Blood capital, WeWork whisperings, and gobs of cash for smiles and vegetables

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Here’s the transcript for Equity, if you’d rather read the conversation:

Connie Loizos:              Hi and welcome to Equity. I’m TechCrunch’s Connie Loizos. This week we have TechCrunch’s Danny Crichton.

Danny Crichton:           Hi.

Connie Loizos:              Crunchbase News’s Alex Wilhelm.

Alex Wilhelm:              Hello everybody.

Connie Loizos:              And this week our special guest is Brian O’Malley a general partner with Forerunner Ventures. Brian, thank you so much for coming.

Brian O’Malley:             Hey Connie, thanks for having me.

Connie Loizos:              Great to see you.

Danny Crichton:           All right, so before we get into the regular topics, kind of the venture world that we usually talk about, I want to do a digression unto the public markets because in the last 48 hours they’ve been leading the headlines. You’re listening to this probably on Friday. It’s Thursday right now, and this has been the second day kind of catastrophic declines in the public markets. The NASDAQ, S&P and the Dow, not to mention global indices if you’re listening somewhere else, have all taken pretty significant damage. Just some top-level numbers, I think the Big Five tech companies, so that’s Apple, Amazon, Facebook, Google and Microsoft or Alphabet, Microsoft, yesterday lost about a hundred and ninety billion in combined market caps. Today they’re off about 24. So that’s an enormous bout of value deletion. And this trickles back down all the way to the SaaS market and a lot of other kind of tech genres. So I was kind of curious what we all felt while this was going on. I couldn’t stop watching CNBC.

Connie Loizos:              Well, first of all, did anybody pull an IPO this week? Or in the last two days that was planning to go out? Do anybody know? This would be the worst day to go public.

Danny Crichton:           Anaplan’s going out soon, right?

Connie Loizos:              Yeah, is it going out right this second, or?

Alex Wilhelm:              They could be pricing this afternoon. This is what happens when I’ve had a crazy day. I’m a little bit behind. But Anaplan’s final I think it was in September. Definitely a long planned offering, and they filed when the sun was shining. They weren’t expecting the flash flood, I don’t think.

Connie Loizos:              No, no. There was another one. A Philadelphia based maker of lithium batteries that strangely spun off earlier this year from a pesticide maker called FMC called Livent, and I know that its shares from today-

Brian O’Malley:             Sounds like a madliv right there.

Alex Wilhelm:              A battery company in Philadelphia from a pesticide company in Georgia.

Connie Loizos:              Yeah, yeah, exactly. Oranges, bananas.

Brian O’Malley:             Eating bananas.

Alex Wilhelm:              And a division fund comes and buys all of it. The only other IPO that I knew of was Yay-yo. It was just Y-A-Y-Y-O, which is that company that used to help people rent cars to use Uber and Lyft.

Brian O’Malley:             Is that little John’s company?

Alex Wilhelm:              I don’t know, but it’s also a cocaine joke, because yay-yo is slang … Anyways it’s terrible.

Connie Loizos:              Is it? I don’t know that. I’m so old, I guess. So wait, wait. Is that a Chinese company that went public here, or that’s a US company?

Alex Wilhelm:              It’s an American company that’s trying to go public here. It’s been on the IPO calendar for a little bit, and it’s never actually managed to get off the IPO calendar. So I don’t think it’s going to go out. So that one might get pulled, but I wouldn’t say it’s because the S&P took a dive. I think because it’s a terrible business.

Connie Loizos:              But what’s happening right now? What’s driving this? There’s been a lot of awfulness for a long time. A lot of uncertainty, tariff war we’ve having. Brian, do you have any idea? What sparked this latest?

Brian O’Malley:             Sure, so my day job is not a public market investor, but I can be like the rest of us.

Alex Wilhelm:              Welcome to equity. We don’t care what you do.

Brian O’Malley:             Actual knowledge need not apply. Yeah, if you look, the multiples are way up on a historic basis.

Connie Loizos:              Right.

Brian O’Malley:             There’s questions about interest rates. So that has caused some people to think about whether it’s time to hit the pause button. And usually when people start selling, other people jump on board …

Connie Loizos:              Right, right. Contagion.

Brian O’Malley:             Because no one really knows what’s going on on a day to day basis. So it’s either a great time to buy, or it’s a good time to run for the hill.

