Transcript – How To Avoid Getting Diluted
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John Warrillow: My next guest Arik Levy is a pioneer in the business of lockers. I don’t know if you’ve been into a Whole Foods recently and noticed the Amazon lockers. Well, apparently this is a thing called BOPUS, buy online, pick up in-store. I didn’t know it existed frankly, but my next guest Arik Levy is the sort of pioneer in this space. He always invented the category. Started off with laundry and eventually moved to install these lockers in apartment buildings where apartment dwellers needed a place to drop off the stuff that they purchased online or have delivery companies drop the stuff off.
John Warrillow: In any event, he built this company up a million in sales in its first year. Four years later was doing $37 million in annual sales. I want you to pay special attention to how he financed his growth because I think we’re always tempted to take on investors, venture capital if you’re big enough, growing fast enough. Certainly, Arik was. Private equity, et cetera. Yet, Arik used his cash flow model, the way he charged for his locker systems, in order to avoid the dilution associated with taking on that institutional money.
John Warrillow: Here to tell you how he did it is Arik Levy.
John Warrillow: Arik Levy, welcome to Build To Sell Radio.
Arik Levy: Hey, thanks for having me. Excited to be here.
John Warrillow: Yeah. It’s cool. So tell me about this company Luxer One. What did you guys do?
Arik Levy: So Luxer One is a, we’re the premier leader in electronic parcel lockers. So what we do is we put lockers into apartment buildings, office buildings, retail stores for packages. So you can imagine apartment building, they receive hundreds of packages a day. UPS, FedEx, Amazon, they put the packages in the locker, you get a text message says you have a package to pick up. You go down, scan the locker, and pick up your package.
John Warrillow: So cool. I’ve seen these. I live in Toronto where we’re a bit behind the US, certainly behind Silicon Valley, but I’ve seen Amazon lockers at Whole Foods. So I could go in, I guess if I got something on Amazon, I could pick it up on Whole Foods. Is that the kind of stuff that you guys do?
Arik Levy: Yeah, exactly. So we’re very similar to the Amazon lockers. We’re not specific to Amazon. So we’re more working as a third-party provider that anybody, a UPS, or an Amazon, or a FedEx can deliver to, and we’re also in Toronto. We’ve started to get quite a bit expansion in Canada as well.
John Warrillow: I just got to get my head out of my ass and start travelling more and start seeing some of these places.
Arik Levy: They’re actually in an apartment building or some retailers are starting to roll them out too in Canada.
John Warrillow: Okay. Great. So I think I get what you’re offering. What was the business model? Who paid what for this service?
Arik Levy: The business model was a challenge for us actually to figure out what that business model would be, and maybe it’s a little helpful for me to give you a little bit more background as sort of my entrepreneurial journey. Because Luxer One is actually really kind of third company that I started, but they’re all an evolution.
Arik Levy: So 2005, I started a company called Laundry Locker, and Laundry Locker was we put lockers in apartment buildings for dry cleaning and wash and fold. So this was before everybody was ordering everything online. It started in 2005. But personally I could never get my dry cleaning done, and so I had this concept if I put my laundry in a locker and someone were to come to pick it up and service it, put it back in there would make my life amazing. So I started a business called Laundry Locker, which grew to become the largest dry cleaner in San Francisco, and then we actually started to… The software… My background’s in software development. So the software that I built for Laundry Locker, we started to sell that to other companies all across the globe. In fact, we’ve got I think two partners in Toronto even in your neighbourhood. So anytime that you see lockers in an apartment building being used for dry cleaning, there’s probably a 95% chance that they’re running our software. We work with some of the largest dry cleaners in the world.
John Warrillow: And the software, again I’m thinking it’s a very low tech business, but of course it’s not. The software is what is sending a text message to the customer that, “Hey, your laundry’s back in your locker.”
Arik Levy: Yeah. It’s a lot more-
John Warrillow: Scheduling it all and stuff like that.
Arik Levy: Yeah. I mean, so if you think about the process, first through a mobile app you need to place an order and say, “I dropped my laundry off at this location.” In fact, you might even need credentials to get into that location. So our software’s managing all that. Then we’re seeing the hundreds of orders a day showing up and optimizing the route for the driver. The driver’s out there with a handheld device, scanning in every package, every piece of laundry. It’s then coming back to a dry cleaning facility where it’s either being outsourced or being done in-house. You’re checking in every piece. We take a picture of every label, of every item. You actually get an email with it. You can mark it up and say, “I have a stain here. It’s a ketchup stain. I want this to be serviced.” So the software behind it is very sophisticated. It’s kind of an ERP system for running a dry cleaner.
Arik Levy: So we had a quite a few people that went out and tried to do the same thing and launch their own business and maybe build their own software or use some of them off the shelf software. I’d say 99% of them converted over to our platform because it was specifically built for the challenges of dry cleaning delivery through lockers.
John Warrillow: Arik, how did you get the money to start Laundry Locker?
Arik Levy: So to start Laundry Locker, which was my first endeavour, I had saved up a little bit of money, maybe $20,000-$30,000 and went out and bought some lockers and put all that money kind of in this account and went and did it. I realized pretty quickly that I was running out of money, and hit up some friends and family and was able to borrow $40,000 or so. To the point where we got it off of the ground and were starting to generate some revenue, and people were using the service. And then I was lucky enough to find a couple of angel investors. One was the laundry mat that was I was running my laundry at. The other was a property owner who had some property that we had our lockers in. And I think we raised about $250,000 back then. And that was enough to really get the company going.
Arik Levy: And then we did two more rounds. So in total, we raised around $2 million for that company. It was all angel and friends and family that we were able to raise our money for. We actually spent a significant chunk of it franchising, going down that path. Realized that wasn’t the right path, but had this really valuable software. And the way this solved the problem for the dry cleaners and the other folks that were calling us was more to license the software than it was a franchise model. But that was the last money we raised was almost 12 years ago or so with that final round that Locker Laundry to franchise.
