This Week in Startups - Best of This Week in Startups: Week of October 19th, 2020

Episode Date: October 24, 2020

E1126 featuring Capital Allocators' Ted Seides: https://rb.gy/bsiinm E1127 featuring Transcend's Ben Brook: https://rb.gy/txkmav E1128 Emergency Pod - Quibi postmortem: https://rb.gy/boh8gv E1129 featuring Ring's Jamie Siminoff: https://rb.gy/3okxvb Follow Jason: https://linktr.ee/calacanis

Welcome back to this week in startups. Ted Seides is here. He runs an amazing podcast called Capital Locators in a book coming out in a year that I'd like you to stop right now. Is it on Amazon yet? Can they pre-order? Soon. Not yet. Soon. All right. Whatever. In a month or two, just do a search on Amazon. It's very important that you pre-order the book and you send one as a gift to a friend or maybe you order two to give one to a friend because we all know for book authors, they store up all those pre-orders and they pop off the first week. So if you get five, 10,000 of them. It's great. And since you have the podcast, as an author, they now pick books based on podcast audience.

I don't know if you knew that. I did not know that. I did not know that. Yeah. Follow account on Twitter, number of emails on your email list, and then podcast listens. If you have those things, you can easily get a book deal. You just have to learn how to write and have something to say. So what is the story with the pandemic in relation to capital allocation?

because one thing I've been trying to figure out, you know, we were talking earlier about real estate and it's just so hard to figure out real estate because you have this layer of like, well, I have to live somewhere. And there's a commute involved typically. So real estate is just very hard to understand. But in the pandemic, I was just talking to my friends today.

Los Angeles real estate's going up. High-end real estate's going up. It's a pandemic. And the stock market's going up. So are we in like some micro, inflationary situation or is it just chaos out there? What are capital allocators doing in the year of the pandemic? Yeah. Well, there was a whole question of sort of how do you respond in a period of a crisis? And I did almost like a mini series within my show of just reaching out to guests

who had been on the show and saying, hey, what are you doing? And a lot of it was what you'd expect at the beginning, kind of just trying to orient with where people are working from and how they're communicating and what's happened in the portfolio, right? Because March was pretty nasty until everything bounced back. And the big question they have now is a lot less about, well, what's happening in the economy because it's just these pools of capital are not set up to pivot that quickly on big questions like that. The big question is this role, these CIOs are really in a people evaluation seat. And so at what point, in time, can they decide

that they can go ahead and evolve their portfolios with people they haven't met face to face? And it's, you know, at first, there's none. You hear a lot of, well, we re-uped with the last fund. So you're definitely right now in the situation

where the people who've already had the capital will continue to get it, but it's harder if you're going out and raising something new. You have situations where you have called it, call them Star Launches, where someone was a, you know, a big name at another fund. And the CIO may be interested in that anyway, but also may want to show their committee, hey, we're still doing stuff. So, you know, what a great way to do it than something that feels safe.

And maybe somebody they met once. Right. What you haven't seen yet is a real shift into these people saying, this is the new normal. And going forward, we are going to need to meet people for the first time, do all of our work and evaluate them without having met them. At the very, very beginning of that, and people still hoping that that won't be the ultimate fate. Yeah, that is something you have to adjust to. And we, when I saw it coming, you know, when the pandemic hit, I immediately thought, you know what, I'm now 49 years old. And I've been through how many of these bubbles bursting. This is the time,

because I have a chip stack, that I am going to do. do it right. So I just moved massively into equities as the market crashed and that paid off. And that was on a personal basis. I just dialed it all up to equities. And so that worked out very well. But in my fund, I was like, everybody's scared? I'm going to invest more. And so I just said our accelerator is now 100% virtual. Do twice as many. Let's increase our activity now because half the VCs I met with, an early stage were like, I'm taking the rest of the year off.

