Pivoting to success
Podcast transcription - 20th June 2018
Peter: Well, welcome again to another podcast. This is interesting because this is the second time we've tried this. It just shows what a starter we are. We started this, recorded it, put it out into the ether, and we had to pull it again because the quality was poor. So, this time, with Plumis we have the two founders. We have William Makant and Yusuf Muhammad.
Peter: So, let's give a little bit of background about both of you and then we'll move onto the company. So, William.
William: So, I am a Mechanical Engineer, born and raised in Brazil, but my family is from Bolton with, curiously, a history in the sprinkler industry. I left that industry when I was working as an intern to work at Ford Engine Development and then I decided to do an MBA to leave the automotive industry. Once the first Tesla was launched, I thought I was going to lose my job. It's a matter of time.
William: So, I went to do an MBA. I wanted to go into the entrepreneurship world and I saw that the Imperial was a really good place to do that. In fact, because I tried to do the industrial design course, but that was twice the price of the MBA at the time, and so I thought the MBA, believe it or not, would be a cheaper solution to get to the same place.
Peter: Excellent. And, Yusuf, of course, you went to Imperial as well. Can you give us some of your background?
Yusuf: Yes. I did a joint course at Imperial in the Royal College of Arts. I'm a graduate engineer by trade. I was at Nottingham University. I was there for four years. I was a little bit disillusioned with Engineering as a whole, and I've always been a creative person, and I really wanted an opportunity to express that. So, Industrial Design Engineering felt like a perfect fit, and that really led me on the path of going down entrepreneurship because it gave me a way of insuring that the ideas didn't stay in my portfolio, but could be actually out there making a difference.
Peter: Good. And, it was, in fact, you and your sleeping partner, Paul, who came up with some ideas. Can you talk through those?
Yusuf: Sure. Every year you have to do a solo project and a group project at the RCA, and for our group project, we said that we'd like to make a difference in an emergency situation. So, we did a load of things. We went to go and speak to paramedics, firefighters, all sorts of different people who work in emergency services, and it was the conversations and the discussions with the firefighters that really resonated.
Yusuf: One of them highlighted that fire extinguishers were deemed as sort of creating a risk for people escaping towers because they were trying to fight the fire as opposed to escaping. So, we thought, "Wow! This is an interesting insight," and it just so happens that there was the very first international Water Mist Association conference taking place at the BRE, so we went across to the event. Everyone there was much, much older than us. They went into unbelievable detail into the droplet size and where the industry was going, but we thought that there were the beginnings there of something that had real potential if we could just find a way of bringing this technology into the home.
Peter: So, you and Paul put something together, and you went to the competition, I believe?
Yusuf: That's right. There was an ideas challenge, which was a university-wide competition, where anyone could enter an idea. It would just be a one-pager with a short brief, and you would win 1,000 pounds, so all of the industrial design engineer graduates, the people going through the course, would put in numerous ideas, hoping that they would win some money so that they could get more, whether it's going on holiday, buying trainers, whatever.
Yusuf: So, I entered, I think, four ideas. Paul entered another four or so, and managed to win quite a few different prizes, one of which was for Auto Mist. The actual product that we took to market later on, and it was off the back of this competition win that we were encouraged to enter the followup competition, which was a business plan competition, and that's, in fact, how I ended up meeting William
Peter: Yes, so let's go back to William. How did you first meet? Was it through this competition?
William: It was in the same competition where it was Imperial and Royal College of Arts together, so the MBA students also pitched ideas into this competition. And, it was curious, because we were seriously confident about winning the prizes and no MBA at all won any prize. Yusuf and Paul between them won half of the prizes available, and I made the mistake at that event of taking my wife with me, maybe not a mistake after all, but when she saw who took all of the prizes, she pointed to Yusuf and Paul and said, "You should get together with those guys and give up your own ideas, because those guys clearly have better ideas than you do."
William: And, the whole idea is that we would then, pitching ourselves as the MBAs, to help them write the business plan for the next competition. Which, instead of 1,000-pound prizes, there were 20,000 and 15,000, respectively, for first and second, and so we were joining forces on the creative and on the, let's say, MBA jargon.
Peter: Yusuf, did you have a choice of anybody else? Was anybody else courting you at this point?
