It was a great pleasure to interview Michael Ellenbogen on the podcast. Especially, as someone who also evolved from working in corporate America to starting and selling his own company. He delivered some great insights all entrepreneurs can benefit from as they plan their own launches, and work through the process of raising money and selling a business.
In this episode you will learn:
- Going from corporate to startups
- Finding the alignment with investors
- How to land high profile investors on the cap table
- Fundraising strategy and process
- How to pick the right exit
About Michael Ellenbogen:
Michael Ellenbogen is the CEO and co-founder of Evolv Technology. Prior to Evolv Technology, Mike co-founded Reveal Imaging and successfully led the company to achieve double-digit growth in both revenue and profitability since its inception. Through more than 20 years of contributions, Mike has reshaped the explosives detection industry.
Reveal Imaging was acquired by Science Applications International Corporation (SAIC) in August 2010. Prior to Reveal, Michael Ellenbogen was VP of product and business development for Perkin Elmer Detection Systems, overseeing the R&D, engineering and marketing efforts. As Director of Marketing for Vivid Technologies, Inc., Michael Ellenbogen was instrumental in the transition following Vivid’s acquisition by Perkin Elmer. At both companies, Mike was responsible for market research, definition and development of new products and product enhancements.
Connect with Michael Ellenbogen:
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrightee. Hello, everyone and welcome to the DealMakers Show. So I think today we’re going to have a really interesting perspective so kind of like going from corporate to the entrepreneurial type of journey and I think it’s exciting. I myself even recognized myself with that because I went from being a lawyer which is a little bit more on the boring side but I went at it as well. And you know with that being said, I would like to welcome Mike Ellenbogen to the show. How are you doing?
Michael Ellenbogen: I’m great. Good morning.
Alejandro: Yeah. Good morning. So I was very excited to have you here and it was very interesting when I saw that you were for about 17 years in Corporate America and then you went at it with the entrepreneurial journey. So tell me a little bit more about how did you take this leap of faith? How did this come about?
Michael Ellenbogen: Well, I always wanted to start my own company. I don’t know why. I’ve always loved building things and eventually I knew I would start my own company. I happen to watch my father do it and I think that was certainly influential in the way I thought about it. My father started his own company when I was in high school, staring high school and I remembered him walking business plan around to a few neighbours looking for initial capital, and then he came home one day and said there’s this new thing called venture capital and explained what venture capital was. And I was able to watch him start one company and then he sold that company and then started another. So I guess I learned that these things don’t just happen by magic to other people. There’s a process that you follow and if you know your space well and can find capital for it then you can find something like this happens. So I started in Corporate America. I spent the first eight years of my career with Analog Devices Semiconductor Company and then joined an imaging technology company called Vivid Technologies which we eventually took public so we were doing xray imaging, various types of things but also with the first company to do automated detection of explosives in suitcases. This is after PanAm 103, the Lockerbie bombing. So that’s the industry I found myself in and that led to starting Reveal Imaging, my last company and then subsequently evolved.
Alejandro: Got it. So I guess before we talk about Reveal, what kind of like roles did you have in these companies that you were involved with? I mean I guess that this would help us understand, especially the listeners understand like how that you know those skill sets were shaped up on your end before you went at it.
Michael Ellenbogen: Sure. Like I said I loved, always have loved building things. I have a physics degree from Colgate University but knew I wasn’t going to be a physicist pretty early on so when I really started my career I wanted to get on to the business side of technology so I started in a marketing role, a product marketing role with Analog Devices which was a fantastic way to learn a lot about a bunch of different industries. They did everything from you know A to D converters and D to A converters for CD players and that’s a throwback right there, I mean even saying CD players but audio and video to instrumentation for industrial applications and military. So I had a really good introduction to a broad range of industries and then like I said I joined Vivid Technologies. I was focused on selling and I think anybody who really wants to start a company should spend some time carrying a bag and selling. So I spent most of time in Asia Pacific selling technology for aviation security, and then took on marketing and business development role at Vivid. So I have a technical background but like I said really got in to the business side of technology, spent some time selling. I think that prepared me a little bit better for a broader role once we took the company public. We actually wound up selling it to Perkin Elmer. Perkin Elmer merged us together with another division and I was VP of sales marketing R&D and engineering. So again, I’ve got a growing level of responsibility across multiple functions and within the safety of a bigger organization.
