This Week in Startups - Spotify earnings, Grimes takes AI-based music approach + Cafe X CEO Henry Hu | E1728

Episode Date: April 25, 2023

Jason starts the show by breaking down Spotify’s latest earnings report before discussing pop star Grimes taking to Twitter to announce a new business model for her AI-generated music (1:44). Then, Cafe X CEO Henry Hu joins Jason to discuss their latest equity crowdfund and being resilient, surviving a downturn, and more (18:22). (0:00) Jason kicks off the show (1:44) Spotify Earnings (8:25) Squarespace - Use offer code TWIST to save 10% off your first purchase of a website or domain at https://Squarespace.com/TWIST (9:56) Grimes takes an AI-based music approach (16:57) LinkedIn Marketing - Get a $100 LinkedIn ad credit at https://linkedin.com/thisweekinstartups (18:22) What is Cafe X? (26:20) Advantages of a robot arm (31:10) Brilliant.org - Get 20% off an annual subscription at http://brilliant.org/twist (32:40) Cafe X’s pivot (38:07) Pricing of the Cafe X system (40:54) Cafe X’s OS  (42:42) Raising equity crowdfunding (43:11) Navigating edge issues  (45:22) Finding success and Cafe X’s current focus  (50:38) Inventing menu items and other use cases FOLLOW Henry: https://twitter.com/supergeek18 FOLLOW Jason: https://linktr.ee/calacanis Subscribe to our YouTube to watch all full episodes: https://www.youtube.com/channel/UCkkhmBWfS7pILYIk0izkc3A?sub_confirmation=1 FOUNDERS! Subscribe to the Founder University podcast: https://podcasts.apple.com/au/podcast/founder-university/id1648407190

Okay, everybody, first up, we have some music tech and podcasting news for you. Spotify has reported their first quarter earnings, and they're really growing their user base. They're over 500 million global, monthly active users. And in related news, Grimes, the artist, has tweeted she wants everybody to take her AI voice and make songs and she'll split revenue with people. One of the most fascinating, interesting, innovative things I've seen in the history of the music industry. I think it's going to result in some bangers. And then I have CafeX CEO and founder Henry Hugh on the show to talk about his crazy last couple of years, near-death experiences as an entrepreneur, never giving up, and just making that robotic coffee machine that you see at SFO.

That's actually making hundreds of thousands of dollars a year. He figured it out one of the great dog and founders I've ever worked with, super innovative. It's going to be a great show. So stick with us. This Week in Startups is brought to you by Squarespace. Turn your idea into a new website. Go to Squarespace.com slash Twist for a free trial. When you're ready to launch, use offer code Twist to save 10% off your first purchase of a website or domain. LinkedIn marketing. To redeem a free $100 LinkedIn ad credit and launch your first campaign,

go to LinkedIn.com slash this week in startups. And Brilliant.org is the first. best way to learn math, science, and computer science interactively. Try everything Brilliant has to offer for a full 30 days and get 20% off an annual subscription at Brilliant.org slash twist. All right, big news in Spotify land. Spotify's stock is up about 10% after they reported their Q1 earnings because they exceeded user growth expectations by 15 million monthly active user. So despite the slowdown in the world and the correction, the down market, people still like podcasts and they still like listening to music. As of 2 p.m. Eastern stock was up about 4%

after that initial 10% pop. Looking at the financials, up 14% year over year, down 4% quarter over quarter. That's slightly below expectations. Their first quarter revenue, 3.3 billion dollars, premium subscriber revenue was 89% of the total revenue. The ad support was 11%. Ad revenue is up 17% year over year, down 20% quarter over quarter. It's a tough time right now in advertising because when budgets get cut and you're in a down market,

people maybe spend a little bit less on advertising and try to be more efficient. But then coming out of a recession or a down market, you'll see people start to ramp up their spending because they start to feel more confident in the advertising game and spending. There's a lot of emotion, I find, historically, in that. So when we have these down markets, people will spend less. And then also people start canceling on the margin subscriptions that they don't need,

or if they're just belt tightening generally, and you might be doing this in your life, you might look at all of your spending. And maybe Spotify, you don't want to pay for ad free. You want to use Pandora or Spotify with ads or, you know, pirate music or listen to it on YouTube. with ads. They had an operating loss of 171 million, but their cash flow was positive at 62 million. So, you know, the reason why you'll see this disparity is because you have to subtract their CAPX costs, you know, capital expenditures from the free cash flow. And you'll have all these,

like non-cash expenses around CAPX, like depreciation, amortization, so you buy something and it depreciates in value over time. That kind of will explain. those differences. What you really want to see is just more cash in the bank over time. User growth is the big story here. All right. So let's look at the total monthly active users in Q1. This is premium subs plus free users. 515 million MOWs. MOWs is monthly active users. And that's up 22% euro over year and 5% quarter over quarter. More people are downloading Spotify and using it. And that exceeded expectations by 15 million. Not sure why that is.

