UP002: Rapchat // empowering a hip hop community

Seth Miller: 00:00:00

Again, it’s about just like helping people like giving everyone these opportunities, like I talked about, like, okay, this is a platform, this is a way to create music. All we’re trying to do is connect more people around the world will make it easier to create music and it’s for the good of the culture as opposed to like introducing a product that really does cannibalize and take advantage of those and the culture.

Jay Clouse: 00:00:23

Startup investment landscape is changing and world class companies are being built outside of Silicon Valley. We find them talk with them and discuss the upside of investing in them. Welcome to upside.

Eric Hornung: 00:00:50

Hello. Hello. Hello and welcome to the upside podcast. We’re finding upside outside of Silicon Valley. I’m eric and I’m accompanied by my cohost, Mr. Scotch on the rocks himself, J Clouse. Jay. How’s it going, man? Whats going on with you.

Jay Clouse: 00:01:06

It’s going well. This is a scotch neat. By the way. There are no rocks here,

Eric Hornung: 00:01:06

not a rocks guy, and change the nickname, hes not a rocks guy everyone.

Jay Clouse: 00:01:13

It’s not that I’m opposed to rocks necessarily so much as I’m that guy who doesn’t refill the ice tray and I live in a studio apartment, so if I don’t refill the ice tray nobody else does. How do you feel about the clear ice verse? Hazy ice debate? Is it worth the extra effort to get the clear ice? Big Fan of clear ice disclaimer, one of my clients in unreal has a physical product that creates clear ice cubes, so rap too on the rocks, which you can find on Amazon. Clear ice.rocks.

Eric Hornung: 00:01:46

That’s Mr. on the rocks, you’re just Mr. Scotch according to together in this new system and you could Mr. Scotch on the rocks. Fundamental. That little plug just worked out there for you. Very nice. Yeah.

Jay Clouse: 00:01:56

I’ll follow up with Matt and make sure that he sponsors the podcast here in the future.

Eric Hornung: 00:01:59

Perfect. So what are, what are we doing here, Jay?

Jay Clouse: 00:02:02

Today we are talking to another founder in Columbus, Ohio. Good friend of mine actually so excited to have seth Miller on the show. Seth Miller is a co founder and CEO of rap chat. He’s a graduate of Ohio University in Athens, Ohio. A Columbus native rap chat was in batch 15 of 500 startups where he entered in 2015. Rap Chat is the best way for today’s rap enthusiast to create, collaborate, and connect with tomorrow’s stars, Ratchet partners with award winning artists and top producers to deliver the hottest beats and the most user friendly platform to make music and network. Combining the convenience of a mobile recording studio with the power of a social network. Rap Chat is the premier place for artists and fans to fine tune their craft while helping the world discover new talent. Eric, there’s not a lot to be found on rap chat. I had a difficult time researching for this.

Eric Hornung: 00:02:57

I did as well, and we get into the actual research. I just wanted to take a step back and for. We’re still a little early in the podcast history. I’d love to have you given overview of maybe some new listeners about why we set up this podcast and what we’re doing here.

Jay Clouse: 00:03:12

Oh, yes, yes, yes. We’re doing this to start the podcast, so eric and I are good friends. We go way back, we spend a lot of time talking about startups outside of Silicon Valley. Eric lives in New York. I live in Columbus, Ohio. I connect with a lot of startups here in Columbus, in Ohio, in the Midwest, part of his role in New York as he’s looking at emerging technologies, so we talk about this a lot and we said, let’s share this and what we talk about and the things that we’re learning with with some listeners and also shine a light on some of these entrepreneurs here in the midwest, in the heartland, outside of silicon valley. We’re proving that they can be just as effective in building world class companies while being capital efficient and maybe even more resilient. So we’re here talking to you guys about what we’re finding as in the way of startups here outside of Silicon Valley. We want to show that there’s a lot of opportunity and not just from the founder standpoint but from the investment standpoint as well.

Eric Hornung: 00:04:13

Absolutely, and looking at it at that investment standpoint, we tried to model our podcasts around the angel investing structure, so what would an angel investor do as they looked at a business? There are three primary stages. There’s research, which is what Jay and I are about to talk about in a second, and that’s looking online using databases, using proprietary sources, reaching out to contacts in the industry to get a sense of this company. The second one is an interview with the founder themselves, so jay mentioned earlier that we’re going to have seth Miller from rap chat on today. When we talked to seth, we want to get a good feeling about the company that we couldn’t get online, get some of our questions answered that we couldn’t find in our research and ask questions that are maybe a little bit deeper futuristic that only the founder can answer and then finally the debrief. So this is gonna be in the form of a verbal, simplified deal memo and we’ll talk more about that later. With that being said, Jay, do you want to get into the research or do you have anything to add? For the audience,

Jay Clouse: 00:05:20

no, I think you covered it. I’m excited to talk to seth here today. I found rap chat, the APP before I even met seth, so it’s cool now to be friends with the founder of this apo screwing around with back in Twenty 15 or 2016, but it’s a fun app so if it wasn’t obvious from the Intro, rap chat allows you to choose some different beats that are inside the APP and there’s a ton of them. There’s a ton of different beats that you can spend hours scrolling through and listening to and then lay your own freestyle rap over top of it. You can save that. Then you can edit it in their studio. You can send that to friends. I believe from what I read, the story was, you know as 20 slash 15. He was talking with some friends. They were talking about app ideas. They were freestyling at the time. I forget the song. You may know the actual song from the research they were freestyling at the time and they said, well, what if we could just send freestyle wraps to our friends that go away like a snapchat’s go away. So it’s a cool story. Eric, what struck you from the research?

Eric Hornung: 00:06:21

So I thought the whole story behind it was fascinating. They created the APP at a startup weekend, which I know you’re really involved with. Jay, if you can give a quick 15 second overview of what a startup weekend is.

Jay Clouse: 00:06:35

Big, big fan of startup weekend, have been organizing it here locally in Columbus for over five years and facilitate events globally because it’s a global organization that run weekend long events, bringing in anywhere from 20 to 120 people and letting those individuals pitch ideas, website ideas, app ideas, business ideas that they then field a team and the team validates the idea builds and mvp and presents that and vp to a panel of judges by the end of a weekend and it’s an incredible resource for people to get an initial feeling and a understanding of what it’s like to be an entrepreneur. It’s a really good experiential education to what it’s like in a microcosm to start a business and validate an idea

Eric Hornung: 00:07:21

and the reason I, I’m pretty familiar with this idea is that when I was in college with Jay, someone named Jay sent me a text message saying, hey, you should sign up for rap chat and send me a rep, and I have never been more confused in my life. I won’t lie. I didn’t download it, so maybe I’ll have to confess to seth that I didn’t download this app in 2015, but like 450,000 people did. So he wasn’t really missing out on my terrible vocal skills.

Jay Clouse: 00:07:50

Are you saying I sent you a text to check out rap chat?

Eric Hornung: 00:07:52

Yeah, you did.

Jay Clouse: 00:07:53

Oh, I don’t remember. I was really big on it for awhile. I was really screwing around. The people on rap chat have gotten so much better. It went from. It went from being this app that pretty average dumpy dudes like me were just screwing around and making horrible stuff to. Now they have some incredibly talented people going in there and making really good stuff and I got intimidated.

Eric Hornung: 00:08:15

I understand that. That’s one of the questions I want to SF looking at the bigger picture because in the name rap chat, you essentially have this huge snapchat, a shadow that you’re laying in which says, okay, this is something that’s low filter, low key. You can come in and you can put a rap out for 30 seconds, a minute, and it’s fun. It’s flirty. You just get it out the door. Right, and then it’s gone. But then you go on there now and I went on earlier today just to listen to some of the people on the top of the charts and they’re putting like some bangers out there. Right. And it’s like, wow, this could have such a bigger potential in solving problems of high studio costs and accessibility to record labels. Like there’s, there’s a, a lot of big players out there and I’m really interested to hear what Seth has to say about the future vision people are putting in work.

Jay Clouse: 00:09:08

The number that really popped out to me and the research was that from an article in May 2017 and I remember seth telling me a similar statistic not long ago. The average user session was 17 minutes. That’s crazy. Someone opens up the APP and spends 17 minutes. Yeah, I don’t spend 17 minutes in instagram and I’m always on instagram.

Eric Hornung: 00:09:29

Yeah, I mean that is huge because it’s a big number. I barely, I barely spent. I don’t spend 17 minutes and spotify. I just flip it open and turn it on. Right. Like you have to be actively participating in APP to be there for 17 minutes.

Jay Clouse: 00:09:41

And so the obvious question is, well one of the clear questions is going to be for seth, what’s the model? Because right. You know this is a b to c business, a rare B to c business in the Midwest. So lots of questions already, but I know that they do not currently do straight up advertising and if you’re having people spend 17 minutes in your app, you have some opportunity to integrate advertising to capture on that attention that you’re pulling in from a demographic that I read was 18 to 24 years old. A difficult demographic to reach as it is. So interested to hear from seth the model, where are their user growth has come from, how much more it can grow and what that means in terms of either advertising dollars or you know, their future plans.

Eric Hornung: 00:10:25

Right. I agree. So I know that they sell premium beats and that seems like unless there’s some sort of data play, the primary driver of revenue at this point,

Jay Clouse: 00:10:36

is that live in the APP or was that a plan that you read?

