This Week in Startups - Best of This Week in Startups: Week of October 5th, 2020

Episode Date: October 10, 2020

E1120 featuring Shift's George Arison: https://rb.gy/bofuxg E1121 featuring Upfront Ventures' Mark Suster: https://rb.gy/itau5m Follow Jason: https://linktr.ee/calacanis

So I'm super excited to have our next guest on because George Arison is the founder of Shift. Shift.com. We're going to talk about that and the company going public via a SPAC. There's been a lot of spectacular companies going public. And we're going to talk about the whole SPAC movement, which everybody's very interested in. But in addition, George created Uber, years before Uber existed or Lyft with something called taxi magic. So we're going to get into the history of that. and what it's like as a founder to create a game-changing company but not win the big prize. Welcome to the pod, George Arison. And I'm

pronouncing correct. It's Arison, A-R-I-S-O-N, correct? That's correct. And thanks for having me. Excited talk to you. Yeah. So I let off with it. It's got to be an interesting moment. A lot of your friends probably bring this up in family members. You create a taxi magic, which if my memory serves me correct, was a way to get a taxi and have it dispatched. Sounds very familiar to me. And you did that back in 2007, which was a couple of years before Uber existed, correct? Yeah, we started Taxi Magic in February of 2007 and, you know, launched it as a product, first on the East Coast and then in San Francisco as well.

You could book a taxi to come to you through your phone. At this point, it was a BlackBerry and a, you know, Palm device. Windows mobile, iPhone did not yet exist. And then you could also pay for the taxi through the phone as well, all connected to the dispatch systems at the taxi fleets. I didn't realize you also had payments because that was Uber's and Lyft's big innovation as well. But you did it with taxis, not with Lincoln Town cars.

Take me back to that decision to do taxis and not Lincoln Town cars. Yeah. So we, I mean, we actually did Lincoln Town Cars in New York, but the thinking was we wanted to appeal to the broadest segment of population and taxis made a lot of sense. The concept for the business came out of B2B use, actually. It was for business travelers first, and they would not want black cars, right? The travel manager would want to limit what you spend, and the idea was to kind of have you do taxis rather than black cars.

That was kind of part of the concept. And, you know, we came up with a lot of great tech, and my co-founder and now, my co-Code shift, Toby Russell calls it the, you know, Netscape of the automotive on-demand space because we came up with a product and then obviously others won, which is fine. We still learned a ton and it was a really great experience. But for us, the really big kind of challenge came when Lehman Brothers went under, actually. Because we, Lehman Brothers was going to be our first New York customer

with all the black cars in New York kind of using our tech to do the pickup from the bank and take you home at night product, which was very popular. You know, back in the day, a lot of black cars were circling the banks to pick people up. Yeah, if you lived in New York, you saw down from any major high-priced building class A office space, whether it was Goldman Sachs or, you know, a famous law firm or Sherman Sterling or something, there would just be tons and tons of Lincoln Town Car circling to take people home for $100 bucks a pop to Brooklyn. Exactly.

Yep, that's exactly right. We were going to be managing that for Lehman Brothers. And literally we signed the contract to do that about two weeks before they went under. So that really kind of messed the New York plan up. But we were going to do black cars in a much more aggressive way in addition to taxis in New York in particular. But, you know, I think the really big problem for us was the fact that we never gave a product away for free. Like the team at its core, and in particular our co-founder, Tom DePasquale, who's a super amazing businessman, but he had done a bunch of enterprise businesses.

And so he really believed the notion that, hey, you got to charge for everything right off the back. And that was a mistake that we made. We should have gone freemium, offer the product for free, gotten a bunch of users, and then kind of... So that throttled your growth because people didn't even know you existed. And the only way they would know you existed if they gave you money. so there's a huge lesson learned. Exactly. And then what's it?

What's it? Okay, continue. He's the really crazy part. So Bill Gurley found us through Michael, sorry for Adam Dell, Michael Dell's brother. Of course. I knew Adam when I lived in New York. I'd say I'm at Bungleow 8 at 3 in the morning.

