NEWS: Instacart and Klaviyo file for IPO, State of VC distributions, AI lawsuits | E1798

0:00maybe we got a little bit too generous in believing the pitch as an industry but not looking at performance And I think people were being funded on their pitches and the promise, but not the performance. And now it has gone exactly the other way. Everybody wants to know our performance as LPs. We want to know how many customers you have, the churn rate. So it's gotten very quickly to brass tacks. And some might say it's an overreaction, but I think you have to play the game on the field. As we were talking about on All In About Politics, I've been really thinking about the game on the field. and the game on the field right now is survive.

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1:27All right, everybody. It is a huge news week with me to read the news. your favorite producer, Nick. Nick, what's on the docket? So today we're going to talk about two major IPOs that are coming up, Instacart and Klaviyo, just files for IPO on Friday. We're going to talk a little bit about the exit market for LPs and how that might kind of be spurring these companies to go public and how specifically venture capitalists need a win because shockingly, there has not been a venture backed tech IPO in a long time, shockingly long time. And then we'll talk a little bit about open AI and some lawsuits that are being filed by Sarah Silverman, Stephen King's piece in the Atlantic.

2:12And just we'll get Jason's general thoughts on whether these large language models, the special, the super big general ones that open AI and others are building, whether they are going to be a liability more than an asset in the future. very interesting okay let's get started i mean these ipos are very important for the market these are not kava the mediterranean food company or shark ninja which went public those are both like five six billion dollar companies four five six billion dollar range and uh one makes electronics consumer electronics items like vacuums the other one makes really good hummus i understand And so those are not major tech IPOs, but these two are very, very important companies.

2:59So tell us where we're at with those. Yeah. So I think before we even get into them, it's important to understand these are the first venture-backed tech companies to go public since the end of 2021. And according to CNBC, the last venture-backed tech company to go public was Hashing Corp in December of 2021. There were no venture-backed tech IPOs at all in 2022. Now, there were a few companies that did what's called a de-SPAC, basically when the SPAC turns into the new company in 2022. But almost all of those went really poorly. Getaround, which is a peer-to-peer car sharing service, was down 95 % since it's de-SPAC last year.

3:38They're trading$39 million market cap. rumble which you know the free speech right wing ish sort of youtube down 23 but still at a 2.1 billion dollar market cap so they've actually fared okay uh grove collaborative whose founder was on the podcast like three or four years ago uh which is a b corp for natural household and beauty products they're down 93 since their dspac last year trading at 125 million dollar market cap uh and then dave which is a neobank for focused on uh cash advances for individuals uh and like short-term lending down 98 trading at an 81 million dollar market cap um all right so we put those all together and yeah yeah i mean putting rumble aside um which is kind of a weird meme stockish kind of situation and they probably actually have some sort of a business because it's basically right-wing youtube um and i think they have a decent amount of traffic um they're burning money but they're growing rumble yeah um get around i'm kind of surprised at because that is a much loved service and people literally buy cars like used cars to put them on get around because it's profitable so just like people might build up an inventory of three or four uh apartments and or home small homes to put on airbnb and make that into a business there's a get around business which is a smaller version of that buy a twenty thousand dollar toyota prius or a used model three tesla and put it in the network rent it and you can actually i think make a decent living but to be trading at a 39 million dollar market cap is crazy um you would think that somebody would buy it or they would go private and somebody would offer you know some amount of money for that um so yeah this is um it's pretty it's been pretty bleak out there for sure and i I guess the question is, are these companies different?

5:27And the answer is yes. Instacart is qualitatively and quantitatively very different. And we'll get into, I think, their run rate, which their run rate is pretty spectacular. Yeah. And John, real quick, if you just pull up this chart, I think this is the best way to sort of show people how insanely dry it's been out there. This is US VC exit value by quarter. And you can see it peaked in Q2. exactly two years ago to this quarter or to last quarter rather um and it's down 98 percent over two years from q2 2021 to q2 2022 267.9 billion um to only 5.5 billion in q2 2023 um yeah which is so there's a couple of things happening here um you also see the number of exits so on this chart on the left you have dollar amount on the right you have the number of exits the line is the number of exits and you can see the number of exits kind of at an all-time low for this five-year period or so since 2018 so that makes sense um there's no ipos uh and i i think this probably includes as exits things being purchased so uh the frequency is very low so now why is the frequency low uh all of a sudden well ipos aren't happening right the public markets don't want to buy shares in companies.

