The Exchanges

Q Well, I know this might be more of a personal question, but I'm really curious, structurally and economically, how do you swap funds? I know that there's a lot of extensive work that goes behind that, whether it's board positions, carry, do you get your carry bought out? How does this all work?

A So on the board positions, like, first and foremost, as personal a relationship as I have with each founder I work with, I have to remind myself that I was representing Kleiner Perkins on the board of all these companies that I served on, and I think with that, now that I've moved over to Lightspeed, there's this obvious, obvious question as to, like, who should do that on behalf of Kleiner Perkins, and so typically what you see in a situation like this is that those board seats do get transitioned, and my partners have been very thoughtful and very supportive of that transition, and making sure that the founders that I work with Uh, are in good hands. Um, so I'm really grateful for that. And so that's how that works. But, you know, that's a, that's a very complicated process and an uncomfortable one, of course, because I just, these are not just like people I work with, but they're lifelong friends, these founders, right? So that was a, frankly, a very emotional experience for me, um, and a difficult one for that reason. But I'm really, really grateful for how my partners at Kleiner Perkins, uh, helped me through that. So that's, that's on the board seats. And then with respect to the carry, you can think of carry similar to the way a startup employee vests equity, right? So they, they're, they're given an equity grant. That equity grant vests over some time period over multip…

AI assessment note: “those board seats do get transitioned... with respect to the carry, you can think of carry similar”

Q So I guess the big question is, why now? Like, what is the scale of the US energy problem?

A Yeah, it's, uh, the, the why now to us is, is, is quite clear. The, if you look over the last few decades, um, if you just look at kind of the electricity sector, load growth is what's called in the industry or basically like the demand for electricity has been kind of ticking up very marginally, a percent or two a year, um, as there's been more population and as, you know, people have computers in their homes that didn't before they were using electricity. But you had this sort of offsetting efficiency gains of, you know, incandescent light bulbs changed to LED light bulbs, and now you're using actually less electricity than before. And only over the last two to three years and, uh, what we believe of over the next few decades that there's a knee in the curve, right? There's a, there's a, there's a much higher slope on electricity load growth. And the reason for that is honestly, it's maybe self-explanatory and relatively simple is that the, End use of energy is moving from fossil fuels from natural gas to heat your home to electricity via heat pump. People are getting heat pumps installed. The end use of energy in the form of gasoline or diesel is now going into electricity for EVs. Um, and then of course, uh, data centers and, and, you know, fueled by AI are also driving this, this load growth phenomenon. And so electricity demand is, is at this sort of turning point Uh, in …

AI assessment note: “only over the last two to three years... there's a knee in the curve”

Q I would love to know if you guys had ever expected to start an energy company. Um, but starting with Zach, so Your career is on the investing side. You worked at Blackstone, and then you were also an investor at Thrive Capital. Um, so how did, how did that navigate you to starting this company? What did you see while you were investing that this was a massive opportunity?

A Yeah, I'll go even further back than that. I'd say growing up, it, it never occurred to me there was anything interesting to do in the world other than start companies. It was always what I wanted to do. I always wanted to be an entrepreneur. I started my first company in high school. I actually started two companies in high school and I started another company in college and, uh, college was really the time where I got excited about opportunities in industry and in, in, in energy, excuse me. I spent a lot of time in college trying to figure out how to develop anaerobic digestion systems in parts of the rural world to Uh, convert human waste into compressed methane, uh, for people to use for, uh, stoves and lights and fans and that kind of thing. Uh, it turned out it wasn't a very good business idea, but, uh, it was a really interesting learning experience. And I actually went into investing because A, I needed a real job and the business wasn't working and B, uh, I wanted to learn what, what good looks like. And I wanted to see how the most sophisticated investors in the world, uh, underwrote businesses, how they talked about businesses, how they thought about businesses. Um, and I think Early in one's career, it's really important to learn what excellence is, and what it looks like, and kind of consistently redefine what excellence is, and so I ended up at Blackstone because …

AI assessment note: “While I was there, I got to spend time on, on energy investing”

Q And you guys are in Austin, Dallas, Houston, with this two hundred million dollars in fresh capital. You're gonna, I'm assuming, expand further into Texas, and then hopefully across the United States. So, like, at what scale are you deploying New units each day. Like, what, what exactly are you looking to hit? Like, what would be the goal for deployments a day?

A I think we, I think we did 19 installations today. Uh, so we're, you know, on the order of, of 15 to 20 installations a day. That number's going up, obviously, you know, by the week. Um, we want to be the, the fastest battery developer in the country, and we're kind of already on a megawatt per month basis Right in line with the fastest battery developers in the country. By the summer we'll be deploying at twice the rate. So we'll be the fastest battery developer in the country, uh, in, in, in the next, you know, three months. Um, and, you know, we, we want to grow exponentially. So, um, you know, we'll go from 20 a day to 50 a day to a hundred a day, and eventually hopefully we'll be doing, uh, you know, thousands of installations a day in the coming years as we go, uh, from Texas, you know, to, to the rest of the country.

