67. Launching start-ups with Navin Kaminoulu and Scott Kaplanis

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Transcript

You're listening to The Entrepreneur Podcast from the Western Morissette Institute for Entrepreneurship powered by Ivey. My name is Eric Morse, and I will be your host for this episode. Building a high-growth business is like launching a rocket. The founder is the engine builder, and venture capital is the rocket fuel. It's a two-sided relationship where priorities are different, but the goals are the same. But what does it take to get liftoff and break through the atmosphere? How can entrepreneurs and investors work together to discover the full potential of their ventures. In this episode recorded at the Western Angels' Demo Day, we hear from two Western alumni from each side of the table, entrepreneur Naveen Kaminoulu and investor Scott Kaplanis have worked together for the past five years, building, raising capital, and exiting ventures. Kaminoulu was the co-founder and COO of Indus AI. The company raised 11 million in venture capital and was acquired in 2021 by Procore Technologies, the world's largest construction SaaS company. Kaplanis played a major role in that story as the managing partner of Groundbreak Ventures, a seed in series, a property technology fund that focuses on finding the next generation of founders in the industry. Together, they discuss what to look for in a company and in an investment firm, the do's and don'ts of raising capital, what keeps them up at night, and the process both pros and cons of the exit.

Eric Morse 

What do you look for when considering an investment in a company?

Scott 

I've had this question a lot, as you can probably imagine by sitting on numerous panels, and I think I've boiled it down to the most simple possible form. It's really two things that we look for, dream and credibility. And it's sort of what goes into those two elements that is what will ultimately make the decision. But the dream is, is the idea big enough? is the addressable market large enough? is the potential for disruption, big enough to warrant venture capital investment? Because venture capital investment is not for every type of business, as you probably all well know. So that's number one, has to be that big enough thing, big enough prize. And then number two is credibility. And the credibility boils down to a number of different things, depending on who the entrepreneur is, who the founder is. It could be their particular skill set. It could be the ecosystem that they come out of. It could be the advisory team, the board of directors that they potentially built. It could be an anchor client that has a brand name and a reputation in the market, something that can prove to us that there is a team that can execute on that dream and can ultimately win in what is now like a globally competitive environment. There are probably numerous teams working on similar ideas all over the world, and that's your competition. It's not just sort of a local pool that you're up against.

Eric Morse 

Thanks, Scott, appreciate it. Navin, you and I had a chance to talk about this. It's not just, you know, kind of due diligence one side. It's got to be due diligence on both sides. So when you went to market, you know, what were some of the things you were looking for when you were evaluating venture capital firms?

Navin 

Yeah, I think that it's interesting that Scott said dream big, because I would say for us, one of the things that we always look for when we're trying to raise money is fit. So we have got this big dream, and our dream was really to improve efficiency on construction job sites, and we wanted to make sure that when whoever raised, whoever was able to provide us capital, also had that same mindset in property tech or industrial automation. So really around fit. The other thing that we really looked for was around the idea of, I'd say, fit 2.0, which is, what were their expectations as an investor? So some investors, or some funds or their their idea of a good investment is, we're going to write you a check, but we also want you to participate in all these events. We want you to go and meet these folks. We're going to expect this time commitment for you, so for us, we were more on the side of we want the capital and at the same time, we want the relationships, but we want to minimize the amount of disruption, because we really want to focus on building and operating our business. Sure. Yeah. Okay, interesting. So Scott, given the framework you talked about a minute ago, what was it you saw in INDUS AI?

Scott 

Yeah. So, I mean, I guess first and foremost, the individuals, you know, a team that had worked together before in a previous iteration, had a success. That's always a good sign. Always something that we would look for with technological chops to build the product that they were going to market with. And then, this is kind of catching us in 2019 it's right on the cusp of a lot of discussion around modernizing and digitizing the construction industry, which had lagged behind in pretty much every metric and was still getting up to speed even as it relates to safety relative to other industries. And then, without going into a ton of detail, basically the INDUS solution was. An always on look at productivity and safety on the job site. So in other words, you can imagine, you go on a construction site and there's a super that walks around, and maybe they take the occasional picture, but really it's just a dude walking the site and then reporting back, and that person may or may not enter anything into the computer, or may or may not take appropriate notes. And so there's really no intel about what's going on on that construction site. It's just a moment in time if that supervisor decides to enter anything. And the INDUS solution was effectively like an always on way to understand what was happening on the job site without being intrusive, like so think, without being a body cam effectively on the worker, which would never fly in the industry. So that's what attracted us specifically to in this.