Yusuf: Yeah, there were quite a few different MBAs who wanted to sort of jump in onto the competition, but I think William and Allen, who is another shareholder in the business, seemed quite grounded. Also, William had a background in the industry, and I think at the time, to be honest, we were just keen to enter the next stage of the competition, and everyone was pairing up with someone. So, we thought, "You know what? Let's give it a go."
Peter: So, that led you to winning 25,000 pounds, but then that led you, also, to getting a convertible loan, didn't it? Let's talk about the journey for funding here. So, at that point, then, you had 80,000 pounds as a convertible loan from the RCA. What happens next?
Yusuf: The whole point of the business incubator was to take us from having an idea to actually having a value proposition into which an investor could invest. So, the whole year was spent developing a business plan, trying to validate whether or not the market existed, and shaping ourselves in such a way that somebody could say, "You know what? There's potential there." At which point, we would be valued and we would convert the money.
Peter: Okay. And then you went out for funding.
William: Yes. We looked at the few places where you would expect to have funding, like the Cambridge Angels, the London Business Angel group, as well. At the time, the incubator was called Design London. It's now the RCA Innovation Incubator, and at the time, they were just being set up, so they didn't have the connections to investors that they now do. They're very well set up now. They have a real good infrastructure. At that time, we were learning with them, so we didn't have that many contacts or people to reach to, but the main ones were the LBA, the London Business Angel group, and the Cambridge Angels.
Peter: And you pitched to both of those. And, how did that go?
Yusuf: It didn't go particularly well. I think were inundated with office. I think we were very, very early when we were looking for investment. We really didn't have a strong idea of market. Where our product would fit and, although there were customers who promised that if we launched this product they would go ahead and buy out certain amounts of stock, it wasn't a necessity for them to buy the product. It was a luxury item for most.
Peter: It wasn't a "must have" exactly, so the unmet market need wasn't really there at that point.
William: I'll say that the real only interest we had was from you. Serious interest was from you and Paul Anson, at the time, leading the Cambridge Angels Group. The only ones that took it ahead to want to know more, visit us, and start doing some due diligence. So, even in hindsight now, we look at it and think, "How is that you, at the stage that we were, with the amount of validation that we had, how did you go ahead into that?"
William: Because, looking at that time, I wouldn't invest in myself then.
Peter: Because, you know, and I've said many times before, it's the people that matter. We invest in people who can execute on something, not necessarily the thing they've presented to us at that time. And, you had to do that. There are several pivots on this journey, aren't there?
William: Yes, there were.
Peter: So, raised money. I think it was about 80,000 pounds. What next?
Yusuf: Well, the next step is we're trying to sell products. We were burning through cash very, very quickly, and we had to identify, or try and convince some of the people who showed initial interest, to go ahead and buy product. And, that was proving very, very difficult. We initially went to the Ideal Home Show. We had a stand there, we thought that we could convince a few homeowners to buy this. For a small amount of money, they could install their very own fire sprinkler alternative in their homes, and it just really didn't work. People weren't interested.
William: Yeah, we had the two main niches on our business plan. We were attempting to validate these two niches, which were the housing associations, which would mean large volumes, but lower purchase cycles, and then the consumer product side of things because we got very excited with all the media that came out once we launched the product.
William: Of course, at the back of the James Dyson Award that we won in 2009, so we saw it on every website. There was lots of people saying, "I'm interested, I'm interested," but none of these were converting to sales at all, and the other niche, which was the housing associations showed lots of interest, but absolutely no priority in terms of their budgetary list of priorities for them to spend the little money they had on. It was first making sure that the tenants had decent heating before they could even think of fire safety.
Peter: So, can you describe the product in a short-
Yusuf: Sure. Our very first product was a series of spray nozzles, water mist nozzles, that fit underneath the kitchen tap. Basically, what that allows you to do is to retrofit a sprinkler system to protect a room or a volume very, very easily. I think the thing that we didn't understand when we first started is the drivers for the fire safety industry, and it's regulation. Plain and simple.
Yusuf: In general, it's a grudge purchase so you can tick a box, and it's really when we only found a niche to fit in where we could enable someone to tick a box that we got any traction.
