SPEAKER_00: right everybody welcome to sunday it's the start of the week we're considering sunday the start of the week that's more in line with entrepreneurs i don't know what number week this is i'm into

SPEAKER_02: that everybody's do you everybody starts working on sunday right like i feel like

Jason Calacanis: friday you recover saturday you goof off sunday you goof off to like three and then you start working is that not only if you're a winner oh only if you're a winner i'm like that's just not

SPEAKER_08: what everyone does if you're a winner and you want to go far in your career if you accidentally wake

SPEAKER_09: up early then you do a little email i mean you can always you know pound out some emails if you get a little time kids are taking a nap or whatever your jam is but sunday nights are for uh winners

SPEAKER_11: to get ready for the week obviously you know it's okay you don't not everybody has to be a winner

Jason Calacanis: but today i hear myself say things that i would never advise to anybody else but that are the way that i prefer to live my life so it's very confusing like i'm like you shouldn't do that i

David Friedberg: like it molly if you love your job and you work 60 hours a week because it gives you great joy if you were then retired and you golfed 60 hours a week or skied 60 hours a week or did poetry or worked at a non-profit for 60 hours a week people would be like oh my god it's virtuous oh my god

SPEAKER_17: it's inspirational it's up to the individual how many hours they want to work a week and if they get joy from it one person's um hustle culture is another person's passion or vocation so let's just

SPEAKER_21: leave it at that you don't need to be a great way to put it you're right i'm not i'm not trying to really be i'm just um you're being judgmental with yourself you are oh myself you're being

David Friedberg: judgmental with yourself you are saying i feel bad telling people i work on the weekends because i'm so passionate about my job or on sunday i try to get ready to have a to crush the week you're

SPEAKER_24: doing something you love it's okay you can own that and we'll own it today with a great vc sunday school on the worst possible moments for founders right before shutting down which is doing down

SPEAKER_26: rounds and the pain and suffering that down rounds include then molly's back with another this week in

Jason Calacanis: climate who do you got on this week in climate moment i do you know i'm obsessed with uh really boring topics that make a big difference such as energy efficiency i love energy efficiency it is like a four to one investment for every dollar you invest in energy efficiency you get like four dollars back and you have like four times the climate impact on just using less energy so i interviewed dan meyers who's the ceo of this company called flare which makes smart vents and wireless thermostats not wi-fi like they don't compete with nest nest is actually a customer and then they build this advanced software for residential heating and cooling to literally just manage and make sure it's efficient and that you're like filter has been cleaned and all the things that save you tons of money save a ton of energy put energy back into the grid it's just like simple and beautiful i've wanted these smart vents

SPEAKER_24: because you know you you put in a nest and maybe the zone is four rooms maybe two of those rooms are not used at night they should be shut there's no reason to heat my office at night or heat the living room at night we're all in our bedrooms the only three rooms that should be heated are the bedrooms and i love this idea of this like micro climates and really refining exactly what it is yep and the

SPEAKER_26: vent can do that the vent can give you another level of control by just closing a vent which i do manually like a maniac i'll just close the vent in the hallway when there's a guest in the guest

SPEAKER_17: room to make the air conditioning just go in there or the heat goes in there so i can't wait to hear this flair coming up next it's gonna be a great show stick with us this week in startups is brought to

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SPEAKER_24: right molly it is sunday so it's time for vc sunday school this is where you uh ask me a question your first year of being a venture capitalist thanks to the fans who have started to make uh you know blog posts about the show i saw one fan had put together in whole architecture if you want to take the content from the show and make a landing page uh and get some promotion for yourself or maybe break into venture capital there would be no better way to do that than to write a blog post about every single

David Friedberg: episode or make a notion or coda instance about every single episode and then when you try to get a job in venture you say hey look i made this thing where i'm trying to learn from vc sunday school from molly and jacal i bet you you get a job from it or an internship or you know your chances

SPEAKER_34: of getting the job go up so make content based on our content as i'm giving you permission right there

SPEAKER_36: but what's your question um let's talk about down rounds oh and i know i know it's such a freaking bummer um you know we could do a bonus on bed sizing if you want to because that's that was so fun on tuesday um but there was this interesting i'm now starting to like correlate stories i see in pitch book

SPEAKER_20: and data i see in pitch book with things that i'm experiencing every day which is uh companies either you know still wanting to believe in the last valuation or having to raise at a lower valuation or having to raise some sort of a bridge round and then pitch book had this piece about how there are um like all these companies that are have had unicorn status billion dollar valuations and of them

Jason Calacanis: like the top 10 of late stage startups by valuation have seen their those valuations plummet from 1.1 billion dollars in q2 to 680 million dollars so down 43 percent a 54 decrease from pre-money valuation so what it made me wonder is what is our role what happens to us if one of those unicorns has that valuation decline and what is our role in the kind of valuation cycle at the early stage like can we be saying to founders now if they're coming to us and they're like i really want a 90 million dollar valuation we're like oh it's gonna probably it's like a 40 right now but is it also are we able to say to them like look you don't want to put yourself in a position where you

SPEAKER_09: could be set up for a down round later so okay when the company is struggling uh and you get into a situation where your existing investors are unwilling molly

SPEAKER_24: to do a bridge round so you said to your existing boss hey i want to do a bridge can you give me

David Friedberg: you know another million dollars based on the last valuation now this could be a 10 million or a billion dollar valuation it could be a hundred thousand dollars it could be a hundred million

SPEAKER_10: dollars whatever the number is is like i need a little more money but i don't want to do a new round

SPEAKER_24: just i can't find a new lead yeah so the height of venture funding is you have multiple new

David Friedberg: investors giving you a term sheet and you're picking between them it's a competition and some might say an auction but there's a competition to lead the next round that means your company's doing great and the market is hot that's what we experienced for the last five years just massive

SPEAKER_46: competition to lead rounds and it became super intense in the last two years okay the next stage

