Deep Dive
Shownotes Transcript
I'm Yasmin Gagne. I'm Josh Christensen. And this is Most Innovative Companies. On today's episode, Fast Company senior writer Ainsley Harris talks about Y Combinator. It felt like the network had reached this point where it was really the biggest machine in Silicon Valley, essentially. Oishi CEO and co-founder Hiroki Koga. The biggest reason why we wanted to raise this money was because
And as always, keeping tabs. Listen, messy sort of relationship situation, but if you're happy, Ariana and Ethan Slater, good for you. But first, here's the download.
The news you need to know this week in the world of business and innovation. Reddit officially went public last week. Shares opened at $47, but quickly shot up to $55. And all of this is despite the fact that Reddit is not a profitable company, which still is wild to me how many non-profitable companies get multi-billion dollar valuations, but that's a
conversation for another pod are you a redditor i'm not a redditor are you so i'm a redditor because of reality tv gossip that's how i got into it but i told you my favorite thing to do is to go on the there's like some reddit forum they're sort of like female in celly like how to be hot and people will post photos of themselves and be like am i ugly and i always comment you look amazing try and find like one nice thing to say about them but i do it when i'm sad
Sometimes you have to be the flower growing out in the dump for people. Anyways. So Reddit wasn't actually the only social media company to go public, sort of, this week. Yesterday, Donald Trump's media and tech group, which owns Truth Social, opened trading. Shares of the company peaked at over $70. While the former president's company is technically going public, this isn't really a traditional IPO. It's more like a SPAC.
That's because they merged with a company called Digital World Acquisition Corp. And that process took Trump Media and Technology Group public. Digital World Acquisition Corp. Could not be a more like meaningless or but actually specific name for this company. Just yeah, we just buy stuff and take it public. It's like something from a bad screenplay. Yeah, it definitely sounds like the villain in like, I don't know, a very goofy movie three. 100%.
Surge pricing is coming to Legoland. Merlin Entertainments, which is the company that owns Legoland and also just, I don't know, killer name. That is such a... Yeah, I was going to say Merlin Entertainments is so good. That's great. I love that. I love everything about it. They also own Madame Tussauds and the London Eye. So just a whimsical brand. And I love that. Madame Tussauds is creepy as fuck. Oh, yeah. It's the uncanniest of Uncanny Valley. Anyway. Merlin Entertainments.
Merlin Entertainment plans to charge customers more on sunny peak season days. The dynamic pricing model will go into effect by the end of the year at most of the Legoland properties. Search pricing has become a bit of a buzzword recently. If anyone remembers the Wendy's not story, that wasn't really a story. Yeah.
the CEO said something about search pricing and then everybody thought it was going to happen and then it didn't. Amazing. Yeah, that's what I was going for. That's what I was going for. But I think it's fair to know in terms of like Legoland's probably going to get some slack for this, but like Disney's been doing this grift for years. Disney's been charging people on kids holiday vacations, just jacking up those prices.
And speaking of vacations you may not want to go on, Boeing is making some huge possibly overdue changes after some not great press. In a press release on Monday, the company announced that CEO Dave Calhoun will step down by the end of the year. In addition, board chair Larry Kellner will not seek reelection as chair and Stan Deal, president and CEO of Boeing's commercial airplane division, will retire.
Lots of change, so let's hope these plans stop falling apart midair. Standeel really sounds like an Ayn Rand character. Standeel does sound... He sounds like an Ayn Rand character or either someone whose name is actually Dan Steele trying to come up with an alias. Yeah.
for their burner account online. And finally, NBC News has officially decided to drop ex-RNC chair Rona McDaniel as a paid contributor after on-air talent from NBC and MSNBC came out real hard against her hiring. On the air, like just dragged their company for hiring her, which makes me think,
Who are we going to track? We could get jobs. Next hiring. Yeah, exactly. Next person Fast Company hires. Doesn't matter who they are. Just going to drag them on this podcast. Which I think her employment at NBC lasted a grand total of like four days, which is not great. Not great, Rona. We have had some short tenures at FC, but not quite that short. No, that's true. And that's the news you need to know today.
Josh, in our segment A, we're about to talk about how some executives at Y Combinator have gotten really involved in local San Francisco politics. And I guess what I'm curious is, if you were a small-time politician, aside from the sort of obvious things that you'd want to get through, like, you know, working on Medicare for All, what are, like, the random small rules that you would try to make happen? Oh, gosh.
Gosh. I mean, are we talking like mayor level, like in a city government or like state representative? Yeah, mayor level. Let's say mayor level. Okay, so local, yeah. Mayor for a day. What would I try to do? For me, it would be like if you're at an ice cream shop, you can't try more than one flavor. I think that's a good one to go. Here's what I would outlaw. I would try to make a law that makes it so if you're driving and...
and it's a two-lane road, and someone in one lane stops to let you go but doesn't understand that the other lane's traffic is still going, that person who stopped and held up the other traffic gets a ticket because that's ruinous empathy right there. That's someone who's not actually doing anything to let you make a left-hand turn
they're just blocking the traffic behind them while the other lane keeps going. Does anyone know what I'm talking about? It drives me nuts. I famously don't drive, but this does sound like a mistake I would make.
Yeah, it's like you're trying to take a left-hand turn. You need both lanes to be clear. One lane, a car stops to let you go, but they have no power to stop the other lane. So now they're just creating this system where people are trying to swerve around them to keep going. Just let me wait for it to be clear. You're making it harder. That, that'll get a ticket when I'm mayor for a day.
