This Week in Startups - Ask Jason! All-In origins, avoiding common investor mistakes, defining “lifestyle” business vs. venture scale & more! | E1176

Episode Date: February 20, 2021

FOLLOW Jason: https://linktr.ee/calacanis

This Week in Startups is brought to you by Our Crowd helps you invest early in pre-IPO companies alongside professional VCs. If you're interested in investing, you can join Our Crowd for free at OUR-C-R-O-WD.com slash twist. Hey, everybody. It's another this weekend startups. We're doing an all Ask Jason. Incredible questions from founders for me. The first one is from SOUD. Sasha, go ahead, Sasha. Hi, Jason. My name is Sasha Fallon. Question number one, I'm creating a marketplace for selling used goods and furniture. I'm a startup, so I don't have $8,000 to $10,000 to create a custom-made marketplace platform.

I need to build a quality MVP. What would you recommend? All right, let's go with question number one first. If you're going to do a marketplace, there are many different marketplace pieces of software out of the box. But the easier thing to do is to just make a landing page with a Squarespace type website, put the items up. And you can actually do this manually. If you're not going to have that many pieces of furniture up there and it's going to be unique, most people would say, don't overthink it and do it manually.

In other words, as Paul Graham said in a famous essay, do things that don't scale. Before you actually commit to making software, just doing off-the-shelf software is a much easier way to do it. So you make a landing page, you put the software up and you say, click here to buy, Squarespace has that purchasing built in. There's obviously Magento and Shopify and other pieces of software that would start to get a little more complicated, I think. Maybe Shopify and Magento would get a little bit more difficult, but certainly, you know, Shopify is somewhat easier. And then on the really easy side would be Squarespace. Let's take your second question.

Question number two. My second project is a media. I have a network of local media resources across the U.S. Do you think media startups have good investment potential? And how would you recommend raising funds for this type of projects? Okay. Media is a terrible investment traditionally. Most media companies don't get to scale. Scale would be 50 million, 100 million in revenue. Most people who start editorial products are not cutthroat business people.

And there is a dependency on advertising. However, big however now, people paying for content has worked for everybody from the New York Times to Disney Plus. So if the media business can make content work in a paid subscription, that is monthly, that is highly, highly investable by the venture community. If it's advertising base, it's less. And you'll see the BuzzFeeds or Voxes hit some level of scale, but you're also seeing them now consolidate and lay people off. So it's very expensive business to run. The margins tend to be challenged. You really have to either have a great operator, Jim Bankoff at Vox, great operator.

I think actually the team at BuzzFeed, pretty great operator. I think actually the team at BuzzFeed, pretty great operators, Vice. I'm not sure. I think they've had a bunch of turnover there, so maybe not so much. But you're seeing that consolidation. I don't think investing in media companies is something you should do unless you have a passion for that, or you see an extraordinary subscription business or an extraordinary founder. And the athletic and the information, also great subscription businesses, right?

They've done very well, and they're scaling. So I love your two questions. All right. Next up is Danielle. Hi, Jason. It's Danielle. from your favorite portfolio company outlaw soaps. And I want to know about SPACs, special purpose acquisition companies.

They're all the rage these days. I see them in, you know, the Wall Street Journal. I see them on CrunchBase. Even investors are talking to me about them. And they seem interesting, but confusing to me, because it's like a blank check. Basically, we want to give you money to go acquire a company and take it public. What do you think the future of these is?

And do you think they're a good idea for investors? And do you think they're a good idea for the companies that are getting acquired? Thank you so much. Have a good one. Awesome. Great question. And if you don't know Outlaw, they make great products like soaps and candles. And they smell like you're out on the ranch.

And they're really amazing products that we love. And SPACs are very interesting. obviously my best Echamath leaded this recent charge and taking them from being kind of obscure and maybe in some people's minds Fugazi to being super credible and all the rage. So what happened and why are these really a great innovation today, even though they've been sitting around? Well, they can get you public slightly quicker and they can get your public earlier and you don't need to go through the typical IPO process and underpriced the stock, etc.

