This Week in Startups - Taking the leap on valuation, strategic retreats (VC School), + more | E1510

Episode Date: July 17, 2022

On today's episode of VC Sunday School, Molly asks Jason about taking the leap on valuation (2:10) and best practices for strategic retreats (11:41). Then, Molly speaks with Meiling Gao and David Lu of Clarity Movement, to talk about their hardware for measuring air quality (33:25). (0:00) Jason and Molly intro today’s show! (2:10) VCSS: Taking the leap on valuation (10:28) Embroker - Get an extra 10% off insurance for your business at https://Embroker.com/twist (11:41) VCSS: strategic retreats (27:44) Microacquire - Sell your business with no fees at https://try.microacquire.com/twist (29:01) VCSS Bonus Round: Does age matter in founders? (32:15) Molly tees up This Week in Climate Startups (33:25) TWiCS: David Lu + Meiling Gao of Clarity Movement (38:00) Brave - download Brave today at https://brave.com/twist to browse faster, search privately and so much more. (39:17) TWiCS: More on Clarity Movement’s air pollution measurement hardware (57:49) Outro + Plugs

All right, everybody, it is Sunday. Welcome to another edition of this weekend startups. We don't leave you hanging over the weekend like some shows. No, no, no, no, six days a week here, maybe someday seven. But we have a must listen to VC Sunday school today about the pain of raising money and keeping your company going in a down market. Yeah, this is hyper tactical. Pay attention and take some notes. I know I did. And then Molly has an awesome, awesome climate startup for this week in climate.

that's called clarity.io. And tell us a little bit about what they do. Yeah, it's a hardware as a service business that builds products to measure air quality. They actually call it sensing as a service for cities, for municipalities. I like calling it hats. It's a SaaS business.

It's a SaaS business. It's a has. But it's just, you know, on the theory that you can't manage what you don't measure. This is really, really valuable. Because it turns out air pollution, direct result of emissions and kills a lot of people every year. Yeah.

And if we can measure it, we can make better decisions, right? So it's going to be a great show. Stick with us. This week in startups is brought to you by Embroker. Embroker's startup insurance program helps startups secure the most important types of insurance at a lower cost and with less hassle. Save up to 20% off of traditional insurance today at Embroker.com slash twist. While you're there, get an extra 10% off using offer code Twist.

Microacquire, the startup acquisition marketplace. Start the right acquisition conversations at your own pace. Get free and instant access to over 100,000 trusted buyers with total anonymity. Say goodbye to brokers and meet your ideal buyer today. Go to try. dot microacquire.com slash twist. And Brave. Brave is an internet privacy company on a mission to protect your personal

info online. Download Brave today at brave.com slash twist to browse faster, search privately, and so much more, all in a single click. All right, Molly is in the second half of her first year as a venture capitalist, and it is going really freaking great. It is. It is going really freaking great. I have four companies in our portfolio. Yum, yum. It's all happening. And I'm just starting to meet with more and more great companies. And then it's sort of like the actual VC learning process layered on with the changing macroeconomics, which makes it even that much more interesting.

Yes, certainly more dynamic. Today, I actually want to present you with a literal test case. Test case. All right, let's do it. Okay. We're not going to say the name of the company, obviously. This is like a, no details. This is a composite.

It's a composite because it's a conversation that is, I think, totally representative of lots of other, some version of this conversation I have now had with like multiple companies. And that conversation is sort of, what should I do next? So I'm talking to this great company, really want to invest in them. They have raised a pre-seed.

Okay. And now are trying to decide if they should raise around at a higher valuation. Right. And of course, we know that higher valuations right now are problematic. And I think a lot of companies find themselves in this position, which is like, do I raise? Do I reopen my pre-seed? Do I do a bridge? And it's sort of like VC plus founder Sunday school.

Got it. All right. So a lot of VCs and seed investors and angels who are already on the cap table of different startups are now faced with what is the best advice you can give to your founder or just as a team, which is really how you should look at it is as a team, investor. and founder, what should our next move be, given the changing market dynamics? What's in both of our interests, right? So, if the company is a pre-seed company, you'd say, that means they probably haven't launched

their product, or maybe they have an MVP, something to that effect. But they may have raised that in 2021 when a pre-seed might get $10 or $15 million as a valuation because people were looking at their portfolios and they were loosey-goosey, they were splashy cashy, splashy cashy, which is what I do when I'm at the blackjack table. Basically it means I like to take $5 chips when I'm doing those $100 things or $10 chips and I'll put the dealer, if I feel like the dealer is really doing a good job and I'm winning, I'll bet on my hands and I'll put $10 and let the dealer get a free roll with me. So if I hit blackjack, the dealer gets, you know, whatever, $25 tip.

It's just goofy and fun, but I call a splashy cashy. So when I'm on a hot street, I splashy cashy everybody. It just means you're tipping everybody. So we were in the splashy-cashy days, and now we're in the, how much runway do you have and can we hit break-even? It's really changed a lot. You know, this is when people are like, well, you know, I guess I'm going to give a 15% tip, but should I include the alcohol or should I tip 10% of the alcohol?

You know, when people start like really optimizing their tipping. Yeah. The opposite of Splashy Cashie is, oh, she. Oh, she. So I think here, you know, if you do a flat round, and you think, well, that valuation was so juicy, you know, in 2021, we'd be happy to take more money at that valuation. Then you just have to check in with your VCs and say, hey, would you like to put more money in at that valuation first? Because if they don't, they could experience dilution.

