This Week in Startups - Late-stage VC market update + Terra Kaffe's Sahand Dilmaghani | E1891

Episode Date: February 3, 2024

This Week in Startups is brought to you by… Uizard.io will help bring your vision to life in minutes, not days with the power of AI. Visit http://uizard.io/twist to get 25% off Uizard Pro for an entire year. Northwest Registered Agent. When starting your business, it's important to use a service that will actually help you. Northwest Registered Agent is that service. They'll form your company fast, give you the documents you need to open a business bank account, and even provide you with mail scanning and a business address to keep your personal privacy intact. Visit - https://www.northwestregisteredagent.com/twist to get a 60% discount on your next LLC. Nuts.com is offering new customers a free gift with purchase and free shipping on orders of $29 or more at http://www.Nuts.com/twist * Today’s show: Jason kicks off the show with an update on the late-stage VC market (1:44). Then, Terra Kaffe’s Sahand Dilmaghani joins to discuss Terra Kaffe’s super-automatic machines (19:35), scaling the B2C business (29:59), and much more! * Timestamps: (0:00) Jason kicks off the show! (1:44) Late-stage VC market update (10:41) Uizard - Get 25% off Uizard Pro for an entire year at http://uizard.io/twist (11:49) Sahand Dilmaghani on his decision to start Terra Kaffe (19:35) Advantages of the Terra Kaffe machines compared to pod machines (24:29) What is takes for a super-automatic machine to make great coffee (29:05) Northwest Registered Agent - Get a 60% discount on your next LLC at - https://www.northwestregisteredagent.com/twist (29:59) Scaling where the product is viable, offices, schools, multifamily homes (35:27) Nuts.com - Get a free gift with purchase and free shipping on orders of $29 or more at http://www.Nuts.com/twist (36:30) The progress in sales and experience with direct to consumer (50:32) Founder Fridays kicks off today! - Go to https://Thisweekinstartups.com/meetups to learn more * Mentioned on the show: https://www.ft.com/content/18430e05-33c0-4f48-8c87-fae74ff29bbf https://www.ft.com/content/eb2e085a-ef5a-4e91-8634-747e2a602fbe * Follow Sahand: X: https://twitter.com/terrakaffe LinkedIn: https://www.linkedin.com/in/sahand-dilmaghani/ * Follow Jason: X: ⁠https://twitter.com/jason⁠ Instagram: ⁠https://www.instagram.com/jason⁠ LinkedIn: ⁠https://www.linkedin.com/in/jasoncalacanis * Thank you to our partners: (10:41) Uizard - Get 25% off Uizard Pro for an entire year at http://uizard.io/twist (29:05) Northwest Registered Agent - Get a 60% discount on your next LLC at - https://www.northwestregisteredagent.com/twist (35:27) Nuts.com - Get a free gift with purchase and free shipping on orders of $29 or more at http://www.Nuts.com/twist * Check out the Launch Accelerator: https://launchaccelerator.co * Check out Founder University: https://www.founder.university * Subscribe to This Week in Startups on Apple: https://rb.gy/v19fcp * Great 2023 interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland * Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin Instagram: https://www.instagram.com/thisweekinstartups TikTok: https://www.tiktok.com/@thisweekinstartups * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

Hey, everybody. I was in Miami all week doing meetings. It went really well. Thanks for asking. But I didn't get a chance to record a new liquidity episode. You know, when we talk about what's happening in venture and startups and with limited partners. So you guys have given me so much amazing feedback on the liquidity series that I figured I'd do a little market update for you, just a little quick market update. And then we have, after the quick news hit, an amazing interview with the CEO of Terra Cafe. How do I know this founder? Well, I bought this incredible super deluxe espresso machine that I love. The design was amazing.

So I wound up investing in the company and we have a great talk about how to build a hard work company, how to have world-class design, and just the ups and downs of startups right now. So this is going to be a great show. Let's get started. This week in startups is brought to you by, Wizard.io will help bring your vision to life in minutes, not days with the power of AI. visit wizard.io slash twist to get 25% off Wizard Pro for an entire year. That's UI-Z-A-R-D dot I-O-slash-T-T-S.

Northwest Registered Agent will form your company fast, give you the documents you'd need to open a business bank account, and more. Visit Northwest Registeredagent.com slash twist to get a 60% discount on your next LLC. and Nuts.com is your one-stop shop for freshly roasted nuts, dried fruit, sweets, pantry staples like specialty flowers, and more. Nuts.com is offering new customers a free gift with purchase and free shipping on orders

of $29 or more at Nuts.com slash twist. First up, I want to talk to you about what's happening in late stage VC. What's late stage VC? This is after the seed round, Y Combinator, R Accelerator, Founding, You get to a series A, and then if a company starts to scale, I'd say getting past 10, 20 million in revenue, that sort of indicates it's a later stage startup now in VCs in the late stage start investing in what you would hear somebody call a B round, a C round, a D round. And so a lot of statistics have been coming out and people are trying to figure out what's going in the market. So let's just go through a couple of charts here. According to the Financial Times, and we call it FT in the industry, USVCs are sitting on 300 and 111.