So I think we were staying, companies were staying private too long. Uber, Airbnb being the canonical examples in most people's minds, going public after a decade being private. And it used to be companies would go public when they had $25 million, $50 million, $100 million in revenue. And we're six or seven years old. And that was great for everybody because then the public buyers of equities could get that appreciation.

The last couple of double ups are the best ones, right? Maybe Uber could have gone public at $20 billion. billion and given people that ability to get a 2x, 3x, 4x, 5x, same with Airbnb, which was, you know, very recently at 30 billion in the private markets. And now is over a billion, I'm sorry, over 100 billion. They were 30 billion in the private markets, now over 100 billion. So this would be great. But we need to make sure that investors understand that when you go into private companies

and you invest in them earlier, you're taking on the risks that venture capitals take on. The risk I take as a seed investor, which means companies under two, $3 million in revenue, that's high risk. Why is it high risk? Because they don't have product market fit or they have light product market fit. In other words, the product and the market are coming together, but maybe not in a really big way. Then venture investors tend to get involved when it's, call it one to a hundred million dollars in revenue. And we would wait for public market equities to get really robust billions of dollars in revenue. That means that the average public market investor has never experienced a donut, a zero, nothing, nada. You put in a dollar, you get back

zero dollars. If you were buying Netflix, Amazon, Google, Disney, Facebook, Microsoft, Apple, and Uber, and Airbnb, and Slack during this public market frenzy over the last decade or two, you didn't experience a zero. You never had a company go out of business. But if you get earlier to where I live, 70%, 80% will go to zero. So you have a group of investors who have never experienced a zero. Now, moving closer to my world where the majority are a zero and you're okay with that because you're doing really, hopefully, highly risky things that could have big outcomes. And somewhere in the middle is the coin toss.

And so if you can handle half of your company is going to zero and you've got a plan for that, SPACs are great. So I just need the public to get educated that this. inventory is going to be high risk inventory in some cases, not all cases, but in many, perhaps even the majority. So if you see Fisker, if you see Nicola, you should have your signals go up. Now, desktop metal, a real company that we're investors in that has real revenue, but it's still early. It's not year one early, but it's not year 10 or 15 robust and established. You might want to take a little bit of risk there, right? So I have shares in that,

full disclosure, yada, and just look at every single company. And remember, Jason's rule, if a company is worth over a billion dollars before it ships its product, it might, it might be a fraud and it might go to zero. We had Magic Leap in Florida worth a couple billion dollars. I don't know if any consumers used Magic Leap last week. I don't think so. And then you had Theranos worth billions or over a billion. That didn't work out.

So be very careful, Nicola and Fisker would fall into these categories as both SPACs worth billions of dollars, no product in market, no customers, or maybe they have weird customers that have a letter of intent or some nonsense. So be very, very careful everybody. Here's a question from Stefan, who asks me, what is the origin of the All In podcast? Why did you and Chimoth start it? And when, why did you add David Sachs and David Freeberg? How will this platform be viable in the future big picture? Great question. I got a text from Chimoth and he said, I want to start a podcast with you. Because Chimoth and I have great chemistry, in fact, many people didn't even know who Chimoth was. And when he started doing public appearances after he left Facebook and he was building out social capital, gosh, close to 10 years ago now, I would be his personal fireside chat host.

So Chimoth would say, hey, JCal, I'm speaking at Waterloo. I don't want to prepare a keynote. I want you to interview me. Would you come up? And I'd say, sure. And he'd say, okay, I got a bird. Let's go. And then he said, hey, I'm going to speak at Harvard.

