Generated Transcript

[00:00:14] David Hornik
Hello and welcome to VentureCast. This is David Hornik from August Capital

[00:00:21] Howard Hartenbaum
and Howard Hart. I’m also from August Capital

[00:00:22] David Hornik
and we’re coming to you. This is like a blast from the past. Howard, I don’t know if you. You probably don’t even remember, but I used to record my podcast while I was driving up. And 101 and 280. I had this little handheld recorder, and I would. And I would comment on random stuff until I got to my meeting. And you could always hear car noise or whatever. And here we are. We’re in. We’re in an Uber. Heading back to the office after a great dinner.

[00:00:50] Howard Hartenbaum
And whose idea was this to do the podcast? Yeah, it was the Kind driver’s idea. He said, you guys should do a podcast in the back of the car.

[00:00:57] David Hornik
Yeah, that’s it. It’s like, don’t you think?

[00:01:01] Taxi Driver
All right, 40 minutes anyway, right?

[00:01:06] Howard Hartenbaum
Exactly the right amount of time for 40.

[00:01:08] David Hornik
That’s about.

[00:01:09] Howard Hartenbaum
How many of these have you done now, you Venture Cast?

[00:01:12] David Hornik
Yeah, I don’t know, 40. Maybe we need to start counting 40 or something. Yeah, this is Venturecast. I mean, you and I have done a handful, so. Oh, you know, this. We were just talking about this at dinner, but Tom, one of the click and clack brothers from. From Car Talk, passed away this week. And, you know, I have talked. You know, we, both of us are friends with Elisa Miller, who runs pri. She’s this incredibly smart, wonderful executive, and I was trying to convince her at one point that she should put venturecast onto public radio.

[00:01:52] Howard Hartenbaum
So what you’re saying now, now there’s an opening.

[00:01:53] David Hornik
Well, so this. So what?

[00:01:55] Howard Hartenbaum
That’s just morbid.

[00:01:56] David Hornik
Well, no, so what Elise said to me was like, oh, you know, we don’t do vertical shows anymore. That doesn’t have appeal. Right. The appeal is, you know, has to be broader than that, etc. I said, well, what about Car Car Talk? It’s really, you know.

[00:02:09] Howard Hartenbaum
And she said, wait, this is Car Talk? We are.

[00:02:12] David Hornik
Yeah, literally. This is literally. Literally Car Talk. And she said, but it’s funny. She said that, in fact, Car Talk was that the way they viewed it was that it was not actually about cars. It was really kind of a comedy show. Right. And in large part because of Tom, who was so great. He was, you know, he was this. His laugh and his kind of joy of life or whatever. And so I always try and emulate that, but I’m sure we’re not.

[00:02:39] Howard Hartenbaum
But they both laugh. And then you’ve got me as a Straight man.

[00:02:41] David Hornik
Yeah, you gotta laugh more. Maybe that’s. Maybe that’s a problem. It’s not helpful. That’s what you’ve got. Is that, like, pathetic?

[00:02:48] Howard Hartenbaum
I’m not feeling very funny today.

[00:02:50] David Hornik
Oh, my God.

[00:02:51] Howard Hartenbaum
So we had this nice dinner at AQ with a young venture capitalist to be.

[00:02:57] David Hornik
He’s sort of a venture capitalist already. But they’re different, you know, they’re different strata. Right. You have to start out by seeing a bunch of stuff and learning. Learning what things are successful or whatever. And hopefully over time, you. You end up a partner, whatever that means.

[00:03:13] Howard Hartenbaum
Yeah. Super charming, bright guy. I think his future is good.

[00:03:17] David Hornik
Yeah, it’s funny. One of the things that’s been fun about. We’ve been out looking to hire a couple of new people into the firm. And in particular, bringing in some younger folks than us, which isn’t that hard at this point. Remember when we were young? Do you have any recollection of that?

[00:03:36] Howard Hartenbaum
I do. And it ended when I was at a restaurant and somebody brought me the menu and said, what drink would you like, sir?

[00:03:44] David Hornik
I think it ended when our children went to college. That’s. We were officially no longer young. Once that happened.

[00:03:49] Howard Hartenbaum
I think it happened earlier.

