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.

[00:00:23] David Hornik
It’s been a little bit. I guess it’s been the summer seems.

[00:00:26] Howard Hartenbaum
Like it was like a month ago.

[00:00:29] David Hornik
Do you remember? I guess it’s not even. Do you remember? It is the fact that every summer people say, well, you can’t raise money in the summer.

[00:00:37] Howard Hartenbaum
And yet August is the busiest time for everybody.

[00:00:40] David Hornik
Yeah, it’s just not true at all. It’s like, I suppose when after the last crash in 2000, people actually took the summer off because it was like, yeah, there’s nothing to see here, people. But, you know, in the years that I’ve been in the venture business, this. There’s always stuff that gets done in the summer. And we’ve done five deals this summer. Something crazy.

[00:01:03] Howard Hartenbaum
Let’s take the fall off.

[00:01:05] David Hornik
Yeah, well, we don’t need to do it. We’ve talked about this on the show before that after Labor Day, if you haven’t done a deal and you’re in the venture business, you wake up and you go, oh, I haven’t done a deal. Now I gotta get a deal done. And then basically you have to find something interesting before Thanksgiving because after Thanksgiving, everybody’s done. And so. Yeah, so this is the busy season. Except that it’s not really true because.

[00:01:26] Howard Hartenbaum
No, no, no. Last year the data showed there was More deals in Q4 than any other quarter.

[00:01:31] David Hornik
Well, so there you go. Yeah, so maybe it is. I mean, I just know that we’re certainly busy year round. It’s not. It’s certainly not back end loaded. It’s not like the end of a quarter for an enterprise software company.

[00:01:46] Howard Hartenbaum
So different venture firms have different signature parties. And August has the end of the summer party, the August Ann, which many would agree is kind of the signature summer party. I think the winter party is Sutter Hill’s party where they have a Christmas party with a lot of flair. And when we talked about deals at the end of the year and calling them Christmas deals, if you’re an entrepreneur and have a good company and you haven’t raised money, just go and stand in front of the Sutter hill party on December 20th with a sign, I am your Christmas deal.

[00:02:17] David Hornik
I’m ready for you.

[00:02:18] Howard Hartenbaum
So who’s the. The spring deal? I mean, the spring party. Who’s the spring party? Nobody owns that.

[00:02:26] David Hornik
I don’t know.

[00:02:27] Howard Hartenbaum
Maybe it’s a TechCrunch party. We have.

[00:02:28] David Hornik
Yeah, we get both. We get the July party and then we have the August annual, which is not in August but is annual in September.

[00:02:36] Howard Hartenbaum
What about a venture firm does like a Valentine’s Day party?

[00:02:39] David Hornik
Yeah, right, exactly. The unrequited love party. Come here and.

[00:02:46] Howard Hartenbaum
Go from stool to stool. Hello there.

[00:02:50] David Hornik
Yeah, someone has to own it. Someone’s got to own it.

[00:02:52] Howard Hartenbaum
Yeah, we’ve been very busy this summer. Your company that you just joined the board of, was that made public yet that you invested? Yeah, yeah, yeah. Okay, so Mass drop, I didn’t want to say if it was.

[00:03:07] David Hornik
I was like, are we talking about it?

[00:03:09] Howard Hartenbaum
Can we talk about this company? Anyway, so massdrop, I’ll probably describe it differently than David, who’s closer to it, but MassDrop is a consumer site for enthusiasts around products. And they have a category of people who are really into mechanical keyboards or they have a category of people who are really into lightweight backpacking products or they have a category of people who are really into headphones, for an example. And I’ve come to the conclusion that massdrop is better than product reviews. And when I want to, that’s good.

[00:03:45] David Hornik
I’m glad. Since we put a bunch of money.

[00:03:47] Howard Hartenbaum
Well, it took me a while to come around to it, but we described it differently. We described it as an enthusiast site and you know, the people who are really into products and doing research. But I actually think it’s something that’s more mainstream just looking at behavior. So I’ve been getting, I joined the, the backpacking group and frankly I don’t backpack, but I do go, I go hiking, but I don’t really need lightweight backpacking stuff. And I get this email and it’s like the new Korean made cova ultralight titanium backpacking stove. And I’m like, click, purchase. Because I must have that because a hundred people who are really, really into this stuff do every bit of market research out there and say this is the best of the best of the best. And then they negotiate a great deal on it. And I buy it and I got it in the mail. It is awesome. It’s a great piece. I’m never going to use it, but it’s really.

[00:04:38] David Hornik
Well, now you have to. Now look at this. It’s inspired. You have to go buy somewhere to cook something.

[00:04:43] Howard Hartenbaum
I’m going to cook it in my house. I’m going to buy some propane. But the point being, I think that product reviews are a lot of work and there’s a lot of bias and a lot of times it’s not by people who really even understand the products all that much. Like I bought it. It’s great because I made a great decision. This is about people who are like, if you’re into mechanical keyboards, like you spend eight hours a day typing or ten hours a day typing on your keyboard, there’s an argument why you should have the best keyboard in the world. You use that product more than anything else. Go to massdrop and you can learn about mechanical keyboards.