Now, they may have pro rata, but they may not have pro rata. The nice thing to do is say, hey, we're thinking, you know, we raised at 15. We've made all this progress. Now the products in market. Now we have 25K a month and revenue 300K a year. Yeah, we don't think we're going to clear. market at a higher valuation, but we think we should top off with another $1.5 million, or another $1.5 million, we're going to dilute 10%.

Of course, you're going to get diluted 10%. Are you okay with that? Or do you want to take advantage of the fact that it's a flat round? So that's like a really mature discussion to have with your investors. And I think for investors, if the company is growing, I keep track of with our team, and you've seen this internally, Molly, of course, I tell my team, when we get the updates from investors, anybody triples revenue over this period of time, I need to get on the phone with them, I need to know what's going on,

I need you to tell me why. So, okay, it's June, it's July right now, we get June numbers. Let's say a company last year was making $50K a month. You know, it's a SaaS business and marketplace, and then all of a sudden we see $160. Wait a second, something's going on here. We might proactively offer that company money.

I might say, hey, things are going really well, And we see you got nine months of revenue runway. You're burning 100K a month. You have 900K. What do you think about doubling it? Maybe we can put another 900K in and what do you think about doing it at the last valuation or do you have something in mind? And three out of four times, founders will take the money from us. So it's a way for us to increase our position.

We have 5 to 10%, 10%, we want to get to 10, 15%. My goal is always, you know, to have double digit. I don't get greedy about it. I don't have a specific number. But, you know, as an investor, if you can get above 10% ownership in a business and it becomes a unicorn, you got a $100 million position, that's meaning. full, you know. So that's our goal and that's another way to look at it. So as an investor, you can be proactively looking at your portfolio and how they're doing and then actually offer

them more money. But of course, the third situation is things are not going well. And that's another can of worms. I want to talk about what to do when things are not going well. But first, I want to go back to this kind of valuation question. So let's say, and this is unrelated, this is not based on a specific company. But let's say, like, so they raised, they did the pre-seed at, you know, the splashy cash evaluation. They're going to do a seed and they want to go up from there. For example, how do you, like, obviously in a downturn, you get more cautious about your tip.

You're taking out the alcohol. You're like, I'm not going to tip on tax. Yeah. May skip dessert. You lower the over check side, yeah. But you don't want to find yourself in the position that I've heard so many BCs on podcasts say, which is I passed on Yelp because evaluation or I passed on Twitter because evaluation and I should have just written the check.

Yeah. So. And I feel like this is exactly the moment when that trap would occur for VCs, right? Where you're just like, oh, well, now we're all thinking about valuation and before we weren't. So if a company is showing signs that they're breaking out, there are some VCs who believe that you can't overpay for that company. So if you see a company that has market pull, market pull means

consumers or businesses are so in love with the product they just are throwing money at the company the company doesn't need to do marketing it just sells itself Airbnb Tesla you know Uber all experience this

at different times in their history somebody shows up in a Tesla they take you for a ride you go buy one Tesla didn't have to advertise it just the market pulled you in to buying that Tesla somebody you jump in an Uber with somebody

you're like what is this How did you get this really dope car? Do you have an assistant like working 24 hours a day who set this up for you? Are you rich? Do you have your own driver? It's like, no, I share my driver. Like, that was the original idea, is that we're going to share a driver. So market pull companies where you see it running away, you can basically give them a lot of credit

on the valuation and you're lucky to put more money in. So the people who put money into Uber Series A, Series B, C, D, and E all did fabulous. So when something's breaking out, and I think Brian Singerman from Founders Funds says, this all the time. Like when we find a winner, we have this really crazy approach where we just pour money into it. And then we make one absurd bet per fund. And it could take up 10, 20, 30% of the funds dollars. So, you know, they saw SpaceX as a breakout. They just kept plowing money to SpaceX, buying secondary, offering them more money, et cetera. And so I think that's a very, really interesting strategy. And so that just means you have to have the discipline to know

what a breakout company is and then have the wisdom to say, you know, does value matter here, if this company is going to be here 10 years from now and it's got market pull and customers can't shut up about it, then maybe I need to, you know, take the leap of faith on valuation. Yeah. Okay. I'm going to be very quick today. You need to understand what cyber insurance is.

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And while you're there, you're going to get an extra 10% off, I kid you not, by using my code, Twist, T-W-I-S-T. Let's talk about strategic retreats. Yeah. When, you know, you should either strategically retreat, with a down round or a flat round or a bridge for some runway. Yeah.

Or when you maybe just need to pull the plug. So, you know, let's start with the hardest pulling the plug. Yeah. Existing investors will be hit up by their troubled companies

early and often. And the company will say, hey, would you like to put more money and we're doing a bridge? And we say, yeah, we don't do bridge rounds. We will invest when you have a new investor price the round.

That's our philosophy at launch. We will proactively invest in a growing company, as I just previously explained, but we generally don't do bridge rounds. Now, there is a caveat there. The syndicate.com, where we have other investors who have the pro rata right, we will let them make their own decision. So if you had 100 people from the syndicate invest in the company and they put in a million dollars, they put in 10K each, now you're raising a bridge and their pro rata is 250K, let's say. let's say we say we're not taking our pro rata or we'll put in a token 25K or 10K to support the company, which is more optics than anything else and just us trying to be kind to a founder. I have done that before.

But I try not to do it because I try to be disciplined about this. Hey, this is not our investment strategy for the fund. We want to see you have an upround or we want to see you get a new investor price around. That's what we want to see. If you can't do that, then our investment is going to be our investment. decision is going to be to stand pat. That's a poker term. Stand pat.

