Thejo Kote is the co-founder and CEO of Airbase which is an all-in-one platform for spend management, giving companies unprecedented financial control and visibility. The company has raised so far $7 million from First Round Capital, BoxGroup, Village Global, and Quiet Capital. Prior to this, Thejo Kote sold a company for over $100 million.
In this episode you will learn:
- The value of Y Combinator and accelerators
- Ways to fundraise
- How to deal with challenging moments
- How to get your company acquired
For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash. Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400 million (see it here).
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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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello everyone and welcome to the DealMakers show. Today, I have a guest that is going to teach us a thing or two about scaling, financing, and then also exiting your company. So without further ado, Thejo Kote, welcome to the show today.
Thejo Kote: Thank you, Alejandro. Thanks for having me.
Alejandro: So, originally from India from the south of India next to Bangalore. How was life growing up there?
Thejo Kote: It was great. We had a middle-class, upper-middle-class family. Lots of love especially from my mother. She was a very caring parent and always wanted the very best for us. It was kind of an intellectual upbringing. So, both of my grandparents were authors in my native language. We had a library of 3,000+ books at home. That’s the environment I grew up in. So, it was fun.
Alejandro: That’s really cool. How did you develop your love for computers?
Thejo Kote: I always knew growing up that I wanted to be an engineer. Back in India, parents push you towards being an engineer or a doctor. But I did want to become an engineer growing up. I made some choices in school even before I started on undergrad that made the path of becoming a doctor impossible. So, I dropped biology. I didn’t even study some of those subjects. I took electronics, and subjects like that, that made sure that was the only option that was available to me. I ended up studying electrical engineering in my undergrad. I was always fascinated by the internet. Remember, this was me sitting in India back in the ’90s, and early 2000s, and I did my undergrad between 2000 and 2004. Out here in Silicon Valley, things were just coming out of the big bust. But still, it was fascinating to me, and I really read about and kept up with every little thing that was happening out here, all of the launches. I was a big student of technology history, and I tried to read as many founding stories and biographies of founders. That was just fascinating and interesting to me. That’s how I got started. I started my career as an engineer. It was at a company called Infosys which was an outsourced services company in India. I didn’t last there long. I learned very quickly that large companies aren’t for me. Then I went and joined a startup and got to work on and build some really cool stuff. So, that’s how I got started.
Alejandro: What was that first startup experience like for you?
Thejo Kote: It was very interesting. It was a fantastic learning experience. We had all of the ups and the downs. Like I said, I started my career at a very large company with many tens of thousands of employees, and I figured out pretty quickly that that wasn’t for me. That was not what I would have fun doing because up to the point, my life was largely on autopilot. Like I said, it was a fairly straightforward middle-class upbringing, and I wasn’t really challenged that much. School was quite easy, and as I was going through those different stages, I went into undergrad. It was finally when I was passing out, I got kind of a kick in the behind during my undergrad when my dream, of course, was to work with some of the best technology companies in the world. It was a big wakeup call when none of them would even give me an interview. In India, when you study electrical engineering, you’re not really studying computer science. It’s leaning a little bit more towards hardcore, electrical engineering and the kind of companies that I looked up to like Microsoft, Google, and Yahoo was a pretty big name. They had a big operation out in Bangalore back then. None of them were even interested in interviewing people who had a background in electrical engineering. That really made me sit down and think, “Wait. What do I really want? What do I want to do?” That’s when I started getting real serious about focusing on the work that I was doing. The answer that I came up with for myself was, “Look. This is what I’m really passionate about, technology companies and startups and founding stories and how were these things done?” I was always a big believer that technology and engineering, especially, is a great way to have an impact. It comes with leverage in terms of you being able to do some work as an individual and have a hopefully positive impact in lots of people’s lives. Technology, computer science, and engineering, in general, gives you that opportunity that a lot of other fields and professions does not. So, I was always very interested in that side of things. Finally, when I had the chance to really sit down and think about what is it that I want to do with the rest of my life, that’s what crystalized for myself. There’s a large company in my mind. The only job I could get, so I took it. I went in, and I started working really hard and went into a startup. Then I got the opportunity to do that. My goal in going there was that I knew I wanted to do something of my own long-term, and that was a way for me to learn. I got an opportunity to join the company started by one of the better know technology entrepreneurs in India at the time. I was one of the very early employees. Fantastic experience with that, and within six months we figured out the whole thesis under which we were building the company wasn’t really going to work. I was building a bunch of these side projects on my own time. We ended up launching one of those. That really took off, and my company changed direction to go after that. That became my baby for the next three and a half years. It was great. We went from nothing to one of the largest value-added services providers in the mobile space in India within a couple of years, and it was a fantastic learning experience. We didn’t have a lot of shares in the company. Too stupid to know better, but it was a great learning experience.
Alejandro: Then how did you come to the U.S.?
