David Karandish is the co-founder and CEO of Capacity which is an enterprise artificial intelligence SaaS company focused on helping teams do their best work. The company has raised to date over $23 million from a Midwest network of private and angel investors. Prior to this, David built and sold Answers.com for $950 million.
In this episode you will learn:
- Why you have to be on the court and in the game to see the best shots to take
- How Equity.com is empowering more new startups
- How David raised over $23M for Capacity.ai
- What he would advise his younger self before starting a company
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Remember to unlock for free the pitch deck template that is being used by founders around the world to raise millions below.
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About David Karandish:
David Karandish is Founder & CEO of Capacity an enterprise artificial intelligence SaaS company focused on helping teams do their best work. Capacitys secure, AI-native knowledge-sharing platform captures mines, and connects organizational knowledge to maximize employee productivity.
Prior to starting Capacity, David was the CEO of Answers Corporation. He and his business partner Chris Sims started the parent company of Answers in 2006 and sold it to a private equity firm in 2014 for north of $900m.
David sits on the boards of Varsity Tutors (an on-demand, real-time learning platform in the ed-tech space), Create a Loop (a computer science education non-profit tackling the digital divide by teaching kids to code), and Prepare.ai (a non-profit providing educational resources and strategic guidance about Artificial Intelligence to individuals, communities, and companies).
David lives in St. Louis with his wife, Erin, and four kids. When not working, he enjoys spending time with his family and playing the ukulele.
Connect with David Karandish:
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello everyone and welcome to the DealMakers show. Today, I am very excited about the person that we’re going to be interviewing. I think that we’re going to be learning a lot about, obviously, building and scaling companies. Then also about the exit and perhaps about the ups and downs that are involved in the journey of being an entrepreneur. So without further ado, I’d like to welcome our guest today. David Karandish, welcome to the show.
David Karandish: Thanks for having me.
Alejandro: So originally born and raised in St. Louis, Missouri. How was life there?
David Karandish: St. Louis is a good place. It’s located right in the middle of the country. Other than a bit of summer humidity, it’s a great place to work and live. Not a lot of traffic. A lot of great food. The food scene has really improved over the last few years. I’ve really enjoyed St. Louis.
Alejandro: Really cool. I understand as well that you started developing a love for computers, so how did this happen?
David Karandish: My dad was working at a company when I was in high school, and they were giving away all of their old computers. So, he ended up taking a computer that they were about to give away or throw away, and I ended up learning how to code on that two or three-generation-old computer at that time.
Alejandro: Got it. After that, you went into Washington University in St. Louis?
David Karandish: That’s correct. I studied computer science and then got a second major in entrepreneurship.
Alejandro: Really cool. What does it mean to get into the major in entrepreneurship? Is it like reviewing case studies, or what do they teach you?
David Karandish: Yeah. It’s funny because it’s a pretty new program at the time, and a lot of people were like, “Can you actually study that?” But I loved my time in the entrepreneurship program at Washington University. They focus on a lot of case studies, to your point, on how people deal with challenges in the startup realm, but they also take an interdisciplinary approach. So we would take marketing classes and finance classes, and strategy classes. You’d have a good mix of core business concepts along with studying the challenges of getting a business off the ground.
Alejandro: I understand as well that even before you graduated, you were already dealing with having side projects and businesses. So tell us about those.
David Karandish: Yeah. We had a few side hustles going on. In no particular order, we started out developing web pages, designing web pages for people toward the end of high school. At that time, if you could develop a web page for someone, you were somewhere between a wizard and a warlock in terms of your magical powers. Then going into college, my business partner and I developed out some technology that would plug into AOL Instant Messenger at the time, almost like that, and AOL Instant Messenger bought Speak, the text messages or instant messages you received out loud. We had an e-commerce website selling celebrity apparel. We had a blog, fashion review website. We had a lead gen website in the financial services space called Expo Group. We had a wide variety of different side hustles through high school and college.
Alejandro: What happened after college with all those side hustles because I understand that you went right to what became one of your biggest success stories?
