Mycroft Funding (2022)

hello everyone my guest today is michael lewis he's the founder of stella stellar semiconductor which was sold to broadcom in 2000 then went on to found cryptic studios which was sold to atari in 2008. for the past decade michael has been deeply involved in charitable efforts through the onspar foundation for me the lewis charitable foundation and now is running mycroft.ai michael you ready to take us to the top sure let's do it alright so first off you were not you were not leading mycroft when i lasted my episode with mycroft so something changed they pulled you out of charitable giving and back into the business from an operating perspective how'd they do it that's right um well uh to be honest i was a backer on the mark ii kickstarter project and so i've been following my craft for a while and when josh reached out and was looking for some additional high-level help at the company i took a look at it and i decided that this was a good time in my life and mycroft's mission merges you know perfectly with the work i was doing at my foundation and uh and the company itself the technology the uh working with hardware working with software working with community that's all in my work experience as well and i'm really passionate about all those things so um it was really just a perfect combination of things that uh that got me interested so for those people that missed the first episode just give us the quick keynote here what does mycroft do what do people pay you for ah right so mycroft makes a privacy first open source voice assistant so what's uh what's really important about this is that we allow the users to control their own experience so we don't consider the users our users we're building a community of people and this community includes people who are developers people who are assist us with con contributing their data and uh and people who just want to have a privacy experience uh in their own home you know putting something that's always listening in home can be a very invasive feeling uh experience and we want people to feel safe and comfortable in their homes and uh privacy is you know is something that you should be able to have in your home so michael you're saying this your song is directly to consumers moms and dads at home or is it a b2b model it's a bit of both to be honest we're a small company and so we're starting off by direct to consumer we're going to fulfill our latest kickstarter and then we'll continue to sell units direct to consumer but i'm calling them developer kits at this point because to be honest the price point isn't really at the level where we could uh realistically ship them to consumers but the functionality is totally there so we want to be able to get to early adopters and and down the road we expect to partner with oems to provide our assistant technology their own devices including smart speakers um and uh you know really refrigerators i still understand what you're selling right so so what are you actually selling to the consumer i have my own house here what are you selling to me okay so a smart speaker is basically something just like the um the amazon you know home uh assistant or uh oh sorry google home uh or the uh the amazon echo so this isn't just like an sdk you're selling to me it's a physical piece of hardware yes yeah so initially the mark ii is a physical piece of hardware it embodies our uh our software and connects to our platform it's basically it's an off-the-shelf device that just works okay and it's i consider it a reference device for other oems who want to produce devices that are like it uh or that just incorporate voice technology in their own products so while we will sell it direct to consumers we're using this to prove out our technology to demonstrate that it works and to um and to serve as a reference design for oem who want to come in and integrate it in with their own technology so what does it cost you to produce one of these pieces of hardware one speaker uh about a hundred bucks right now okay and what do you retail it for that's just the hard costs um it's not set just yet um but um you know we're not due to really ship it i think until the second or third quarter next year that's i think our realistic timeline guys are you guys so we have a great revenue today um we have um we're effectively pre-revenue right now we have not tried to monetize any of our customers we have about 50 000 people who are signed up to our system and are using our system but uh we are not actively trying to monetize them yet because quite frankly the experience isn't where we want it to be we're not marketing to the audience right now we're we're more working with developers and uh people who want to um you know add to the system and improve the system and who are interested in integrating it in the future with their own products got it okay so 50 000 people it's kind of an open source ish like platform you have your own piece of hardware have you guys bootstrapped this or raised and if you've raised how much uh minecraft over the last five years has raised over five million dollars in crowdfunding uh and uh very favorable loans but we've never raised an institutional round so that's a favorable loan uh basically it's a long-term loan with very low rates uh and that's basically a balloon payment at the end so what would you consider low are you talking like five or six percent yeah exactly and and why did how i mean how does a bank get comfortable loaning to you in your pre-revenue what are they loaning against what's the collateral it's uh these actually weren't from banks um one of them was actually from a previous investment deal that kind of went sour before i got involved and as a compromise they agreed to convert the part of the investment that had you know that had been made into a loan rather than keeping it as equity another big part of loan is actually from my own foundation because mycroft's mission so closely matches what my foundation is interested in i was able to convince the board of directors to make a sizeable investment in mycroft uh purely because of of the mission so how much of the five million has been debt that has to be paid back um offhand it's um a little under two million okay got it so nice nice mix here now what i mean you guys have also a lot of investors right according to crunchbase when you have 47 investors that have put in the five million dollars your cap table must be a