David Friedberg: down is go ahead molly that's the ideal that's like that's the ideal best possible yep okay that's possible for the founder not great for the investors because it means if there's competition you're

SPEAKER_26: going to be paying a higher price in some cases in cases absurd prices the deals are going to close quickly there'll be less diligence in fact i would say it can get unhealthy yeah okay now the market collapses you can't even find somebody to lead your next round so you do a bridge and you ask your existing investors hey we did a lot of work we'd like to increase the valuation 30 percent because we increase the revenue 30 percent and they say okay fine we'll give you a bridge we want to own more of the company we believe in the company next step down hey we couldn't find the lead you don't want to do a bridge in an up round would you be fine doing a flat round okay flat round they say no we're not interested okay are you interested in investing at all as a previous investor and they say yeah but we want to get three warrants we'll do the last round but we want to get three additional shares for every share we buy now so we'll give you the million bucks that million bucks is going to buy

David Friedberg: five percent of the company it's a 20 million valuation but we want an extra three shares so we're essentially going to be buying 20 of the company but we're going to be putting cash in for five we have the option to buy those other warrants okay that kind of sucks right you're getting a million dollars in cash in you're diluting five percent but you have to give away twenty percent of the

SPEAKER_26: company ultimately with these warrants and we talked about them before then there comes the worst case scenario this is when you have a cram down round a pay to play round and a new investor comes in and

SPEAKER_24: says y'all don't want to put in a single dollar the existing investors are giving a complete vote of no confidence they're unwilling to put any money in founder goes to their attorney and says i want to do a pay to play round i am going to do a cram down round every single person who has preferred shares

David Friedberg: now is going to convert their preferred shares into a common share alongside the founders so let's say there were 10 million shares in the company worth ten dollars each that would be a hundred million dollar valuation those 10 million shares and let's say 30 of them three million were preferred shares seven million were common we're going to make them all common they're all common now we have 10 million common shares and we are going to value the company at let's say 20 million bucks

SPEAKER_26: so now instead of ten dollars a share they're two dollars a share for common but we have a new investor coming in who's willing to put in five million bucks and they get the preferred shares everybody else is common let's say it's even a 15 million dollar valuation so they own 33 of the company the 30 you own is now in common shares you lose your board seat you lose your information

SPEAKER_56: rights you're just like all the other common shareholders and then the common shares affects

SPEAKER_20: the liquidation preference right you're junior to the preferred shares correct you get paid later

SPEAKER_08: if you get like if you get anything if they if you get anything yeah and that overhang is now washed

SPEAKER_24: so that let's say you had paid 10 million bucks or whatever for your 30 ownership over time

David Friedberg: um you don't that 10 million doesn't count towards anything you just own common in the company your common is now worth a third of the remaining 70 percent let's say 50 percent who went down to so you have like 15 of the common so you went from 30 percent of the preferred to 15 of the common and sometimes these crammed down rounds are even more brutal you know they just say it's a 10 million dollar valuation new investors are getting 50 percent common is five percent so you now you're at like five percent so you still have like a chance that you may get a recovery but it basically means you're

SPEAKER_60: washing everybody out that's that's like the last ditch effort for a company before they shut down

SPEAKER_61: listen founders very important if you're in sas or you're in services and you store customer data in

David Friedberg: the cloud you need to be sock 2 compliant yesterday and you don't you might be hearing this and you may not even know what sock 2 is or maybe you heard about it you know you're behind the eight ball let's get this solved today this week i want you to be compliant from a third party so that you can close big deals do it now do not look like a a dope when you try to close a deal and they're like do you have sock 2 and you're like uh that long pause that's going to be the sound of them going to your competitor

SPEAKER_63: use vanta which makes it incredibly easy to get and renew your sock 2 on average vanta customers are sock 2 compliant in just two to four weeks and compare that to three to five months without vanta and they partner with over two dozen audit firms who have been trained to file sock 2 reports directly within vanta i was able to invest in vanta it's a great company a bunch of my portfolio founders have used vanta they've had amazing experiences they give it their highest rating and and let's just be clear here if you're not sock 2 compliant you can't close major customers it's that simple it's one of the first things they're going to ask for here's the best part of this ad read vanta loves this weekend startups they want to support founders and they want to support founders early and they don't want you to break the bank so they're going to give you a thousand dollars off think about that get one thousand dollars off at vanta.com twist v-a-n-t-a dot com slash t-w-i-s-t one thousand dollars off vanta.com twist get your sock 2 now and then if we're the

SPEAKER_36: investor in that situation what does the calculation become how do we make our decision yeah how do we

SPEAKER_13: decide if we're like yeah we'll take that common stock i guess you know as opposed to what are the

SPEAKER_57: alternatives for let's say us who has decided we've decided not to invest anymore yeah we're about to

SPEAKER_42: be washed out in this way yeah then what do we say internally so we internally have a discussion

SPEAKER_24: okay do we want to pay to play in this round do we want to put another 500k in now that they put a gun

SPEAKER_26: to our head you know it's not a flat round you know uh we're going to lose all of our rights we're losing our board seat we lose our preferred we lose our liquidation preference we lose our interest on the note all that stuff gets washed we uncommon would we invest in this company this is how you have to

David Friedberg: look at it it's from like just first principles if this was a new company pitching us forget about

SPEAKER_26: the money we've invested already would we participate or not and that's really the most intellectually honest way to do it very hard to do because you might have emotionally been involved with this company for five years you might have been on the board and it's just hard and what you have to do i think as an investor and this is what we would do in our investment team and i literally had a conversation with somebody who had a down round and they said hey you chose not to invest from our fund and i slacked them back and i said okay here's how we make our decision the fund has a certain amount of reserves the investment team looks at the opportunities before it and we give that money to the highest growth companies your company has not been high growth it's you know had some challenges it's not a vote of no confidence we are only giving those reserves to the top 10 or 20 percent of the people in the portfolio so you're not in the top 10 or 20 doesn't mean that you're not in the top 70 you know or the 80th percentile just you're not in the top 20 so don't don't take it as a vote of no confidence take it as a a vote that we are only investing the remaining funds in those funds the what they call the reserves in a venture fund you want the reserves to go to the highest performers so that you can ensure your lps get the best return so that you can raise your next fund and so just you have to be cutthroat at that point this is investing not friendship this is not your pal who's down on their luck and they're like hey buddy you know we were best friends in college i'm out i'm down on my luck can you send me 500 bucks so i can make my make my rent or i could use you know five grand to help my kid pay for college like i get those phone