AI assessment note: “we're, you know, on the order of, of 15 to 20 installations a day.”

Q In terms of the go-to-market strategy, you mentioned a couple partnerships. Um, I'm really curious, does seasonality affect that as well? Like, I would love to just break down the go-to-market strategy. Like, is it A, like partnerships, and then B, like also seasonality, or are there other components maybe that you're riding off of?

A I would say it certainly does, right? When, when, when it gets really hot in Texas, people are super focused on the power grid. When it gets super cold in Texas, people are super focused on the power grid. Uh, when there are outages, obviously people are really focused on backup power, but, uh, really in any month people want to save money, right? So we offer two things. We offer outage protection and we offer lower monthly electricity bills. And so we find that there are definitely spikes in demand around outages and extreme weather events, but we see pretty consistent demand from customers who are looking to save money on electricity. We have, we think about customer acquisition In really two ways, there's a direct channel and the indirect channel. The direct channel is mostly referrals, direct mail, paid advertising, you know, word of mouth, uh, field marketing, brand marketing, um, those kinds of things. And then the indirect, sorry, yeah, the indirect channel is partnerships like what we've announced with Lennar, uh, one of the largest home builders in the country. If you're buying a Lennar home in, in select communities in Texas now, I think it's 25 communities across the state. When you go to buy a Lennar home, you have the option to sign up for base At kind of effectively checkout so that when you move in and deal in our home, your home is base powered and you have a ba…

AI assessment note: “I would say it certainly does, right? When, when, when it gets really hot in Texas”

Q Well, pulling out a bit broader, what is the current state of play between public policy and space companies?

A Um, the, the job of regulating space companies is split, um, into multiple different agencies, which, you know, sort of makes it a little trickier on the startup side, um, to navigate that all, um, to give you like, you know, the three simple examples, not everybody's regulated by all three of these, but let's say the three that are, you know, sort of most important to Varda. Um, we get regulated by the FAA, both as a part of our launch on SpaceX's rocket, as well as our re-entries. Um, we get regulated by the FCC for the radio spectrum that we use to communicate with our satellite. Um, and they specify, so for example, recently the FCC actually specified a particular frequency for ISAM, which is in space assembly and manufacturing. Um, and so for, you know, basically spacecraft like ours, we're now assigned a particular frequency. We still have to apply for it, get a license. Um, and then you're also regulated by NOAA, um, which, you know, sounds surprising because I think it's like, uh, the, National Ocean something administration? I forget. But anyways, it's kind of funny that an ocean, you know, regulator is regulating space, but they actually regulate all of the cameras that are up in orbit. So if you have a camera pointing anywhere, NOAA is responsible for that. There's been some talk about, do you centralize some of these functions into a, you know, a single vertical spa…

AI assessment note: “the job of regulating space companies is split, um, into multiple different agencies”

Q think the best companies are not, they're not going out, not because of valuations, right? Um, I think some of them would even be priced higher in the public markets than they were in the private markets. A lot of it is decision on a capital allocation basis, right? They can invest much more in growth and the opportunity while still private and go public at a more opportune time.

A Well, we're seeing this also with companies like Plaid, like Plaid just did a big repricing. They, they repriced down a bunch to hopefully maybe go public. I mean, who's to say, because I don't know. I mean, like everything that you mentioned is very positive. Like, I think even the Collison's, they were on the all in pod and they're like, why, why do we need to go public? We have enough capital. There's plenty of financial institutions that are private. There's actually no need for us to go public. So why don't we, why do we have to do anything? There's not to say like, we won't think about it in the future, but there's nothing that's actually like pressuring them because they have access to capital and they have everything they need to stay private.

AI assessment note: “they have access to capital and they have everything they need to stay private.”

Q I think I look at my calendar more than I look at my text messages. Um, just to put some numbers against it, like maybe how many users have you had in total, or how do you measure the kind of success like daily?

A So we've always been a retention based business. And, uh, I think the reason my co-founder Max partnered up with me was he saw the early Google analytics data back in like 2019 from Staples and saw that Step function increase in DAO daily active users over the enrollment, and saw that even after I graduated, the engaged percentage of the student body continued to increase. Um, so we look at a lot of things. We have, you know, our DAO now, the stickiness daily active, the percent of monthlies that are active every day is over 50%. Um, our D-thirty retention of brand new users is well over 30%, um, with 70% Uh, for existing, 90% of new users return every single year. So that's why, you know, freshmen use it as sophomores and kind of grow up with the product. Um, you know, we have millions of users at 18,000 schools right now, but retention is always what we focused on. I think a lot of other products in the space may have focused just on user acquisition numbers, and we probably grow more slowly than some would like. It's not been an overnight journey. We've been at this for five and a half years, but During the summer months, you know, we reach number two on the entire App Store, number one in productivity, ahead of some great tools like ChatGPT and others, TikTok, um, just because, you know, we focus on the K factor, we focus on the user acquisition, but then you must retain th…

AI assessment note: “our DAO now, the stickiness daily active, the percent of monthlies that are active”

Q The most popular newsletter ever. Um, could you just break down what builds that consumer product for you guys? Like what, what is the recipe there?

