Tony Conrad of True Ventures joins Nick to discuss Avoiding Attribution, The 50.1% Rule of Life, How to Invest in Red Oceans, and Why Investor Inaction is Often Best. In this episode we cover:
- The importance of building camaraderie
- What does it take to get 20% Ownership in a Company
- How to Invest in Red Oceans
- Investing in Hardware
- Selling Hardware vs. Software
- Impact of Consumer Trends on Tech Startups
- Is AI a threat to humans and what is the role of AI in the market
Guest Links:
The host of The Full Ratchet is Nick Moran, General Partner of New Stack Ventures, a venture capital firm committed to investing in founders outside of the Bay Area.
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0:19
Tony Conrad joins us today from San Francisco. Tony really needs no introduction here… But for the newer folk he is a true legend having invested in many iconic companies at the very first institutional round. For the past 18 years, Tony has served as a Partner at True Ventures.
There he has invested in companies including Automattic (the creator of WordPress), Blue Bottle Coffee, Sweetgreen, MakerBot, Fitbit, Slack, Modern Animal, Hodinkee and Hashicorp amongst many others.
Prior to True, Tony was a software entrepreneur exiting two companies, Sphere and About.me to AOL. Tony – welcome to the show.
Hey, listen,
0:57
great to be here. Nick, I’ll just do one little quick correction. You know, it takes a team to invest in a lot of these things. Not gonna take for hashey Corp and a few others. But we’ll get into that now. Around attribution and lack thereof, no attribution.
1:13
No attribution allowed.
1:16
So it’s only what’s not on the resume? What did what did I miss? You know,
1:19
all the fun stuff. You know, all the formative stuff? Is years ago, I got asked that question. And it’s always been my favorite question to have been asked, like, what’s not on your resume? And I had to pause for a second because I was like, what did they know that I don’t, but as I kind of dug into it, and I thought about is like, yeah, it’s all those, like silly, incredibly awesome jobs that you did as a, as a, you know, a young person. And those are things that just typically don’t show up on your LinkedIn page. And yet, they’re probably the most formative and important things that you’ll do as a young person to prepare yourself right to have a have a career and to have a have a life and marriage ID, whatever it is you want to do. But you know, I had lots of odd jobs, some are a little more glamorous than others, such as like coaching and camp counseling, and all that kind of stuff seems kind of fun and cool. But I was also a glue machine operator in a, in a factory and I’ve had a menial job at a pharmacy where I stocked shelves, and you know, and, and filled up the soda machine and all that kind of stuff, and probably the low light and yet, one that I’m incredibly proud of that I was capable of doing was I was a janitor in my fraternity at college in order to make a little extra money and, and to pay bills. And I just tell you, if you can imagine a fraternity in the in the 1980s, the cleanup is not it’s not for the faint of heart,
2:47
but especially in Bloomington, Indiana, you know, these are famous famous there.
2:52
But I’ve always been super, super active. And I don’t really even know where that comes from. I don’t know what pushed me to do that, except for maybe boredom and, and being in a small little, you know, farming community in Indiana, and it just kind of looking for stuff to do. But I’m really glad I did all those things, they really helped me. You know, it’s
3:12
funny, I was I was writing my quarterly update to investors just the other day, and we were looking at the layoffs in tech, and we’re looking at labor. More broadly speaking, not only are we losing labor force, you know, in the form of boomers and retirees, but young folks are at an all time low in labor participation, both, you know, sub 20, as well as the 20 to sort of 25 group. In my opinion, I know that everything changes, right, we have to adapt, but in my opinion, it’s kind of a shame. Because some of those early retail and menial jobs I did it kind of taught me about customer service, or what a good boss looks like versus a not so good. And like some of these really foundational lessons that at the time, I had no idea I was, you know, absorbing, but any any general thoughts on sort of the labor market today, Tony? Well,
4:04
I don’t know if I have thoughts on the labor market, except for it seems to be softening a little bit after, after a lot of people were being laid off, and it seems to be slowing down hopefully. But, you know, I think those those jobs, they teach you things like being on time, right? You know, I mean, it’s kind of a shocking concept as a, you know, like when I first started mowing lawns, you know, at the age of like, six or seven, you know, is kind of like, just kind of come do it on a Saturday or Sunday or whatever day you can do it. But as you start to have jobs where, you know, you’re you’re plugging into a shift, you know, in a factory or you know, whatever it is like those things, have timetables, and you got to be on time and you got to do an honest day’s work and, you know, it’s all that kind of stuff. So I think there’s just so many lessons that you’ll learn from that. And I think you know, kids today I don’t I don’t I don’t think, you know, especially like if I look back to where I grew up in You know, North Manchester, Indiana, which really is a farming community, for the most part, but a town of about 6000 people, you know, there’s just as many jobs there today, as there were, you know, when I was a kid, you know, I think we have this myth that all the jobs have gone away, maybe some of the good jobs have gone away that that that might be really quite accurate. But there are plenty of jobs, you know, as a young person to get yourself involved with. So anyways, I hope if there’s any young people out there, be proud of yourself, you know, like, wake up and and get involved.
5:32
Awesome. Well, Tony, you know, with that, maybe can you tell us a bit about your experience at true and kind of your thesis and investment approach at the firm?
