Pivot - Pivot Schooled #2: The New Generation of Innovators, with Nextdoor CEO Sarah Friar and investor Rana Yared
Episode Date: August 30, 2020In this audio version of the second episode of our live video series Pivot Schooled, Kara Swisher and Scott Galloway talk about the future of innovation in the US and worldwide. They interview Nextdoo...r CEO Sarah Friar and Balderton Capital general partner Rana Yared, answer questions from the audience, and make predictions. Plus: A prediction from Silicon Valley actor Suzanne Cryer, and why TikTok isn't selling to anybody. Get your tickets for the next Pivot Schooled, "The Big Four," at PivotSchooled.com. Get your Pivot Schooled hats, mugs, shirts and more at PivotSchooled.com/Shop. Learn more about your ad choices. Visit podcastchoices.com/adchoices
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Hi, everyone. It's Cara. Today on the podcast feed, we're going to share an edited version
of the second episode of Pivot Schooled, our live video series. This episode was originally
broadcast on Wednesday,
August 12th, and the theme was a new generation of innovators. Our guests were Nextdoor CEO,
Sarah Fryer, and venture capitalist, Rana Yared. And later in the show, we also answer listener
questions and make some predictions. What you won't hear on this episode are the parts of the
show that don't translate well to audio, but you still have a chance to watch Pivot Schooled Live.
Our final episode is this Wednesday, September 2nd
at 10 a.m. Pacific, 1 p.m. Eastern.
If you already bought a ticket
for any of the previous Pivot Schooled episodes,
you're all set and we'll see you on Wednesday.
But if you haven't, you can still get your ticket
for Wednesday's show at pivotschooled.com.
But now let's go to Pivot Schooled
about the new generation of innovators.
Scott masks off. Are you ready? Good to see you. How you doing? I'm doing really well,
Kara. So ready. You look so much better. How you doing? I'm doing really well, Cara. How are you?
So ready? You look so much better. What's with the beachy setting there? Where are you now?
What ridiculous vacation spot are you in at this moment?
I'm in Nantucket, just dressed up my kids like seals in wetsuits and they're off.
So yeah, we're here.
All right. Looks Nantucket.
This is how pathetic I am, everyone.
Cara Swisher is now arranging playdates for me. She feels sorry for me, and she's setting up playdates for me.
So thank you for that.
I need the socialization.
I need the structure.
It's going really well.
She's a fan.
Her friends of mine are there, and they wanted to meet Scott Galloway for reasons unknown.
And so there we have it.
And so, Scott, there's so much to talk about.
This is a great episode.
This is an innovators episode.
This is the new generation of innovators.
We're going to talk about a lot of things and where innovation isn't actually,
but let's bring it down.
There's been so much news you've missed.
I've had other guest hosts,
Stephanie Rule.
I had Andrew Osorkin this week.
We have had a lot of news.
You've been missing quite a bit up there in your,
in your vacation hotspot.
So you wanted to run down a few thoughts on a couple of things.
So go for it.
Yeah.
So first of all,
most importantly,
Andrew Osorkin from New York, that's a lie.
He is a Gordon from Alberta, Canada.
It's just time to stop that.
He's not.
Anyways, okay, so the most over-reported story,
two words, tick and tock.
Everyone thought that, okay,
the reality show that Donald Trump attempts to script out
where he plans a scenario, inserts himself, and what he believes are writers that the script will unfold the way he plans.
And then what do you know?
He's the hero.
This is just not going to play out the way he thinks it's going to play out.
We have Twitter.
I mean, effectively, unless he has auctioned off and he may have behind the scenes with Xi, giving them some island in the South
China Sea in exchange for Xi serving up TikTok on a platter. The notion that Satya Nadella,
who probably has to shower every time he gets on the phone with his Corp dev team and goes
through the process of having Donald Trump force a company on him. The notion that this could even
be forced on. So let's talk about the ban, right?
I don't know even though logistically or legally how they're going to execute this ban and what will be a way to piss off 100 million people and to
see what happens when I take away my iPad from my nine-year-old times 100 million. It's just not
going to happen. Yeah, but WeChat's in there too. It is a ridiculous distraction. There are bigger
issues with China, as I have pointed out, that are not, that have nothing to do with this. And so
it should, you know, it'll fade away just like the caravans of immigrants
that are headed to our border.
They're still on their way, apparently.
It's another distraction.
Of course, now he's got Kamala Harris to focus in on.
And so like the Nat attention span,
that's where it's going to go.
By the way, I have not been this excited
about a female vice presidential candidate since Tim Kaine.
I think this is just so exciting. Anyway, that is so inappropriate. Totally inappropriate. He was a Marine.
Thank you for your service. Totally inappropriate. Anyways, so you have-
What other news? What other news?
You have effectively what's going to happen here is a bunch of companies will announce
they're in talks because they figured out that every company that announces they're in talks,
their stock goes up 5%. She can wait just
88 days realizing there's no way logistically to pull this off until the next election. But
everyone is trying to guess who is going to acquire TikTok. The answer is none of the above.
It's not going to happen. Anyway, the most underreported story is what's happening across
America in university and K through 12. What has been a consensual hallucination between university
leadership, their finance departments, and parents. The least vulnerable cohort in America right now
is the children of wealthy parents that make up university freshmen right now. And all of this
discussion and hand-wringing over whether universities are going to open, it all leads
to one place, and that is they are going to go all remote. It's just a question of
how many infections and how much damage is levied on university towns, but it is ridiculous to even
think you're going to open universities. I'm so excited to buy the car on Monday.
The Florida Marlins pay their players an average of $3 million a year.
The endowment at Princeton is approximately $3 million per student.
The most well-resourced college in the world decided that they don't want to deal with this.
And if that means they can, it means no one can.
So we are going to see universities shut down.
