This Week in Startups - VC investing in a downturn & protecting founders + smart vents with Flair's Dan Meyers | E1617

Episode Date: November 20, 2022

J+M kick off the show with another edition of VCSS: a VC’s role in a down market and protecting your money and founders. (4:32) Then, Dan Meyers of Flair joins Molly for this week’s edition of TWiCS.(28:27) (0:00) J+M discuss how winners start work on Sunday (4:32) VC Sunday School: Raising and deploying capital in a collapsing economy (11:32) Vanta - Get $1000 off your SOC 2 at https://vanta.com/twist (13:02) Pay-to-Play + fiduciary duty vs friendship (18:10) Smash Digital - Visit https://SmashDigital.com/TWIST to get a free SEO video audit for your business (19:32) Dollar-cost averaging into a trade and having the founder’s back (28:27) Molly kicks off TWiCS with Flair Founder - Dan Meyers (36:41) Microsoft for Startups Founders Hub - Apply in 5 minutes, no funding required, sign up at http://aka.ms/thisweekinstartups (38:10) Flair’s business model and the smart puck and vent (49:23) Dan’s pitch to customers and Flair’s competition FOLLOW Jason: https://linktr.ee/calacanis FOLLOW Molly: https://twitter.com/mollywood FOLLOW Dan: https://twitter.com/flair Check out Flair: https://flair.co Subscribe to our YouTube to watch all full episodes: https://www.youtube.com/channel/UCkkhmBWfS7pILYIk0izkc3A?sub_confirmation=1

All right, everybody, welcome to Sunday. It's the start of the week. We're considering Sunday the start of the week. That's more in line with entrepreneurs. I don't know what number week this is. I meant to that. Everybody starts working on Sunday, right? Like, I feel like Friday, you recover. Saturday, you goof off. Sunday, you goof off to like three and then you start working. Is that not? Only if you're a winner. Only if you're a winner. I'm like, that's just not what everyone does? If you're a winner and you want to go far in your career. If you accidentally wake up early, then you do a little email. I mean, you can always, you know, pound out some emails if you get a little time. Kids are taking a nap or whatever your jam is. But Sunday nights are for winners to get ready for the week, obviously. You know, it's okay. Not everybody has to be a winner.

But today you can hear myself say things that I would never advise to anybody else, but that are the way that I prefer to live my life. So it's very confusing. Like, I'm like, you shouldn't do that. I like it. Molly, if you love your job and you work 60 hours a week because it gives you great joy, if you were then retired and you golfed 60 hours a week or skied 60 hours a week or did poetry or worked at a non-proper for 60 hours week, people would be like, oh my God,

it's virtuous. Oh, my God. It's inspirational. It's up to the individual how many hours they want to work week and if they get joy from it. One person's hustle culture is another person's passion or vocation. So let's just leave it at that. That's a great way to put it. You're right.

I'm not trying to really be. I'm just, you're being judgmental with yourself. You are. Oh, myself. You're being judgmental. mental at yourself. You are saying, I feel bad telling people I work on the weekends because I'm so passionate about my job or on Sunday I try to get ready to have a, to crush the week. You're doing something you love. It's okay. You can own that. And we'll own it today with a great VC Sunday school

on the worst possible moments for founders right before shutting down, which is doing down rounds. And the pain and suffering that down rounds include, and Molly's back with another this week in climate. Who did you got on this week in climate, Molly? I do. You know, I'm obsessed with the really boring topics that make a big difference, such as energy efficiency. I love energy efficiency. It is like a four to one investment for every dollar you invest in energy efficiency. You get like four dollars back and you have like four times the climate impact on just using less energy. So I interviewed Dan Myers, who's the CEO of this company called Flair, which makes smart vents and wireless thermostats, not Wi-Fi.

Like they don't compete with Nest. Nest is actually a customer. and then they build this advanced software for residential heating and cooling to literally just manage and make sure it's efficient and that your like filter has been cleaned and all of the things that save you tons of money, save a ton of energy, put energy back into the grid. It's just like simple and beautiful. I've wanted these smart fence because you know, you put in a nest and maybe the zone is four rooms. Maybe two of those rooms are not used at night. They should be shut. There's no reason to heat my office at night or heat delivery.

room at night. We're all in our bedrooms. The only three rooms that should be heated are their bedrooms. And I love this idea of this like microclimates and really refining it's exactly what it is. Yep. And the vent can do that. The vent can give you another level of control by just closing a vent, which I do manually like a maniac. I'll just close a vent in the hallway when there's a guest in the guest room to make the air condition and just go in there or the heat goes in there. So I can't wait to hear this. Flair coming up next. It's going to be a great show. Stick with us. This week in startups is brought to you by Vanta. Compliance. and security shouldn't be a deal breaker for startups to win new business.

Vanta makes it easy for companies to get a SOC2 report fast. Twist listeners can get $1,000 off for a limited time at vanta.com slash twist. Smash Digital. Scaling organic traffic for your startup can be challenging, but it doesn't have to be. Visit smashdigital.com slash twist to get a free SEO video audit for your business. You'll see if SEO is right for you and what it takes to become an industry leader. And the Microsoft for Startups Founders Hub helps all founders build a better startup at a lower cost from day one. Open to anyone with an idea, you'll get up to $150,000 in Azure credits, technical advisory, access to mentors and experts, free dev tools, and so much more.