John Warrillow: And so friends and family. You did some debt with them. Reasonable terms kind of thing. Your in-house terms. Friendly terms I’m guessing.
Arik Levy: Well, those early loans, when we did our first round, we were able to convert that to equity. So we actually never did any significant debt. We have a small line of credit with the bank, but it was really difficult to get any lines of credit, significant ones. Although I shouldn’t say that. When we built our dry cleaning plant, we were able to get a fairly significant SBA loan for the build-out of that.
John Warrillow: Got it. Okay. So you’ve got a couple of angels involved, some investors, and then you mentioned there were sort of three businesses in one here. So Laundry Locker. There’s another pivot. What was the second sort of iteration?
Arik Levy: Yeah. So the second one was when we went through that franchising process, and we actually were about to close around the private equity. Concurrently, we realized, wait, the real business here is just to license this software. And so that is a… It’s really under the same business, but it’s a brand called Drop Locker. And so Drop Locker is a software platform for people that want to run a locker-based dry cleaning business. And so that business grew pretty well. It was a software-based business, really worked out well. We were able to enable… I think we have about 75 partners in 15 different countries who have built their entire business around this platform. You have one of the largest dry cleaners in the world is running it. Tide Dry Cleaners for their delivery service is running it. Like I said, we kind of went into some of the details. But if you want to do delivery this way and lockers are a really powerful yet simple way to provide an asynchronous transaction. So if you look at dry cleaning, “Hey, I want to drop my dry cleaning off on my convenience.” And the dry cleaner wants to pick it up at their convenience. So a locker is a nice secure way to create that transaction.
Arik Levy: And so that’s sort of the basis of what the business I’ve built on. But going back, kind of circling back on that is if you want to do locker-based deliver, you have to have some kind of software platform to manage that, and that’s what Drop Locker was or is. We still sell that software, and I’m still involved in that company.
John Warrillow: Okay. So take us into Luxer One and what the next iteration was.
Arik Levy: Yeah. So you can imagine now we have in the US about 50 different companies that are out there. Most of these people are entrepreneurs. They’re entrepreneurs who said, “I love what Laundry Locker’s doing in San Francisco. I want to bring it to DC.” So the guy in DC is sitting there knocking on doors saying, “Hey, let’s put some lockers in your building for dry cleaning. This great amenity to be able to offer.” And the property manager’s going, “Yeah. That’s cool. Let you put those in, but can you help us with this pile of packages we have here? Literally we’ve got 100 packages sitting in our leasing office. They’re taking up all of our space, all of our time. We need a better way to solve this. Is there something we can do with these dry cleaning lockers?” And so I’m getting calls from all of our licensees. I’m getting calls in San Francisco from Laundry Locker that we’re still operating and realizing that this package growth is really just continually been growing, becoming a really big problem for these properties.
Arik Levy: So I go, “Okay. Yes, we can build lockers to solve this. I don’t know what the business model’s going to be, but I think we can have a technology solution for this.” So I went out and was able to develop an electronic package locker system and place it in some buildings. And it worked great. I mean, we were able to work with the carriers. We kind of figured out how to wheel and deal with them to get them delivering to lockers. But the way I look at it, there’s really we call it a three-legged stool. But there are really three constituents that drive the success of the locker system.
Arik Levy: You have the person that lives in the apartment, the recipient who’s getting the package. You have the property manager who’s, in essence, the gatekeeper, everything’s got to come through their property. They’re the ones who had a big problem. And then you have the carriers, the UPS, the FedEx, the Amazon where that last-mile delivery makes up 40% of their cost. And so if you look at those three different constituents, who’s going to pay for it?
Arik Levy: So if you start with the recipient, it’s very hard to get people to pay for delivery, right? I mean, I’d rather pay $100 a year for Amazon Prime and not pay for shipping and not get nickel and dime on it versus going to some other website and having paid $10 for shipping. And Amazon really hit their growth curve when they offered free shipping. So it’s been proven over and over and over again that we’d even had competitors who’ve come out, tried to launch competing platforms that charged a resident, and yes, you might be able to get small 5% share who are willing to do that. But the bulk of people are not willing to pay for shipping. So that was kind of out.
Arik Levy: The next was the property, and so we went and talked to the properties. At least the ones that we had talked to initially said, “Yeah, this is a great idea, but this isn’t our problem. We’re getting all these packages. We should just shut this off and not even have to deal with these packages anymore. We’re just doing this as a service to our tenants. We’re not paying $30,000 for a locker system. Are you crazy?”
Arik Levy: And so then it was like the carriers, we’re saving them a ton of money. We can give them pretty much a guaranteed first time delivery. We can reduce their delivery time. This should be a huge win for them. They should be willing to pay for this. And so I spent about the first year, almost two years working with UPS, FedEx, Amazon, US Postal Service to try to convince them that this was a great business. And I think they understood. We were able to convince them of that but to get them to actually shell out that money and to really kind of pay a per-transaction fee or whatever it is has been and still remains insurmountable.
Arik Levy: But what happened concurrently was our space is really there’s three players who own 99% market share of lockers in apartment buildings for package delivery. So our other two competitors came out actually before us, and they both come from a property management space. So they were able to actually go out and convince property managers that they should be paying for these lockers, that it’s a great ROI. And, in fact, it is. It’s like a six to nine-month ROI if you look at the dedicated staff that they’re putting into managing these packages. So our competitors actually knew the customer better than we do, and they were able to convince them to pay for lockers. We had a lot more experience obviously in lockers, locker technology, the software, et cetera. So we had a much better product, and we had a product built and ready to go but couldn’t find the market. They found the market for us, and we went in and became the dominant player in that space.
John Warrillow: So you essentially repriced the offering based on what the competitors were doing?
Arik Levy: Yeah. Well, we shifted our focus saying, “You know what, where we thought we couldn’t charge properties, we can charge properties.” It’s a really good ROI for them.
John Warrillow: What made you guys so much better in a practical way? What was the value proposition that made you guys so much better than the competitors that came out of property development?