Connie Loizos:              You know it’s interesting, speaking of a good time to buy. I was looking at a Business Insider story earlier today. It was talking about all the people on Robinhood, this trading app that let’s … Millennials especially I think is their target audience … Trade for free, and a lot of them are buying up Tesla right now. I think they said a hundred and eleven thousand people on Robinhood have bought it because Tesla has … It’s off, I don’t know how many percent, from its high, and I guess they see it as a buying opportunity. Things are off. It will be interesting to see how quickly they go back.

Brian O’Malley:             Yeah. It’s always scary when people’s stock picking decisions are based on funny Tweets, as opposed to business fundamentals.

Connie Loizos:              Right, right, absolutely.

Brian O’Malley:             We’ll see.

Alex Wilhelm:              People are very, very dumb. Danny, are people panicking in the streets of New York? Is there chaos? Are there riots? Is there street signs? What’s going on?

Danny Crichton:           There’s rain in New York, so no one’s going outside, Alex. But I will say in covering the Chinese tariff battle, I think it’s still the massive underpinning for this market change. You look at some of the discussions particularly in the last week, whether it’s the Bloomberg story about this chip, or non-chip as it might be. We also had a Wall Street Journal report, I think in the last 24 hours, that the Justice department has arrested the first Chinese spy for industrial espionage. So it looks like it’s going to get more hard and more intense. I think for the global market there’s just a lot of concern all around the board.

Alex Wilhelm:              I mean Thomas … I’m going to mispronounce his last name. Tongus, from Redpoint Ventures. One of the more, I think, intelligent investors in the SaaS base. He has a very great personal blog, kind of going over his view on SaaS metrics and economics that everyone tends to read. He had a great post out on the 9th of October, discussing the rise and public multiples for SaaS companies, and how far they are outside of historical norms. So my thesis about why this happens is that it had to happen some time, why not now? We’ve pushed things so far for so long, now that the rubber band’s snapping back, maybe just for a couple of days even. I’m surprised that we’re surprised at this. This should happen more often we’re this far up.

Brian O’Malley:             I almost say it’s the opposite. I think we’re surprised that it took this long in the first place.

Connie Loizos:              Right, right, right. Yeah, yeah, yeah.

Danny Crichton:           Amen.

Brian O’Malley:             Right? So then you start to forget about the fact that this can happen. Usually these are good times where some companies struggle. Other ones that have the right fundamentals … One of the main reasons why public market investors love SaaS companies is because of their predictability. And a lot of those macro trends still have a long way to go. So the right companies will persevere. It was like buying NetSuite and Salesforce in 2009 in December. It was a pretty good time to buy. Many of those stocks are up 20, 30x since then.

Alex Wilhelm:              Yeah I think, as always, good businesses will be fine. It’s kind of the old joke, who can raise right now? Only the good companies. It’s always true.

Brian O’Malley:             Actually everyone can raise right now.

Alex Wilhelm:              I just got burned by a venture capitalist. This is a new low in my life. It’s a phrase you can use it any point in the business cycle, but I do agree, it sounds very silly now.

Alex Wilhelm:              On that point, let’s talk about WeWork.

Connie Loizos:              Yes, speaking of raising money. We don’t know what’s happening yet, but SoftBank and its massive 100 million, or I guess 93 million … Billion, excuse me, billion Vision Fund.

Brian O’Malley:             Dr. Evil.

Connie Loizos:              Exactly. It’s apparently, according to the Wall Street Journal, talking to WeWork about taking a majority stake in the business. I don’t know what that means exactly, but they plan to pour a whole bunch of money in it. So SoftBank has already invested something like 4.4 billion dollars in WeWork, which is that co-working space that’s taking over the universe. According to the Wall Street Journal, now it’s talking about … SoftBank’s talking about investing another 15 to 20 billion in the company. This is enormous for … Literally and also figuratively. This will be a quarter of SoftBank’s fund, which is pretty crazy that it would invest so much in this company.

Connie Loizos:              Also it’s interesting because … I don’t know what this means with the company. If this means that Adam Neumann would be … I don’t know what it would mean for the management of the company. Brian, what do you think of the deal? [crosstalk 00:07:42]

Brian O’Malley:             Yeah I think there’re three things that are kind of interesting here. The first of which is just the sheer dollars involved. I remember when the [inaudible 00:07:51] team put 50 million dollars into Lyft, and we all thought it was nuts.

Connie Loizos:              Exactly.

