SPEAKER_00: All right, everybody, welcome to the Sunday edition of this week in startups, no such thing as a day of rest.

David Friedberg: No, you get Saturday, but who knows, maybe we'll start releasing content on Saturdays. But we have a great VC Sunday school

SPEAKER_04: today, we're talking about how should you evaluate a startup if they are pre traction, they haven't lost their launch their product yet, they don't have any traction. How do you decide who gets money? When there's no product to play with, there's no

SPEAKER_05: customers to talk to, it's a great topic.

SPEAKER_00: It really is. And it and you would not expect it to be as tactical and specific as it is. But that's Jason for you.

Jason Calacanis: And then in this week in climate startups, I sit down with micro cycle founder and CEO Joanne Rodriguez is a company that uses mushrooms to remove toxins from construction waste and

Chamath Palihapitiya: turn it into new building materials. So get a big chocolate bar filled with non psychoactive

SPEAKER_04: mushrooms. Order a mushroom pizza. Don't put the don't put the

SPEAKER_08: wacky mushrooms on it just the regular delicious ones. And enjoy this great show. It's gonna be great stick with us.

SPEAKER_10: This week in startups is brought to you by open phone. As a startup founder, a lot of mistakes are easy to roll back. But using your personal cell phone number as your company number isn't one of them open phone makes it easy to get business phone numbers for you and your team, right on top of your existing devices. Visit open phone.com slash twist to get 20% off your first six months. Masterworks is the first company allowing investors exposure into the blue chip artwork asset class. Twist listeners can skip the wait list by going to masterworks.io slash twist today. And help where helps you outsource the tasks that slow your team down from data entry to world class customer support. Help where can help make you bionic. Go to help where.com slash twist to get $1,000 off your first invoice. All right,

SPEAKER_04: everybody, it's VC Sunday School. We're in month seven of these. And if you go to this weekend startups.com slash V.C.

SPEAKER_16: SS, you can see a list of all of the VC Sunday schools, we're gonna make a super cut, we're gonna make this into course, maybe afterwards, it's kind of becoming like a whole curriculum on being a venture capitalist.

Jason Calacanis: It really is. It is so interesting. And it's just kind of evolving organically into not only learning in public, but super good content. And so this today's topic was kind of sparked by our discussion about boom supersonics deal with American Airlines. But we've also had a bunch of conversations recently where, you know, when you're evaluating a startup, it's very interesting to me to see which stuff you throw out. Like you're like, Oh, a letter of intent? Nah, or even like hardware? Nah, only talk to me about the revenue of this and that. And, and then there's this, you know, as we get earlier and earlier with companies, or in my case, I'm seeing a lot of companies that are like, coming out of R&D and about to commercialize and there's not really a product yet. Mm hmm. But there's potentially a lot of potential. So how do you evaluate like, what are the metrics that matter when you're evaluating a company that's like pre launch or even pre traction?

SPEAKER_22: Great. Yeah. So just to clarify what we're talking here for people who are neophytes, and just to take out all the

SPEAKER_16: buzzwords, if a startup has their product in market, it's in the App Store, it's available to purchase on Amazon, you can use it. Well, then you're going to know the number of customers who are using it, you're going to know how much they're paying, you know, no profits, you're going to have all that, what we'll call traction and to be an umbrella of traction data that we could look at, that's our bread and butter, we like to look at year one of traction. So that would make a seed investors early stage investors. Now some seed investors, accelerators, angel investors like to invest even before the product is launched. This is incredibly high risk. I tell everybody who's starting as an angel investor do not do this. Make your first 20 investments based on products in market with traction. Now do I say that to eliminate angel investors from investing in prelaunch startups? No, there's plenty of people who do it. Still, even though I tell people not to do it, I do that because I want angel investors to have a good experience because the attrition rate, even amongst launch products is 70%. I would say 70 80% fail of prelaunch. 99% of people in this category are going to fail, either fail to deliver the product or the

SPEAKER_22: product gets launched, and it doesn't become an outcome for a venture capitalist or seed investor. Okay, but how do those

SPEAKER_16: companies then get funded would be the question, right, Molly? Like, well, how do they get funded? The truth is, they are most commonly bootstrapped, which means the founders pay for it

SPEAKER_22: themselves, they work at Google. And on the weekends, they build this, they save up some salary, they work for six months for no

SPEAKER_04: salary. And they are they work off ramen, right? Or they go to an

David Friedberg: accelerator, all of those things are possibilities. But sometimes people do invest before there's a product. And before this

SPEAKER_28: traction, because in order for the attraction, there has to be a product. So what would you look at?

SPEAKER_32: And we don't have to be an Adam Neumann to be clear, we do not

SPEAKER_31: only mean,

SPEAKER_04: right? Well, Adam Neumann is a great example, very instructive

David Friedberg: example. The first question I asked when looking at a pre launch company, so the products not in market, they're not they haven't built the product yet. The number one thing I look at is has this

SPEAKER_04: founder had a successful exit. So number one, have they taken a company public number two, have they sold the company, then if they have sold the company, gold is public, silver sold the company, and then there's bronze, sold the company and made a profit for your investors. And then see is the bronze sold the company. And maybe you didn't get a profit for your investors, right? Maybe you got them their money back, or was in what's called an aqua hire and acquisition in order to hire the team and save yourself from having to hire 20 developers on the open market. So that's, that's the number one criteria of

Chamath Palihapitiya: backing a startup pre product launch is the founder. And

SPEAKER_39: then how do you not the founder? I'm sorry. Yeah, yeah. Have have the previous success track,

SPEAKER_02: right? Okay, track record is way to say it. But even better on

SPEAKER_04: track record, not that you worked at Google. Did you take a company public yourself? Yeah, did you? So and then you just, we

David Friedberg: just jumped the fence here for the second one, which is have you worked at a startup that had an exit? Have you worked at a startup that went public? And what did you do there that was

SPEAKER_04: meaningful? The 1000th person at Google, maybe not as meaningful as the sec third higher at YouTube third higher at YouTube that did product seventh hire who started the ad business, whatever, you know, like, that's meaningful. So you have to double click on it. It's not just that you worked at

SPEAKER_46: Apple and Google, because working at Apple and Google as the 10,000 or 20,000 employee at each is nice, but it's not startup signal nice.

