SPEAKER_00: All right, everybody, it is Sunday. Welcome to another edition of This Week in Startups. We don't leave you hanging over the weekend like some shows.

David Friedberg: No, no, no, no. Six days a week here, maybe someday seven. But we have a must listen to VC Sunday School today about the pain of raising money and keeping your company going in a down market.

SPEAKER_01: Yeah, this is hyper tactical. Pay attention and take some notes. I know I did.

SPEAKER_07: And then Molly has an awesome, awesome climate startup for This Week in Climate. It's called Clarity.io. And tell us a little bit about what they do.

SPEAKER_08: Yeah, it's a hardware as a service business that builds products to measure air quality. They actually call it sensing as a service for cities, for municipalities. I like calling it Haas. It's a Haas business. It's a Haas business. It's a Haas. But it's just, you know, on the theory that you can't manage what you don't measure. This is really, really valuable because it turns out air pollution, direct result of emissions and kills a lot of people every year.

SPEAKER_01: Yeah. And if we can measure it, we can make better decisions, right? So it's going to be a great show.

SPEAKER_14: Stick with us. This Week in Startups is brought to you by Embroker.

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SPEAKER_20: All right, Molly is in the second half of her first year as a venture capitalist, and it is going really freaking great. It is.

SPEAKER_24: It is going really freaking great. I have four companies in our portfolio. Yum, yum. It's all happening more and more, and I'm just starting to meet with more and more great companies. And then it's sort of like the actual VC learning process layered on with the changing macroeconomics, which makes it even that much more interesting. Yeah, certainly more dynamic, yeah.

SPEAKER_00: Today, I actually want to present you with a literal test case. Test case. Yes. All right, let's do it. Okay.

SPEAKER_27: We're not going to say the name of the company, obviously. No, no, no. Absolutely not. No details. What do they call it a composite?

SPEAKER_28: This is a composite.

SPEAKER_24: It's a composite because it's a conversation that is, I think, totally representative of lots of other... Version of this conversation I have now had with, like, multiple companies. And that conversation is sort of, what should I do next?

SPEAKER_08: So, I'm talking to this great company, really want to invest in them. They have raised a pre-seed. Okay. And now are trying to decide if they should raise a round at a higher valuation. Right. And of course, we know that higher valuations right now are problematic. And I think a lot of companies find themselves in this position, which is, like, do I raise? Do I reopen my pre-seed? Do I do a bridge? Right. Okay.

Jason Calacanis: And it's sort of like VC plus founder Sunday school.

SPEAKER_20: Got it. All right. So, a lot of VCs and seed investors and angels who are already on the cap table of different

SPEAKER_33: startups are now faced with, what is the best advice you can give to your founder? Or just as a team, which is really how you should look at it is, as a team, investor and founder, what should our next move be, given the changing market dynamics? What's in both of our interests, right? So, if the company is a pre-seed company, you'd say, that means they probably haven't launched their product, or maybe they have an MVP, something to that effect. But they may have raised that in 2021 when a pre-seed might get $10 or $15 million as a valuation because people were looking at their portfolios and they were loosey-goosey and they were splashy-cashy, splashy-cashy, which is what I do when I'm at the blackjack table.

SPEAKER_20: Basically, it means I like to take $5 chips when I'm doing those $100 things or $10 chips and I'll put the dealer, if I feel like the dealer is really doing a good job and I'm winning, I'll bet on my hands and I'll put $10 and let the dealer get a free roll with me. So, if I hit blackjack, the dealer gets, you know, whatever, $25 tip. It's just goofy and fun, but I call it splashy-cashy. So, when I'm on a hot street, I splashy-cashy everybody. It just means you're tipping everybody. So, we were in the splashy-cashy days and now we're in the, how much runway do you have and can we hit break even? It's really changed a lot. You know, this is when people are like, well, you know, I guess I'm going to give a 15% tip, but should I include the alcohol or should I tip 10% on the alcohol? You know, when people start like really optimizing their tipping.

SPEAKER_28: Yeah. The opposite of splashy-cashy is oh, shh. Oh, shh.

SPEAKER_20: So, I think here, you know, if you do a flat round and you think, well, that valuation was

SPEAKER_33: so juicy, you know, in 2021, we'd be happy to take more money at that valuation, then you just have to check in with your VCs and say, hey, would you like to put more money in at that valuation first? Because if they don't, they could experience dilution. Now, they may have pro rata, but they may not have pro rata. The nice thing to do is say, hey, we're thinking, you know, we raised that 15. We've made all this progress. Now the product's in market. Now we have 25K a month in revenue, 300K a year. Yeah. We don't think we're going to clear market at a higher valuation, but we think we should top off with another million dollars or another $1.5 million. We're going to dilute 10%. Of course, you're going to get diluted 10%. Are you okay with that? Or do you want to take advantage of the fact that it's a flat round? So that's like a really mature discussion to have with your investors. And I think for investors, if the company is growing, I keep track of with our team. And you've seen this internally, Molly, of course, I tell my team, when we get the updates from investors, anybody triples revenue over this period of time, I need to get on the phone with them. I need to know what's going on. I need you to tell me why. So, okay, it's June. It's July right now. We get June numbers. Let's say a company last year was making 50K a month. Um, you know, it's a SaaS business, a marketplace. And then all of a sudden we see 160. We go, wait a second. So this going on here, we might proactively offer that company money. I might say, Hey, things are going really well. And we see you got nine months of revenue or runway. You're burning a hundred K a month. You have 900 K. What do you think about doubling it? Maybe we can put another 900 K in and what do you think about doing it at the last valuation or do you have something in mind? And three out of four times founders will take the money from us. Um, so it's a way for us to increase our position. We have five, 10%. We want to get to 10, 15%. My goal is always, you know, to have double digit. Uh, I don't get greedy about it. I don't have a specific number, but. You know, as an investor, if you can get above 10% ownership in a business and it becomes a unicorn, you got a hundred million dollar position. That's meaningful. You know, uh, so that's our goal and that's another way to look at it. So as an investor, you could be proactive in looking at your portfolio and how they're doing, and then actually offer them more money. But of course the third situation is things are not going well. And that's a whole nother can of worms.

