This Week in Startups - Jay Trading, Stripe valuation cut, $NFLX ads, $PTON outsourcing, + more | E1508

Episode Date: July 15, 2022

Today, Jason makes his first investment in our new Jay Trading segment (which is not investing advice), and Jason and Molly break it down (3:22). Then, we do a little segment called “Series A & M&A” (24:40)! We also cover Stripe’s 409A valuation (37:52). And of course, we have to cover the Netflix + Microsoft partnership (45:50). Finally, we wrap with Peloton outsourcing their hardware manufacturing (57:00). (0:00) Jason and Molly tee up today’s show! (3:22) Jay Trading: Bill Gurley bought ~1M shares of Stitch Fix yesterday for a total of $5.4M and the stock popped as much as 15% on the news (14:17) Liquid I.V. - Feel better faster. Get 25% off at https://liquid-iv.com using promo code TWIST (15:30) Talking revenue and profit (23:18) Wealthfront - Get your first $5,000 managed for free, for life at https://wealthfront.com/TWIST (24:40) Series A and M&A: You.com (35:59) Harmonic - Get $4000 off at harmonic.ai/twist (37:52) WSJ reports that Stripe just cut its internal valuation by 28% (45:50) Netflix named Microsoft as its global advertising technology and sales partner  (57:00) Peloton is going to stop making its own bikes and tread machines, opting to outsource all manufacturing to Taiwan  (1:06:00) M&A: Battery Ventures announced a $3.8 billion raise (1:15:07) Outro + Plugs

Hey, everybody. It is Thursday, and we're kicking off today. Look, you thought that we were kidding, but we're not. Yeah, that's right. I'm going to start actively trading on the show. J-trades will occur, not day trading, we're J-trading. This is not investment advice. But today I'm going to talk about my first investment. I've never traded public stocks before. I've always been an index fund, Vanguard, low-fee, index funds,

and then put all my risk in doing startup investing, Molly. But I feel like this is a unique opportunity. And so I'm going to put a million or $2 million into equities and I'm going to trade it live here on the show and tell you my thinking because we talk about the viability of all these companies. And today's investment is a really interesting one. It is. I think that you all will find this interesting too from the perspective of hearing an investor

talk about investing in a totally different context, which is public equity. So I'm excited to compare the thinking on both of these things. And we have a new segment to get back to our Root Series A and M&A. We're going to be talking about an interesting Series A startup. And then in the search space. In the search space, Jason's got a lot of the. I'm not saying I baited you with this one, but I may have, like I like to say, put a little Velvita on that hook and toss it into the water. Trigger warning, Mahalo.

And an MNA. We talk a little bit about M&A and some VC firms wanting to get into the M&A business and then we're going to cover Stripes 490A valuation and why it's a bit of a clickbait story in the Wall Street Journal and just what 409A valuations are and how they work. Yeah, private company valuation. Super interesting topic.

And then, of course, we have to cover the Netflix Microsoft Partnership, what it means for both of those companies. Who is the winner in that deal? Yeah, Netflix is going to have an ad, supported tier by the end of this year, we understand. And then we're going to wrap up with Peloton deciding that they're no longer going to build their own hardware. We're going to outsource it to Taiwan. And if that's a big deal, a good sign or a bad sign for the absolutely troubled company, which is trading at under $3 billion now. Tell you who is a winner, though,

you, because it's going to be a great show. It's going to be a great show. Stick with us. This week in startups is brought to you by Liquid Ivy, making hydration a priority will help you feel better on a day-to-day basis. Get 25% off at Liquidiv.com by using promo code twist. Wealthfront. Wealthfront makes it easy to invest and easy to grow your savings with a diversified portfolio that balances your other riskier bets. To start building your wealth and get your first $5,000 managed for free, go to wealthfront.com slash twist. And Harmonic.

Need to speed up your growth without speeding up your burn? Harmonic gives investment, sourcing, and sales teams data superpowers. Learn how A16Z, Craft, Notion, Brex, and many more source better leads and qualify them faster. Get $4,000 off at harmonic.a.ai slash twist. All right, everybody. in our first story, a good friend of my, Bill Gurley,

venture capitalist from Benchmark, has bought a million shares of Stitchfix yesterday for a total of 5.4 million. Stock popped 10, 15% on the news. For those of you who don't know, Stitchfix is a styling service that uses recommendation algorithms to give you personalized outfits.

Tell us a little bit more about it, Molly. Yeah, I have been a Stitch Fix user on and off for many years. I actually wrote a big, cover story about them for the New York Times, not long after they launched, about this idea of them doing like really curated styling. They built this really actually pretty impressive AI platform combined with human stylists to kind of recommend clothes for you. And the way that it would work is you would sign up as a subscriber. You'd get this box of things that were picked out for you by a stylist. But in combination, the stylist would sort of already be on third base because the algorithm would be like, oh, this person took this quiz. They picked these. things and then previously they have enjoyed these things. So it would get like a pre-curated list to an individual stylist. How long have you been a customer?

I think I wrote that story in the Times in like 2017 is how long I've been using Stitch Fix. Now, to be fair, I sort of stopped using it for a while. So the way it works is you get this box of like five items that are pre-selected for you, whatever you want to keep, you keep, whatever you don't want you send back. And they would give you like a discount if you bought all five things. And then they have sort of evolved as a product. launched an actual like shopping service that suggest things that go with the stuff they've

already sent you. It's very clever. That's actually very clever. You use another service, right? That's related. So what happened is I stopped wanting to have new clothes showing up all the time. And now I use rent the runway, where I just get four new things every month, where I'm until I'm bored with them and then you send them back and it's literally more like a rental service. And I like that because it's a little more sustainable. It's used stuff. Do you know? Does Stitch Fix, do either of them offer the other service yet? And would you consider them contemporaries? Rent the runway, you can buy the things that you rent if you like them.

So you can keep them. And so in that way, it's a bit of a Stitch Fix competitor. Stitch Fix does not have a try this and return it. Like, try this for several months and return it the way that run the runway is. Is it the runway public or is it still private? Rent the runway is public. Yeah. Yeah, we might want to compare there.

Yeah, we'll get some statistics on there. So, you know, anyway, yeah, Stitch Fix has been a little bit of trouble. sorry, to get to the point, to stop shopping for a second and get to the point. Stitch Fix has had a tough narrative lately. They had a leadership change. Katrina Lake, of course, a very well-known, incredible founder, stepped back into executive chairwoman. Elizabeth Spalding took over, maybe some slowing subscriber growth.

There's been a lack of investor confidence. And then, of course, this big move came. Yeah. Yeah. And they also did maybe a 15% cut last quarter in terms of getting rid of some employees, a layoff, and the stock price is about five bucks in change, and the market cap is 600. Now, think about that.

Market cap is $600. A million. My understanding is they peaked at about $100 a share in the boom times and had $11 billion market cap. So 95% of the value has been wiped out, 94% I think, to be exact. Yeah. From its peak. Yeah.

So this is one of those companies that's absolutely been decimated. I've been talking about on the show, I'd like to start trading and buying some shares in companies over the next year because I've never traded, I've never been an active trader in stocks. I've always done index funds because they didn't have the time to put into it. But I frequently on the show pick winners. In fact, all the time. And we do this really deep dives on them. I think I'm qualified to do this, especially with 10 years of private market investing. And since I met a lot of these companies when they were private, had them on this very show, etc. I think I have some unique insights. So I decided I would sell two million bucks of index funds and I start trading them here. So I'm going to start that process today. And so I'm very frustratingly. I haven't like been trading. I'm going to have a robin-and-a-counter account with some doge coin in it.