SPEAKER_08: calls you know and it's like as i say you're nicer than i am that's always a no well it's either a no or

SPEAKER_80: donation i don't look at it as a loan people ask me for a loan i'm like here's a gift one time you

SPEAKER_26: know if i if it truly feels like it's something i should do or whatever or you know like sometimes you got to say no because you got to take care of your family right your own family it's a hard thing to do or you don't want to enable people and so this is what it's like for vcs we are investing other people's money we have to think we have to think about our fiduciary responsibility to them before our friendship responsibility to you that's the hard thing sometimes for founders and capital

SPEAKER_00: allocators and i would be lying if i said it wasn't hard for me yeah it's a hard part of the job i'm in

Jason Calacanis: the meetings it's awful um and not not all of them but enough of them where it's like it's clearly very painful um but let me be ruthless and keep talking about the options related to down rounds because sometimes they can also trigger anti-dilution preferences yeah is that right and what does that

SPEAKER_24: mean so you may have the some right set that says you get to approve an m a transaction you get to improve the issuance of new stock you might have the ability to buy any shares that are being sold

David Friedberg: first you have first right of refusal if some common shares get sold or some preferred person wants to

SPEAKER_24: sell so there's a series of preferred rights uh that venture capitals are putting money in fight for and um those sometimes are called protective provisions you know the anti-dilution one is hey if you're going to dilute us we need to approve that um so okay yeah sequoia is coming in to do the series b they want to take the whole round okay yeah we'll waive our pro rata we'll we'll give them major investment rights we'll waive our ability to block a sale so typically vcs have some say in future corporate governance transactions in these protective provisions anti-dilution being one of them and um but if if you're not willing to put money up and the company has exhausted all options they've looked at m a but and there's just some you know many you know maniac maniacal true believer who says i believe in this business but i believe in it as a five million dollar business where i put in a million and i get you know 2x war on coverage i get a 10 percent a 15 percent interest rate because none of you all believe in it enough to put up a single dollar then the founder says you know listen i exhausted everything this is a hard reality and it's legal to do this it's legal to do this it's

David Friedberg: it's a corporate governance issue if nobody wants to back the company yeah the founder wants to keep going i understand it as a founder so you know it's hard medicine it is what it is take the medicine

SPEAKER_63: one of the first things i do before i invest in a company is i look them up and i check on their seo i want to see if they understand how to get that free traffic from search engines you know one of

SPEAKER_95: the most basic things you can do to drive free consistent traffic and make it easy for your

SPEAKER_63: customers to find you is seo and a lot of people they it's it's a little scary for them right they think it's like a black art they don't understand the basics of it a lot of the basics of it is just very technical content and basic blocking and tackling and so you got to call our friends over at smash digital smash is hyper focused on seo and they specialize in high-end link building this is not a generic digital marketing agency they only focus on world-class seo founder travis also an investor and he started smash digital to help grow the businesses that he runs and invests in an in-house seo expert i would say gonna cost you 75 to 100k a year and you're gonna still need a budget to make great content to try to get people to link back to you for that content to send signal to the search engines that you're worthy of traffic well smash starts as little as 3500 a month and for a limited time smash is offering free audits for twist listeners at smash digital.com twist that's right you're gonna get a free personalized video audit of your startup's seo for free smash will map out the exact steps you need to take to outrank your competitors again they're gonna do it for free to try to build that relationship with you and show you they're good at what they do so go to

SPEAKER_08: smash digital.com twist smash digital.com twist do we ever encounter like the weighted average

SPEAKER_20: adjustment or the full ratchet adjustment is that all like i mean you could dollar cost average into

SPEAKER_26: this you know like people talk about like when they're jtrading.com uh the swing startups.com

SPEAKER_09: jtrading or jtrading.com for some reason the domain name resolves for some browsers but in chrome jtrading.com is not if somebody can look at that for me who is a tech person and explain why i had a bunch of trouble with chrome lately i don't know some people type in jtrading.com they go right to

David Friedberg: the site yeah brave it works fine chrome it doesn't i don't know what's going on anyway you

SPEAKER_26: can dollar cost average into a bad trade if you still believe in the company i guess so you paid 15 bucks for one or brothers discovery it goes down to seven you say you know what i'll buy it uh and my average will be the average between 7 and 15 or whatever 12 bucks and change you know i think it's a fine thing to do but with private companies because of the power law we talk about molly what down rounds and cram down rounds basically tell you is this is not going to be one of your power law companies so why are you spending time on it is what vcs say behind closed doors i have a different approach as you know which is i want to be um just absolutely supportive of every founder we can to an absurd degree understanding that because of the power law the chances of them being the one or two names in a fund that make the fund i don't care about that i care about actually our reputation and the feeling the emotion the camaraderie actually between us and the founder uh just because that's the loyalty that is part of who i am so i want our firm to feel loyal to the founders especially in defeat because the founder i have experienced will get up again and i want them to think you know what when i got my ass kicked j cal and his team picked me up they gave me some water you know like the uh the hype man you know next to the fighter i want to be the hype man next to the fighter saying hey listen you know it only takes one punch get back in the ring you can do it yeah you know you lost the first five rounds of the six round fight but there's a chance so get in there and give it your best and i'm proud of you for you know the pummeling you took here and just making it to the end of the six rounds and not getting knocked out and having a chance to knock the person out that says something about your character to me and i let if you do lose the fight we'll be with you on the next fight and we'll give you some cold water and we'll put that massage thing on your neck the ice pack