There is no funding requirement and it only takes minutes to join. Sign up today at aka.m.s. This week in startups. All right, Molly, it is Sunday, so it's time for BC Sunday school. This is where you ask me a question. Your first year of being a venture capitalist, thanks to the fans who have started to make, you know, blog posts about the show. I saw one fan had put together in whole architecture. If you want to take the content from the show and make a landing page,

and get some promotion for yourself or maybe break into venture capital, there would be no better way to do that than to write a blog post about every single episode or make a notion or code instance about every single episode. And then when you try to get a job in venture,

you say, hey, look, I made this thing where I'm trying to learn from VC Sunday school from Molly and Jake Al. I bet you you get a job from it or an internship or your chances of getting the job go up. So make content based on our content

as I'm giving you permission right there. But what's your question to that, Molly? Let's talk about down rounds. And I know, I know, it's such a freaking bummer. Um, you know, we could do a bonus on bed sizing if you want to because that's what was so fun on Tuesday. Um, but there was this interesting, I'm now starting to like correlate stories I see in pitch book and data I see in pitchbook with things that I'm experiencing every day, which is, uh, companies either, you know, still wanting to believe in the last valuation or having to raise at a lower valuation or having to raise at a lower valuation or

having to raise some sort of a bridge round. And then Pitchbuk had this piece about how there are, like all these companies that have had unicorn status, billion dollar valuations. And of them, like the top 10% of late stage startups by valuation have seen those valuations plummet from $1.1 billion in Q2 to $680 million. So down 43%. A 54% decrease from pre-money valuation. So what it makes. me wonder is what is our role? What happens to us if one of those unicorns has that valuation decline? And what is our role in the kind of valuation cycle at the early stage? Like, can we be saying to founders now if they're coming to us and they're like, I really want a $90 million

valuation and we're like, ooh, it's going to probably, it's like a 40 right now. But is it also, are we able to say to them like, look, you don't want to put yourself in a position where you could be set up for a down round later. So, okay, when the company is struggling and you get into a situation where your existing investors are unwilling, Molly, to do a bridge round. So you said to your existing, I want to do a bridge. Can you give me another million dollars based on the last valuation? Now, this could be a $10 million or a billion dollar valuation.

It could be $100,000. It could be $100 million. Whatever the number is. And bridge is like, I need a little more money, but I don't want to do a new round. just yet. I can't find a new lead. Yeah. So the height of venture funding is you have multiple new investors giving you a term sheet and you're picking between them.

It's a competition, and some might say an auction, but there's a competition to lead the next round. That means your company's doing great and the market is hot. That's what we experienced for the last five years. Just massive competition to lead rounds. And it became super intense in the last two years. Okay. The next stage down is, go ahead, Molly. That's ideal.

That's like best possible. Best possible for the founder. Not great for the investors because it means if there's competition, you're going to be paying a higher price. In some cases, in cases, absurd prices. The deals are going to close quickly. There will be less diligence. In fact, I would say it can get unhealthy.

Yeah. Okay. Now the market collapses. You can't even find somebody to lead your next round. So you do a bridge. And you ask your existing investors, hey, we did a lot of work. We'd like to increase the value. valuation 30% because we increase the revenue 30%.

And they say, okay, fine, we'll give you a bridge. We want to own more of the company. We believe in the company. Next step down, hey, we couldn't find a lead. You don't want to do a bridge and an up round. Would you be fine doing a flat round? Okay, flat round. They say, no, we're not interested in flat.

Okay, are you interested in investing at all as a previous investor? And they say, yeah, but we want to get three warrants. We'll do the last round, but we want to get three additional shares for every share we buy now. So we'll give you the million bucks. That million bucks is going to buy 5% of the company. It's a $20 million valuation,

but we want an extra three shares. So we're essentially going to be buying 20% of the company, but we're going to be putting cash in for five. We have the option to buy those other warrants. Okay, that kind of sucks, right? You're getting a million dollars in cash in. You're diluting 5%,

but you have to give away 20% of the company ultimately with these warrants. We talked about them before. Then there comes the worst case scenario. This is when you have a cram down round, a pay to play round. And a new investor comes in and says, y'all don't want to put in a single dollar.

The existing investors are giving a complete vote of no confidence. They're unwilling to put any money in. Founder goes to their attorney and says, I want to do a pay to play round. I am going to do a cram down round. Every single person who has preferred shares now is going to convert their preferred shares into a common share alongside the founders.

So let's say there were 10 million shares in the company worth $10 each. That would be a $100 million valuation. Those 10 million shares, and let's say 30% of them, 3 million were preferred shares, 7 million were common. We're going to make them all common. They're all common. Now we have 10 million common shares. And we are going to value the company at, let's say, 20 million bucks.

So now instead of $10 a share, there are $2 a share for common. But we have a new investor coming in who's willing to put in $5 million and they get the preferred shares. Everybody else is common. Let's say it's even a $15 million valuation. So they own 33% of the company. The 30% you own is now in common shares. You lose your board seat. You lose your information rights.

You're just like all the other common shareholders. And then the common shares affects the liquidation preference, right? You're junior to the preferred shares. Correct. You get paid later if you get like. If you get anything. If you get anything. And that overhang is now washed so that, let's say you had paid 10 million bucks or whatever for your 30% ownership over time.

That 10 million doesn't count towards anything. You just don't comment in the company. Your common is now worth a third of the remaining 70%, let's say 50%, what went down to? So you have like 15% of the common. So you went from 30% of the preferred to 15% of the common. And sometimes these crammed down rounds are even more brutal. You know, they just say it's a $10 million valuation. and new investors are getting 50%

common is 5%. So now you're at like 5%. So you still have like a chance that you may get a recovery, but it basically means you're washing everybody out. That's like the last ditch effort for a company before they shut down. Listen, founders, very important. If you're in SaaS or you're in services and you store customer data in the cloud,

you need to be SOC2 compliant yesterday. And you might be hearing this and you may not even know what SOC2 is or maybe you heard about it, you know you're behind the eight ball. Let's get this solved today. This week, I want you to be compliant from a third party so that you can close big deals. Do it now. Do not look like a dope when you try to close a deal. And they're like, do you have sock two?

And you're like, uh, that long pause, that's going to be the sound of them going to your competitor. Use Vanta, which makes it incredibly easy to get and renew your sock to. On average, Vanta customers are sock too compliant in just two to four. four weeks and compare that to three to five months without Vanta. And they partner with over two dozen audit firms who have been trained to file SOC2 reports directly within Vanta. I was able to invest in Vanta. It's a great company. A bunch of my portfolio founders have used Vanta. They've had amazing experiences. They give it their highest rating. And let's just be clear here, if you're not stock two compliant, you can't close major customers. It's that simple. It's one of the

first things they're going to ask for. Here's the best part of this ad read. Vanta loves this week in startups. They want to support founders. and they want to support founders early. And they don't want you to break the bank. So they're going to give you $1,000 off. Think about that. Get $1,000 off at vanta.com slash twist. V-A-N-T-A dot com slash T-W-I-S-T.