Eric Hornung: 00:10:40

that’s live in the APP. I was, I was playing on it today. You can buy a starter pack, which is like 11 beats for supposed to be $18, but you get it for like two 99 and then you can buy additional beats on top of that anywhere from ninety nine cents to five 99 or something like that

Jay Clouse: 00:10:54

in app purchases as a major revenue driver. Now in the APP market because people don’t want to sully their user experience with advertising. You have things like clash of clans that do billions of dollars of revenue a year selling fake swords to fake soldiers. Right. So I think there’s probably a future there and I’m interested to hear what his actual projections look like with that as a model.

Eric Hornung: 00:11:18

I’m very curious because you also have the, so for the exact same beat, you have a free version which is about a minute, minute and 30, and then you have a full version which is like 3:30 to five minutes. So I think the latter geared at full songs and the former geared at just samples or these challenges, which is something else that I’m really interested in on the product side to hear how they’re utilizing challenges because I saw one where they actually got machine gun Kelly’s trap Paris beat and they put it out there and then they had a machine gun, Kelly challenge and everyone posted and posted and there was like some sort of giveaway for the, for the winter. So

Jay Clouse: 00:12:01

can you introduce machine gun Kelly and maybe do a cover of one of his songs.

Eric Hornung: 00:12:05

Can I introduce it? So he is a wild boy from Cleveland east side two, one six shaker heights actually. Uh, but he, he grew up in Cleveland, uh, and he’s a huge supporter of Cleveland and he is one of the white rappers out there and he has a little bit harder of a style. Can I do one of his songs? Yes. Will I, I don’t have scotch in front of me Jay

Jay Clouse: 00:12:33

I’m not a lucky one here for, for those who can’t see. Eric isn’t a full suit right now. And I would love to see him try to cover a machine gun Kelly song right now, but I’ll let you off the hook for now. You did put in some work earlier, sending me a rap chat, which I have not yet reciprocated. So I feel like I don’t have leverage in this negotiation.

Eric Hornung: 00:12:55

Yeah, to the users. It’s bad. So moving forward into competitors. What do we see here in terms of the competitive landscape? Because the main thing that you’re vying for his musical attention, which is a massive market.

Jay Clouse: 00:13:12

Well, musical attention, yes, but just even attention generally. Why am I going to go into rap chat as opposed to instagram? You know, I’ve got 15 minutes here. I’ve got, I got my 17 minutes, I’m going to spend on an APP. Why rap chat as opposed to instagram. So I’m interested to hear what he knows about the psychographics of the people who use this because it’s a much more active time than just scrolling through photos. It’s asking you to put in effort. But as far as the competitive landscape. Super interesting question. I was thinking about this because you know, soundcloud is in trouble and that’s a major player in the music app space, but then you have shizam being purchased by apple in December of 2017 for $400, million dollars. You have musically that was bought in November of 2017 for $800, million dollars. They had raised almost a $150 million through a series c and then you have smule which is like this karaoke app to what I understand raising $157 million through a series h. did I take all of your fun facts.

Eric Hornung: 00:14:13

You did not take all of my fun facts but you did a great job of looking at the biggest players in the startup music space and where they’ve been and I really think that the most interesting part of that is going to be not the multiple that they get because obviously it’s a. seems like a pretty nice multiple, but which of these is the best comparable to rap chat and I’m not sure I know the answer to that. Is it a karaoke app? I, I don’t. I don’t think so. Is it more of a pipeline almost almost like a training space or a proving ground? then It wouldn’t be like any of those things you just mentioned, so it’s very, very unique. I couldn’t find any great comps for it.

Jay Clouse: 00:14:59

Unique New York. Yes. I would agree. Musically and smule both have some similarities, but rap chats put in a lot of work to add more of a social component. Yes, but also add in these higher quality studio components, but you know, the question is are these apps and indication of consolidation in the space? Does rap chat become a an acquisition target by a musically or a spool? Obviously rap chat is not raised the level of funding that these companies have, which I’m interested to get his take on that. The amount of funding that they’ve received compared to rap chat with the user engagement numbers I’m seeing on rap chat. I wonder if that is a component of geography. You know, like I said earlier, a b to c company like this in the Midwest is a rare bird and a difficult sell based on what I know about investors in this area. So interested to hear more about that.

Eric Hornung: 00:15:51

Yeah, same. I’m also interested to hear if they’re planning to follow the genius model, which for those of us who were around 10 years ago was called rap genius maybe not even 10 years ago, eight years ago. It was called rap genius and they got their break in into rap because it was the easiest to get a foothold and then expanded into all music, I believe poetry and some novels and other types of written words that they could put anecdotes to. Uh, and I wonder if rap chat eventually just becomes chat and you can be the next country star as well as the next rap star.

Jay Clouse: 00:16:32

Good question. We’re going a little long here. You ready to jump in and talk to south or do you have any closing comments?

Eric Hornung: 00:16:37

I don’t. I am really excited to jump in and let’s do it.

Jay Clouse: 00:16:41

Alright, let’s do it. Seth, welcome to the show.

Seth Miller: 00:16:49

Thanks for having me, Jay. I appreciate it. Excited to be here.

Jay Clouse: 00:16:53

Can you give us a brief intro to you?

Seth Miller: 00:16:56

Sure. I live in Columbus, Ohio. I run a company called rap chat, which I’m sure we’re going to do what ratchet is, but it’s an app that lets you record freestyles on your phone and share them anywhere you want. So other than that, a love. Cleveland Sports. I love watching sports. Hanging with friends.

Eric Hornung: 00:17:15

What are you from? Are you from Cleveland?

Seth Miller: 00:17:17

I am from Columbus actually.

Eric Hornung: 00:17:19

Okay. So how’d you get into Cleveland Sports?

Seth Miller: 00:17:21

My Mom’s side of the family is from Ravenna, which like northeast Ohio and so my grandpa’s a huge browns fan, unfortunately.

Eric Hornung: 00:17:29

Uh, I nothing unfortunate about that man. This is going to be the year we’re going to get more wins and last year that’s for sure.

Seth Miller: 00:17:36

I’m ready for the draft again. Draft night. Okay. The superbowl, but yeah, so my mom’s side of the family and then yeah, there’s really no professional team in Columbus, so I mean I liked the crew so hopefully they don’t move out, but that’s a little background on me. I went to school at Ohio University, lived in Cleveland for a year after that, moved around went to Chicago, San Francisco. I’m sure we’re going to do it a little bit, a through 500 startups. Lived in La and then I’m back back in my hometown,

Eric Hornung: 00:18:05

so let’s get into that now. That sounds interesting. So you moved around a bunch and somehow 500 startups got involved. Can you tease out that story a little bit more for us?

Seth Miller: 00:18:15

Yeah. My first job out of school, I was working as a server infrastructure engineer at progressive insurance and Cleveland. I started ratchet wall in school. We launched live the summer. I graduated basically right when I was taking this big boy job and after eight months there quit that and that’s when I moved to Chicago to work on ratchet with my business partner, pat and I moved to Chicago. Initially we were like, our whole goal is getting to an accelerator that summer and so, you know, we hit up all the main accelerators and really 500 stars was the last one we applied for and it’s kind of a funny story, but like it was really our last shot and night of applying we’re going to a concert and we were like pregame and that pat spot and we’re like, all right, this is, this is it. But you know, of course it’s the night before the applications do and every single accelerator asks for like a pitch interview video which you never actually have and we didn’t have time to like even do one on the spot. And so we just pasted a link to J Cole Song Blow Up. If you’re not familiar with like the lyrics it goes come about to blow up and it’s like this awesome hype song and that’s what we put in as our link for our pitch video. So yeah, it was pretty funny. And then, I mean I really was getting ready to move back to Columbus at that time because I’ve been staying at my friend’s family’s house for like three months and I’ve been out of a job for like a year and a half, just like freelance and like basically out of money literally the weekend I was like start going to move stuff back out, got a call from 500 and they’re like hey, like we were going to have you here, like can you get here in two days, blah blah. And so I booked a ticket and left from Columbus to San Francisco in two days with half of my stuff’s still in Chicago and my family or a friend’s family’s house. So it was nuts. I mean it was pretty much right before we decided we had to go back and get real jobs and right before I was like gonna move back in with my parents. So that was huge. And why they want us in like we were different. We were pretty much the only consumer social network APP company and that batch, which was interesting out of like 40 companies there at the time, really focused on marketplaces and sas companies, uh, but our growth was really good and uh, they had a couple of guys on staff that are really interested in consumer mobile and so it was nice to have some champions in there. Then, I mean, the whole organization was just super excited about us.

Eric Hornung: 00:20:54

So why’d you make your way back to Columbus? You’re in Columbus currently, right?

Seth Miller: 00:20:57

Yeah, almost every time I’ve made my way back to Columbus because I ran out of money. So we went through 500, you know, you get some funding through $500 and we made that last for a year and like I said, we stayed in San Francisco, extremely expensive place that decided to stay. Don’t recommend that, especially when you don’t have more than like three months of runway. Uh, but we were there for eight months and then moved to La for a couple months and basically we ran out of money and so we’re like, we have to go home because we can’t afford to live anywhere. And so I did at this time I did move back in with my parents for a couple of months, but again it was like, you know, let’s just give us a final go and that’s when we just went and pitched a bunch of investors and Columbus and the ecosystem actually evolved a lot since the last time I was in on the first two years prior and we got some traction with local investors and we’ve been, we’ve been fundraising for like three years. And so once we officially locked in a lead it was a lot easier to go like, you know, hit up all these other people that were initially interested because just let me know when you get a lead. That’s a classic line. But we did and some of them joined in on their own.