SPEAKER_24: I want to talk about what to do when things are not going well, but first I want to go back to this kind of valuation question. So let's say, and this is unrelated. This is not based on a specific company, but let's say like, so they raised, they did the pre-seed at, you know, the splashy cash evaluation. They're going to do a seed and they want to go up from there. For example, how do you like, obviously in a downturn, you get more cautious about your tip, you're taking out the alcohol. You're like, I'm not going to tip on tax. Yeah.

SPEAKER_66: May skip dessert. You lower the over check side. Yeah.

SPEAKER_24: But you don't want to find yourself in the position that I've heard so many VCs on podcasts say, which is, I passed on Yelp because of valuation, or I passed on Twitter because of valuation, and I should have just written the check. Yeah. So, and I feel like this is exactly the moment when that trap would occur for VCs, right? Where you're just like, oh, well now we're all thinking about valuation and before we weren't.

SPEAKER_35: And so if a company is showing signs that they're breaking out.

SPEAKER_33: There are some VCs who believe that you can't overpay for that company. Mm-hmm . So if you see a company that has market pull, market pull means consumers or businesses are so in love with the product, they just are throwing money at the company.

David Friedberg: The company doesn't need to do marketing. It just sells itself. Yeah. Airbnb, Tesla, you know, Uber all experienced this at different times in their history.

SPEAKER_33: Somebody shows up in a Tesla, they take you for a ride, you go buy one. Tesla didn't have to advertise. It just, the market pulled you in to buy in that Tesla. Somebody, you jump in an Uber with somebody, you're like, what is this? How did you get this really dope car? Yeah, do you have an assistant like working 24 hours a day who set this up for you? Are you rich? Do you have your own driver? It's like, no, I share my driver. Like that was the original idea is that we're going to share a driver. So market pull companies where you see it running away, you can basically give them a lot of credit on the valuation and you're lucky to put more money in. So the people who put money into Uber Series A, Series B, C, D and E all did fabulous. So when something's breaking out, and I think Brian Singerman from Founders Funds says this all the time, like when we find a winner, we have this really crazy approach where we just pour money into it. And then we make one absurd bet per fund and it could take up 10, 20, 30% of the funds dollars. So you know, they saw SpaceX as a breakout, they just kept plowing money to SpaceX buying secondary offering them more money, etc. And so I think that's a very, really interesting strategy. And so that just means you have to have the discipline to know what a breakout company is, and then have the wisdom to say, you know, does valuation matter here, if this company is going to be here 10 years from now, and it's got market pull and customers can't shut

SPEAKER_77: up about it, then maybe I need to, you know, take the leap of faith on valuation.

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SPEAKER_01: twist, TWIST, let's let's talk about strategic retreats. Yeah, when you know, you should either

SPEAKER_24: strategically retreat with a down round or a flat round or a bridge for some runway. Yeah. Or when you

SPEAKER_88: maybe just need to pull the plug. So, you know, let's start with the hardest pulling the plug.

SPEAKER_33: Yeah, existing investors will be hit up by their troubled companies early and often. And the company will say, Hey, would you like to put more money in? We're doing a bridge. And we say, Yeah, we don't do bridge rounds, we will invest when you have a new investor priced around. That's our philosophy at launch. We will proactively invest in a growing company, as I just previously explained. But we generally don't do bridge rounds. Now, there is a caveat there, the syndicate.com where we have other investors who have the pro rata, right, we will let them make their own decision. So if you had 100 people from the syndicate invest in the company, and they put in a million dollars, they put in 10k each, now you're raising a bridge. And their pro rata is 250k, let's say, let's say we say we're not taking our pro rata or we'll put in a token 25k or 10k to support the company, which is more optics than anything else. And just us trying to be kind to a founder, I have done that before. But I try not to do it because I try to be disciplined about this. Hey, this is, you know, not our investment strategy for the fund, we want to see you have an up round, or we want to see you get a new investor

David Friedberg: priced around. That's what we want to see. If you can't do that, then our investment, you know, is going to be our investment decision is going to be to stand pat. That's a poker term stand pat

SPEAKER_33: means we're not going to put any more money in the pot. But we will say to the syndicate, hey, if you want to make a different decision than us, you're welcome to do that. And then what we find is, in those troubled cases, maybe 10 or 20% of the money will come in. In other words, angels are just, you know, have a similar philosophy, most angels make one bet, and they don't do follow on. And so if the company is not growing, well, of course, they're not going to do follow on and then you have to have this really frank discussion with the founder, which is how many VCs did you meet with? How many new investors did you meet with? Sometimes they come to us. And they don't even meet with new VCs. So you know, don't you think it would be a good idea for in your own best interest to price this company on the market? What if you get somebody who prices it at, you know, you're going out at 15 million with this bridge round? What if you get somebody who wants to put in money at 30? So go meet email 50 investors and tell me how many meetings you got. And then tell me how many term sheets you got. So go do the work and 50 emails takes you, you know, whatever a week to send those, you do 10 a day. And then you do two weeks of meetings, you get 1020 meetings, you know, half an hour, hour each. And you'll know where you're at in under 30 days. So go do that, right? That's the best thing you can do as an investor is say, Did you do the work? And then you can tell them share the the the the spreadsheet with us, where you're tracking who you met with, and maybe we'll add some names, maybe we could do an introduction for you. And let's have a frank discussion. If you put into that spreadsheet, why they declined. So it's really important to encourage your founders to say, Hey, I understand your passing. Can you give me any feedback on what things if we change them? Or if what things if they change might attract you to doing an investment in the future? And I'm not going to hold you to this. But I, you know, permission granted to be candid, like, if we had twice as much SaaS revenue, if we were profitable, if we were break even, or if we charge more for our product, what things would we need to change to make this a more attractive investor? So at least you get market signal. And it