Alejandro: Got it. Got it. I agree with you. I mean that as a founder, you really need to know how to sell. I think that’s critical. So I guess let’s go to the first initiative here to Reveal. How did Reveal happen?
Michael Ellenbogen: So I started Reveal in 2002 and like I said I had been in the security industry for a while. Nine eleven happened. There was a completely new legislative requirement in the United States to screen the suitcases, the checked baggage going in to the belly of the plane so the very high level of requirement from at the time, the FAA now, the TSA for what this screening process has to look like and what technology is required, the test that it has to pass. So I had spent the last seven or eight years in the industry so I guess I felt like I had my obligatory 10,000 hours in aviation security so I decided to start Reveal and what we did was come up with kind of like the network of PCs as compared the mainframe. So at the time, there were these big million dollars scanners and if anybody who’s listening remembers the immediate response after 9-11 was to put them in the airport lobbies and to have people carry their own bags to these scanners and everybody saw that there was an opportunity or need to integrate them to the flow at the airport but that required spending anywhere from $3 million to 5 million in construction and conveyors for every one of these $1 million scanners so it’s hugely expensive in infrastructure. So at Reveal, we developed a smaller, cheaper, lighter network of systems that you could sprinkle around any place the airport wanted to bring bags in, and really eliminate or significantly reduce that infrastructure cost. So we started the company in 2002. Over the next seven years, we raised about $23 million in venture capital and then sold the company to SAIC in 2010.
Alejandro: Got it. So I see as well that you had top tier investors obviously but I guess before we talk about the investors, what was the founding team. What did the founding team look like at Reveal?
Michael Ellenbogen: Yeah, we started with a group of people who had worked together for quite sometime and really knew the industry they were actually—so I started the company but we pretty quickly pulled together a core group of five people who knew the customers well, who knew the technology really well, meaning we had built systems that had to accomplish this task and had to pass the various test that TSA would subject us to and brought that capability in to Reveal from day one. So before we had a product, we had really three marketing people. It was a little lopsided but it was a core team that I knew could realize this vision and not only that but convince others that we could realize that vision.
Alejandro: Got it. Got it. And I see as well that you did multiple rounds so you did your seeds, series A, series B, series C and you got investors such as Graylock, Flybridge. I actually know these two VCs, great folks in there, and I also General Catalyst. So how did you find those investors?
Michael Ellenbogen: I had a CFO, a friend actually a neighbour from across the street when I was working on the business plan. I asked him if he was a former CFO. I asked him if he would be willing to help me out with the numbers. So he wound up I remember us sitting at the kitchen island working on the business plan and looking through the numbers. He had folks that he had worked with in the past specifically at Graylock and some of the venture firms that had spun out like Flybridge. So he was able to make some initial warm introductions. We met with folks at probably over time 30, 35 different venture firms. Believe me, walking in telling people you’re going to make a bomb scanner for airports. Very, very few VCs had anybody with any expertise in the field most of them had no interest in doing anything that was government related. So there were a few that were intrigued and I think they were impressed by the team we’ve put together and you know our backgrounds and our commitment and then they were willing to roll up their sleeves and do some work and understand this market opportunity and help up put a little sand in the sandbox so we could actually develop and bring to market the technology that is now screening millions of bags every week at about 300 airports across the US.
Alejandro: Got it. I mean this is a pretty impressive roster of investors. So is there any trigger, Mike, that you guys had in the business while executing you said, okay, now is the right time to bring in VC and scale this up?