Peter: Yeah, let's talk about the domain, but first of all, you ran out of cash quite soon, didn't you? That cash we put in was too little. You asked for too little, we gave you too little. What happened when you ran out of cash?
William: Well, I think the first point is that we asked for too little because I'm not sure we would have convinced anybody to take more for a start, so we got the amount that we were able to get, and tried to do the best with what we had. You could argue that even today we are highly bootstrapped into trying to get to where we want to, but we've learned that probably that was the only way forward. Especially in the industry that we are. It's so slow-moving, you don't have quick adoption of new products.
William: The other day, we were having a meeting with an established manufacturer of alarms, and their Development Manager was telling us that one of their products has been launched 10 years ago and customers were telling him that this was a new product. This is a new product, barely in the market, and he got back to them and said, "This product is 10 years in the market, and you're telling me it's a new product. We have our latest launch product is a year old, and we are already iterating to its next version of it, and this is the difference of a stocked-up speed with what the industry is."
William: So, we have had to adapt ourselves to this much slower and much higher barrier to entries of having to fire test, to have third party scrutiny into everything you do with your product.
Peter: So, for a few months, you didn't pay yourselves, and then we put some more money in, and what happened then?
William: So, for many months, we didn't pay ourselves. We did all sorts of cost containment strategies of our own so that we could survive like that. Even, I moved to a place where I would be fully subsidized, Yusuf moved to his parent's house where he would be fully subsidized, so we had to do some very bizarre strategies to be able to keep the business and keep investing our time in the business because that's what it needed.
Peter: And then you went back and we put some more money in. I guess you got a slightly better story, but that ran out as well, didn't it?
William: Yes, so I guess that was our real first pivot that we did, was when we had very little sales from the consumer side or from the housing associations side, and we had the consumer knocking at our door saying, "I'm refurbishing my home. I have building control telling me that I have to put a sprinkler, and I'm wondering whether I can put your tap spray system in my kitchen and in my living room."
William: And, we're like, "How on Earth are we going to put ... We'll have to put a sink in the middle of his living room." We didn't even know what building control was. In fact, that's where it's useful to explain where my experience from the fire industry proved to be completely useless, because the experience that I had was from a commercial-industrial side of things where it's all insurance-driven. It's all reducing premiums because you're reducing the risk of a claim for your insurer.
William: And, we've learned that, on the residential side, it's completely different. It's all building codes, building regulation-driven, and it means that the drivers are completely different. The solution is completely different, so all the experience I had was completely useless. I didn't know what building control was, but we went to a local building control office and just learned what exactly they did and how our product could fit. And, they said, "Yes, indeed, your product could be used for this very niche-specific loft conversion application, which is written into the guidance of the building regulations in the U.K."
William: And, that's really what the business started growing organically from.
Peter: And, this was what? Six years ago now, I think, wasn't it?
William: 2011, probably, was the first install.
Peter: So, the root market is through installers, not direct to consumer, so we've got a business now that's starting to grow, starting to get some market pull, got a patent being granted, some defensibility. What next? How did you scale the business?
Yusuf: Once we had identified this niche that we would be able to help people get their homes signed off and enable them to have sort of more open plan, more desirable layouts, we just tried to educate the market as much as possible that we were here. We were an easy solution, and we could help people to ease things off.
Yusuf: So, we did a lot of CPD presentations, education to industry, to approvers, tried to get more architects to specify us, and more installers to kind of spread our story as well.
Peter: And, you're working from interesting locations, both in London and elsewhere. Tell us about London, Yusuf, and then elsewhere, William.
Yusuf: Okay. Our very first real established office was in the HMS President, which was a World War II corvette, which was located quite near Blackfriars in the river Thames. I remember, with the first day that we moved in there, it took awhile to get used to the fact that it was sort of undulating as the Thames hopper went up and down. Once we were over the seasickness-
William: But, it was a really great place. It was cheap.
Yusuf: Yeah, it was affordable. There was a semi-workshop space, sort of below sea level, where we could put together some of our more basic parts. Assemble some units, and we could ship equipment out of there, so quite flexible, but it worked really well.
Peter: And, William, you moved slightly further away from that?
