This Week in Startups - NEWS: Instacart and Klaviyo file for IPO, State of VC distributions, AI lawsuits | E1798

Episode Date: August 29, 2023

This Week in Startups is brought to you by… Vanta. Compliance and security shouldn't be a deal-breaker for startups to win new business. Vanta makes it easy for companies to get a SOC 2 report fast. TWiST listeners can get $1,000 off for a limited time at vanta.com/twist Carta now lets you launch and administer SPVs for your syndicate. Share your knowledge, capital, and network to launch your syndicate SPVs through Carta. Get 10% off your first SPV at carta.com/twist with promo code TWIST. Roots. Invest in the only real estate investment trust that creates wealth for you and its residents at investwithroots.com/twist * Today’s show: Jason breaks down the exit market for LPs (8:57), Instacart and Klaviyo’s IPOs (22:13), writers suing OpenAI and Meta (50:15), and more! * Time stamps: (0:00) Producer Nick joins Jason (2:27) The significance of Instacart and Klaviyo’s IPO filings (5:41) The VC exit market (7:50) Vanta - Get $1000 off your SOC 2 at https://vanta.com/twist (8:57) The exit market for LPs and over-indexing in venture (13:57) VC bloat and current state of the market (20:39) Carta - Get 10% off your first SPV at https://carta.com/twist with promo code TWIST (22:13) Breaking down Instacart’s S-1 (28:56) Ad dollars moving to new platforms and the importance of being close to the sale (33:26) Instacart GTV tail off (36:30) Roots - Head to investwithroots.com/TWIST to sign up and start investing today! (38:03) Breaking down Klaviyo’s S-1 (44:09) Why it is crucial for founders to retain ownership early on (50:15) Writers suing OpenAI; are broad-based LLMs trained on tons of data becoming a liability? * Read LAUNCH Fund 4 Deal Memo: https://www.launch.co/four Apply for Funding: https://www.launch.co/apply Buy ANGEL: https://www.angelthebook.com Great recent interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland, PrayingForExits, Jenny Lefcourt Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow Jason: Twitter: https://twitter.com/jason Instagram: https://www.instagram.com/jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

Maybe we got a little bit too generous in believing the pitch as an industry, but not looking at performance. And I think people were being funded on their pitches and the promise, but not the performance. And now it has gone exactly the other way. Everybody wants to know our performance as LPs. We want to know how many customers you have, the churn rate. So it's gotten very quickly to brass hacks. And some might say it's an overreaction, but I think you have.

have to play the game on the field. As we were talking about on All In about politics, I've been really thinking about the game on the field. And the game on the field right now is survive. This weekend startups is brought to you by Vanta. Compliance and Security shouldn't be a deal breaker for startups to win new business. Vanta makes it easy for companies to get a SOC2 report fast. Twist listeners can get $1,000 off for a limited time at vanta.com slash twist. now lets you launch and administer SPVs for your syndicate. Share your knowledge, capital, and network

to launch your syndicate SPVs through CARDA. Get 10% off your first SPV at carda.com with promo code twist. And, Roots. Invest in the only real estate investment trust that creates wealth for you and its residents at investwithroots.com slash twist. All right, everybody.

it is a huge news week with me to read the news. Your favorite producer, Nick, Nick, what's on the docket? So today we're going to talk about two major IPOs that are coming up, Instacart and Clavio, just files for IPO on Friday. We're going to talk a little bit about the exit market for LPs and how that might kind of be spurring these companies to go public and how specifically venture capitalists need a win because shockingly there has not been a venture back tech IPO in a long time, shockingly long time.

And then we'll talk a little bit about Open AI and some lawsuits that are being filed by Sarah Silverman, Stephen King's piece in the Atlantic, and just we'll get Jason's general thoughts on, you know, whether these large language models, the special, the super big general ones that Open AI and others are building, whether they are going to be a liability more than an asset. that in the future. Very interesting. Okay, let's get started. I mean, these IPOs are very important for the market.

These are not Kava, the Mediterranean Food Company or Shark Ninja, which went public. Those are both like $5, $6 billion companies, $4, $6 billion range. And one makes electronics, consumer electronics items like vacuums. The other one makes really good hummus, I understand. And so those are not major tech IPOs. but these two are very, very important companies. So tell us where we're at with those. Yeah, so I think before we even get into them, you know, it's important to understand

these are the first venture-backed tech companies to go public since the end of 2021. And according to CNBC, the last venture-backed tech company to go public was Hashing Corp in December of 2021. There were no venture-backed tech IPOs at all in 2022. Now, there were a few companies that did what's called a dispatch. basically when the SPAC turns into the new company in 22, but almost all of those went really poorly. Get Around, which is a peer-to-peer car sharing service, was down 95% since it's D-SPAC last year. They're trading a $39 million market cap. Rumble, which you know, the free speech, right-wing-ish sort of YouTube, down 23%, but still at a $2.1 billion market cap.

So they've actually fared okay. Grove Collaborative, whose founder was on the podcast like three or four years ago, which is a B-Corp for natural household and beauty products. they're down 93% since their DSPAC last year, trading at $125 million market cap. And then Dave, which is a neobank focused on cash advances for individuals and short-term lending,

down 98% trading at an $81 million market cap. So we put those all together. Yeah. I mean, putting Rumble aside, which is kind of a weird meme stockish kind of situation. And they probably actually have some sort of a business because it's basically right-wing YouTube. And I think they have a decent amount of traffic.

They're burning money, but they're growing, Rumble. Yeah. Get Around. I'm kind of surprised at because that is a much-loved service. And people literally buy cars, like use cars, to put them on Get Around because it's profitable. So just like people might build up an inventory of three or four apartments or small homes to put on Airbnb and make that into a business, there's a good. get around business, which is a smaller version of that, buy a $20,000 Toyota Prius or a used model

three Tesla and put it in the network, rent it. And you can actually, I think, make a decent living. But to be trading out a $39 million market cap is crazy. You would think that somebody would buy it or they would go private and somebody would offer, you know, some amount of money for that. So, yeah, this is, it's pretty, it's been pretty bleak out there for sure. And I guess the question is, Are these companies different? And the answer is yes, Instacart is qualitatively and quantitatively very different. And we'll get into, I think, their run rate, which their run rate is pretty spectacular. Yeah.