Guys, elect us. Going full Gary Tan right now. We'll get shit done. No more... A limit on ice cream samples. Yeah, that's the real hard-hitting stuff. Neither of us went for, I don't know, improved public education funding. It's a hopeless cause. All they need to do is listen to this podcast. And then we... That's what would solve the education crisis in this country. Yeah.
Come here for your knowledge, kid. We'll give you all the news you need to know today. So, okay, now let's actually talk about Y Combinator and people with real money who are trying to influence local politics. Y Combinator has become arguably the most powerful force in tech. Five and a half percent of the startups that have participated in Y Combinator have actually become unicorns.
which is at least double that of rival accelerators like Techstars and 500 Global. But Y Combinator has started suffering from exactly the kind of corporate bloat that its founder, Paul Graham, abhorred. Current president and CEO Gary Tan, who also happens to be a YC alum, took over last January and promised to reclaim YC's roots and focus on serving early stage founders. Here's Fast Company senior writer Ainsley Harris to tell us what's going on.
So Ainsley, we're here to talk about Y Combinator. But before we get to what it's like present day, let's talk about how it was set up in the first place. Who is founder Paul Graham? And what was his vision?
Paul Graham founded Y Combinator originally in Boston. He was an entrepreneur, a computer scientist, and he had successfully sold a company that he founded himself. And I think through that process, saw these pain points that he felt like other founders were experiencing, particularly when it came to raising money from venture capitalists.
And so Y Combinator in many ways was founded really to be this safe haven for founders. And that is still very much the ethos today. But in the beginning, what that looked like was...
small groups of founders. I think there were maybe eight companies in that first class, which actually did include Reddit, which just went public this week. But the idea was really to give a lot of hands-on coaching to these founders, but also to provide them with this kind of safe home where they could ask questions and get intros to investors and just really be supported in a way that you felt like the ecosystem wasn't providing.
Right. That makes total sense. Now, Paul Graham, and we will get into this with Gary Tan as well, is a notorious... He has Twitter fingers, and it has landed him in hot water before.
I say that as somebody who also has been known to run their mouth a little too much. But the first time I encountered Paul Graham was when he talked about the fact that like women couldn't really code. Or he was saying that you have to get 13-year-old girls interested in computers. I mean, just give us some context about like who he is on a sort of personal level or his political views.
Paul Graham does certainly have some very strong views. In a lot of ways, his views were really like an early recruitment tool for YC. He would publish these essays. I mean, he was on Twitter pretty early on as well, but he would also publish these long form essays where he's outlined advice around company building, but also his thoughts on philosophy and life and all these things. And he has been, I think, pretty unapologetic about those views. And they've been pretty consistent over time.
He, in many ways, is the original libertarian at the heart of a lot of the politics in Silicon Valley. And to your point, Yaz, he has disavowed some of the problems that people might identify in terms of how Silicon Valley sort of nurtures talent. Yeah, there aren't as many women founders as there are male founders.
There is not great minority representation in a lot of the YC classes. And Paul Graham has written pretty explicitly and said pretty explicitly that it's sort of like not his problem, that the ecosystem needs to do a better job of creating a pipeline or maybe people just aren't interested in these paths. And that's not really his concern. YC in some ways has gotten more diverse over time, but it does remain very male-oriented.
The leadership of the organization is very male. And in some ways, it's become diverse is actually by becoming more international. So there are now a lot of teams from overseas. And I haven't done the analysis myself, but I bet if you looked at the U.S. team, so the diversity hasn't moved very much over the years. Got it. That tracks with my impression, I guess. The first iteration of the program in your piece, you say, was an improvised mentorship program.
And Y Combinator paid $6,000 per founder in exchange for about 7% of the company equity.
Tell me how the program has evolved since then. The program has evolved in terms of the terms that it offers, for sure. You get more money now, for one. It is a bit more expensive to start a company than maybe it was back then. And really, I think the idea then was that Paul Graham was offering you essentially enough to pay for your ramen budget. But he wasn't really doing much more than that. You were going to be couch surfing and making ends meet that way.
Now you do get more money. And I think there's also an expectation that you're going to potentially get follow-on capital with YC's help. I think the thing that they have really developed over the years that has given them so much staying power and clout is relationships with investors. If you look at those kind of early days, a decade or so ago, one of the things that really made YC worth it was that investors like Ron Conway essentially were writing checks for the whole class.
So you weren't just getting that money from YC, you were almost guaranteed money that would follow. And in addition to that, YC partners might individually invest in your company as an angel, and Paul's friends might be interested. And so as the network kind of grew, you really saw that there was this ability to use your YC experience effectively.
as a transformative thing that would allow you to grab onto more resources and more capital. And that has also been, I think the flip side of that is that a lot of venture investors would say that YC's terms are not great for them and that they don't have enough power. And that while YC has historically done not a bad job, a pretty good job, in fact, of filtering talent. And that's why people keep coming back, even if they complain about
I think those terms to Paul's original vision are probably better for founders than they are for investors.
Your piece also touched on the value of the YC network, right? It seems like people hire executives from other YC companies to come to their YC company. You know what I mean? It's like an incestuous little family. I think that was really what made us interested in doing the piece was that it felt like the network had reached this point where it was really the biggest machine in Silicon Valley, essentially.
And I think the thing that we found interesting was to try to break down how that machine works and why it's become so powerful. And that, to us, was particularly interesting given that YC and folks like Gary Tan, who's now CEO, are starting to get more political. And as they are, I think recognizing how and why they are powerful helps you understand why their political power is interesting. But yeah, to your point, that network...
