Investor Stories 17: What’s Next (Gasser, Struhl, Day)

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On this special segment of the Full Ratchet, the following
investors are featured:

  • Eric Gasser

  • Jonathan Struhl

  • Rob Day

Each investor discusses sectors, drivers and/or
market trends that may have significant impact in the
future and are potentially positioned for outsized-returns.

Itunes:  http://apple.co/1hEtRLW

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FULL TRANSCRIPT
*Please excuse any errors in the below transcript

Nick: On today’s special segment, we have Eric Gasser. Eric, are there any big sector changes and/or thermals that you feel may materialize in the next few years that could significantly impact the way we do things? If so, can you select one or a couple and talk about what you see coming and the impact it may have?

Eric: There’s two verticals that I think are kinda controversial. One is the connected concept of everything being connected and we’ll use it as macro connectivity, kind of Matrix style. Controlling a phone from five thousand miles away. But what most people don’t know is somewhere in the neighborhood of ninety to ninety-two percent of all global networks aren’t connected to an IP network. So there’s a lot of people working on this problem. There’s a company that San Diego Business Journal wrote up on last month. It was investment that Seed San Diego made in a small company based here in San Diego. It’s actually trying to solve this problem.

What exists now in the marketplace is hardware solution. So you have to take legacy network—if you really think about it, all of the street signs, all of the lights, city infrastructure, power grid, a lot of these things aren’t IP enabled because they were built so long ago. So one of the problems is being able to take those networks and control them, not necessarily remotely, but be able to manage how they function. And so there’s companies that work on this from a hardware perspective and they’re all the bigger hardware server makers, right. And we don’t have to name them, but the bigger problem is that that’s a huge cost.

So if you go to the city of San Diego and go “Oh, by the way, we can fix your blackout problems, but you’re gonna have to spend two billion dollars over three years to fix this and rip up a bunch of roads–”

There’s companies out there solving this solely from a software layer. So I think city infrastructure and the ability for us to keep things connected, and the value that comes from that data, is something that is underestimated on its value and how it can actually change the world.

I look at that sector form a macro perspective. Not a “How do I fix the 911 system” but “How do I fix it so that when the San Jose police department’s radios go down”—which happened a few months ago—why didn’t a whole bunch of lights go off? Why didn’t IT guys’ phones start lighting up? But I’ll tell you, when it goes down for a long period of time and people are hurt, then it’s a problem. So that’s one thing that I think is interesting and a problem that is worth solving.

Then next one revolves around how the macro environment of just stuff is created, in the perspective of going into those stores in the mall where it’s just full of plastic. You walk in and you’re like “—-, the whole store is plastic!” it’s just all plastic. And I’ve been in the middle of the ocean where there’s just huge pools of trash and there’s like masses of problems. I really think that’s one that we can solve. I think it revolves around a combination of 3D printing and some sort of—the ability to reuse and repurpose things.

I’ll give an example. Maybe you buy filament, you run it through a printer, you make a cell-phone case, great! Well, what happens when your kid breaks the case? Well, now you grind it up, make more filament, and run it through the machine again and print another one. That would cut down on masses amount of waste. It would fundamentally change the way the retail system works. And I really believe that there’s a shift happening, and it’s subtle. It’s so subtle that I think it’s being missed.

And most people talk about how that impacts retail and domestic output and all those things, but I’m less worried about that, I’m more worried about what companies can have that kind of impact, that ecosystem and change it for the better? And what revenue channel is gonna be key? Some argue it’s selling a file, some argue it’s selling high quality printers. And I think it’s still too early to know, but it’s one that people should be looking out for.

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NICK: On today’s special segment, we have Jonathan Struhl of Indicator Ventures. Jonathan, are there any big sector changes, thermals, or trends that you see on the horizon? And if so, can you select a couple that may have significant impact, and or are positioned for outside growth.

JOHNATHAN: I believe in virtual reality. A lot of investors shy away from it because it’s the unknown right now. There’s no—there’s nothing really out there yet to buy for a customer. There’s some dev kits, the oculus is out, you can sort of buy the DK1, DK2, but at the end of the day, we’re still early at the end of the virtual reality movement. There’s a lot of money pouring into entertainment and media as it pertains to virtual reality.