[00:03:50] David Hornik
Maybe earlier. Maybe earlier. Anyway. But it’s been pretty awesome to bring in to meet with a bunch of people and, you know, and it’s interesting, different people have different thoughts about the venture business and what, you know, what’s. What is successful and how to think about it. And, you know, this. So tonight was great because it’s, you know, someone who has. Who has really done an amazing job, I think, of connecting with people. And in the end, my view is the venture business is about connections. Right. It’s not about. And I don’t mean that in a cynical way. I don’t mean it’s like, you know, hey, I’ll trade you this for this. I mean, it’s like. It’s about genuinely connecting with people, having them like you and you like them and wanting to be mutually successful in some. Some capacity. Right?

[00:04:32] Howard Hartenbaum
Yeah. If you’re gonna work with somebody in a venture deal for seven or 10 years, you have to like them. This was a likable guy.

[00:04:39] David Hornik
Yeah, I mean, I always joke about this, but, you know. So you and I’ve worked together for six, six years. Oh, my God, it seems like 60. No, I mean that in. I mean that only in the nicest of ways. I’ve worked with Vivek for, you know, for a dozen. And I was. I was at an event at Rene Lacert, who’s the CEO of. Of Bill.com. and I was at an event at his house on Saturday, and I was telling someone that Renee and I have been together now for 14 years.

[00:05:11] Howard Hartenbaum
Why haven’t you been married?

[00:05:12] David Hornik
14 of the 20 that I’ve been married to my wife. I’ve been working with Renee, so I hope he likes me. Otherwise, God, he must be so over it. He must be so tired.

[00:05:23] Howard Hartenbaum
Well, you keep offering him money. How can you say that?

[00:05:26] David Hornik
Rene is an amazing character, I have to say so. You know, he’s now raised, I don’t know, eight or more rounds of financing across his two companies, PayCycle and Bill.com. he met with 50 different company, 50 different firms. I think he said, before I funded PayCycle, I gave him his very first money. Since that financing, he has never gone out looking for money. In every single instance, he has had a preemptive financing where people have said, please take my money. Think about that. That’s unbelievable. And obviously, the first set made a bunch of money. And I think that Bill.com is, you know, on that path as well. But so maybe we’ll do a third one, and Renee and I’ll be together for 25 years, and then I have to, like, what is. I have to give him a platinum ring or something.

[00:06:20] Howard Hartenbaum
What’s the 20, 15 years that it’s got the silver anniversary.

[00:06:24] David Hornik
Silver. I have to give him silver next year.

[00:06:25] Howard Hartenbaum
Well, maybe it’s paper. You’ll be lucky.

[00:06:27] David Hornik
I hope it’s paper. I’ll give him a crane or something.

[00:06:32] Howard Hartenbaum
That’s a really nice ride. I hope there’s not too much background noise, but it’s very quiet.

[00:06:37] David Hornik
Yeah, Yeah. I don’t. Hey, have you. Have you ever had other people do a podcast in your car?

[00:06:41] Taxi Driver
First one.

[00:06:42] David Hornik
This is the first one.

[00:06:43] Taxi Driver
First one.

[00:06:45] David Hornik
How are you liking being an Uber driver?

[00:06:47] Taxi Driver
I love it.

[00:06:48] David Hornik
You do it.

[00:06:49] Taxi Driver
Give me, you know, freedom. You call it freedom.

[00:06:53] David Hornik
Yeah. Uber. Uber freedom. It’s been all right.

[00:06:55] Taxi Driver
Well, it’s my own business. I could do my own hours, you know, treat people right. People treat me right. It’s fun.

[00:07:02] David Hornik
I have to say, you. You have been extremely charming thus far, but we don’t want to prejudge. We’ll see. We have. We have a bunch.

[00:07:09] Taxi Driver
We have about half more hour to go, right?

[00:07:11] David Hornik
Yeah, Half more hour.

[00:07:12] Taxi Driver
Don’t.

[00:07:12] David Hornik
Don’t blow it. If you crash, we’ll be less. We’ll be less charmed.

[00:07:15] Howard Hartenbaum
Friend of mine was in, I think I told you, was in an accident in Uber Yesterday.

[00:07:19] David Hornik
Yesterday.

[00:07:20] Taxi Driver
Was UberX?

[00:07:21] Howard Hartenbaum
No, an Uber. And they got rear ended. It wasn’t the Dr. They were stopped and somebody hit them, and it was a pretty bad accident.