It means we're not going to put any more money in the pot. But we will say to the syndicate, hey, if you want to make a different decision than us, you're welcome to do that. And then what we find is in those troubled cases, maybe 10 or 20 percent of the money will come in. In other words, angels are just, you know, have a similar philosophy. Most angels make one bet and they don't do follow on. And so if the company's not growing, well, of course they're not going to do follow on. And then you have to have this really frank discussion with the founder, which is, how many VCs did you meet with?

How many new investors did you meet with? Sometimes they come to us and they don't even meet with new VCs. You know, don't you think it would be a good idea for in your own best interest to price this company on the market? What if you get somebody who prices it at, you know, you're going out at $15 million with this bridge round? What if you get somebody who wants to put in money at $30? So go meet with email 50 investors and tell me how many meetings you got. and then tell me how many terms sheets you got. So go do the work.

And 50 emails takes you, you know, whatever, a week to send those. You do 10 a day. And then you do two weeks of meetings. You get 10, 20 meetings, you know, half an hour, hour each. And you'll know where you're at in under 30 days. So go do that, right? That's the best thing you can do as an investor to say, did you do the work? And then you can tell them, share the spreadsheet with us where you're tracking who you met with.

And maybe we'll add some names. Maybe we could do an introduction for you. and let's have a frank discussion if you put into that spreadsheet why they decline. So it's really important to encourage your founders to say, hey, I understand your passing.

Can you give me any feedback on what things, if we change them, or what things if they change might attract you to doing an investment in the future? And I'm not going to hold you to this, but permission granted to be candid.

Like if we had twice as much SaaS revenue, if we were profitable, if we were break-even, if we charge more for our product, What things would we need to change to make us a more attractive investor? So at least you get market signal. And it might be, I think the market size is too small. The Tam is too small.

You're only selling to dentist offices. You know, like this, you know, I was talking about the SaaS product just for a dentist's office. Yeah. So those are all the things you have. Those are all the hard discussions you have to have with the founder. And it could be hard because the founder might be like, well, why aren't you supporting me? And it's like, well, this is a business. The reserve capital in the fund is reserved for the breakout hits.

We don't, we can't indefinitely fund companies that are not growing. The whole concept here is we invest in a basket of companies and then the ones that are the highest performers get the money. You are not one of the highest performers. So we'll support you in non-monetary ways, but you have to earn those dollars. It's sort of like somebody saying like, why didn't I get to the playoffs? It's like because you didn't have the record. Right. But that's hard to say to people, right, Molly?

Yeah. It's like saying you're not good enough. And, you know, VCs don't want to ruin the relationship with the founder and they might be, fragile at that point in time. So this is a very, I'm just telling you real, it's like the hardest, suckiest part of the job

is to tell a founder, you failed. Right. You know, or we failed. Or the world doesn't need this product. And, you know,

for them, they're so identified with the company, Molly, that, gosh, that's a hard thing to say to somebody

because, you know, they may consider themselves the company. Yeah. So it's, you take it very personal. I could see it.

Anything else that's like between those two, breakout company, and obviously the market doesn't want the company, you know, you can have, you know, a layered discussion about, you know, okay, we've got. To be clear, we did the polls here in some ways, right? We did the polls. And so, you know, when you get into center, like, you know, I've got some situations

where I'll tell a founder like, you know, your company is burning 200K a month and you have 20K in revenue. This company would look completely different if you were burning 50K and had 20K in revenue and I think you'd be fundable. But I don't think anybody's coming in to sign up for a bridge round in a company that's not growing. You hit 20K a month for the last four months. It's not growing. Or it's going down, right? So who's going to put $2.4 million into something that's sideways and that has this giant burn when they could put that $2.4 million into something that's growing in their portfolio?

So do you think you might want to cut the burn to 50K a month, have 20K in revenue, and then have a plan, so you're only burning $600 for the next year. You can go to your existing investors and say, hey, listen, if I can get 200k in new money, would you put in 400K? Here's how we're going to get the 20K to 60K. And if we get it to 60K, then we're only burning 10K a month. And now you've got a credible story. But I find some founders, especially during this go-go days, this boom market, they are, they take time to take that advice and to make those changes because it requires going

to a team of 20 and saying we're going to be a team of six or seven. Yeah. And that's just like saying to your team like, hey, we failed. Yeah. We failed and we need to retreat and we need to rebuild this and we need to take radical action if we're going to survive. And it's really easy to take radical action like, okay, like, you know, the ship is sinking. We need to throw all these non-important things over the sides of this, you know, we reduce the weight and we're going to put everybody on rations. Like you can see it right in front of you.

And so how do you do it if you're a founder? you say we have four months of runway and we need 12 months of one way to work this out. We're burning 200K a month. We need to be burning 75. Here's how we're going to get there. We're going to have seven people not 20 and the seven people who remain,

the top three people are taking 50% pay cuts, the founders. So we're going to go from 150K a year to 75K until we work this out. So we're going to take the most pain. Everybody else in the company is getting paid more than us and I'm sorry to the people we laid off. We're going to give you all four weeks

severance. And it may not be your fault. It may just be the market. Like it may, you know, it seems to be this sort of like belief only goes so far when the market is the market. So then what about if you are, I could imagine a universe where you're this startup who's like, well, my seed valuation isn't going to clear market. Yeah.

I'd like to open, reopen my pre-seed round maybe, you know, at the same valuation. So put a number on it. Yeah. So it's easy for people. So let's say, okay, like you raised a pre-seat at $10 million. Yeah. You want to go out with a seat at 15, but you're like, that's 100x, right? That's not going to clear.