So he found us and then he told Bill Gurley about it. Bill Gurley kind of started to get really interested. This is all like way before Uber is leaving around. And he really wanted to do a round of funding and shift. and ultimately Tom, our leader as a founder. In Taxi Magic. Taxi Magic. Tom really didn't want to do that because they disagreed on this kind of consumer

premium versus enterprise approach. So it's even worse than not hitting it. You literally have the guy who did the Series A and Uber would have given you the money one of the 10 greatest venture capitalists in the history of venture capitalists. And the history of venture capital was on your doorstep. And because of your co-founder not agreeing with him about something Bill Gurley was clearly right about and you understand now, it killed the deal. I was kind of in the middle.

Yes, that's exactly right. And it was a, you know, probably cost me personally like hundreds of millions of dollars. No, no, billions. Maybe billions. Well, you were a co-founder in the company? Yeah. Yes. So, I mean, if you're a co-founder with 10%, Uber's worth $65 billion right now, I'm going to

say even if you got diluted down to 2% you would be worth $1.2 billion right now. Yep. So it was a tough, tough, tough process. But anyway, you know, look, I... You know what? I think about that sometimes because I could have put 50K instead of 25K into Uber. And then, you know what I did? And look myself in the mirror and said, don't get greedy.

Get back to work. Don't worry. Don't sweat the small stuff. I agree. And look, I think I learned a ton of taxi magic and we built a great company, even though we made a ton of mistakes. and, you know, I'm taking a lot of those learnings and doing things differently now. Everybody who you know says you could have built Uber.

What's that like at Christmas or whatever, you know, New Year's Eve? That was asked a lot more back in the day before the kind of shift was, you know, fully humming. Today, not that many people ask that anymore. I think for us, to be honest, beyond that specific mistake, not being in the valley, got in the way as well. because we were based in Virginia and that really kind of the mentality of like enterprise only don't give away for free, etc.

Back then was very much like only in Silicon Valley was that a thing. So you weren't bold. Basically, East Coast companies at the time were very conservative. They were thinking, and the VCs on the East Coast, with some notable exceptions like Fred Wilson, were so obsessed with downside protection

and not losing their money that they didn't swing for the fences, did they? Yep, that's exactly right. So I think that, you know, kind of even before Gurley, like, we should have thought about moving the company out to San Francisco and or Bay Area. Got somebody from the former Soviet Union, and you look at America today, and you see a contingent of people, I put it in the Bernie Sanders, Elizabeth Warren, New York Times, anti-capitalist, ban the billionaires, capitalism is bad, Jeff Bezos and Elon are horrible because they're successful. When you look at this as somebody coming from Russia who had to

fight for every inch of your existence, I am certain, to get here and your father, the maniac he was, demanding you learn English to have a better life, what do you think when you look at the last couple of years in the anti-capitalism, the pro-socialism, ban the billionaires movement in America, even though I know it's a small contingent. What do you think, honestly, as somebody from Georgia and the firm or server USSR, what do you think? Well, I mean, I think Bernie Sanders is nuts, even though I went to college in Vermont. And, well, I guess maybe because I went to college in Vermont, I knew about Bernie Sanders before anybody else knew about Bernie Sanders. Look, America is the most amazing place in the world. Nowhere else could you do what I did.

I'm a gay kid born in the Soviet Union. I now live in Palo Alto with a husband and two children and build two companies in my life. That's not possible anywhere else. This is the most amazing experiment in the history of mankind and we have to do everything we can to protect it because we've been left by our forefathers with an incredible gift and we need to ensure that it's there for the future generations. And I don't think that going the socialist route, socialism route kind of helps you do that. I think capitalism and Republican government are very intertwined. Free trade is obviously critical to that as well. And I love politics, in part because I want to make sure that our system of government perpetuates

because it is the most incredible system of government we've ever had before. When you look at, you know, sort of the interference from the Russians and Putin specifically, what is he sitting there laughing at us that he's been able to find our two weaknesses I mean really if you'll think about America's weaknesses one is the terrible racial history of this country and the scar we have from slavery our original sin here and the indigenous people here are getting rolled over and taking their land that is one really sore spot that we need to resolve and then you have the second source spot which is the polarization of wealth