There are now thousands of founders. In addition to getting help from other founders when you're in the program, you're getting help from YC partners. But a lot of times the coaching you're getting is actually from other founders who you're encouraged to reach out to.
And you can do that through... YC has an app that's essentially like a VIP network for people who are founders in the program. There's, of course, like the public-facing message boards like Y Combinator News and Hacker News, etc. But there's this private network that people really utilize for pitching, for sales, for networking, for hiring. There are specific hiring tools where you can do resume screenings with YC's support.
And so all those things have added this enormous value to it's not just the check you're getting. And it's not just the network, it's also this infrastructure. And that infrastructure has become really powerful as people in the network have become more successful.
And it all feeds on itself where then, you know, someone who writes an angel check to you might also become a customer and someone who's a customer might introduce you to someone else. And before you know it, essentially, the YC network is essentially at this point, the most powerful network in the Bay Area.
Give us some of the biggest companies that have come out of YC. One, obviously, yeah, went public this week. There's Reddit, part of that first batch. But the other companies that have IPO'd, Airbnb is, I think, the most valuable of the alums that have gone public.
DoorDash, Dropbox, Instacart went public, I think, last year. And then there are, of course, huge unicorns that have yet to go public. So you have Stripe, Fair, Brex, Rippling. And that's really just a handful of names. There are many others. And I think the collective value of all of the YC alums is something like $600 billion. So we're not talking. Yeah, that's a lot of money. This is a significant part of the startup economy. Yeah.
Sam Altman was obviously in the news a lot, has been in the news because of all the drama with OpenAI, but he actually ran Y Combinator before Gary Tan. And Gary is working to reverse some of his decisions.
First off, tell us how Sam became involved in Y Combinator and tell us how he reoriented or changed the company. Sam's tenure is really interesting. He was a YC founder. He went through the program himself after dropping out of college, became something of like a Paul Graham protege and was brought back to run the organization, I think, in 2014.
And his big mark that he left was that he really wanted YC to go big and think big and get bigger. So that meant both increasing the batch sizings. Suddenly you had hundreds and hundreds of companies per batch and YC takes sort of two batches a year. So it was sort of approaching the point where you had almost a thousand companies a year.
Right. Almost like a spray and pray approach, right? Where you just... Very much. It's like the elite version of spray and pray. Yeah, definitely. And the other thing that he did that was also transformative was that he really pushed for companies that might not otherwise have thought of YC as a home for themselves. So biotech, deep tech, nuclear fusion, all these things were things that he really wanted to see get that YC treatment.
And it really did change the profile of the companies going through.
There still are plenty of SaaS companies, consumer tech, etc. Right now, there's a ton of AI, but you do still see now a wider array of companies who see that there might be value in learning the methodology that YC teaches around sales and iterating on product and all these sort of foundational startup concepts. He also started a sort of growth stage investment arm that
Gary's done away with? I mean, tell me about that. He started what he called the Continuity Fund. I think they ultimately raised like two or three kind of funds that then they were using as essentially growth capital to support YC alums who had grown beyond a certain scale. And they were essentially operating like any other kind of growth stage investor doing later rounds,
Series B, et cetera. And Gary, his first big move, really, I think within a month or two of starting on the job was he shut down that fund and he fired everyone involved with it.
And it was really meant to send a signal that the YC was back to basics and here to focus on the batch process, the core, and not get so caught up in what he perceived to be distractions. It's also worth noting when Sam Altman was ousted from OpenAI, which we just mentioned, its board chose another Y Combinator guy, Twitch CEO Emmett Shearer, to be the interim leader. And at the same time, other...
YC alum founders were rallying around Sam Altman, like Brian Chesky from Airbnb. It's kind of crazy to understand how many YC alums are in our ecosystem. I think the founders who have gone through YC, they share this special bond, particularly those early classes. And many of them have cycled back through the organization to serve as a visiting partner. Some of them have even gone through YC multiple times at
one of the co-founders of Twitch, Justin Kan. He has gone through the program, I think, four times. So people keep coming back. There are also people within the YC leadership world who no longer speak to one another. So it's not like it's like hunky dory. Name names. Maybe another time. DMs are open. Yes. There's, I think, this feeling of like it being this mothership that people kind of come back to. And also it's
for many early founders through those early cohorts, it's also their friends, right? This is like their social life. These are the people they invite to their weddings and all of that. It's like a college-based, like... Yeah. It's true. Can I ask a dumb question? And I probably should know this, working at Fast Company. Is there any institution that even approaches...
the scale at what Y Combinator is doing, like in this vein. You compared it to Techstars in your piece, but that is a little different, right? Yeah. So a lot of the other incubators, accelerators, they've kind of come upon hard times. And that's certainly been true since we've had this environment with higher interest rates that have affected the venture ecosystem broadly. But even before that, a lot of them kind of hit this point where
They decided that in order to scale, they were going to sign on corporate partners and they were going to go to other cities. They were going to kind of focus on specific industry verticals with support from a local city or a local business. And so they've kind of, I don't want to say they've necessarily like diluted what they do.
But it's a really different model than the YC model, which is like, hey, we own and operate this whole thing. It's our network. We do it our way. Though they recently, I think, are going to be raising some outside capital and they did for the continuity fund. They have plenty of money themselves because of all the money they've made from their investments. So I think it's just this really different model that is in many ways like very independent.