$11 billion of what we call in the industry dry powder. That is a record amount. Take a look at this chart. It's unbelievable. The dollars keep building up. So what you're probably hearing as a startup is where's all this money going? Why are the VCs not investing this money? Well, in order to explain this, you have to understand how the LP and the VC, sometimes

called GP relationship works. LPs will give this money to VCs. But these funds are earmarked for typically three. three to four years of primary investment, and then they move into six, seven, eight years of harvesting those investments. The typical life of a fund is stated to be 10 years. They can go as long as 15 before all of the investments are returned and exited. So think about that 10-year window and there's four years of primary investment. You have to do something called a capital call. You ask VCs, the VCs ask LPs, hey, can you send us some money and we'll invest it? Why don't

they just take all the money down at once? Well, because it's easier to do it over a period of time. And the LPs can keep that money, you know, in an interest-bearing account or in the public markets, right? So they're making some amount of money on it. At today's interest rates, maybe they're making 5, 6% on it. So the next thing that we want to look at here, and we'll pull up this chart is looking just at how much money exited. the system, right? So LPs give VCs money, VCs built companies with founders, those companies go public or get sold, and then an exit occurs. There's a little tiny third way after the IPO, the main way, second way, M&A, mergers and acquisitions, somebody buys your company,

and the third way, there could be what's called a secondary transaction, somebody else wants to own the shares, and people sell them in private companies. So let's take a look at this chart, just to explain this chart, there's a bar chart, it has the exit value, and then there's the exit count, the number of startups companies that exited. And if you see, it cruises right around 1,000 a year, but it peaked at 1,900 startups a year and close to $800 billion in 2021. This was a bunch of IPOs, a bunch of sales of companies, and it has plummeted since. 2022, there were 1,400 exits, but only for $78 billion. And then it came back, came down to in 2023, 999, and then it just plummeted down to $61 billion.

Why? We all know the IPO window has been closed for two years now. And the current regulatory regime, i.e. Lina Khan, has been very hawkish on M&A. You may have seen Figma had there, and that happened largely because of regulators in the European Union and in the UK, they are just blocking MNA transactions. So either you IPO or you probably don't. get an exit. And if you look at these, the average exit value from 2013 to 2023 per year was

$185 billion. But if you take out the 2021 boom year, that number drops and you have an exit value of about $125 billion a year. So we are seeing half of what the average has been for the last 10 years. Now, if you're a VC, you've got to call capital. And these LPs are getting half as much as the average and a massive decrease from the peak. That means they can't recycle money. So the whole system has basically indigestion. We need to sell more companies so that VCs can return capital to LPs, so LPs can then invest in the VCs next funds. So the whole system has been locked up for two years and now it's just starting to crank back up. And one of the things that will, you know, kind of get this unstuck is IPOs. We're waiting on the

Stripe IPO. You may have seen Instacart went out. It was a little bit of a disaster for the later stage investors. And Reddit is about to go out. And that is at maybe half their evaluation in the private markets, $5 billion instead of $10, according to reports. Now, another article came out. So I want to dovetail all these issues. And this one is Lightspeed. Lightspeed is a very big venture firm, late stage largely. They have $25 billion. million dollars in AUM. That's assets under management. Take all of their funds, put them together. That's how much they have in assets under management. Well, there's a really interesting thing that's occurring. Since there's no M&A, and since IPO window has been, the IPO window has been

closed, they've started something called continuation funds. What are these? These are new funds where the firm will sell shares in the private companies in their portfolio. So in this case, according to these reports, Lightspeed is selling about a billion dollars worth of their stakes in 10 of its portfolio companies. Now, who are they selling it to? Other investors. And what these are designed to do

is to give liquidity to LPs so that the VCs can get back to work. And so this could be interpreted in the most cynical fashion as, what, is that some kind of shell game? You're selling these shares to another group, you're resetting the clock. But what it really is, is there has to be a buyer who wants these shares, and they have to price these shares at a price that they think will get them a return.

So a new set of investors is coming in. They're looking at these private companies and saying, yeah, I want to own them. But you can be certain that they're looking at them and they've really sharpened their pencils. They've really done the math and said, this is what I want to pay. So that might not be, you know, that might not feel great to light speed or their LPs, you know, these prices that the new people will pay. but it is, and this is, I think, my interpretation of this, and this would be the most generous interpretation of events that are occurring here with these continuation funds,

is that we have a high functioning market. And people are being realistic about what's going on. So, hey, these companies have been private for a long time. We know there's not going to be M&A until maybe there's a regime change in Washington. And if Biden wins again, maybe it's another four years of not being able to have M&A. Looks like the stock market will open back up to some new inventory, great, but it's still going to be a bit of a slog, so we want to get liquidity for folks.

And in this case, you know, it looks like Lightspeed is going to give LPs a choice of liquidating or holding to get a better return. So that's really interesting. And here's what Lightspeeds chief business officer told the Financial Times,

the FT, quote, VCs can't just use the excuse that the IPO window is closed. They need to take a page out of the private equity playbook and build more consistent liquidity that LPs can count on. So some questions will emerge

out of all of this. The number one question is, are we going to have more of these downround IPOs in 2024? Reddit at half price, Instacard, I think went out at 25% of its peak private market valuation. And the answer to that is clearly, yes, we're going to see a ton of down rounds and IPOs, but it's better to get out, better to have that fitness of being a public company and the maturity of being a public company and the scrutiny and the liquidity for everybody involved. Now, some companies will wait it out. So if you're strike, and you've got a ton of cash and the business is doing great, maybe you wait, maybe you wait until 2025,

and you hope your valuations bounce back to those 2021 levels. People will make those hard choices. And eventually, the market rebound will catch up with the market being overheated in 2019, 2020, and 2021, or the distance between those two numbers will be such that it'll be an easy decision to make. So how much value of destruction are we going to see for late stage VC firms? That's going to be the interesting thing to watch.

And what is that going to do to LPs' appetite in the growth stage? What I'm seeing in the market, LPs are really interested in going a little bit earlier. We do pre-seed and seed at our fund launch. We do the founding university, which is pre-seed. We do our accelerator and direct investments, which is considered seed. Pre-seed typically means before your product launches.

Seed, your product's in market. Series A, your product's got a couple million in revenue. That's an easy way to sort of think about it. And so, yeah, a lot of LPs are going to be either pencils down. they're not going to write checks or they might be looking earlier and maybe to write smaller checks. So you can check out those FT stories in our links. And next up, the Terra Cafe interview. Enjoy. Right now, startups have to do more with less. We all know that. And that means increasing your product velocity while maintaining or even lowering your costs. Now, don't forget,

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65% of us drink coffee every day. And the average coffee drinker, three cups a day. No surprises there. But brewing from home, it's brutal, right? People have drip machines. They do pour over coffee ponds, destroying the environment. I've always wanted to have a great one-touch automatic coffee machine. A super automatic.