Eric Morse 

Thanks Scott. I mean, I'm guessing it wasn't kind of the first pitch that you did that got this series A but, you know, you go through this process, and it can be a long one. It can be tiring. Sometimes you hit the jackpot, but typically it's a long process of building relationships. And, you know, doing a lot of different pitches, and, you know, meeting a lot of different people. What are some of the do's and don'ts that you've picked up through that process?

Navin 

Yeah, I think the first, it's interesting that you touched upon building relationships, I think that that is the, I'd say, the pie in the sky. If you want to raise venture capital, you need to go and build some relationships. And if I would say it's analogous to either a big purchase, such as buying a home or buying a car, you want to go and do your research, go and build a plan. Go and build relationships. And it's an interesting story. When we raised our seed capital, one of the things that we were trying to do was go to events like this and to go meet people. So we had gone to an event in the Bay Area, and we had met a gentleman who was similarly doing a fireside chat like this, and he was the founder of a company called Clover. So I don't know if you ever go and pay it, you know, point of sale device. And he said, What are you guys doing? He said, Well, we're doing we're trying to make construction better by using machine learning and computer vision looking at images and construction videos. And he said, Wow, I was just thinking about how construction is super inefficient. Have you guys raised any money yet? And we said, No, we're not. We're not, we're not yet, raising yet. And a week later, he sends us an email. He said, guys, I want to write you a check. And we said, no, no, we're not ready to we're not ready to raise money, and so on and so forth. He kept bothering us. Finally, he just sent us a note for a safe. We signed it, and within 24 hours, he had wired us $150,000 US, which was our, I'll say, our pre seed money. Now that's not the relationship part. The relationship part is we had gotten to know him really well throughout that process, and he actually introduced us to our eventual and eventual seed investors. So I think, to your question, there the relationships go and meet people. And, you know, I always hear that, you know, the second part of it was around do's and don'ts. I hear founders who send people pitch decks. That is probably the worst thing you can do, if you think, going back to my earlier point there, you're asking somebody for a considerable amount of money, and you're the way that you're asking them to do that is you're just sending them a deck, like you have to go and meet them, get to know them, get to know what, what, what they're interested in. You know, really do your homework, and then at some point you can start your process in formally trying to raise money. So I think that that's super important.

Eric Morse 

Cool.

Scott 

Do not internalize what Navin just said about that safe note story that does not typically happen. That's not the way it was.

Eric Morse 

That's one of those long shots coming through.

Scott 

But I would say, you know, we've come across a lot of founders who would say things like, yeah, we're not raising right now, or we'll come back to you when we are raising like no, no. You're always raising all the time. You're always pitching something, whether it's your product, whether it's a network, whether it's your relationship, whether it's your round, it's just constant. And you have to take that type of mindset. You never know where a relationship like that could come from.

Eric Morse 

Yeah that's what I was going to point out, is that you're there trying to build relationships, and it worked faster than normal, but you were doing the right things.

Navin 

No I was going to say, you ruining our the founders playbook on raising money.

Eric Morse 

Scott, I'm going to start with you on this one. I'm going to come to Navin. Same question, basically. But when do you get nervous about an investment, and when do you get excited? Like, are there particular levers that are huge flags for you one way or the other?

Scott 

I guess I'll do the nervousness first. I think so. A couple of points come quickly to mind. The first is the initial meeting you have, whether that's a board meeting, if you're represented on the board, or you're an observer on the board after you've written the check. So that that always makes me incredibly nervous, because it's effectively the point where all the bullshit around, like pitching and stories and narrative is like, Oh crap, this is where the business is right now. So that's first point of anxiety. I think, like second point of anxiety is probably the text that you get on that random day that says, like, Hey, Scott, do you have five minutes? That is never a good text. And, you know, it leads to like, "hey, we need more money, or this thing's happened, or some other issue has occurred." So those are, like, the two things for sure. And I'm putting Navin on the spot, since we're supposed to be a little bit candid here, like in the story of INDUS, I definitely had a moment of panic, as it related to one of the key people that we did due diligence with to make the original investment that got us excited about the opportunity was one of their clients eventually, and the onboarding process did not go well, and that was a client that ended up actually churning, like maybe nine months into the process, and it was a material client. And I was like, Oh, wow, what? What's going on here? And so, you know it, there's all kinds of points like that that happened. It's part of the part of the story. This one ended up working out. But...