Michael Ellenbogen: We knew there would be VC from the get go. We did kind of the classic friends and family round to get started. We borrowed free office space. We kind of scratched and clawed to pull together that initial system and prototype and during that process, we started talking to VCs. It’s the expensive proposition developing. These are $400,000 scanners so it was expensive to develop them. We knew we would need venture capital. We also got some government funding along the way which helps in a couple of ways. One it’s non-dilutive funding but also it helps demonstrate to potential investors that there is interest from the customer behind it. So that was helpful as well but we knew we need venture. Immediately after closing our friend and family round we started talking to venture capitalists and we’re able like I said to find a few that really believed in the story and wanted to join the venture.
Alejandro: And you build it to over $100 million in revenue. Is that right, Mike?
Michael Ellenbogen: That’s correct. Yeah, in 2010, we did just over 100 million in revenue.
Alejandro: And I guess how did you see the process of valuating the company like what were those investors looking for example like at a seed or then at a series A or at a B or C round? Like how did you see the due diligence or their focus shift as the company was maturing over time?
Michael Ellenbogen: So I was always surprised at the process of placing a value on a company. You know I think it’s what’s the market clearing price is the way to think about it in a series A or even a seed, probably a series A. Typically the investors are going to look for somewhere around half the company therefore the valuation I think you back in to it, how do you need, and expecting to give up half the company, what’s the valuation got to be. So that’s probably not a particularly satisfying answer but I think it’s an inexact science especially at the early stage. Everybody is looking to own as much of the company as they can so it’s a bit of an arm wrestle.
Alejandro: Got it. I hear you. And I guess the business later was acquired by Science Applications International. So what kind of multiple do you give back to investors?
Michael Ellenbogen: Our investors got about 8x their money back.
Alejandro: Got it. Not bad. Not bad at all. And were you always planning to sell the business?
Michael Ellenbogen: Yeah, I think once you take venture money, you know, you’ve charted a path. You’re going to come to a fork on the road at some point you’re either taking the company public or you’re selling it, right? It’s not going to be a lifestyle business. There’s an expectation that you’re going to provide a return to these investors who have taken a risk with you. So it’s got to be one of those two things I guess. There’s a third option which is a product private equity recap but for all intents and purposes, you’re going to go down one of those two paths.
Alejandro: Yeah. And what was the trigger for you for saying okay, now we need to take a look at perhaps exploring an exit.
Michael Ellenbogen: Yeah, so the multiple is going to be based on some multiple of either revenue or earnings and your growth trajectory. So we were growing like a weed. We had obviously our revenue was growing fast. We also had great bottomline Ibiza. So we knew we were at the point where we would probably get the best potential return and you know with a—we had one significant risk is that TSA was our single largest customer and that’s always an uncomfortable scenario for a business operator and entrepreneur. There’s just too much call it stroke of the pen risk so that combination of things are going great, we’re growing fast, we had a couple of inbound inquiries which often triggers investigation of the market so that’s really what motivated me to suggest to our board that we look at the options of selling the company.
Alejandro: Got it. So I guess once you get the alignment from the board, then you all agree okay, let’s take a look at this. Is there like do you bring on board investment banker or do you do it internally?
Michael Ellenbogen: So we used an investment banker which I think was absolutely the right idea. You need somebody who can create a little heat under the deal but also knows the players and can run the process. If you’re trying to run a business with everything that goes along with that, also running the sales process, it’s nice to have somebody else who’s experienced and knows the players, knows the process and can really drive it as a co-pilot through this process.
Alejandro: And talking about the process, how, I mean just recommendation for others that are listening, how do you get alternated offers because at the end you want to make it competitive. You want to create that kind of like bidding war type of structure but how do you do that without really alienating others?
Michael Ellenbogen: I think just very clear and honest with people that you’re going to run a process and you’ve put together a book that describes the company. You essentially send that out or seek indicative interests from anybody who you know might makes sense as a potential buyer and then you drive a process with dates, right? Nothing better than people knowing that this property is going to sell so whether it’s an offensive move on their part or a defensive move, then they know there’s a transaction that’s going to occur. There are dates to follow and it keeps the whole thing moving and it keeps everybody honest all the way through.
Alejandro: Got it. Got it. And I guess the other thing is that you had really sophisticated investors sitting on the table. In many instances, unfortunately, you kind of like see how many of them have their own interests. It just happens because they have their own LPs and all that. So did you experience any of that?
