This Week in Startups - How AI and remote work is coming for your job | E1940

Starting point is 00:00:00 Well, this is a moment in time, and I just took it. There you go. I put it right on my bag. Is it, Elon, I'm stealing a mug. He said, yeah, have one. And take 10. Then I actually need one. I don't know that much you have in his face. But I mean, it's so classic.

Starting point is 00:00:14 David, how you doing? I'm doing well. I'm in Miami right now. One of the portfolio perks is office set up for me whenever I come in. But you're based in New York, am I correct? I'm based in New York, yeah. That's that great view. Where is your office?

Starting point is 00:00:28 We're in one world. We're on 85th floor. Amazing. So that's 85th floor. Oh, my Lord. How many floors are in the building? I think they call it 100, but I think if you actually count, it's probably like 92, 93, but I think there's some marketing going on.

Starting point is 00:00:41 You think what they do is they make the lobby like 10 floors and then they, yeah, gives them a little bit of air cover. How's your tooth down? It's good. The swelling's down. And I was talking to my wife and I'm like, everybody's commenting on YouTube of how bloated and how fat my feet. face looks. And she's like, well, it's welcome to being a woman. Everybody just talking about

Starting point is 00:01:05 all your, you know, outside qualities and giving you a hard time. But anyway, the swelling's down. My energy is off the, off the charts. I did a coal plunge day. So I'm ready to go. Let's get to liquidity episode 13. We made it. And we've got the, uh, we got the liquidity conference. Liquidity summit. Go to liquidity pod.com. You'll see the summit page. It's supposed to be 100 people. I extended it to 125, David, because you gave me so many great recommendations for LPs to invite. Thank you very much for that. You're a mention.

Starting point is 00:01:32 And it's just GPs, LPs, three days in Napa. We get there, it's the first week in June, Sunday, Monday, Tuesday, Wednesday. Sunday, we arrive, have some food and play poker, just hang out. Monday talks all day, dinner, poker at night, Tuesday. We have talks. Then in the afternoon, we do activities. So you go painting, cooking class, play pigeon shooting. We got a bunch of different things to do in Napa.

Starting point is 00:01:59 such a great place to go. Then we do food and poker again. Wednesday, we have a closing brunch. So it's pretty, pretty fun agenda. What's the overall vision? You haven't told me that much. You know, I'm trying to build relationships with all these different GPs in the world, because we've gotten earlier and earlier. And the way, as you know, David, for a well, people will judge an early stage program like Founding University or Accelerator or Ycombinator or Techstars is how many of those companies go on to get future funding. Usually it's like 10, 20, 30, 30, percent. And so in order to get those numbers up, and we need to meet seed funds and series A funds, and show them our inventory. In other words, hey, these are the founders we've invested and we think

Starting point is 00:02:40 are interesting and then match them. So I just want to build relationships. Also, I want to have fun. And I just find three days together, only GPs, only LPs, no founders, no service providers, you know, like 50 service providers a month try to get into the event, lawyers, accountants, headhunter, real estate brokers, because they're looking to sell, but we want to have like a no sales kind of situation. So there's other big events out there. There's tons of family office events, but this is my small one to pair with the podcast and what David and I are doing here, just to build relationships with people that we think are high quality to help us all trade notes and become better at what we do. That's the vision. I don't know. I'm excited and Jessica's coming.

Starting point is 00:03:23 Awesome. All right. Well, there you go. She'll be hanging out with us as well. Absolutely. You and I, This is the same thing, Beauty and the Beast, right? You get a 10, you put it with like a four. You average out with seven. Beauty and the brains. Beauty and the best, maybe. I think it's, in my case is beauty, the brains, and the beast. All right, let's get started.

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Starting point is 00:04:16 Twist listeners can get an extra 20% off any plan for your first six months at openphone.com slash twist. and Hidden Layer. Generative AI is revolutionizing industries. Hidden Layers' AI detection and response solution secures your generative AI and LLMs for malicious attack, helping you generate more by enabling seamless and secure generative AI. Visit hiddenlayer.com slash twist to learn more. Welcome back to this week's liquidity podcast.

Starting point is 00:04:51 With me today, I have Jeff Richards, managing partner our notable capital, formerly known as GGV. We have Ryan Denehy, CEO of Unicorn Startup Electric. AI. And of course, we have Jason Calicanus from the launch fund. I'm your moderator, David Weisperd, co-founder of TenEx Capital. Today, we have several great topics on the docket, down rounds, something most people don't talk about. How do they work? And are they as bad as they sound? And we'll discuss how large corporates, such as United Airlines, are integrating AI today. We'll finish for the latest three investments from Jeff and Jason. Let's dive right in. This September, Pitchfick reported that down rounds accounted for 11% of all VC deals more than any

Starting point is 00:05:34 time in the past two decades. That being said, down rounds were still nowhere close to dot com numbers where they reached a record high of 58% of all rounds. Jeff, when you look at 2024, do take the over under the 11% of down rounds that you have. last year. It's a great question, David. Let's zoom out a little bit. So to me, the downround thing, and I answer this question coming from having been a founder, you know, back in the late 90s and early 2000s, which was kind of a crazy time to raise money in the deal with the aftermath of the dot-com bubble, where I raised capital and dealt with, you know, all kinds of different structures. But the downround question you mentioned it, we don't talk about it much. It's a little bit like Hollywood and

Starting point is 00:06:15 Ozempic or plastic surgery. Nobody really knows who's done what. So I don't, it's very hard to make sense of that data. If you ask the question of what percent of private companies that raised in 21 or 22 have a lower stock price today, in the public markets, it's almost all, right? Almost every small cap and mid-cap tech company has a lower stock price today. And they would all love to be back where they were, but they're down 60, 70%. If you look at the software market, multiples peaked in 21 at 20x forward revenue. Today, they're at 5 to 6. So even if you grew your business, 3x or 4X in the last two to three years, you're fighting a headwind where multiples came down 75%. So I just don't know, I know the 11% data point. I think it's a hard one to

Starting point is 00:07:01 get your head around because the reality companies that are raising money today are good companies. It is a very hard market to raise capital in if you're not a pure AI infrastructure play. And so those companies are great companies. We've seen a very challenging fundraising in a market. I'd be curious to see what Jason has seen over the last 12 months, but I can tell you that, you know, just dealing with the headwind of market multiples, folks that have been able to raise in a flat round, that's the new up round. And frankly, as an investor or as a founder, if you're playing the long game and you're looking five, 10 years out, an up or down round in the near term isn't going to impact

Starting point is 00:07:37 the long-term outlook of your business. You think about companies like Square or DoorDash that did down rounds, did rounds with structure. They went on to build multi-10 billion dollar companies. It just didn't impact them in the long run. So we are advice to founders, focus on the long run, get whatever you need to get done to move on, get the capital you need to build your business and go build your business. Yeah, when a market crashes this severely and the tide goes out, you figure out who's wearing

Starting point is 00:08:01 swim trunks and who isn't, as the famous expression goes. I like your Jeff plastic surgery one. Although with these celebrities, when they start doing stuff to their face with the Botox, like when they start doing, I heard 20, 30-year-olds are doing Botox. Anyway, sometimes if they go too far, you can tell. there really are two types here, David. There are down rounds. Okay, you raised that $100 million.

Starting point is 00:08:22 Now you're raising at $50. Okay, we get it. Then there's cram down rounds. And so cram down rounds are a different beast. And I just want to talk about those for a second because those are also happening. And they're happening with very notable companies. And these are also referred to as pay to play rounds as well. That's actually a Hollywood term.

Starting point is 00:08:42 If you hire somebody to do a movie, if the movie gets made, they get paid, movie doesn't get paid, made, they still get paid, pay to play. What's happening with the cram down rounds is a founder goes out, they try to raise money, they can't. There's too much of an overhang in the company. Companies making, let's say, $10 million in revenue. Last round, they raised that $200 million. Somebody put $30 million into the company for 50%. They've got, you know, some cash left, but they're still burning, but they're back to $200 million. growing, so there's a company here, but nobody wants to invest at that valuation, and they

Starting point is 00:09:17 don't want to invest with the $30 million. They can't raise money. They're still losing money. What do they do? They go to market, or they have somebody inside the company who is one of the three or four investors, and they say, hey, here's an idea. Have you considered a cram down round? Or a pay to play around. And then they go to every single investor and say, we're taking all of the preference stack. 30% is owned and preferred. They're getting 5% of the company. you know, that 30% goes down to five. You're getting cut by whatever that is, 80%. So you go from owning 10% of the company to, and by the way, it's common shares. So you lose all your protective provisions. You don't get out first. You don't have information rights.