And I was looking for one of these. And they came across one called Terra Cafe, and people were losing their minds over it. I wound up meeting the founder, and I love this product so much that I invested in the company. So, uh, welcome to the program. Sahand Dil, Dilmagan. Sahan Dilmaghan. Thanks, Rand.

Did I get it right, Sahan? You nailed it. You nailed it. You know, when you have a name like Calatana, as I always tell people, you got an obligation to at least give it a shot to get the difficult, uh, or more than two-cellable, non-American names correct. It's not that hard. I take a lot of pride in the name being so difficult for a barista's to write down on the cup that, you know.

Oh, yeah. It's such an inspiring moment that I had to start my own company to offset that pain point. So you made this gorgeous coffee machine. We were lucky enough to invest in it from our fund. And, you know, we're not big on direct-to-consumer. It's a really hard space, right, for founders to crack. And then, you know, especially in consumer electronics, appliances, that's a very crowded space as well.

So why don't we start from the beginning? I know you're launching the TK2, the Tera Cafe 2. I have the Tera Cafe 1. Can't wait to get the two. But maybe we step back for a second here and you could just tell the audience, what was the inspiration for the company? And then how did you assess as a founder? This is the important question that you should go after this opportunity

knowing how hard it is to create a direct consumer, slash physical product in the rural world as an entrepreneur. Why am I a glutton for punishment? Basically. What did you want to just put your hand on the table and smash it with a hammer every day? On top of the already prototypical slog of a journey that is entrepreneurship. Yeah. Yeah, you just increase the degree of difficulty.

Yeah, exactly. I just throttle it up to the max. No, I think that it has to always go within that trifect of kind of passion, and competency and opportunity. You not holistically or have any sort of absolutism by any measure, but you have to be able to check those three boxes before starting on any journey, let alone something within the hardware space. Because as we all know, every sort of path has a different varying degree of, you know, challenges and hurdles to overcome. But just as far as, you know, the early days from the inspiration from getting started, I will say as much as, you know, it is the starting point kind of dates as far back. to kind of culturally, like basically I joke that the rule, not the exception is that if you're

Persian, hot drinks and dried fruits basically are the social nucleus of your lives. So I had pretty much every gadget under the sun that average household in the U.S., I believe, has around two coffee machines per household or 1.8, so I'm rounding up a little bit. But I like to think my household contributes as a pretty big outlier to that average. So we had everything under the sun. And as somebody who deeply deeply, deeply, love just as an enthusiast as a hobbyist, the space, I would say that, you know, when I started digging in looking for a new machine, exactly as you said, in that area where you have the best of both worlds of ease of use, push button brewing, have the convenience factor that we need on a daily

basis in our mornings, and then the higher quality that we were getting used to out of home, especially with the third wave coffee movement, the elevation of craftsmanship throughout coffee, people drinking more espresso-based beverages than ever before. So we saw 2017 latte became the most ordered drink in the U.S. surpassing drip coffee, and that kind of continues to climb. So as much as, you know, maybe people like to dunk on Starbucks here and there, you know, you've got to pay a bit of reverence, a bit of respect to their three-and-a-half-decade growth of what is kind of known as the EBB category or espresso-based beverage category.

And seeing how much that was growing, seeing how much that was growing, seeing how much we were looking for that convenience but didn't want to resort to single-use plastic aluminum pods or capsules. It became very clear to me when I looked at that intersection of super autos. What was out there? It was this incredibly dated, incredibly antiquated assortment of only a few incumbent brands that were serving this space. Nothing spoke to the modernity that we came to expect of appliances, consumer electronics, automotive, and so on. You know, I kind of like to say that we created the Apple of our category where, you know, the five or six incumbents were, you know, the Blackberry. But, you know, I kind of feel like that's an insult to Blackberry.

It really felt like it was more of, you know, the Sega Genesis or Game Boy Color at the time. And really wanting to stand out in the early days with the hardware design and an attractive price point, not cheap per se, but a great value for money from what we were. seeing where the average selling point when we started was over $2,000. Yeah, there was juror. I had a juror at some point. My, my, my, my, my, my, my, my, my, my, my, my, my, my, my, my, my, my, my, caca, seca, yeah, seco. And, you know, at the time, 10 years ago, they were okay. But what I found was, uh, I didn't get consistent, um, flavor that I was looking for from espresso. Tons of work to maintain them. Uh, and, you know, listen, any espresso machines a bunch of work, just by the nature of pulverizing, a

bunch of grounds. But you came out with this. I think when the TKO1 came out originally, it was maybe $7.95. Now it's $8.95, a little bit of inflation. We're in the $700s, exactly. Yeah. And now you have the TK.O2 coming in for $14.95. Can't wait for that.

I think that's going to be shipping soon. We just started shipping. You did? Oh, wow. We just started getting the first units out the door. People have just started receiving them over 10,000 units of demand in just the pre-order alone, wait list, you know, 5,000 plus and growing. So it is, you know, beyond exciting. If anything, the demand that ended up coming our way for the, for the O2 really did exceed our

forecast because we didn't know, look, I didn't want to do a race to the bottom. I was looking at, you know, we have seen some new entrants come in and it really ends up being this kind of, you have like this four or $500 engine model that really is, you know, just in a hunk of junk. and then you have this $4,000 or $5,000 category, which is prohibitively expensive. And it was, again, in that kind of sweet spot that we saw an opportunity to say, okay, look, the Pod-based systems, yeah, of course the front cost is going to be cheaper. But actually, if you look at what you're paying in the lifecycle of the product, that's how they're obviously their business model is designed.