Michael Ellenbogen: So everybody comes to the table with slight different perspective but I have to say that I was really lucky and I wish I could claim that it was forethought. I think a lot of it was forethought but you know not from me. As I mentioned, our CFO at the time knew a lot of people in the industry and we started with Graylock who’s really one of the best known kind of really high class venture capitalists. They introduced us to a few folks. We wanted to work with Smart Money, people that had been there, done that and were able to help us grow Reveal. So we had people at the table like Bill Helmund from Graylock and Joe Cutler from General Capitalists and others who this wasn’t their first rodeo. They weren’t looking for their first exit. They were willing to kind of follow the company and support the family through not looking back was you know it was a roller coaster ride like any other and they never once pushed me to sell the company or push me for an exit. The questions I was getting was, “Mike, what do you think is the right thing to do with the company now? Should we double down? Should we look at selling? What do you think we should do because you’re closest to the business?” And I really appreciate the fact that they were seeking guidance from me and my management team about what we should do rather than trying to push something to their timelines.
Alejandro: That’s fantastic because typically you don’t hear that unfortunately and I guess that at the end of the day, it’s really all a matter of trust. Without trust, there’s nothing and I think that trust is really build by obviously delivering on your word than having that integrity but then also to have a really nice line of communication. So how did you optimize for that level of communication? How did you keep people on the loop for let’s say the exit?
Michael Ellenbogen: So once you get to the exit, the frequency of communication tends to go up and you’ll have kind of a tiger team, a working team looking at offers and really following the process. Prior to that, I mean you’re absolutely right. It’s all about honesty and integrity so there’s going to be good news, there’s going to be bad news along the way and you have to share both when they happen with your board, with your investors. So that’s a big part of it. Once you built up that trust, you spend a bunch of time in the foxhole together then as you get towards the exit, it’s really about it’s the tactical execution that you’re focused on more so than getting everybody on board. Everybody should be you know together on board before you actually decide to pull the trigger and start the process.
Alejandro: And what was the timeline in terms of the process from beginning to end?
Michael Ellenbogen: It took about six or seven months if I recall from the point where we started circulating the book to actually closing.
Alejandro: Got it. I mean I’ve gone through it myself. It’s incredibly stressful going through one of those transactions. So just out of curiosity, how did you celebrate, Mike?
Michael Ellenbogen: That’s a great question. So I recall very specifically so my father had passed away just before I started Reveal. And I was a recipient of a car of his and I remembered driving home after we got the contract signed and with the top down, playing a song that reminded me of him and I think shedding a few tears actually thinking about what he had done and what we had just accomplished.
Alejandro: What a great way to honor your father, Mike? Thank you for sharing that. So once the deal was closed, you went then to become an entrepreneur in residence in with General Capitalist which was one of your investors. So what was the experience of being an entrepreneur in residence?
Michael Ellenbogen: It was a great opportunity to sit on the other side of the table. For a little while I did about a year and a half almost two years at General Catalyst as an EIR. In that role, you’re looking at opportunities as they come in to General Catalyst to the VC sitting in and listening to pitches, providing whatever level of you know experience or expertise or connections you can to help evaluate opportunities all while trying to figure out you know what you’re going to do next or what as I say what I’m going to do as I grow up. So it was a really great opportunity to get your nose in to a different deal flow and see how things are evaluated from the other side, right, from the investor’s perspective, and then we got a lot of help in figuring out what we were going to do next.
Alejandro: Got it. And you were here for a few years then finally you go on to launch your most recent entrepreneurial journey I would say which is with Evolve Technology.
Michael Ellenbogen: Right.
Alejandro: Can you tell us a little bit more about Evolve Technology?