Starting point is 00:09:56 You no longer have pro rata unless we're raising 10 million for 20% of the company, the $50 million valuation right now. You've already put $10 million in. Now to keep up your percentage, here's how much you have to put in. Okay, so you want to get back to 10% ownership, you know, and it's a $50 million company. I put $5 million in new capital in. And then the founders, they keep their common. So they're fine. And, you know, the whole thing starts over again. It creates a lot of bad feelings.

Starting point is 00:10:25 But it also forces people to put up or shut up. But if your fund is completely deployed, so, Jeff, what fund is GGV on? We're on fund eight. Yeah, now notable capital. Yeah. So if this was from Fund 2 or Fund 3, that funds fully deployed, what would you do? Jeff, if you're faced with this, and I'm sure you've been faced with some of these cram downs, now you're in this very weird, precarious situation. You've got to re-underwrite the thing from

Starting point is 00:10:48 first principles, and it's contentious, it sucks, it's hard, and then how do you come up with the number? I've had situations where I own 1% of the company, they're like, you're now on 0.001% of the company. I'm like, is that fair? And it's never fair. When you get to that point, people are grasping at straws, right? As you know, I mean, you're in a desperate situation, the founder's desperate for capital, and you have a shark-ish-type investor who's coming in and saying, look, I could own 80% of this company, put in $5 million and own 80% of a company that was valued at $30 million. But very often what you have is an untenable situation where the company is essentially out of money. In many cases, they've already raised venture debt.

Starting point is 00:11:27 They've got to pay a debt provider back. And so you've got a crossover PE-type firm that comes in and says, look, we'll pay off the debt provider, we'll buy a huge chunk of the company. It's a really challenging situation. about you, Jason, I think we're in the early days of that happening. We're in the second inning because companies raised so much money in 2021 that they've been able to run through 22, run through 23, which was a tough year for most. And unless you extended your runway for a very long period of time, which Ryan could talk about because he did that, you're now in a challenging

Starting point is 00:11:56 situation and you're going to your investors and saying, gosh, this is the only option I have on the table and it just gets very painful. And some investors have blocking rights to do the next round. So now you're in this like, you want to talk about a game of chicken or a standoff. You know, okay, I can block the round and I'm not putting any more money in. And we're six weeks to add a cash. So I'm literally dealing with, I don't know, you know, we have 400 portfolio companies historically, maybe 250 are active. I'm dealing with, you know, a couple of these a month. So this is a very real thing happening in the market. There's two ways to protect yourself, you know, as a founder and as a management team, number one, be profitable. Number

Starting point is 00:12:40 two, have a big cash reserve. And when the, when the sun is shining, you get that hay, right? And so I literally was on a board call the other day and I'm like, we're crushing it. Shall we put $10 million and sell 10% of the business for $10 million or 10% of the business for $15 million? Would we do that? And the person was like, we have 18 months of runway. I'm like, yeah, we do. Let's, we're strong. Raise money when you're strong. The less your business spends on operations, multiple systems, and on delivering your product and service, the more margin you have, the more money you keep, right? You want to get fit in this new era here in Silicon Valley and in tech broadly, but with higher expenses on materials, employees, distribution, and borrowing, of course,

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Starting point is 00:14:08 So here's your call to action. By popular demand, NetSuite has extended its one-of-a-kind flexible financing program for a few more weeks. Head to NetSuite.com slash liquidity. That's netsuite.com slash liquidity. Ryan, I guess your thoughts would be interesting here as a founder since Jeff and I are out of the game for a little while.

Starting point is 00:14:28 No, I'm glad. I'm glad you brought up the idea of like the cram downs, recaps, rounds that have a lot of structure, that also make them unappealing. Define structure for people in the audience who, they hear us say structure, structure, structure all the time. What does it mean? Yeah, I mean, these are going to be terms where, you know,

Starting point is 00:14:43 for example, a new investor comes in, and let's say the founders really want to preserve that billion-dollar unicorn valuation and the only person who's willing to give them money at that billion-dollar valuation is they're going to want three times their money back before everybody else gets paid. And that's not unreasonable, is it, to have, like, if you're putting money in, at that ridiculous valuation?

Starting point is 00:15:05 No, absolutely. And there's a bunch of funds who make a lot of money going around essentially just making, making those types of offers. But what I'm hearing in the market, I get at least one, sometimes two calls a week from other growth stage founders. I have the, you know, fortunate or unfortunate benefit of this is my third venture, startups. I've seen a lot of messed up stuff. And so I get a lot of calls. And the most common thing I hear is founders are trying to defy gravity to avoid facing the music. And so what that means is,

Starting point is 00:15:38 for example, is doing a lot of really unnatural things. You know, oh, if we can just add another 10 million a net new, then maybe when we go back out to raise the money, we can clear the last round valuation. But to Jeff's point, which he's done a phenomenal job coaching me and his other founders on is that doesn't matter. What matters is, are you building a good business? Particularly today, now that the tide's gone out, everybody has a sharper pencil. Yeah, you might be putting up impressive net new numbers, but your cacks also through the roof. Your retention, your retention hasn't moved anywhere. And those are things that are really just only going to make your business weaker, you know, in the long run. So that's one, another one that I think way too many founders

Starting point is 00:16:18 think that, oh, well, someone will do the round. It just might be a terms we don't like. Also, not true. There is a really finite amount of, it is so much, and if I sort of put my investor hat on, and the 35 or so some odd companies I've Angel invested in, like, that's another thing I hear a lot too. And like, the reality is many investors and Jason and Jeff, keep, keep me honest on this one, but in many cases, you'd rather cut a check into a clean story without a lot of hair on it and sort of know what you're getting versus go. going back to the hoop on something that maybe you've been in for a long time. It's, the terms are complicated, a lot of bells and whistles.

Starting point is 00:17:02 And so I think that's another thing that founders really have to let sink in. It's advice they give all the time is like, there might not be around out there for you and you have to operate as if the money is far from guaranteed at any price. So I gave two pieces of advice. Hey, get to break, even have a war chest. You're giving a third given to you by Jeff, which is have great business fundamentals. like the business, you know, which I guess is close to, you know, what we would call getting to break even, etc. But, Jeff, the CACs got to be right because people are going to reevaluate this thing from first principles.

Starting point is 00:17:37 They're going to just re-underwrite it from a blank sheet of paper in these kind of situations. And I think what's happened, Jason, is, as you know, in a zero interest rate environment, people, you know, when you're getting literally zero to keep your money in a T-bill or a bank account, you're highly incentivized to throw money into the money. market into risk capital, right? I want to bet on startups. I want to bet on crypto. I want to bet on whatever. When rates went up and people are getting paid five, six, seven percent, or they're getting paid nine or ten or eleven in a credit fund, those family offices, sovereign wealth funds, you know, the big giant pools of capital of the world that couldn't wait to pump their money into Silicon Valley are suddenly gone. And so there's a lot fewer investors putting money into the market. And, you know, one of the things that I've been very public about on Twitter is,

Starting point is 00:18:22 When I got into venture capital in 2008, the U.S. venture capital market was supposedly around $28 billion a year. Somehow it ballooned up to $300 billion a year in 21 and 22. I would argue most of that was not venture capital. It wasn't going into seed A and B series C companies. It was the $10 billion into stripe at $50 billion. Not really venture capital. That's mid-cap tech. Those are IPOs. Or IPOs. And so what you have is the folks that were doing those rounds or even the growth rounds at $500 or a billion or $1 billion, $1,000,000,000, they have the option of buying public companies at those prices.

Starting point is 00:18:57 They can say, gosh, I can buy a public company doing $500 million of revenue at $3 billion. Why would I take a flyer on this private one that has an inconsistent history, a rookie management team, et cetera, et cetera. And so the investor base that is evaluating your deal and your company has more time and they're more discerning. And to Ryan's point, the bar has been elevated. And so the way that they're looking at businesses today, the way that we're looking at businesses is just we're having it. We have very high bar. And it's a great place to be as an investor.

