Is this the end for the Roomba? Why iRobot went bankrupt | E2224

No one's coming for you to help you with your job loss. There's somebody training a robot or software or experts are training AI to do your job. Let me make that clear. Your job's going away. I mean, everybody. How do I know this, Alex, is the question. Well, I get pitched by startups. Well over 50% of the pitches we get are, there's a job writing RFPs. We're going to write software that lets AI write RFPs, and it will make the average person 50 times better at it, which means 49 people lose their jobs. Get a hundred of your laid-off HR executive recruiter friends and start a syndicate. Start a little micro fund, make a $5 million fund, a $3 million fund and say we're going to go invest in 20 companies and watch the magic happen. These demo days, which we just had one, this is where the magic happens. We get rid of 99%. We filter out 99% of the applicants and we try to do our best to give you the top 1%.

All right, everybody. Welcome back to This Week in Startups, where we talk about tech news and we try to avoid how absolutely horrible things can get in the real world and focus on business and technology and finance. I'm Jason Calacanis. He's Alex Wilhelm. And big news, the House has passed the Invest Act. Let's get into this because this is something that's very near and dear to my heart.

To have a small venture fund like 10 sub 10 million previously and I think they had increased it under Trump's first term to 12 million. You can have these qualifying venture capital vehicles. All of these regulations started after the Great Depression when people were basically scamming people out of money with different investment vehicles. Think like, you know, here's a prospect somewhere out in the Wild West where they're going to have a gold claim or something. Anyway, we're sitting here a hundred years later, literally 95, 96 years later, and some of these old regulations are still there. And one of them around these formation of capital vehicles has been the limit of 250 accredited investors in $10 million funds to have these small, easy to run venture vehicles, micro funds, let's call them. Well, now it's going from 250 participants to 500, from 10 million to 50 million. What does this mean? Well, if you did 250 people, that's 40K each to do a $10 million fund. If you do 500, it's only 20K each to do a $10 million fund. This dovetails with another part of the regulations here in what is, this is like an acronym, it's an acronym: Incentivizing New Ventures and Economic Strength through Capital Formation Act. That's the Invest Act. And it passed on a bipartisan basis. The other part that's super important that dovetails with this is section 203. So they're going to create a test which will allow anybody who's not accredited, which is 95% of the country, to be accredited. Those other folks are going to be able to participate. So you combine these two things together, Alex, what you could have is, I don't know, a bunch of HR executives who make $75,000 a year who really understand the HR space. They could form together, you know, 500 of them and put 10K each into a $5 million fund and then anytime they get sold on some new productivity software for the HR space, they could say, 'Hey, yeah, we'd love to have you come to our syndicate, our little venture fund, pitch us on it, and we'll vote and we'll all participate in it.' What this also does is since it's a test, it becomes fair. Previously as an accredited investor, you had to have like 200k a year in revenue or income rather or you had to have like a million dollars in net worth not counting your home. And then there's qualified purchaser which is like 5 million in net worth. What this means is the ability to become a rich person, move from poor to middle class, middle class to rich and all the little strata in between was greatly limited if you weren't born rich or got rich through the lottery or through your sheer force of will or entrepreneurship or some combination. These are important legislations even though they seem minor because company formation is where all the new jobs come from. So no Uber, no Airbnb, no Coinbase, no YouTube, no Meta, Facebook, Instagram. These things created lots of jobs and then lots of secondary economic impact. So this is a very, very important piece of legislation. I'm not sure what happens next, but eventually as well.

