry somebody, you might want to go out on a few dates and meet their parents.

[00:31:46] Jeff Clavier
Especially.

[00:31:48] Howard Hartenbaum
Because you’re not only stuck with her, you’re stuck with the parents.

[00:31:51] Jeff Clavier
I just pictured that especially. I mean, you know, we do some amount of due diligence when we go and write or half a million dollar check, then you have to do way more due diligence, you know, because there is so much we can do diligence in a early stage company. Right, right. Customers. What’s that? Revenues? What? So, you know, it’s basically spending time with the founders and doing breadth checks on them and so on and so forth and figuring out that they have the ethics that it takes to actually, you know, be successful. But when you go and raise a five million dollar round or a $15 million round, you cannot, like you said, you cannot sort of expect people to just hand you the money without doing very serious work. And if, yes, they’re not doing their job and there is an amount of risk. And you know, as I was sort of doing postmortem with my entrepreneur, who’s a great entrepreneur, who’s, you know, repeat and everything, you know, he said I should not have said yes because he was clear that I hadn’t done the work and now it’s my fault. And the good news is that, you know, we got this other term sheet and everything, so we’re fine. But I was just so shocked. I haven’t decided yet whether I’ll go public on it or not, but I might.

[00:33:01] David Hornik
The tricky thing, it is such this interesting thing because we’re all in this interlocking relationship where, you know, look, we fund with Other. We do each other’s deals, etc. Whatever. And you know that even oftentimes when you see someone do something that you think was. You would not have done or you think is inappropriate, you know, there are people out there who are vindictive and you don’t want to, you know, like me. It’s just not worth raising the ire. We can decide among ourselves, okay? We know the story, and we’re not going to work with them. But going public is tricky, right? I mean, it’s just a tricky. It’s tricky joke.

[00:33:37] Jeff Clavier
I haven’t decided to tell him, but I think it’s. I just think entrepreneurs.

[00:33:42] Howard Hartenbaum
What I would say is it’s up to the entrepreneurs to do it, not to the venture guys to do it. And I’ve seen some cases where entrepreneurs have seen that type of stuff happen. And then later, another entrepreneur is thinking about taking money from that investor, and they ask me, and I say, well, go ask that entrepreneur. And then they come away saying, okay, thanks, because I don’t really want to say it, but I’ll let the entrepreneur say it.

[00:34:05] David Hornik
Well, also, when a VC is saying it about another vc, you look like that. You look like a bad guy, and it’s not as credible. Whereas you say, look, go talk to. Here’s someone to talk to. You might want to check with them. I’ll get the company name later, Jeff. And we’ll pass people towards them, and it’ll be all good. It’ll all work.

[00:34:21] Jeff Clavier
Well.

[00:34:25] Howard Hartenbaum
E. Commerce.

[00:34:26] David Hornik
You know what? I’m gonna leave you two to it. I have to go get a haircut.

[00:34:32] Howard Hartenbaum
All right. What button do I push when we’re all done?

[00:34:35] David Hornik
I’ll push that one. It says stop.

[00:34:36] Howard Hartenbaum
It says done.

[00:34:37] David Hornik
This has been David Hornik of August Capital. I apologize for leaving early.

[00:34:41] Howard Hartenbaum
I’ll cut your hair right here during the show.

[00:34:43] David Hornik
That’d be kind of fun. Mr. Clavier, good to see you there.

[00:34:47] Howard Hartenbaum
Do you think our haircuts look similar? No, because we use the same person.

[00:34:54] David Hornik
I’ll tell if she says hello, that you say hello.

[00:34:57] Howard Hartenbaum
All right. We promise not to say bad things about you.

[00:34:59] David Hornik
Oh, yeah. This is the first show I’m going to listen to after I’ve done it.

[00:35:03] Jeff Clavier
Just to make sure it’s no longer your show. So, E Commerce. We’re just chatting about the fact that. So we’re just back from that. He’s gone. We’re just back from the lobby. Yeah, that’s a conference that David is organizing.

[00:35:19] Howard Hartenbaum
And he wore an orange tuxedo. And I Sent a picture like orange ruffles, orange shirt, orange vest, orange jacket, orange pants, orange top hat. I took David’s picture and I sent it to my wife and she said I didn’t know Elton John was playing at the lobby.