And me, Big Al and Chimoth went to, you know, Boston, went to. a nice Michelin Star restaurant, fly out on the PJ, and I would interview him at Harvard Business School, went to a nice restaurant, played some cards on the plane. Beautiful. And we've done a bunch of other things where he speaks at our events. And I think when he started doing a lot of these CNBC hits and more press, you want to be able to control the environment and you want to be able to dictate where the conversation goes. And let's be honest, media companies are trying to get ratings and that becomes super alluring to people. And maybe, you know, when you have a podcast, you're not hopefully doing, you know, the entire discussion, the whole purpose to just go in the rankings.

Paradoxically, the whole crew got a little ratings obsessed and I had to talk them down a bit and say, hey, guys, it's not just about ratings. It's about how awesome do we like doing the podcast. How awesome is it for us to do the podcast? How much fun is it for us to do it? And, you know, that's the most important thing. So when we did the first couple and we were starting to get this ramped up, we wanted to talk about the pandemic because it was during the pandemic when it was just starting. We had a lot of questions. Well, Sacks had really. written a lot about the masks. And Sachs was very early, everybody should wear a mask. And then Friedberg was an actual scientist who does real science. And we were like, let's just bring them on.

So we have somebody to talk to us about it. And we were going to rotate people. And then it worked so well and people reacted so well that we decided we'd lock it in. Now we've done 22 episodes at the time of this taping. And it's, you know, become a perennial number one, two, or three tech podcast and top 100 podcasts in the world. You know, every major network or podcasting outfit has asked us to join their network or be on air with them. And we've all committed because we have so much fun and joy doing it to doing it every Friday. So you'll have an episode every Friday night. Hopefully we can keep the band together. There's been some growing pains. We've been trying to figure some things out. But big picture, I think, you know, I've always had a platform, which has

been great for me. But Chamath didn't have a platform. We were starting to build one. And then I think Sacks, you know, you'd do a blog post once in a while. He'd speak at some events at Freiburg had none. now you look at all of our followings and you look at how much people love the show it's been great for everybody and it really does lift all of our other businesses

and our ability to communicate we're all adding many many followers on social media, Twitter, whatever we're all increasing our deal flow and I think we'll do we talked about on the show

maybe doing sacks on SaaS or something like that or maybe Freeburg doing a science show and this possibility of this week in startups all in being anchors to an all in network of shows. And so not only do we have the number one show in tech most weeks and one of the top

podcasts, we're starting to think, why don't we just start a network now and just have all four of our shows? We each have an individual show. We have the group show. And then, you know, maybe other besties, like a Draymond Green or something, would want to do a sports show and we could be on his show and just promote the whole network. So I think we have zero expectation and then big ambition at the same time. We're considering all these offers we're getting. It's incredibly generous that people want to include us in their platforms. we want to keep it independent, I think, is the likely scenario, but you never know. I mean, if somebody came to us, you know, if Daniel from Spotify call me, was like, hey, you got to be on

Spotify and here's what we'll do, would we take it off of iTunes and YouTube? I don't know. We don't need money. But if it was a better distribution opportunity, maybe, maybe if Netflix or Amazon or somebody wanted it on their platform, would we license to them to be on their platform as well? Maybe. You know, we're open to anything. But right now, YouTube and an RSS feed, which means iTunes, Spotify, whatever, is really the plan. But great question. Do you ever wish that you got to invest in some of the best performing IPOs of 2019 and 2020? Well, our crowd investors did invest early in many of those awesome IPOs. With Our Crowd, accredited investors can invest directly and easily in startups early before they IPO or they get bought. Our crowd investors have benefited from companies IPOing like

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Okay, let's get back to this amazing episode. Okay, we'll take another question. This one's from Mariah. What is the number one mistake you see new angel investors make? How to avoid it? Very simple.

They don't understand diversification. So they make one investment or two investments with their entire chip stack. That's not enough diversification in order to have the chance at an outlier. I would say, and most people I talk to in the angel investing community, say, if you have quality deal flow,

We'll get into that in a second. 20, 30, 40, or 50 investments is how many you need for the chance of an outlier. What's an outlier? Let's just say a company that pays 25, 50 to 1. You put in a dollar, you got back $25 or $50. In other words, if you made 25 investments and one of them returned 50x, you would be doubling your money, right? You put a dollar into each of 25 companies.