Jay Clouse: 00:22:05

Can you talk about that fundraising process a little bit in the Midwest for a company like yours? I know you, I know you came back because you needed money, but that seems like there aren’t many b to c companies in Columbus, Ohio raising funds, so can you talk about that reality?

Seth Miller: 00:22:21

Yeah, it’s an unfortunate reality, but it makes sense. There just hasn’t been a ton of consumer success stories in the Midwest and by default in the industries that aren’t Columbus or surrounding cities, you know, investors are a lot more drawn to healthcare and sas companies and yeah, if you’re a consumer company, I mean the place to be a, they tell you San Francisco or la, which is true, but we found like even, you know, we pitched a bunch of investors more in San Francisco, in La, there, there’s so many companies, so many consumer companies and were already burned out from the twitters and the facebooks and. Well those are the success stories. The companies that followed him that we’re trying to be twitter, facebook, instagram. There was just this huge wave of funding initially for social networks and a lot of them flopped, YikYaks a decent example from Atlanta. They got money from out west and so yeah, I think there was just a hesitance out west because they’ve been burned so many times and it’s not as sexy. They’re more into like Ai Vr, et Cetera, and then here it was just like. I think it was a unique time for us because there’s a lot more capital now and I think there’s still figuring out what companies like how to actually fund all these companies like the capital since three years ago. It’s pretty much like 10 x, at least in Ohio and so it was just. I mean, to answer your question round about way of answering your question, it was tough, but there was also unique advantages definitely being like classic bigger fish in a smaller pond. We probably had the most traction out of any consumer startup in the Midwest at the time we were raising and so that was it. It’s easy to get meetings. It’s easy to sell people, but the hurdle isn’t necessarily getting the meetings and getting people excited. It’s like Holy Shit, like you’ve never invested in a consumer startup. Like are you ready to invest in a consumer startup like it’s a totally different trajectory than a sas company where the financial models really sturdy and you have experienced with what a SAS model or sas companies trajectory looked like. Our trajectory is totally different than that and you don’t have experience with that, but the returns will be crazy if we do, we do blow up, you know,

Eric Hornung: 00:24:27

you mentioned a financial model and how it’s a little different in sas and B to C. What is for our listeners a typical B to c business model look like. And then how does rap chats business model both mirror that typical model and maybe add on a little bit.

Seth Miller: 00:24:44

Alright. So I guess typical B to c model and this is one that facebook did a really good job of and twitter’s trying and instagram, that’s a really good job but I got bought by facebook but just get as many users as you possibly can and then you leverage that to create an advertising platform that is the model or has been the model I’d say for like the past 10 years. But it’s changing and I think like that’s what a lot of consumers, startups nowadays are struggling with this like which model go with and so like one, you know, a newer model that more companies are tracking and games have a ton of success with or it’s like a freemium model where, you know, clash of clans can make a million dollars a day doing this, but you give away the APP, your product for free and then you charge for upgrades that’s different than just advertising your users. That model is something we’re way more interested in because like our products, like there’s tangible value that or adds up add ons. Right. So like it’s a free mobile recording studio. We have a ton of free beats but we want to offer the ability to buy better beatxs or by vocal effects or buy things that are actually adding value as opposed to just, you know, cluttering your feet with a bunch of ads and having to get into like an ad targeting. I mean you just see all that stuff facebook’s gone through. So those are Kinda the two main models I’ve seen. But in reality, like from a venture perspective, it’s still very much like the business model is less important than how many users you have ultimately. Like the real model is just amassing as many as you possibly can and getting bought by a bigger company that has that figured out or already has an advertising engine all off facebook, Allah, any of these Chinese behemoth a digital companies. Again, everyone has a different opinion. But like most strategic investors and advisors I’ve talked to, the status is still like just get as many users, like you’ll figure it out or another company. I figure it out. Like, you know, again, it’s all about engagement and engagement is money nowadays. It’s just like how do you actually get money? That’s the bigger question.

Jay Clouse: 00:26:51

At some point when you guys were low on cash, you’re probably foregoing some level of advertising revenue. Right?

Seth Miller: 00:27:00

Oh we still are, like we still are. I mean that’s the other thing with the first model I mentioned, is that the advertising rates are right now and they continue to go down and they have been declining for ever. And so that model, like looking forward continues to be less and less exciting and less profitable, but for us yet, and we’re struggling, of course I was always like running, you can run projections and it’s like even if we make this like, yeah, I guess I can live a little better, but it’s not, it wasn’t a crazy sum of money that was going to fund the business, you know. So that’s, that’s really why we’ve been pursuing investment and just like knowing that, all right, we need to scale the user base and you know, we’re always testing the model and again, I still believe in the freemium model, but it’s just a matter of when you kind of pull that lever and like there’s a lot of other levers we’re interested in right now.

Jay Clouse: 00:27:50

You talked about your user engagement being really high even on the west coast. Can you give us some insight, some numbers about your user engagement and growth over the last year, two years?

Seth Miller: 00:28:03

Yeah. So I mean one number off the top is like the average user spends over 15 minutes on the app a day. That’s more than almost every app besides facebook, so that’s. That’s something we’re really excited about. We’ve grown our active user base consistently over the past two years, but this month we’re going to pass 300,000 users that are active on Ios and android per month.

Eric Hornung: 00:28:26

What’s like annualized growth on that look like over the last two years? Roughly?

Seth Miller: 00:28:31

It’s over 10 X. I would say 10 x, but I think it’s a little over the interior that’s 2017 or 2016

Eric Hornung: 00:28:40

users seem to be a huge. I mean they are a huge part of the business model both in freemium and the advertising model and engagement is kind of your guys’ bread and butter it sounds like because 15 plus minutes is pretty crazy for engagement, so who is your target audience?

Seth Miller: 00:28:57

So there’s really two different distinct audiences that are a target and that use the APP. One is the actual rapper or aspiring rapper that really truly wants to create music and gain a following and spread to spread the word about their brand both on and off. Yet there’s soundcloud, their twitter, whatever. They’re coming to the APP because it is like a crazy utility for them to be able to create a song right from their phone for free over all these different beats and share it. They can share it to their socials. It’s just an easy way to create relevant content. The other thing is they can actually do like a lot of different demo tracks where they’re practicing their flows and they can save it and send it to whoever they’re actually going to rap with. That’s a whole another use case, but those are the power users and the aspiring artists. The other bigger segment actually is people that just want to have fun and create a funny rap and share with their friends like jaded whatever, three years ago. Yeah.

Jay Clouse: 00:30:00

You know the last time I logged into the APP, is that what you’re saying?

Seth Miller: 00:30:04

Oh no, but it gives me. I was in there today, man. Okay. There’s retention for you three years and then today, but no, like then the other group yet it’s like Jay that isn’t an actual aspiring artists but finds a lot of value in and fun in just like creating music and wraps on their phone and then sharing it with their friends, texting and ridiculous wraps the perfect couple and they are ridiculous, but it’s two distinct user groups and two distinct use cases so that, I mean, one, it’s awesome because they both want to share their raps externally and that just drives a lot of viral growth to it. It does make building product a little difficult sometimes. Trying to figure out who to really appeal to.

Eric Hornung: 00:30:47

do You also have like record label, talent scouts or anything on there at all or have any, have any of them reached out to you to kind of be like, hey, if this person, if someone that actually blows up on here and we can find some talent, it’s pretty cheap way to do it and we don’t have to travel to them.

Seth Miller: 00:31:04

So I don’t know, but I don’t think, uh, currently. I mean, we do work with record labels in a different sense where they want to promote artist that they scouted better new that are up and coming and a lot of times we do contests and different challenges and different promotions around one of their smaller, more up and coming artists. We do think though it will eventually be a place to discover the next wave of big rappers without a doubt. And like there’s a handful on the APP right now that I know can be signed to a label. You know, that that’s just something. Once we get more resources and just more scale I know is going to come naturally. Just like youtube or soundcloud or any of these other content creator networks. Like you will have those kind of mega stars at that rise from it. And what’s nice is that we have worked with a ton of labels and managers and so eventually we’ll, we’ll be at a point where we can just hit them up and I go, here’s the top 10 hottest rap chapters this week. Let me know who you want to talk to or you know, facilitate a more efficient way to do it.

Jay Clouse: 00:32:07

Is that something that you want to capture value on facilitating or is the value for you guys that if people are coming to scout on the APP that’s going to drive more people into the APP?

Seth Miller: 00:32:17

We thought about it. I don’t think we know for sure yet the former or like facility like cap up, like actually cashing in on facilitating that is almost. We’re basically a pseudo label. That’s something we’re interested in and think would be awesome. But like in being realistic, it’s we don’t have the resources for that right now and just not a space to be in but I don’t know. I mean for starters like yeah we just want get our users sign because they should be and it’s a way to make money and like we’ve helped create careers and once people see the value in that, that makes us like the number one, you know, creation app is like Holy Shit, you can get signed to Roc nation if you blow up on one contest from rap chat. Like that is not an insane story to think
about the year.

Eric Hornung: 00:33:01

So let’s pivot back to something that you mentioned earlier, the challenges. What are those, how are those increasing engagement, if you have numbers on it or not, what was the impetus behind creating them? Was it the record labels or was it something you guys came up with?