5:41
Yeah, true is genuinely kind of one of the joys of my life along with my family and a few other things I’ve done. We have a tremendous partnership that started in 2005 2006, we started talking, the firm is actually founded by my two partners, Phil Black and John Callahan. And then Tony Schneider, and myself, we were part of, loosely we’ll call part of the founding team, we are not co founders of the firm, I want to be clear about that. Although John and Phil are much more generous with that designation, that I would be. But you know, at the very, very beginning, we had a an ethos of let’s figure out how to build a trust and a culture amongst the, you know, the small team that we had. And if we do that, and we get that piece of the formula, right, we’ll probably set ourselves up for good decision making and, and ultimately, hopefully, success. And so in the very beginning, Tony was running, he was CEO of automatic WordPress, along with, you know, where Matt Mullenweg is the is the founder there. And I was, you know, one of their lead investors, or I guess, I was a lead investor, along with Phil, from our team. And I had a company called sphere that I also co founded with Tony, oddly enough, and so we had a lot going on, in those first four or five months that we were, you know, getting, you know, True Ventures off the ground. And I think what was so amazing about Phil, and John’s attitude about these day jobs that Tony and I had was that, you know, they this kind of depressurized, you know, the, the, you know, can like, you know, some people can look at and go like, Well, why did they get to do those things, and we’re over here toiling away and trying to build this firm. And I think they’re like, No, that’s really cool. You’re doing those things, because you’re plugged in to the founders communities. And that’s going to bode well for us, you know, long term. And so we’ll just figure out all the scheduling stuff and how you make that work. One of the big challenges for both Tony and I, in the very beginning, I think was this notion of venture firms typically meet on Mondays as an example, you know, partner meetings on Monday. And for both of us, it felt intellectually dishonest and disingenuous to the responsibility that we had for the companies that we were, you know, had started and we’re building. And so John and Phil just meet said, Well, why don’t we just do our partner meetings on Tuesday, right. So when you wake up on Monday, you know, your first order of business is not to go to your venture firm your side hustle, but to go to your primary job, which is your company, that we happen to also be an investor behind. Right. And, you know, from that, very, I think that, to me, is so symbolic of the way we operate as a firm today, which is not to get fixated on roles and responsibilities. And it’s not to say that that stuff doesn’t matter, because it ultimately does, especially as you get to our scale. But in the beginning, it’s really about creating camaraderie and trust and a certain fluidity in the way that you work. And I think we nailed that in the very beginning. And it served us incredibly well. You fast forward to where we are today. And we have, you know, a little over $4 billion under management in the history of the firm. We are now on fund eight, we just closed last fall. And that’s an about a $900 million fund. And then we have four growth funds on top of that, and we have 12 total funds and a few other little side vehicles, the way that we operate internally, we’ve expanded now we have, you know, probably 40 Some people on the team is that, you know, we get together on Tuesdays, we try to do on a month or excuse me on a quarterly basis, we do a full day, you know, kind of on site or off site, if you want to call it that. We just had ours yesterday, which is always great. And that’s where we do all the deep dive more strategic planning work. And then the rest of the two and a half months when we’re just meeting it’s it’s about deal management and portfolio management and whatever issues are in the market. We have a pretty strong new attribution kind of this back to you know, your introduction, which was incredibly kind but So, not 100% accurate in what I’ve, I’ve led. But, you know, we try not to do attribution when the venture industry probably most people know, who’s involved in which deals and, and, and all that kind of stuff. But it’s not the focal point for us what’s most important is that we, as a team, are producing the type of results and with the type of integrity, that, you know, we promised both to our LPs, but also to ourselves. And I think that’s, that’s kind of been like the little secret sauce for us, right, where we don’t get caught up in one person’s fantastic game. You know, it’s like, you know, oh, that person scored 38 points tonight, you know, well, you know, somebody had to set a lot of picks, you know, basketball analogy, you know, somebody had to do a lot of blocking, somebody had played defense, somebody had to rebound the ball, somebody had to pass the ball, somebody had to manage the team, somebody had to like, get the uniforms there, somebody had to take care of injuries, you know, there’s a lot that goes into that one person having 38 points. And I think we understand that intuitively. And we’ve lived by those values from day one. And it’s really, it’s part of the magic of being part of the True Ventures team.