6:49And then the other issue is, if you're running one of these companies and your value has gotten crushed, what's your motivation to go out in a down market, right? So I think part of this is people opting to not go public, people opting to not sell their company because they don't want to sell it for a bargain basement price. And so that's people who, part of this is choice, part of it is circumstance. I think there's a third prong too, which is like the regulatory environment, right? is lena con is going after small acquisitions yeah so the regulatory environment would impact acquisitions but not ipos obviously so in fact the regulatory environment kind of pushes people more towards ipo and independent businesses so that is uh probably a minor factor here that'd be like you know distant third probably to one uh people don't want these companies going public but then you know the bankers are saying hey we can't find money to buy these shares and then two people not wanting to take a haircut and sell their company for pennies on the dollar yeah if you're a sass or services company that stores customer data in the cloud then you need to be uh sock to compliant you knew that from a third party and you need that third party to close big deals and if you want to get compliant easier and faster you need to use vanta v-a-n-t-a vanta makes it so easy for you to get and renew your sock too on average vanta customers are SOC 2 compliant in just two to four weeks.

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8:47Vanta is going to give you$1 ,000 off. That's 10 hundies. Get$1 ,000 off at vanta.com slash twist. That's vanta.com slash twist for$1 ,000 off your SOC 2. Can you give an update on the sort of LP market right now and how it's going to trickle down to founders? I think it would be interesting for people to hear your update. I'm out there raising Launch Fund 4, meeting a bunch of LPs. the previous three funds we raised we raised them mostly from friends of mine high net worth individuals 10 million 11 million 44 million dollar size fund this time we're trying for 100 million and you know it's it's always a very humbling experience for an investor or somebody who's successful i've had some some amount of success in my career to go out and ask for money and i was on a hike i'm up in the mountains in the adirondacks and i was on a hike with another person and we were talking about fundraising and i said you know it's this is a really good practice being the manager of the fund and having to go ask for money because it reminds us of how hard it is to be an entrepreneur entrepreneurs have to do this every 18 months or 12 months they go out they try to raise money they try to convince people you get tons of no's and what's happening is you know if you look at uh this um problem of what percentage of your endowment, your fund to funds, etc, is in venture that got very high.

10:06Public markets came down. So people were over indexed in venture, and then they maybe did too many venture funds. So what we're hearing quite consistently from LPs is not only are we not adding a new fund like yours, we're taking the 12 funds we have to come into and we're these four funds we're not going to continue with as is their right, right? Like the venture fund doesn't perform. They're not obligated to do the next one now they might tell the person uh you know as people have told me hey we're in it for multiple funds just like somebody might tell a startup hey we're in it for multiple rounds um but if the performance isn't there we're obviously not in it for multiple rounds and so they are pairing their positions or they might be saying to people hey i said i would put 25 million in your next fund we're going to go to 10 um and so there's a lot of that going on what that means is less dollars to be deployed uh and that means less dollars for and less venture capitalists i think we're going to see a lot of people close up shop because it will take a certain type of individual who fight through this many no's this many people saying we're basically um not doing commerce in the world we're hunkering down so the way startups hunkered down and got rid of employees and cut spend that's happening with lps not that they're getting rid of employees but they are saying we're going to deploy less capital in fewer funds maybe not add as many funds so large pools of capital belt tightening and austerity up and down the stack so you have to fight for every dollar and if you you might lose lps right so i'm in a very lucky position that i have a very public following between this podcast and and all in both getting 50 million listens a year you know that kind of reach allows me to reach a bunch of um investors and then i might have a higher top more people in the top of funnel and so i can get meetings and i was talking to one um lp they said they have 6 000 people contact them and they're able to meet with you know a couple of hundred of these funds like say 200 of them 300 of them a year so you start 300 a year 50 weeks a year maybe you're working 45 but let's just use 50 that means you're you know are you meeting with you know i don't know five six five a fund manager a day basically but then you have to decide which one of them do you take a deep dive on so if they were meeting with 300 maybe they take a deep dive into 60 of them like one in five but that one in five so now you're down to 60 so basically one percent of people might get to the point or maybe it's even 30 go to a deep dive in other words they look at your data room and they decide they take a really deep look which would be due diligence in a certain maybe it's 50 basis points of the people who apply to get funding so i'm very lucky that i kind of get into that pool in four to five cases i get the meeting but that doesn't mean i get the money so it's particularly hard out there and uh it's been great for me because it's made me sharp uh i really believe in our strategy i really believe in what we're doing i don't care what the number we wind up making is i just want to get back to work so november 1st is the hard date for me to stop raising and i'll just stop whether we're at 30 million or 100 million it doesn't matter to me we'll just put that money to work get really great returns for investors fight like dogs to find great companies support the companies and then we'll just start the next fund but i think a lot of people are going to quit just like a lot of founders are quitting um this really is the kind of shake-up that gets rid of you know um it trims the herd.