William: Yes. At the same time, my wife was pregnant and decided that the best place to have a child was in Brazil. Which, having just received Angel investment, sounded like the worst idea ever, but I guess I couldn't argue at that point, given that I wasn't the real bread winner at that point, so I was working from Brazil. The time zone differences between three and four hours were helpful because I could do the first feed of the morning at 4:00-5:00 AM and then I could start working in the U.K. time zone and got to bed at 8:00 PM every day.
William: So, that ended up working, curiously, pretty well, having, at that point already, Skype numbers and that sort of thing already working very well, which meant that I could call building controls architects and they would never know that I was, in fact, calling from Brazil.
Peter: But, you came back after you had three children in rapid succession. Well done.
William: Exactly. Yeah. They're very close and people ask me, "Why?"
William: And I say, "Well, it's because our investors wanted us back."
Peter: We did. We love you for coming back. So, you came back, but, at this point, you're still living with about three or four people. I remembered having a conversation about growing the business, not retaining capital, but growing it.
William: The conversation was, more or less, you calling us cash hoarders.
Peter: Was it, ok!
Yusuf: But, I think that was definitely apart from our history, and the story that for so long we'd bootstrapped, for so long we didn't want to spend any money here, let's save money for stock, that actual moment where we were able to say, "You know, let's invest. Let's grow the team," was like a-
Peter: You resisted it. I remember you resisting it.
William: Yeah. Yeah, we did resist, because we weren't sure even on what to spend, but it was probably a good time to get us to change and grow, because, at that time, was when we had the InnovEduca grant to invest into R & D.
Peter: The first one.
William: The first one, yeah. So, it allows us to invest into R & D much more than we thought that we would, in fact, to be able to get the latest product launched.
Peter: So, this is building the team up over that time while doing sales and, also, being profitable as well. So, move forward a bit. We've moved down to Clapham, got product in the market, but something has to happen. It needs to scale faster. Talk about America.
Yusuf: I recently just came back from InsureTech Connect, which is a big conference with most of the major insurers in the U.S. present there and they're all looking for new ways to insure that insurance remains relevant and is set for this modern world with smart homes and IoT and trying to use technology to make sure they understand risks better and can pass on the value to their customers.
Yusuf: This seems like a great opportunity for us, because our solution can very well be driven by that in the U.S.
Peter: But, before that, you set up a U.S. entity. Some years ago now, which has been partially successful?
William: What started happening is that we quickly learned that for a life safety product like what we ended up being, we were expecting to be, originally, an add-on, an elective, more of a consumer product, we ended up being a product which is used for life safety to meet building regulations, which means that it's highly regulated in terms of the certification or the approvals you have to have to sell your product, which is completely at odds with innovation.
William: The standards are driven by historical product development, which means that you can't easily innovate and still meet the standard, because innovation will invariably be outside of the scope of the standard. It means you can't have it meet the standard or certify against the standard, so our first interest in going to the U.S. was having a version of our product that would perform just like a sprinkler and, therefore, allow us to have a much wider product appeal or market opportunity. Simply because it would compete directly with the sprinkler by meeting the same requirements that a sprinkler does.
William: So, that was our first interest of going to the U.S., is having a UL-listed system and being offered as an equivalent to a sprinkler. We started the office there as the objective to have pilot installs and learn from the field so that we could evolve the product and the documentation to make sure that, by the time we were UL-listed, we were having a product that was certified to, really, what the market wanted.
William: You're not allowed, really, to make a mistake on the certification on getting mismatch with the market because it's so expensive. You don't have another shot.
Peter: And the capital requirement for that was high, wasn't it? So, you had another round, and also got a good-sized Innovate U.K. grant as well?
Yusuf: That was so that we could optimize the product for the American market, so the initial system was sort of one pump to one head, which meant that you could cover a room that was about 8X4 meters with one set of kit, but with our new product, you can have multiple heads. So, whether it is the bottom floor of an apartment block or a large house, it can still cover it and it can still be cost effective.
Peter: Compared to sprinklers?
Yusuf: That's right.
Peter: So, the patents. Let's talk about defensibility. It's very important. It's a business that, in order to grow and sell it, needs some defensibility in the product. You applied for the patent first, even before you'd formed the company almost, was it?