A Yeah. Um, so for the first couple of years of the product, We didn't even ask the user for their contact book. We had no invite flows. It was all word of mouth. That was slower, but it allowed us to focus on the downstream retention and the core jobs to be done in the product. I think a lot of times people will build a viral flow, but they won't think about retention. And then you will see that reverse K factor effect. Users won't actually engage with the product. And you could acquire users more by either, if daily active users equals acquisition minus churn, increasing your retention reduces churn. But acquiring more users without reducing churn is not, I think, a recipe for success. It's users will invite people to products without knowing what they do. We've seen time and time again products reach the top of the app store for one or two days and then completely die off. There is a playbook to that. Um, we took a pretty hand-to-hand approach With building out the products early in the newsletter piece, we talked about how we would white label each product. So if at Staples, it was called iStaples. Weston was iWeston. Greenwich was iGreenwich. And the app felt really homemade. It was easy to spread word of mouth. It was branded in the app store for your specific school. And that drove us to getting 50 plus percent penetration, sometimes within 48 hours, often within the first…

AI assessment note: “allowed us to focus on the downstream retention and the core jobs to be done”

Q We've really worked our way up to present day, and this has just evolved tremendously, even in the last year. Gordon, I want to bring it back to the very beginning of Emergence's founding story. Could you tell us more about how you founded Emergence?

A Happy to. I'll try to fast forward, but, uh, you know, the people you meet change your life, and Marc Benioff, uh, my second company that I built, um, I sold it to IBM, and Marc Benioff was looking For a launch partnership with IBM to get his, you know, then fledgling company, Salesforce.com sort of its first real launch, uh, you know, logo and customer. And we ended up backing them both from a marketing perspective early on, uh, and from a, you know, financial perspective, really helping, helping to, to fund some of those early, uh, marketing objectives. And Mark Benioff, I, uh, 18 months later, he recruited me out of, uh, IBM, uh, to start a new company with him, a parallel company to Salesforce called Software Service, and it, the concept was to be anyforce.com, that we would create all, any of the new, uh, uh, software that's, that's needed to be created where Salesforce had been a single application, uh, he wanted to, and we wanted to create, um, In effect, a, a, a development platform for the cloud. We worked on that for, uh, uh, a while, and then Mark had to go back in and run Salesforce day in, day out, uh, and he had, he had actually become chair and left it to another CEO for a period. Went back in during the really tough time after the bubble burst and took over the reins, and obviously the rest is history for Mark. Uh, the, uh, software service became the foundation…

AI assessment note: “do I want to start, uh, uh, another, another SaaS company... or a venture firm.”

Q Looking back, what are your biggest takeaways since writing that and what has changed?

A Yeah. I think the biggest thing that's different from what we expected when we wrote that piece about a year ago is how fast we get to some of the things that we concluded. Like, I think the major takeaway from that piece is that the best organizations are going to use multiple models in concert with one another to power their end experiences. It would no longer be a world in which you just plug in to open AI's latest model. And they would run, ah, really effectively. And instead, ah, what, what we thought was that you would leverage a series of different models, whether it be from Anthropic, from Mistral, from Meta, from any of these different model providers, some of your own models that you've developed. In some cases, you'd actually choose to use small language models as opposed to large language models for some of the, the simpler use cases. So, The way in which we thought about where the market is going is developing a core system that allows you to interchange between different models with the right tooling in place to move between them really seamlessly. And now when we talk to application layer providers, we learned that so many of them are tinkering with multiple models. Actually, no, we learned that Claude is better for this use case than, than GPT. We actually learned that we can fine tune our own thing here. That can reduce our cost basis by 90%, so for these types…

AI assessment note: “the biggest thing that's different from what we expected... is how fast”

Q We've really worked our way up to present day, and this has just evolved tremendously, even in the last year. Gordon, I want to bring it back to the very beginning of Emergence's founding story. Could you tell us more about how you founded Emergence?

A Happy to. I'll try to fast forward, but, uh, you know, the people you meet change your life, and Marc Benioff, uh, my second company that I built, um, I sold it to IBM, and Marc Benioff was looking For a launch partnership with IBM to get his, you know, then fledgling company, Salesforce.com sort of its first real launch, uh, you know, logo and customer. And we ended up backing them both from a marketing perspective early on, uh, and from a, you know, financial perspective, really helping, helping to, to fund some of those early, uh, marketing objectives. And Mark Benioff, I, uh, 18 months later, he recruited me out of, uh, IBM, uh, to start a new company with him, a parallel company to Salesforce called Software Service, and it, the concept was to be anyforce.com, that we would create all, any of the new, uh, uh, software that's, that's needed to be created where Salesforce had been a single application, uh, he wanted to, and we wanted to create, um, In effect, a, a, a development platform for the cloud. We worked on that for, uh, uh, a while, and then Mark had to go back in and run Salesforce day in, day out, uh, and he had, he had actually become chair and left it to another CEO for a period. Went back in during the really tough time after the bubble burst and took over the reins, and obviously the rest is history for Mark. Uh, the, uh, software service became the foundation…

AI assessment note: “the question then was, do I want to start... another SaaS company... or a venture firm”

Q Looking back, what are your biggest takeaways since writing that and what has changed?