It could be people are coming for Joe Rogan or call her daddy, you know, things that are exclusive. But would 15 million come for that many? I don't know. It's hard to tell. Maybe people have more free time. Maybe there are some bangers out there,

some great songs people want to hear. But there's not that much exclusive stuff on Spotify. There are very few services in the world that reach 500 monthly active users outside of China. So when we look at the U.S. and just global services generally, Facebook 2.9 billion monthly active users, YouTube over 2 billion,

WhatsApp, 2 billion, we chat, 1 billion plus. That's a Chinese service, obviously. Instagram, 1 billion, TikTok, 1 billion, Snap. Surprisingly, Snap's doing really well in this regard, 750 monthly active users. Spotify premium subscribers, 210 million. Now, that's an even,

more narrow group of services, the number of services that have over a hundred million subscribers, Netflix, Disney Plus, very few in the world. And so they're in rarefied air. Disney Plus has a global subscription base of 162-ish million. I'm rounding up there. Netflix globally, 233 million I always round up. And then when you look at the average revenue per user, that's where the story comes in. So it's not enough to just look at how many subscribers they have, how much they make per subscriber. Spotify makes four bucks and 74 cents.

We're almost in 74 cents. Disney is at $3.93, largely because they started with a lower pricing. And remember globally, what we pay in the United States is very different than what people pay in India, China, or emerging markets, let alone frontier markets. Netflix, average revenue per user is $11.70. So they're really high. They kept raising their

prices over time. And they just started doing their ad-supported service. They're not releasing that number, but I don't, I think they missed was what people said. And so it will take a little time. They expect their average revenue to drop over time as more people take the ad choice. and here's what our friend, friend of the pod, Daniel Eck, has to say. Daniel, come back on the program. I haven't talked in a while. I don't think I've ever seen anything like any technology,

how fast innovation and progress is happening in all the really cool and scary things that people are doing with AI. Interesting. So AI is something that Spotify has been doing with their algorithm for a long time, right? One of the great things about Spotify is when you play your two or three songs,

the next two or three, even if you don't know the artists or music that you might really like. And so there's going to be a lot of opportunity for Spotify to look at your behavior, look at the behavior of your friends. They've never really built out the social network on Spotify. They should probably take a second swing at that of letting us comment. How great would it be? And I don't, I've never seen this inside of Spotify. I know you can share a playlist.

But somebody just invited me to a playlist where I could add songs to it. So that's an interesting social feature. But if they could build out a social. inside of Spotify and really get that going. Instead of seeing what your friends are listening to, which is a little creepy, you could start to build some AI that would say, hey, your friends are listening to this episode of this podcast. And these other episodes are related to it. And your friend graph could start to introduce you to stuff. So combining what we learn from social networks with what's trending in the world and what's actually happening inside of a podcast or inside of a song.

so you can analyze the lyrics, the beat, the melody of songs, and present more like it. All that stuff's really going to be interesting. If you can tell from the podcast lately, we've been doubling and tripling down on Founding University of launch. In fact, it's basically the future of our venture capital firm, and that's awesome because I'm working with a couple of hundred early stage founders really early and getting to see what tools they use. You know what tool they show up with most?

They show up with Squarespace. They put up their first website instantly, quickly with Squarespace, and it's beautiful, and it makes them look like a million bucks. The thing you may not be aware of is that Squarespace, beyond the beautiful templates that make your company look like a million bucks, and that work on mobile. It's not just a pretty website. It is a powerful e-commerce platform now, and they have member areas. What's a member area?

You know people like to sell content now and premium content? It's a big business. well, they have that built in to Squarespace and they don't take, you know, double-digit percentages of your revenue like those other platforms do. And they also have appointment scheduling. So, you know, if you're doing a business where you're a consultant, you want to charge for your time, well, you have scheduling built into it as well. And this is the brilliance of Squarespace.

It's going to look beautiful, as you know. So here's what I want you to do. Just head to Squarespace.com slash twist for a free trial. When you're ready to launch, use the offer code Twist. You save an extra 10% off your first purchase of a website or a domain. We love your Squarespace. You know how it is. When you're a technologist,

everybody in your family, your friends, your circle, your network, come to you and say, hey, I've got to get a website up. Can you find me a developer, a designer,

a product manager? And you just say, you know what? Yes, I can find you all that and more at Squarespace.com slash twist. But the most interesting thing of all is what people are doing with AI generated music.

And the artist, known as Grimes, has told fans and artists, she will let them use her voice to make AI generated music. And she will split the royalties with them 50-50. Now, we talked last week on the show about Heart on My Sleeve. That's the song that went viral using AI-generated voices of Drake in the weekend. I'm not sure if the lyrics were AI-generated.

I think a lot of times people are writing the lyrics and then having these AI artists perform it. But the industry is really not interested in this, and they're putting the kibosh on it. But Grimes is an independent artist, according to her tweets. And it's just an interesting turn of events that a pop star on her level is just letting people know they can have at it. She retweeted the Drake and the weekend story from the New York Times and says, I'll split 50% royalties on any successful AI generate song that uses my voice. Same deal as I would with any artist I collab with. Feel free to use my voice without penalty.