And I think that in some ways is what makes them so powerful is they don't really answer to anyone in the same way that I think Techstars has had some, there's been some reporting suggesting that not all of their corporate partners are very happy with the results that they've been getting.
wisely very much in that world, stands alone. They like to compare themselves to like a Harvard. I think that's often the end. They recruit at places like Harvard and Yale and Stanford. Real outside of the box choices there. Yeah, yeah. For an organization of disruptors, these are also a group of people who I think
like that validation of being the top of the game here. Why not diversify it and like look at Stanford and UCLA? I don't know. I'm just spitballing. It is funny. I think in your piece, there was a stat that said Y Combinator is harder to get into than Stanford, right? Yeah.
It definitely, at various points, has been more difficult than Stanford. Even when they were increasing the batch sizes, so many people applied that those percentages are still really low. I knew a couple of people who got to Y Combinator from college, and I got to say, never the most fun people to hang out with. Not the best crew.
I went to theater school for undergrad, so I don't think any of them went to Y Combinator. They'll be treating the AI models that we'll use to replace actors. Yeah, that would really bring in the language models there. Siblings, siblings. Red leather, yellow leather. Thank you. So I want to get into Gary Tan a little bit. Yeah. He is also someone I've followed on Twitter for a long time, and it's funny, in your piece you talk about the fact that he's actually fairly mild-mannered in person. Yeah.
I really don't trust people like that, to be honest. When you're spewing stuff on Twitter and being like, yeah, I'm drunk, so what? And then you actually meet them and they're like, nerds. But...
Tell us who Gary Tan is. Tell us a little bit about how he ended up at Y Combinator. Yeah, he grew up in the Bay Area. He was interested in tech from a really young age, kind of taught himself to make websites and even before college had jobs doing that kind of stuff.
Ended up at Stanford. And when he graduated, took a kind of traditional corporate job. And it was that moment when startups were collapsing. It was like the initial kind of internet bubble that burst. So it was like the early 2000s, right? I think he ended up doing YC in maybe 2008. So yeah, this would have been like, yeah, early 2000s. And basically, he found the corporate life soul crushing. And...
decided that he was going to be a startup guy for life, ended up being an early employee of Palantir, and then started this company that focused on a mechanism for making blog posting easier. And then through that, got brought into the YC fold.
And he's really been a central figure for many years now, even though he did leave the organization for a while to start his own venture firm. Someone was telling me that if you look back to a lot of the early photos of YC, Gary is an amateur photographer who even thought about doing it professionally. A lot of those photos of like Paul Graham with like all the nerds in their cargo shorts, those are like taken by Gary. He's been like right there at the center of power in YC for many years now, leading up to this appointment, I think, which happened last January.
Right. And he also has been, as you alluded to, wading into political discussions. He describes himself as a center Democrat. Love those. And...
often tweets his thoughts on San Francisco local government, why Combinator's been hiring people to deal with the government more. Tell me about that. He makes no apology for the fact that he wants to reverse any perception of a San Francisco doom loop, restore the city to its glory. And the sort of way to do that is to bring people who are like-minded into power in San
local races and by calling out on Twitter or X certain supervisors who are like city council members in San Francisco that he does not particularly like. He basically thinks that like the lefty commies have taken over the city and are letting it fall apart. And so, yeah, he makes no apology for that. He
I think has gotten some pushback from some folks within the YC community who are not so happy with his politics or people who might feel, certainly have heard that there are folks who feel like they
They probably shouldn't apply to YC if their views are different than his. They should probably delete certain tweets before they apply if they're going to apply. When you have such a powerful organization and such a powerful, visible leader, there is definitely a risk that is already playing out to some extent around this intimidation factor that I think he is not necessarily apologizing for. He wants to see these changes in San Francisco, and he's not really taking prisoners on that.
How important do you think it is for people in Y Combinator to share those views? You talked about it deterring some people from applying, but is it a factor in the selection process for these companies? We don't have a lot of insight really into exactly how these decisions are made. And if anything, what YC will tell you very openly that I do think guides their decision-making process is that they're really interested in necessarily like what people are interested in. If half the applications they're getting are for crypto or
or for AI, that to them is not a sign that they should step in and try to shape the market to better fit what they think is most important. That to them is a signal that like, hey, we need to invest resources in understanding crypto and bring more of those companies into the program. And so...
I think that was something that was really striking to me is that this sort of sense of like founder knows best. And so let the founders take the lead. And what that brings you to essentially is an organization that is not necessarily pushing certain values in terms of how companies should operate or what should be important to them. And I think that's something that is important to understand is that then you end up with companies that
that are maybe pushing at the boundaries of regulation in some ways. Like Coinbase is one of YC's most successful investments. Gary is personally wealthy from Coinbase, right?
Yes, he is. He wrote a check, I think, through Initialized. And that was very early on. And so when Coinbase went public, he made quite a bundle. And a company like that really has a very strong perspective on regulation and perhaps the need to not have regulation.
YC, I think, is starting to develop its perspective on how it thinks about this. As you think about where they're going, they have hired for the first time someone who is a policy person in Washington, D.C., and they are positioning themselves as this voice for what they call little tech, as opposed to, of course, big tech, Facebook, Google, etc. And I think the question for me, and really the tension at the heart of the story, is how can you be an advocate for little tech?
when you are this enormous machine yourself that's incredibly powerful and a lot of the companies that are on your team, like a Coinbase, are by no means really little tech anymore. Best case scenario is that one of your companies becomes a FANG type situation, right?