Jason Calacanis: That is a very good and very subtle note, because you see a lot of slides that say like x Tesla x Google, like it's it's sort of like stacking up the brands. Yeah, on that. Yeah. Okay, it's

SPEAKER_16: it could be a vanity metric. It could be vanity. Here's three logos are founding team. And we tell people to do this. We tell

SPEAKER_04: people in our accelerator, if you're gonna talk about your founding team, put the logos of where they previously worked.

SPEAKER_22: It's super important. But you should as an investor double

SPEAKER_19: click on that. Okay, your team worked at Apple. What did they do? They worked at the Apple store? Okay. You can literally do

SPEAKER_56: that. I mean, that would be really gnarly to do do that makes you feel like you're lying. But you know, if you've worked at

SPEAKER_16: Apple for 18 months. Yeah. Yeah. You know, in 20 in 2020, what project was it? Was it the AR glasses? Okay, great. And you're

SPEAKER_46: starting an AR software company or marketplace. Great. Let's talk.

Jason Calacanis: Okay, let's say, we've got no's on both of those. No, the founder has not taken a company public or sold it and was not, you know,

SPEAKER_22: number two. And that was not was not a significant contributor at another successful company. Okay. So then you could start looking at, do they have some unbelievable skill in the world?

SPEAKER_16: And what work have they done in the world? So if they were working on the open source project for WordPress for six years,

SPEAKER_22: and they were the top five contributor, and now they want to start a WordPress competitor, or a decentralized WordPress competitor, that's, you know, on the blockchain or whatever, and it's no central authority. Okay, great, great starting point. You

SPEAKER_16: did commits for six years. Okay, we got we got a way to actually look at the work you've done in the world. Okay, that's pretty good. You got some serious skill. Oh, you were the number one sales executive at snowflake. And before that, you were number one at go to meeting. So you worked in sales twice, and you know, all the customers for the past 10 years. And now you're going to start a zoom go to meeting killer. Mm hmm. Okay, now it's getting interesting. So that's what I would look for. Next is like, is there some specific skill and insight this person has? Right. And

SPEAKER_39: if I were to ask you, Molly,

SPEAKER_07: like they know the weaknesses of the industry they're going after or into,

SPEAKER_16: this would be called domain expertise by some people. So domain expertise could lead to unique insights. So I would ask you in your first six months as a venture capitalist, most of the companies you see are ones that can't clear market. So let me explain what that means to people, you're going to see people who've been trying to fundraise for a year or two, in some cases, they're not fundable, based upon that piece of data, they have not yet been funded, and they've been trying for a year or two. Therefore, they're, as the market is saying, it's not me saying it's not a dig, as constructed, the market has chosen not to fund them, which would mean they're unfundable. Other companies you see, how many fall into that basket of not being funded or being unfundable? And you're seeing them, because they're trying to get meetings and they they're they're on market, if they had been fundable, they wouldn't be racing for 18 months. So out of 10 startups, how many fall into that bucket? Would you say out of 10? I'm going to say

Chamath Palihapitiya: seven? Okay, I was guessing six. Yeah, exactly what I experienced

SPEAKER_04: as well. Yeah. So this is another thing to think about as you're become a venture capitalist, if you're seeing it, and the deal is not closing. There might be a reason why this startup is still on the market. Mm hmm. It might be too early. It might be the wrong founder, it might be poor execution, it might, it could be any number of things. They're just not good at executing is the most

David Friedberg: likely situation, or there are a bunch of idea people, and there's no builders on the team. Therefore, there's no product to look at. And if they had shown product velocity, as we've talked about before, the product constantly improving over time, they probably would have got somebody on the hook to make an investment. And so these are the things you kind of look at to determine if the startup should get

SPEAKER_04: funding before they have a launch. Could also be something super attractive about the customer, like, hey, we're going after people who rent homes on VRBO. We're going after people who, you know, run Airbnb, you know, bed and breakfasts. There are people out there who own real estate, we're going after we're going after high net worth individuals, who get a taxi, who, who are

SPEAKER_16: trying to get a car. Yeah, like you could start to say, Okay, well, these people have a lot of money. And yeah, sure, these could be good customers. How many are asking how many of those

SPEAKER_22: customers are there? How would you reach them? What is the current solution? And that's where you sort of figure out customer base? How are they currently solving the problem? Okay, the way you're currently solving the problem is you hire a driver for a four hour window for $125 an hour, and it costs you $500 to have a Lincoln Town Car for the morning. And that's how

SPEAKER_16: some baller person before Uber would have a SUV waiting for them from, you know, whatever 10am to 12 1pm. To pick them up

SPEAKER_22: at the airport, you would basically be buying that person's time for 234 hours. Okay, that's how they currently do it. Okay, how does Uber do it? Oh, they do it on demand? Oh, and it costs one fifth? Okay, rich people are going to do that. Who would rather not have the person waiting there for three hours and pay four times as much? Oh, you're gonna charge 20% less, gonna be 300 instead of 400. Probably not enough for them to make a difference. They'll go with what they know. So you can actually kind of have that. You can look at that evidence. But right, what does it cost you to wait? caution? Nothing as an investor to wait. This is why founders need to understand the other side of

SPEAKER_16: the table needs to understand, if you're not showing progress, and you're just waiting for a VC to anoint you and give you money or seed fund, you've self selected into a bucket of

SPEAKER_22: people who VCs will say behind their backs, quite unkindly, that's a talker, not a walker.

