🎧 #043: Scott Ellison on smart building startups, mistakes to avoid, and why the time for innovation is now
“There's a mentality, at least in Silicon Valley that says, ‘Hey, we're just going to run in like a bull in a China shop and disrupt… Disrupt, disrupt, disrupt.’
If you're a startup and you do that in this sector, you're just going to be one of a number of other companies off on the side of the road in a ditch.
This sector, you know, built world and building tech, I think really demands: yes, disrupt; but also respect certain things. And the respect is just fundamental motivations, like a lot of the financial dynamics.”
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Episode 43 is a conversation with Scott Ellison, advisor, investor, and consultant for startup founders in the built environment.
We talked about: startups, investing, building businesses, and why the time for innovation in our industry is now.
Mentions and Links
Episode 5 with Troy Harvey (30:55)
Building Ventures (33:01)
You can find Scott Ellison on LinkedIn.
Thoughts, comments, reactions? Let us know in the comments.
Why is technology behind (it’s potential) (5:02)
The 80s playbook (13:19)
Scott’s consulting work, with some background on early-stage start ups (16:19)
Why now, for building tech? (20:49)
The biggest mistakes prop tech startups can make (28:13)
Advice for startup founders pitching investors who may or may not understand the building industry (32:46)
How the service provider challenge fits in (36:29)
What the entrepreneurs of the next decade may look like (41:18)
Things to look forward to in 2021 (43:14)
The unique challenge and some advice for hardware innovators (46:54)
Note: transcript was created using an imperfect machine learning tool and lightly edited by a human (so you can get the gist). Please forgive errors!
James Dice: [00:00:03] hello friends, welcome to the nexus podcast. I'm your host James dice each week. I fire questions that the leaders of the smart buildings industry to try to figure out where we're headed and how we can get there faster without all the marketing fluff. I'm pushing my learning to the limit. And I'm so glad to have you here following along.
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Episode 43 as a conversation with Scott Ellison and advisor investor and consultant for startup founders in the built environment, we talked about startups investing and building businesses and why the time for innovation and our industry is now without further ado, please enjoy nexus podcast, episode 43. All right, Scott, welcome to the nexus podcast. Can you introduce yourself?
Scott Ellison: [00:01:13] Certainly, uh, Scott Ellison, uh, I live in the San Francisco, Silicon Valley Bay area. although I guess that doesn't matter these days so much, hopefully we're getting back to that soon. where geography you'll be at least, uh, one factor in business and investing and innovation.
Um, I started out, out of undergrad. Working like, uh, thousands of others in strategy consulting. great training ground early on, had an opportunity to go to a young growth equity firms spend a number of years there. had the flexibility that I really appreciate to, uh, to actually take off. And I traveled the world from Mongolia to Antarctica.
in many places with my fly rod and fly gear, in the bottom of my back. So I'm, one of the things I love doing when, uh, my adventure is these days are, are my three young kids, but, anytime I can get away, I like to get out to a trout stream or, some other form of fly fishing. So, did that from, the flats in Venezuela to the jungles in the Amazon and a bunch of other spots.
Wow. Came back and, did some, uh, public company investing for a while. And then, had a chance at the end of 2016, I just lost conviction, which direction the markets were going to go, for a variety of reasons that those of us who lived through it probably understand. but I had, shortly thereafter, an opportunity, a friend of the family, Introduced me to one of the Tesla co-founder who was developing a new platform, bringing a propulsion, to class six or eight vehicles.
So not the sexiest part of the transportation continuum, but one that has a big impact, obviously on a carbon footprint. So I spent about six months with him just working on a variety of different things and what that, Kindled for me was it reminded me of, my personal passion, and where that was, which is, uh, startups, early stage companies and places where innovation is happening.
places where it's, the purest form of business. I think, you know, you make a decision on Monday and by Friday, You know, if you're brilliant or brain dead. Right. and then you get to make another decision in the next Monday to either correct it or double down. so I've had the good fortune to be able to work with a number of entrepreneurs in startups.
and I should also mention that, you know, before I went off to university and, No fancy consulting and, and investing. I have a blue collar background, a bunch of uncles who were general contractors. Uh, I worked in a hardware store that paid part of my college. and so I've always had a connection to the built world, as I think about it now.
whether it's prop tech, construction tech, any of the other sectors that are in and around that. because of some things, obviously we can get into and in terms of talking about trends, wasn't sure how that, part of my life fit in with the other part, until the last few years where I've, really seen a number of trends come together in such a way that I think the next decade is going to be very different from the last two decades.
so. I'll, uh, stop filibustering on that one question. And hopefully that gives you a sense, for my background. No, you and
James Dice: [00:04:30] I have talked before and that helped, that actually provided some context that I didn't know about. So thank you for that. so I want to was obviously, we're going to talk about innovation and startups and potentially some investing here today.
Um, you mentioned the next decade comparing to the last couple of decades. So now is when I ask my favorite question, which the last time you and I talked, uh, Ben from key frame, uh, kind of threw some shade at my favorite question. but I'm going to ask it anyway, because I think it's valuable.
you know, why is technology and buildings behind, and, and I think we should add behind its potential to a piece Ben.