Yeah, there's this underdog mentality that I think is actually in some ways very typical across Silicon Valley. I'm not sure it's entirely a YC exclusive phenomenon, but this idea that we're the underdogs, that everyone is out to get us, that we deserve sort of special treatment because we're doing something new and different.
I think that perspective very much pervades at YC. Josh, why did you just make a face? No, it's just, it definitely isn't new. I mean, this goes back to the beginnings of kind of internet tech overall of everyone views themselves as,
the underdog. But the reality is, especially after the bubble burst in 2000 in tech, you had a lot of people who were winners and a lot of people who were losers. And the winners are the ones who are now saying, oh, we're the underdogs. But they're definitely not. And that's kind of the world that YC started out of, that mid-aughts.
Sounds like you're just mad you didn't graduate from Stanford. I am mad I didn't graduate from Stanford, but you are I. Go Rams. Rody, Rody, Rody, Rams, Rams, Rams. Is that what they're called? That's the University of Rhode Island Rams, that is. And our cheer is Rody, Rody, Rody, Rams. Who knew? I do want to touch on, before we leave, more about Tan's restructuring plan. So he obviously axed the growth stage fund project
What else is he trying to do with the organization? Well, you may have heard on X people talking about the importance of being a builder. You don't want to just watch the world go by. You want to make things. And that is very important to Gary. And so he's trying to find ways, I think, to... It's not just going back to basics with batch size and focusing on that early stage kind of process that companies go through to find product market fit. It's
It's also about doing these sort of demos on Fridays where people come in and show their progress from the week. You know, what part of our product launched this week and here's what we learned. And then let's all go ahead to happy hour.
And so it's very much this sort of like, almost like a product manager type view of how to think about what they should be doing. He wants to invest in Bookface, which is this internal app that they've built for the network. He's hiring not one, but two people to be full-time engineers on Bookface. Is that a joke? Is that a play on Facebook? It must be. Okay. I don't know if you remember, there's an episode of The Office.
The office, that's exactly... Yeah, it's like a Halloween episode and someone puts a sign that says book on their face. No one gets that they're meant to be Facebook. They're like, book face? That is the origin of it. I actually really like that. It's interesting. I think this is one of the things that... Could have called it not or hot. Yeah.
Also catchy. But Bookface has become, I don't know, like a sales wasteland, according to some folks I talked to. I think one thing that happens when the network gets really big is that you log on and it's like,
500 people sending you messages like, try my new thing. Try my new product. Hey, would you like a free trial? And then you're like, no, I'm good. Yeah. Yeah. It's like my inbox with PR pitches. Exactly. And if you're, you know, I think there's sometimes a pressure to feel like, oh, well, I want to give back to this network. It gave me a lot. But at the same time, as it gets bigger and bigger, you do have to pick and choose and it becomes too much. And so I think, yeah,
Yeah, as we look ahead, it is really interesting that we see folks like Sequoia launching what I would call a more like bespoke accelerator. They've launched something called ARC that is really just like a dozen people at a time. It's much more high touch. You're not there full time. You're kind of coming back at a few intervals over a few months.
And it's just like a really different model of investing in leaders. And I think it will be really interesting. Gary has brought the batch size down from over 400 companies to more like 250. That's still a lot of people. And
I think maybe that won't make sense going forward if interest rates stay high and the ecosystem is still under some pressure because just so many of those companies won't make it. But also, yeah, it's going to get harder and harder to use the network as it gets bigger and bigger. It will be interesting to see how it all plays out. We're going to take a quick break, followed by my interview with Oishi's CEO and co-founder Hiroki Koga. Hiroki Koga
In theory, there are a lot of benefits to indoor farming. Indoor farms often use 90% less water than traditional farms and can produce year-round crops. But we've also lately seen a bunch of companies like AeroFarms and AppHarvest really struggle with making the unit economics work.
I wanted to hear from Oishi's CEO and co-founder Hiroki Koga. He farms luxury strawberries in vertical farms based in New Jersey, and those strawberries can now be purchased at Whole Foods for $15. Here, he talks about the challenges of vertical farming and explains why he recently raised a whopping $134 million to expand his operation. I guess by far the most simple answer is what product you choose to grow.
And I think, you know, the names that you've mentioned and a lot of the other vertical farms that have been struggling, they've been focused on growing leafy green products. So like your lettuce, your herbs, your kales and spinaches.
They're mostly commodity products, and you can't really command a higher premium even if you grow them in a vertical farm setup. And as a result, because their operating costs are still more expensive than traditional farming, if you can't command a premium compared to conventional products, then you just don't have a really good margin.
So I think that's by far the biggest challenge that this whole industry has been facing. And the reason why people couldn't go beyond leafy greens was because anything beyond that, like tomatoes, strawberries, they require pollination and you need bees. But bees are very difficult to operate in a vertical farm setup.
Now, I want to talk about some of the high operating costs that you mentioned, because a lot of these farms have touted using 90% less water, but it sounds like just getting the lighting right and AC costs are really high. What are some of the highest operating costs that these companies are facing and that your company faces? So I think it really depends on the geography of the operation, but usually it's either the electricity cost or human labor cost.