I'm just going to work on my portfolio company. I'm saving my draft potter. So what I did was I went all out to get more LPs. I met with more LPs on Zoom, and we're closing LPs and investments over Zoom in 30 minutes, 45 minutes. People like it better. That's great.

Now, are those, do those tend to be like high net worth individuals? High net worth individuals are more interested. So we have a syndicate called The Syndicate. We were the first syndicate on Angelist. So now we can pivot into the real reason for this podcast, which is for me to get pre-consulting from you on how I should run my business. But we were the first syndicate on Angel list.

The first deal we ever did was Calm.com. We put $370,000 in that when it was a $5 million company. That's like a $60, $70 million position right now for us. It's one of our biggest positions after Uber and Robin Hood. It's actually bigger than Robin Hood. And then we left because we didn't want to share carry with them. We want to control our destiny. So now we have the syndicate.com with 5,500 angel investors, high net worth individuals.

And so they are also LPing our funds. So we've done basically three funds, 10, 10, and 40. And when I went out to do the $20 million fund, launch fund three, we had so many people say no from the big endowments because we're too small. They want to write a $50 million check. But then all the people in our syndicate were like, I'd love to write a $50,000 to $250,000 check. And I've never actually done a venture fund.

How does that work? And boom, we just doubled our target immediately. So it's been pretty great. So I guess the question I have, though, is with these funds, you mentioned before that they were sticking with the relationships they have. This is the thing I hear over and over again from these endowments who have been, you know, I get incoming from them. They ping me.

And they come out to see, the free pandemic, they would come out and see me and have lunch and spend three hours and want to meet the companies and want to see our returns. I mean, I've been relationships with them for two years now, three years in some cases, where I've met with them four or five times. They've never become an LP. So what is this story with how they evaluate venture funds? And let's face it, I'm a new manager. I've been doing it for 10 years. The first five were like part-time and then last five full-time.

How do they evaluate new managers? And you mentioned this relationship. And then conversely, how do they kick managers out? Because that seems like a very delicate thing as well. Yeah. Well, in the first part, you're doing it. you are in the process. I know you feel like this thing's gone on way too long for rationality,

particularly in a world where you're pumping out so many different deals every year. But this is what they do. They're not in a rush. They have a full portfolio. And they want to pay attention and get to know you and see what you're doing. Because if they do decide to invest, they're not intending to invest for fund three. They're intending to invest for fund three, four, five, six, and seven. Got it.

So they're going to take their time. and that's, you know, the fact that they're still willing to come talk to you means that, hey, they're interested in continuing to have a dialogue. The frustrating part of that from your perspective probably shouldn't be that. It's that the duration of the tenure of the people in those particular seats isn't necessarily, you know, 10, 20 years long. Today's subject, Ben Brooke from Transcend, is got some or has, his company, Transcend, has a lot of great customers. And that's what we're looking for in the series so that we can break down exactly what it takes to build these companies.

And we'll, of course, delve into what they do. So we're going to talk about building SaaS companies and also, obviously, in this case, the subject, Ben, is privacy and data privacy. specifically. What does Transcend do and why did you start it? Sure. So Transcend starts. So Transcend makes it simple for any company to give their users data rights. So data rights is this sort of new concept that's coming into the world. It largely started with GDPR, which is a modern privacy regulation in Europe. And that's now going to other regions like California with the CCPA coming into effect to Brazil with LGPD and to many

other countries around the world. And in these laws, consumers are getting the right to actually access all of their personal data, to erase all of their personal data, as well as opt out from a variety of different forms of processing personal data. So users are getting choices over how companies process your data. And these are a new set of rights that are coming in. And effectively, companies have to comply with these requests on a very short timeline. So this is usually within 30 to 45 days. They have to respond to the user saying that they have successfully erased all data

within their business about that user. Now, the problem is companies have been basically spewing data into dozens, if not hundreds of different data systems for decades. And your personal data is scattered across orgs. And so what Transcend builds is data privacy infrastructure. And you can kind of think of that as a layer that sits over top of all types of data systems, whether that's a database, a warehouse, a SaaS tool like Salesforce or Zendesas or Google Analytics, and actually manages all the personal data inside that.