The tragedy, the least prepared and the most vulnerable in terms of non-health are K through 12. That is
where I think, unfortunately, America comes under huge strain because we're not talking,
your 19-year-old at home is a nuisance. Your nine-year-old at home is a tragedy and could
literally puncture 30 to 50 million households come September. So you're going to see,
unfortunately, you're going to see almost all of them close down.
So TikTok goes to no one.
TikTok goes to no one.
Universities, they close.
Sucks to be a grown-up.
And K-12 is the most underreported story,
how the impact that's going to have on Americans.
All right.
We're going to bring in some friends of Pivot
to talk about the future of innovation,
which Scott is, I would say,
negative about. First up, Sarah Fryer, the CEO of Nextdoor.
Hey, Scott. Hey, Kara. Hi, Sarah. So let's start. You have a really fascinating background. You had
been at Square and a bunch of other places. Let's talk
about the rise of Nextdoor during COVID. Maybe you could address what Scott said first, actually,
in terms of innovation. You've been around the block, a lot of blocks. So how do you look at
sort of the innovation economy? Where do you put it? What is the landscape from your perspective?
I mean, I'm still a wild optimist on innovation. I've had an almost 20-year career now in Silicon
Valley. And for sure, you can get into these ad moments where you're kind of like, what is the
next big platform change? But I remembered at the beginning of Square seven years ago,
when I joined 200-person company and everyone said, there's no innovation in finance. And
I think we really spawned the innovation of fintech. And so similarly,
when I look at something like Nextdoor and when I made that shift over, a lot of people said,
you know, no one's ever made local really work and have a strong business model. And I really,
you know, disagree. I think there's massive innovation that's coming all the time. So I
guess I'm an innovation optimist to Scott's pessimism right now. Scott?
Sarah, do you think that maybe fintech, I agree with you, in fintech there's been tremendous innovation,
but do you think that maybe it's because fintech is one of the huge large categories that isn't dominated by one or two companies,
that the fastest growing parts of our economy, search, hardware, cloud, social media, are dominated by a monopoly or duopoly and that yours is one of the few
industries that isn't dominated thereby, leading to this notion that if the biggest parts of our
economy are actually having innovation suppressed? You know, I don't know if I agree on the innovation
suppressed, but I do think that you need to be careful of that monopolistic behavior that can
happen. And I think that's why it's super important, right, at a company like mine, that we find our area and then really play to our competitive strengths, right? When I think about
the neighborhood hub, the next door is becoming, right, number one is this being founded on trust.
And we were willing to go a little slower in the beginning because we verify that you're a real
person at a real address, right? And that's very different from social media and therefore has a very different outcome. And so I think there can
sometimes be a slow burn in these areas because it does take a long time to build a firm foundation.
But I don't really think ultimately innovation is stifled. But I do think it needs a strong
hand at the tiller from a regulatory standpoint and making sure that there's
good oversight, which I think is what you're calling to. So when you think about local,
you just said something, sort of a throwaway line, local hasn't really worked. And I think of
Tim Armstrong throwing money at it. I don't even remember what that was called. But since I started
covering the internet, there was something, there was digital cities, there was all kinds of stuff to try to spur local. Talk a little bit about that. And you moved from Square to this. Why did you
think this was an opportunity? Besides the fact that I kept bugging you to be a CEO,
what do you, I was always like, Sarah, be a CEO, stop being a CFO. What do you think is,
what is the problem in local and how do you look at it right now?
Sure. So, I mean,
there's three big reasons I came to Nextdoor and I think they've only been magnified. Number one
was a deep belief in kind of a purpose-driven company. And I think the more we see companies
arise like that, it'll just be better for society and our communities. And so huge believer in that
power of local. COVID-19 has only accelerated that. So as we went from
February to March, we saw an 80% lift in our daily active members, for example. So I think
local has come into its own. Yeah, we're all stuck in shelter-in-place mode. But from a business
perspective, that's where it got really interesting. Remember, I have a way back, used to be a research
analyst. So I've spent a lot of time in my life analyzing companies.
And when I look at local, to me, it's this interplay of the residents, the neighbors in the community, the local businesses.
And I use the word local, not small, because Walmart, Fortune One, is a local business all the way down to Tony Tudor's Pizza here in my local neighborhood.
They're all local.
They want to act local.
And then there are other constituents
like the public agencies, the nonprofits, and so on.
And I think that interplay is what starts
to create really interesting business models.
So no one's ever done a good job of really aggregating
how does a neighbor go talk to a local business, right?
If I stood you down on Main Street and said,
Kara, there's a gas station.
I want you to kind of tell me, are they open at 6 p.m. tonight, right? And you can't go physically
go talk to them. You'd kind of be a little head scratcher, like maybe you'd email them. Would you
expect them to reply? Maybe not. Would you find a website? They might have some details. Maybe they
have an Instagram page, probably less likely if they're a gas station. And so there's been no kind of singular aggregation.
And I think that's the opportunity that I got excited about is how do we aggregate the interplay of those small businesses who really need their best customers, who are their neighbors?
And how do we get residents to really support their local businesses?
to really support their local businesses.
And again, it's a place where COVID is actually helping play that strength
because we just polled our neighbors,
72% of them said they want to shop local
much more today than they did five months ago
because they recognize the importance
of those small local businesses
to have their community thrive.
Sarah, can you just give us-
Well, except they're getting decimated.
Oh, sorry, go ahead.
Can you just give us, just step back
and just give us sort of the overview or the elevator pitch on Nextdoor and some of the numbers around growth and your business model?
I don't want to assume that people, including myself, really understand Nextdoor.
Yeah, no, thank you for that.
So Nextdoor, we're the neighborhood hub.
It often surprises people when I say we're in 11 countries.
So this is not just a U.S. phenomenon.
and surprises people when I say we're in 11 countries. So this is not just a US phenomenon.