In some ways, not to be a mercenary. Yeah. Being able to reopen the pre-seat at that $10 million could be great for me, new investor. Sure. What happens if though, like, is there ever a scenario where I would be the investor who said, I don't want to be diluted? Or what happens if you were the founder and your previous investors are like, Nope. So the previous investors would not get to make that decision.

If you can't clear market and the company's going out of business, they could say, you know what, we're racing around at $5 million. That is what's called pay to play. So yes, you invest it at $10 million, but we're going to do this round at $5, which means when we raise that million dollars, you're going to get some dilution here. And it's not going to be pleasant, but the choice is either shut the company down or live to fight another day. So if you owned 10% of the company,

now the company raises a million at 5 million post, let's say, and now you're going to be 20% diluted, you're going to own 8%. And the way you would look at it is, well, you could be part of that million dollar round. So if you put 500, now you own 20%. Or if you own 10%, you only have to put 100 in to protect your pro rata.

So you have the option to keep maintain your percentage, and if you don't, that's your choice. And so these things can be even more punitive. And one little technique that I've seen used and have used we're going to raise that $10 million in the last round, but each investor who invests in this round gets a warrant to buy another share sometime in the next 10 years for a penny. What does that mean?

We've maintained the number of shares, so you're not getting the dilution now. But if we do win, do know that the people who put that million dollars in for 10%, they can buy another 10% of the company for $10. And so they got a little pot sweetener, right? And so that would affect everybody. Those are called warrants. Some people ask for warrant coverage in times like this.

And it's a fine thing to do. You know, it doesn't screw up your current cap table, but you do have those warrants hanging out there. And then when the sale does happen, those people execute their warrants. And all of a sudden, it's like, hey, wait a second. I thought I was going to make $5 million on this. It's like, nope, you're only making $4.5 because they executed their warrants

and they own 10% more of the company. So that's where warrants come in. Huh. Fascinating. Now I feel like we can do another hour on warrants, but I think I'm good on this one. Yeah. A warrant is a right to buy a share, and sometimes people will give it to a consultant.

Hey, we'll give you $10,000 in warrants, or they'll give warrants to Silicon Valley Bank or Comerica or First Republic if they give you venture loan. And they'll say, okay, yeah, we just want to have warrant coverage. So if this thing does work out, we have the option to buy some shares before you go public. And that's their little pot sweetener. So people use warrants here and there. So if you're a sophisticated founder, should you sort of establish a little baby pool of them so that you don't get,

because I can imagine that good amount of hand. Yeah, you know, it's not like an employee stock option pool where you're accounting for them, but like a mental pool. Like I'm going to get 10 of these. It's sort of like a last minute thing to do to close a deal. So we're trying to you know, it's like yeah and here's some groppa and some

you know, biscotti at the end of your meal. It's just like a little pot sweetener at the end. Just a little thing to make those investors who took the risk. Sometimes people will ask for a 3x liquidation preference. So this company is going out of business. I'll put 250K and that's enough to get you through five more months or burning 50K a month. I want to get three times my money back in cash because I'm giving you this high risk loan, basically.

So I want 750K back before and then I want my equity. So it's a $10 million valuation. I'll put the 250K in for 2.5%. But I want three times the 250. It's called the liquidation preference. I want three times that $250 in cash first. And then if the company was sold for $100 million, I would get the $2.5 million for the 2.5%.

But I would take the $750 off the top. So then the proceeds would be $99 million.250. That's like the really sharky thing, the liquidation preferences. But the board might be like, okay, nobody else wants to put up money. So we'll take that. You know, and you know what?

If it's a company that's circling the drain and you're going to put $250 in, yeah, having some guaranteed return, would maybe give you the ability to justify making a crazy bet. It's like getting odds, you know, like, okay, if I'm going to bet on this like horse that's 20 to, you know, that's the weakest of the pack,

I should get 20 to one odds if it does make it to the front of the, it does win the race, right? So you're basically just like betting on ponies, right? And it's like, okay, yeah, this is a long shot. Some people love the long shots. They get like a little bit of dopamine hit from it. So it's a great question. and the most important thing is to candidly discuss this with your investors and for investors

to be super upfront immediately about what their plans are. The worst thing to do is give false hope. So I'm very clear with people. We're not participating. You can ask the syndicate if they want to, but the company's not growing. We have to use our funds reserve capital for things that are the highest growth. Our LPs also know what the highest gross companies are because we send them updates. Like if they see us investing in things that,

are low growth or no growth, they're going to say, wait a second, that wasn't the agreement. You told us when you pitched us on being on this fund that you would reserve 20% of the capital for the high growth stuff. What's going on here, J-Cal? So you have to have a little empathy as a founder for the investors' strategic ability to get a return for their fund. And the thing that really annoys me is when investors give false hope to the founders. They're like, I don't know, come back to me when you get a term sheet or yeah, maybe we will. I don't know, is anybody else investing. And I mean, that's valid.

Like, is anybody else going to do this? So I, in my earlier days would say... Right. I think it's, like, important to say, because we do say that to founders. I said that today, again, to a founder, right? Like, ideally, when we say it, we mean it. It doesn't mean if you get a lead I'm going to invest, but it means... You're saying that for a new investment, right?

For a new investment. Yeah, yeah. I'm talking about when you're already on the cap table type situation. A new investment, it's fine. Like, yeah, we don't want to lead. But if you find a lead and you define terms, sure, we'll look at it. Who knows what terms you'll get? You know, maybe it'll be attractive to us.