13:34Yeah. If you think about it like a herd, right? Like who do the lions take out? Do they take out the strong members of the herd that are at the front of the pack? Nope. They just wait. They pick off people at the end of the pack who are meek and weak and who are liable to give up. So I feel like it's a test of everybody's will right now. And so if you're a founder or a fund manager, they're testing, the market is testing your resolve. How bloated do you think the venture capital industry got in 2020, 2021, if at all? Well, I think there are a lot of great ideas out there that need to be funded.

14:10And I almost feel like there's a never-ending pool of ideas that need to be solved. So I don't think that we want for ideas that require great entrepreneurs to tackle them. So then you look at, oh, the number of entrepreneurs. now i do think we started to have people who maybe didn't have the grit or the resolve the passion the work ethic even the skills or just raw horsepower to take on those challenges so it's possible maybe we funded twice as many companies as we needed um or that were qualified let's say they just had the teams that had the horsepower to be the leaders of a company that doesn't mean those people are worthless and weak or something it just means they probably would have been instead of CEO, Chief Product Officer, and the VP of Engineering at this startup, they should have been the number two in each of those positions at another startup.

15:02So that would roughly mean probably twice as many VCs backing twice as many companies, the bottom half of which maybe we got a little bit too generous in believing the pitch as an industry, but not looking at performance. And I think people were being funded on their pitches and the promise, but not the performance. And now it has gone exactly the other way. Everybody wants to know our performance as LPs. We want to know how many customers you have, the churn rate. So it's gotten very quickly to breast hacks. And some might say it's an overreaction, but I think you have to play the game on the field.

15:41As we were talking about on All In About Politics, I've been really thinking about the game on the field. and the game on the field right now is survive or venture funds especially new ones like ours you know we're uh only like a 10 year old fund that's new we were on our fourth fund that's new you know under six or seven funds you're new so vc is a very long-term and prior to the third fund very long-term take management fees right now the first two funds were kind of like you know your price my first whatever piano my first you know whatever those were like my first funds like let me see part-time if i want to be a vc more full-time and i really made that commitment between the second and the and the third one that this was going to be i don't say full-time commitment but this is going to be my life's work right it was gonna be a big part of it and so the lps will aren't going anywhere and i think for venture capitalists it's a matter of proving to LPs, I'm not going anywhere.

16:41I'm staying. I'm going to be here. You're going to have to deal with me. So if you met me for fund four, and you said no, that's fine. But you will get an email from me and you will see me for the next three years investing, you will have to review and you're going to have to deal with me for fund five and six and seven. And it's the same thing for startups. Hey, Instacart didn't go away. Other 15 minute deliveries went away. So now the market has to deal with Instacart. And what did Instacart do? Going back to our IPO stories, they had to resolve to make the cuts to cut their valuation you know which was really hard multiple times they cut their valuation twice i believe this is hard work so i have a ton of respect they also switched out i think the ceo position if i remember correctly so this is a company that went through the war and now they're on the other side potentially and going public so what this means to me is that this um six quarter process of cleaning up the mess of the crazy party we had for five years where things got out of control and people broke a bunch of lambs and you know lit the couch on fire and things got a little crazy the party's over we cleaned it up and now the public markets i think they know if a company's going public right now that is a company of substance that is a company with real numbers and i think that's a good segue maybe to talk about the numbers behind these two yeah professional um try to try to be And by the way, for those of you looking, I am in the Adirondacks at a lake on a little corporate retreat with a couple of friends.