A Yeah. I think the biggest thing that's different from what we expected when we wrote that piece about a year ago is how fast we get to some of the things that we concluded. Like, I think the major takeaway from that piece is that the best organizations are going to use multiple models in concert with one another to power their end experiences. It would no longer be a world in which you just plug in to open AI's latest model. And they would run, ah, really effectively. And instead, ah, what, what we thought was that you would leverage a series of different models, whether it be from Anthropic, from Mistral, from Meta, from any of these different model providers, some of your own models that you've developed. In some cases, you'd actually choose to use small language models as opposed to large language models for some of the, the simpler use cases. So, The way in which we thought about where the market is going is developing a core system that allows you to interchange between different models with the right tooling in place to move between them really seamlessly. And now when we talk to application layer providers, we learned that so many of them are tinkering with multiple models. Actually, no, we learned that Claude is better for this use case than, than GPT. We actually learned that we can fine tune our own thing here. That can reduce our cost basis by 90%, so for these types…

AI assessment note: “the biggest thing that's different from what we expected... is how fast we get to”

Q podcast on YouTube, Spotify, Apple, or wherever you listen. The link is in the description to sign up. You more formally bucket this out, um, In terms of the decade of data, AI as the new platform, and decentralized infrastructure as database. Could you break down each of these and maybe provide a portfolio company or two to better, you know, emphasize and, uh, just, you know, expand on that?

A Yeah, for sure. So the decade of data with the modern data stack, postmodern data stack, this is the idea that every company or every product is producing data and they need to make some, something useful out of it. There's raw material like an ore, and then it needs to be refined to make steel, let's say. Um, and so over the last 10 years have been many companies in space. We were lucky. I was lucky to be on the board of a company called Looker that Google bought for a 2.7000000000, and we backed the The, many of the original team of that company in a business called Omni. And, uh, that business, if you think about like classic BI, there were four companies in, in the year 2000 that were building BI. They reached worth about two billion and they controlled it. They locked it down. It was totally centralized. Very, very difficult to get access to report. A company called Tableau that Google, that Salesforce bought for about sixteen billion, came out of Stanford and said, everybody can have access to BI. And so there was this pendulum swing from centralized control to decentralized control, and then we invested in Looker, which was more centralized control, but on cloud data warehouses. Omni is a combination of the two. We're thrilled, thrilled to be partners with Jamie and Colin and the rest of the team. Um, in that AI is a new platform. We look for three things when we invest …

AI assessment note: “So the decade of data with the modern data stack, postmodern data stack”

Q back in May, you mentioned writing an article about emerging fund consolidation. In this tweet, you bucketed out into like three different items. So you said this could entail merging with other emerging funds, merging with other large platforms, and well, shutting down. So based on that and the time between it all, uh, Where are you at with the article and what gave you inklings of this potential behavior?

A Yeah, I kind of put it out there. Like sometimes I'll tweet things to see if there's general interest, like kind of like MVP and the idea of writing an article by just tweeting it out. And if people are interested enough, I'll actually write the article. But the general idea was that, um, you know, I'm hanging out with the merchant managers all day long and what's happening kind of in background conversations, I think is, um, a lot of A lot of uncertainty that the market, I think generally knows there, there will be a shakeup. Like that's pretty obvious at this point, but the extent of what that might look like and also the options for GPs, I think are things that people should talk more about. And that if we were to speak as freely about venture funds, as we do startups, like, and viewed that conversation as being okay, that I think it would, it would help LPs and GPs understand the dynamics heading into not only 20, 24, but kind of like the next cycle of, of venture capital, because it's pretty clear, like the world's changed quite a bit. And so I think the, Since I tweeted that article, there's been, even the past two weeks, some pretty interesting ideas that have, that have come out. One was, um, Josh Wolf at Lux Capital wrote his quarterly letter and he predicted that 30 to 50% of venture firms would, um, cease to exist. And then Rick Zulo at Equal Ventures, who's a friend…

AI assessment note: “in terms of where I am with The article, I'm, I'm making a ton of progress”

Q To go even further back, how did this start? So when were you founded, and how did you get the idea?