wreck uh oh it's more exciting than that uh we have over 1500 investors because we went through a crowdfunding campaign a couple years back so how do you manage that i mean is your cap table literally 1600 people on it yep the basically we are very forthcoming with our investors we put out a monthly newsletter try to keep them informed as to what's going on we've never had any problems uh to date um and um yeah i mean it's it's really about being transparent with what's going on in the company and setting the proper expectations i mean but so for example if you're going how much are you trying to raise right now institutional uh our target's five million dollars okay um so i mean one of the things that obviously any institution is going to come in and look at is the current cap table and is there any risk and one of the risks they'll look at is well if one just one of these 1600 investors holds out on some decision it could take the whole company essentially how do you convince the vc that you potentially work with those on this new round that's not a risk well there's a couple ways um first of all we have two classes of shares we have voting shares and non-voting shares so all this um the cohort of the crowdfunding investors are all non-voting chairs so that's one issue secondly as i said you know we keep our investors happy but um you know there are ways around us we may have to you know do some uh creative um uh corporate uh restructuring um you know in the same way that maybe an angel fund uh creates uh a sort of um company that uh serves all of its investors we may you know end up creating a a sub entity that um you know uh encapsulates the crowdfunding investors and to simplify the you know the cap table at the top level um that's just just one idea how do you i mean um this is sort of a direct question but like why are your investors happy i mean your first seed round was back in february of 2016 with tech stars and star power partners about four hundred thousand dollars raised here we are four years i need product crowdfunding even earlier than that in 2015. here we are four or five years later and you still i mean there's there's nothing's been shipped your pre-revenue i mean these guys can't be happy the well it it depends on you know why you get into this right a lot of people have in fact most of the investors that we have today have gotten involved with minecraft because they believe in the mission they believe in what we're trying to do and experienced investors like tech stars know that startups have uh they can encounter dumbling blocks right i've uh i've been fortunate to avoid some of these in my previous companies and i've full-on run right into them and others and the you know hitting just one stumbling block can kill a startup right hitting two at the same time you know could be you know an instant death blow but um mycroft has persisted because the investors there's there are just so many people who are um who want what we want right who want a privacy respecting voice assistant because the idea of having you know of not even having the option um to not allow attack into your home is is just you know crazy to them so um so we are we've been able to find people who continue to support our mission uh you know to date to you know to keep the company moving forward to be honest though that's actually been one of the the pitfalls that the company's run into in the past with this constant cycle of fundraising you know it's been hard to focus on product development and uh and so that's uh one of the things that i came into to help solve so for the past year i've basically been bankrolling the company personally myself and um basically i mean you start as an investor did you basically come in and buy the company no i did not uh nope i came in as as an investor i came in um you know basically i'm uh you know josh and i are peers we work hand in hand um you know josh is a great guy he's got a great understanding of the market and the technology and you know and i i want him around right so um we work hand in hand on this you know i'm bringing my product development experience and you know and he's bringing his uh you know his deep understanding of the of the the market and the technology and um you know my main purpose here in joining the company was uh to basically to bring some experience in getting product out you know i i've been through this a couple of times and i know how difficult it can be to get a product uh shipped to focus on a product that yeah that you can actually share i mean it's been four years for four or four years yeah yeah there's always more features you want to add but you've got to narrow it down to just the essentials that that you need and you can always add more later let's fast forward here we'll go forward a year you have some products shipped is there a software play here or is it pure make margin on a hardware speaker sale no um it's it's almost entirely a software play what we're really promoting here is a platform mycroft is promoting a platform what we have is um you know the smart speakers are sort of our uh the way we get people interested in the platform because you know not very many people use voice interaction on their pcs um or their laptops right the smart speaker is sort of a trojan horse if you will that like has kind of tricked people into thinking that voice interaction is new and and desirable but it's been around the ability to do this it's been around for a long time just that finding this um you know the right killer app to make it understandable to the user how voice interaction can be useful uh you know took a while so smart speakers are really just the entree into what is going to be basically ubiquitous voice interaction everywhere and so that's what we provide is a platform that enables oems to voice enable their products and not have to worry about any of the details of how to create you know the the multitude of ai systems that are required to recognize that yes i get the product i think everyone listening gets the product what i'm trying to get at is okay my first question is you know listen amazon doesn't have to make money on a speaker sale they can ship every house in america a speaker for free because of the data play on the back end you don't have that luxury you you have to you cannot give away because you don't have the cash on the capital you you can't just give away a subscription fee yeah but you can't give