The Exchanges

Q I totally agree. Can I ask David though, how do you really determine that? Pre-signing the term sheet and pre-the investment, when really the timeline for me and you to get to know each other in that investment process is really quite short. How can you stress test the relationship?

A I do a couple of things. One is I do a deep dive. I want to talk to entrepreneurs that they are on the board of and not the successful ones. I want the ones that it went badly. A test of somebody is not when things are great. A test is when things are bad. So I will back channel them tons and tons in that process. I'll be honest, Harry. I mean, you find things that you would have never expected. I found one where one, the investors we were thinking about who seemed like a nice guy who was going to be chill. I found out once I talked to his entrepreneurs is that he often changes the terms of their term sheet right before a round closes. Well, that is a huge red flag. I found one that insists on approving all press releases for the whole company. Why in the world do I want an investor who is going to get so involved in such the wrong things that they are going to want to approve all press statements, right? And so these are just huge red flags made. The other thing I've learned, I learned this From the CEO of Starbucks, Howard Schultz. Howard Schultz has a great trick to see if you're going to work well with an investor. The question that Howard Schultz asks is, he proposes a scenario where things go badly. So he'll be like, hey, look, how would you handle the case where our cash burn is twice as bad as we predicted it was going to actually be? And he wants to see what their reac…

AI assessment note: “I want to talk to entrepreneurs that they are on the board of and not the successful ones.”

Q super interesting element that is, is too intriguing not to. The pressure is sometimes not often discussed in this kind of, oh, we're all crushing it world, that an entrepreneur will undoubtedly feel. How do you Handle that pressure in the early days when it was something that you weren't used to, and was there any mechanisms that you had to really allow yourself to live and thrive with it?

A I think the best thing to do is to get a great therapist. I think that is step one. I think step two is to find one advisor, so for ours it was Mark Williamson, who anytime I have a question or I'm talking to something, I go to him, and the reason why I think it's important to find one is I think lots of first-time entrepreneurs have this inkling that I'm going to ask for lots of advice, and I'm going to ask a bunch of my friends and, and, you know, a whole bunch of people. One of the most important things at early stage is speed, and by asking five people for their thoughts and advice, they aren't going to give the same advice, so then you're going to spend a whole bunch of time, and you're going to have to debate it and think about it, and you're going to be much slower, when actually option A and option B probably weren't life Threatening, and it was just about making a quick choice. So I think it's really helpful to have one advisor who you just go to versus having five advisors.

AI assessment note: “I think the best thing to do is to get a great therapist.”

Q No, I do get you. So if that one thing that's conventional wisdom that maybe we push back on, the other piece of conventional wisdom that is always said nowadays is that founders should always be raising Klaus, do you agree with this notion, and how do you advise founders on kind of relationship building between financings?

A I think if you're always raising, it can consume all of your life, and as an entrepreneur, there are other things that you have to do to ensure that you don't run out of cash. It isn't just raise. You also want to build a great business, so I don't think you always need to be raising or always need to be putting in a tremendous amount of work. I think it is always smart to be spending five percent of your time on the relationship side. So that could mean at a dinner that you can tell that there's some folks there or other types of events. I don't think it's a tremendous amount of time. I think at least what our approach has been, it's always a small amount of time. It's especially helpful if you had an investor that you pitched last time and the person was a bit unsure about one aspect of it. So I will give you an example. So, um, Rick Yang, who led our B round and is in a fantastic board member, um, I actually pitched him for the A, and Rick passed. I think his concern was, how many people are actually going to buy this class, all these classes? And at the A round, that was still before launch. And then after we launched, I stayed in touch with Rick, because the first time I met with Rick, I loved him, but it was just that it was that one question. And after we launched, I Our sales just took off, and I pinged Rick, and Rick then led our next round, I think it was like three m…

AI assessment note: “I don't think you always need to be raising”

Q I totally agree. Can I ask David though, how do you really determine that? Pre-signing the term sheet and pre-the investment, when really the timeline for me and you to get to know each other in that investment process is really quite short. How can you stress test the relationship?