Thejo Kote: As I was going through that journey, just a little bit more on that is that the service that I was building on the side, it was a text-message-based social application. So, the initial piece of the business was that we were going to build a mobile-based portal which used data connections, but the flaw in that model was that back in 2006 in India, there were just not enough phones with data connections. Like, I think they were 3G in 2010 or 2011 or something like that. So, it was too early. But what everybody did have, there were a hundred-odd million phones in India at that point. I think it’s a billion to this point. It’s a pretty high number, but even back then, the addressable market for voice and text-message-based services was there. So, I was using some of these APIs that I had to build text-message-driven services. Funny enough, it was the service that we launched, we had launched a couple of months after Twitter launched out here in the Bay Area in 2006. Then we were growing quite fast in India. That was obviously going really well out here in the U.S. So, I always was looking at them from afar and asking ourselves, “Why are they doing so much better than us?” We were in a similar space, and we were both seeing fast growth. I came to the conclusion that we weren’t really good at a lot of the things that it takes to build fantastic products, consumer products especially around product design and product management and marketing. All these things really matter, and our kind of skills as a team really wasn’t world-class in those areas. It was clearly doing a much better job in that area. The other thing was location. I decided that location really matters. That was out here, and then they were in all the places that were getting all the early adopter. They were going to places like South by Southwest and blowing up over there and getting a lot of growth. I decided that being on the other side of the world in India where the ecosystem, at least back then wasn’t really strong and wouldn’t help me achieve my longer-term goal. So, I decided I want to come to Silicon Valley, and that’s where I can pursue my dream of being an entrepreneur, and starting a technology company, and things like that. At the same time, I wanted to learn and put myself outside my zone of comfort. I was an engineer who looked at the world in black and white. Everything was binary, but all the interesting stuff happens in the middle, right in the grey areas. So, I thought, “I’m going to go and study design, and I’m going to study human computer and interaction. I’m going to just do things I’m terrible at and maybe it will broaden my horizons.” So, I ended up coming to UC Berkeley, and I got a Masters. I did that in 2009, and I focused on those things. It didn’t make me a designer or anything like that, but at least I know how to build products, how to work with people, how to build teams. Those were some of the skills I picked up there. That’s how I ended up coming to the U.S. and to the Bay Area in particular.
Alejandro: Really cool. Then your first company was NextDrop where you were a co-founder. So, that was right before you started Automatic which was about 2010. Tell us about NextDrop. What was the experience, and what ended up being the outcome?
Thejo Kote: NextDrop was a social enterprise. It really started on my very first day at Berkeley. I took a class which was all about starting social enterprises. The professor there was super passionate about it. He was offering this class, and it sounded interesting to me, and I just went in. A group of us got together to solve this problem that I grew up with which was all about just knowing when water will come in the tap. In the developed world that sounds so obvious. Like, yeah, turn on the tap and water flows, but that’s not how it does in the developing world. There are a lot of social costs because you just don’t know when you’re going to get water. Then the downstream effect of that is things like children not getting back home from school to make sure that when the water does come, you collect it in all the containers. Those are more impacted by that than [11:19] and things like that. I’ve had many, many different issues on health and things like that because people just don’t know when they’re going to have access to water. So, this was kind of a problem that we started trying to solve from an information perspective. Throughout my two years at Berkeley, we ended up working on that problem, and I had a few other people, students, and a student from the Public Policy School, and things like that. I was a little more entrepreneurial. I knew that we needed money to make anything work, so I focused a little bit more on going to business plan competitions and grants and making sure that we focus on getting some cash in. By the end of those two years, we got a big grant from the Night News organization. There’s something called the Night News Challenge, and we raised about a half million dollars. It was interesting because it was also during that time that I had started working on what ultimately became Automatic. I was in this research department at the university, and I was working on this project with Jerry, who later became my co-founder at Automatic, and I was identifying this opportunity that I felt could actually be a company because that was partly what I was doing once I came down here. Every experience and every interaction that I had was being put through this filter of, “Hey, is this a real opportunity to go start a company?” I didn’t think it would happen so quickly, but by the time I got to the end of those two years, sometime in 2011, now I had a choice to make. I had to ask myself, “Okay. I have a half million dollars in the bank. For the NextDrop, it’s a social enterprise; I could keep working on it. Or, I have Automatic. It was not called Automatic back then, but that was a more traditional kind of technology company opportunity to pursue. I had to make that call, and I decided, “You know what? That’s the larger dream that I came here with. I’m going to pick the [13:21] capitalist company so social enterprise can wait for a bit. I decided to go work on Automatic. Then we later got accepted to Y Combinator in the summer of 2011. That journey started there. I stayed on for a while advising at least for the next few years and things like that. My focus completely shifted to Automatic and ended up building that company for about six years.
Alejandro: We’ll talk about Automatic, but let me ask you. What ended up being the outcome of NextDrop?