Consumer focus stuff. I’m a big believer in the enterprise use cases. What are the use cases for virtual reality outside of gaming? Outside of movies and entertainment? A company that we just invested in, a company called Iris VR is tackling virtual reality for architecture, engineering, construction, design industry. So being able to do a virtual walkthrough of a building or a space pre-construction, being able to iterate within a virtual realty experience is really important.

We believe that virtual reality will have other uses outside of gaming and we believe it will happen sooner than everyone else thinks. The headsets are at a decent price point, sometimes cheaper than a cell phone. Like oculus is going to come out between 3 and 4 hundred dollars. Samsung and HTC and the rest of the VR headsets that are coming out are going to be a reasonable price point. And that will help consumer adoption.

So really interested in seeing the enterprise business use cases for virtual reality.

I think another one that I’m really interested in is crowd funding. Obviously Kickstarter, IndieGogo have established themselves as the leader of crowd funding. It’s not crowd funding specific, it’s crowd funding for anything you really want to crowd fund. I’m a big believer in hardware companies crowd funding their projects before they release.

It essentially, I look at it as a preorder before it’s built. Now of mobile, people are going to start preordering or crowd funding on their mobile devices, becoming more socially acceptable, hardware companies are getting insane dollars raise in crowd funding and it’s really proof point for VCs. I know a lot of people believe it’s technically not a real indication that the hardware will be adopted by the masses but crowd funding in specific industries.

So one of our portfolio companies is a company called Inkshares. It’s essentially crowd funded book publishing. So we believe the book publishing industry is broken. We have a couple of large book publishers, deciding who gets a publishing deal.

Now, what if you open that up to the masses and say instead of these older guys sitting at their offices, deciding who gets published, why don’t we let the crowd do it? Essentially, what Inkshares has built is an incredible platform where enthusiasts can come on and essentially crowd fund or preorder a book before it’s even created. Once the book hits the funding goal, Inkshares helps them market it, edit it, illustrate it if needed and then publishes it.

And they have great partnerships with some of the largest in each class. So crowd funding for specific use cases, like book publishing I think will start to take off. E-sports is a big deal. A lot of people laugh at it, a lot of people shy away from it. E-sports is essentially gaming, video games essentially, right?

League of Legends, DOTA, look at Twitch which was acquired by Amazon for a close to a billion dollars, who would’ve thought that people would come and go online and watch other people play video games? It’s unbelievable. Now it hasn’t taken off as much in the US as it has in other places like Asia, Europe, specifically Australia and they’re packing stadiums with people watching professional e-sports leagues.

Somewhere around two hundred plus million people watch e-sports last year. That’s more than the Super Bowl. And that’s just growing. Especially as the gaming population starts to get older and the young guys start to spend a lot of time in their rooms playing video games. There’s a real industry there. There’s a huge opportunity.

NICK: Yeah, I saw a picture recently from a game oriented startup that was featuring this PewDiePie guy? Who apparently is the most watched gamer and he’s clearing millions a year just on recording and publishing his game experience.

JOHNATHAN: It’s unbelievable. I watch ESPN all the time and I was on ESPN2 and they were showing League of Legends, game. And the announcers were passionate, it was just fascinating to watch. I’m not such a big gamer myself, but watching on ESPN2 other individuals across the world playing this professional League Of Legends match and packed stadium going nuts, it was eye opening. And we will start to see a lot more of that.

NICK: Interesting. It’s like the new form of entertainment.

JOHNATHAN: It is. It’s a little scary. But it’s also very exciting.

 

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Nick: On today’s special segment, we have Rob Day of Black Coral Capital. Rob, are there any big sector changes and/or thermals that you feel may have significant impact in the coming years? And if so, can you select one or a couple and talk about what you see coming and the impact it may have?