Arik Levy: Yeah. I mean, I guess it’s we still break it down into three different areas of where we see ourselves differentiating from them. From a technology perspective, that’s my background. That’s our bread and butter. We run an IOS based solutions so that just the touch and feel of quality of it when you use our product, you can sense the quality and tell that it’s a much better performing solution. The camera that we’ve got in there. The touchscreen in there. So from a technology perspective, we continue to sort of lead in that area.
Arik Levy: From a support perspective, we’ve got 100 people on our support team, staff 24/7. They’re in-house. They’re here in Sacramento. We have cameras on every single one of our products that are out there. So every locker system that’s out there has a camera feed. We can pull that up. We can see what happened from a support side to be able to help those folks.
Arik Levy: So those are really kind of the key differentiators in the way that we develop and sell our product.
John Warrillow: Got it. So give us a sense of a trajectory. So you’ve discovered this business model that the properties are going to pay. First of all, how did you finance that year or two where you’re trying to convince the FedEx and the UPS to pay… How are you kind of making ends meet at that time?
Arik Levy: Yeah, so Laundry Locker was mildly successful business. Not wildly successful but did okay. It was profitable. Drop Locker, which was the software company, was pretty profitable and was really a good business. And the cash that was coming out of Drop Locker, in essence what we use to fund our initial R&D and get the business…
John Warrillow: Why not double down on Drop Locker? What was it about putting lockers in buildings that was so attractive to you? Why not just sort of stake in the second pivot and milk that?
Arik Levy: No, no. I go back to that one a lot because that was a fantastic business. It was like four people. I could live wherever. I kind of built that as sort of my ideal business. I mean, it was going to be a nice, strong cash flow company. I was single at the time. I figured I could travel around the world, work from my laptop, life would be great. But I love the solve problems. I’m very focused on efficiency and coming up with creative solutions. So when I saw this market sitting there and really starting to take off and knowing that I really had the right to win in that space, I pretty much… We’ve got patents on it. I pretty much invented locker-based delivery. And so I always had a greater vision of really wanting lockers to proliferate as a way of facilitating streamline transactions. So with that in mind, when I say this Luxer One opportunity, I couldn’t pass it up to some extent. So even though Drop Locker was kind of the perfect business, I knew that there was a… I could just foresee sort of the opportunity for this. And if we could change the way that packages are delivered, then it’s a game-changer, right? So for me, it was just kind of the excitement and the knowing that I had to go after that market and give it a try.
John Warrillow: So again ballpark, I don’t know if you can talk to this directly, but ballpark what were the Drop Locker financials like? Kind of top-line revenue, you mentioned four employees. Can you talk about kind of generally margins or revenue? Any sort of to give us a sense of how big the bread box was at Drop Locker?
Arik Levy: I mean, it was doing I think at the heyday probably around $3 million a year, and we were probably around 20-30% EBIDTA.
John Warrillow: Okay. So you’ve got this what you think is a much bigger opportunity in these lockers in buildings. Where does it go from there? Roughly what year are you in when the sea change happens and the buildings start to say, “Okay. We’ll underwrite the cost of the lockers.” Kind of what year were you in at that time?
Arik Levy: Yeah. So 2015 is when we started going to market, going to trade shows, starting to sell our lockers, and that was our first year in business. First year, we did over a million dollars in business. So it was a great first year. Literally it was about $250,000 investment from Laundry Locker, which we had paid that within about nine months I think. We paid back that loan to Laundry Locker, and we were free-standing, cashflow positive profitable business.
John Warrillow: Wow. That’s amazing. So the building pays for the locker installation. Is that right?
Arik Levy: Yeah. See the way our model works is they own the lockers. I mean, we’re a little more flexible now, but you can imagine back then when we didn’t have access to a lot of cash. We’ll sell them a system for $20,000. They’ll pay $10,000 upfront, another $10,000 when the lockers are installed. And then there’s a monthly service fee for us to maintain and support and provide all that customer service to their residents. I mean, we pretty much take the problem off their hands. So now when deliveries happen, even if it didn’t go into our locker, we can typically figure it out, and go, “Okay. USPS probably put that in your mailbox. Go check your mailbox.” So now anytime a resident has a problem with a package, they call into our support center and we manage to help that. So we take that whole load off the property. And there’s a monthly service fee for doing that.
John Warrillow: The value proposition to the property owner is, “Look, you’re staffing this with a person. You don’t need to have that person necessarily do that anymore.”
Arik Levy: Exactly, yup. Yeah, it’s a pretty quick ROI.
John Warrillow: Yeah. So what was the sales model? You went to trade shows. So property managers have trade shows? Who knew? I had no idea that they-
Arik Levy: Oh yeah. There’s a couple of really big… There’s really big shows and then there’s regional, local shows as well. So the big shows are very well attended. The trade shows in this industry are really powerful. They’re great ways to get to know people. I mean, we were the new kids on the block a little bit. Like I said, our competitors knew everybody in the space. So you got to figure out the buying decision sometimes is happening in property level, sometimes it’s happening in a JP Morgan level. The asset manager runs sort of a whole portfolio of REITS and stuff like that. So it was a lot of making connections in the industry.
Arik Levy: We partnered with one company to build a specific product for them. It’s called AMLI is the name of the company. They’re a large REIT, very well respected in the industry. And we actually built a product for them called Luxor Room. They wanted instead of putting lockers in, they wanted to be able to convert a room to handle packages but use our same technology and automation around that. So partnering with them really helped. They were able to spread the word about our technology. Winning some key deals with some key REITs, and a lot of… There’s a lot of consolidation within the industry. So one REIT might own 100 properties. When you do a really good job with them with one property, they’re going to choose you for all their other properties.
John Warrillow: And when they do choose you, the cash moves, as you described, X amount up, like a percentage upfront, a percentage on delivery, and then an ongoing fee. So you’re managing your cashflows so that you’re getting that influx of cash basically upon signing.