Maybe you find a great lead who we have faith in. This is for like the existing companies. This is the right. Yeah, yeah, totally. I have told founders before, listen, if you want us to take on this pain of investing and like this really risky bet, I want 100% of the existing investors. So there's like when I was an angel, I said, you know, you got seven angels here. If, and I'm one of them, if all six put up their pro rata, so you raised a million, now you want a 250K bridge. If everybody does 25% of their original investment, I'll do it.

And they were like, yeah, only two people want to do it. I was like, okay, well, I'm not doing it. And sure enough, they went through each person and they basically shamed them into doing it. And then one person who had only put in 5K, you know, who didn't have, wasn't a very liquid person. I wouldn't say their name, but they were kind of like a blogger or something. And I was like, okay, well, it doesn't matter. It's $1,500 or something, that $1,250 that they would have put in. So you got six out of seven, good enough.

And we did it. And of course, I lost my money. So punchline. Even that strategy didn't work. you're betting on something that's proven in the market. Yeah. This is why you have to look at these startups as... There's a reason.

There's a reason it can't clear. Yes. And so you have to look at these as experiments. And if you could say to the founder, hey, this experiment didn't work. Shut the company down. We'll all take the loss and come back to us in a year with your next best idea. And let's do a fresh cap table with your new idea. And, you know, we'll go from there.

And that's, it takes some founders are very quick to shut things down because they're entitled and they want to get paid a huge salary. And if it's not easy, they just, shut it down willy-nilly, even with money in the bank and they could have kept going. And then other founders will grind it out forever. And, you know, sometimes people grind it out too long. Right. So you got to be, right in the, you got to be, like, quick to shut it down for the right reasons.

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It's very simple. Microrequire helps startups find buyers. Buyers can browse the listings. They pay just $390 a year. If you're a buyer, you can do that. try.machwire.com slash twist. And if you want to list your company, you can do that as well. Do you want to do a bonus?

Because we have a super chat question. Oh. That is BC Sunday School related. Great. Here we go. Via Enterprise AR super chat question. So all this money is going to charity and we get a bonus answer for our listeners. Okay.

Here we go. Does age matter? Says Enterprise AR. Do older founders 40 plus listen and make those hard choices faster than young founders? I would say more seasoned founders. will definitely make these decisions faster and more maturely because they've been through it and they're more mature. Sure, of course. Yeah, people who have more experience will make these decisions much faster. I could imagine you must also find yourself in a scenario though where you've

got somebody who's like, I had multiple great exits, like I know what I'm doing, I'm really good at this and you can still find yourself in a situation where the business isn't working and would you then maybe encounter this pushback? Like I could imagine the opposite occurring, probably not as often, but that sense of entitlement, maybe, which is like, you're going to buy on me because I'm awesome. I think after you've done three startups, let's say, I'll put it in like the number three, you're pretty pragmatic about this. Hey, it worked.

Like, with, I'm not going to put an age on it because I've met founders who've done their third startup and they're 30 years old, right? So they don't need to be 40 or 50. I've done it. Or 25 years old even. And they say, you know what? We took your 500K. We did this.

I'm telling you it's not going to work. I want to work on other stuff. the team is not motivated. We made a mistake. We still got 200K in the bank. We'd like to send you 40 cents on the dollar back. And that's the mature thing to do. And I'm like, okay, thanks.

I'm like, do you have an idea you want to pivot? Nope, we don't want to pivot. The team's burnt out. This is, this is a, this dog, you know, don't bark. We're done. And I'm like, okay, thank you. Now I can move on to the next company. So it's, you know, super efficient.

And yeah, I think that maturity comes from understanding the dynamics of the overall ecosystem, which is you understand the power law. This company is not going to impact your life, your employees, nobody's going to get rich, and your investors can afford to take the loss because it's 1% of their fund, therefore 2% of their fund. They would rather you move on to your next adventure, and they don't have to monitor this and they can take the ride off and put their energy towards the winners in the portfolio. That takes a level of maturity that's very easy to say on a podcast, when it's not your company, it's not your baby, you didn't spend three years of your life on it. It's very hard when you spend three years of your life on something to let go.

Heck, I'm still running inside and it's in the second decade. It started as Mahalo. And it's doing great. It's doing millions of dollars a year in revenue. I won't give it up. I got to get that across the finish line, right? I have a certain sense of pride about that. Might have most other founders would have shut it down. And trust me, if it wasn't working, I would have shut it down, let everybody take the loss. But I'm like, no, you know, I'm going to, I got a rabbit and I'm pulling out of the hat any day now. Yeah. Like, I think somebody, I think like there's many buyers for inside.com, you know, with 10 million in revenue and we're halfway there. So, you know, I'm like, you know what?

This would be hilarious if in year 14 of this company, or 12, whatever it is, I came back and gave everybody two extra money back and was like, hey, you know that thing that you invested in? Yeah, it wasn't working. Hey, it worked. That to me would be like one of the great, you know, moments of my life. I love it. You guys, what a great BC Sunday school.

There we go. Next up we have this weekend climate startups, a super interesting conversation with the founders of clarity movement, Mayling Al and David Liu. It's this really interesting hardware as a service. business that builds products to measure air quality. Yes, this is a great interesting company. Awesome. And why do they measure the air quality? Who are their customers, I wonder? Their customers actually are cities, like municipalities. They have the city of London.

