Investor Stories 14: Why I Invested (O’Donnell, Blank, Day)

Nick: On today’s Investors’ Stories segment, we have Charlie O’Donnell of Brooklyn Bridge Ventures. Charlie, can you walk us through a situation where you did decide to invest, what the key factors where that led you to yes, and how that investment has worked out so far?Charlie: Sure. I am a seed investor in a company called Canary, which is a connected home security device. And the company was pre-Kickstarter. They have the Xerox problem. It was a pre-Indiegogo presale. So it was just a couple of team members and a PowerPoint with their designs, and it was a lot of risk. And it was a big market, and they had not built a prototype yet and I wound up leading their seed round. And that was basically “There are 90 million homes that don’t have security.” This makes sense to me intuitively as a consumer, where as an apartment dweller, you know, I’m not gonna install ADT.A couple other devices on the market—Dropcam. But Dropcam’s not really sold as a security solution, it’s more sold as sort of a nanny cam. And the problem still persists. And so I was willing to back that team. Not only that, I’ve backed a few hardware plays. I’m an investor in Ringly, an investor in goTenna. And so hardware doesn’t scare me too much, so I was willing to make the bet that they could build this thing.And as it turns out, the hardware, once you figure out the manufacturing and find a good manufacturing partner, the hardware’s not necessarily the hardest part of the thing. Making sure it’s financed appropriately, not running out of money, and all that sort of stuff. But in Canary’s case, the software is incredibly complicated and we had the hardware back in August. It was only February of this year, March, that we felt comfortable shipping it out to backers. Because the combination that really is the hard part.And I like the team in the sense that I felt like they had an appropriate background. Adam started a non-profit related to neighborhood watches and worked in cyber security at a bank, and what just a really thoughtful, mature guy about how consumers think about personal safety. And he seemed like somebody who knew what he knew but also I could work with. He was willing to take feedback and was what he didn’t know about. And so I made that investment.

They wound up setting the record on Indiegogo. At the time, almost two million dollars of sales, and they wound up getting a ten million dollar round of financing from Kohsla Ventures jut about five months later, actually, a significant step up from where I invested in it before the pre-sale. And that team is now eighty-five people, give or take, and you can buy a Canary in a BestBuy, on Amazon, in a Verizon store, and it’s a terrific product. It works and I love it. I had painters working in my hallway and I don’t have to worry about “Did I lock the door? Did I not lock the door?” because if anybody walks into my apartment, I’m gonna know it from my Canary.

Nick: Speaking of distribution, you mentioned BestBuy and Verizon and such, in hardware spaces, especially consumer channel can be a whole different challenge than maybe in the software side of things. So, does that enter sort of your evaluation and your diligence process, how the startup and the founder team is gonna go about distribution?

Charlie: Yeah, I mean, there’s pretty standard marketing and distribution practices, right. So, “How are you gonna market?” “Well, here are the channels, and here’s what I learned at business school, and we’re gonna execute that marketing.” I think-I’m not sure there’s anybody I’ve seen who has a kind of proprietary special angle on distribution and marketing. What you really care about there is that team has thought about it and thoughtfully considered it and understood the risks around it and the cost. And if they’re appropriately resourced. If they’re gonna get carried in retail, well, you know, is there anybody on your team who struck one of those deals? And what is that gonna do to your economics if you’re gonna get carried in retail, and here’s the plan around it.

And so I think it’s more of a blocking and tackling. It’s not a special, but every channel comes with its own challenges and you want a team to really thoroughly research, understand, and know how to appropriately resource those channels.
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Nick: For today’s investor story segment, we have Steve Blank. Steve, can you walk us through a situation where you did decide to invest, what the key factors were that lead you to yes, and how that investment has worked out so far?
Steve: I tend to invest in my students and cheer them on, so, unlike other investors who are doing this to keep score for all the right reasons, I tend to invest in students who have a combination of change the world passion, relentless tenacious, and I think they’re gonna have an impact. My favorite example is a company called Neon, which is a content recognition company. Came out of Carnegie Mellon, and was one of our original iCore teams. And so Sophie Lebrecht is the CEO and just an incredible CEO and an incredible startup. That one is incredibly fun watching.
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Nick: On today’s special segment, we have Rob Day of Black Coral Capital. Rob, can you walk us through a situation where you did decide to invest, what the key factors were that led you to yes, and how that investment has worked out so far?

Rob: To answer that, you really gotta understand how our firm does things differently than most venture capitalists do.

