This Week in Startups - How VCs evaluate pre-launch startups + Mycocycle's Joanne Rodriguez | E1540

Episode Date: August 21, 2022

Sunday show! First up, Jason breaks down how VCs evaluate pre-launch startups (1:54) and startups that are going after a market that doesn't exist yet. (15:21) Then, Molly is joined by Mycocycle CEO and Founder Joanne Rodriguez to talk about developing fungi-powered toxic waste removal and raw material generation! (30:36) (0:00) Molly intros today's segments! (1:54) VC Sunday School: How Jason evaluates pre-launch startups (13:46) OpenPhone - Get an extra 20% off any plan for your first 6 months at https://openphone.com/twist (15:21) How VCs evaluate startups building for markets that don't exist yet (20:51) Comparing early examples of traction: pre-orders, crowdfunding, LOIs and more (29:16) Masterworks - Skip the waitlist to invest in fine art using at https://Masterworks.io/twist (30:36) Mycocycle CEO Joanne Rodriguez joins to talk about fungi-powered toxic waste removal and raw material generation (38:26) Helpware - Go to https://helpware.com/TWIST to get $1000 off your first invoice (39:33) Mycocycle's finished product, how they're recycling raw materials, traction so far, future of the business Disclaimer: Since inception, Masterworks has sold five paintings from the collection. All sales are net of all fees and expenses. The sale of any paintings from the Masterworks collection, and the option to waive fees, is at the sole discretion of Masterworks and paintings may be held in excess of or up to 10 years or longer. Past price performance is no guarantee of future results. Any historical returns, expected appreciation, or probability projections are not guaranteed and may not reflect actual future performance.

All right, everybody, welcome to the Sunday edition of this week in startups. No such thing as a day of rest. No, you get Saturday, but who knows? We'll start releasing content on Saturdays, but we have a great VC Sunday school today. We're talking about how should you evaluate a startup if they are pre-traction. They haven't launched their product yet. They don't have any traction. How do you decide who gets money when there's no product to play with?

There's no customers to talk to. It's a great topic. It really is. And you would not expect it to be as tight. tactical and specific as it is, but that's Jason for you. I got tactics. And then in this week in climate startups, I sit down with Miccosycle founder and CEO Joanne Rodriguez. This is a company that uses mushrooms to remove toxins from construction waste and turn it into new building materials.

So get a big chocolate bar filled with non-psychoactive mushrooms. Order a mushroom pizza. Don't put the, don't put the wacky mushrooms on it, just the regular delicious ones, and enjoy this great show. It's going to be great. Stick with us. This week in startups is brought to you by Open Phone. As a startup founder, a lot of mistakes are easy to roll back, but using your personal cell phone number as your company number isn't one of them.

Open Phone makes it easy to get business phone numbers for you and your team, right on top of your existing devices. Visit openphone.com slash Twist to get 20% off your first six months. Masterworks is the first company allowing investors exposure into the Blue Chip Artwork Asset Class. listeners can skip the wait list by going to masterworks.io slash twist today. And Helpware helps you outsource the tasks that slow your team down. From data entry to world class customer support, Helpware can help make you bionic. Go to helpware.com slash twist to get $1,000 off your first invoice. All right, everybody, it's VC Sunday School. We're in month seven of these. And if you go to this week

and startups.com slash VCSSS. You can see a list of all of the VC Sunday schools. We're going to make a super cut. We're going to make this into course maybe afterwards. It's kind of becoming like a whole curriculum on being a venture capitalist. It really is. It is so interesting. And it's just kind of evolving organically into not only learning in public, but super good

content. And so this, today's topic was kind of sparked by our discussion about boom supersonics deal with American Airlines. But we've also had a bunch of conversations. recently where, you know, when you're evaluating a startup, it's very interesting to me to see which stuff you throw out. Like, you're like, oh, a letter of intent? Nah. Or even like hardware, nah, only talk to me about the revenue of this and that. And, and then there's this, you know, as we get earlier and earlier with companies, or in my case, I'm seeing a lot of companies that

are like coming out of R&D and about to commercialize and there's not really a product yet. but there's potentially a lot of potential. So how do you evaluate? What are the metrics that matter when you're evaluating a company that's like pre-launch or even pre-traction? Great, yeah. So just to clarify what we're talking here

for people who are neophytes and just to take out all the buzzwords, if a startup has their product in market, it's in the app store, it's available to purchase on Amazon, you can use it. Well, then you're going to know the number of customers who are using it.