Starting point is 00:19:24 It's why I'm bullish on the next five years. I know you are as well. But as a founder, my advice to founders has been take the bull by the horns. You know, if you're sitting on the beach and it's 80 degrees out and you're putting sun lotion on and all of a sudden it starts hailing and it's 30 degrees. Don't pretend like it's 80 degrees out and it's sunny. It's not sunny anymore. It's cold. Prepare for the cold, right? Get profitable. Cut burn. Get your business into a mode where it's attractive to those new investors who have a much higher bar than they used to. But take the bull by the horns, be responsible for your cash runway, be responsible for your cap table. Don't run into a situation where you're passively going out to raise capital and ending up with a bunch of term

Starting point is 00:20:02 sheets you don't really want. And David, I think one of the situations here is if all this advice is being given for two or three years on, you know, various podcasts of note quietly in back rooms with investors and Jeff talking to his portfolio, me talking to my portfolio, Brad Gerser out there saying get fit to public companies, you know, like the weather change, the game changing on the field was known for two full years here. And people knew it was a hot market for the last two years of this nonsense. And they were saying, if you're a founder and you cannot navigate your firm financially at scale or getting to scale through this,

Starting point is 00:20:46 what probably is going to happen is people behind the scenes are going to say this person isn't fit to serve. It's a hard thing to say because we're such a pro-founder community, and being founder-friendly is critical for people like Jeff and I get deals with people like Ryan. We want to be seen as founder-friendly, but you have to ask, if it's been four years, you didn't do any layoffs, and you ran this thing off a cliff, and you had $40 million in money in the bank, and you still burned a million dollars a month, knowing all of this, well, are you the best person to lead the next stage of this company? And I think a lot of people will just say no.

Starting point is 00:21:27 And that's what I'm hearing on the back end. Yeah, I think what's really happened is a lot of those founders that didn't change were basically paralyzed. People go through crises. It's not that they necessarily take wrong action is that they take no action. So they've kind of been sitting around to Jeff's point, you know, hoping that more capital will come in and there'll be this kind of Messiah that comes in and saves them rather than doing the difficult things. And the difficult things, you have to wake up every morning. I've been a founder twice and you have to eat that frog, do the difficult thing every day.

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Starting point is 00:23:23 Ryan, you were in a really interesting position in that you raised almost at the height of the market. October 2021, you raised at a billion dollar valuation, raised $90 million. Then you kind of started to see the market. How did your operations evolve as the market changed? wholesale change across the board. I mean, so, you know, exactly, you know, to the point that all of you are making and, you know, Jason, I'm glad you brought up the point that you just did. Like, I ran into one of the partners at Diversa at an event.

Starting point is 00:23:54 He said, we're doing more CEO searches than we ever have in the last decade. And that's because at some point, your investors are bored, they're going to be sitting around the table and they're saying, like, yes, you're an operator, yes, you're a founder, but you're a steward of this capital on behalf of us and RLPs. You have a real responsibility to figure out where does the next incremental dollar need to go or not go, right? And I was just having this conversation with someone internally. There's a company that I won't name, but doing low nine figures, ARR raised a lot of money kind of at the peak, had never done any layoffs. Staff would openly admit that there was a lot of bloat. And they announce a 5% riff. The 5%, my COO said,

Starting point is 00:24:46 he goes, that'll get rid of the Cheetos in the break room and not much else. I mean, it's no man's land. And so it's not just about making changes, but are you actually making the changes to an extent that they're going to make sense and really bend to the arc of the business. And I think it's doubly hard when you're coming off the sugar high of raising money every six to eight months at a huge uptick, never had to worry about money at least, you know, for years and years. And yeah, correct. In our case, you know, we raised over $100 million across two rounds between the end of 2021 and early 2020. Four months after we raised our Series D extension, I went back to the board and the investors and said, we're going to do our first round. riff. And then we did another one and then we did another one. And then we committed to completely

Starting point is 00:25:39 rewiring our go-to-market motion, completely reimagining the product and the feature and the functional, all of that to really guide us in a direction where we could still deliver on the mission of the company, but we could do it orders of magnitude more efficiently and more effectively than we were doing it before. I had to learn that the hard way. My first two companies, even though they both had small but successful exits, were weeks away from running out of money. And what I knew coming out of those experiences in my first two companies is it's always in the final days

Starting point is 00:26:12 when the movie's almost over that you go, but we were just starting to figure it out. We were just, I mean, how many times do you talk? Let me ask you a question, Ryan. You did three riffs. When you look back on it, should you have done two? Should you have done one?

Starting point is 00:26:25 Should have ripped the band-aid off quicker? And then take me through the psychology of being a founder and how absolutely arduous, painful, and how much suffering goes into doing these reductions in workforce layoff? It's unbelievable. And obviously, we would have loved to have just won and done. I mean, that is always you want to cut deep, you want to do it once and move on and be able to focus. And know you have the team.

Starting point is 00:26:51 I think the difference with us is we were going from a model that was sort of a mix of software and services, a big inside sales model to really reimagining this as pure SaaS, bottoms up product-led growth. And so it wasn't clear until a little bit further into the cycle exactly what the go-to-market mode, you know, exactly what the sort of 2.0 version of the business was going to look like. Only then did it become clear, hey, here's a cost structure that makes a lot more sense with what we know the business is today. And I don't think that not every business has that problem. I will say, though, I think that there are a lot more companies out there that need to do a much more sort of wholesale rewiring of how they make money,

Starting point is 00:27:39 how they serve their customers. I think we all know, it's like, oh, you can't cut your way to growth. You can and you can't. You can't cut your way to growth if you're just going to do the same thing you've been doing for the last seven years with less money. If you commit to running a more efficient business and you commit to the product and the organizational change to do that, you can absolutely spend less money and grow faster. And this is the high degree of difficulty, Ryan, and Jeff, I would like your input on this because you and I were former founders who are now capital allocators. You know, you're being asked to cut costs and at the same time innovate in product and then

Starting point is 00:28:18 increase sales. And so seemingly, this seems like, well, these are, counterintuitive, wait, we have to invest to get growth. It turns out slowing down, getting rid of, you know, excess in an organization, and excess can come in many forms. It could come in, you know, just undisciplined marketing spend, undisciplined product development, whatever it is, undisciplined T&E and an office space, whatever it is. But if you start getting efficient and then you start having constraint, what you find in an organization is people figure out how to do things quicker.

Starting point is 00:28:54 And this is one of Elon's tricks, as he just says, you know, they're like, oh, this is going to take six months. He's like, okay, I give me a way to do it in six days. And I'm on a board right now. And they showed me, it's an e-commerce company, I wish I was one. And they're, they stayed away from Amazon for a long time. They believed in building direct, but they, they had competitors and knockoffs just crushing it on Amazon.

Starting point is 00:29:14 So we could not, not be on Amazon. So we said, okay, we have to have an Amazon strategy out of the gate. It goes explosive. And so they're like, we're going to double Amazon next year. And I said, hold on a second. We're going to double Amazon next year. Give me a plan for 10xing Amazon this year. And they were like, what?

Starting point is 00:29:30 I'm like, yeah, we're starting from a very low point. It's low single digit percentages of our sales. Give me a 10x. Show it to me in 10 days. And then 10 weeks after that, I want to see if we hit 10x or not. And then I want to plan to go 10x again. And, you know, most times that unrealistic thing, you know, you would think on its face, Jeff,

Starting point is 00:29:53 you know, you seem like a lunatic. You know what it did? It worked. Inspired people and it worked. Yeah, yeah. And people are like, wow, we think we got a 5X from this. We found this other thing. They're subscribe and save.

Starting point is 00:30:04 You know, we didn't realize how big Amazon is in this other geo. We found this consulting firm that said we can do coupons and we discover coupons. And I'm like, this is what I'm talking about. Let's do less with more. And I did the same thing with our team. I want to meet more founders. I want to do more introductory calls because I believe deal flow

Starting point is 00:30:23 is your destiny in this business. So I said, how do we do a hundred first time calls per week? Oh my God, 100 first-time calls per, I mean, look at Jeff's eyes, but 100 calls a week.

Starting point is 00:30:33 We're a 21-person firm. That's great. It's just a lot. It's a lot. I said, okay, here's how I want you to do it. Call it an introductory call. Tell the founder,

Starting point is 00:30:41 we don't want to waste their time. Framing matters. It's only going to be 15 minutes of them presenting their company in five minutes of us explaining to them how we invest and making sure we understand their vision and then determining if a second call with a more senior person is a good idea for them because we don't want to waste their time. So we reframed it. You know, shout out Scott Adams, creator of Jillbert. We reframed it. He's big on reframing, but that's a concept of psychology

Starting point is 00:31:11 for decades, you know, to be only 20 minutes. Well, now if it takes an hour to write the coverage or whatever, you know, round you up to two hours of work for an associate or a researcher. Okay, yeah, they could do three a day, four a day. Okay, so now you know 15, 20 of these a week. Okay, how many people do you need?