Seth Miller: 00:33:15

That was a feature that was added on after we went through 500. We made a pretty big shift from being a messaging app that was like a really simple, a recording app to pretty much a full on social network component as well. And with that we added a big discovery section and that’s something we’ve iterated on as well. But contest it was just kinda like a natural evolution because we would add beats, right. And then people would like love to rap over certain beats and they tweet about it and at the same time there’s all these other challenges like I can’t like so gone challenge, right. It was like a challenge. I went viral on twitter. There’s just so many different challenges going on on other platforms that were maybe even video or or rap or singing. But it was just like this kind of trend we noticed with millennials and social media and it just made perfect sense. And so we run our own too, like we did a fortnight challenge

Eric Hornung: 00:34:11

or an upside challenge

Seth Miller: 00:34:13

or we can do an upside challenge

Jay Clouse: 00:34:16

We did a mannequin challenge at startup weekend.

Seth Miller: 00:34:18

Yeah, exactly. I was trying to think of that one. So yeah. Great example. People are already ready for the challenge mindset and it is a cool way like we can leverage it so many different ways. We work with artists, we work with producers, but then we’ll do fun stuff like a fortnight challenge or over like a fortnight theme be, you know, eventually we’ll probably open that up to brands do to like offer different things like shure microphones, like we did one. Sure. Where the winner gets a free shirt microphone, which is a pretty dope microphone. Things like that. So. And it just gives people a reason to wrap, you know it like a subject or. Yeah, just anything that kind of can give you, you know, the subject. Is this helpful

Jay Clouse: 00:35:02

with the premium beats being one of your revenue models or part of your revenue model? Are you assuming that the one segment of your audience segment that wants to be rappers, that smaller segment, do you just need them to be into the premium beats for this to be a, a success for you guys and to get to where you’re trying to go or does not need? Does that need to carry into that bigger segment of kind of the casual Jay and Eric rapper?

Seth Miller: 00:35:31

Well, I mean one really important piece of the business model, a or new age business model I forgot to mention is subscriptions and that is something that a lot of apps have been keen on and are making really good money doing for us, like the, you know, the protectors we’ve ran, the models we have, we’re not as worried about the jays and Eric’s a, it’s more about can we provide enough value to power users where they’re willing to pay month over month and the subscription fee to unlock all the premium content. You know, we’re still going to offer you the ability to buy a one off filter, one offbeat, but what we want to do is offer enough tools where it makes sense to pay a small amount a month or over and over again just like you would for for Netflix or soundcloud pro or anything. So that is actually the most important piece of this business model.

Jay Clouse: 00:36:23

This is just an exploratory question. Is top line monthly active user growth important or is it important for your business to become sort of like an adobe creative studio for rapper?

Seth Miller: 00:36:37

That is a million dollar question. It’s tough. I mean we’re to be honest, we’re still having discussions around that and still trying to figure out which route makes sense for what we wanted to do because up until this point we’ve been kind of in between and we might say in between. I mean my find a way to do that, but yeah, it. Going back to what I said earlier, there’s two distinct user groups. You have the adobe creator group and then you have like just the casual fun instagram if you were to do photoshop versus instagram, right. And both companies make a ton of money and have a lot of success and so trying to figure out if we can stay in between or you know, if we need to go one way or the other, which kind of which way you’re going to go.

Eric Hornung: 00:37:19

Well you could say that before instagram, the divide was flicker, verse Photoshop, right? And then instagram came in and just was the middle ground. So maybe that divides just shrinking across the cross every playing field.

Seth Miller: 00:37:33

Sure. Yeah. Yeah, definitely. And I mean

Jay Clouse: 00:37:36

it’s good that you’re in a position where you can make that decision. You can, you can say, well our user growth is crazy and we can keep going down this path. At least you’re in a position where the choice is yours and it’s not kind of dictated by, by user growth

Eric Hornung: 00:37:50

or dictated by competitors, which we haven’t really gotten to yet. So what do you see as the competitive landscape? Because Jay and I talked a little bit about this in the intro and we don’t have a solid competitor for you. So w w when you guys are looking at, okay, who’s doing what? What are you looking at?

Seth Miller: 00:38:07

We look at a handful of different apps and platforms. I guess like one competitor is smule so smule is a music app. Conglomerate. Like they have 10 of the top 50 music apps. They make a ton of money on these music apps. They’ve figured out how to get people to pay for music apps. They do some things really well. They have a specific rap app called auto rap that will change your voice and turn it into t pain style auto tune and then sync it to a beat, which is a cool experience. But

Jay Clouse: 00:38:41

will that make me sound good?

Seth Miller: 00:38:43

It will I think or maybe not. I think it’ll make you sound terrible actually in anyone who listens a. no, I’m just kidding. It actually. It actually is cool. But yeah, so, so Auto Rap smule as a whole, like if you’re a music APP, they’re a competitor. Like they just, they own so much of the market that and they accumulate so many dollars from users that could be paying for your app that you have to keep an eye on them. For us, like it’s cool because Auto rap, even though it may get more downloads per day or at least it did when I was looking last, but it doesn’t have a real community and so like our bank has always been like investing in our community and making sure that people get value outside of just a recording app and they give feedback to each other. And so we, we have a strong, big engaged community community that no other music creation APP has. And so that’s what, that’s what always set us apart and you know, you go look at leader boards or any sort of discover section for an auto rapper, any other rap apps, you can just look at the numbers and you can tell like, you know, why we’ve had our success. But, but anyway, long way to answer smule is one. Uh, there’s other smaller apps that are kind of coming out of the woodwork that do like basically the exact same thing. We fought off apps like that for the past three years. We probably still will because you know what, when I started working on this, no one had an APP, no one had a rep creation or rap up and then people realized how big the market is and I was actually shocked that no one did it, so it’s not. It’s not really that surprising. We also just look at the music industry as a whole. We look at it like spotify, we look how people use soundcloud. We look at how people use garageband or splice or any of these platforms. That’s important for our power users, but yeah, I mean competitors like that’s tough. It’s not like instagram or snapchat and we’re constantly like looking over our shoulder have to be like, like we’re, we’re just heads down. We are ahead of the pack when it comes to rap creation apps and so we just keep building and key partners around like that’s what we’re focused on.

Jay Clouse: 00:40:51

What about musically

Seth Miller: 00:40:53

a, so that’s not a competitor. Yeah, I mean musically it’s been a huge inspiration for us for me from a design perspective, what they were able to do with just really simple videos in a great social network and get acquired for basically a billion dollars. That was awesome for I think social and consumer needed that, you know, I think it came at a crucial time when people thought it was dead, but yet this APP could get half of American teens using it like crazy. They’re not a competitor because the users don’t make music and frankly their user base as of now, I was like way younger than ours. They’re probably like more middle school and were kind of 17, 18 up there. Probably 13 to 17 or I know they are, but yeah, in terms of like they’re way more helpful than her. I guess. Like we always look at how they feature content. Their designs are always great. How they do their leader boards, how they do their tagging. We take a lot of inspiration from, from them.

Jay Clouse: 00:41:57

One last kind of hard question for me now that these are hard because you know, what numbers do you guys look at internally, what’s important for you to monitor? I’m not asking for specifics, but what’s important for you guys to monitor to see the health of rap chat and how things are growing.

Seth Miller: 00:42:12

Retention is probably the most important for any APP or even business I guess depending on your, your sector, but yeah, we are laser focused on retention and like can we get users to come back day over day, week over week, month over month. So, uh, focusing on daily, weekly, monthly retention, longterm retention, like that’s really important when you start modeling out like how you’re going to make money and yeah, what percent of your users you actually can make money. Uh, that’s the hardest thing in mobile apps is that retention is just really freaking hard and if you’re not facebook, instagram or snapchat, like it’s even. Yeah, it’s just, it’s, it’s the hardest thing. So we, we focus on that a lot and then outside of that deeper engagement numbers that are more relatable to what we do. So a raps uploaded number, a unique number of creators. Are we growing our creator base raps shared, are we growing the number of raps that are shared externally, these are all things that correlate directly with Mau and just like health of a company and are in our space.

Eric Hornung: 00:43:20

Looking at retention specifically over the last three years. I’m guessing you guys have tinkered with the APP and have come up with some ways that you thought would improve retention. Do you have any specific stories of big successes in the rap chat platform or maybe some failures that you had to reverse?

Seth Miller: 00:43:40

Definitely some successes. So when we read it, uh, we moved from a messaging app to a social network that greatly improved retention. That was a crazy shift. We introduced a whole new discover page with the contest and tags and leaderboard. That was another pretty big shift. Those are the two biggest. We’re getting ready to Redo the studio the summer and do some, some other really cool audio type features that we haven’t. We haven’t touched a studio in like three years, which is crazy. Um, we’re getting ready to Redo that. I think that’s going to have a good impact, but yeah, those two things, those two things were big, but actually, and I think most well mobile app entrepreneurs will tell you like it’s rarely do you have like a really big jump in retention off one feature. Like it’s a lot of really small tweaks that compound into just your, your retention curve rising. And so that’s, that’s what we try to focus on. You know, even something as simple as like upping the amount of people that opt into push notifications that can have a crazy impact. You know, like we, we send out notifications that when we have a contest or when we have new beats added, you know, we don’t spam people but it’s relevant. People want to know about if they’re not subscribed or they’re not have to tend to push notifications. They don’t get that. They lose that motivation to come back to the APP. And so like making small tweaks in how you ask people for push notification often or were you asked for it and the onboarding flow or if you do an onboarding at all. That all has crazy, crazy applications. And so like every other APP company, we’ve tinkered with that quite a bit and we’ve seen some crazy jumps. I mean from small things like that. Yeah, I mean there’s also things you do outside of the APP completely. Like how you communicate with users that you’re doing a contest or the winner of a contest or that there’s new beats that doesn’t even directly, you know, again, it’s not like a feature on your app is just this greater communication matrix that makes people want to come back to your app. You know,

Jay Clouse: 00:45:43

rap chat is the only app on my phone that I want my volume to be on when I receive a push notification. Can you talk about the sounds with your push notifications? What’s going on there? What’s the inspiration?