Scott Ellison: [00:05:10] Yeah. I'd love contrarian discussions. And, uh, what James is referencing was actually one of the, do you call it members calls? Uh, next week next is that I think are really fantastic and are doing a great service, for the sector, just in terms of what we were talking about this before, you press record, but, in terms of providing a forum in which people who wouldn't naturally connect with each other, just because they're spread out geographically or, or maybe, once did pre pandemic at one or two shows a year and had a coffee or a beer.
this is, uh, a forum in which people can do that without jumping on a flight and going through, you know, the taxation of all of that time just to get to a show. So I think it's fantastic, but, Yeah, so, Ben was, was I think playing the devil's advocate, to the question. Okay. Why PropTech, why context?
And, and I like that because I think it's important to ask, um, I think you could give, just about anyone with a few brain cells to rub together. a few articles on where, built world is in terms of adoption and use of technology. And within a few hours, they'd come back and say, wow, there's an amazing opportunity for introducing innovation in the sector.
And why is it, 20 years behind and why aren't they doing this? And why aren't they doing that? And, you know, why, why are buildings still stuck at level one or two of the OSI stack in, many cases? so that part is. Not interesting to me necessarily. I mean, that's, that's really obvious.
Right. but the question is not only, you know why that is, but for me, even more importantly, will that change if we're having this discussion in 2031, are we basically saying the same thing? Um, now. I obviously, have a thesis as to why that won't be the case and why I, I think the next decade will be the decade of built tech and we can go into that.
But, I think you have to be intellectually honest and say, you know, well maybe there's just something structurally about these sectors that make them allergic to technology or innovation. So I, in terms of the questioning, why has there been a lag perhaps, or why has this sector not lived up to, or not taking as full advantage of technology as has maybe others have?
there are a number of reasons for that. but I would actually refer people if they haven't listened to it to Joe and Joe apologies if I, uh, massacre your name, but, uh, Gasper, Doni, you got a Montgomery. as a podcasts you did with him, I think three or four months ago, in which, he does a terrific job of breaking down some of the financial incentives and motivations, in that case, particularly around building owners, land owners.
so specifically on the prop tech, there are similar trends, I think, uh, in the construction world as well. but. All of those, I think are important to really understand, Because there's a mentality, at least in Silicon Valley to say, Hey, we're just going to run in like a bull in the China shop and disrupt right.
Disrupt, disrupt, disrupt if you're a startup. and if you do that in this sector, you're just going to be. One of a number of other companies, off on the side of the road in a ditch, this sector, I, all of, you know, built world and built tech, I think really demands yes. Disrupt, but also respect certain things.
And, and the respect is just fundamental motivations. Like a lot of the financial dynamics that, that you and Joe touched on.
James Dice: [00:08:52] Totally. What would be some other things to that you feel like people don't necessarily respect when they're jumping into disrupt,
Scott Ellison: [00:09:00] another driver, frankly, of maybe why this sector has been a couple of decades behind, has just changed, in the past 12 months.
And that is if you were a landowner, property manager, anybody, Related to, and, and specifically commercial space, but there are trends obviously in, multifamily and single family housing as well. But if you're someone who, whose life was oriented around, commercial space and leasing it out and striking ten-year leases, or maybe S sometimes slightly shorter than that.
You never had the answer, even ask the question much less, answer it. Uh, why do people have to come into, um, and you know, we can talk about whether there's going to be a, you know, pandemic, snapback and, there's. Certainly those who predict, everyone's just going to rush back into the same way of doing things.
And maybe that's true in some cases and to some extent, but the fact that the pandemic has gone on as long as it has, and the world. Yeah. I mean this past year has been really challenging on a number of fronts, but the world hasn't fallen apart, we've all figured out a way to actually do our work right.
More or less, and so, going forward, I think you're going to have to, as anybody in the world of commercial real estate, Whose job really is to, to create these spaces for people to work in. You're going to have to ask like first principle questions that you didn't have to before. Um, why is it that Steve or Amir or Amy, or, you know, this team at a company needs to come into the office?
Maybe they don't and if they don't, Maybe they won't. now we can talk about all the reasons why they need to, but I think that dynamic is going to be really interesting to watch over the next decade to also,
James Dice: [00:10:58] yeah, I often think about, so when I'm teaching the foundations course, it talks about the connection to the top line or connection to the business value that you're creating is a part that I feel like when you're coming in to disrupt.
You often focus on the technology, right? You're you have this disruptive technology, it's better than that. Other technology that's in the buildings now. And so therefore I'm going to disrupt things, but that's not always, I basically tell people to start with the stakeholders, you know, who basically who first and then what does it mean to them to
Scott Ellison: [00:11:32] begin with?
Cool. It's another, uh, common and. I think lauded prize mentality in the startup world, that, this kind of field of dreams concept, if you're brilliant enough and your product's brilliant international, you create something that, you know, they will come, the world will just beat a path to your door and realize how brilliant you are, right.