And where we wanted to enter in was being an amazing value for money, the V1 great entry model, you know, the original Super Auto that we came out with, still a great bargain for what it does. then the V2, I just want to blow everything else out of the water. So again, doubling down on the hardware design, but then using the software and the data as how we're going to kind of carry the torch forward because it's OTF datable. So it's going to keep improving as we get more of that information back from the customers and kind of having those feedback loops on a regular cadence. And when you're, you know, just bean to bean, apples to apples, oranges to oranges, using a pod system, what are these pods charging per pod of coffee?

And then if you buy the equivalent coffee bean and grind it fresh in a super automatic machine, what are we looking at, you know, apples to apples cost? You're going to be saving anywhere from 50 cents to a dollar per cup, depending on which pods you buy because there are differences between them. So you can get some, you know, the virtuo pot, for example. or any of the kind of like seasonal like pods that you see come out, you're going to be saving basically per cup, you know, anywhere from 50 cents to a dollar.

Got it. You, depending on how many people are in the household, you have to imagine, especially with, you know, the stats you shared at the beginning, you know, three cups a day. You're having, you know, on average, you know, the number of people in the household, you're having two people use this device every morning. Really, it depends on how many of those cups are in home versus out of

But you are essentially, if you're comparing this to out-of-home coffee, you're paying back this machine in a matter of months, not years. So, yeah, you save 50 cents a dollar per cup, three bucks a day, two bucks a day, four bucks a day, over a year, it pays for itself. And this is like, and also thinking about the environment is one of the things that makes me crazy. I'll go to an Airbnb or I'll stay at a hotel and I'll use these pods under duress. But, I mean, I was in Italy and I had an Airbnb. and they had a pod-based system there. I don't know which one this is. There's like K-cups,

and then this one was like so much plastic. It had like a hard plastic. It was sort of like a cylinder. Have you ever seen those ones? I think it's the Delta. The Delta. You know, I love I, I love Ily. And, you know, God bless them.

You know, it's delicious espresso, but you can buy the beans, you know, and they had these pods. And I was throwing, you know, I drink five cups a day or six, six espos a day. finish a full sleep in one day, in one morning. And I'm just like, come on, this is the most, uh,

this is the most abusive thing. Is there any way that you could justify the use of these pods in your mind? Like, it just seems unconsciously to know. The way I like to talk about is it's that like the evolutionary scale of coffee graduation. Like you, you have this trajectory where nobody is really kind of starting out, even oftentimes with any of the,

pod-based systems. A lot of times it's going to be a pot of coffee approach, you know, even at times instant coffee, depending on which geography you're in. And you kind of graduate, you graduate, you graduate. And look, a lot of the, what we saw was when we got started six years ago was there was this level of saturation around the pod-based system where people were looking to graduate. The problem is when the jump goes from a $500, $400, $400 system up front with a long-running cost to a, you know, what we were seeing for, $5,000 machine or device, that is a very challenging step function for most people. Now, if people kind of graduate away from us, let's say, in the interim in the early days, into Alamara's Okina mini, they want to spend $5,000 for the

machine, another $2,000 for the grinder, that's beautiful. If you want to take that time every morning to do that and you want to make that investment for your coffee corner, that's great. That is not the lion's share of the market. That is not what that actually looks like. The vast majority of people are holding into the potty ecosystem for one factor. All the surveys empirically show convenience. It's ease of use. It is important when it comes to the morning coffee that you have it get, you know, delivered in as seamless a way as possible. You cannot overestimate convenience in that moment.

I have at the ski house, this melee in-wall unit. Now, that was, I didn't purchase that. It's a fancy, fancy owner had the house before me and spent a bunch on the appliances. This thing is Millet or Millie, I don't know what kind of pronouncing. Millet, yeah. Millet, yeah. Is the bane of my existence. The thing costs like five grand.

It's breaking constantly. Yeah. In the amount of maintenance and the amount of messages it gives me, you know, listen, I understand, you got to clean the thing, you got to fill the beans, you got to fill the water. There are steps to this. It's, nothing's free. But my lord, this thing costs five large, and your new one cost 15. I could buy three of yours. Yeah.

Yeah. Give two away as Christmas presents, or I could buy six of the TKO1s. I can tell you right now, the espresso from the TK1 is as good as better than the melee, and it's less maintenance. So what is the secret in these super automatic machines to making great tasting espresso? at the core, is it the temperature, is it the grind, is it the amount of coffee, is it all of those things? What comes into having that perfect crema, delicious espresso that I get from your machine?

So to the first part of what you said, I will say that we took a lot of the insights from the 01 and fed those into the 2002 development process too, right? So tens of thousands of 01's in field learning from that, learning what mattered most the people. It was obviously enhancing the customization, enhancing the technology, the precision, the reliability. But frankly, what you just hit on about the maintenance, the cleanliness, the ease of use, that was one of the most critical elements to keep enhancing, enhancing, enhancing, to stand out from anything else out there. So from the front loading water tank, waste, bin, everything from the front facade, having everything kind of dialed in where you don't

have to access the prudent or anything like that any further. So from a reliability standpoint, and covering all of that, having, you know, technology built into it that provides a proprietary level of precision makes a huge difference. To your question, I will say investing in the components is critical. So that in terms of not just quality at first brew, but over time. So the quality of the grinder, one of the most important things, quality, the precision, you know, the not just the components, but then also the firmware code and logic around the thermal blocks, the flow meters, everything. That is where we invest a lot in the V2 and where I say

I wanted to be like crossing the Sahara Desert to get to the next best option after the V2 because, you know, I looked at the milays. The melee connected melee machines, you know, the connectivity again, it's almost generous to call it a connected device at this point, but it's $6,000. You know, you're looking at $6,000. Yeah, because they don't have a competitor. So have you looked at them with the 6,000 wall unit and thought to yourself? Maybe I should get in on that?