$1,000 off vanta.com slash twist. Get your sock to now. And then if we're the investor in that situation, what does the calculation become? How do we make our decision? Yeah, how do we decide if we're like, yeah, we'll take that common stock, I guess, you know, as opposed to what are the alternatives for, let's say,

us who has decided, we've decided not to invest anymore. Yeah. We're about to be washed out in this way. Yeah. Then what do we say internally? So we internally have a discussion. Okay, do we want to pay to play in this round? Do we want to put another 500K in?

Now that they put a gun to our head, you know, it's not a flat round, you know, we're going to lose all of our rights. We're losing our board seat. We lose our preferred. We lose our liquidation preference. We lose our interest on the note. All that stuff gets washed. We own common.

Would we invest in this company? This is how you have to look at it. It's from like just first principles. If this was a new company pitching us, forget about the money we've invested already. Would we participate or not? And that's really the most intellectually honest way to do it. Very hard to do because you might have emotionally been involved with this company for five years. You might have been on the board.

And it's just hard. And what you have to do, I think, as an investor. And this is what we would do in our investment team. And I literally had a conversation with somebody who had a down round. And they said, hey, you chose not to invest from our fund. And I slacked them back. And I said, okay, here's how we make our decision. The fund has a certain amount of reserves.

The investment team looks at the opportunities before it. And we give that money to the highest growth companies. Your company has not been high growth. It's, you know, had some challenges. It's not a vote of no confidence. We are only giving those reserves to the top 10 or 20% of the people in the portfolio. So you're not in the top 10 or 20%. Doesn't mean that you're not in the top 70%, you know, or the 80th percentile.

Just you're not in the top 20s. So don't take it as a vote of no confidence. Take it as a vote that we are only investing the remaining funds in those funds, what they call the reserves in a venture fund. You want the reserves to go to the highest performers so that you can ensure your LPs get the best return so that you can raise your next fund. And so you have to be cutthroat at that point. This is investing, not friendship.

This is not your pal who's down on their luck. and they're like, hey, buddy, you know, we were best friends in college. I'm down on my luck. Can you send me 500 bucks so I can make my rent or I could use, you know, five grand to help my kid pay for college? Like, I get those phone calls, you know, and it's like. As I say, you're nicer than I am. That's always a no. Well, it's either a no or a donation.

I don't look at it as a loan. People ask me for a loan. I'm like, here's a gift one time, you know, if I, if it truly feels like it's something I should do or whatever or, you know, like, Sometimes you got to say no because you got to take care of your family, right? Your own family. It's a hard thing to death or you don't want to enable people. And so this is what it's like for VCs. We are investing other people's money.

We have to think, we have to think about our fiduciary responsibility to them before our friendship responsibility to you. That's the hard thing sometimes for founders and capital allocators. And I would be lying if I said it wasn't hard for me. Yeah, it's a hard part of the job. I'm in the meetings. It's awful. And not all of them, but enough of them where it's like, it's clearly very painful. But let me be ruthless and keep talking about the options related to down rounds,

because sometimes they can also trigger anti-dilution preferences. Yeah. Is that right? And what does that mean? So you may have some right set that says you get to approve an M&A transaction. You get to improve the issuance of new stock. You might have the ability to buy any shares that are. being sold first. You have first right of refusal if some common shares get sold or some preferred

person wants to sell. So there's a series of preferred rights that venture capitalists are putting money in fight for. And those sometimes are called protective provisions. You know, the anti-dilution one is, hey, if you're going to dilute us, we need to approve that. So, okay, yeah, Sequoia's coming in to do the series B. They want to take the whole round. Okay, yeah, we'll waive our pro rata. We'll we'll give them major investment rights, we'll waive our ability to block a sale. So typically VCs have some say in future corporate governance transactions

in these protective provisions, anti-dilution being one of them. But if you're not willing to put money up and the company has exhausted all options, they've looked at M&A, and there's just some maniac, maniacal, true believer, who says,

I believe in this business, but I believe in it as a $5 million, dollar business where I put in a million and I get, you know, two X warrant coverage. I get a 10% a 15% interest rate. Because none of you all believe in it enough to put up a single dollar. Then the founder says, you know, listen, I exhausted everything. This is a hard reality. And it's legal to do this. It's legal to do this. It's a corporate governance issue. If nobody wants to back the company. Yeah. Yeah. The founder wants to keep going. I understand it as a founder. So, you know, it's hard medicine. It is what it is. Take the medicine. One of the first things I do before

I invest in a company is I look them up and I check on their SEO. I want to see if they understand how to get that free traffic from search engines. You know, one of the most basic things you can do to drive free, consistent traffic and make it easy for your customers to find you is SEO. And a lot of people, it's a little scary for them, right? They think it's like a black art. They don't understand the basics of it. A lot of the basics of it is just very technical content and basic blocking and tackling. And so you got to call our friends over at Smash Digital. Smash is hyper-focused on SEO and they specialize in high-end link building. This is not a generic digital marketing agency. They only focus on world-class SEO. Founder Travis, also an investor. And he started Smash Digital

to help grow the businesses that he runs and invests in. An in-house SEO expert, I would say, going to cost you $75 to $100k a year. And you're going to still need a budget to make great content, to try to get people to link back to you for that content to send signal to the search engines that you're worthy of traffic. Well, Smash starts as little as $3,500 a month. And for a limited time, Smash is offering free audits for Twist listeners at smashdigital.com slash twist. That's right. You're going to get a free personalized video audit of your startups SEO for free. Smash will map out the exact steps you need to take to outrank your competitors. Again, they're going to do it for free to try to build that relationship with you and show you

they're good at what they do. So go to smashdigital.com slash twist. Smashdigital.com slash twist. Do we ever encounter like the weighted average adjustment or the full ratchet adjustment? Is that all like? I mean, you could dollar cost average into this. You know, like people talk about, like when they're J-trading.com, this week's startups.com, sish, j-trading or j-trading.com. For some reason, the domain name resolves for some browsers, but in Chrome, j-trading.com is not.