And want to buy your stuff. And, and that's true in certain cases, theoretically can even be true in the built world, but. Only in very, you know, fringe cases, you know, the real tale cases. And if you want to be an entrepreneur in this space, it's, you know, it's back to the future. It's back to when we were talking about before, but, you're far better off taking a playbook from, enterprise software in the eighties, you know, how, companies were built early on in the, late eighties, early nineties, then you are taking the playbook from, uh, tech Twitter today.
That's not to disparage that cause there's a ton of really great insight, on, and I just use that as shorthand. You know for what people, the conventional wisdom as to what you should be doing, whereas you build a company now. but it's going to send you in the wrong direction. in some cases, one of, you know, one of the things being what you just mentioned, This sector is it's far more important to be great at product development and marketing and sales and, and listening, right. Listening to your customer, than it is to, be focused on, whatever technology it is that you're developing. Totally.
James Dice: [00:13:09] So what is that playbook from the eighties? For those of us that were maybe born in the eighties and might not know
Scott Ellison: [00:13:16] that the eighties or history books for most of us, but, um, I mean, I it's shorthand to me for, Kind of a back to basics business building, right.
Which is, there are businesses now that are starting in the tech world that go from zero to unicorn in 12 months. I mean, we've just had one, I'm sure a bunch of people have participated in, in clubhouse. And it's a really interesting concept. And, you know, I think has legs and is going to be. an interesting contributor to all of our discussions, over time with that said, if your vision is to go zero to unicorn, in 12 months in the built world, it's just, I guess I want to invest in you retrospectively, right?
Um, because there probably will be, some examples of that. but it's far more important, to just think of who's my customer, what am I selling to? I mean, these are really simple, you know, almost color by number entrepreneurial things. And to have the patients to say, you know, if I'm a 20 something gen, Z.
and I have a bunch of entrepreneur friends, I'm not going to be able to go to cocktail parties in 18 months, likely and match stories, right. About how I just raised a series C at X hundreds of millions of dollars valuation. but what I might be able to do is seven years from now, be talking about a really interesting sustainable business that I've built with my team.
well, my friend who went Zerto to series C in nine months is now on their third startup. You know, in the interim while I was building the company. So it just takes, I think it takes a different mentality. It takes a different personality. somebody who, for whatever reason, is passionate about this space.
That's really important. I don't think you need to have a ton of experience in the space necessarily, but you better be passionate about it and has patience to look at the, you know, the long game. Totally.
James Dice: [00:15:24] Yeah. Loving the problem is a definite requirement and this face, because the problem is thick.
Scott Ellison: [00:15:31] So, and I mean, you're going through it yourself with building your platform and your community.
yep, totally. I, we talk every now and then. but you know, I'm not in your head hearing all the. Challenges and hiccups and problems that are inevitable to anytime you're starting something new. and if you don't have that North star of I'm really, you know, in your case, whatever it might be, but I'm really fired up about creating this community.
you know, you're gonna flame out after, after a few months. Totally.
James Dice: [00:16:02] Uh, before we dive into investing, I want to ask you about headwaters. So what do you, what do you do every day?
Scott Ellison: [00:16:07] Yeah. So, so that's just my, uh, LLC. that's kind of an umbrella for me too. you mentioned investing and I make, targeted investments.
I'm not, uh, they're, they're angels out here in Silicon Valley that, you know, invest in two companies a month and run up big numbers there. But I, uh, I advise early stage companies and also do some, targeted consulting sort of project work for later stage, organizations, on the early stage side.
it's just not, I don't think it's appropriate, to be, uh, if I were, if I were an entrepreneur, I certainly wouldn't be, you know, paying for consulting services or, you know, anything related to that. But there's an interesting dynamic that's occurred in the space, that it's relatively easy. And I say relatively, because I'm not saying it's easy, but it's relatively easy to raise that first sort of quarter million maybe, or even a hundred thousand enough to just get.
You know, to test out your, your concept and maybe go out and talk to some customers. Right. I won't even call it friends and family because I know a lot more people who don't have friends and family, that will just write a check like that then do, but whatever that initial slug of capital is, And then the next step used to be, you raise a series at, at, it was somewhere around $3 million, three to five, and you do that after maybe a year.
and along with that comes an investor. Who's taking a board seat and brings a fair amount of resources and connections and perspective. On what you should do from there. not that you have to listen to them on everything, but that resource is immediately available to you. then as things moved on, you know, over the last decade and a half, In that three to $5 million range became a seed stage investment.
Right. And that had a little bit less support, although that's starting to change. but what was required then to get a series, a round done, the bar on that continue to rise. and now companies are doing pre seeds and in some cases, even. Pre-seed one, pre-seed two or doing a safe slash convertible note, and then doing a pre-seed and then doing a seed.
And the point being that there ends up being for most companies and particularly in this sector, two to three, maybe even four years between that initial. you know, I'm, I'm, taking the leap, I'm going to be an entrepreneur. I have a really interesting idea. I raised a little bit of money to pay for, you know, whatever food and housing to, okay.
