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FULL TRANSCRIPT: David Sacks Interview with Kara Nortman | Upfront Summit 2019 (transcribed by Sonix)
Kara Nortman: We’re very fortunate today to have David Sacks with us. I think many of you guys know David Sacks, but I’ll give a quick introduction. Founding COO of PayPal, Founder and CEO of Yammer. And then most recently, in his operating repast, went into Zenefits during its most difficult time as CEO. And then, a very prolific and successful angel investing career in a few companies you guys might have heard of – Facebook, Slack, Airbnb, SpaceX just to name a few of them. And then, most recently, David started Craft Ventures, a $350 million venture capital fund. So, we have a lot of topics to cover today.
David Sacks: Great.
Kara Nortman: So, David, you’ve made some big bets both with your career and as an investor in trends kind of before other people saw them. So, FinTech with PayPal, the consumerization of communication in the enterprise with Yammer, which Microsoft obviously bought for over a billion dollars. I think what’s probably most interesting to start off with for this audience are: so, what trends are you most excited about? What are you thinking about? What are you investing around?
David Sacks: Yeah. Well, thanks. Thanks for having me. I think the computing era that we’re in right now is the era of devices and sensors. You know, each successive era in computing kind of redefines the one that came before it. When you had the shift to mobile, we kind of interpreted — we kind of reinterpreted the PC as an insufficiently personal computer. The mobile device is really the most important, is the most personal computer.
David Sacks: I think what’s happening with device and sensors is we’ll look back at the mobile phone as just one of, you know, end devices that become internet-connected and transformed in the process. Well, there’s going to be a proliferation that’s already happening of new kinds of devices, appliances, sensors. And I think that’s creating a lot of interesting new business models.
Kara Nortman: And you just used to invested in one, I think, that you announced last week. Do you want to tell us a little bit about Swarm?
David Sacks: Yeah. So, Swarm is a critical enabler of this trend. It’s a — Swarm actually creates a — It’s a satellite network, a new satellite network. But what it does is they’ve got a chip the size of a quarter that any developer will be able to put in their IoT device, and it will just be kind of magically connected to the internet. Right now, if you want to connect a device, an IoT device to the internet, you need to have a WiFi hotspot or a cell tower. And what Swarm will enable is just, you know, it’ll work anywhere just kind of automatically. You pay a metered rate for your data. And right now, that’s not really possible with the existing satellite solutions. They’re just kind of too expensive, and the procurement process is too difficult.
Kara Nortman: And so, what are the kind of the killer apps that once this is built you think will sit on top of these devices?
David Sacks: Yeah. I mean, it’s — So, the ones that are easy to think of are the ones where people are trying to connect a sensor where there’s no internet access. It could be a shipping container on a boat that’s the middle of the ocean, or it could be a sensor in an agricultural field, or it could be traffic lights. Well, you know, how do you connect those things easily?
David Sacks: But I think what’s really exciting is that once you create kind of ubiquitous connectivity, what are the new applications that we’re going to see that don’t even exist today in the same way that, you know, every expansion of internet access has led to all sorts of — whether it was — you know, first, it was kind of you went from dial-up, to broadband, to WiFi. And this is kind of the next step in that evolution.
Kara Nortman: And so, I mean, a couple questions for a company like this, right. It’s a big ambition, big vision, a lot of potential applications. I’d say, first, how do you due diligence the founders and the technology in a space like this?
David Sacks: Yeah.
Kara Nortman: Start there.
David Sacks: Yeah. So, I mean, in this particular case, we used some experts in our network to help us evaluate the core technology, the kind of the micro satellites. What they’ve done is they’ve invented a satellite that’s like this big. I mean, it’s tiny but fully — Well, they can put a satellite in space for about 1% of the cost of those big Iridium satellites. And so, it’s just incredibly disruptive on the cost side, and that allows them to offer this kind of very simple metered rate. It’s kind of API for internet access.
David Sacks: I think, for us, we’re not big on necessarily taking a tremendous amount of invention, like scientific invention risk. In this case, the company had already proven the satellites work. They had three of them already in space. And so, we just had to believe in the market adoption. And we feel very comfortable taking kind of market risks.
Kara Nortman: And so, then, flipping to the market side. So, sort of the world is your oyster. In terms of go-to markets, a bunch of different applications from bringing internet to the developing world, to connecting lights. I definitely have one light in particular I’d like to move faster. So, if you know anyone once it’s live, please lob in a request for me.
David Sacks: Right.
Kara Nortman: But how much does the team think — how much are you looking for the team to think about go-to market at this stage? And how far in advance are they developing those use cases?