Seth Miller: 00:45:53

I gotta give a shout out to my business partner for that named Pat aka P Holla. But he uh, yeah, he’s an actual rapper. Producer, musician, unlike myself, but I think we were just in La one day and we were just shooting the shit and talking about features and brainstorming and we got to talking about like Adlibs what if you could do popular adlibs over tracks or the ability to do an ad lib track. And then he kind of ran with that. He’s like, also you should get them for push notifications to, you know, like it’s a quick like hey, like whatever, whatever it is. So we just did it.

Jay Clouse: 00:46:39

Also shout out to Pat p Holla for doing our intro tunes for this podcast, which we’re very excited about. Went to pat and I said, basically pat, you use HQ Trivia. And he was like, Yep. And I said, we’ve got to have the intro b hype. I need hype, I need a Woo. You know, we looked through his whole, his whole catalog of music and we said, this is the one, this is the track.

Seth Miller: 00:47:04

That’s great. I heard it sounded awesome. Very hype.

Jay Clouse: 00:47:07

Can you talk a little bit more about your team because you know, we did some research and I know the team that exists now isn’t your startup weekend team per se. So can you talk about your team and the evolution of that?

Seth Miller: 00:47:18

It’s definitely evolved. When I started at like OU it was related to a few guys, one of my best friends who we came up with the idea together and went through startup weekend, pitched it and one and then kind of built a team in Athens, Ohio. You know, pat got involved right away and I remember calling him up and same thing and being like, I got this rap app idea, I need beats. And he’s like, I got beats. And then he was really interested from there on out and just got more and more involved very early on. And so that was huge to have really a cofounder that knew music and knew. I’ve talked about. These two groups is kind of whole call. Like I can represent the people that want to freestyle and suck at rapping, im alright, but like generally not that great. And then pat and represent people that actually make music. So pat and I were, I mean, yeah, we were together, heads down on it, barrier early on, but you know as, as it evolved, it really like as I graduated, some of the existing team had, had jobs they had to go to and kind of fizzled out a look for a little bit and then really over the next two years it was pretty much just pat and I and like random people that would come along and want to work on it. And we’re always kinda like starving for tech talent. Neither of us could code. And then the summer I graduated, I was like this, I got to learn how to code because I can’t keep trying to get people to work for free. It just doesn’t, it’s not working and we haven’t found the right person. So I taught myself how to code. And so over the next two years I could actually code the updates. That was huge. That took a lot of pressure off everything. And

Jay Clouse: 00:49:01

that’s insane, Do you realize how crazy that is? And nobody does that.

Seth Miller: 00:49:06

Well. I’m sure people have done it, but

Eric Hornung: 00:49:08

how’d you do it?

Seth Miller: 00:49:08

Necessity out of necessity. Like. Yeah. I mean looking back at it and I can’t believe some of the products are. Some of the products we ship. Yeah. I just learned from Youtube what else? Like Google, I did have a mentor at the time that I was like advising that was really good ios developer and so he would help out when he was free and like mentoring me, but I mean it took me eight months to a year to really feel comfortable like shipping production level code, the parentheses, but at least something that would work and then I don’t know, it was crazy and I just got better and better and more comfortable and then we can do updates faster and then eventually finally found somebody better than me at a ios development that was, that was willing to work. We found the android developer that was willing to move out to San Francisco and live on our live in our living room for no pay, like on a Futon and pat had like a broken air mattress and I got an actual mattress but it was like an inch thick from Ikea. So like, yeah, really no mattress. See,

Jay Clouse: 00:50:14

I would love to see some comparative or some comparable to look at the number of users on a platform as coded by someone with less than a year of coding experience. I got to think you’re up there on the leaderboard

Seth Miller: 00:50:29

maybe. I mean that’d be cool, but I’m trying to think of anyone else who has let me know. I know there’s a bunch of people, but

Jay Clouse: 00:50:36

something you just touched on that I wanted to ask about earlier. You mentioned a mentor, so in the, in the Midwest, like I keep saying not many b to c companies here. What’s the role of mentorship for you as you run this company? Can you find mentors here? Are you talking to people elsewhere?

Jay Clouse: 00:50:52

Yeah, I mean I have, I have mentors here in the Midwest and then I have people outside of the midwest like San Francisco, La that are in this space. It’s really important too because like I said, honestly the investors don’t really mess with these type of companies right now and so like you need a mentor. Usually someone that has a. ideally someone has a ton of experience where we can go back and be like, look like this is crazy. Like I’ve talked to my mentor x who’s done y he sold a company for $100,000,000. He’s an Lpn, a big fund. Like he’s telling me this is crazy. Like you need somebody to tell you. It’s crazy because in the midwest there is. I guess I got to be careful how that but there’s just a lot of terms that are like shared across investors or a lot of norms that are just kind of like solidified, which is fine. Like I, I understand it, but like you have to have mentors outside of the midwest or even just outside of these circles that can tell you like, Yo, this is crazy. Like, this is how it’s gone down out west and you have like this day and on like we did because you don’t have a ton of experience in this area. Let us help you, help you, help us, you know, and figure out what makes sense for these type of investments, whether it’s terms or whether it’s just how you think about it, whether it’s how you think about the business model. We’re getting ready to bring on like a huge independent director and advisor that is going to have a lot of insight from their experience in the area at like a really big company and that’s gonna be a pretty seismic shift in how our board or investors think about what we’re doing. You know? So I think it’s especially if you’re a consumer company, like you gotta get somebody, it’s gonna be hard to find somebody in the midwest with consumer experience. First off, second off, you just need a fresh perspective that can bring fresh insights to the table.

Jay Clouse: 00:52:47

Besides being a consumer company, was there a challenge in communicating like a hip hop concept? Was that a complicating factor? Was it, was it just being a consumer company?

Seth Miller: 00:52:57

I think that’s always been a huge factor. Like I’ll never forget some of the first vc meetings, like I had some from here some elsewhere, but like people don’t understand how big and when I say people, I mean like older investors don’t understand how big hip hop is for the younger people in relevant and relevant. It’s the number one genre by far in the world it has been for for years. It’s continues to. It is literally like the rolling stones back when they grew up and so sometimes it’s helpful to explain it like okay, you remember like raise your hand who in this room is play guitar with their buddies when they were in high school and like you’ll probably get two or three out of five and it’s like alright this is the same thing. Like freestyling or listening to rap or just messing around is the same thing but just without guitars and with different types of instruments or just your voice and then says sometimes framing it like that helps. But yeah, I mean generally the hardest part of our pitch almost always if the set investor or partner isn’t familiar with hip hop, getting across how big hip hop is and getting it, like making the connection between like the massive market of hip hop and then the massive market that is social media and media creation, instagram, snapchat, musically like combining those two forces, like that’s why are some of our numbers like jump off the charts, like it just makes sense, you know. And so like we, we really have to drive that home which sometimes is a pain in the butt. Like sometimes that also like people’s eyes open up really big.

Eric Hornung: 00:54:34

So hip hop is at its core, a African American heritage in the United States. It started in that culture. Have you ever had any awkward situations when you were pitching for the, so you can’t see, seth is not African American and he’s Caucasian. Have you had anything like that? Is there any type of ethnicity bias?

Seth Miller: 00:54:58

Um, no I haven’t picked up on it. Like I haven’t noticed. I’m sure there is, but like it hasn’t been strong enough or like I haven’t done enough where I felt like uncomfortable or yeah, or I thought it would sway a decision or anything like that for us. Again, it’s just about like making it easy for anyone to create music and like I think even hip hop as a genre has expanded to kind of all cultures. Like you know, even in London and South Africa there’s all these different blends of, of hip hop now. So, so no I haven’t picked up on it because I think we are very genuine about like what we’re doing and why. Like there is the saying in hip hop and there is this thing a lot of black people think is that white people are here to vulture the culture like culture vultures, right? Like that that is a thing that’s a term and we are the opposite and are really passionate on the opposite front where one, we haven’t even made a dollar like real. I mean we have but realistically we haven’t made a dollar. Again, it’s about just like helping people, like giving everyone these opportunities, like I talked about, okay, this is a platform, this is a way to create music. All we’re trying to do is connect more people around the world will make it easier to create music and it’s for the good of the culture as opposed to like introducing a product that really does cannibalize and take advantage of those and the culture. And another thing that helps with my business partner grew up rapping with a bunch of different cultures and a bunch of different people and like he’s lived like the upcoming rapper game too. And so like in a way he does have credibility to stand on. Like yes, I’ve handed out mixed tapes, I’ve created music in my room, I’ve had to hustle on soundcloud and I’ve had some success on youtube. Like things like that that also helps alleviate any sort of like you’re just like to, you know, nerdy white guys that want to create this app and take advantage of a culture that you don’t know anything about. It know, like we live and breathe and again, like we’re, we’re pretty embedded in view ourselves as like advancing hip hop culture, uh, which you, you always have to remember the roots are African American and you do have to understand that and respect that and that, that’s something we’re always cognizant too.