I have no label and no legal bindings. I think it's cool to be fused with a machine, and I like the idea of open sourcing all art. and killing copyright. So very interesting position, but she followed up because, obviously, there could be people who might do things that are

no-gueno. So she says, okay, hate this part, but we may do copyright takedowns only for really, really toxic lyrics with Grimes' voice. IMO, you'd really have to push it for me to want to take something down, but I guess please don't be,

quote, the worst, as in try not to exit the current Overton window of lyrical content with regards to sex violence. Like, no baby murder songs, please. And I think that's pretty reasonable. And last week, I talked about artists leasing out their voices and how this could be a totally new business model in the industry. I was thinking about artists who are no longer alive, like Elvis or bands that are no longer working together like dire straits. And that this could be amazing and delightful for people to imagine, you know, Elvis doing a new song every year or a new album every other year or a dire straits album coming

out every couple of years. That was completely written by fans or done by AI. In fact, if somebody makes me a dire straits AI, I'll start writing new lyrics myself. That's how much I love that band. And so, you know, the lesson always for me is when new technology comes out, you just have to ask yourself, well, what crazy thing can I do with it and what if it works and embrace it? even though Universal Music Group and others are fighting to protect their catalogs and, you know, don't want their stuff being done this way, I think this is going to become a major trend. Some people are claiming the end of music is coming. I think this is going to be a tremendous boost for the music industry. I think we're going to see a certain artist who adopt this. become the artist of the futures. And so Grimes has always been a cutting-edge artist,

but I think this will define a new generation of artists, people who allow people to remix it. I talked about sometimes you have to retrain your brain to become an early adopter and stay ahead of trends. And I talked about that in the Blueprint series here on This Week in Startups on episode 1537. Here's a 46-second clip where I talked about this. It's very easy to look at something.

and humans take a very pessimistic view early on. We're scared creatures. So you have to retrain yourself to be an early adopter. And there's this, of course, chart that you see all the time, early adopters on one side, laggers on the other, and the majority, right? And there's like the faster majority and the slow majority of people

when they adopt technology or trends. I like to, as an individual, look at these new trends, and instead of being scared of them, I like to be curious about them, right? and I like to look at them and say to myself, what if they work, right? And so you want to anticipate

that these things that look like they're not going to work are going to become something big. And usually it takes three, four, five tries for something to actually stick. So there you have it, folks. You just want to say, what if it works? And so if this does work

and let's say a thousand people make Grime songs, and let's say 10 of them are really good and she makes an album out of those 10, what if two or three of those chart? What if two or three of those make, you know, hundreds of thousands of dollars in royalties a year for the individuals who write them? Well, then they might write more. And then next year it might be 10,000 songs get released and Grimes becomes the number one artist in the world based on people just using her aesthetic. This could be transformative. And if Kanye West, you know, does avant-garde music, but it's kind of cool to see him do cover songs, you know, maybe. letting AI do a cover and he doesn't have the propensity to want to do these. Well, I kind of like listening to Kanye and cover. I love cover songs. One of my favorite playlist on Spotify, speaking of Spotify, is they have like folk or acoustic covers, it's called, something like that.

And sometimes when I'm driving, I'll just put that on. And I get to hear different people's interpretation of classic songs or modern songs, you know, on acoustic guitar. And it's delightful. but you have to wait for somebody to do it. Now you could have Kanye covering a dire strait song or dire straits covering a Kanye song. It can get really just fun and interesting. So I say embrace it. Speaking of embracing it, next up,

one of my earliest investments and exciting ones, CafeX CEO Henry Hugh is on the program. He's been on the show a couple of times before, but the last three years were brutal for CafeX because pandemic, shut things down, including airports where they have two machines at San Francisco's airport here, SFO. And so we talk about the different pivots they've made and how they survive the downturn.

But this barista robot that they've built with the moving arm that can serve hundreds of cups of coffee a day, it's actually working. And he actually has people who are buying the machine from him now and doing hardware as a service. People buy the machine, they buy the software, and they can run their own cafes. He's raising money, an equity crowdfunding effort on Republic. So if you want to join the fund and place a bet, and these are bets, most startups fail. So be careful, folks.

But if you want to be on a cap tab with me, feel free to go check that out and make an educated decision for yourself. But here he is, Henry, from CafeX with the update. Listen, when you're selling a B2B solution, you really want to get your pitch in front of decision makers, the ones who have the corporate card or sign the POs. And typically those senior level executives are the hardest people to reach unless, and you know this to be true, you use LinkedIn. Yes, that's right. They're getting close to a billion people on LinkedIn.

It's like 875, 900 million people use it. But of that group, 180 million of them are the coveted senior level executives. And 10 million C level executives are on the platform. They're the ones who can make a purchasing decision. You can reach them with LinkedIn ads. It's built specifically for business to business marketers like me and you. No other platform in the world has these type of eyeballs, nor do they have them in the business context, right? When I'm on LinkedIn, LinkedIn equals business, business equals LinkedIn.

LinkedIn equals business equals LinkedIn. You know that to be true. So they're going to reach these business to business decision makers in a respectful, focused environment. So if you're selling a B2B solution and you want to engage with the elite buyers, Just mark it on LinkedIn and here you go. A Hyundai is waiting for you $100 in credits. Just go to LinkedIn.com slash this week in startups to claim your credit, no spaces, no dashes,

LinkedIn.com and then the name of this podcast, this week in startups, no spaces, no dashes. Terms and conditions apply because they're giving you a hundie. All right, welcome back to the program, everybody. We're excited to have our guests back on the program today because my philosophy of startups is, I don't quit. and if things get hard, I just double down, triple down,

and I will work with any founder that we've invested in until they decide to give up. My founder today had ample opportunity to give up at any time during what was one of the hardest streaks of bad luck I've seen an entrepreneur have to go through. Hardware is hard. Running a retail operation is hard. San Francisco is the most impossible location

to run a retail location, as you've all seen over the past five years, and we had this little thing called COVID shut down the world. Today on the program, the co-founder and CEO of CafeX, Henry Hugh. Henry, welcome back to the program. How are you doing? Good. Thanks for having me back.