David Karandish: Yes. Let’s see. The timeline: my senior year, last semester, and my business partner and I were wrapping up our time at Wash U. One of the things I wanted to do was just get out and start networking, meeting people, expanding who we knew, and not knowing exactly what we were going to do next. So at that time, there was a casting call for the Apprentice Television Show at Wash U, and I ended up going on one of the tryouts, and I ended up making it all the way through to the show. Now that season was the season that they ended up doing the Martha Stewart Apprentice. So I did not get to meet our fabled president. I don’t know if that’s a good thing or bad thing. Yeah, I was on the Martha Steward Apprentice Show. It was my first time in New York. I had never been to New York at that point. I believe I was the youngest person on the show at 21 or 22. It ended up being a really interesting catalyst because my business partner and I were about to start a comparison-shopping site, but we needed someone to syndicate their product listings to us. So we had this great idea, but we didn’t have much money. We didn’t have a website. We didn’t have any products. So I had flown out to California, crashed at my aunt’s house, started calling all of the major comparison-shopping companies to see if they would syndicate their product listings back to us. Well, during that time, come to find out that Yahoo, who was one of the sponsors of The Apprentice, also had their Yahoo shopping product at that time. So we used my time on The Apprentice as an in to get connected with the right people within Yahoo. They ended up syndicating their product listings back to us, and that’s how we started our first company at scale, which was called Find Stuff at the time, and later became known as Announce Media or AFCV Holdings.
Alejandro: And this was 2006?
David Karandish: 2006, yeah. The spring of 2006.
Alejandro: So let’s talk about the early days. How did you guys build up the operation, and what kind of challenges were you experiencing?
David Karandish: Early on, we were in an interesting situation where we effectively started a business with one large customer. So when Yahoo was our customer, Yahoo shopping listings, and their search ads, we had a very large customer concentration, which is usually not something you want as a business starting out. At the same time, though, it really simplified a lot of things for us because it meant that since we had a customer that would effectively buy whatever clicks we could sell them as long as it hit their traffic-quality thresholds, that meant that we could go focus on building out the marketing platform and make that a core competency of ours. So we ended up generating a large list of search engine marketing base keywords that we could go advertise on, build landing pages for, drive traffic to our various properties, eventually not just in shopping, but in other categories like in health and autos. That model allowed us to scale very quickly, but at the same time, we were in this situation where if Yahoo sneezed, we caught a cold sort of thing. So here we were. We had a very fast-growing business, a very concentrated business, a very profitable business, but we were very reliant on our largest partner at the time.
Alejandro: So what did you do to kind of like relieve that pressure because obviously, as you were saying, if they were to pull the plug, you guys would be done?
David Karandish: Yeah. So we looked at it, and we said, “Okay. We’re developing on our own content, and we’re cutting all these licensing deals to receive syndicated content from other players. So we went out and said, what if we could find a property or another company that we could acquire that has a lot of unique content, a lot of question and answer-based content, a lot of SEO or organic traffic? Through our search, we ended up connecting with the folks at Answer.com. Answers.com was about 20 million in revenue. It was a public company at the time. I believe it was officially headquartered in Jerusalem, unofficially headquartered in New York. So we ended up hiring a bank, flying back and forth to the Holy Land, meeting with the folks at Answers.com about joining the two companies together. We had never done any acquisitions at that point, so buying a public company as an international, take private, turnaround, with a levered balance sheet. We like to make it nice and fun for ourselves in that first vest.
Alejandro: How much revenue were you guys producing at that point?
David Karandish: I’d have to go back and look at it, but let’s call it north of 50 million in revenue.
Alejandro: North of 50. And did you guys raise any money to get to the 50 million in revenue?
David Karandish: We had an angel round early on, and then we did a round with a private equity firm toward the end of 2007, but that was primarily to provide a little bit of liquidity to the founding team. Then 2008 happened, the market crashed, and had we tried to have the same kind of liquidity event even six months later, it would have been a very, very different dynamic. Call us lucky or smart or blessed or a combination of all three, bringing on those partners at the end of 2007 really helped us. I’m sure that we could grow the business, but also not be in a spot where all of our assets were tied up in the business two years in.
Alejandro: How much money was raised in total?
David Karandish: We raised about 50 million in that round. Then when we went to go to do the Answers.com acquisition, we raised, I’m going to say 100 million, but if I remember correctly, all 100 million of that was through Debt Facility instead of equity.
Alejandro: So how does the raising money through Debt Facility work?
David Karandish: It’s interesting because when you move through the different funding life cycles, you’ve got angel, you’ve got VC, you’ve got private equity, you’ve got debt. They all have different perspectives in terms of what time horizon looks like, what downside protection looks like. The debt guys don’t participate in the upside. So all they care about is making sure that they get paid back.