Brian O’Malley:             So we’re talking about over 10 billion dollars into a company. It’s really because SoftBank is not a venture capital firm. They’re not an equity firm. They’re really looking at broader market trends, and macro trends, and being able to put massive amounts of money to work, which is something that, if you’re a large enough sovereign wealth fund, they’re really the only game in town that can put that much money to work, and actually have a strategy for returning it.

Connie Loizos:              What do you think of WeWork? And I had a chance to sit dow with Adam Neumann a couple of … I guess a Disrupter or two ago. And he really was selling the vision of WeWork as a technology company. Of course I think there’s some debate about how far he is from fulfilling that vision. It’s still very much a real estate company. Do you think even at 20 billion dollar valuation, which is where WeWork is today, sounds reasonable?

Brian O’Malley:             Yes, so I would have called WeWork wrong from the get go. When I came up in the venture industry, it was all about asset lite businesses. It was all about driving innovation through technology. I actually invested in a company called Loose Cubes, which is basically leveraging the excess space in offices to create this kind of marketplace. A lot harder than just renting out buildings and leasing it to other people, and ultimately it didn’t work out super well. So I think one of the big things that is different about WeWork, is really not the technology. The technology’s not why people are going there in the first place. And it’s not driving the majority of their revenue. It’s really that they’ve been so amazingly effective at raising capital to date. Their ability to raise cheap capital has been what’s enabled them to create an experience that a lot of people like. It works well from a working environment perspective.

Brian O’Malley:             So I don’t know if they have to be a tech company at the end of the day. That might ultimately impact their multiple, but their impact in terms of how people are working, and establishing this trend, is clearly here to stay. Now the question is at the end of the day, are people willing to pay a premium to work at a WeWork? Or, does it get to be become the Starbucks of co-working, and people would rather work in one of the many boutique type offerings that are popping up? So ultimately, it’s a real estate game, as their ability to charge a premium over what that space would lease for otherwise.

Connie Loizos:              Right, right. It’s certainly a trend, as you say. That could change. People could decide to go a certain opposite direction. Have you looked at boutique co-working spaces? Is it something that’s ever been interesting to you?

Brian O’Malley:             Yeah again I think it’s not … Again, historically I would describe it as not my job to invest in those companies, although again, WeWork would have been a good one to do early on. But it is certainly something that a lot of our companies are looking at. If you think about it, a lot of the issues here is just the way the leases have been structured in these large, urban environments, is that the small companies that have only been around for a year or two, are signing five, seven, 10 year leases, that they know they will never be in those places. They’ll either be long … Far bigger, or they’ll be long out of business.

Connie Loizos:              Gone. Right.

Brian O’Malley:             And so a lot of what WeWork brings to the table is just the ability to cut that lease into much more digestible chunks, and enable you to flex up and flex down. For small companies, that’s a huge offering.

Connie Loizos:              Well the big deal too I guess for the company is getting the big companies now that are doing that as well, because they’ve also bulk up during times like this, where it’s go, go, go for a decade. But in the case of a downturn, they’ve got Microsoft and many other under-priced clients, they can just sort of be like …

Alex Wilhelm:              But that flips. We just talked about the market falling apart. Who holds the leases in the end of the day? It’s WeWork. So if all these businesses flex down, as we were saying, they could be left holding the financial bag. And the last numbers in the company are even during this amazing boom time, when co-working is hot, and everyone’s moving into these spaces, they’re still losing oceans and oceans of money on an operating basis. So the company’s managing to not do well right now. Danny, go for it.

Danny Crichton:           No I was just going to say, you’re absolutely right. Even just in New York, these are numbers from the Wall Street Journal. There’s 265,000 desks in WeWork, in 287 buildings across five million square feet. So WeWork is now the largest commercial renter in Manhattan.

PART 1 OF 3 ENDS [00:12:04]

Brian O’Malley:             … in square feet and so WeWork is now the largest commercial renter in Manhattan. And so, any down turn that affects the tech industry, the ad industry, the finance industry, it’d be basically anything, WeWork’s gonna be the one holding those leases and in many cases, they’re 15, 20 year leases.

Danny Crichton:           That’s incredibly long. So, that’s two cycles of the business cycle right there. So they’re gonna have to hold these through, good times and bad, twice.