Arik Levy: Yeah. I mean, that deposit, in essence, allows you to buy inventory, and for us, our initial production was out of China. We’re buying product out of China, bringing it into the US. You’re trying to flow your cash because you’re starting… This company’s becoming millions and millions of dollars. It starts getting pretty scary. You’ve got $5 million in inventory you’re trying to come up with. So this stuff’s moving around. You got to run tight receivables and make sure you’re getting paid on that followup. You’ve got to be in essence selling enough so that the cash is coming in from those sales to fund your future operations. But fortunately, yeah, I mean, we were able to for the most part actually it kind of gets into what we’re going to talk about from the transaction side.
Arik Levy: But when we found somebody that wasn’t willing to work in that model on a large scale, we run a massive retail portfolio and rolled our lockers out to retail store. They would pay us a 50% upfront, and so that became that 30, and that changed the whole ballgame for us. So when that happened is when we really started to deplete our cash and realize we were heading into a scenario where we couldn’t cashflow this thing anymore. And if we were to get another retail client, we have pilots going with all the top retailers in the states. If we were to get another retail client, there’s no way we could continue with this path. And so that’s when we went out to try to seek funding.
John Warrillow: Okay. So the retail, to go back to my silly example earlier. The retail is when a company like a Whole Foods says, “We want to put these lockers in our retail store.”
Arik Levy: Sort of. Whole Foods and Amazon are not putting the lockers in there for Whole Foods, it’s when Walmart says. So the big shift in retail, and a massive amount of retailers growth these days. If you look at Target, Target will say that over 50% of what people purchased online they picked up in the store. So it’s called BOPUS, buy online, pick up in-store. And if you look at that number and you start peeling back the layers in that experience, I don’t know if you’ve ever done BOPUS, but when you go into… You buy the stuff online, you go, “Great. I need to go pick it up at my Walmart.” And you go into Walmart, and they say, “Oh, pickups are over here,” and it’s the customer service line. So hopefully if there’s somebody there, they’re probably helping other customers. Otherwise, you have to ring a bell, somebody comes over. They say, “Oh, let me go get the package out of the back.” They get the package out of the back, and they give it to you. The average wait time is 10 minutes.
John Warrillow: Oh.
Arik Levy: 10 minutes. I ordered something online and have to go park. I come into the store and I’m waiting 10 minutes at the customer service line when I see the product sitting right there, and I could just go buy it, go through self-checkout.
John Warrillow: Yeah.
Arik Levy: So that experience generally scores in the 60-70% customer satisfaction rating. When we put our lockers in, it’s over 95% customer satisfaction because that’s exactly how you expect it to work. I ordered it online. Yeah, I can get it in two hours at the local Lowes or Home Depot or Best Buy or whatever it is. And you go down there, and you scan your QR code at the locker, and you pick it up in two seconds. And you’re on your way. So the customer satisfaction scores went through the roof. We did a pilot with a retailer, it was fantastic, and we’ve got almost a chain-wide rollout now with them.
John Warrillow: Sorry, with who’s that?
Arik Levy: It’s a major home improvement retailer.
John Warrillow: Got it. We don’t need to know the names, but you can kind of guess. One of the biggies, I guess. Got it. So again from a consumer perspective, from my own edification, why don’t you just have them ship it to you? Why would you want to pick it up in store? Why wouldn’t you just say, “Just ship it to my home.”
Arik Levy: Yeah. So if you look at sort of the drivers behind BOPUS, there is a lot more speed of delivery. So Amazon’s now pushing towards this one-day delivery, but that’s never the way it used to be. So if I need screws, I need screws today. I don’t need them three days from now. I’m working on a project. I want to be able to go to Home Depot and grab my screws. So a lot of it is the speed. It’s the savings. So for retailer and for consumer, can’t take Amazon out of the play, but typically if I go buy something from Best Buy, a lot of times they’ll charge me for shipping. But if I go pick it up in the store, they won’t charge me for shipping, or you can get it shipped for free but it’s going to be there in three days or you can come to the store and you can pick it up tomorrow.
John Warrillow: So the BOPUS value proposition is going to be faster, it’s going to be in some cases cheaper. Got it. What about-
Arik Levy: The other big issue is so the thing that is not talked about in eCommerce a lot is that I think the number is like 70% of people don’t have a secure way to receive a package. And so shipping to people’s homes is not very secure. Offices are not really wanting to accept packages anymore. So that’s why you’ve seen Amazon Lockers. Amazon Lockers is brilliant, right? I mean, they’ve opened up a market to so many people who can’t receive packages. So a lot of it is just I can’t even receive packages but I still want to do eCommerce and order stuff online. And so that’s one of the other major reasons people choose BOPUS.
John Warrillow: How did you guys think about Amazon in the business? Because it sounds like in one case, they’re a collaborator. Big shipper to the apartment buildings you guys serve. And in other cases, they almost sound like a competitor.
Arik Levy: Yeah. I mean, we wouldn’t be in business if it wasn’t for Amazon. Amazon is what created the need for this. That being said, Amazon was never really a competitor. They were always a partner of ours. We work with them like they do UPS and FedEx. Amazon’s launched their own delivery fleet. So they deliver to our lockers, and they still do. Amazon actually did launch a competing product to ours called Amazon Hub where they’ve started to install lockers into apartment buildings. And absolutely, that was and is a competitor of ours and a powerful competitor. But Amazon’s not getting in the locker business to improve the workflow for an apartment building or to make UPS and FedEx’s life better. So if you look at the motivations behind why Amazon’s putting lockers into apartment buildings, it’s to drive people to buy more Amazon packages and be able to give them a guaranteed great experience with Amazon. And to some extent even to control that experience for UPS or FedEx customer or Walmart or Nordstrom’s customer, right? So we’ve been able to counteract that and still remain very successful in the marketplace.
John Warrillow: Do you ever get pressure from major retailers saying, “We’ll install lockers all over our stores, but you got to stop doing business with Amazon.”
Arik Levy: I won’t say we do business with Amazon. I mean, for us to say, “No, Amazon can’t put packages in our lockers,” would be more… We’re selling our lockers to a property. So the properties owning the lockers. We’re really just providing a service on this. Bought a refrigerator, who knows what goes in that refrigerator. That being said, when you work with major retailers, you cannot run on AWS anymore. We have to move our entire platform off of AWS.