They have the city of Houston. And then they have like the UCLA school district because this local, basically like if a city wants to measure air quality right now, they use these massive shipping container size, super expensive things. They might have one or two. But a service like this can supplement that with hyperloor. local real-time measurement and help people make decisions about, I mean, sometimes you know in the Bay Area or LA, like literally when it's safe to go outside. Or is school going to be open or not? Should we have kids outside or inside? Should they come to school or not? Should you come to work or not? Yeah. Exactly. Exactly. And then potentially drive policy because we know like pollution is also

emission. So it's a climate impact. Absolutely. That can drive a lot of money in and action. Super interesting conversation. If you, if you can measure it, you can manage it coming up next, the founders of Clarity. Enjoy. David Liu is the CEO and Mayling Gow is the C-O-O of Clarity Movement doing precision error pollution monitoring. Guys, welcome to the show. Thanks for having us, Malik. Thanks for having us, Malik.

Nice to meet you. Whichever one of you is best at your elevator pitch, for those who are not familiar with clarity, tell us what you do and then I want to ask each of you how you came to that. I'm happy to give a quick overview and make them probably adds, you know, if I miss anything. So Clarity Movement is a clean tech startup that's a focus on providing professional-grade air quality monitoring service

that comprise hardware software and our air quality expertise to municipalities, government, large organizations, and the industries all around the world. Why do these municipalities and governments and organizations need to buy this from Clarity Movement? Yeah, absolutely.

So I think David gave a great overview. And the way I like to tell people who don't have knowledge about air quality or the climate space is we really make it easier to measure the air around us, so we can do something about it. And this is one of the challenges in the environmental space is that the technology that is being used to monitor air pollution to drive action, whether it's a government, you know, in academia doing research, it's very clunky, it's expensive. it's difficult to use and we're really making it easier to get beyond that point.

So we can actually generate the data that's useful that whoever is making that decision about what to do about air pollution that's happening in the West Coast all around the world. It's actually we're making that that action happen a lot faster. And then if you wouldn't mind like draw that connection for us between air pollution and climate. I think people are starting to become aware of just how dangerous air pollution is and how these two things are related, but the knowledge base is not totally there yet. There are a lot of connections between climate and air pollution.

And I think, first of all, I think a lot of us, especially for living in the West Coast, you see extreme air pollution events happens much more often because of the wire fire. And that's a symptom of the climate change that we're facing nowadays. As a matter of fact, I think this type of extreme events

is going to probably become a regular part of our life. And that's depressing. But on the other hand, now be able to protect ourselves during this kind of extreme event is becoming another priority, I think, in certain part of the countries. So on the other hand, another connection between the air pollution and climate is that they often share the same sources of emissions.

Like we usually say the climate and the air pollution are essentially the two sides of the same coin. and that's kind of true in the majority of the city we're working. When a city is trying to tackle the air pollution, they are also tackling the climate emissions in the city as well. I mean, just for example, in London, one of their signature policy is the introduction of the low-emission zone in the city. And by doing so, they start to curb, you know, preventing vehicles beyond certain emission standards from entering into the city.

So when you start to doing that, air pollution drop in the city, but at the same time, carbon emission also drop, at least in that region. So, yeah, so we definitely started to see this co-benefits. That's usually the word they use of climate actions when people are trying to tackle the air pushing issues. And in clarity, there's help them to quantify that as well. User privacy is one of the biggest topics in tech right now. We talk about it on the show all the time. And if you care about your privacy, you need to check out Brave. Brave shields you from ads, trackers, and other creepy stuff that follows you across the web.

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search privately, and so much more. All in a single click. Brave.com slash twist. Go download it today and try it. feedback. May, tell me how hard this is to measure precisely and how clarity movement tackles the measurement problem, because it sounds like it's, there are a couple different with it, right? There's this kind of citywide measurement that exists now, or there's the smaller consumer ones that people are familiar with and like purple, and you sort of sit in the middle.

Yeah, I think there's two axes you think about. There's a time element is how frequently you're measuring. And then also a space element is how many sensors you have covering a certain area. So that drives down to the issue with air pollution. It can be very hyper-local. So air pollution can vary quite a bit, neighborhood-to-neighborhood, road-to-road. So having that high resolution across space is really important to understand the type of area breathing. The area breathing right now It could not be measured by a government monitor that's maybe 10 miles away. So in some cities right now, if they have any kind of monitor, they maybe only have one or two, only a few. So it really doesn't help you understand, help the government understand what's happening at the local level.

And within the U.S. and internationally, what we're seeing right now, as we're getting better at controlling these larger sources of pollution, where it's really becoming hyper-local. And a lot of that's driven by transportation sources. So having that hyperlocal monitoring is really important to help identify where these new hotspots and pollution sources are within an area. So the government can go in and actually find ways to tackle this better. And this is really important because we're seeing consistently that it's often in disadvantaged communities where their pollution levels are the highest. So this is definitely a very strong environmental justice issue. And this is something we've been tackling within the U.S. internationally.

for the last few decades. And then time, the other scale I mentioned is you can't just take one measurement a month and be able to capture what's happening at that location, right? So having that time resolution where you're sampling or collecting data more frequently every few minutes, you know, in some cases there are sensors out there collecting every second. That might be too much data. But having understanding what's happening with the air pollution hour to hour across, you know, different hours of the day, the days of the week.

is really important to understand when the pollution source is happening and where they're happening. That really helps identify and help us be able to control and create policies to reduce these types of sources. Is there such a thing? It's too much data. Come on. Let's be more specific, actually, about the devices that are being replaced. Like when you're operating in the city of London or let's say you were operating in San Francisco, I think, David, when we first met, explained to me that these government monitors are massive and super expensive. and that's why there's only a couple of them, right?