If somebody can look at that for me, who is a tech person and explain why we can't have trouble with Chrome lately. I don't know. Some people type in jatrading.com, they go right to the site. With brave, it works fine. Chrome, it doesn't. I don't know what's going on. Anyway, you can dollar cost average into a bad trade.

If you still believe in the company, I guess. So you paid $15 for Warner Brothers Discovery. It goes down to seven. You say, you know what? I'll buy it. And my average will be the average between seven and 15 or whatever, 12 bucks and change. You know, I think it's a fine thing to do.

But with private companies, because of the power law we talk about, Molly, what down rounds and cram down rounds basically tell you is, this is not going to be one of your power law companies. So why are you spending time on it is what VC is saved behind closed doors. I have a different approach, as you know, which is I want to be, just absolutely supportive of every founder we can to an absurd degree understanding that because of the power law

the chances of them being the one or two names in a fund that make the fund, I don't care about that. I care about actually our reputation and the feeling, the emotion, the camaraderie actually between us and the founder, just because that's the loyalty that is part of who I am.

So I want our firm to feel loyal to the founders. especially in defeat because the founder I have experienced will get up again and I want them to think, you know what? When I got my ass kicked, J-Cal and his team picked me up, they gave me some water, you know, like the hype man, you know, next to the fighter. I want to be the hype man next to the fighter saying, hey, listen, you know, it only takes one punch. Get back in the ring. You can do it. You know, you lost the first five rounds of the six-round fight, but there's a chance. So get in there give it your best and I'm proud of you for, you know, the pummeling you took here and just

making it to the end of the six rounds and not getting knocked out and having a chance to knock the person out, that says something about your character to me. And I let, if you do lose the fight, we'll be with you on the next fight. And we'll give you some cold water and we'll put that massage thing on your neck, the ice pack. And we'll hang out with you after the fight and break it down and be with you and defeat. I just want to be that guy. I want us to be that firm or that gal or that, they, them, whatever. It's getting pretty, like, it's getting pretty rough out there. Companies are coming and saying they've got three or four months of runway,

and then they can't raise because of that. And do the, just random question, do the holidays play into that at all? Like, do people, like, if you're a company, you don't have three months of runway left and, like, VCs are goofing, not us, obviously, but VCs are goofing off because it's holidays. Like, is it even worse timing to be in that situation? There's a whole thing about seasonality of VC business. Like August, we shut down, December, we shut down. There's some truth to that in every industry, Hollywood included.

Deals don't get done over the holidays. People want to relax. Great deals get done at any time. I mean, if it's a great deal, people will do it on Christmas Day. They'll do it on Hanukkah. Like, it does not matter. July 4th. Like, if there's a great deal to be done, people will be like, tell their kids to go in the pool on July 4th and they'll go inside and be like, I'll be back in three hours.

Yeah. You all eat some hot dogs. I'm closing this deal to get my Uber and Airbnb share. So let's be honest. If it's a power law company. Yeah. Yeah. people are going to be engaged.

So full stop there. But what I would say actually is more likely is I do think some founders reflect during the holidays or the down market and they say, you know what? I'm done. And the I'm done conversation for, you know, this part of my journey, this chapter in my story is going to close is a hard one for people to have. I should have shut down Mahalo according to all my advice I've gotten. But I made inside, I pivoted it to inside.

I had that domain name sitting around. I contributed the domain name that I bought for 65. the company and now the company does millions of dollars. I've got an incredible team there and I think I can build it into a billion dollar company. I'm never say die. Rulof is still on the board from Sequoia. He doesn't need to be. I told them, please get off the board. I know this is a waste of your time. Everybody said, no, I'm going to be with you to the end. Yeah. And I'm like, okay, rule off then. I'm going to do 45 minute board meetings and I'm going to take it seriously and I'm going to try to get this thing over the finish line. You know what? I kind of figured it out.

You know, like it's a five-year-old business after Mahalo, but you know, this thing's been going on for 15 years, 14 or 15 years, and I never say die. So I learned something about that. It's my personality to never say die. And it's Sequoia's personality to never give up on the founder unless the founder gives up. And that's something I took from Ruloff, who's been a great friend to me and a great mentor. So I'm never say die. That's a mistake in venture capital according to most people. I think it's an attribute of a great human and a great life. I think you will have a great life if you actually curate friendship and deep, meaningful relationships. That's my belief about life. I can't separate business in life. To me,

life, business, same thing. And it's a fault. People criticize me for it, but I also feel like it's a superpower. Other VCs are going to do better than me in the short term because they'll just leave the boards of these companies and move on to the next companies and I'll stick with them until the end. You know, whatever. You got to do what you think is right for you as a human being in the world. And for me, I'm ride or die. Rod or die. Better or worse. Jump on a grande for you. That's it. Rod or die. Can't laugh at your side. I mean, it's as corny as I am or I seem, pretty much the truth. I mean, pretty much the truth. I got a lot of emotion about this.

Yeah. Difference whatsoever. Friends, I really want you to know this. There is no difference whatsoever in any J-Cal that I have met in any environment or scenario. Equally embarrassing. Consistent. Whatever. We could literally have this meeting go into the investment team meeting

and there would be absolutely no change in tone. There would be no difference. Exactly. We should make, we should do a public investment team meeting. That would be a cool thing to do. A public investment team meeting? I don't think we'd have to get the permission

of the founders. Yeah, I'm like, I don't know how they would feel about that. I should come to like agree to it. The ones who are like, um, would only do the ones. Do we ever sign NDAs? Is that a thing?

I've had a couple of numbers. You sign an NDA and I'm like, I don't know. I didn't do that as a journalist. We never signed IDA. But our whole reputation is on being discreet. And if a VC is not discreet, man, that blows up right in their face. I can't even imagine a scenario. You kind of don't have blah, blah, blah about a company's internals.