Thejo Kote: NextDrop, a couple of the other founders went forward with it. They ended up working on it. They’re still working on it. They actually also got accepted into Y Combinator independently. They [14:07] in terms of the problem that they were solving. I think they got accepted to Y Combinator. It was in 2016 or something like that. They’re still going strong. I’m a little less associated with NextDrop at this point, but that’s where that stands.
Alejandro: Okay. Let’s talk about Automatic now. Then you go to Automatic. You had a decision that you had to make, and you go at it with both feet. So, how was the day where you finally say, “Hey, we’re going to make it happen,” and you get your co-founders together? What did that founding team look like?
Thejo Kote: It was me and my co-founder, Jerry. He was a Ph.D. student at the same lab, and we worked together. Just a little bit of background. The problem that Jerry has started working on that and I went and joined him to help out and to build some of the infrastructure and things like that was basically to answer the question of: is it possible to study transportation behavior? Like how do people make choices around when to drive, or walk, or take the bus, or things like that? And is there an opportunity to influence that behavior, and make them change how they behave. So, we had built a bunch of technology to monitor essentially what the existing behavior was. So, the new thing that we were doing in that was traditionally in that field, people generally gave diaries to participants and said, “You write down like what did you do today?” That was not super active. So, smartphones had just come out. This was early 2009 and in the period, and smartphones were just getting popular, and we thought, “Look. Lots of sensors, install an app that runs in the background, is always looking at data from all of the sensors. We’ll upload all of that sensor data to the cloud through machine learning on it, and quite accurately determine when they were driving, walking, running, all of the different modes of transportation. That was the thing that we brought to the table. It was at the same time that I was a grad student. I was a pro-grad student here in the U.S. First time I was here, and I bought a car. This was like 1998 Honda Accord, and I could buy insurance. This insurance was $1,600 or $1,700. It was way more than what I was making every month as a grad student, and I’m like, “This is ridiculous. Why is this so expensive. I’m a pretty good driver, and this is an old car. Why is it so expensive? I started digging into it, digging into it, and I essentially understood that “Is it that expensive because I don’t have a history, and I’m new in the country? They have no idea if I’m a safe driver or not.” In general, the insurance industry was without any data. But then the bulb went off. We had built this technology which easily gave you access to data about when you’re driving, and how you’re driving, and things like that. So, that’s when I started connecting the dots all the way to how your car is the most expensive computer, but you have never, ever—it’s not connected. It’s a huge ecosystem and an industry, and everybody wants access to that data that a lot of services that are beneficiary for the owners of the car so we can provide to them if only you could get that data out of the car. That’s what we started working towards. I basically took Jerry out to lunch and said, “Look. I really think there’s an opportunity here, and do you want to come and build this company with me?” He was game for that, and we got going.
Alejandro: Nice. What ended up being the business model behind Automatic?
Thejo Kote: Eventually, when we got into Y Combinator in 2011, it wasn’t yet a hardware company, which it ultimately became. We just had the mobile app. We were a little more focused on the insurance use case. One of the big lessons I learned going through that process was how hard it was to sell to these larger companies. We just weren’t ready or experienced as a team to go sell to large insurance companies. I was completely ignorant about what it would take to make that happen, and so, along the way we learned that. For almost a year, I banged my head against the wall trying to make that happen. It just did not happen. Towards the end of that year, we slightly changed our model to say that, “Look. Let’s play to our strengths, and let us go to market by first showing the value of what having access to data from the car can do for consumer. Because part of what we had heard from insurance companies was, we all know that having access to the data will allow us to better determine risk and potentially give discounts, and figure out who’s a good driver, bad driver. But why would a customer do that? Why would they want to give access to your driving data? It’s very private data, so there has to be some value that they see other than the discount, and that’s something we heard over and over. So, we decided to focus on our strength as a team which was building a high-quality consumer product. So, at the same time, I decided that just having a smartphone, the data just wasn’t good enough or strong enough to solve some of these longer-term use cases around what you could do with the data coming out of the car. So, we decided we were going to make a hardware device that connects to a standard port that every car has, and we’re going to pull that data out, and we’re going to start by showing what that value is for consumers. So, we focused on that. Then for the next 12 months, we did that. We launched that product in the market in 2013. That was great, and we launched the product in the Apple stores. We set a high bar for ourselves that if you go make a hardware device. Again, [19:56] retained that and we didn’t really know what we were getting into, but we decided if we make a hardware device, it has to be the kind that Apple would be happy to carry in their stores. But ultimately, we did it, but it was a lot of learning and stumbles along the way. But we finally did that, and we sold it in the Apple stores, and BestBuy, and all these traditional retailers. So, we had that consumer business, but once that was a little established, then that allowed us to open the doors to have a lot more meaningful conversations with these large insurance companies. That was the first enterprise vertical that we went that way. So, we were building this cloud-based platform which ingested all of this data coming in from cars, and the job now was to show ” Here is consumer value that we can deliver, and here is how all of these different verticals and enterprise space can start monetizing that data and using it to better their own processes to build new products and all of that.” So, that was a second kind of part of that journey of Automatic.