Nick: Sure.

Rob: We have a lot of flexibility and we also share a lot about manager teams and execution. So I’m gonna give you a specific answer to your question, but you have to understand the context of why it would’ve been compelling to us and not others. I mentioned my colleague, Christian, who’s our management director. His background is not only as management, but also he brings this specific methodology for assessing managing teams. Their core skills and gaps. And that was one of the things that he and I hit it off one, what I just really strongly believed that in these sectors, I’d gonna come down to execute more than any on particular package or one particular technical idea or something like that.

And so a few years back, we came upon a team here in Boston that was doing home energy services. Pretty small group, about ten guys, two trucks, show up at your home, doing an air sealing, energy audit, help you do insulation. And a lot of VCs, for very good reason, wouldn’t take a meeting with them because it’s like “Where’s your secret sauce? What are you doing that different than anybody else?” and what we saw was a really high execution team that had a strong vision for how they wanted to actually change how energy efficiency and energy solutions scaled up in the residential sector.

Residential energy solutions has always been highly, highly fragmented. There’s just a world of things that home owners should do, if you look at the payback periods over life, that they just don’t do. And there’s a bunch of reasons good and bad that homeowners don’t do it. And that’s what these guys wanted to solve. What I recognized was they wanted to become a new channel for energy solutions.

And meanwhile, I had already spent several years getting hit up by very smart entrepreneurs with a widget for a solution for the home. Something where they’d say “Hey, look at this payback period, every homeowner should want this.” And I would say “Yeah, that makes sense, on paper they should. How are you actually gonna get it into thousands of homes?” and the entrepreneur would scratch their heads and say “Well…we’ll work with utilities.” Well, anybody who’s actually tried to sell things using utility as your channel partner, you need tests of what—a lot of brain damage that’s gonna use.

Or they would say “We’re gonna sell it through BestBuy or through Amazon.” It’s like, okay, they’re just gonna go [inaudible], right, so it’s still unclear how you’re gonna get your profitability. What we really liked about Next Step Living was they were gonna show up in people’s homes as a trusted energy advisor. They were gonna do an analyses of the home, and be able to present a fact based set of solutions, some of which they did, some of which they didn’t, and be able to say “Here are the things that you should be thinking about for your home.”

And some of that, people may not be thinking about. Like “Okay, I want to put solar on my roof.” Well, in a home that was built in 1950s and it’s very leaky, that’s not where you should start. You should actually make sure that your home is efficient, and then, yeah, also think about solar on your roof if you have the right conditions. Or if you don’t have the right conditions, you know that you can now do community solar, which is essentially virtual panels on your roof, although they’re on a ground mounted solar farm somewhere far away.

And that’s what these guys at Next Step Living had a vision to do, and we really liked it. So we backed them as a Series A investor. That company’s grown to now be tens of millions of dollars of annual revenue. They show up in tens of thousands of homes per year as a trust energy advisor. They continue to build out that suite of offerings that they can provide to homeowners. They’re in multiple states out, and for their growth equity along the way, now they have become interesting to venture capitalists who looked at what’s been pretty exciting growth, and they said “We want to be a part of that.” then they look at what’s going on in the solar world, in terms of residential energy services, they say “Yeah, this company is actually doing what they’re doing quid pro quo,” so that they can get an even bigger share of customer wallet and they haven get an even lower cost of acquired customer dollar, which you take advantage of all the different things that homeowners might want.

So it’s become a really exciting growth story, but at the time, we looked at it and said “High execution team. They got a business model innovation.” We were willing to get in early stage because we have the flexibility to do so, even though it pressed on what was their secret sauce, we would have had to just point at the team. And so that’s actually worked out well for us.

The way that we approached identifying high performance teams and then backing them has really helped us because—I don’t know about other investors but—I am not a great entrepreneur. And being able to partner with great entrepreneurs has worked out a lot better than trying to pretend I’m a smart entrepreneur.

Nick: Sounds like that rare but unique combination of resourceful, determined, but also coachable too.

Rob: Yeah, that’s exactly right. I mean, these guys are first time entrepreneurs, and that’s one of the great things about bring in the follow-on investors that have been [inaudible] is, as the hit that big growth phase, you get a lot of pattern recognition about what that looks like for any kind of startup. Again, labels don’t really matter, right. A fast growth startup is a fast growth startup. They have their own challenges, their own risks, and that’s where being able to get other smart investors able to handle it has really helped Next Step Living.