So you and I met. You sent me famously a video. I think you were in Hong Kong or China or Shenzhen. I don't know exactly where you. Hong Kong. Yeah. Years ago. And you said, look, it's a robot.

making coffee. And I said, is it a joke? You said, it's not a joke. I built it while you're in college. I said, that's interesting. Come to my accelerator. Came to the accelerator, raised a bunch of money, and you figured out how to actually do food service. And I want to put this against the backdrop of I was very excited about robots being able to make food because I knew there would be a shortage of workers. That turned out to be true. We knew robotics was going to happen and would get more refined over time. But when I looked at it, the pizza company I looked at, Zuma, a couple of hamburger companies, I think one was called Moment, salad bot, tea bot, ramen bot, frozen yogurt bot, dishwasher bot, almost none of those worked. I think the dishwasher one did work.

And you were able to make this incredible CafeX automated coffee machine. Now, it took years, but I just want to let folks know, and we can play a video here, if you've been to San Francisco, you have two of these robotic coffee machines working in SFO. It was really hard to get in there. And so we don't have to rehash the past week. You've been on the pod so many times. But I want to just start with just what's working. And then we'll work backwards to just how cataclysmic COVID was for your startup and how you survived it. So here we see on the screen, the robot doing what it does, making perfect coffee. at a tremendous rate.

Talk about the two machines at SFO and what you experienced in 2022 and into 2023, and welcome back to the program. Sure. So, yeah, 2022, we reopened after COVID and we initially started with one machine and then we added a second one. And we had a great year. They did over $730,000 between the two machines combined.

And we really kind of proved two things. One, that as far as I'm aware, they're the highest revenue generating vending machines in the world. So fully automated, fully unattended, like literally there's nobody there. We go there once a day usually for cleaning and filling it up. Otherwise, it's just sitting there running by itself, serving hundreds of people every day. And then the second thing is that we prove that it's reliable. Like, there's, again, like, there's nothing, there isn't like a fully automated robotic food service machine out there

the public today. There's just this, except for us. Right. And so when people ask, how is this different than the powdered coffee machine we see in Better Call Saul, where you put in 50 cents

and it makes a cup of Sanka with some powdered milk in it? Explain the question we got all the time. Why are you doing this with a robotic arm? Doesn't this exist already? I think those were the two objections or questions that, you know, the public and more importantly, investors had, what was the answer you gave people to those two questions? And how have those two specific questions? Why use

a robotic arm? And how is it different than the previous machines? What is proven to be right, wrong, or interesting about those questions you got? Yeah, a lot of people will immediately say, like, what's the difference between this and an espresso machine? And so it's, I think it's because probably these people don't have a very good understanding of how specialty coffee works or how how baristas make really good quality good tasting coffee um actually one of our customers now is like one of the top like specialty coffee roasters in the u.s um and we were serving their coffee at sfo it's called onyx coffee lab um so really like i think we've done the right things to you know make a system that serves good quality coffee um and we've put in the right components um

such that it makes sense. So what is a brest to do when they make coffee? They move cups around and they operate semi-automatic machines. That's essentially what our robot does and moves cups around. And because the airport is a busy location, which is why it's a good fit for this machine, it's helpful because the machine can be simultaneously making six, eight, ten drinks at a time.

You're moving the cups around to different machines, to collect different ingredients, giving them to the right customer at the right time, Like for a person to manage that is pretty stressful. And then the actual machines that make the drinks, you know, making good coffee is just having a good machine and having good ingredients. And then also dialing in that machine properly, sort of calibrating it to create the recipes properly. And so, like, we use a, you know, the top of the line fully automatic espresso machine. We work with great coffee roasters. We work with them to dial in the recipes so that everything tastes.

good. And then the robot just allows us to make lots of drinks, you know, perfectly, accurately at the same time. And that consistency is a key component here. So what people missed about your vision, which I'm not sure why they missed it, because it was so apparent to me, having been to a Starbucks or even a blue bottle, that mistakes are made. And then you actually had statistics on this, like I remember you're telling me at some point, like over 50% of the drinks have mistakes in them. You know, their temperature's wrong, etc. Humans make mistakes. The robots infrequently make mistakes.

And if it does, it tends to be, well, something's wrong with a piece of hardware, not the actual ordering system. And then this parallel, this ability to work in parallel without error is something that people just don't immediately grok. But when you see four people around the machine ordering one or two drinks each, this thing is, cranking, making iced beverages from a tap, espresso-based beverages, getting ice, seraps, whatever, and it does it all quite flawlessly. What's the, so that's the consistency part. Now, why do you need a robot arm as opposed to there was a company called Brigo, which had a machine next to the SFO one, that had a conveyor belt-like system?