Alejandro: Got it. And for you guys, the company was founded, as you were saying, in 2011, but your Series A, you ultimately raised it in 2013. So, definitely bumpy because something like this, it needs an injection of capital and is capital-intensive. So, what did you guys do during this couple of years where you were like lean to the max?
Thejo Kote: When I started Automatic with Jerry, like I said, both of us were grad students. For the longest time, the two of us didn’t pay ourselves a salary. During Y Combinator, we lived in a little flat in Mountain View, but then we moved up to the city. It was in a bad part of San Francisco. We rented the cheapest house we could find, and the house was our office, and we didn’t pay ourselves salaries. I had a debit card for the company’s bank account, and I went to the grocery store and bought groceries, and that was how we fed ourselves. That’s pretty much it because Y Combinator had given us some money, and there were many different ups and downs during that process. Maybe not getting here into detail, but one thing I should probably talk about on a high level that might be interesting to the listeners, especially the founders who might just be in early stages of building a company. Towards the end of Y Combinator, there was this massive implosion on how one of the early employees that I had brought in. Remember I had told you how I was learning that I can’t just go selling to the insurance industry?
Thejo Kote: I decided to bring in somebody more senior in terms of somebody who had actually founded an insurance company, and I decided to bring him on. We had almost closed the Seed Round at the end of Y Combinator. He decided to do a bait-and-switch and basically said, “Look. Make me the CEO. Otherwise, I’m going to quit.”
Thejo Kote: There was this whole trauma around that. We decided to just separate from him at that point, Jerry and I. Clearly, the whole Seed Round did not happen. We all thought that “This company is going to die now because we’ve basically spoken to half of Silicon Valley.” Now, I couldn’t go back to them and close any money because where’s this other guy that you had brought in, and there’s all of this drama happening within the company. So, we just slowed down. Did nothing for three more months. Went and focused on the product, heads down, and then came back after three or four months and ended up closing a Seed Round. That was a big lesson. The biggest lesson I took away is that especially in the earlier stages of the business if something’s not working, you can’t assume that somebody else will magically come and solve that problem for you. So, that’s a lesson that I’m never going to forget from that experience. That’s been reinforced through the years, that kind of Automatic and now basic things like that. Whatever are the existential problems that your business faces, you as the founder has to be focusing on those yourself, and finding an answer for those. Yes, you’re going to surround yourself with smart people. It takes a team, but some of those extremely important existential questions for the business and you as a founder and CEO have to own those and then figure out a way to solve them yourself. You can’t just try to outsource that to somebody else.
Alejandro: So, how did you guys address that? Because I can imagine the awful situation that you’re in where you brought this guy to all the meetings, he’s part of the team, and then all of the sudden he’s never in the picture, and that’s probably sending a negative signal to the market. So, how did you address that?
Thejo Kote: Look. The way I addressed it is I stopped the fundraising process, and I said, “I want to come back after three months, and I’m going to have a better story.” I went and found other advisors from Progressive and a bunch of these other companies. I built up an advisory board to give investors the confidence that, “Yeah, we do have the right level of a knowledge of that space, and we have the right advisors in that space. Then I went back and ended up pitching a few more funds, and this was kind of a wide string. What happened at that point was two really good firms, Andreessen Horowitz, and Founders Fund ended up investing in our Seed Round. At that point, I decided I had the wind in the back now, and we just went in and went with the angel list at that point. This was back in 2011, early days for angel list to end. I basically went to an angel list and said, “Hey, we’re just coming out of the latest Y Combinator batch and we’re funded by Y Combinator, and Andreessen and Founders Fund, and we’re closing up our Seed Round.” And boom. Within the course of a week, we closed out by 1.5-million-dollar Seed Round, and we went from the brink of death to just wrapping up our Seed Round, and we had the money that we needed to go show that we had something. The important lesson is that you’re going to have these near-death moments, but persistence is key, and you stick through it. Luckily for us, things worked out.
Alejandro: That’s amazing. How much capital did you guys raise in total before the exit?
Thejo Kote: About 30 in equity, and we had some debt because we were a hardware business. There was some capital stock that we raised some debt forward. There was about 30 million in equity.
Alejandro: 30 million, and obviously, great, great investors. I mean I see Comcast Ventures, Anthony’s Group. You were talking about Andreessen Horowitz. So, great, great folks. Was this all part of the network that you had built in Y Combinator, or how did you come across these guys?