In fact, what I liked about the TAM or the total addressable market for Nextdoor is there's not a community in the world that doesn't want to build stronger local ties. So you go to North Korea,
you'd see the same thing, pregnant mothers getting together, older people feeling isolated,
local shopkeepers. So every country in the world is addressable in this case.
shopkeepers. So every country in the world is addressable in this case. If you look at our business model, there are really three ways today that Nextdoor monetizes. So remember, in the US,
we have very broad distribution. One in four households in the country is actually on Nextdoor
and the awareness is building. So that does open up an advertiser model. I know you're not a super
fan of advertiser models, but in our case, we give advertisers
something very, very unique.
We give them hyperlocal.
We give them the ability to be part of a community, right?
For example, during COVID, Walmart actually came and did a campaign with us around help
groups where if you wanted to go shop at Walmart, you could say, hey, I'm going to Walmart.
Can I
help out a neighbor? Go grab groceries for you. Maybe you're immunocompromised. And so it went
far beyond just an ad. It actually brought a company that wanted to be purpose-driven
into the community. So that's kind of revenue stream one. The second revenue stream is those
small local businesses. So they have a wonderful home on next door. From the get
go, we've seen neighbors give recommendations. So a very natural thing that happens on the platform
is I say, hey, you know, I woke up this morning, super leaky faucet, who's the best plumber out
there, right? And it's a very high trust ask, because this person is going to walk into my home
where my children are. And so those recommendations are inherently positive.
So unlike, say, Yelp, where you get this one star
and businesses get all pissed off about who really reviewed them,
the business knows that it's inherently positive and that it's trusted.
It's really from the neighbors living in that community
because they're the only people who can give a recommendation on Nextdoor.
Kara, can I follow up quickly?
Sarah, I just want to comment on something
while I'm thinking about it.
It's not, I think the ad model
from a pure business model standpoint is fantastic.
A lot of fixed costs
and then 95 points of gross margin on ads.
The problem I find online with the ad model
is it leads to a business model
where you pursue engagement at any cost,
including not putting in place the right content moderation or filtering to create a safe aspirational environment.
And there are some issues around racist comments and basically hateful commentary on your platform.
What are you doing to implement that kind of moderation such that we don't end up at
Facebook and Twitter in a rage machine?
Yeah, which has been a longtime issue at Nestor, what they've tried to address. And it was before
you got there too, but it was probably one of your major issues was this content moderation
issue. The second one I would say right now with COVID is the decimation of small local retail.
I mean, just in my neighborhood alone, seven businesses that were thriving are gone. Gone.
And I don't know what's going to
happen or anything else. So talk first about the content moderation and then about the decimation
of local retail. Sure. So on the moderation point, Scott, it's an incredibly important point. And I
think that's why I started by saying I went to Nextdoor because it was purpose-driven and it
can't be engagement at any cost. Remember, we wouldn't even do verification if it was engagement
at any cost because making people verify slows down the build of the network. From a moderation standpoint,
it's a layered cake for us, right? On the bottom layer, local moderators, and that's really
important because I truly believe you have to live locally to understand whether the content
should be taken down off the platform, whether it's against our community guidelines. And we're very explicit that we have a set of community guidelines. The next layer is clearly
technology. We've done a lot of work with academics around things like slowing people down. So the
rage machine you talk about, the fuel of it is speed. And so we actually do things with technology.
We have something called kindness reminders. So if you were about to write to Kara, you moron, like, why did your, why is your faucet working? Clearly,
you know, you did something to it last night. That's just another Wednesday for us.
Sarah, you get me. I was being polite by using the word moron. A little kindness reminder.
It's the other way around, Sarah, just so you know. Go ahead. Sorry, go ahead.
It might seem, you know, somewhat know somewhat superficial right this interstitial
yeah but what it's doing is a couple things it's slowing you down so like you're no longer in this
dinosaur brain you're up here slow thinking common read totally it's reminding you that
there's a community guideline at work which is to be kind not hurtful and when people think they're
going to be reviewed in a
future state, they actually behave better. And so these are examples of ways we can use technology.
So it's not just everyone says machine learning, like it's, you know, the second coming. In reality,
it's about how do you get smart using deep academic research, but put it into product in a
way that feels seamless. And then finally, we do have internal moderators too,
who look at content,
particularly when it's in the zone of discrimination
or racial profiling.
All right, we have two questions from the audience,
but do you feel that these issues around racism
and next door,
because a couple of years ago, it was ridiculous.
You know, it was, you know,
person of color walks by my house
and it was really kind of crazy.
Like, how do you feel if it's improved?
And then I have questions from the audience.
So I do think it has improved a lot.
So if you look at something like racial profiling,
that's where we worked with Jennifer Eberhardt,
who I think you interviewed last year, Cara,
to actually ask people, in fact, her tagline
for what we put in place was,
instead of if you see something, say something, it's if you see something suspicious, say something specific.
And so we really went out of our way to define racial profiling, to let people know they might be engaging in it, even if they don't realize it, and to realize that things like color are not a way to describe and walking is not a suspicious activity. And so what
we've seen, even just implementing that racial profiling flow, is that racial profiling posts
declined over 75% and actually continue to decline. So I actually, I mean, will you ever feel good?
No, because it's like fraud. These things are always evolving, right? The bad actors are always
finding new ways into the system. But do I feel good about our reaction and that we're making neighborhoods kinder places? I
absolutely do. And I feel totally inspired by what I've seen during the crisis.
Okay. What is striking is just this morning, the president tweeted about suburban housewives and
being scared of poor people and people of color. It resonates. It continues to resonate. I don't
know if it works,
but nonetheless, let's get some questions. I'm going to lean forward from the audience.
Nextdoor has been trying to achieve profitability for many years. What are its plans to achieve
operating profitability and when will it happen? And let me read the second one.