Eric Morse 

Anything that just gets you even more excited. Like, wow, we were... We underestimated how good this was.

Scott 

Yeah, fair enough. I was too much on the negative side. I think that you really get excited when you know something has achieved, product market fit, like when all of a sudden you see a predictable and repeatable process starting to occur. That is exciting, because now you know, it really is like we can accelerate these things with incremental capital and resources. And the hard stuff about trying to find the idea that's going to work and resonate is is done for the moment, and something is actually working, you're seeing the results. That's pretty exciting.

Introduction/Outro 

That yeah, great answer. I love that. All right. Navin, I mean, as a founder, you're always anxious, so we'll just leave that on the table. But in terms of the relationship, are there things with the investors where you go, Oh, wow, I'm a little worried about that. Or hey, I'm excited about that.

Navin 

Yeah, I think that... So on the relationship with the investors, you're always going to be nervous, and you're always going to have a level of anxiety. That's just normal. But I go back to earlier, you know, if you've built that good relationship, and it's built on credibility, and it's built on trust, that alleviates some of that nervousness. That doesn't mean they're not going to give you crap and they're not going to, you know, use some words that we shouldn't be using and tell you that this, you know, you're heading in the wrong direction and using all types of superlatives. But nevertheless, I think that relationship and that credibility helps with that the second question, second part of the question...

Eric Morse 

Are there also places where you get excited, like, hey, this was...

Navin 

Yeah, so on the same thread that Scott was talking about that, when you've achieved that product market fit, you really, really get excited when you start seeing either your use, the two metrics you probably want to look for usage or revenue, right? So once you start, you know you're looking at your dashboard for what however you're tracking your usage, and you're seeing, holy shit, people are actually using this.

Eric Morse 

The trend line looks just like I said it would!

Navin 

And you're like, wow, I didn't know I built something like this. Or the other part is, oh, last month we did two deals. This month, we did four. Next month, we did 12. Like, when you start seeing that trajectory, you get super excited.

Eric Morse 

Yeah, cool. So I'm going to say maybe back away from the investment side of things, but maybe this actually plays in what was maybe the biggest challenge, or a couple of the bigger challenges you faced in kind of building INDUS AI?

Navin 

I think for us, and I go back to the usage piece we were, we built a technology and a product for a very unsophisticated buyer. So Scott talked about superintendents, right? So we would go into a lot of these sales meetings, and we would pitch, "oh, here we've got this product, and it's doing these bounding boxes around people and machines," and the superintendents and project managers would look at us like, what is this? We don't care about this, right? So I think for us, it was really around, how do we shift that narrative from moving away from a technology that we were selling to a product. So I think that was the biggest challenge, the biggest learning, and we were able to learn that quite quickly. But a lot of folks love to sell their technology, but you really have to try and sell your product, and you're like, what's the value that the customer is going to get!

Eric Morse 

Yeah, that's coming from understanding the customer, right? It's not what you are selling, it's what they're buying and what they want to buy. Yeah, cool. I'd love to have you in different rooms and have you come out and answer this question separately, but so try and do that. But if you were just to define what is an exit, Scott, what's an exit mean? I mean, we use the term all the time, but I'm not sure we really think through what that means in a relationship like this.

Scott 

I think, to me, it just means the ending is the end of whatever that particular story is, right? So an exit. It doesn't mean that the company doesn't still exist in some form or fashion, but it's the end of that investment period for us, and that can be a company that doesn't work and out and ultimately goes to zero, and it could be a company that gets rolled into a large, publicly traded company that becomes embedded in their technology stack. But for us, it's definitely like a financial measure like this is the end for us in that investment journey.

Eric Morse 

Cool and Navin, how about you?