John Warrillow: AWS being Amazon Web Services for folks who don’t know that.
Arik Levy: Yeah. I mean, Walmart’s got theirs. There’s articles about it. If you work with Walmart, you can’t run on AWS. And all the other retailers feel the exact same way.
John Warrillow: Got it. So I love this example. I want to dig in here. Around so you’re in the early days working with the commercial, the buildings, and they would pay 50% upfront, which gave you the cashflow. A little juggling to get the thing done. The retailers come in and say, “That’s not how we work. We’re net 30.” You’re like, “Oh my god. We need 5000 lockers, and I don’t have the money to finance that upfront,” which caused you to go looking for money. Is that right?
Arik Levy: That’s exactly right. Yeah. So we went to banks-
John Warrillow: What happens next?
Arik Levy: I went to banks and said, “Look, we’ve got these contracts with retailers. Can you give us $5 million?” And they go, “Yeah, go pound sand. We’re not really going to do this.”
John Warrillow: What’s your revenue at this point, Arik? Give me a sense of how much revenue you have at this point. What’s your ballpark?
Arik Levy: We’re probably about a $20 million business at this point.
John Warrillow: Okay. Got it.
Arik Levy: That’s pretty fine. That’s in like three years, right? So I’m more on this crazy tailwind. And then we start some of the biggest retailers in the world. So yeah, we’re having board calls going, “What are we going to do? Do we go try to raise some money from our investors again? Do we go out, try to get VC money?” And so that was sort of our plan was, hey, let’s go out and get some VC money. You can see our track record. It’s going. There’s some massive opportunity here. This should be a pretty highly fundable business.
John Warrillow: Mm-hmm (affirmative).
Arik Levy: I’d done the VC thing probably two or three times through the years to try to get VC money and was never able to get it. And it is the most miserable process ever. I was not looking forward to that at all.
John Warrillow: What makes it miserable by the way?
Arik Levy: A couple of things. One is it’s very hard to run a well-structured process where you have multiple VCs involved and sort of bidding on it. And if you’re not super dialled into the world, you’re starting sort of at the bottom with an associate who you’re having calls with, who’s then saying, “Let me pitch it to a partner.” Then maybe you get to go talk to the partner. Then the partner brings it to a partner’s meeting, and you’re making trips to Palo Alto every day. I mean, it’s literally a full-time job, and even if you do it as a full-time job, it’s hard to do it well. And it’s a lot of rejection. I mean, you’re going in there and you make it so far, and then they’re like, “No.” So you go three-four meetings, and they’re like, “No. No. No.” So it’s just a lot of no’s and a lot of work. At the end of the day, you now have some venture capitalists who own a significant amount of your business, and you’re working for them. And they’re the ones who have sort of the upside. They got a lot of downside risk protection, and you hope that you can grow this into a $100 million, billion-dollar business so that you can see a good payday out of it.
Arik Levy: Sort of stepping back, what happened actually during that process, and the timing was really good. I received an email from a customer, and so when someone’s a customer and they’re like, “Hey, lockers are in my apartment building. I want to talk to you about blah, blah, blah.” I usually have to at least respond to it and not be a total jerk, right? So this one was an investment banker, and we get calls and emails all the time from firms, private equity firms, and VCs, and bankers, et cetera. We get those probably two or three a week. So I was like, “Ah, okay.” Well, we got a lot of inbound leads and interest, but this one was particularly interesting. It was a gentleman that lived in an apartment building with us, worked for PWC and was one of their… Worked on their investment banking team, and reached out to me and says, “Hey, I’d love to talk to you about your financing needs.”
Arik Levy: So I returned his call, and said, “Okay. Well, tell me about this.” I really didn’t know anything about investment banking. I’m like, “Educate me on investment bankers and how this works because I’m not looking forward to this VC raise. Can you guys help me with going out and raising some VC money?” And they pretty much go, “Yeah. It’s like nothing down, and we just take a percentage of what we raise.” I go, “Well, that sounds too good to be true. You’re going to line up these meetings and put together the proposal deck and all that stuff?” And they’re like, “Yeah.” I was like, “All right. Let’s do this.” So it was good timing. We partnered up with the bankers over at PWC, and really with the intention of actually raising money. So it was to go out and whether it be VCs or strategic investors. We listed the UPSs and the FedEx and all these other strategic investors that we thought could be interested in this.
John Warrillow: Arik, how much of the business were you willing to give up on a percentage basis, and how much did you want to raise? What was kind of the calculus? Is this a big chunk of the business? Is it a little sliver?
Arik Levy: I mean, I think we’re looking to raise like $10 million, and assuming that someone get about 25… Hoping they get about 25% equity. I mean, most of VC rounds are about 25-30% range.
John Warrillow: Yeah.
Arik Levy: Those were our expectations.
John Warrillow: Got it. Okay. So that’s kind of what the goal is. And how did PWC feel about that expectation? Did they say, “Yeah, that’s reasonable,” or-
Arik Levy: I’m trying to remember whether they set that expectation with us or if we kind of told them that’s what we were expecting. We’re pretty aligned on that. There wasn’t any… I mean, there was good alignment on that.
John Warrillow: Okay. And again, at this point you’re kind of roughly $20 million top line, growing like a weed.
Arik Levy: Yeah. Yup.
John Warrillow: Got it.
Arik Levy: We’re on a nice, solid trajectory. Hitting our numbers every month. We’ve got large clients, large REITS, great financials. I mean, the company was buttoned up and running really well.