But maybe that's. The most important thing really is between portfolio companies that pivot and overlap. I don't know if we did a VC Sunday school on that. what happens when two of your portfolio companies wind up in the same space. So like, you know, Uber pivots and adds Uber Eats and you invested in DoorDash or you had postmates in your portfolio and then Uber adds, Uber Eats, you know, something like that. Those things happen all the time. Somebody is in a consumer business and then they see some SaaS business doing better but

with the same sort of customer base and the same product. And they're just like, well, screw this. I'm not going to go D to C anymore. B to C. I'm going to go B2B. And all of a sudden, you're sitting there with two companies. We had this happen in the influencer space. We have six or seven influencer businesses,

and they all kind of start drifting towards making SaaS products. And now you have three people in influencer marketing who have SaaS offerings, and they each overlap 10 to 30 percent. And you did then have to create firewalls inside your company. And then have a little bit of a conversation with them. And then people will pitch you sometimes, Molly, on a company. And you're like, we have an investment in that space. And in that case, you have to say to the person,

we have an investment in the space. I'm happy to meet with you, but you should know, we're already investors in DoorDash. So, you know, Postmates come to you say, okay, yeah, I don't know if it's different or not if you're comfortable investing, but I'm on the board of DoorDash. And it's like, oh, no, no, I don't want to pitch you. We're going to compete with them. So you just be upfront with that if the founder, in fact, didn't do their homework. Founders do your homework. Look at the portfolio. Make sure there's nothing in the portfolio that is competitive. You can't pitch. You can't pitch Bill Gurley on Lyft if he's in Uber already. It should be obvious, but, you know, sometimes you will have people send their deck

and a bunch of details to a Bill Gurley who's on the board of Uber and this like dumb founder never thought to look at the portfolio page. It was a really dumb thing to do. And they sent a bunch of proprietary information to them. And then Bill Gurley's got to delete and say, I deleted your email. I'm on the board of door. You may not know this, but I'm famously on the board of Uber. Incredible.

All right. Well, there you go. Everybody. All right, everybody. Sised BC Sunday School. Dan Myers is on this week in climate startups today. He's the founder of a company called Flair, which is super interesting. They offer smart vents and thermostats because climate solutions come in all kinds of flavors.

And energy efficiency is a huge one. I mean, this can drive so much change and such a huge emissions reduction. And people just don't even think about it. So these smart vents and thermostats help people balance heating and cooling across their homes and potentially then, of course, cut energy use. In September, Flair announced a $7.6 million series A raise, led by active impact investments and lower carbon capital. He broke down kind of the story behind the company,

talked about the smart vent technology, how it gets installed in people's homes, talked about how Flair actually started as a D to C brand, but then eventually gained the trust of HVAC professionals, which is not easy to do. It's a super interesting conversation, a really great solution, and I hope you enjoy. Dan Myers is the founder of Flair Systems.

Welcome to this week in climate startups. Thanks. Great to be here. So tell me what Flair does. It's smart vents and thermostats. And that's all I'm going to say. I'm going to let you explain the rest. So we are mostly residential-focused climate tech focused on heating and cooling systems.

We are a combination of hardware and software. And if you're a homeowner, we solve a lot of the most long-standing problems. you've had with heating and cooling sort of comfort in your home. We also make it really convenient to connect equipment that oftentimes isn't easily connected by, say, a nest or a honeywell or some of the conventional thermostats that are out there. So to put a finer point on that, we build a smart vent system, which basically routes air to rooms with people in them instead of, you know, the whole home at once. we also make a smart thermostat for the world's most ubiquitous yet least connected

HVAC equipment called the ductless heat pump or sometimes called the mini splits. Right. So you don't install or make heat pumps or mini splits. You make the vents and the controlling mechanism for that heating and cooling. So it sounds like it could work with like an electric heat pump, but it could work with a traditional natural gas seating system. Yep. If you've got an AC in a furnace or if you've got a,

got a heat pump, we pretty much work with all of them, pretty much anything you find in a residential setting. And in some cases, like commercial as well. And then what got you, so you raised in September, just last month, it sounds like you announced a $7.6 million series A raise, led by active impact investments and lower carbon capital. What is it about this that is, that has not only been hard to solve in the past, but is a venture scale business? It's a great question. So I think a lot of things have been hard to solve in the past in this space. So distribution is always tricky in the HVAC world. We sort of took an approach. It's a bit unusual for the heating and cooling world, which is we actually went D to C to start. And we've been

scaling that for pretty much since we went to market. And then in parallel starting to scale through the traditional HVAC channel. But we also sell through utility programs. So we, I guess we didn't talk too much about that so far, but in addition to these hardware products which are connected, we also sell services back to utilities that allow them to manage peak problems, which I know you're in California comes up pretty much every summer where they're worried about blackouts. We solve a solution to kind of avoid a lot of that. So between those, you know, we've got a lot of ways of getting in the home and a lot of people interested in having us in the home. So I think there's a venture story behind that. The other thing that's happening right now is

there's this huge attention focused on getting off of conventional heating systems in particular, oil and gas. We are the leading hybridization solution for the dirtiest homes in the United States, whereby we provide essentially an on-ramp to fully or I would say maybe 90% electric heating for homes that essentially are burning oil and gas all winter long, especially in the oil case, huge amounts of carbon. we provide almost piggybacking on air conditioning, ironically, a mechanism for hybridizing a home that's very cost-effective and attractive to a homeowner.

And that I think is really what caught the eye of lower carbon and a variety of other investors. Break that down for me a little bit. I don't totally understand what hybridization means. Clearly, I understand how you make the heating and cooling way more efficient. And is that what you mean? Nope. Great. Okay, help me understand.

Yeah, so we actually, when we started, we were focused on sort of the convenience, the comfort, the efficiency, purely, right? It was about kind of optimizing an existing system. But a couple of years ago, we had an opportunity where people, you know, in the Northeast, for instance, have homes that don't have traditional ducting. They have boilers and maybe radiators or sometimes they're on the baseboards, but something, some sort of hot water that's almost invariably here. heated by gas or oil.

Right. And it's like it heats one room. Or actually, it will generally heat most of the home. So you'll have a radiator system throughout the whole home. Oh, right. And you'll have a radiator in each individual room, but not the ducting that we think of that is tubes that go through the wall and carry air. Totally.