11:18
In 20. What is the strategic planning session look like? You know, what are the desired outcomes coming out of that? How do you arrive at them,
11:26
the most strategic thing that we’re going to do is kind of in this will sound a little woowoo. But it’s really, it’s about, you know, bringing everybody together, just that in itself is already 90% of the victory. You know, and there’s some hard work that happens subsequent to that, but it’s getting us all together is having a chance to do we always start off our offsites with a quick check in. And that check in, at, in the very beginning for me is some of these things felt a little like, Oh, that’s very new agey. I wouldn’t want to pass you, Tony. Yeah. But it felt a little new agey to me. And in certain certain ways, you know, let’s do a quick meditation, you know, as a group, 10 minutes said it all this, but I’ve just come to love it and need it. Because it’s an opportunity for each one of us to share maybe what’s just kind of, you know, happening in our world right now. And sometimes it can be very specific around portfolio about companies, but the job itself, sometimes it has nothing to do with the job, right. And we all know, when you got a lot of stuff that you know, is hurting or misaligned in your personal life, or just things that are happening COVID, you know, all this kind of stuff. If you’re not good there, it’s, you know, ultimately, it shows up in your professional life somewhere, right? And so it’s great to do a check in with everybody around the team. on just a few words, where are they? Are they good, they’re not good, you know, in the stuff that we’ve learned about each other, through that that approach has been thrilling at times has been heartbreaking at times, it’s but it’s been unifying every single time. And I think that is, that’s just so incredibly important to us as we do these meetings. So after we do that, we get to the whoo stuff, the kicking off stuff. Yesterday, each one of these meetings will be a little different. But yesterday, we did a very exhaustive, deep dive around the portfolio. And there’s a lot of preparation work that goes into that by our team, to make it a magic carpet ride for the rest of us to participate in the conversation. But it’s a lot of data we’d been in some weird way, the SVB crisis, you know, the one kind of good thing that came out of that, and there’s very few good things, I think that came out of that. But one good thing that did is that we learn more about our portfolio in cash positions and where people’s heads were in about 36 hours, then maybe we learned in the last two years, right? This company has exactly this much cash on hand, their cash is being held custodian here, was it being custodian in the right way or not, you know, almost 7% were, but there were a couple were like, no, like, what were you doing with risk? That’s not your job, right? But we just go through each one of the companies and try to understand where they are and then are there things that we can do to help unlock value faster? Or do we just need to kind of get out of the way, you know, you know, I think one of the myths of venture for all of us is especially when you’re at the beginning of it, you feel this incredible need to do things, you know, to be helpful to prove your mettle, like, you know, whatever is sometimes most important thing you can do is inaction. Right? Maybe mastered this a little too much. Because some people in my life would say like dude, a little more action a little less in action, but I really try to pay attention and assess the necessity of more involvement beyond dialogue and pushing people to articulate and to think through the strategic things that are in front of them the tactical things that are in front of them, versus feeling the need to jump in and actually solve problems myself, right. And so part of our portfolio review is to really kind of identify, you know, those areas where we, as a firm, or individuals can be, you know, additive or helpful to the portfolio companies. So, it was a great day yesterday, it always goes way too fast. We always do a checkout at the end of the day, as well as a check in in the beginning. And then that’s it, you know, but there’s no, I don’t think there’s any, I don’t think there’s anything radically different, except for maybe the way we prioritize the coming together. And I think maybe that’s different for firm, a lot of firms, I think we’ll get there and get your coffee, and then you’re jumping right into the portfolio. And, and I think we just try to recognize that that’s, you’re going to try to bring an entire group of people together into a conversation, you have to have something that actually breaks the ice and enables that in a constructive way.
16:19
Amazing. Well, in light of my attribution is another mistake.
16:24
I’ll take them by the way, another mistake
16:26
I made is, you know, I look at the size and scale of true and the various funds that you manage as a group, and I assume that you are more oriented to, you know, late stage investor. However, you know, we’ve chatted before and you enter much earlier, so can you give us a sense for kind of the stage of entry, you get involved and sort of, you know, valuation ballpark?
16:51
Yeah, yeah, absolutely, we are one of the things I’m most proud of, is that we set out and we had a strategy that, you know, when we started the firm, there was US First Round Capital in Union Square Ventures, and a couple others that were, you know, trying to service, this earliest stage of the formation of a company, right, and, and, you know, bringing institutional capital, as opposed to friends and family and seed capital, as we kind of come to refer to it today. You know, what that looks like, for us is a check between one and $3 million. And it equates to 20%. So if you’re an entrepreneur out there, you’re like, what the, you know, WTF? You’re gonna get 20%. Day one, but, you know, I’ll come back to that, I think it’s, it’s important that, you know, we have alignment around our goals as well as theirs, right, when we’re entering into a partnership, we have never deviated from that strategy. Right? That was the strategy we set out with, that’s the strategy that we’re still operating under today, and 2023. And we’ve never had a median ownership across any fun that has been below 20%. Wow. And that’s not figurative, you know, people can be hand wavy about numbers, I want to be really crystal clear about numbers and, and accurate about numbers, we’ve literally never been 19.99 or below, like, we’ve always been 20% or above. And that average check size obviously has grown over the years, it started off actually sub 1 million, I think our first fund it was about, it might have been about nine years, right, and we were getting that kind of ownership. And then today, that check size will typically be kind of in our car to two to 2.5 million in order to get that 20% ownership in the very beginning. One of the things that, you know, I think differentiates us is that we don’t really have, we don’t have like deep rooted convictions around different sectors or thesis around different sectors. Obviously, certain people on our team do actually do a deep dive into their sectors much more effectively than I do. But for the most part, we’re all kind of generalist, and what we’re looking for is the right type of founder, that we’re excited to be in business with, that maps to a vision that we believe is unique, either maps to a large Tam, or we can we can kind of imagine how a tam might, you know, kind of evolved, like in the case of Fitbit, there was no Tam, you know, on that per se, right? And so you got to be able to imagine and think through like what that could be if you unlock that value. So for us it is about we have clear conviction around business thesis for us as a fund. So it’s back to those metrics of one to $3 million check 20% ownership need to be involved the very, very beginning of a company’s formation or if we miss that we just we just never ever get involved in terms of the sectors that we’ll look at, it’s really much more, you know, founder driven and idea driven and tam driven than it is, you know, oh, we’ve thought through everything on AI, or on crypto or on SAS or whatever, and we see all these holes. That’s not really our Mo, right, because we’re actually, we’re more interested in where the market can go versus like, analyzing where it is right now. Right. And so it’s a little bit the way we operate.