SPEAKER_82: The company, you say is a talker? No, the founder, talker, not a

SPEAKER_22: walker. The founder, the founder just keeps talking about what they're going to do. And we don't see them do it. They're not of action, as we've talked about being of action in the

SPEAKER_16: blueprint. They're not of action. So they self selected into a group that will only build their product only go on this mission. If they've been given money. What does that tell

SPEAKER_22: you? They run out of money, they're going to quit. They don't care about the project all that much. They're talkers. This is what I'm not saying that I'm necessarily saying that not saying I'm not saying that. But in a world where you meet, you

SPEAKER_04: meet 10 people a week, and in 10 weeks, you meet 100. If 70 of them, of those 100 people never really make progress on their startup, and they're just keep talking about what they're going to do. And then 30% are doing stuff. Yeah, and you only have to make 10 bets a year, or five bets a year, you're gonna pick the

SPEAKER_85: pool of people who are actually doing stuff in the world. Or have

SPEAKER_86: done stuff in the world. Right? Or have done stuff. All right,

SPEAKER_87: everybody on the phone today is open phones founder Darina Kouya. Welcome to the program Darina. Thanks, Jason. Great to

SPEAKER_89: be here. Now what mistakes do most founders make with phone

SPEAKER_92: numbers in their startups? Great question. First one is they use their personal phone number for their business. And it's an easy mistake to make because you don't necessarily think about it much. You know, you incorporate your company, you put your phone number, there's all these forms you fill out, it very quickly goes from being your personal number to being the number for the company. And when that happens, there are all these data aggregators and all kinds of services that take your number and put it everywhere. Yeah. Suddenly, now there is this uptick in spam text messages. It's the worst. Yeah. And people just wonder, like, how are others getting my number? Well, let me tell you, you put it in different places. And it kind of snowballed from there. So that's the first mistake. The second, which is initially, as a founder, you're the salesperson, you're the only sales sales rep. And then you hire a first sales rep. And sometimes founders let that person use their personal phone number. Oh, no, that number, the data, everything that happens is just fully belongs to the sales rep. And if that person leaves,

SPEAKER_99: you lose the entire history with your customers. Yeah. And then what if that sales executive goes to a competitor? Exactly. Yep.

SPEAKER_102: Okay, everybody, twist listeners can get 20% off any plan for the first six months at open phone. Just go to open phone.com slash twist. If you got an existing number, they'll put it right over for free. Head to o p e n p h o n e.com slash twist today for 20%

Jason Calacanis: off. And then there is, there is a timing question too, right? Let's say you're a really early company and you're trying to your your prelaunch and pretraction and you have identified like a brand new market that barely exists yet. How do you evaluate that? Who? Yeah, this is pretty relevant. And the climate thing, by the way, everybody's like, Oh, yeah, it's like gross. And I'm

Chamath Palihapitiya: like, yeah. So here's where

SPEAKER_04: accelerators and taking small bets while you figure these things out, exist in the world, when things are truly speculative, maybe giving somebody 100k or them doing a 250k round to build a prototype to get five customers to try the product is in order. The problem is a lot of founders think highly of themselves. They self select for a group of people with strong charisma, strong egos. That's what you want. You want a charismatic, strong ego, strong will person. So they will be strong willed. And they will believe that they should be funded as if they've already launched the product and have 10 paying customers. So they'll want a $15 million valuation for a company that has none of the

SPEAKER_16: characteristics of other companies in the market that you could buy into at 15 million. So this is why we always talk about the founder, the team, the customers, and the deal.

SPEAKER_22: The three things the founders should worry about are those first three team product customer. But the fourth one we have to look at which is the deal. The company is coming into Y Combinator Techstars launch accelerator at a $2 million valuation making 100k bat to own five or 6%. And you're gonna get diluted down to one and a half percent. Okay, you made 100k bat, you can afford to lose a whole bunch of them, you can't make a 500k bat and lose as many of them at a $15 million valuation to have a

SPEAKER_85: similar ownership percentage, right, or 750k. But the founders

SPEAKER_22: want that. And that's where like this marketplace dynamic exists that for people who are not doing what we're doing every

SPEAKER_16: day. They don't understand it. They're like, why did that person get funded? Why did this person get funded? Why am I not being funded? Why is this not fair? I'm as smart as them. But then you break it down, it becomes in a marketplace a matter of choice. If you had a choice to buy a home for a million dollars, that's four bedrooms, and it's 30 minutes from San Francisco, and a home in San Francisco is the equivalent home is $4 million. Somebody who doesn't have to come into the city every day is

SPEAKER_22: going to buy the million dollar home and pocket the 3 million and go live at Berkeley, or they'll go live in Orinda, or they'll go live up in Napa. I don't know where, you know, I don't know, Gilroy, you know, somewhere in the birds, other

SPEAKER_51: than Gilroy have million dollar homes. But yes, I know what you're talking about.