[00:35:36] Jeff Clavier
And so my favorite part of the lobby is the user jointed conversation where you know, we have an hour, so we have eight hours of talks around, you know, topics that we come up with. And actually I hadn’t seen that because I was already gone. Oh my God, that’s very Elton Johnish.

[00:35:56] Howard Hartenbaum
Just showing the picture of David wearing an orange, you know, tuxedo and it’s pretty amazing.

[00:36:01] Jeff Clavier
And so one of the conversations I had was, okay, it’s kind of interesting. Every year at the lobby we talk about what’s hot and what’s not. And I try to do it every year. And this year clearly E Commerce, which was a very favorite category last year, felt to have dropped out, you know, out of favor over a bash, few moment. And it’s sort of rare that something is super hot and then becomes super cold in just a few months. And I would say, you know, you look at Groupon, the whole sort of deal categories clearly out of favor, but.

[00:36:40] Howard Hartenbaum
And gaming is out of favor now too.

[00:36:41] Jeff Clavier
Gaming is out of favor because of Zynga and everything going on there. But subscription commerce, a lot of next gen commerce. So what’s next gen commerce? It’s E Commerce with a different sort of business model, are definitely much, much trickier to fund than they were just a couple of quarters ago.

[00:37:04] Howard Hartenbaum
It’s a simple thing. What happens is entrepreneurs say we’ve come up with this new wonderful thing, it’s called subscription commerce. And instead of having high customer acquisition cost and an undefined lifetime value, they might buy one thing, they might buy another. Now we get them to sign up for years worth of stuff and all we’ve got to do is measure the dropout instead of the repurchase and everything looks great. And the investors say, ah, finally a solution. It’s going to be worth so much money and we invest and we’re hopeful and then six months later or a year later we look at the numbers and say, uh oh, it’s not going to be worth. They’re not all that easy, it’s not all that innovative, it’s going to be hard. Customer acquisition costs are higher, dropout is higher, cohorts aren’t what you think. And then we start seeing a few companies out there which are, are failing where they had a low customer acquisition cost and now they’ve got customer acquisition cost is 2 times lifetime value. So they’re going to burn money forever. And kind of the whole segment, we lose enthusiasm and then new ones come up and we just don’t really want to fund them all that much. And so if you’re at the leading end of something new, even if all the economics haven’t been proven out, you can raise money and get a good price because we’re all hopeful. But if you’ve ever heard the saying nothing fucks up a perfectly good business like having real numbers. So by the time a few of these have come around and they’re 6 months or 12 months or 18 months old and we have lots of data and they’re not generally working, then it kind of takes the whole sector with.

[00:38:31] Jeff Clavier
It though, from what I heard. So I’m not an investor, you guys are. But I heard that Zulily was doing extremely well.

[00:38:39] Howard Hartenbaum
Yeah, Zulily is a great company, but they thought about all the things about lifetime value and such and it’s not a subscription bill business beforehand and they’re doing a great job. But it’s a tough business. But you know, in E commerce what are you worth in the end? I mean what was Zappos purchase price compared to revenue? 1x 1x so if you’re a startup company and you have like no revenue and you’re asking for a $5 million pre money doesn’t make a lot of sense. And then you’ve got 3 million in revenue and you’re asking for a 15 million dollar pre money, it doesn’t make a lot of sense. And then you get to 80 million in revenue and you sell for 80 million. Just not that exciting. So it’s kind of a challenge. But somebody else is going to come up with something pretty soon that’s going to solve all of this stuff. And venture capitalists will happily fund you until you prove us otherwise.

[00:39:31] Jeff Clavier
Well, you have a bunch of companies which are trying to be infrastructure companies for all those E commerce companies. And if all the E commerce companies aren’t doing well, then you’re all screwed essentially. But it’s been sort of.

[00:39:44] Howard Hartenbaum
But being out of favor is tough.

[00:39:46] Jeff Clavier
Yeah.