Rob: I think, by far, the biggest innovation that’s gonna hit the project finance, and venture capital, is that we’re figuring out how to finance smaller distributed assets. I don’t think a lot of people realize how radical a change that is for both types of verticals. If you look at venture capital, we’re used to backing something that is gonna be scalable, but it’s gonna be scalable because it has a lot of network effects and you code it once and then a whole bunch of people can buy it, download it—something like that.

If you look at project finance, the time that we take every ounce of risk out of building this one individual project, if we’re gonna take all that time and effort to do so, then we need to do it for singular big projects one at a time. What’s happening right now, thanks to just the emergence of smaller distributed hardware manufacturing techniques, and building automation, and all of the good stuff that’s happening and lots of other stuff that has nothing to do with cleantech, but just smaller, smarter hardware, that’s allowing us to put stuff out into the field that is cleantech that does have compelling payback periods that will run itself or at least doesn’t require a lot of hands-on maintenance and the like.

Whether that’s rooftop solar panels or whether that is a small scale respotter treatment plant being distributed out of mining location, or whether that is a fleet of electric vehicles for a corporate fleet where they’re basically rolling computers now and can report back how they’re doing and how they’re being driven and the like. All of these are just examples of individual projects and implementable hardware devices that the project finance world, and venture capitalists, have gotten trapped into corporate financing in the corporate equity stack, which becomes very expensive. The venture capital math does not work very well when you start talking about project pools that you must finance through that are in the tens of millions of dollars.

And so what I really think is gonna be exciting across all of these areas is as we start to take the lessons learned from rooftop solar and realize that these are actually pools of assets and that we’re assessed them in different ways, we assess the risks in different ways, we figure out how to do all the nuts and bolts around contracting and everything else necessary to take all the risk out of it, but we finance it through project finance type structures alongside venture capitalist structures.

We have the luxury of being able to do that ourselves and not having to pair two different approaches across two different organizations, but writing both of those check ourselves, we’ve seen it’s really powerful for unlock the ability of those platforms to then bring in Wall Street capital as follow-on project and implementation funding. And that’s gonna drive a lot of scaling of these types of solutions.

Nick: Yeah, I was recently talking with a friend of my, and entrepreneurs—shout out to Rich Baltimore—that founded a company. Basically they are creating an energy plant attached to big industrial facilities in areas where the cost of natural gas to run the place fluxgate wildly. And so this little energy plant that sits right next to it, sort of a symbiotic relationship, is a methane plant. So they bring in chicken litter—you know, he’s got a map of basically concentrated chicken areas also correlated with these fluxuated and high energy natural gas cost areas, and he’s figured out a way to bring this chicken litter into the methane plant and produce a very predictable energy source, and then he also has a byproduct. The byproduct is a saleable fertilizer.

So I never came across anything quite like that, but it’s more of this project based approach that you’ve articulated.

Rob: Yeah. It’s very true. There’s a lot of stuff here as well that people just don’t think about as being technology solutions when they think about what they’re gonna be working with. That’s one great example of where you can apply smart technology and also intelligence from an IT perspective to being able to automate something like that and make it run for profitability.

But the other thing about it is, once you start building those out in great volume, how are they gonna be financed? And that’s what I’m point to as being the area that’s gonna be really exciting, because the first couple of those deployments probably have to be financed from his startup, from their balance sheet.

Nick: Right.

Rob: But they can’t do all of them like that unless hundreds of millions of dollars—billions of dollars valuation. Wall Street isn’t necessarily gonna wake up one day and decide to invest in those, unless somebody shows them how to do it. If you’re asking the customer to do it, then you’re making a big expensive capex request and there’s your long sales cycle.

How do you unlock that? well, you figure out how to deploy special purpose vehicles for financing them, and really smart ways where it’s an easy handoff then from Morgan Stanley for the second such project pool, because they know exactly how it’s gonna work, and the structure completely works for them, the contracts work for them, etcetera.

Nick: Yeah, maybe some time offline I can pick your brain about the types of financing vehicles and structures that you use for these deals.

Rob: Yeah, it’s a lot easier said than done, but it’s worth the effort.

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