Yusuf: Yeah. It was almost a prerequisite to being able to go into the business incubator. I remember some of our initial conversations with you where you were asking exactly where we were with things, and how solid our IP position was. So, we initially started with our tap-mounted sprinkler, we very quickly moved on to thinking about a wall-mounted version, and then our latest products are SmartScan system, which this is the platform which we're going to hopefully build the American market. We've, again, looked to kind of bolster our IP position.
Peter: But, that's also varied. Sometimes the patents have not been that relevant, have they?
Yusuf: Yeah, we've tried a number of different things, and sometimes either it wasn't protectable, in other cases we've let it slip because it's just been unnecessary for where we've ended up.
Peter: Can we talk about the role of the investor? Who came onto the board? The positives and the negatives, please.
William: I think, as first time entrepreneurs, there's a clear benefit of having somebody with not only the business, but some investment experience, or knowing, I would say, better, how the contract between a entrepreneur and the investor should be, which is we're signing, I wouldn't say signing your soul to the devil, but you're agreeing, at that point of investment, that your objective is to exit and hopefully will be fired, because the product and the company is bigger than us and we've exited.
William: So, it's got a life of its own, and we're not necessary anymore, but we've got our contribution as a result. That was the first clear benefit because this was a first time for both of us. For all of the founders and shareholders involved in the company, so the first big guidance is on this journey of how do you validate your market and get the company growing and sustainable before we can even grow to scale it, really. It's validate what the market is first.
Peter: So, how did that help? What's the positive and negative of having somebody like me on the board?
Yusuf: I think definite positive, you had links to manufacturing, which was a big help in terms of setting up for the very first time a production line for something completely new. And, I also think it was beneficial that you invest in companies which have a similar scope or are trying to do similar things, so, in talking to some of the other founders, you can learn from their experience.
Yusuf: But, I think to sort of counter that, it does mean that there is a certain mindset in and around what you do and how you do it. And, I think, later on in the chain, when we have some exposure to American companies, it was quite shocking to see the contrast between a U.K. Business Angel and a American V.C. Not that one way is right or wrong, but that exposure has definitely kind of changed my outlook for when it comes to the relationship between an investor and an entrepreneur.
William: There's a natural conflict that you would expect because it's the potential next step of investment and it's in a different country where they're more aggressive, but also with a higher failure rate, and having this difference of mentality, trying to absorb which of the two places should we be in terms of, "Is it the U.K. Angel investor or the U.S. V.C.," so I agree that was a curious learning that we've gone through.
William: I think the one positive thing that we've had is just having the investor doing the scrutiny work of everything that we were doing. Having our board meetings that, at the start, we thought, "This is so frequent that we have our board meetings. Why does it have to be that frequent?" But, just the fact that, at every board meeting, we're stopping and thinking of what we're doing, and taking a lot of heat of saying, "Is what we're doing right? Are you spending your money properly?"
William: This is where, I think, it's not something that they're used to having in big business. You're just doing what the high inertia of a large company is doing. You're not changing things as quick, and that's why I think that the scrutiny of an investor being with you, making sure of where you're spending your money every two months, as we always had our board meetings, has been very, very useful.
Peter: I remember you saying at one point that you felt that if you raised more money, the company might not have been so successful. Can you explain that?
William: I think we even consider still, after nine years, we are new to the industry, because this is such a long-term product cycle industry, we were even more naïve than we are today at that point. We knew nothing about the industry, so now we can clearly see that if we had raised more money we could have insisted on a path that, only now, seven years later, is showing any interest and serious significance.
William: We could have drained all our money trying to get that version of our business plan. Our original top-down, easy to sell version. I say easy to sell to investors, not easy to sell the product itself, right, but a more beautiful version of reality that we had on our original business plan, which was to the housing associations, is we could have spent all our money on that, trying to still get business from that, and we could have gone bankrupt much faster than what we did by originally being very bootstrapped and being able to pivot. To change our focus much quicker by just being the three of us and with much less money and much less cost.
Peter: In terms of scaling in seven or eight years, the company turns over about 2,000,000 pounds, is profitable, and is installed in how many homes now? How many thousand homes?
Yusuf: About 5,000.