SPEAKER_00: and we'll hang out with you after the fight and break it down uh and be with you in defeat i just want to be that guy i want us to be that firm or that gal or that they them whatever it's getting

Jason Calacanis: pretty like it's getting pretty rough out there companies are coming and saying they've got three or four months of runway and then they can't raise because of that and yep do the just random question do the holidays play into that at all like do people like if you're a company you'll have

SPEAKER_20: three months of runway left and like vcs are goofing not us obviously but vcs are goofing off because

SPEAKER_110: it's holidays like it is it even worse timing to be in that situation there's a whole thing about

David Friedberg: seasonality of vc business like august we shut down december we shut down there's some truth to that in every industry hollywood included uh deals don't get done over the holidays people want to relax

SPEAKER_26: great deals get done at any time i mean if it's a great deal people will do it on christmas day they'll do it on hanukkah like it does not matter july 4th like if there's a great deal to be done people would like tell their kids to go in the pool on july 4th and they'll go inside and be like i'll be back in three hours yeah y'all eat some hot dogs i'm closing this deal to get my uber and airbnb share so let's be honest if it's a if it's a power law company yeah yeah people are going to people are

SPEAKER_24: going to be engaged it doesn't matter full stop there um but what i would say actually is more likely is i do think some founders reflect during the holidays or the down market and they say you know

David Friedberg: what i'm done and the i'm done conversation or you know this part of my journey this chapter in my story

SPEAKER_26: is going to close is a hard one for people to have i should have shut down mahalo according to all my the advice i've gotten but i made inside i pivoted it to inside i had that domain name sitting around i contributed the domain name that i bought for 65 to the company and now the company does millions

David Friedberg: of dollars i've got an incredible team there and i think i can build it into a billion dollar company

SPEAKER_17: i'm never say die rule off is still on the board from sequoia he doesn't need to be i told them please get off the board i know this is a waste of your time everybody said no i'm going to be with you to the end yeah and i'm like okay we're off then i'm going to do 45 minute board meetings and i'm going to take it seriously and i'm going to try to get this thing over the finish line

David Friedberg: you know what i kind of figured it out you know like it's a five-year-old business after mahalo but you know this thing's been going on for 15 years 14 or 15 years and i never say die so yeah

SPEAKER_26: i learned something about that it's my personality to never say die and it's sequoia's personality to never give up on the founder of the unless the founder gives up and that's something i took from rule off who's been a great friend to me and a great mentor so i'm never say die i that's a mistake in venture capital according to most people i think it's uh an attribute of a great human and a great life i think you will have a great life if you actually curate friendship and deep meaningful relationships that's my belief about life i can't separate business and life to me life business same thing and that's a it's a fault people criticize me for it but i also feel like it's a superpower other vcs are going to do better than me in the short term because they'll cut they'll just leave the boards of these companies and move on to the next companies and i'll stick with them till the end you know whatever you got to do what you think is right for you as a as a human being in the world

SPEAKER_72: and for me i'm ride or die rather die better or worse jump on a grande for you

SPEAKER_124: that's it ride or die can't laugh at yourself i mean it's as corny as i am or i seem pretty much

SPEAKER_126: the truth i'm pretty much the truth i got a lot of emotion about this yeah difference whatsoever

SPEAKER_36: friends i really want you to know this there is no difference whatsoever in any jcal that i have met

Jason Calacanis: in any environment or scenario equally embarrassing consistent whatever we could literally have this

SPEAKER_131: meeting go into the investment team meeting and there would be absolutely no change there would

SPEAKER_126: be no difference exactly we should make we should do a public investment team that would be a cool

SPEAKER_135: thing to do a public investment team meeting i don't think i would have to get the permission

SPEAKER_136: of the family like that yeah i'm like i don't know how they would feel about that

SPEAKER_139: like agree to it the ones who are like um would only do the ones do you do we ever sign ndas is that a thing i've had a couple of times when you sign an nda and i'm like i don't i didn't do that as a

SPEAKER_26: journalist we never sign nda but our whole reputation is on being discreet and if a if a vc is not discreet man that blows up right in their face so i can't even imagine a scenario like

SPEAKER_10: blah blah blah about a company's internals but maybe that's the most important thing really is

SPEAKER_26: between portfolio companies that pivot and overlap i don't know if we did a vc sunday school on that what happens when two of your portfolio portfolio yeah wind up in the same space so like you know uber

David Friedberg: uh pivots and ads uber eats and you invested in doordash or you had postmates in your portfolio and then uber ads uber eats you know something like that those things happen all the time somebody is in a consumer business and then they see some sas business doing better but with the same sort of customer base and the same product and they're just like well screw this i'm not going to go d to c anymore b to c i'm going to go b to b and all of a sudden you're sitting there with two companies we had this happen with in the influencer space we have six or seven influencer businesses and they all kind of start drifting towards making sas products and now you have three people in influencer marketing who are have sas offerings and they each you know overlap 10 to 30 percent and you

SPEAKER_26: then have to create firewalls inside your company and then have a little bit of a conversation with

David Friedberg: them but and then people will pitch you sometimes molly on a company and you're like we have an investment in that space and in that case you have to say to the person we have an investment in the space i'm happy to meet with you but you should know we're already investors in doordash

SPEAKER_26: so you know postmates come to you say okay yeah i don't know if it's different or not if you're comfortable investing with us but i'm on the board of doordash and it's like oh no no i don't want to pitch you we're we're going to compete with them so you just be up front with that if the founder in fact didn't do their homework founders do your homework look at the portfolio make sure there's nothing in the portfolio that is competitive you can't pitch you can't pitch bill gurley on lyft if he's in uber already it should be obvious but you know sometimes you will have people send their deck and a bunch of details to a bill gurley who's on the board of uber and this like dumb founder never thought to look at the portfolio page i mean it's really a dumb thing to do and they sent a bunch of proprietary information to them and then bill gurley's got to delete and say i deleted your email