It's a huge deal because as an example, I have a podcast or I am a popular person on Twitter and I have 10,000 followers or a 100,000 followers. And I say to them, hey, I want to start this venture fund to work in just startups in Nashville, just startups in Detroit. I want to revitalize Detroit. Now, I don't want to raise from, you know, 100K from a 100 people to get to 10 million. I'll raise 20K from on average from 500 people. It's just going to allow more people to participate. It's going to allow the funds to get bigger. So, it might be that 100 people put in 250K each, you know, and that adds up pretty quick. Then you get a 100 people to put in, you know, 100K each and you get 300 to put in 10K each. All of that will create more participation which then gets people looking for more startups and giving that crucial first check. The bottleneck right now is not series A. The bottleneck is not you know seed funding and it's certainly not late stage. There's plenty of money for companies that get to a million or two million in revenue and that get to year two or three. It's really year zero that matters or year one. So you need high-risk small amounts of capital and you need many different venture firms looking for their Uber, looking for their Airbnb, looking for their Micro One, looking for their Robin Hood. And if they get out there and they start placing bets at that critical year one stage, it's great for everybody. I have been pushing for over a decade for these changes. And I sound like a broken record, but here we are. And we have an administration that is not paternalistic, I guess would be the term, where they believe poor people are stupid and can't make their own investment decisions. The SEC has to create this test. I believe it's within a 100 days or something and they have to create this test and it says like a government entity, but my understanding is that means SEC and it has to be free. So, there's going to be a free if you've considered being an angel investor and you're a journalist who makes 100K or you're a developer who makes 100K and you previously couldn't participate, now you can and you should risk in my mind. This is investment advice. I believe that people should risk like 10% of their assets on high. This is my belief. It's literally I'm you know how everybody says I don't give investment advice. I'm going to give investment advice. If you're a young person, yeah, why not take 10% of your net worth, 10%, 5%, whatever you can afford to lose in your mind, which for a young person might be 30%. Why not swing for the fences and try to place bets, aka investments, on startups. Now, you should read my book, Angel, where I lay out, you know, all the lessons I've learned. You got to get to 30 or 40 investments. You have to have deal flow. I teach a course, Angel University. It all goes to charity. We've given a quarter a million dollars in ticket sales to charity. I don't make money off courses, but I do this course. I used to do it four times a year. Now I do it once or twice. This Angel University course, I teach people how to, you know, source deals, how to make decisions, and, you know, how to do a little bit of portfolio management. I would love to see the other 95% of Americans take this test. And by the way, no one's coming for you to help you with your job loss. Your job's going away. Every job in America, there's somebody training a robot or software or experts are training AI to do your job. Let me make that clear. Your job's going away. And when I say you are, I don't mean you, Alex, or me. I mean everybody. Your as in the collective jobs of humanity. How do I know this, Alex, is the question. Well, I get pitched by startups.

Startups move fast. And in the age of artificial intelligence, they're moving faster than ever. But moving quickly doesn't mean you can fall behind when it comes to security and compliance. Hey, move fast. Let's break things. Good advice at times, but not exactly what huge enterprise customers want to hear. So that's why I recommend Vanta to my founders. Let Vanta worry about your SOC 2 and your HIPAA requirements so you can focus on building a world-class product. Vanta will continue to monitor your company as you scale up and you'll always be ready for the next big deal. And Vanta's new Agentic Trust platform is context-aware so you can stop reacting when something goes wrong. You got to be proactive. You got to spot these security and compliance issues before they become a problem. It's a new world and expectations for your company have changed. You're growing up, so it's time to get secure with Vanta. Twist listeners can get $1,000 off by going to vanta.com/twist. That's vanta.com/twist for $1,000 off. Back in the day, maybe five or 10% of pitches were people saying, 'Hey, we're going to replace this job. We're going to eliminate this job.' Now, well over 50% of the pitches we get are there's a job writing RFPs. We're going to write software that lets AI write RFPs and it will make the average person 50 times better at it, which means 49 people lose their jobs roughly. How do we solve for that? We got to create more companies. We got to create more startups that find more problems to solve and create more jobs. The end.

Now, let's pause on that one. That's a super critical one. We have demo days. At demo days, lawyers will tell folks, don't say, unless you know every person in the room's accredited, that you're raising money. And because you could risk somebody investing theoretically and this has always been like a gray area and some founders are just like I'm going to do it. I'm going to say on Twitter I'm raising around. Venture capital firms when they raise around they generally don't say anything unless you do like a special designation where you have to verify everybody's accredited. Anyway, these are antiquated laws. They're overly protectionist. We want people to lose money. We want people to take risk. And if people can say, 'Hey, I'm raising money. Forget about equity crowdfunding, just regular raising money and not be scared of saying I'm raising money. Well, then I don't know that group of dentists who create and and they would be accredited, but the group of HR people who created their own syndicate. Like if you're an HR person and you get laid off, this is my best advice. Get a hundred of your laid-off HR executive recruiter friends and start a syndicate. Start a little micro fund. Make a $5 million fund, a $3 million fund, and say we're gonna go invest in 20 companies and watch the magic happen. And these demo days, which we just had one, this is where the magic happens. Accelerators, college incubators, they all do a sorting function. They get rid of 50%, 99% in our case, 99% in Gary Tan's case at Y Combinator. We get rid of 99%. We filter out 99% of the applicants and we try to do our best to give you the top 1%. We would love to have more of these demo days say exactly how much they're raising that they're raising. And in a lot of these demo days, they don't say they're raising. And you're like, well, why are we having a demo day? It's like, obviously they're raising.

