The Exchanges

Q And how much of that, is any portion of the 50 dollar automatic campaign you're launching for Nathan's Florist, is any of that going towards a flat SaaS related fee to you, or is it all just a cut of ad spend?

A Yeah, it's actually, there is no ad spend in that initial, uh, spend, because what we're doing is we're standing up our own, basically our ad, our own ad network On the newspaper's website that has our ad units inside it. So we do, you know, about four billion impressions a month on this ad network that we basically own and operate. There's no ad costs for us for that. The upsells that we do, um, which we're actually just getting into right now this year, 2018, we're starting to kind of add on to that. So you're like, okay, let's take this ad and put it on Facebook. Let's put it on Google. Let's put it and sell it programmatically for you. That's actually A new thing that we're doing. So in terms of 20 seventeen's revenue, all of that was our own, uh, operated owned and operated ad network, and we don't have any pass through revenue. So the, the number that we have made our newspaper partners, that 50 dollars, if you want to do the math, we've actually made our newspaper partners in In 2017, I think it was something like a hundred and ten million dollars. We made our newspaper partners with that ad position.

AI assessment note: “there is no ad spend in that initial, uh, spend”

Q just raise money, but anyone valuing it. Let's say someone is even potentially acquiring the business, right? You're going to get a better multiple if you can make the revenue look like recurring SaaS revenue versus a percent of ad spend. Do you just forfeit and say, no, we are a percent ads and we're not SaaS? Or do you try and say, no, we are recurring. It's predictable revenue.

A It is recurring and predictable revenue. It does have very high churn because the newspaper's That we work with have very high churn naturally. So you, you know that like something like a nine out of 10 businesses in their first year end up churning, right? Um, well, newspapers, it turns out, get a very high percentage of those customers because, you know, if you're running a business and you don't know what you're doing, let's say it's a, you know, a restaurant. Um, and it's your first year. One of the things you do is like, well, I need business cards and I need to advertise in the newspaper. And so we will get that ad once. And this is something like 50% of our, of our ads. Uh, so we'll see that customer one time. And those customers, that, that is a really high churn rate for us. So month over month, like we're looking at almost 50%. We never see that customer again. But then we have this cohort of about 20% of customers that just keep coming back every month, every month, every month. So that's kind of how we model the business. But it's a new 50% is the thing.

AI assessment note: “It is recurring and predictable revenue. It does have very high churn”

Q Two years, yeah. Okay, talk to me about PPE, because a good friend of mine, Bill, said, Nathan, you've gotta see, Lloyd's done something incredible. It's like nothing to ten million run rate very fast. When did you print or make your first mask, and what got you excited about doing this?

A I think we first started doing it in, uh, I think we had our first machine in April, and I think we shipped our first box of masks around May, May, May. And, yeah, and for me, it was, um, you know, I was, I was kind of my, I actually grew up, um, with my, my dad was in manufacturing, and so I kind of grew up, you know, going to the plants every, you know, couple of weeks, seeing my dad, and, you know, you kind of idolize your parents, um, And, uh, you know, I, I've always kind of wanted to get into manufacturing, but by the time I was, you know, of age, um, there were no manufacturing jobs left in my hometown. In fact, just to put it in perspective, my, my hometown, when my dad was the same age was about 200,000 people. And when I left Duluth, Minnesota, it was about 16,000 people. And so that shows you just like how much from manufacturing and production it shrank. Um, and so, um, you know, I was, I was looking to get back into it at some point in my career. Um, I, I went, I kind of got, you know, sidelined doing a tech startup like, like we do through that business to about a, a, a, a, a, a million dollars in revenue. Um, and, uh, it was, it was a great business, uh, but it was right when the pandemic struck, I was like, Man, the problem here is that we just, we rely too much on one region of the world to produce all of our strategic stuff. And I'm like, when is someone going…

AI assessment note: “we had our first machine in April, and I think we shipped our first box”

Q So did you raise five million back in April?