Or is it just, you know, when you look at it, how many people are going to hire a contractor to put this thing in the wall? That's like that's one percent or madness. Most people are just going to put it in appliance on their counter like me. Yeah. The roadmap of what it accounts for right now is just the level of inbound. We're getting, we have no shortage of opportunities because coffee shows up everywhere, whether that's in an office space, whether that's in a retail showroom, whether that's in a. it can be a university campus, a hospital, you name it, a car dealership. You know, it's showing up in so many places.

So what inevitably ends up happening is the V2 from a durability standpoint is going to be incredibly powerful. And, you know, again, leaps and bounds beyond anything else. So we look at a lot of these commercial environments. Sometimes that can be working with developers for a spec and unit. But in terms of, you know, immediate opportunity and pipeline, the amount of commercial activity that doesn't require a new product, but instead actually looking at the software and how we can layer in things like plate management over time, how we can use the data that is actually

valuable to them in terms of maintenance and repair. Just things that are ultimately going to reduce the overall product cost for both TK and the end user as well as just having a longer-term seamless experience is where I think we don't just win today. I want to win when somebody has this on their countertop on year five. This is just the best thing. So from a life, cycle testing standpoint, putting a bar so high up there that, you know, I think that's ultimately how you build the customer intimacy, loyalty, goodwill that you would see in a brand like an apple. Yeah, I always tell folks when they get this TKO one, I sent one to Chimov as a Christmas present at some point. And, you know, like he loves it, right? And, you know, he can have his choice of

machine. You ripped his, didn't really out of the wall. No, I, you know, I think those of us who have them, you know, might be a little frustrated with them or whatever. Um, you know, I almost want to it out of the wall. I'll be totally honest because then I have guests over and the guests can't figure it out and they can figure what happens in the repair. Do they have to send someone over or say what is? They have their own fleet of people who fix it. Yeah, and they'll troubleshoot it and you know, you're in for

$800. When people see you have that device, it's like you live in a certain zip code or you have a certain appliance like I had these melee dishwashers as well. Man, and they see you coming and they're just like this is a whatever. It's a $1,500 dishwasher. We're going to charge you $800 to fix it, you know, whatever it is, whatever the problem is.

They just added zero to whatever they were initially thinking. Basically, basically. And then you got a nice American brand. All of a sudden, they're just like, oh, yeah, boom. Yeah, no problems. You know, 150 bucks to fix it. Starting a business used to be a pain. You needed a lawyer.

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visit Northwest registered agent.com slash twist today. That's Northwest registered agent.com slash twist today. So let's talk about offices. I was going to put the TKO one in the office back when people went to an office and you're like, not exactly for an office. You got a certain number of cups a day, you know, and so is the TKO2 going to be for small offices or like in the doctor's office kind of situation or when people ask you about that, How many cups a day before you've got to fill water, before you got to empty grinds?

And then how do you think about that next tier up, which is maybe somebody who wants to have it in a location with 10 people or 20 people, not just, you know, a family of 3 to 5? Yeah, I think, you know, the guidance that we generally give people on the B1 is when you see you're brewing in excess of 40 cups a day, then, you know, it's time to like check whether or not you're in the right category. And then for the B2, you're looking at about 80 to 100. Got it. And so you also have a bigger water tank, bigger waste bin, easier to clean. Bean hopper can hold more beans. Also a cleaner geometry, so no beans will ever get stuck behind a grinder dial. So automating and actuating the grinder dial is what allows us to do true drip coffee.

So taking that out and having a controlled means, we can automate the coarsness setting. So when you're doing drip coffee, you're getting true drip coffee. That was one of the biggest functionality. The TCO2 does drip. Yeah. Oh, fantastic. So you're not just doing Americano. here's your two espresso with six ounces of hot water in it.

Some people do like that flavor. That's like a thing some people like. Some people hate it. It's a two-partner decision when you buy this product. So it could be that the person who's actually buying it is a latte lover, a flat white lover, a Cortado lover. But their partner only drinks a drip. Or they'll say, I drink normal coffee is what they'll say. They won't even know how to articulate it.

That's fine. That's fine. But given it's a two-partner decision, it's really important for us to hear that with all of our own customers, the value of D to C, the value of a direct relationship is knowing how valuable that was to them in terms of it. When you invest in this product, you want it to serve everyone, whether it's the whole household or the whole office, you want it to serve everyone. And so being able to do that actually has a true drip function where, you know, it does take longer because, again, it's drip. So it's truly running the process where it's letting gravity do the work.

That is where things get very exciting because it opens up a new optionality in terms of the brewing. And then we actually bifurcated the way that the brewing works. It's espresso profiles and then your custom drinks. So we wanted to think about it. What we learned was it's kind of, think about it like how you would go to a cafe. Now, with espresso profiles, roasters can, you know, upload their own recipes and profiles to the machine. So, you know, you can have a bean type. But of course, the average user does not think about it like, oh, what is the bean? When I go to a cafe, I don't think, what bean am I getting? You think I'm going to stump town. And then when you're brewing and your,

you're ordering or during, you're thinking, I want a flat white, I want a latte, I want to just straight espresso shot. You're not thinking 20 grams at this temperature for this long of a pole, which is what baristas do great. We wanted to make the science, the kind of like, we want to demystified in the sense that it matches exactly the user experience you're used to when you want that ease of use, that convenience, but the science, the precision behind it is, is all happening within the machines. You don't need to dial that in. You can play with the settings. And where even, you know, playing with ideas like a pro mode where you can get more analytics on the usage and stuff like that. Because, again, the number of sensors, the amount of information we have, you can basically, you know, create so many different profiles and views of data as it's actually extracting the drink, you know, but it's one of those areas where, you know, I want to be measured with how much, you know, we share on the pipeline side of things.