Jay Clouse: 00:57:19

Such an interesting difficult conversation to have when it comes to diversity inclusion all the time. You know, I was watching snl last night and Chadwick Bozeman was the host, the guy who’s the lead in Black Panther and they had a little sketch where they have people coming out of the Black Panther movie and it’s like a couple of white guys and they come out and I haven’t seen Black Panther, but they do this some sort of gesture that is part of like unity and like Brotherhood in Black Panther and they do it and then they have a couple of the, uh, some of the actors from snl who are black and they just do this thing like, ah, something about what you just did there just didn’t seem right. Like, we agree that we should be able to share this. But something about that just didn’t seem right, you know, and you know, with, with get out last year being this blockbuster hit and the country being as divided as ever, this is such a relevant topic, you know, like Eric, if I would have phrased that same question, I would have been like what’s the pc way to put this?

Eric Hornung: 00:58:21

But did i not do that. Did I not do that at all?

Jay Clouse: 00:58:23

It was very pc. It was very pc, but you know like hip hop predominantly is black. So it’s like a question that we can’t ignore. You know, let’s, let’s talk about this because it’s probably something you guys faced. But at the end of the day, you know, it’s, it’s about making music people enjoy. It’s about giving, like you said, seth people, the tools to create music that’s in a genre, whether it’s dominated by one group of people or not. But you know, it’s, it’s such a interesting and difficult topic to bring up because there’s so much involved and you know, at the end of the day we’re trying to show respect all the way around.

Seth Miller: 00:59:00

For Sure. And I think it’s even harder for like, it’s hard to talk about it because you don’t know how to frame certain terms or conversation. And again, we, I think we’re all on the same page and there’s no one that’s a culture vulture. It’s tough. It’s tough, but like has to be talked about

Jay Clouse: 00:59:17

in startups, in technology, we recognize that having diversity to inclusion strengthens businesses and it’s so hard to talk about that and create a plan for doing that without looking systemically at how do we expand the talent pool because you don’t want to be tokenizing or targeting. And I’m not, I’m not talking just African Americans. I’m not talking just black people. I’m talking to all races, right? It’s, it’s difficult, but it’s, you know, it’s, it’s something that we got to keep talking about and acknowledge and work towards being better. And it’s going to make our companies better. It’s going to make our society better. Sorry, went on a little bit of a tangent. Maybe it’s the second scotch songs rocks. Eric.

Eric Hornung: 00:59:59

Oh, that’s okay. Because our podcast, and we’ll get to our final question here in a second, but our podcast is about finding upside outside of Silicon Valley, but that is just because silicon valley’s the majority of venture capital, so in a way we’re kind of always looking at the minority players, the people who are fighting a little bit harder and I think that it’s definitely a relevant conversation and it’s a tough conversation regardless of what industry you’re in, whether it’s race or dollars or whatever. Whenever you’re coming from the smaller perspective, there’s always going to be tough conversations to have and I’m really happy that you answered that the way you did and we had a pretty good conversation about it. I think even if Jay has had, is that another glass of Scotch in your hand? Jay

Jay Clouse: 01:00:42

Second Scotch. They a long day. I earned it.

Eric Hornung: 01:00:47

Alright. So our final question, Jay, do you want to take it

Jay Clouse: 01:00:53

A couple of questions. Is there anything stuff that we should have asked that we did not ask that you wanted to touch on or talk about?

Seth Miller: 01:00:53

Not off the top of my head, no.

Jay Clouse: 01:01:01

All right, so after this our listeners are fired up. They want to get into rap chat, they want to make some of their own apps. Where can they find more about you or the company and B, is there any type of upside challenge we can do?

Seth Miller: 01:01:21

OK, just google rap chat or go to your APP store and search Rap Chat and it will be available on both Ios and android. There’s also a rap name generator that we introduced in December last year where you can put in your name and it’ll generate a cool rap name for you, so that is a lot of fun and I’m actually going to pull it up and see if I can get one for you Jay because what was your rap name?

Jay Clouse: 01:01:49

It’s been a couple of things. When I was working at a healthcare company, my rap name was hippa compliant, which I think is a great rap name. First of all though, lately I’ve got my current name is unreal. I just registered in an account for upside and there may or may not be an Easter egg at the end of this episode where Eric and I share a couple of our own raps.

Seth Miller: 01:02:09

Love it, love it. Leak the leak, Frosty jay profit

Jay Clouse: 01:02:16

frosty day profit is not bad.

Seth Miller: 01:02:20

Not terrible No, I think we got an update or an algorithm because some of these are getting really long, which means it’s been used mean it’s been used over a million tons.

Jay Clouse: 01:02:27

Its Going to be hard to beat Hipaa compliant. I felt pretty good about hipaa compliant.

Seth Miller: 01:02:33

so yeah. All right. Google rap chat. If you drop a rap and tag it with upside will be able to send over a list and maybe we can get the tag, try and bang or something. Or maybe you guys can get the tag trending a that we’ll send over a list of wraps and you guys can tweet it out and there’s some good ones. We’ll tweet it out from our account like we normally do. So we’re also rap chat app on twitter and on instagram and we’re very. We’re like twitter’s definitely falls into where that’s where all our announcements are and we also tweet out a lot of funny like rap videos. So

Jay Clouse: 01:03:05

good stuff man. Well said. Thanks for joining us. Looking forward to see how rap chat grows in the future and I’ll be back in the APP soon, man.

Seth Miller: 01:03:12

All right, appreciate it guys. It was fun.

Jay Clouse: 01:03:19

All Eric, we just talked to Seth Miller, Co, founder and CEO of rap chat. What stood out to you and also can you introduce what we’re about to do here?

Eric Hornung: 01:03:28

What we’re going to do here is a very simplified verbal deal memo. We’re going to call it a deal memo. It’s a version of a deal memo, but what a deal memo is, is it as a way after you review a company, you do your research and you do an interview to write out all of the things you like about the company, all the things you don’t like about the company. You look at the current market and there’s a lot of other things that go into it, but for our purposes we want to look at four main questions and see if we can get a firm understanding and a good feeling behind these four. So they are. How committed is this founder? What are this founder’s chances of success both in this business and in life? What does winning look like in terms of my revenue or in terms of revenue and my return or our return in this case. And why has this founder chosen this business? So Jay looking and hearing seth, what do you think is kind of the thing that stands out to you? Because I know you asked me that, but I’m, I’m turning the question back on you. I want you to start us off.

Jay Clouse: 01:04:33

That’s fine. Take a minute to think. I’ll, I’ll say I’ll take.

Eric Hornung: 01:04:37

There’s a lot I want to let it, you know, just kind of drip down.

Jay Clouse: 01:04:40

So to me what’s always stood out about seth is that, you know, we, we talk on this podcast as we just mentioned about doing things in what some people would see as the hard way and going the harder path. He’s got a B to c company and he was in California. He went through 500 startups. So one of the most premier accelerators out there. And he came back to Columbus to build this company. And I know from living here that this is not the friendliest place to try to raise capital from investors for a b to c company and not only is he doing that and did he do it successfully. I don’t have a of another company, anything like rap chat, anything in the B to c space that’s done that here, but he made that first convertible note from 500 startups and what she received at the end of 2015 stretch until the middle of 2017. Maybe even later before he closed this million dollar series a. again, this is like super capital efficient. He came back to live with his parents. There are companies that were in his batch in 500 startups that raised their series a over a year ago and Ron a series b. Now he’s. He’s proven that he can be capital efficient while growing the company and that’s not even touching on the fact which he just kind of glossed over. That’s always been remarkable to me. He taught himself how to code native mobile to build the first version of this. You don’t hear that. You don’t meet people who did that and the people who tried weren’t able to actually build a product people want and then that people use that didn’t break. That’s what really stood out to me. There’s a lot more to say about that, but let’s get your initial thoughts.

Eric Hornung: 01:06:22

Yeah. The coding, the teaching yourself how to do it and then having millions of people or millions of uploads of a raps on it is just like, it’s like mind bending stuff. But the thing that really stood out to me is something we didn’t actually talk about that much. Well we did indirectly, but it’s the community and how strong the community is on the platform. Even though it’s not the largest social network, the engagement is through the roof and that is hard to do. The niche social network is kind of like a thing now. Um, so you have social networks are focused around real estate, you have social networks focused around really anything, right? But this, this one around rap and creating rap music and hip hop music seems to have a really deep hold on users. And I think it is partially due or maybe primarily due to the intense focus on retention by both the founders

Jay Clouse: 01:07:26

and what’s got be kind of frustrating and where we still need to move the needle here outside of Silicon Valley is those numbers, that engagement, that usage, that retention, those numbers should speak for themselves. Even for investors who haven’t seen anything like this before, you should be able to take those numbers and plug them in to a corollary of something out west that’s done something similar and understand the opportunity in front of you with this. Obviously the story for rap chat is yet to be told the ultimate outcome, but for an average user to spend 15 plus minutes a day in this application, that should tell you enough. Fifteen minutes a day of somebodies intention attention, which is the most precious and rare resource any of us have, is a huge testament. What did he say? The only app that beats that is facebook and Instagram, not, not bad company to be in.

Eric Hornung: 01:08:18

Yeah, absolutely. What were some of the areas that you were like, I’m still a little hesitant to fully grasp and fully embrace.