What product timelines have changed, accelerated at Nextdoor because of COVID. So let's do the second one
first and then the last one about profitability. So I think it's important in crisis, like if you
don't change anything, clearly something's wrong because you should be reacting. But I think the
worst thing you can do is start to get super tactical. So you're kind of in whack-a-mole
territory of let's do this, let's do that. So instead, what I think about is how do we accelerate the long poles of our strategy?
So you asked me about small businesses.
We accelerated a product we'd planned to launch, for example, in next year into the midpoint of this year,
which is our business engagement bundle.
So we know that small businesses want to post into the feed.
We know that their need to tell their neighbors right now what's going on has never been higher. And so that's a product that we brought forward. Similarly,
we just launched a product around nonprofits where we have an amazing part of our platform
called For Sale and Free. So kind of our classifieds business, we see about $2 billion
per month put on the platform. And now you can sell on behalf of a nonprofit. So my dream is
we could even get 10% of that, right? $200 million a month going to nonprofits. How amazing would
that be for communities? On the profitability side, it'll come as we grow, right? We are
inherently a profitable business. Scott pointed out the margins of advertising or the SaaS
businesses that we have, right? These are inherently very high margin businesses.
So it's really about making sure you have the foot on the gas to keep up growth, but that you're doing it in a very mindful way.
So we clearly have plans to turn profitable, but I want to balance that right now to grow, grow, grow as much as we can, particularly while we're a private company.
All right. Here's another question.
What does Nextdoor do to train their local moderators? And how many of them are there? What is the balance
between AI, your different tools, and the moderators themselves?
So the moderators, so what we call leads today, there's hundreds of thousands of leads, right? We
have 266,000 neighborhoods and every neighborhood
has a minimum of one and usually multiple leads. So I'll give you a sense of scale.
Something new that we're doing right now is also starting to bring in more community reviewers. So
leads kind of do everything. They welcome you, they review content, but they also act as like
the normer of what's the right behavior in this platform.
And so we're finding that some people just want a very specific role and a community reviewer role
is one of them to train people up. Today, we use a more basic set of here's our community guidelines.
We help people think about how if content's being looked at against that guideline,
is it, you know, how should they review it?
Is it something that should get taken off?
Because we will remove content.
We have work to do there, though.
I will be totally honest with you.
I think we need to do more training of moderators,
particularly with the rise of systemic racism
and really understanding just the huge inherent problem
in the country right now.
Related to that, and it's your last question, so we only have just one more minute.
Does next, recently a friend of mine had some family in Ohio. They were saying there was going
to be a caravan of Antifa coming down to this minor town, this small town in Ohio, which it
wasn't. And it was on Facebook groups and they were all convinced they were
getting their guns ready. They were ready for the buses, this and that. None of it was true.
And Facebook moderated none of it. And my friend kept saying, there's no buses coming of anti-fop
people. This is not happening. And it went on and on. And what are you doing to fight
disinformation? Because your platform is perfect for that. There's going to be looting. There's
going to be this. And all these cities are in distress right now, for good reason, a lot of them. And so,
what do you, and yet there is, you know, damage being done, like in Chicago and other places. So,
how do you, what do you do in that position? Yeah, so we take it super seriously. So, to begin with,
we make sure that mis- and disinformation, we want to get at the top of the news feed,
really credible sources. So, if you go back to COVID, we wanted to make sure that mis- and disinformation, we want to get at the top of the news feed really credible sources.
So if you go back to COVID, we wanted to make sure people were hearing from the CDC or their local health and human services department and not from their neighbor who had heard on the grapevine some cure for COVID.
So that's number one is how do you boost content that is accurately sourced?
Content that is accurately sourced.
And then using something like Kindness Reminder,
we do a pop-up that when you are posting about a given thing,
like let's say it's your parade that you're talking about,
we ask you to put a source in and that's a credible source.
So again, we're trying to push you not just to promote hearsay,
but to actually think about where did I get that information from?
Nextdoor is different from the bigger platforms because in the end, you're just talking into your community. So it's a much smaller group. You're a real person. It's your
real name. That gets a lot more. Yeah. But remember, a Facebook group has no verification.
I could be a bot, an avatar. I could be a Russian agent and a group across the country, right?
There's nothing that keeps it hyperlocal. And I think in the hyper local,
there's more of a repeat game, right? If I'm always that person that's posting the wild and wonderful thing, people can mute me, people can keep reporting my content. And eventually I think
there's kind of more of a accountability of, you know, when I'm posting, it's actually real
and it's in the spirit of how you're just the make money. So you're just the crazy neighbor who always has some theory.
There's a little bit people get to know you
for the actions that you take.
And we can do a lot more to norm the good.
So Sarah, you were accurate.
My middle name is glass half empty,
but I just want to say we got a comment
from someone who's listening who said,
and I quote,
I built my in-home IT business on Nextdoor.
So thank you.
So well done, Sarah.
All right.
Yes.
Well done, Sarah.
Okay.
I love to hear that.
That is great to hear.
Thank you.
I'm so glad to hear you, too, by the way.
Anyway, thank you so much for being with us.
And it was really interesting.
I hope you keep fighting that misinformation and stuff like that.
It's really critical as we move out of COVID to help local businesses, for sure.
Anyway, thank you so much for coming on.
Congrats on your success, Sarah.
Thank you.
Bye.
So, Scott, what do you think of that?
You know, I know so little about Nextdoor.
I don't like my neighbors.
I don't want to make eye contact with them, much less have any digital connection to them.
Do you use Nextdoor? I do. I use it for a lot of stuff. I do. I don't want to make eye contact with them, much less have any digital connection to them. Do you use Nextdoor?
I do.
I use it for a lot of stuff.
I do.
I find it really interesting.
Explain to me from a consumer end.
Information about local businesses.
You know, boxes.
It's down to like, we have some boxes.
Would you like some?
There's a lot of community groups like that already on sort of listservs.
But I find it interesting.
There was, for many years when I was using it,
was persistent racial comments.