SPEAKER_22: Well, I mean, I'm trying to think, well, okay, so maybe it's two versus 4 million, right? Probably right now. You're probably right. So instead of a 4x difference, a 2x difference. So the market then reflects that. And so at some point, the person in San Francisco, if they're trying to get five or 6 million guys, you know, it's not clearing market, I got to lower the price eventually. Yeah, yeah. And that's what happens with startups, although it's emotional, because it's your baby, just like a home is emotional. So sometimes people take a long time to get there. And that's why VCs, it's got to be you have to be patient. Hey, we love your company. We'd love to you know, and we understand you're raising at 15. Let's talk when you have 10 customers, right? And so we're not going to invest yet is what we like to say in our firm, which we stole from Sequoia, and not yet. I literally stole it from Rulof Botha, after getting an email from him, who, when I shared a company with him said, you know, it's a really great company. We love the founder, Jason, but it's not yet for it's a not yet for us. And I was

SPEAKER_46: like, Oh, I like that. Great, great way to phrase it. Because then you could actually add to it not yet. Hit these notes,

SPEAKER_28: right? And we should have another meeting. So I think this is,

SPEAKER_04: you know, where we wind up and sometimes founders will go to the market, not clear market, and they'll say, Hey, yeah, let's go. We're gonna go to an accelerator. We hear you or, by the way, we got five customers. So now let's talk. Yeah. And then some of them just give up. And that that is the unfair in some people's minds, or the brutal nature of a competitive

David Friedberg: marketplace for ideas. This is why the United States is still the greatest country in the world, especially when it comes to company formation and capitalism, we crush everybody. And we crush

SPEAKER_04: everybody with just over 300 million citizens. This imperfect system we have is the best one created to date, because it's so dogged and competitive, unfair, and brutal. You have brutal venture capitalists, who are picking the best companies, you have brutal competitors as entrepreneurs who are crushing each other and executing and working harder than each year and clever on the margins, maybe breaking some rules, bending some rules, stealing trades. I mean, it's just a violent, it's

SPEAKER_124: lord of the chaotic system justice, you have to accept it a

SPEAKER_04: certain point that we have a system that is rabid, and Europe as a system that is not rabid. And then in rigged systems, dictatorships, they're picking favorites. Turns out the rabid system, the full contact system that we have here produces the most unicorns, the most businesses of note.

SPEAKER_07: I mean, it also has a little bit of favorite picking and we would be foolish not to acknowledge that. Sure. Adam Newman, but still, okay, real quick.

David Friedberg: What's we work public? Again, remember, the first thing I said was a publicly traded company. We work publicly traded

SPEAKER_07: $4 billion did go public.

Jason Calacanis: Real quick, another thing that I often see with companies that are very early, who are trying to give a sense of how much revenue they have slash are going to have is that they often bring up their pre orders letters of intent, maybe Kickstarter funding or sales.

SPEAKER_85: These are awesome indicators on how to evaluate them.

SPEAKER_51: It's pretty great. If you like one better than the other, like is it a letter of intent? Actually, real letter of intent means nothing. As we talk about, it's a

SPEAKER_16: letter of nothing. They're L O Ns. They're lawns. Letter of nothing. Shout out. Sorry lines. Sorry a lot. Um, no, it's a letter of nothing. And frequently when these letters are signed, the conversation that happens is we're trying to raise venture capital. If you sign this non binding letter that you can rip up at any time, it'll help us raise money to build this product for you. And it is cost you zero. Plus, you'll get to do a press release and get some shine from our company on your old legacy company. How does that sound to you? Middle manager? Can you sell that to your upper manager or maybe your CEO? And they're like, they go to their CEO. Listen, we were going to

SPEAKER_22: order a hundred booms. It costs us $0 and boom. Now we don't know what the boom, if they're $0, but it could be like, I think the Amazon letter of intent for those trucks with whatever company that was, was in fact, zero. Nobody could ever tell me what the letter of intent said. It was like up to 100,000 trucks. Yeah. But unless you're putting $1,000 deposit for each truck, it means nothing. Now, kickstarters and Indiegogo are different

SPEAKER_16: because you put your money up. Mm hmm. And you can lose it if they don't deliver. Okay. So if the letter of intent includes a

SPEAKER_46: deposit, sure, it's valid. It's a preorder with a deposit pre

SPEAKER_22: orders in full or deposit are super meaningful, because it means somebody out there wants the product so much, they're

David Friedberg: willing to take the risk. Greatest example ever would be the Tesla Roadster and the Tesla Model Y huge deposits, you had to put down your full amount.

SPEAKER_34: That's for example, but still meaningful $500 for the Model

SPEAKER_04: three, I believe was and Model Y were $500 1% of the cost of the are I think roughly. So 1% or more interesting one to 5%, the full deposit amazing. Okay, it's like if people were to buy an apartment, and you know, in a condo that's being built and will be completed in three or four years, if they buy if they put down 10%, pretty meaningful, right? $100,000 for a million

SPEAKER_16: dollar apartment. Yeah, pretty meaningful. If they buy the

Chamath Palihapitiya: whole thing, super meaningful. Got it. But letters of intent. Let me see it first. Alright, there we go click on it, devil is in the details. And I can tell

SPEAKER_04: you the conversations that go on in the back end. Boom. And then also at the kickstarters, the other thing to look at is are

SPEAKER_22: they selling the product for less? Oh, so this is the other

SPEAKER_147: right? Totally. So if I'm saying actually, and Columbo math

Jason Calacanis: occurred. To you? Yeah, absolutely. And and Mike Savino was like, what Jason would do here is divide the price that they say by the revenue and then be like, Wait, it looks to me like maybe you sold this on Kickstarter for $2. Instead of the 50 you said you were going to charge.

David Friedberg: Yeah, that happened to know I remember this case.

Jason Calacanis: Math is a harsh mistress.