A I was thinking in this space probably like, 2018, 2019 time frame. Um, the initial thing was actually, I think the initial, Thing that caused me to order some stuff online for prototyping was I wanted to build a overpowered pizza oven that could cook like Neapolitan style pizza and like the correct time, like 90 seconds or whatever. And so was like, Realize that there was not, that was not something you could do from just a normal plug. Like, um, for reference, like the, the standard US electrical plug gives you about 1500 watts of power, which is like, yes, it'll run a toaster or a blender at like okay power, but it's not something that's gonna make that, make a pizza in 90 seconds or something like that. You need substantially more power. And then I kind of went down the path of looking at batteries and being like, Hey, so how much energy and how much power can you get out of kind of the latest and greatest batteries that you could buy today? Realized it was more than adequate. And, uh, kind of annoyed the crap out of a lot of my friends talking about this and other ideas and things like you could do it. So I kind of started from like the product first. I was like, okay, if you embed a battery in an appliance, you could make it more powerful for the first time. And this was also just, just as a reference point for like where the market was, there were a number of, um, I think…

AI assessment note: “I was thinking in this space probably like, 2018, 2019 time frame.”

Q Learn more about how Archer is set to open up a new world of opportunity for passengers by providing safe and efficient access to people, places, and events across the communities they live. Visit Archer.com. How do you integrate these into the home? Like, I know my friends who have Tesla Powerwalls, you know, they have to get special setups and that kind of thing. Is this the same thing?

A No. So, so one thing that actually, I think this is, this is part of the whole kind of Trojan horse play is an appliance installation. So a Tesla Powerwall installation costs about six grand. And then like, so the Powerwall costs like 12 grand, but like installing it costs six because you essentially have to go to your main electrical panel and do all this hacking to make your house able to back up parts of the house with the Powerwall. Basically there's, there's all this huge mess there. Um, in our case, um, we're not doing a whole home backup solution. We're just making a single appliance to start. So there's no tear up on that side of the house that you have to do. You just have to like essentially plug or wire in the appliance, just like you would plug or wire in a normal appliance. So we can actually go through the normal appliance installation path, which happens every day in every community, all over the world, basically.

AI assessment note: “No. ... You just have to like essentially plug or wire in the appliance”

Q Anyways, I wanted to really get to a question and then we're going to wrap up, but do you, do you imagine given these different elements that we just mentioned, like, do you imagine America becoming a strong competitor for creating and actually manufacturing batteries?

A Yeah. So we're going to have to be, um, and ironically, China is going to help us here. Um, and, and is in process of helping us here. And so I think that's also a narrative violation. Like, The most probable biggest battery factory news in the U S is Goshen, which is, um, anglicized form of Guoshan. The, the Chinese large battery cell and pack manufacturer is opening a cell and pack line. I believe targeting automotive and stationary storage in Illinois. They did a big buzzy announcement with the governor and stuff like that. I think like earlier this year, like maybe it was, maybe it was late last year or early this year. There's an, and BYD has a facility that builds, like, all the transit buses down in LA. There is, there is Chinese manufacturing pieces moving to the United States. I've also heard stories of, like, Tesla buying CATL cell and pack equipment and relocating it to the US for the same reason. And a lot of this is driven by, um, the tariffs on battery cells and packs getting pushed up a little bit and that making sure that, like, Essentially Tesla's trick of getting these Chinese packs and putting them in cars in the U S is going to run into the issue of, they're going to want to source the packs locally, but that doesn't necessarily mean the Chinese firms are going to get cut out. They just may relocate their alliance to the United States. So that's the first th…

AI assessment note: “Yeah. So we're going to have to be, um, and ironically, China is going to help us”

Q of like a cold call center for just sourcing and dialing and dialing. And so you've gotten exposed to many founders on top of the ones that you've backed, That have had huge successes. So what I'm getting to is given that and given your direct exposure, what insights have you gotten from these kinds of founders and what it takes to build a world-class company and a world-class CEO?

A Yeah, it's a great question. Um, maybe actually just using the same, the same companies I just talked about to keep it consistent. Like one thing I learned from Emory, who's the CEO of Frame.io is, um, is that there's no match for intensity. You, you need it. And he, he once gave me this really powerful analogy where he said, if I was training for the Olympics of figure skating, um, Nobody would ask me, do you have work-life balance? Like, I would be figure skating all day long. Everything I eat, every time I go to bed, it all relates back to my figure skating career. Um, and so I'm trying to build, be not a world-class figure skater, but I'm trying to build a world-class company. And so my entire life revolves around this. Like, Every action I do throughout the day is building towards this vision, and I thought that intensity was super powerful, and I've seen it across a number of founders since then, but it is rare, and, um, and, and when you see it, I, I try to invest. Um, and, uh, and maybe, yeah, from Glia, learning there is, is kind of what I mentioned before around understanding your customers. Like, I think CEOs sometimes get a bad rap because they like to grandstand or, you know, talk, and oftentimes, you know, they might even have egos, but actually the best CEOs are the ones who, maybe they have an ego, who cares if you have an ego, but they put it aside and really l…

AI assessment note: “one thing I learned from Emory, who's the CEO of Frame.io is, um, is that there's no match for intensity.”