Thejo Kote: Yes, it was mostly that, and that was partly the big value that Y Combinator gave to Jerry and me with that newer first-time founder. I was just in the country for less than two years at that point. I barely had a network of my own when I landed here in the U.S. I guess I had a friend who worked at Intel, I think, and that was the one person I knew in the Valley. In fact, that was all hustle and trying to get to know as many people as possible. Jerry also didn’t grew up here. He’s from Southern California, and so he didn’t really have a network. That was a real value that YC brought to the table for us was that network and our ability to go in and speak with the [27:34], and just reputational boost that you get by being a part of Y Combinator. So, that certainly helped, but of course, we might also be the only company Y Combinator has joined. Maybe not. There are a lot of companies that have gone to YC since, but at least at that point, the only company that did not raise a single dollar coming out of [27:57] because of the debacle that was happening on the side. So, later, we did go and use some of those relationships to open doors when we were ready to raise money. But the bulk of the money that we raised at Automatic off the 30 million actually came from strategic investors because that’s the other lesson that I took away from Automatic is that maybe you’re a couple of years too early because if you think about it, Silicon Valley, at least back in 2011, ’12, ’13, when I was starting the process of building Automatic, Silicon Valley always thought that doing anything in the automotive space is a stupid idea, and there was partly truth to that for a few reasons, but it was only around the late 2013, 2014 stage when automotive, self-driving cars, mobility, and of course, Uber was always there to an extent in the mobility side, but really everything else in the automotive side was just not seen as a good idea, and a lot of the venture dollars and things like that started coming into the space around 2014 kind of stage. So, maybe a couple of years too early, and that’s another important lesson to really ask yourself. It’s all well and good if you see that a market is going somewhere, but that doesn’t always mean that now’s the right time to go after it. That’s a big lesson I took away from that process is to really spend more time on the question of why now? Is now the right time? Is the auto market ready? Are the customers ready? Is the investment community ready? Is it a capital-intensive business that you are setting out to build? If yes, you’d better make sure that the investor community is also at that same stage where they’re willing to put in money into a space. So, in our case, they weren’t exactly there early on, so I ended up following a financial strategy where the bulk of the dollars came from, strategic investors who actually got the problem because they were living it, they saw the value, they were talking about these trends internally, they were thinking about what their plans were going to be over the next few years, and they were more willing to back the companies who were speaking that language, who understood where this whole space was going. So, the bulk of our investment dollars came from strategic investors.
Alejandro: Let me ask you this. You got all this money. You guys are executing, and then in 2017, obviously you did an exit later and great outcome. But I guess in 2017 you hit another bump. I think that’s a bump probably more like at a personal level because always letting people go is not fun, but you have to achieve certain milestones, and you’ve got to be strategic. So, what happened there?
Thejo Kote: 100%. I had to do a layoff and let go of 25% of my company in early 2016 because ultimately, as with any business, you have to be very, very sure that either you’re bringing in the money or the amount of money you’re spending if they don’t add up at the end of the day, you get upside down. You’re in a tough spot. Right? So, I guess the mistake that I made as a CEO at the end of the day was assuming that 1) we’re going to hit some of the milestones and bring in the revenue to make up for some of these investments that we were making and increase of the headcount and things like that. Also, assuming that the market was just going to stay the way it always was. In our case, in a few years that in the early 2000s, it was quite good in terms of an entrepreneur’s ability to go get his money and things like that, but all the sudden in 2016, that changed. For the folks who remember and who were around 2016 was like a very difficult year. Investors really were not making too many investments. The bar just went up much, much higher in terms of the kinds of companies that got funded and the kinds of traction and progress and evidence that was being asked for before checks were being written, and which meant that if I didn’t make that decision to do a layoff in the company, we would just be dead by the end of the year. So, the focus really became like how do we make sure that we make what we have last and how do we get the profitability as soon as possible, and sacrifice and grow, and all of those things. That was obviously, at least so far in my life, the most difficult decision that I’ve had to make, and how it would look. A lot of the people that I had sold to and asked them to come join me on this journey to now look at them and say that “Ops. Sorry. I screwed up, and I don’t have a job for you anymore.” That’s like the worst feeling ever. That’s the kind of thing that you don’t easily forget.
Alejandro: What did you do, and who were you being as a leader, I would say in order to get over that bump and to continue to lead the way? Because I can assume that, just like you were saying, very hard moment. Obviously, this has an impact on the morale and on the culture, so how were you able to overcome this?