Starting point is 00:31:27 Do you need five people? Is that possible? I did 70 last week, 60 or 70. So I'm almost to 100. It all goes in a database. It's going to be pretty good for returns. That's a game changer. It's a game.

Starting point is 00:31:39 The other thing I'd add, Jason, you know, Ryan gave some great context into what he did. I think the broader, some additional color I would give on his scenario because I was involved with that day to day. But he has a great set of advisors around him. He has Dick Kossel and Adam Bain, who used to run Twitter. He's got Tim, we've got a CEO on our board.

Starting point is 00:32:02 We've got Emmanuel Scala, who was the chief customer officer at Toast. We've got Bob Goodman from Vesmer and myself. Ryan's got a good sounding board of people. And as we were heading into the late stages of 21 and into 22, he was raising all this capital. he wasn't afraid to call us either and say, hey, guys, there's some things in the business that aren't working, and I think we should put them on the table and talk about him. That led into that summertime conversation in 22, Ryan, I remember when you called me and said, hey, I think we got to blow this thing up. Like, we got some things that are just not working in this

Starting point is 00:32:29 business. And I want us to be in five or 10 years. I want to be a higher margin, higher growth, channel-driven business. And here's how I think we should do it. A lot of founders are afraid to have that conversation with their board and with their investors. And so, a lot of credit to Ryan. Some of that's being a third time founder to have the confidence to do that. But a lot of it was building the relationships with those people over the years. He didn't just pull that board together in the summer of 22, you know, off of some angelist recruiting site. He had carefully handpicked these folks over years and built relationships. And so when the time came to really deal with this sort of like wartime mode, he had good people around him. And one of

Starting point is 00:33:08 things I see in the market today is I get these founders coming to us, Jason, at series B and C, who are still burning a ton of cash. And I say, well, who are your mentors and advisor? And they say, gosh, do you have any recommendations? They don't have anybody. They have nobody that's giving them good counsel. And in many cases, they've got junior investors on their board who aren't giving them great advice.

Starting point is 00:33:27 And so it can be a really challenging and lonely place to be if you're a CEO. So one of my main pieces of advice, I know, Ryan, you share this with folks all the time who are at Series A and B is cultivate those relationships with advisors, board members, people actually want to have an interest in helping you be successful because you may not think you need them today when things are going well, but when you hit stormy seas, it's invaluable. I don't know, Ryan, if you want to add any color of that. But to me, it was a huge part of your process. Yeah, absolutely. But, you know, the other part of it, too, though, just kind of, Jason, go back to your comment, too, about when you throw that audacious goal out there, like, Jeff, something

Starting point is 00:34:08 you talk about a lot is just creating situations where there's... know where to hide, right? And like, that's one of them when you go to a team and you say, oh, yeah, I know we only put 100 customers on the new product last quarter. So this quarter we're going to have any more money or any more people to do it. The right people are going to jump out of their chair and be like, I don't know how we're going to do it, but like, man, like, we're going to, you know, we're going to go try. And the wrong people are going to kick and scream and come back to you the next week with all the reasons why, you know, why they can't do But now more than ever, as companies are making changes like this, that's one of the things

Starting point is 00:34:45 that I think, and it's a piece of advice to give to other founders, is like, that's what you need to ask of your people. It's not about the little incremental improvements you quarter. If you're going to reduce cost, let's really reduce cost. If we're going to launch a new product, we want to scale quickly. Let's really figure out how far we can take it. And all of that is made much, much easier by having people around the table who are ex-operators who bring a diversity of viewpoints.

Starting point is 00:35:11 And, you know, in my case, seven out of ten times I bring a question to someone like Tim or a manual on my board, it might just agree with me or kind of repeat back, but it's, you're building that muscle memory and that validation to trust your instincts and make decisions faster. And so I think all of these things are critical right now. Listen, we all know, Jenner of AI is revolutionizing every industry. In fact, we talk about it here on this podcast. week. And companies that are slow to leverage this technology, well, they're going to risk

Starting point is 00:35:42 falling behind their competition. But new innovations also bring new threats. How do you safely accelerate your company's gen AI adoption while also managing the risk? Well, let me tell you about hidden layers, AI detection and response platform. It's a security solution specifically designed for generative AI and large language models. LOMs, you know that. It provides your security team with visibility and tools necessary to detect and prevent threats like leaking of confidential information. We've seen that a couple of times, as well as malicious prompt injection. That's a serious threat and model theft, right? People are starting to steal. That's just the truth of it, folks. People will steal your innovations. That's going to enable your company to harness the power of

Starting point is 00:36:21 AI and to do that securely and confidently. It's trusted by leaders in finance, tech, health care, and even the U.S. Department of Defense, the DOD. Hidden Layer helps you generate more by enabling seamless and secure generative AI. So here's your CTA, the old call. to action. With Hidden Layer, go from pause to possibilities and step into the future of secure AI innovation. Learn how to protect your generative AI today by visiting hiddenlayer.com slash twist. That's hidden layer.com slash TWIST. Speaking of cutting costs, United's CIO, Chief Information Officer, Jason Burnbaum is going all in on AI. United is reportedly using AI for everything from chatbots to pilot and

Starting point is 00:37:07 and we'll be piloting AI applications across the entire company. Ryan, your founder and CEO of Electric.AI, you were early on the AI thesis and you help small businesses integrate IT solutions, including AI. What are you seeing across the thousands of SMBs that you service? My guess is that this airline CEO a year and a half ago was all in on Web 3. So, I mean, I'm half joking, but I'm somewhat wary of people that make big splashy public announcements. I am not pooh-pooing the commercial applications and the potential business transformation that a lot of these new tools can bring.

Starting point is 00:37:50 Specifically for us at Electric, we're making IT really easy for small businesses. They don't really care how we do it. They care that it gets done. They care that they can click a button and the computer gets provisioned and sent to the new high. They care that they can click a button and we can tell them a whole bunch of things about how they can make their environment more secure. I think AI for the time being is certainly a useful buzzword. It's a useful hook. It's getting a certain type of early adopter, S&B customer into our funnel. But specifically on this end of the market, you know, if you do a great job with your software, it kind of disappears in the background.

Starting point is 00:38:32 And so, you know, I think ultimately, you know, one of the things we talk about a lot in turn. is that, you know, AI didn't over, you know, all of sudden overnight changed the fundamentals of product management. You start with the problem and work backwards. And I think there's a lot of great things that AI can do to accelerate the solutions that you want to deliver to your customers. You know, beyond that, I think I probably have a bit more skepticism than some people. I'm very curious, Ryan, you've fractionalized IT services for Electric.

Starting point is 00:39:01 Do you see the fractionalization of AI in the future where large companies will have their internal AI teams and tools, but you'll see SMB's benefit from broader platforms. Yeah, specifically, I think like vertical SaaS and SMB vertical SaaS stands to gain the most from AI, as we've probably all seen playing around in these LLMs. They do much better when they can index something more specific than the entire internet, right? And so when you're dealing with a constrained set of problems, a constraint set of intended solutions, and like many vertical SaaS companies,

Starting point is 00:39:35 you're sitting on a pretty juicy, proprietary data set. You can do some really cool stuff with that. And you can produce, I think, extraordinary customer outcomes. So that's the part I get really excited about is, I think a lot of these companies don't need to be built new from scratch. I think there's a lot of great companies that might have been around 7, 10, 12 years that are actually in pole position to become the next great AI story because they have a 90-yard head start with an existing solution,

Starting point is 00:40:05 existing data, existing set of customers. And now with the air cover of all this macro uncertainty and a lot of businesses rewriting the way they do things, this is a great time for a lot of those companies to reimagine themselves and what they can do with this technology. Jeff, I see you nodding your head. How do you see enterprise companies integrating AI? Yeah, I think, look, Ryan makes a great point

Starting point is 00:40:29 about companies wanting to sort of jump onto the bandwagon. We see this in venture capital. You go back a decade ago, and there were folks creating funds dedicated to mobile apps. There were people who created cling tech funds that sort of were there and then went away. So I think, look, I've been in Silicon Valley since 1995. You get these paradigm shifts every decade or so. We had it with dot com and the internet. We had it with cloud and mobile.