Talk to me about what exists now for a city or a university and then what the difference is in literal product. Yeah, of course. So the current government-operated air quality monitor is often a size of a, I would say, a decent size of shipping container. So it's... So not that portable?

Absolutely not. It's going to take, I don't know, months to be able to cite and then actually put them in, not to mention all the years of permission to do so. And the cost is very expensive. It can go as high as probably a quarter million dollars to just simply purchase one station. And it's cost roughly in the neighborhood of $100,000 a year, just to keep it running. So both on the CAPEX and OPEX-wise,

it's extremely expensive. So one thing we want to make it clear here is that priority is not to replace this kind of government monitoring station. I think there's a place for them. I think there's a reason that they're very, very expensive is because they're trying to go for that, like super precision, precision and accuracy. Clarity's precision is really to supplement the station

that's already deployed in the city, so that the government operators can essentially leverage this reference station as what we call an anchoring point and kind of expand their footprint. of air quality monitoring in the cities. So, for example, in the city of London, which is a customer, we should say. Yes.

Yeah, which is a customer. They actually have one of the best reference monitoring infrastructure in the world, composed of roughly around 100 reference station across the city. So you may thinking, well, they already have so many, do they really need more? Yes. As a matter of fact, when we first started with the network, we were putting in 150 additional clarity sensors in the city to supplement their network. Now that number has grown to the north of 400 all across the city.

That's because no matter how city are huge, and just as may mention, nowadays is really coming down to street corner to street corners when we're talking about the fight for air pollution. So be able to measure exactly where they want and when they want is, I think, what we are offering to kind of the government operators or other organizations. Yeah, it may break it down for us. There's hardware and there's software.

Talk to me about the deployment and the business model and how it might work in conjunction with like these existing government reference monitors. Yeah, absolutely. So we really designed the system to be easy to use and integrate it. So a lot of times the older technologies, there's purely hardware and they're very expensive. But we designed it where, and actually I think David has a unit in his hand right now. Nice. Where you can see how small it is. Yeah, so we wanted to have the hardware make it really easy to deploy.

There's a, you know, a global SIM card inside that works out. of the box in over 180 countries that really makes it easy for a customer not to deal with a SIM card, communications. There's a solar panel as well, and battery insides, you can deploy it that's not relying on the grid. And this is really important because a lot of the places where pollution is a concern is the grid is not reliable. We're expanding into Southeast Asia and deploy this is in Africa, South America, where sometimes a grid goes offline. So they really need to be able to deploy in areas where people think there is an air pollution concern. So on top of the hardware,

we also built easy to use a software suite where the user, the government, can actually log in and manage and view all the data from their tens, hundreds, you know, of sensors that they have deployed across an area. And it's, we designed it so you don't have to have a background or PhD and in public health or air pollution sciences to be able to understand the data that's coming in from your network

and know how to manage it. So it really is this sweet. And obviously on top of that, we're building insights right now. We also have a team of air quality experts that are providing that service to make sure that the experience of doing the deployment across all your sites and getting the data flowing and understanding the data and also the calibration to make sure the QAQC data is, you know, it's really seamless. And that's kind of how we saw there was a gap in the market where oftentimes that process is very difficult. and groups are often stuck on the technology side, and they aren't able to focus on what's important, which is really looking at the data that's coming in,

so they actually drive decision and action. So I think, you know, in terms of how we develop the product, that's kind of our vision, is we really want to make that integrated and easy to use for a customer. So you have this team of people who help with installation and deployment, make sure that the data is accurate. Do they also help with insights, or will that be software-driven? So actually, we design a product,

so the customer does the deployment themselves, solves. And we've had customers, you know, David mentioned cities. They're as well funded as London to community groups or, you know, teachers in schools doing these deployments for you. So it is very easy to use. And they are the ones that actually go out and do the deployments. And we have a team supporting them if they need to, you know, have questions. The insights piece, we're working on that right now with the software. But we also do have that team of, you know, air quality experts are able to step in and help direct. that conversation also help them direct some of the data analyses.

So that's kind of the piece that we will be building out in the next couple years. Gotcha. Love it. Let's talk about outcomes of measurement. You know, it's so you can't manage what you don't measure. It's such a sort of simple way to put it, but it's really true. And so I wonder how you imagine a future where we actually really do know, where nobody can make excuses because the measurement of air quality and air pollution is so

hyperlocal and so precise and no one can hide from the reality of this data. What do you hope then comes out of that? Yeah, I think like the fundamental of the air pollution management is elimination of the pollution source, right? I mean, that's pretty much the only way you can curb air pollution events in your cities. So our kind of vision of having this is really to empower either the legislator or the kind of facility operators or even just the citizens to act on this data. So that they can either kind of crafting policy that's addressing specific problem that's reviewed in our network or as a physical. like facility operator to drafting reaction plan to protect your occupants in the facility from the approaching events.

For citizens, using this data to advocate and then putting pressures to the legislator to act on this. So, I mean, as a matter of fact, we have already seen some really great initial success, of utilizing this data across our customer base. I think one of our customer, which is Los Angeles Unified School District, actually recently announced they deployed this massive network

of 200 sensors across their schools. In the past, they had to rely on the local governments on the airport information to decide whether to, let's say, preventing the children's going out in the yard or even sometimes cancel the school or not. But that information, as may mention, is very, very sparse. And Los Angeles Unified School District has a thousand facilities all across the whole LA counties.