SPEAKER_34: i'm on the board of door uh you may not know this but i'm famous on the board of uber

Jason Calacanis: uh incredible all right well there you go everybody everybody sized bc sunday school dan meyers is on this week in climate startups today he's the founder of a company called flare which is super interesting they offer smart vents and thermostats because climate solutions come in all kinds of flavors and energy efficiency is a huge one i mean this can drive so much change and such a huge emissions reduction and people just don't even think about it so these smart vents and thermostats help people balance heating and cooling across their homes and potentially then of course cut energy use in september flare announced a 7.6 million dollar series a raise led by active impact investments and lower carbon capital he broke down kind of the story behind the company talked about the smart vent technology how it gets installed in people's homes uh talked about how flare actually started as a d2c brand but then eventually gained the trust of hvac professionals which is not easy to do it's a super interesting conversation a really great solution uh and i hope you enjoy dan meyers is the founder of flare systems welcome to this week in climate startups thanks great to be here so um tell me what flare does it's smart vents and thermostats and that's all i'm gonna say

SPEAKER_158: i'm gonna let you explain the rest uh so we are mostly residential focused uh climate tech focused

SPEAKER_160: on heating and cooling systems um we are a combination of hardware and software um and if you're a homeowner we solve a lot of the most long-standing problems you've had with heating

SPEAKER_161: cooling uh sort of comfort in your home we also make it really convenient to connect equipment that oftentimes isn't easily connected by say a nest or a honeywell or some of the conventional thermostats that are out there so to put a finer point on that we uh we build a smart vent system which basically routes air to rooms with people in them instead of you know the whole home at once um we also make a smart thermostat for the world's most ubiquitous yet least connected uh hvac equipment called the ductless heat pump or sometimes called the mini splits right so you don't install or make

Jason Calacanis: heat pumps or mini splits you make the vents and the controlling mechanism for that heating and cooling

SPEAKER_57: so it sounds like it could so it could work with like an electric heat pump but it could work with a traditional natural gas heating system yep if you've got an ac in a furnace or if you've got a heat pump

SPEAKER_161: we pretty much work with all of them pretty much anything you find in a residential setting and in

Jason Calacanis: some cases like commercial as well and then what got you so you raised in september just last month it sounds like you announced a 7.6 million dollar series a raise um led by active impact investments and lower carbon capital what is it about this that is and that has not only been hard to solve in the

SPEAKER_171: past but is a is a venture scale business it's a great question so i think a lot of things have been

SPEAKER_160: hard to solve in the past in this space so distribution is always tricky in the hvac world

SPEAKER_161: we sort of took an approach it's a bit unusual for the heating and cooling world which is we actually went d to c to start and we've been scaling that for pretty much since we went to market and then in in parallel starting to scale through the traditional hvac channel but we also sell through utility programs so we i guess we didn't talk too much about that so far but uh in addition to these hardware products which are connected we also sell services back to utilities that allow them to manage peak problems which i know you're in california comes up pretty much every summer where they're worried about blackouts we solve a solution to kind of avoid a lot of that so between those you know we've got a lot of ways of getting in the home and a lot of people interested in having us in the home so i think there's a venture story behind that the other thing that's happening right now is there's this huge attention focused on getting off of conventional heating systems in particular oil and gas we are the leading hybridization solution for the dirtiest homes in the united states whereby we provide essentially an on-ramp to fully or i would say maybe 90 electric heating for homes that essentially are burning oil and gas all winter long especially in the oil case huge amounts of carbon we provide almost piggybacking on air conditioning ironically a mechanism for hybridizing a home that's very cost effective and um attractive to a homeowner and that

SPEAKER_174: that i think is really what caught the eye of lower carbon um and so and a variety of other investors

Jason Calacanis: break that down for me a little bit i don't totally understand what hybridization means like sure clearly i understand how you make the heating cooling way more efficient

SPEAKER_160: and is that what you mean nope uh so it's actually right so yeah so we actually when we started we

SPEAKER_161: were focused on sort of the convenience the comfort the efficiency purely right it was about kind of optimizing an existing system but a couple years ago we had an opportunity where people you know in the northeast for instance have homes that don't have traditional ducting um they have boilers and maybe radiators or sometimes they're on the baseboards but something some sort of hot water that's

SPEAKER_174: almost invariably heated by gas or oil right and it's like it heats one room uh or actually it will

SPEAKER_182: generally heat most of the homes you'll have a radiator system throughout the whole home there's

SPEAKER_57: a boiler and you'll have a radiator in each individual room yes but not the ducting that we think

SPEAKER_182: of that is tubes that go through the wall and carry air totally it's it's uh what they call wet heat quote unquote right and it's either you're educating us on the basics of hvac right now also so yep yep

SPEAKER_185: uh and and so those systems which have all been fossil fuels they've been around forever

SPEAKER_161: and especially in the northeast are quite popular because air conditioning wasn't really needed for so long um those systems it turns out have gotten a lot of attention because they're so carbon intensive um and simultaneously what was happening was uh they didn't have ducting so the path to adding

SPEAKER_160: a heat pump uh was a little bit tricky uh you didn't just plop down a traditional central heat pump

SPEAKER_161: and say cool we don't need the furnace anymore you didn't really have any of that infrastructure so a specific type of system called the mini split you might be familiar with them they're usually hung up on a wall a couple feet wide like a white box and operated by a handheld remote yeah that's a category that we're one of the we're basically the leader in thermostatic controls for

SPEAKER_57: those got it okay and and what we do is i get it now that has been seen as sort of this hybrids like you don't have to redo the whole house you can put these in the rooms where you need them for

SPEAKER_174: example absolutely and so so what was happening in the marketplace uh to start was people said well

SPEAKER_160: i just want this for my primary bedroom or my den for air conditioning purposes and somebody smart at