Michael Ellenbogen: Sure. So yeah in that two years at General Catalyst I spent with my partner Enel Chikara who’s my cofounder and our president and we looked at all kinds of different technologies but what we were really focused on was sensors that could either actuate a service or a process and my background had been obviously in physical security. So we came across some very interesting technologies that had been developed for IOT and cellphone technologies and laboratories experimentation and we saw a need at the same time that the sort of the terrorist targets and active shooting had in the US had really shifted from look historically had been hard targets like aircraft and government buildings and well protected targets like military to soft targets. So we were looking at this variety of different technologies including modern networking and other capabilities and IOT on how we might apply that to this changing landscape in the security industry. With the rise of ISIS and Al Queda in Europe, in Middle East, Asia Pac and that industry in active shooters here in the US, there was clearly a need for something that would do a much better job at screening more people, more quickly, more securely for threats to a crowd or a venue which were specifically explosives and firearms. So that’s why we started Evolve is to really enable our customers who are security directors and others to make those places where we expect the level of safety make them safe.
Alejandro: Got it. Got it. And you’ve definitely done it again on the financing side. So how much capital have you raised so far?
Michael Ellenbogen: So we’ve raised $30 million so far. And we’re just about to close our series B.
Alejandro: Got it. And did you find because I typically see this a lot so you see founders that previously were at VC firms or you know that have some type of existing relationship because when you go at it for the first time and you start knocking on VC doors, you don’t have the existing relationship and it’s a real pain in the neck because it’s like a hundred rejections to get one potential yes. So did you find in your experience, Mike, that having that existing relationship with General Catalyst where you were working for let’s say two years helped in kickstarting a little bit the financing efforts?
Michael Ellenbogen: No, I would say I kickstarted it a lot.
Michael Ellenbogen: Having the existing relationship helps a lot having had the successful exit helps a lot. So as an EIR, you’re operating assumption is you’re going to go out and find the next big thing and the firm that you’re working with would support that next big thing. So that’s why you do it. And that’s certainly was the case for Evolve. We had a vision that we shared with folks at General Catalyst, the partners at General Catalyst, the partners at General Catalyst along the way and by the time the deal had kind of come together they were on board and we were very lucky to have support from couple of other investors as well.
Alejandro: I mean like you said it, Mike. I think that when you are a proven founder you know you’ve had an exit, you already have some form of relationships. It definitely helps to get things in motion. And I think that you, you know I always say this, that it’s like being in the cafeteria. Now you know things have shifted that instead of you going to the table of the cool kids for permission to sit down, now you are actually sitting on the table and the investors are asking for permission to sit down. So I guess having this in mind, you obviously had the opportunity to be a little bit more pickier with who you would bring and putting your cap table so what were you really looking for when you say, “You know what, now is the time to get investors involved and this is what I want from them in order to have, you know, to give them access?”
Michael Ellenbogen: Yeah. Two things for me: people I trust and respect and people who can help us really figure out how to grow this business. I was very, very lucky to form a relationship with Joel Cutler over years at General Catalyst have tremendous respect for him as an investor and advisor so I was excited to have Joel on board. I was also lucky to be able to work with Bilal Zuberi who’s now at Lux Capital. Bilal was at General Catalyst as a principal while I was there as an EIR and I was referred to Bilal and Elle and I call him our coprocessor. So Bilal was right there. We filled up a lot of whiteboards with a lot of ideas together. He then left and joined Lux as a partner which is a great opportunity for him and that was as our Evolve deal was coming together. So we had General Catalyst and Bill Gates both interested in funding Evolve and I asked that we make room for Bilal so make room for Lux just because we had spent so much time with them and I’ve developed such respect for him, his vision and his ability to sort of understand markets and technologies that I really wanted him on board as an investor, advisor and friend because you know you’re going to be in this for you know for quite some time so you want to work with people that you like and that you can learn from and I was very fortunate that we were in the position to be able to do that.
Alejandro: So, Mike, I mean I have to ask you this. You have the dream come true of any founder. You have Bill Gates as an investor. How did this happen, Mike?
Michael Ellenbogen: There was some overalp between some technology that we licensed at the beginning and investment that Mr. Gates had made so we were able to meet his team through that overlap and I mean without putting words in his mouth, he likes to tackle, clearly likes to tackle big problems, reinventing security, physical security is a big problem that can make the world a better place so I think it was a pretty good fit.