[00:05:13] David Hornik
You will know more about mechanical keyboards in about a minute and a half. So I’m totally into board games. I think they’re, I think they’re amazing and different and fun and whatever else. And Master up has a, a game shop category and they have, they have a bunch of magic, the gathering stuff, whatever, but they also have a bunch of board games and things. That thing that I think is super cool is I’ll see a bundle of games and I’ll have one of the games and then there’ll be two others. What are those games? Or I’ll see someone recommended one thing and then the comment thread is, oh, it’s like this other game. And then, and then on Master App they have things that I hadn’t seen. They gather up things that had seen. Like there’s a, there’s a video podcast called Tabletop where they play the game and if you ever like been super annoyed because you have to figure out how to play the game, you don’t have to do that. Just watch Tabletop and you’ll see the rules in action and you will then know how to play the game.

[00:06:10] Howard Hartenbaum
And because nobody likes reading the rules.

[00:06:12] David Hornik
No, you don’t read the rules, you just watch them play. Oh, it’s this and it’s this and this and then they play it and you, oh, okay, great. I get it. It’s funny, it’s interesting. Like, anyway, so I agree with you, I think, I mean this is why we were, we were excited about the company. But when you, when you dig into it, I got a bunch of, hey, why are you doing this? Because it’s just group buying and remember in the late 90s there were group buying companies that, that failed. And I said, no, no, you kind of are missing the point because it’s about enthusiasts and it’s about, you know, it’s kind of next gen forums. It’s really about that, the information. It just turns out that it also then says, okay. And by the way, if a hundred of you buy this thing, you’ll get 37% off. If 200 of you buy any, you’ll get for 45% off. And that’s like, oh, great, that’s, you know, that’s a bonus.

[00:06:57] Howard Hartenbaum
I just like the data. Like.

[00:07:00] David Hornik
Yeah.

[00:07:00] Howard Hartenbaum
Because think about when you go to Amazon and you’re looking at reviews on products and there’s 362 reviews and you start reading the five star reviews and you start reading the four stars. Then you dig down what are the one and two stars and you’re trying to draw your own conclusion. Should I buy this product? Is this the best product? Product. And you’re comparing it. It’s a lot of work.

[00:07:17] David Hornik
Yep.

[00:07:18] Howard Hartenbaum
I don’t want that work.

[00:07:19] David Hornik
No. And here it’s. People propose. Oh, here. Which of these three things is the best pair of headphones or whatever. I just got this pair of master and dynamic headphones. Master dynamic are like these high end headphones. There’s a headphone community and that have like the greatest frequency range ever. And so. And the. And on massdrop, more than your ears. It is literally more than your ears. It goes lower than your ears and it goes higher than your ears.

[00:07:47] Howard Hartenbaum
Great.

[00:07:47] David Hornik
Which is like, you know, wasted frequency. You could put. You could send information that way actually. That’s how. That’s how. What’s the wireless power company, how they U beam. That’s what you beam uses. Maybe you could listen to music, but the really super low end frequency that you can’t hear could then drive power to your other devices or to your wireless headphones. Yeah. Circle it back around. It’d be like a, like a permanent loop and you could never have to power them again. I don’t think that works. But anyway, so I. These headphones, if you go to Massdrop, there’s a whole there, you know, there’s a commentary about which ones. And then I saw my favorite headphones which are Etymotics. If you ever used Etymotics, they’re in ear headphones. They were designed by these like scientists. It’s not. They weren’t. They didn’t start out as commercial headphones and they’re incredibly precise. But if you don’t like in ear headphones, they’ll make you crazy. And then I just got a pair.

[00:08:50] Howard Hartenbaum
Of Beats for free.

[00:08:53] David Hornik
Yeah. I was gonna say you’re like, why would you get Beats, David? If you have, if you have master and dynamic and you have Etymonic, you do not get beats. That’s like the.

[00:09:01] Howard Hartenbaum
Do you want me to sell them on ebay for you?

[00:09:02] David Hornik
That might be the answer. So the reason that I got beats is that there, you know how Apple has always had a back to school Deal. And usually. And basically what they do is they kind of pimp their new things. So when the, when the iPad came out, if you bought a laptop for back to school, you got an iPad. When you know you could get a ipod in the early days. So they just bought Beats. And so now if you buy a laptop, my kid going off to college got a new Apple laptop, you got a free pair of Beats headphones. To which my son said, how would I take your Master dynamic headphones? And you keep these like no, get your own. You can’t, you can’t afford them, punk. But anyway, I think it’s, I think it’s very clever.

[00:09:48] Howard Hartenbaum
That’s clever for them because the cost of goods on the Beats headphones must be really cheap. And it’s like five dollars or something.

[00:09:55] David Hornik
It’s perceived value. Right. It’s one $99 product. I wonder what the. You think it’s only a five dollar cost of goods on a pair of beats headphones?

[00:10:03] Howard Hartenbaum
Maybe 10.

[00:10:04] David Hornik
That’s all intellectual property. It’s $190 worth of intellectual property.

[00:10:12] Howard Hartenbaum
We can probably. Let’s ask Massdrop, they’ll know.

[00:10:14] David Hornik
Yeah, go find out what the deal is.

[00:10:15] Howard Hartenbaum
What do headphones cost?

[00:10:17] David Hornik
Yeah. Oh they actually. That’s exactly right. Turns out if you were to create your own, they’re pretty inexpensive. The problem is you don’t know which ones will sell.