Thejo Kote: 100%. At the end of the day, first of all, this is not about me or the company at that point. This is, obviously, a lot harder on the people who are at the receiving end of it, and so you try to be compassionate. Then you try to be understanding, and try to do everything you can to be helpful and supportive to them at that moment. Then you also try to be as transparent as possible with the team for why is this happening, and what were the assumptions we made? I guess, at the end of the day, if you’ll do that, people understand, and they want to help and see this whole thing through because the larger market opportunity was already there. That’s the thing with any company that you build. As long as you are in the right market, and you’re building the right things for the right customers, and solving the right problems, you’re always controlled timing. So, that’s something that you might not have control over. That’s another thing to think about when you’re going after the specific spaces. How long does it take for revenues to materialize? How long are the sales cycles, and do we have the exact right team to make some of these things happen? Obviously, those are all the super valuable lessons that I took away from that process, but yeah, you just try to be as open and transparent about your own failings, and the mistakes, and the learnings that happen. Then try to be as supportive of the people that you have to part ways with because not only is it the right thing to do, but the rest of the team is also watching you. Like how are you treating the people that you are now parting ways with because a lot of them are friends? You want to make sure that people don’t feel like anybody’s being treated badly. That was not kind of our culture. That was not how we did things anyway. But I think ultimately, I’m not saying it’s easy for any team, but we manage to get through it, and get to the other side and thank you for that.
Alejandro: Let’s talk about the other side and getting it to the finish line. Absolutely. How did the acquisition come about?
Thejo Kote: In any company, there’s always a Plan A, Plan B, Plan C, like I said. Plan A for us was raise money, keep going. We weren’t on the path of being profitable. Given that, we were a capital-intensive hardware business. If I look back now at all of the hardware companies that have been built or at least attempted like I’ve actually gotten in the habit of now adding to a list the name of any company that I hear about that didn’t make it. Building a hardware company is tough, and this is one of those things that if I knew what I was getting into before I started, I would never have done that kind of thing. So, building a hardware company is especially hard given how capital-intensive it is and just how long [36:24] takes and there are so many different ways and so many different failure scenarios that are unique to hardware companies that it’s something that I just didn’t know about. Now, I know and I’m smarter about it, and I try to help other founders who are thinking about it to at least be smarter about it and go into it knowing what they’re getting into. So, that was something that we had already learned about, and we were evolving in the Plan A for us was try to raise money and stay the course. There was a lot of vision. There was a lot of opportunity that we were going after, and then as we were going through that bad market in 2016, there was also this Plan B around, “We should consider having conversations and building relationships around and with companies that we might potentially be acquired somewhere, and because it’s just the smart thing to do. For any founder, I think it would be a bad idea if you assume that “I’m going to go IPO someday, be a massive success, a billion-dollar company, or I’m going to fail. That’s just irresponsible especially when you have taken a bunch of money from investors. That is a responsibility at least I take very, very seriously in that you take somebody’s money. You should give all of it, and a bunch more back to them. Same thing with your employees who have potentially given up competition, cash, and have taken equity as compensation, and you have to make sure that all of them get something for the sacrifices that they have made. So, while there is always the attempt to continue to build as a successful company as you can, I think it’s a [38:12] to have a Plan B when you’re thinking about what am I fallback options here as I think through the next 12, 18, 36, months? For us, that option was there’s a potential exit because we knew what we were working on and the platform we had built was valuable to many different aspects of the larger automotive ecosystem. We were uniquely fortunate with that because the automotive industry is so large and there was so much interest and appetite in this big wave that was happening where every car was getting connected. There was data come out of it, and everybody from the telecom industry. Ultimately, SiriusXM that acquired us. They’re kind of a Tier 1. When people don’t really know them as that, but they do a lot of busy with carmakers. That’s an ecosystem. The insurance industry is a very large part of the automobile ecosystem. There are many multi-hundred-billion-dollar industries within that larger automotive industry that clearly had an interest in what we had built, and we were at the cutting edge of that. So, the Plan B was, build these relationships. Even if it’s not for an exit, it might be for a partnership. It might be for distribution, and it might be to clearly understand how they’re thinking about it, and how could we partner with them to help them get ahead in terms of their own roadmap for the next two or three years. So, that was an exercise that I’d already started, and those conversations continue to happen throughout the course of 2016. At some point, we started getting some interest, and we just kicked off the process from there, and it happened.
Alejandro: Did you manage it all yourself, or did you get a banker? How did you do this?
Thejo Kote: We did have a banker to manage the actual process of the back-and-forth and to create a sense of urgency and to create a sense of competition and things like that. So, that’s where usually the bankers bring the value. Ultimately, I always have mixed feelings about using bankers, and I guess there’s no founder who has sold a company and used a banker who has been like utterly thrilled with that whole experience and the money that they end up paying the bankers and all of that. But ultimately, all the offers that really seem for automatic were all relationships that I’d been building for almost 12 or 15 months even before the acquisition happened. These things take time. Nobody comes and writes a nine-figure check for a company after meeting them a month ago. Maybe that happens, but what most entrepreneurs should know is that companies are bought. You don’t go, and all of the sudden decide to sell your company. A larger company will come, and they will choose to buy your company when that process takes time of getting to know you, getting to know the capabilities of the technology of the team that you have built, and how well does it fit into your strategy with the long-term. All of these things take time. So, you can’t all of the sudden decide that “Yeah, I have six months of cash left. I’m now going to go sell my company, and assume it will just get done and the building of the relationship and all of those things will happen in a short period of time. That’s one of the things that I had done right. I screwed up a lot of ways, but obviously, that’s what I kept telling my teams too. As long as you’re doing 51% of the things right, hopefully, things will turn out right because you’re also making lots of mistakes along the way, but this was a decision to build those relationships that worked out, and finally, the offers we got all came through those relationships with the bankers. They play a role in keeping that sense of competition and urgency and all of that which is what we’re good at, and that’s the role that they play.