So when a user does request to erase their data, we can receive that on behalf of our customer and precision strike that person's data across all different systems. That's the data privacy infrastructure. And then we also make that entirely self-serve for the end user. So we offer our customers something that we call the Privacy Center. And this is basically a website that lives at privacy. dot our customer name.com. And that's where users can go to understand in simple terms what the heck this company is doing

with your data without having to read a full privacy policy. And then actually offers a control panel where users can exercise these choices in an entirely self-served way. But the GDPR has started giving up fines. I saw one. I don't know if you're familiar with the case of H&M got hit with this giant fine. But that wasn't for their users. this was for their employees.

I guess they had kept their employees' data and their employees' data got hacked. So a lot of this, if you didn't take steps to lock up the data or that you were recording it in general? So data breaches under GDPR are in fact illegal. And so it actually doesn't matter whether you were collecting it

or whether you tried to protect it. it will still be in violation of the criminal code. So, so, showing in court, yeah. This GDPR fine was for 35 million euro, something like 41 million USD at the time of this article I'm reading.

If you get hacked by somebody, you're responsible for being broken into, whether that was the most sophisticated hacker in the world or not. you're still responsible. That's correct, yeah. And I will say that... Not the person who broke in. I mean, they're also responsible, I guess,

on a criminal basis, but is this not crazy that if you took reasonable precautions and you had your servers updated and some hackers very sophisticated and they figure out how to break into your system that you're now responsible? I mean, what if they... What if an employee gave the passwords that they had

and they weren't supposed to do that now? could the GDPR then still find you? Well, I think it's good that there are financial incentives in place to protect data. And so at the end of the day, it is about the result of your security practice. And the courts can actually decide whether to be lenient because, you know, maybe HNN did everything within their power or to a reasonable degree to protect data. And frankly, 35 million on GDPR scales actually isn't that high. So under a data breach, the European Union could have actually fined H&M for 2% of their global

revenue. If H&M were failing to respond to data rights requests, so this is like access erasure and things like that, that can go up to 4% of their global revenue. Wow. So they're looking at this, I guess. like the way, I guess they were doing speeding tickets in Norway or whatever. Like, we're not just giving you a fine in a vacuum. They were giving speeding tickets.

I think it was Norway or Sweden. We're giving fines based upon your income. So it was a percentage of your income. So if you were like a famous NHL player famously, they got a speeding ticket. It wound up costing about $100,000. Like the speeding ticket was the price of the car in that case. So they're really going after you for a percentage of, um, of, your revenue for the year.

Do you know what the largest fines have been to date? And do they feel fine? And British Airways facing a $230 million GDPR fine. Wow. Yeah, that was one of the big ones. Yeah. I'm not sure what the current record is, but I do expect they will continue going up.

As I said, the regulators are effectively only getting started and they're internally spinning up their own organization. there also hasn't been a very large window to see these big breaches. So for example, Facebook and Cambridge Analytica are very lucky that that came out in 2017 before the GDPR came into effect because that would have been one of the cases

where it would have gotten closer to the maximum penalty. 4% of revenue or 4% of the value of the enterprise was what you said? Global revenue. 4% of global revenue. Wow. So it doesn't even impact that. That seems, did they even have the authority to do that to tax your global revenue?

I would think it would be 4% of the revenue in Italy or whatever. It makes sense. It occurred in Italy. But that's not a little overreaching? Well, that's something that will be determined in court because whoever gets that penalty first is going to fight that in court. and then there will be jurisprudence set on whether that actually is something that the European Union has authority over. Everybody, you guessed it.