away it cost you a hundred bucks to make a speaker you can't give away a million speakers you don't have a hundred million dollars sitting in your bank right and amazon could so like the first question is how do you get these speakers like distribution so you know as quickly as possible so that more people rely on your open source oem privacy friendly sdk that you're building or platform you're building well like i said initially our distribution is basically to developers because we want to get developer support for our community um but we have interest you know we've we've been in talks with the big uh uh you know the big box retail chains right there are people who want to put a privacy respecting solution on their store shelves you know we're talking about you know walmart and target and you know these companies want this and uh it's just not available so once it's available then we can start to talk to people about white labeling that's going to be one initiative we have um you know it we're also going to talk to oems about cost reduction versions of this so distribution is really about finding the right partners okay i don't want to get into you know being a hardware distribution company i want to find the partners who are going to build our technology into their products and then distribute it so uh that's really nice i think it's a challenge though right i mean that is why facebook amazon apple i mean that is why they have so much power here it's they are distribution channels for both hardware and software and then data collection and then serving us back commerce right related to the data they're ingesting voice data or other other sorts of data i just don't understand how you find distribution partners that can be more potent than those big four the 30 of the people who are interested in buying a smart speaker have not done so because of privacy concerns there's just no way that facebook apple amazon google can even address that market that's basically what that 30 of the market has said is we don't trust these companies we're just not going to play with them right so that market is just sitting there and as big as the voice market is just 30 of it is enormous right so we don't have any competition right now but maybe there's a reason for that maybe that's exactly the issue maybe there's a reason there's no one else doing this i i think it's a lack of imagination you know come on michael this isn't right this isn't sending someone to mars a privacy a privacy bas a home speaker that is not back on the big four and you're not sucking up data you think that's some original idea that people just haven't imagined it's it's really hard to convince people to uh not do things the traditional way will you just send it very well yeah exactly but find a find a finding a business you know that wants to do this is a different thing right um you know my background more most recently was in video games where we did subscription and the video game industry has moved a lot of its business to the freemium model where they just give away the product and then they charge for upgrades and and this is certainly a thing that happens in other you know businesses as well but it's really not familiar to that many people and people aren't comfortable with it because they don't understand it um like there are there's a lot of reasons to not understand it as well like in video games one of the most popular things that people like to buy is clothing it has no impact on the game it has no effect it's just personal it just allows you to express yourself well that's counter-intuitive right and that's and that is i think a thing that um people don't really get and you know my by embracing the idea that we don't want to control the user we want to empower the user and uh and part of that is respecting their privacy and you know you know we do encourage them to opt in and let us use their data in in you know limited ways to help uh train our machine learning algorithms but um but by default you know we respect their privacy we do what they want if they opt in they can later opt out and we just delete all their data right um this is a this is a you know this is a system where the user is really in control and people are afraid of doing that um and are they afraid or they just realize or they just realize the user is not gonna use the thing most effectively i mean that's actually the thing i think you're going up against here is i think over time as amazon is able to deliver more and more value to customers with their voice data more and more people will say i don't i know they're collecting my data and i don't actually care because i'm getting so much value i'm getting i'm getting a divide i can go online an order and get something two minutes later to my doorstep um they can listen to our voice and they know we're going on a vacation in two months they give me a 300 discount on the cruise like if you deliver enough value people don't care about privacy in my opinion um there's just not an option it's like it's like cable tv right there was no option to cable tv you could get a couple of channels over the air and and that was it so you either had a couple of channels you know uh network channels or you had you you know you'd pay some arbitrarily large some from the one provider that you were uh you know you could get cable tv from now that people have realized that uh consumers want to have that choice there's you know the market's expanding we have better television than ever because people are willing to pay for exactly what they want you know you can get a subscription to hbo or disney i think they want a speaker and they're okay giving up their privacy rights in exchange for faster delivery times discounts on goods they love that that amazon learned about through audio data like i think people actually want this i think you're building something that sure people say they care about privacy but if you can deliver enough value people actually don't care about privacy in my opinion in um i really don't think that there's an alternative so i don't think they have a choice their choice is to either buy something that doesn't respect their privacy or don't buy anything at all right so that's the choice they have right now but you look at amazon you know i use amazon i'm a prime subscriber i use it all the time but in a lot of ways i don't feel like i have a choice we actually have a close advisor of ours who's