18:13Not corporate retreat, but people I've worked with before. And I went e-foiling. So I'm trying to, as I get myself fit, Fat Jason could have never done this, Nick. I got up on the e-foil. Woman said I was one of her fastest students. And I just took to it immediately. This is an incredibly complex sport. It's a surfboard. and then beneath the water is a blade spinning really fast you have to balance on this board and it lifts out of the water nick oh so you know the thing you saw zuckerberg with the um yes yes flag yeah i don't think that was an evil i think it was the one where you pump up and down to get the momentum this one you you have a handle like a little joystick like you're you know and you hit the blade but i'm now fit enough to take on a new sport i would have just quit probably when I was 40 pounds heavier or so.

19:01You know what I think your next step of fitness needs to be? You can run this by your fitness coach too. Run it up the flagpole. We'll see if he salutes. Yeah. But I think you need to get prison strong. That's your next thing. I think you need to - Prison strong. Yeah. What that means is you need to get rid of the tonal. I am of the belief strong using things that come out of the wall. You need to never do rubber plates. You need to buy a bench press and a squat rack and buy a bunch of iron 45 and 25 plates stick those on there plates prison strong that's it plates don't worry about tracking it don't worry about anything you got to go i'm going i'm going for it i'm going prison strong 2023 that's what i want to do on that journey with you do a little prison strong journey yeah i specifically have always kept my career very straight and down narrow never never cut corners because in prison it would go one of two ways for me i'd be running the place or i'd be dead in it in 48 hours so one of my good good friends is uh deploying to iraq shortly he's an apache helicopter pilot he actually was a yeah west point wrestler he's a total stud uh and he's like so excited because they that's what they call it on the base because all they have there is like squat racks yeah bars he's like it's you get prison strong on there you never you're never stronger than when you're on the base uh my friend was in one of the i wouldn't say exactly which one but one of the elite forces uh not navy seals but one of the other you know corollaries in the other military and he said i don't know what they're putting into our food but we get we get deployed and we work out and they're putting stuff in our food because we all got jacked it's the plates iron plates i'm telling special protein and other enzymes into the food source to make you listen if you're in the tech industry you know about carta carta is the leading venture capital and equity management platform and they have huge news to share here on this week in startups.

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22:43Instacart at its peak was valued at$39 billion in 2021. Last year, it reset its valuation multiple times, most recently to$13 billion, so a 66 % haircut, basically. Its 2023 run rate is about$2.9 billion, which would be about a 4.5x multiple on its projected 2023 revenue. 2.9 billion dollars the question i have that's not the value of the food that was delivered that's the value of the fees they captured so it's very important just for people who are listening who are wondering how these things are valued that's not 2.9 billion dollars worth of milk and egg and cheese that's the fees that come off of that just like uber you know uh or uh airbnb you know they have a certain fee structure that comes off they don't get the whole night so let's keep going instacarts just for the numbers instacarts uh gross transaction volume which is the total value of the you know orders 29.4 billion dollars over its last 12 months yeah okay so that's very interesting the reason it's interesting is they delivered 29 billion dollars worth of groceries and they made a top line revenue of 2.9 billion off of it so about they're able to extract 10 percent of the value of deliveries they made yeah and just for us to keep our mental model these numbers are close but the gross transaction was its last 12 months the 2.9 billion is what it should make for 2023 so slightly different but but generally close um oh i i wanted to run this by you so rich barton school of branding instacart unique word in the cart three syllables so that's no good no no no high price scrabble letters so that's no good either no but unique very generic word it's a generic brand it doesn't feel unique um yeah it doesn't feel unique when compared to uber okay so let's get into some metrics uh instacart's last quarter which ended june 30th revenue 716 million of 15 year-over-year ad revenue and we're going to go deeper on this in a minute 206 million of advertising revenue up 20 year-over-year net income profitable 119 million dollars they have 600 000 instacart shoppers which are obviously akin to dashers from doordash or uber drivers etc and uh sort of their top line users are the people who put your food in the bag they do the ice cream last and if you wanted coffee ice cream you know from haagen-dazs and they're out of that they will text you to swap so those are the shoppers and they get paid both for shopping and putting things in bags and for delivery.