You returned 50. You paid back your original 25. You got a new 25 and you doubled your money. And so that's pretty much what the stock market would have done during that period. You really, if you're going to take investment. invest in these assets, you want a chance at tripling your money. Now, I did mention the deal flow and the quality of it. I have something called the valuation versus traction matrix. A company will grow in valuation from $2 or $3 million to $10 million on the journey from an idea to a prototype,

to an MVP, minimum viable product, to paid customers, and then to scaling customers. If you invest all 25 companies, that $25 in this example, all 25 companies before they're even launched, what you'll see is most of them will die. But if they get to $1 or $2 in revenue, just pass that giant, giant valley of no revenue, and they get to the other side where they're just charging, they have $1,000 a month in revenue, $10,000 a month in revenue, you're going to see the number of zeros go down, I think, because they've proven that 10 people will pay for this product. Now, that doesn't mean they're going to succeed, but it does mean they have a greater chance of succeeding in my mind than somebody who has not gotten 10 people to pay for the product, right? Seems pretty logical.

If you get 10 people to buy the cheeseburger versus nobody has bought the cheeseburger, I think you want to go with the company that has 10 people because at least you can talk to those customers. So those are the two. You want to be diversified. So you have a chance at an outlier. And number two, you want to invest when they get those companies. You want to invest in companies that have a product in market. There is no reason for you as an early angel investor to be just investing in any company based on their pitch. You should see a price. You should see a you should talk to those customers. You should use the product and talk to the customers. Do those two things and be disciplined. For the first 25 investments, only invest in companies that have products

in market and that you've talking to the customers and at least use the product. And you will see a dramatic difference, I believe. And only invest the money you can afford to lose in risky assets, whether that's gambling, poker, Bitcoin, cryptocurrency, or startups. These are all in the category of high risk, high reward, right? The lottery falls into this as well. Okay, James asked, lifestyle versus venture scale. What metrics should I be looking at to tell if my startup might be better suited as a lifestyle business versus going for venture capital? Are there examples you can share when you invested venture dollars into a company and realized they were a lifestyle scale business or vice versa? Fantastic question. A lifestyle business means it provides a great

lifestyle for the founder. A venture scale business is it gets great returns for venture capitalists. So let's pause for a second. A great lifestyle for a founder might be defined does, I work two days a week, I put in 20 hours, and I make a million dollars a year. Wow, I get to go skiing the other five days a week, spend it with my kids, and I take down a million a year in profits. That's an incredible sick lifestyle. Epic Pass, Aspen, Kyoto, man, you're just going everywhere, skiing, enjoying life. A lifestyle business is not a derogatory term. For some reason in the last couple of years, I think because of the whoa, crazy virtual signaling mobs, they're like, oh, you're dismissing this as a lifestyle business. What people meant is it's a sick lifestyle. It's an insanely

great lifestyle. It is a lifestyle of privilege to make a million dollars and do a de minimis amount of work. If your business is doing that, why would you sell it? Why would you raise venture capital? You have to ask yourself that. So if you have a business and you've created a piece of software and a thousand people pay you $2,000 a year for it, right? Doesn't seem so hard. A thousand people pay you $2,000 a year. It seems pretty easy, right? $200. a month or so, 150 bucks a month for your software product, and you just got 2,000 people to pay for it, and they're paying, whatever, $2,000, or $1,000 people paying $2,000, $2 million, cost you a million to do, you get a million in profit. Great. This is an amazing indie hacker-style business or a