You're going to know how much they're paying, you know, no profits. You're going to have all that, what we'll call traction. It would be an umbrella of traction data that we could look at. That's our bread and butter. We like to look at year one of traction. So that would make us seed investors, early stage investors. Now, some seed investors, accelerators, angel investors like to invest even before the product

is launched. This is incredibly high risk. I tell everybody who's starting as an angel investor, do not do this. Make your first 20 investments based on products in market with traction. Now, do I say that to eliminate angel investors from investing in pre-launch startups? No, there's plenty of people who do it. Still, even though I tell people that to do it, I do that because I want angel investors to have a good experience because the attrition rate, even amongst launch products,

is 70%, I would say, 70, 80% fail. Of pre-launch, 99% of people in this category are going to fail. Either fail to deliver the product or the product gets launched and it doesn't become an outcome for a venture capitalist or seed investor. Okay, but how do those companies then get funded? Would be the question, right, Molly? Like, well, how do they get funded? The truth is, they are most commonly bootstrapped,

which means the founders pay for it themselves. They work at Google, and on the weekends, they build this. They save up some salary. They work for six months for no salary, and they work off ramen, right? Or they go to an accelerator. All of those things are possibilities. But sometimes people do invest before there's a product and before this traction, because in order

of the freebie traction, there has to be a product. So what would you look at? And we don't only mean Adam Newman, to be clear. We do not only mean. Right. Well, Adam Newman is a great example, a very instructive example. The first question I ask when looking at a pre-launch company, so the product's not in market, they're not, they haven't built the product yet. The number one thing I look at is has this founder had a successful exit? So number one, have they taken a company public? Number two, have they sold a company? Then if they have sold a company, gold is public, silver is sold a company, and then there's bronze, sold a company, and then C is the bronze sold a company, and maybe you didn't get a profit for your investors, right? Maybe you got them

their money back, or it was what's called an aqua hire, an acquisition in order to hire the team and save yourself from having to hire 20 developers on the open market. So that's, that's the number one criteria of backing a startup pre-product launch. Is the founder. And then how do you go about the founder? I'm sorry. Yeah, yeah, yeah. Have the previous success.

Track record. Correct. Okay. Track record is a way to say it. But even better on track record, not that you worked at Google. Did you take a company public yourself? Yeah. Did you?

So, and then you just, we just, jump the fence here for the second one, which is, have you worked at a startup that had an exit? Have you worked at a startup that went public? And what did you do there that was meaningful? The thousandth person at Google? Maybe not as meaningful as the third hire at YouTube. Third hire at YouTube that did product, seventh hire who started the ed business, whatever, you know, like that's meaningful. So you have to double click on it. It's not just that you worked at Apple and Google. because working at Apple and Google as the 10,000th or 20,000

employee at each is nice but it's not startup signal nice. That is a very good and very subtle note because you see a lot of slides that say like X Tesla X Google. It's sort of like stacking up the brands. Yeah. On that, yeah. Okay. It could

be a vanity metric. It could be vanity. Here's three logos. Our founding team and we tell people to do this. We tell people in our accelerator. If you're going to talk about your founding team, put the logos of where they previously worked. It's super important. But you should as an investor double click on that.

Okay, your team worked at Apple. What did they do? They worked at the Apple store? Right. You can literally do that. I mean, that would be really gnarly to do. Don't do that. It makes you feel like you're lying.

But, you know, if you worked at Apple for 18 months, yeah. Yeah. You know, in 2020, what project was it? Was it the AR glasses? Okay. Great. And you're starting an AR software company? or a marketplace? Great, let's talk.

Okay. Let's say we've got noes on both of those. No, the founder has not taken a company, public or sold it, and was not you know, number two at the Apple. It was not a significant contributor at another successful company.

Okay. So then you could start looking at do they have some unbelievable skill in the world and what work have they done in the world? So if they were working on the open source project for WordPress for six years and they were the top five contributor and now they want to start a WordPress competitor or a decentralized WordPress competitor that's, you know, on the blockchain or whatever and it's no central authority. Okay, great, great starting point.

You did commits for six years? Okay, we got a way to actually look at the work you've done in the world. Okay, that's pretty good. You got some serious skill. Oh, you were the number one sales executive at Snowflake, and before that, you were number one at GoToMeeting. So you worked in sales twice, and you know all the customers for the past 10 years, and now you're going to start a Zoom go-to meeting killer. Okay, now it's getting interesting. So that's what I would look for next. Okay.

Is like, is there some specific skill and insight this person has, right? And if I would ask you, Molly. Like, they know the weaknesses of the industry they're going after or into. This would be called domain expertise by some people. So domain expertise could lead to unique insights. So I would ask you, in your first six months as a venture capitalist, most of the companies you see are ones that can't clear market. So let me explain what that means to people.

You're going to see people who've been trying to fundraise for a year or two in some cases. They're not fundable based upon that piece of data. They have not yet been funded, and they've been trying for a year or two. therefore they're as the market is saying it's not me saying it's not a dig as constructed the market has chosen not to fund them which would mean they're unfundable of the companies you see how many fall into that basket of not being funded or being unfundable and you're seeing them because they're trying to get meetings and they're they're on market if they had been fundable they wouldn't be racing for 18 months right out of 10 startups how many

fall into that bucket would you say out of 10 i'm going to say seven. Okay, I was guessing six. Exactly what I experienced as well. Yeah. So this is another thing to think about as you become a venture capitalist. If you're seeing it and the deal is not closing, there might be a reason why this startup is still on the market. It might be too early.