It was really quite ridiculous.
And I would report them all the time.
Yeah, just like, oh, there's a black guy walk by my house.
I was like, uh-huh, like what?
And then there was a package-thief videos,
which were, let me just say,
a very diverse group of people steal packages. But that went on for a long time, which is sort of interesting and weird to watch.
But I use it for a lot of things, like information about community meetings, about think crimes,
school stuff, playgrounds, what's open, local businesses. So I use it. You should try it
sometime. You don't have to talk to people. It's fine. Why doesn't Google do to Nextdoor what they've effectively done to Yelp or Facebook?
They just feel vulnerable to me.
You don't think they're vulnerable?
There's moats there?
Well, I think local is incredibly hard and so much money.
You know, Tim Armstrong had it a day or two.
Yeah, well, yeah.
It's hard, and they would rather just do the easy stuff to shoplift from people, I think.
Hey, it's Kara.
We're listening to the second episode of Pivot School, which was broadcast live on Wednesday, August 12th. We're going
to take a quick break now, but we'll be back after this. Fox Creative. This is advertiser content from Zelle.
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One challenge that fraud fighters like Ian face is that scam victims sometimes feel too ashamed to discuss what happened to them.
But Ian says one of our best defenses is simple.
We need to talk to each other. We need to have those awkward conversations around what do you
do if you have text messages you don't recognize? What do you do if you start getting asked to send
information that's more sensitive? Even my own father fell victim to a, thank goodness, a smaller
dollar scam, but he fell victim and we have these conversations all the time. So we are all at risk and we all need to work together to protect each
other. Learn more about how to protect yourself at vox.com slash Zelle. And when using digital
payment platforms, remember to only send money to people you know and trust.
This is Pivot School.
Let's get back to the show on our second friend of Pivot interview
with investor and former Goldman Sachs
managing director, Rana Yarad.
Now for a different perspective,
let's bring on our second friend of Pivot,
Rana Yarad.
Rana is a general partner at Balderton Capital.
Bring her on, Rana.
partner at Balderton Capital. Bring her on, Rana. Hi, good afternoon. Thank you for having me.
All right. Thanks for coming. Anyway. Rana Goldman. Oh my gosh, I just saw that in your profile. Are you a DJ? Are you DJ Rana? I have no musical talents. I'm very sorry.
None? Well, either does David Solomon.
Come on.
That shouldn't stop you.
Maybe I should just dream bigger.
That's not fair.
No.
All right.
So, Rana, before you were at Baldwin, you did run a huge division at Goldman, investing
in huge enterprise companies, including some crypto.
So talk a little bit about why you left and what's your focus now.
Sure.
So I'll just start by saying that Goldman
was an incredible experience. I spent the first 14 years of my career there and left as a partner
in what was named the Goldman Sachs Growth Equity Team. And I've now gone to Balderton Capital as a
general partner. I'll report that it's my second week there. So it's very exciting to be there
again after being on the sideline for six months. Second week. Nice.
The main reason why I went is twofold, really. The first is that Balderton has a legacy
of really being best in class in Europe. They've been there for 20 years. They're known for being
a best in class, early stage investor. And I found that incredibly exciting to be part of
the extension of that into a growth platform. That's the first thing. And then the second is that despite all the interest that I've been printed about the dismay that European governments have about the lack of technology, European champions, I actually very strongly that there is room for both disruption and for
European champions and for those champions to actually grow and flourish staying in Europe
and raising from the capital markets in Europe versus being forced to come to the U.S.
Well, let's talk about that because Europe's always been an issue. That's always been,
you know, I've spent a lot of time going to Europe looking for fresh companies and Spotify
and several others have been the only ones that have really,
you know, there's Atlassian and Australia and others.
Talk a little bit about that.
And then your overall view of sort of the innovation landscape.
Scott had a very negative view of it.
How do you, what do you look as opportunities and where's your focus?
Sure.
So you won't be surprised that coming from Goldman,
my focus has historically been financial technology and enterprise technology,
and that will continue to be my core focus at Balderton. When I look at the innovation landscape,
I'm not as bearish on what COVID has done. So there's a line of thinking that goes,
COVID has thrown the baby out with the bathwater. Everything has changed. From my point of view,
the bathwater, everything has changed. From my point of view, many of the trends that we're seeing are actually trends for whom the seeds were already planted prior to COVID. So the
acceleration of health and beauty businesses online versus going to bricks and mortar isn't
new. Bricks and mortar were having problems before COVID, right? If you think about healthcare,
which Scott had focused on, there have been healthcare deserts in the United States long before we had a problem with
coronavirus and a true need for telemedicine in places where hospitals have long been closing down
and people find that they have to increasingly drive hundreds and hundreds of miles to get
proper care. So again, to Scott's point, the biggest saving wasn't time, sorry, wasn't cost, it was time.
And the risk associated with walking around with COVID has caused an acceleration of the
provision of telemedicine in places that frankly have needed them for a long time.
And then if I look at, you know, close to my home base in financial services, it's not
like the financial services industry in the United States hasn't needed to
become more user-friendly and frankly hasn't lagged in terms of customer care and customer
accessibility behind the rest of the world. When people didn't want to go into branches anymore,
all the services that I couldn't get from my big universal banks on my phone or my tablet
suddenly became available. And so I'm very positive on
innovation because I think there was a lot of innovating to do, and we now have a proper
catalyst for that innovation. And Cara, to address your question on...
All right, Scott, go ahead. I'm just saying you said the word accelerated,
and Scott now has a VC crush on you, essentially, because that's been his sort of song.