It's what they call wet heat, quote unquote, right? You're educating us on the basics of HVAC right now also. Yep, yep. And so those systems, which have all been possible. fuels, they've been around forever, and especially in the Northeast are quite popular because air conditioning wasn't really needed for so long. Those systems, it turns out, have gotten a lot of attention because they're so carbon intensive. And simultaneously, what was happening was they didn't have ducting, so the path to adding a heat pump was a little bit tricky. You

didn't just plop down a traditional central heat pump and say, cool, we don't need the first harness anymore. You didn't really have any of that infrastructure. So a specific type of system called the mini split, you might be familiar with them. They're usually hung up on a wall, a couple feet wide, like a white box and operated by a handheld remote. That's a category that we're basically the leader in thermostatic controls for those. Got it. Okay. And what we do is we can. I get it now. That has been seen as sort of this hybrid. It's like you don't have to redo the whole house. You can put these in the rooms where you need them. for example. Absolutely. And so what was happening in the marketplace to start was people said,

well, I just want this for my primary bedroom or my den for air conditioning purposes. And somebody smart at, I think Eversource is the utility where somebody was really thinking, said, well, if we could just get these to run for most of the year in heating, we could avoid a lot of the boiler usage. And they couldn't quite convince or get homeowners to do that in a sort of a manual fashion. But because we could integrate with the boiler system and the ductless heat pump or the mini split, we could actually automate and prefer certain systems at different times. And so we were this sort of technological intervention to a behavioral problem. And that is, so we turned a house into a Prius, right?

And that was sort of the start. Just kind of a cool novel solution. Yeah. Amazing. So where are you currently operating? We operate primarily in North America and the U.S. and Canada. Okay. We do actually also have an interesting JV in China, focused on the 500 million mini splits

that are in operation there and largely not connected to the internet for anything interesting or useful. And we have a few projects here and there. We got a World Bank grant for a project in Columbia. We have an ongoing pilot in Barbados. So we've got a few things. different places, but our sort of core markets are the U.S. and Canada. Okay, I'm here with Allison Rose from Microsoft for startups. So Allison, what is the most

valuable resource for founders in the early stage of their startups that Microsoft is offering? So let's face it, financing is one of the biggest, if not the biggest roadblocks that startups face today. Through Founders Hub, we're alleviating some of the financial stress of starting a company by providing tons of free resources for founders. So we provide founders of any stage with up to $150,000 in Azure credits, which is huge because that's, That can be used to do anything from building your prototyping to a lot of our founders are using that for conducting experimental development without eating into your runway. So there's so many things that you can do with those credits.

But beyond that, we also provide founders with free access to crucial tools and software like GitHub Enterprise as well as a suite of Microsoft software like office, teams, power BI, and so much more. That's amazing. Yeah. I mean, those things alone are like a line item or two in any startup's budget. and you could redeploy that with an extra sales executive, designer, developer, just by recapturing those credits. The Microsoft for Startups Founders Hub has no fundraising requirements.

It's open to anybody. You don't have to go to some elite program to get those credits. That only takes five minutes to apply, and startups can get up to six figures of benefits right away. Sign up for the Microsoft for Startups Founders Hub today at AKA.m.S. slash this week in startups, aka. dot MS slash this week in startups. Thanks, Allison. Thank you.

And then walk me through a little more about the business model. You said you started D-to-C, there's a utility play, who pays you and when? Yeah. The interesting thing is the majority of our product gets into the market, not because people are like, I really want to electrify or I really want to save a few bucks on my energy bill. most people buy our product because they like the features. So we actually have a lot of consumer pull where they say, I've always wanted to have my home office or my bedroom the right temperature.

And in order to do that, I have to freeze out or overheat some other space. And for a couple hundred bucks, I can basically go in and solve that. And so for a lot of homeowners, that just has its own appeal and they'll adopt it. And then we can piggy back on all the efficiency or utility program, those kinds of things. we do also, though, go into the market through the traditional HVAC channel. And in that case, it's also a hardware cell. And then basically on the back end, once we've got devices in the home, we will work with a variety of grid integrators and aggregators

and essentially promote those solutions to our existing customer base, whereby either the utility or our partner who's facing the whole, wholesale electricity markets will pay us for the ability to sort of regulate, especially during peak times on the grid. Right. So customers can opt in at installation and effectively say, yes, there are times when you can remotely control my heating and cooling. Yeah.

And some people do that because there's an incentive and some people are just like, oh, I love the idea of trying to match when I use my HVAC with lower carbon times on the grid and things like that. Or to save money. I mean, I always think, I feel like these are always my favorite climate solutions. in a way because they're the sort of Trojan horse ones. Like, you don't have to have a philosophy about climate change. You just have to want your house to be more comfortable or save money.

I think consumers always love comfort, convenience, those kinds of things. Efficiency is more of a vitamin. Comfort is, I think, more of a painkiller. So to the extent that we can offer both, but maybe really solve a pain point for somebody, that's a really great solution, I think, when you're going out. after a climate problem. Yeah. And then how do you work with, if at all,

traditional HVAC installers? Like if I were having a heat pump installed, which I hope to be doing soon, would they know about you? You know, what would be the integration there? Yeah, that's a good question. So what they know about us is a really interesting one. It's somewhat regional right now.

I'll ask them when I know my quotes. Yeah, for sure. Yeah, so it's interesting, right? So we started D to C knowing that we could just stand up a Shopify store and nobody could tell us no, right? Yeah. The HVAC channel is a little bit slower to adopt connected products and new technology, and rightfully so. They've got a lot on their plates. But I think some of the most forward-thinking contractors have sort of found us and really started to promote it.

And then in other regions, rebate programs and other types of things have really promoted us into the HVAC channel. and we've sort of used that to, you know, open the door and get in and start to really grow our relationships there. So it's a mixed bag. We're basically bootstrapping that channel. I mean, we've bootstrapped it pretty far so far, but, you know, we still have a pretty heavy concentration in the Northeast. A lot of that attributed to the hybridization solutions. Right. Talk to me about the actual product.