[00:07:31] David Hornik
Yeah, well, you know, look, the reality is, it’s always amazing to me that there aren’t more accidents on the road when you think about it. First of all, anyone can drive a car. Secondly, we’re all distracted by all sorts of stuff. Third, it’s just happenstance, Right? I periodically, I’ll pull into a lane, thinking it’s totally clear, and then look up and there’s someone right in my rearview mirror and think, like, where’d they even come from? So it is a little amazing to me that there aren’t more. Have you ever been in an accident? No.

[00:08:01] Taxi Driver
Honestly, never.

[00:08:02] David Hornik
Never.

[00:08:03] Taxi Driver
That’s why you’re playing the smart choice of choosing Uber Black, which is the best. You don’t have to make an accident.

[00:08:08] David Hornik
It’s all about Uber Black. That was like an ad. Now I got my part. Of course.

[00:08:11] Taxi Driver
All right, you’re doing your podcast, right?

[00:08:13] David Hornik
Here’s. Here’s the good news. We’re buddies with Travis Kalnick, and we’re going to put in a good word for you, Travis. What’s your name, sir? No, we should probably not do that. We’ll get you afterwards.

[00:08:24] Howard Hartenbaum
Who knows what Travis will do?

[00:08:26] David Hornik
Yeah, we’ll let Travis know how awesome you are. I have to wait.

[00:08:31] Howard Hartenbaum
We should have gotten, like, one of those recommendation codes before this. And we give it out and then people start using it and we get our free radio.

[00:08:36] David Hornik
Oh, yeah, that would be good. Is there any such thing?

[00:08:38] Taxi Driver
I have it, of course.

[00:08:39] David Hornik
Do you? Oh.

[00:08:40] Howard Hartenbaum
What?

[00:08:40] David Hornik
What is it? What should we tell.

[00:08:42] Howard Hartenbaum
Now you’re driving. Don’t be looking in your wallet.

[00:08:43] Taxi Driver
You take care of business now. Take care of my business later on. I’m ready.

[00:08:46] David Hornik
Okay, you let us know we’re ready. We’ll get you all sorts of referrals. All six people who listen to our podcast will try out your Estonia. We had some guy from. What? Turkey? Where was that guy from? From Turkey. So we’re heading back. We went to dinner in San Francisco, and we have this ongoing debate with our partner, Tripp. Tripp lives up in the city. Tripp is. And Tripp is convinced that we should open an office in San Francisco.

[00:09:21] Howard Hartenbaum
And David and I live down on the Peninsula, and all that really matters is is it a good business decision or not? Because I’m perfectly happy to drive.

[00:09:29] David Hornik
Yeah.

[00:09:30] Howard Hartenbaum
Or ride in a New York ride in.

[00:09:33] David Hornik
As long as this charming gentleman will come pick Us up at our flat.

[00:09:36] Howard Hartenbaum
Right. To Menlo Park.

[00:09:37] David Hornik
Exactly.

[00:09:37] Taxi Driver
Especially for you.

[00:09:39] David Hornik
A special deal.

[00:09:41] Howard Hartenbaum
So a lot of. A lot. I don’t know if it’s a lot or not. A few venture firms have moved up to the city, A few have opened satellite offices in the city. And the real question is, is that better for their business or not? And we are trying to come to that conclusion because we will do whatever is important to our portfolio companies.

[00:09:59] David Hornik
Yeah, no, I think that’s exactly right. Look, we’re up in the city plenty, right? I’d say easily a half dozen companies where I’m on, on boards of companies up in the city. So I’m up in the city plenty. I don’t think that’s the issue. I think the question is why, you know, do we need to have an office? You know, do entrepreneurs want you to have an office in the city? And if so, why, like, does it matter in any way? If it does, count me in. Like, I’ll take the train up, I’ll drive up. It doesn’t make a bit of difference. But, but it doesn’t strike me like the venture business is a weird business because our office is kind of bullshit. Who care?

[00:10:36] Howard Hartenbaum
Well, I think for partner pitches or one or two meetings when they’re coming, if they’re coming to our office, we want to be sensitive to their time and convenience. I had an entrepreneur a couple weeks ago whose office was based in Mountain View and I was introduced to them. They said, let’s get together. And they said, well, let me know the next time you come down from the city to the Peninsula or I can drive up there. And it was exactly the opposite of what I expected. It made me wonder, do they expect us to be up in the city?