20:30
Perfect. I want to talk about some of your investments here and get, you know, more insight on your thought process. Right. So some may characterize some of your investments is for walls is right or border, right? So you’ve got, you’ve got investments in companies like Blue Bottle, sweet green, modern animal, we’ve discussed that I believe it’s like the one medical for pets. Yes, let’s start, let’s talk a minute about Blue Bottle. So coffee has been done before, some would argue that it’s been done really well, by others. It’s brick and mortar, its quick serve its food and beverage, you know, the margin profiles, the the operational complexity, the the capital, intensity of geographic expansion, you know, these are, these are all things that give investors heartburn, you know, how do you get there on a company like Blue Bottle?
21:19
Yeah. And I think, you know, the fact that it gives everybody heartburn is sometimes for good reasons, right? And, but sometimes you got to look beyond that. And you got to listen, and you got to think, and to write off a sector, like four walls, by the way, and I don’t want to be known out there in the podcast community is the four wall investor. I guess I have done a few of them. And I actually like it. But I also do SAS, and I also do hardware, and I do other things that are more deep science and tech. But on the case of blue bottle, you know, it’s a big red ocean market in terms of there’s tons of coffee, you know, options out there, there’s obviously Starbucks, and there’s Pete’s, and there was a bunch of what I’ll call Second wave type coffee companies. But when we sat down with James Freeman, and Brian Moynihan, who was the chairman, and listen to how they thought about the market, to me, it kind of blew my mind, right, because they felt that there was this opportunity for an artisanal approach, I had actually experienced that myself with James at the farmers market. So I was familiar with his style of coffee, coffee preparation, and how it just kind of resulted in a much more delicious and elegant, you know, elevated experience around drinking coffee. But you know, what was interesting was James, James’s key insight was that a lot of coffee shops had kind of been reduced down to transactional kind of experiences. And not to pick on stock Starbucks, but because I do like Starbucks for a lot of different reasons. But one of the things is interesting to me, when you walk into a Starbucks, often, it’s like you’re going through like a 711, by the time you get there to offer, you know, to order your coffee. And once again, it’s not a knock on them, it’s just they have a different model, they do other things incredibly well. They ushered in incredible advancements for employee rights and things like that, and health care and all those kinds of things. But in terms of the coffee experience, not exactly that elevated. And James felt like oh, we could at scale, have a prepare to order type environment where somebody comes in, and we make the coffee fresh right in front of them. And, and we move it through. And he had a very clear point of view, which was different from anybody else I’d ever, you know, kind of talk to about his vision and imposing his vision on the consumer, right? So things like, I’m going to read, I’m going to minimize the amount of choice here. So the paradox of choice was eliminated. And you’re just going to have, you’re not going to have any vin de grande you have small, medium large type offerings. It’s just one size. And if you get an expresso drink, well, that’s not for takeout. That’s to be consumed in a ceramic cup, on premise, and just all kinds of things that are a little antithetical, right? It’s okay, if there’s a line, you know, like a line is not bad people might talk, we’re not going to put any plugs in our blue bottles, so nobody’s gonna come in and plug in their laptop, it’s not an office, we’re not going to have Wi Fi because we’re not going to want to police that right. And we’re going to create a culture which is very centered around the baristas, and we’re going to pay our baristas more than anybody else does. We’re going to treat it like a vocation, not a transitional transactional type job. Right? That’s lumpy, because we want people that are thoughtful and love the craft After preparing delicious coffee for our consumers, and that kind of simplicity around vision, also translated into simplicity around operations, even though these things are incredibly complicated and blue bottle is incredibly complicated to scale and to run. But it did create a simplicity for us that made it very manageable and resulted in incredible margins, incredible paybacks on the units. Faster paybacks on a unit than almost any other fast casual concept out there. I think Chipotle, at the time was the gold standard at 20 months. What that means is that you’ve generated enough profit to pay back the cash outlay that you had to put in place in order to build the physical structure, right. So in our case, our coffee cafes are very expensive. They’re almost, you know, $750,000 to a million dollars. But we’re paying those things back in, you know, 15 to 16 months. And the immense popularity, you know, of the concept. And I love that I love how to the brand. I’m such a, you know, I’ve gone on record of saying this many times, it’s actually incredibly true. There have been a number of companies where I’ve been kind of excited about the idea, but when I got to, you know, did they actually have the brand name, they don’t. And when I look at them, like the brand name is everything, it really is. And blue bottle to me was just magic, because the origin story of blue bottles are what coffee was shipped in Ethiopia, Yemen, and they’re really kind of coffee producers, when they were shipping it to, you know, Vienna and Istanbul and those they shipped it in a blue bottle in order to keep it from turning rancid. And so it had this connective tissue back to something that was important to coffee. And then I love the fact that you could just put a blue bottle image on the door and on the signage, and it would translate into every single language, right, we don’t have to write the words Blue Bottle, like you just you see it in whatever it is in Japanese or Korean or whatever. So it has a has a scalability about it. That is really, really exciting. And then the last thing I’ll say on blue bottle here is I really genuinely believe, and I’ve had good fortune and we as a firm have had the great fortune of working with some of the most important kind of consumer brands to emerge over the last 20 years, the peloton and the Fitbits and the ring, doorbells and so many other kinds of consumer businesses. I think blue bottle is one of the most 10 iconic brands has been built over the last 15 years in America. They do. I think it’s that phenomenal of a brand. It’s a brand that if you’re in the culinary community, mixology, community barista community, or just somebody who’s like just generally interested in it. You can be in Indianapolis, Indiana, and you’ll know about this brand. Like even though we don’t have a cafe anywhere close to Indianapolis, Indiana, right? You just didn’t know about it. It’s just one of those brands that carries says magic stress.