And John, real quick, if you just pull up this chart, I think this is the best way to sort of show people how insanely dry it's been out there. This is USVC exit value by quarter. And you can see it peaked in Q2 exactly two years ago. to this quarter, or to last quarter, rather. And it's down 98% over two years from Q2, 2021 to Q2, 22, 267.9 billion

to only 5.5 billion in Q2, 20203, which is wild. So there's a couple of things happening here. You also see the number of exits. So on this chart, on the left, you have dollar amount. On the right, you have the number of exits.

The line is the number of exits. and you can see the number of exits kind of at an all-time low for this five-year period or so since 2018. So that makes sense. There's no IPOs and I think this probably includes

as exits things being purchased. So the frequency is very low. So now why is the frequency low? All of a sudden, well, IPOs aren't happening or the public markets don't want to buy shares in companies. And then the other issue is if you're running one of these companies and your values gotten crushed, what's your motivation to go out in a down market, right?

So I think part of this is people opting to not go public, people opting to not sell their company because they don't want to sell it for a bargain basement price. And so that's people who are part of this is choice. Part of it is circumstance. I think there's a third prong too is like the regulatory environment, right? Because Lena Con is going after small Facebook acquisitions. Yeah.

So the regulatory environment would impact acquisitions, but not IPOs, obviously. So in fact, the regulatory environment kind of pushes people more towards IPO and independent businesses. So that is probably a minor factor here. That would be like, you know, distant third probably to one, people don't want these companies going public. But then, you know, the bankers are saying, hey, we can't find money to buy these shares. And then two, people not wanting to take a haircut and sell their company for pennies on

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Here's the best part. Vanta's going to give you $1,000 off.000 off at vanta.com slash twist. That's Vanta.com slash twist for $1,000 off. Your sock, too. Can you give an update on the sort of LP market right now and how it's going to trickle down to founders? I think it would be interesting for people to hear your update. Sure. I'm out there raising Walsh Fund for meeting a bunch of LPs. The previous three funds we raised, we raised them mostly from friends of mine, high net worth individuals, $10, $11 million, $44 million dollar size fund. This time we're trying for. for a hundred million. And, you know, it's always a very humbling experience for an investor or somebody who's successful. I've had some amount of success in my career to go out and ask for money. And I was on a hike. I'm up in the mountains in the Adirondocks, and I was on a hike with another person. And we were talking about fundraising. And I said, you know, this is a really good practice being the manager of the fund and having to go ask for money because it reminds us of how part it is to be an entrepreneur. Entrepreneurs have to do this.

18 months or 12 months. They go out, they try to raise money, they try to convince people, you get tons of nose. And what's happening is, you know, if you look at this problem of what percentage of your endowment, your fund of funds, et cetera, is in venture. That got very high. Public markets came down. So people were over-indexed in venture, and then they maybe did too many venture funds. So what we're hearing quite consistently from LPs is not only we're not adding,

a new fund like yours. We're taking the 12 funds we have the Commitist to, and these four funds, we're not going to continue with, as is they're right, right? Like the venture fund doesn't perform, they're not obligated to do the next one.

Now, they might tell the person, you know, as people have told me, hey, we're in it for multiple funds. Just like somebody might tell a startup, hey, we're in it for multiple rounds. But if the performance isn't there, we're obviously not in it for multiple rounds. And so they are pairing their positions

or they might be saying to people, hey, I said I would put $25 million in your next fund, we're going to go to 10. And so there's a lot of that going on. What that means is less dollars to be deployed. And that means less dollars for and less venture capitalists. I think we're going to see a lot of people close up shop. Because it will take a certain type of individual who fight through this many knows,

this many people saying we're basically not doing commerce in the world. We're hunkering down. So the way startups hunkered down and got rid of employees and cut spend, that's happening with LPs. Not that they're getting rid of employees, but they are saying, we're going to deploy less capital in fewer funds, maybe not add as many funds.

So large pools of capital, belt tightening, and austerity up and down the stack. So you have to fight for every dollar. And if you, you might lose LPs, right? So I'm in a very lucky position that I have a very public following

between this podcast and all in, both getting 50 million listens a year. You know, that kind of reach allows me to reach a bunch of investors. And then I might have a higher top, more people in the top of funnel. And so I can get meetings. And I was talking to one LP. They said they have 6,000 people contact them. And they're able to meet with, you know, a couple of hundred of these funds, like, say, 200 of them, 300 of them a year.

So you start 300 a year, 50 weeks a year. Maybe you're working 45, but let's just just 50. That means you're, you know, are you meeting with, you know, I don't know, five. I have a fund manager a day, basically. But then you have to decide which one of them do you take a deep dive on. So if they were meeting with 300, maybe they take a deep dive into 60 of them, like one in five. But that one in five, so now you're not to 60. So basically one percent of people might get to the point.

Or maybe it's even 30. Go to a deep dive. In other words, they look at your data room and they take a really deep look, which would be due diligence in a certain. Maybe it's 50 basis points of the people who apply to get funding. So I'm very lucky that I kind of get. into that pool, in four to five cases, I get the meeting. But that does it mean I get the money. So it's particularly hard out there. And it's been great for me because it's made me sharp.

I really believe in our strategy. I really believe in what we're doing. I don't care what the number we wind up making is. I just want to get back to work. So November 1st is the hard date for me to stop raising. And I'll just stop, whether we're at 30 million or 100 million. It doesn't matter to me. We'll just put that money to work, get really great returns for investors, fight like dogs to find great companies, support the companies. And then we'll just start the next fund. But I think a lot of people are going to quit. Just like a lot of founders are quitting. This really is the kind of shakeup that gets rid of, you know, it trims the herd. Yeah. If you think about it like a herd, right? like who do the lions take out?

Do they take out the strong members of the herd that are at the front of the pack? Nope. They just wait. They pick off people at the end of the pack who are meek and weak and, you know, who are liable to give up. So I feel like it's a test of everybody's will right now. And so if you're a founder or a fund manager, they're testing. The market is testing your resolve.

How bloated do you think the venture capital industry got in 2020, 2021, if at all? Well, you know, I think there are a lot of great ideas out there that need to be funded. And I almost feel like there's like a never-ending pool of ideas that need to be solved. So I don't think that we want for ideas that require great entrepreneurs to tackle them. So then you look at, oh, the number of entrepreneurs. Now, I do think we started to have people who maybe didn't have the grit or the resolve, the passion, the work ethic, even the skills, or just raw horse. power to take on those challenges.