which, you know, if you're in Russia, you know, if you get wealthy, Putin just takes half your money. Or you run away. Or you run. So when you look at his interfering here and the collapse, essentially, Russia is becoming irrelevant, oil is becoming irrelevant, what are your thoughts on the interference and how America has basically fallen for this hook line and sink? Well, he's been, Russians have been interfering in elections in its neighboring countries forever, right? in Georgia, they interfere all the time. In the Baltics, they try to interfere all the time. So it's not per se, like, surprising that Russia interferes in elections. I think we've let him kind of do it.

I think there's a problem in both parties, frankly, that we can't really talk to each other about some fundamental issues. I mean, politics should end at the water's edge and we should be able to have a unified foreign policy, right, even if we disagree on what the approach should be. And we've been, you know, making mistakes on that front for a long time. I don't know. I, I, I, I'm kind of of the mind that, you know, this election is going to be what it is, but ultimately both political parties, especially younger people in both political parties, have to step up and figure out what we're going to do about governing ourselves in a better way because what we've been doing for the last, you know, 12 to 15, 20 years is not really working. And by the way, it's not

about like, oh, things are going to be bad in the United States. If things are bad in the United States, things are going to be really crappy everywhere else in the world. And so... This is a very important observation for young people listening to this podcast who are entitled and have been coddled in America their entire lives, which is if America is not exceptional and we're exceptional through capitalism and through creating products, that's how we are exceptional in the world, is the freedoms we have to create the world's dominant companies that spread around the world, whether it's Google or Uber or Tesla.

We need these companies. We need to lead economically. And we need to lead on human rights and on having a just system here. And if we don't, well, then despots and, you know, whether it's MBS in Saudi Arabia or Xi Jinping in China or Putin in Russia or the Kim Jong's in North Korea, this is bad for humanity. Yep. And human rights globally. And generally speaking, when a world system that's kind of running well falls apart, it's usually followed by centuries of mass kind of chaos for the world. And that's really bad. So I think that we have a lot of obligations to the world and to ourselves and to our children, right? So I don't know. But that said, I'm super hopeful, right? Like we figure things out in America and when we do, we tend to do them really, really well. And I'm very confident that we'll do this in this case as well.

I'm really excited today to have one of my great friends, colleagues, and co-conspirators on the podcast. He's been on now, if my memory serves me correctly, four times in 10 years. And this is the fifth. He's on every two or three years. Episode 25, episode 279, episode 429 in 2014, episode 674 and 2016. And you know what? Four years between appearances is way too long for a gap. with getting Mark Suster on the podcast. My mistake, the problem is we're on a board of density

together and we get to see each other all the time. And I forgot the point of this pod is for you to get to listen in to me having conversations with the smartest, most driven, entrepreneurs, capitalist thinkers in the space. And one of those is my good friend, Mark Suster. Welcome back to the pod for a fifth time. Thank you, Jason. You know, I should say also, we used to produce a show together called This Weekend Venture Capital, which was fun to do. It was fun to do, but you were too busy being a venture capital as to do it consistently. But I've been doing this now. Gosh, it's so crazy.

You were on the 25th. Can you believe now over a thousand episodes since you've been on? Amazing. What does sustainability mean in the lens of investing specifically in companies? What is a sustainable company? What does that mean that they use paper cups and paper straws? Or does it mean they have a product that is, you know, creating paper cups and shrass in the industry. Explain. The hard thing about being an investor is we have to

invest in where we think the market is going to be five to seven years from now. If we invest in things that are going to be big 15 years from now, it doesn't matter if we're right. Being too early is the same as being wrong. So we have to be in a five to seven year cycle. Usually if I'm talking about something to my investors, my LPs, I say to them, if my idea is obvious to you and you're not your head, I probably missed the idea. So I want to make you slightly uncomfortable because I want to be investing in things that you don't buy into today. And then the other hard thing is you not only have to be right about the category, you have to pick the right team. So I was very early in text messaging and free text messaging being a service. And I had a thesis because I lived in Europe when Skype