A I do a couple of things. One is I do a deep dive. I want to talk to entrepreneurs that they are on the board of and not the successful ones. I want the ones that it went badly. A test of somebody is not when things are great. A test is when things are bad. So I will back channel them tons and tons in that process. I'll be honest, Harry. I mean, you find things that you would have never expected. I found one where one, the investors we were thinking about who seemed like a nice guy who was going to be chill. I found out once I talked to his entrepreneurs is that he often changes the terms of their term sheet right before a round closes. Well, that is a huge red flag. I found one that insists on approving all press releases for the whole company. Why in the world do I want an investor who is going to get so involved in such the wrong things that they are going to want to approve all press statements, right? And so these are just huge red flags made. The other thing I've learned, I learned this From the CEO of Starbucks, Howard Schultz. Howard Schultz has a great trick to see if you're going to work well with an investor. The question that Howard Schultz asks is, he proposes a scenario where things go badly. So he'll be like, hey, look, how would you handle the case where our cash burn is twice as bad as we predicted it was going to actually be? And he wants to see what their reac…

AI assessment note: “I do a couple of things. One is I do a deep dive.”

Q I would love to kick off this day with a little bit about you, so tell me, how did you make your way into the world of startups and come to found, without a doubt, the world's most sexiest education platform in the form of Masterclass?

A So, I went to grad school And I met a guy by the name of Michael Deering, and he is a genius and runs a fund here in the Valley. And I went and worked with him, and I was investing, and I actually missed building. So I went to him one day, and I said, hey, Michael, I actually want to go build, but I am not sure what. And he's like, why don't you propose a plan? And so I proposed the plan, and And he basically invested half a million and told me to go think of an idea. And all of a sudden, I had funds, and I now had tons of pressure to go try to think of a great idea. That might seem like a really amazing chance. It actually is really, really hard, and it is a lot of pressure because I knew this was the only time in my life I'm going to get this chance, and I don't want to mess it up. And so I, I tried tons of approaches. I tried, I'm going to think of trends and see how I can address trends. I'm going to think of personal needs and try to figure out how I can quell those. And then when it came down to me is there's one thing that has changed the life for me and my family, and that was education. And I actually recall I was eight or nine years old at the time, and I was a part raised by Mike My grandmother, and I remember I went to her house after school one day, and I was complaining to her about all of the math homework I had, which I obviously did not have a lot, because I'm …

AI assessment note: “he basically invested half a million and told me to go think of an idea.”

Q milestone thinking instead of the actual time-based thinking. Speaking of never running out of cash and knowing your cash zero day, one option, as we said there, kind of being the next round is venture funding, but a lot changes with VCs behind you. As you said, the pressure one that you felt early on in those days. How do you think about how raising money changes outcomes then, David?

A That's a really great question. I think it does a few things. It allows you to do things that you otherwise could not do. So for, for example, we had raised approximately five million before launch. That is rare. But the reason is, is because we had to film classes and that was going to cost money. And so if I hadn't raised that funding, if venture did not exist, this type of company would never exist. Because this requires a significant amount of fixed cash up front, and so I think it allows you to do things like that. It also allows you to go much faster, and so I think there are huge pros. The cons are, if you bring an investor on board, the expectations that they have might not be aligned with you, and so I have a bunch of friends that have raised funds, and they just wanted to have a lifestyle business. If you want to have a lifestyle startup, the worst thing to do is to raise venture. So I think that is one big risk. A next big risk, which I don't think people often talk about, is this investor who you bring on is going to be a large part of your life. You got to make sure that their approach to advise and help is actually one that you are aligned with, and that means both in the level of how involved they are going to actually be, It means to what are they going to prioritize over, you know, growth compared to, to actually cash burn and trying to understand that beforeha…

AI assessment note: “It allows you to do things that you otherwise could not do.”