starting up a competitor to amazon and you know and i wish them all the luck because i think that there's a place in the world for a federated system of companies that can deliver the exact same value that amazon does um but without the you know mysterious uh backdoor um you know who knows what's going on back there in there that's how they deliver the data that's how they deliver the value is because they have so much data that's how they make the system more efficient there's there's basically no vendor who's worked with amazon that hasn't been screwed over by them if amazon finds a product that is making good money they copy it and they sell it themselves and yeah you know which is great for the consumer which is great for the consumer because we probably get it cheaper now why is that bad for the consumer uh it's bad for the consumer because they don't really have a choice now right yes they do there's a cheaper option amazon crushes the competitor brings in a cheaper option and you rock and roll like they do with diapers well listen hey look we'll have to see what happens you you proved me wrong this interview i would look very very silly two years from now if you have a million speakers to market you will i will i will post this everywhere on all my social media i was completely wrong they killed it look at what they've done before we wrap up so let's just talk again about software real quick let's say you've got a million devices out there what is the software subscription look like are you charging developers to use it and if so what's the monthly price point um so it's a completely open source system it's free to developers it's free to oems to integrate into their system what we charges the consumers for basically upgrades so you get all the basic services everything that you need to do your normal everyday activities on a smart speaker a voice assistant that comes for free anybody can make an account and it'll just work in fact on a linux system you can go download a snap install with one click right now and go test it out um it's free to make an account um down the road we'll provide premium features like custom voices additional languages different accents you know i think that it's really important that the technology that we use today reflects our users and as we move to a voice interface you know this has uh it has the trappings of a personality and i think people want to see you know their own values their own culture reflected in the technology they use and uh that's just you know that's something that we're going to focus on so those will be upgrade paths they'll be premium features like access to sites that actually cost us money to use their api like if we're providing stock quotes or you know real time analytics and various you know business markets or things like that that'd be part of an upgrade um and uh you know the really there's uh there's just so many options in terms of providing value add to the users above the basic level of subscription uh or the basic level of just having an account the uh you know it's a it's a it's a really open market um and i think that you know as video games have moved to uh you know to this freemium model and i think that um the same thing is going to work really well for us yeah yeah but video games have billions of users you haven't shipped to speaker yet that's why i'm here minecraft has minecraft blocks um you know i've got a track record of getting hardware out the door um i've got a track record of dealing delivering software products the first the first 3d hardware integration i did worked the first time we didn't have to spin the chip then they bought our company when city of heroes launched in 2004 we told the developer or we told our publisher okay the game is ready you can launch it tonight and then we all went home we didn't stay there like sweating at our computers to see if it was going to work we knew it was going to work and it did we had a flawless launch and we didn't you know we didn't have 30 developers staying up all night to make sure you know i know how to do this i'm going to get a product out there that works and then we'll see you know we'll see if people really care about privacy but i don't think we can test that until we offer them the choice when is the product going to be out when can someone get it in their house it's working they can use it by this time next year it'll be uh available for directors michael sounds like the perfect time for a follow-up interview this time now let's wrap up with the famous five number one favorite business book business book um i think it's called from many one the the story of the the visa startup how easy got it started number two is there a ceo you're following or studying no number three what's your favorite online tool for building mycroft um github number four how many hours i sleep breaking every night about five okay and situation married single kids uh married uh twin boys five years old oh wow that's exciting very cool how old are you i am 48 48 last question what is something you wish you knew when you were 20 michael [Music] um that uh people aren't scary guys there you have it mycroft.ai they want to introduce a home speaker that does not suck up all of your data and sell it to people and do bad things with it they raised 5 million to do this they have speakers out they have a lot of backers on kickstarter the goal is to ship this first speaker product by this time next year so called august of 2021 once that happens the developer ecosystem can take off and they'll get consumers using this and then have a subscription model where they upsell things like custom voices or custom stock quotes via an api access that they've set up on the back end to monetize this thing full stretch but ultimately the play here is a speaker that is not owned by a data sucking big tech company michael lewis thanks for taking us to the top thank you so much nathan i really appreciate it one more thing before you go we have a brand new show every thursday at 1 pm central it's called shark tank for sas we call it deal or bust one founder comes on three hungry buyers they try and do a deal live and the founder shares back end dashboards their expenses their revenue arpu cac ltv you name it they share it and the buyers try and make a deal live it is fun to watch every thursday 1 pm central additionally remember these recorded 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