Starting point is 00:40:57 I think this is a massive paradigm shift. I think this is probably bigger than those because the world is ready for it. The infrastructure is there. The compute is there. If you think about the S&B segment where Ryan plays, one of the reasons we're so bullish on that segment, it's 42% of US GDP. It's 55% of U.S. employment. SMBs 15 years ago didn't have any technology.

Starting point is 00:41:21 Most of them didn't even have Internet access in their shop. Now they're running Shopify for e-commerce. They're running square for payments. They're running toast inside their business. they're running home base for payroll and time clock management. They've all bought technology, and the layer is there for now, as to Ryan's point, for the incumbent vendors to roll out AI features and modules that make those businesses more productive.

Starting point is 00:41:42 I think one of the cool things there, it's not going to be a headwin for labor. In big tech, we're definitely seeing a headwin for labor because of AI. We saw that, you know, Jason mentioned the efficiency wave with Zuck and Elon and others, and I think everybody's gotten religion around the idea you can build much bigger companies today than you used to with less headcount. In small business, if you take the average 10 person shop, the owner is doing accounting, the owner is doing finance, the owner is doing sales, marketing, payroll, etc. So when you give them an AI tool built on top of their existing software or a module on top

Starting point is 00:42:17 of their existing software that can do this things for them, it's going to make that shop that much more productive. It's not going to allow them to eliminate headcount inside the shop because nobody's doing those functions inside the shop. If you take that 42% of US GDP in America and you give it a 5% or 10% boost because of AI, that's huge. That's huge for our economy. And so one of the things I'd love to see us, you know, get the narrative out. There's a lot of negative headlines around AI. It's going to reduce labor. The robots are coming, et cetera, et cetera. I'm not saying those are valid questions. I just don't know why nobody's focusing on the potential benefit of this technology, particularly

Starting point is 00:42:52 to small business, which is almost half of our economy. I think it's going to be huge and we're betting big on it. I think for LPs, it's a category that will generate a ton of returns. As Ryan mentioned, it'll probably come from companies we've already funded. One of the challenges in the venture capital world today, it's not that easy to go fund new ideas in AI other than the infrastructure space. In the application layer space, it's a little bit hard to imagine a brand new company today coming in with something with AI that will displace, say, call it 100 million ARR business that already has thousands of customers because they're rolling out that same functionality. It depends on the category.

Starting point is 00:43:27 It depends on the category. Yeah, I might take the other side of it. I think it's a low probability that somebody coming with an AI first solution displaces the incumbent, but it's possible. And so, you know, when they do it, it'll be big. Yeah. Yeah, or they can, you know, M&A can take them out. So it's just such a transformative technology.

Starting point is 00:43:45 and I don't see a world in which all workers do not become a minimum of one or two percent more efficient every month because of it. I'm picking the lowest possibility, 2%. That means every 35 months, everybody's twice as good at their jobs. Just take the rule of 72, right? Now, if people were, you know, became, you know, 5%, 6%, maybe even 7% better at their jobs every month, which I do think in certain jobs is not just possible but probable. We can all think of a developer getting 7% better every month at writing code. We can all think about a writer or a researcher or an SDR or an account executive getting 7% every month.

Starting point is 00:44:29 That means every 10 months or 10.2 months, you can look up the rule of 72. They're going to get twice as good at their jobs. And so this is why I think it's, like all of these hype waves, whether it's mobile, broadband, cloud. You have this weird, overhyped, underhyped, you know, moments that happen, overfunded,

Starting point is 00:44:51 underfunded. You got to take a relentless, haste approach to this as a founder for those founders who are listening. And as an investor, I think you just have to let the founders show you how they're using it and then look for those clues.

Starting point is 00:45:05 We have an incredible company called podcastAI.com. And they did a very simple thing for us. and the podcast, the liquidity pod.com uses them, and so does this week in startups.com. It started with taking every episode, transcribing it.

Starting point is 00:45:22 By the way, that used to be a $500 to $1,000 to get a decent transcript. You know, then it became an international thing because it used to be like $5 a minute here, $10 a minute in the U.S. International made it $1 to $3 a minute, using people in Manila,

Starting point is 00:45:38 but, you know, had error rates. Now it's getting better and better and better. now it's telling us the chapters in each of these. Then it's giving us what clips we should do. Now it's uploading those clips to Twitter and LinkedIn for us. So you start looking, you know, every quarter of this company, podcastAI.com, which we've invested in three times, they release something that we buy.

Starting point is 00:46:00 I pay $500 a month for this. And I'm like, charge us $2,000 a month, $1,000 a month that we'd still pay it. But anyway, and then our producers here at this podcast and, you know, and at the Week in startups, they free up 10 hours a week. Well, what can they do with that 10 hours? They can do better research for each episode. They can book better guests.

Starting point is 00:46:20 There's always something to do to make this better. And then they came to me today and they said, oh, by the way, if you tell us who your next guest is, we're going to go out for all the web, find the podcast, YouTube videos, social media of that person and build you some notes. And I'm like, okay, here we go. Now this idea of getting 7% better a month

Starting point is 00:46:42 that being a podcast producer is here. And who are they going up against? A WordPress site is what we used to use, but it didn't have any of this function out. The WordPress site was just, you know, shout out to my friend Matt Mullenweg and Brian Alvey over there. Fantastic, the greatest publishing platform in the world. But you start thinking about a niche like podcasting,

Starting point is 00:46:59 and then you put AI on it and you have a team of, you know, right now they're three people, but they were 30 people. Oh, my Lord. What they're going to do is just going to, you know, free us to do so much more work. So I am over the moon with the application layer. Imagine every small business in America, you're running a $500,000, a bit small business that does $500,000 a year. And you get a 10% bump in cash flow because you're better at sales and marketing, you're better at finance and accounting, you're saving money on your taxes.

Starting point is 00:47:28 That 50K almost just sort of appears out of nowhere. It doesn't hurt anyone. Where does that 50K get spent? It gets recycled back into the growth of the business, potentially gets recycled into more headcount. So I just think long-term, I put a long thread about this on Twitter. I started writing and just kept going. I just don't see how this isn't a huge tailwind for our economy. I feel like this paradigm, and you and I live through the dot-com era, Ryan, I'm not sure how old you are if you did, but I feel like if you take all the different paradigm shifts we lived through, and I lived through the PC era, which was after client server and the cloud era, the online era, broadband era, mobile era, cloud era, I think that's all the eras. And then I

Starting point is 00:48:08 I, it feels like this is the culmination of all the, in other words, everything has been a setup to this point. And we're seeing and we're funding companies in the pre-seed stage that get to 250K in revenue per year with two people, three people. And they're like, yeah, I'm like, how much you're going to raise? And normally it would be $3 million seed run. And they're like, yeah, how about $500K for 5%. And I'm like, well, if you're going to go out and raise, why not raise $2 million? I don't think we know where we spend it. Oh, whoa, that's a very interesting moment for LPs and VCs to noodle on.

Starting point is 00:48:44 Maybe they don't need as much money from us. Maybe we're the problem. Maybe dropping too much money into this, you know, system. The same way in America, we dropped too many calories on America and 60, 70% of the country got fat. Who's responsible for that, you know? Big ag, we had a really great idea. There was this thing called dwarf wheat, and they did these wheat studies of how to get more calories out of a hectaree. you look up the dwarf wheat studies.

Starting point is 00:49:11 I think it happened to Mexico and all these great scientists came together into all these hybrid versions of wheat and the book, Wheat Belly and other things go over this. They were so good at concentrating calories into the wheat shaft that they made it so fat

Starting point is 00:49:23 and the husks so then that it made it a super wheat. That wheat spiked your blood sugar and made you fat. And the reason they call it dwarf is because it was so fat, the husk, that it would break the long strand of a wheat,

Starting point is 00:49:35 like, you know, amber waves of gold kind of situation. So they just said, oh, let's just make them shorter so they don't fall over. Sometimes you can just make something so efficient that it makes everybody fat. And the reason we're fat today is just bread and calories and cereal. When you started talking about super wheat, I thought you were talking about something else. It's very popular here in California. A whole different economy.