Q super interesting element that is, is too intriguing not to. The pressure is sometimes not often discussed in this kind of, oh, we're all crushing it world, that an entrepreneur will undoubtedly feel. How do you Handle that pressure in the early days when it was something that you weren't used to, and was there any mechanisms that you had to really allow yourself to live and thrive with it?

A I think the best thing to do is to get a great therapist. I think that is step one. I think step two is to find one advisor, so for ours it was Mark Williamson, who anytime I have a question or I'm talking to something, I go to him, and the reason why I think it's important to find one is I think lots of first-time entrepreneurs have this inkling that I'm going to ask for lots of advice, and I'm going to ask a bunch of my friends and, and, you know, a whole bunch of people. One of the most important things at early stage is speed, and by asking five people for their thoughts and advice, they aren't going to give the same advice, so then you're going to spend a whole bunch of time, and you're going to have to debate it and think about it, and you're going to be much slower, when actually option A and option B probably weren't life Threatening, and it was just about making a quick choice. So I think it's really helpful to have one advisor who you just go to versus having five advisors.

AI assessment note: “I think the best thing to do is to get a great therapist.”

Q your board members and your investors there with Rick, I'm really interested, because when you're a company like Masterclass, you have several offers and competing, but you said to me before, pick your investors as board members, not investors. Can I ask, what did you mean by this, David, and how do you advise founders when it comes to really picking that investor for the next 10 years or so?

A Yeah, I mean, you have to handpick this person, and it actually is, this isn't about the cash. If you're doing well, You're going to have some choice. And for me, the most important thing was, is this person going to actually help us? And now that help could mean that they aren't going to cause pain, but like, to me, this was going to be, I'm going to be close to this person for the next 10 years. Is this somebody I want at my board meetings? And so we often chose not the best price in exchange for the best person. And so for example, Rick was somebody who I knew I wanted on our board. I had a bunch of friends that he was on the board of. He is exceptionally bright, and so I wanted to pick people I wanted at that table, and I'm willing to trade off a couple points of my equity in order to assure that I have a great board, and if you talk to anybody who's been on a bad board, it is like death. It will destroy you, and if you have a great board, everything is just much easier. I mean, we here chose not on price It was on who is the best board member.

AI assessment note: “we often chose not the best price in exchange for the best person.”

Q milestone thinking instead of the actual time-based thinking. Speaking of never running out of cash and knowing your cash zero day, one option, as we said there, kind of being the next round is venture funding, but a lot changes with VCs behind you. As you said, the pressure one that you felt early on in those days. How do you think about how raising money changes outcomes then, David?

A That's a really great question. I think it does a few things. It allows you to do things that you otherwise could not do. So for, for example, we had raised approximately five million before launch. That is rare. But the reason is, is because we had to film classes and that was going to cost money. And so if I hadn't raised that funding, if venture did not exist, this type of company would never exist. Because this requires a significant amount of fixed cash up front, and so I think it allows you to do things like that. It also allows you to go much faster, and so I think there are huge pros. The cons are, if you bring an investor on board, the expectations that they have might not be aligned with you, and so I have a bunch of friends that have raised funds, and they just wanted to have a lifestyle business. If you want to have a lifestyle startup, the worst thing to do is to raise venture. So I think that is one big risk. A next big risk, which I don't think people often talk about, is this investor who you bring on is going to be a large part of your life. You got to make sure that their approach to advise and help is actually one that you are aligned with, and that means both in the level of how involved they are going to actually be, It means to what are they going to prioritize over, you know, growth compared to, to actually cash burn and trying to understand that beforeha…

AI assessment note: “It allows you to do things that you otherwise could not do.”

Q I totally agree with you there. I do have to ask, there's a lot of advice that goes around the ecosystem, stay on the right amount of runway to raise for. When you think about that as the leader, how do you think about that? Is it 18 months, 24 months? Do you favor now the 36 month approach? What would your advice be?