I had a bunch of free shares because I guess you get a free share for every time you get a member. So I literally had gone hundreds of members. And so I had hundreds or I shouldn't say that. I think they capped me at 70. 75 shares. After that, they wouldn't give me more free shares. But because I tweeted about it early on, I literally had hundreds of people, you know, join the app, which is my job as an angel investor in the company. So I literally had to sell just to clear out my account, I think 75 shares in all these little pharmaceutical companies and other things that I didn't even know. So I was literally swiping, swiping, swiping. So I cleared out my account. I have some more money coming into it. But I decided I would make my first j-trade in this company. So I just bought 1,500 shares today, not a lot. I think it's like whatever, $6,000. $7,000. $500 worth. And I may buy more, but I'm going to pursue a couple different strategies, and I'm going to explain them here.

My strategy here is I want to get to know the company. And we should be clear. When you say $1,500 shares, you mean stitch fix. That's why we were in case that wasn't obvious, the reason that we were talking about stitch fix is because that is the first J trade, which we should be clear is not investment advice. I'm not, no, I'm just sharing with you what I did. So before I came on air, I swiped up on my.

Robin Hood account. This isn't an ad for Robin Hood. They're not advertised in the program, but I am an angel investor and shareholder. So I just decided I'd buy a tiny little piece of it. Not a lot. 1,500 shares to Bill Gurley's million shares. So, you know, 10 basis points of what he bought. I might buy more. Who knows? But I want to start making small bets and even larger size bets. And I'm going to categorize them. This category of bet, I'm going to put under two themes.

The first theme is insiders, who I respect buying shares. Bill Gurley, I can't think of somebody I respect more, bought shares. So I'll buy some shares based on that. And I was, and I don't think I said this earlier in the setup either. Bill Gurley was an early investor in Stitch Fix. He was really one of the people who propelled Katrina Lake and this company to success. So him making this big investment is him saying, I love this company.

I'm not giving up on it. And it was a big market mover for it. Yeah. And I think he might still be on the board. So we should just double check that. But I believe he's on the board is what they said. on CNBC today. So he's, you know, very engaged and he sees some value here.

So that's theme number one. Insiders buying shares. Dara bought shares in Uber recently. Danny Meyer, I heard downtown Josh Brown on CNBC today. Danny Meyer bought shares of his company, ShakeShack. So I think this is going to be something we'll see. Now, you have to look at the number of shares. In this case, Bill Gurley bought approximately.

one percent of the shares in the company, I think. If the company's got a market cap of $617 million, it's rounded to $600, and he bought $5,6 million in shares, that's almost 1%. So this is not a small, you know, 10,000 share buy. It's not $50K. It's a million dollars. So you buy a million shares or $6 million?

I think it's $6 million in value and a million share. So you bought a million shares at $5.40, which is like close to $6 million. So $1 of the value. Yeah, 1% of the market cap. I mean, this is not a small bet. It's a big bet, I think. Now, I don't know Bill Gurley's exact net worth, but it's a big bet for an insider to make. And so I'm watching these.

You know, here's the market cap. You can see it got crushed since it's gone public. So I'll just pull that up for a second. Based on those two themes, I just want to deep dive into it. So maybe you could just give us what happened in Q3, their last quarter, less fiscal quarter, which was reported on June 9th. Yeah, so last fiscal quarter, they reported end. the quarter with 3.9 million active customers down 200,000 or about 5% year over year. Okay. Net revenue per active customer, however, was $553 up 15% year over year over year. Yeah.

I mean, when you... That's a lot of money for care. Wow. Okay. I mean, you get these boxes in the mail and it's like $200 worth of stuff and that and you can get that as much as once a month. Yeah. Okay. That feels good. You know, so that, yeah. And if you, if you want, and they get you too because I'm such a shopper. because if you do it, you get this big discount. So you basically get one thing for free. So you always buy the whole box. Got it.

Got it. Got it. Back to numbers. Assets in Q3, $137 million in cash on hand. Short-term investments, $97 million. Long-term investments, $48 million. So total cash plus short-term investments, $234 million. Total cash, including all of these investments, $282 million.

The reason that's important is we don't want to catch a knife here that the company is going to run out of money. So we'll eventually get to, you know, what's their profit or loss and cash flow? Like, you know, are they burning a billion dollars a quarter? In which case, oh my God, or are they profitable or are they burning 50K, you know, a quarter, right, have whatever amount of runway. So we'll get to the runway issue in a second. Yeah, exactly. So they do have cash on hand, $282 million and $213 million in net inventory. Okay. Okay. Which means they could sell that theoretically in theory and get the money from it. If they sold. As reassuring to me, because dumping a bunch of clothes on the market is maybe a little bit tricky, but, you know.

I mean, if they got 25% of that of value and they got $50 million, still, you know, a nice little, a bit of cash there. There we go. We just got our good on-screen graphic, by the way, reminding everyone that this is not investment advice. Not investment advice. Make your own decisions, obviously. Your own decisions.

Especially if you're investing in a company that's lost 94% of its value. You know? Recently, yes. Yeah. And to be clear, I'm investing an amount of money in this and all, combined that I can afford to lose. So if I lose all of it, half of it, if I double it, whatever happens, I'm good.

So just so we're all clear here. It's a de minimis amount of money for me. Not a big deal. I mean, it's also, it is skin in the game. I'm going to put a million and $2 million bucks. It's not, it's not nothing. Into stitch fix? No, no, no, total.

In total, in my J-Cow trading. That's kind of my goal is maybe to get to a million to $2 million dollars deployed over the next six to 12 months, which I think is going to be the down market. That's my overriding thesis, Molly. We're going to be in a recession for six to 12 months. People don't want to buy equities. There's no buyers in the market.

Therefore, maybe a good time to buy some things I might want to hold for 10 years. And that is my outlook. I'm not trying to make 20% this year. I'm trying to make three or four times my money in 10 years. In other words, I want to beat the market significantly, would be my goal. It's been a hottest heck summer. and I've been working my tail off. When I push my body hard like this,

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And he loved it so much that he just ordered about 20 pounds of it for his runs all over San Francisco. Way to go, Prash. Mixing Liquid IV's hydration multiplier in just 16 ounces of water will hydrate you two times faster than regular water. And there are amazing flavors, watermelon, strawberry, and bottom line, Liquid IV gets you hydrated twice as fast and it tastes great. I'm addicted to this stuff. So grab Liquid Ivy in bulk nationwide at Costco. or you can get it for 25% off at Liquidiv.com with the promo code TWIST so they know your fans of the pod. And actually we're going to talk a little bit more about buying in the down market with respect to venture capital in a minute.

But continuing with the financial health of the first J-Trade investment here. Let's talk about revenue and profit. Net revenue in Q3 was $492 million. That was down about 9% year over year. cogs were $282 million, their cost of goods sold. So gross profit here is $210 million. Great. Yep. Yep. Net loss in Q3, $78 million, meaning they lost $60 million more in 2022. Then they lost in 2021. Adjusted, EBITDA was $36 million. So basically taking out

$31 million of stock-based comp, plus some other minor things left them this $36 million number. to get a real look at the actual business. Taking out stock comp, that makes sense. So that's interesting to me. The way I would sum this up is they're on a $2 billion run rate approximately, $500 million times four quarters, $2 billion. Yeah. And so the company's valued at $600 million with $2 billion in revenue.

That does seem to be a mismatch. Gross profit looks okay. And so even if they're losing a little bit of money, you want to see them grow, and they have to get back to growing. And that's why this is so depressed. So I think this would then fall into, you know, a change in management is another theme. So the opportunity to invest this low is because there are some challenges in the business. There are definitely some challenges in the business.

I think there's been slowing subscriber growth. There's this kind of question about the long-term viability and competition. And then there have been people, I think investors had a lot of competence in Katrina Lake and are not as sure about Elizabeth Spalding, the new president. Yep. And frankly, in the pace of shipping. new features and product. If you look at this revenue chart here, the quarterly revenue chart,

which is showing a bit of a challenge here during COVID or coming, you had that massive dip right after COVID in 2020. And then, yeah, just massive run-up, right? So I guess people at home started to appreciate this. My thesis here is, you know, there's a core group of people who spend $500 a year and perhaps undervalued and an insider buying. So you put all that together.