[00:10:25] Howard Hartenbaum
I wonder if massdrop could be useful for the successful Kickstarter programs where people are talking about, you know, a company who are enthusiasts by nature are proposing some neat product and they’re gathering money from potential customers. It is a demand generation platform but there’s really no way for other enthusiasts to evaluate the product and make more of an unbiased opinion. So Kickstarter, you could say marketing idea and marketing is where it’s at, but there’s really no evaluation of the product. I wonder if there’s a way for the community of 150 of the world’s deeply interested people in high frequency headphones could look at something on Kickstarter and then determine if it’s really good or not. So that it’s not just. That’s a great video.

[00:11:17] David Hornik
I think in the long run brands will pay to get their goods on. Kick on on massdrop because you know they’ll get the validation. Right.

[00:11:26] Howard Hartenbaum
So better than a review. Yeah, it’s like paying for reviews.

[00:11:28] David Hornik
Get it enough. If you could sell a thousand of the new headphone model on massdrop, it jump starts the enthusiast community who are, you know, who could say this is truly better, etc. Etc. Now, of course, you have to be better, but, you know, but I think. I think in the long run, sort of like ebates, where if you put an ad in the front of ebates to say, hey, 6% back instead of 3% back, you sell a lot more stuff on massdrop, I think people will ultimately say, like, you know, can we. Can we get our headphone into a. Into a drop? And so that would be interesting.

[00:12:03] Howard Hartenbaum
And mass drop came up this morning because I got a marketing email from them that had a backpack for dogs, and I was like, I didn’t know I need that, but I need that.

[00:12:13] David Hornik
I need that.

[00:12:14] Howard Hartenbaum
I want to make my dog lazy dog.

[00:12:16] David Hornik
And you have a big dog. Your dog could carry, like, some serious.

[00:12:19] Howard Hartenbaum
Now, this is very practical. My dog is a big German shepherd, and when I walk my dog, I have to carry around its poop in a bag afterwards. I’m gonna make that dog carry its own.

[00:12:31] David Hornik
That’s very clever, Howard. Oh, thank you. Now you carry it in my pocket. My dog is, I think, six pounds. So your dog could carry my dog.

[00:12:42] Howard Hartenbaum
That’s the next kind. That’s like a kitty doggy backpack.

[00:12:45] David Hornik
Maybe we could have your dog take my dog for a walk.

[00:12:47] Howard Hartenbaum
Mean. It’s a horrible thing to say. There is somebody in my neighborhood in los altos who. Their dog goes to the bathroom, and they pick it up in a little baggie, and they make the dog carry it, like, in its mouth with the plastic bag hanging from its mouth like a toy. And they’ve trained the dog to do this. And every time I see it, I just think it’s cruel. But I ain’t gonna take it away from the dog, but.

[00:13:06] David Hornik
Yeah, exactly. But now you can just pop it in your doggy backpack.

[00:13:10] Howard Hartenbaum
I think there’s a market for doggy. I think there’s a market for doggy backpacks.

[00:13:14] David Hornik
Well, I hope so, because, you know, we just funded the company that’s selling it. All right, enough pimping massdrop. The pimping massdrop, although it’s really fantastic and you should go on massdrop. It’s too bad we don’t, like, have an invite code so we could get credit.

[00:13:27] Howard Hartenbaum
Yeah, just go to massdrop.com.

[00:13:29] David Hornik
Yeah, massdrop.com. tell them Howard and David sent you.

[00:13:32] Howard Hartenbaum
Yeah. So you had an email. We were talking about this the other day. You had an email from an entrepreneur who wanted to get a meeting with you. So.

[00:13:46] David Hornik
Yes.

[00:13:46] Howard Hartenbaum
Tell me. Tell me what happened.

[00:13:47] David Hornik
Yeah, so let me. I actually think I’LL just read you the email chain and it’ll, it’ll say it all. Assume I can find it. Yeah. So I get this email, perfectly, perfectly level email from someone with whom I’ve traded emails before, which is great. So. And the email said, hope all’s well, wanted to catch up. Also have a very interesting company that we should discuss. When do you have a few minutes to talk? So what’s your response when you get an email that says it’s got an interesting company, do you have a few minutes to talk?

[00:14:21] Howard Hartenbaum
I’d say so that I’m prepared for the discussion. Can you send me a little background information on the company?

[00:14:28] David Hornik
I said, do you have an overview I can check out? Seems reasonable. He writes back, I can get you one. Can you talk for a couple minutes now or tomorrow? So I said, I would much rather just give a quick read. Thanks. Now, you and I know the point of giving a quick read is like most of what we see is not a good fit for us, right? So it’s not that I’m trying to be a jerk. I just feel like, whatever. I mean. So he interestingly said, david, let’s have a couple minute conversation. It’ll be brief or whatever, like, okay, fine, but you know, it really would be better if you just would send me an executive summary or a PowerPoint in the same three minutes. I’ll be able to get the information I need to know if the conversation is. Was worth having. Not because I’m trying to trick you out of that conversation. Right?

[00:15:23] Howard Hartenbaum
I mean, yeah, well, I’ll give another case, which I explained, where somebody that I know and trust said, hey, Howard, you should meet this entrepreneur. She’s really great. I said, okay, send me the intro. I got the intro. And I said, what do you do? Well, I’ll tell you when I meet you. And I said, great. Would you mind sending me something ahead of hand for background? Because you’re in the city, I’m down here. One of us is going to spend two hours in the car in an hour meeting. Whether it’s me spending three hours or you spending three hours, I just want to make sure it’s a fit before meeting. But we can go ahead and schedule the meeting, but please send it beforehand. And she responded back, oh, you know, that’s, that’s kind of rude. And you know, you got the introduction from so and so and we should get together. And I was just like, there you.