David Karandish: Private equity guys are kind of one step earlier where they want to protect a lot of the downside and get a strong return for their investors. If you move earlier, VCs will take more risk than the PE guys, but they typically still want to see you pass the idea stage. Then angel funding is very much betting on the jockey, in my opinion. We looked at it, and because our core business was profitable, we looked at the Answers.com acquisition as an interesting opportunity because the business was doing about 20 million in revenue, but it didn’t have any cost of content since it was all being supplied via Swicki, and it also didn’t have any cost of traffic because it was all organic traffic. So our view of the world was that 20-million-dollar revenue business, which was really more like a let’s call it a 19 million or 19 and a half million dollar gross profit business. So we had this very divided opinion of the acquisition where some people thought we were crazy for buying this company that was not really growing, kind of an older internet model. Then other people thought, “Wow. You guys really came in and were able to make a great acquisition.”
Alejandro: Why would you say that you decided to pull the trigger and go ahead with the acquisition?
David Karandish: Well, ultimately, we looked at it as a way to both diversify our revenue. I’d say it was advertising partnerships outside of Yahoo, and diversify our traffic, so we no longer had to rely entirely on our paid-marketing platform, but also on our organic traffic. And it just catapulted the company. Most people hadn’t heard of our previous properties. Answers.com was a fairly recognized property in the space. So we looked at it as an opportunity to bring the best of both worlds together. Bob Rosenshine and the Answers team did an awesome job building a community-driven Wiki from the ground up, which is no easy feat. When you combine that with our marketing platform, it’s a pretty nice combination.
Alejandro: What were some of the things you were looking for because obviously when you were doing an acquisition, you guys were doing your due diligence. What were some of the checkmarks that were important to you as you were looking into the business?
David Karandish: We were looking for a business that would have multiple ways to grow. I like having multiple shots on goal, multiple ways to accomplish what you need. So we looked at it and said we had an opportunity to both grow the content, add new content types, add new traffic types, add new channels so we weren’t reliant on if we acquire this company and things don’t work out exactly as we planned, then we’re not in good shape. We wanted it to be something where we had multiple ways of adding value and building the thing up. The second thing is we actually had to find something that we could afford. So I think we had set a cap. We couldn’t do anything more than 200 million dollars in acquisition price. So there might be other properties we wanted to have gone and bought, but we had some limitation on that side of things. Then we also wanted something where in addition to diversifying our revenue and traffic, it would give us a brand from which to really hang the rest of what we were doing underneath. So while we had a variety of different web properties, the Answers brand was the most recognizable, so while we acquired Answers.com, it really became the parent company or the parent brand for everything we were doing going forward.
Alejandro: How many employees did they have at the time, and how many employees did you have?
David Karandish: I think we were roughly equal-sized; around 100 employees each.
Alejandro: In this case, did you guys bring on board all the employees or did you do some restructuring there?
David Karandish: It was a combination. We had some folks that we brought on, and some who stayed on for a very long time. We had other folks that it wasn’t their cup of tea, and we decided to part ways. So we had a mix. But the fascinating thing was, here we were. We buy this company, we’re in the middle of this integration, and we’re, call it, 90 days in, 100 days in, and the next thing you know, Google makes a big algorithm change that starts to favor sites that are, we’ll call it, more thematic. So a website like WebMD did really well on that update because almost all the content on WebMD is focused on the health vertical. Well, for us, because Answers.com at that time was very much a horizontal, we lost a significant amount of traffic, it actually caused the acquisition to go unprofitable, and in typical Google fashion, they don’t tell you what they’re going to do. So, in the course of about three hours, our profitable, growing, exciting acquisition becomes unprofitable.
David Karandish: So here we were trying to figure out and scramble. “What do we do about that?”
Alejandro: Yeah. So what did you guys do about it?
David Karandish: We had really two major approaches that we took.
Alejandro: David, before we even talk about the correction that you guys put in place, I want to know because during those tough times I mean, tough times are really difficult. We’re talking about really dark days. Here you’ve raised 100 million to complete this acquisition. Integrations are a beast. You guys were really putting everything in making this happen. So what was it like for you the experience of going through these really dark days? These dark moments, maybe in those three hours or whatever that was.
