An Entrepreneur Explains 10 Things To Build A Business That Investors Can’t Say ‘No’ To

An Entrepreneur Explains 10 Things To Build A Business That Investors Can’t Say ‘No’ To

Hot Supply Chain Management. Investment flows into supply chain companies. In 2021, more than $25 billion was invested in supply chain companies in just the first three quarters of the year.

One successful private equity-backed company is Unicorn Locus Robotics. Bruce Welty was one of the founders. Mr. Welty understands both private equity and supply chain management. He has battle scars to prove it.

Fail until you win

Mr. Welty founded a company that sells warehouse management systems (WMS) called AllPoints Systems in 1987. Mr. Welty tried to accelerate the growth of this WMS company through outside investment. But, despite repeated efforts, he was not able to attract external funding. He sold the company in 2001 when the company generated around $10 million in revenue. she was Not successful sale. The company that bought his company, EXE Technologies, is now popular among those who have followed the WMS market. EXE Technologies purchased AllPoints in stock. EXE stock moved to tank; Mr. Welty has little left to make up for his 13 years of effort except hard-earned experience.

He became a resident executive at Great Hill Partners in the early 2000s. At that time, Great Hill Partners managed two investment funds with a capital of more than $ 300 million (today the Great Hill Company manages almost $ 6 billion). Resident executives are looking to join the target company’s executive team, but they can also be considered, in a sense, an insurance policy. If the private equity group feels that the current CEO is not working, a resident executive of the company can be listed as the new CEO. Resident executives are also industry experts who understand the nuances of the industry better than a financially oriented equity firm’s partners, and thus can help partners better understand whether a potential deal should or should not be completed.

Next, Mr. Welty bought WMS which became the platform on which he created a different company called Quiet Logistics, a third-party logistics company focused on picking e-commerce orders using robotic technology. This was a unique and exciting business model for those who understood e-commerce fulfillment. After a few years of working on the business plan, Mr. Welty contacted his former colleagues at Great Hill Partners and they made an investment. The first investment was minimal – hundreds of thousands of dollars. It was really meant to let us buy a few bots and rent some space, just get started” and prove the business model.

Within 6 months, Quiet Logistics had clients. “We went back to them, and asked for more money. We asked for $2 million to buy more robots and then shortly thereafter another $4 million. We had the demand. We just need the robots to meet the demand. They totally got it.”

Ultimately, Mr. Welty and his team raised $9.5 million to support Quiet Logistics’ business model. By 2012, Quiet’s revenue was $37 million, it was profitable, and no longer needed more investment. “If someone were to invest in us, I think they would have fairly given us a valuation in the $50-75 million range.”

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Then the bottom fell. Quiet Logistics was purchasing autonomous mobile robots from Kiva Systems. Kiva pioneered a new class of robots – autonomous mobile robots – that were much easier to install, easily scaled to meet growing demand, and had fewer risks than pull-down forms of automation.

Unfortunately, Kiva Systems was purchased by Amazon
AMZN
. Amazon paid $785 million, a price that at the time seemed exorbitant but has since proven to be an excellent investment.

Amazon initially told Kiva customers that they would continue to supply and service the robots Kiva sold. Then Amazon changed its mind more than a year later. “Amazon called us and said we were stopping our business support. Basically, they were saying you can’t use these bots anymore. At that moment our rating went to zero. You can’t sell the business. Nobody wants to have that problem.”

“So we had a company that lost a lot of its value that day. After a 3-month search for alternatives, I went to my investors and said, ‘Hey guys, we want to build a new bot.’ Their attitude was, ‘You know, Bruce, you had something worth something yesterday. And today is worth nothing. And now you want us to give you an extra two million dollars?”

My answer was, ‘Well, yes, if we don’t put in two million dollars more than we all go out with nothing. If you invest two million dollars, we have a chance to save something. But Mr. Welty successfully built two companies, had a background in warehouse technology, and earned some confidence.

This was the birth of Locus Robotics – a company that makes its own version of autonomous mobile robots. Locus separated from Quiet in 2016 and became its own company. Quiet was able to purchase Locus’ bots and continue to operate as an efullfiment service provider based on bots. At that point, it was possible to raise funds in both Locus and Quiet as Pureplay entities. Quiet was sold in late 2018 to a new ownership group and then sold again by that ownership group in late 2021 to American Eagle Outfitters
AEO
for 350 million dollars.