I feel pretty good about this. And the revenue growth has been up and down, which is this next chart will show. Revenue quarterly year over year. You see the dip during COVID, that first quarter, second quarter of, you know, 2020 was really scary. Everybody, you know, in lockdown, yada, yada.

And then, boom, they had their record quarter coming into 2021. I guess stimmy checks maybe played some part here. And then, yeah, a little correction there. As I guess people went back out into the real world, maybe going to retail again. So, and their profit margin has been challenged as well. So a lot of challenging stuff here.

The price to sales ratio is when we talk about a lot of the show. Yeah. It's like there's a big sale at the Stitch Fix store right now. Yeah. As in it's the cheapest it's been, the price to sales ratio and Stitch Fix is time as a public company now around 0.3. What is that percent? Yeah. Oh, that's the ratio.

The ratio is 0.3. Yeah. So, I mean, if their sales are. If your sales were $2 billion here and you're valued at $600 million, three times $600 million in change is $1.8 in change, right? So they're trading at, yeah, but 0.3 times their, the value of the company is, one times would be $2 billion, right? If we're trading out one times their revenue, $1.9 billion or so in change,

they'd be at a $1.9 million company. Instead, they're a $617 million company or whatever it was at the time we took that snapshot. So there it is, folks. that's J-trading. And I'm going to share all the stuff in a document with the audience. And I'm looking for you as the audience to, you know, tell me what you think I should trade. And if my logic is bad or not. And I think this will get interesting.

I'm going to probably do, you know, a couple trades a week. And I'm going to figure out, I have to figure out bet sizing for different bets. And then I'm going to have themes, right? So I'm looking for more undervalued, significantly undervalued companies where insiders are buying. So if anybody in the Notie Gang or anybody who listens to the pod has ideas around that, go ahead and just tweet them to me and just use the hashtag J trading. It could be let's go with J-A-Y trading, just so it's clear. I mean, if you put J-trading without the A-Y, I guess we'll figure it out. But let's go with J-trading and let me know.

And other theories I'm okay about. you think about this first trade, you know, give us your thoughts. This is not investment advice. You should make your own decisions. The notice have a lot to say about reconciling retail, retail clothing, buying with an oncoming recession. Well, that's their big question for you, which is an actually an interesting part of the bet, right?

What is your thesis there, Molly? What would you think? Look, I think this is a now or never moment for Stitch Fix. You are coming out of, like, people are going back to work. Yep. Empirically, they're getting new job. They're going back out into the world. I know I certainly am like going back out in the world thinking like I need to lug out a really fancy

manicure on Sunday before I went on this to this con. You know, like this is the moment for Stitch Fix to capitalize on pent up appetite for cute clothes. And if they can't pull it off now, they're never going to. So like this is, you know, they should be going hard with marketing galore saying if you need new clothes, don't worry. I know you don't know what anybody's wearing anymore. This is what I constantly feel.

What are people wearing? What happened in fashion? Citibank should be like, we got you. We will literally style you for the return to the world and send it to you at your house. And if they don't go hard now, but it's a great opportunity. It's a great opportunity to go really hard now

and be that like literal stylist in the mail to save you from looking like you're wearing your three-year-old pre-COVID clothes. Yeah. And I think one of the other concepts I have here is that these companies will be takeout targets as they clean up their, you know, businesses. So Peloton, BuzzFeed, you know, other small companies that have gone public and that lost 80, 90% of their value, like we saw with Zendesk going private, I think there'll be some of these moments happening.

So as a backstop to the investment could be wrong here, I do think that M&A is going to become a thing during the recession where somebody like Amazon, which bought Zappos, and I, believe they bought diapers.com and, you know, they've gone on little, you know, adventures buying other e-commerce brands. Yeah. This feels like a perfect brand for them to buy. They've got a love customer base. So Amazon buying this. And if Amazon wants to buy it, they're probably going to have to double the price or triple

the price. Yeah. And so Amazon tried to build a competitor and it just went nowhere. Like they built a something like a stitch fix that was like algorithmically chosen clothes and it just did not. It didn't fly. So, yeah. I don't think people want Stitch Fix as an Amazon brand.

I think they want it as a standalone brand with its own aesthetics and its own, you know, culture. So anyway, there it is, folks. And if you have any other ideas, I am going to be building a portfolio with you live on the air. With full disclaimer, my goal is to hold these things for 10 years, but I may sell some of them on the show. So you may hear me say, I'm going to sell them or I'm selling this. And, yeah. J-trading is not investment advice. She's not investment advice.

I'm sure you might think. I'm saying it just in case. But yeah, you know, it's interesting to hear investors talk about investing, whether, wherever that comes from. Listen, if you're interested in the stock market, it's been a rough year so far. We all know that. But if you're investing for the long term,

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Wealthfront.com slash TWIST. This bit of investing wisdom is a paid endorsement from Wealthfront. All right, but speaking of, yes, getting back to basics, you have been asking us for more news about startups and investing. And so we have a new segment. Yes, here we go. Working title, Series A and M&A. Okay. Uh, uh?

I like it. I like it. It rhymes. It is what you say it is. And let's take a look at. It rhymes. It's better to be clear than clever, as we used to say in the headline writing game. All right.

So we're going to start with an interesting series A company and then talk about what's happening in M&A. Like I said, very literal. Here's what's happening in the Series A. Today's Series A company, no big deal, is coming for Google. Ah. Yes. Okay, I've been there. Good luck with that.

Exactly. We've seen this happen before. You.com or you is this private ad-free search engine powered by natural language processing. So AI-driven results and a highly customizable interface that we'll talk about in a little bit. You launched out of beta today and is announcing this $25 million. in series funding. It's investors. The round was led by radical ventures

with participation from Mark Benioff's time ventures. Benioff actually led the seed round because one of the things that's so interesting about you is that it's founded by two former Salesforce guys who are PhDs, like science and AI PhDs, a former chief scientist at Salesforce, Richard Socher and Brian McCann

lead research scientist at Salesforce research. Okay. And you can see I put in their competitor thesis and the bet. Love it. Okay. So I just did a search for myself, which is the first thing everybody should do. And the results are basically comprehensive search, which is something I did with Mahalo and something that Naveur did in Korea first, where they give you like, here are the TikTok results, here are the image results. And Google started to do this. Google used to be 10 blue links.

They copied Navor down this path. I copied Nader down this path. You was copying people down's path. My results included some spam and some low-quality sites. they'll work on that but it is the interface is like a 7 out of 10 it's not very well designed yet the logo is completely ugly and the results are just average so great that they're starting

and you got to judge a company by where they go right not where they start and so being ad free well add free one of the other things is that they say you can so if you look at the top here above this there's this kind of carousel of search results. They're trying not to do the like the endless scroll. They give you

this carousel where you can scroll sideways, but there's a thumbs up and a thumbs down. Part of their promise is that you can actually customize. Huh. They, these results. So if I like, you know, I'd searched for myself. So if I cruise sideways and I discover Alexander Wood, a merchant from 1772 to 1884, uh, who was the center of a sex scandal in 1810, I can be like, interesting, but unrelated to me, thumbs down. And then, It'll let me customize my sources and maybe it'll show me like more or less from Wikipedia or more or less from Reddit. So that was one of the promises is that you could sort of say, I'm not impressed with these results up and down. But I can up or down both them. Yeah, it's an okay concept. It leads to

gaming is the challenge. A lot of people have tried this as well. And as a signal, people explicitly voting isn't as good of a signal as what people click on. And then if they hit the back key and come back. So they'll probably quickly learn that that's of little value. And I see they're doing votes up and down based upon each section, not the items in each section. So anyway, there's a long way to go in this. The interface

is, yeah, just okay. I think anybody... It is interesting. They started out with like a focus on developers. Like you could search for code snippets for developers. And I think you can see that in the interface for sure. Yeah. Their bet, the thesis at least, is that, you know, people in

brands in particular want alternatives to Google and that Google results have been have been too skewed by ads showing you either ad results or their own products and that there's not really a long-term future for ad-supported search results because of things like Apple and the European data privacy laws. So they're going to try to monetize by building, it sounds like partnerships with actual app. So they would have app functionality built into the search results. Okay. That's, uh, Which is a more interesting thesis, I think, than kind of, and, you know, privacy first and search for snippets and all that stuff. But to me, that's a little more interesting than just like we're an alternative search engine.