Now, you consider yourself still a journalist or you consider yourself an entrepreneur, an analyst? We had this little discussion today. What we consider Alex, I consider you an analyst, but are you opposed to investing in startups?

Okay. So, you are in the game.

I think you should just throw it in the garbage, the whole journalism rules, and you should just get conflicted up and create your own little micro fund.

I think you should just do it. F it and see if it works. And these new rules will make somebody like you who might be venture curious even more curious because there'll be less red tape. Right. I don't know if you're venture curious. I'm taking

I want to make a point though about the power of technology companies though while we're discussing them in the aggregate. Jason, if you take a look at this right here, this is what we were looking at this morning as a group here. This is a screenshot of section 108 from the bill. And if you don't know how to read a law, this is just an absolute mess. So, what we did was we took all of these and we fed them into our dear friend producer Claude. And what you get on the other end of it is this crisp, lovely, just easy to read, simplified version of it. And I cannot recommend this enough if you're struggling to read something in a long bill from Congress. Drop it into I prefer Claude or your favorite AI and it will just make it legible and readable. And this is how we prepped for this segment today. Fantastic. We use it each and every day. That's what powers the show. And we'll have more about this when the Senate picks it up, Jason. But at least we're ending the year with a positive regulatory note. High five.

Yeah, exactly. High virtual high five. I took this whole thing and I put it into Claude. I said, 'Summarize it.' Then I was like, 'Oh, I got to get this to the team.' And usually I tell the production team, 'Hey, cut and paste this and spend 15 minutes cleaning it up.' And that 15 minutes we recaptured, which means you can spend more time analyzing or reading the document and understanding it. I went back and I took that section on this, you know, small venture capital formation and I looked at the history of it using Claude and I was like, 'Oh yeah, by the way, it went from 10 million to 12 million under Trump in the first time and I was like it went up 20%.' While in that same time period, venture rounds went up 20x. So like the average seed round went from like 250K to 3 million. Like it literally went 10x and then they're like, 'Yeah, we're going to increase the size to 20%.' When you see it go to 10 to 50, that's the game on the field, folks. That's the opportunity space. So, you know, this is another great thing about AI today is just how quickly you can increase your understanding of complex topics. And one of the most complex topics is private markets. And private markets is where all the money is being made. When SpaceX goes public, Stripe eventually goes public, any of these private companies goes public, a lot of the value has been taken out of them. And what that means is poor people, middle class people, even upper middle class people never had access to it. And the rich people did. You know how many times I get pitched on buying SpaceX shares or Stripe shares or Anduril shares? All week long I get offers. Do you know how much time my parents middle class family gets pitched on this? Let alone your Uber driver or your Door Dasher. Never. And they would know. So let's let everybody participate in this. It's like those Invest America, you know, accounts. We need everybody to understand equity ownership. We need 100% equity ownership in America. And that's how you beat socialism, communism, and control top down is by having so much competition that people can participate in it.