SPEAKER_12: might be, I think the market size is too small. The Tam is too small, you're only selling to dentist offices, you know, like this, you know, I was talking about the SaaS product just for dentist

SPEAKER_33: office. Yeah. So those are all the things you have, those are all the hard discussions you have to have with the founder. And it can be hard because the founder might be like, Well, why aren't you supporting me? And it's like, Well, this is a business. The reserve capital in the fund is reserved for the breakout hits. We don't, we can't indefinitely fund companies that are not growing. The whole concept here is we invest in a basket of companies. And then the ones that have the are the highest performers get the money, you're not one of the highest performers. So we'll support you in non-monetary ways, but you have to earn those dollars. It's sort of like somebody saying, like, why didn't I get to the playoffs? It's like, because you didn't have the record, right? But that's hard to say to people, right, Molly? Yeah, it's like saying you're not good enough. And, you know, VCs don't want to ruin the relationship with the founder, and they might be fragile at that point in time. So this is a very, I'm just telling to you real, it's like the hardest suckiest part of the job is to tell a founder, you failed, right? You know, or we failed, or the world doesn't need this product. And, you know, for them, they're so identified with the

David Friedberg: company, Molly, that, gosh, that's a hard thing to say to somebody, because, you know, they may consider themselves the company. Yeah. So it's, we take it very personal. I could see anything else

SPEAKER_33: that's like, between those two breakout company, and obviously, the market doesn't want the company, you know, you can have, you know, a layered discussion about, you know, okay, we've got

SPEAKER_107: Right. To be clear, we did the polls here, in some ways, right?

SPEAKER_33: We did the polls. So, you know, when you get into center, like, you know, I've got some situations where I'll tell a founder, like, you're right, your company is burning 200k a month, and you have 20k in revenue. This company would look completely different if you were burning 50k and had 20k in revenue, and I think you'd be fundable. But I don't think anybody's coming in to sign up for a bridge round in a company that's not growing, you hit 20k a month for the last four months, it's not growing. Or it's going down, right? So who's going to put $2.4 million into something that sideways, and that has this giant burn when they could put that $2.4 million into something that's growing in their

SPEAKER_07: portfolio. So do you think you might want to cut the burn to 50k a month have 20k in revenue, and then

SPEAKER_33: have a plan? So you're only burning 600. For the next year, you can go to your existing investors and say, Hey, listen, if I can get 200k in new money, would you put in 400k? Here's how we're going to get the 20k to 60k. And if we get it to 60k, then we're only burning 10k a month. Yeah. And now you've got a credible story. But I find some founders, especially during this, you know, go go days,

David Friedberg: this boom market, they are, they take time to take that advice, and to make those changes, because it requires going to a team of 20 and saying, we're going to be a team of six, or seven. Yeah. And that's just like saying to your team, like, hey, we failed. Yeah, we failed. And we need to retreat, we need to rebuild this. And we need to take radical action, if we're going to survive.

SPEAKER_33: And it's really easy to take radical action, like, okay, like, you know, the ship is sinking, we need to throw all these non important things over the sides of this, you know, we reduce the weight, and we're gonna put everybody on rations, like you can see it right in front of you. And so how do you do it? If you're a founder, you say we have four months of runway. And we need 12 months

SPEAKER_12: of one way to work this out. We're burning 200k a month, we need to be burning 75. Here's how we're going to get there. We're going to have seven people not 20. And the seven people who remain the top three people are taking 50% pay cuts, the founders, right? So we're going to go from 150k a year to 75k until we work this out. So we're going to take the most pain. Everybody else in the company is getting paid more than us. And I'm sorry to the people we laid off, we're going to give you all you know, four weeks severance. And that's in it. May not be your fault. It may just be the

SPEAKER_24: market. Like it may you know, it's or it seems to be this sort of like, belief only goes so far, when the market is the market. So then what about if you are? I could imagine a universe where you're

SPEAKER_08: this startup who's like, Well, my seed valuation isn't going to clear market. Yeah, I'd like to open

SPEAKER_24: reopen my pre seed round maybe, you know, at the same valuation. So put a number on it. Yeah. So it's easy for real. So let's say okay, like you raise a pre seed at $10 million. Yeah, you want to

SPEAKER_08: go out with a seat at 15. But you're like, that's 100x. Right? That's not going to clear in some ways not to be a mercenary. Yeah, being able to reopen the pre seed at that 10 million could be great for me, new investor. Sure. What happens if though, like, is there ever a scenario where you I would be the investor who said I don't want you I don't want to be diluted? Or what happens if you're the founder

David Friedberg: and your previous investors are like, Nope. So the previous investors would not get to make that decision. If you can't clear mark and the company's going out of business, they could say, you know what, we're racing around at $5 million. That is what's called pay to play. So yes, you invested at 10 million. But we're going to do this round at five, which means when we raise that million dollars, you're going to get some dilution here. And it's not going to be pleasant. But the choice is either