Brian O’Malley:             I think one of the things that gotta take a step back and look and say, “Look, what is their ultimate business model?” And today their business model’s been raising gobs of cash, right? And they’re very good at that. And so, that’s created a competitive advantage in their day job but it’s also something that they’ve been very good at, and it’s one of these questions that when you look at venture funds or you look at people that are investing lots and lots of money, is their day job the fees that they’re getting or is the day job the carrier they’re getting? And, sometimes when you look at these startups they might have generated five million dollars of revenue but they’ve raised a hundred million dollars of capital, so their salaries are far more getting paid by the dollars they’ve raised than the customers that they’ve served.

Connie Loizos:              Right.

Brian O’Malley:             And so, I think WeWork has been very effective at that to-date and the question is, how far in the future do you need to look? And I think that again, they offer a very good product and you can draw a chart where the lines converge and the business all makes sense, but to-date, the biggest thing that was not obvious about WeWork was their ability to raise lots and lots of money compared to a Regus or someone else that historically been in that space and innovated in 20 years.

Connie Loizos:              Right. Well, that’s why I think the technology piece, even though it’s minor today, could become more important over time. Basically like like office management and I think they are sort of already licensing that technology to companies that don’t want to necessarily move their employees into WeWork but wanna turn their own spaces into more WeWork like spaces. Anyway, it’s-

Danny Crichton:           Yeah.

Brian O’Malley:             I think it’s super cool. I think layering software on top of hardware, and these guys are just buildings, think about it however you want, it is neat, but they’re gonna raise more money … I think we can all agree on this … and so, they’re gonna add even more expectations to fulfill and so I’m worried if that technology component can kind of grow into the sort of value, to fill in the valuation gap they’re gonna have.

Connie Loizos:              It’s … yeah. They’re definitely … the sands are going through the hourglass.

Brian O’Malley:             Yeah.

Connie Loizos:              But what’s interesting about this deal too is … so SoftBank, now I guess it was maybe in Recode I saw earlier today them saying, “This is a possibility.” First of all, apparently there’s tension in these talks, so I don’t know what that means exactly, but on top of whatever was already happening, WeWork has to deal now with sort of a reputational hit that SoftBank seems to be in the midst of right now and that’s because of SoftBank’s biggest investor, which his Saudi Arabia, and it’s crown prince Mohammed bin Salman-

Danny Crichton:           Or MBS, as we tend to call him.

Connie Loizos:              Or MBS, which is a lot easier to say. So, I’m sure listeners have been following this case to some extent, but there is a missing journalist who was most recently a columnist for the Washington Post. He disappeared at the Saudi Embassy in Turkey. He is believed to be dead. He didn’t … there’s footage of him going into the embassy and not coming out. Basically Turkish officials have said that they think MBS was responsible for basically ordering a hit on this guy. We don’t know what happened but either way, it’s sort of kind of brought to the fore the fact that MBS and Saudi Arabia are not like your typical LPs and though money has been coming into the venture industry for quite a while from these sovereign wealth funds, SoftBank has raised so much from this group, forty five billion dollars, and it’s … MBS just last week said he plans to commit another forty five billion dollars to a second Vision Fund.

Connie Loizos:              So it’s kind of complicated. Brian, do you have any thoughts about how sort of, I guess VCs and potentially, their founders, should be looking at all this, if at all? I mean, think it’s relevant, but of course it’s easy for me to say, I’m not an investor.

Brian O’Malley:             Sure. So as a venture fund, we care a lot about where our money comes. We take a lot of pride in the LPs that we work with, not just because of institutions that they represent, but because of the longstanding relationship that we hope to have with them. But, historically, it’s been something that founders haven’t spent a ton of time focused on. They might look at the venture firm, they might look at how established they are, but very rarely do we get questions in terms of where our money’s ultimately coming from.

Brian O’Malley:             And so, even though this whole situation is tragic and it’s still TBD what actually happened, I’m not sure if this is gonna materially change how founders look at working with SoftBank ’cause SoftBank already has several materially different things working with them versus the last big innovator, which in my mind was really DST. And DST’s whole model was showing up and saying, “Look, we’re gonna give the founders a ton of control, we’re gonna write big checks at big numbers, but we’re largely gonna be very passive.” A lot of that money originally emerged from Russia and that wasn’t a huge factor at the time.

Connie Loizos:              Right. Right.

Brian O’Malley:             But SoftBank is showing up and they’re putting operators on the board seats that have a ton of experience. They’re buying a lot of control of the companies. They typically will have terms on their deals, which are not always the most favorable terms. So I think the focus is still gonna be on that and the right deal with SoftBank could be a huge pro, but the wrong, and I think this is one of the questions that the WeWork team might have around a majority control deal, the wrong deal can ultimately put a company in a more difficult position.