Well, no, we always say here that COVID's more of an accelerant than a change agent. But let's
talk about, in the US, we like to simplify things, and we're fairly narcissistic, and we think of
Europe as one country, and it's not. When you look at the different markets there, if you were to
think of them as stocks or as assets, and that is looking at culture, looking at the startup scene, looking at the universities that pump out great IP and hopefully, you know, smart people,
the interest in entrepreneurship. What markets or what countries specifically in Europe are you
long on? And I won't ask you to go short because nobody wants to offend anybody, but what are the
overlooked countries or markets where you see a lot of innovation? What are the stocks you want
to go long on regionally in Europe? I don't know if it's overlooked, but maybe it's
less favorable because of the Brexit scenario. But I'm long the UK and I have been for a long time.
And I'm long for a couple of reasons. That's the FinTech hub, right?
Well, it's not just that it's the FinTech hub. It's that you have commerce. So London,
you have universities, Cambridge, Oxford, Imperial College
Kings in close proximity to that, and you have the seat of government all within a one-hour train
ride of each other. And those things together should be the right combination of factors in
order to provide not only access to innovation, but also access to government help and regulatory frameworks to
allow that innovation to be a responsible kind. So I still think that just the confluence of
events that started when Cambridge was founded a thousand years ago that put it close to the
capital is a reason to be long the UK on innovation. And then I'm also long Germany
on innovation for a couple of reasons. One, there's a lot of forgotten industries that people manufacturing hubs that are thinking about the next generation
of transport and logistics, or what we're seeing in Berlin around the consumer. They really have
grown multiple hubs with specific expertises across Germany. And so I'm pretty excited about
that. And they're a dark horse. Five years ago, I wouldn't have said that.
Okay. Let's talk about the whole world because a lot of people feel there is sort of a splinter net coming, you know, this idea of different hubs
of innovation, different development. U.S. has been the center of that, you know, for, and capital
formation and everything else. What, if you had to look out where the U.S. is right now, because
you've got to be looking at that because you want to, you're now a VC, you want to make, you know,
and you want to make returns. How do you look at the U.S. market now? And what do you see as the positives
and the negatives, especially around the economy? In London, there was just a report out of Britain,
the economy is at a freefall. The U.S. economy is problematic. Doesn't mean there's not money.
Wall Street's doing great. Where do you see the U.S. as that leader,
or do you feel like that's done? I don't think it's done at all, right? So the U.S. will continue to lead in both capital formation, capital provision, and also in just
innovation and creation. When I think about even companies that are outside the United States,
in particular sectors, they will always need to access the U.S. either for clients or capital. So particularly in business to business enterprise technology, it's foolish to think that an Asian or European company won't need at minimum clients of the largest technology companies in the U.S. So I'm still very long the idea that the U.S. will be
first among all the rest. And the positives are obvious, huge amounts of capital,
a capital market system that's considered second to none at this point, and an open and free
economy still that allows for innovation. And so those are the pros. The cons are a little bit of
like what Scott had mentioned. There's a huge concentration. And the result of that concentration
is potentially the stifling of the potential to be hugely innovative and disruptive and frankly,
game-changing for the consumer by large companies who have so much
capital sloshing around that they buy them before those companies reach their full potential.
So, Rana, you're—
All right, we have some questions from the audience.
Oh, I'm sorry. Go ahead.
Scott, we only have about two minutes, but go ahead. Ask if it's a very quick question,
so I want to get to the audience questions.
The PE guys I know that focus on Europe say it's not that we buy better companies,
we just get them at better prices in Europe. What are you seeing in terms of valuations in the U.S. versus an
equivalent company in Europe? So having covered Europe for the previous five years as well at
Goldman, I would say that, yes, the valuations are less astronomical in Europe. I regret to report
that that gap is closing. But yeah, I think the PE guys are correctly reporting that.
But I would hypothesize
it's less impactful on the PE guys
who are able to use financial engineering
and leverage to get the returns that they need
versus on a venture
where it's an equity-only model.
Thank you, Rana.
Right. Okay.
So let's go.
This is a question.
Should VCs be held liable for any negative externalities that the products they fund create? That's an interesting question.
That's an interesting question.
I think I know the answer. Ronna, do you want me to answer for you?
I think you know I'm going to answer no.
No, please. Ronna can speak for herself.
No. I mean, no.
No.
Like ultimately, boards of directors and companies are held responsible for that.
They are, and they are not, Rana, unfortunately.
Anyway, should VCs have, they should be, that's true.
If wishes were horses, all beggars would ride.
Should VCs have to pay automation tax?
What?
I'm just, it's a quote from Shakespeare, my friend.
Anyway, it's an.
Okay, sorry.
I'll tell you later.
I'll try to find the reference to it.
I once met a guy in Nantucket.
Shakespeare.
Oh, wait, never mind.
Sorry.
Go ahead.
No, no, no.
Don't even start.
Should VCs have to pay information tax
that goes directly to social services
when they invest in companies
whose sole purpose is to automate human jobs?
That's a big question.
That is an interesting line of questioning.
That's a very interesting question. Tax the question. And again, you won't be surprised when I say that my answer
is no to that. So not in a direct way. So one could argue that companies may need to become
more responsible participants in the societies from which they profit. Becoming that more
responsible participant may incur costs for that company.
That cost will reduce the returns. Inherently, the VCs are the shareholders in those companies
and therefore will pay that tax by virtue of having their returns reduced. And so
all of the focus on correcting the consequences should be on the companies and the boards that have fiduciary duties to the shareholders and to the communities.
In late 1999, I started an e-commerce incubator in New York, and it was funded by Maveron, J.P. Morgan, and Goldman Sachs.
And we took funding in December of 1999.
So I just want to say I'm sorry, Ronna, that didn't end well.
That didn't end well.
But that's neither here nor there.
So do you-
It is not neither.
It is neither.
Venture capital returns,
it seems to me, are largely a function of,
well, the deal flow and where you invest
in terms of where in the cycle.
Do you worry that you could be outstanding
at what you do?
And we're in this trope where it seems to me
private market valuations are just crazy. Are you worried that you're going to overpay? Is this the
wrong time? Venture firms are closing on record funds. Valuations are sky high. Isn't this just
the wrong time? Are you worried about valuations and where you're entering the cycle, if you will?