Alejandro: I agree with you. I think that having those relationships is key, but I think that just like what you were pointing to, being able to remove yourself from being the bad cop, especially when the negotiation happens, and you’re going to detail into numbers, I think that the founder needs to be always the good cop, and the one that jumps into untangle things whenever they need to be untangled. I think that that’s an interesting take there. Let me ask you this then. What were the terms of the deal?
Thejo Kote: I can talk about what has been made public was an acquisition for 115 million dollars, all-cash deal, and there was obviously a bunch of money left over for the team that stayed on, the retention, and all that. So, that was the deal finally, and it was a great outcome for everybody involved. So, it worked out.
Alejandro: Really cool. What was the first thing that you bought for yourself?
Thejo Kote: You know, like I said, I come from a very simple, middle-class background in India. I’m not the kind of guy who’s all about the flashy stuff. Money has not been a big thing for me in my life. Of course, I would be lying if I say that the financial isn’t good. It’s amazing, just not have to think about money and the freedom that it gives you to pick and choose what you want to do for the rest of your life. Now, all of that is amazing, but in the grand scheme of things, I’m not the kind of guy who just goes out and buys a Ferrari or whatever. That’s just not me.
Alejandro: I hear you. Let’s talk about passion, and let’s forget about money and let’s talk about passion. So, that passion has driven you to start and do it again. What happened with Airbase? How do you come up, because I believe that you launched Airbase very recently? Tell us about Airbase.
Thejo Kote: One of the problems that I faced building Automatics—there were many, but by nature, I’m a curious kind of person, and whenever I see a problem I naturally think of “Hey, is this a business opportunity? Is there a startup here? That happened when I was building the automatic too. Whenever I came across something like that, I just went and made a note of it, and then I went on to document financial ideas. Look at it when you have the time kind of thing. One of those problems was just how painful the process of how we spent and managed money was. This is a problem that pretty much every business faces and if you think about the process of how businesses spend money, all the way from how does it get approved? How do you make the payments? Then how do you go and categorize it and record it in your accounting software? If you think about all of those different steps, it is a very messy way in which companies end up doing it. There are just so many different tools in that stack, approvals, and in a growing company because remember, even now everyone is focused on market companies. They’re not thinking about 50,000-person enterprise companies and things like that. We’re focused on mid-market companies, growing companies. Our sweet spot is like 50 to 500 to 600 employees. That’s kind of a magic zone for us. When you get there, you’re at a place where you want a little more process because you want a budget. You want to make sure that you have a plan, and you’re working towards that plan. But then simple things like when I have a budget, but then how do I make sure I’m adhering to that budget? How do I make sure that people who want to spend money in the company are requesting it and the right people are approving it? How does that happen? How does that happen? Two days are completely broken. It just happens on Slack, or email, or maybe a finance team would have put in place a janky process like a Google form, and that’s where you go request spend. The actual payments also happen in different systems. You have a corporate account program like American Express or the bank that you’re working with. A lot of money’s being spent over there. Windows is sending you invoices. They’re using a system like build.com or concur. You kind of process the invoice, make the payment, get another system. So, you have all of these different systems in the mix, and in the middle of all that, a big thing that has changed over the last five, six, seven years is that the backend of how businesses spend money is fundamentally different. Everybody has figured out that their cutting revenue business model is the best one. Everything is service, and it’s not just about software subscriptions and things like that. It’s also you’re ordering stuff from Amazon, Instacart, and everything’s a service. It’s so easy to put down a credit card and order stuff that people do it. We face this in our personal lives, and it’s a much more acute problem in businesses. At Automatic, I literally had a spreadsheet of 160 different things that we paid for on a regular basis. It was incredibly hard to ask a simple question, “What are we not using that we can just stop paying for?” And these zero abilities to easily answer that question. So, all of this was very frustrating to me. It was a lot of busywork and manual, tedious work that my finance teams had to do. Of course, I didn’t have the time or the patience to do anything about it. I identified it as a problem, and just tracked it somewhere, but finally, when Automatic was acquired, my wife and I took a break. We travelled around the world. Did all of that. Then I spent a lot of time talking to people. That was a big lesson also is that I did not start writing a single line of code until I had spoken to at least two dozen controllers and finance leaders and founders and things like that. I went deep into the problem. I had a fairly good understanding of it myself, but that process gave me a much better understanding of what finance teams face on a day-to-day basis. Then I essentially went back, and I worked with a designer. I did those sketches myself. I went back to all of those people with higher fidelity markers. The designer that I worked with helped me come up with, and I basically said, “Look. If I’m going to build this, are you going to buy it? This is the solution I’m thinking of.” It has evolved, obviously, since then, but a lot of people looked at it and went, “Yeah. If you solve this problem of how we spend money in this specific way, we will buy it. This is a much better solution than what we have now. Once I had pre-sold it, once I had that confidence that I would get customers. That’s when I started writing code. That’s a common mistake a lot of entrepreneurs make, and I made early on in my career is that you start building. Building is the most expensive thing you can do, and you don’t want to build first and then figure out if somebody will actually buy it. You want to reduce that risk as much as possible. You want to de-risk that process of selling as much as possible up front. Then go build it so that you don’t have to spend a lot of time, money, and effort building something that nobody wants.