The first part of the bet, you know, people and brands want an alternative to Google. And that, you know, there's too many because there's too many ads. The counter argument to that that I've heard is that people who are willing to pay are willing to pay because it's more targeted. In other words, the best brands eventually win, and the spammers can't keep up with the best brand. So if you're searching for hotels in Hawaii and somebody wanted to intercept that result, who was an intermediary, let's say. They can't beat Expedia or they can't beat, you know, a specific hotel in Maui, the Four Seasons in Maui, whatever it is.

You know, and so that's the counter argument to it is that the ads are actually the content and they're really good over time because it's an auction. So what you actually see up the top. So, yeah, I think that. And I will say the counter argument from the business and brand side is that if you're a business who relies on Google for search results and Google keeps changing its algorithm, right? It's the super black box algorithm. They change it. And they prioritize, for example, first ads, then their own shopping results.

Yes. And then finally some stories and you don't know why those stories were chosen. You can scroll. Like I just did a search for iPhone 13. Okay. And I get ad at like I'm literally, it's an entire page. You're talking about on Google.

On Google. Yes. I have three ads. I have the Apple website with a bunch of specs. I have related questions. And then I have to literally scroll down a page. Yeah. Before I get to any like tech site reviews.

Yeah, and when you type iPhone into you.com, you get the Apple site first, the Wikipedia, then they're news in a carousel, Wikipedia in a carousel, because what they're doing is they're taking the sections of Wikipedia and letting you, or actually they're taking all the different iPhone pages on the Wikipedia and putting them in a carousel like iPhone 7 and you know, first generation iPhone 8. So that's clever. Then they do TechCrunch, then they do shopping. Yeah. If you were like a CNet or a P, like if I do Apple iPhone 13 review, then the first thing I get is like PCMag or Tom's guide. I could imagine if you were a brand who's frustrated by the Google things, maybe what you would want to do is buy some app functionality from you and be like, oh, okay, when you surface this result, let people shop for it directly and give me a lead or something.

I would say, you know, in certain searches, it might come up with better, a 20% better experience. And that is always the challenge and the challenge for the u.com team and I hope they succeed is if you're 20% or 50% better than Google, nobody will change their behavior. You gotta be like two times better than Google, three times better than Google

to actually get some change in behavior. And that's why it's been very hard to challenge Google. Either you need to have a distribution advantage, which is why Bing did okay. And Apple is doing okay with their search results. There's actually a search team in Apple. So when you do the spotlight search, do you notice it's getting more and more robust

and Apple, where it shows you, hey, here's apps, here's things in your iCloud, here's your photos, whatever. They're doing their own version of comprehensive search, which is what's on your device, and then they're going into the app level and searching inside of apps.

So, you know, that's because those two players, Microsoft has search inside of, they have search inside their browsers and their operating system, and then Apple, of course, has search inside of their devices. So it's going to be really hard.

The chances of success are incredibly low, but I do like people continuing to after this. The one question I have is their actual search results, are they crawling the web when they show organic results? So if I type an iPhone review, Tom's guy came up in a carousel as number one and then trusted reviews, number two, et cetera, then CNET. Did they index the web to get that?

And are they doing a crawl? because that's the other problem. There's only like two people or three people really crawling the web. So when used duck, dot, go, you're actually using Microsoft Bing. Bing is actually crawling the web. I think Yahoo stopped crawling the web.

Yahoo used to have a search API. And that's actually a question I have is, is there a company that makes their own search index of the web that allows anybody to use it as an API? That would be actually a company I would think would be very interesting.

But searching the web in real time right now is an incredibly hard task. And this is where network effects become super important. They've got tens of thousands of people working on search at Google and they figured out how to index Twitter and YouTube

and Facebook and every little nook and cranny of the web really well. So I wish them luck and it's a really good series A company. They're going to have a really challenging time. This is one of the craziest things

you could ever do is try to go over to go against somebody with a monopoly. That's 90% in most markets. The chances of success here are less than five percent, which is why people are making the bet.

If you do succeed... Which is why we had to bring it up, right? Because it's like... Well, what is every point of search worth today? So Google's market cap is currently $1.5 trillion. Trillion. I would think that $1 trillion of that is based on Google search. I'll give the other $460 billion to YouTube and some other services they have.

Maybe some cloud stuff or whatever, but mostly search. Yeah. That means every percentage point of search is worth $10 billion in market cap. So there you have it, folks. If you have a 5% chance of hitting but 1% of search, you have a $10 billion market cap company. This is exactly like why we thought about making that merch that merch that basically said, but what if it works? But what if it works is the bet here. And I love people making crazy bets.

That's what our industry is all about. And we also don't know what else they have in the works. Right? Yep. So there's the pitch they invent. It's so frustrating too when you read. now that I know better when I read the tech crunch article and I'm like, yeah, yeah, yeah, I want to know what they said to the investors.

Like, I want to see the deck. Yeah. Because somewhere in there, there was a pitch that made Beniof go, I'm all in on this and then made these, you know, these second. I mean, this is a search company with no obvious revenue path that's competing against Google and has raised $45 million. So something is in there, either the technology or the eventual plan, one assumes, that made people go like, yeah, yeah, that's cool.

Pre-revenue, $45 million, invested? Absolutely, let's go. Hey, everybody, I want to tell you about a new product I have been using. It's called Harmonic. What is it? It's a database that has all of the companies and all of the employees and all of the data around those companies updated every day. So you can search inside this database for companies that have raised a Series A and that

have these qualities that have this many employees, that have this much revenue. It's really interesting how you can slice and dice the data. Now, why would you want to slice and dice the data? dice, all this amazing data. One, you're a VC like myself. We have to source startups. Like, we want to do outbound and we want to find really interesting companies, maybe B2B companies like SaaS, but we don't want the ones that everybody knows about that are

series C and D because our investment window is earlier. So I've literally got my researchers and associates inside harmonic AI, and they're finding these incredibly high-quality startups. We email them. The hit rate has been extraordinary. And then I thought about it. Well, my team at inside.com and this week in startups, they sell ads. And they sell ads to a lot of SaaS companies and high growth companies.

Well, they started doing searches here and they said, hey, JCal, we're finding really good companies in here. And we've already started to get meetings. Even companies like Brex use the harmonic database. They find newly incorporated founders to sell to. And we can find, like, the founder backgrounds, like did they go to Stanford or do they have a degree in AI? I mentioned before, like their headcount growth and other metrics. We can perfectly customize these searches and then save them. And if you have great data and you can get great leads,

you can grow faster. So here's what I want you to do. I want you to visit harmonic. a.ai slash twist. H-A-R-M-O-N-I-C-A-I-S-T-T-S-T-T-S-T-E. And you're going to get $4,000 off your company, sourcing, and monitoring. I am just shocked by the quality level of the data here.

So I want you to check it out, harmonic. H-A-I-S-T-T-E-R-M-O-N-I-C-T-T-S-T-T-S-T-E. And you'll get $4,000 off your account. Enjoy everybody. It's really cool. News from the Wall Street Journal today, which I am mentioning specifically because one, it was an exclusive, but two, it's based on unnamed sources.

So also non-investment advice, make your own decisions. But the Wall Street Journal reported that Stripe told employees in an email Friday that its internal share price was about $29, that it cut its internal valuation by 28%. And its internal share price was now $29 compared with $40. In the most previous internal valuation, known as a 409A valuation. The move, and I'm quoting from the journal, lowered the implied valuation of those shares to $74 billion, according to one of the people. Stripe, of course, recently raised $600 million at a $95 billion valuation. It did not explain its decision to lower the internal valuation.