John Warrillow: That’s awesome. Let’s go forward at this point. So they go to market looking to raise money. What was the-
Arik Levy: So engaged with the bankers. They spent a solid three-four months helping us really with our books, getting our books in order, and getting the P&L and balance sheet really dialed up, and getting our forecast super solid. So especially PWC, they’re auditors. So they’re bringing in their auditors and helping us really dial in our books, and that process alone was worth a couple hundred thousand dollars. We didn’t even have to pay for it. And we’re putting together a pitch deck, and then we’re putting together a list of targets to go after. So they started down the strategic path first because typically it’s a longer process than the VCs are. So we started launching our pitch deck over to or they started launching our pitch deck to strategics and have the first call and talk to them and get them excited about the business. They’re doing the same thing a couple weeks later with venture capitalists, and then it’s just meetings. I mean, it would be incredible. I would go down to Silicon Valley, Palo Alto, and I’d have three meetings back to back scheduled in the exact same day all with partners. So I was like, “This is incredible.” I mean, it would’ve taken me six months to try to line up these meetings and to have all these… And for me, I’m up in Sacramento. So I’m a solid two-three hours to get down to Palo Alto.
Arik Levy: So it’s lining up the VC meetings. We’ve got strategics coming out. It’s kind of coming at all angles, and we’re just kind of pitching them like crazy for a couple weeks there, which was a lot of fun.
John Warrillow: At this point, you’re still looking to raise money.
Arik Levy: Yeah. Yeah, exactly. So all I’m doing, the guys are raising money. That was sort of our intention. Then the bankers are like, “Man, these strategics are really interesting. We’ve got five of them that want to make an offer to buy the company. What do you think about that?” I was like, “Well, that’s interesting.” We weren’t really ready to sell the company. I mean, we kind of want to keep growing with this thing. We’re having a lot of fun. We’re building a great team here.
John Warrillow: Who’s the we? Who’s involved to decision to buy, sell to company? Who in the team did you want to have on side that decision?
Arik Levy: When it comes actually that decision, it’s really me and the board. And the board are some of the… It’s a three person board, and the other two are investors in the company. And so that’s really the decision makers here, and we’re representing the shareholders, which is probably about 20 different shareholders. And then my CFO, we were also working together on it. She was heavily involved in the process. But as far as making that decision, then yeah, I think we’re ready to sell. And that was really came down to how much it was going to be, right? If you look at it, it’s like, “Hey, I could sell my company for X, or I could go get venture capital, and then have to grow it to three X to hopefully sell it for the same amount of money and put the same amount of money into shareholders’ pockets. And then the VCs get rich on it, right?” So the option of selling… As soon as you go the VC path, you are going to sell your company, and you’re going to have a lot of pressure on you to sell your company in a relatively short timeframe.
Arik Levy: So it was either we can go VC and sell the company, or we’re going to sell the company today. And then it came down to the different offers and comparing those. And a lot of it, the ASSA ABLOY who we finally decided to sell to, a lot of that was around letting us continue on our path. Yes, they own the company, but to some extent, they’re much more like a strategic investor. ASSA ABLOY’s a $9 billion company that are made up of 300 separate companies, and a lot of the brands and the companies that they own still operates their own company. You can think of Yale Lock or HID, which is the car readers, or Medeco, or August Lock. And these companies still operate very independently, as do we. I mean, I’m still the CEO of Luxer One. We still have the same team in place. They haven’t brought anybody in to run the company. So it’s very much like bringing on a strategic investor, yet they own the whole company now.
John Warrillow: Got it. So ASSA ABLOY. I’m saying it slowly because I had never heard the name. I’m sure I’m just ignorant. But it’s a big Swedish company, right?
Arik Levy: Yup. Yup.
John Warrillow: And they do anything to do with… I think I was reading on their website, anything to do with doors.
Arik Levy: Yeah. Door openings.
John Warrillow: Locks. As you point out, RFID. Crazy the companies out there. Like who knew there was a $9 billion company out there. I had never heard of them before.
Arik Levy: You’ve heard of their brands. You just haven’t heard of them, and that’s kind of the way they… I don’t want to say that’s exactly the way they run it. I mean, the ASSA brand is a relatively powerful brand if you’re in that industry. If you’re in [inaudible 00:41:17] and such. But, yes, they’re not really a consumer brand.
John Warrillow: So who were the other… Because I can see how there’s an adjacency with ASSA ABLOY. You certainly you guys had something to do with the doorway. In an essence, you were accessing the doorway. It provided another doorway into these buildings in a sense. So there was an adjacent sort of value proposition for them. Who were the other four strategics, and what did they see? What was the strategic fit with them?
Arik Levy: Some of them were international companies that were doing lockers internationally, really wanted to kind of accelerate in the US market. Others were companies that felt that lockers were pretty important piece of their evolution, whether it be like… There’s a huge shift now from mail to parcels. So it used to be we check our mailbox for mail. Now we can care less what’s in our mailbox. We care about the parcels. So there’s this huge shift. So you can see anybody’s who’s sort of witnessing that shift or involved in that shift would be very interested, and we’re the largest player in the space. I mean, we have the most lockers deployed in the United States. We have the best technology and best platform out there. So anybody that wanted to get into that market, we were the right company to acquire.
John Warrillow: Got it. So these strategics were out there. What made ASSA ABLOY’s offer more attractive?
Arik Levy: I mean, you get into the details of the offer. Actually, the reality is ASSA actually wasn’t the highest bidder. We had higher bidders. But what we liked the most about ASSA was that we were going to be able to keep the team in place, and we were going to continue running on our trajectory and keep the company operating as it is. The other ones, you could just tell. If they came in, they were going to bring in their team. We were going to get sucked into their company. We were going to become a product that they were going to offer tightly integrate into, which was interesting. But I don’t think it allowed us to sort of continue executing on our vision.
John Warrillow: What was it in those conversations in the LOIs that led you to believe that the other offers were… The acquirers were going to suck you in. I’m trying to think for other entrepreneurs listening who might be looking at an offer right now, what should they be on the lookout for if they don’t want to fall victim to that?
Arik Levy: Yeah. Well, it was a couple things. One is, and there’s very different types of acquisitions. Sometimes people are just looking to get out of the company. Other times they want to keep running with it. So you have to choose sort of what you want. One of the best ways is you go and you talk to the companies that they’ve acquired in the past. I mean, it’s pretty easy to see sort of the trajectory of these acquisitions and how they’ve happened. ASSA ABLOY, a lot of the companies that they’ve acquired, the CEOs are still there. They’re still running those companies.