SPEAKER_161: i think eversource is the utility where somebody was really thinking said well if we could just get these to run for most of the year in heating we could avoid a lot of the boiler usage and they couldn't quite convince or get homeowners to do that in a sort of a manual fashion but because we could integrate with the boiler system and the ductless heat pump or the mini split we could actually automate and prefer certain systems at different times and so we were this sort of technological intervention to a behavioral problem and that is so we turned a house into a prius right

SPEAKER_160: and that was sort of the start just kind of a cool novel solution yeah amazing so where are you currently operating we operate primarily in north america in the us and canada um okay we do actually

SPEAKER_161: also have an interesting jv in china focused on the 500 million mini splits that are in operation there and largely not connected to the internet for anything interesting or useful um and we have a few projects here and there we we got a world bank grant for a project in columbia we have an ongoing pilot in barbado so we've got a few things in different places but our sort of core markets

SPEAKER_193: are the us and canada okay i'm here with allison rose from microsoft for startups so allison what is

SPEAKER_63: the most valuable resource for founders in the early stage of their startups that microsoft is offering

SPEAKER_196: so let's face it financing is one of the biggest if not the biggest roadblocks that startups face today through founder sub we're alleviating some of the financial stress of starting a company by providing tons of free resources for founders so we provide founders of any stage with up to 150 000 in azure credits which is huge because that can be used to do anything from building your prototyping to a lot of our founders are using that for conducting experimental development without eating into your runway so it's there's so many things that you can do with those credits but beyond that we also provide founders with free access to crucial tools and software like github enterprise as well as a suite of microsoft software like office teams power bi and so much more that's amazing

SPEAKER_63: yeah i mean those things alone are like a line item or two in any startup's budget and you could redeploy that with an extra sales executive designer developer just by recapturing those credits the microsoft for startups founders hub has no fundraising requirements it's open to anybody you don't have to go to some elite program to get those credits that only takes five minutes to apply and startups can get up to six figures of benefits right away sign up for the microsoft for startups founders hub today at aka.ms this week in startups aka.ms this week in startups thanks allison thank you and then walk me

Jason Calacanis: through a little more about the business model you said you started d2c there's a utility play

SPEAKER_160: who pays you and when yeah the the interesting thing is the majority of our product gets into the market

SPEAKER_161: not because people are like i really want to electrify or i really want to save a few bucks on my energy bill most people buy our product because they like the features so we actually have a lot of consumer pull where they say i've always wanted to have my home office or my bedroom the right temperature and in order to do that i have to like freeze out or overheat some other space and for a couple hundred bucks i can basically go in and solve that and so for a lot of homeowners that's just has its own appeal and they'll adopt it and then we can piggyback on all the efficiency or utility program those kinds of things we do also though go into the market through the traditional hvac channel and in that case it's also a hardware cell and then basically on the back end once we've got devices in the home we will work with a variety of grid integrators and aggregators and essentially promote those solutions to our existing customer base uh whereby you know the either the utility or our partner uh who's facing the wholesale electricity markets will will pay us for the

SPEAKER_207: ability to sort of regulate especially during peak times on the grid right so customers can opt in at

SPEAKER_20: installation and effectively say yes there are times when you can remotely control my heating and

SPEAKER_160: cooling yeah yeah and some people do that because there's an incentive and some people are just like oh i i love the idea of trying to match when i use my my hvac with lower carbon times on the grid things

Jason Calacanis: like that or to save money these i mean i always think i feel like these are always my favorite climate

SPEAKER_20: solutions in a way because they're the sort of trojan horse ones like you don't have to

SPEAKER_191: have a philosophy about climate change you just have to want your house to be more comfortable or

SPEAKER_161: save money i think consumers always love comfort convenience those kinds of things efficiency is

SPEAKER_160: efficiency is more of a vitamin uh comfort is i think more of a painkiller so to the extent that

SPEAKER_161: we can offer both but maybe really solve a pain point for somebody that's a really great solution i think

Jason Calacanis: when you're going after a climate problem yeah and then how do you work with if at all um

SPEAKER_57: traditional hvac installers like if i were having a heat pump installed which i hope to be doing

Jason Calacanis: soon would they know about you you know what what would be the integration there yeah that's a it's

SPEAKER_172: a good question so would they know about us is a really interesting one uh it's somewhat regional right

SPEAKER_160: now yeah yeah for sure um yeah so it's interesting right so we started d2c knowing that we could just stand up a shopify store and nobody could tell us no right yeah the hvac channel is a little bit slower to adopt connected products and new technology and rightfully so they've got a lot on their plates

SPEAKER_161: but i think some of the most forward-thinking contractors have sort of found us and really started to promote it and then in other regions uh rebate programs and other types of things have really promoted us into the hvac channel and we've sort of used that to you know open the door and get in and start to really grow our relationships there so it's a mixed bag we're basically bootstrapping that channel i mean we've bootstrapped it pretty far so far but you know we still have a pretty heavy

SPEAKER_163: concentration in the northeast a lot of that attributed to the hybridization solutions right

SPEAKER_20: um talk to me about the actual product so you have the flare puck which is the wireless thermostat that looks a little like one you may be familiar with that's a nice round white design um and then the smart vent which requires at least one puck so tell me about the actual mechanics the actual hardware how complicated is it how much does it cost to make and then how what's it what's the installation process

SPEAKER_160: like sure um so the yeah it's funny so the smart vent originally was sort of the thing we were going after yeah um we i had grown up in a home in south florida i was living in chicago after college

SPEAKER_161: and i had this experience where just clicked one day i was like the sort of temperature imbalance problem seems to be a consistent problem in the u.s housing stock right so i said okay well if i had a damper and an actuator that could kind of adjust how much energy is being delivered to rooms seems

SPEAKER_160: like an easy way to solve it right um you know dangerous thinking but but nonetheless it seemed

Jason Calacanis: pretty logical no more dangerous than all of us up on some stool in the middle of the night trying to like move that little lever to like make you know not so hot on this side of the room right right