So it's possible maybe we funded twice as many companies as we needed or that were qualified, let's say. They just had the teams that had the horsepower to be the leaders of a company. That doesn't mean those people are worthless and weak or something. It just means they probably would have been instead of CEO, chief product officer and the VP of engineering at this startup, they should have been the number two in each of those positions at another startup. So that would roughly mean probably twice as many VCs backing, twice as many companies, the bottom half of which maybe we got a little bit too generous in believing the pitch as an industry, but not looking at performance.

And I think people were being funded on their pitches and the promise, but not the performance. And now it has gone exactly the other way. Everybody wants to know our performance as LPs. We want to know how many customers you have, the churn rate. So it's gotten very quickly to brass hacks and some might say it's an overreaction, but I think you have to play the game on the field. As we were talking about on All In about politics, I've been really thinking about the game on the field.

And the game on the field right now is survive. We're venture funds, especially new ones like ours. You know, we're only like a 10-year-old fund. That's new. We were on our fourth fund. That's new. You know, under six or seven funds, you're new. So VC is a very long-term game.

And prior to the third fund, you didn't even take management fees, right? No, the first two funds were kind of like, you know, Fisher Price, my first, whatever, piano, my first, you know, whatever. Those were like my first funds. Like, let me see part-time if I want to be a VC more full-time. And I really made that commitment between the second and the third one that this was going to be, I don't say full-time commitment, but This is going to be my life's work, right? And it was going to be a big part of it. And so the LPs aren't going anywhere.

And I think for venture capitalists, it's a matter of proving to LPs. I'm not going to anywhere. I'm staying. I'm going to be here. You're going to have to deal with me. So if you met me for Fund Four and you said no, that's fine. But you will get an email for me. And you will see me for the next three years investing.

You will have to review. And you're going to have to deal with me for Fund Five and Six and Seven. And it's the same thing for startups. hey, Instacart didn't go away. Other 15-minute deliveries went away. So now the market has to deal with Instagram. And what did Instacart do? Going back to our IPO stories, they had the resolve to make the cuts to cut their valuation,

you know, which was really hard. Multiple times. They cut their valuation twice, I believe. This is hard work. So I have a ton of respect. They also switched out, I think, the CEO position, if I remember correctly. So this is a company that went through the war. And now they're on the other side, potentially.

and going public. So what this means to me is that this six-quarter process of cleaning up the mess of the crazy party we had for five years where things got out of control and people broke a bunch of lambs and, you know, lit the couch on fire and things got a little crazy. The party's over. We cleaned it up. And now the public markets, I think they know if a company's going public right now, that is a company of substance. That is a company with real numbers. And I, I mean, I think there's a good segue maybe to talk about the numbers behind these two, yeah. Professional. Try to be fresh.

And by the way, for those of you looking, I am in the Adirondacks at a lake and a little corporate retreat with a couple of friends, not corporate retreat, but the people I've worked with before. And I went e-foiling. So I'm trying to, as I get myself fit, that Jason could have never done this, Nick, producer Nick. I got up on the e-foil. The woman said I was one of her fastest, like, students, and I just took to it

immediately, this is an incredibly complex sport. It's a surfboard. And then beneath the water is a blade spinning really fast. You have to balance on this board and it lifts out of the water neck. Oh, so you know the thing you saw Zuckerberg with the, um, yes, yes. Flag? Yeah. I don't think that was an evil.

I think it was the one where you pump up and down to get the momentum. This one, you have a handle, like a little joystick. Like you're, you know, and you hit the blade. But I'm now fit enough to take on a new sport. I would have just quit probably when I was 40 pounds have a year or so. You know what I think your next step of fitness needs to be. And you can run this by your fitness coach to run it up a flagpole. We'll see if he salutes.

Yeah. But I think you need to get prison strong. That's your next thing. I think you need to. Yeah. What that means is you need to get rid of the tonal. I am of the belief strong using things that come out of the wall. You need to never do rubber plates.

You need to buy a bench press and a squat rack and buy a bunch of iron, 45 and 25 plates. Stick those on there. Plates, prison strong. That's it. Don't worry about tracking it. Don't worry about anything. You got to go, I'm going for it.

I'm going prison strong 23. That's what I want to do. Come on that journey with you. Do a little prison strong journey. Yeah. I specifically have always kept my career very straightened down there. Never cut corners because in prison, it would go one of two ways for me. I'd be running the place or I'd be dead in it in 48 hours.

One of my good friends is deploy. going to Iraq shortly. He's an Apache helicopter pilot. He actually was a West Point wrestler. He's a total stud. And he's like so excited because that's what they call it on the base because all they have there is like squat racks. Yeah.

He's like, you get prison strong on there. You never stronger than when you're on the base. My friend was in one of the, I wouldn't say exactly which one, but one of the elite forces, not Navy sales, but one of the other, you know, corollaries and the other military. And he said, I don't know what they're putting into our food. but we get deployed and we work out and they're putting stuff in our food because we all got jacked right away it's the plates it's the plates iron plates i think they're putting special protein and other enzymes into the food source to make you listen if you're in the tech industry you know about

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What a deal. Carta, C-A-R-T-A-com slash T-W-I-S-T. Make sure you use the promo code twist for 10% off. All right, let's, speaking of getting strong and getting fit. Let's do the numbers here. We'll get a double segue into the Instacart. By the way, shout out Instacart. I love Instacart.

I use Instacart, Uber Eats, and good eggs. And I'll talk about how we use those different ones and what's in Arizona when I think of the product. But let's talk about the numbers. All right. So obviously, Instagram's business on demand, grocery delivery, everybody knows that. Founded in 2012. The founding CEO of Porvameda was actually replaced by Fiji Simo in 2021. Instacart was at its peak was valued at $39 billion in 2021.

Last year it reset its valuation multiple times. Most recently to $13 billion, so a 66% haircut, basically. It's 2023 run rate is about $2.9 billion, which would be about a four and a half X multiple on its projected 2020 revenue. Now, $2.9 billion, the question I have, that's not the value of the food that was delivered. That's the value of the fees they captured. So it's very important just for people who are listening, who are wondering how these things are valued. That's not $2.9 billion worth of milk and egg and cheese. That's the fees that come off of that, just like Uber or Airbnb, you know, they have a certain fee structure that comes off.