grew. And I backed a team that was incredibly talented. They just weren't WhatsApp. So we had, you know, tens of millions of users very early on. It was called TechS Plus. They had built and sold an IPO to a company before. We just didn't end up being the winner. Now, sustainability. In 2013, my partner, Eve Sisterone and I started saying we need to invest in companies that are solving our long-term water crisis. We need to solve our long-term water crisis means we need to solve agriculture because there's way more water wasted in agriculture than is wasted in your toilet or your shower. And so we took three bets in the category. One, all of them were like half a million dollar bets and then we followed them. One of them was appeal sciences. And what they did

is they took the waste products of fruit and vegetable and they create an organic compound that seals in moisture and prevents oxidation without herbicides and pesticides. And if you want to have an impact on water, you have to solve agriculture. About 45% of all agriculture in the United States is spoiled before it's eaten. About 70% in the developing world. And so really, we wanted to impact how long your fruit and veg last. And so the ability to take avocados and have avocados last 30 days longer is massive. And what the impact has been is avocado wastage before it's sold in retail has gone from about 10% down to about 2% in the retailers that use us. In citrus products, wastage has gone from 6 to 7% to less than 1% before it's sold.

And then once it gets to the consumer's house, a lot less is getting thrown in the garbage bin and is getting eaten by people. So that saves money and is increasing revenue because if you go to a grocer to buy avocados, and you only buy two or three, now suddenly you can buy five or six. So we saw sales go up more than 40% in the grocers that we're using appeal. So we're now being rolled out across the largest grocer in Germany called Edeca, the largest grocer in the United States, which is Kroger. And it's an invisible plant-based seal, just to be clear, it's not plastic. This is a plant-based seal that goes on an avocado, just makes it last longer.

100% organic FDA approved. I'll give you another example. cucumber. So you notice sometimes you go to the grocery store, they have plastic on them. That's, but that's to preserve it because otherwise it doesn't last very long. So Walmart, sorry, Walmart, uh, yeah, Walmart has announced that they're going to standardize on appeal for all cucumbers and get rid of all plastic. So that's one example. I want to give you a second, Jason, if you don't mind. I know it's a little bit long-winded. We've invested in a company that nobody on the skulls heard of. Okay. It's called Insuffalo. Insect.

Okay. It starts with a why not an eye. Okay. What they do is they figured out how to grow industrial scale worms. And what they do is they grow in vertical farms. It uses 97% less carbon than you would if you grew it in a horizontal manner. It actually has a negative carbon footprint. and we use robots to grow them. So we stack containers. The robot goes in, lifts it up,

feeds the worm, drops it, goes in, feeds the next worm, drop it. Now, why does any of this matter? What happened was we were depleting the world's stock of fish. We were pulling sardines and anchovies out of the population and feeding them as part of fish mail to other fish. And that was causing a problem in terms of sustainability of fish stock. So what fish growers did is that they started feeding them carbohydrates. But it turns out a lot of fish can't digest carbohydrates. So fish mortality went up. So they started using antibiotics and amino acids in fish, which is not good for the unpopulation.

We were starting to do to fish what we've done to cows and chickens for generations. So what we are now able to do is use insect worms as an input to the fish. Now, in the wild, fish already ingest 15% of all their ingestion is already. insects. So all we're doing is returning them to the protein that they already use. So this company went from having zero revenue to north of 100 million in bookings overnight. Wow. And they basically make little pellets that you can feed to fish because fish eat crickets already. So we, today we only grow worms. We are going to increase. But worms turned out like we tested a whole bunch of insect types, including things like crickets. The problem is when you grow them in

close quarters, they become cannibals. So you actually can't scale them. And what we do is we take the manure and we use the manure as an organic fertilizer. At maturation, we crush the worm. We take the liquid products and we sell it to the pet food industry to make kibbles more water soluble. And we take the dry cake powder as an input into fish meal. Amazing. When we look at SPACs, this is exciting. I had one of my companies, desktop metals, going out by a SPAC. I had Rick Fullop on the pod. And I've got four or five other companies that, you know, I keep having SPAC promoters contact me about and say, hey, do you think Calm or do you think Robin Hood or Thumbtack or whatever?