[00:11:05] David Hornik
Yeah, but this is a great example, right? Yeah, there are a lot of companies up in the city, but there also happen to become like, you know, we’re Data Torrent is down, you know, in south of Palo Alto we have a number of companies that are, that are in the South Bay, that are in the Peninsula.

[00:11:23] Howard Hartenbaum
I have a few in San Mateo.

[00:11:24] David Hornik
Right. So like why are they second class citizens? Why do they deserve.

[00:11:29] Howard Hartenbaum
I have one on Treasure Island.

[00:11:30] David Hornik
Yeah, that’s pretty crazy.

[00:11:32] Howard Hartenbaum
They, they said the city was too expensive and they wanted to be near the city, so they squeezed in that direction.

[00:11:36] David Hornik
They were halfway between Oakland and San Francis.

[00:11:40] Howard Hartenbaum
For one potential employee, it was a no go because that person wanted to ride their bike to work.

[00:11:47] David Hornik
Yeah. And riding on the bridge, riding on.

[00:11:51] Taxi Driver
The bridge, not a good idea.

[00:11:52] David Hornik
That’s a bad plan. Although, did you ever. I’ve seen. Well, anyway, is there any public transit out to Treasure island or do you have.

[00:12:03] Howard Hartenbaum
There is a bus that you can take and you can actually put your bike on the front of it, but it doesn’t run very often. Yeah, but there is Uber.

[00:12:10] David Hornik
Yeah, you could always. You could say this is just one long advertisement.

[00:12:14] Howard Hartenbaum
We should have invested.

[00:12:15] Taxi Driver
I once had four bicycles in my car.

[00:12:17] David Hornik
You had four bikes in the back.

[00:12:18] Taxi Driver
I sold it over SUV and I have four bicycles. No problem.

[00:12:21] David Hornik
There you go. I’m telling you, Uber, they’re so flexible.

[00:12:24] Howard Hartenbaum
This kitty bicycle.

[00:12:25] Taxi Driver
No, no, it was three. It was like four girls. One of them had a flat tire. Right, so then what you could do, you order Uber black, then Uber suv.

[00:12:34] David Hornik
There you go.

[00:12:35] Taxi Driver
I’m not even kidding. True story. No, we somewhere at the end of the city, next to the beach, you know, long distance back home.

[00:12:43] David Hornik
I like.

[00:12:44] Taxi Driver
I’m so happy. That’s for sure.

[00:12:45] Howard Hartenbaum
I always wondered what I would do if I got a flat tire on my bike. I figured I’d just leave my bike.

[00:12:50] David Hornik
Call your wife. That’s what you do. Have her come pick him up. That’s fine. Apparently not. Apparently Uber. Now you have the phone. That’s what you do. We were just talking about this and Howard nailed it. You said that we have known for some time that the thing about smartphones and location now that they all have gps, is that location was gonna matter. Right.

[00:13:12] Howard Hartenbaum
Somebody is gonna build a big interesting company location and it’s Uber.

[00:13:17] David Hornik
We thought it was gonna be. Some people thought it was gonna be check ins. Right. Remember when that was like, oh, actually it’s all about check ins.

[00:13:25] Howard Hartenbaum
And people thought it was gonna be geo targeted ads based on location, which.

[00:13:30] David Hornik
I didn’t like, and push ads. Yeah, right.

[00:13:33] Howard Hartenbaum
I thought it might be tracking of your friends and family where they are, and it turned out it was Uber. But because they know where the two parties are and you push a button and it pushes together.

[00:13:42] David Hornik
Yeah, no, I mean, we should have seen that. Howard.

[00:13:46] Howard Hartenbaum
I. I wanted to do it. You didn’t want to.

[00:13:49] David Hornik
What are you talking about? That’s such revisionist history. Of course we should all want to do it.

[00:13:54] Howard Hartenbaum
I must have said to Kirsten that I had some concerns about the legal implications of taxis, Ubers and all that, because I said to Kirsten today, yeah, I was going to take an Uber. And she goes, yeah, you didn’t want to do that deal because of the legal issues. And I said, wow, I don’t remember saying that. That must have been Vivek.

[00:14:11] David Hornik
How do you like that? Howard’s assistant is keeping him honest. Like, she remembers, too. Kirsten’s, like, on. She probably has a file. Things Howard said that I will call him on in the future, and she.