It might be the wrong founder. It might be poor execution. It could be any number of things. They're just not good at executing is the most likely situation. or there are a bunch of idea people and there's no builders on the team, therefore there's no product to look at and if they had shown product velocity

as we've talked about before, the product constantly improving over time, they probably would have got somebody on the hook to make an investment. And so these are the things you kind of look at to determine if the startup should get funding before they have a launch. Could also be something super attractive

about the customer, like, hey, we're going after people who rent homes on VRBO. we're going after people who, you know, run Airbnb, you know, bed and breakfasts. There are people out there who own real estate. We're going after, we're going after high net worth individuals who... Can't get a taxi. Who are trying to get a car. Yeah, like you could start to say, okay, well, these people have a lot of money.

And yeah, sure, these could be good customers. How many of you start asking how many of those customers are there? How would you reach them? What is the current solution? And that's where you sort of figure out customer base. How are they currently solving the problem? Okay, the way you're currently solving the problem is you hire a driver for a four-hour window for $125 an hour, and it costs you $500 to have a Lincoln Town car for the morning,

and that's how some baller person before Uber would have a SUV waiting for them from, you know, whatever, 10 a.m. to 12, 1 p.m. to pick them up at the airport. You would basically be buying that person's time for two, three, four hours. Okay, that's how they currently do it? Okay, how does Uber do it? Oh, they do it on demand? Oh, and it costs one-fif? Okay, rich people are going to do that.

They would rather not have the person waiting there for three hours and pay four times as much. Oh, you're going to charge 20% less? It's going to be 300 instead of 400. Probably not enough of them to make a difference. They'll go with what they know. So you can actually kind of have that. You can look at that evidence. But what does it cost you to wait?

Cost you nothing as an investor to wait. This is why founders need to understand. The other side of the table needs to understand. if you're not showing progress and you're just waiting for a VC to anoint you and give you money or a seed fund you've self-selected into a bucket

of people who VCs will say behind their backs quite unkindly that's a talker not a walker The company you say it's a talker or the founder

talker not a walker The founder just keeps talking about what they're going to do and we don't see them do it they're not of action as we've talked about being of action in the blueprint they're not of action

so they've self-selected to a group that will only build their product, only go on this mission if they've been given money. What does that tell you? They run out of money. They're going to quit. They don't care about the project all that much. They're talkers.

This is what, I'm not saying that I'm necessarily saying that. Not saying I'm not saying that. But in a world where you meet, you meet 10 people a week and in 10 weeks you meet 100, if 70 of them, of those 100 people never really make progress on their startup and they just keep talking about what they're going to do and then 30% are doing stuff,

And you only have to make 10 bets a year or five bets a year, you're going to pick the pool of people who are actually doing stuff in the world. Or have done stuff in the world. Right. Or have done stuff. All right, everybody on the phone today is Open Phones founder Dorena Kulia. Welcome to the program, Dorena. Thanks, Jason. Great to be here.

Now, what mistakes do most founders make with phone numbers in their startups? Great question. First one is they use their personal phone number for their business. And it's an easy mistake to make because you don't necessarily think about it much. You know, you incorporate your company, you put your phone number, there's all these forms you fill out. It very quickly goes from being your personal number to being the number for the company. And when that happens, there are all these data aggregators and all kinds of services that take your number and put it everywhere. Yeah.

Suddenly now there is this uptick in spam text messages. It's the worst. Yeah. And people just wonder, like, how are others getting my number? well, let me tell you, you put it in different places and it kind of snowballed from there. So that's the first mistake. The second, which is initially as a founder, you're the salesperson. You're the only sales rep.

And then you hire a first sales rep. And sometimes founders let that person use their personal phone number. Oh, no. That number, the data, everything that happens is just fully belongs to the sales rep. And if that person leaves, you lose the entire history with your customers. Yeah. And then what if that's... sales executive goes to a competitor.

Exactly, yep. Okay, everybody, Twist listeners can get 20% off any plan. For their first six months at OpenFone, just go to openphone.com slash twist. If you got an existing number, they'll put it right over for free. Head to O-P-E-H-O-N-P-H-O-N-E dot com slash twist today for 20% off. And then there is, there is a timing question too, right? Let's say you're a really early company and you're trying to, you're pre-launch and pre-traction and you have identified like a brand new market that,

barely exists yet. How do you evaluate that? Yeah. I know. This is pretty relevant in the climate thing, by the way. Everybody's like, oh, yeah, it's like, gross. And I'm like, yeah. So here's where accelerators and taking small bets while you figure these things out

exist in the world. When things are truly speculative, maybe giving somebody 100K or them doing a 250K round to build a prototype, to get five customers, to try the product is in order. The problem is a lot of founders think highly of themselves. They self-select for a group of people

with strong charisma, strong egos. That's what you want. You want a charismatic, strong-egoed, strong-willed person. So they will be strong-willed and they will believe that they should be funded

as if they've already launched the product and have 10 paying customers. So they'll want a $15 million dollar valuation for a company that has none of the characteristics of other companies in the market that you could buy into at 15 million. So this is why we always talk about the founder, the team, the customers, and the deal. The three things the founders should worry about are those first three, team, product, customer. But the fourth one, we have to look at which is the deal. If a company's coming into Y Combinator, TechStars, launch accelerator, at a $2 million valuation,

you're making 100K bet to own 5 or 6% and you're going to get diluted down to 1.5% okay, you made 100K bet you can afford to lose a whole bunch of them. You can't make a 500K bet and lose as many of them out of $15 million valuation to have a similar ownership percentage, right?