So you have the flare puck, which is the wireless thermostat that looks a little like when you may be from, familiar with. That's a nice round, white design. And then the smart vent, which requires at least one puck. So tell me about the actual mechanics, the actual hardware. How complicated is it? How much does it cost

to make? And then what's the installation process like? Sure. So the yeah, it's funny. So the smart vent originally was sort of the thing we were going after. I had grown up in a home in South Florida. I was living in Chicago after college. And I

had this experience where just clicked one day. I was like, the sort of temperature and balance problem seems to be a consistent problem in the U.S. housing stock, right? So I said, okay, well, if I had a damper and an actuator that could kind of adjust how much energy is being delivered to rooms, seems like an easy way to solve it, right? You know, dangerous thinking, but nonetheless, it seemed pretty logical. No more dangerous than all of us up on some stool in the middle of the night trying to, like, move that dusty little lever to, like, make, you know, not so hot on this side of the room. Right, right.

Yeah. So, so as you can imagine, the smart vent looks a lot like a traditional vent. But behind it is, or sort of incorporated into it, is this, you know, fully wireless battery system, motor, actuator that can open and close and regulate the amount of airflow into a room. And so that basically, we make a variety of sizes and it just drops right into replace. place an existing vent. You don't have to do any fancy wiring, anything like that, which we thought was really big because nobody has wiring going to all these different, you know, rooms in their home. So, you know, we've designed it for really like four years of

battery life built in. So, you know, I think that that ends up sort of solving any kind of, I wouldn't call it range anxiety, but time anxiety, maybe. And then, you know, what we found early on before we really went to market, this was early testing, was we needed a separate. sensor and that's kind of where the puck came from. It was too hard to tell the room temperature from the vent. So we said, well, why don't we feature creep our way to something a little more involved? And at the time, as we were bringing up the supply chain, we were living in China and saw just endless numbers of mini splits.

And so kind of added a little bit of features set to kind of go after that market. So the puck works with the smart vent in the context of central heating. But in the duckless mini split context where, you know, you know, you know, you know, you. You don't have ducting. The puck is a standalone smart thermostat that can be pretty much command strip to the wall with no wiring, no screws, no anything. It's a really fast install. And from an install standpoint at the software level, you know, we just kind of walk you through

it. So you don't have to be an expert in any of this stuff. You basically just sign up, create an account. You know, you get it online, pretty traditional IOT. type bring up. And then you just tell us, okay, I'm in the living room and I've got a Mitsubishi model one, two, three, and boom, it's connected and smart. Wow.

That's pretty awesome. How much does it cost? We retail our smart vents between 89 and 109, depending upon the size. And the, I'm just looking at them now, pervent. And then the puck retails for 119. We also do, for the hybridization, we sell an extent. exclusive version of the puck, which sells for a little bit more, but it's only available through the HVAC channel.

So it's a sort of feature enabled, almost like the way Tesla does it, right, where they just flip a software switch and add some features. We do something similar and sell that exclusively to the HVAC channel. So, and then from a pricing standpoint, the other thing that's kind of cool is you don't necessarily have to buy a puck for every event. You know, obviously there are rooms with multiple vents. we certainly wouldn't need them for that. But also in the event that you have, say, an EcoB and a bunch of remote sensors,

which is quite common, we can actually take all the data from the thermostat and the remote sensors and drive the vents with that. So it can be a very cost-effective deployment if you've already made some investments in your heating and cooling system. Although a hundred bucks a vent, I'm sort of trying to mentally count the number of vents in my house. Like, how many events do people typically buy? Yeah, it's a little bit...

It's not crazy, but it's not super cheap. It depends on what your reference is, right? Yeah. But I would say it actually is all over the place. We see kind of a bimodal buying pattern. So we see customers who the first room off of their air handler put a vent because that room just always gets too much heating or too much cooling. And they might get away with just one vent, right?

And that just solves kind of a frustrating problem. And then we have other customers who are like, I want a set point on every single room individually and across my whole McMansion and, you know, they might put in 20. And they're your favorite. They're great customers, but we love all of our customers. But yeah, it really varies. I would say the typical customer probably three or four, maybe up to five. And then after that kind of splits and goes into like the whole home side.

Yeah, totally. And then how are your margins on the hardware? Generally, I would say we generally run somewhere 60 plus percent gross margin. But the, you know, I think the other side of that would be obviously we've dealt with supply chain craziness like everyone else. So, you know, try our best to keep them around there. But at the same time, you know, I think every any given month or any given buy, there's always some fluctuation, but pretty close to that. And then how does the utility services part fit into? the business model? Sort of the cherry on top. So, you know, it's, I guess I'm excluding that from

a gross margins calculation. But, but I mean, you can imagine we may make a few dollars per device a month in a program like that. Some cases, you're structuring contracts specifically where it's almost structured as like a set amount per month. In other cases, some of the programs we operate in our performance base. So if the cost of the wholesale markets, you know, go sky high and we alleviate a lot of the peak load, we could have a really windfall moment, actually. So it's a little bit variable. I feel like I could imagine that becoming an even bigger part of the business as time goes on,

because it is such a, it's more of an acute issue every year, it seems. Well, I mean, I think so we work on the energy, I like to say sometimes, like we work on the energy transition within the home and then outside of the home. And to that point, as you load into the grid more solar, more wind, some of these more intermittent supplies, and you throw tons of EV load and HVV load and HVact electrification into the mix, the estimates from RMI are a 3x increase in demand. Right. So when you sort of combine all that new demand and the sort of intermittency of the supply, the criticality of making sure those match up well is there's a lot of value there, right? And that's kind of some of the value we're bringing to the market.

And how do you think about your impact from a climate perspective? Yeah. And how big a part of your pitch is that? You know, we sort of talked about how this can be like a Trojan horse solution. But I mean, we all know that HVAC is like a massive, massive contributor. So I think the pitch to the homeowner, we don't actually push it too much. Not because we don't love it, but more because, you know, the thing that a homeowner wants is just, hey, I want to control my unit from my phone or, you know, I want to solve an annoying comfort problem so I sleep better or something like that, right? So we try to meet them where they're at. From an investor's standpoint or, you know, like more strategic conversations, like, yeah, obviously we love the story there. And how much do we think about it?