[00:14:24] Howard Hartenbaum
Files it for me because I like files.

[00:14:27] David Hornik
She’s tabbed it. That tab is in yellow.

[00:14:30] Taxi Driver
And whenever you’re ready, I’ll give you the code now.

[00:14:32] David Hornik
Oh, you got the code. We’re ready.

[00:14:34] Taxi Driver
So we can get a code for $20 off.

[00:14:36] David Hornik
$20 off.

[00:14:37] Taxi Driver
Uber, first ride. Okay.

[00:14:38] David Hornik
For your first ride. So anyone who has not ridden an Uber before, and you people are crazy if you haven’t, because as we’ve pointed out, this is one heck of a service. All right, what’s the code? H.H.

[00:14:51] Howard Hartenbaum
My initials. H.H.

[00:14:53] David Hornik
Say that again. Sorry.

[00:14:54] Taxi Driver
So H, H, Q.

[00:14:56] David Hornik
Yes. 0o E. H, H, Q. 0o, E. Easy breezy, easy, easy lemon squeezy. You can get 20 bucks off your first ride at Uber, and he gets his. Courtesy of our. We can. We could use your first name. What’s your first name?

[00:15:13] Taxi Driver
Costell.

[00:15:14] David Hornik
Costell. So courtesy of Costell, our Uber driver. He’s. He’s taking care of you people. It’s the. It’s the Venture Cast.

[00:15:25] Howard Hartenbaum
So a company that I’ve been using, and not to dis Uber at all, but I use this service called redcap, where a guy drives me around in my own car. And they were having trouble figuring out how to grow a lot because it’s a little bit of an unusual thing, and I think they couldn’t kind of get it mainstream. And they’ve had a shift in their business model, where they are now a service by car dealers to when you want to bring your car in for service, instead, the dealer will say, we’ll send a guy out to pick up your car and bring it back to us.

[00:15:59] David Hornik
I literally just had this conversation with Pamela where I said, we have two cars that have needed service forever and that I was gonna hire a red cap to take my car in.

[00:16:09] Howard Hartenbaum
So their channel is the dealers. Audi is doing it now, so.

[00:16:13] David Hornik
Good.

[00:16:13] Howard Hartenbaum
And Audi pays for it because they want you to be happy, and then you don’t take a loaner from them.

[00:16:18] David Hornik
Way better, way cheaper than a loaner. My kids are like, well, what are you gonna do? The red cap is gonna just sit there. And I said, yeah, who cares?

[00:16:24] Howard Hartenbaum
No, what they do is they have a chase. So the guy comes, he drives out to your house, gets in your car, and drives it to the dealer. And then another and leaves it there. And another guy picks him up and takes him back to his car. It’s $45 for one of the pieces. $45 on the other side too. So it’s 90.

[00:16:44] David Hornik
That’s 90 bucks for a service. That’s a lot of money.

[00:16:46] Howard Hartenbaum
That’s a lot of money.

[00:16:47] David Hornik
That’s a lot of money. But that was sort of what I was figuring, that it would be like a three hour endeavor and I’d pay 60 bucks to have someone take it.

[00:16:56] Howard Hartenbaum
Yeah, but it’s like an oil change. Yeah, Y.

[00:16:59] David Hornik
It just needs like this stupid basic service and I keep not doing it. So the other one I just used was Lux. Right? You had some other one that was.

[00:17:07] Howard Hartenbaum
Like, this is, this is Lux and there’s carbon. C, A, A, R, B, O, N.

[00:17:13] David Hornik
And so these are valet on demand. Basically, it’s. You get an app and when you get to where you’re going, then you say, hey, come pick up my car. And they. Lux grabs your car. It’s five bucks an hour, and I think it’s a maximum of 15 buc. And they take your car off somewhere and they rent it out to someone else. They use it as an Uber X for the three hours that you’re parked. It’s a great business. They park it somewhere and then when you hit the button, it come. They take the car to where you are. So what I. What happened is I had a board meeting. I had two board meetings up in the city. So I went to one board meeting. I met the guy. The guy showed up on a skateboard, hopped in my car. He said, hey, do you need any gas or a car wash? I said, actually, I do need a car wash. He overcharged me for a car wash, which was totally fine by me. 40 bucks to get the car wash, which is probably double what it should have been, but saved me the time of doing it. Took my car away to somewhere. I had my board meeting. I then hopped in an Uber X between my two board meetings. So that was another like seven bucks. And then I had another board meeting down in, you know, many blocks away. And then I called my car up and showed up in seven minutes. Cost me 15 doll to park it, as opposed to 40 if I parked it in one location, never mind in those two, and it was washed. And then I drove home. How good is that?