I'm a legit company. I've raised money. I have people on the board. Um, what hasn't changed is that in that time, a lot of really critical decisions, that are going to impact where the company is a decade from now are being taken. Right. And so. there's an opportunity and, and I should say the other thing that's happened over the last decade and a half is, some structures have been put in place and distributed, that make it easier for companies to say, I'm going to bring on, you know, a handful of advisors.
I know what I need to give them. I don't, have to be given out, you know, Points of equity, that are going to dent my cap table, but I can bring people on that can help. and I think it can be in the right case, an entrepreneurial hack, um, in the wrong case, you know, there's still the dynamic of, of people saying, Hey, I'm going to bring on an advisor and then it turns out they're not helpful at all.
but I think that can be in certain cases, even if it turns out that. You know, you could go a month or two where you're not seeing immediate value from someone and then they make two calls or a couple of connections, and it's just, you know, there's massive catalyst for the next stage. So you're playing in that,
James Dice: [00:19:53] between, you know, inception to, series a
Scott Ellison: [00:19:57] timeframe.
Yeah. And then, you know, it can be the case that. Usually for, people who are, you know, getting involved with startups that's a reasonable timeframe, and target. it can also be the case though that after a series, a even once in a, uh, a founder, a CEO has, institutional investors on board, that they still want kind of their own sounding board.
because as much as. during the, dating period for series a rounds, everyone is, uh, you know, in love and it's, it's a wonderful dynamic. We also know that over time interests can diverge. So it's helpful for CEOs to continue to have a sounding board that, you know, they can just test certain ideas off, uh, rather than, than just relying on their, board investors.
James Dice: [00:20:44] Cool. I'll just learn a lot. Hopefully other people did too. Uh, so let's dive into like where we're at now. I hate the word prop tech, but investing in technology for buildings. Let's say that I actually like that a lot better. Yeah. So. Why now? Like can you just summarize for people that maybe have their sort of head in the sand, or had an, a mechanical room or a controller somewhere what's happening in the investment space for, Boeing technology right now?
Scott Ellison: [00:21:14] Yeah, this gets back to the, um, okay. arguably the sector is two decades behind, but let's ask the question 10 years from now. Are we going to be saying the same thing? Right. And, So my thesis on why I'm spending time in this space, starts with this in the fact that, you know, whether it's an iPhone or an Android, um, so much of our computing power is now mobile and can move anywhere and can move with us.
as we go into the commercial buildings, pre pandemic, and certainly, uh, post it's even more acute. Um, but you combine that with the fact that. generationally, if you're young gen X, millennial, or gen Z, which are now, not only roughly 50% of the workforce may be a little bit more, but as importantly are moving into decision-making roles and will continue to move into decision-making roles.
you've combined those two dynamics and you have people who are going to be making decisions and who are going to be. in a lot of cases dictating sort of how work gets done, right? Even if a gen Z is not making, a work decision necessarily, they're going to be driving a lot of discussion around how we can work and how we should work.
and so just think those two catalysts in particular, are gonna have a big impact on the sector. Um, it's no longer going to be the case that a senior executive can. Can just say, well, that's how we've always done things in this space. Right? you're going to have people who are now in positions to actually push back and say, Well, you know, you may have carried around a stack of paper, this high, you know, in a big bag over your shoulder, on a construction site or, or, you know, in a building when you were coming up, but that's just not the efficient way to do it.
and there are much, better ways to work. When you combine that with the other dynamic that on the money side, there are it's, uh, small numbers still. Um, but there are companies who, in the built world tech that have had exits, you know, we know the names, plan grid in the Bay area is probably the best known.
Right. But, you know, conics, and there's, uh, I'd say probably a dozen or so where. Uh, entrepreneurs have made enough money in an exit, that they can start doing angel investing. Um, that's helpful at that earlier stage that I was describing before. and maybe even more importantly, there are now a dozen or so venture firms, Who have a mandate from their bosses.
you know, the limited partners who invest in their funds to focus on these sectors, and. To, bring a mentality, to really understand the dynamics that we're just talking about. and the reason that's important, just as a side note is that if you have an investor at say a traditional Silicon Valley firm who is on six boards, five of them are consumer SAS or enterprise staffs.
And then a buddy of theirs made this introduction to this really interesting prop tech company. And they said, all right, I'll invest. Their tendency is going to be to come into board meetings and have the mindset of what is required to be successful in that other category of companies that I was describing.
And so there'd be a natural tendency to say, well, hold on a second. Like, are we making the right decisions here? It doesn't seem like we're growing a lot. All my other companies are talking about MRR and ARR and know all these other stats. Now that's a bit of a caricature of course, but, I have heard that from a couple of companies actually, um, that they wrestle a bit with that.
So getting back to the point about the, prop tech or built world focused funds, those, uh, investors, those partners understand that dynamics, and know what to look for, and I think can add value. in more powerful ways for companies in this space.
James Dice: [00:25:06] And you also mentioned the accelerated focus on the occupant that you talked about earlier.
So that's, it seems like driving investment in this, space as well these days.