Because, of course, we have a prioritization first unit's in field. We're getting feedback. The priority right now is making sure everything we're hearing from people. be layered into our product development process, our program and planning on how we're making changes. Because again, it's going to keep getting better with time. So everything everyone's experiencing right now is truly the B1. If anybody has electric vehicles or any of the connected vehicles of the automotive industry, they've seen version after version how the software can improve. And when you're in a nimble startup, that's where you really get to stand out. So you're going to be

able to upgrade the firmware here through an app. If things need to be tweaked, you can do that. You don't have to put a, I don't know how you do, how would you upgrade the TKO1? Is that like you have to put a thumb drive in or you can't? Yeah, you would have, yeah, exactly. You would need the device back to actually like plug into the PCB. And just like you can in a way that that unlocks so much by way of different use cases we can tap into with the devices. It unlocks so much by way of customization that we can create over time. And then I think just the most importantly is that when people say, hey, we want, you know,

We would like it to be able to do this or we would like, you know, the drinks to come out and, you know, this way. Like, we can play with those parameters and how people can use them. Of course, safety is critical. So from a testing standpoint and also from a certification standpoint, we always have to be listening to, you know, RCMs or tier one supplier, certification agencies and so on. But with adequate testing, yeah, you just take all of that feedback and we want to set up stuff doing like feedback Fridays, let people vote almost in like a Reddit-esque way. What do you want to see built out as a new feature into the device?

and we'll put that into our can band bars. The most important thing for great espresso is the grind and the amount of the beans and the temperature. Yeah, those three things. Yeah. And then you just want consistency as much as possible. Okay, it's always been helpful to have great snacks around the house if you have kids. Or if you like to host people like me, it's a great look to have a bunch of awesome snacks

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Well, this is amazing. It's been great to invest in the company. In terms of channels, I notice that you're in some stores now. And how is that going? You know, I presented you as a direct-to-consumer company because I think most of the sales come from the website. Majority. Majority.

But then how do you think about having it on Amazon or William Sonoma or whatever, you know, and, you know, channel conflicts or just in general dealing with channels? Discipline channel strategy over everything. We are very fortunate that we sell well direct. We're not dealing with a lot of the challenges. I know after iOS 14, a lot of people got hit with a sledgehammer. I do think just by virtue of the brand we build, the product features functionality, a price point, and white space.

We still perform incredibly well direct, and we're fortunate in that manner. So we don't feel like we need to rush into any sort of given channel for purposes of volume or hitting some sort of vanity top line metric. But I will say that we obviously recognize that this product is still a product that is largely bought in brick and mortar. In retail, it's experiential. People want to see it.

They want to taste it. They want to smell it. So we have been having more conversations. You know, we were delighted to know that we were, you know, I think it was Nordstrom's number one product in kitchen and dining in spring of last year. When we launched, we are, you know, Sax's number third product in kitchen and dining just behind the Le Cruset pot and KitchenAid blender, which is, you know, we're in good company there. And so we scaled up.

up a lot of that, but it was the discipline channel strategy was incrementality. I want us to constantly be scaling it up, but honestly, the most important thing is we're not sacrificing our brand equity, our reputation, or our narrative to customers when we're doing that. So with the O2, as you can probably guess, we've gotten a lot of in bounds. And you may have mentioned some of the names that we're having conversations with in terms of people are interested in it, but ultimately, I want to make sure that we're getting the right deals for the business, because I've heard a lot of horror stories of other brands that have rushed this, sign on to things that aren't sustainable.

So we have leverage in that regard. We need to use it to our advantage because we know we have newness in the category. We have a unique product. And frankly, it's not a small TAM. It's not a small market. There are a lot of people that are looking for something like this. So we want to take advantage of them. Yeah.

My experience with this is slow and steady wins the race, being thoughtful. And, you know, if you throw it up on Target or you think, throw it up on Amazon or Walmart, you know, you, okay, you reach a lot of people, but they're going to grind you down on the margin,

so to speak, and, you know, coffee pun. Yeah. Good coffee pun. They're going to grind you down. And they're going to drip,

drip, drip your earnings away. So you've got to think this through, right? Yeah. And you're not a mass market device, even though most people could benefit from it, and it's within reach. This is one of the things I try to explain to people.

I had my cleaning lady at the house. I said, please use my coffee. I saw it coming with Starbucks in the morning. And I'm just thinking like, I know how much you're getting paid. I know how much that latte costs as bagging hurt. Please use my coffee. Use my TKO1.

Please don't order Starbucks. It's so expensive. That heads up, I don't order Starbucks when I'm going to go out for the day. I take my Contigo cup. I take my $6.7 a cup. It's great. It's nuts. And you also have to give a tip and then the line and everything.

And I'm just like, you know, once in a while I'll treat myself to Starbucks. Of course, at an airport or something, if I have to. But I just take a continuum. cup, I make myself a nice latte, and I bring it with me. And so I just, I think people need to be thoughtful about putting in the total cost of ownership like you do with an electric car. You know, hey, you're not going to gas stations anymore. Here, you're not ordering pods. You're saving two, three bucks a day. You're not going to Starbucks. If you order two Starbucks a day, you know, now you're saving 10 bucks a day, eight bucks a day. You know, this thing pays for itself

right quick. It's actually funny that it's January 26th because based on averages of average income in this country, an average spend on coffee, for the average, household up until January 23rd, everything you've earned has just gone towards coffee. I was always, you know, we're always kind of joking and turning like if we ever had the budget for a Super Bowl ad, it would be perfect timing to just hit that note. It's the amount you are spending is obfuscated, I promise. And if you invest in something that does provide you an even better consumable, better experience, you know, it's going to be pennies on the dollar over time and it's actually has longevity tied to it. You're not just having an

enhanced experience, you actually are saving money, but it does take investment. And we're trying to always come up with more interesting ways to kind of expand the market so that we can give it a bit more of that, you know, accessibility, approachability. And so there's a lot of interest. Well, buy now, pay later. I would think that you offer that on the website, buy now pay later. And do people take that option or no? Absolutely. That's exactly one of the areas that we were, you know, we were very excited. What do you use a firm or something or? We use Klarna. We use Klarna. So we've been working with them for a long time, honestly. And how does that work on economics?