A I never think about it in terms of time. I think about it in terms of what I need to Achieve. So what are the hypotheses that I have to prove right? And then how much money is it going to cost me to actually prove those things right? Now, each of those takes time, right? So if I said, Hey, look, one of the things I need to prove is that I can make great classes, right? The people are going to like the classes. How many classes am I going to have to make in order for me to think I have a really great shot at That I can improve enough that I can make them great. And then what is the cost to make those classes? And then I always times it by two, because however fast and efficient you think you're going to be, everything, when you actually work on it, just takes more time and just costs more. So I actually don't think about it in terms of, I don't start with time. I start with first, what is it I need to prove? Now that can be proved to ourselves that this is a key part of Or it could be, I have to prove this to actually raise the next round.

AI assessment note: “I never think about it in terms of time.”

Q I would love to kick off this day with a little bit about you, so tell me, how did you make your way into the world of startups and come to found, without a doubt, the world's most sexiest education platform in the form of Masterclass?

A So, I went to grad school And I met a guy by the name of Michael Deering, and he is a genius and runs a fund here in the Valley. And I went and worked with him, and I was investing, and I actually missed building. So I went to him one day, and I said, hey, Michael, I actually want to go build, but I am not sure what. And he's like, why don't you propose a plan? And so I proposed the plan, and And he basically invested half a million and told me to go think of an idea. And all of a sudden, I had funds, and I now had tons of pressure to go try to think of a great idea. That might seem like a really amazing chance. It actually is really, really hard, and it is a lot of pressure because I knew this was the only time in my life I'm going to get this chance, and I don't want to mess it up. And so I, I tried tons of approaches. I tried, I'm going to think of trends and see how I can address trends. I'm going to think of personal needs and try to figure out how I can quell those. And then when it came down to me is there's one thing that has changed the life for me and my family, and that was education. And I actually recall I was eight or nine years old at the time, and I was a part raised by Mike My grandmother, and I remember I went to her house after school one day, and I was complaining to her about all of the math homework I had, which I obviously did not have a lot, because I'm …

AI assessment note: “he basically invested half a million and told me to go think of an idea.”

Q Totally agree with you there, and I love those takeaways. Tell me, what motto or quote do you frequently revert back to?

A There's one from Aaron Sorkin. He said, when you go to a doctor, and you tell him my arm hurts, and then you say, I think it's because I twisted this, and I have a torn rotator cuff here, I hope that the doctor ignores every word after my arm hurts. And the reason was, or the thinking behind it is like, there is tons of info that we get that's tied to facts, and then there's tons of They're tied to opinions, and you have to become very good to pull those apart, and when I go to a doctor, it's a fact that my arm hurts. Everything else I say afterwards, I am inventing, and as a good doctor, but also as a good entrepreneur, which I think, you know, their parts are the same, is you have to be good at figuring out what are the facts, and then what is the noise? So that's one quote.

AI assessment note: “There's one from Aaron Sorkin. He said, when you go to a doctor”

Q I totally agree with you there. I do have to ask, there's a lot of advice that goes around the ecosystem, stay on the right amount of runway to raise for. When you think about that as the leader, how do you think about that? Is it 18 months, 24 months? Do you favor now the 36 month approach? What would your advice be?

A I never think about it in terms of time. I think about it in terms of what I need to Achieve. So what are the hypotheses that I have to prove right? And then how much money is it going to cost me to actually prove those things right? Now, each of those takes time, right? So if I said, Hey, look, one of the things I need to prove is that I can make great classes, right? The people are going to like the classes. How many classes am I going to have to make in order for me to think I have a really great shot at That I can improve enough that I can make them great. And then what is the cost to make those classes? And then I always times it by two, because however fast and efficient you think you're going to be, everything, when you actually work on it, just takes more time and just costs more. So I actually don't think about it in terms of, I don't start with time. I start with first, what is it I need to prove? Now that can be proved to ourselves that this is a key part of Or it could be, I have to prove this to actually raise the next round.

AI assessment note: “I never think about it in terms of time. I think about it in terms”