SPEAKER_33: shut the company down, or live to fight another day. So if you owned 10% of the company, now the company raises a million at 5 million posts, let's say, and you're now you're gonna be 20% diluted, you know, an 8%. And the way you would look at it is, well, you could be part of that million dollar round. So if you put 500, now you own 20%. Or if you own 10%, you only have to put a hundred in to protect your pro rata. So you have the option to keep maintain your percentage. And if you don't, that's your choice. And so these things can be even more punitive. And one little technique that I've seen used and have used, we're going to raise that 10 million the last round. But each investor who invests in this round gets a warrant to buy another share sometime in the next 10 years for a penny. What does that mean? We've maintained the number of shares. So you're not getting the dilution now. But if we do win, do know that the people who put that million dollars

David Friedberg: in for 10%, they can buy another 10% of the company for 10 bucks. And so they got a little pot

SPEAKER_12: sweetener, right? And so that would affect everybody. Those are called warrants. So some people ask for

SPEAKER_33: warrant coverage in times like this. And it's a fine thing to do, you know, it doesn't screw up your current cap table. But you do have those warrants hanging out there. And then when the sale does happen, those people execute their warrants. And all of a sudden, it's like, hey, wait a second, I thought

SPEAKER_12: I was going to make $5 million on this. It's like, Nope, you're only making 4.5 because they executed their warrants. And they own 10% more of the company. So that's where warrants come in.

Jason Calacanis: Huh? Fascinating. Now I feel like we can do another hour on warrants. But I think I'm good on this one.

SPEAKER_33: Yeah, warrant is a right to buy a share. And sometimes people will give it to a consultant, hey, we'll give you 1000, you know, $10,000 in warrants, or they'll give warrants to Silicon Valley Bank or Comerica or First Republic, if they give you a venture loan, and they'll say, Okay, yeah,

SPEAKER_12: we just want to have warrant coverage. So if this thing does work out, we have the option to buy some shares before you go public. And that's their little pot sweetener. So people use warrants here and

SPEAKER_24: there. So if you're a sophisticated founder, should you sort of establish a little baby pool of them, so that you don't get it? Yeah, you know, it's not like an employee stock option pool,

SPEAKER_01: we're not a real pool, but like a mental pool. Like I'm gonna get out of these are

SPEAKER_33: it's sort of like a last minute thing to do to close a deal. So we're trying to, you know, it's like, Yeah, and here's some grappa and some, you know, biscotti at the end of your meal, it's just like a little pot sweetener at the end, just a little thing to make those investors who took the risk. Sometimes people will ask for a three x liquidation preference. So this company is going out of business, I'll put 250k. And that's enough to get you through five more months or burning 50k a month. I want to get three times my money back in cash, because I'm giving you this high risk loan, basically. So I want 750k back before. And then I want my equity. So it's a $10 million valuation, I'll put the 250k in for 2.5%. But I want three times the 250. It's called a liquidation preference. I want three times that 250 in cash first. And then if the company was sold for 100 million,

David Friedberg: I would get the 2.5 million for the 2.5%. But I would take the 750 off the top. So then the proceeds

SPEAKER_33: would be 99 million point 250. That's like the really shark eating the liquidation preferences. But the board might be like, Okay, nobody else wants to put up money. So we'll take that, you know, and you know what, if it's a company that's circling the drain, and you're gonna put 250 in, yeah, having some guaranteed return, you would maybe give you the ability to justify making a crazy bet. Yeah, it's like getting odds, you know, like, Okay, if I'm gonna bet on this like, horse, that's 20 to, you know, that's the weakest of the pack, I should get 20 to one odds if it does make it to the front of the it does win the race, right? So you're basically just like betting on ponies, right? And it's like, Okay, yeah, this is a long shot. Some people love the long shots, they get like a little bit of dopamine hit from it. So it's a great question. And the most important thing is to candidly discuss this with your investors and for investors to be super upfront immediately about what their plans are, the worst thing to do is give false hope. So I'm very clear with people, we're not participating, you can ask the syndicate if they want to, but the company is not growing, we have to use our funds reserve capital for things that are the highest growth, growth, our LPs also know what the highest gross companies are, because we send them updates, like, if they see us investing in things that are low growth, or no growth, they're gonna say, Wait a second, that wasn't the agreement you told us when you pitched us on being on this fund that you would reserve 20% of the capital for the high growth stuff. What's going on here, Jake, Al? So you have to have a little empathy as a founder for the investors strategic ability to get a return for their fund. And, you know, the thing that really annoys me is when investors give false hope to the founders. So like, I don't know, come back to me when you get a term sheet, or yeah, maybe we will. I don't know, is anybody else investing? And I mean, that's valid, like, is anybody else going

SPEAKER_01: to do this? So I in my earlier days would say, I think it's like important to say, because we do

SPEAKER_24: say that to founders. I said that today, again, to a founder, right? Like, ideally, when we say it,

SPEAKER_01: we mean it, it doesn't mean, if you get going to invest, but you're saying that for a new investment, right? For a new investment. Yeah. So yeah, I'm talking about when you're already on the cap

David Friedberg: table type situation, new investments, fine. Like, yeah, we don't want to lead. But if you find a lead, and you define terms, sure, we'll look at it. Who knows what terms you'll get, you know, maybe it'll be attractive to us, maybe you find a great lead who we have faith in. This is for like,