David Karandish: Yeah. I can remember those three hours. If you look at some of those movies about the stock market crashes, and people start jumping through windows, and they’re wondering what in the world is going to happen. It felt very much like that. One of the biggest fallacies that web-based publishers had early one was this idea that Google was a partner to help these companies rank, and do well, and advertise, and these types of things. What we found is that when you can have a web-based business that’s been around for over ten years, and it could lose a third of its traffic overnight with no warning, with no stated reason, it really cemented in my mind that whatever I was going to do next, I did not want to be dependent on somebody else’s ecosystem. It’s ironic because the partner ecosystem dependency was how we got started and grew so quickly in the early Find Stuff days. But being dependent on an ecosystem partner for too long hurt our ability to grow in a stable fashion. We looked at it and said, “We’ve got to stay one step ahead, and we’ve got to fight it out.” One of my favorite entrepreneurial quotes I think it was Sean Parker, who said, “Entrepreneurship is like eating glass. Pretty soon you get used to the taste of your own blood.” So it felt very much like an eating glass phase of the business.
Alejandro: So let’s talk about the correction. So now, you know the news. And the world is falling apart for you guys, so what happens next?
David Karandish: Yeah. The world’s falling apart, we had a two-prong strategy. The first strategy was let’s go double-down on content. By content, that meant producing longer-form content, article content to pair up with our Wiki content. But it also meant looking into channels, new and upcoming channels. There was a website at that time called The Facebook that was all the rage with the college kids. We knew early on that Facebook was going to be a big thing. So we started producing more content for SEO but also filling our content that would be focused on acquiring traffic via social media. The second thing that we did though is, we said, “Look. We would really love to be in a position where we could take a lot of our technological know-how and go syndicate our Q&A out to other places. So we came up with this idea of building out a syndicated Q&A platform that we could go place on other websites. We didn’t have the model for that yet, but it got us interested in this Software as a Service business model. We ended up, pretty quickly, doing a roll-up in the space where we bought a couple of different SaaS companies, put them together, until fast-forward not too much longer ahead, and we now had north of 100 million in revenue from subscription business models instead of our advertising-only business model.
Alejandro: So at what point, David, did you realize, “I think we’ve survived this really big hurdle that we had in front of us.”
David Karandish: You know, you have all the different stages of grief. You have the uncertainly; you have the anger; you have the resignation. We went through all the different stages of when we ran into these issues, but we fought it out. We were able to get the company back to break even, get the company back to growing, build out these content channels, build out these Software as a Service acquisitions. It was one of those things where we knew we had a playbook where we still had these ecosystem dependencies, but we were moving the company toward a more sustainable business model over time. So each day didn’t get easier because we still had algorithm changes and challenges, but we had a path toward a business that was generating north of 100 million revenue with a significant portion of that via subscription revenue as well.
Alejandro: Really, really interesting. Then how would you say that because I think that the company is obviously like different resources, needs, and requirements from when you’re at a 10 million or when you’re at a 20, 50, or 100 million, so how would you say that those requirements and perhaps the management team or whatever the company needed to continue growing, can you walk us through that?
David Karandish: Yes. There are different stages of companies in terms of size. When you have ten people in a room, it’s very different than when you have 600 people in 10 offices. I think the big thing that we went through is that when we acquired four or five SaaS companies in the course of three years, we now had offices of people that we never hired. It hadn’t gone through our cultural vetting process. These are folks that we brought in through these acquisitions. We couldn’t be in every office at once, and so we did a lot of tours of duty just going from office to office trying to get people aligned and on the same message, and also just trying to row in the same direction. Now, when you’re scaling like that, you end up in this situation where you have to take on a different role even as a CEO. Whereas, early on, I had been very much a Business Development CEO or Sales CEO toward that mid-to-late phase of my last company. I was doing a lot of M&A, so we were doing a lot of meeting with investors, both on the buy-side and on the sell-side. So that was a very different role even than what I’m doing today, which is largely a Product CEO role. I’ll talk about that in a few minutes. The other thing, to that point, that I really struggled with is that I love to create things, and that was part of the reason why I got into entrepreneurship in the first place. I just love to take an idea, build something, and run with it. The acquisition side of things was fun, but I wasn’t as close to the creation part of what we were doing. So I felt like I got to learn a lot. I felt like I got some immense opportunities, but there was always a part of me looking back, saying, “Man! I wish I could have gotten a little closer to the product side of what we wanted to do.”
Alejandro: Interesting. Then you were talking about the M&A, and how your role now is different. I think there are a lot of people that choose M&A as a way to grow their business by acquiring other entities, and most acquisitions fail, and they do that because of integration. My question that was hitting me and was coming to mind when you were talking about this was, what did you learn about integration and how did you guys put the right measures in place to make sure you had the right assembly line to get all the pieces to click?