25:21Yep. And just their top line user metrics, 7.7 monthly active orderers, that's their monthly active user metric that spend an average of$317 per month on the platform. In 2022, Instacart's average basket size, so the average order size was about$110, which if you put those two numbers together on average, users are about three times a month. that tracks tracks perfectly i mean if you have kids whatever because i'll tell you what's happening there you probably shop one time a month yourself so that's what i see the pattern is you go shopping when you have time and you don't have time and mom or dad are busy or dad dad or mom whatever combination you got are busy you hit the instacart or you forget something and so you're seeing that order size is actually like 110 if i think you said that's like replenishing that's not for a family of five or whatever full like when you have a family of five or something like that or four people living in a household you're earning three hundred dollars worth of groceries when you go to the store two three hundred so i think this is increasing the frequency um so you run out of milk whatever so i think people are probably yeah ordering more frequently be interesting to compare this type of shopping which i think is city shopping i think they're mostly in metros, not suburbs, and they're kind of getting to the burbs.

26:41So that also probably is a factor. You might have some single people in there. You might have some couples in there, two people and a dog, no baby yet. So this is Instacart's advertising revenue scale up from 2019 to 2022. It's pretty amazing. Advertisers on Instacart grew almost 6x from around 1 ,000 to 5 ,700 from 2019 to 2022 at the end of the year. Ad revenue grew 11 times from 67 million in 2019 to 740 million just three years later last year. And in 2023, Instacart's on pace for more than$800 million in ad revenue, which is on pace to make up for the year, which is on pace to make up about 28 % of Instacart's total revenue.

27:21It's a little troubling to me because you would think it might be 10 % of their ad revenue or something of their overall revenue mix. So this seems like a very high number, which I think is because groceries are such a low margin business and people are hard to extract money from it because if you charge too much for the delivery for the fees, people get in the car and they go shopping because people don't necessarily not like shopping. Yeah. So maybe this is the business. Maybe it's an advertising business ultimately. Well, it sort of is. So John, if you go to that next graphic, this is one of the red flags I wanted to bring up to you, Jason, which actually I heard Alex Wilhelm point out.

27:56So I'll shout out to him on today's equity podcast is what he does. This is Instacart's gross transaction volume, quarter over quarter it's relatively flat for the lat basically since covet started so you're right on yeah see i think what's happening is um the the the main business is not it's hard to make profitable just like some segments of uber's business might be hard to make profitable or even airbnb it's like it might be hard to be profitable for somebody sleeping on a couch kind of situation for under 100 a night and they make most of their profits from the two three 400 a night stays where uber maybe doesn't make money on pool they make a little on x they make a lot on black cars yada yada um so this is a disturbing trend this would be a reason to not invest in the company which is they're they're not if they're not growing their base of users or not growing their product shipped and they're extracting more value out of people they're going to hit some optimization moment so how much more advertising they charge now i just want to talk about the advertising this is a revolution in advertising the question you really have to ask yourself nick is when advertising is moving to a new platform and you're seeing this you know advertising on amazon advertising on uber advertising on instacart okay where do those advertisers come from they didn't suddenly procter and gamble or unilever they didn't suddenly decide you know what we need to spend more on advertising they're moving the advertising dollars they have a certain advertising budget they're moving it so where did it move from well it turns out um the end cap uh or you know the end of the aisle is called the end cap in supermarkets i think they've created a new end cap in um commerce which is when you're about to check out they upsell you uh so if you've used doordash or uber eats you're about to check out they take the three or four most ordered items on the menu and they give you one more shot you sure you don't want to add french fries sure you don't want to add a drink sure you don't want to at a dessert that's happening also you check out of uber eats or good egg i don't know if good eggs does it uber eats does it constantly and then instagram does constantly hey you're checking out we noticed you didn't put the fage greek yogurt you love we noticed you didn't put this in and you didn't put ice cream you didn't put this sugary cereal in do you want to add it because you can just click add right here those are advertising slots and then when you do the initial search or you open the app they'll have rewards and offers so i was ordering ice cream the other day on uber eats and i was like two for one ice cream what literally buy a pint of ice cream and get a pint free so i was like are there any brands in here i like they got me and i literally just ordered like eight pints of ice cream i ordered four i got four for free or whatever and it was a bit of a mess because it was kind of bait and switch they were sold out of the one i wanted so it's like it was i think they were kind of putting the weird flavors that maybe don't sell but anyway it was a great hook and so i think getting people at the point of sale whether it's amazon whether it's uber where the closer you get to that transaction and i think that also would signal maybe less broadcast advertising less radio advertising because radio and broadcast advertising okay i'm telling you about some ice cream or some beer okay but you're not purchasing right now so maybe have to move some of those dollars so i think this will affect media yeah you made that point before about the closer you can get to the transaction the higher value the advertising will be yeah i mean and it's also quantifiable so you can go back and say to people listen the person took an uber we upsold them on in and out burger they clicked on in and out burger there was an in and out burger that they were passing in the uber or by their house or by their destination or the starbucks is by their destination they're getting out of the car to go to a meeting and there's a starbucks there and we told them where the starbucks is like that kind of stuff just did not you couldn't buy that in inventory just like you couldn't before google buy somebody typed in volvo you know 2010 used santa monica like that inventory did not exist before uh and so when you create that new uh highly valuable advertising that can be quantified you got a winner on your hands so there's an argument here maybe they'd lower the prices for instacart delivery and then just make it an advertising business.