Jay Clouse: 01:08:28

I’m, I’m curious, where are they will ultimately go with this model because from the direction of revenue coming from in APP purchases, which needs to come from a small percentage of users, does it really need to be a full out user growth model or are there users, these semi professional musicians, creators who want to use this tool to create their art? You know, should this be something more akin to the adobe creative cloud where you pay a subscription and that’s the number you care about, you care about number of paid subscribers. Do you need to put more focus and building tools for them and acquiring those users than just acquiring your, your everyday bad rapper? Like, you or I, what’d you think? I haven’t heard your rep

Eric Hornung: 01:09:19

yet, so I don’t know if your bad or if you’re terrible. So you might have been giving yourself a little bit of leeway there.

Jay Clouse: 01:09:25

I can tell you that my best rap I ever made was for a New Year’s party in Twenty 15 and I actually have most of it memorized. It was like New Year’s Eve, 2015 year of making friends, a year of making green. Maybe a got you regret. Have you got something to forget? Whatever your reason for coming here. Let’s get together for the new year. 20 16 is going to be nuts. I’m telling you now, hold onto your butts. And so as a New York New Year’s Party, I’m losing my. Don’t get me started. We got three or four bands playing some tunes. We got three or four coolers for the booze. Don’t expect to drink hot cocoa in this house. We drink four loco. Wear something fancy. Bring your best dance moves. You can get dancy, wear something nice. We’re going to get fancy. Something like that. Pretty good. But that was not.

Eric Hornung: 01:10:19

It was free styling it at the end though. You didn’t, you didn’t rap anymore. You just started saying it.

Jay Clouse: 01:10:24

I don’t know if I rapped it in the first place, but uh, I took that. I saved that file and this is the best party you’ve ever thrown. And as you know, I’m not kidding. It was because I took this, I took this, I took the audio, I took a bunch of just random videos from my camera roll, I toss it into I movie and I made a film out of it. I think if you search Vimeo, n y, e underscore 2015 underscore hype, and maybe throw my name on there, you might find this video

Eric Hornung: 01:10:56

that’s actually really interesting because if they do decide to go to the creative cloud suite, uh, getting back to rap chat for a second, your, your thing sounds amazing, but if the audience finds that, please post to twitter. But as I’m in the mindset of analyzing this company, their potential.

Jay Clouse: 01:11:15

Sorry. Yes, that’s what we’re here for.

Eric Hornung: 01:11:17

If they do go to the cloud suite and they decide to be a professional studio type thing for rappers who wants to make it up the pipeline, um, while still opening the funnel at the top for people to get in. Music videos are pretty hot. So it would be pretty cool if they could do something with that as well, maybe a little bit better than your pictures.

Jay Clouse: 01:11:36

Music videos are hot for independent musicians. One of the easiest ways or shortest paths to getting self sufficient income is licensing your music. And so if they use this tool to create an obviously there’s some legal implication of whether the beatsthey’re using are owned by them are able to be used by them. Let’s assume they’re there buying some premium beats that they can use. If you create music that you licensed. That is how a lot of musicians I know pay for being a full time musician while they build up some of their other music as they licensed it to commercials, TV shows, movies.

Eric Hornung: 01:12:11

That’s pretty cool. So we asked about my concern. So sorry we got out, we got a little sidetrack there. Jay, through a new years party in the middle of our deal memo. But one thing I’m interested about and I asked about was the record labels and their relationship with them. It seems like they have some really great relationships there and they’ve definitely dug themselves a little bit of a relationship mode and as we discussed an interview, I’m hesitant to believe that they’re utilizing that, those relationships to their full potential. Maybe it’s strategic or maybe it’s just a bit of fear, but it’s one of the. It’s one of the two and I think that it’s. It’s an untapped resource at this point.

Jay Clouse: 01:12:45

I would agree and you know, this is the type of business that I look at and I say if you get the right influencers behind this, talking about rap chat and driving their audiences into rap chat, this business transforms overnight and I think part of what has slowed them down from doing that a, it’s not like it’s you snap your fingers and you form relationships with influencers be. I know that they have been looking at this premium beat in app purchase model for a while and that was a big part of their fundraise. It was a big focus, but fundraising itself was a big focus and until they could do that, they couldn’t dig into that. I think they were holding back a little bit to build some that capability out until they had cash and they’re waiting to turn on some of the marketing and influencers until they had a product that people could go in and buy, you know?

Eric Hornung: 01:13:34

Yeah, absolutely. So kind of pivoting real quick to the founder himself, and I know you started off on this, but when we’re looking at these questions, there is no doubt in my mind that seth is a committed founder. He took eight to 12 months living at home teaching himself how to code going broke in San Francisco, which I just, I, I can’t even imagine going broke in San Francisco because I feel like that just has to be like the worst city to be broken because you can’t leave it like that. Yeah. But I, I think that he could not be more committed. I am a little bit miffed that we didn’t get to hear like the real why. Like why did he stick through this team that kind of left for different jobs? Why did he stick through his first job and just run with this idea? Maybe he’s like a huge rap, a holic and we didn’t really get to that, but I, I just, I couldn’t make that connection. Why this idea was so seth that it couldn’t be anybody else’s.

Jay Clouse: 01:14:33

You’re right. We should have dug into that more and all I can do is speculate. Uh, it could also be that, you know, as business partner, pat is driving a lot of this, but you know, a why could be. It’s, it’s clear to me that seth understands the business potential, the actual winning potential of this business. Yeah, that’s enough to drive a lot of founders. But, you know, I’m like, you, I don’t, I don’t know if I got the I live and breathe hip hop. It might be, I didn’t get that from the interview, but I didn’t not get that from the interview. So I’m like, you, we could have dug into that a little bit more, but for the sheer fact that he did come back, uh, to extend his own runway, to keep this going. And then he went through over a year of fundraising to get there, working on it, building it the entire time. I mean, think about, think about this guy who was taught himself how to code. He’s an engineer, let’s call it, let’s say he has an engineering skill set. The opportunity cost of being a native mobile engineer, even in Ohio on an annualized basis is over six figures. So to me, for him to forego that revenue from a salary to do this, speaks to his commitment and it speaks to some underlying motivation that’s, that’s bigger than, you know, I wanna I wanna just be a CEO of a company.

Eric Hornung: 01:15:55

Absolutely. Well, I mean, you know, he’s a Cleveland Fan, so he loves, he loves to grind it out. That’s what I got out of it. Weve grinding it out for years. Man.

Jay Clouse: 01:16:04

This is the year. This is the year.

Eric Hornung: 01:16:08

Yeah. So what about, what about competitors? That the competitive landscape was interesting to me. It seemed to be, at least in his eyes, primarily dominated by just one conglomerate.

Jay Clouse: 01:16:18

Yeah. From, from what he could drive as the closest corollary. You know, I think part of our assessment, the beginning of this interview is correct from the standpoint of their competitors aren’t just other music creation apps, their competitors are these social networks that are taking up people’s time and attention. Would you agree?

Eric Hornung: 01:16:35

I would agree a hundred percent,

Jay Clouse: 01:16:36

so I think he’s looking at is are their competitors doing exactly what we’re doing and it sounds like over the years there’s been some copycats or some, some companies who are trying to play in a similar space, but with the age they have in the market, the retention, they have the user growth or having 10 percent month over month or year over year. I think he, I think he meant month over month. That’s pretty good. That gives them some staying power. There are demographic as hard to serve generally, but you know, they’re competitors. Like I said, they’re, if they’re really competing for attention and they don’t need to do it from an advertising standpoint with the model they’re doing now, but they’re fighting against the likes of facebook, instagram and twitter. Snapchat,

Eric Hornung: 01:17:16

yeah. We, uh, I think it was 10 x over two years was the number, but we got a little sidetracked and a little long winded not sidetracked. I take that word back. We got a little deep into a topic that is maybe more social than it is commercial. And that took us a little over. So one thing we didn’t get to, I don’t think we need to go back into that topic, but one thing that we didn’t get to touch on is what is the future of this look like? Right? Because when I look at what is our pretend, what does potential revenue in a deal like this and what is a potential 10 years down the road product looked like I’m still a little limited in the vision I’d not. And this is, this is more of a critique of us and it is of the business at all and our ability to effectively ask the correct questions, which we’re not always going to do.

Jay Clouse: 01:18:09

So it’s, it’s hard to cover a lot of ground in an hour. You know, we, we want to know about the product, we want to know about the landscape. The question I think you’re alluding to is, what is the longterm vision? What is an exit look like here?

Eric Hornung: 01:18:22

So does it go, does it extend beyond rap? Is it, is it more than that? And yes, that is exactly what I’m asking and talking about and it’s more of a comment than a question, but I think that it’s something we can do better next time. That’s what do you think?

Jay Clouse: 01:18:37

That’s a good question and I think that was a super precedent thought you had in the upfront of does this need to be rap chat or can it be the corollary of rap genius, which just became genius and could it be that for country music, could it be that for, you know, pop music and I think you’re right, he didn’t, he didn’t speak to that, but I think there is an opportunity there because he’s. What he did allude to is that he’s trying to give the tools to sort of democratize the creation of music. Right? And even when we look at the competitive landscape and some of the consolidation that’s happened in music apps, you know, as we talked about the upfront Shizam being bought by $400,000,000 musically being bought for $800, million dollars. I think there’s, I think the play is ultimately acquisition or exit. He even alluded to some point, you know, the model is users, users, users, cell. Let someone who’s figured out monitization figure that out with your user base and you know, I think they’re, I think they’re in that zone. It’s going to take a little bit of time. I don’t know the user numbers on Shizam or musically when they were bought smule sounds like it’s a conglomerate itself, you know, what are you thinking?