Connie Loizos:              Right.

Danny Crichton:           But DST was private money out of Russia versus this is public Saudi money.

Brian O’Malley:             True.

Danny Crichton:           So we’re talking about a private fund of a Russian versus public money from the Saudi Arabian government effectively or ruling family, if you will. Here’s a headline from August 22nd, 2018 from The New York Times: Saudi Arabia Seeks the Death Penalty for Female Activist. This is the country it’s been all along. Why was this ever okay?

Connie Loizos:              Well, I … oh, sorry, Danny, go ahead.

Danny:                         I was gonna say, I mean, I think one of the challenges we’re facing is as you get to these larger and larger fund sizes, the universe of potential LPs just shrinks massively, right? Like even a Harvard, which has one of the largest, the largest university endowment, probably has a total of maybe 10, 12 billion in alternatives and probably assigns maybe one or two billion total to the venture industry across multiple funds. So, if you wanna raise a 100 billion dollar fund, sovereign wealth, massive wealth managers which come from the oil industry, Russia, from China, you tend to get into a tougher group of LPs that I think the VC has traditionally participated from.

Brian O’Malley:             Yeah and I almost wonder if it’s the inverse, right? Which is, “Hey, there’s all this money out there that is looking for some sort of alpha and some place to put itself. It’s looking to diversify away from things like oil, which you can see that the trend line might not be the best on that over many, many decades. And so, the question is, did the funds start out and say, “Where can we go raise this kind of capital?” Or did they start and say, “Hey, there’s all this capital out there, what’s the right sort of vehicle that can be effective in deploying it.” And I remember this conversation, it was really when the unicorns concept started getting going-

Danny Crichton:           Like 2014-ish?

Brian O’Malley:             2015, 2014-ish.

Danny Crichton:           2015. Got it.

Brian O’Malley:             And there was lots of questions about whether any one company would be successful, but a lot of people at the time were saying, “Hey, if I could just buy the basket of all of these unicorns, I’d feel really confident in that.”

Connie Loizos:              Mm-hmm (affirmative).

Brian O’Malley:             And if you think about what SoftBank’s doing,-

Connie Loizos:              ATF, basically.

Brian O’Malley:             … it’s really buying the basket of these companies … these unicorns, and if you have hundreds of billions of dollars that you gotta put somewhere, it’s not about strategy.

Connie Loizos:              Well, also in fairness to MBS, if I can … I can’t believe I just said that.

Brian O’Malley:             I cannot wait to hear the rest of this sentence.

Connie Loizos:              Another of SoftBank’s really big LPs is Abu Dhabi and it’s Mubadala Investment Company. They’ve got a 15 billion dollar stake in SoftBank and they’re also … stoning is legal, people are disappeared, I mean, so … but, what’s interesting-

Brian O’Malley:             People are disappeared.

Connie Loizos:              They are.

Danny Crichton:           That’s a euphemistic way of saying murder. [crosstalk 00:20:14]

Connie Loizos:              I mean, I’m just saying there’s … yeah, a lot. It’s terrible.

Danny Crichton:           I mean, we’re talking about theocratic despotic governments that murder their own people.

Connie Loizos:              But it is really … these are-

Danny Crichton:           With impunity.

Connie Loizos:              These are … they’re very different LPs than VCs are used to dealing with. So we’ll see how this plays out over the long-term. But, I will say … wait, wait, wait, I’ve gotta tell you something else. This is an inside tip, but I think it’s interesting. So, Mubadala also established a 400 million dollar fund out here in Silicon Valley a year ago and I’m hearing that they’re kind of like scouting system for SoftBank, which I think is kind of interesting. They’re kind of managing … they’re sort of, I think, making sure that their investment in the bigger Vision Fund is sort of safeguarded by what they’re seeing on the ground here, but I think they’re also … because you sort of feel like how can SoftBank kind of have relationships with these more nascent startups? And I think this is one way that we haven’t talked about on the show.

Danny Crichton:           It’s too bad we couldn’t fund the global innovation ecosystem without taking money from theocratic monarchies that murder their own people. Oh, if only we could have done this with moral money. It’s just too bad we couldn’t. What a shame.