They don't get the whole night. So let's keep going. Instacart's just for the numbers, Instacart's gross transaction volume, which is the total value of the, you know, orders, $29.4 billion over its last 12 months. Yeah, okay, so that's very interesting. The reason it's interesting is they delivered $29 billion worth of groceries, and they made a top line revenue of $2.9 billion off of it. So they're able to extract 10% of the value of deliveries they made. Yeah, and just for us to keep our mental model. These numbers are close, but the gross transaction was its last 12 months.

The $2.9 billion is what it should make for 2023. So slightly different, but generally close. Oh, I wanted to run this by you. So Rich Barton's School of Branding, Instacart. Unique word. In the cart. Three syllables, so that's no good. And no high-priced gravel letters, so that's no good either.

No. But unique word. It's a very generic word. It's a generic brand. It doesn't feel unique. Yeah, it doesn't feel unique when compared to Uber. Okay. So let's get into some metrics.

Instacart's last quarter, which ended June 30th. Revenue, 716 million of 15% year over year year, add revenue, and we're going to go deeper on this in a minute. 206 million of advertising revenue, up 20% year over year, net income, profitable, $19 million. They have 600,000 Instacart shoppers, which are obviously akin to dashers, door dash, or Uber drivers, etc. And sort of their top line user. The shoppers are the people who put your food in the bag, they do the ice cream last, and And if you wanted coffee ice cream from Hagenas and they're out of that, they will text you to swap.

So those are the shoppers. And they get paid both for shopping and putting things in bags and for delivery. Yep. And just their top line user metric, 7.7 monthly active orderers, that's their like monthly active user metric, that spend an average of $317 per month on the platform. In 2022, Instacart's average basket size, so the average order size was about $100,000. $10, which if you put those two numbers together, on average, users are, yep, about three times a month. That tracks perfectly.

I mean, if you have kids, whatever, because I'll tell you what's happening there, you probably shop one time a month yourself. So that's what I see the pattern is. You go shopping when you have time and you don't have time and mom or dad are busy or dad, dad, dad, or mom, whatever combination you got are busy, you hit the Instacart or you forget something. And so you're seeing that order size is actually like 110, if I think you said. That's like replenishing. That's not for a family of five or whatever, full. Like when you have a family of five or something like that or four, people living in a household,

you're ordering $300 worth of groceries when you go to the store, $2,300. So I think this is increasing the frequency. So you run out of milk, whatever. So I think people are probably, yeah, ordering more frequently. It would be interesting to compare this type of shopping, which I think is, city shopping. I think they're mostly in metros, not suburbs, and they're kind of getting to

the burbs. So that also probably is a factor. You might have some single people in there. You might have some couples in there. You know, two people in a dog, no baby yet. So this is Instacart's ad advertising revenue scale up from 2019 to 2022. It's pretty amazing. Advertisers on Instacart grew

almost 6x from around 1,000 to 5,700 from 2019 to 2022 at the end of the year. Ad revenue grew 11 times from 67 million in 2019 to 740 million, just three years later last year. And in 2023, Instacart's on pace for more than $800 million in ad revenue, which is on pace to make up for the year, which is on pace to make up about 28% of Instacart's total revenue. It's a little troubling to me because you would think it might be 10% of their ad revenue or something of their overall revenue mix. So this seems like a very high number, which I think is because groceries are such a low margin,

business and people are hard to extract money from it because if you charge too much for the delivery for the fees, people get in the car and they go shopping because people don't necessarily not like shopping. Yeah. So maybe this is the business. Maybe it's an advertising business ultimately. Well, it sort of is. So, John, if you go to that next graphic, this is one of the red flags I wanted to bring up

to you, Jason, which actually I heard Alex Wilhelm point out. So I'll shout out to him on today's equity podcast is what he does. This is Instacart's gross transaction volume quarter over quarter. it's relatively flat for the last, basically since COVID started. So you're right on. Yeah. See,

I think what's happening is the main business is not, it's hard to make profitable. Just like some segments of Uber's business might be hard to make profitable or even Airbnb. It's like it might be hard to be profitable for somebody sleeping on a couch kind of situation for under 100 a night. And they make most of their profits from the two, three, four hundred a night's days where Uber maybe doesn't make money on pool.

they make a little on X, they make a lot on black cars, yada, yada. So this is a disturbing trend. This would be a reason to not invest in the company, which is if they're not growing their base of users or not growing their product shipped and they're extracting more value out of people, they're going to hit some optimization moment. So how much more advertising they charge. Now, I just want to talk about the advertising. This is a revolution in an advertising. The question you really have to ask yourself, Nick, is when advertising is moving to a new platform, I mean, you're seeing this, you know, advertising on Amazon, advertising on Uber, advertising on Instacart.

Okay, where do those advertisers come from? They didn't suddenly Procter and Gamble or Unilever. They didn't suddenly decide, you know what, we need to spend more on advertising. They're moving the advertising dollars. They have a certain advertising budget. They're moving it. So what did it move from? Well, it turns out the end cap or, you know, the end of the aisle is called the

end cap in supermarkets. I think they've created a new end cap in commerce, which is when you're about to check out, they upsell you. So if you've used DoorDash or Uber Eats, you're about to check out, they take the three or four most ordered items on the menu and they give you one more shot. You sure you don't want to add French fries, sure you don't want to add a drink, sure you don't want to add a dessert. That's happening also. You check out of Uber Eats or a good egg. I don't know if good eggs does it. Uber Eats does it constantly.

And I think Instagram does it constantly. Hey, you're checking out. We noticed you didn't put the Fagé Greek yogurt you love. We noticed you didn't put this in and you didn't put ice cream and you didn't put this sugary cereal in. Do you want to add it? Because you can just click ad right here. Those are advertising slots. And then when you do the initial search or you open the app, they'll have rewards and offers.

So I was ordering ice cream the other day on Uber Eats. And I was like, two for one ice cream. What? Literally buy a pint of ice cream and get a pint free. So I was like, are there any brands in here I like? They got me. And I literally just ordered like eight pints of ice cream. I ordered four.