Or 750K. But the founders want that. And that's where like this marketplace dynamic exists that for people who are not doing what we're doing every day, they don't understand it. They're like, why did that person get funded? Why did this person get funded?

why am I not being funded? Why is this not fair? I'm as smart as them. But then you break it down, it becomes in a marketplace a matter of choice. If you had a choice to buy a home for a million dollars,

that's four bedrooms, and it's 30 minutes from San Francisco, and the home in San Francisco is, the equivalent home is $4 million. Somebody who doesn't have to come into the city every day is going to buy the million dollar home and pocket the $3 million.

They'll go live at Berkeley or they'll go live in Arinda, or they'll go live up in Napa. I don't, know where, you know, I don't know, Gilroy, you know, somewhere in the birds outside. Not of the locations, other than Gilroy have a million-dollar homes, but yes, I know what you're talking about. Well, I mean, I'm trying to think, well, okay, so maybe it's two versus four million.

Right. Probably right now, you're probably right. So instead of a four-x difference, a two-x difference. So the market then reflects that. And so at some point, the person in San Francisco, if they're trying to get five or six million goes, you know what, it's not a clearing market. I got to lower the price eventually. Yeah. Yeah.

And that's what happens with startups. Although it's emotional because it's your baby, just like a home. is emotional. So sometimes people take a long time to get there. And that's why VCs, it's got to be, you have to be patient. Hey, we love your company. We'd love to, you know, and we understand you're raising at 15. Let's talk when you have 10 customers, right? And so we're not going to invest yet is what we like to say in our firm, which we stole from Sequoia, not yet. And not yet, and not yet, not yet, and not yet, uh, after getting an email from him, who, when I I shared a company with him, said, you know, it's a really great company. We love the founder, Jason,

but it's not yet for us. And I was like, ooh. I like that. Great, great way to phrase it. Because then you could actually add to it, not yet, hit these notes. Right. And we should have another meeting. So I think this is, you know, where we wind up. And sometimes founders will go to market, not clear a market, and they'll say, hey, yeah,

we're going to go to an accelerator. We hear you. Or, by the way, we got five customers. So now let's talk. Yeah. And then some of them just give up. And that is the unfair in some people's minds or the brutal nature. of a competitive marketplace for ideas.

This is why the United States is still the greatest country in the world, especially when it comes to company formation and capitalism. We crush everybody, and we crush everybody with just over 300 million citizens. This imperfect system we have

is the best one created to date because it's so dogged and competitive, unfair, and brutal. You have brutal venture capitalists who are picking the best companies. You have brutal competitors as entrepreneurs who are crushing each other and executing and working harder than each year and clever

on the margins, maybe breaking some rules, bending some rules, stealing trade theories. I mean, it's just a violent, chaotic system. It's Lord of the Blacks. Look, it just is. You have to accept it at a certain point that we have a system that is rabid and Europe has a system that is not rabid. And then in rigged systems, dictatorships,

they're picking favorites. Turns out the rabid system, the full contact system that we have here produces the most unicorns, the most businesses of note. I mean, it also has a little bit of favorite picking, and we would be foolish not to acknowledge that. Sure. Adam Newman, but still. Okay, real quick. What's we worked public?

Again, remember, the first thing I said was a publicly traded company. We work publicly traded $4 billion. Did go public. Real quick. Another thing that I often see with companies that are very early who are trying to give a sense of how much revenue they have slash are going to have is that they often bring up their pre-orders, letters of intent, maybe Kickstarter funding or sales. These are awesome indicators on how to evaluate them.

It's pretty great. Is like one better than the other? Like, is it a letter of intent actually? Letter of intent means nothing, as we talk about. It's a letter of nothing. They're L-O-Ns, their lawns. Letter of nothing. Shout out to Lons.

Sorry, L-Land. No, it's a letter of nothing. And frequently, when these letters are signed, the conversation that happens is, we're trying to raise venture capital. If you sign this non-binding letter that you can rip up at any time, it'll help us raise money to build this product for you,

and it costs you zero. Plus, you'll get to do a press release and get some shine from our company on your old legacy company. How does that sound to you, middle manager? Can you sell that to your upper manager? be your CEO and they're like, they go to their CEO. No problem.

Hey, listen, we're gonna order 100 booms. It costs us $0 and boom. Now, we don't know with the boom if they're $0. Right. But it could be like, I think the Amazon letter of intent for those trucks with whatever company that was was in fact, zero. Nobody could ever tell me what the letter of intent said. It was like up to 100,000 trucks.

Yeah. But unless they're putting a thousand dollar deposit for each truck, it means nothing. Now, Kickstarters and Indiegogo are different because you put your money up and you can lose it if they don't deliver. Okay, so if the letter of intent includes a deposit, sure, it's valid. It's a pre-order with a deposit.