I think if you can get into companies with incredible management teams that have incredible investors names on them and you can hit 30 or 40 of them so you have diversification and you do it with the small amount of your net worth that you're willing to lose. In other words, the money you might spend on a vacation, the money you might spend gambling in Vegas or on sports, your disposable income, why not make this disposable income instead of making it entertainment, consider it half entertainment and consider it one-third entertainment, one-third education, and one-third investing. If you were to look at it like that, you could say, 'Okay, it's really entertaining for me to go to the syndicate every week or AngelList every week and see what people are investing in.' It's like really like you get a rush out of it. Like, oh wow, this is the future. Then second, you get educated. Oh, I know what Anduril is. I know how Stripe works. And then third, hey, it might work out. And it might work out to the tune of getting into the next Tesla or Uber before it goes public. Now, the reason some people are a little wary of the SPVs now is that some of them because they're so popular amongst the rich that everybody feels they need to have a piece of these companies and they'll charge 10% loading fee. That's a big number, but they won't charge carry. And so there are hustlers or dealmakers, however you want to look at it, almost like a trading desk where they just want to get that five or 10% commission. Just like in the Wolf of Wall Street when they were selling penny stocks and they told Leonardo DiCaprio he gets like a 50% commission or something selling it. and he's like, 'Give me the phone. Give me the phone.' He's like, '50% commission. I'll do it.' Now, they're getting 10%. And sometimes they're double layered SPVs. So, you're doing an SPV, you've got access to an employee. I do an SPV, you charge 10%, I charge 10%. Now, you get 20% fees. So, there are on the margins for the latest stage things a lot of fees you have to look out for. But, as an intelligent person who takes the accreditation test, you should be able to understand fee structures. And if you can't understand basic fee structures, you can't understand the valuation, well then you shouldn't be in it. But and also getting in late, you start to learn, oh well maybe, you know, Anduril or SpaceX, maybe there's like a triple left in them in the next 10 years. Maybe they'll quadruple in the next 10 years, which would beat the market by like, you know, double or triple or quadruple. The market might double, you might quadruple. So you, you know, you take that risk maybe being the last person in, but you'll still be the first person before the IPO. And then sometimes it doesn't work out. You have Instacart privately valued at 30 or 40 billion goes public at 10 billion and people are down from day one on that last valuation. So it is possible you could lose 75% of your investment when it goes public. So then you know this is where diversification comes in also part of the test. So this is a place you can take risk. I meet with a lot of companies and I'm telling you every founder I know is asking themselves the same question. How do I get more out of AI? We all know these tools are making people more productive. They're making people more efficient. But a lot of founders still have reasonable concerns about data security or just finding the right application for their way of doing business. But waiting on the sidelines is no longer an option. So I recommend founders use Netswuite by Oracle and put AI to work for your company. Netswuite is the number one AI cloud ERP and it's trusted by over 43,000 businesses. They're going to give you a unified suite of products, all safely sharing interconnected data. And that's going to help you automate routine tasks, dive into your analytics for clear, actionable insights, all while keeping your costs low and making your team faster. Right now, get the free business guide, demystifying AI, at netswuite.com/twist. The guide is free to you at netsweet.com/twist.

That was my bad ear, Alex. I thought you said nine billion.

I know the largest vehicle in this group is a $3.3 billion fund aimed at essentially backing the XI, the Anthropics in their portfolio, the super late stage growthy stuff, but still quite a lot of capital in there for other companies. This to me fits neatly into the idea that we're seeing multi-stage funds become ever larger, ever more important. Your Andreessens, your maybe your Thrives, and now your Lightspeeds. We have some data on the concentration of large venture capital funds and how they're changing the market. But I'm curious for founders out there when you're giving advice, what do you tell them about these funds that might be able to lead their series A through series F? Is it the right way to go or should they try to pick different partners for different parts of their journey? Generally, you know, having a deep pocketed venture fund is a great idea. When you're at series B, series C, absolutely for your seed and your series A, you probably want worker bees who are going to put a lot of work into it and have expertise at those rounds. So, these big funds, one thing that can happen, this would, and this isn't unique to Lightseed, this would be like a similar critique somebody might make of say Andreessen Horowitz, you're too small to matter. Now, they would argue, 'No, no, we care about all founders.' And that's absolutely true. But show me an incentive. I'll show you an outcome. If you give an investment team a billion dollar growth fund, and you triple the billion dollars, you have two billion in profits. They make 20% carry on that 2 billion, you know, in the two and 20 model. So, they make 400 million. Now, you give that same group a 100 million. And they 10x it and they make a billion in they make 900 million in profit. They get 20% of that, which is 20% of the $900 million gain. Let's say it was a billion dollar gain and turned it into 1.1 billion. Okay, they make 200 million. So the economics really do matter and the incentive matters. So you know and then there's this continuity problem which is a little more complex. If you get your seed round, let's say from A16z speedrun, which we've had like five of our companies go from our accelerator or founder university to this awesome program. We had one of the partners on last week, Brian Kim. He was awesome on the program. Now, let's say they have a growth fund or you know and they did your series A or they have a series A fund and they did your incubator and they have an incubator fund or a seed fund. Okay. If they don't do it, other folks might be like, well, why aren't they doing it?