It's an emergency pod. Quibi is dead. Quibi is dead. They burn through $1.4 billion in 30 months. That's $47 million a month. We're going to break down what went wrong. And we're going to do an autopsy, a post-mortem. And it is not pretty, folks.

Stick with us. This is obviously a bit of a disaster. And we should take a moment to the, to the... think about what went wrong and to think about what could have gone right and how the lessons here of how it could have worked. If you want to create original content that are 10 minutes or less and you could watch them during lunch or an Uber ride, does that exist in the world? Where does that exist? So let's take a moment and pause in just first principles. Where does a 10 minute episode exist? Where does that exist? Podcasts? Nope. Podcasts are long form. I mean a short

podcast is 20 or 30 minutes. Certainly not five or 10 minutes. What about television? Well, the shortest television show, we watch or we binge is the 30 minutes sitcom, which has typically been 22 minutes with commercial breaks. In the age of streaming, there's no commercial breaks typically, so they go 30 minutes. So that doesn't count. So where does this mythical five to 10 minute show exists? Short films at the Sundance Film Festival, which nobody sees, and that is a non-starter, right? Those short films are like student projects. So I don't think they were going for student projects. So they were trying to create a new media type. And the only place that really exists is those YouTube videos, right, people doing short blogs. But that was not this. So they took the vlog format from YouTube,

which does work, and they applied it to high production value. Now, if you're going to start up a high production value show, like The Walking Dead or, you know, pick Ted Lasso, whatever it is, orange is the new black, things that have worked before. People don't want to stop watching after 10 minutes. They want to go 30 minutes. You really can't tell that narrative in five or 10 minutes. And in fact, the Walking Dead did these, like, silly shorts. Everybody tries these silly shorts as like little things in between shows.

They've never worked. They didn't work back in the day for, you know, pop.com or other web 1.0 companies, the spot. There were all these kind of ideas around this. So that to me, when I first heard the idea, I just thought, well, that doesn't work. People don't want that. And they never actually tested, I believe, that this is something that people actually

wanted. So out of the gate, the product seems that it's new and therefore you'd want to test this concept. Just like people tested vlogs. They tried to see if vlogs would work. They tried to see if vlogs would be a thing. And they did it in a very low cost way. People looked in the camera, lonely girl, 13, whatever.

They looked in the camera. They talked about their day. I, Justine. they cut it short and it costs 500 bucks total to produce. Let's pause for a second and think about the amount of money put into each of these Quibi shows. Well, according to some data we found online, and I don't know if this is exactly correct, but it certainly was correct at some point in time.

They had 175 shows. And the Wikipedia page, in fact, shows dozens of shows, something like 8,500 of these 10-minute episodes were produced. 175 shows divided into a 1.4 billion equals 8 million. 8 million is not a lot of money for an entire series. In fact, famous shows have gotten up to 8 million per episode, right? Like a Game of Thrones or, you know, friends or something where they're paying everybody a lot of money. It can get expensive like that per episode.

But this is for the entire series. So you say, okay, maybe that makes sense, but these are 10-minute shows. So then you look at the 8,500 episodes divided into 1.4 billion. And you're getting a baked-in cost of, you know, $164,000 per episode. If you compare that to a television show, that seems like a bargain. But in fact, if these were 10-minute episodes or 5-minute episodes, you would times that by 3 or 4 and get to a real number of an actual episode being 500,000, $750,000.

What the correct way to look at this is, I think, looking at it versus a podcast episode or looking at it versus a vlog, there's no vlog in the world that costs more than a couple of thousand dollars. Even when this kid who's David Dobrick or whatever gives away a Tesla, I mean, he could give away, for the amount Quibi made these episodes, they could literally give away a car, a $60,000 car for each one, and still spend $100,000 on the production of it. Now, I know they spent money on marketing and there's overhead and paying for Meg Whitman

