A View from Startup Entrepreneurs: Shock and PivotInterview conducted in May 2020
Meet Y. and J., startup entrepreneurs in the AI space. Y. is an engineering graduate from a prominent American university who, three years ago, founded a Canadian company that provides consulting and software solutions to companies in automated driving. The company is largely supported on a cash basis but has recently accepted some financing. For the past year, J. has been on the executive team of a Germany-based cybersecurity startup whose viability depends on immediate outside investment. J. maintains a long-term position at another organization which provides stable income and a risk cushion.
Both are small companies with a handful of employees, releasing new products and probing market acceptance. Y.’s company has received vital networking and promotional support from SAE International’s Silicon Valley office. Its cash position has been maintained largely through consulting services, and Y. is content with slow organic growth. J.’s company lacks a service revenue stream and needs venture capital or an acquisition to maintain and grow
SAE: Picture yourself on New Year's Day 2020, the whole decade is in front of us. We had heard a little bit about a virus, but we had no idea what its impact on all of us might be. How would you have described your goals at the beginning of this year?
Y.: My five-year goal would be building this very automated product. At the beginning of 2020, we were almost set with our seed funding. I was sure that we had enough money in the bank for the next couple of years, at least through the end of 2021. Then at that point, based on what traction we would see from the market, I would need to either raise a next round or hopefully be completely cash positive so that I wouldn’t need to bring in external funding at the cost of equity.
J.: Starting in November of last year really, we were very, very focused on investment and trying to find either VCs or strategic partners to scale with. And we were looking into both options, both into VCs and also strategic investors. And then in January, we got very, very close to closing a deal with a large German corporation. They wanted to invest in or take over 50 percent of the startup, so we were in a very good mood. We were very optimistic that this is all going down the right way.
In terms of new goals, we were thinking we would probably reach 3 million euros by the end of 2020 and that we would be able to scale significantly by the fall of 2020. Then we would move our focus from the automotive sector into various other industries like defense, medical, fintech and aerospace. It was nicely mapped out. And we were really thinking that we could, over the next 12 to 18 months, enter all these new markets: technically but also geographically, since this acquiring corporation is a multi-national that is well-known. And so, that was the plan.
SAE: How has your situation changed over last three months and how has it affected your goals and what lies ahead?
Y.: They have been all shifted for three months to be honest with you. Because I would say for a startup in our stage, the most important factor, the only important factor really, is product-market fit. It's that we have some product vision based on some limited interaction we have with the market. We build something from some concept. We go to the market, validate it, and then come back and change our roadmap or continue working on what we did. This type of iteration is absolutely crucial. Then because of COVID, we had very little luck—or I'm not sure if it's COVID or in general, but that's how it is with some of these entities—but we had very little luck in the outreach process, even with the visibility that we got from GAMIC. We have been in some other programs where there was great presence from OEMs and Tier 1s. But the traction that we got was almost zero. And it's not that they looked at the product or offering and said, “This is good or it's not good.” It's like we couldn't get into a meeting with them. At the end, what makes sense for us is to talk to a couple of technical folks and engineers and say, "What problems do you have? Would you be interested in seeing them addressed in a product?" And then, “What are the features that you want in that product?” These are the conversations that are vital for a startup like us. That's something that we have not been able to capture. One of the things that I was very excited about is that at WCX we were planning to attend and present our solution and then do the entire challenge there. A fantastic opportunity to meet a lot of these entities face-to-face. That affected us.
Then we had quite a few conversations going with OEMs and Tier 1s. When the COVID situation happened, among the first departments affected were the innovation centers because these are mostly good to have rather than vital parts of the system. I was sending emails in the beginning of January and then by mid-February when I was sending these emails, half of them would come back and say: “This person doesn't work in this organization anymore.”
SAE: Then in that context, how have you changed directions, activities or plans now that you have experienced that it's next to impossible to even get a conversation started, not even feedback?
Y.: In fairness, some of these challenges have been going on for the past two years. We invested quite a bit reaching out to mobility folks and have not really received much of an interest in terms of engagement. So, we reached out to some other markets. Now we are running two pilots with satellite imagery. But we had to pivot, and that's actually expensive because now there's a tool set that we have built for ADAS and AEP companies that’s not 100 percent transferable to this domain. Also, it’s a little bit more unstable, because we are not working with OEMs and Tier 1s, but with startups in a smaller market, more emerging. Specifically, because of COVID, it's quite a bit of a deviation from the path we were on. We are not making this decision because we know there is no interest in what we are doing; we are making this deviation because we get no feedback. It's uncertain. Certainty is good. If you have a bad product-market fit, that's perfect information. But we don’t have that. I don't know if a particular ADAS system, ADAS market or AV market requires a solution or not. If they do not, then that's absolutely fine. We just have 100 percent conviction to go somewhere else because we aren’t getting any signal. That's where we are.
J.: When the Coronavirus crisis really hit, and it hit the news big time, our strategic partner to-be said, "We have to freeze everything. We're not allowed to invest. We're not allowed to hire personnel," and all of that stuff. It happened overnight. It was a huge blow to our plans and to what we were thinking of the future. That was the biggest shock perhaps. And then a couple days later, we got hit by another one. That was when the corporations we were working with, including a German carmaker, gave us a call and said, "Look, we have to cancel the new projects.” The ones that are active, we can finish, but the ones we were trying to close, they had to cancel them before they even got started. That was a bit of a bummer to say the least.
SAE: So, this was the middle of March. Since then, no new activities regarding potential investment fundraising? All still on hold?