Navin 

I think a little bit different than Scott. I think the way that I would define an exit, and you know, you look at it from an investor perspective, and you're investing capital, and you're investing in companies... As a founder, and you're raising venture capital, you're raising it from institutional funds or venture funds throughout your journey, I would say the last part, which is the exit, is when that part of that journey is, there is somebody who's coming to offer you a large amount of capital, and they're essentially buying the rest of your business. So it's still a part of your raising capital journey. It's just a different financial outcome, right? So they're just buying all the remainder of your shares. So just, I think, for any founders out there, if you're thinking about an exit, you know, we always hear about these stories, this company got bought for this much or XYZ, you really have to look at the lens. Why are they doing that? And they're buying it because they want to put that capital into your business, and it helps their accelerate their product roadmap or their strategy.

Eric Morse 

So tell me a little bit about your story, like, how did that exit come about? Was that something that was a long time coming, a long time relationship again? Or was this something that was a bit unexpected?

Navin 

Yeah, so I the mechanics, I would say are the quick part. So, you know, if we talk about the deal, the deal part, that's the real easy part, but for us, the actual exit took a long time. And I'll tell you the I'm going to try giving a short version of the story. So in 2019 when we were raising our Series A we had pitched a specific fund in the US, and they said, No, guys, we're not and this goes back to my earlier point around doing our research and planning, this fund had already invested in a construction property tech company. And they said, guys, we're not interested because we already have this investment. Said, Okay, fine, we'll move on. Literally a day and a half later, that company that they had invested in contacted us and said, Hey, we understand you guys pitched XYZ firm. Would you guys be interested in acquisition? And we're like, not at this time, right? They went away for a little bit. Fast forward about six months. We had gone to their conference. They have a big construction tech conference, which is probably the largest, I'd say, prop tech conference in the world. It's called groundbreak, ironically enough, the same, same same same name as Scott's firm. So we had gone to their event, and we had a booth there which said artificial intelligence for Procore and for construction, their CEO came up to us and was like, Wow, I'm super excited about this. We'd love to kind of have you guys and visit us in Santa Barbara. And we said, Okay, fine. So we went there and we visited them. Remember...

Eric Morse 

Why wouldn't you visit Santa Barbara?

Navin 

Exactly. We went there. We talked about bunch of different things, how we can integrate what our idea of a, you know, super successful product and strategy looks like bunch of different questions. And again, this is, you know, eight months in... fast forward again, about a year. And all throughout this period as well, we had gone through covid. We were, you know, in the process of raising our series B, and when we're raising our series B, we had two strategic investors who we wanted to attract to come on our cap table. One of them was Procore. Another one was Autodesk. So at that point, Procore was like, Hey, we've gotten to know you guys really well. We've done a couple of integrations with you guys. Would you guys be interested in acquisition? And for everybody out there, when somebody says that, the immediate answer is, "no," no, we're not interested. We want to build a big business, right? So we had two competitive buyers and one of the other, you know, the I guess, for us. And it goes back to your definition of an exit. At pre acquisition, we were processing about 100,000 images a week, and Procore came to us and said, Hey guys, we have three and a half million images a week that we're collecting that we're doing nothing with. You guys are basically raising money so you can acquire customers, to acquire images, to provide return of provide ROI on those images. We're going to give you those three and a half billion images become a part of us. So that's really, you know, that's giving you a very condensed version, but a lot of it was the relationship we had built, getting to know them, them, getting to know us, and the right point in time that we felt it was the right time to exit,

Eric Morse 

Cool. So Scott, you presumably know this is going on. When do you get involved? And what does that involvement look like?

Scott 

I think in general, the best VCs, and I think the Americans, do a much better job than the Canadian VCs, in this capacity, is they're they're building relationships for exits basically day one, and it's by laying bread... breadcrumbs to whether that's heads of IT departments within organizations, whether that's talking to investment banks to make them aware of what's going on, they're they're sowing the seeds early, so that those entities know who those companies are when it comes time for that company to potentially fit within their strategic vision. So that's what the best investors do. And I think, like, that's something that we're trying to continually get better at, which is why it matters to connect to potentially players that may not otherwise come to the top of your mind as to where you should spend your time. So, like, we should spend our time with investment bankers. They do help. We should get to know them so that they can help us on exit. As it relates to the mechanics, like once the process is in place, I don't know if there's a lot that we, we as a minority investor, were able to add in the case of INDUS. If there is a if there is a larger investor that has a certain share percentage, they take a vested interest. It matters for them; They're going to be much more involved in the negotiation. We were a minority investor, so we're kind of just watching the process from the outside looking in. But we have had instances where a founder will lean on us to say, hey, what do you think about this clause, or what about this claw back? Or talk to me about earn outs. Have you ever experienced an earn out before? What do they look like? What are the risks? And you know, frankly, we have done that over the years, and sometimes there will be insights that we can offer, but it just depends on where you are in the cap table. In the case of INDUS, we weren't large enough to have a major role.