Q are limited options, limited number of companies, limited number of like really excitable talent. And not only that, but okay, there's a huge dislocation in late stage capital for Hardware companies and then maybe software for hardware companies. I'm sure like the sales cycles are somewhat similar. So I'm just curious to push on that like a little bit more. Where does the bullishness come from and the conviction? Yeah.

A I mean, the reason people have stayed away for many years, again, it's, it's real. Like, it's crazy when you talk to these, uh, these customers, they are using a wild set of resources. Like, A lot of them are doing, you know, jerry-rigged Excel setups combined with JIRA, combined with scribbled notes that integrate with 19 eighties on-prem software, and it's run on an industrial computer. And so on one hand, it's like, wow, how do you get them out of that lifestyle? Cause it's really, really entrenched. But also, you know, the more optimistic side of me is like the power of moving this to the cloud, which will allow for all this, you know, collaboration and compute capacity. It's super exciting and opportunities there, but, but sort of like the difficulty of it and the promise are really intertwined. Like it wouldn't be so exciting if It hadn't been so hard over the years. And, um, the reason it's so exciting now essentially is, is because there's all of this debt that hasn't been addressed and it hasn't been addressed because it's really hard. So it's like a, a bit of a stew. Um, but you have, you know, really interesting data points from, you know, the, the size of the prize as well. Like, you know, Toyota we found pays Matlab, fifty million dollars a year. Um, Boeing pays Simulink and MATLAB hundreds of millions. Um, Samsung has an eight figure contract with Atlassian. Like …

AI assessment note: “size of the prize as well. Like, you know, Toyota we found pays Matlab, fifty million”

Q Are there any specific companies that you have in mind that best exemplify this?

A There's one we invested in, um, uh, more than six months ago now called GovDash, which I think is the perfect example of a hybrid SaaS company. Um, and GovDash, it's in the government procurement space. For those that don't know about the space, it's totally crazy. 36% of U.S. GDP is spent on government spend. Um, there's seven hundred fifty million of spend last year that, um, That went through federal contractors. And if you're a federal contractor, every single piece of business you do goes through a formal RFP. And that's actually a good thing. If, you know, there's a federal courthouse down the street and they need to paint it, um, they're not just going to be able to say, oh, hey, I've got a buddy that has a painting company. I'm going to give him that contract. Like this is our taxpayer dollars. They should be running a formal, really, you know, rigid and, and, uh, deep RFP process to find the best contractor for the job. Um, but if you're a contractor, if you're a painting company, you want to be out there painting courthouses. You don't want to be spending your time going through like a 75 page Government RFP contract and like, you know, putting together the case for why you're the best painting company in all of Brooklyn. Um, and so what, what GovDash does is, is they provided an AI solution that, you know, you upload the RFP that you want to complete. You have a sort…

AI assessment note: “called GovDash, which I think is the perfect example of a hybrid SaaS company.”

Q Like any founder, I'm sure. Um, so who led this round? How much was it? What was the general process like? You mentioned it was quick. Cause it mostly existing investors.

A Yeah. So it was pretty interesting because we went out to, I actually sent out an investor update, uh, earlier this year. And in that update I'd mentioned, Hey, listen, we're thinking about potentially raising towards the, uh, towards the end, end of summer. Um, And one of our, and I think we we've shown pretty solid traction from our side in terms of growth and all those things. And at that time, I think we were just probably like 10 months, 11 months, 12 months from launch, give or take. And we already had a few hundred customers. So seeing the momentum, one of the insider investors, uh, Valor equity partners decided to, uh, put forward a term sheet to our, to our group and to our team. Uh, and yeah, it was, it was great. They were like, Hey, listen, We'll put together a term sheet here. You will preempt you here. We, you don't have to go out and fundraise and waste time on those, you know, on that operational process away from the business, things like that, especially because when you're a small team, CEO is still pretty involved and founders are pretty involved in running the day to day. And I was like, well, this sounds pretty great. Started talking to other people that were potentially interested in joining on. Um, so brought on folks like, uh, the founder of rippling, uh, the other, uh, Um, SVP of Yelp for 12 years, the ex-mayor of DC, head of ML at Amazon, things, peop…

AI assessment note: “raised ten million dollars... led by Valor Equity Partners. So, relatively fast process.”

Q Right. So is that then the portion that you're initially going after? How are you strategizing out your go-to-market if the market's so big?