Alejandro: It’s the mentality of build it, and they will come. It’s more a sell it and then you figure out how you deliver.
Thejo Kote: Yeah. That’s a fine balance. You don’t want to over-promise. You don’t want to lie. You don’t want to misrepresent. Clearly, you should not do any of those things, but at the same time, how can you find that balance between making sure that you are only building things which is the most expensive thing. You’re only building things that you have the confidence that you are going to be able to sell and charge for. So, I went through that process and spent a bunch of time just then building the product, spend like the latter half of 2017 just building the product, started onboarding customers to the latter half of 2017. Did that throughout 2018, and it was all about iterating through the product, really honing in on the value proposition, and solving the 10X problem for customers, a really valuable problem. We ended up with some great customers. We have companies like Gusto, Segment, Getaround, and Doximity. A bunch of folks like that that have been using [50:47] for a while. Yeah, that has been a fantastic journey. Along the way I’ve ended up building a really great team. I’ve been implementing a lot of the lessons that I learned building Automatic in terms of capital efficiency and Airbase is a fully distributed team. Our team around the world. That has been great from the perspective of attracting really high-quality people no matter where they are and doing it in a very capital-efficient way. So, cash flow, positive towards the middle of last year, and that made raising the Series A easy because there was a lot of evidence of paying customers and things like that.
Alejandro: Who did you have on the Series A?
Thejo Kote: First Round Capital led the round.
Thejo Kote: [51:39] was the partner over there. He’s on my board. They’ve been a fantastic firm to work with so far. There are a few others in the mix. I ended up raising around—that’s the other lesson is that you can always go raise tons of money, but you should ask yourself if you really should. I think constraints are good and making sure that you don’t overcapitalize yourself before you’re confident that you have figured out the right pain point for the right customers and the right market. You’ve have figured out the sales motion. You have figured out how you’re going to scale that out before you have the answers to those questions, you shouldn’t go and raise crazy amounts of money even if you can.
Alejandro: Absolutely. I always say you raise money to speed up the machine. You don’t raise money to build the machine. I think that you’re raising money for building the machine and you still don’t have product/market fit, you’re shooting yourself in the foot.
Thejo Kote: 100%. Yep.
Alejandro: So, I want to ask you something because we’ve been talking about lessons, and definitely you’ve learned quite a few. One question that I always ask our guests, if you had the opportunity to go back in time and talk to your younger self before you’re launching your first company, what would be one piece of advice that you would give yourself and why?
Thejo Kote: There’s a lot, but if you ask me to pick one, I would probably tell myself to focus a lot harder on the customer pain point and to really dig into it, to unpack it, to look at it from every angle, to talk to as many people as possible, and to gain a lot of confidence that you are working on something that is truly an important pain point for the customer. If you do that, and you do that well, and you’re not in a hurry or a rush to figure that out—in a lot of cases there’s displeasure, “Oh, I went into [53:47] and I raised a round of funding, and I have to do the next round of funding within 12 months or 18 months. Forget about all these artificial deadlines and spend as much time as you need to truly, deeply figure out what that pain point is, and if it is a real pain point and you can solve it in the right way. Part of that question is how do you solve it in the right way? If you get those two together and you get those right in the beginning, everything else down the line becomes easier; your ability to market, your ability to sell, your ability to attract people to come work with your company, your ability to control your own destiny and become profitable sooner, and to charge a fair price for what you’re doing. Every single thing lines up behind that. That’s the #1 thing I would tell myself is spend a lot more time really digging into the problem and the customer understanding that really well.
Alejandro: I love it. For the folks that are listening, Thejo, what is the best way for them to reach out and say hi?
Thejo Kote: I’m on LinkedIn. I’m not that active on social media, unfortunately, but LinkedIn is a good way. Feel free to reach out to me over there. Or if you go to our website, www.airbase.io there will be a contact.
Alejandro: Amazing, Thejo. Thank you so much for being on the DealMakers show today.
Thejo Kote: Alejandro, thank you so much for having me, and it’s been great.