David Sacks: Yeah. I mean, we talk about it extensively. For me, the founding team having a distribution plan is critical. In fact, I would say that the team innovating on the distribution side is as important as them innovating on the product side. And I’m always looking for a team that’s figured out a distribution trick.
David Sacks: The way we did at Yammer with, you know — Yammer was one of the first viral applications inside of the enterprise. And so, we use kind of consumer vitality as our trick to grow in the enterprise. At PayPal, it was also viral, but we used sign up for referral bonuses. We also bootstrapped off of eBay. So, I’m always trying to figure out like, what is the thing that’s going to allow this to grow at some unusually fast rate?
Kara Nortman: Got it. Wonderful. So, maybe shifting gears to another kind of company in the space that we both probably love to talk about, but you’ve been with since the beginning. Is Bird kind of one of those companies you think fits into this thesis?
David Sacks: Yeah, totally because it’s — you know, basically, you connect a scooter to the internet, and you, you know, pack it with new devices or new sensors like GPS and other things, and all of a sudden, you’ve got a new mode of transportation. And so, that’s really exciting. I think it’s a great example of how when you take a kind of non-obvious device and connect to the internet, you can enable all sorts of new businesses.
David Sacks: And I do think from our standpoint as startup investors, the device has to be somewhat non-obvious because Amazon and the big Google, big companies are connecting all the obvious ones. I mean, Amazon right now is running down a checklist of they’re connecting your microwave and all that. And so, if you’re just kind of doing that, I don’t think it’s interesting enough for startups, but if you take a really non-obvious one, I think Bird’s an example of the kind of magical things that can happen. And I really do think it’s a new mode of transportation in cities that’s just going to keep getting bigger and bigger.
Kara Nortman: Awesome. Okay. We’re going to unpack Bird a little bit. Have anyone heard of Bird? Can you raise your hand in the audience? Okay, just kidding. So, let’s start with the easier stuff. You funded Bird in the first $3 million round. It’s right in our backyard in Santa Monica. We eventually got smart and caught up. But what did you see at that stage? This is a founder you’ve worked with in the past, but in a space that no one was talking about back then.
David Sacks: Yeah, yeah. So, I mean, Travis had work for me at Yammer. I thought he was a terrific entrepreneur, and he came to me with this idea. I thought it was crazy. I mean, you know, you’re just going to leave these scooters. No one has really seen this. This is really a new type of scooter.
Kara Nortman: And you had funded him in something that didn’t quite work, right?
David Sacks: Yeah, I’d written his first angel check in his previous company, which was on-demand car washing service. It was called Cherry. The company didn’t work, but it created some interesting tech. It got acquired by Lyft. And then, he got recruited to be an executive at Uber. So, he was very deep in this transportation space. And what he saw at Uber was that half of trips in cities are under three miles, and he discovered this really new form factor with these new battery-powered scooters that were coming out of China, and he had this idea that we could solve that last mile problem more cheaply, more easily, more convenient doing this.
David Sacks: And, you know, when I first heard the idea, I thought it was crazy because, you know, you’re just going to leave these things on the street, and people are somehow going to know how to use them. But then, I actually tried the product, and it was a lot more magical than I was expecting. And so, you know, I wrote him an angel check. And then, when we had the fund, we wrote him, you know, a venture check as well.
Kara Nortman: Yeah. I mean, I remember. Obviously, the business grew up under our eyes. And so, I remember one day running around UCLA, and nobody was on any of the bikes, and everyone was on Bird scooters all over the place. And it was just very clear that something was happening.
David Sacks: Yeah. In fairness to you guys, I had the opportunity to preempt the round because of my relation with Travis. So, yeah, it would’ve been a tough one for anyone else to get. But, yeah, I just thought it was just this really magical thing. And you can see how transformative it’s been. And, now, we’re in a little bit of a, sort of, pessimistic news cycle about it. But people should just keep in mind that one year ago, scooters were only available in one city, Santa Monica, that was actually criminally prosecuting the company for launching there.
David Sacks: And a year later, we’re now in hundreds of cities all over the world. It’s become this revolution. And cities have now embraced it and accepted it. We’ve got operating agreements with dozens of cities now. The Mayor of Boston just said yesterday he wants to welcome them. The New York Times has come out on their editorial page saying that they should be brought into Manhattan. So, this whole wave is just getting started.
Kara Nortman: So, I mean, do you think — So, this market euphoria, slight pessimism euphoria. So, let’s kind of plot the line. Let’s plot the line through it.
David Sacks: Yeah.