What is this 409A thing? Yes, so a 409A valuation is a valuation that is done by an independent appraiser. And it gives you a fair market value for a private company. companies common shares. Okay? So there's a lot to break down here. You have an independent party say, hey, your common shares, the ones owned by the founders and the employees are worth this amount.

Now, why would you do that? Well, because the preferred shares are the name of the shares bought by investors. So when that 600 million was put in at 95 million, those are preferred shares. Preferred shares in a stack of share classes go on top of the common share. Now, when a company goes public and the exit is clear, where it gets bought, the preferred convert into common and there's one class of shares typically and it goes public. Oversimplifying here, of course, is a lot of nuance. But why do you need to put a value in the common shares? Well, the preferred shares have a series of rights that the common don't have.

So when they put that money in, they get a liquidation preference. So if the company were to sell for but $600 million, the preferred shares would get 100% of that and the common would get nothing. they might get a board seat, they may get information rights, they might get the ability to have prorata and buy more shares, they may get to approve a sale down the road, they may get to approve the change in management, right, depending on how many preferred shares you have. So the preferred are the professional investors buying into a company. Now, why does that exist? Well, those investors need to have some downside protection because they're putting money at work.

And so 99 times out of 100, a company has this structure. There have been some companies that have sold common shares to investors, but it's very rare. So you do this because there's no way to actually know the value of the common shares because nobody's bought them. They were given to people. And that price is the price employees have to pay for them, Molly. So when they execute their share options, so you go to work at this company, you're the CTO, and they give you 2% of the company, you've got $2 billion worth of share.

but you know, maybe in the beginning you have but 200,000. You want the fair market value of the common shares to be low, so employees get to get the gain when the exit happens between the 409A evaluation and the eventual exit. Typically, the 409A puts the common at 20%, 30% of what the last preferred was. So here, this is just a way since the market has changed and valuations have come down to make sure the new employees don't get a sky-high valuation. So this is done strategically and fairly, by the way,

to correctly appraise what the common shares have in terms of values. Sometimes a company, Molly, will be running out of cash. They have less than a year of cash in the bank, and they're not making money. And the fair market value of the common, if there was $20 million invested in the company and the company's only worth $10 or $20 million in the public markets, you know, in terms of what people would pay for it,

not the public markets literally, but in the market, then the common might be worth 5% or 10% of what the preferred shares are worth because the company has the risk of ruin. And so these 409 evaluations are done by these firms. They get updated yearly. They used to cost $10,000 to do. Now they cost $500 to $2,000 to do for early stage startups. I met a guy who that's what their company does is private market valuations.

Maybe they did this one. But so, okay, so, but just to sum up, So the investors do not get diluted here. No. This is specifically about this internal valuation so that presumably when and if Stripe goes public, employees are in a better position. And I would imagine that this must be in preparation in some way for an IPO. There were like a lot of rumors in the spring that Stripe was going to go public any minute now.

Yeah. It's actually not done in preparation. It's done every year. So companies do these every year, basically. Right. Just as good hygiene. Sometimes they'll skip a year because. or not issuing any more shares or nothing's changed with the company.

But generally, you'll see startups do this every year. And it's literally like appraising the value of your home. You're just appraising the value of these common shares. So when people do execute their options, you know what they should pay. So the shares are worth a dollar each. We're going to put the fair market value of common. You know, people paid a dollar and they're preferred. We're going to put the fair market value of the common at, you know, 25 cents.

employee executes their options. The company goes public at a dollar. The employee pays $0.25 for their option and then gets to $0.75 in between. So those transactions then occur when the company goes public. And the notice are pointing out that even though this is a cut in the internal valuation from $95 to $74, that that is nowhere near as deep a repricing as, for example, PayPal has seen in the public markets where it's down over 60% since January 1st. employees don't understand this. Typically, they have options. They haven't experienced, you know, shares being worth anything.

And so it's all very, you know, it's all very theoretical for most employees until, you know, you have, you meet somebody and they're like, yeah, you know, I worked at Microsoft. I bought this house with my options. Yeah, then I went to Google and then I went to Facebook and now I'm at Uber and I'm going to leave Uber when my four-year vest happens. I'm going to find another company or I'm going to go work at a venture firm. So that's one of the magic things about Silicon Valley is once you move here, you know, you know, people who've won the lottery of their stock options, right? Right. And it's like, oh, I wonder who lives in this big house in my neighborhood.

It's like, oh, yeah, that person was at Google. Yeah. And we're the, you know, 657th employee at Google. They did okay, you know. And so this is the lottery we have. You really do care. Right. So when you hear this as an employee, you really care.

But as a headline, it's a little misleading. It's not like a, it's not a markdown. I actually, yeah, it's not like the, this is the opposite of this. Because it reads like it's a markdown story. No. That's why I was disoever. appointed with the Wall Street Journal on this. I think it's like a slow news day and just like, I would say it's in the, you know, market collapse porn category of like, oh my God, the world's

coming apart. Here's another headline. Click on it. Well, yeah, because you hear lower evaluation and you're like, oh, and you hear that about Stripe, which is like a money printing machine. And then you're like, what, what, what, what? What's the company we just did the story of that Sequoia invested in? And it went from 45 billion down to like $6 billion, the buy now, pay later company. Yeah, Clarna. Clarna. That actually is a legitimate, you know, preferred shares we're selling at $45 billion and they could only clear a market at $7 billion. That's a legitimate headline, Clarnia. This is a silly headline and the Wall Street Journal should do better. Do better. Do better. Good to know. Well, I'll tell you who's doing great today. Yes. Microsoft. Yet again, Microsoft just keeps on winning. We might get a second J trade on the same day. I mean, this is not investment advice, but I am saying that. that my investment professional loves him some Microsoft. Yeah, exactly.

Netflix has named Microsoft as its global advertising technology and sales partner. So we have a double interesting business story. One, Microsoft winning business from a huge player, Netflix. Yep. But also Netflix is definitely going to do an ad-supported subscription plan and Microsoft is going to power it. Amazing. This is nothing short of amazing. Yeah, this is fascinating.

I mean, this is Netflix movie. incredibly quickly, which they have to do. And then Microsoft really, I think interestingly, just you wouldn't think of Microsoft for this, right? As the like help you build out ad-supported infrastructure. But Microsoft is probably one of the few at this point that is a big enterprise software provider like this who also doesn't have a streaming service. Like Google has YouTube, Comcast has Peacock.

Apparently they were both being interviewed as potential partners, according to CNBC. And Netflix, COO said Microsoft has the proven ability to support all our needs and blah, blah, blah, tech talk. So here's what you need to know. Microsoft made almost $50 billion in Q3 of 2021. I just was looking for ad revenue, so this is a little bit dated.

But I was looking for the 2021 yearly ad revenue. So at that time, they were doing search and news advertising revenue combined, was $2.9 billion in Q3. Actually, here we have it. In Q3 of 2022, they had almost $3 billion in ad revenue. So that's $12 billion a year

out of their whatever they have in revenue per year, which is I think probably in the $200 billion range. So this is not a small amount of revenue for them, you know? This is like 6% of their revenue. So Microsoft is trying to continue to grow their ad revenue, just like Amazon is, because it's really highly profit. And so Google's revenue is, of course, like, you know, 85%, 90%, well, I mean, it's 80% ad revenue.

Yeah. And so, you know, it's kind of the opposite, the companies, in terms of, you know, mirror images. One makes their money through software and the other one makes it through advertising. But it's meaningful. And this is a way for Netflix to get a really great deal. Microsoft has the need to grow this and advertising is about scale so if you get

some really lighthouse customer a lighthouse customer is one in our industry the term lighthouse customer means they are so bright that all the other ships can see them from far away and they that's where everybody goes they go towards the light right

so when you get Microsoft gets Netflix you know that's a setup that somebody else who wants to follow this path you know might come to them, HBO Macs, whoever. And if they can get

more and more partners like that, then they control the interface. Some advertiser wants to be on Netflix, which seems like a place advertiser is going to be.