And the cups would go along the conveyor belt, and I don't know. exactly what strategy was doing. I think it was doing more brewed coffee, like maybe a fills or something like that. But you'll know better than me. And the coffee was, I would say, below average for me compared to the super espresso machines with the dialed in coffee, making it perfect every time.

But it wasn't terrible, but the Brigo machine was giant and it did not have a robotic arm. It was a fixed conveyor belt system. Brigo, I believe, felled. Why did Brigo, if I'm pronouncing the company correctly, walk me through Brigo's technical decisions on hardware and your technical decisions on hardware and versus what you see when you're in Japan, I just got back. I saw plenty of coffee machines making powder coffee.

So we walked through those three systems. So our machine at Terminal 3 and SFO is actually currently located where the Brigo machine was. Oh, okay. Well, that's a victory. And so I think before COVID, the airport's probably still like 15, 20 percent. more passengers than there are currently. And our sales are like three to four times what the, the, the, the, the, the, the, the, the, the bribo machine was doing at that same location.

Um, so I think, so there's, there's multiple kind of advantages to having the robot arm, but maybe the first one that's most obvious is that it's fun and entertaining. Mm-hmm. Um, that's kind of important for, for a product. It delights people. It draws attention. Um, literally every single person using the machine. is on their phone taking a video or photo of it.

So it kind of creates a bit of real world virality. But the other benefit to the robot is it gives us a lot of flexibility to expand the menu. And so this is something that's very important in food and beverage. My background is just dropping out of college. So I am not like a multi-year restaurant tour or coffee shop owner. But we learned this kind of. over time. Like,

you have to constantly be adding new products, improving your menu. And so having a robot allowed us to add the tap system. It allowed us to add now cookies, candy, macarons, you know, snacks.

And it allows us to move the cup very flexibly between different components. And so we can constantly kind of build new drinks. We have this software now that allows us to create new products super easily that we built in house. It's, it's like very very convenience so we're constantly using it to add new products to the menu

so it takes it adds complexity maybe to have the robot arm I don't know if it actually adds complexity versus the brigo if I think about it the brigo seems but the point is the brigo cannot add an ice machine the taps and then pick up food and then hand it to people or

like your machine does you know it's delighted with last time I was there, I had something that was on the seasonal menu that was very, it was like some iced apple, something, but you have the ability to go get ice from the ice dispenser. Then, because originally you didn't have ice drinks or taps. So now you get some ice, then you get the tap, you put some kombucha in the tap, but then you could also put foam over it. So I love these ice latte, macho latte kind of drinks. And those are complex drinks from what I can see, the Brigo is never going to be able to do that.

You have to rip the machine apart and start from zero almost, since it's a conveyor belt system. Yours, you pick up the cup, it gets ice. It correct me up around, hits the tap. Then there is a foam machine that's able to do with the cold foam. Is that a separate machine or is that something that's super espresso machines I added later? Because cold foam, is that different than hot foam? Yeah, we've always used sort of the top of the line espresso machines.

We work with a company called WMF from Germany, They're the biggest commercial cough machine maker in the world. So they've always had top of the line ability for the machine to do really good espresso and also milk. So milk, we have different kinds of milk. We have obviously hot and cold milk, but also different textures of foam. So there's three or four different kinds of hot foam texture, cold foam texture, and we can play around with that to create different drinks. I think the one you had was the spiced apple tea, which we had.

That was pretty good. It was like an apple flavor tea from the tap. tower and then we bring it over to the coffee machine and get oatly oat milk cold foam that goes on top. That was delicious. Yeah, it was pretty popular. So the, and then now we compare these two systems, the Brigo conveyor belt to the cafe X,

hey, sky is the limit. And now you compare it to powder coffee machines. It's really just an issue of taste, is it not? Yeah. Yeah, the powder thing is, yeah. I mean, if we could put a powdered machine into our machine to, you know, say it's, but we'd never do that. You know, it's just like we've selected the best equipment there is out there.

We have the expertise to properly use that equipment to make good quality drinks. And then we work with good quality ingredient providers. If you're listening to this podcast, you clearly have an interest in startups and technology, but do you have the skills and knowledge and need for a career in tech? And if you do have those skills. skills, are you still learning and growing? Because everyone in tech knows, if you're not building new skills geared towards the latest platforms, well, you're falling behind. And right now, that platform is AI, artificial intelligence. AI isn't just the future, it's the present. We see that happening.

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Okay. Now, the company, let's go to the pivot you made. We, in the early days of experimenting with a company, tried to open some locations, San Francisco, the Metri-on, people remember Market Street, etc. And the goal was always to get into some airports, finally got into airports. That's not an easy task to get into an airport, correct? Yeah, that took a few years.

Yeah, and the hardware takes a couple of years, and retail takes a couple years. So we have proven now that a machine can do hundreds of thousands of dollars in revenue a year, with but, I don't know, 30 minutes of cleanup a day and restocking an hour? What does it take on hours? Yeah, it's between 30 to 60 at the airport. It's particularly dusty just because of how many people there are. So we actually have to spend a little more extra time just wiping things down.

Okay. So the idea is a full-time person who worked an eight-hour shift getting paid 30 bucks an hour, would be able to clean a machine an hour, no problem, in an airport. Yeah. So, I'm rounding up thinking at some point the person is a little bit lazy to get some. I always rounded up. I can do it in 32 minutes. That's my record.