So because of that, you know, like the information to rely on, were incredibly, like, how I was it, not exactly as helpful as they wanted to. I mean, ideally, they want to be able to act on exactly the information at their school at that moment. So I think that's one of the ability we kind of come in and offer is really we're starting to empowering a lot of organizations that in the past had to rely on governments for AirClaughts information, now taking the air monitoring to their own hands. and knowing the data they're getting is accurate and reliable and to make their critical kind of decisions.

And then we see how community members can utilize this as well. So we see the community in Houston actually was able to leverage in that data that collected and clearly see the periodical spikes during that. particularly time period and so on, and really pushing the legislator to make an action on that. And I think that is actually going to the right direction. The legislator now have to

be something about putting in a reference monitor in their community. And when they do so, they will be enforced by law to making sure that air pollution stay within well, cleaner as a kind of frame. So that's like really the power way we're seeing. Let's drill into that, the public health part of this too, because I think for people who are not on the West Coast or who have never lived

somewhere where air quality can get to the point where it is unsafe to be outside. You know, you mentioned Los Angeles making these really specific decisions. We've, of course, had that in the Bay Area multiple times where they've had to cancel school. because of air quality or, you know, tell kids to wear and or everybody to wear N95 masks because the air quality is literally that terrible. May, can you draw that line for us? Like, make it really clear how big of a public, there's sort of the acute public health crisis part of this. And then there's this sort of ongoing, slow moving nightmare train public health disaster part of it. Yeah. We're really trying to make the invisible visible with the data we're generating.

It's if you're living in an area where you can't see the air pollution, it doesn't mean it's not there. Maybe you're lucky enough to be in living the location where generally pretty healthy, blue skies. But unfortunately, about 90% of the world's populations living in areas with bad air, according to the WHO. So it is a very significant portion of the population. And we're really trying to clarify that kind of relationship and bring awareness to this. And I think, unfortunately, in the U.S., it's something. that a large portion of the population is more increasingly aware of this now. When we first started clarity a few years ago, it was interesting.

Most of our work was international until the last few years when wildfires really came into focus for the West Coast so that everyone started asking us about PM2.5, particular matter and the soot and everything that was happening. Because it wasn't just, I mean, we sent our wildfire smoke across the entire country. Yes. And it's something that travels, right? So it's not just contained, in a certain region, we've detected on the west of the Mississippi, mercury from, you know, coal burning in China. And so it's something that's very, that's very global. And we can't really just say, we'll tackle at one source and we don't have to worry about it. So it is a very global problem.

And it's interesting, from the public health perspective, because it's been, you know, studied since for the last few decades. And it really is no safe level of air pollution. When you breathe it in, it's going to cause to premature mortality, cardiovascular effects, increase in asthma attacks if you're asthmatic, and it's just linked to a whole slew of things, and then they're doing increasingly in studies as it expands, it's harder to, it's easy to quantify the significant impacts of breathing in bad air and what this means for public health.

And the linkage between air pollution and climate is interesting that the impacts of air pollution happens a lot faster, and it's more visible and it's more personal than in climate change. So sometimes in part of the climate narrative, bringing air pollution to talk about that as impacts on public health is actually makes it more climate change even potentially more relatable to people on the ground to actually make them care about it even more. So I think this is something our vision for myself and David and the rest of the company

is how do you tell that story and link air pollution as part of this larger environmental narrative and say this is something that we really should care about and it gives people the right time scale to think about all these changes are happening around the world, around with the environment. Right. Like put really simply, emissions cause pollution and pollution kills a lot of people every year.

Full stop. And there's just a cycle too, that positive feedback and as you emit more causes climate changes and it worsens all these other factors as well. And so it's telling that really complex story is what we're trying to do. Yeah. Well, in less complex stories, actually, maybe more complex stories. Tell us quickly about the business model since we're talking about the startup.

Yeah. So we actually provide something we're called sensing as a service to our customers. So it's composed of the hardware you just sold, the software may mention, and our air quality expert support. And we wrap everything in this subscription model to our customer. I think the whole point of designing such model is really kind of design around the idea of, we want to make the air quality monitoring easy. We want to make it accessible for everyone. So let us to take care of all the hard stuff, and you can focus on how you can make changes. depends on the data you're getting.

David and May, David Liu, CEO, Maylingau, C-O-O of Clarity Movement. Thank you so much for the time and good luck with everything. Thank you so much, Molly. All right, everybody, that wraps up another amazing week of this week in Starves. My God, what a great week, Molly. I know, so good. Turns out, this is like a really good show.

It's a good show, yeah. We keep you guys informed. If you guys have any thoughts on how to make it better, producers at this week in startups.com. Tell us what you love. Yeah, keep them coming. And of course, another awesome news show tomorrow. We're going to be talking about among other things. We assume a lot of news is going to break over the weekend like it always does. But also, interesting, pitchbook released its Q2 venture monitor. We're going to break it down. Break it down hard. Yes. I love doing that. I suspect we're going to see a lower amount of dollars invested, but it's good to monitor

and give everybody an idea of where they stand. Of course, if you want to watch us live every day, 10 a.m. Pacific, go to YouTube.com, such this weekend. You hit the subscribe button, but next to it is that notification bell. You get that notification bell. You can listen to us on YouTube, listen to the background while you're working. And, you know, a couple hundred people come and chat with us, so it's really great. And if you love the show,

give us a five-star review, and maybe we'll give you one of these amazing this weekend startups, ember heated mugs. People are going crazy for those on the Twitter. Beautiful. Yeah. All right. See you Monday, everybody. All right, bye-bye.