Pre-orders in full or deposit are super meaningful because it means somebody out there wants the product so much, they're willing to take the risk. Greatest example ever would be the Tesla Roaster and the Tesla Model Y. Huge deposits you had to put down your full amount.

Lesser example, but still meaningful. $500 for the Model 3, I believe, was in Model Y were $500. $1% of the cost of the car, I think, roughly. So 1% or more, interesting, 1% to 5%. The full deposit, amazing. It's like if people were to buy an apartment and, you know, in a condo that's being built and will be completed in three or four years, if they buy, if they put down 10%,

pretty meaningful, right? $100,000 for a million dollar apartment. Yeah, pretty meaningful. If they buy the whole thing, super meaningful. Got it, but letters of intent. Let me see it first. All right, there we go.

If you double click on it, devil is in the details and I can tell you the conversations that go on in the back end, boom. And then also with the Kickstarter, the other thing to look at is, are they selling the product for less? Oh, so this is the other trip.

Right, totally. So if I'm selling you. This happened, actually, and Colombo math occurred. To you. Yeah. Absolutely. And Mike Savino was like,

what Jason would do here is divide the price that they say by the revenue and then be like, wait, it looks to me like maybe you sold this on Kickstarter for $2 instead of the 50 you said you were going to charge. Yeah, that happened to know. I remember this case now. Math is a harsh mistress. Well, if they said, you know, what we're selling it for $100 each and we have a thousand pre-orders, you would reasonably say a hundred times. a thousand is $100,000.

And then if they only have $25,000 in revenue, and you're like, what happened? Oh, you sold it for $25 for the early adopters. Great. What's the build of materials? What's the bomb? Before you have to do shipping, before you have to do anything. And they're like, oh, the bomb is $75.

And they have to factor in returns, shipping, delays, whatever. Returns, okay. And as Brian Alvey would say, the greatest fiction ever written was done in Excel, not Microsoft Word. So awesome. That is such a great line. I'm printing that out and I'm putting it on the wall.

It's a post-it. This has been VC Sunday School. If you want to see all of them, go to this week in startups.com slash VCSS. And if you have ideas, shout out to Molly Wood or Jason or just email producers at this week and startups.com. Love to hear it. All right. And then next up, because Sunday is not over.

We have another segment of this week in climate startups. We got this week. I am continuing on the mushroom train. I'm obsessed with the fungi. I got another mushroom startup. Joanne Rodriguez is the founder and CEO of Micosycle, which uses mushrooms, fungus basically, to remove, literally mushrooms, to remove toxins from organic construction waste,

and then either sell this treated material that's no longer toxic and full of chemicals, but also turn the mycelium networking stuff into other construction material. And fascinatingly, just looked online and I see that they raised an equity crowdfunding at some point. So we were just talking about in VC Sunday school, hey, you know, where does, uh, pre-orders exist? Well, there's another thing, which is equity crowdfunding, which means civilians can. And I would say that's a, uh, a little bit of signal as well. It means you told a good story to civilians, right, or to your own customers. Again, you got to double click on all these things.

But, uh, can I ask a question about mushrooms? When humans discovered mushrooms. Yeah. What was the process? Like, you'd have a tribe of people, you'd have 20 people in the tribe, and they see a bunch of mushrooms. Yeah. And somebody comes back, and they're high A-F on mushrooms.

Yeah. And then another group is like, these are delicious, and then a third group is dead. Right. How do humans, how did they keep wanting to eat the mushrooms because it was like,

okay, these people seem like they're having a great time. I'm going to ignore the dead people over here and I'm just going to instead of eating the ones that taste delicious I'm going to keep risking it I mean yet here we all still are totally doing that like oh wine oh cigarettes

like well that'll be fine yeah I don't know man you got to watch the Netflix documentary fantastic fungi it is the most fascinating like you will come away I'm not even a lie I came away with it and I was like mushrooms

might be God. Well, like the mycelium networks yeah, since we're going there. They communicate. And how they exist over like hundreds of miles and they communicate to each other and you're like,

what's going on with mushrooms? Like, they make our brains go wacky. And they unlock all kinds of visions. They taste delicious on pizza, but they talk to each other across miles. And they decompose everything and reconstitute it. And then there's also this like the stoned ape theory that because it can, they can regenerate neural pathways.

Uh-huh. They think that it's possible that like our ancient ancestors ate psychedelic mushrooms. And that is how we evolved into like a primate that could use, uh, tools and think and create all that. Like, see, this is some Prometheus level like, mushroom sprang alien, mushroom stuff. Like I think if this, I'm pretty convinced we're in a simulation. I think I'm like 51% of the way there. And I think like the mushroom stuff is like some sort of like Easter egg in the simulation, like some sort of weird power up because it's got too many weird characteristics that don't

exist in any other like bananas. Mm-hmm. Delicious. Banana had banana bread the other day. Not talking to each other underground. Fantastic. Bananas have nothing to say. Not decomposing.

Not to anybody. Heavy hydrocarbons and turning it into like. Delicious. Insolish. I don't know. Dates. Amazing. I love a date.

grapes. There's so many of them. Amazing. They make wine. They can't recreate your brain though. No, I mean, listen, they do make wine. So you give them some credit. They can undo.