Connie Loizos:              Well, I also, I’ve written about this actually this week, when I was thinking it really is for the VCs though, like it for the founders with the SoftBank. So, if you don’t take SoftBank’s money, they’re gonna go somewhere else and the VCs probably feel the same way. If they don’t take MBS’s money, he’ll give it to somebody else, so it’s all sort of very ugly.

Danny Crichton:           I also think a huge part of it is also MBS did a very good job on sort of the PR launch of his administration. I mean, whoever … he sees power, right? But he wasn’t supposed to be here. His brother was in charge, this is Mohammed bin Nayef, and he does this sort of 24 hour bloodless coup and managed to take over and he’s sort of telegenic, he’s talking about the future and technology and getting Saudi Arabia off of oil. That to me is, I think, was a charm offensive. I mean, I think it really pulled in the Valley and say, “Look, there’s something new here.” I think the challenge with the Valley gets into these more political situations is it just does not have the sophistication of Wall Street or DC to say, “Well, who are we really dealing with?” And, we’re gonna have these issues now.

Connie Loizos:              I think they knew exactly who they were dealing with, to be honest. I mean, I feel like he is charming and I’ve heard some of these guys describe him as very much like a … that he feels like a Silicon Valley entrepreneur. But, I mean, they also knew that, to Brian’s point, he was looking to diversify away from oil and that this was a chance to get money into their company. So, I think that was a big part of why they thought he was so attractive.

Danny Crichton:           At the end of the day, as a venture fund, you always have the option of deciding of whether you take one person’s or another and so, I don’t think it’s … it’s kind of a cop-out to say … I think a lot of this is that some of this news has come out more recently and as people look to work with different LPs, you just gotta make a judgment call of whether their values line up with your values and take it from there.

Connie Loizos:              Right.

Danny Crichton:           ‘Cause we ultimately all have the choice of who we take monies from and who we give money to and you wanna make sure that that’s the kind of thing you can look in the mirror and feel really proud about.

Connie Loizos:              I know this is not fair, but I hope founders will think more about this too.

Speaker 1:                    Applause. And as a concluding note before we move on to whatever’s next on the agenda, Thomas Friedman left NBS and so, with that level intellectual half behind him, what could have possibly gone wrong? And I’m just gonna let that go away.

Danny:                         Thanks, Alex.

Speaker 1:                    Sorry, this does make me really mad. I know it’s capitalism and that’s fine, I’m a capitalist, but couldn’t we do it without their money? I guess not. All right.

Connie Loizos:              Absolutely.

Brian O’Malley:             Well it’s interesting, you could say. I think we’re all just so numb from the news cycle in general given how many things are coming out at such a frequency, that you almost get to a point where you just kind of can’t take one more hit and so you put the blinders on and you focus on doing a great job of what you’re doing.

Connie Loizos:              Right. Well that’s … sure, sure, sure. Well, that’s a part of this thing too, and I don’t mean to … I know we’re dwelling on it for so long, but, I mean, this story’s gonna go away. If this guy’s never found, it’s gonna be back to business as usual. And the news cycle is … ’cause there’s so much that comes down the pike, in two days, nobody-

PART 2 OF 3 ENDS [00:24:04]

Connie Loizos:              The new cycle is, because there’s so much that comes down the pike. In two days, nobody’s going to be talking about this again and there’s-

Alex Wilhelm:              You know, there’s an enormous hurricane right now and just there’s always so much. And the markets are falling apart and everyone’s raising several hundred million dollars. It’s chaotic. Can we put a pin in the vision front we-

Alex Wilhelm:              Hey everyone, don’t forget this episode is brought to you by [Sharespost 00:24:20].

Alex Wilhelm:              Actually, I almost forgot something. Our guest, Ray [Simonte 00:24:27], actually is and I’m trying to fireball between the last topic and this topic.

Connie Loizos:              Not just a little though. A lot. Congratulations.

Brian O’Malley:             Thank you. We’re really excited. We closed a 360 million dollar fund and we feel like it’s the Goldilocks fund size where it’s big enough that we can lead series A’s. We can be a strong lead investor and have lots of capital there to follow on our founders, regardless of the environment; but small enough where we can still be very aligned with those teams and not force them down the road to taking more capital than they really need to operate their business.

Connie Loizos:              Absolutely. For people who maybe didn’t catch where Bryan works, at the outside of this podcast, he works for Forerunner Ventures. Bryan’s been a VC for a long time. He keeps getting poached by firms-

Brian O’Malley:             I love the word poached. [crosstalk 00:25:10] My mom actually appreciated that. I think she was the only one in the family that liked the “poached” term.