And I know you do it yourself. We'll get to that in a minute. But that means for a $30 an hour person, you know, which is a, you know, whatever, four times a minimum wage federal and double the local minimum wage in like a place like San Francisco or Seattle, New York. For double what a Starbucks barista gets paid, you can clean the machine, and then these machines, on average, can do a couple of hundred cups a day, no problem. Yep.

So that is quite a savings. And these are not, these do not need to take up a storefront at an airport. If there's a lounge area, which airport is filled with them, you could remove, but, I don't know six seats maybe six seats on each side 12 seats or so wide you can remove a bench and put this thing in as long as you have 220 and do you have to pour water to it or do you bring in water um it's designed for for water and for drain um but if this is like something that can't be set up it can be done so that's portable ah so it could be made portable he's put a 50 gallon drum of yeah we we've really optimized the deployments now so when we set up a

a machine for a customer. It takes like just a few hours, like it used to take days. Okay, so let's talk about that. At some point, you realized, hey, taking this national is going to be really hard. We should be a technology provider to other cafes or franchisees or, it's not technically a franchise product,

but people can now buy the machine themselves. They can slap their own logo on it. If you were the New York Knicks and you wanted to put four of these in Madison Square Garden, you could have a panel at the front that says, you know, Knicks drinks, and you could have all drinks based on the Knicks players. You could have the panel change to the Rangers the next night, or Miley Cyrus or The Grateful Dead, or Billy Joel, if they played there.

Or you could just have it, say, MSG, and have your whole MSG drinks with a NICS orange latte or whatever. Sounds pretty terrible, but putting that aside, or other airports around the world, or campuses, NYU, if they're having a problem staffing these things, they could just buy five or ten machines and operate them themselves or a kitchen provider

that provides to NYU or Fordham or Harvard campus could now buy them. They buy the machine. I think they cost a 250K and there's a smaller machine coming and then a couple of thousands a month in SaaS. So you're now a hardware as a software model and you have some number of customers from this.

Explain the pivot, how you decided to do it and how it's going. Sure. So we basically used our own machine and developed it over multiple years. We basically started in 2017 with those three prototypes in downtown SF. He served over 300,000 paying customers. And so when we were running at the airport in 2022, at that point we were like, this is a very reliable machine.

And it's something now that we've optimized everything, the hardware, the software, the experience, for operators to operate the machine to a point where like anybody could operate it. So we started selling to other businesses as a white label solution. We've customized the machine with different finishes, branding.

We customized the ordering app as well. And last year we shipped to five of our first B2B customers, a few notable fortune companies, big consulting companies. and they're using it. We're not going to say the names here. They're testing them or something.

Yeah. Yeah. Okay, great. Yeah, so we delivered to five. The farthest one that we shipped to was in Dubai. That machine's all doing great. It's doing about the same as the San Francisco Airport in terms of performance. And then this year, we're building more machines.

There's one here behind me that we're shipping out soon. We already have orders for 10. So, um, fantastic. Yeah. And the pricing on this current model and then you're always trying to reduce price on them, on the, the original prototypes cost a million to make probably all in. What is the price now in terms of what we're selling it for? We'll assume there's some profit margin in there.

You don't have to say specifically what it is. But, uh, you can, uh, maybe talk a little bit about what a customer can expect in terms of buying this. And then what it would look like over 10 years because a, uh, this, I think for some people, it's an economic decision. I want to make into a business. For some people, it's a convenience. This is something you have in your high-rise tower,

and now you've got a 24-hour barista going, because this thing can run 24 hours. I mean, it's pretty amazing. Or a college campus or a museum or a corporate environment. Yeah, so for people that... An amenity, rather, is what I would say. For people that want to start, like, a coffee business, it's about the same price as opening a coffee shop.

it might be a little higher, but you have the benefit of being able to move it over, you know, if there's an issue with the location. The machine's going to last for 15, 20 plus years. We use all the best commercial, industrial, you know, hardware in there. So it's going to last a long time. And then, yeah, in the amenity case,

it's great for companies to be able to add a cafe that's got extended hours. That's super reliable. and for the people that have to manage the catering operation, they don't have to go out and hire a team of people to run the machine and have to deal with people quitting, being late, not showing up. It's just super convenient. Literally just one day, move it in,

plug it in, and it starts, you have a full-on automated coffee shop. And break down the costs, what people would have cost to buy it and what the way it's like right now. Our list price is $285,000, and that's fully loaded. including customizing the machine and white labeling the software. And that includes the shelf, which is an accessory that you can use for selling cookies and snacks, basically any retail item. We have a customer now that's going to be using it for selling coffee beans because they're a coffee roaster.

Ah. Coffee beans are high margin. If you're selling, you know, a $20 pound of, usually it's $20 a pound for this high-end coffee. I see it's like $18 for 12 ounces. They seem to be playing a little game with me because I look at it and say, oh, it's, $18 a pound. And it's actually $18 for 12 ounces or 14 ounces. There's some really special ones that are like $200.