[00:16:15] David Hornik
Go being rude again, asking for an executive summary.

[00:16:18] Howard Hartenbaum
So I just go, fine, why don’t you come down and we’ll meet. But. But keep in mind, there’s a very good chance you’ll get two slides or 20 slides into the deck, and there’ll be something that means it’s not a fit for us. And it will have been a waste of your time, three hours of your time, including transport. And she’s like, oh, no, it’s not a waste of time. It’s great. It’s all good. It’s.

[00:16:39] David Hornik
My job is never a waste of time.

[00:16:42] Howard Hartenbaum
Haven’t heard that before.

[00:16:43] David Hornik
I’ve seen it tattooed on someone’s butt.

[00:16:46] Howard Hartenbaum
What are you looking at somebody’s butt.

[00:16:47] David Hornik
For eating Howard Brum. It’s never wasted time. I didn’t tell you whose butt.

[00:16:52] Howard Hartenbaum
So anyway, the entrepreneur comes down and really impressive person and goes through the entire pitch, and I am focused and looking for Series A deals. And when I’m looking for something that’s a later stage at Series B or something, I want to see a lot of business traction in the company. Granted, the founder was really impressive, and frankly, it was a reasonably good idea, but they really had just pivoted, didn’t have a lot of traction, and had already burned through 15 million bucks and wanted to raise an even bigger financing at an up round. And that’s just not a fit for what I’m doing. And maybe there’s somebody else who is. And I said to the entrepreneur, we’re in the meeting 45 minutes. I said, you’re awesome. Your new idea is kind of pretty interesting, but it really is kind of back to a seed stage deal, and yet you’re raising a Series B and asking for tens of millions of dollars in valuation. I’m sorry, that’s not a fit for me, and I hate to say it, it was a big waste of your time to come all the way down here. And she was very nice. Oh, no, I really appreciated meeting you. And this and that and left. And that was the end of it. And all I was thinking of is maybe the CEO is not going to make it because they’re not using their time efficiently. Like, if they could save three hours by simply sending a deck ahead of time, that might be a good.

[00:18:07] David Hornik
This is the problem. There it is. You’re not gonna trick some. I don’t mean trick, but I mean, you’re not gonna talk someone into investing in your business. That’s not a good fit for them. Right? It’s like when I’ve said to someone, hey, I don’t. I don’t think this is a good fit for us because I’m not convinced that X, Y and Z is true. And then I get back an email saying, no, you’re wrong about that. You know, here’s why you’re wrong about it. And becomes this sort of argument. It’s like, no, don’t. If, if some venture investor is convinced that there’s a reason why it’s not a good fit for them, go find someone else. The likelihood that you convince them lists are just wrong. Like, oh no, you misunderstood the market, here’s the answer, or whatever, right? You’re much better off spending your time talking to someone else than. But I had a pitch once where three or four slides in to the, to the pitch date. The business was sort of similar. Not it wasn’t a seed, but some good technology but not very far along. And then I get to a slide and it says raising $60 million. And I said, is that, is that a typo? Are you a 60 million pre. Or you know, no, no, we need $60 million because this is what we need to do whatever else. And I said, well, are you thinking you’re selling the. A majority interest in your company or no, no, absolutely not. And it was the same thing. I said, well, it’s. Then I don’t think this is a good fit for us because it doesn’t seem to me for these reasons that’s not our model. And he was certain, very off put. Like, what are you talking about? Like, you should hear, you should hear the rest of the story. No, the rest of the story is why you are gonna, you think you’re raising too much money at a price that doesn’t make sense based on what I know of your business. Doesn’t make any sense. And, and ultimately you finish the rest of the pitch. And then I delivered that message like, nope, it’s not, you know, it’s not.

[00:20:01] Howard Hartenbaum
Yeah. So how many times in the past 15 years, however long you’ve been doing this, have you had a pitch where it became contentious? Because I can think of one for me which I’ll describe. But have you ever had that happen?

[00:20:14] David Hornik
Yeah, sometimes. What happened, but not very often.

[00:20:18] Howard Hartenbaum
I can think of.

[00:20:19] David Hornik
My most contentious one was, let’s call it, it was a social network in the early days of social networking called.

[00:20:26] Howard Hartenbaum
Facebook or the Facebook.

[00:20:28] David Hornik
It wasn’t Facebook, it was another company and they showed and they gave me a slide. And it was, here’s Facebook and its growth rate and where they are. And here we are and here’s our growth rate. And if we continue compounding our growth rate in X number of months we’ll be bigger than Facebook. And by the way, Facebook was already big, 200 million users or whatever. And I said, look, no, that’s not gonna, you’re not gonna be bigger than Facebook. I mean, you may be something miraculous, but your business can’t be predicated on the idea that you’re bigger than Facebook. We got this back and forth and he’s like, no, I’m going to be bigger Facebook. And they’ll. And he’s like, but they, you know, you’re talking about compounding because they’re at 200 million and you’re at, you know, a million. So of course you’re growing faster than that. 200 million.

[00:21:12] Howard Hartenbaum
Did they make it?

[00:21:12] David Hornik
We had this back. No, they went out of business. But it was just like, maybe if.