Kara Nortman: So, what — Let’s hit some of the harder topics. Let’s first talk about safety. So, there’s a lot — you know, there’s a lot of opinions on safety. I think people don’t necessarily know the safety story of Bird, but tell me how you think that safety is, you know, the original board member, and what Bird is doing specifically in that area.
David Sacks: Yeah. So, I mean, from the beginning, Bird has been very concerned about safety. One of the things we realized very early on is that night riding. So, you know, riding late at night would be dangerous for riders. We never allowed it. So, I think, you know, we turn off all the scooters at 9:00 p.m. If you look at where are the fatalities and critical injuries have actually occurred, it’s generally been between midnight and 4:00 a.m. in the morning. You know, our competitors have not done this. They want the extra rides, and we think it’s irresponsible.
David Sacks: The only fatality that’s occurred on a Bird has been — It was actually a Bird that was stolen out of a charger’s house and was ridden at 4:00 a.m., which kind of it’s the exception that kind of proves the point about this, you know, riding late at night. That wasn’t something we could control because the scooter was in task mode. But if you look at our competitors, they’ve just had, you know, multiple fatalities at night. We think it’s really irresponsible. Anyway, the company has, I think, done a lot on the safety side. And, you know, they’ve given away a lot of free helmets. They’ll send you one if you want one. And they’ve done a lot on the rider education side as well.
Kara Nortman: And so, we have Travis here tomorrow. So, I’m not going to go too deeply on the economics and other questions that he’ll likely get to. But I think from that perspective of the investor and the board member, what are some of the lessons learned? What are some of the things you think the market’s getting wrong? You know, add to or dispel any myth that you’d like.
David Sacks: Yeah. So, I think, in 2018, the big challenges or the things that the company had to prove were, first of all, product market fit. I mean, again, everybody was incredulous, including myself, about this idea until Travis proved that people wanted it. And I think the company has proved that in its first year.
David Sacks: And the other thing is regulatory acceptance. I mean, we had to fight these battles including in, you know, our home city. But I think that cities have generally come out on the right side of this, which is it’s going to be allowed, there’s going to be operating agreements, or creating permits. And so, I think those are the big battles.
David Sacks: I think, in 2019, the big battle or the big things that the companies are focused on is dialing in on the economics. And there, the challenge is and what we’ve learned is that if you just use a retail scooter, scooter that’s available for sale on Amazon, which is what all the copycats are doing, the economics of that won’t work. The scooters aren’t rugged enough. They’re too easy to steal. There’s no supply chain for parts. And so, we’re seeing from Bird and, you know, also, the other kind of market leader, Slime, is they’ve now both vertically integrated, developed their own supply chains, developing their own scooters. And I think it’s a significant barrier to entry because if all you’re going to do is use these retail scooters, we can tell you that that business does not work.
Kara Nortman: Yeah.
David Sacks: But it’s what was available a year ago. So, when Travis want to prove product market fit, it’s what was available, it’s what he used. But, now, we’ve again gone vertical and are building our own.
Kara Nortman: Yeah. So, last quick question, and then we’ll move on to another topic. It’s a company that’s raised a lot of capital quickly, and is sort of in a blitz scaling moment, and suspending quite a bit of capital to take share. How do you think about, you know, bumpy markets for for a company like Bird?
David Sacks: Well, I think that is the right strategy. I mean, PayPal did the same thing. You know, we were — you raise a lot of capital, and you burn a lot of capital in order to take market share. And I think that is the right approach. The reality is that consumers aren’t going to want to have five scooter apps on their phone, you know. There’s going to be, you know, one, maybe two scooter apps on their phone. And, you know, getting the biggest footprint, creating the most liquidity in the market, developing that supply chain, those are all capital intensive things, but they’re what is required to win this big market.
David Sacks: And I’m not a fan of kind of Lean startup methodology. At least once you have product market fit, I am a fan of blitz scaling, which is once you know that there’s a market there, you need to basically go all out to win it. And I think that is the right strategy for Bird.
Kara Nortman: And also knowing that there’s margin there, right? And that-
David Sacks: Yeah.
Kara Nortman: And so — but totally makes sense.
David Sacks: So, we know there is because with every successive generation of scooter that we use, the economics keep improving. And so, if you look at like Bird Zero, which is their own homegrown scooter, it’s much more ruggedized. It’s better on anti-theft. The economics are vastly better than the retail scooters. And there’s — I mean, I don’t want to spill the beans, but there’s new miles of scooters coming. And with every successive generation of supply, the economics just keep getting better and better.