Yeah. So, there's a signaling risk. I think people may be overindexed on that. It first came up with the Sequoia Scouts program which was done in a pretty stealthy fashion. We didn't promote it because we didn't want if Sequoia passed on the series A or didn't do the series A of Uber or Thumbtack or Datastacks my investments. They wound up doing two of those. They wind up, I think, investing in all three of those later on, but it could create a little signaling risk. So, they were very careful not to damage the startups, you know, by saying like, 'Oh, yeah, we're not going to invest. We're already on the cap table. We're passing on continuing investing.' The market has adjusted to this, I'll be totally honest. But some people still have it in their head that oh, what happens if they don't invest? It's a competitive marketplace. So therefore, the founders should be getting three or four term sheets when they do their series B. And they should try to get a different investor than the series A investor to be honest. Because now you got two smart people around the table, two people who bought at two different prices, set the price twice, and they're going to fight to increase the value of each share. You got two different firms. So this is why I have no problem. I was texting with Gary Tan this weekend. You know, we have a couple of companies coming out of our accelerator who want to go to YC and they were like, hey, can you recommend me? Absolutely, I can. We have them going to Andreessen. We have them going to Antler. We have them going to all kinds of different funds or other incubators. So, that's a good thing for founders to have, hey, you've got Jason Calacanis and you've got Mark Andreessen on your cap table. That's kind of a cool thing when you go for your series A, right? Oh, you got Jason Calacanis and you got Gary Tan on your team like Tax GPT does and then the next round goes easier. So that's the lesson of startups is how many people can you get on your cap table who are rooting for you and if they're rooting for you that means they might not be rooting for your competitor because they've placed a bet on you. So there's that.

Yeah, absolutely. And that immediately goes into the Alex's best dad jokes of the year.

Okay, now we have two. Building out your team is one of the most crucial things you have to get right in your startup. And finding the right developers is particularly important. But now there's lemon.io. They're going to save you time, money, and headaches by doing all the time consuming leg work for you. They've got an experienced lineup of prevetted developers working for competitive rates. Just 1% of applicants are accepted into Lemon's elite program. And they're not just out there finding this great talent. They're also working with you to integrate these new members into your team. Plus, if it's not a good fit, hey, and sometimes things don't work out. Lemon will hook you up with a new developer ASAP. I've seen startups go from just pretty good to amazing after filling out their teams with developers from lemon.io. Go to lemon.io/twist and find your perfect developer or technical team in 48 hours or less. Plus, Twist listeners get 15% off their first four weeks. That's lemon.io/twist.

Really exciting positive stories or three. And now we have to go to oh, what can go wrong? So, we're going to talk about a company called Pipe. This was a fintech company that was very, very hot.