A Yeah, for us, the, the, we're staying super focused on the e-commerce and SaaS companies, e-commerce, CPG, and SaaS companies. Uh, I think it's, if you look at it from a platform level, it's, you know, the folks that, uh, you know, we support Shopify merchants, big commerce merchants, uh, The, we're starting to add integration to Magento. We're, we support Stripe customers, things like that. So largely focusing on a select group of platforms and just going deep within these specific platforms, because a lot of these platforms just have, uh, A pretty wide base of merchants. Um, and the reason that we're going after e-commerce and staff specifically is because that's where the pain point is the highest right now. Uh, that said, I, you know, next year or the year after we could potentially see ourselves getting into retail. These are people that have like brick and mortar stores, things like that. Will we ever touch specific other industries? We like, we probably won't ever touch like telecom, uh, oil and gas, things like that. It's just not our sweet spot industrial companies. But yeah, the, the, the pain point is just the highest of the e-commerce SaaS segment, but specifically within these like one to two hundred million dollar revenue businesses.

AI assessment note: “we're staying super focused on the e-commerce and SaaS companies”

Q and, you know, just kind of cementing New York as a figure in the tech world. There's always a debate. We love the debate. It's so much fun. But, um, so, you know, like, NYC is known for fintech and health tech, but I'd love for you to just break down the NYC AI angle and bring us all up to speed. What is the state of the market there?

A Well, I'm still hoping to get you back in New York, Molly. So I am optimistic that maybe the West Coast has not went out on you, but, uh, maybe, you know, after this podcast, you'll be like, you know what? Grace convinced me. I'm packing up my bags, uh, back to New York City. But, um, I really think New York is poised to be the next hub for AI. Um, and I, I think it's really simple. It's because the demand is here and the talent is here. Um, A few, like, stats, which, you know, folks may not know, right? 44 of Fortune 500 companies are headquartered here. Um, it is a center of major industries, like you mentioned, not just, you know, financial services, but also media, uh, fashion, et cetera, healthcare. Um, there's also a lot of really good research talent here. So NYU Silver Lab, that's like the top AI lab that feeds a ton of folks to Meta. It's led by Yann LeCun, who is Meta's chief scientist. The top labs from Columbia, they have excellent machine learning and biolab. Cornell Tech, which now is a massive campus in New York, which is affiliated with several Luxe portfolio companies too. Princeton, they have a great NLP Institute with Dante Chen and Karthik Narasimhan. Um, as well as just great international talent, startups moving to the US, whether it's from Europe or Israel, um, new grads, number one choice for new grads to live because they want to live here. Um, and so l…

AI assessment note: “I really think New York is poised to be the next hub for AI.”

Q Are there any particular companies or projects you're watching?

A Yeah. Um, a few in our Lux portfolio are crushing it, and I would plug four. Um, so I think like factory AI in the coding space is doing excellent. Maton is wonderful. Um, Maven AGI in the customer support space in Boston and New York, crushing it. And they have a really great underlying tech team. Both of them do have really great underlying tech teams, really understand the user workflow, pricing to value for their customers, and then are thinking about how do you actually keep things flowing, um, and automated for the customer. So it's a true seamless and autonomous resolution, uh, for, for those end users. Um, I'm also really excited about AI as it pertains to, like, the sciences and, like, areas where you've still seen very little penetration. So we're investors in evolutionary scale. They're a really cool company at the intersection of AI and biology. They actually spun out of Meta. Um, Alex Reeves used to run, kind of, the bio AI team there. He offered a paper card ESM Fold. To spare you the details, it's kind of like an open AI for bio. But there's going to be a huge potential to tap into big data sources, take a lot of key expertise in the sciences, whether it's physics, whether it's chemistry, whether it's material science, and then turn that with a great understanding of that workflow and with this data into really transformative outcomes. And so I think the impact o…

AI assessment note: “a few in our Lux portfolio are crushing it, and I would plug four.”

Q That's fun. So in terms of the team, um, Kian, how big is the team and what is the makeup of that?

A Yeah, we're a pretty small team, actually. We're only 14 people full-time. Um, we have, I mean, I think I like to joke that half has a PhD, half is under 25, which honestly, it's approximately true. Um, so, uh, we have a chief scientific officer who used to run one of the largest, um, DTC academic projects. We're providing kind of innovative genetic analyses to customers. Um, Lasse Folkerson. Um, we have, uh, you know, People who used to work at the National Human Genome Research Institute and do their communications for Warner runs our communications. We have people who used to actually do comms at Ancestry, right, Ancestry Health, the former technical director of Genomics at LabCorp, many, many others, but the, we have a very deep bench of kind of technical talent across, you know, science, communications, um, you know, and beyond really. I mean, because if you're on our technical bench, it's not just about the bioinformatics, the statistical genetics, Also even the communications. It's just about, you know, the engineering, the full stock development, the systems architecture, right? So in terms of kind of complexity, if you want complexity, you should come to Nucleus.

AI assessment note: “We're only 14 people full-time. Um, we have, I mean, I think”

Q That's fun. So in terms of the team, um, Kian, how big is the team and what is the makeup of that?