28:08
We’re very excited about getting our blue bottle here in Chicago across from the Merchandise Mart and it’s coming. Well, it’s here. It’s heavily trafficked,
28:16
we opened Okay, great. So
28:20
we’re talking about difficult categories. And you’ve also been an investor in hardware. Right? This is an area that many investors just avoid altogether, right? We have a number of hardware investment investments here in new stack, and there are times where I’ll share a deal and people just, you know, paths based on the hardware elements. So you’ve mentioned a number of these notable investments that true has made companies like Fitbit MakerBot, and ring and peloton as well. What is it about hardware that gets you excited? And are there some key characteristics that must be present in order for you to engage?
28:56
Yeah, it evolves. I think we you know, we got very lucky in that we met Bre Pettis in MakerBot, Embree was one of the most unique and still one of the most unique individuals I’ve ever met in my life around entrepreneurship. But he was a teacher, I think out of Seattle, and then moved to back to New York or moved to New York and started this company in Brooklyn. And he had a thing when I first met him called the Batcave. And it’s just you know, it was all really geeky. And what he was doing was a 3d printer but not just a 3d printer like a 3d printer that was had ambitions as he said to me in the pitch he said are said to us in the pitch he said you don’t get it these we’re not just we’re not just going to print plastic trinkets in you know and silly things like that, which are fun too but like we’re going to be printing organs. And I remember like, What’s he talking about? Like you know, print organs, you know, like and sure enough like you fast forward and like, you know, these 3d You know, printers can actually print organs, right. And they’re used within hospitals, and they’re used in schools, and they’re just, they’re incredible machines, we got lucky in the sense that Bree was such a compelling spokesperson for the company, right, and just a really unique individual. And he was able to bring this kind of obscure machine, you know, into kind of the minds of normal people. And what we found was really quickly, these machines were getting bought by schools, like every school had a MakerBot, like, if you didn’t have a MakerBot, and like, whatever, you know, and we just, you know, I thought this market would take three, four or five years maybe to start to show itself. And I remember saying that to our team, like, you know, we got to be really patient on this one, it’s gonna have a lot of ebb and flow. And that wasn’t the case, we just came out of the gate, and it worked. And it just had traction. And it was amazing. That company ended up getting bought by Stratasys, which is a big public market company that transaction details were it was a unicorn type, you know, outcome. And it gave us a lot of confidence that actually, this thing that we kind of did on a whim with absolutely zero knowledge around hardware might work. And it did. And so we then met, John met with James Park, and Fitbit, that was our second one. And obviously another massive hit, we kind of got away with it, we definitely got away with it on MakerBot, which was just selling hardware. And we were also selling some materials, but really just hardware, right. And, and that’s kind of not a great model. You know, at the end of the day, with Fitbit, we were also selling a lot of hardware, but like a lot, a whole lot like these things were flying off the shelf. But we didn’t really have a recurring revenue model. And we started thinking about the network effects of the community from a software perspective. And we started the very early work on that when the company was going public, and the company got public, and we all know had a meteoric rise and and then ultimately, it was not delisted, but was taken, taken private by Google for a massive, you know, transaction number. But there was the first time where we started thinking about like, okay, it can’t just be hardware, it’s got to be an integrated hardware software play, which has a recurring revenue component to it, right. And if you can get that variable, correct, you can build a massively scale, the massive scale business. And so with ring, we got there, and we started, we had great, we get to a point where we realized we could actually sell the hardware, the ring Video Doorbell hardware, almost at cost, right, because we would have a subscription plan for the management of the video data and storage of it. And if we get that that was highly profitable, super, super, super high margins, much higher margins, and you’re gonna get on the hardware unit. But then Amazon came along and bought the company, another unicorn, you know, kind of outcome. And at that time period than we were getting involved with peloton and peloton finally nailed the model, like really nailed the model in understanding that it was to buy the hardware. And we figured out how to sell the hardware at a margin. Like, you know, these are expensive bikes. But most importantly, we have recurring revenue in that people pay a monthly subscription fee to have access to the content. And it’s that lock in that’s around 20 to 25%. I’m not sure where it is exactly today, but somewhere in 20 to 25%, that Wall Street loves right because it creates certain predictability in the model visibility into the bottle. And also tells you a lot when consumers one of the knocks on that kind of equipment is that they become coat hangers in your room. You just don’t use it anymore. And what was in what you know anybody interested in the company could see was no crazy engagement numbers, right? People logging in almost daily, certainly weekly. And people not very low churn, almost non existent churn on the subscription piece of the equation. We learned a lot that I would say that was like our master course it kind of took 10 years, but what by the time we got to that were like, Okay, we now know what to look for in hardware. Right?
34:20
What is that 20 to 25% metric is that over a certain period is that ma use
34:26
just to make it simple, like so if you sold a machine for $1,000 Do you generate $200 In the course of a year, I shouldn’t fees, so $20 call that not quite $20 a month, but $240 would be 24% of that right? And so it’d be $20 a month. And so a typical peloton machines around a couple $1,000 And you know, the subscription fee is around $40 a month. That’s how you get to those numbers and they’re great numbers.