They undo the good work of the mushroom. Exactly. All right. But I mean, shout out to bananas. They are delicious. They're delicious. Yeah, they're delicious. Anyway, it's going to be a really interesting interview with Joanne.

2020 has been a crazy time for investors. Inflation at a 40-year high. Stocks are down from those pandemic peaks and it's really hard to predict the future with all this uncertainty. So instead of worrying, diversify. Last year, I invested in a really interesting alternative asset class that I'm going to tell you about right now. Fine art. This asset class is historically uncorrelated with the stock market. Now, you know I'm no expert, but I do know about performance. And for the first six months of 2022, Masserworks, 500. million dollar art portfolio was up 12.4% according to their reporting, whereas the S&P 500 and the NASDAQ were down more than 20% during the same period. And as you probably know,

Mass Work securitizes multi-million dollar paintings. Then they let any investor buy a share in legendary works. I am about to make another Mass Works investment. I'm choosing between a Jonas Wood, my guy, who I'm friends with, and maybe a Warhol or a Picasso. I've already got my basketat, so I am building up my collection here. And here is your call to actions. Just go to masterworks.com. To get priority access right now, masterworks. com slash twist to cut the line today.

Now you're going to need to see those important disclosures at masterworks. com slash disclaimer. And I'm really fascinated. Great job to the masterworks team. What a great idea. Joanne Rodriguez is founder and CEO of Miccocycle. Thanks so much for coming on this weekend. Climate startups.

Thanks for having me, Molly. I'm excited. Please tell us. it's best if this explanation comes from you. Please tell us what you're doing at Micosycle. I'm training mushrooms to eat trash and create new raw materials based out of mushroom and trash. I mean, right? That's why it was better if it comes from you.

All right. Now, let's go to the details. How does that work? Where do you get the trash? What are the materials? How do you train mushrooms? It's so good. So many questions, so little time.

But yeah, mushrooms are nature's recycling. so they've been cleaning the environment for centuries without us. I spent decades in construction products and material manufacturing and all of that waste was going to landfill and that just was bothering me. So I left my corporate position because corporate and went into environmental consulting and I took a course in permaculture design and learned about mushrooms and their ability to break down heavy hydrocarbons found in petroleum and plastics and started collaborating with scientists and formed microcycle and now we're treating the fourth largest waste stream being landfill construction and demolition waste. And then the other part of that is then to use that mycelium to create new

materials because it's not only nature's recycler, it's nature's builder. So, Mushrooms can literally break down construction material. Like, I think when people hear the idea, you know, of converting waste into some other product using mushrooms, they're thinking food waste or some kind of bioorganic. But you're really saying all of that stuff that's a byproduct of a construction project can be eaten effectively and transformed into mycelium. Like, we need to get a little more into the science here. Right, absolutely. So we use a classification of fungi called white rot mushrooms, which is huge. There's a ton of species in there. So they're very rigorous to break down forest, right? You see mushrooms growing on a dead tree. It decomposes it within months. We're basically taking that same mechanism of the fungi, the mycelium, the root structure, that dispatches these enzymes to break. it down. It eats wood for food, right? And it converts heavy hydrocarbons in nature just to something less available and less complex, almost like photosynthesis. So think about like fourth grade

earth science, right? Where we learned about these natural conversion processes, that's what the fungi are doing. But because they're super strong, they can break down woody mass. They can start to detoxify and neutralize heavy hydrocarbons as well as break down the physical materials. And what we get at the end is this matrix. For people who are, sorry, just to back up even for another definition, what are heavy hydrocarbons for people who aren't familiar with why this is such a big deal? There we go. Petroleum based materials.

Yeah. Sorry. I get in my own science mind. That's what I'm here for. Yeah. But yeah, no, I mean, pretty much everything that we, the carpet under our feet, the roof of our head, the walls around us, all have petroleum-derived products or chemicals in them. And those go to landfill in mass. They're hard to recycle for a reason. And usually it's

because there isn't a process between them being taken in by a recycler or a waste hauler and a connection to an end use that's viable, that shows validity into new markets. And so we're serving as that intermediary to take this waste stream. And to put it into context, we talk about like food waste, plastic waste, municipal solid waste, construction and demolition waste is twice the amount of that every year in the United States. Wow. Yeah. But it's just not as accessible, right? We don't think about like where the shingles on a re-roof went or the carpet that we tore out when the contractors generally are responsible for that. It's out of sight, out of mind. And so we're running out of room. And it's, yeah, that all goes into landfill. So let's now we'll sort of break this down into

the parts of how you accomplish this. How do you access that waste? Well, right now we're working with construction and demolition recyclers and material recycling facilities. So there's a whole sector of business dedicated to creating end use out of wood, metal, concrete, aggregate. Even some asphalt roof shingles get made into new roadways, but just not in an amount large enough to make a dent. So we're working with them as our primary partners right now are mobilizing on site. They're already handling the way so we don't have to become a logistics company. We just have to provide a process.

that is easy to scale for them, easy to use, and produces something that's viable for use into new products or that they can gain value from. And so then do you pay them for the waste? Do you have like a partnership? Do you co-locate there? Well, we can do that. We certainly can do that where they would license the process

and then they'd pay us for the treatment. So we actually develop our own bulk treatments. But they would facilitate the process on site. So it would be a licensing agreement and then a per ton treatment in terms of the way we would go to market with that waste sector. We are dealing with a lot of manufacturers, though, who are interested in licensing, building their own facilities that we partner with them on.