lifestyle business. That means every 10 years you make $10 million, and at the end of 10 years, you still own the business 100%. Why would you sell it? You're printing money. You have a money printing machine. If you had a machine that printed money, would you sell it to somebody else? Well, the only reason they would buy it is so they can print money. So why don't you just keep it? Now, venture scale means you give up half the business, two thirds of the business. You might even give control over or share control with a group of investors. Why would you do that? Well, if you thought you thought you could build the business to a billion dollars in value

and your 30% ownership would be worth $300 million and you would make those venture capitalists and your employees $700 million, let's say the employees own 10%, so they would get $10 million to $100 million. And your investors would get $600 million. the investors made twice as much money as you, but they put it in $50 million to help you grow it. Well, you'll be making a different bet. All the time,

we have this discussion with people. I've gotten very sophisticated in accepting people, and I came up with my own little hack as a venture firm. When people are applying to our accelerator, I say, we ask them, and my team does this for me. I don't even do it anymore.

It's how lucky I am to have a great 12-person team that's growing at 20. If you want to join us, launch.com, slash careers. Launch.co.co. Slash careers, looking for anybody with a lot of energy

who's willing to work, 50, 60, 70 hours a week and wants to crush it and is self-starting. So, but if that's not you and you want to punch a clock, don't come work for me, go work for the post office or somebody else. The concept here is when you're building these, you know, really great businesses, we asked the founders, explain to us how you get to 50 million or 100 million in revenue. And what they'll say is, like, I don't know. And we say, okay, here's year 10, 100 million.

Let's assume the last year you grew 50%. which means you were at 65 million, and you grew by 35 million and got to 100. Okay, we know what year nine is. It's 65 million. Let's say the year before that, you doubled. So you went from 30 to 40 to 65. Okay, year before that, you doubled.

You went from 20 to 40. Year before that you tripled. Okay, you went from 7 to 20. Okay, year before that, you tripled again. So you went from 2 to 7. You can actually back into it. And then you just say, how much is your software cost? So in the same example, the $2,000 a month for each customer,

They spend about 150 bucks a month on your software, $2,000 a year, let's say. How many customers would you need to make it work for venture capitalists? You'd need $50,000. So in the lifestyle business, you only need 2,000 customers. I'm sorry, 1,000 customers making $2,000 a year to have a great lifestyle. Just 1,000 customers. Pretty easy. But if you can get 50 times that and go to $50,000, well, you might need $50 million to do that.

You might need a sales team and marketing and infrastructure and servers, etc. because servicing 50,000 customers is a lot harder than just a thousand. You get the idea. So you have to make that decision. And I like to have that discussion early with founders. And I don't engage them unless they can take me through the thought exercise of how they would get to 50 million or 100 million in revenue. Now, when they're in our accelerator, we start working with them on a detailed plan of how they're going to grow to get to that number. So we asked them to back of the envelope it when they come to the accelerator. But in the accelerator, we have a growth specialist work with them, Craig, to talk to them about growth techniques and teach them the growth techniques so they know what it costs to get a new customer, KAC, customer acquisition cost. They know LTV lifetime value of a customer.

You can look the stuff up online. KAC and LTV. They know the ratio of those two things. How much is their KAC as compared to the lifetime value? Hopefully it's a multiple of that. You spend $100 to get this customer. And their lifetime value is $6,000. The ratio is $60.

You get the idea. So we not only ask them to do the back of the envelope when they come into the accelerator, during the accelerator, we ask them to make a model. How much do you need to grow in the next two years to put you on that trajectory? That over 10 years, you get to 50 to 100 million in revenue. And if you can't, that's okay. Some businesses don't get there. And in my early days, I picked businesses based on the pitch and the founder.

And then later, I kind of decided, I want to see a plan. I would like to discuss a plan because hope is not a plan. and a plan at least shows you've really thought through how you're going to get there. Thank you so much for these amazing questions. If you want to ask us a question, just email, ask jason at launch.co. Or if you're on Twitter, there's an account called TWI Startups, and you can just DM your question if you follow at this week in startups, at TWA startups.