Scott Ellison: [00:25:15] I think so. I mean, uh, I, you know, I don't have a crystal ball that's any better than anyone else's. but property owners and landowners are certainly going to have to wrestle with this question.
Why do people need to come into the office? and there are some reasons for that. And there are some use case, a number of use cases for that, you know, beyond just the socializing, which is important. but regardless, uh, you're going to have to. Over the next few years, think about that. and as importantly, when people come into the office, you know, how easy are we making it for them to seamlessly pick up work that maybe they did at home on Monday.
And now they're in the office on Tuesday. And how easy do we make it for them? You know, even things like parking garages and, elevators and all these things that nobody ever really gave a lot of thought to, as a building owner, I think you're going to have to pay a bit more attention to that because people aren't going to have the same level of patience for this parking garage thing takes forever and it's a pain in the neck.
And then I get in and, you know, two thirds of the elevators are broken. Like they always are. you know, so stuff like that, I think people are really going to have to pay attention to, I suspect.
James Dice: [00:26:26] Totally.
Hey guys, just another quick note from our sponsor nexus labs. And then we'll get back to the show. This episode is brought to you by nexus foundations, our introductory course on the smart buildings industry. If you're new to the industry, this course is for you. If you're an industry vet, but want to understand how technology is changing things.
This course is also for you. The alumni are raving about the content, which they say pulls it all together, and they also love getting to meet the other students on the weekly zoom calls and in the private chat room, you can find out more about the email@example.com lab. Start online. All right, back to the interview.
What about sustainability? Do you see that driving change? Driving
Scott Ellison: [00:27:07] investment? Yeah, I think most people, uh, watching or listening to this, we'll we'll know the stats about the impact that the built world has on carbon emissions and the footprint and sustainability.
and while I don't put on my, you know, I'm focused on sustainability hat, every day. it's an interest of mine. I think it's re it's a really important trend. and I think that just by virtue of doing the things that need to be done in the built world, For for innovation.
you almost as a, even a first order effect are having an impact on sustainability issues. and it's also true. I think, you know, when you, consider gen Z's and millennials that are coming into the workforce, you're going to get a lot more pressure around, you know, what's the carbon footprint of our buildings and this gets back to why should I come into the office?
You know, it's, it's, uh, Connected in a corollary question that says, okay, when I come in in the office, you know, am I being responsible and in line with my ethics and the way that I want the world to be
James Dice: [00:28:13] totally. So I want to talk about the. Startups you've seen. So what we've done is we've kind of painted a picture here around, you know, technology being behind, uh, us being excited about it.
investors being excited about it. And then you're, you're working with a lot of startups, so basically attacking that space. And so I wanted to ask you, like, how do you see startups mess up the disruption? We talked about it a little bit, you know, not, Catering to the right people. What are other ways you see people come into this space and sort of mess things up?
Scott Ellison: [00:28:45] Yeah, I think we've touched on a couple of them. certainly being, more tech focused. I'd say that, certainly as you begin to build a company out, you should be the senior levels at at least one of your founders has got, gotta be, you know, two thirds, even 80% of the time, thinking about the customer, thinking about the product that you're offering, the customer, what they want.
And as importantly, how that solving a specific problem or a specific, I'll say a set of problems, but you want to keep it constrained, especially at first, right. Cause you're talking to people, who, one of the other dynamics in the sector is, is that they're thin margins, as we all know for the most part, and so at least from an operating budget.
Um, and so you're talking to people who don't, have just money to throw around and spend on a variety of projects that may or may not turn into something that's valuable. Um, so. I I'd say the biggest challenge, for entrepreneurs is to constantly come back to that touchdown of what does the customer want and why are we solving a problem for them that nobody else can for the same cost?
I mean, it's, it sounds so simple. And in some respects, I guess it is, It's simple conceptually, but, in practical terms in execution, you know, forcing yourself to constantly come back to that constantly come back to that. is it's a challenge. I mean, I don't think anybody, you know, nails it, a hundred percent.
James Dice: [00:30:15] How should startups think about the different stakeholders? So you say focusing on the customer. I mean, the customer could be the occupant or it could be the facility manager or property manager or building owner. So like how do you stay focused on one person when technology in a building impacts
Scott Ellison: [00:30:34] so many different stakeholders?
Yeah. It's a really important question. It's multifaceted that, um, what are they individuals that you've had on your podcast? Another individual who you've had, who I think is doing some really interesting work and I've had the. good fortune of, being a sounding board for him as, he built the company over the last, 18 months or so, uh, Troy Harvey at passive logic said to me, in one of the first conversations that really opened my eyes, um, when I, like, I think a lot of people, were at first glance skeptical about, you know, building, Automation building controls a startup.
he really laid out, I think this whole challenge, uh, when he said, you know, we had a lot of success early on selling to the boardroom because we have this sexy technology and this really interesting approach. But he said, what, we had to really internalize was the importance of selling also to the boiler room.
and this, this concept, and I think it's applicable across the built world. You know, the same is true in construction technology. For example, you got to, yes, you have to sell the innovation groups perhaps, but you also better make sure that. You're either selling or thinking about in building your products, for the people who are actually gonna use it.