[00:39:47] Howard Hartenbaum
So even if you have a good business now in that sector, it’s tough. Valuations are going to be. It’s like if you’re a gaming company, you’re doing well. People are still going to say the market doesn’t appreciate it. E commerce people are going to say the market doesn’t appreciate it. It’s tough. The worrisome Hit could be on marketplaces. Back in 99, marketplaces were the most. I mean, there were marketplaces for bull semen. There were marketplaces for everything. And then they all crashed and burned. And now marketplaces are all hot again. Airbnb is a marketplace and Relay Rides is a marketplace and Dog Vacay is a marketplace and they’re all over the place. But all you got to do is have one of the big ones, have some fundamental problem with it, and the whole segment can be cold for quite a while.

[00:40:31] Jeff Clavier
Yeah, we have a couple of companies which are out in the market right now, both Marketplace or Exchange Commerce. And those are really, I mean, those are good teams doing well. And to be honest, they should have gotten funded by now, still conversations and so on, so forth. So I’m still really hopeful, but it’s been much harder than I had anticipated given the strength of the teams and the numbers. So it’s, you know, that really shows that when entrepreneurs think about what they want to build. Yes. It has to be led by passion, something that they really want to do. And they have to have this sort of walk through walls attitude, but they really have to think twice about, you know, who else is there. And is it something that can, that can scale?

[00:41:14] Howard Hartenbaum
Yeah.

[00:41:15] Jeff Clavier
Because otherwise.

[00:41:15] Howard Hartenbaum
So you hired somebody new recently, did you, or.

[00:41:18] Jeff Clavier
Yes.

[00:41:19] Howard Hartenbaum
Well, you gave Stephanie a promotion.

[00:41:21] Jeff Clavier
Yes.

[00:41:21] Howard Hartenbaum
So we’ll give our shout out today to SoftTech. Stephanie Palmieri got a promotion. Congratulations to Stephanie. And you hired somebody new as well.

[00:41:29] Jeff Clavier
No, no, no, we. So there’s. Okay, I’m wrong, then there’s four of us. Well, Steph has been with us for a year and yes, she’s just been promoted to principal. And Steph is awesome and really sort of psyched to have her. But there’s four.

[00:41:44] Howard Hartenbaum
I bump into her all over the place.

[00:41:45] Jeff Clavier
She’s done a good job building a name for herself as someone from New York. Actually, she’s from Jersey Shore.

[00:41:51] Howard Hartenbaum
Well, Jersey Shore is no more.

[00:41:53] Jeff Clavier
That’s the line of the true. She showed me some of the pictures of where she’s born. It’s pretty brutal and our thoughts are with these people. But it’s kind of interesting because partnerships are really sort of small entities and you really need to make sure that, you know, there is a good bond between the different members of the team. And my partner, Charles, I’ve known for 11 years, and so I had no doubt things would work out. Steph was a complete serendipity and.

[00:42:23] David Hornik
We’Ve.

[00:42:23] Jeff Clavier
Been very lucky to have her.

[00:42:25] Howard Hartenbaum
You guys are almost the size of August now?

[00:42:27] Jeff Clavier
No, there’s four.

[00:42:28] Howard Hartenbaum
Four. We have six.

[00:42:31] Jeff Clavier
Well, there’s three investment professionals.

[00:42:32] Howard Hartenbaum
Okay, we have six.

[00:42:33] Jeff Clavier
Okay.

[00:42:34] Howard Hartenbaum
So you’re half the size.

[00:42:35] Jeff Clavier
So next fund, you know, we’ll hire another partner and we’ll get close to you guys.

[00:42:39] Howard Hartenbaum
So if we just fire David and me, then we’ll be the same size.

[00:42:43] Jeff Clavier
If you do that, call me.

[00:42:47] Howard Hartenbaum
Anyway. We have to. You know, this is. We call this the David Hornik show, even though he calls it so he has left. And I think it’s only polite for us to either close it down or ridicule behind his back.

[00:42:59] Jeff Clavier
Absolutely.

[00:43:00] Howard Hartenbaum
And since he tends to get even with us, I think we should probably just say goodbye. Goodbye. This is Howard Harttenbaum from August Capital.

[00:43:08] Jeff Clavier
And our special guest, Jeff cladier from SofTech VC.

[00:43:11] Howard Hartenbaum
And we want to say thank you to all of you for listening. And if you’re on your treadmill, we hope it was long enough today.