And Ford now has to go to Microsoft through the Microsoft interface. And hey, maybe while they're in the interface, they were doing a little bit of Bing advertising or news advertising. Maybe they increase it, right?

So there's a huge loss for Google and a huge win for Microsoft in terms of building their ad networks. And I bet you, Microsoft was like, you know, we'll take some very tiny percentage. You know, Google might have offered them like, you know, we'll do it, but we want 30% of the ad revenue.

Microsoft might have come in and said 10%. Right. I don't think that data is available yet on this deal, but eventually it will come out what percentage they get. And I would guess, you know, it's low double digits. So 70, 80%, I would say Google might have offered 30 and they offer 10, if I had to take a guess, right? YouTube offers 55% to just anybody off the street.

and they take 45%. So they would have to give a better deal to somebody bringing so much audience. So maybe they go down to 30, but maybe Microsoft doesn't care about making a profit here. They just want the lighthouse customer. Right.

So I can build that ad business and add yet another adventure to the stable. I mean, Microsoft is just absurd. Every single cylinder is firing there. We should note as just a preview that Netflix is going to report its earnings on Tuesday, and they are expecting

to have lost two million. billion subscribers during the second quarter. So I hope they are enjoying today's little stock bump. Should it be occurring? Because it's going to be a tough one. So in this J trade, and this is not investing advice, not investing advice, not investing advice. I would really, you know, like buying Microsoft seems like, you know, and again, I haven't gone through the numbers and drill down here, they seem like the winner in this trade.

Netflix feels like they're getting off of their, you know, Bread and Butter, which was... Oh. Well, no. Their whole brand was around not having advertising, and that's what I loved about them. And now putting advertising in it, listen, I'm never going to pay for that, but I know what happens. Like, I pay for no advertising on a lot of services, and then it seems like some, you know, little carve-outs exist.

So you watch some show on Hulu, and I'm paying for the ad-free version, but I still get served ads on some things. Yeah. Or I pay for ad-free on NBA, and I still get served some ads, you know, and it's just, I just beat my head against the wall with this issue. And I, you know, just looking at Netflix, find myself, Netflix is the fourth service I go to. Yeah. Right now it's Hulu, HBO, Macs, and Disney.

And, yeah. I literally like, and I'm on Netflix. So sorry to the Netflix team. I mean, I've been saying this for months that Netflix is the optional one. And it has been for a while. And I think that making it kind of cheaper and more ad-supported is probably the right way to go. But I would have liked to see what they could do with a more, you know, I mean, I'm willing to pay a lot more for HBO than I'm willing to pay for Netflix, for example. I was, I had almost canceled it and then I started watching this stupid show that's just stupid.

Are you watching a stupid show on Netflix, which isn't? Do you remember the Lincoln lawyer? Oh, okay. Yeah. I know. I mean, it's totally, it's just like a little like, you know, cheeseball crime drama or whatever. And I'm like perfect. Like, this is great for. like procedural one season and then I'll probably be out and then I'm definitely canceling Netflix yeah I you know I find Hulu keeps having big winners for me I like great dope sick I I think the bear is a Hulu or is it FX? Yeah I like the bear I go to it through Hulu but yeah

yeah I find myself going to all that FX stuff like Hulu yeah Hulu is great and Amazon Prime actually has really good shows like Netflix I just finished the boy season three which is a little yeah I got to get after that I'm going to get after that I'm going to get after that It's actually, you know, it's kind of interesting. They really play with a lot of themes on there. But what I hate about this is the culture of Netflix is now going to be forever changed. The culture of Netflix was, we're so good, like HBO, give us your money, and we'll just give you great stuff. It was a very simple trade.

And now they're going to say, you know what, our stuff is really not that good, not good enough for you to pay for it. So we're going to give it to you for free and you monetize it. I love the fact that they challenge themselves and their audience. to make that transaction. And now I think this breaks that covenant. It breaks that contract. And I am not there for it. I would have preferred for them to say,

we're now going to buy out the top, you know, 50 podcasts or we're going to do podcasts that we think are really interesting, right? So to take the Spotify playbook, but do it without ads. Because they could afford to, they could have afford to do the Joe Rogan deal or call her daddy,

whatever they vibed with, whatever content they vibed with. And then imagine if you could only get that stuff with your Netflix. Well, now, anybody who is Call Her Daddy, I think Call Her Daddy and Joe Rogan are the two main and the ringer. If they had done those three deals at Netflix

and they had the vision to do those three deals, well then anybody who liked any one of those three and got some value from Netflix wouldn't churn. So these two million people, if they had those three podcasts, those three podcasts and podcast networks have tens of millions of listeners. If you could only get them there,

maybe they would have saved a million of those two million or 500,000, right? I mean, this is what I hate about the kind of like the maximize shareholder value or the CNBC version of the analysis of Netflix is like, sure, okay, could you get more subscribers by having a cheaper base? Probably, fine. But fundamentally, content is king. And that is what people pay for when they go to streaming services. And Netflix did not innovate on anything except for a cheap, you know, know, pile of content that they just like threw it people. And now they're going to make it seem even more like, I'm sorry, a garage sale by tossing ads in on top of it. And it's like,

when it comes to streaming, people want great content and they want a premium experience and they want star power. That's what content is all about. It's not the baseline for every single business, but that is what streaming is about. And this is just like Netflix did sit on its butt. And so congratulations, Microsoft, but I don't think this is, I'm not sure this day. Netflix in the long run either. I would have liked to see Netflix get into a music subscription, and, you know, they could have just been the super bundle. They could have done news as well. So, you know, we make fun of CNN Plus because it was horrible. But there's an argument that Netflix could have done their own news network kind of coverage and just had like, whatever,

eight hours of news a day. They could have spent $100, $200 million on that and had a better, you know, and had a cool product. So I just hate, hate, hate them changing their culture from the elite content worth paying for and going this route. But it could work, I think. It could work.

We'll see. Well, it'll work for like short-term numbers. Will it work for like a long-term sustainable business? I don't know. I mean, it'll just be like NBC all over again, right? It takes the promise of streaming and just turns it into a cable bundle. I wonder if people are going to drop down

from their paid tier. too free. And so that, I think, is going to be their internal conflict. Like, they're literally going to be having circular discussions at board meetings and the rank and file are all going to be debating when they start losing even more paid members because the paid members go, well, why would I pay for this if I can get it for free? And it's a recession. And the only thing I'm watching is the Lincoln lawyer.

Like, I don't care for those ads in that. I'm already not paying attention. Yeah, you're already like, you know what? I'll just go on my phone for it. I'm just doing it while I email. So, like, yes, I'm just. definitely going to drop down to the free, right? I'm like, oh, he has a dumb show on in the background while I answer emails. They literally took somebody who could afford it and they're going

to turn you into a free customer and you're not going to watch the ads. So they're not going to work anyway because everybody's going to just multitask and be on their phone and turn the volume down. Oh, yeah, yeah, terrible decision. Okay, let's continue the terrible decisions. I heard Peloton is making a terrible decision. This is such a terrible decision. Is it? I don't, yeah, let's say. Tell us what's So Peloton, which had many competitive advantages, not least of which was that it was premium, it had wonderful content, it had all the things we were talking about with Netflix. And it also had this great thing that I personally know several consumers who made the buying decision based on exactly this.

Pelotons were made in the United States. That was a huge deal. Did they cost a lot? Yes. But they were made in the U.S. Peloton has now decided. That's why they're so well constructed. They were really, they are very well constructed.