Um, because the dynamics in this space are such that it's relatively easy for the end user to just mothball your product. If they want to. Even if someone way up the chain thinks it's amazing and plays golf with the founder of the startup. Right. so. another one of the challenges in the space, um, you know, to really think about how do we sell at different levels.
and how do we do that effectively?
James Dice: [00:32:21] Totally. So we just talk about sort of pitching to the customer. How about pitching to investors? So. I would imagine. And there's several investors in the pro community that I feel like understand this space, but I think the general investor community and people throwing money at startups might not understand the dynamics of this.
Is that a, is that a fair assumption? Might not understand the dynamics of the built environment. So how do startup founders Like how should they think about going to pitch people that just don't know what it's
Scott Ellison: [00:32:53] like here? Yeah, I mean, in addition of band and, you know, Travis van, a key frame and Travis and Heather, at, uh, building ventures who are doing a great job.
there are, as I mentioned before, a dozen or so firms that have the mandate to invest in this space, both here in the U S and, and I would also know, in Europe, I mean, they're in the last. 12 months there've been, at least two funds that I know of that have raised more than a hundred million euros.
so arguably actually even more money than a lot of the prop tech firms in the U S are raising. and, uh, you know, all of that has been with the, with the mandate that over the next decade, over the course of the fund that they've raised, they're going to be looking for opportunity for innovation in this space.
Um, There are a handful of startups who have successfully raised capital from more of the traditional route, uh, open space did, you know, there've been others the past open spaces in, uh, construction technology. but, I was thinking through this question earlier, cause I knew it would come up and.
I think there's an opportunity even for, built world startups, to do their a and maybe even their B with firms who really understand this space, while at the same time, not necessarily eliminating some of the, maybe, you know, well-known glamorous firms. and I say that because. A lot of the well-known Glamour's firms.
I mean, we can talk about, uh, you know, names that everyone knows Sequoia and Andreessen Horowitz and, and others on Sandhill. Uh, Kleiner's doing that as well and, and a bunch of others, not the name, Jack, anyone. Um, have raised pools of capital to invest in series B series C series D companies. and so, uh, you know, I think there's an argument to be made that you might be best off as an entrepreneur bringing on one of these, firms, you know, in the prop tech world that really understand the dynamics that you're facing early on and being a partner with them.
As you build to a point where you've reached escape velocity as a startup, and then can bring in big checks from others who long-term will benefit you. in addition to your prop tech investors, in terms of just, you know, recruiting and, you know, eventually FPO or, other exit options. Totally. So I would say holding that aside, in any discussion that I had, with a potential investor, I'd want to have some sort of conversation prompt, some sort of slide in my deck, um, that it wasn't even obvious.
This was the point of the slide that gave me a sense. For whether they understand the dynamics in the sector. Um, one of the companies I'm working with, we were just yesterday, finalizing a deck for their pre-seed and there's a, a slide in their deck. Um, one part of which, is to test some of that. now it comes as part of a broader discussion.
but one piece, one potential benefit of that discussion, is going to be a sense for is this person that I'm talking specifically, this person, and then also potentially their fond. Um, do they understand the dynamics and as importantly for this company, because it's so early, are they really passionate about the space?
James Dice: [00:36:27] So, this is a next topic I want to ask you about was we brought this up a couple of weeks ago at the pro gathering. what I'm calling the kind of the service provider challenge in this space, which is there's a challenge where a lot of our software companies and prop tech, mostly on sort of the more technical aspects of building optimization, building operations.
It's difficult right now to get a pure SAS arrangement. Right? a lot of the companies, a lot of software, a lot of technology depends on service providers to sort of prop the solution up to basically fulfill the value proposition. that's just the way it is. Um, and so how should people be thinking about that in terms of, I guess, how do investors think about it and then how do I, as a startup.
Approach this challenge where you, you often need service providers to fulfill that value proposition. But while you're trying to do is build a scalable solution. So there's like this dichotomy going on. So how do you think about that? And I guess, how do you advise startups
Scott Ellison: [00:37:30] to think about that? Yeah, I'll touch on that, but there's a related concept that maybe we also want to, hit on, which is, companies that have hardware, some, some, piece of hardware as a, as a fundamental innovation, to their business.
Um, and I think that w well let's okay, so let's hold that aside for a second on the services side. yeah, I thought we had a really interesting conversation a couple of weeks ago about this, but, First off as an entrepreneur. I mean, you'll hear this, uh, you know, on tech, Twitter, wherever else. but it is a really important question to ask, which is, do I want to be a venture scale business?
do I want to create something that is worth a billion dollars? and it seems like an obvious, you know, answer well, yeah, of course I want, you know, of course I do well. Maybe you do, maybe you don't. because there are certain, there are a number of different things and there are hundreds of podcasts.