David Sacks: You know, one thing I can tell you about like retail, the retail scooters is you can now buy a $25 chip set or brain kit from China and convert, you know, those Xiaomi or Ninebot scooters. So, you know, you take that stolen scooter, convert it to a personal scooter. And that’s, I think, what’s fueling a lot of the theft. You can’t do that with Bird’s own scooter because it’s something they completely own. There’s no chip set for that. So, it’s just one example of how everything gets better when you control it yourself.
Kara Nortman: Absolutely, absolutely. One of the things I love about LA and about scooters growing up here is you literally would see women in their couture, maybe it was, you know, ready to wear, but, you know, they were dressed up with their heels on their Bird scooters. And it was — you know, a beautiful sight to see all kinds of people using Bird scooters.
David Sacks: Totally.
Kara Nortman: So, let’s hit — I want to get into some other things, but before we do, I know you’re looking at a couple other themes. Just to leave it with potential co-investors in the audience, what are some of the other themes at a high level you’re thinking about?
David Sacks: Yeah. So, I have two partners at Craft. You know, one of them is Jeff Fluhr, former founder of StubHub, which is, you know, the most popular ticketing marketplace. He’s spending a lot of time looking at marketplaces. But the big shift he’s seeing is moving from product marketplaces to service marketplaces. It’s not really about selling goods. It’s more about selling services. And a lot of those are B2B marketplaces. And so, we’re taking a look at a lot of those things.
David Sacks: And then, my other partner, Bill Lee, spends a lot of time on emerging areas like VR, crypto, gaming, and you know. And what we’re seeing there is, you know, we made a big investment in Cloudnine. We led that Series A round. It’s an e-sports company. E-sports has just gotten huge. And we think there’s a lot of things like that in gaming and virtual brands that get us excited.
Kara Nortman: Awesome. Wonderful, wonderful. Okay. Well, so, shifting gears a little bit. You know, one of things we sometimes in VC or newer VCs, maybe a bit more timid, you know, there’s kind of a maybe sometimes a lot of copycat investing, tiptoeing. You’ve made some big, bold bets very quickly. So, you know, one of my favorite and most overused words in venture capital, it’s the synergy of its time, is conviction. But tell us, you obviously have a lot of conviction to make the bets you’ve made. Tell us what gives you conviction.
David Sacks: Yeah. I mean, I guess, I’m not like tremendously worried about job security. And our LPs are diversified. So, I kind of figure it’s okay for me to be more concentrated. The number one thing that gives me conviction is when I can use the product myself. And I mean, that’s not always possible, but when I can use the product myself, and it’s a product that is useful to me, and I love it.
David Sacks: And so, Bird was a case like that where I tried it down here in LA. And then, when I went back to San Francisco, I felt myself missing it. So, you know, I’m listening to that voice in my head. Same thing with Uber, you know. I think I discovered Uber in 2010. And six months later, like I got rid of my car. I just went full Uber. And so, I reached out to the company to invest in that. Similar story with Houzz and PlanGrid, which I was doing a construction project, and I used PlanGrid for my plans, and I used Houzz for my interior design.
David Sacks: And so, anytime I’m using a product, I will reach out to the company and see if I can invest in it. Obviously, that doesn’t work for something like Swarm. And, you know that, I’m going to rely on things like, you know, obviously, how great is the team, and, you know, does this product make sense, can I put myself in the shoes of who the customer is, and have they thought of that distribution trick.
Kara Nortman: Yeah, I love it. I love it. I always say I know I’m very excited about a company only when I’m driving my husband crazy. If I can’t stop talking about this like, “Did you make an investment already?” So, I think it was passion, do the work, all the stuff that our mothers probably told us but not everyone does. So, that’s exciting.
Kara Nortman: Okay. So, we’re going to shift gears, and I’d love to talk a little bit. I think you and I were just talking about this. We met back when you were starting Geni, which is the predecessor company to Yammer. So, first question, you started Geni in LA-
David Sacks: Yeah.
Kara Nortman: … many moons ago, but then you moved Yammer up to the Bay Area. Is that — Why did you do that? And tell me how you would think about it today.
David Sacks: Yeah. I think, you know, that was 10 years ago. And, you know, we felt that the LA ecosystem, the tech ecosystem was a lot smaller back then. It’s not a decision I would make today. I think if I were down here with a startup today, I would not try to move it. And the reason is just because the tech ecosystem in LA has just gone so much bigger. It’s so much deeper. There’s so much more talent. There’s, you know, a lot more investors like you guys who cover it. There’s this — the relative advantage, I think, of Silicon Valley is just it’s much less, and there’s a lot of advantages to LA now as well.