SPEAKER_33: the existing companies. This is the right. Yeah, totally. I have told founders before, listen, if you want us to take on this pain of investing, and like this really risky bet. I want 100% of the existing investors. So there's like, when I was an angel, I said, you know, you're at seven angels here. If, and I'm one of them, if all six put up their pro rata, so you raised a million, now you want a 250k bridge, if everybody does 25% of their original investment, I'll do it. And they were like, Yeah, only two people want to do it. I was like, Okay, well, I'm not doing it, right? Sure enough, they went through each person, and they basically shamed them into doing it. And then one person who had only put in 5k, you know, who didn't have wasn't a very

SPEAKER_12: liquid person, I wouldn't say their name, but they were kind of like a blogger or something, we just and I was like, Okay, well, it doesn't matter. It's $1,500 or something, that 1250 that they would have put in. So you got six out of seven good enough. And we did. And

SPEAKER_20: of course, I lost my money. So punchline. Even that strategy didn't work because you're betting on something that's proven in the market. Yeah. This is why you have to look at these

SPEAKER_148: startups. There's a reason there's a reason it can't clear. Yes. And so you have to look at these as

SPEAKER_33: experiments. And if you could say to the founder, Hey, this experiment didn't work, shut the company down, we'll all take the loss and come back to us in a year with your next best idea. And let's do a fresh cap table with your new idea. And you know, we'll go from there. And that's, it takes some founders are very quick to shut things down, because they're entitled, and they want to get paid a huge salary. And if it's not easy, they just shut it down willy nilly,

David Friedberg: even with money in the bank, and they could have kept going. And then other founders will grind it out forever. And you know, sometimes people grind it out too long. Right. So you got to be right,

SPEAKER_00: you got to be like quick to shut it down for the right reasons. Correct. Yeah,

SPEAKER_152: that's a whole nother discussion. We can do another VC Sunday school, which we should

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SPEAKER_24: Do you want to do a bonus because we have a super chat question? Oh, That is BC Sunday school related. Great. Here we go. Via enterprise AR super chat question. So all this money is going to charity and we get a bonus answer for our listeners. Does age matter says enterprise AR do older founders 40 plus listen and make those hard choices faster than young founders? I would say more seasoned founders will definitely make

David Friedberg: these decisions faster and more maturely because they've been through it and they're more mature. Sure. Of course. Yeah. People who have more experience will make these decisions much faster.

Jason Calacanis: I could imagine you must also find yourself in a scenario though, where you've got

SPEAKER_24: somebody who's like, I had multiple great exits. Like I know what I'm doing. I'm really good at this. And you can still find yourself in a situation where the business isn't working. And would you then maybe encounter this pushback? Like I could imagine the opposite occurring, probably not as often, but that sense of entitlement maybe, which is like, you're going to bet on me

SPEAKER_33: because I'm awesome. I think after you've done three startups, let's say I'll put it at like the number three, you're pretty pragmatic about this. Hey, it worked like with, without, I'm not going to put an age on it. Cause I've, I've met founders who've done their third startup and they're 30 years old. Right. So they don't need to be 40 or 50. I've done it or 25 years old even. And they say, you know what? We took your 500 K. We did this. I'm telling you, it's not going to work. I want to work on other stuff. The team is not motivated. We made a mistake. We still got 200 K in the bank. We'd like to send you 40 cents on the dollar back. And that's the mature thing to do. And I'm like, okay, thanks. I'm like, do you have an idea you want to pivot to? Nope. We don't want to pivot. The team's burnt out. This is, this, this is a, this, this dog, you know, don't bark. We're done. And I'm like, okay, thank you. Now I can move on to the next company. So it's, you know, super efficient. And yeah, I think that maturity comes from understanding the dynamics of the overall ecosystem, which is you understand the power law. This company is not going to affect your impact, your life, your employees, nobody's going to get rich and your investors can afford to take the loss because it's 1% of their fund. Therefore, 2% of their fund. They would rather you move on to your next adventure and they don't have to monitor this and they can take the ride off and put their energy towards the winners in the portfolio. That takes a level of maturity. That's very easy to say on a podcast. When it's not your company, it's not your baby. You didn't spend three years of your life on it. It's very hard when you spend three years of your life on something to let go. Yeah, heck, I'm still running inside. It's in the

SPEAKER_12: second decade, you know, started as Mahalo, and it's doing great. It's doing millions of dollars a year in revenue. I won't give it up. I got to get that across the finish line, right? I have a certain sense of pride about that. Might have most other founders would have shut it down. And trust me, if it wasn't working, I would have shut it down and let everybody take the loss. But I'm like, no,

SPEAKER_33: you know, I'm going to, I got a rabbit and I'm pulling it out of the hat any day now. Yeah. Like I think somebody, I think like there's many buyers for inside.com, you know, with 10 million in revenue and we're halfway there. So, you know, I'm like, you know what, this would be hilarious if in year 14 of this company or 12, whatever it is, I came back and gave everybody two extra money back and was like, Hey, you know, that thing that you invested in? Yeah, it wasn't working. Hey, it worked.

David Friedberg: That to me would be like one of the great, you know, moments of my life.

SPEAKER_24: I love it. You guys, what a great BC Sunday school. There we go. Next up, we have this

SPEAKER_08: weekend climate startups, a super interesting conversation with the founders of clarity movement mailing out and David Lu. It's this really interesting hardware as a service business. Yes, it builds products to measure air quality. Yes, this is a great, interesting company.

SPEAKER_51: Awesome. Who are their customers? I wonder their customers actually are cities.