I'm sure you could find talking about the dynamics around that. but you may, as you really ask that question and dig in the answer you may come to is know I don't. and that doesn't mean that you can't be a successful startup. Or a successful entrepreneur, um, and, particularly in a space like this, where there's a need for just a lot of creative problem solving that doesn't necessarily bake easily into an algorithm or, you know, or software package initially, uh, There are a lot of people who've made, a great living for, for a long time, actually in this space.
building company in that second category, or even in the first category, I, I would almost say like, that should be your default. And then unless you're a computer science grad coming out of undergrad and you, you have. Developed a vision for an algorithm or a layer of the software stack that you can really address, uh, and that can scale.
but it does always come back to scale, right? if your intention is to, is to go, try to be a unicorn and be a venture backed company, you better have something that can scale, that over time. You as, the individual, as the founder, don't have to be involved in whatever it is installing, servicing.
but you can hire people to do that. Um, I think there's a middle ground also, which is, you can start out with services. In wherever it is your particular area, and then, and constantly keep your antenna for, is there something that can scale? Is there a piece of this that, I deliver it to my customer and then I don't think about it as much.
Like I continued to help them solve problems on a daily basis, new things come up, but there's this other piece that. Is really adding value. Number one, number two, I don't have to every day be, you know, spending time solving it are are correct. Yeah.
James Dice: [00:40:27] This is a piece where I think me as like someone that's inside of the industry.
Looking at all this money being raised right. And being thrown at the problem. And I know that, and this is probably just a generalization, but I know that there's expectations of scale behind that money usually. And I've just looked at most of the problems that I've solved in my career. And it falls in that category.
You just talked about, which is like, this is creative problem solving. I just can't. Imagine a scalable solution for most of what I did, you know, uh, in every building I've ever worked in. So it's just something that's on my mind. I just feel like there's a gap between what investors are expecting and what's the reality of the space a lot of times.
And you're right. There's, there's no shame in building. Uh, great service based business. so I, I think
Scott Ellison: [00:41:18] there's even a thesis, you know, in this space that, the best entrepreneurs over the next decade, are not going to be the, you know, Stanford computer science went to Facebook, went to Google, you know, and then, created this.
Again, the sort of zero to unicorn in 12 months, but rather are going to be, folks, who have spent maybe five years, maybe 10 years, maybe 20, 25 years, in the sector and really have an appreciation have, have always had an entrepreneurial mindset. Right. And I've always been asking why and why can't we do this better?
but have a real appreciation for the different, pressure points that we've talked about in the sector, and who, maybe even, you know, don't necessarily sit down and you know, read a consulting report and see, construction is a trillion dollar industry and it's two decades behind or PropTech is this big space and wow, isn't this incredible.
And I'm going to go start a company, right. Not to denigrate that. but. If you take that path, you better make sure you're really filling in, you know, that context that you can only get from being in the space. and which is why I say, you know, maybe now entrepreneurs of the next decade are going to be the ones who have already spent time.
In some sort of, uh, junior management or even senior management role, in the sector who realized, okay, I finally, you know, I was on a run and it finally hit me. This is the scalable idea. Now I'm going to go try it and try and make it happen. And that's why
James Dice: [00:42:50] I wanted to dig end of this with you, Scott, because I think those are our listeners.
Those are the people that are listening right now. And I, if you're listening right now and you're still hearing this it's, it's on us. It's on, you guys to transform this. Uh, thanks for that perspective. So. All right. Let's let's, move to, wrap up here. We've we've talked a lot about like, looking forward to, to 2021.
What are you most excited about besides like being able to have a beer with somebody? What are you excited about in this face? for 2021, as we sorta wrap, up here.
Scott Ellison: [00:43:26] Yeah. That will be nice. And, uh, you know, you're in Colorado, right? Yeah. So maybe there can be, uh, a nexus offsite, uh, somewhere in a beautiful spot in Colorado at some point where we can all, uh, share a beer or a coffee, everybody's looking forward to that.
James Dice: [00:43:47] Yeah, there's a lot of skiers and snowboarders in the, in the nexus community. And so I think we're going to, uh, I don't know how I'm going to plan it and put it together as this one man company, but there needs to be some sort of event next week, the nexus ski summit ski snowboard
Scott Ellison: [00:44:00] summit. Absolutely.
Absolutely. but what I'm, you know, there's a, a natural question that, um, you know, people always ask. Okay. So, you know, what are the spaces you think are most interesting? Um, I think anything in and around the built world is, interesting and has opportunity for improvement. I mean, you can't. Uh, walk into pretty much any building in the world without, thinking about ways to do the experience related to it better or to reuse the space or to do different things.
Um, the thing that excites me is, continuing to have, the opportunity to work with, founders who are really excited, passionate about, Maybe having found that nugget of, you know, maybe this is something that can scale or even. By the way I think, the other feature of PropTech, venture firms is that right now they're relatively small.
Um, in the grand scheme of things, meaning most funds are a hundred million dollars or less. And what that means is you don't have to have a $10 billion exit or a $5 billion exit, or the things that people. who are partners in some of the, you know, the, the bright light names, the Sandhill names, um, have to be shooting for because they have billion dollar funds.