I wake up every day excited to electrify homes. I mean, how could you not be excited about that? So it's definitely something that internally we talk a lot about in terms of building into the product. We're focused on all the time. But when it comes to a homeowner, we obviously talk about what converts. And what converts is the other sets of the features. And we're just sneaking in all these benefits without them even necessarily buying for any of them. Yeah, totally.

All right. So where can people find you if they're shopping after doing this? We're primarily sold online. The exception being the HVAC channel. So if you found yourself weirdly in a Johnstone Supply or a Ferguson, you know, plumbing store, you might find our products. But if you're a regular consumer, you'd find us on Flair.co, which is our sort of Shopify store.

You'd find us on Amazon. You'd find us on Lowe's.com, Home Depot.com. So, and I would say, you know, we kind of love the online channel. I feel like it's actually a great way to be able to stay in touch with your customers, sort of pre-purchase and sometimes post-purchase. Yeah. And then who is your competition? I mean, I could imagine Nest is the obvious one,

at least from the thermostat perspective, but is any, I've never heard of a smart vent until today. Okay, granted, when we booked you, I heard about it. You know what I mean? Sure. Until I heard about Flair, I didn't know that smart vents were or could be a thing. Like, is anybody else doing this? So, yeah, it's a great question.

So the first one I would say is we actually aren't, a competitor to NIST, we are a partner. So we don't make a traditional thermostat for central heating and cooling systems. Right. And you mentioned, yeah, the puck. So the puck never has to be wired in, to be clear. Exactly. There's no ports to even wire it in.

So it's specifically for the ductless heat pump market or as a companion to the smart vent. And the ductless market, we're sort of pretending to be the remote. It's kind of a cool, a cool hack in some ways, right? and that's how we're universal and easy install. But to answer your original question, so we have some competitors in the duckless control space, and rightfully so, there's like a billion and a half mini splits on the planet, and there's probably 30 OEMs that make mini splits.

So there's a fantastic market, I would say, actually, for the control side of that. And on the smart vent side, we had two competitors. Actually, they made a bit of a splash early on. But I think it caused us to do some really like sort of well-disciplined learning early on. So we had competitor at the time called Keene was on Shark Tank, actually, raised a ton of money early on. We had a competitor called EcoVent out of MIT and raised a good chunk as well.

What ended up happening is they raised all this money. They ran to market with a product that wasn't quite ready for big time. And I think from our standpoint, we were like this sort of, well, and also ran in the beginning. And we just said, okay, well, then we'll just do the scrappy bootstrappy way and figure it out. And so we spent, you know, a lot of time lean and mean. And I think that forced us to focus on the product and the customer more so than, you know, some of the companies that were funded right out of the gate. And that, I think, just forced a successful product.

At this point, we are the smart vent market. but it took a while to be the smart pit market. Right. But still, congratulations. Slow and steady wins the race. And then finally, how did you get into this? What's your background that led you into this business? So my undergraduate, I did computer engineering.

My master was at CompSai. But I've always been really hands-on, kind of mechanical, just love tinkering and building things. And it's funny, actually, the way it got started was I was living in, Wicker Park in Chicago and had this problem in my own place, realized that this was a common problem, called up my co-founder Kenny and said, hey, I think there's an opportunity. He was working at Microsoft. And the thing that really got me going, though, was they had these free 3D printers to use at the Chicago Public Library, and I had never 3D printed anything.

So I saw a poster or a flyer or something. And so after, work, I was just writing software for startup. After work, I went down there and I sort of got my bearings, cadded something up, you know, the next day, brought it, printed, and just started going from there, right? It was just, I'm going to solve my own problem. And eventually I realized, oh, there's maybe a big market for this, for solving this problem. And then, you know, eventually walked the plank. Yeah. Oh, my God. Shout out the public library. That is such a great part of that story. At some point, I think I met the person who wrote the grants to get those 3D printers,

like years later. So just amazing, right? What a public library can do for you in the modern era? That is absolutely beautiful. That's the perfect place to end this heartwarming tale, Dan Myers of Flair at flair.com, founder of Flair Systems. I cannot wait to buy this. Things were coming on.

Thanks for having me. Thanks for watching, everybody. Molly, we got through the show. Please, no self-loathing. Don't be so critical of yourself. Work hard. It's okay. Seriously.

Seriously. Thanks, therapist. You're so freaking right. I love my job. We have a short holiday week coming up. We do want to warn you. We do take some holidays, although we will probably work on some of them. Because we can.

Because we like to. We will have shows on Monday and Tuesday. and then the Twist team is off until Sunday. I like this. I like this. I like this. We take a nice long break. Good.

We could have done a Wednesday show. We used to do a Friday show. I'm just trying to be a good boss and just let everybody take a nice breather. You know, but maybe you never know. Maybe I'll do like an emergency pod. I'll just throw on the, uh, if Sam Bagman Fried gets picked up on the tarmac on Thanksgiving, I'm doing a live stream. We're going live.

going live on my own. We're going live. All right. President Mike Savino wants to know if we're doing our one-on-one, so I guess we better wrap. Stay tuned, though, for a potential bonus episode, speaking of which that we may or may not drop over the weekend. But either way, we'll see you.

We're also ramping up our social game. So check out our TikTok. Search for This Week in Startups, our Instagram, This Week and Startups. We're putting a little clips up there. Give us a little candid feedback of what you think would work there as we learn. producers at this week in startups.com. Always welcome to get some feedback from you on what would be content you'd want there. We're going to start making content just for that format.

I wanted to do that already, but we got a little busy here with so many shows to do. But we're going to start making dedicated 90-second TikToks or, you know, shorts. Fun, fun, fun, fun, fun. I'm calling mine hope. I'm just going to make, like, hopeful TikToks about climate solutions to make everybody feel better. Like, we got this. We can do this. All right. It may or may not be a long weekend. I'm just leaving in at that.

We'll see you tomorrow. See you tomorrow. Yeah. All right. Bye-bye. Bye-bye.