Yeah, so for, for example, I mean, it's not stood up on the on the V2 yet since it's still only on wait list. So I encourage everyone to go sign up for the wait list for the TKO2. And then for the V1, you're looking at 90 bucks a month. You know, that is, if you do the math, it's given it's, you know, pennies on the dollar for each cup. You really are looking at basically three bucks a day to serve the whole household. And then you pay it off within whatever number of months, 10 months or something. But for you, do you pick up the extra cost of that and the potentiality of somebody not paying? No, we don't assume the risk of that.

So, yeah. So we work with them. They obviously are, you know, hugely valuable in that sense that they help us be able to reach more customers and without us kind of assuming their credit risk. We also did build into the app for the TCO2 how much people are saving with the device. So for each cup, we have a. We have a waste savings calculator, which includes both the kind of ecological environmental waste as well as the economic savings. I love that. And so, and we can, you know, have fun with it, a Spotify year and review of all the drinks you brewed.

If you make a Chewbacca's cappuccino on your machine or whatever you want to do, you can just play back. What's a Chewbacca cappuccino? I don't even know what this is. Oh, okay, great. Yeah, well, you can name everything on the screen. So that's what we learned us with the V1. Everyone wanted, you know, we said, hey, everyone in the household has a cappuccino or everyone has a Corto. So you can just change the entire home screen of your TK2 to be.

It can be my Cortado, which, you know, might be 50-50. Someone else wants to do a hotter drink. Somebody else wants to do more coffee than, you know, what-at, what-have-you-so stronger dosage. Just letting people customize it. But, you know, it's as seamless as you want it to be or as out of the box as you want it to be. You can just start brewing right away. But the deeper you want to go, we wanted to let that kind of profile, that persona that

wants to tweak and toggle them having the optionality to do so. I love that Klarna stuff. I think this is where it makes sense to me. Like I was giving them a hard time, a firm or somebody, Clorna was doing like groceries. And I was like, hey,

I don't advise people buying groceries on this. Listen, I know if you're stuck, you don't want to finance a few bananas. Yeah, I thought that was kind of weird. We got into it a bit on the Twitter or whatever. But I do think for an appliance that does save money,

ultimately paying a little bit in interest or whatever it winds up being whoever picks that up, it is worth it. And that's where like a Tesla, they too have in there what your savings in terms of versus gas and the total cost of ownership, super important.

And of course, if you care about the environment, I have stopped with straws in the house I have the metal straws. I have stopped with pods. I've got the TKO1. I'm getting the TKO2, hopefully. You can move me up the list.

And, you know, you know, then I do cold brew coffee now myself. Because I was ordering those like cartons from blue bottle that were four bucks each and I was like this is crazy. Like I'm ordering 20 of these a month is 100 bucks in

blue bottle a month and I could just make it myself in a pitcher and then not have all that cardboard. So really just thinking about the environment I think is so important. And pods are just so bad for the environment. Please stop doing them folks. Ban the pod. They're terrible. All right. Listen,

everybody go to Terra Cafe. and, you know, order one if you're into coffee, I guarantee you're going to love it. It's the greatest. I love it. Thank you for making it. Thanks for letting us invest. Great job.

Yeah, you have to fight through COVID. Not easy as a founder. Supply chains and all kinds of stuff. But you survived it all, right? Yeah. I mean, just to make it through a, what do they say? It's not a black swan event. It's a flock of black swans.

It was supply chain crisis, the COVID crisis, you know, great resignation. through 20, like there was, I mean, everything from, you know, getting the components to just making sure that can get, you know, the product out into the market. It's, it's just, it's been, I think, incredible to demonstrate resilience through this period. And I think it will present as its own moat over time. I just think, you know, I completely empathize with everyone that had to go through building a startup over the last five, six years because it's just, you just got to stay on your toes, but use the nimbleness to your advantage.

Yeah, I mean, if you survive it, you went from a ZERP environment where people were throwing money at you. Exactly. You experienced that. Then nobody wants to pick up the phone. Everybody thinks that's the end of the world. And then here we are somewhere between the two, which is, hey, is this a really viable business? What's the margin? And are you controlling spending?

And that's one of the great things. You know, I read your updates to investors. And you really did a great job. I just want to give you credit for that of navigating a really tough situation and making sure the company fit and lean, that there's margin in the business. So really great to work with you as an entrepreneur. Everybody go to Tara Cafe. Just search for it on Google.

T-E-R-R-A. Cafe K-A-F-F-F-E. Terra Cafe. I love this product. Thank you. Thank you for the support. Thank you for everything. Yeah, it's great.

I mean, I try to stay away from physical products in the real world. Unless I feel they're differentiated. I just felt like you're a differentiated founder with a great vision, with a great passion for this. And I know you're always going to dig. your best effort and man, the love you get from, I mean, I've never seen a coffee machine have people like, you know, sharing it on Instagram and sharing it on TikTok. I mean, people are bonkers. How do you create that? Like, how do you get like the fandom going? Or is it just? The only heavy dogmatism I think I hold is towards differentiated design.

I think I always wanted us to stand out for the tastemakers, tastemaker. I didn't want to go after the GQ reporter. I wanted to go after the person that he follows. The tastemaker's, what a great lens. So the GQU reporter follow somebody on Twitter or Instagram or TikTok who's a design snob. I want to know who they follow. That's their finger on the pulse. And if I wouldn't their heart. So you literally look at who they're following on Twitter?

Yeah. Yeah. Yeah. I want to know who their heart sits with, like who their favor sits with. And can we win their favor in our brand? Can we get their vote of confidence? And every time that happened, it would be very hard to act. attribute at times because those people are not transactional. They don't want, if you want to say,

hey, I'll pay, no, they're not interested in payment. You need to impress me more than you need to pay me. And that is where we started to see some really big Ws for the business. And I think that is what materialized into the, you know, fandom and flywheel of everyone sharing their experience. And then, you know, even to a certain extent where I would tell people that would share, I would say, that is not a good enough picture. Please don't post it like that again. Yeah. Like, yeah. Tighten it up over here. Right. Proper lighting. for our machine. Is it German design, Berlin?