I got four for free or whatever. And it was a bit of a mess because it was kind of bait and switch. They were sold out of the one I wanted. So it was like I think they were kind of putting the weird flavors that maybe don't sell. But anyway, it was a great hook. And so I think getting people at the point of sale, whether it's Amazon, whether it's Uber, the closer you get to that transaction. And I think that also would signal maybe less broadcast advertising, less radio advertising,

because radio and broadcast advertising, okay, I'm telling you about some ice cream or some beer, okay, but you're not purchasing right now. So maybe we have to move some of those dollars. So I think this will affect media. Yeah, you've made that point before about the closer you can get to the transaction, the higher value the advertising will be. Yeah. I mean, and it's also quantifiable.

So you can go back and say to people, listen, the person took an Uber, we upsold them on In-N-Out Burger. They clicked on In-Out Burger. There was an In-M-Out burger that they were passing in the, the Uber or buy their house or by their destination or the Starbucks is by their destination. They're getting out of the car to go to a meeting and there's a Starbucks there. And we told them where the Starbucks is. Like that kind of stuff just did not.

You couldn't buy that in inventory. Just like you couldn't before Google buy somebody typed in Volvo, you know, 2010 used Santa Monica. Like that inventory did not exist before. And so when you create that new highly valuable advertising that can be quite, quantified, you got a winner on your hands. So there's an argument here. Maybe they'd lower the prices for Instacart delivery and then just make it an advertising

business. Yeah, I mean, if you just look at their last quarter's earnings, right? If you take out their ad revenue, $206 million, they made $119 million in profit. The asset revenue was 100% margin. So that's really where that's their profit center, right? It's like 80% margin. You have salespeople and you have a little bit of accounting. You have to do some post sales sales.

support, but I would call it 80, 90% margin business, yes. You get to keep 80, 90% of every dollar you sell. Pretty great business. Yeah. Pretty great business. And, you know, there's Costco, right? My understanding of Costco is you pay a membership fee and they make the majority of their profits from the membership fee. And then they just make the price is so low that people lose their minds and they just get, some people who are just Costco disciples, right? Yeah. So it's one of the most brilliant business models of all time, Costco. It really is. I think so. I think Amazon Prime as well, you know, you buy Prime membership. And, you know, you get to have access to all this great inventory and they solve the shipping problem for you.

So maybe Instacart ultimately becomes, because there's a membership that we pay 10 or 20 bucks for and we pay for the Uber One membership. I don't think Good Egg has a membership yet. And those memberships give you a pretty steep discount on delivery costs and you get prioritized. So I shout out Uber One. I think it's one of the great unknown subscriptions out there. It's really up there with Amazon Prime now for me. Last question on Instacart.

Do you think post-COVID Instacart starts to see a little bit of a tail-off as people are okay with going back to the grocery store? You think that's it? I think, you know, the biggest issue for them is DoorDash and Uber Eats. So I'm close to both those companies and they both are already delivering you your dinner and picking you up in cars. And I think those are the two major headwinds because if you were going, if your food's coming out of a cloud kitchen. And that cloud kitchen has the 15-minute grocer, like was it called Joker, was the one that we always talked about a couple years ago.

Yeah, there was Get-Geteer, Joker. Yeah, all these 15-minute deliveries. Gorillas. Yeah. Yeah, all that belongs in a cloud kitchen. So imagine you have a cloud kitchen like Travis's company in Diego. There's 20, you know, restaurants or maybe there's 50 restaurants, you know, in 20 restaurant areas in there.

Well, it doesn't take much to have, you know, a 7-Eleven, which they have in the network, I believe Cloud Kitchen supports 7-Eleven or somethings like that. And Dorish has 7-Eleven. So then you could have other brands there. And it's quite possible eventually that somebody like Procter & Gamble will have like a P&G direct store where they just go into a Cloud Kitchen and Procter & Gamble's line of products are there and they disintermediate the grocery store. Yeah.

That was GoPub's business. That is GoPuff's business, right? They own the store. They own all the inventory and then. Yes. Right. But now imagine you're, but they still have to buy Procter and Gamble's cereal. They got to buy Cheerios.

They got to buy Irish Spring Saw, you know, soap. They got to buy edge gel. Now imagine you're the maker, your Gillette, your P&G, I don't know which brands own what. And they start opening stores direct consumer. Now you've got really, you know, a straight path and that could lower cost. And then the profits, if you take out the supermarket's profits, you could give that to the delivery. And then, you know, everything becomes more efficient. And it's actually probably arguably better for society in terms of traffic and in terms of real estate, in terms of time, that you get your groceries delivered, actually.

Because if they're delivered, there's a chance that two or three people will be a long must stop. And then you don't have to have this giant warehouse that everybody goes into. You don't have to have all these cashiers. It just all happens seamlessly. And you don't have to drive to the grocery and back. So it's net, net, net, a benefit for society, I think. probably lowers the carbon footprint. Yeah, I think it's cool too because it takes

business model. It takes the entrepreneurship from the retailer, right? You're not going to see a lot of mom and pop grocery small stores anymore, but it takes the entrepreneurship from the retailer to the brand side, right? You're seeing a million new different kinds of gummies and, you know, any kind of CPG thing you could think of. Yeah. It's a cool kind of shift that's happening.

Yes. If you were an entrepreneur in a hundred years ago, you might start a grocery store. or a deli. Now you start something that can be purchased in a deli or a grocery store and you have more product innovation. Hey everybody. Today I'm joined by Roots CEO Dan Dorfman. Dan, welcome to the show. Thanks for having me, Jason. Tell everybody here in the audience, what is Roots and what makes it different than the other real estate investing platforms? I'm a complete neophyte.

Roots is a reet with a little twist. Sorry, I had to do it. We are the first real estate portfolio that we know of that builds wealth for both our investors and our residents. And we've created a unique win-win model that creates partners and not tenants. So you're telling me instead of putting down a $2,000 one-month security deposit, you get $2,000 invested into the REIT. So you're day one and owner. Absolutely. And so it kind of goes against, you know, when we first started this two years ago, I wasn't really looking to build a product out, to be honest. I was looking to find a product that I could offer my residents in my other portfolios that would help them get to homeownership or help them participate in this in this market. And all I saw was, you know,

rent to owns. And in theory, those are great, except for the fact that less than 10% of them actually convert into homeownership. So you're kind of just putting a carrot out in front of your resident and you're not really actually impacting. So we wanted to really develop a program and a model that said, hey, we believe in you. You're a partner from day one. help us take care of this thing and we can all win at the end. Head to invest with roots.com slash twist to sign up and start investing today. That's invest with roots, no spaces, no dashes. Dot com slash twist to sign up today.