SPEAKER_04: Well, if they said, you know what, we're selling it for $100 each. And we have 1000 pre orders, you would reasonably say 100

SPEAKER_22: times 1000 is $100,000. And then if they only have $25,000 in revenue, you're like, what happened? Oh, you sold it for $25 for the early adopters. Great. What's the build of

SPEAKER_16: materials? What's the bomb? Before you have to do shipping before you have to do anything. And they're like, Oh, the bomb

SPEAKER_22: is $75. And then you have to factor in returns, shipping delays, whatever returns. Okay. Hmm. And as Brian Alvey would

SPEAKER_16: say, the greatest fiction ever written was done in Excel, not Microsoft was so awesome. That is such a great line. I'm

Chamath Palihapitiya: printing that out. And I'm putting it on the post it. This has been VC Sunday School. If you want to see all of them, go to

SPEAKER_16: this week in startups.com slash VCS. And if you have ideas, shout

SPEAKER_157: out to Molly Wood or Jason or just email producers at this week in startups.com.

SPEAKER_129: Love to hear it. All right. And then next up because Sunday is

Jason Calacanis: not over. We have another segment of this week in climate startups. I am continuing on the mushroom train. I'm obsessed with the fungi. I got another mushroom startup. Joanne Rodriguez is the founder and CEO of myco cycle, which uses mushrooms fungus basically to remove literally mushrooms to remove toxins from organic construction waste. And then either sell this treated material that's no longer toxic and full of chemicals, but also turn the mycelium networking stuff into other construction material.

SPEAKER_16: And fascinatingly, I just looked online. And I see that they raised an

SPEAKER_22: equity crowdfunding at some point. So we were just talking about in VC Sunday School. Hey, you know, where does pre orders

SPEAKER_16: exist? Well, there's another thing which is equity crowdfunding, which means civilians can, and I would say that's a little bit of signal as well. It means you told a good story to civilians, right, or to your own customers. Again, you got to double click on all these things. But can I ask a question about mushrooms? When humans discovered mushrooms? Yeah, what was the process? Like, you'd have a tribe of people at 20 people in the tribe, and they see a bunch of mushrooms? Yeah, and somebody comes back. And they're high AF stones mushrooms. Yeah. And then other group is like, these are delicious. And then a third

SPEAKER_165: group is dead. Right? How do humans how did they keep wanting

SPEAKER_166: to eat the mushrooms? Because there's like, okay, these people seem like they're having a great time. I'm going to ignore the dead

SPEAKER_04: people over here. And I'm just gonna instead of eating the ones that taste delicious, I'm gonna keep risking it.

SPEAKER_171: I mean, yet here we all still are totally doing that. Like, oh, wine? Oh, cigarettes? Like, well, fine. Yeah, I don't know,

Jason Calacanis: man. You got to watch the Netflix documentary. Fantastic

SPEAKER_07: fungi. It is the most fascinating, like you will come away. I'm not even like him away with it. And I was like mushrooms might be God.

SPEAKER_166: Well, like the mycelium networks. Yeah, since we're going there, they can and how they exist over like, hundreds of miles. And they communicate to each other. And you're like, what's going on with mushrooms? Like, they make our brains go wacky. And they unlock all kinds of visions. They taste delicious on pizza. But

SPEAKER_04: they talk to each other across miles.

Jason Calacanis: And they decompose everything and reconstitute it. And then there's also this like the stoned ape theory that because it can they can regenerate neural pathways. They think that it's possible that like our ancient ancestors ate psychedelic mushrooms. And that is how we evolved into like a primate that

SPEAKER_51: could use tools and think and create all that like

Chamath Palihapitiya: see, this is some Prometheus level, like mushrooms for alien mushroom stuff. Like I think if I'm pretty convinced we're in a

SPEAKER_04: simulation, I think I'm like 51% of the way there. And I think like the mushroom stuff is like some sort of like Easter egg in the simulation. Like some sort of weird power up. Because

SPEAKER_16: it's it's got too many weird characteristics that don't exist in any other, like bananas. Mm hmm. Delicious banana had

SPEAKER_178: banana bread the other time to each other under fantastic. Bananas have nothing to say. Not decompose us not to anybody the heavy hydrocarbons and turning it into delicious and so I don't know that. Dates. Amazing. I love a date. Grapes. There's so many of amazing. They can't recreate your brain though. No. I mean, listen, they do make wine. So you give them some credit. They can

SPEAKER_182: undo the good work of the mushroom. Exactly. All right. But I

SPEAKER_56: mean, shout out to bananas. They are delicious. Delicious. Yeah,

SPEAKER_187: they're delicious. Anyway, it's gonna be a really interesting interview with all right with Joanne 2022 has been a crazy time

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SPEAKER_00: idea. Joanne Rodriguez is founder and CEO of micro cycle. Thanks so much for coming on this weekend climate startups. Thanks for having me, Molly. I'm excited. Please tell us it's it's best if this explanation comes from you. Please tell us what

SPEAKER_195: you're doing at micro cycle. I'm training mushrooms to eat trash

SPEAKER_198: and create new raw materials based out of mushroom and trash. I mean, right? That's why it was better if it comes from you.

SPEAKER_00: All right. Now let's go to the details. How does that work? Where do you get the trash? What are the materials? How do you train

SPEAKER_199: mushrooms? It's so good. So many questions. So little time. But

SPEAKER_200: mushrooms are nature's recyclers. So they've been cleaning the environment for centuries without us. I spent decades in construction products and material manufacturing and all of that waste was going to landfill. And that just was bothering me. So I left my corporate position because corporate and went into environmental consulting. And I took a course in permaculture design and learned about mushrooms and their ability to break down heavy hydrocarbons found in petroleum and plastics and started collaborating with scientists and formed micro cycle. And now we're treating the fourth largest waste stream being landfill construction and demolition waste. And then the other part of that is then to use that mycelium to create new materials because it's not only nature's recycler, it's nature's builder.