[00:21:16] Howard Hartenbaum
You would fund it.

[00:21:16] David Hornik
And finally I said to him, a, you’re never going to be bigger than Facebook. B, I don’t care. Like, I don’t care if you’re bigger than Facebook. You still could have a fantastic list. There are big companies. You know what, Twitter is never going to be bigger than Facebook either. And when they pitched it, they were never going to be bigger than Facebook, but they became a great business. Like, there are businesses to be had. But when entrepreneurs are absolutely dig in on a thing that just is not even that. It’s one thing to dig in a thing that you’re wrong about. Okay, fine. It’s another thing to dig in a thing that you’re both wrong about. And it doesn’t matter. Like you, like, who the fuck cares you, you still could build a big business.

[00:21:56] Howard Hartenbaum
So let me give my example. This is more along the lines of I knew, like you said, you’re three slides in and the guy’s raising $60 million for a seed. I was sort of in a situation where a few pitches in and he gets to the team slide. And the guy pitching, who is the sole founder of the business, said, and as soon as I raise the money, I’m going to hire a CEO and I’m going to hire a CTO and I’m going to hire this and I’m going to be a non executive chairman of the company. And I said, oh. I said, you know, I just, you know, I don’t want to waste any of your time. But that’s not our model. We are trying to invest in. Entrepreneurs that want to build their own companies are going to be full time, not somebody who wants to armchair it and hire people to kind of run the whole business. And he got Quiet for a minute. And then he got angry and said, well, I could have told you that I was going to, you know, be the CEO of the company and drive the company forward and taken your money, and then immediately after done this, I could have lied to you and get the money. And I said, now I know. I’m glad I’m not investing in you. He started yelling at me. And I was just like, I’m sorry, but let’s just end the meeting. It’s not going in the right direction.

[00:23:03] David Hornik
Yeah, the part where you’re yelling at.

[00:23:05] Howard Hartenbaum
Me, it’s yelling at me. Have you ever heard me yell at anybody?

[00:23:10] David Hornik
No.

[00:23:10] Howard Hartenbaum
No.

[00:23:10] David Hornik
And it’s like. And look, we all talk about the dating analogy all the time in the venture process. Like, can you imagine, you know, three seconds, three minutes into your. A date with someone and then they’re like, no, you’re wrong. Like, this is wrong. You’re. You’re misunderstanding. And I could have lied to you, but, you know, to sleep with you, but I didn’t do that.

[00:23:30] Howard Hartenbaum
I told you I was married. You would sleep with me if I had told you I wasn’t married, but that would have been dishonest.

[00:23:37] David Hornik
And then that would be the end of the date. That would be like. And you’d be like, you’re psycho. Like, what? What are you talking about? So don’t do things that you wouldn’t do in a date.

[00:23:49] Howard Hartenbaum
So I think the theme here, the theme is that VCs and entrepreneurs, it’s like a sales process and you’re just trying to find a good fit. And if you can find a reason, like if you’re an enterprise software company and you call on Yahoo to be your customer and you have a great product and Yahoo says, this sounds really interesting. I have no budget for this. Don’t waste your time with us for two years. We have no budget. Are you going to spend the next few days trying to convince them that they should create a budget for you when they’ve said they have no budget? That’s like trying to tell a VC that he should do your deal. He has no budget for that. So you’re better off to filter and find the guys or girls who are interested and the ones who say, wow, this is exactly what I’m looking for. It’s in a space that I’m interested in. It’s at a stage that I like.

[00:24:38] David Hornik
Yeah, I agree. So you and I, of course, agree.

[00:24:41] Howard Hartenbaum
On this, but we agree with ourselves.

[00:24:43] David Hornik
We always agree with disagree. But it is the thing that is interesting to me is that there is some sense that people just want, like, hey, just tell me yes or no. I don’t need. I don’t, I don’t want to know why I don’t need to know. Like, if it’s not for you, fine. But like, don’t be telling me why it’s not for you because then you might be wrong and I’ll have to fight with you about it and whatever else. And, you know, you, Howard, are, are someone who even in meetings will say, hey, look, I think I appreciate what you’re doing here, here and here. I think that you’re wrong about this, or I’m not sure about that, or this is a different. You might approach a different market, or we’re not the right. Whatever. And half of the entrepreneurs are incredibly grateful. They say, like, oh, great. Oh, thank you. Why do you think about that? They have a conversation, they get value out of that meeting, they leave. The other half get pissed. Are like, who the fuck are you?

[00:25:33] Howard Hartenbaum
I’d like to think it’s only 1% that get pissed.

[00:25:35] David Hornik
Whatever. Whatever the number is. Yeah. I mean, we don’t see people get really angry.

[00:25:39] Howard Hartenbaum
But.

[00:25:39] David Hornik
But I think the, you know, some people view it as, oh, this is valuable, and other people view it as a rejection, like, oh, you’re rejecting me? And they have a negative reaction. It’s just funny to watch because in every instance you’re a. Just trying to save them time and be giving them your honest feedback. Like, it’s not okay. You don’t believe it. Don’t believe it. Right?

[00:25:57] Howard Hartenbaum
But yeah, get feedback from 10 guys and determine what. So I’ll give two examples. One where it went negative and one where it went positive.

[00:26:04] David Hornik
Yeah.