All right, you want to move on? Yeah. To Clavio? Oh, Clavio is great. Yeah. So Clavio. Marketing automation platform helps businesses reach customers via email, SMS, push notifications, and more.

Then it collects all that data and puts it into like an easy-to-read dashboard. It was founded in 2012 by two co-founders, Andrew Bilecki and Ed Hallen. The company, so this is a great lesson for founders. The company got profitable really early. They didn't raise any capital until it's seed round in 2015, so they waited three years. They went on to raise $778 million between 2015 and 2022 and kind of go for that hyperscale. It was last valued at $9.5 billion in a 2021 series D where they raised $320 million. That would be about 15x.

It's projected 2023 revenue upcoming. Just for a little Rich Barton School of Branding, clavio is named after clavia, which is the Spanish word for a mountain spike. And the idea is if you're going to climb a mountain, you need the right tools to do it, which I think is pretty cool. Under the Rich Barton School of Branding,

unique word, yes, deeper meaning, yes. Not two syllables, has three. But they do have some mediumly high-price scribble. V and K are pretty good, yeah. K is five-point letter, V and Y are four-point letters. So decently, decrystal. Yeah, not bad. Not bad.

Not ascribble. Yeah. Yeah, if you were doing e-commerce, you kind of have to use Clavio. It's for marketing automation. So, you know, when brands, like, I don't know if Nike's their customer, but I got into Nike for a little bit. I really liked the products. And the Nike app was really good. And they had, like, a lot of different types of shoes.

So I started trying and, like, getting into it. And it was just really good. Like, I would get these emails and marketing emails or SMS is from Nike. And they were very fine-tuned to me. And I think they're using clavio, is my guess. So they're studying what you've purchased, what pages you've looked at, and then they make custom emails, programmatic emails. They know if people unsubscribe, you know, they will upsell you on, hey, how often do you want to get these emails? Some people like to get a Nike email every three days.

Some people might want it every three weeks or three months. So there's a lot of nuance. And what people used to do was they would use a generic email provider to send, you know, a bulk email to 10 million emails in the day. database. And that makes no sense. You have probably a group of people who are on the website every week and browsing and they order 10 pairs of sneakers a year. You're going to treat them very differently than somebody who comes, you know, twice a year and they buy sneakers on some pattern and they buy only running sneakers and you know they're replenishing and they buy the same model. So when I was a marathon runner, I bought the same sneakers, you know, I'd buy three pairs

of them at once and then I would rotate them, you know, or two pairs, wear one, one day, where one the next, you know. Yeah, it's like, have you gotten that email where you look at something on a page and then three days later, you know, Nike will email you and say, hey, that pair of sneakers you were looking at is now 20% off. And you're like, oh, that's clavio and business is like. That's clavio. Yeah.

So they're like building those tools so that each e-commerce vendor doesn't. And they get a pretty penny for it. And I think it's like one of these win-win-win-win situations. And that's, if you're thinking entrepreneurship, I encourage people always to think about win, win, win, win. Clavio wins because they make money selling the tool. Put that aside. They wouldn't exist if they didn't.

But then the customer wins because they get a better experience. And then the brand or whoever's using that tool, they win because they don't have to build it themselves. And then like Squarespace or other tools, as the prices, they can keep investing in making the product better, but keep the price the same. And everybody just keeps winning more. And so Clavio is going to be, that's going to be like a HubSpot or an Atlassian, both toolmakers. who help other people grow their businesses and they're more efficient. Shout out to Scott from Atlassian, Darmesh, from HubSpoddle. We have a little Atlassian tie in here coming up in a second too.

So just for the metrics, Clavio's last quarter, which again, ended June 30th. Revenue 164.6 million, up 51% year of year. Free cash flow of almost $40 million, $39.5. Net income, $11 million, basically, cash position for $40 million. dollars, clavio is profitable and it's growing quickly. Also, the founders, I think, have the highest ownership percentage, 38% or something, 39%. I saw somebody had tweeted this. Jason Lemkin tweeted it.

Jason Lemkin tweeted it. He keeps a tracker on this. Shout out to Jason Lemkin. And so most founders wind up with 10 to 20% of their company. And if there's two founders, they split that five each, 10% each, like Larry and Surrogate, I think wound up with about 10% each of Google. here, you know, the co-founders or the founders had 38% of the company, I believe, and the next one of the highest ones was obviously Atlassian.

And then Ryan from Qualtrex also had a massive ownership position. So this is why- Yeah, John, can you pull a lot of the graphic up, please? So this is from Saster, obviously Jason Lemkin's platform. Yeah, this is pretty shocking, right? Clavio CEO and co-founder Andrew Bilecki, 38.1% of the company, like Jason just said. But what I found even more amazing is so Scott, the founder of Atlassian and Scott's co-founder, Mike, if you look right underneath, Atlassian obviously is the second most in terms of most ownership for a single co-founder.

But look at the ownership between the two Atlassian co-founders at IPO. 37.7% for each, that's almost 80% of the company. It's crazy. Yeah, 75% of the company. Yeah. That's amazing. Jason, you want to talk about. You also find here.

Is that founder one and founder two don't always have the same ownership percentage. So there's, most people think what atlasian did is, you know, typical. Usually the person who comes up with the idea brings on the second co-founder, see CloudFair there, 16% and then the co-founder, 5.6%. You know, you bring on the co-founder, you make them an offer. You know, hey, it's likely to be a co-founder. You get this amount. Some people have it in their head that, you know, all three would get the same amount. And Cloudflare is a good example.

The founder had 16. the second founder had five, the third founder had one percent. So it's not always as it seems. You want to talk about the importance of founders sort of retaining ownership percentage early on if they can and how staying profitable kind of plays into that? I mean, it's so obvious that, you know, and this is why I've been very upset about some of these new accelerators asking for free equity. That is not commasurer, commasure it with the value they're providing. If you want free equity, 25, 50 basis points, maybe even a point as an advisor or over two years for doing some predetermined amount of work.