SPEAKER_00: So mushrooms can literally break down construction material. Like I think when people hear the idea, you know, of converting

SPEAKER_112: waste into some other product using mushrooms, they're thinking food waste or some kind of bio organic. But you're really saying all of that stuff that's a byproduct of a construction project can be eaten

SPEAKER_00: effectively and transformed into mycelium. Like we need to get a little more into the science here.

SPEAKER_205: Right. Absolutely. So we use a classification of fungi called white rot mushrooms, which is huge. There's a ton of species in there. So

SPEAKER_200: they're very rigorous to break down forest, right? You see mushrooms growing on a dead tree. It decomposes it within months. We're basically taking that same mechanism of the fungi, the mycelium, the root structure that dispatches these enzymes to break it down. It eats wood for food, right? And it converts heavy hydrocarbons in nature just to

SPEAKER_208: something less available and less complex almost like photosynthesis. So think about like fourth grade earth science, right? Where we learned about

SPEAKER_200: these natural conversion processes. That's what the fungi are doing. But because they're super strong, they can break down woody mass. They can

SPEAKER_208: start to detoxify and neutralize heavy hydrocarbons as well as break down the physical materials. And what we get at the end is this matrix for people who

SPEAKER_112: are sorry, just to back up even for another definition. What are heavy

SPEAKER_00: hydrocarbons for people who aren't familiar with why this is such a big

SPEAKER_218: deal? There we go. Petroleum based materials. Yeah. Sorry. I get in my own science mind. That's what I'm here for. Yeah. But yeah, no, I mean, pretty much

SPEAKER_200: everything that we the carpet under our feet, the roof of our head, the walls around us all have petroleum derived products or chemicals in them. And those go to landfill in mass, they're they're hard to recycle for a reason. And usually it's because there isn't a process between them being taken in by a recycler or waste hauler, and a connection to an end use that's viable, that that shows validity into new markets. And so we're serving as an intermediary to take this waste

SPEAKER_208: stream. And to put it into context, we talk about like food waste, plastic waste, municipal solid waste,

SPEAKER_200: construction and demolition waste is twice the amount of that every year in the United States. Wow. Yeah. But it's just not as accessible, right? We don't think about like where the shingles on our

SPEAKER_208: re-roof when or the carpet that we tore out when the contractors generally are responsible for that. It's

SPEAKER_00: out of sight, out of mind. And so we're running out of room. And it's yeah, that all goes into landfill.

SPEAKER_149: So let's now we'll sort of break this down into the parts of how you accomplish this. How do you

SPEAKER_199: access that waste? Well, right now we're working with construction and demolition recyclers and material recycling facilities. So there's a whole sector of business dedicated to creating

SPEAKER_200: end use out of wood, metal, concrete, aggregate. Even some asphalt roof shingles get made into new roadways, but just not in an amount large enough to make a dent. So we're working with them as our primary partners right now are mobilizing on site. They're already handling the waste so we don't have

SPEAKER_208: to become a logistics company. We just have to provide a process that is easy to scale for them, easy to use

SPEAKER_200: and produces something that's viable for use into new products or that they can gain value from.

SPEAKER_112: And so then do you pay them for the waste? Do you have like a partnership? Do you co-locate there?

SPEAKER_200: Well, we can do that. We certainly can do that where they would license the process and then

SPEAKER_208: they'd pay us for the treatment. So we actually develop our own bulk treatments, but they would facilitate the process on site. So it would be a licensing agreement and then a per

SPEAKER_200: ton treatment in terms of the way we would go to market with that waste sector. We are dealing with a lot of manufacturers though, who are interested in licensing, building their own facilities that we partner with them on. And then in that scenario, we get the licensing, the per ton treatment, and then some royalties of all the, off of the products that it gets used into.

SPEAKER_208: So, and then there are scenarios where we're going mobile, right? We're going to where the waste is

SPEAKER_198: and we're decentralizing waste management. All right. So now you've got the waste.

SPEAKER_149: You need to apply your mushrooms. What does that facility look like? What is the end process?

SPEAKER_200: Yeah. I mean, it's basically three steps. One, we create our own treatment. So that's in our lab. That's separate. When we get onto site, it's basically three steps. It's pretty easy. One, we work with

SPEAKER_208: waste that has usually been ground down. So an asphalt shingle gets ground down. That's very common practice or wood or gypsum drywall. We blend it with our treatment, put it into containers for

SPEAKER_200: incubation. And the end of four weeks, we harvest a by-product. So there's a post-finishing process where we just stop the growth. And so for that incubation, we put it into a climate controlled facility. So ambient temperature, just like you and I like, and the secret sauce really is in the blend and how we treat this and fortify the fungi and the mycelium to grow through the materials.

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SPEAKER_149: family Helpware. And then can you describe for us like, what's the product when you take it out, when you take it out of the cooker? Do you have a slimy half digested piece of wood? Like what?

SPEAKER_236: It looks actually more like styrofoam. It comes out in a solid block.