They're great machines. Like, I mean, I am not kidding when I know one person in particular who was like, this is the only reason that I bought the Peloton. Peloton is now going to stop making its own bikes and tread machines and outsource all manufacturing to Taiwan. Thank you to, by the way, Andrew Nwanli in our Twitter community. This week in startup slash TC, he put the story on our radar, tweeted, expecting Jason to address or comment on the news that one Peloton will outsource all hardware manufacturing. Is Peloton now a fitness or lifestyle brand, a software company, or something else? So from a cross perspective, this makes sense, obviously, right? Yes.

So I mean, Apple design, so this, I guess the nuance to this is there, the design is still being done by Peloton. So, you know, when it says designed in Cooper Tino. Yeah. You know, it's made in China. But made in iPhone. Yeah. Yeah. So, you know, Foxcon is like.

yeah, here's how we can, you know, shove more stuff in here and we'll, we'll slap together your design and, you know, make it even better. And it's still designed in Cooper Tino. Our deal is the software, right? Our deal is the operating system. But also the design of the hardware really matters. So what this is saying is they're going to try to squeeze more margin, whatever it is, 10% more margin out of the hardware, by manufacturing it in Taiwan. So this isn't as dire as they make it sounds.

that means they're probably moving to what Apple does and that works fine but they're not doing what Tesla does which is Tesla has its own factories when you have your own factories you can scale to extraordinary lengths and you can do incredibly innovative things

and so you can basically have materials come in one side and the car come out of the other side as Tesla has proven they can do to the tune of whatever they're doing a million cars a year so you know it just this is what happens when your company

is mismanaged and you have to write the ship. This is a ship writing moment. Right. It's not ideal. Give some credit, which is that it is a bold move, right? It's a hard decision.

I'm sure it was a hard decision. It's a big cut. It's a, you know, I mean, it's the kind of dramatic move that you pretty much have to make if you're trying to,

like you said, write the ship. And that's, yeah. Peloton's only goal right now is either do that and or get bought. Yeah, it's hardware is hard. and I still love my Peloton.

I'm still a subscriber. I think people who love Peloton are still subscribers. The market cap of Peloton is at $2.8 billion. That is stunning. Let me find the peak. It looks like the peak share price was 162. And now it is down 94.8%. So 95%, and it's down to $8.

and that is just extraordinary. Yeah. It's going to be a hard turnaround, but I think that they're going to do it. I think this is a company that should be, you know, with two billion, they still have two million members, I believe. Their revenue is still around, you know,

it's close to $2 billion. So, you know, for this company to be worth one, the price to sales ratio is like 1.X here, right? This seems like I'm not making a J-trade, but because I do we have to look at the cash in the bank and how much they're burning I do think that this is a

this should be on the short list of a J-trade based on my thesis of takeout candidate loved customer base that loves it and has a high ticket price so if we look at Stitch Fix and we compare these businesses both of them have a very loyal base of users who spend a lot of money each

so and great products you know if you have a great product and a lot of customers who love you and you make a lot of revenue from each one, there's something there, right? This is not a fake business. This isn't like some SPAC that came out and they never delivered the cars, right now,

like Nicola or something. Honestly, it's a real business. Like, I would have, I would be so happy as a consumer if the announcement that Peloton made instead of we're going to outsource our manufacturing to Taiwan, which means it'll take longer and maybe have worse build quality,

but I don't know, right? I'm not trying to cast dispersions, but that's less of a sell than made in the USA. If they had announced instead, that they were going to do that hardware subscription? Like, I am in overnight. I sort of, and it's, to me, it's a question about, it, it does make business sense to say,

we're going to make this big systems change because that's going to save us a lot of money, versus we're going to make a system change that will cause a lot of customer acquisition. It's almost the Netflix model and possibly going to the hardware subscription. Maybe they just like did the math and they said, no, making this big systems change about manufacturing will save us more money than the short-term customer acquisition.

And it might be like, maybe I'm a low-quality customer because I'm just paying $100 a month instead of dropping the like $4,000 right out of the gate. But I really still hope they do that. I think there'll be a lot of options for them to pursue once they, the new CEO gets control of the ship. And, you know, we went through the new CEO's pedigree. He's, you know, a legit guy who's done stuff like this before.

and I believe he's a previous CFO, if I'm not mistaken. So it's kind of how you send in here is like the fixer. So they sent a fixer in here. And what you're seeing is fixer's fixing. And the previous founder was all over the place and not disciplined. And so this is like the downside of the founders can do no wrong. Yes, you know, founder authority is really important. You want the founder to run the company ideally, unless the founder isn't disciplined enough.

to run an operationally hard business. Some founders are super creative. They make a category defining product like Peloton. There is no doubt that Peloton is the greatest exercise equipment ever made, the greatest most innovative product ever made, period, full stop. There is nothing even close to it in my mind, except for maybe the tonal, which I think got a lot of its DNA from Peloton in fairness to Peloton.

And I don't have shares in either company, just to be clear. But I do own both of them. tell you, I watched Tonal copy Peloton and, you know, they're clearly inspired by it. It's that much of a category defining company. But a category defining company with bad operations is what Apple did when Steve Jobs was running it without people like Tim Cook. And then Steve Jobs got ousted. And then he came back for round two and it was like, you know what? I need to have an operationally sound business. I need people like Tim Cook running it. And now we're seeing the totally. uninspired version of Apple

today with Tim Cook running it so they lost the founder innovation and authority and they just got this incredible operator running it and it's printing money. It prints money. Doesn't have to be inspired. Well, it's just basically all the inspiration that

Steve Jobs came up with. They just keep releasing MacBook airs and iPhones that are literally cover songs of what Steve Jobs came up with. Like literally, they just edit a verse to one of Steve Jobs' great songs. It's a remix.

Like, it's just a remix on the brilliant stuff that Johnny Ive and Steve Jobs created. They keep releasing the MacBook Air. And I keep buying them. They keep releasing the iPad and the iPhone. I keep buying them. Yeah. Because they're so good.

You know, it's like, they're so classic. It's like the Rolling Stones or, you know, whatever incredible band, they can just keep going on tour and people keep buying tickets. you know, that's how transcendent the product was. I actually believe Peloton is that transcendent of a product that if this person can just get the ship righted

and operationally make the math work on the subscriptions and the product sales and the cost structure, they'll be back in the game. So now I'm talking myself into a J-trade. Oh, my God. Which is obviously not investment advice. Which is obviously not investment advice. Don't follow me.

I've never done this before. Two things on that. One, tonal also cut 35% of its workforce. FYI to cut expenses and readjust to consumer demand. And then, speaking of M&A, I really want to ask you actually about this story that I read in Forbes today about Battery Ventures. Okay. Sure. This might be a Sunday school. Let's go. I didn't read the story. Explain to me what the stories. Oh, maybe. Well, it's related to, I had put it in as the M&A part of Series A and M&A because what Battery Ventures announced basically was two things.

One, they announced a $3.8 billion raise, so it's fun. Okay. But also said that there's story. strategy in this downturn kind of is that they're going to use this big war chest to buy out venture-back companies. Oh. And that they are going to structure more of their growth stage investments to look like buyout deals, which evidently is super unusual. Bessemer venture partners launched a similar growth buyouts practice I'm reading from Forbes.

But otherwise, traditional venture firms have seldom explored this type of strategy. Is this like when there's blood in the streets go shopping and like go shopping? Okay. yes, that's exactly what this is. If companies were overvalued, there'd be no opportunity, right? So I just bought Stitch Fix shares at a 95% discount to the peak. If it was trading at its peak, I wouldn't be bottom feeding like I am and taking advantage of that.

And obviously, like, if battery was going to try to buy the company and it was worth 20 times, you know, it's worth $10, 12 billion, they wouldn't have the Work Chess to do that. But a $600 million stitch fix, and that's a public company. But if a private company was worth $600 million, they have the Workchust to actually buy something like that and then try to take it public and grow it. So, yes, that's opportunistic. The other thing they're saying this story is their plan is to stretch out the $3 billion over as much as three years. So remember I said in a down market that VCs will not make capital calls because they, or they didn't in the 2008 crises, because they didn't want their LPs to

have to sell equities and they knew their LPs might be in a bit of a cash crunch too. So they were like, Yeah, we'll, you know, we'll slow down a little bit here. We'll circle the wagons. We'll work on our existing companies and getting them, you know, operationally sound and we'll opportunistically make small investments. So we don't have to call that capital down, right? Yeah. Now, they could be jerks and just be like, I'm going to pound that money because it's in my best interest as the GP.