A Yeah, we did. In fact, um, uh, it was, I would say the fastest that we've ever raised that I've ever raised money before. Um, it was literally a weekend. Uh, in fact, I, I didn't originally plan on raising money for this. I was like, you know, I I'll buy one assembly line, uh, just with, for myself and see what happens. And then one of my entrepreneur friends said, Hey, like, and he, I was going through the math of it and he was like, you really need to scale this. Like the U S needs more than just this one line. And so, I put together a really bad deck, probably the worst deck I've ever put together. And, uh, I, I pitched all the investors, um, but actually I just bought out my investors from my previous company. And, uh, so I think it was good timing on that front. And I said, Hey guys, do you want to get in on this? And yeah, we raised about five million dollars in a weekend.

AI assessment note: “Yeah, we did. In fact, um, uh, it was”

Q And what was, I mean, this is not like own local where it's a software play with a billion dollar potential upside sort of market value sort of deal. What return are you pitching in? Was it like a fixed interest rate or something?

A That is a great question. Uh, we actually kind of invented a new thing where I, I, um, I didn't, so own local in the way that traditional VC works, as you well know, is that, um, you know, you're, you're kind of always pretending you're going to be a billion dollar company. You have to, the problem is not every company is meant to be a billion dollar company. So look at own local. Like we created a great business, very profitable, cashflow heavy. Um, but it just, at some point at what, it didn't make sense for it to be a billion dollar company. So my investors are kind of hanging around going like, Hey, you raised all this money. What's the plan? What's the, cause they got to exit, right? They, they, an investor like typically doesn't want to be in a deal for more than seven to 10 years. And so, you know, they were looking for their exit rightfully. So, so this time I was like, I'm not going to make that same mistake where that incentives are a little bit perverse. Um, and I'm going to really align the incentives with the investors. So what I did was I created a royalty based model. Where it is, it's structured as a note that is paid back as the machine makes money. And then once the investor hits their one X, uh, of payment back, then it flips into a royalty agreement where they make money for the life of the machine.

AI assessment note: “I created a royalty based model. Where it is, it's structured as a note”

Q Wait, what situation does that happen in? Was there a weird water flow on the cap table or when would you have gotten rich that they wouldn't?

A So what happened was, uh, we were, we were just at a Y Combinator. It was, um, 2000. 10, we'd just raised, I mean, we had just closed, so we'd, we'd only been running the company for, for a matter of months, and we got an offer for about seventeen million dollars valuation, uh, to buy the company from, uh, let's just say a big internet company, and, um, the deal was, though, that most of the employees that we had hired, um, because they were just kind of like really down and dirty salespeople, we had about 17 employees at the time, um, I knew would not have passed muster to, to be hired by this company, and this sort Sort of the story and the vision come in, make this thing happen. Um, and maybe you'll be able to participate in, in the wealth, uh, that wouldn't have happened for them. Um, and, uh, and then for the investors, what they wanted to do was they wanted to just, um, Uh, they wanted to take all of the money that they were going to pay me and my, my co-founder. Um, and they wanted to do a, a, a, a ten-year payout, which is kind of weird. Um, but then they wanted to, uh, put just, and give the investors their money back. So basically the way that I was looking at it was like, well, they're getting their like one X liquidation or whatever, but, uh, That's not really a good deal for the investors, and that's not why they signed up. And I know that, like, one of our investo…

AI assessment note: “we got an offer for about seventeen million dollars valuation”

Q anyone listening that's getting inspired to like bring more of this back to the U S manufacturing back to the U S they go, well, wait, how did Lloyd find like an assembly line to buy? I didn't know you could do that. It sounds like you did something in Pflugerville. I mean, how'd you find it, what it costs and what does it mean to buy an assembly line?

A So everything we did was just off the shelf robotics, um, that already exists. A lot of the parts, um, we went to, I went to the folks that were making this stuff for 1020 years in China, and none of this before the pandemic was fully automated. So in China, labor is much cheaper. Um, so a lot of it, they're dependent on, um, a lot of that labor, uh, to move to different parts of the machine. Uh, so we said, okay, well, here are the, like, four or five different steps that it takes to make a surgical mask. Um, we're gonna put that, put it together and use a robot to connect it all together, and so it's kind of like our, the, the machine we have now is kind of a, a version of something that started in, uh, in China with, uh, robotics from Japan, and, uh, probably about 30% of the machine today is, uh, made in the U.S.,

AI assessment note: “everything we did was just off the shelf robotics, um, that already exists.”