SPEAKER_210: yeah so so than that so as you can imagine the smart vent looks a lot like a traditional vent um

SPEAKER_160: but behind it is or sort of incorporated into it is this you know fully wireless um battery system

SPEAKER_161: motor uh actuator that can open and close and regulate the amount of airflow into a room um and so that that basically we make a variety of sizes and it just drops right in to replace an

SPEAKER_160: existing vent you don't have to do any fancy wiring anything like that which we thought was really big because nobody has wiring going to all these different you know rooms in their home so right you know we've designed it for really like four years of battery life built in so you know i think that that ends up sort of solving any kind of uh i wouldn't call it range anxiety but time anxiety maybe um and then um you know what we found early on before we really went to market this is early

SPEAKER_161: testing was we needed a separate sensor and that's kind of where the puck came from was it's too hard to tell the room temperature from the vent so we said well why don't we feature creep

SPEAKER_160: our way into something a little more involved um and at the time as we were bringing up the supply

SPEAKER_161: chain we were living in china and saw just endless numbers of mini splits and so kind of added a little bit of features feature set to kind of go after that market so the puck works with the smart vent in the context of central heating but in the ductless mini split context where you don't have ducting the puck is a standalone smart thermostat that can be pretty much command

SPEAKER_160: stripped to the wall with no wiring no screws no anything it's a really fast install and from an install standpoint at the software level you know we just kind of walk you through it so you don't have to be an expert in any of this stuff um you you basically just sign up create an account you know

SPEAKER_161: you get it online pretty traditional iot type uh bring up and then you just tell us okay i'm in the living room and i've got a mitsubishi model one two three and boom it's connected and smart wow

SPEAKER_160: pretty awesome how much does it cost uh we retail our smart fence between 89 and 109 depending upon the size uh and the i'm just looking at them now prevent and then the puck um retails for 119 we also do

SPEAKER_161: for the hybridization we sell an exclusive version of the puck which sells for a little bit more um but it's only available through the hvac channel um so it's a sort of feature enabled almost like the way tesla does it right where they just flip a software switch and add some some features we do something similar and sell that exclusively to the hvac channel so and then from a pricing standpoint the other thing that's kind of cool is you don't necessarily have to buy a puck for every

SPEAKER_160: event um you know obviously there are rooms with multiple events we certainly wouldn't need them for that but also in the event that you have say an ecobee and a bunch of remote sensors which is quite

SPEAKER_161: common um we can actually take all the data from the thermostat and the remote sensors and drive the vents with that so it can be a very cost effective deployment if you've already made some investments

SPEAKER_20: in your heating and cooling system although a hundred bucks event i'm sort of trying to mentally count the number of vents in my house like how many events do people typically buy yeah it's a little bit

SPEAKER_160: crazy but it's not super cheap uh it depends on what your reference is right yeah but i would say it actually is all over the place we see kind of a bimodal buying uh pattern so we see customers who

SPEAKER_161: the first room off of their air handler put a vent because that room just always gets too much heating or too much cooling and they might get away with just one vent right and that just solves

SPEAKER_245: kind of a frustrating problem and then we have other customers who are like i want a set point on

SPEAKER_160: every single room individually uh and you know across my whole mcmansion and you know they might put

SPEAKER_248: in 20. and they're your favorite they're they're great customers but we love all of our customers but

SPEAKER_160: but yeah it really varies um i would say the typical customer probably three or four maybe up

SPEAKER_161: to five and then after that kind of splits and goes into like the whole home side yeah totally um and then

SPEAKER_160: how are your margins on the hardware generally with i would say we generally run somewhere 60 plus percent um gross margin um but the you know i think the the other side of that would be obviously we've dealt

SPEAKER_161: with supply chain craziness like everyone else so uh you know try our best to keep them around there um but at the same time you know i think every any given month or any given by there's always some

SPEAKER_20: fluctuation but pretty close to that and then how does the utility services part fit into the business

SPEAKER_160: model sort of the cherry on top uh so you know it's i guess i'm excluding that from a gross margins uh

SPEAKER_161: calculation but but i mean you can imagine we may make a few dollars per device a month um in a program like that um some cases you're structuring contracts specifically where um it's it's almost structured as like a set amount per month in other cases some of the programs we operate in are performance based so um if the cost of the wholesale markets you know go sky high uh and we alleviate a lot of the peak load um we could have a really windfall moment actually so yeah um it's a little

SPEAKER_20: bit variable i feel like i could imagine that becoming an even bigger part of the business as

SPEAKER_191: time goes on because it is such a it's it's more of an acute issue every year it seems well i mean i

SPEAKER_161: think so we work on the energy i like to say sometimes like we work on the energy transition within the home and then outside of the home and to that point as you load into the grid more solar more wind some of these more intermittent supplies and you throw tons of ev load and hvac electrification into the mix the estimates from rmi are a 3x increase in demand right so when you sort of combine all that new demand and this sort of intermittency of the supply the criticality of making sure those

SPEAKER_160: match up well is there's a lot of value there right and that's kind of some of the value we're bringing

SPEAKER_85: to the market and how do you think about your impact from a climate perspective um yeah i mean and how

Jason Calacanis: big a part of your pitch is that you know we sort of talked about how this can be like a trojan horse

SPEAKER_20: solution but i mean we all know the hvac is like a massive massive contributor so i think the pitch to

SPEAKER_160: the homeowner we don't actually push it too much um not because we don't love it but more because you know the thing that a homeowner wants is just hey i want to control my unit from my phone or you know i

SPEAKER_161: want to solve a an annoying comfort problem so i sleep better or something like that right so we try to meet them where they're at from an investor standpoint or you know like more strategic conversations like yeah obviously we love the story there and and how much do we think about it i wake up every day excited to electrify homes i mean how could you not be excited about that so it's definitely something that internally we talk a lot about in in terms of building into the product we're focused on all the time but when it comes to a homeowner um we obviously talk about what converts and what converts is the other sets of the features and we're just sneaking in all