Eric Hornung: 01:19:45

Yeah, I think this is definitely a acquisition exit. What the multiple is what the. That’s all going to depend on how long they take to get acquired and how they can keep the growth, engagement retention up and whether they can expand horizontally or they stay vertical and become the number one source for the future rap. So the chance the rappers go through there, the everyone goes through there before they get picked up by a record label and that’s how you get spotted. Um, they essentially become the, Oh man, why am I going to blank on this? What’s the, the younger kids basketball league that everyone has to play in Aau, Aau.

Jay Clouse: 01:20:24

That sounds familiar.

Eric Hornung: 01:20:26

Yeah. So it’s a view that every star basketball player plays in at the beginning. It’s the pipeline, right? Um, is this the rap pipeline? If that’s, if that’s what it becomes, then it’s, I think it’s much bigger and it might be able to stand on its own or be something like a Hulu with a joint venture with all the major record labels. I’m not sure.

Jay Clouse: 01:20:45

And that was an interesting question that it seemed like he hadn’t quite decided yet, you know, is the value here recognizing and then representing some of these artists that are up and coming or is the value of the fact that artists are being recognized and that drives user growth? It kind of looks at two different business models, but the music industry is super interesting in terms of can you make money as a label on one hand, you know, these gatekeepers are kind of falling down. A lot of industries, book publishing, writing generally is crashing, whereas the music industry is actually retained some of its value because they have rights to the entire back catalog that’s existed and uh, you know, there’s still some profitability in music, but it’s got to be tough to just be an up and coming label at this point. Most of the, most of the powers that be are the powers at be they’ve got the back catalogs and they have existed. So I agree. That’s interesting. And he has a, an interesting crossroads there. I don’t know what that means in terms of our return and what is possible with either one of those models specifically.

Eric Hornung: 01:21:53

Yeah. And just to hypothecate a little bit more, only because I’ve been thinking about this a lot lately. A spotify just went public and relating spotify and Netflix is actually very hard, although they seem like very similar models because Netflix was able to leverage and pretty much operated at a loss on the movie industry until they had enough cash in the door to start creating their own originals and then eventually that’ll get rid of movies, but they were allowed to keep tv shows. Right? So third party TV shows were like, yeah, we don’t care if you have your own tv shows were on stations with TV shows all the time, but movies cared in the music industry and so a lot more consolidated and you have full artists that will pull off who are driving so much of spotify as traffic and user base growth. So someone like spotify bought this. Right? And they said, look, we’re not getting. We’re not competing with Taylor swift or Kanye west or anything like that. Right. We’re not, we’re not like hiring independent artists here. We’re just. This is our like little pipeline that we look at and it’s. It probably won’t ever get any like play because you guys have the better pipelines. You have the of the priority and they could play it like that. So I’ve been about the curious ways that spotify can get into their own content generation or their own essentially becoming in their own record label and this seems like as a strategic acquisition, if they could expand this across multiple genres, it might be one that is pretty interesting to them.

Jay Clouse: 01:23:20

Even spotify is such an interesting company to think about because to my knowledge they’re not a highly profitable company and you know, neither was Amazon for a long time, so maybe that’s the wrong metric to look at, but they pay so much money. It’s these record labels to keep that catalog on their what is their play, what, what is the longterm value of a spotify? And they’ve been at it for how many years a decade? So yeah, it’s tough to look at spotify and say this is, this is the model to look at too. It’s anything and B to c like this and this is why midwest investors are so conservative. It’s hard to look at and to understand and to really quantify because even the winners in this market are new. They’re less than 20 years old and uh, there’s so few of them. It’s hard for people to look at this and say, I understand the B to c model and this looks like that and I know it’s going to be successful because there’s just not the longitudinal history and the, the cases to look at. So Eric put you on the spot, putting on your investor hat. How do you think about companies like this? What’s important to you? Do you, do you think about taking a chance or what are you looking at for six to 18 months from now out of, out of rap chat to make this something that you’re compelled by?

Eric Hornung: 01:24:39

So I think that the model of looking at a BDC company in general and taking it on that user growth trajectory and advertising trajectory is definitely something that, I mean, you, you have to consider, especially the founders are like, they have it in their minds. Um, I think it’s all about being found. They’re founder friendly as an investor. But I mean, you want to keep your investors safe, but you need to be a little founder, founder friendly. The second part of that question was, where do I see rap chat in six to 18 months and that hinges so much on what they do with this business model and how they either married the two of these business models together in a way that is, they’re going to have to prioritize one over the other if they want to really accelerate growth and whether that’s growth of revenue or growth of users, then that’s a decision they’re going to have to make. But I don’t think you can continue forever in limbo between two business models unless you are being aggressively funded. Um, so in six to 18 months, I expect rap Chat’s growth to continue. I expect their engagement or retention to continue and I expect them to have leaned one way or the other and their business model not, not cut off one or the other, just just leaned on one or the other.

Jay Clouse: 01:25:55

I would agree. So that’s the type of founder that I think he knows his product. I think he’s knows his market, he knows it much better than I do. I trust seth to figure that out and guide the ship. I would love to hear more certainty from seth on which direction he’s going and I think we just caught them at a time where he’s thinking about these things a lot in and in considering, but you know, once he decides the direction he’s going, I think they will go full steam ahead and do that. What’s interesting to me or what would have been interesting to ask that I had a note for and just didn’t do was if he looks at the Pier B to c side and they user growth side, what is their current customer acquisition and cost and their current customer acquisition strategy and how does that compare to the average lifetime value. Even if that is spread across all their users. Mostly coming from the power users because that helps me as an investor no matter where I am, understand this opportunity a little bit better and understand my personal upside a little bit better.

Eric Hornung: 01:26:54

That’s a great question.

Jay Clouse: 01:26:55

Anything else that I missed that we wanted to talk about?

Eric Hornung: 01:26:58

No, that was. That was great and I hope everyone enjoyed it. And who’s listening?

Jay Clouse: 01:27:02

Yeah. I hope you guys listen through the end of our, our outro here. We’ve got a disclaimer that we’d like you to listen through as well. Eric and I are not professional investors and this is not investment advice, so give that a listen, but at the end if you stick through the end of that disclaimer, you will hear some Easter eggs of Eric and I trying out the rap chat platform, so please stick around. Thanks for listening

Eric Hornung: 01:27:28

People are going nuts in the background. It’s wild.

Jay Clouse: 01:27:31

People are talking about it. I’ll say that people are talking about it. So thanks for listening guys. Uh, if you love our show, please subscribe and leave us a rating on itunes. Helps us out a ton. If there’s anything we’re missing, and really, truly, we’d love to hear your take on this one. This is outside of our own expertise. We’d love to hear your thoughts. Tweet at us @upsidefm or email us Hello@upside.FM, and if you know a guest who would be good on our show, please email or tweeted us as well. Eric, thanks for taking the time late on a Tuesday night to record this interview. We’re exhausted,

Eric Hornung: 01:28:07

we are exhausted and it was great talking to
you, Jay. Great talking to seth, later

Jay Clouse: 01:28:12

See You guys, next time. That’s all for this week. Thanks for listening. We’d love to hear your thoughts on today’s guest, so shoot us an email at hello@upside.FM, or find us on twitter @upsideFM will be back here next week at the same time talking to another founder and our quest to find upside outside of Silicon Valley. If you or someone you know would make a good guest for our show, please email us or find us on twitter and let us know and if you love our show, please leave us a review on itunes. That goes a long way in helping us spread the word and continue to help bring high quality guests to the show. Eric and I decided there were a couple things we wanted to share with you at the end of the podcast, and so here we go, Eric Hornung and Jay Klaus or the founding parties of the upside podcast. At the time of this recording, we do not own equity or other financial interest in the companies which appear on this show. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinions of Duff and Phelps Llc and its affiliates on your collective llc and its affiliates or any entity which employ us. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. We have not considered your specific financial situation nor provided any investment advice on this show. Thanks for listening and we’ll talk to you next week.

Eric Hornung: 01:30:12

upside outside, feelin like a 90s jam, hands up side to side, Yeah were like a 90s jam 20 somethin boys to men, Pixie dust up on the scene, flying out of never land, Gotta hold up and acknowledge the fact that this whole jam was made on Rap Chat. Shout out to seth and shout out to pat as my dude from my ?. We was bumpin the track in college. No Dollas we aint talking about that upside outside. I can’t sing but I tried upside outside, i cant sing but i tried, upside outside, upside outside, but let me explain what we’re doing finding dope founders and were talkin to em. Were not thug, we have no pac influence, like them, were growin too just, maybe not as fast and maybe not as well, theyre pre series a and were.. well, findin upside outside of the valley. that doesn’t mean we are opposed to Cali, scales have been tiltin not favorin the best, I am about to endorse rise of the rest?

Jay Clouse: 01:31:03

upside. Let me take a minute to talk about the pod. No love outside the valley felt kinda odd. We’re here to shine a light outside of the coasts. The folks who never bragged, the ones who never boast, we know they kick ass and still we tip our hat, spinning up a pod and makin a rap chat. subscribe to upside on itunes. Five stars.