I always have a very healthy paranoia about overpaying and what that'll do to returns.
And so, yes.
But I'll also add, I think there's a third pillar to what makes ventures successful, and that is the ability of the underlying investor to really have a differentiated view of the sector or the industry in which they
are investing. And so expertise is more likely to survive those kinds of cycles than investors who
are generalists. All right. Rana, this is so great. Such a fantastic conversation. I really
appreciate it. And good luck with your new job. Thank you so much. Have a great day.
All right. Thanks a lot. Okay. Now it's time for listener mail. First, we have a video question.
Let's watch. Jungle Cat and Big Dog, huge fan here coming to you from Los Angeles. My question
though is about global expansion. Do we see today's new generation of innovation, innovators
and big companies narrowing their focus to. markets or European markets and avoiding the emerging
markets like Latin America, where I do most of my business, because of the combined effect of
the pandemic and the protectionist kind of nativist politics that's going on in the U.S.,
in Brazil, and in Mexico. Really curious your thoughts. Oh, that's a great question. That is
a great question. Carol, what are your thoughts? Well, I do think that we are getting to this splinter net, this idea of where it is.
I think the pandemic is going to accelerate it.
I think there's going to be less aggressive investing worldwide, you know, until this is solved.
Obviously, things change after that.
But, you know, it was already so Silicon Valley-centric for people in Silicon Valley and a lot of the venture capitalists there.
And they still have a bulk of the money, no matter how you slice it. There have been good signs of, you know, venture
capitalists, local venture capitalists in each of these markets. And I think that's how it has
to happen. There has to be great venture capitalists in Europe, like Rana, or in Latin America. I don't
think it's going to come from this country. And I think China at this point is out of the picture for a lot of companies were opening.
Venture money was going there.
Innovators were staying there.
But if you're a Chinese company,
you put yourself in harm's way, at least right now,
and especially if Trump wins for a lot of problems.
I think it's not helping.
None of this nativist stuff is helping innovation at all whatsoever.
Scott?
Yeah, I was interested in what Rana said about she still sees the center of capital formation
as the United States.
I've always felt that the best investment you can make in innovation is kind of K through
12.
And that is people still typically,
people with options,
people who are investors or entrepreneurs
are people who usually have more options
than your average bear.
And number one in their selection criteria,
I don't even think is money typically,
it's the quality of life.
And if you look at the centers of innovation,
they typically are a couple of things.
One, they're a bike ride from a world-class
engineering university. I still think higher ed is the secret sauce, is the ground zero.
Within a bike ride of Stanford, there was more wealth created from 92 to 99 than all of Europe
since World War II. And the second is investing in society, investing in accommodative man,
investing in public education, investing in infrastructure, investing in a tax system and
a healthcare system that works. And that's the biggest threat to us is at some point,
San Francisco becomes such a dystopia that regardless of the money, people just don't
want to live there. So an investment in schools is an investment in innovation. I'm still very
bullish on Europe and U.S. because I still think they're the best places in the world to live.
Okay. All right. So then, it's a really
great question, and we really appreciate it, Rob, from California. Now, audience questions here.
Which tech company will lead the revolution in telemedicine and healthcare? Let me say,
I've been around the block so many times with Google and others trying to, Microsoft,
Vault, like a million things, and they all sort of it never happened like an apple certainly is is very
active and they certainly would be at the forefront of this because they've got the phone and the
devices and things like that and google also but they seem to have pulled back under sundar
pichai we can ask him that when he's here on our show um what do you where do you think who do you
think the player amazon is the one we talk about all
the time that could be a really big player in healthcare. So unfortunately, it won't be,
there'll be small companies that'll make a lot of money as acquisitions, but the companies that
are most likely to dominate healthcare as they are any other sector where there's margin and
shareholder value creation because of a neutered DOJ and FTC is big tech. So let's go through each of them. First off, Facebook, not possible. No one's going to tell Facebook they have diabetes
or an STD. They're off. Apple is largely, in my opinion, overrated as a healthcare company. I
think it's more show and utility and branding than it actually is data sets that will help them in
real healthcare.
Google has the culture, the greatest concentration of IQ since NASA in the 60s is at Google.
But unfortunately, their healthcare has been more moonshot,
things like cured death.
And I think when an adult showed up, Ruth Barat,
she focused them and probably took them,
I don't want to say off the table in healthcare,
but I think they'll be a provider of tools
as opposed to in the business. The fastest growing healthcare company in the world will be Amazon. Amazon, vis-a-vis Prime and Alexa, they know your body mass index, the food you eat, whether you're in a monogamous relationship, your economics, your zip code, all the indicators and signals of disease and morbidity.
of disease and morbidity, and they will have the ultimate actuarial data set.
And what they're really good at is sitting on top of a data set and deciding which businesses to insource, i.e. high-margin businesses like dermatology or insurance or diagnostics, and
which shitty businesses to outsource, i.e. pediatrics, and they'll just let pediatricians
on their platform and take a cut of it.
So get ready to come home and have an Alexa say, hi, Rob,
are you interested in cutting your healthcare costs by 50%? Say, Alexa, tell me more about
healthcare. Fastest growing healthcare company in the world by 2023, 2024 will be Amazon.
That's great. What about any of the actual healthcare companies? Do you see like an Anthem
or any of the others or not at all? Can they innovate their way in here
the way Hollywood has done a relatively good job
finally moving into streaming and entertainment,
stuff like that?
I don't know.
I don't know much about healthcare,
but my sense of these guys is that they have so,
they have such incredible,
it's the ultimate innovator's dilemma.
They have so much vested interest
in maintaining the status quo that their best people are primarily weapons of mass entrenchment, lobbying.