SPEAKER_24: municipalities, they have the city of London, they have the city of Houston, they've got, and then they have like the UCLA school district because this local, basically like if a city wants to measure air quality right now, they use these massive shipping container size, super expensive things. They might have one or two, but a service like this can supplement that with hyper local real time measurement and help people make decisions about, I mean, sometimes, you know, in the Bay Area or LA, like literally when it's safe to go outside

SPEAKER_12: or open or not, should we have kids outside or inside? Should they come to school at or not?

SPEAKER_24: Should you come to work or not? Yeah, exactly. Exactly. And then potentially drive policy because we know like pollution is also emissions. So it's it's a climate impact. Absolutely. That can drive a lot of money and action. Super interesting conversation.

SPEAKER_12: If you if you can measure it, you can manage it. Coming up next, the founders of clarity.

SPEAKER_08: Enjoy. David Liu is the CEO and Mei Ling Gao is the COO of clarity movement doing precision error pollution monitoring guys. Welcome to the show. Thanks for having us Malik.

SPEAKER_175: Thanks for having us Malik. Nice to meet you.

SPEAKER_08: Whichever one of you is best at your elevator pitch. For those who are not familiar with clarity, tell us what you do. And then I want to ask each of you how you how you came to that.

SPEAKER_177: I'm happy to give a quick overview and then make and probably add if I miss anything. So clarity movement is a clean tech startup that's focused on providing professional grade air quality monitoring service that comprise hardware, software and our air quality expertise to municipalities, governments, large organizations and the industries all around the world.

SPEAKER_24: Why do these why do these municipalities and governments and organizations need to to buy

SPEAKER_180: this from clarity movement? Yeah, absolutely. So I think David gave a great overview and the way I like to tell people who don't have knowledge about air quality or the climate space is we really make

SPEAKER_181: it easier to measure the air around us so we can do something about it. And this is one of the challenges in the environmental space is that the technology that is being used to monitor air pollution to drive action, whether it's a government, you know, in academia doing research, it's very clunky, it's expensive, it's difficult to use, and we're really making it easier to get beyond that point. So we can actually generate the data that's useful that whoever is making that decision about what to do about air pollution that's happening in the West Coast all around the world. It's actually we're making

SPEAKER_08: that that action a lot happen a lot faster. And then if you wouldn't mind, like draw that connection for us between air pollution and climate, I think people are starting to become aware of just how dangerous air pollution is and how these two things are related, but the knowledge base is not totally

SPEAKER_177: there yet. There are a lot of connections between climate and air pollution. And I think, first of all, I think a lot of us, especially if we're living in the West Coast, you see extreme air pollution events happens much more often because of the wire fire. And that's a symptom of the climate change that we're facing nowadays. As a matter of fact, I think this type of extreme events is going to probably become a regular part of our life. And that's depressing. But on the other hand, now being able to protect ourselves during this kind of extreme event is becoming another priority, I think, in certain parts of the countries. So on the other hand, another connection between the air pollution and climate is that they often share the same sources of emissions. Like we usually say the climate and air pollution are essentially the two sides of the same coin. And that's kind of true in the majority of the city we're working in. When a city is trying to tackle the air pollution, they are also tackling the climate emissions in the city as well. I mean, just for example, in London, one of their signature policies is the introduction of the low-emission zone in the city. And by doing so, they start to curb preventing vehicles beyond certain emission standards from entering into the city. So when you start to do that, air pollution drops in the city, but at the same time, carbon emissions also drop, at least in that region. So yeah, so we're definitely starting to see these co-benefits. That's usually the word they use of climate actions when people are trying to tackle the air pollution issues.

SPEAKER_189: And in clarity, there's helped them to quantify that as well. Yeah.

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SPEAKER_08: May, tell me how hard this is to measure precisely, and how Clarity Movement tackles the measurement problem. Because it sounds like it's, there are a couple different, right? There's this kind of citywide measurement that exists now, or there's the smaller consumer ones that people are

Jason Calacanis: familiar with, and like purple, and you sort of sit in the middle? Yeah, I think there's two axes

SPEAKER_181: you think about. There's a time element is how frequently you're measuring. And then also a space element is how many sensors you have covering a certain area. So that is drives down to the issue with air pollution that is can be very hyperlocal. So air pollution can vary quite a bit neighborhood to neighborhood, you know, road to road. So having that high resolution across space is really important to understand the type of air you're breathing. The air breathing right now could be not be measured by a government monitor that's maybe 10 miles away. So in some cities right now, if they have any kind of monitor, they maybe only have one or two, only a few. So it really doesn't help you understand, help the government understand what's happening at the local level. And within the US and internationally, what we're seeing right now, as we're getting large, getting better at controlling these larger sources of pollution, where it's really becoming hyperlocal, and a lot of that is driven by transportation sources. So having that hyperlocal monitoring is really important to help identify where these new hot spots and pollution sources are within an area so the government can go in and actually find ways to tackle this better. And this is really important because we're seeing, you know, consistently that it's often in disadvantaged communities that where their pollution levels are the highest. So this is definitely a very strong environmental justice issue. And this is something we've been tackling within the US internationally for the last few decades. And then in time, the other skill I mentioned is, you can't just take one measurement a month and have it and be able to capture what's happening at that location, right? So having that time resolution where you're sampling, we're collecting data more frequently, every few minutes, you know, in some cases, there are sensors out there collecting every second, that might be too much data, but having understanding what's happening with the air pollution, hour to hour, across, you know, different hours of the day, the days of the week is really important to understand when the pollution source is happening and where they're happening. That really helps identify and help us be able to control and create policies to reduce these types of sources. Is there such a thing as too much data? Come on. Let's be more specific, actually,

SPEAKER_183: about the devices that are being replaced. Like when you're operating in the City of London,

SPEAKER_08: or let's say you were operating in San Francisco. I think David, when we first met, explained to me that these government monitors are massive and super expensive. And that's why there's only a couple of

Jason Calacanis: them, right? Talk to me about what exists now for a city or a university. And then what the difference is in literal product.