J.: The funny thing is our strategic partner to-be got back to us at the beginning of May. They said, "We would like to start the conversation again and see how we can get back together." But instead, we told them, "We've reached out to another firm," one we met through crazy coincidence that they said they can help us find VCs or strategic partners. Now, for the past four or five weeks, we've been busy putting together marketing material, presentations, a proper business plan, and figuring out how to sell our software as a service. This new firm is actually reaching out to VCs in the U.S. and also in Europe. That is happening just now.
SAE: And your goals and plans?
J.: They haven't changed significantly because that is basically the only route we can go. We need to scale now. The software we have developed is very sought-after. I am sure Google is working on it. I'm sure IBM is, too. And if we don't scale now, we're going lose that race because I'm sure Google has no problem throwing in 500 million euros to develop a toolkit like the one we have. The timeline has changed a little bit. And what's also changed is we're more open to other industries that we were completely unaware of, like the defense sector. Coincidentally, we were approached by them and have had several conversations. That's new on the map really, the whole defense sector. We're also more open toward China because this new partner firm is very well-connected to the Chinese market: to Alibaba and Tencent. Now, we're also open to that, which we were not really looking at in January or February.
SAE: What are your biggest professional challenges right now?
Y.: Essentially the next 18 months is going to decide our fate. There are three scenarios. One: fantastic traction so that we can actually sell and make quite a bit of profit-around two-million dollars on a year- to-year basis. We are at $300,000 right now and want to increase that by six- or seven-fold. That would be a really good case scenario, but we are far from that. Two: good engagement with OEMs and Tier 1s so we understand what type of solution they would pay for in the long run. Then we can focus on something that makes a difference a few years down the road. Three: show little traction and stay selling to smaller startups, and then by end of the second year, we don't have any clear product roadmap because we don't have good engagement and we don't have a good revenue stream either. At that point, we probably would have to shut down the business.
J.: It’s generating new leads. You can reach out to people, but that doesn't mean they're interested and seriously considering working with you. The automotive sector is scared stiff. It’s crazy. The second is entering new markets, which is not easy because everybody's looking out for themselves at this point. And three, I can't generalize this, but just looking at our own position, I think it'll be difficult maintaining the valuation that we got in the beginning of the year when we were first talking to VCs and strategic partners. I'm sure this will all be inspected under a very different light right now. A company that was worth, say, 30 million euros in January 2020, now when somebody looks at it in June or July, I am sure that number will go down significantly.
SAE: Where do you need the most help? And how can SAE specifically help?
Y.: I think SAE Silicon Valley has been a tremendous help in having joint events with SAE, which we have been doing for the last seven or eight months, bringing in very distinguished speakers and great minds from Vancouver, Invest In Canada and Silicon Valley. That has been going really well. The other engagement that we have had through SAE Silicon Valley is the GAMIC challenge. We won the award just three weeks ago in the connected mobility. SAE probably has been our main way of getting into the mobility market in general and then trying to get exposed to OEMs and Tier 1s and essentially get the pulse of the market. We also edited an EDGE Report that we just finished last week. The events provide a bit of high caliber networking. Through the GAMIC award, we wanted to get exposed to OEMs and Tier 1s. Then through these SAE EDGE Reports, we hope to establish some sort of thought leadership and get connected to all the subject matter experts in the data side of mobility.
J.: For number one and two, I think SAE's network. I'm very, very, very grateful for SAE Silicon Valley because they’ve got a huge network and I can always reach out to them. I'm very, very happy to know them and to get connected to people. And number three, that's up to the gods.
SAE: What about a wish list? Where can SAE help even more or what do you wish it could change?
J.: I'm sure there are many events happening in the U.S. I don't think there are many events happening in Germany or in Europe that are organized by SAE. So, I think they could take advantage of their network and also have more events in Europe/Germany. I think networking events like professional networking events, but also events around very concrete technological issues. Then also I'm just very, very privileged to know the people at SAE Silicon Valley. They always reached out to people when I need certain input. I think that is something that could also be institutionalized, where SAE becomes known as just this huge and awesome networking organization. And this is especially useful speaking from a startup. It would be very helpful if we could get connected to strategic investors or to VCs in general. I think it makes perfect sense for SAE to go a little bit more on the international scale because most of the companies that are members of SAE are multinational corporations.
Y.: In terms of the standardization, when the market reaches a place where you actually can put a standard around some of the services, that market is already mature. We are not there yet with AI. I think eventually it would be needed, but then those standards won't help us. For us, it's more about thought leadership and building a network than having a foundation for building standards. We would like to help in building those standards, but for those of us living in a startup mode, we can help you to get to the right path but we can't afford to sit and come up with a standards catalog because it's not aligned with our business needs.
About the AI and machine learning in general, there's so much that automation and then AI can bring to the table that it's almost surprising for me that SAE doesn't have a dedicated branch to this subject. These would be type of events that I would definitely try out because then there's a niche in that type of event. It would be like if SAE has an event in computer vision, then I would definitely attend. For example, I attended [an SAE talk about data sharing] and they asked three of my colleagues to attend as well. That was a really good event. I really liked it. Absolutely crucial. Absolutely needed.
SAE: How would you compare the 2008/2009 crisis to the current situation?
J.: In 2008/2009, I was looking at it from a very different angle because I was still in research. And, of course, research budgets got cut significantly. Some of my fellow scientists and higher research groups got shut down basically overnight. I didn't really have any idea of what the industry was like, so it's hard for me to compare. Also, back then, I wasn't living in Germany, I was still in the U.S. But I know that Germany made it through the crisis basically without a scratch. Whereas now, when I talk to our German OEMs or Tier 1 suppliers,they're all in a very dismal mood. So, it's just very, very different.