But there's a little GP LP dance that occurs here where it's like, is it okay for me to draw this down? Or the LP, the LP might say like, hey, it would be good if you drew this down a little bit slower, right? So now that I'm in 20 funds and I just announced one of the ones that I put in very small amounts of money. And typically that's drawn down completely at the start of the fund because they're micro funds, the ones I'm looking at. But yeah, sure, it would be nice if people are like, hey, the market's down. We're going to, you can give us the money over the next three years instead of all at once or, you know, over two, right? So it's just a kind thing to do to your LPs.

So yeah, it's interesting. But buyout deals are not what VC funds do, you need to have a group of cutthroat insane operators inside the business. I don't know battery well enough to know if they have that. I suspect this is not a good idea. Yeah. I suspect this is not what venture capital should be doing this where private equity people should be. And I'll tell you why. Well, and I keep saying that all these big funds are moving more toward private equity. Like, this is a thing. Anyway, yes, tell me, yeah. Well, here's the thing. The culture of venture is optimism and growth. Yeah. The culture of private equity is cutthroat and making a spreadsheet

and then sending in people who don't care what people think about them or the culture who just come in and fire the people who cost a lot of money, do pay cuts or pay freezes, get rid of the kind bars, everything that startups, you know, it's antithetical to startup culture of pampered employees and growth and joy

and it's just cutthroat, right? We're going to run this business for optimizing the earnings and we're not going for growth, we're not going to have R&D, we're going to just squeeze every dollar of profit we can out of it, because then we can use that profit

to pay down our debt because usually they finance this stuff with some portion of debt, and we can flip it. And the person who buys it then can decide, well, I've got this money printing company, do I want the money printing? If there's no competitor, sure.

If there's competitors, okay, well, we might have to put some money into R&D, but if not, that's the buyer's issue. The buyer can make that decision. We just made it look really good. To be fair, there are plenty of people who think that that's what VCs do. VC real large as a category that they come in at some point and are like, oh, I need a return, so I'm going to force a sale of this company.

I think there's a perception that later stage VCs might do like meddling and optimization at that level. Certainly that was part of the We Crash story and even the story, which is VCs coming in and forcing a lot of change. Okay, so there's two different things there. There's forcing a sale, which is, hey, listen, we've been at this 10 years. We need to get a return. We need to sell this company or take it public because the window here is.

But we let you run it, and we didn't get in there and roll up our sleeves and tell you how to run it. Yeah. We just met, we went to the board meetings, we looked at your plan, which is what VCs want to do anyway. They're not designed to roll up. When you go to a private equity firm, you know, they could send in a SWAT team of 10 people to go. go do the HR stuff and to start firing people and do the accounting. VC. firms don't have those people. They don't have those fixers sitting there ready to go in and, you know, be the temporary CEO, CFO. So they're just not staffed that way. And then if a company is mismanaged, that is like

the edge case of like, this thing is such a disaster that the founders buying wave machines and smoking pot on planes and, you know, going to just destroy the whole company. We have no choice but to interview. Drinking daughter like water, the good stuff, Rufka. I mean, it's literally like the last ditch effort to save the company, whereas that is the default behavior of private equity firms. The default behavior is coming in, you know, and setting up that temporary war room like the guy did in the WeWork drama and saying, we're going to go everything with a fine tooth comb.

No more kind bars. We're selling everything. We're ripping at, everybody is getting a pay cut. Oh, you've got a cultural department. Oh, you're doing a retreat. No more retreat. No more kind bars, you know, no more, you know, business travel unless it's approved and you're flying coach. You know, they just basically rip out all the joy of working at the company and any of the perks.

I mean, so, yes, it can happen with VC, but usually only as a result of dramatic mismanagement. And that still doesn't, and that still is separate from this just kind of interesting move, which is, you know, changing the model of VC. And I almost wonder if that's some of the thing that just started. it has to happen when your fund gets so big. It's just so much money. Like, what else are you going to do? You got to start squeezing out returns however you can, because to return two or three times $3.8 billion dollars is hard.

It's really hard. Well, if you own 10% of each company, you know, and you bought into the company when it was a billion dollar company, you spent $100 million. Now, if you get 30 times that, you know, it has to go from a billion dollar company to a $30 billion company. like that's only happened a handful of times Uber, Airbnb, you know, pick the company. Like, you know, Facebook.

It's very rarefied air. And I think that's what people are going to be faced with is these multi-billion dollar funds came up at a time when people thought there would be an unlimited number of Uber's and Airbnbs and Facebook's and Googles. And it turns out, that's probably not going to be an unlimited number of those. There's going to be, you know, like it used to be a billion dollar company was rare. And then it was like, yeah, we have a thousand of them. them. We're going to go back down to a billion-dollar companies being a little more rare,

and certainly the $10,000, $20 billion, $30 billion outcomes being very rare. You remember when it was like every coin-based investor was a genius, the company was worth $70,000, and then now it's worth $70 billion, and then now it's worth $10 billion or something. Dropbox was another one, you know, like that became a $10 billion company. Like really hard to get there. 10 billion is a very big company. It's not easy, folks. And that's why the ideal fund size for a five, six partner firm, according to Fred Wilson and, you know, benchmark is 200 to 600 million. Each person does six, seven bets, eight bets, nine bets, whatever it is. Each bet is, you know, whatever it is, five million dollars.

You get to, you know, 40 bets in a fund, 50 bets in a fund, 30 bets in a fund. There's like an optimization there. that seems to work really well with five partners, $500 million. Five partners, $300 million. Or at least that was the old numbers.

Who knows where it winds up today. Mm-hmm. And there you go, everybody. It's like Thursday, VC Sunday school. I'm so glad I brought that up because I thought that was really interesting and I'm glad you think it's as unusual as it seems to be.

I think that's it for our Thursday show. Yeah, great show, everybody. Yeah. Tomorrow, we're going to do two really great interviews. I sat down with the FCC Commissioner Brendan Carr to talk about TikTok. You might remember Brendan Carr, Commissioner Carr, sorry, wrote that letter to Sundar and Tim Cook and said, listen, TikTok out of the app stores. Let's go. And TikTok has been trying to defend themselves. I've been hearing PR people try to spin it, but I am with Commissioner Carr.

And we have a really important discussion about the very unpopular task of telling people the delightful TikTok should not be allowed in America. I cannot wait to listen to this. I sort of wish I had been there to be the devil's advocate, but, you know, it's... I brought you up. I brought up your position. It's going to be good. And then, of course, it'll be Friday, so we will have another great OK boomer from producer Rachel. And as always, follow us on the Twitter, Molly Wood, Jason and TWA startups.

Join the Twitter community at this week in startups.com slash TC. If you want to invest alongside Molly, as she invest in climate startups, the syndicate.com slash climate. he had to be an accredited investor. Sorry, we didn't make the rules. And, uh, but if you're a climate startup, you can apply to our syndicate there too. Oh, and if you have questions, you can post a question at inside.com. Now, inside.com slash questions. And you can post jobs, inside.com slash jobs.

So I'm still tinkering on my little product over there and, uh, we're making good progress. So inside.com slash questions, inside.com slash jobs. You can post a question for free, post a job for free. And I might just tweet it for you. Uh, rate and subscribe, yada yada, YouTube. dot com slash this week in if you want to join us every day and watch live 10 a.m. All right, everybody give a thumbs up. My God, so many comments from the notice. Thank you so much. And we'll see you all tomorrow. Bye bye. Bye bye.