32:10Yeah. I mean, if you just look at their last quarter's earnings, right? If you take out their ad revenue,$206 million, they made$119 million in profit. The ad revenue was 100 % margin. So that's really where that's their profit center, right? It's like AWS for Amazon. 80-90 % margin. You have salespeople and you have a little bit of accounting. You have to do some post-sale support, but I would call it 80-90 % margin business. Yes. You get to keep 80-90 % of every dollar you sell. Pretty great business. Yeah. for a great business and you know there's costco right my understanding of costco is you pay a membership fee and they make the majority of their profits from the membership fee and then they just make the prices so low that people lose their minds and they just get some people who are just costco disciples right yeah uh so it's one of the most brilliant business models of all time costco it really is i think so i think amazon prime as well you know you buy prime membership and you know you get to have access to all this great inventory and they solve the shipping problem for you.

33:04So maybe Instacart ultimately becomes, because there's a membership that we pay 10 or 20 bucks for, and we pay for the Uber One membership. I don't think Good Eggs has a membership yet. And those memberships give you a pretty steep discount on delivery costs, and you get prioritized. So I shout out Uber One. I think it's one of the great unknown subscriptions out there. It's really up there with Amazon Prime now for me. Last question on Instacart. Do you think post-COVID, Instacart starts to see a little of a tail off as people are okay with going back to the grocery store you think that's it i think you know the the biggest issue for them is um doordash and uber eats so um i'm close to both those companies and they both are already delivering you your dinner and picking you up in cars and i think those are the two major headwinds because if you um were going if your food's coming out of a cloud kitchen and that cloud kitchen has the 15-minute grocer like was it called joker was the one that we always talked about a couple years ago there was get get tier joker uh yeah all these 15-minute deliveries gorillas yeah yeah all that belongs in a cloud kitchen so imagine you have a cloud kitchen like travis's company in diego there's 20 you know restaurants or maybe there's 50 restaurants you know in 20 restaurant areas in there well it doesn't take much to have you know a 7-11 which they have in the network i believe cloud kitchen supports 7-11 or something like that and doordish has 7-11 so then you could have other brands there and it's quite possible eventually that somebody like procter and gamble will have like a png direct store where they just go into a cloud kitchen and procter and gamble's line of products are there and they disintermediate the grocery store yeah that was gopuff's business that is gopuff's business right they own the store they own all the inventory and then yes right but now imagine you're but they still have to buy procter and gammels cereal they got to buy cheerios they got to buy irish spring saw you know soap they got to buy edge gel now imagine you're the maker you're gillette you're png i don't know which brands own what and they start opening stores direct consumer now you've got really uh you know a straight path and that could lower costs and then the profits if you take out the supermarkets profits you could give that to the delivery and then you know everything becomes more efficient it's actually kind of probably arguably better for society in terms of traffic and in terms of real estate um in terms of time that you get your groceries delivered actually because if they're delivered there's a chance that two or three people will be along the stop um and then you don't have to have this giant warehouse that everybody goes into you don't have to have all these cashiers it just all happens seamlessly uh and you don't have to drive to the grocery store and back so it's net net net a benefit for society i think it probably lowers the carbon footprint them yeah i think it's cool because it takes this model it takes the entrepreneurship from the retailer right you're not going to see a lot of mom and pop grocery small stores anymore but it takes the entrepreneurship from the retailer to to the brand side right you're seeing a million new different kinds of gummies and you know any kind of cpg thing you could think of yeah it's a cool it's a cool kind of shift that's happening yes if you were an entrepreneur in a hundred years ago you might start a grocery store or a deli now you start something that can be purchased in a deli or a grocery store and you have more product innovation hey everybody today i'm joined by roots ceo dan dorfman dan welcome to the show thanks for having me jason tell everybody here in the audience what is roots and what makes it different than the other real estate investing platforms i'm a complete neophyte roots is a REIT with a little twist.