Connie Loizos:              He was with [Battery 00:25:16], then [Excel 00:25:18] came calling and then most recently, Forerunner. He’s known the founder of that firm, Kirsten Green, for 10 or 11 years, but what Forerunner is sort of known for historically, is these really smart prescient bets, and they’ve been small, but they’ve turned out to be great outcomes. Dollar Shave Club, Jet, Bonobos, Warby Parker, Galassia, I mean basically any brand that you’ve just discovered in the last five to eight years, this firm is behind, and probably wrote one of its first checks.

Brian O’Malley:             It’s amazing what Kirsten and Yuri and the rest of the team have done. There’s a lot of other companies that are more of the B2B businesses that are powering these companies. About one out of every four dollars we invest, goes into a company that’s maybe a little bit more behind the scenes, but that portfolio is doing as well, if not better than the ones that are more commonly known.

Connie Loizos:              I bet. Now, you’re interesting, because you’ve always kind of straddled both worlds. You’ve got like, one of your past investments is Hotel Tonight, but you also have Duetto, a business to business software company. So are you sort of coming in thinking, are you going to be dividing your time between consumer stuff and B2B?

Brian O’Malley:             We have a relatively small investment team, there’s six of us. We all are doing the same things and so it’s not my job to come in and have my expertise, where I go off to the side and do my thing. It’s my job to be there right with the team and we’re looking at a lot of great direct to consumer businesses. Some of those are product companies, some of those market places. Some of them are more subscription or media model. We’re really thinking about the changes in the daily consumer life. There’s a lot of conversation about millennials, but you think about Gen-x, I didn’t realize this, Gen-x actually spends more money than millennials or the baby boomer generation, and they’ve largely been forgotten to date. You have Gen-z coming along –

Alex Wilhelm:              Why does Gen-x have all [crosstalk 00:27:08] I think I’m the only millennial in this group, Hey I’m a millennial [crosstalk 00:27:10] so what’d you do with all the money. Danny you’re in New York, you’re not in the room.

Connie Loizos:              It’s true. I wanted to ask you about teeth, because there was a big teeth deal today. I talked to Mithril, which is an investment firm that’s in San Francisco and moving to Austin soon, but they were talking about how there’s this overlooked generation, the Gen-x, or even beyond, baby boomers. So they had invested in this dental robotics company in Miami, Florida, that performs implant surgery. I guess like 500 thousand people now receive implants each year, which is pretty lucrative. On the other end, what we’re seeing much more of here in Silicon Valley is sort of like, teeth start ups. There was one today called –

Alex Wilhelm:              Is this the broader Invisalign world I keep hearing about?

Brian O’Malley:             Smile Direct club

Connie Loizos:              Sort of, yeah exactly. I haven’t really followed this one that closely –

Alex Wilhelm:              It’s a multi-billion dollar company. It’s worth over three, almost four billion dollars.

Brian O’Malley:             It’s interesting, these macro trends are large. It’s like everyone’s got teeth, for the most part. In the US, people want straight teeth, so these are big categories. The patents behind Invisalign have come off of patent. A lot of consumer investors have gotten really focused on these concepts of customer acquisition value, cost, and lifetime value. From a pure math perspective, these businesses look really good. I think one of the big questions is just, what’s the underlying asset that you have? Do you have longterm relationships with these customers? What’s the ultimate equity value, which is still TBD for, not Smile Direct specifically, but a lot of these direct to consumer brands.

Brian O’Malley:             When we think about it, we look for great products that consumers love, but we also look for founders that have broader vision in terms of how they can shape people’s lives, as opposed to just sell them one product and then go away.

Connie Loizos:              You don’t really think about patents, when it comes to direct to consumer things, but you’re involved in a company called [HEMS 00:29:15] that I think is sort of interesting, and I brought it up a couple of weeks ago, because there’s all these sort of Men’s wellness, not all of these, but a couple of them, that have raised a lot of money. One element of HEMS, is that they sell erectile disfunction medicine that was, I guess Viagra had the patent on it and it expired last year, so that’s again, why this space is kind of heating up right now.

Connie Loizos:              When you are a company that’s pursuing a patent that’s just expired, I don’t know if you were going after a generic alternative; how much of an advantage does that give you? How much time does that give you to establish a business around it?