David Karandish: Yeah. I think from an integration standpoint, the power of culture is so important. An example of this I can remember when we went to the old Answers.com headquarters in Jerusalem, everyone had an office. Every single person had an office in that environment. Now, argue that’s a good idea or bad idea, I actually think there’s more research coming out starting to provide a bit of a backlash to the open office environment, but it was a different culture compared to our St. Louis office where there are a couple of offices, but most people are in an open layout. Just little things like that that you have to work through as you’re doing an integration. We also had some people move from Jerusalem to St. Louis. While obviously, I’m a big St. Louis fan, that’s not a trivial move, especially if you grew up in Israel. So you had that cross-pollination. Conversely, we had another acquisition where we sent our Head of Product to effectively live out of Ann Arbor, Michigan, and that is a way of cross-pollinating between the offices. So I think the cultural piece is so important because you can’t underestimate how hard it is to change a culture once it’s in motion.
Alejandro: Yeah. I think that culture is everything. When you acquire a company and culture’s already there, it’s just so tough to integrate. I can imagine. Let’s talk about the acquisition that you guys had yourselves. Can you walk us through how this happened?
David Karandish: Yeah. We were in the middle of trying to take the combined company public, which is one of those things where we had this plan to try to get the company to be a majority subscription revenue. We were about halfway through our plans. We had 60/40, almost 50/50. The problem, though, was that we had investors who had been in for a long time. We had markets that had been opening up, so we went down this path of saying, “Could we take the company public? What would that look like?” Well, I distinctly remember going out and meeting with some of the investment bankers, and they were like, “David, this company’s amazing. Over 200 million in revenue. Headquartered in St. Lous.” “Oh, thank you.” “Who do you want to cover you?” “What do you mean?” They said, “Well, what analyst would you like to cover your stock if you go public because we need to figure out what the coverage map looks like.
David Karandish: I was like, “You guys are the investment bankers. Tell us who you guys think should cover us.” They said, “Well, we’ve got our software analyst that cover the Microsoft’s and the Oracles of the world. Then we’ve got our internet analysts who cover (at that time) the Googles and the Yahoos of the world.” Well, they didn’t do a lot of cross-coverage, so the software guys and gals couldn’t make heads nor tails out of our media business, and our media guys and gals analysts didn’t understand the power of the subscription revenue platform. So we were in this weird situation where we had overcome a significant amount of adversity. We had significantly diversified the business, and our plan was working, but in almost like a Shakespearean tragedy we were in this spot where we hadn’t moved enough of the way toward being a subscription business to get full credit as a SaaS company. But the media business we weren’t also entirely a media business either. So we didn’t have an easy-to-fit-in box from a public company perspective. So that would have made the IPO process difficult. We ended up getting approached by a couple of private equity firms. We ended up selling almost all of the company to one of those private equity firms and then fighting it out fighting all those different algorithms and changes that happened afterward. Not too long after that, I realized it was time for me to go and take some time off. I had been it for almost 11 years. “I think I’ll start a new company.”
Alejandro: To wrap up the chapter with Answers, did you guys decide to run an M&A process when all these private equity firms were approaching you, or how was that managed?
David Karandish: We were running a dual process, which is something I hadn’t been familiar with where we were working with two firms to go through the public process. We had gotten approached by another firm about what it could look like for a dual-track. Then we ended up going the private equity sale route because it would provide almost entirely cash. We didn’t have to get through the story piece of getting 80% or 90% subscription revenue.
Alejandro: Why did you guys decide to go with the private way that you sold to? Why them and not the others?
David Karandish: Well, the particular firm we were working with had a lot of experience in both the internet and software space. It was one of those things where we try to make the best decision we could with the information we had. They were great to work with. We didn’t have any major challenges along the way through that process of picking. They emerged as the lead horse.
Alejandro: And this was Apax Partners?
David Karandish: Yes.
Alejandro: Cool. How big was the company when you guys closed the deal?
David Karandish: I think we were around 250 million in revenue. Somewhere in that range.
Alejandro: Wow. How many employees?
David Karandish: Around 600.
Alejandro: Wow. What was the size of the deal that was reported?
David Karandish: It was north of 900 million. There was a small part that got spun off, so technically, it was around 960 million, but let’s just say north of 900 million.
Alejandro: Wow. Almost touching a billion.