36:45Sorry, I had to do it. We are the first real estate portfolio that we know of that builds wealth for both our investors and our residents. And we've created a unique win win model that creates partners and not tenants. So you're telling me instead of putting down a$2 ,000 one month security deposit, you get 2000 invested into the REIT. So you're day one, an owner. Absolutely. And so it kind of goes against... When we first started this 2 years ago, I wasn't really looking to build a product out, to be honest. I was looking to find a product that I could offer my residents and my other portfolios that would help them get to homeownership or help them participate in this market.

37:27And all I saw was rent-to-owns. And in theory, those are great, except for the fact that less than 10 % of them actually convert into homeownership. So you're kind of just putting a carrot out in front of your resident, and you're not really actually impacting. So we wanted to really develop a program and a model that said, Hey, we believe in you, you're a partner from day one, help us take care of this thing. And we can all win at the end, head to invest with roots.com slash twist to sign up and start investing today. That's invest with roots, no spaces, no dashes.com slash twist to sign up today.

38:03All right. You want to move on to Klaviyo? Oh, Klaviyo is great. Yeah. Yeah. So Klaviyo, marketing automation platform, it helps businesses reach customers via email, SMS, push notifications, and more. Then it collects all that data and puts it into like an easy to read dashboard. It was founded in 2012 by two co-founders, Andrew Bielecki and Ed Hallin. The company, so this is a great lesson for founders. The company got profitable really early. They didn't raise any capital until its seed round in 2015. So they waited three years. They went on to raise$778 million between 2015 and 2022 and go for that hyperscale.

38:37It was last valued at$9.5 billion in a 2021 Series D where they raised 320 million. That would be about 15X its projected 2023 revenue upcoming. Just for a little Rich barton school of branding clavio is named after clavia which is the spanish word for a mountain spike and the idea is if you're going to climb a mountain you need the right tools to do it which i think is pretty cool uh under the rich barton school of branding unique word yes deeper meaning yes not two syllables s3 but they do have some meat v and k are pretty good yeah k is five point letter v and y are four point letters so decently decently uh scrabble yeah um yeah if you were doing e-commerce you kind of have to use klaviyo um it's for marketing automation uh so you know when brands um like i i don't know if nike's their customer but i got into nike for a little bit i really like the products and the nike app was really good and they had like a lot of different types of shoes so i started trying like getting into it and it was just really good like i would get these emails and marketing emails or sms's from nike and they were very fine-tuned to me And I think they're using Klaviyo is my guess.

39:49So they're studying what you've purchased, what pages you've looked at, and then they make custom emails, programmatic emails. They know if people unsubscribe, they will upsell you on, hey, how often do you want to get these emails? Some people like to get a Nike email every three days. Some people might want it every three weeks or three months. So there's a lot of nuance. And what people used to do was they would use a generic email provider to send a bulk email to 10 million emails in the database. And that makes no sense. You have probably a group of people who are on the website every week, and browsing and they order 10 pairs of sneakers a year, you're going to treat them very differently than somebody who comes, you know, twice a year, and they buy sneakers on some pattern, and they buy only running sneakers, and you know, they're replenishing and they buy the same model.

40:36So when I was a marathon runner, I bought the same sneakers, you know, I'd buy three pairs of them at once. And then I would rotate them you know or two pairs wear one one day wear one the next you know yeah it's like have you gotten that email where you look at something on a page and then three days later you know nike will email you and say hey that pair of sneakers you were looking at is now 20 off and you're like oh yeah that's how did that happen yeah that's clavio yeah so they're like building those tools so that each e-commerce vendor doesn't and they get a pretty penny for it and i think it's like one of these win-win-win situations and that's if you're thinking entrepreneurship encourage people always to think about win win win um klaviyo wins because they make money selling the tool put that aside they wouldn't exist if they didn't but then the customer wins because they get a better experience and then the brand or whoever's using that tool they win because they don't have to build it themselves and then like squarespace or other tools as the prices they can keep investing in making the product better but keep the price the same and everybody just keeps winning more right um and so uh klaviyo is going to be that's going to be like a HubSpot or an Atlassian, both toolmakers who help other people grow their businesses and they're more efficient.