And then in that scenario, we get the licensing, the per ton treatment and then some royalties of all the, off of the products that it gets used into. So, and then there are scenarios where we're going mobile, right? We're going to where the waste is. And we're decentralizing waste management. All right. So now you've got the waste.

You need to apply your mushrooms. Yes. What does that facility look like? What does end process? Yeah. I mean, it's basically three steps. One, we create our own treatment. So that's in our lab, that's separate.

When we get onto site, it's basically three steps. It's pretty easy. One, we work with waste that has usually been ground down. So an asphalt shingle gets ground down. That's very common practice, or wood, or gypsum drywall. We blend it with our treatment, put it into containers for incubation, and the end of four weeks. We harvest a byproduct. So there's a post-finishing process where we just stop the growth.

And so for that incubation, we put it into a climate-controlled facility. So ambient temperature, just like you and I like. And the secret sauce really is in the blend and how we treat this and fortify the fungi and the mycelium to grow through the materials. You hear me say this all the time, but you know it's true. Time is money. And money helps keep your startup alive. So that's why you need to check out Helpware. Helpware calls itself people as a service.

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And any resultant product becomes part of that matrix, right? And some of these products we treat are really great replacements into new materials like rubber, fiberglass reinforcing mesh, things that maybe don't disappear become part of it. And so we could create a secondary incubation where it can grow into a mold and become insulation board or brick or block, or we can grind it and become a new fiber or new filler, which is where we are right now. That's what we're looking at to enter it into concrete mixtures, hard surface flooring, carpet backing, new gypsum products, acoustical tiles. So all of those opportunities open up when we can homogenize the blend and grind it down. And then

this seems obvious, but just to like really put a fine point on it, what is better about the product that comes out? It's less toxic. It has had its hydrocarbons, heavy hydrocarbons eaten. Well, it's, I mean, one, it's coming from waste. So there's, that's desirable. So good. Right. I think it's really about the properties of the mycelium. So that's a whole other conversation that mycelium inherently is lightweight, water resistant, fire resistant. has properties of insulation and acoustical properties. That's just by nature. So we benefit from that. Like, we get a, we get a dual benefit from our mushroom friends. And, and just because it seems like matter in the universe can't be created or destroyed,

like, what does actually happen to the toxins? So it goes, most of them go from like a heavy long chain and the mycelium, the activity, the enzymes break them down to less complex chains, so they're not creating harm, or they make them less bioavailable. So they uptake them and they just house them. Like they're not there in the materials anymore. So, I mean, we, there's latent contamination in some of the materials, but it's far. less than what the resource extracting. And so we're really focused on the circularity of the process so we could start to extract less natural resources and use more waste. Are there currently any other ways to recycle? I mean, you said you're working with recyclers. So there must be other

ways to recycle. Why is this so much better? Because we're working with the manufacturers to almost like a matching process to say, okay, you know, how much tonnage of this raw material do you need to make this product? And then we can calculate how much it takes to digest and create a supply chain. So really design waste out of the supply chain. The recycling in the industry is meager for certain streams like asphalt. So of the 13 million tons of asphalt shingles

that get put into the waste stream, only 2 million tons gets recycled. So there's still a lot of waste going to landfill. And so you can recycle, it sounds like almost any kind of waste. Like there's not that. It seems like there are probably materials that are easier for the industry to currently recycle and you're saying we don't have those same constraints. Like just give it to us. I'm famous for saying give me your problem child.

Right? Like if I don't want to take the things that you can already find a market for. I mean, we can't treat things that aren't organic. Let's start there. So we're not doing concrete, aggregate, metal, steels, you know, things that have robust markets. We're really looking at, like, wood products, asphalt-based products, sealants, coatings, insulation, foam, rubber. And we can even expand into textiles, like polypropylene fibers and face masks. I would say them.

Yeah, I know, right? There's a ton of face masks. They're just all over the ground. It's terrible. Everywhere. And that's, I see an opportunity to do a very consumer facing brand at some point in time around the face mask digesters. And it's just a matter of time.

And there's so much more we don't know. We've just scratched the surface on what we can do. We being you the company or we like humans? Because I feel like this sort of using mushrooms for recycling. is a really new and super exciting part of the climate tech conversation. I say we, yes, as us as microcycle, but yes, us as humans. I think we have to get over this phobia of fungi. I think people are kind of weirded out about the fact that mushrooms can consume and digest, right?

And they're decomposers. And it makes people skittish to think about it. But honestly, there is so much science to be had. And I think it's the key to the climate issue, honestly. Yeah. Mushrooms overall, like using fungus to recycle and break down and decompose. That and clean water, we're seeing it in new food. I just think all the way around to create a regenerative society, cleaner soils and start to create ecosystems that thrive with fungi at the middle of them.