34:56
Does the new CEO pull peloton out of the sort of the The unfavored group of hardware tech companies,
35:02
I will say that Barry is doing a great job. It’s a public company that we still have some loose involvement with. And so I don’t think I should really comment in that direction, I would just say that we’re big fans of the business. And we’re super excited about where they’re headed. And we’re incredibly appreciative for the, you know, the the return on capital, that for us and our limited partners, and I think they also did it, John Foley, and his team did it with high integrity. Fitbit became one of those things where it was both a double edged sword becoming such an iconic brand, really, really quickly. And I think its user base absolutely loves it. And then I think, you know, there’s been a lot of quasi some subtle missteps that every company makes, but they get amplified in a company that has such high visibility like that. And then there’s been a few really unfortunate things that have happened in that business over time. But the company is in great position. Put it this way, this is not a business that is declining. It’s a business that is becoming more important, not less, its valuation might have declined quite a bit from its peak. It’s a great Mesas.
36:15
I agree, we had well, you know much more about it than I do. But we had a debrief as a team and we’re all quite bullish on on peloton, especially at the current price. You know, Tony, what are some of the more impactful consumer trends that you’re monitoring and or, you know, data that, that you’ve observed, that you think will influence startups and maybe lead to new tech startups?
36:37
I don’t know, if I have my pulse on the trends, it gets back to like, what we, in the opening where I talked about lack thesis, you know, I’m not that type of investor. Once again, there are other people on our team that could answer this question more crisply. But I do pay attention to certain things such as, I think the models that are winning in the consumer space are simple. And they I think what, you know, the mistake that a lot of consumer brands have made, you know, and patient is probably miss characterize them as a mistake, because those business, a lot of these businesses get to massive, massive scale. But I think simplification is an acknowledgment that I’m not going to try to be all things to all people and I’m going to try to bring a point of view into that experience that you’re going to have, that I think you’re going to quite enjoy. And you may not realize that you’re you’re going to like back to like the blue bottle, it’s really simple, like, Paradox of Choice. I mean, it’s paralyzing, you know, you go into a lot of these places, and you got to make 18 decisions, just to get your cup of coffee, you know, that’s exaggerated, but you probably have to make three, four or five decisions. And it’s just like a silly, I just want a cup of coffee, you know, and that complicated, right? And like, okay, maybe I’d like them to single origin versus your blend. Okay, that’s it, that’s really the choice that you’re making. And I just think models that nail that are going to win, we have another one that I’m involved with, I’m on the board of called Holy Grail doughnuts. And I am as bullish on that as, as I was on blue bottle, or as we were on sweet green. And once again, it’s it’s simplifying choice. And it’s the same kind of playbook and that, you know, most of the donut shops that you go to today, they’re producing their donuts early morning. So it can be 10s of hours before you actually buy it sitting in a display case for a long time. It’s not fresh it all the the ingredients that are the source ingredients to begin with are questionable. And it’s pretty junky, you know, experience and you go into a holy grail. And there’s five doughnuts, that’s it, there’s, you can get a four pack, or you can get a single, they call it the hot single and the hot single is just a honey, you only have one choice, honey donut, that simplicity of choice is so empowering for the consumer, right. And it’s also empowering for us because what it says is we’re going to rotate through seasonality and you know, all these things that which really express to the consumer a level of creativity, a creative a timeliness seasonality, fresh perspective, unique flavor combinations, collaborations, all that kind of stuff is really, really fun for the consumer, if you can simplify it, but once you put it in there and you’d like to hear the day’s going to TGIF, you know of everything got his Fridays, or whatever that little works to you know, I should be really clear, like those models do work, where they really have something on that menu for everyone. Right? But I think the models that win are the ones who figure out like no, this is my core constituents, and I’m going to not only give them what they want, I’m going to actually nudge them along and bring them on this journey in it. introduce them to new things, right. And I think that’s really fun when you can get to that relationship with a consumer. It’s no longer transactional, it’s experiential, it’s very different. Right? Go into, you go into something where you got like a lot of menu choice that’s very transactional, right? It’s very unsure. It’s like when No, I’m guiding you. I’m going to bring I’m going to elevate this experience, I’m going to bring you someplace that you know is gonna blow your mind. Right. And so we have these doughnuts from Holy Grail, which are now just in LA. And in Hawaii is where they they came out of the stones are based on taro root versus cake flour. So they’re basically they’re not gluten free technically, because they have a little bit of cake mix in it to make it rise. But for the most part, they’re gluten free. And ironically, they’re vegan. And we didn’t set out and the founders didn’t set out to make vegan doughnuts. And we don’t talk about them as being vegan doughnuts. Vegan means bad taste, consumers. And by the way, as these things are not bad tasting, these are the most delicious doughnuts you’ve ever tasted in your life, and they’re prepared on the spot. Come in, it’s just like blue bottle, you prepare it, we make it, you order it, we make it not made beforehand.
41:11
I love this whole message about like the elegance of the experience. And the way it makes makes the consumer feel, you know, a lot of sort of the historical product, teachings and stuff were about utility and feature and benefit. And you kind of lose that, you know, in, in a lot of these success stories, but blue bottle makes you feel a certain way. The experience is great. If you ask somebody to articulate why they go back. Maybe they’ll tell you they like the coffee or something. But it’s the overall experience that draws you back in. It’s a feeling that becomes hard to articulate. Yes, thanks.
41:46
I mean, we work these things too hard. They were hard in the very beginning, right? It’s hard to wrap your head around a million dollar cash outlay for a cafe. It’s a gut check moment, because your instincts are no we got to get these units down to 300k 400k. So they can be profitable, faster, faster, but Right. Like, it’s like no, and James to his credit like like NSFW. Like. By the way, I don’t think James has ever used a curse word. So that’s I don’t what associated FW with him, but because he’s such a refined and sophisticated individual. But now that’s not what he wants to do. He wants to build something that’s beautiful. And you go in, and you’re like, This is a really nice, clean modern space. That’s it. It’s part of the experience. And I want to come back tomorrow, because I like it.