So you have to return much more than that. So that too is kind of a back to the future moment that these venture firms. Have smaller funds. And so you don't necessarily, I, I talk about zero to unicorn because that's a, you know, an easy shorthand for what a lot of people would know, but I think there's opportunity for building a number of what I think of as multi-hundred million dollar companies, you know, over the next five to 10 years, uh, that are doing some really interesting things.
They're scalable, but it doesn't have to be, you know, the entire world is using this, In three years, it could be this as solving a really important problem as good economics. And then maybe it's, you know, they're, they're big companies now who are making acquisitions, you know, maybe it's something like that.
So to me, particularly where I spend most of my time on the super early stage side, uh, it's almost always, you know, Three quarters, the entrepreneurs and, and for me, when I'm making decisions, you know, am I going to be able to add value to a company like this? but that's what really excites me is constantly talking to people who are fired up about some concepts, that maybe I probably, I haven't even thought about, um, or I've thought about it, But almost, always not to the depth that it needs to be thought about in order to really build a company. That's awesome.
James Dice: [00:46:43] Anything else to add before we wrap up,
Scott Ellison: [00:46:45] uh, this, this is separate topic, and maybe we can have it as a conversation on the future nexus, you know, protocols, but this whole concept of, Innovation that's happening at the hardware level.
and how companies, how startups think about building a hardware company, in a world when hardware is, uh, you know, I don't know how many letters that is, what's that eight, 10 letters, but it's a four letter word for most investors. Um, we forgot
James Dice: [00:47:11] that we were at the circle, but
Scott Ellison: [00:47:12] I think there are some, some interesting sort of.
approaches to that, including I'll just throw out one idea. I was talking to a company yesterday. who's doing really interesting stuff in the elevator vertical transportation space and has as a component of their solution, uh, a hardware piece, um, about, Setting up dynamic with a customer where you're getting an upfront payment that actually covers the cost of the capital to get the, in their case, a small box, uh, installed.
So that as a startup, you can still scale because you don't have to raise venture capital just to pay for your cost of goods sold for that equipment. Um, but then in exchange, striking a two year, three year contract of which, the first X number of months would be free. Hm. Okay. So you get the box in, the customer pays for it.
They almost always have a bigger balance sheet. Right. and once they put something in number one, it's super sticky. Number two, they're not interested in ripping it out either. So there's good alignment there where you can say maybe after a little testing period, Hey, let's, let's set up a two year three-year contract.
and that's a way in which you can actually have. I mean, I don't even know if this is a term, but you know, HR are, you know, hardware, recurring revenue, business model, um, where you're getting paid for the innovation, over time. Hmm. Interesting.
James Dice: [00:48:41] I haven't thought about that sort of business model. Most people give away the box and try to have SAS. Right.
Scott Ellison: [00:48:49] Interesting. Which is fine too. But I mean, that runs into a problem, particularly if your cost of goods sold on a box is more than 10 bucks. Right. You know, if you have, this particular company, You know, their equipment's in the hundreds of dollars, per box.
And they just got an order for what could be a thousand units, um, from a very prominent, you know, entity on the East coast
James Dice: [00:49:16] where they're like, shit, how do I, how am I going to
Scott Ellison: [00:49:19] fulfill that? Right. So, I mean, anybody can do the math in like five seconds. Right. and you realize that even if you have the capital, because you've raised, some money, to do that, you don't want to tie up that capital, you know, the thousand times, a few hundred dollars on that.
And then wait for this revenue, this recurring revenue stream to come in over time. you're never going to get off the ground. Interesting. Interesting. And if you go to try to raise money to do that, you'll be quickly seeing a lot of, you know, unreturned emails and phone calls from investors. And
James Dice: [00:49:54] there are several companies that are actually charged for the box as well upfront.
And I've always wondered why that is, and that makes total sense. cause it doesn't seem like that much until you add it up.
Scott Ellison: [00:50:04] Yeah, well, and arguably it's not actually to the customer. It's not that much, right? Not to them on their balance sheet. Yeah. My first startup, you know, it can be huge, so absolutely.
James Dice: [00:50:17] Oh, cool. Scott let's uh, let's wrap this up. Thanks so much for coming on the show.
Scott Ellison: [00:50:21] I appreciate your, uh, having me there a number of, Exceptionally bright people, you know, writing checks in this space that we alluded to before that anybody who's thinking about. you know, building their company probably already knows, but you know, rather than listing names, um, they're out there.
If you look around, some really smart people that are building interesting companies and, and, you know, partnering with, with companies at that kind of seed and then beyond. and so it's one of the reasons that I, as I alluded to that, I'm, I'm bullish on this space, this sector over the next. Okay, cool.
Thanks again. Here's to, uh, here's to the next, uh, What do you, what do you call them? Nexus, uh, pro member pro pro member gatherings. well, great job, uh, doing this and, uh, and you're still grabbing a beer in Colorado with everyone soon.
James Dice: [00:51:16] all right, friends. Thanks for listening to this episode of the nexus podcast for more episodes like this, and to get the weekly nexus newsletter, which by the way, readers have said is the best way to stay up to date on the future of the smart building industry. Please firstname.lastname@example.org. You can find the show notes for this conversation there as well. Have a great day.