Arik Levy: You talk about during that process of meeting with them, there’s a lot of meetings, especially when you start getting into due diligence. What’s the future look like? Here’s our trajectory. Here’s what we want to do. And trying to gauge and feel with them sort of what that’s going to look like. But past performance is probably the best predictor of what the future’s going to look like for. And every company has a very different approach to acquisitions.
John Warrillow: How did ASSA ABLOY deal with the working capital situation? Because the whole reason you went to raise money in the first place is you needed to fulfill these massive orders, and you didn’t have the kind of capital to float those. Did that come up in your conversation how they were going to fund those or what commitments they were going to make around funding them?
Arik Levy: Not specifically, but you do come back to an important point. ASSA ABLOY’s a $9 billion company. At the time, we were $37 million company in revenue. And so in the grand scheme of things, we’re not a massive piece of ASSA ABLOY’s business. Some of the other acquirers, I mean, we were almost… We would’ve been some of the largest acquisitions that they’ve ever made. So having that level of pressure on you and knowing that they’re pretty much putting everything into this acquisition, that’s pretty scary. So that one was a couple of the acquirers that we were looking at. It was like, okay, if this acquisition happens versus the ASSA ABLOY, you can imagine they’re very different. So ASSA ABLOY’s got to have access to the capital. I mean, that’s not a problem. As soon as they acquired us, we sort of had a line of credit that we’re able to tap and use that. So now we don’t worry about capital anymore.
Arik Levy: With some of the other acquirers, it would’ve been a lot… It’s like every penny that you’re asking them from was coming from a line of credit or something that they were going 100-
John Warrillow: Back to a bank. Yeah.
Arik Levy: 110% in on this acquisition. If this didn’t work, their company was dead.
John Warrillow: Yeah. Yeah. Yeah. Yeah, that’s huge. In the case of ASSA ABLOY, and again I don’t mean to drill in on this point, but I think it’s fascinating what triggered the need to raise capital. So is part of the negotiation, did you get them to commit that they would allow you to access essentially the funds to fulfill the big retail order, or did you just assume that because they were so big that that wouldn’t be a problem.
Arik Levy: Yeah. I don’t remember that specifically coming up as part of the acquisition conversation. I guess we just assumed that they weren’t going to want to starve us and make us go under. So it’s like you make this acquisition, you’re going to make sure that they’re funds to support it. But yeah, that is an interesting one. In hindsight, it might’ve been helpful. I think it’s a very good point around okay, your acquirers for X. How much money are you going to set aside for us to go continue to invest and try to grow this business? We’re a profitable business, and we remain profitable. I think to ASSA ABLOY, that’s very important. They kind of only acquire profitable businesses, and they have a very… They acquire profitable businesses with a strong management team in place. Those are really kind of… And one that’s in somewhat of a related or adjacent industry that they think they can sort of add a tailwind to. And then they give those companies the resources that they need to succeed. And so that’s what we’ve seen.
John Warrillow: Excellent. So you had five strategics at the table, and I’m assuming you had other investors that PWC…You had conversations with that were willing to invest as opposed to acquire.
Arik Levy: Yeah. The VC path didn’t go as well as… We had great meetings, really meaningful meetings. We’re a hardware company. VCs are very much in the software companies. Finding the right fit. What’s interesting is when you come into a venture capitalist through a banker, they don’t particularly like that. They know the banker’s getting a piece of the money that’s going to be raised. They know that they’re being shopped, and that you’re going to be competing with other ones that they’re going to try to bump up the price that you’re going to pay for it. They kind of play on that naivety that a lot of entrepreneurs have. “Oh, wow. Some big VCs want to talk to me. That’s cool.” But when you’re doing it with a private equity or with a bankers, you’ve got five VCs at the table.
Arik Levy: We pretty quickly, once we saw where it was going, we started getting offers from strategics. We kind of cut off the conversations with VCs and knew that we were going to go this path where we’re going to sell the company.
John Warrillow: And I guess I ask because under the invest kind of door, you would’ve taken money and continued on as CEO and major shareholder. Under the acquirer bucket, you sold the company in essence, but now remaining on as CEO. I mean, you’re an entrepreneurial guy. I guess what I’m asking is… I guess what I want to know is what it’s like for an entrepreneur who is so wired to be entrepreneurial… I mean, you’re starting a lockers when nobody has lockers. You’re building a software company over a year. This is your third business. You’re pivoting. It’s growing. To go from that to being a division in a $9 billion company. How have you kind of come to grips with that as an entrepreneur?
Arik Levy: Yeah. It’s a fantastic question. I think what happens when you start getting deals on the table to sell your company, when you never even thought you were going to sell your company, and you were so all into I got another five years in this thing. And now I’m going to have VC money behind me. I don’t have to bust my ass. This is going to be crazy. To wow, you’ve got an offer on the table that’s going to change your life. You’re never going to have work again. It’s going to be everything you could ever imagine of. I mean, it messes with your mind. I don’t know what kind of profanity we can use here, but it is crazy. And then you go through this process where you’re like, “I don’t know if this deal’s going to close. Hopefully we get across the table.” And so you’re going through this, and you can’t sleep at night. It’s just crazy. You’re thinking about the stuff you’re going to buy with your money, and then you’re like, “There’s not that much you can actually buy with your money.” What’s it going to do for your family and your kids? What are your kids going to grow up like?
Arik Levy: I mean, it’s just like a whole new world of stuff that you never even thought of. Then the deal closes, and you’ve got this money. You don’t know what to do with this money. It’s like, “Do I just let it sit in a bank account? Wait, this is actually work to manage this money.” And then, “Why am I working still? Do I need to work? What’s the purpose behind my work?” And it’s a solid six to nine months of sort of finding your way, figuring out what you want to do and where’s this journey going to take you. I felt tremendous responsibility to my team. I felt tremendous responsibility and still feel tremendous responsibility to ASSA ABLOY who acquired me and bet on us. Like I said, I wasn’t trying to sell the company and get out.