[00:18:49] Howard Hartenbaum
Awesome.

[00:18:49] David Hornik
There’s no way that’s a business that can survive.

[00:18:54] Howard Hartenbaum
I’m actually going to take the opposite. I actually think it will.

[00:18:56] David Hornik
How?

[00:18:57] Howard Hartenbaum
Because their target are people who are coming every Day and going to work, and there’s no parking lot near their office.

[00:19:05] David Hornik
What are the economics? How can. So it’s a real estate business.

[00:19:08] Howard Hartenbaum
I’m not convinced it’s a venture business, venture scale, but it is a real estate business. So they get a lot that’s kind of a mile away that’s very, very cheap. And the cost to them is probably three bucks a day on average for a packed space. And then they just have to pay for the guy to go another direction.

[00:19:26] David Hornik
So how many cars do you think a guy can pick up and drop off in any given hour? Three, four?

[00:19:35] Taxi Driver
I don’t know.

[00:19:36] Howard Hartenbaum
Depends if they’re driving your car around with their bud in the back.

[00:19:41] David Hornik
I mean, someone said to me, oh, what? You know, you have no idea what they’re doing with your car. But that’s true. Anytime someone parks your car, it’s sort of like people getting all worked up about giving their credit card number on the Internet. I’m sorry, do you ever go out to dinner? Because when you hand the dude, the waiter your credit card, they go in the back, and now they have smartphones and they can just boop, click. Now they got your info, so you really want to worry about it that much.

[00:20:06] Howard Hartenbaum
Wait, are you being the paranoid guy now? I thought that’s my role.

[00:20:09] David Hornik
That’s true. Your job is to. Is to be paranoid.

[00:20:12] Howard Hartenbaum
Yeah. You want to talk about debt.

[00:20:14] David Hornik
Paranoia. Yeah, talk about paranoia.

[00:20:16] Howard Hartenbaum
I want to talk about debt. I had a company in the past that had some venture debt. So this is the lesson for the day.

[00:20:22] David Hornik
Yeah. This is the portion of the program that actually teaches you something unlike everything else you’ve heard to date.

[00:20:27] Howard Hartenbaum
Oh, wait, we’re out of time.

[00:20:29] David Hornik
Oh, no. But the good news is that if you’ve never used Uber before, which is not even imaginable, but if you’ve never used Uber before, our friend here has just saved you $20, so that’s good. So you. You might have made 20 bucks on this particular waste hour of your life.

[00:20:43] Howard Hartenbaum
I think the beauty of it is normally we have to sit in your office, and now we’re just getting done while we’re coming.

[00:20:49] David Hornik
Hey, it’s genius. We gotta go places. We gotta venture cast on the run, on the go. From now on.

[00:20:55] Howard Hartenbaum
Ubercast.

[00:20:56] David Hornik
Uber. Yeah, Ubercast. Brought to you by Uber. H. Yeah. All right, here it is. The code again, just in case you missed it.

[00:21:05] Howard Hartenbaum
HH. As in my initials.

[00:21:07] David Hornik
HH like Howard Hartinbaum. Q0o e h, h, q O. Very cool. So debt. Yeah. The lesson in Debt. And I happen to agree with you on this one.

[00:21:21] Howard Hartenbaum
Well, you’ve learned, you’ve learned the hard way.

[00:21:23] David Hornik
Unfortunately, anyone who’s new to the venture business is going to make this mistake.

[00:21:27] Howard Hartenbaum
So let me first describe why people do debt and then describe what it does to you. The reason people do debt is good. Entrepreneurs raise money from their investors. They have $6 million in the bank and some debt lender comes along and we want to give you some free money because venture guys just gave you $6 million. So we want to give you $3 million more and you don’t have to pay it back for a long time. And we don’t really, we’ll get like a little tiny bit of equity. So it’s basically like free money.

[00:22:02] David Hornik
Free money. Free money.