To a certain extent, COVID-19 will create more innovation in healthcare because all of a sudden, the government has demanded certain levels of HIPAA compliance and torn down barriers such that we could deliver medicine remotely.
medicine remotely. And that was over the objections of the healthcare industry that has a vested interest in what is one of the most efficient deliveries of one of the most important services
in the world, U.S. healthcare, that has resulted in incredibly negative externalities for our
society. So I think they're going to be more focused on delay and obfuscation than they will
be on innovation. All right. Okay. Very quickly, we're running over. So let's get these questions
quickly. How long until the internet is considered a right necessary like other public utilities? I just talked about this today with someone. They some not. I think this educational problem we're having with kids from remotely just shows that completely.
Everyone should have robust internet access and it should be done like a utility. Scott?
Yeah, I agree with you. The first line of defense when we want to break these guys up is you need
natural monopolies that have the size and girth to offer the incredible,
you know, to make the kind of investments they need to make. And what that spells is utility.
So they want to be, they want to have the power of monopoly, power of utility. They just don't
want the regulation. But to your point, Kara, I think you're right. I think they need to be
treated more like utilities. And then this massive investment in 5G, I don't know, that'll be super
interesting whether that, we see the same spillover effects we saw from DARPA and all that good stuff. 100%. Last very quick question. How
could Twitter and TikTok merger compete with the likes of Facebook, Instagram, and even YouTube?
It's not going to happen. So you're not going to see that. Correct, Scott? Or maybe you will.
I originally got so excited about this because when you think about it, it's kind of would be the ultimate gangster move for Xi or for the Chinese because, all right, Trump says you have to sell an American company.
And they say, and I think they're just going to stick up the middle finger and nod and just wait till the election and then do whatever they want.
But say they decided, OK, we need to sell an American company.
The ultimate jujitsu move here was to sell to Twitter because Twitter at $28 billion, the valuation of TikTok 40 to 50, that means effectively TikTok has acquired an American company. The ultimate jujitsu move here was to sell to Twitter because Twitter at $28 billion
is a valuation of TikTok 40 to 50. That means effectively TikTok has acquired an American
company. And that just would have been such an interesting, you know, gymnastic move to say,
fine, you want us to be acquired by a U.S. company? Fine. We'll end up buying a U.S. company,
i.e. Twitter. And it would have in some ways been elegant because you would have had-
Like the AOL time order.
That's exactly right.
And then Vanessa Pappas would have been,
Twitter needs a full-time CEO.
I get the sense that Miss Pappas
is a really competent leader.
And two, they need a strategy
and they need product innovation.
So it would have been elegant.
I don't think it's going to happen,
but it was kind of, my mind was blown
when I thought about how Manbite.
Yeah, exactly.
Twitter has stuck its thumb in the eye of its best customer recently, President Trump.
Anyway, one more thing we have to do before we wrap up today's show is Scott and a surprise guest to make predictions.
Okay, let's go to that.
Professor Galloway, before you make your prediction, I have asked a special guest and a good friend of mine to send in her prediction.
Let's play it.
Recognizing that we're all totally overwhelmed by tech, Karen Scott are going to radically pivot.
And their next generation of entrepreneurs are going to join them in destroying all physical tech and using all of the items that they can gather from it as repurposed.
So one's going to be a macrame artist who's weaving cords and wires into wearable pieces. The next is taking keyboard keys and doing mosaics to
make tables that we can live with in our COVID houses. The third is going to be taking all the
collective precious metals like aluminum and copper and gold and melting them down to make
a new kind of post-Bitcoin coin, a coin coin actually, and pieces of jewelry.
That's Susan Cryer. Suzanne Cryer, who's a good friend of mine.
And she played Lori Bream on HBO's Silicon Valley.
It was literally the best character on that show.
It was a venture capitalist.
It was an amalgam of every venture capitalist I've ever met.
And she's terrific.
So, Scott, anything to add?
Please make your last week at Kathy Griffin.
Now we have Suzanne, which was great,
what is your prediction? Very quick
because we have to go. We made our
first prediction. Trump,
she will play Trump, tell him he's handsome
and he will brag that they're making
progress and as a function of that, extending
the deadline on banning
TikTok when he realizes that he doesn't control
the studio audience here and he's made another stupid
strategic move. Nothing happens. It's a lot of fun for the media, but basically,
they just wait and there's no acquisition. And we wait till the election and then we see what
happens. What do you think will happen to Biden? You have to follow that up. Do you have any
thoughts? I don't think so. I just don't. Look, you know what you could see? Here's another
prediction. China takes a medium-sized company, not Apple, and says, okay, I'm not even Starbucks. We've
decided you need to sell to a Chinese company. I mean, the Chinese are now carrying a bigger
stick than us. That's what we just don't realize. I mean, we are just as dependent upon them as they
are on us. Granted, we're a consumer economy. We're the customer, but they're the supplier,
and they can start making noises too. The worst mistake you can make in strategy
is that you assume you are punching a speeding bag. I got into boxing. I was amazing on the
speeding bag. I entered a boxing tournament. I got knocked out. And the reason my nose bends right
is because I was under the impression that my competition wouldn't hit back. And this is the
fundamental error in strategy and geopolitical
strategy is you assume your competitor cannot hit back. The Chinese can hit back and they have
fists of stone right now and we have fists of Trump. Guess who gets the shit beaten out of them?
That was good. That was good. The dog is back. Capital D. Capital D. Sign us out.
Thanks so much to everyone who's been joining us live for pivot school.
And don't forget that our last episode is this Wednesday,
September 2nd at 10 a.m. Pacific 1 p.m. Eastern.
We'll be talking about education and the recovery with the president of Howard
university, Dr.
Wayne Frederick and the superintendent of the Los Angeles unified school
district, Austin Buechner.
Get your tickets now at pivot school.com.
You can also shop pivot school swagivotschool.com slash shop. Thanks again for listening and see you on Wednesday.