[00:26:05] Howard Hartenbaum
And the one that went negative recently, it’s a really impressive founder of a business, very successful guy, has done really amazing stuff before, which is. I wanted to meet him. He has a new business. His new business is growing very quickly, but I think it’s a services business. I think it’s probably a great business. I just don’t see how it’s an outperforming investment. And I told him that, and I said, you’re going to make money, you’re going to have a lot of revenue, you’re going to have decent margins. But the market, I don’t see how it gets valued greatly. It’s not exactly what we’re looking for. It’s not a software business. And he kind of sent me a note like, how rude I was and how negative. And he had this great experience at this other venture firm years ago where he came in and self admittedly, it was a really bad idea. And I had a guy who was pitching with me who was sweating and nervous and he gave a crappy pitch and the VC just smiled and was really nice and came back to me the next day and said, no, we’re not investing. What a great experience I had with that vc. And my reaction to him was, perception is reality. And if I pissed you off, then I pissed you off and that’s the way it is. I’m sorry, I apologize. I use the words I apologize in the email. What I think about your business is you’re an awesome guy, you’ve done impressive stuff in the past. You probably don’t want any feedback. I’m not investing and that’s okay. By the way, I’ve already sent you a customer and I’m going to send you some more because I think your service is great and I wish you the best. And I don’t know how he’s reading that email at the moment.

[00:27:31] David Hornik
Well, he’s pissed, right? Because if you’re pissed, you’re pissed. So it’s like, oh, don’t try and be nice to me. Yeah, it’s very hard because our job is about saying no. Like, our job is just about saying no. We say it, we do it all the time. And. And some people want you to say no. It’s a little bit like sales. Like some people want you to sell, you. They want you to sell one way and others want you to sell another. And if you get it wrong, then they just get mad and you know.

[00:27:55] Howard Hartenbaum
Yeah. So I’ll give another example where a guy pitched a company recently and it was a company that looks into video, what the products are and then you can click on the video and then purchase the product. So if Rihanna’s carrying a handbag or Tom Cruise is holding got shoes on like, whatever, he’s got a watch on, like, you know what the. And I said to him, I invested in a company called Pixaza, which changed its name to Luminate, which was doing this for images, photos on the web and really great team. Unfortunately, it didn’t turn into a great business. I still got bloody knees from that company. So I’m just going to wish you the best. I don’t feel comfortable. And he came back and said, would you mind sharing what the challenge is that Pixar’s Illuminae had? Maybe I can learn something from it. And I was like, the guy wants feedback. So I said the challenge by the way Luminate had 250 million monthly uniques for free through partner publisher relationships. And the thing that they learned is the number of people who actually click through is so small, like hundreds of percentages, that even with a quarter billion people per month using the service, the revenue was in the millions of dollars.

[00:29:10] David Hornik
Business model doesn’t foot when you take large number times small percentage times small percentage.

[00:29:15] Howard Hartenbaum
And even worse than that, what they learned is people don’t actually want those shoes that, that Brad Pitt is wearing. They actually use that to start a discovery process. So you can’t focus on the shoes. You have to focus on what other products are sort of like those shoes. And then we went to brand advertisers and we got Nordstrom’s and Macy’s to do branded ads associated with it. And the numbers just never worked out. Like when you have a quarter billion people using your product all the time and you can’t make any money from it, it’s just fundamentally broken. And so hopefully you can figure it out. I don’t know if the time has changed or what’s right, but this is why Lum8 didn’t work. And he said thank you. I didn’t know that’s what Luminate did. I didn’t understand it. That’s really interesting. I’m going to do more research. Maybe it’s relevant to me, maybe it’s not. I appreciate you giving me the direct feedback and I felt good about that one. No, but not the other one.

[00:30:05] David Hornik
That’s the way it should be, right? I mean, this number thing is. It is astonishing. We’ve probably talked about this. Every venture cast in some form or other. But in the end, like, this is simple math. It turns out there’s a top of funnel in whatever you’re doing. If you’re E Commerce or you’re advertising whatever, there’s the top of funnel, and then some percentage of that converts to the next thing, and then some percentage that converts the next thing and then some percentage converts to someone paying something for something and then you keep some percentage of that money. And if you do that math and you start at the top and you make your way all the way to the bottom, then you can figure out is there any hope of this being a gigantic business? It is. Why I think in almost every instance, freemium model is a bad model. Because if you do that math, it almost never works out to a big enough business for venture back.

[00:31:00] Howard Hartenbaum
The additional challenge of freemium is you tend to attract the people that want free. So then the People you’re trying to convert are the people who like free stuff in the first place, and they’re even harder to convert. Yeah, I’m not a big fan of freemium either.

[00:31:13] David Hornik
It’s tough. It’s a tough model. And always the assumption is it is so. Accelerates adoption, that it’s great. Like, well, it accelerates adoption of free things.

[00:31:24] Howard Hartenbaum
How do you make money that’s good.

[00:31:26] David Hornik
Anybody want free stuff? Yes, I would like free stuff.

[00:31:28] Howard Hartenbaum
And the challenge with freemium models is they usually cost money.