Eric Morse 

Okay, yeah, thanks. So Navin, you've been through this process. There's usually mixed emotions when you when you do exit, finally, and maybe share some of those positives and negatives when, when you went through this exit.

Navin 

Yeah, I'd say the positives, you know, you're, I go back to that story of going from 100,000 images to three and a half million images a week, right? So it's like, wow, you're, you've now gotten your product at scale. So that's definitely a super big euphoric high. And I would say on the, you know, I'd say the lows are, you know, you're now a part of what you essentially left. You know, as an entrepreneur, you've left working for a big business, now you're working again for a big business again. And you know, some of the things that come with that. So for example, when you're an entrepreneur and you want to hire somebody, you know you're going to go put your requisition up on XYZ job board. You know, you're gonna go through the interview process and hire somebody now you're working for a large organization. Now you have to go and do a business case. You have to go and speak to somebody in HR and you know, they're gonna start that process. So a lot of the bureaucracy that you kind of left and you're like, I don't want to be a part of this. You're a part of that again, right? So I would say that, you know, having your product realized at scale, super big, euphoric high. The second piece, that's probably the low, is, now you're a part of a big bureaucratic machine again.

Eric Morse 

Yeah. What didn't I ask that? I should have asked? This might put you on the spot.

Scott 

I mean, like, look, I think what we've gone through in the last I won't take up too much time, but we've gone through a very interesting phase in the venture capital world as it relates to valuations, expectations for founders, hopes and dreams. And I think it's worthwhile to just sort of focus a little bit on how challenging it truly is to build a business, how much effort has to go into it, what the chances of that success could look like, and recognize, I think, a little bit that from an investor's point of view, providing risk capital at the thinnest edge of the risk curve, what they need to achieve in order to make the wheels go round. Because ultimately, if you build a relationship with an investor. You make the money the first time around, they're going to support you the second time around, and they're going to support you the third time around. But if you, if you position yourself at a valuation level as an example that is so outrageous that you cannot make that first person money, then you don't get that second opportunity and that third opportunity. And I think founders today, having gone through the last few years of euphoria, still need to kind of readjust their mindset. So I think that's I'm not sure if you should ask that, but that is some advice that I would give this crowd. Your capital creation chain is really, really, really important, and making money for your investors every step of the way is a critical element of creating success. And actually, that's something Indus did super well. And I don't know if you want to go into details, but they didn't have to in all the and all the instances. Yeah, cool. Navin, anything on your side?

Navin 

I think the only thing I would add is that, you know, people think that raising money and building a venture backed business is something that you have to do. There's other ways that you can build a business, so you should be aware of that. And the other thing is, when you if you are going to build a venture backed business, remember that you're the custodian of somebody's money, and you have to be ready to sign up to what those terms are, so they're not giving you, or they're not investing in you, to get 10% growth year over year, even though that sounds amazing. Amazing. They're looking for 6, 7, 8, 10, 20, times growth, so be prepared to sign up to that type of growth.

Eric Morse 

Yeah, both of those were great, good ads guys. Questions from the group

Question 

how or why did you decide to come to the exit point?

Navin 

You know, it's we, two things, one, I think the terms, we were super happy with. So we were like, Okay, there's a couple of different outcomes that can happen when you're building a venture backed business. The first outcome that happens to 90% of them is the company is going to die. The most unlikely outcome is you're going to build something that's super huge, and you take it all the way and it's going to become public. That's doesn't happen very much, right? And the more and the more favorable outcome for founders and for investors is you do have an acquirer in there who's somewhere in that life cycle that is going to give you good liquidity, is going to you know, your product is actually going to become realized to your vision. So I think we really that those boxes were checked for us.