I don't know. Like, you got to talk to them. It's really not my place. But, you know, we have half the number of publicly traded companies now. My friend Chamath is piling up the same. Spacks. My friend Mark Pinkis is piling up this Pax now, apparently. What impact will this have on our business? You and I, early stage investors. Positive and good. Is it bad? Positive and negative. Okay. Walk us through. Like most things in life. Yes. So let's understand a basic fact,

which is 20 years ago, successful companies, the best of the best went public in a six to eight year time frame after being founded. And they were raising money when they were smaller and younger. and most of the appreciation, the gains that came for the company came in the public markets. So that was a net good for public investors. That was not necessarily a net good for venture capital. Now, the good thing for venture capital, the good thing for founders is we got liquidity earlier. And that's a positive, right?

The bad thing is we didn't capture the 10x. So look at Uber. Like your net worth is dramatically increased because it stayed private, for longer if it was forced to hold. Yeah. And you may have chosen to be a public market investor, but being private for longer benefited people. So what happened was in the last 10 years, the best companies were staying private 11 to 13 years or longer. So what happened was money moved from the public markets into the private markets and funded them on a private basis. So capital availability meant they could stay private. They preferred to stay private because they didn't

want to have to deal with the machinations of the public market and the vultures that are out there. Scrutiny. Yeah, the scrutiny and whatnot. And so they stayed private longer. So people like Upfront Ventures benefited because our company stayed private and we were able to raise growth vehicles that could then invest in their private rounds. So all of the value capture happened in the private market. But generally speaking, I think it's a healthy outcome to get more companies public because,

you know, as they say whatever, sunshine cures all wounds or whatever. I don't know what the exact. Sunshine is the best disaffected. There you go. Thank you. And I believe that. And so it will sunlight. And it will lead to best outcomes when companies have more public scrutiny of how they're operating and how the companies are doing. So I think generally it's good. I think show up where it's coming or no? Listen, we get a. There must be circling, right? The SPAC people must be pinging you and saying, will bird go SPAC? I'd say every late stage company we have is getting circled. So that's a better way of saying. How would you frame it for a company like that? Would you want them to go public?

Would you want them to say private and keep iterating? So for me, it's really more a question of access to capital, right? So if you need three to 500 million dollars, then you say to yourself, is that more available in the private markets or in the public markets? So in the last five, eight years, it was only available in the private markets. I mean, it was mostly available in the private markets. Now, the pendulum has swung. And there's a lot of money now in the SPAC industry. So a lot more companies are now having the discussion about whether they should use this as a fundraising event to solidify their market leadership position. Yeah, I mean, for me, I think, you know, I have been thinking about how long I'm having to hold some of his positions and I would

like to have 20, 30% liquidity maybe. But that can be solved and that is being solved in the private market. Slowly. Slowly I'm having it happen. Yeah. Yeah. And then you, I mean, just this possibility of, you know, a great founder being able to use that public currency in a really intelligent way in the way Bezos did or Google did or Facebook did. I mean, they really use their equity in those cases to buy YouTube, Instagram, et cetera. And the best entrepreneurs will, because you have a premium if you do well in the public markets, and that premium allows you to acquire companies that don't have the premium. You know, that's the case of Google and YouTube. If Ring was still private in this SPAC era, they would have spacked, wouldn't they?

Probably. Yeah, I don't see why not. I mean, I would have loved that company to stay private, but I don't fault Jamie because Amazon is a great company and he's partnered with a great company. It worked out for Tony Shea. It's one thing that Bezos really gets, which I think the Google team learned later, which was just leave them independent. If it's working, don't break it. Like, you don't need to break a high functioning founder and culture at, whether it's Zappos or YouTube or whatever it is. Just let it sit over there and operate. Totally agree. So acquire companies that are already great at running themselves. The best of this week in startups is brought to you by Squarespace. Turn your idea into a new website. Go to Squarespace. Go to Squarespace.

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