SPEAKER_200: And it's a combination of the root structure. So it'll look white or tan or oranges depending on what species we use and what product we're working on. And any resultant product becomes part of that

SPEAKER_208: matrix, right? And some of these products we treat are really great replacements into new materials like rubber, fiberglass, reinforcing mesh, things that maybe don't disappear, become part of it. And so we could create a secondary incubation where it can grow into a mold and become insulation board

SPEAKER_200: or brick or block. Or we can grind it and become a new fiber or new filler, which is where we are right now. That's what we're looking at to enter it into concrete mixtures, hard surface flooring,

SPEAKER_208: carpet backing, new gypsum products, acoustical tiles. So all of those opportunities open up when

SPEAKER_00: we can homogenize the blend and grind it down. And then this seems obvious, but just to like really put a fine point on it, what is better

SPEAKER_112: about the product that comes out? It's less toxic. It has had its hydrocarbons, heavy hydrocarbons eaten? Well, it's, I mean, one, it's coming from waste. Right. So that's desirable. So good. Right.

SPEAKER_200: I think it's really about the properties of the mycelium. So that's a whole nother conversation that

SPEAKER_208: mycelium inherently is lightweight, water resistant, fire resistant, has properties of insulation and

SPEAKER_196: acoustical properties. That's just by nature. So we benefit from that. Like we get a, we get a dual benefit from our mushroom friends.

SPEAKER_112: Um, and, and just because it seems like matter in the universe can't be created or destroyed, like what does actually happen to the toxins?

SPEAKER_200: So it goes, most of them go from like a heavy long chain and the mycelium, the, the activity, the enzymes break them down to less complex chains. So they're not creating harm or they make them less bioavailable. So they uptake them and they just house them. Like they're, they're not there in the materials anymore. So, I mean, we, there's latent contamination in some of the materials, but it's far less

SPEAKER_208: than what they're resource extracting. And so we're really focused on the circularity of the process.

SPEAKER_200: So we could start to extract less natural resources and use more waste.

SPEAKER_112: Are there currently any other ways to recycle? I mean, you said you're working with recyclers, so there must be other ways to recycle. Why is this so much better?

SPEAKER_200: Uh, because we're working with the manufacturers to almost like a matching process to say, okay, you know,

SPEAKER_208: how much tonnage of this raw material do you need to make this product? And then we can calculate how much it takes to digest and, and create a supply chain. So really design waste out of the supply chain. The recycling in the industry is, is meager for certain streams like asphalt.

SPEAKER_200: So of the 13 million tons of asphalt shingles that get put into the waste stream, only 2 million tons

SPEAKER_208: gets recycled. So there's still a lot of waste going to landfill.

SPEAKER_00: And so you can recycle, it sounds like almost any kind of waste, like there's not that.

SPEAKER_112: It seems like there are probably materials that are easier for the industry to currently recycle.

SPEAKER_149: And you're saying we don't have those same constraints, like just give it to us.

SPEAKER_200: I, I'm famous for saying, give me your problem child, right? Like if I don't want to take the things that you can already find a market for, like, I mean, we can't treat things that aren't organic. Let's start there. So we're not doing, um, concrete, aggregate, uh, metal, steels, you know, things that have robust markets. We're really looking at like, um, wood products, asphalt based products, uh, sealants, coatings, insulation, foam, rubber. And we can even expand into textiles like polypropylene fibers and face masks. I would say, yeah, I know, right. There's a ton of face masks all over the ground. It's terrible. Everywhere. And that's, I see an opportunity to do a very consumer facing brand at some point in time around the face mask digesters. And it's just a matter of time. And there's so much more we don't

SPEAKER_208: know. We've just scratched the surface on what we can do.

Jason Calacanis: We being you, the company, or we like humans. Cause I feel like this sort of using mushrooms

SPEAKER_112: for recycling is a really new and super exciting part of the climate tech conversation.

SPEAKER_283: I, I, I say we, yes, as, as us, as micro cycle, but yes, us as humans, I think we have to get over

SPEAKER_200: this phobia of fungi. Uh, I think people are kind of weirded out about the fact that, uh, mushrooms can consume and digest, right. And they're decomposers and it makes people skittish to think about it.

SPEAKER_208: But honestly, there is so much science to be had. And I think it's the key to the climate issue, honestly.

SPEAKER_112: Yeah. Mushrooms overall, like using fungus to recycle and break down and decompose.

SPEAKER_200: Uh, that in, in clean water, we're seeing it in, in new food. Um, I just think all the way around to create a regenerative society, clean our soils and start to create, um, ecosystems that thrive

SPEAKER_112: with fungi at the middle of them. Yeah. How much you're deep in this every day? Like how much science and funding are you seeing going into this science and some of these technologies? Like what, you know, what is known now versus what could be known? One percent, two percent.

SPEAKER_200: I, I would say one or two percent. Yeah. Yeah. I think that there's a lot of room. And having said

SPEAKER_208: that the last six months or so, there was probably over a hundred million dollars that went into

SPEAKER_200: mycelium based companies, primarily on a new food or new, um, products, but none of them emanating from

SPEAKER_198: waste. Got it. I know that it's sort of a complicated answer, but how will your business

SPEAKER_200: model work as you go forward? Yeah. I mean, we'll work in large part in partnerships, um, a distributed model, and we really want to grow the community of growers. So there's revenue opportunity to grow the, um, bulk treatment that, that we have IP protection on, but really it's going to be through licensing royalties, um, as well as per ton treatment. And then there's a lot of opportunity to create other verticals in there, uh, working with, uh, cannabis waste to create packaging materials and doing environmental cleanup, like straight up bioremediation work, but contained. Uh, so we're looking at a lot of opportunities,

SPEAKER_208: but we're really just focused on this beachhead strategy, strategy right now.