David Karandish: Rounded unicorn.
Alejandro: I’m getting dizzy here with all the zeros. I know that you did a five-month off type of vacation with your wife and kids. Did you do like any indulgence? Did you buy anything that you wanted to buy?
David Karandish: I didn’t do anything crazy. I think just taking the time off felt pretty indulgent to me.
David Karandish: Went up with my wife and kids to Montana. Saw some moose. I had never seen a moose before. Just like Bullwinkle in the Rocky and Bullwinkle cartoons.
David Karandish: Yeah, I wanted to figure out what I wanted to do next. I took the time off, and it was very valuable.
Alejandro: I guess during those five months you had the time to reflect and look back into your journey with this business. So what was your biggest takeaway your biggest lesson?
David Karandish: I had so many lessons good, bad, ugly, but I think the
Alejandro: If we pick one good lesson and one bad lesson, what would those two be?
David Karandish: The biggest good lesson is you only see opportunities when you’re in the game. To use a basketball reference: there are shots that you just can’t understand sitting in the crowd; you never think of sitting in the crowd. You can only see, you can only envision, you can only call the ball for if you’re on the floor ready to shoot. And you might not have even planned to shoot those shots, but being in a position, being in the game, being in a position to score, I think there are things that you just can’t see being on the sidelines.
Alejandro: What about a bad lesson?
David Karandish: On the bad lessons, I think I was pretty burned out at the end. For high performing, high achieving, driving people, you don’t just burn out in a day or a week or a month or maybe even a year. So toward the end of my time, I was really burnt out. I wanted to do something new, and I don’t think I even realized it until it was much, much later. So I used both of those lessons in helping to start Capacity because I really wanted to see people do their best work, which is the mission of our new company.
Alejandro: Got it. So then after those five months off, you started the next business, EQUITY.com and that actually was what led to your new business, which is Capacity. Can you tell us about the transition?
David Karandish: Yeah. One of the things I wanted to be able to do the next go-round is, I wanted to start a parent company that could help incubate other great entrepreneurial successes and do it right here in St. Louis in the Midwest. That includes both for-profits and non-profits. So my business partner, Chris and I started EQUITY.com in January of 2017. Our first incubated company was this company Capacity. The idea behind Capacity was that we looked at this big wave that was coming with the whole Artificial Intelligence tsunami. We said, “Wow. This is one of those it’s not a page turn or even a chapter turn in technology. This is like a shake the bag, rewrite the rules. This is the type of technology that will up-end the way that society functions.”
David Karandish: So I really was fortunate enough to have gotten into advertising when it was super early, so I loved the idea of jumping in and starting an AI company in the very early stages of AI beginning to take off. The second thing though is, I wanted to start a company that could address a lot of the challenges that I didn’t get a chance to address in my last company: communication, process, workflows. I wanted to start a company that could help, like I mentioned earlier, really help people go do their best work. I think having come out of that situation at the end of Answers, being burnt out really placed a high value on the ability to work effectively and efficiently and to be able to enjoy your family, but also work 50, 60, or 70 hours if you need to. But not unnecessarily work more hours than you need to. So, we had this idea of building out an AI platform that could connect to all of your major systems: your apps, your documents, your knowledge base where if you ask Capacity a question, you don’t really need to know where that information lives because Capacity can go find it whether it lives in Salesforce or on SharePoint or in a document somewhere in the knowledge base itself. That was the initial idea.
Alejandro: Got it. So how did the idea mature until you guys were really able to monetize?
David Karandish: Yeah, so we set a parent-level goal at EQUITY that any company we launch needs to be generating revenue in the first six months from launch or “No, that’s too long. Let’s scrap it. Let’s go start something new.” So on month five, day 30, true story, we signed our first customer in Capacity, and then we’ve been off to the races ever since.
Alejandro: Wow. That’s amazing.
David Karandish: We’ve got a couple dozen customers now. The Software as a Service model we’re not beholden to any one customer. What’s been so fascinating about what we’ve been doing is that as we go into a company, and as we connect to more and more of their systems, their documents, their knowledge of their team, we’re just able to continue adding more value the more people that use the system, the more people that get involved. So I’ve really loved working on a product where the more you use it, the more powerful it becomes. That’s a natural network effect; a natural moat that gets built up in the way we’ve designed the platform.
Alejandro: Very nice. Also, my understanding is that you guys recently did a rebrand, and rebrands are a beast. They are super challenging. I’ve gone through a couple.