SPEAKER_177: Yeah, of course. So the current government operated air quality monitor is often a size of a, I would say, a decent sized shipping container. So it's... So not that portable? Absolutely not. It's going to take, I don't know, months to be able to site and then actually put them in, not to mention all the years of permission to do so. And the cost is very expensive. It can go as high as probably a quarter million dollars to just simply purchase one station. And it costs roughly in the neighborhood of $100,000 a year just to keep it running. So both on the capex and the opex wise, it's extremely expensive. So one thing we want to make it clear here is that clarity is not to replace this kind of government monitoring station. I think there's a place for them. I think there's a reason that they're very, very expensive is because they're trying to go for that like super precision, precision and accuracy. Clarity's precision is really to supplement the station that's already deployed in the city, so that the government operators can essentially leverage this reference station as what we call an anchoring point and kind of expand their footprint of air quality monitoring in the cities. So for example, in the city of London, which is a customer, they actually have one of the best reference monitoring infrastructure in the world, composed of roughly around 100 reference stations across the city. So you may be thinking, well, they already have so many, do they really need more? Yes. Yes. As a matter of fact, when we first started with the network, we were putting in 150 additional clarity sensors in the city to supplement their network. Now, that number has grown to the north of 400 all across the city. That's because no matter how like the city are huge, and just as May mentioned, nowadays, it's really coming down to street corner to street corners when when we're talking about the fight for air pollution. So be able to measure exactly where they want and when they want is, I think, what we are offering to kind of the government operators or other organizations.

SPEAKER_209: Yeah, may break it down for us. There's a there's hardware, and there's software,

SPEAKER_08: talk to me about the deployment and the business model and how it might work in conjunction with

SPEAKER_181: like these existing government reference monitors. Yeah, absolutely. So we really designed the system to be easy to use and integrated. So a lot of times the older technologies there, there's purely hardware and they're very expensive, but we designed it where and actually I think David has a unit in his hand right now. Nice. Where you can see how small it is. Yeah, so we wanted to have the hardware make it really easy to deploy. There's a you know, a global SIM card inside that works out of the box in over 180 countries that really makes it easy for a customer not to deal with SIM card communications. There's a solar panel as well and battery inside so you can deploy it. That's not relying on the grid. And this is really important because a lot of the places where pollution is a concern is, you know, the grid is not reliable. You know, we're expanding into Southeast Asia and to places in Africa, South America, where sometimes a grid goes offline. So they really need to be able to deploy in areas where people think there is an air pollution concern. So on top of the hardware, we also built a easy to use software suite where the user, the government can actually log in and manage and view all the data from their tens, hundreds, you know, of sensors that they have deployed across an area. And it's, we designed it so you don't have to have a background or PhD in public health or air pollution sciences to be able to understand the data that's coming in from your network and know how to manage it. So it really is this suite. And then obviously, on top of that, we're building insights right now. We also have a team of air quality experts that are providing that service to make sure that the experience of doing the deployment across all your sites, and getting the data flowing and understanding the data and the also the calibration to make sure the QAQ see the data is, you know, it's really seamless. And that's kind of how we saw there was a gap in the market where oftentimes that process is very difficult and, and groups are often stuck on the technology side, and they aren't able to focus on what's important, which is really looking at the data that's coming in. So they actually drive decision and action. So I think, you know, in terms of how we develop the product, that's kind of our vision is we really want to make that integrated and easy to use for our customer.

SPEAKER_08: So you have this team of people who help with installation and deployment, make sure that the

Jason Calacanis: data is accurate. Do they also help with insights? Or will that be software driven?

SPEAKER_221: So actually, we design a product so the customer does the deployment themselves. And we've had

SPEAKER_181: customers and you know, David mentioned the cities, they're as well funded as London to community groups or, you know, teachers in schools doing these deployments. So it is very easy to use. And they are the ones that actually go out and do the deployments. And we have a team supporting them if they need to, you know, have questions. The insights piece, we're working on that right now with the software. But we also do have that team of, you know, air quality experts are able to step in and help direct the conversation also help them direct some of the data analyses. So that's kind of the piece that we will be building out in the next couple years. Gotcha. Love it. Let's talk about

SPEAKER_08: outcomes of measurement. You know, it's so you can't manage what you don't measure is such a sort of simple way to put it, but it's really true. And so I wonder how you imagine a future where we actually really do know where nobody can make excuses because the measurement of air quality and

Jason Calacanis: air pollution is so hyperlocal and so precise and no one can hide from the reality of this data.