[00:31:32] David Hornik
All right, I’m gonna. I apologize to the people involved in Lux, but I am gonna. I’m gonna rant for a second here, and hopefully it’s instructive. It’s not meant to only be about Lux, but it is. But it is representative of some of these business model challenges. So Lux. I used to tell people how much I love Lux. So Lux is this parking app. You go to the city, you go to park. When you get someplace, you say, come get my car. They get your car. It was five bucks an hour, maximum $15. They’d park your car when you wanted your car, you press it. They bring you your car. Right. I thought, wow, like, cheaper, more efficient, all these things. So yesterday, when I went to use Lux, get the app, it had. They had fixed one big problem, which is you. What you. It took them a while to get to you, and you want to just tell them to come when you weren’t there yet. So now on the app, you say where you’re going, and they know where you’re going, and you know, and so they try and triangulate and get someone there when you get there. Clever. It didn’t. The form. I think that’s a. That’s an algorithm that will get better. I like that. The price had gone up when I first looked, it said $6 maximum 18. By the time they got my car, it was $7 an hour, maximum 21 or something. Okay. It’s still a fine price, but it’s starting to now. It’s not like, oh, this is a great bargain or whatever. Now, it’s okay. It’s just. It’s just the price that you pay to park your car. But. And then I just. Then. Then in. In favor of their business model, say, hey, do you want your car wash? Say, yeah, I’d like my car washed. That’s a good one. 40 bucks they get for washing my car. But frankly, the convenience was fine. And they say, when your guy comes, when the car gonna be done? I say, I’ll be Done at one, they take the car off. I end up being done actually at like, 2. I call for the car. And two things that happened. One, oh, hey, we didn’t get to your car wash. What are you talking about? You ha. You knew I was getting my car at 1. It’s now 2, and you didn’t get to the car wash. Oh, that’s problem. And your car. We will get your car to you in 27 minutes. 27 minutes. Like, I’m gonna sit and.

[00:33:43] Howard Hartenbaum
Would you wait for an Uber for 27 minutes?

[00:33:45] David Hornik
Never. Absolutely not.

[00:33:47] Howard Hartenbaum
Yeah. Logistical challenge.

[00:33:49] David Hornik
Right. I would have parked, and so I could have walked to four different parking lots in seven minutes and paid the $21. And so suddenly, a thing that was extreme, that had cheaper and better, was cheaper and better, was now not cheaper and not better. But maybe that’s necessary to make the economics work, because if you looked at the economics of the first offering was really tricky. Meanwhile, their competitor, I forget what it’s called. Zerks. One of these guys just raised a bunch of money from a car company. So I, you know, like, I. These things are interesting. Again, I’m not trying to throw Lux, you know, off the bus. I think that I loved the product. I was a user of the product. But the product at 27 minutes to return, and we didn’t get your car washed, and whatever else, it’s not.

[00:34:43] Howard Hartenbaum
The challenge with logistically complex businesses is one bad experience and you lose the customers. And unfortunately, there will always be issues like there’s traffic or. AB Katz at our office, he was using, I think, Zerks, and they brought him his car, and he got in and drove away, and his Bluetooth phone wouldn’t connect, and he realized he was in the wrong car, that they had brought him the same Prius, the same color, but somebody else’s car. And now he’s driving around, needs to go somewhere in the wrong car, and he called them, and they’d given his car to somebody else. And so this is. I mean, this shit happens.

[00:35:22] David Hornik
Yeah. It’s not that surprising, except it’s just hard. It should never happen.

[00:35:26] Howard Hartenbaum
Yeah. So when you have logistical complexity in businesses like these, these are the types of things that, when you hear them, I mean, to give an example, I don’t know if this is true or not, but I heard one of the challenges DoorDash had early on was the guys delivering your burgers and fries, were eating your fries on the way, because they’re thinking, like, they’ve got your little bag of food. They’re like, Ah, a few fries, he’ll never know. And then they eat them and eat enough, they’re like, shit. So then they finish the fries and then they deliver it and then the people are like, what happened to my fries? And the restaurant’s like, I put the fries in there and the delivery guy’s going, I don’t know what happened to any fries.

[00:36:01] David Hornik
Well, I mean, one of the problems truthfully is both a logistics problem, but a, a scale problem, etc, which is that you could totally see, forget eating all the fries. You can absolutely see someone eating some of your fries, right? You pick up the thing, you’re driving around, whatever. And so it requires you to have drivers who people feel good about, they, you know, they trust and whatever else. And those of us who live in Palo Alto have watched doordashers, you know, all over the place. And you watch them outside smoking and waiting and picking their teeth and whatever else. And it makes you less confident in the experience, which is why it is so hard. It’s why an Amazon gets so much value out of being so precise and being so predictable and creating that creates immense value over time. You know, I will pay some percentage more to get something at Amazon than essentially anywhere else because I know it will get to me. I know, I know it will get to me. I know I can return it. They’re like very specific things, right? And it’s very hard to build that, that trust. And yet the venture business has been funding all sorts of service related businesses like crazy. And my strong suspicion is that at five years from now, for sure, maybe three years from now, for sure, at least 75% of them will be out of business.

[00:37:27] Howard Hartenbaum
Tough. So what made you think of Xerx today? You just used it yesterday and you were frustrated with the 27 minute wait. You’re still.

[00:37:33] David Hornik
Well, I was thinking about the economics, right? Yeah, you think about the economics of the business and what are the economics and how much does it cost to acquire a customer and then what is it? And then you have to, and you have to throw them and whatever else. And so me as a customer of Lux the life, the potential lifetime value, there was hundreds of dollars, thousands of dollars.

[00:37:52] Howard Hartenbaum
You go to the city several times a week. Yeah, it was a fantastic thousands of dollars, perfect customer for them.