David Karandish: I have other B words I could use to describe that, but we’ll go with beast for now.
Alejandro: Okay. I’m sure there are a bunch of people now listening that are maybe thinking about changing the name of their business. So tell us, why did you decide to change the name, and what steps did you take to make sure that it was a successful process?
David Karandish: The previous name of the company was Jane.ai, and we had gone down this path of personifying the AI, so we wanted to give the AI a human name. Jane stood for The Joy of Accessing Nearly Everything. We liked it. Customers seemed to like it, but over time, as we continued to build back to being in the game, we realized the platform was where the power was at, not just the bot. The bot is the interface. The platform is where all the heavy lifting happens. The other thing is, as we were moving to a platform, we wanted a name that you could look at, and it would capture the essence of what we wanted to go do in the same way that we didn’t want to be too literal. So you think about Amazon wasn’t called Shopping.com but the vastness of Amazon, the all-encompassing nature of it, it’s a great name for that company. We weren’t just going to call the company like InternalHelp.com or something like that. We wanted it to capture the essence of what we wanted to do. The other thing, though, is that we wanted the name to be something where it wasn’t all about us, but actually what we do for our customers. So we liked the name Capacity because it really reflected a multilayered name where we’re freeing up the individual capacity of a single team member. We’re freeing up the capacity of an entire team, and our platform works in a variety of capacities, so it just encompassed the holistic, integrated play that we were going for. It’s a huge pain in the neck to find a good domain name. I’ve got a lot of war stories on that. It’s a huge pain in the neck to go through the rebranding process, but I think it’s been worth it so far.
Alejandro: We’re actually speaking here with someone that owned Answers.com and EQUITY.com. So, man! You know a thing or two about domain names.
David Karandish: A good name is hard to find and important to keep.
Alejandro: So any special tip for those that are thinking maybe about registering a new name and getting a domain?
David Karandish: Yeah, I would say you have to stay with the longest list possible, and you need lots of people contributing ideas. We ended up with a very, very long list of names, some of which we liked, but we wouldn’t be able to get the trademark on. Some of which we liked, but they were hard to spell or hard to say, so we ended up in a really good place, but it took a while to get the right name with the right branding and the right positioning.
Alejandro: And how did you guys finance the operation, David?
David Karandish: We’ve gone through an atypical style fundraising. We did a Seed Round, my business partner and I, to get the business off the ground. We raised 1.6 million in the seed. It was all internal team members and founders. Then we raised a Series A Round, but we waited until after we had our first customers. One piece of advice I would give to listeners out there is, if you can get a big valuation jump and proof point, if you can show that you’ve got actual customers willing to do the unnatural act of opening up their wallet, paying you for your products or services. From there, we grew our customers, we grew our product base, and we just raised a Series B Round of just more of the 13 million. Now, coming from my previous experience having worked with private equity and different types of investors, we really wanted to be able to maintain a lot of control in the business, and we wanted to be able to work with investors that aren’t just looking for a quick flip. Put the money in, flip it around two years, three years later. There’s nothing wrong with that. There’s nothing wrong with those types of investors. It’s just not the time horizon that we are working under. So, we didn’t go after the traditional VC firms. We went after a significant number of CEOs and operators through networks like Young Presidents’ Organization, through personal networks of our founding team and ended up with a nice diverse cap table without any major concentrated investors.
Alejandro: Then, why get any investors? It seems that from the last deal that you closed almost a billion bucks exit. Two or three generations you could have lived a very comfortable life. Why getting outsiders to come into your business?
David Karandish: Yeah, great question. So while our founding team did participate in each of the rounds, we knew that we would need to raise a significant amount of capital, and we also wanted to be in a spot where the connections of the investors could lead to additional revenue opportunities. So in the time since we’ve worked on this recent Series B Round, a number of high-quality enterprise-level introductions we’ve gotten through our investor base has been staggering. From just an overall standpoint, while we had north of 100-million-dollar exit in Answers, by that time, I was a very small portion of the company. So I was not in a position to finance the whole thing myself, but I was able to participate in each of funding rounds.
Alejandro: Got it. Makes complete sense. And you were talking about culture. Something that you really learned when you were acquiring other companies, like with Answers where you had all these hundreds of employees. I think you mentioned something like 600 employees. So what did you know for sure that you wanted to make sure that was going to be around culture for Capacity?