Yeah. I don't know if we need to go there. That would be incredible for them because if you're walking home and this thing is running at 10 o'clock at night and you forgot to buy beans, you can just pick it up right there and they're fresh roasted, etc. And the software then they can have their own app or do you have to use the CafeX app? Can you produce an app? So if I was a coffee brand, if I'm, you know, is it intelligentsia or, you know, one of those brands, if I wanted to put these in 10 locations in airports and I wanted to try to get those franchises for,

you know, high quality espresso and really as marketing to some of my beans, can I have my own app that does that? Yeah. Or do you have to use a CafeX app? So we've built our software to support, you know, operating this machine a bit, like a mix of like the Tesla app plus Shopify. So it's kind of like

created a way such that a customer can customize their the look and feel of their customer facing mobile ordering app. And by the way, it's a, it's a Flutter web app. So you don't actually have to download anything. You just scan a QR code and you can order in seconds. And then we have the kind of

back office dashboard, you know, admin software where you can customize the menu, manage the prices, the photos, create new products. We've built all of that out. So like literally anybody can run it and it just takes a few hours of training. Amazing. And so it was a tough COVID period. Company came within inches of its life, I think. You had to struggle multiple times, which by the way, I know a couple of other companies in the hardware business, rocket chip companies, car companies. And even software companies, Airbnb, marketplaces that all have come and had these near-death experiences.

You've been able to basically thread the needle here and survive. Now you're raising an equity crowdfunding. Explain the equity crowdfunding that you're doing. Sure, yeah. Well, having the machine at SFO gets a lot of exposure to a lot of people. We just got a lot of requests for people that were interested in investing in the company after using the machine. and also customers that bought machines that also are interested in investing. So we thought this would be a good opportunity for people who do that.

Amazing. And running the systems in San Francisco was extremely difficult. We had multiple. The number one issue we had, I think, in San Francisco was vandalism? Am I correct? It definitely happened a lot. Like we'd have the storefront glass completely smashed. graffiti or crazy people coming in and hurting our customers.

So yeah, just the typical stuff that you hear about in the news. But yeah, I'm glad we're not dealing with that. The airport's a very safe place. Well, and there was also, to be clear, we had a lot of also regulations to deal with. People didn't know what box to put this in. Is it a vending machine or is it a food service? So the regulations in some locations, San Francisco, I think included, oh, there's fresh milk in here.

Can you have fresh milk without a human being there? All these like edge issues started to come up. But you've been able to work through those and navigate those, just like Uber, Airbnb, and other companies have been able to navigate these kind of issues. Yeah, yeah. We've gotten pretty good at working with these regulations. Although, you know, like our machine is out there in the public. It's not like an Uber that's kind of just like it's not obvious what cars and Uber and what's not,

whereas our machine is just sitting there. So I think we have to follow the regular. We had to be very good about actually following the regulations. Well, you have health inspectors coming. You have landlords that have to use this. And so, you know, massive congratulations. I think just being able to weather the COVID storm and how hard it is to do a hardware company, I'm just so impressed that you didn't give up.

And so I'm really thankful as an investor in the company that you've continued to fight. you can go see the equity crowdfunding and you can if you're a civilian and you want to invest in the future, go to republic.com slash cafe dash X disclaimer, disclaimer, disclaimer. Most startups fail.

This one almost failed very far times like all startups and I've had failed startups. But still grinding away and you can go see the machines in San Francisco. San Francisco airport must be delighted that there are more coffee options that don't have 30 people online. I mean, that was the big point.

problem in SFO for me. That airport had at a peak was really crowded. I think it's probably 20 or 30% off its peak now that San Francisco isn't such a destination. Is that about right? Or is it back up to pre-pendemic levels? I think it's less than 20%, but it's still down a bit. Yeah. But yeah, that's why the airport wanted us there because they had crazy long lines for coffee. So we're helping with that. I think, you know, there's also this struggle when you come to the airport. You can't bring a beverage through security. And so when you get past security, there's a lot of great options. When you're before security or you're at baggage claim, typically there are no options.

And I just think every baggage claim area should have this at every airport, just as a starting point, because when people come out, a baggage claim, you know, they may be getting in a car, they want to have a nice refreshing beverage, maybe a little pick me up. It's the morning. Have you had any discussions with people about that specific? insight or it's just a theory I have, but that seems like a wide open blue ocean. You're not competing against Dunkin' Donuts or coffee and tea leave or Starbucks. Yeah. For space in the, by the gates, which obviously is a captive audience. But man, you get all those people leaving. Everybody's got

to go, almost everybody gets a bag. So, hmm. Yeah, I think it's a great opportunity. There's a number of our customers that are looking at, you know, airport locations. Um, so maybe that's something that they'll find. But like for now, you know, like one of the reasons that we have survived is because we,

we have decided just to focus on a few, a few things. And so right now, our, our sole focus is building machines for customers. So we,

yeah, that's all we're focused on. And that's enough. When you think about it, if, if the customer is focused on the location, uh, the operation and the menu and the brand,

that's all off your place. and then you focus strictly on adding features to the robot and to the hardware stack and refining the software. I think that's a good trade of services. You don't have to be thinking about how somebody's going to use the car. You just have to worry about making the best car possible. And that's kind of where you're at now. Yes, although a lot of the customers do,

like our menu, our CafeX menu at SFO has been pretty successful. So actually a lot of people want to just do the same thing. So for now, we're just sharing it with people, but I think there's some opportunity for maybe franchising in the future. I have to say, the menu seems to change on a pretty frequent basis. Are you driving that yourself personally? And then how do you come up with these ideas? And then when is asking for my three daughters,

when is a boba option coming? Because if you have all this flexibility, you know, they just love going to get a boba. I could see you ripping everything out of this machine, accept the taps and then adding Boba and you know leachet is it leach jelly and I don't know all the stuff my daughters are

putting in this thing all I know is I walk out with $8 per drink yes I we're a super small team so you know I I do the menu myself and just like stand there and mix things and come up with things that I think taste good

but for Boba so Boba is the difficult part about Boba is the tapioca pearls or the boba itself, like that stuff is you have to cook it and then it only lasts for a few hours. Otherwise, it starts to get kind of hard or too soft. So it's hard to manage that.