I started in Berlin. So, yeah. So it was basically a lot of my network when I was working in electric vehicles in Germany that were either designers or engineers and being surrounded by these people. Look, I will give credit where it's due to my parents. I'm the son of two architects. So I think that must have, through Osmos, was seeped into my brain. But when I was a child and I asked my parents about architecture, they said, whatever you do,

just don't be an architect. It's a brutal journey. but it is, I think, you know, being surrounded by sculpting books, you know, interior design, architecture, everything as a child, kind of growing up, even though I had a finance background and then a much more kind of startup entrepreneurial, you know, journey for a while before starting Terra Cafe, I think all of those experiences, kind of the alchemy or the amalgamation into respecting what that means in terms of whether consciously or subconsciously how it influences our day. And then what is more important in terms of influencing the day than your morning coffee. It's the morning is the childhood of the day. If it's, if you treat it right, if you treat it well, you carry yourself better, make better decision feel better. And so, I think it's just so beautiful. Yeah, the tendency to do it's beautiful to interact with the machine and see it on your, you know, counter. And, you know, not everything is beautiful on the counter. And I do think about that. It's a sculpture. And I can always tell

when something's thoughtful when I look at the topography and the fun. And I, exactly. I love typography. I'm so into it. I'm so. I say that the TKL1 is the Rothko, the TK2 is the Pietmondrian. So it is. I have no idea what that means, but I'm sure, I agree with, I'm going to Google. I'm going to Google that later. I'm going to look at those painters, but my lord, I just, I was looking at it today, you know, when it boots up, because in anticipation of being here with you, I was watching it boot up. And I, it shows you like the side of the machine.

Yeah, the diagrammatic blueprint. Yeah. And I was like, you know what? It looks like an architect's blueprint. That was the idea. Exactly. So shout out to mom and dad. All right.

We'll see you all next time on this weekend startups. Go buy, Tara Cafe. Go buy one for your mom. Okay. Thanks. We'll see you next time. Bye, bye, everybody.

Bye. Hey, everybody. I talk to a lot of founders here on this weekend startups and as an investor. And they tell me the same thing over and over again. They want two things from me, more FaceTime and money. They want me to invest in their companies. And they want to spend time together. So we've been working here on a new meetup program.

We call it Founder Fridays. And Founder Fridays are an event by founders for founders. This is an event that is hosted in cities by people like you. If you're listening to This Week in startups, you're a founder. So what are you going to do at Founder Fridays? You're going to get together with other founders in your community. It could be four or five of you. It could be maybe up to 30 of you in a location.

Pick a cafe, pick a co-working space. I like to go to a great Mexican joint or maybe a dim sum restaurant. You know, where you can do shared food, have a couple of cocktails maybe. You do it on a Friday. You get together and you host it. Now, why is it important for founders to get to get to? together. Shouldn't you be at home just focusing, shouldn't you be in the office just focusing on your startup? Well, if you get together with other founders, true founders who are in the arena

building like you are, you're going to get a lot of value from that because you can trade notes with that other founder about what's working at your startup and what's not working. The truth is, if you're facing a problem, there are hundreds of founders out there who have probably solved it already. And instead of you banging your head against the wall, when you sit there and you talk to three or four founders, you're having some dim sum, you're splitting a cassidia, some projitas. Somebody's say, oh, you know what? I had that same human resources problem. Oh, I had that same technical problem.

Oh, I had that same marketing problem. And they might tell you about a tool or a service that'll solve that problem for you. This happens over and over and over again when I do Founder Fridays with our portfolio companies. Now we're going to give you that same experience. But here's what I need you to do. I need you to host this in your city. So you're going to go to this week in startups.com slash meetups. That's it. And you'll see a landing page where you can sign up and you can say, I want to host in my city. Now, your city may already be hosting so you can just join that person. And what if you go to this event and you learn some go-to market strategy that 10-xes your growth? That might unlock funding. Or you might be talking to somebody and they say, hey, I'm a marketplace too. I'm not a competitive marketplace. Your marketplace is for used cars. My marketplace is for hairstylists, whatever your jam is, whatever you're working on. But they give you some technique that you didn't know about to increase your supply side or get more demand.

in your marketplace and you 10x your business. I see this happen all the time. And founders are like mutants, right? And I'm like Professor X here. I'm trying to put on Cerebro and find all the founder mutants in the world and then have you get together and do your own little meetup. And here's what you're not going to have to deal with. You're not going to have to deal with a bunch of service providers trying to sell you software or services. And you're not going to have to sit through a bunch of passive speakers. You can listen to this weekend startups and get the greatest speakers in the world on your own time. And you're not going to have to have to sit through a bunch of. And you're not going to have to pay for a ticket to a conference or get on a plane or fly somewhere. No, this is about having

an intimate experience with five, ten, maybe two dozen other founders in your city. Please go to this week in startups.com slash meetups if you are a founder. This is four founders by founders only. If you are not a founder, this event is not for you. You can start your own meetup for lawyers, accountants, recruiters. This is four founders by founders. We vet everybody to make sure you're a founder, and if you host it, it's a non-commercial event. Our first founder Friday will start on February 2nd. So please mark your calendars, and we're going to do these on a rolling basis. You can join an existing meetup if it's already occurring in your city, or you and one or two other founders can start your own. We're using a wonderful piece of software that we've invested in

called River. You can sign up for a River account just by going to this week in startups.com slash meetups. We've already got hosts and attendees lined up in San Francisco, New York City, Toronto, Los Angeles, Las Vegas, London, and even in India. So this is your chance to connect. And if you didn't hear your city named, you can start your city. Go to this week in startups.com slash meetups.