41:44Shout out to Scott from Atlassian, Darmesh from HubSpot. We have a little Atlassian tie-in here coming up in a second too. So just for the metrics, Klaviyo's last quarter, which again ended June 30th, revenue 164.6 million, up 51 % year over year, free cashflow of almost$40 million, $39.5. Net income,$11 million, basically. Cash position,$40 million. Klaviyo is profitable, and it's growing quickly. Also, the founders, I think, have the highest ownership percentage, 38 % or something, 39%. I saw somebody had tweeted this. Jason Lemkin tweeted it. Jason Lemkin tweeted it. He has a tracker on this.

42:26Shout out to Jason Lemkin. and so most founders wind up with 10 to 20 of their company and if there's two founders they split that five each 10 each like larry and surrogate i think why not with about 10 each of google here you know the the co-founders or the founders had 38 of the company i believe in the next one of the highest ones was obviously atlassian and then ryan from qualtrics also had a massive ownership position so this is why pull a graphic up please so this is from saster obviously Jason Lemkin's platform. Yeah, this is pretty shocking, right? Klaviyo CEO and co-founder Andrew Bielecki, 38.1 % of the company, like Jason just said.

43:05But what I found even more amazing is, so Scott, the founder of Atlassian and Scott's co-founder, Mike, if you look right underneath, Atlassian obviously is the second most in terms of most ownership for a single co-founder, But look at the ownership between the two Atlassian co-founders at IPO. 37.7 % for each. That's almost 80 % of the company. It's crazy. Yeah. 75 % of the company. Yeah. It's amazing. It's extraordinary. Jason, you want to talk about - You also find here - Sorry. Is that founder one and founder two don't always have the same ownership percentage. So most people think what Atlassian did is typical.

43:43Usually the person who comes up with the idea, brings on the second co-founder, see Cloudflare there, 16%, and then the co-founder, 5.6%. You bring on the co-founder, you make them an offer. Hey, I'd like you to be a co-founder, you get this amount. Some people have it in their head that all three would get the same amount. Cloudflare is a good example. The founder had 16, the second founder had five, the third founder had 1%. So it's not always as it seems. You want to talk about the importance of founders retaining ownership percentage early on if they can and how staying profitable plays into that?

44:15I mean, it's so obvious that, you know, and this is why I've been very upset about some of these new accelerators asking for free equity that is not commensurate with the value they're providing. If you want free equity, 25, 50 basis points, maybe even a point as an advisor over two years for doing some predetermined amount of work, and both people can cancel the arrangement at any time if they don't feel it's providing the right amount of value for either party. So your equity is valuable. And so what I would just encourage every founder to do, imagine you're a billion-dollar company. And when people ask you for 1 % of your company, you can say, well, that will be$10 million.

44:52So in the case that we become a billion-dollar company, which we know is 1 in 100 or 1 in 500, whatever you think it is, you can kind of get an expected value for those shares, which is if you look at it, it's a 1 in 10 occurrence, 1 in 100 occurrence. well it's one in a hundred it's like a hundred thousand dollars in expected value rates uh so of you know like 10 million dollars you know one one in a hundred chance of getting it so um i think that's a uh reasonable way to do it and yeah to the extent you can not blow money on stupid things and instead be frugal um then you will have a larger ownership percentage on exit which is super meaningful now that you do still want to build a big pie So, you know, Airbnb, very big pie, Google, Uber, these are very big pies.

45:43So getting a smaller slice of Uber or Airbnb at, you know, 80, 90, 100 billion, or, you know, a small slice of Google or Apple, obviously, Tesla, these are worth a lot more. So you always want to concentrate on building the biggest company possible. But part two of that is, yeah, you don't want to dilute the cap table, because you suffer from it. And farmers have common. So if you build a big preference stack, as we've talked about many times, that can be problematic as well. Can I ask you what it is about the email sort of marketing platforms like MailChimp, like Klaviyo, where they can grow profitable into multi-multi-billion dollar businesses where the founders retain huge ownership percentages?