Okay, the reason this is controversial and the reason this document leaked is because clearly somebody is upset. So I said to the person, like, how did you get this document? Like, how did you get board documents? How did you get the financials? And he said, oh, I did journalism. And I said, yeah, but somebody leaked it, right? Like, you should say how you in some way got this information and verified it. So, let's put that aside, you know, in the journalism controversies over leaked documents. I don't assume they asked somebody to leak it because that would be potentially legally actionable. Yeah, that would be highly unethical. But they could have had somebody who was upset and they said, I'd love to know more. And then that person sent them a screenshot. Now, that person is breaking trust. I think a board member, former board member, investor, somebody who was associated with the company leaked this because they're upset at the founders. The founders who left the company or became board directors had done a big secondary. At the time, it was super controversial for a company raising at this ridiculous valuation. And it was a ridiculous valuation. Everybody knew it. And I remember, I think Sax maybe did the Series A. A lot of my friends were investors in it. It was a great idea. It was an idea at the time that was awesome for potentially our founders. So, this is peak Zerp. You've got SaaS companies with predictable revenue. You could go in, we talked earlier about investors being able to place bets on startups. Here was a way to loan money to a startup. Let's say it was Slack, you know, doing incredible growing when it was a private company. They're growing. Instead of raising another round of financing, they know they have 10 million in revenue. Next year, they're going to do 30. They say, hey, give us 10 million now. We'll deploy that and we're willing to sell that 10 million in future revenue for 90 cents on the dollar, 94 cents on the dollar. So give us $9 million now and then when we get the 10 million next year, we'll give you the 10 million. You'll make, you know, this 10, 11, 12% gain. And it's like doing corporate paper and loans for SaaS startups. Now, what's the problem with this business? If those SaaS companies stopped growing, which we had massive headwinds and they did, it was like the space was just too populated and AI came in and the idea of every one of your flagship customers going to grow their base of employees by 10% turned into they're going to lay off 10%. So what happened to the Stripe's of the world were okay, we have a thousand person company paying us $15 a month per employee. It's a $180,000 contract. That contract will be worth 250 in two years or 350 and we're going to sell them on these new features and products. And then that company comes back and says, hey, we want a discount. We're thinking of using an open source product and we went from a thousand employees down to 600. So, we need to get 75% off. Well, if you gave them a loan against that revenue, that's problematic. So there were multiple reasons why this startup had challenges. But if you're taking money off the table and you allow secondary sales and then the founders move out of the management positions and they're not going to grind, they're going to go spend the money on their lifestyle. This left a very bad taste in people's mouths according to my recollection. Now I'm not saying anybody did anything nefarious. These are all adults who sold shares and bought shares in the secondary market and no crying in the casino. The founders made a better trade than the investors who bought the shares from them. In some cases, the founders make a terrible trade. Sometimes you'll have founders of a company sell shares early in YouTube or Instagram or Uber or DoorDash and they leave the last 10x or 100x on the table and they should have just not bought their second house or their first house. They should have just, you know, not diversified or sold their position. So anyway, it does make one wonder what's going on here.

And so, it appeared to be kind of like they got secondary and got to leave. Everyone else was left holding the bag. So, it wasn't just a better time to trade. It was also possibly some operational incompetence.

The founder I knew, Harry Hurst, was particularly smart and a great fundraiser and I would dare I say product visionary. I think he was like particularly smart and then maybe he was so smart he realized, well, this company is, I don't want to say overvalued, but if he just felt fully valued or valued to perfection is probably one way to say it if you want to be gracious and thoughtful about it. Another way to say it is overvalued, you know, that's in the eyes of the beholder. But yeah, I think he became kind of the villain in all of this and probably unfairly. If you're a venture capitalist and you're buying his shares or other founder shares, you are a very sophisticated investor and those people buying those shares probably thought they were getting the better of Harry Hurst. And Harry, you can come on the program anytime. And half of startups fail, you know, 90% fail depending on what stage you're investing in them. So if it does fail, I mean, everybody kind of expected, you know, and understands those rules of the game. Netflix failing at this point in time or Uber or DoorDash failing or Coinbase, like these are very robust US companies that have decades ahead of them in all likelihood. They could still fail. They could still get disrupted or they could not execute well. But in startups, the people who are buying the founder shares, they knew that. And yeah, maybe they also went too aggressively in giving loans like you said to crypto companies. That's another thing. You know, when you have a company doing a new business model with companies that are not as robust. So you have a startup backing startups, it's like two levels of risk. Then you add a third level, crypto. Now crypto today doing it might actually work really well. So timing also matters.

Lighthouse customers happen all the time and they can save a company. You could also create a dependency on one company where if that company decides this isn't a strategic priority anymore, you got big problems. So it can save a company. It can give him life support for a year or two and just push out the eventual failure of the company because the company doesn't have a robust set of diversified investors. Anytime you get one customer being more than a third or half of your revenue, you should take notice as the board of directors. You should take notice as the founders, as the sales team say, hey, we need to diversify our revenue. LPs, same thing for venture funds. You don't want any venture fund be more than five or 10% of your fund size. And in fact, some LPs have written in stone rules. We won't be more than 10% of the equity in a venture firm. So, diversification of revenue across customers and sometimes across product lines is critically important. The reason Uber did spectacularly well during COVID was as rides went down, ordering food went up because people were locked in their houses. Then when people started going out to eat, DoorDash had a problem because people wanted to get out of the house. The number of orders went down or didn't grow as fast and then rides went crazy. Everybody was like, oh, I got to get an Uber and go get my drink on and whatever it is. So, diversification critically important.