Starting point is 00:49:57 But it's a great point because if you think about it, like my first company started in 2007, back then, it was impossible to raise money. If you did raise money, maybe you raised a few million bucks, maybe. maybe really big, you raised like 10 or 20, and that was like the absolute most. And like there was a time when we all believe, like, software is efficient. Software businesses have these big margins and you can, you know, and I think there's almost kind of like it's come full circle in that sense because, you know, Jason, to your point, it's like this culmination of all of all these different errors, right?

Starting point is 00:50:30 Like this, you know, and Jeff, to your point about the productivity increase, right? Like, this isn't an AI headwind that's going to negatively impact the average American worker. Like, this is an AI stimulus that no one's really talking about yet. And back in the 99-2000 era, we raised money to build data centers. There was no AWS. We ran little mini data centers all over the country. That's where the money went. And how much did that cost?

Starting point is 00:50:53 Cost a fortune, right? It costs a fortune. What did it cost per startup to put up your co-location? It was so expensive. It was so expensive. Million? $2 million. The world SaaS hadn't been invented.

Starting point is 00:51:04 invented, we were an ASP back then. But you had to raise capital to buy hardware, build your own data centers, pay for the bandwidth, and then Amazon came along and solved that for everybody. So I just think this is the net, this is knowing what we know now about how transformational AWS was, it's hard not to look at this wave and say, gosh, this is going to be a huge turbocharger for our economy. 10x what AWS did. Yeah.

Starting point is 00:51:28 That went from a, I think the average startup probably spent 500K in the first year to set this up, about 250k in service. I know we did at Mahalo when I did my last startup Mahalo, we spent about a quarter million dollars putting service together and putting bandwidth together at a co-location facility. Plus, you had to have two cisadmins, SISOPs people. So you're at about a half million

Starting point is 00:51:47 dollars and then steady state, probably a half million dollars a year. So first three years, we probably spent $1.5 million. Our friends at Microsoft, our friends at Oracle, they're being really aggressive and trying to get into the startup community and I've had good relationships with both of them.

Starting point is 00:52:03 they'll offer our startups, you know, $100,000, $250,000 in credits. And that covers them for the first five years. So it went from $1.5 million over three years to free. I mean, that's extraordinary. And just going up a level, Jason, you know, David, you mentioned LPs. How are they looking at this whole AI universe? And there's been a lot of capital thrown into the infrastructure layer. All that money that is being spent on infrastructure, not only by Amazon, Microsoft, Google, etc.,

Starting point is 00:52:32 but some of the newer companies, Open AI and Anthropic and these other companies are raising capital is going to benefit the startup community that we're talking about. And I think the output of that, one of the reasons all of us are bullish on the next three, five, seven years, you're going to have more well-run companies that need to raise less capital. The founders are going to own more. Investors will get a better return on their capital. And the outcomes could be bigger. We should have more profitable companies where the outcomes are bigger because some of those infrastructure companies today are absorbing, they're going to spend a lot of money. I mean, one of the challenges Sam has publicly talked about with Open AI, he had to go out

Starting point is 00:53:09 and raise billions of dollars to build out the infrastructure for Open AI. It wasn't doable on a shoestring budget. But once all that infrastructure is there, it's kind of what Level 3 did for the internet way back when, go back 20 years ago, somebody had to build out all the bandwidth that we're now running the internet on. And it was very expensive. And there was a bubble and it popped and level three stock tank. But the output of that was there was fiber everywhere.

Starting point is 00:53:31 and we take sort of gig to the home for granted, but, you know, windback clock 15, 17, 20 years ago, you couldn't get fiber to the home. Yeah, look at this, the headline you just put up. All that fiber that people thought was crazy. Yeah, 2002, people thought it was crazy. And today, it's all getting used. And think about all the amazing things that are happening in science and healthcare and banking and all these other things.

Starting point is 00:53:54 We're in the first or second inning of even understanding what this next wave of AI is going to do. you know, they overbuilt fiber to the point at which the companies went out of business. Yeah. They invested so much and they couldn't sell it. They went out of business. And then Google and other folks bought this fiber up. It became, there was a term, dark fiber. Fiber laying around.

Starting point is 00:54:18 Jeff and I are all to remember these days. Yeah, yeah, yeah. And the, the paradox, the irony was internet traffic. They were correct. internet traffic continued to grow. Who was the beneficiary? The beneficiary of all this was YouTube and Netflix, Dropbox. You couldn't build applications like that in the 90s.

Starting point is 00:54:41 In fact, my friend Mark Cuban, who did broadcast.com, said YouTube and Netflix are insane. It will never work. They will break the internet. And in some ways, he was right. If everybody had gotten on to Netflix at the same time, YouTube at the same time, and it had gotten to where it is now. But we were able to keep up with it. A lot of other things happened with compression and storage and the plumbing

Starting point is 00:55:01 cost of storage. But sometimes it overbuilded and a glut, it kind of makes people be like, oh, yeah, I can get truffles and lobster at a lower price. Yeah, let's make, you know, lobster sandwiches for everybody and we'll charge 20 buck to them. Like, if there were too many lobsters available, and, you know, in New York at the turn of the century, lobsters were so available. It's what poor people ate.

Starting point is 00:55:21 They were considered like the cockroaches of the ocean and they take them out of the East River in the 1800s. and that's what poor people ate. Because everybody else is like, oh my God, you want to eat those things, those bottom feeders? Like nobody wants that. Supply went down.

Starting point is 00:55:33 They became elite items. But it's really such a great thing. And I just wonder, are we going to be sitting here in two or three years? And there's H-100s and data centers everywhere. And the software developers have figured out how to build these language models so efficiently and small and in verticals that you don't need all this.

Starting point is 00:55:53 And, you know, people like Grock doing inference. so well and efficiently, they get rid of 99% of what people need in terms of compute. This could go in the opposite direction if we overbuild. So I am fascinated to watch this. One of the things I think with these generational transfers is that every time the game changes, you mentioned the early 2000s is about who could fundraise $5,10 million pre-product. Then I went to the engineering phase, whereas who could build the best product.

Starting point is 00:56:22 One of the inevitable things that I think we'll see in the next five to ten years is who could distribute their product in the most effective way. You see the rise of influencers. You see other clever ways to hack distribution. I think will be an inevitable battle line once you have products that are able to scale very quickly and very cost effectively. Well, one of the reasons I love where Ryan is sitting is he is sitting at the epicenter of the way small businesses buy software and technology. If you wind back the clock to why Bessemer and Notable and much of other good firms got excited about his vision. It was, here's a $500 billion category where small businesses spend on technology and we're going to sit at the center of that. And, you know, Ryan, you mentioned earlier, we're joking that you bought the domain for $50 because nobody was buying AI domains, but you were ahead of the curve.

Starting point is 00:57:09 And I think we're seeing that today. A lot of businesses that were pretty excited about at Series B and C and D got started seven, eight years ago and made the bet on. on this AI trend before it was cool. Yeah, exactly. And also, Jason, your point about, you know, like YouTube, for example, being the beneficiary of, you know, kind of in the dot-com era, everyone laying all this fiber and building the infrastructure, I think folks in the application layer, we're going to reap a lot of benefits of a lot of the money being put on the ground.

Starting point is 00:57:36 Now, I mean, you know, one thing we've talked about internally here is if you think about, like, who is the biggest winner as a result of refrigeration technology? It wasn't the refrigerator companies It was Coke coal Should give us another minute to figure that I was like who was it I was going to think ice Because ice

Starting point is 00:57:56 You know you had to There were people who were taking ice from Canada Or something cutting it up or whatever Putting in boxes And putting in boxes And there were ice delivery So like then all of a sudden You could make your ice at home

Starting point is 00:58:07 And that was like pretty crazy I'm also wondering if like Meat and milk going bad And you know you can have your milk for a long longer, but that's more efficient on the consumer side. But yeah, Coca-Cola. Yeah, nothing like an ice-coal-co. Warm Coca-Cola is awful, right?

Starting point is 00:58:21 Ice-cold Coke is delish. Yeah. And so I think, you know, all of this stuff, to me, it kind of feels like a tail is oldest time, right? You know, you look at sort of like the size of a computer that would be, you know, needed to do, you know, basically what a Cassio watch could do today. You know, it's the same. I mean, how many times has this cycle repeated itself?