as CEO and office space and all these different things that companies spend money on, legal infrastructure. But the truth is, in today's world, we invest in companies and the way those companies compete with the big companies, they don't have cost structure. They have low cost structure because they have low cost structure because they have, posting on YouTube. They're posting on TikTok. They're building apps with three, four developers per app. You don't need a lot of money. The modern day company doesn't need a ton of employees. And in fact, this company had a lot of employees given the revenue footprint 300 employees,

a lot of people. And so this money clearly could have been deployed in a more intelligent fashion, but they went for it. And I think this is the cardinal sin. You're creating a new format, but you didn't test it. And it didn't exist before. So they basically threw it. The Hail Mary Pass, and they believed that they could spend this much money on a show and that it would generate a massive amount of consumer interest. It would become addicting when this format has only worked one other time in history for something very unique and specialized, which is not the Sundance Film Festival shorts, which are delightful, not the shorts at the beginning of a Pixar film, which are also delightful.

Those are very delightful. Those are amazing. And I would say the Sundance ones are variably delightful. Most of them are bad. Some of them are delightful. Like, in fact, the movie in the series saw, I believe, came from a short at the Sundance Film Festival. So the way Sundance worked was you would put up your short film there. There would be financiers in the audience.

And then you would take your short and say, hey, I won best short at Sundance. Can I get the money to take this 15 minute one, you know, saw horror film, you know, contraption short film and make it into six of them and have an arc about, you know, they have to get through six of these crazy trials and will tell the full story of whoever the horror film Saw's main character is who's on the tricycle. I can't remember. It was a goofy thing anyway. So they basically came up with a format. Who knows who made that decision? It was Katzenberg or whoever, but they should have tested this format over and over and over again. Welcome back to this week and starts. My guest is Inventor Jamie Siminoff of Ring.com.

I absolutely demolished Jamie's early career when he was in the trow of despair. which every entrepreneur must go through, correct, Jamie? I think, you know, as we were kind of laughing about it getting into this, the truth is at the time it was to, I was, I would wake up at night in my bed and I tried not to wake up my wife when I was crying. And that's like, that's, no, that's serious. Like I really was, I had, I basically had taken the little bit of like success I had, put it all into this and was watching it.

In front of my eyes, if you will, the Amazon reviews, go just blow into the ether. And I didn't know how to get out of it. I didn't know how to build product. I was trying to do the best we could. But it was at the time you couldn't see an avenue out of this. Wow. It looked like a death spiral. And luckily, I had gone so far down this one-way road. that turning around was just death. So I just kept going. But it was brutal.

You burned the boats on the beach. There was no going back. I burned the beach, the boats, the everything. Everything. The compass. Everything was burned. The maps. There was no way to get back.

We have to make this work. Yes. And in a way, was that freeing in that you knew what direction to go? or were you still absolutely anxious and, you know, had your toes over the cliff? I think the problem is in hardware is it's so capital intensive. That to say you're scared looking at the future of like what you meet with someone, like, oh, what you have to do is hire 500 engineers and rebuild this. And you're like, we're broke at the time.

And it's like, you know, and like, yeah, I'm going to now go raise money on what you're seeing like the, the dashboard is public basically of the company. Yes. And I'm going to go to an investor and say, hey, put in $5 million. Look at what I've done. And it's like, okay. So it was, you know, it was scary. I mean, it was, it really was.

So did you try to raise money and go to people and say, look at my, and they would pull up these reviews? And how do you get over that objection? So I got super lucky. Yeah, again, I would say I was working hard. but I also got lucky. We got on Shark Tank. And with the awareness and credibility of Shark Tank,

it gave us enough of a sort of a flywheel effect that I could get a little bit of extra money in through sales that I probably would not have gotten otherwise, which let me hire some engineers and rebuild the inside of the company to then go to an investor and say, hey, I see what you're seeing here, but look at this is what I'm really doing. Yeah. And I brought it to true ventures and they like, I think they were so skeptical they had to invest.