42:36
Exactly. Whereas I don’t want to knock on Starbucks. But it’s not. It’s no longer a pleasant experience going through the the assembly line transactional experience, in my opinion. Switching gears a bit here at Tony, we’ve we’ve seen the power of technology as a source for good in the broad benefits on health and standard of living, etc. We’ve also seen some negative impacts, it’s causing higher rates of mental health issues and young people there’s manipulation via false headlines and narratives. Mike could go on. And most recently, many, including Elon Musk are expressing caution and concern specifically with regards to AI. But you and I have discussed AI before to start here. Do you think that AI is a significant threat to humans? Why or why not?
43:23
I don’t have an opinion yet. I think it’s exciting. And if you’d asked me the same question about social 15 years ago, it was of course, it’s a agent of good, right. And then we’ve seen that it can not be good. I mean, and we we should caution ourselves, you know not to throw the baby out with the bathwater, so to speak, that social does have a lot of good, right, it still has a lot of good today. But there’s a lot of nastiness that we didn’t, we didn’t plan for or that we didn’t suspect would happen. With AI. I think it’s interesting, the conversation is very quickly digressed into these camps of like, oh, this is really threatening, and it’s bad. And that’s going to result in the elimination of jobs and humanity. And it’s like a little fear mongering and, and maybe with reason I might do this call with you six months from now or six years from now and go like, wow, yeah, I mean, the blinking lights were were there. Right, you know, day one. But I suspect that’s not the case. I suspect like with a lot of technologies, there’ll be a lot of energy and ebb and flow put into creating positive, you know, you know, net positive for humanity, you know, type companies and services and all that. And I’m sure there’ll be some things that are that are super negative. So let’s take here’s, here’s a good one. So, you know, we’re close to Stanford, and we spend time, you know, talking with their students and people like them. We have a young man who is joining our firm who runs one of the CES labs there. For students. We talk a lot about AI and it’s interesting 90 I think it’s 91% of Stanford students admitted in the fall already in the fall, right? This is all relatively new stuff that they used judge Chet GPT, to assist them in writing their, their winter papers. And I think it’s like, oh, that’s plagiarism. And that’s cheating. And it’s all of this. And that might be right. But maybe what is happening is education might have to change, instead of getting into an arms race of how did they detect and eliminate and all that kind of stuff, which is the first knee jerk reaction to it, once again, might be the right long term reaction, you know, we’ll see how it all plays out. But I suspect it’s not. And I suspect what ends up happening is that it says, okay, sure, go ahead and use these tools to assist you, you still gotta go edit it, and you still gotta like, put your voice into it. And then I’m going to put more emphasis on critical thinking and, and expression and things like that. And so maybe education is going to radically change. And we might look back on it and go like, wow, magic, like that was a great change for education. Right? You know what I mean? But right now, it’s all like, oh, it’s all fear mongering around? It’s, it’s cheating? I don’t think so. I really don’t think that’s what it is. I think people have been using resources for a long time, both pre internet and post internet, right, I think we’ve been using whatever resources we can, in order to formulate opinions. Right? And so I think we’re gonna see how this plays out just education in a really positive way. And I suspect, we’re gonna see a lot of that across every sector, I can’t wait to see, you know, what is the thinking around agriculture? What are the thinking about all these sectors that aren’t so sexy and consumer facing, but our underlying things are like foundational pieces of how we live, right, and we’ll see where the AI intersects with that. And I think it’s incredibly exciting. We, as a firm, we have a handful of AI beds, we’ve had them in our SaaS companies, where it’s a variable in their mix, it’s not the driving, it’s not like they came to us on AI for voice or I’m AI for the switching, you know, router technology. But it’s definitely integrated in so we’re quite familiar with it for a while. And then we have a number of robotics companies, which makes sense because of our hardware exposure. But a lot of these robotics companies have aI integrated in for obvious reasons. And so beyond that, though, I don’t think we’re, we’re not rushing to put dollars out the door against the first wave of ideas here. And I’m sure we’re gonna miss some massive companies, whatever. But I think we’re trying to be a little bit more patient. And just think through the quick evolutionary steps in the market, what’s happening, where how did the ideas get refined, and I fully expect that this latest button that we we raised, will have a very large percentage of companies will be AI based. But we don’t have to run today to get to pay attention here. Pay attention moment.
48:23
Right? It you know, you’ve been at this a lot longer than me, you’ve seen platform shifts, completely changed the technology landscape, right? The Internet itself, you are an entrepreneur, we’ve seen mobile. To me, this feels like one of those paradigm shift moments and the early in largest winners in the technology space from some of these other paradigm shifts. I’m interested in thinking through, you know, what are some insights? And what are some patterns that we’ve seen during some of these shifts, that, you know, we can take advantage of as investors? Is there anything that you think we should be mindful of that you can reference back from history and think about what what emerges with these big shifts? As we’re seeing limitless apps being built? What are some opportunities to kind of lean into and be most mindful of?