Starting point is 00:58:43 So I think, yeah, the point about, yes, Some engineers somewhere are going to figure out how they can operate their own models with vastly less compute. That's probably something that will happen. And again, I think folks in the application layer who are solving very specific, often vertically oriented business problems, stand to be some of the biggest winners. And it's all tied together in the economy, right? I had lunch yesterday with a guy who started a chain of restaurants. He's got several locations in the Bay Area. and he was telling me how he started his business pre-pandemic, but just as DoorDash was starting to get scale.

Starting point is 00:59:21 And he said, I don't know if you could build my business today without that. I rode that tailwind on Uber, Uber Eads, DoorDash. We built a social media business where people understand what our brand is. We've got, we're doing a lot of volume. He has a location in San Francisco that the area no longer has as many people living there, no longer has people coming into the office. And so the foot traffic went way down, but their DoorDash traffic is. gone way up. And so there's just, there's all these interplays in the economy that I don't think we quite understand yet. I think economists are really, you know, everybody was projecting recession

Starting point is 00:59:51 for the last two years. It didn't happen. Why not? People are having a very hard time getting their head around all these different variables. We've got a record number of people that have started small businesses, right? 10, 15 million small business applications in the last three, four years. We've never seen anything like it. And nobody can get their heads around it. Well, guess what? They've got Shopify. They've got Square. They've got all these tools and technologies they can use to launch a business today. I just think we're in the middle of a really interesting time frame where all these things are connected.

Starting point is 01:00:19 And AI, Jason, back to your point about productivity, it's going to be a turbocharger. It's going to be like lighter fluid on a fire that's just getting going around technology. It's going to be, it's a good reason to be long. Having said that, I do think we're just entering into the It's Overhyped cycle. So back half of 24, it's overhyped. Stocks are going to take a hit. People are going to be on TV saying all these guys have no real AI. And then in 25 and 26, you'll see these things that come out of nowhere and everybody's like,

Starting point is 01:00:46 oh, my God, I can't believe all the success. I think there's like a major macro discussion that has occurred from the past two or three years that we're going to need to reset going into 20 or as we wrap up 20, 24 and go to the back back nine, which is, wait a second, all these layoffs were done. Companies got stronger. We thought that earnings were going to go down, but earnings are a function of how much you spend to make money and the earnings are doing fabulous. And the efficiency means you can be Uber.

Starting point is 01:01:16 And Uber I think didn't add any employees for two years, but they keep growing 30%. And, you know, obviously we saw what happened at X, but meta getting rid of 20 or 30,000 people, I'm not sure what the exact number was. And you know he's going to do it again. There's a rumor he's going to do another 10. It's like already you five extra stock from $92 where I bought it,

Starting point is 01:01:35 it's up to 500 or whatever it was. It took a little hit today. But there's a macro discussion here of, how come unemployment is so low? How come inflation, you know, gets to 3%? We can't get it back down. We're still in five, whatever we're at, you know, in terms of like the rate cuts and we're not having rate cuts. Like, what is going on in the actual economy in America that, you know, it feels like people should be in a panic.

Starting point is 01:02:02 And then I open up like TikTok or Twitter and I start seeing, because I like to look at layoff talk, which is like a very specific TikTok, because I like to have my finger on that because I'm hiring. I'm going to hire three, four, five people this year. And I'm investing in our business. I'm like, hmm, these people are saying they can't find jobs or that they're finding jobs that are 50 percent that are offering 50 percent less salary. And I'm like, huh. So that's what's going on here. It's not that the economy is going to crash or something. It's that I think leadership is taking it really seriously, this, you know, get fit movement that Brad Gerson are talking. talked about a whole bunch or that Elon kind of led, and I think Brad kind of named it after that,

Starting point is 01:02:45 and then pushed Zuck to do it, and he did it. Now it's got all this momentum about getting fit. You know, part of getting fit is saying, you know what, we used to pay 150K for your position, but we can have somebody out of school do it for 70. And you know what? There's people in Portugal and Manila who will do it for 35. And that's a very weird thing that occurred, Jeff, because you mentioned remote work essentially. I think what remote work is such a major driver of this. What leadership figured out during COVID, I know I did, was that, you know, hiring somebody in another country who doesn't care about stock options or carry in a venture firm,

Starting point is 01:03:27 like they don't have this in Portugal or Manila, whatever. So that's like they don't even want it. You would have to like spend months explaining it to them for them to even care about it. And they probably wouldn't. They would think it's some kind of a scam. putting that aside, I have two virtual folks. I'll talk about this,

Starting point is 01:03:44 another, I'm going to make an announcement about this virtual investment I made next week in a virtual assistant company and I'm the first investor in it, but I don't want to spoil it yet. I've got to announce next week.

Starting point is 01:03:56 And this company, we have two virtual assistants for $36,000 a year each. And then I compare them to entry-level Americans. And they're both in the Slack. they're and they cost half the price and somebody else manages them and trains them and if they don't work out they give you a new one next week

Starting point is 01:04:18 and I'm like, huh, I don't know, there's about a third of jobs I could see these folks doing. What are the constraints, Jason? So obviously they could replace many other functions, but what functions could remote not replace? You tell me, you know, because how much of what we do is in person now. and did you see the New York there was a restaurant that had a you know the standard you said you're an investor in toast by the way Jeff no but one of the former exec from toast is on the board of electric with Ryan Emmanuel Scala she's terrific I mean think about how toast just has changed the restaurant business you don't need waiters you just need transformational and by the way if you've got kids and you got to order an extra round of dumplings trying to flag a waiter down for 10 minutes is death but ordering it and getting it to your table and in 10 minutes is life.

Starting point is 01:05:10 You know, especially when, you know, two eight-year-old daughters are fighting over who got the last dumpling. They had a person from Manila, Philippines somewhere or India, it's like 1 a.m. their time, they're taking New Yorkers orders over Zoom. They're literally just in a Zoom window.

Starting point is 01:05:25 And Zoom, basically 24 hours a day for free. And so you could order from the kiosk or you can order from the woman on the computer. Okay, that person's getting paid. I can tell you what, people in Manila get paid, cashier in Manila gets paid a dollar an hour. A serious person,

Starting point is 01:05:42 you know, with a college education, gets paid five an hour. So you start thinking, you know, 10,000, 12,000 a year is like what a college educated person gets. Two or three thousand dollars a year is what a cashier would get,

Starting point is 01:05:54 a non-trained person, a very, you know, entry level first run. So, um, yeah, it's kind of nuts.

Starting point is 01:06:03 And if a restaurant can figure it out, what's happening corporate America Ryan? I just hired a phenomenal executive assistant in the Philippines. He's fantastic on top of things, hard to imagine going back. And, yeah, got us thinking internally, you know, what, what, yeah, what, you know, what, what, what, what, what, what, what, what, what else is there, right? And I think, you know, I think, when I moved back to New York City in 2016, and, you know, Google had that big office over, uh, over meatpacking and I had a couple friends who worked there. It's how come by, we've got this sushi chef and, you know, all the stuff. And we go over there and a table full of product managers bragging about the fact that they can't remember the last time they did any meaningful amount of, you know, work in a given day and they're all making, you know, five, six, seven, $700 a thousand a year. And I think rightfully, yeah, that was the biggest heist in tech for a long time.

Starting point is 01:07:00 It's like, I'm just going to go there and hang out and do nothing for a while and, like, make way too much money. And then people are surprised when those jobs start evaporating. So I think there's going to be a flight to quality. There's going to be a flight to, what are the things that you as a human can do and you can do better than, you know, than anyone else? but even for us, you know, we've got some phenomenal stateside engineers. We also have a lot of excellent people in Brazil, both ICs and engineering managers.

Starting point is 01:07:30 And so it's hard for me to imagine a world where to be competitive, you don't think globally and don't think much more realistically about where everyone sits and what that means for the business. And that process of working with those folks overseas has gotten so smooth. I have another company that I'm involved in where, Jason, back to your point about setting aggressive goals. I remember we were having a December board meeting and the founder said, we want to move all of our basically front end lead gen and go to market to this other area in Argentina by June. And several the board members said, well, why don't we do it by April? And he said, well, that seems a little crazy. We got a lot of it. And ultimately, he said,

Starting point is 01:08:09 you know what, let's do it. We'll do it by April because we're going to learn in that three month window from April to June. We're going to make some mistakes. We're also going to learn a ton. Guess what? Rolled it out, did it. Cut their count. back in half. It's going to be the reason that he's pointing the company towards profitability later this year. So savvy, sophisticated founders, they're not waiting, they're figuring this stuff out, AI is going to play a role, offshore is going to play a role, and all of it is connected because of remote, right? We're now much more comfortable as a society working remote. Think about our industry. I mean, we're a tiny microcosm of the universe, but how much more

Starting point is 01:08:42 effective are we as investors meeting people over Zoom than we were five years ago? I remember driving around San Francisco, walking up and down streets, you may be met two or three people in a day. Now I can meet five or six founders in a day, half hour, it's better for them, it's better for us. If there's a great fit, we get together in person. I met somebody today. We're getting together tomorrow in person for lunch. It's a way better model. It's way more efficient.