SPEAKER_177: What do you hope then comes out of that? Yeah, I think like the fundamental of the air pollution management is elimination of the pollution source, right? I mean, that's pretty much the only way you can curb air pollution events in your cities. So our kind of vision of having this data is really to empower either the legislators or the kind of facility operators or even just the citizens to act on this data. So that they can either kind of crafting policy that's addressing a specific problem that's reviewed in our network or as a facility operator to drafting reaction plan to protect your occupants in the facility from the air pollution events or for citizens using this data to advocate and then putting pressures to the legislator to act on this. So, I mean, as a matter of fact, we have already seen some, you know, really great initial success and of utilizing this data across our customer base. I think one of our customer, which is Los Angeles Unified School District, actually recently announced they deployed this massive network of 200 sensors across their schools. In the past, they had to rely on the local governments on the air pollution information to decide whether to, let's say, preventing the children of the children's going out in the yard or even sometimes cancel the school or not. But that information, as May mentioned, is very, very sparse. So, and Los Angeles Unified School District has a thousand facilities all across the whole LA counties. So, because of that, you know, like the information to rely on were incredibly, like, how to say, not exactly as helpful as they wanted to. I mean, ideally, they want to be able to act on exactly the information at their school at that moment. So, I think that's one of the abilities we kind of come in and offer is really we're starting to empowering a lot of organizations that's in the past had to rely on governments for air quality information now taking the air monitoring to their own hands and knowing the data they're getting is accurate and reliable and to make their critical kind of decisions. And then we see how community members can utilize this as well. So, we see the community in Houston actually was able to leverage in that data that collected and clearly see the, like, periodical spikes during that particular time period and so on, and really pushing the legislator to make action on that. And I think that is actually going to the right direction. Now, the legislator now have to be thinking about putting in a reference monitor in their community. And when they do so, they will be enforced by law to making sure that air pollution stays within, well, clean air

SPEAKER_229: acts kind of frame. So, that's, like, really the power we are seeing.

SPEAKER_08: Let's drill into that, the public health part of this too, because I think for people who are not on the west coast or who have never lived somewhere where air quality can get to the point where it is unsafe to be outside. You know, you mentioned Los Angeles making these really specific decisions. We've, of course, had that in the Bay Area multiple times where they've had to cancel school because of air quality or, you know, tell kids to wear and or everybody to wear N95 masks because the air quality is literally that terrible. May, can you draw that line for us? Like, make it really clear how big of a public, there's sort of the acute public health crisis part of

Jason Calacanis: this. And then there's this sort of ongoing, slow moving nightmare train public health disaster part

SPEAKER_180: of it. Yeah, it's, you know, we're really trying to make the invisible visible with the data we're

SPEAKER_181: generating. And if you're living in an area where you can't see the air pollution, it doesn't mean it's, it's, it's not there. And maybe you're lucky enough to be and live in the location where generally pretty healthy blue skies. But unfortunately, about 90% of the world's population is living in areas with bad air, according to the WHO. So it is a very significant portion of the population. And we're really trying to clarify that kind of relationship and bring awareness to this. And I think, unfortunately, in the US, it's something that a large portion of the population is more increasingly aware of this now. When we first started Clarity a few years ago, it was interesting, most of our work was international, until the last few years, when wildfires really came into focus for the West Coast, that everyone started asking us about PM 2.5, particulate matter, and the soot and everything that was happening.

SPEAKER_24: Yeah. Because then it wasn't just, I mean, we sent our wildfire smoke across the entire country.

SPEAKER_181: Yes. And it's something that travels, right? So it's not just contained within a certain region, we've detected on the west, west of the Mississippi, mercury from, you know, coal burning in China. And so it's something that's very, that's very global. And we can't really just say, we'll tackle that one source, and we'll, we don't have to worry about it. So it is a very global problem. And it's interesting public, from the public health perspective, because it's been, you know, studied since for the last few decades, and there really is no safe level of air pollution, when you breathe it in, it's going to cause to premature mortality, cardiovascular effects, increase in asthma attacks, if you're asthmatic, and it's, it's just linked to a whole slew of things. And then they're doing increasingly in studies, it's, it's, as this expands, it's harder to, it's, it's easy to quantify the significant impacts of breathing in bad air, and what this means for public health. And the linkage between air pollution and climate is interesting, that the impacts of air pollution is more visible, and it's more personal since then, in climate change. So sometimes in part of the climate narrative, bringing in air pollution to talk about those impacts on public health, is actually makes it more climate change, even potentially more relatable to people on the ground, to actually make them care about it even more. So I think this is something our vision for myself and David and the rest of the company is, how do you tell that story, and link air pollution as part of this larger environmental narrative, and say, this is something that we really should care about. And it gives it gives people the right time scale to think about all these changes are happening around the world around with the environment. So, right, like, put really simply emissions

SPEAKER_08: cause pollution, and pollution kills a lot of people every year, full stop. And this is a cycle

SPEAKER_221: to that positive feedback, you know, as you emit more causes climate changes, and it worsens all these

SPEAKER_181: other factors as well. And so it's telling that really complex story is what we're trying to do.

Jason Calacanis: Yeah. Well, in less complex stories, actually, maybe more complex stories, tell us quickly about the business model, since we're talking about the startup.

SPEAKER_177: Yeah, so we actually provide something we call a sensing as a service to our customers. So it's composed of the hardware you just saw, the software may mention and our quality expert support. And we wrap everything in this subscription model to our customers. I think the whole point, you know, of designing such model is really kind of designed around the idea of we want to make the air quality monitoring easy. We want to make it accessible for everyone. So let us to take care of all the hard stuff. And you can focus on how you can make changes. Depends on the data you're getting. Yeah.

SPEAKER_08: David and Mei, David Lu, CEO, Mei Ling Gao, COO of Clarity Movement. Thank you so much for

SPEAKER_196: the time and good luck with everything. Thank you so much, Molly.

SPEAKER_12: All right, everybody, that wraps up another amazing week of This Week in Startups. My God,

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SPEAKER_24: course, another awesome news show tomorrow. We're going to be talking about, among other things, we assume a lot of news is going to break over the weekend, like it always does. But also, interesting. PitchBook released its Q2 Venture Monitor. We're gonna break it down. Break it down.

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SPEAKER_00: give you one of these amazing This Week in Startups, ember heated mugs. People are going crazy for those on the Twitter. Beautiful. Yep. All right. See you Monday, everybody. Bye bye.