Locus, in turn, generates more than $100 million in annual revenue, has seen its customers complete their billionth selection, and has deployed more than 10,000 robots. The Locus team has achieved this in just a few years. The company has raised $300 million in capital and is valued at more than $1 billion.

There is no x factor

There is not one thing that makes the company attractive to outside investors, says Mr. Welty. But there are 10 things you can do to build the “perfect business that investors can’t say ‘no’ to.”

1. Private investors want to see a large and growing market. “In our field, supply chain management, there is a huge market. You don’t really have a hard time proving that you have a large market. But you have to prove that you can sell your product across a very large segment of that market. Your market within the market has to be big.”

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2. Private investors also want to see “unfair advantages”. “For us, Locus has an unfair competitive advantage. This was because we were the only people at the time who really had a product — remember Amazon had discontinued sales of Kiva. We had five years of experience with Kiva and it was one of the very few companies with this experience. We understand how warehouses work and how this product fits into that environment. Locus is a complete solution that elegantly solves the problem.”

Locus has a strong patent portfolio but in general patents provide only limited protection. Other companies can read the patent and may be able to reverse engineer the product in a way that does not infringe the original patent. But even if they infringe the patent, this proves to be a ‘litigation nightmare’. In the final analysis, in the two or three years it takes a competitor to bring a “me too” product to market, if your company continues to innovate, it “will achieve this unfair advantage.”

In short, Locus’ experience with technology combined with its industry expertise made for a unique product. “It is very, very difficult to create a unique product,” Mr. Welty stated.

3. Investors also love an irreplaceable company. The company is part of a larger ecosystem. It should not be possible for another company in this ecosystem to step in and wipe out a young, fast-growing company. Somehow, the Quiet Logistics broker was scrapped when Amazon bought its supplier Kiva as part of Amazon’s vertical integration strategy and as a way to improve its own advantages. Amazon has taken advantage of this feature and has deployed more than 500,000 Kiva bots across its own network.

4. Private investors love the annual revenue model. “The idea here is that you sell something once, but you get paid forever.”

5. Outside investors also love “transaction-based pricing – this is where your revenue grows as customers use your products.” In the case of Locus Robotics, more choices require more robots which leads to higher revenue. The more robots you choose, the more money Locus Robotics will make.

6. “The product or service you sell must be a ‘need’. It cannot be ‘want’. People give up their wants before they give up their needs.”

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7. The product or service cannot be shipped abroad. It must be complex, have a low labor component, need to be built or provided locally (eg remote execution cannot be provided). In the case of Locus, the work to build a robot is minimal, so the labor savings will not be matched High shipping costs.

8. Products must be able to grow revenue in multiple dimensions. In the case of Locus, Locus makes more money from more transactions. But they also sell multiple types of bots and can sell them across multiple warehouse locations.

In short, when you get a new customer, you want to be able to “expand that relationship with that customer in multiple directions. You also want to add more customers. That’s multidimensional growth!” The ability to sell in multiple dimensions to existing customers while also selling to customers Neo reduces the company’s cost of sales.

9. Attractive low cost of customer acquisition. In logistics, it used to take a year or more to sell a WMS because a customer would need to spend $1 million or more on software and implementation. This type of investment takes time. But with Locus Robotics, customers can start with a few bots in one location, prove it, and then invest more. In addition, the bots are sold “as a service” and offered under a subscription model, so no capital expenditure (CapEx) is required. This makes sales cycles shorter because the customer sees an immediate return and does not need to place an order for capital.

“You want to make sure you know you’re not spending more money acquiring a customer than you’re going to make a profit on that customer. Margins matter —” What that means is that you can sell a product for more than it costs you to make and sell it. Microsoft
MSFT
Margins in the Thirties. Some drug companies fall into the 90% range. But I mean, if you make $9 for every $10 of revenue, your customers value your business very highly.

Mr. Welty is baffled by the investments in companies that offer grocery home delivery, pick-up and ride-sharing services. “Their metrics just don’t make sense. These are companies with a negative gross margin. If you add selling costs to the cost of making a product, they are actually paying their customers to use their products. This is a charity, not a business!”

10. Segmented markets can be attractive. Industries are fragmented, or have many players holding small market shares, in the early days of the industry. If the industry has matured and is populated by few big competitors “a lot of opportunities have been seized by the big players who have already succeeded”.

Successful serial entrepreneurs are a rare commodity. I guess we haven’t seen another Mr. Welty.

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