A Yeah, we're a pretty small team, actually. We're only 14 people full-time. Um, we have, I mean, I think I like to joke that half has a PhD, half is under 25, which honestly, it's approximately true. Um, so, uh, we have a chief scientific officer who used to run one of the largest, um, DTC academic projects. We're providing kind of innovative genetic analyses to customers. Um, Lasse Folkerson. Um, we have, uh, you know, People who used to work at the National Human Genome Research Institute and do their communications for Warner runs our communications. We have people who used to actually do comms at Ancestry, right, Ancestry Health, the former technical director of Genomics at LabCorp, many, many others, but the, we have a very deep bench of kind of technical talent across, you know, science, communications, um, you know, and beyond really. I mean, because if you're on our technical bench, it's not just about the bioinformatics, the statistical genetics, Also even the communications. It's just about, you know, the engineering, the full stock development, the systems architecture, right? So in terms of kind of complexity, if you want complexity, you should come to Nucleus.

AI assessment note: “We're only 14 people full-time. Um, we have, I mean, I think I like”

Q Within that, you mentioned a couple of industries. And so, uh, There are large legacy industries that haven't caught many of the waves of innovation throughout time because, you know, they're more laborious. It's like physical demand. Um, what exactly are you targeting with Zoo? Like, is there a particular part in the process for further hardware development? Is this like a specific niche in the industry?

A Yeah, to narrow it down, we start at the design phase of the hardware development lifecycle. You know, there's various elements that go into Uh, generating design and getting something into production for an actual, you know, engineered, manufactured part. And we start on the design side where it's actually generating the geometry, generating what eventually gets made downstream. We don't touch that downstream area yet. We will be soon. And, and the intent of that is to capture essentially industry-wide, you know, once you have the geometric primitives, all those shapes, all the computation to combine those shapes together into more and more complex geometric Uh, parts, you know, engineered designs. Then there's no one specific industry that's optimized for, for all of them, because those primitives can be combined in a way that forms shapes for any industry. But the people who we tend to see the most adoption from are people that see software development and hardware development side by side. There's an asymmetry there. Where in modern software development, you can write code at scale. You can push that to the cloud. To dynamically allocate that, dynamically scale that. Then you can write unit tests. You can write, um, what is called continuous integration workflows, where you automatically make a software edit that automatically gets tested to verify that works well, and that…

AI assessment note: “we start at the design phase of the hardware development lifecycle.”

Q Yeah. Yeah. And are there certain positive signals that you'd like to see in founders? Cause I know, you know, we got a whole host of personalities and expertise and all of that good stuff, but what are like the main positive signals you find?

A Well, so I think, you know, we talk about three things at Upfront. We talk about product market fit, and what do we mean by that? Because it's a term everybody throws out. Um, we're investing long before product market fit. Sometimes we're investing before products even been launched in market. So by definition, it can't be product market fit, but we have to understand something about the unit economics of the business. Is it going to dramatically lower the cost? Is it going to dramatically make something more efficient? Is it going to improve convenience a great deal to customers? Is there some industry change That we expect to happen, that this is going to lead to this company being more successful going forward. So we're looking for that. Like we have to be able to explain to ourselves why we believe this is going to be big. The second bucket is, um, founder market fit. And that matters a lot to us. And the example I sometimes give is in 2008, I met two young guys out of Harvard, and they were guys, and they were launching something in the mom space. And I'm like, You're 22. Like, what do you know about breastfeeding? What do you know about colicky babies? What do you know about what moms go through? Like, it's just not authentic. And of course, that's an extreme example. It happens to be a real example, but it's an extreme example. We're looking for, like, what is your rais…

AI assessment note: “The second bucket is, um, founder market fit. And that matters a lot to us.”

Q that are traditionally capital intensive. Um, I listened to your episode on Apex, and I thought that was great. I thought you provided a really good example and reasoning behind why you're still doing it and how you debunk these misconceptions. So I'd love to hear more about maybe it's specifically with Apex and space, but what, what are the main misconceptions about these categories that are now being unraveled?

A So if you assume that you're operating a hardware business that requires CapEx, that let's say it's a 50% profit margin, just to pick a random number, and let's say your product is ten million dollars, so it's five million dollars for you to actually produce it, five million in gross margin, okay? If that five million, so your, your sales price is ten million, if I get 20% down, From a customer. If I'm producing something they really need that they can't get from other places and they put 20% down, I'm covering two out of five. So I'm covering 40% of my capex with a down payment before I start even buying materials. Then you can do stage gate payments. So you have milestones. And when I hit the milestones, you have to make another 10%, another 10%. So you can find yourself in a world in which you've shipped a product That has very limited capex risk, not zero, but limited capex risk, um, as long as you're meeting the deliveries that you set forth for yourself. Um, in, in the case of some hardware products that I'm seeing, uh, you have to invest 1015, twenty million dollars in setting up manufacturing in the first place. That's a large capital outlay, but the size contracts that they're talking about are a hundred plus million dollars. So in what category selling t-shirts and socks are you going to get to a hundred million dollars in orders in a year or two? So it's at a differe…

AI assessment note: “you can find yourself in a world in which you've shipped a product That has very limited capex risk”