So obviously, if you're operating in an area where electricity is cheap, but the human labor cost is high, which is actually the case in the US, I'm assuming that labor cost is probably higher than electricity costs. But in other regions, it could be the opposite. Now, the other thing that strikes me about vertical farming, and yours is included in this, is like you guys have opened a facility in New Jersey. Yes. Other vertical farms were sort of looking at
geographic areas that I would say are more expensive than where a lot of agricultural farms are located. Tell me about the reasoning behind building your company in New Jersey, but also talk to me a little bit about how the location factors into the economic troubles in this sector. When you think about the economics, it's all about at what price point can you sell a product and then
how much does it cost to grow your product, the top line and the cost side. And for us, we chose New Jersey because of the proximity to the New York market. And we thought we'll have a lot of wealthy customers who are also foodies, who's willing to pay premium for a differentiated product. And so for us, that was the most important thing. And
cost of electricity or labor was secondary because those will not really swing the needle. But if you can sell a berry for $20 versus $10, that makes a huge difference. Yeah, but I still want to talk about the fact that there is...
I mean, in the case of most vertical farms, and I have to assume yours, there's some depreciation where you start running the operation and try and compete with potentially like an outdoor grown product. At what point do you get profitable? How long does it take? What does that look like?
I think there are two levels of, I think, profitability that we need to clarify here. One is like company level profitability and the other is facility level profitability. And for us, company level profitability is important, but it's less in the long term because it's all about how much we invest in research and development. The most important thing for this industry is to really focus on
how profitable are each of our facilities? Because as long as the facilities are profitable, it's all about, okay, can we build more facilities and generate more profit so that we can cover the research and development cost? Or we can decide to stop research and development and
we might be able to achieve company-level profitability. And so it's really about facility-level profitability that we are all focusing on. So at Oishi, we already have a profitable business model. And I think a lot of the other...
most leafy green companies are still struggling to get there. And until you can actually see a facility level, like strong cash flow, investors are going to be skeptical forever whether we can ever break even as a company. It seemed to me like almost every vertical farming company had a pitch to say they found a unique solution to lower the cost of vertical farming. That could be using AI or
computer vision to tweak the conditions on the farm. Did you have that kind of pitch? Yes. So I come from vertical farming background in Japan. So Japan has been doing this for the past 20 years and I've seen the whole hype cycle
crash in Japan more than 10 years ago, which was almost exactly the same situation as what we're seeing here today. And because of that experience, I thought starting with leafy greens was probably not the best idea. And therefore, we exclusively focused on how to fly these in a vertical farm setup so that we can grow the crops like strawberries or tomatoes that we can prioritize more than leafy greens.
And so that's kind of been our bread and butter pollinating flowers and flowering crops. Do you think that the sort of tech angle that so many vertical farming companies have taken is basically because investors may not want to invest in farms, but they would like to invest in a tech company?
I think that's a great point. When I started the company, a lot of the professors at my business school told me that no one's going to invest in a farm, right? And especially back then, people were only investing in sauce companies and IT companies. And also, I think a lot of the founders of these Western vertical farms didn't have a farming background, and I think they were much more used to pitching a tech company
solution to investors than really focusing on the farm technology side. It's also interesting to me with all of these investments, and I suppose yours could be included in this, but on the investor side, like
profits generated by a vertical farm are by nature going to be really different from the sort of upside you see from a SaaS company, if that makes sense. What do those conversations look like? So I think certain group of investors, they just would not even touch vertical farming because they think it's so different from what they're usually investing in. But I think certain group of investors, they look at the fundamentals differently.
of the industry, right? I think a lot of people invested in tech because they thought there's going to be a lot of disruptions using technology and IT. But when you look at industries like
the automotive industry or agriculture, even though it doesn't seem like a high-tech industry, when you think about the sustainability problems, there is a huge fundamental problem and a flaw in the system that is not sustainable. And to that extent, there is a huge opportunity for technology disruption, even if it was not purely led by AI.
AI or technologies. So those investors saw an opportunity, let's say, you know, in the early days of Tesla or BYD or those EV companies, which probably were not your typical VC investments. But a lot of investors kind of familiarized themselves with that industry and then started to realize, oh, maybe it's not just the tech and IT companies that can become
a decacorn or a hecticorn. There might be other industries that have this kind of potential. And I think vertical farming was definitely one of those. That explains a lot. And, you know, speaking of raising money, Oishi just raised a humongous Series B. I think it's $134 million. At a time when, you know, there's a lot of retrenchment in tech investing. Tell me about why you wanted to raise so much and what that money will do for you. So, you know,
So the biggest reason why we wanted to raise this money was because our traction from the market has never been as strong as today. And so everything that we're producing in our current facility is basically sold out, right? And we're being asked by our retailers to produce more and more.
So even though the fundraising market was not as flush as a couple of years ago, we really wanted to keep on building and expanding on our capacity and get our product to more people across different geographies and also keep on innovating so we can make this more affordable and accessible to everyone. So with this money, what we're doing right now is we're building an even larger platform
that we should be able to enhance soon and also invest in innovation on the automation front and also sustainability front. That makes a lot of sense. In terms of the automation front, my next question was going to be what kind of technology are you investing in or you think will change the sector? So,
So we're trying to automate almost every process from planting the seeds all the way to harvesting and then to packaging as labor cost is becoming a very major component of our operation. At the same time, there's just not enough people to keep on feeding the growing population. So automation is inevitable.
And one thing that we're focusing right now on is the automated berry picking machines. So we actually do have robots that's picking berries for us.
I can't talk about the details, but I think we'd be able to showcase this to the world pretty soon. Is this the kind of technology that you think you could maybe license out to other companies? Is that an additional revenue stream for you guys? It's definitely something that we could in the future, but the thing is there's no other...
vertical farms that's currently producing strawberries that are scale. So until people catch up on the production technology side, I think we're going to be the only ones that can actually efficiently use this AI and visual recognition and the robotics technology. When Oishi first came out, you were selling strawberries for $60 a pop. Now that price is around $15. Tell me what your margins look like.