Arik Levy: So what I’ve realized is this now gives me… It takes the risk and the fear, and to me as an entrepreneur fear was what guided my decisions every single day. You don’t realize how much fear sits on your shoulders and how much that guides your decision making. And it’s good. I mean, it makes you do things that most safe or sane people might not do. It makes you go after and start businesses. And I still love creating that. We have a whole innovation team here that works on product innovation. Today, we actually just launched a pilot for a whole new business model in essence that I’m super excited about. And so what’s nice is I don’t really need to make… For me, starting a new company is not around striking it rich and making money. It’s around my passion for changing the way the world does things, which I really enjoy doing. And challenging current business models and stuff like that.
Arik Levy: So this actually becomes that place, that incubator where I can kind of do that stuff, and you take money off the table and you don’t need money anymore. It’s like, “Well, maybe this is where I do finish my career.” I don’t have to work 80 hours a week and five days a week. I can kind of pare that down a little bit, put in place a management team and do what I like to do. Hopefully have some upside in that success. But to me, I’ve kind of realized that now it’s more about the success of the people that work for me, and that’s become really motivating and enjoyable was how do I help them build strong careers and the tool sets they need and whether that be in ASSA ABLOY or outside of ASSA ABLOY. I’m in a great position now to be able to help the people that helped me get to where I am. So it’s a really fun and crazy… It’s just this crazy journey you go on that you would never even understand or I never even thought about it until it started happening to me. I was like, “Wow. I probably should have thought about this ahead of time.”
John Warrillow: What advice would you give a fellow entrepreneur about to embark on that journey?
Arik Levy: Of selling the company or raising money and such?
John Warrillow: No. The check is about to clear tonight. More money than they’ve ever imagined is going to be deposited in their bank account, and they’re about to embark on that nine month journey of self exploration. What advice would you give that fellow entrepreneur?
Arik Levy: So one of the most helpful things for me is a group I’m in called EO, Entrepreneurs Organization. It’s the largest entrepreneur group in the world. Been pivotal in my career. But what’s amazing about EO is there’s plenty of guys in this chapter alone, not… Outside of my Sacramento’s chapters, but even in Sacramento, we probably have five or six guys that have been through exits. I mean, we got one guy who’s sold two companies for $500 million. And so you’re able to find people that have gone through this, and to be able to talk to them, to see their stories, what the decisions that they’ve made are. Some people say, “Yeah, it’s great. I play golf all day.” Some guys say, “I can’t stop working. I’m going to work every day. You’re going to want to start another business tomorrow.”
Arik Levy: So being able to see those journeys, to be able to hear their stories, to be able to talk to them is incredibly helpful. Patience too, especially your phone starts ringing left and right from all these money managers. Those are fun.
John Warrillow: Hey, Arik. Yeah.
Arik Levy: I wasted a bunch of my time of me and my wife talking to all of them going, “Oh, you can manage our money. All these guys do is trade stock and charge you for it.” So we didn’t really go down that path. We kind of had some patience around that, which was great. So it’s like take the money, stash it away, don’t think about it. Buy some of the nice stuff that you want. Make sure your family’s happy. Set up a good trust and good protection, asset protection. And then for me it’s business as usual. In fact, I probably work harder now than I was working before. Mainly because I’ve got a boss and a company, and I’ve got all these meetings I have to go to and attend that I never had to before, which is interesting. I wasn’t expecting that. But it’s fun too. It’s great too. I didn’t become an entrepreneur because I had to get out of the corporate world. I started my career at General Electric and enjoyed it, enjoyed the people there, the learnings there. I’ve worked for small companies and startups. I don’t really have any problem working for someone else. It’s nice to have other smart people to bounce ideas across.
Arik Levy: I mean, yesterday we’re looking at doing acquisition and I had people in the group who have done three or four acquisitions. So I’m able to bring those folks in, and they share a perspective with me that I would never have because they’ve seen stuff that I never have. So to me it’s just kind of the next step in the journey, and it’s been a lot of fun.
John Warrillow: Amazing. Well, I’m grateful for you sharing this story. One last question. Did you buy yourself a trophy? Was there a something you bought that for you signifies the sell?
Arik Levy: It’s funny. So there’s a piece of property that we always wanted, my wife and I. So we ended up buying that property, and I brought one of my coworkers out to it. He lived in Atlanta, and he was out here for a week. I was like, “Save an extra weekend.” So he came out, and he’s like… I’m driving around in my four wheeler around our 20 acres, and he goes, “Has it sunk in yet?” I’m like, “Yeah. This is when it sinks in,” when you have kind of everything that you ever wanted. And it’s great. I mean, our life is fantastic. But yeah, I’d say kind of the property’s probably the trophy that we bought.
John Warrillow: Love it. Love it. I think that’s important to do to commemorate and celebrate it. It’s not the material I think but it’s the billage to kind of remember the achievement, which is huge in your case. I’m so glad for you to spend the time that you have with us today. I know people are going to want to reach out, congratulate you, and probably pick your brain. Do you accept LinkedIn connections or how do you feel about people sort of reaching out?
Arik Levy: Yeah. I mean, LinkedIn is fine. A lot of times I won’t accept the connection unless it’s somebody I know.
John Warrillow: Okay.
Arik Levy: But you can still put a message in there, and if it’s interesting, I’ll definitely like you and respond to it. Yeah, that’s probably actually the best way to get in touch with me is just the LinkedIn message.
John Warrillow: Okay. And the website is LuxerOne.com.
Arik Levy: Yeah. Luxer L-U-X-E-R-O-N-E.com. And you can find me on LinkedIn. It’s just Arik A-R-I-K Levy L-E-V-Y.
John Warrillow: Well, you’ve been generous with your time today. Really appreciate you taking the time. Thanks, Arik.
Arik Levy: Absolutely. Yeah. Great to talk to you. Thanks so much.