[00:37:58] David Hornik
But by it being a 27 minute wait, done, you know, I am in all likelihood now, maybe, maybe I should try it again and see. Whatever. And by the way, I called customer service and they said you need to leave 20 minutes, whatever. And so maybe the answer is you have to anticipate and so you call it before you get there. But the thing that was great about it is on demand, right? The thing that is great about Uber is that it is on demand. That you go, Lyft is on demand. You say, I need a car now. How long will it take? Oh, three minutes or, oh, it’s 13 minutes. What’s the other one got? Oh, three minutes. I’ll take you. Right. Did you see, by the way, Travis Kalick was on the Late show last night. He was on with Colbert. And Colbert said like, you know, he was very nice. It was kind of. He said, like, what’s next? You have this food, you have the cars. And Travis said, oh, we’re doing food. What’s next? He said, oh, well, how’s that going to work? Jarvis said, well, you’re gonna press a button. They’ll deliver you your lunch. He said, oh, culprit. Well, like, do you get to choose? Yeah, you press a button, they deliver you a sandwich. Like, what if I don’t want a sandwich? Oh, well, you’ll have some choices. And it’ll be in the car. And he’s like, you’ll have a tuna fish sandwich sitting in the glove compartment.

[00:39:10] Howard Hartenbaum
Like, I don’t.

[00:39:13] David Hornik
No, no, it was, I mean, it was. What is amazing is that here is the first week of this guy’s show. And yesterday has Elon Musk on. Today he has Travis Kalik on. These are like when tech icons are becoming like pop icons. That is weird.

[00:39:33] Howard Hartenbaum
Yeah. Big consumer brands.

[00:39:36] David Hornik
Big. And, and he’s. And, and, and. I mean, this must have made Travis feel really great. Colbert says, how many of you have used Uber? And you could tell from the audience reaction it was everyone. Everyone.

[00:39:49] Howard Hartenbaum
Which that’s a bad sign. Maybe the market saturated. That’s why they’re doing lunches now, because they’ve saturated the pickup.

[00:39:57] David Hornik
No, that business is one where you use it once and then you use it 10 times. Then you use it all.

[00:40:02] Howard Hartenbaum
I think the interesting thing is, can you imagine the conversations going on at the boardrooms of the big auto manufacturers as they look at Uber and they look at Google self driving cars and Tesla and they’re like, we’re getting attacked from every single direction. How are we going to survive?

[00:40:21] David Hornik
Yeah, what do we have to do?

[00:40:22] Howard Hartenbaum
I bet most of them have no clue.

[00:40:24] David Hornik
It is truly astonishing to me that nobody, that none of them has attempted to buy Tesla yet. Now maybe it’s so expensive, it’s so valued or whatever, but, but it’s just, you know, it’s like anything else, you’re gonna have to survive. And, and it’s perfectly clear. I was, I was over visiting my buddy, this guy astro teller who runs Google X, and he took me into the garage of the Google X office and showed me their little, the little.

[00:40:50] Howard Hartenbaum
Car that they’re, I’ve seen them driving down my street.

[00:40:53] David Hornik
They’re awesome. They’re these adorable little pods. And it turns, they have steering wheels right now, but they’re designed so that when it’s no longer required, they can just not even put it in. And you can sit in your little pod and read your magazine or go through email or whatever, and then it gets you to your office and I forget what the number was. Something like 4 million minutes driven. And they’ve had a dozen accidents and not a single one of them has been caused by the self driving car.

[00:41:20] Howard Hartenbaum
So my street in Los Altos is on their commuting path and we used to only see the, the Lexus rxs, but now I’ve seen twice the little pod cars come down the street. I’m getting ready to like throw something in front of the car, you know, do something and see what happens. Can you imagine the press I could get if I jumped in front of a Google self driving car, got hit and caught it on video?

[00:41:47] David Hornik
Good idea, Howard.

[00:41:48] Howard Hartenbaum
How much would Google pay me for that video?

[00:41:50] David Hornik
Oh my God, he’s not gonna do it. Those of you listening to this now. It’s just surmising.

[00:41:58] Howard Hartenbaum
No, right now they’re looking up my address and they’re going to change their commute path. That’s what they’re going to do.

[00:42:02] David Hornik
Which was exactly what you wanted to do. Well, mission accomplished. If nothing else has been achieved in this episode of Venture Cast, it is that you have gotten them to change the route for Howard Hartenbaum’s house in Los Altos. You can look it up.

[00:42:17] Howard Hartenbaum
I’m sure they know where it is.

[00:42:19] David Hornik
They know everything. Yeah, well, you’ve wasted another perfectly good hour. I stole that from the car talk.

[00:42:25] Howard Hartenbaum
The car talk, guys.

[00:42:27] David Hornik
And in this instance, you’ve only wasted 42 minutes because I was chatting with my partner Vivek about his, his son’s party tonight.

[00:42:35] Howard Hartenbaum
So I missed the first high school kid with a hundred friends coming over. They need security. Yeah, and I know where you can get security anyway.

[00:42:43] David Hornik
All right, people, well, thank you. This is David Hornik, this has been.

[00:42:47] Howard Hartenbaum
Venturecast, and this is Howard Hartenbaum, also been Venturecast.

[00:42:51] David Hornik
And we appreciate you taking the time.

[00:42:55] Howard Hartenbaum
Thanks.