David Karandish: From a cultural standpoint, I knew that I wanted to work with people who want to be in a startup, in an early-stage startup. People who can work in the ambiguity of an early-stage startup. Startups are not like normal companies. They’re very much their own thing because the rules of the road are just very different when you know, you’re not a large profitable, scalable type of business. You’re still trying to find your product/market fit, trying to acquire that next customer, trying to get your systems and processes in place. I wanted to work with people who could work well in that environment, but I also wanted to work with people who could fit with the values of the company itself. When I think about what we’re setting out to do, we want to go create amazing products. We want to help our customers out. We want to do the right thing, which people talk about integrity in a business. Doing the right thing can encompass a lot of what that looks like. Then ultimately, we wanted to have fun. Like I said, back to my experience at the end of Answers, having been burnt out, I didn’t want to work in an environment where people didn’t enjoy it. One of the things we say all the time is, “If this is a place where you’re not enjoying it for a significant period of time, it’s not the right place for you, and that’s okay.” We wanted people who are hungry, who were excited to be at the forefront of a new wave of technology. I’d say by and by this is the best culture I’ve ever worked in.
Alejandro: Very cool. Just out of curiosity here because there’s a lot of hype around AI. Everyone is saying, “I have AI for this, AI for that.” So how do you cut through the noise, and you’re able to really showcase, let’s say investors that this is the real deal?
David Karandish: Yeah, great question. So you pull up a license plate in my home state. Missouri is the Show-Me state. So rather than getting up and talking about all these things that AI could do, we show our investors and our prospects and our team, “Here’s what AI is doing.” For us, while there are many different applications of AI, the area that we’ve zoomed in on has this idea of accessing your company’s intelligence and really using AI as a system of engagement. What do I mean by that? So many companies have pushed their software and their databases and their documents out to the Cloud, and they’ve ended up storing these items in these systems of record like Salesforce, like Office. These systems of record are okay. They’re actually pretty good systems of record, but they’re terrible systems of engagement. Find me one company that likes their Salesforce, for instance, and I will find you a company that’s lying. Find me a company that had an easy migration path to Office 365, and I’ll find you 100 that didn’t. So the way we think about it is that technology is all about abstraction layers. So we have an abstraction layer of assembly code on top of bits and bytes, even an abstraction layer of the operating system on top of assembly code. They have an abstraction layer of apps that are written on top of an operating system, on top of the assembly code, on top of bits and bytes. At the highest level, you could think of us is that next layer of abstraction, that next system of engagement where you ask Capacity your question, you don’t need to know where the answer comes from, and the bot will go out and find it and come back to you with it instantly. Initially, it starts out as questions and answers or inputs and outputs, but over time, it becomes more guided conversations, workflows, more of an embedded help desk. So you could think of what we’re doing as a modernizing the stack of how people are supported within organizations. You can think of it as an automation suite.
Alejandro: Very cool. Very cool. One thing that I typically ask guests that we have on the show, David is, if you had the opportunity to go back in time and have a chat with your younger self, with perhaps that David that was launching side projects and doing hustle projects and all of that stuff, if you had that chance to sit down with that David and give yourself one piece of business advice before launching a business, knowing what you know now, obviously, what would that be and why?
David Karandish: That’s a great question. One piece of advice I’d give to my earlier self. I think I would tell my earlier self to continue to be a student of the distribution channels how you acquire customers. So many entrepreneurs that I meet today and even seasoned entrepreneurs can get caught in this trap of falling too much in love with their product and not in love with how you can get that product into the hands of your customers or clients. So I would tell my younger self to study the acquisition channels and know them and learn them and make that a core part of what we do.
Alejandro: Thats really amazing. I think that selling is everything because the “build it and they will come,” it never works. It’s all about you sell it, and then you figure out how you build it and deliver it.
David Karandish: Yeah. I think that customer acquisition is way understudied in the marketplace.
Alejandro: Yeah. 100%. So David, for the folks that are listening, what is the best way for them to reach out and say hi?
David Karandish: You can check out the Capacity website at Capacity.ai or you can shoot me an email: email@example.com
Alejandro: Amazing. Are you on Twitter or LinkedIn or any of that stuff?
David Karandish: Yeah, I’m on LinkedIn. I have a Twitter account, but I’m all fake-news out. You can reach me on LinkedIn as well.
Alejandro: Wonderful. Well, David, thank you so much for being on the DealMakers show today.
David Karandish: Thanks for having me. I really appreciate it.
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