It's a difficult question. I'm not able to disclose our exact margins. But we went from, as you said, $50, $60 to now we're actually...
around $10 in all things. Okay. So even lower. Yes. We've been able to cut down our costs by, you know, 80% in the last six years and we're still working on to bring this down. So you can probably imagine, you know, what our prices could be in the, in the next, you know, five, five years.
And a lot of this has been driven by operational optimization, but also getting as much yield as we can from the same plants. So compared to an outdoor farm where your harvesting period only lasts for a couple months in any given year, we've figured out how to keep on growing.
bearing fruits from the same seedling for more than 24 months. And this means that we can keep on producing for 12 months out of full year. And our cashflow is significantly more than a traditional farm. So while vertical farming can seem expensive, we can do a lot of things that traditional farms couldn't do. And as a result, we're still a little more expensive, but we will be able to achieve cost parity with conventional farming.
That makes a lot of sense. You expanded into a new category, tomatoes, fairly recently. How do you decide which categories to enter next? What are the criteria for you all?
It's always been clear from the start that our mission is not only to make agriculture sustainable, once again, using vertical farming technology, but also to do that deliciously. So what that means is we always want to introduce crops that people can actually taste a big difference in the quality. And so that's why we started with strawberries. So we decided to go with our tomatoes because...
we knew these were significantly better than your average tomatoes. It would be really difficult to prove that our lettuces are significantly better than your traditional lettuce. And that's why we've stayed away from the leafy green products. But our strategy is always to target a crop that we know we can do multiple folds better than what's available on the conventional market, because that's the only way you can build a strong brand.
How long or what is the R&D process like for this? Because I can imagine it's expensive if you're trying to grow and optimize a lot of different fruits or vegetables that may not come to fruition. Yes. I think the beauty of it is that once we've mastered strawberries, that allowed us to figure out how to fly bees, perfect pollination, how to keep environments in our farms very consistent, how to irrigate.
irrigate water efficiently. So a lot of the foundation of indoor production has been established with our strawberry R&D. And so while perfecting the strawberry recipe took us five years until here, but the tomatoes actually only took us two years to perfect. And we're also working on melons and other crops. So
I think that R&D cycle is going to get shorter and shorter as we keep on building the foundation that can be applied across different crops. So earlier I mentioned the sort of large series B that you raised and
I guess I'm curious how you see the future of the company. Like, what does an exit look like for Oishi? Or is this a public company? Or how do you think about where the company can go or what kind of exit you would look at? Exit strategy is something that I actually don't optimize our management or our strategy around.
whether if it's an IPO or an acquisition or we just stay private forever, is secondary. The most important thing is what is the best way to really accomplish our mission in the long term, which is to really make this the mainstream of agriculture so that we can make agriculture sustainable once again and also keep on delivering amazing, fresh crops
high quality produce to our customers at an affordable price. So for us, it's all about how can we get there as quickly as possible. And if the means to get there is an IPO, we may IPO. If we quickly turn company level profit positive, then we might be able to keep on fueling our R&D just by our own money. So for us, the exit scenario is something secondary.
Some vertical farming operations, I'm thinking of AeroFarms and I think Bowery Farms, talked about opening vertical farms or facilities in different parts of the world. I'm thinking of Abu Dhabi or Saudi Arabia. First of all, I'd love to hear your thoughts on that and whether that makes sense or doesn't. And also,
where you think about opening new facilities. I think it makes sense for a lot of those companies to expand globally and for any vertical farms to do that because the beauty of our technology is that we can grow
these crops anywhere around the world as long as there's power. So I do expect this industry to become a global manufacturing industry instead of siloed farms scattered all across the world. And so in general, we think the same. And our plan is to expand beyond just the United States into other regions. We're looking at Southeast Asia. We're also looking at the Middle East. I
I think a lot of the companies are now rushing to the Middle East, particularly because there's a lot of funding sources. But for us, that could be one reason to expand there. But for us, it's really about figuring out which cities are far from production sites and have concentrated wealth and also population. So it's not just about where the money is, but where is the right market to enter and
And our priority is always formed around where are cities that are far from production sites so that consumers currently don't have access to fresh and high quality produce.
and where there is enough concentration of wealth and population. So for us, these targets would be like Southeast Asia, obviously the North Americas, and maybe the Middle East as well. But the population there is not as big as Asia. You know, you mentioned observing, you know, how vertical farming went in Japan, right? Yeah.
What are some of the other lessons you took away from watching that boom and bust? Yes. So I think the boom in Japan happened probably five to 10 years before the U.S. And the bubble bursted five to 10 years earlier as well. But what I'm seeing is that there were a handful, probably 50,
four to five vertical farms that survived that bubble. And after, let's say, 10, 15 years, they finally come around the corner and some of those companies are actually generating a positive cash flow from the facilities. So I have no doubt that after a certain time period, we will all get there. And it's just a matter of how can we survive as an industry and
and make sure that at least a few companies get to the other side of the river without drowning all the way. Yeah. How do you think about growing? We've seen companies like AeroFarms wildly overestimate how fast they could grow. I think in 2015, they were projecting to build 25 farms in five years.