And both people can cancel the arrangement at any time if they don't feel it's providing the right amount of value for either party. So your equity is valuable. And so what I would just encourage every founder to do, imagine you're a billion dollar company. And when people ask you for 1% of your company, you can say, well, that will be $10 million. So in the case that we become a billion dollar company, which we know is one in 100 or one in 500, whatever you think it is, you know,

the you can get kind of get an expected value for those shares which is if you look at it's a one in 10 occurrence one in a hundred occurrence well it's one in a hundred hundred hundred it's like a hundred thousand dollars in expected value rates so of you know a 10 million dollars you know one one and a hundred chance of getting it so um i think that's a reasonable way to do it and yeah to the extent you can not low money on stupid things and instead you frugal, then you will have a larger ownership percentage on exit, which is super meaningful. Now that you do still want to build a big pie. So, you know, Airbnb, very big pie, Google, Uber, these are very big pies.

So getting a smaller slice of Uber or Airbnb at, you know, 80, 90, 100 billion or, you know, a small slice of Google or Apple, obviously, Tesla, these were worth a lot more. So you always want to concentrate on building the biggest company possible. but part two of that is, yeah, you don't want to dilute the cap table because you suffer from it. And founders have common. So if you build a big preference stack, as we've talked about many times, that can be problematic as well. Can I ask you what it is about the email sort of marketing platforms like MailChimp, like Clavio, where they can grow profitable into multi, multi-billion dollar businesses where the founders retain huge ownership percentages?

Yeah. They don't take a lot of money to build. So that's number one. It's just software, right? There's no physical component in the real world. You're not building spaceships or cars or dealing with the networks of real world stuff like Airbnb and Uber. So they're very efficient. So a small number of people can build them.

Number two, once a customer gets onto a platform, you know, we remain MailChimp customers, even though I took a bunch of lists down for MailChimp because they were infrequently used mailing lists. So they're free on substack or free on some other platforms. So that is one of the reasons they work really well. Same with website builders. If you're a Squarespace customer and you're delighted by their product, you might stay 10, 20 years. If you're a MailChimp customer,

I've been a MailChimp customer for over 10 years. I still have our high frequency stuff on there because I like the interface. I like some of the tools. Same thing with Clavio. Once you put it in or Twilio, once you lock it in, SendGrid, Quilio, MailChimp, once they're locked in to rip them out, probably not worth it.

Now, you could negotiate your price, and that does happen. So the margins can come down a little bit. And so there's pricing that can change. And you can negotiate pretty hard. I can tell you that with a lot of these products. You can say, hey, listen, we got two quotes with these other ones. But they also know on the other side, Nick, oh, you're going to have to learn a new interface. You're going to have to move your data over.

So the portability is friction. Therefore, if you got an offer from Plavio's competitor or Mailchimp's competitor or Squarespace's competitor for 50, percent less. It may not be that big of a number. So you might have like a hundred million dollar e-commerce business and it doesn't matter to you if you spend 100,000 or 150. Right. That doesn't, it's such a minor portion of it. It'd be like, oh, I have a new lawyer who's charging me 600 an hour, but I have the lawyer I love and I trust for 800 an hour. It's 25% seems like a huge amount until you realize like it's kind of nice to work with the same lawyer for 10 years, you know, and have that personal touch and you know the product and

the switching cost is high. So what I always advise people is, you know, pay for it. And then, yeah, you can negotiate on the margins. But if you're getting good value out of it, switching can be very expensive. All right. Last question on this before we move on to a final thing. But if Insta Car goes out around 13 and Clavio goes out around 9 and a half, which do you like more at that price? I would say Clavio.

I like more because I think that's a business that, you know, will not see as rabid competition, has more lock-in, has higher margins. It doesn't mean I don't like Instacart. I love it as a customer,

but I do think that that product is not as differentiated as Clayvio. Like, awesome. Instacart is slow. Uber is fast. And like, I've started using Uber Eats more often

because I like fast. I like picking what I want and getting it within the hour. Instacart, you're picking a window. It's not as instant. as the name might have you believe. So I prefer, yeah, Lou Brees and Doordish, you know, like I like that more speedy thing.

And then I think you also have the 800-pound gorilla Amazon, which, you know, owns Whole Foods. And they haven't, I don't know if you started getting same-day delivery of some products, certainly when you were near Manhattan, you did. Yeah. And that's a very weird thing that's starting to happen. They have new outlets in South San Francisco that are servicing the peninsula. So they've started to build these big warehouses, and I think they know what the high frequency skews are in a geo, and they're in that facility, and they're going out anyway. So to drop off your USB cable or whatever popular item, your battery pack, you know, your anchor, powerback, or whatever, you know, AirPods or something, they're going to get you pretty fast.

Yeah. Sorry, do I look ridiculous in my blue lockers? Sorry, everybody, but my eyes are straining, so I'll put them on for a second. You look like you're about to like have a saws all on some wood. Yeah, I got a change saw. Yeah, like a right angle drill. I got a tree. I got a fell to tree.

All right. So there are some writers, notable ones that are suing Open AI. And Stephen King, one of Jason's favorites, wrote a little piece about artificial intelligence being, his books being trained on AI in the Atlantic. So comedian and author Sarah Silverman sued Chat GPT maker OpenA. AI and meta in separate lawsuits for copyright infringement last month because both platforms had their data sets trained on her 2010 memoir, which is called the bedwetter. From the AP story, here's a quote, Silverman's lawsuit says she never gave permission for open AI to ingest the digital version of her 2010 book to train its AI models, and it was

likely stolen from a shadow library of pirated works. It says the memoir was copied without consent, without credit, and without compensation. Silverman and two other authors are obviously, as I just said, suing meta for copyright infringement. And the reason is because they're claiming that meta used a data set called Books 3 to train Lama, which is their open source, LLM. And Books 3 allegedly contains $170,000 books, worked by Stephen King and others. and some other notable authors have separately sued Open AI, including Mona Awad, who's known for 13 ways of looking at a fat girl and Bunny, and Paul Tremblay, who's known for a head full of ghosts, the cabinet at the end of the woods, and Survivor Song.