Brian O’Malley:             When we think about companies, there’s a couple questions. One is, why now? What’s changed recently that’s created an opportunity today versus what maybe wasn’t there a year, two years ago. So far Hims and [Ro 00:30:05] and a few these other businesses, patents have changed, the laws around telehealth have changed, and that’s opened the door, because if you think about it, a lot these categories are things that people don’t advertise that their customer’s in. There hasn’t any brands that have spoken to this use case. It’s something, from again, a lifetime value perspective. For example, Hims, is in the hair loss business. I don’t know if you guys have looked into that.

Alex Wilhelm:              They’re the ads in my gym, I see them.

Brian O’Malley:             It’s one of these products that once you start using, you literally have to keep using, otherwise all the benefits you’ve gotten today go away. So when we think about lifetime value, there’s kind of nothing better than that. That’s kind of why, now. The question that we also need to answer is, why tomorrow? It’s one thing if you get a wedge in and it helps you acquire some customers and then the cost of customer acquisition gets driven up and the whole market erodes.

Brian O’Malley:             So, when we think about these investments, we also want to see teams that are thinking about [ancillary 00:31:02] products, where they can have a bigger relationship. Building brands that ultimately resonate, building differentiated service experiences, and things that will be lasting. Where, if another company comes along and undercuts them by twenty percent in price; the customer doesn’t really care because they like the relationship they have, and they want to keep buying from that one brand.

Brian O’Malley:             That’s something we saw with Dollar Shave Club, where it started out with razors. But they ultimately had a whole suite of products, that was one of the reasons Unilever thought it was an interesting company to look into.

Connie Loizos:              [Cutting Out Doctors 00:31:31] is also really interesting. In fact –

Brian O’Malley:             To clarify, they don’t cut them out, they have their own.

Alex Wilhelm:              It’s like medical marijuana companies. They add your own Skype doctor, it’s fantastic. Those were the good days

Connie Loizos:              But orthodontists, apparently are not happy with the Smile Direct Club, because they’re saying it violates the law, it allows people to skip in person visits and x-rays.

Alex Wilhelm:              Yes it does, but I don’t like getting x-rays. I had to do that recently and it was awful. We are very short on time, but we’re going to shout out a couple of things that we didn’t get to today.

Alex Wilhelm:              There’s a Chinese vegetable delivery company that goes from farmer to restaurant called [Mai Kai 00:32:04]. It could be raising 600 to 800 million dollars at a seven billion dollar plus money valuation. It’s a company you haven’t heard of that is explosively large. Just a data point out of China, Ignite raised 75 million –

Brian O’Malley:             These things are always refreshers of just how big China is.

Alex Wilhelm:              Every time I hear these, I’m like how many people – oh lots of them. It’s a big country. It’s four times as big as this country or something.

Alex Wilhelm:              And then another Chinese company that does Airbnb type things raised 300 million and that’s pronounced [Chau Zhou 00:32:33] So much money going on around the world –

Connie Loizos:              Danny, just quickly, do you know the market there? Isn’t there like a big company in china that was talking about trying to acquire Airbnb a couple of years ago? Airbnb turned it down. I think the investors were essentially not that happy about it. Like [Tao Tao 00:32:53] or something. I’m just wondering how sealed up the market is or not.

Danny:                         Tourists from China going overseas is actually a massively growing market, so if you’ve ever been to D.C. around the White House or anywhere in New York, it’s absolutely exploding. Airbnb just doesn’t have the same access there. What you’re actually seeing, it’s actually a consumer acquisition play, rather than a sort of property piece. What’s interesting is that, that sort of splits the market into two categories. The people who work with Airbnb, and get sort of a Western Europe American clientele, versus those who work with the Chinese. You can image that some properties are being customized to suit those sort of cultural tastes. I don’t recall the specific deal you’re referring to a few years ago.

Alex Wilhelm:              One thing I’ll throw in there is that according to the Financial Times, back in 2016, Airbnb nearly bought [Chau Zhou 00:33:42] so there’s a little bit of history. Maybe they should have done that back a couple years ago. Anyway, that’s all we have time for this week, we’ll be back in seven days. Until then stay cool, don’t sell your stocks, Bye!

Alex Wilhelm:              Alright everybody, thank you for listening and a big thank you to Connie Loizos, our Producer Christopher Gates, our Executive Producer, Henry Pickavet, and we will see you all right here, next week.