[00:22:04] Howard Hartenbaum
And entrepreneurs are all excited. Free money. Instead of having 6 million in the bank, I’m going to have 9 million in the bank. And my father taught me, never borrow money you can’t pay back.

[00:22:14] David Hornik
Well, that’s a good.

[00:22:16] Howard Hartenbaum
And that’s the problem when you’ spending debt money like it’s equity money, there’s a very good chance you won’t be able to pay it back. And what happens, often businesses have challenges along the way and having debt can exacerbate those challenges to the point where it drives you out of business. So I’ll let you explain the situation that you are witnessing.

[00:22:39] David Hornik
Yeah, well, we see this all the time, right. So I think you’ve described it perfectly, which is at the end of the day, entrepreneurs think that debt is free. Like, oh, I get 24 months of interest free payments and by the time it comes around, I’ll pay it off or, you know, we’ll be making a bunch of revenue, we’ll pay it or whatever. And when it works, they’re totally right. It’s great. It’s not like debt is never a good idea. You know, having a mortgage on your home turns out to be a perfectly reasonable thing to do in the rising market. Right. If you can afford to pay it and you can write off the interest and all those things.

[00:23:15] Howard Hartenbaum
But when the market’s going down, debt’s not so good.

[00:23:17] David Hornik
It’s not great. And we saw, we saw that happen. So what we have both experienced and what I’m experiencing at the moment is here’s a company, it’s got, you know, it still has some do some, some dollars in the bank, but it’s doing, it’s, but it’s now servicing millions of dollars in debt. And so while the burn rate without debt would be, you know, a couple or few hundred thousand dollars a month. There’s a million dollars in debt service to get there, and suddenly you’re burning a million three a month. And, and, and so you might otherwise have deposit if it was 300,000 moving to zero, but instead it’s a million three and you’re never going to get from a million three to, to zero in the time frame available. Right. And so, and so you inevitably have to go out and raise capital to start paying off this debt. And there’s, if there’s One thing that VCs hate, it’s investing in companies where the money’s going to go to pay a bank, right? Where it’s not going to build value, it’s not going to build to build customers or whatever else. It’s just paying off the debt. Right. And so we see this time and time again where not only does it mean that you have to raise money sooner, but it makes it really hard to raise money. And so you’re basically mortgaging the future.

[00:24:39] Howard Hartenbaum
There’s another twist to it, which is there are occasions where the venture guys might be willing to lend you money even though you have debt, but then your prior debt lenders will not let that new money coming in be senior to them. Meaning if you sell the company, they still get their money back first. So investors feel nervous about putting in equity because it’s going to pay off the debt, and they feel nervous about putting in debt because it’s second in line behind somebody else. And the end result is often when a company is struggling and has a big debt load, nobody will put money in the company. And the debt lenders say, you know, we don’t care if it goes bankrupt because we’ll just sell the assets and get our money back and it can drive the company out of business.

[00:25:27] David Hornik
And we’ve seen it. We’ve had company, we’ve, I have witnessed it personally. Yeah, Both, both of us have in our own companies and we’ve seen it in companies in our portfolio. And despite that, and despite the fact that we are constantly sitting at board meetings saying debt is dangerous, we, you know, the dilution of an equity round is worth the certainty of having the capital. We are outvoted by other investors all the time. And it just seems, it just seems to me so crazy that we have this conversation time and time. We’ve seen it happen time and time again and yet people still are willing to take on debt in order to extend the Runway. And that is not, and it is a recipe for disaster.

[00:26:13] Howard Hartenbaum
Debt is bad.

[00:26:15] David Hornik
This is like, you know, the ultimate preaching. I’ve had this preaching to me brother hopes are their heartbound.

[00:26:20] Howard Hartenbaum
I’ve had the same discussion with other investors, and I’ve lost.

[00:26:24] David Hornik
We lose, right?

[00:26:25] Howard Hartenbaum
Yeah.

[00:26:25] David Hornik
Doesn’t it make you crazy?

[00:26:27] Howard Hartenbaum
And unfortunately, then we’re right.

[00:26:29] David Hornik
And it doesn’t help us to be right because the company still goes out of business. Business. We’re still screwed. And we can’t even be smug about it. So I think we, you know, maybe we just need to be more persuasive.

[00:26:42] Howard Hartenbaum
Yeah, that’s your job.