David Sacks: So, yeah. I mean, I think, you know, LA is an ecosystem that we really like as investors. So, you know, I was an angel investor in SpaceX, and we did have a follow-on investment through the fund. They’re obviously been here for a long time. There was Bird, Cloudnine, the sports company I talked about. I think that LA is definitely the epicenter for all things, e-sports, and content, and gaming-related. We actually did a seed round in a B2B cannabis marketplace in LA and which is based in LA. And so, yeah.
Kara Nortman: So, if the other ones don’t go well, we got you guys covered.
David Sacks: Yeah. So, there’s been — you know, there’s just been a lot of really interesting companies that are coming out of LA now. And so, we think it’s a great ecosystem.
Kara Nortman: Awesome, awesome. And how — you’re also somebody who, in the distant past, made a movie, Thank You for Smoking, which was a great movie. If you haven’t seen it, those of you who are like in your early 30s, go back and watch it. But I was curious, like how do you compare and contrast innovation in Silicon Valley and in tech in LA to innovation in more of kind of the traditional content fields or Hollywood?
David Sacks: Yeah. I mean, after producing a movie, I went back into tech. I wanted the relative sanity of the startup business after my exposure to Hollywood. I think, you know, the basic problem is entrepreneurship is very hard in Hollywood, in the kind of traditional content business because the entrepreneur really kind of gets squeezed between the studios, kind of the distribution gatekeepers on the one hand, and then the talent on the other. And those are really the two big kind of rent extractors. And I think it’s very hard for an entrepreneur to come in and disrupt that.
David Sacks: You know, obviously, Netflix has done a lot of very big scale, but I think for a startup, it’s just very tough. And, you know, the great thing about startups is just, you know, there are no real gatekeepers yet. And the talent are the entrepreneurs. And so, you know, I always — there’s always something that kind of rubs me the wrong way about when I got to Hollywood and started producing this movie. You know, I learned that there were these people called the talent, and I wasn’t one of them. And that always, you know, maybe a little bit kind of concerned. So, yeah, I just think, you know, tech moves a lot faster, it’s much more scalable, and it’s much more kind of free and open to entrepreneurs. So, yeah.
David Sacks: Yeah. Yeah, absolutely. The room, they’re always there. When there are problems, there’s room for solutions as well. We’re just about out of time. So, maybe we’ll leave with one kind of last thing. Maybe a bit of advice. Again, we have a lot of VCs the audience. So, you’ve, now, been on both sides of the table.
David Sacks: Yeah.
Kara Nortman: As a kind of former operator and, now, board member, what’s your advice to, you know, somebody sitting around the table as a relatively new board member or, you know, a longstanding board member as to what’s been most valuable to — what’s the most valuable kind of board behavior you’ve seen? And what are the things that drove you crazy as a founder?
David Sacks: Yeah. I had, you know, really — I had a really great board at Yammer. I mean, I got along with everybody, and everyone contributed in different ways. You know, I think that there’s a lot of things that an investor can bring to a startup. You know, let’s say, first, is being a great sounding board. You know, giving feedback, strategic advice. You’re never going to be deeper in the problem than an entrepreneur, but I think you can provide — Again, you can just be a sounding board and make sure that you’re giving feedback, make sure they’re thinking about it the right way.
David Sacks: I, also, think that investors tend to have more breath. So, you know, founders are, you know, hopefully, just very heads down obsessed with what they’re doing. Investors get a lot more breath. And so, they can bring, you know, benchmarks. They can kind of tell you, you know, what’s working in other contexts. They can tell you what your numbers should be, you know, at this stage or, you know, what number — you know, is this cap number a good number or a bad number? So, you know, I tend to think that investors can provide perspective, and that can be that can be helpful.
Kara Nortman: Any pet peeves?
David Sacks: Probably the thing that that VCs do the most is just overestimate the number of things that a startup can really do. And so, there tends — You know, if you have a board that every board member has kind of their pet thing they want the company to do, the reality is that startups can’t get that much done. And so, you know, the thing I’m always pushing for is just focus, you know. Like what is the one most important thing that we need to get right now and let’s just be obsessively focused on that. So, yeah, that’s probably the — I don’t know it’s a pet peeve but it tends to be. Just by having a lot of voices at the table, that can be the unintended consequences as you kind of defocus the company a little.
Kara Nortman: Yeah, yeah, yeah, yeah. Well, listen, David, thank you so much. We’re so honored to have you here. This is a wonderful conversation.
David Sacks: All right. Thanks, Kara.
Kara Nortman: So, we really appreciate it.
David Sacks: Yeah, absolutely. Thank you.
Kara Nortman: Let’s give David a round of applause.
David Sacks: All right, great. Thanks. Yeah.
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