SPEAKER_00: All right. Describe the beachhead strategy again. And then I want to ask about all the other,

SPEAKER_149: like the one-stop shopping for all mushroom reuse. Sure. Yeah. That's, that's us. Yeah. We'll,

SPEAKER_200: we'll be the big mushroom logo with, you know, red light. Um, the beachhead has been on construction and demolition waste just because nobody's been really focused. It's really complex. I have an understanding because of my background. And so that really seems to resonate when we're talking to multi-global manufacturers in the space that we don't expect you to replace a hundred percent of your products with a hundred percent of this. Cause it's, it's all new. We have to do an R and D product Kaizen and, and develop it out. So it is a space that I've tried to tiptoe out of a little bit, but I think that we need to stay true to our core. Cause this is such a major issue. Yeah. Regulations are coming after it. Um, landfills are out of space here and in the European markets, it's a target. And so we're going to, we're going to stay here with it right now. Yeah. I mean,

SPEAKER_112: it would seem like a pretty big TAM. Yeah. Like if you could potentially be selling this material

SPEAKER_149: into at some level, any construction project, like, is there anything it's not appropriate for?

SPEAKER_309: No, I mean, I don't, we don't know the clear answer on that yet. I mean, we're,

SPEAKER_200: we're constantly surprised too. We were able to break long chain, fluorocarbons in PFAS from a waste stream. And, you know,

SPEAKER_149: PFAS being for those who don't know the forever chemical, the thing that is in all of our bodies,

SPEAKER_313: I believe in the entire planet. Yes. Forever, ever. Thanks a lot. Thanks a lot.

SPEAKER_200: Teplon. Right. Yeah. I mean, I guess we're happy when we're not getting wet with our rain gear. Yeah, exactly. So, I mean, it, I know it is, you know, you could see if you look at chemicals and the history of how they came through the decades, how we got to where we are. Mm-hmm. Now's the time to fix it and, and try to reach, reach some level of moderation. Like, so I'm not saying that we would not ever use petrochemicals again. I wish I could say we would

SPEAKER_208: never use PFAS again, but until they find a substitute, it'll still be used because there,

SPEAKER_200: it's a fire retardant. Yeah. You know, so, but I think we need to bring up means and ways to treat it, right? Like to neutralize the impact.

SPEAKER_00: Mm-hmm. So what, how early are you? Like, what is the,

SPEAKER_149: what's the stage of the business right now, if you could describe it?

SPEAKER_320: Confusion. Yeah.

SPEAKER_200: We're, we're still early stage. I mean, we have small revenue, but I, I don't, I don't feel that we're recurring revenue right now. And right now the revenue is mostly from the treatment? Yeah. It's mostly from the treatment from our pilots. And then we're working to convert the

SPEAKER_208: pilots to, to long-term contracts. So, um, it's the good and the bad of working with large corporations. It takes a little bit longer, but once you get there, it's, it's really good.

SPEAKER_200: Uh, we're in our seed round. So we're raising around, um, but we're really building. I mean, I just moved our office last week to double the space. Uh, we're getting ready to hire at least three more people and bring in a few consultants. And so this is really like that next phase. Like this was, we were like, yeah, we could do this and we're proofing this out. Now we're really validating and replicating and, and building all the systems and processes and documents and

SPEAKER_112: agreements and the actual company. Love it. And then tell me about the mushroom science community. Like, are there conferences? How are you growing? Are you on Reddit groups? Like,

SPEAKER_149: what do you call when you get stuck on a mycelium related topic?

SPEAKER_200: Well, you know, I would say I'm outside of Chicago. So, um, I, we have a lot of people working in mycelium around here. Uh, so the, we've coined a term here locally, actually,

SPEAKER_236: a, a fellow founder, uh, Michelle Ruiz. Yeah. I was just gonna say, I think

SPEAKER_322: high faith foods is around the corner from you, right? Yeah, absolutely. We're both in the, uh,

SPEAKER_200: chain reaction at Argonne national labs, the cohort right now together, which is fun.

SPEAKER_236: Yeah. She's coined shroom boom. And so good. I know it's room boom. Right. It's so it's, and it's kind of funny to see that

SPEAKER_208: happening here in the Midwest, but I think it's really appropriate since there's so much agriculture in the Midwest that maybe we look at it differently. We look at ways to replenish the soil, uh, create new food. Mm-hmm. But I'm fortunate to be connected to a really good community of applied mycologists and myco

SPEAKER_200: remediation specialists. And there are pockets of them all over the place. So Danielle Stevenson and Leif Olson and Daniel Reyes, who is our mycologist, our R and D director. He's amazing. Uh, and then Juliana Fersi, we all, we all bow to her. She's a fungi foundation. And there is a huge Congress, uh, the end of October in Mexico that she's keynoting and she'll be there. So there are more and more activities around the space. I still don't think it's super mainstream.

SPEAKER_00: Yeah. Not yet. Anyway, Joanne Rodriguez is founder and CEO of micro cycle. Mushrooms are

SPEAKER_259: going to save the world. Let's go. Absolutely. It's go time. There's a fungus among us. Joanne, this is so great. Thank you so much. I appreciate it. Molly. Thank you.

SPEAKER_164: All right, everybody. Thanks for listening. It's Sunday. Hope you had a restful weekend. Hope we

SPEAKER_16: entertained and informed you and inspired you perhaps even we'll be back tomorrow and you know

SPEAKER_07: what's going to happen. So there was no slow weeks. Exactly. We can safely predict to you at this

SPEAKER_02: moment that by tomorrow we will be drowning in news and we'll be here for you. It's literally not

SPEAKER_04: happening. There's no slow news. No. So we're here for you to entertain, inform, uh, inspire and have

SPEAKER_08: a good time and maybe a couple of laughs, you know, which is always great. See you tomorrow. Kick it around. See you. Bye.