Starting point is 01:09:06 You apply that on a bunch of other industries that really matter to our economy, and I just think it's going to be not only the virtual piece, but the AI piece is going to be a huge tail win. And to your point, Ryan, how much time did you spend raising money for? your startup pre-COVID and like going to Santo Road and taking meetings. Even in an aggressive day where you said, I'm going to do four meetings a day. You know, that's a lot. And you'd have a driver and you would be two hours at Sequoia, two hours that finer, two hours at my last company got to a point where my co-founder and I said, he goes literally,

Starting point is 01:09:37 he's like, you need to stay in the office and run the company. I'll go handle this because even at the seed stage, it was a full-time job. And, you know, every round, you know, at electric, COVID, you know, on word was, hop on Zoom, do the thing, get back to work. Yeah, I mean, and you had this weird thing. Whereas human beings, if you're going to fly out for a meeting, well, of course, I'm going to take you for a meal. Of course, we're going to have a meeting.

Starting point is 01:09:59 And we probably should do one other thing. So you flew out, I mean, to fly out and do a half hour meeting, be like, bye. I mean, it was like, I spent. Ryan, Ryan can attest to this. He crushed me in SoulCycle before we invested here. Oh, yeah. I'll give Jeff a lot, a lot of credit. I think he emailed me on a Monday.

Starting point is 01:10:17 I said, hey, I think the rounds coming together quickly. He's like, we can be there tomorrow to take you for dinner. I said, hey, well, I promised the team I would go with them to SoulCycle after work. He goes, I'm there. Love it. Shut up. We had the little barbecue steak and SoulCycle. And Ryan put, thankfully, there was somebody else on the team.

Starting point is 01:10:37 I'm a larger human being. There was somebody else who was my size who rode in the back with me. I didn't have to be too embarrassed there under the candlelight at SoulCycle. But Ryan was clocking, you know, well, however fast you were riding while I was in the back huffing and puffing. Well, what matters is you might have lost the SoulCycle class, but you won the deal. Yeah. I was going to say, that's how you know around us truly oversubscribed, Jeff, when you get beaten

Starting point is 01:11:00 in Sol Cycle. Yeah, yeah, it was fun now. On that note, let's wrap up with Jeff's latest three investments and also Ryan, you tell the audience a little bit about Electric and what you're looking for in the market. Yeah, Ryan, you get a full plug. Go for it. Tell us about the company who you're your, your customers are and who you're hiring.

Starting point is 01:11:19 Thank you. Yeah, Electric is the easiest way for small businesses to manage IT. You want to manage your devices, software, get more secure. We are designed specifically for companies that don't have any in-house IT staff. So if you are a small business and you care about the security of your employee and customer data and you care about your staff not wasting time doing things like buying and provisioning computers, go to electric.AI, check it out, sign up for a premium product online, and anything else you need. I mean, feel free to hit me up directly. I'm very easy to reach, and we love our

Starting point is 01:11:58 customers. Who are you hiring for? You hire a bunch of IT professionals across the country to work on this? No, at the moment, we really don't have too many open positions. We've just got absolutely rocking team. So speaking of remote work, do people want to put employee monitoring systems on? Is that becoming a thing? It keeps coming up like, and I wouldn't do it with the high-end employees we have, but call centers record everything on a computer. If you want to work from home for JetBlue doing customer sport, you don't expect that. Like, the screen's not recorded the whole time and they're tracking you and how many calls you're doing. And I looked into it because I wanted to increase productivity

Starting point is 01:12:40 at our company. And I was like, hey, is there way people could get a private report or maybe them and their manager of just how much work they did. Because we can see it in Slack and Notion and Google Docs. We could see your activity. So if you think somebody was squirreing around, you could say, how many days did they log into Slack? And I look at, I don't look at it every month, but I've looked at maybe twice in the last year, just who logs into Slack every day, right? And it was pretty interesting to see who was like 30 of 30 days and who was 19 of 30 days.

Starting point is 01:13:09 And did they take the vacation days? That famous incident when Marissa took over his CEO of Yahoo. and they had like 10,000 employees that were all working from home. And I guess they pulled the records for their VPN. And ultimately what she found is that the vast majority of employees, when they were working from home, were in fact not working because they weren't even logging to the VPN. So they couldn't actually engage any work.

Starting point is 01:13:32 What a lot of companies realized was that was more a function of working at Yahoo at that time than it was with anything else. Yeah. So do people want remote employee monitoring? And what's the best practice? Yeah, we don't, we don't see that. You know, and that's also something that we always tell our customers. You know, we have an agent that's installed on the machine that cannot see anything that you're actually doing.

Starting point is 01:13:54 It's really just looking at the health and the security of the device. We've no idea what you're doing. But, yeah, I mean, I think, you know, what we see across, particularly our startup customers, the departments where that really matters is ultimately either sales or engineering. pretty easy for engineering teams to see just what, you know, the amount of code that folks are committing and pretty easy looking at Salesforce reports who's actually getting in there and making calls. So I don't want to say it's a solved problem, but I think for the people where it matters, a lot of the tools they use today can kind of tell them who's busy and who's not.

Starting point is 01:14:30 All right. Lightning around, Jeff, you're at three. Go. All right, three companies. We recently invested in. We have a company called Homebase that is kind of an operating system for small businesses. So 200,000 merchants in America, roughly two million workers are on the app. This is obviously something I'm very passionate about. We talked about it earlier in the pod.

Starting point is 01:14:50 Great company, John Waltman, terrific founder. He and Rishi have built this thing over the last decade. So note to founders, it takes time to build great companies, but this is a company that is valued in the hundreds of millions of dollars, north of 50 million an ARR growing very quickly, doing well. And just a company that we're really excited about and extremely well run. And I will just tell, you know, note to the world out there, it is very challenging to raise capital right now at this stage for companies. And this is a real testament to the cohort data, the margins, you know, all the things we talked about earlier.

Starting point is 01:15:24 These guys have their stuff together. And it's just an impressive team that we think is building in a great space, similar to what HubSpot did, Toast did, Square did, Shopify did, going after this, you know, 40% of the economy that is small businesses. So Homebase, really exciting company. Second, I'll give you Arteria. It's an AI bet. Ryan mentioned earlier, vertical AI. So this is a company that's going after the banking industry. Probably also will go after insurance, healthcare, energy, places where a lot of contracts,

Starting point is 01:15:58 agreements, documentation, a lot of data surrounding all of that. Very important to the businesses. You think about the banking industry, literally executing contracts and trades every day. There's a lot of data there. They've built a proprietary set of. of AI that can extract information from that and help companies make better decisions on the fly and also just understand risk exposure and things that are really important to these very large companies that are very important to our economy.

Starting point is 01:16:21 And then the third one is a company called Vercel. Hopefully all of you guys have heard of Vercel. It's an incredible infrastructure company, modern developer platform. Every month, over a million developers are building new projects on Vercel and launching them. Huge beneficiary of what's happening with Gen A.I. and just an amazing founder in Guillermo, who has also become a great co-investor for us, a great angel investor that we've partnered with on a number of new investments. So, Roussel is one of those companies that we think is very well positioned to take advantage of

Starting point is 01:16:50 everything that's happening in AI. It's on the infrastructure side, so not something you will hear as much about unless you're a developer in which case you probably love Versel. So another company we're excited about. Fantastic. Take us out, David. What a great episode. Amazing.

Starting point is 01:17:04 I love having Ryan on because Ryan is an angel. investor and a founder, that is really dynamic to have you have both of those hats on. And Jeff, great job. Excellent. Well, it's been another great episode of the liquidity podcast. I love the discussion for Jeff Richards, Ryan Denaheith, Jason Callicanis. This is your host, David Weisberg. Thanks for listening.

This Week in Startups - How AI and remote work is coming for your job | E1940

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