Scott 

Can I add something to that? Just from the investor perspective, I think, like where Indus was, is a very interesting fork in the road where, you know, they had built a real business, so past the idea phase, but now there was a decision point. There's a point where you can take an exit and you can potentially go and do something else with your life, or you're really doubling down into a very high risk proposition for the next sort of five to 10 years, about where that could go, if you raise the series B and all of the things attached to that on the risk probability scale. And you know, I think it was actually, and this is also coming out of covid, complete uncertainty of the market, the idea that there that a founding team could be honest with themselves about what those two paths look like and say, You know what, this is probably the best risk reward decision right now. And even though, like very candidly, we as investors in the series A we didn't make a ton of money, this isn't like a fund changing type of opportunity, it was the right decision to make, and we were more than happy with that rationale, because we saw the same challenges and risk reward that we would had to buy into for the next five to 10 years if we kept going down this path. So yeah, it was a hard decision, but you really have to look at yourself in the mirror and be honest with where the business is.

Eric Morse 

Yeah, cool.

Thinking about the exit now, a few years later, if you were to go back in time, what would you change? Any terms you would specifically look at, how did it turn out? You know, better or worse than expected?

Navin 

That's a good question. I to be honest, I wouldn't change anything like we were, you know, we were very, very happy. We were, you know, the the company that acquired us a part of going back to that relationship, they treated us really, really well. They give us a lot of autonomy. And at that point as well, they hadn't gone public. So that was another, I'd say, an exit to Dotto for us. So I really wouldn't change anything.

Eric Morse 

Cool. Other questions?

Question 

This is a question for Scott. You mentioned one of the worst calls is, Hey, Scott, do you have five minutes? What metrics do you use to decide whether or not you double down and continue to financially support a company or a founding team that needs you?

Scott 

Yeah, yeah. I mean, it's, this is a very, very critical question that we struggle with all the time. It's like, you, you clearly don't want to throw money, additional money, after something that's not working. So unfortunately, there's a whole bunch of prongs and different parts, different criteria that go into that answer. But I think the first thing is, could you can the business get stabilized into an outcome is probably the starting point. So in other words, what would it take for me to get this business to cash flow, break even, and then I can figure out a way to exit, potentially at a modest multiple but I'm going to get my money out and I'm going to be able to cycle that capital if I if we were to think that that is possible and believe in the ability to get there, we probably double down. So you're already, you're already making the decision that this isn't a home run, it's not going to work out. It's not going to be your fund maker, but getting to an exit, and then positioning your role within that new capital with with some sort of mandate that gets the business there. So it could be a clause, and what you build in, it could be expectations that you set up with the founding team, but something that drives the business to an exit versus drives the business to continuing on forever and becoming a zombie company.

Question 

Are you going to do another startup?

Navin 

Are you asking me, or Scott? I'm on a break. I'll say that for now, and I tell people I may have aged out. You know, it's a long process, so I don't know.

Question 

Someone has to throw them a safe note uncapped, right? We'll see you in about four months. So there's always a complicated relationship. You know, you're the company, you're the investor. There's always a back and forth. When do you how do you make that balance happen? When do you guys have to intervene into the company, and vice versa, etc, push and pull. How micromanaging are you?

Scott 

Depends on the severity of the problem and the size of our check. I think it's probably the right answer. You look, you do build trust, and you build a relationship with the people that you invest with as humans like we've had instances where CEO of one of the companies that we worked with had a very serious mental breakdown effectively on the job, and we had to go, we had to basically manage that through with a second in command for five months, and help that individual take the time that they needed to get better. I mean, so these are people, and you either have a relationship, you take the time to build it as a human, or you don't. Some funds don't do that. Some funds do it really, really, really well. You don't have time to be best friends and build deep relationships with every founder, but you you know you want to do as much of that as you can mutual respect. You know what we're trying to achieve. We know what you're trying to achieve. Sometimes they're aligned, sometimes that they aren't, but you got to just be honest with one another.

Introduction/Outro 

The Entrepreneur Podcast is sponsored by Quantumshift, 2008 alum, Connie Clerici and Closing the Gap Healthcare Group. To ensure you never miss an episode, subscribe to the show on your favorite podcast player or visit entrepreneurship.uwo.ca/podcast. Thank you so much for listening until next time.