Peter: Five thousand homes. So, this is a successful, solid business that's scaled very slowly, hopefully on some sort of strong upturn getting into the States.
Yusuf: Yeah, I remember a couple of lectures in the Royal College of Art when my tutors were saying like the only problem with innovation, the more innovative the product is, the more explanation and marketing that you have to do in order for people to understand your value proposition and then accept it and buy into it.
Yusuf: And, I think if we would have raised a lot more money and we've got more staff, then that process, perhaps we would have fallen off a cliff long before the market had kind of caught up with what we were presenting them, so I think it's worked out, fortunately, quite well.
Peter: There's another thing that you mentioned that was somewhat negative about the conflict of the investor director and the rest of the board can happen.
William: I think that was evident when we had our last investment, because, at the time, we had used an investor where you were already a shareholder and where our interest when we're trying to get a new investment is to get as high an evaluation of the company as possible, but raising as much money as possible, too, so you representing, then, the investment group, Martlet at the time, not seeing us having the valuation being justified to be as high, so having the conflict of interest of saying, "Is this a personal interest or is this in the interest of the company?"
Peter: As a founder, yeah.
William: As an investor, are you representing the interest of the company, are you representing the interest of the investor, and, obviously, there's going to be conflict there because we're trying to get the highest valuation. You're trying to get the lowest valuation at that point, so it's hard to negotiate because we both want the best for the company, but there's a clear conflict at that point.
Peter: Yeah. We'll definitely cover that in the book. Yusuf?
Yusuf: It feeds onto a point that I think is apparent throughout the whole journey is, "What's normal?" Whether it's valuation, the company structure, how many people are meant to be on the board, it's always really hard to try and gauge, in a space where every business is unique and you can do your own personal twist on things, where you should sit. It's always been tricky trying to find a place where you're comfortable.
William: Even when we were discussing the valuation and the conflict of interest, the thing that we agreed on is that you can only state what the valuation is at the moment there has been an investment, right? When the price has been set, because, after that point, it's just guessing. Whether it's using multiples or just using, "What is the vision of the company," it's just like a word battle. You can only validate it once you've had an investor putting money at that valuation. That's where you can really determine that that's been the price.
William: Later on, you can find that it's been overvalued round, if you have to go through a down round, which, fortunately, we haven't gone through that, but that's the only point where you can price it. Any other event, you can't price a company.
Peter: Well, you can do with a conventional loan, but that wasn't appropriate at that point.
Peter: So, obviously you've learnt a lot in the last seven or eight years, and I've learnt a lot from you. Have you any tips for entrepreneurs, bearing in mind it's not just Angels that are entrepreneurs listening to this podcast. Yusuf?
Yusuf: I think, first and foremost for me, it's about finding a network of people who are going through the same struggle because, not only is entrepreneurship a very lonely journey, there's so many different ways that you can go about it and approach it, and leveraging other people who are experiencing some of the things that you are has definitely helped along the way.
William: Yeah, I think that you should have an open mind, being ready to change things very quickly because what we saw clearly from our journey is that it's got nothing to do with what we originally planned. In fact, nothing that we originally planned is in the current company. Not even the product. Not even the people.
Peter: The founders are.
William: Yeah, not all the people that started it, yeah? The team is not the same, the product is not the same, the time that it took. Originally, when we signed our investment agreement, it said that up to five years, you're a bad leaver if you leave before that, and we were making jokes. Like, "How are we going to exit way before that?" We're on the ninth year, and now I don't put the time limit to when is it that we're going to exit, because now we've learned that 10 years is like a new product, still, in the market.
William: So, if you're really innovating, you will find out that, with experience only, that what you had originally planned your product and your company to be will change very rapidly and you just have to be ready to change very rapidly.
Peter: Exactly, which is what makes a good founder, in fact. The ability to change, to be agile, to pivot. Anyway, both of you, thank you very much indeed. I really enjoyed talking to you, Yusuf and William, and let's continue our journey together.
Peter: hanks for listening to another Invested Investor podcast. You can subscribe to all future podcasts via our website www.investedinvestor.com or via a number of online podcast platforms, and be sure to follow us on Twitter, LinkedIn, and Facebook to get the most up-to-date, interesting, and insightful content.