Yeah. how much you're deep in this every day like how much science and funding are you seeing going into this science and some of these technologies like what you know what is known now versus what could be known one percent two percent i i would say one or two percent yeah yeah i think that there's a lot of room and having said that the last six months or so there was probably over a hundred million dollars that went into mycelium-based companies, primarily on new food or new products, but none of them emanating from waste. Got it.

I know that it's sort of a complicated answer, but how will your business model work as you go forward? Yeah, I mean, we'll work in large part in partnerships, a distributed model, and we really want to grow the community of growers. So there's revenue opportunity to grow the bulk treatment that we have IP protection on. But really, it's going to be through licensing royalties as well as per ton treatment. And then there's a lot of opportunity to create other verticals in there, working with cannabis waste to create packaging materials and doing environmental cleanup,

like straight up by a remediation work but contained. So we're looking at a lot of opportunities, but we're really just focused on this beachhead strategy right now. All right. Describe the beachhead strategy again. And then I want to ask about all the other like the one-stop shopping for all mushroom reuse. Sure. That's us. Yeah, we'll be the big mushroom logo with, you know, red light. The beachhead has been on construction and demolition waste just because nobody's been really focused. It's really complex. I have an understanding because of my background. And so that really seems to resonate when we're talking to multi-global manufacturers in the space

that we don't expect you to replace 100% of your products with 100% of this because it's all new. We have to do an R&D product Kizan and develop it out. So it is a space that I've tried to tiptoe out of a little bit, but I think that we need to stay true to our core because this is such a major issue. Regulations are coming after it. Landfills are out of space here and in the European markets. It's a target.

And so we're going to stay here with it right now. Yeah. I mean, it would seem like a pretty big tam. Yeah. Like if you could potentially be selling this material into at some level, any construction project? Like, is there anything it's not appropriate for? No. I mean, I don't, we don't know the clear answer on that yet. I mean, we're constantly surprised, too. We were able to break long chain fluorocarbons in Phaas from a waste stream. And, you know.

Phaas being for those who don't know the forever chemical, the thing that is in all of our bodies, I believe, in the entire planet. Yes, forever, ever. Thanks a lot. Thanks a lot, Teflon. Right. Yeah, I mean, I guess we're happy when we're not getting wet with our rain gear. Yeah, exactly. So, I mean, I know. It is, you know, you could see if you look at chemicals and the history of how they came through the decades, how we got to where we are. Now's the time to fix it and try to reach some level moderation. Like, so I'm not saying that we would not ever use petrochemicals again. I wish I could say we would never use P5. us again, but until they find a substitute, it'll still be used because it's a fire retardant. Yeah. You know, so, but I think we need to bring up means and ways to treat it, right?

Like, to neutralize the impact. So what, how early are you? Like, what is the, what's the stage of the business right now, if you could describe it? Confusion. Yeah. We're still early stage. I mean, we have small revenue, but I don't feel that we're recurring revenue right now. And right now the revenue is mostly from the treatment process?

Yeah, it's mostly from the treatment from our pilots. And then we're working to convert the pilots to long-term contracts. So it's the good and the bad of working with large corporations. It takes a little bit longer. But once you get there, it's really good. we're in our seed round, so we're raising a round. But we're really building. I mean, I just moved our office last week to double the space.

We're getting ready to hire at least three more people and bring in a few consultants. And so this is really like that next phase. Like this was, we were like, yeah, we could do this and we're proofing this out. Now we're really validating and replicating and building all the systems and processes and documents and agreements and the actual company. Love it. And then tell me about the mushroom science community. Like, are there conferences? How big, are you growing? Are you on Reddit groups? Like, who do you call when you get stuck on a mycelium related topic? Well, you know, I would say I'm outside of Chicago. So I, we have a lot of

people working in mycelium around here. So we've coined a term here locally, actually a fellow founder, Michelle Ruiz. Yeah, I was just going to say, I think Hafei Foods is around the corner from you, right? Yeah, absolutely. We're both in the chain reaction at Argonne National Labs, the cohort right now together, which is fun. Amazing. Yeah, she coined Shroom Boom. So good.

I know. I don't know. Shroom boom. Right. And it's kind of funny to see that happening here in the Midwest, but I think it's really appropriate since there's so much agriculture in the Midwest that maybe we look at it differently. We look at ways to replenish the soil, create new food. But I'm fortunate to be connected to a really good community of applied mycologist, a micro-remediation specialist. And there are pockets of them all over the place. So Danielle Stevenson and Leaf Olson. and Daniel Reyes, who is our, mycologist, our R&D director. He's amazing. And then Juliana Fersi, we all bow to her.

She's a Fungi Foundation. And there is a huge Congress, the end of October, in Mexico, that she's keynoting and she'll be there. So there are more and more activities around the space. I still don't think it's super mainstream. Yeah. Not yet. Anyway, Joanne Rodriguez is founder and CEO of Micocycle Mushrooms are going to save the world. Absolutely.

Absolutely. It's go time. There's a fungus among us. Joanne, this is so great. Thank you so much. I appreciate it. Molly, thank you. All right, everybody.

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