[00:26:44] David Hornik
But, you know, I was, I was on talking to a guy today talking about exactly this, and I said, hey, I’m. I’ve got a company that’s thinking of taking, taking on more debt, etc. And this guy said, have them call me and I’ll tell them. I’ll tell them the perils. I said, it doesn’t matter. We’ve all told them it doesn’t matter because it feels like free money when it feels like everything’s. But, you know, there are companies that are going to run out of money.

[00:27:11] Howard Hartenbaum
I remember when I first looked at Prosper years ago, and this is before they straightened up their ship. I was trying to decide if I wanted to put money into Prosper as a lender. And I was reading the various loan asks, and one of them said, dude, my girlfriend is unemployed. I just lost my job. I feel a lot of stress. Please lend me $4,000 so we can go to Hawaii on vacation.

[00:27:38] David Hornik
Wow.

[00:27:42] Howard Hartenbaum
And at the time, I thought to myself, I’m not so sure peer to peer lending is such a great idea.

[00:27:49] David Hornik
You know what’s great? So I don’t know if you have ever given any money, lent any money on Kiva. Kiva is the lending platform that allows folks around the world to take out small micro loans.

[00:28:03] Howard Hartenbaum
So Bill Draper gave the financing to get Kiva going.

[00:28:06] David Hornik
Oh, did he? Good for him. Kiva’s amazing.

[00:28:09] Howard Hartenbaum
Yeah.

[00:28:09] David Hornik
So it’s some woman in, in Nigeria or a man in Venezuela or wants.

[00:28:17] Howard Hartenbaum
To open a little walnut shop.

[00:28:20] David Hornik
Yeah. Or they want to produce more sweaters and they need more yarn to produce sweaters. And they can’t get the, you know, twelve hundred dollars it costs for the, for the yarn to increase their sweater production. And so you loan them the money and it’s a loan, Right? It’s a loan and it gets repaid over time. And, and what I have found with Kiva is that the loans get paid back with incredible certainty. Like, you know, not all. It’s not 100%. Right. It’s not like they always get paid back there. There are plenty of circumstances in which. But. But in this instance, it turns out that people are being thoughtful and careful about their business. They were making choices that give them leverage to be more productive, and then they take their commitment to repay the money very seriously. And as every time a dollar is paid back to me in Kiva, I re lend it. Actually, I sort of end up. It ends up being a bit of a problem because what happens is I’ll have, you know, like 200 bucks to re lend. And then someone needs 300, so it keeps growing. So I’ll lend 300. So then I’ll have a loan portfolio in Kiva that’s 1,000 bucks or 1,400 bucks.

[00:29:36] Howard Hartenbaum
The neat thing is a small amount of money really makes a difference for these little businesses.

[00:29:40] David Hornik
And it works. It works. You know, and I think, you know, we, you know, we see this all the time where people are trying to figure out, you know, where there are lending businesses where the APRs. The interest rates are relatively high, and people think, oh, this is, you know, an unfair lending rate. But they empower people to then make choices for their business.

[00:30:03] Howard Hartenbaum
I gotta give them directions.

[00:30:04] David Hornik
Oh, yeah, yeah, you gotta go left.

[00:30:06] Howard Hartenbaum
In the second entrance. Yeah, down here. And then under the building, you’ll see a mini convertible.

[00:30:12] David Hornik
Yeah, exactly. I’m just on the back side here. We have just made it to August Capital.

[00:30:17] Howard Hartenbaum
Yeah, I think that the. Is that it house is ending.

[00:30:21] David Hornik
No, no, we’ll see how long until we get kicked out of the. Of the. Of the sedan. There’s my car. We’ve made it to the Mini.

[00:30:31] Taxi Driver
Nice.

[00:30:32] David Hornik
It’s been. This has been a very pleasant ride, Howard.

[00:30:34] Howard Hartenbaum
Yes, it has.

[00:30:35] David Hornik
We’ve got to say that I’ve enjoyed this. Go. Go lend money on. On Kiva. Get your free. You get your 20 off your first ride and no debt. And. And please, only debt. If you need some skeins of. Here’s the code again. HHQ0O E. And. And, and thank you for listening. This has been David Hornik from August.

[00:31:00] Howard Hartenbaum
Capital and Howard Hartbaum, also from August.

[00:31:02] Taxi Driver
Capital, and Costell from Uber suv.

[00:31:06] David Hornik
Costell from Uber suv. And we appreciate you, Sam.