They built two of those. What does that look like for Oishi? So because I saw this firsthand in Japan and how difficult and complicated things can get inside the farms, at Oishi, traditionally, we've always never overpromised or we've never really took the approach of advertising something before we can deliver. And we've been extremely conservative and we've been very clear to our investors that
about what we think is reasonable and what we think is very ambitious. And
We've obviously missed some milestone in the past six years, and we're a little bit slower than what I originally wanted to. But we've never made the mistake of telling investors that we're going to build 500 farms in 10 years and only build one. So I think that's where we get a lot of trust from our existing investors, but also our new investors, when most of them have talked to other vertical farms.
And, you know, seeing their operation and when they come to our operation, I think they understand that we're really down to earth and really focusing on what's right in front of us. What comes next? What can you I mean, you just mentioned melons earlier. What can you reveal about the next thing you might release?
Yes. So in terms of products, we've already announced our tomatoes, but it's really in a limited scale at the moment. We want to expand our footprint there and then hopefully launch more crops like melons and some other fruits in the coming years. But what I can tell you is that the demand from the market is already increasing.
way beyond what we can produce just with strawberries. So we're obviously going to continue focusing on producing more strawberries and get to more people
across the country and around the world. And as we do that, we will continue launching new products following Strawberry so that people can see more Oishis in their local supermarkets and really make this available anywhere around the world at an affordable cost. I didn't mention it, but I am a big Oishi consumer. Thank you.
And when it doesn't drink, it's like my favorite thing to bring to people at parties because everybody's always really excited. No, exactly. Right. If you're bringing a $50 wine, you're probably not going to be able to impress that many people. But Oishi berries, people can kind of smell. Yeah. So this was great. Thank you so much for taking the time to come on our show. Thank you. Thank you for having me today, Yasmin.
Okay, we are back with Ainsley and it's time to wrap up the show with Keeping Tabs. This is where each one of us shares a story, trend, or piece of pop culture we're following right now. And Ainsley, since you're our guest, what are you keeping tabs on? Well, I feel like I should make it official that I have entered my fantasy romance era. I am on the Sarah J Maas bandwagon. Wow.
Our producer Avery is probably like smiling ear to ear right now. Big advocate of the romance genre. I can't read it. I feel I'm such a prude actually. My most Muslim trait.
The TikToks are also entertaining if you want to get involved that way. But that's actually what got me interested is just, I think it's so fascinating the way that authors build communities online now. And it seems like, I mean, her community is obviously kind of insane and very vibrant and really creative. I was like, you know what? I'll give the books a try. And here I am. I just thought it's like third one in a week. Yeah.
deadlines for work, whatever. Just got to get through the next 700 pages. But yeah, I've come to really respect when it comes to plot and pacing. I'm like, I have a lot to learn from you. Yeah, I got to read it then. You got to get past. If you're squeamish about some of the stuff, there's plenty of distractions from the plot and pacing. Yeah.
But yeah, no, I actually, I feel like I can like wholeheartedly recommend that you check them out. I love that. We're not going to beat this. Josh, what are you keeping tabs on? I'm keeping tabs on new up and coming pop star, Chapel Roan. Are you guys listening to Chapel Roan at all? David Salazar is a big Chapel Roan fan. Chapel Roan is awesome.
She just had, this past week, was on NPR's Tiny Desk concert, and it was terrific. One, love Tiny Desk concert overall. It's such a great program. Chaperone, I've been listening to her since I turned on to it by the Lost Culture Reasters podcast. Terrific artist, if you haven't checked her out. Just super fun, campy artist.
poppy, heavy 90s influence to some of the riffs. And her big song right now is Red Wine Supernova, which I wonder if that's a little bit of an homage to Oasis, Champagne Supernova, a little bit. Or Red Red Wine. Yeah.
You'd be 40. Ooh. But just like... Her voice is terrific. Love Chaperone. Everyone should check her out. Yaz, what are you keeping tabs on? So I have a couple things. The first is Ariana Grande's new album is actually really good. So good. Despite the fact that it's about her leaving her husband for a married man who played SpongeBob SquarePants on Broadway. Yeah, that's a little weird. It's like...
I don't know. I feel like there was so much kind of backlash against her. And then like the album came out and people were like, Oh, this is just good. Yeah. It's a good album. Yeah.
It's a good album. Listen, messy sort of relationship situation. But if you're happy, Ariana and Ethan Slater, good for you. Ethan Slater is also a really terrific actor, I will say. I know he played SpongeBob, but he's really good. Yeah, I saw clips of him as SpongeBob and he was really good as SpongeBob.
He was just in Spamalot, which is closing next month, but he played one of the tracks in that. And it was so good. It was so funny, so talented. I bet he's good. It sounded great. Yeah, he's great. You've got to have Riz to pull. Never underestimate the Riz of a straight musical theater man. Never. Never.
Bit of a self-serving comment, but that's okay. Not me. Me not included. I feel like, Josh, you have like a new romance category that you just created for us. The musical theater romance. Yeah, exactly. I should write some musical theater romance. There's two types of straight musical theater man. It's the worst man you've ever met and the best man you've ever met.
man. There's no in between. The other keeping tabs I did want to bring up quickly is something friend of the pod, David Salazar told me about, and I read about it this morning. Um, Tracy Morgan, comedian from 30 rock, um, got on Ozempic and gained 40 pounds. In his own words, I beat Ozempic. Um,
Which is really funny. It's such a good joke. It's so good. Anyway, that's it for Most Innovative Companies. Ainsley, thank you so much for joining us. Thank you for having me. Our show is produced by Avery Miles and Blake Odom. Mix and sound designed by Nicholas Torres. And our executive producer is Josh Christensen. Remember again to subscribe, rate, and review. And we'll see you next week.