Like they, it was like, it was like such an insane story that it was almost like, let's just see what happens. Do you attribute the fact that you were unwilling to give up to what made you attractive to them as an investor? I think definitely like, yes, I think coming in like I should have already shut it down and been pitching them on my next thing. And I think they were impressed that I was like, and I was totally open about it and humble. I was like, here's what I've did. Here's what I learned. And this is where we're going. And what got them that was the mission. Because my mission from day one with this, which what got me excited about the product was that I thought it could be a new way of deterring crime in neighborhoods that had never been done before. So I really did see early on this, like once I

built it on the door and sort of got there. My wife was kind of the one who said, you know, this makes me feel like we have gates. And when people come to the house, they'll now think we're home, even if we're not. And so that's what had me excited. And so when I pitched true, I said, you know, this is a way to make neighborhoods safer and a way to build home security and neighborhood security in a different way. And that was the, that was the hook. I mean, that was the- So you basically took these really hard-earned lessons, but when you opened the aperture up and said, hey, listen, I know that the product got mixed reviews, and let's be fair, it wasn't all bad reviews, and everybody saw the potential. I mean,

one of the things you get from those reviews is disappointment because they really wanted this to work. And so that's very powerful. That's almost like, I wanted to love this movie, or I wanted to love this restaurant. And, but, you know, they sat us late or something. It's not like the killer where I don't want this product. It's, I really do want this to exist. I'm rooting for And you're right, it's actually very interesting. There's a lot of hardware companies that launched that had five-star review products. But in the review, it said, like, I got it working, the product's great. I'm not that interested anymore.

It was like, and it was almost a false positive than people would invest and put all these, like, there's a lot of companies that looked a lot better than we did in this sort of time frame of hardware being funded, that looked a lot better, got a lot more money than we did. Where I would look at them and say, wow, man, if I could have raised $10 million, what could I have done with that? Yeah. And they all just would, like, just right into the ground. There was one that was like the XOX or something that was like a camera you would attach to your iPhone

that would make it a better camera. And they had raised tens of millions. And, you know, just tons of dashboard cameras, all kinds of interesting ideas that people just, yeah, you're right. They got them working. They loved them in concept, but they didn't actually use them. And this was something that was a really acute need for people and opening up to, a bigger mission made people more attracted to it.

Yeah. And I'd also say because of the people who listen to your show, I'd add this because I think it is interesting, is that when a product comes out and it's perfect right off the bat, it's actually typically been, if you look, and I think you could see the data on this, a bad sign for the company because it means that what you're doing is not innovative enough and it's too easy. And it's almost like having a, again, like you said, like it was. worked for some people. It wasn't like Doorbot wasn't like a, you know, a total dud, but it didn't

do the promise that people wanted it to do. But part of that was because it was so hard to do. And so it took us longer to figure that out. It took us iterations of learning on that, which built that internal sort of like in the company. It built that muscle, which then made us, you know, stronger and obviously into a, you know, long term into a successful outcome. Yeah. If it's too easy, it's not ambitious enough, I guess, is a way to say it. And this was so ambitious. And providing neighborhood security and this network of security was so, such a big, heady mission. And you immediately saw payoff where people started to have, you know, package, at the same time, Amazon packages were getting stolen as like a

reoccurring occurrence. And you decided to let people share those and build advertising around them, correct? Not advertising, but we built, definitely built the way, the way for people to connect in their neighborhood, to share that information, to be safer, to talk about what's happening. And so, yeah, we built definitely a very different, it's interesting, even today when people say, who's your competitor. The truth is that there really is only one ring. The way that we present the product, because we're so missionary, I think, is different than

we're not just selling product. a experience around neighborhood security. The best of this week in startups is brought to you by Gusto. Running a startup is hard work, but thankfully, Gusto makes payroll easy. They also offer flexible benefits, onboarding, and so much more. Twist listeners get three months free at gusto.com slash twist. Masterworks. The first company allowing investors exposure,

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