So any thoughts on that generally, Jason? Yeah, so I want to actually read from the specific Stephen King short piece and do some analysis of his sort of take on it, which I think is probably the great take. That's why I put my glasses on. we explained on the podcast that if you want two pirate books, pretty easy to do. Screenplays also very easy to do. People put them in Google drives.

They make them public drives. Shout out Google Drive, great product, but you can use it for that. So if you just type in Sarah Silverman's book or my book or the name of any book, and you do site colon, do docs.gulgoogle.com, there is a strong chance you'll get the PDF. And then there's something called a shadow library. So there are hackers out there. there or freedom of speech people or just people with extra time on their hands who

build websites that host these things. And they get advertising from ad networks on those websites. So they get free content, i.e. my book, other people's books, Tim Ferrars's books, whatever, Sima King's books. And they kind of make advertising them. The good news is 99 out of 100 people in the Western world are not going to steal your book. They're going to buy it. And if your book gets stolen and it actually trends on those things, it's just a sign that

there's a global audience for it who can't afford. it. Right. Demand. When your book gets, it's demand, right. And it's flattering in some ways.

It's a bummer in other ways, but, you know, somebody in Singapore, you know, or Manila or Brazil might not be able to afford it or it might not be in their language yet, whatever. But because the web is open and because these LMs,

his language models, crawled the web, they inadvertently, or quite by design, got these. And what will happen in discovery is, somebody will have said in a Slack room, hey, you know what?

We should do, we should search every PDF on the web and put site colon Google and get all those too because that would be great training data. So there's probably some rogue people at OpenAI and every other model. And when discovery happens, they're going to have a discussion

and then they're going to get pulled into a deposition, Nick, where 10 open AI developers are going to have conversations of, hey, you know, Twitter time, out when we get to the sixth or seventh page, how do we, you know, scrape Twitter? How do we scrape this? And, you know, the use of the product is what matters. So the argument against Sarah Silverman and then these other folks is like, is anybody using it in any way to harm Sarah Silverman? So that's going to be their argument. Like, it's probably no harm and we'll just take her out.

We'll build the next one. We'll just take you out. And then when people ask, hey, what's Sarah Silverman's book about, it will just say, we don't know. So there's the search engine aspect of it, which Sarah certainly wants to be in. And then there's, does this, is this infringing on people's ability to make a living with some new, or some new product? So it's not infringing on Sarah Silverman, but maybe there is a new product Sarah could have made based on her book. Certainly Stephen King could create an AI where you pay Stephen King, $99 a year, and you get to go in there and say, make me another version of misery where it has this character. And I wanted to do this. And I wanted to do this. And can you make me a short story in Stephen King's genre that's about my life or about

Star Wars and make me like a mashup of something? And that could actually be a product in the future. It could be a really good product, like a Stephen King AI that makes new stories every day and then people vote them up and down and they tweak them. So maybe like the next job is like I could be a Stephen King curator where I am such a Stephen King fan that instead of writing fan fiction, I work with the AI to massage it and prompt it to make interesting Stephen King fan fiction. you take some character out of misery and then you write the prequel or the post

put him in a sequel or whatever. The Shining. Whatever, yeah. Or there's a character in the, the Shining had a second version, right, with all the people who shined. And so there's all these, like I think interesting ideas

and products that could come out of it. There was another person who did a really interesting product and this is where you can see like maybe there's going to be a little bit of overreach or we've got some things to work out. So there's this guy,

Benji Smith, and he had a website called rosecraft.io. And he basically took it down. And I think it forwards now to a post. And he did this really interesting thing where as a writer, he was trying to figure out, well, how many books, how many words are there in a book? And so he started putting that into a Google sheet.

Then he was trying to figure out which words are like exciting words, adverbs, verbs, high energy words, low energy words. And he started analyzing books to become a better writer. because he had heard the story on NPR about how Kurt Vonnegut invented the idea about the shapes of stories, and he gets into this in his blog post, and that they could kind of understand the emotional arcs and books and do sentiment analysis, a fancy word for like the ups and downs in the book. And this person started to build really interesting graphics and charts and stuff like that. But in order to do this, you have to ingest the book. I would say if this went to the mat

that this person would win because he's not interfering with their ability to do commerce in the world although he's using the whole book he's just doing an analysis of it and I think it's fair use and he's not monetizing it anyway. It's not like he was selling this as a subscription or a product or something to the best of my knowledge

so as I've always said these fair use tests are a test and people are going to take it to the mat and I think publishers will have their content removed from opening AI's future crawls. And I don't think it will matter.

I think they'll be able to build synthetic content to analyze or they'll be able to find enough open source content like open source books to do this. And then there could become a licensing fee where the book industry could just say, you know what, any language model that wants our corpus of books at Harper's can pay and it's a yearly fee and we distributed equally across our writers and we take some percentage of it

and we've got their permission and they can opt out of it and hey, new business model, new licensing fees. Just like for music, whoever thought that like the Rolling Stones and Bruce Springsteen

would be making more money from the commercial use like literally in commercials or marketing of their music or licensing loops of songs I think TikTok pays to license some loops of these songs and put them into

you know, stuff. So the license. Spotify just signed a deal with, I think, UMG where there will be some, or no, sorry, YouTube, not Spotify, where there will be sort of payout for songs used to train AI. Sure, why not?

Yeah, so I think everybody's going to have to just sit around the table, hash out how much value is being created and is it fair, right? So I could summarize, I could read all of Stephen King's book and write in Stephen King's voice. There's nothing he can do about it. I could say, like, I'm the heir to Steve.

Just like there's a band that is kind of like a Led Zeppelin band. I forgot the name of it, but. Greta Van Fleet. Greta Van Fleet. And like, the guys like, hmm, they asked the Led Zeppelin guys. Like, what do you think? And they're like, oh, that's freaking great that somebody is like taking on the legacy and he's inspired by us.

And that just sends more people to us as a source material. Great. Everybody carry on. So it's going to be a negotiation. and some people will feel very passionately about it and they will win and in some cases. And I think some new business models are merged. I encourage everybody to sit around the table and say how much value is being transferred. What's a reasonable number?

And just talk about what's a reasonable number. And I think that's where technologists could improve. They like to just do shit and have no ramification for it. I was technically able to do it. Therefore, it's legal. That's not actually how the world works. All right. You want to wrap?

All right. Thanks to producer Nick for reading the news, and we'll see you all next time on this week in service. Bye-bye.