Alejandro: That’s fantastic. And what kind of differences do you see from let’s say engaging or pitching family offices, you know, Bill Gates from the difference between pitching that type of profile of investors with pitching let’s say a VC? Like what are the differences there?
Michael Ellenbogen: That’s a great question. I don’t think I saw a significant differences because if you can imagine the resources that are available to evaluate an opportunity at a place like Gates Ventures are pretty significant not fundamentally different than you’d find at a VC. I have seen huge differences in processes that are well managed or not well managed that are respectful of the entrepreneur or not respectful of the entrepreneur. And I think that it doesn’t matter if it’s a family office or a venture firm. Having a clear type process enables a firm to stand out as somebody who respects what the entrepreneur is trying to do and the demands on your time therefore will also be supportive as a partner in the long term.
Alejandro: Got it. Got it. And obviously this time being your second rodeo, you know, I guess on the first time there’s that steep learning curve and I guess there’s always a steep learning curve when you’re building financing and scaling a business but the second time it’s a little bit easier because you already have your stories that you’ve learned a ton from. So I guess in this time around I mean where were you seeing you know like certain aspects that you are like okay, I know this. I’m going to do it differently. Like where do you feel that those lessons that you learned you applied them to both when building the second business?
Michael Ellenbogen: What I learned through the first business is that the plan is never as linear as you’re going to expect. You’re going to hit peaks and valleys and you’re going to have to figure out how to get to the goal and that’s entirely about the team, the team that one figures out what the product technology can do, visualizes the products, can execute on it, can make something that works all day everyday in the real world, the team that finances the company. It’s really all about pulling together a group of people who can figure out how to react to changes in the market, can figure out how to drive new technology in to a space in a way that’s efficient and effective. I’ve unfortunately have too many experiences where individuals didn’t work out whether it was fit or capability and you have to move on relatively quickly and bring in the people that can actually move the needle and elevate the game across the board. So that was a goal from day one. And you’re never done learning. There’s always changes that you’re dealing with. The market isn’t necessarily going to react in exactly the way that you anticipate it will so you’ve got to be able to kind of pivot with those punches.
Alejandro: Got it. And I guess let’s say really quickly here so if you had the chance to sit down with your younger self, let’s say with Revolve before you went at it with your first rodeo, what would be that one piece of advice that you will give yourself about fundraising?
Michael Ellenbogen: About fundraising.
Michael Ellenbogen: Good question. I would say and I know this sounds trivial but there’s only 100% of your company to go around. So guard that equity very jealously. Make sure that you’re partnering with people who are going to be aggressive and help you grow the company, not just aggressive about how much of the company they can own and focus on execution. The quicker you get to profitability, the quicker you take command of your own destiny.
Alejandro: I love it. I love it. And if we’re shifting gears to acquisitions and M&As, what would be that one piece of advice to your younger self, Mike?
Michael Ellenbogen: Focus on the outcome of the deal, not necessarily just the price. There are good buyers and there are buyers who maybe may not fit the company and the culture tha tyou’ve developed so the buyer’s culture eventually is going to take over whatever it was the company that they bought so look for a good cultural fit. If there isn’t, then the company that you built eventually is going to disappear. If you believe in what you built, if you’re passionate about it, you want to find a good owner. So that’s as important certainly as the entrepreneur that’s as important maybe more important than the ultimate number you get. Your investors may or may not agree with that.
Alejandro: Yeah. Yeah. I agree with you there, Mike, because at the end of the day there’s nothing bigger than looking back and being proud of what you’ve built and how others are continuing to increase that legacy that you’re leaving behind. So I really love that, Mike. So what is the best way for folks that are listening to reach out and say hi?
Michael Ellenbogen: You can find me on LinkedIn, Michael Ellenbogen. I’m on Twitter. Happy to connect with anybody who would like to talk.
Alejandro: Well, thank you so much, Mike, for being on the show. It has been a pleasure.
Michael Ellenbogen: Alejandro, it’s great to talk to you.