However, we are working actually on a topping dispenser that replaces where the pastry shelf goes currently. So the robot would be able to scoop, you know, toppings and put it into cups. And then we already have the tap tower and the other. ice and the syrups and the different kinds of cream and milk foam. Like, we have everything already there. So a topping might be, hey, here's some whipped cream or here's some.

Like, more like the, like the light she jelly or. Oh, that kind of stuff. Yeah. Popping boba, that kind of stuff. The stuff that, um, that. You shop stable. Yeah, you just keep it like, keep it cold and it's good for the whole day. Um, whereas the, like the boba that, the, the, the, you know, the squishy black boba, that stuff is,

like if if there was a cafe that had staff there and you know this machine was as was integrated as part of the cafe or the boba shop that could make a lot of sense because they have someone there to cook it and to replace it every few hours but for a fully automated location probably makes more sense to do like the popping boba yeah that's interesting is more stable yeah oh yeah that my if actually given the choice my daughters go for the popping boba more than that so there's a solution right there is hey listen i if you like the gooey

Boba, that's not us, but if you like the popping one, hey, we can just drop it in there. Yeah. Yeah, I think that's, you know, it's one of the great things about having a successful startup like you do now, and you've proven out the concept is people's minds go crazy. What other ideas have people started to ask you about? Because when you see the four taps in there, it doesn't take a genius today. Hmm, kombucha teas. What else can come out of a tap? Yeah, I think there, um, something we kind of want to do is to make,

like a system that's just for like different kinds of mixed cocktails and beer on tap. Obviously there would have to be people there, but you know, with alcohol, it's the margins are pretty straightforward. It makes sense to have somebody there anyway. But that might be something we do in the future. Yeah, I mean, depending on the venue, if you can only get into a venue with a driver's license, then once you're inside the venue, then you don't have to worry about children having access or underage people having access to the drinks.

Yeah. So that could be solved. If you had a mega club and people were at some, you know, mega club and there was a thousand people on the club or 500 people in a bar or a stadium. Yeah, there could be a way to do that where kids wouldn't have access to it. Or you could literally just have a concierge on the side checking people's IDs as they collect their beverages. Not perfect, but.

Our top system is something we, like, we completely engineered it ourselves. but with the nitrogen infusion and, you know, how everything connects together, how it's dispensed remotely. Like, this is something, it's like a separate product that we could, you know, turn into something else. Well, they have it, everybody. If you've got a crazy idea and you want to do something big with Henry, if, you know, I was, my dream has always been that one of the big,

Dunkin' Donuts, Starbucks, intelligentsias, you know, some big, and even a legacy brand would be amazing, you know, if Ily or, you know, chock full of nuts or whoever decides, you know what? We really want to, you know, get into the retail space in a major way to build our brand and to make money and have a larger footprint. I've always dreamed that somebody like that would say, you know what? Give us a hundred machines. Give us 250 machines a year and let us handle the branding because we've got the best espresso

in the world. Now, a Starbucks or a blue bottle, they seem, and I don't want you to comment anybody's specific, but just from my perception, there seems like there's a collection of brands that are precious about the barista experience. But I think there's also an equal number of brands that just want people to be able to get a cup of coffee without waiting 20 minutes. Yeah, but I think there's, like, even if, even if you wanted to have, you know, some baristas, you know, as part of the experience, our machine can still add a lot of,

of value because it's possible to have it like sort of collaboratively work with baristas so that those baristas can focus on you know things that take lots of practice and training like doing nice latte art or making making food products and serving that to customers so you could still kind of integrate our system into a concept that has people um or staff serving customers but you would just have you just have less of them or you would get you or you'd be able to have higher output. Yeah. So anybody, Henry, what's your email?

Best email for you or for people to email if they want to do a partnership? Yeah. I'd love to see if anybody knows anybody in the coffee business, one of the great ways to help startups is to just email the CEOs or people at companies like that and say, wow, you should check out this episode. This seems really interesting. So what's your best email or the best email for partners? H at cafe.

kapp. com. H at CafeXAP. at CafeX app No spaces, no dashes.com. All right, Henry, continued success. Keep grinding. I see you're in the laboratory right there

in your warehouse somewhere by SFO in Southern San Francisco. You're in the lab. And it's been great to back you as a founder and watch you grow into this CEO position and just never giving up in the grit. You have my respect. A lot of founders I know,

they hit one, two, three bad beats. You hit five, six, seven. It's hard. And I've seen a lot of them fold and I saw you double down. So continued success. And we'll see you all next time on this week's years. Bye bye.