49:15
Well, I’ll stay journalist here. First of all, you have to have a voracious appetite to inform yourself. And you have to be also careful, at least I tried to be careful not to overly formulate, and box myself in on a thesis so early in the evolution of a market like this. I mean, it, it serves you poorly if you jump too quickly, right. But you do need to inform yourself and be lockstep in with how it is evolving. For me the best parallel here, and I’m sure I’ll change my thinking over time. But today, it feels like the transition of, you know, the browser to mobile and in GPS in particular to be the better analog. Because when I think about the internet, it’s a massive, that was a massive, massive change. But here you have begin, but you didn’t have an embedded market yet. Right? It is, you know, you I just watched something the other day on a flight. And they were just talking about, like the early days of the internet. And, you know, it’s like today’s show, and Brian gamble or whatever. And he’s like, so what is the internet, World Wide Web, you know, and it’s like, everybody’s kind of learning here is different. We all know what technology is, we’re all interacting with technology, most like 90, I mean, most of humanity is interacting with technology of some sort, which is closer to when mobile happen in most particular when GPS got unlocked in mobile, right. And when GPS got unlocked in mobile, all of a sudden, it enabled us to shift the thinking from Oh, I’m just going to copy pixel for pixel by website, and just make it render correctly on a small screen on a phone to know this is underlying technology, which is radically different that has location tied to it. And when locations tied to it all sudden, you can have things like Uber, you know, or Airbnb, or whatever, all these services, right, that we could not have imagined at the beginning of mobile, like literally could not have imagined any of this stuff. And it’s amazing, right? And so I think this is what we’re going to see with AI. Because, yes, there’s going to be, let’s make all of our software companies and all of our consumers make everything we’re working on more efficient, right? And so we’ll leverage AI into code and everything, right? But it’s going to be like, what does it unlock? What does it enable that we’re not even close to understanding at this point? That’s what I think is going to be really exciting. And that’s also where there’ll be some stuff that falls out. That’s not great for society. Right? We already know that. Hopefully, society will be smart and figure out how to stamp that stuff out and not repeat some of the mistakes that we’ve let happen in social. But maybe I’m just being pollyannish.
52:13
I hope you’re right, Tony, I hope you’re right.
52:15
I got I hope I’m right. And but I have to say for you know, since I’ve been working in venture and around technology, this is the most bounce in my step I’ve had in a good 20 years. And I find this really exciting. Whereas I was very appreciative and very interested, but not excited about all the web three in the crypto stuff, right, which we have lots of bets in as a firm. And I’m very happy that we do even despite where the market is today. Still, I’m still bullish that that stuff will play out in really valuable ways. But this is just mind blowing. And this is so exciting. This is really exciting. This is not just a better mousetrap. This is a totally new mousetrap, right? And crypto feels like a better mousetrap. It’s like decentralized versus centralized. And it’s currencies versus other currencies. It’s like whatever. I don’t want to go into crypto madness again, because nauseating. But but but
53:20
I mean, this looking at the range of real applications that you can see the value near term that are being built. Yeah. It’s astonishing. It is astonishing.
53:36
The young, but there’s not,
53:38
I feel like it’s one of the best things about being a venture capitalist, as we get to talk to these young folks or middle aged folks or whatever, they may be building these transformational companies. It is nice. I tend to outsource the ideas to them, because I’m never going to be as deep in a segment as the entrepreneurs that we invest in. Yeah, hopefully not. Right. Hopefully not just a wrap up here. Tony, do you have any habits, tactics or techniques that are a secret weapon?
54:07
Yeah, I did. All right. This is I hope you could wrap your head around it. It’s pretty simple concept. But it’s one that was imparted to me from my father. And I think it is amazing concept. It’s the concept of 50.1%. And what he was alluding to was he says, you know, in life, you’re going to have lots of moments where you might get upside down with somebody or a company or whatever it is, you’re just gonna get you get upside down with them. And sometimes for right reasons, and good reasons. But the trick in those situations, and hopefully there’s not too many of them, is to not be at 49.9% or below on the ledger. Just get it to 50.1 If you get to 50.1 is just kind of out of sight out of mind neutralize just enough in the positive camp that you don’t have to carry the burden of the dislike or The disagreement with you, because these things are all things that you carry with you when they’re in the negative side of the ledger. And I think it’s some of the best kind of silly, common sense advice that I was given at an early age. And it’s guided me. And yes, are there a few people out there in the world? Where I’m below on the ledger? Yes, absolutely. You can’t be at my station of life and not have that. But at the same time, are there a lot? No, you know, there might be a few that I’m unaware of. But I think the more powerful thing is just park, you know, to be able to park, that relationship, or that disagreement or that burden, kind of just enough in the positive camp where you just, you know, you can move on from it. And it gets good advice and adventure. I think if you think through of all the situations that you’re going to be in, or that you have been in, for as an entrepreneur, I think that advice will serve you
55:58
really well. Wonderful. And then finally, here, Tony, what’s the best way for listeners to connect with you and follow along with True Ventures?
56:05
For True Ventures, we have a newsletter that we put out, and you can go onto our site true ventures.com. And you will find you can sign up for that make, it’s a really great way we also, you know, obviously have Twitter and Instagram and all those things. And then me for individually, I used my Twitter account is Tony sphere, you know, is my, the Tony Spear is my first company. So I have a security sphere. I also have Tony Conrad, but I never use that on Twitter. And then on Instagram. It’s just Tony Conrad. And that’s really it.
56:41
That’s all Thank you, sir. Pardon the pun, but it’s been a true pleasure and really appreciate all the insights and words of wisdom today. So thank you, Tony.
56:48
Thank you, Nick, really great. And I appreciate you. So thank you.
56:52
Thank you, sir. All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same accomplishment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening
Transcribed by https://otter.ai