SPEAKER_160: these benefits uh without them even necessarily buying for any of them yeah totally all right so where can people find you if we're shopping yeah yeah we're primarily um sold online um the exception being the hvac channel so if you found yourself weirdly in a johnstone supply or a ferguson you know plumbing store you might find our products but if you're a regular consumer you'd find us on

SPEAKER_161: flare.co which is our sort of shopify store you'd find us on amazon you'd find us on lowe's.com home depot.com uh so and i would say you know we kind of love the online channel i feel like it's actually

SPEAKER_269: a great way to to be able to stay in touch with your customers um sort of pre-purchase and sometimes

SPEAKER_36: post-purchase yeah and then who is your competition i mean i could imagine nest is the obvious one at

SPEAKER_20: least from the thermostat perspective but is any i've never heard of a smart vent until today okay

Jason Calacanis: granted when we booked you i heard about it you know what i mean sure until i heard about flare i didn't know that smart vents were or could be a thing like is anybody else doing this so yeah it's

SPEAKER_161: a great question um so the first one i'd say is we actually aren't a competitor to nest we are a

SPEAKER_160: partner uh so we don't make a traditional thermostat for central heating and cooling systems right um and

SPEAKER_273: you mentioned yeah the puck so the puck never has to be wired in to be clear exactly there's there's no

SPEAKER_161: ports to even wire it in so it's it's specifically for the ductless heat pump market or as a companion to the smart vent um and in the ductless market we're sort of pretending to be the remote it's kind of a cool cool hack in some ways right um and that's how we're universal and easy install um but

SPEAKER_160: to answer your original question um so we have some competitors in the ductless control space and rightfully so there's like a billion and a half mini splits on the planet uh and there's probably 30 oems that make mini splits so there's a fantastic market actually i would say actually for the control side of that um and on the smart vent side uh we had two competitors actually they made a bit of a splash early on but i think it caused us to do some really uh like sort of well disciplined learning early on so

SPEAKER_161: we had competitor at the time called keen was on shark tank actually i raised a ton of money early on we had a competitor called ecovent uh out of mit and it raised a good chunk as well um what ended up

SPEAKER_160: happening is they raised all this money they ran to market with a product that wasn't quite ready for the big time and i think from our standpoint we were like this sort of well and also ran in the beginning um and we just said okay well then we'll just do the scrappy bootstrappy way and figure it out and so we spent you know a lot of time lean and mean and i think that forced us to focus on the

SPEAKER_161: product and the customer more so than uh you know some of the companies that were funded right out of the gate and and that i think just forced a successful product at this point we are the

SPEAKER_172: smart vent market um but it took a while to be the smart market right but still congratulations slow and

SPEAKER_20: steady wins the race and then finally how did you get into this what's your background that led you into

SPEAKER_160: this business so my undergraduate i did computer engineering um my master's at comp sci um the but

SPEAKER_161: i've always been really hands-on kind of mechanical just just love tinkering and building things and uh it's funny actually the way it got started was i was living in wicker park in chicago and um had this problem in my own place uh realized that this was a common problem called up my co-founder kenny and said hey i think there's an opportunity he was working at microsoft um and the thing that really got me going though was they had these free 3d printers to use at the

SPEAKER_160: chicago public library and i had never 3d printed anything so i i saw a poster or a flyer or something and so after work i was just writing software for startup after work i went down there and i sort of got my bearings catted something up you know the next day brought it printed and just started going from there right it was just i'm gonna solve my own problem and eventually i realized oh there's maybe a big market for this for solving this problem and then um you know what eventually

SPEAKER_285: walked the plank yeah oh my god shout out the public library that is such a great part of that story

SPEAKER_245: i uh i would i at some point i think i met the person who wrote the grants to get those 3d printers

SPEAKER_278: like years later uh so just amazing right what what uh what a public library can do for you in the modern

SPEAKER_20: era that is absolutely beautiful that's the perfect place to end this heartwarming tale dan meyers of flare at flare.co founder of flare systems i cannot wait to buy this thanks for coming on yeah thanks for

David Friedberg: having me thanks for watching everybody molly we got through the show please no self-loathing don't be so critical of yourself work hard it's okay seriously seriously thanks therapist you're so

Jason Calacanis: freaking right i it's my job we have a short holiday week coming up we do want to warn you it we do take some holidays although we will probably work on some of them because we can because we like to we will have shows on monday and tuesday and then the twist team is off until sunday i like this i like this

SPEAKER_24: take a nice long break good we could have done a wednesday show we used to do a friday show i'm

David Friedberg: just trying to be a good boss and just let everybody take a nice breather uh you know but maybe you never

SPEAKER_26: know maybe i'll do like an emergency pot and i'll just throw on the uh if sam bagman freed gets picked

SPEAKER_59: up it's just gonna on the tarmac on thanksgiving i'm doing a live stream so i'll put it out there

Jason Calacanis: i'm going live on my own we're going live uh all right uh president mike savino wants to know if we're doing our one-on-one so i guess we better wrap stay tuned though for a potential bonus episode speaking

SPEAKER_10: of which that we may or may not drop over the weekend but either way we'll see we're also ramping

David Friedberg: up our social game so check out uh our tick tock search for this weekend startups our instagram this weekend starts but we're putting a little clips up there give us a little candid feedback of what you

SPEAKER_26: think would work there as we learn producers at this week and startups.com always welcome to get some uh feedback from you on what would be content you'd want there we're going to start making content just for that format i wanted to do that already but we got we got a little busy here with so many

SPEAKER_60: shows to do but we're going to start making dedicated 90 second tick tocks or or you know uh shorts

SPEAKER_57: fun fun fun i'm calling mine hope dot earth i'm just going to make like hopeful tick tocks about climate solutions to make everybody feel better like we got this we can do this all right it may

SPEAKER_13: or may not be a long weekend i'm just leaving it at that uh we'll see you tomorrow yeah all right bye

SPEAKER_305: bye bye