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Transcript of our conversation with Leonard Speiser:
Raj Suri:
- Welcome everyone to the Founders in Arms podcast. I'm Raj Suri, co-founder of Lima and Tribe. And today, Immad is not able to make it. He is working very hard at an undisclosed location. We will find out next week where he is, but today we have a great guest joining us who's going to more than compensate for Immad's absence. Welcome Leonard Speiser.
Leonard Speiser:
- Thank you.
Raj Suri:
- So Leonard, you founded multiple companies, but you're best known for Clover, is that right?
Leonard Speiser:
- That's correct, yes.
Raj Suri:
- Yeah, yeah. What were the companies you started before Clover?
Leonard Speiser:
- So I, with, with a few other folks, started a company called Bix, which was kind of, I think about it like American Idol for everything. So anyone could create a contest, anyone could enter it, anyone could vote on it, sort of the people ruled.
Raj Suri:
- That's cool.
Leonard Speiser:
- And we actually, that was a, a, a very fast story because eight months after founding it, we got acquired by Yahoo, and then we were there for a couple of years both running that and I took over. Yahoo Group saw was there as well.
Raj Suri:
- Oh, cool. That sounds like more of a consumer company, is that right?
Leonard Speiser:
- Yeah, I'd say, you know, the majority of stuff I've done has actually been historically consumer. I think Clover was, was sort of the foray into, into small business and then, and then now a little bit more on the enterprise side.
Raj Suri:
- Love to dive into that. Yeah. Because it's a really cool model of what you're doing now. So Clover, how many devices did you guys ship? I mean, like, or how, how's a company shipped? Do you have any idea right now what it is? I mean, this is a payment system, the payment terminal. That's everywhere. Yeah.
Leonard Speiser:
- Yeah. I don't know what the current total numbers are. The, the total amount of payment processing exceeds about 30$0 billion in card processing. And the volumes are in the millions as far as, you know, how, how many units are out there. So I, I believe it makes it the largest sort of you, if you would call it the largest modern point of sale platform out there. So I think it processes more than Square and I think even Shopify and some other, other companies as far as total payment processing volume today.
Raj Suri:
- Wow, wow, wow. And, and one of the unique things about Clover, I mean, you were one of the first people to do this, you know, you designed your own hardware, right? You had some very unique hardware back in the day.
Leonard Speiser:
- Yes.
Raj Suri:
- I think they still use the same hardware. I think it's very similar to what it's still being used. And you were probably, I mean, you were running the hardware part there, right? You were running all the technology.
Leonard Speiser:
- Yeah, it was a, it was an interesting experience. So when, when we started, and we can go in more detail on, on, on our interactions with the, the company and, and KKR, but when we first started talking to KKR, which Kohlberg Kravis Roberts, which owned First Data, had bought them for about 30 billion, they really wanted to replace their entire front end stack. And initially we were thinking we could be the software piece, not the hardware piece, because we were told, oh, they, they have a hardware team. And so then after we started working with them, we realized they didn't, they didn't actually have a hardware team. They, they had a company they had outsourced to. And very quickly we realized, oh my goodness we're we, this company does terminals. There's no way they can build modern point of sale systems. We have to ramp up a team. And so I can imagine, you know, we, we did a deal with them and a week later I was trying to put an entire hardware team together. And I had never done hardware before, never touched it. And so we had to build an entire hardware team, and I had very aggressive goals. I wanted to be live in eight months with a fully shipped high production volume unit in eight months, which anyone who's been in hardware before will tell you, even with a full fledged team, that's crazy talk. And I hadn't even, I hadn't even hired anyone yet to be part of the team. And so it was a, it was an extremely wild journey to, to, to get there. And the end product was phenomenal and lots of really interesting learnings on the hardware side.
Raj Suri:
- Yeah. You know, I've seen stories like at Apple, apparently where they conceived of the iPod and like, whatever, it was, early 2002, early 2003, Tony Fadell joins like a month later, and then they ship it by the fall. Like, it's like they, they conceive it in the, the beginning of the year and then they ship it by the fall. I'm like, that's not possible. Is it like, based on everything I know it takes at least 12 months to ship like a good hardware product? You know, I would think.
Leonard Speiser:
- A couple things we had going in our favor for this. The first was, you know, we were in Silicon Valley, so you know, when I needed to build a hardware team, I picked up the phone and I called a friend of mine, gene, who's, he was the guy who created the original batteries for Tesla. So there was this 20 person team at the original Tesla. This is like basically even before Elon was involved in, in Tesla. And, and he had built the batteries. Now he was the wrong person to build devices like this, but he was literally the only person I knew in hardware. And I was just like, gene, I, I need help here. Like who, who should I go to? And so he immediately put me in touch with two of the former team members. One of them, Dave Lyons, had built the initial prototyping team at what became IDEO. And so he, he, he kind of knew everyone and understood everything, and he was very focused on prototyping. He was great. And then through him, and we started to connect with other folks who were exceptional at hardware. And so we basically put a team in place in like, like weeks, like from the time we decided to do it, which is again, one of those benefits of the network, right. That, that would be very hard otherwise. The other thing that I think was, was interesting here was exactly what you said. Like we, when we wanted to go build something, we would go try to find the best people to do different aspects of it. And there's a, there's a group called Function in Silicon Valley. And actually, like if you, if you, you people who live in Palo Alto will walk by their office. They don't even put their sign up in front. They're just known. But like, it was, it was really interesting that you mentioned the, the iPod, because they were the ones who actually did the original mechanical wheel. Like when Apple wanted to do something crazy, like they go to the, these, these guys are the best in the world at Mechanical. And I remember talking to the person who, who ran our, our accountant team there, and I said, I want to get live in eight months. And she goes, ha ha ha. Like all you entrepreneurs always want to get live in that time. And it doesn't, it never happens. We actually were in full scale production in nine months. And, and now whenever an entrepreneur comes in and talks to her and says this, she goes, no one's ever been able to build a product in less than one year, except there was this one team that did it. And so it is possible, but there are a lot of choices you have to make that people don't make. And there's a lot of things you have to do as far as how you make choices that led to us being able to do it. And it doesn't always work, and it doesn't always work for every situation, but it turns out there's, you know, a lot of people don't ask the why it's hard to do something in, in less than a year. And once you kind of understand the mechanics of why it is possible, it's hard, but it's possible.
Raj Suri:
- Hmm, hmm, hmm. Yeah. You know, back in the day, I think when you started Clover, and even when I started Presto, hardware was so unsexy in Silicon Valley, right? It was like no one was building hardware and now like robotics companies are getting funded left and right, you know, it's such a different world that we live in. And also back then everyone was building stuff in China. I feel like nowadays you can't really build stuff in China anymore. No. Nobody would make that decision today to build something in China. Yeah. Where do people build things today? Do you have any idea?
Leonard Speiser:
- When we were looking at where to put our facilities, we looked at a bunch of different locations, and actually our very original facility was in Suzhou, was just like, just outside of like the Shanghai area. There were a lot of things that were good fortune for us as well. So, so the market like laptops and desktops, it kind of just cratered in the sense of volume. So you have these large scale, very talented organizations. We chose Quanta, but these groups are typically orig, they're based out of Taiwan, although they'll have a lot of the manufacturing, their facilities and labor in, in China.
Raj Suri:
- Yeah.
Leonard Speiser:
- They were faced with a situation where they're like, wait, we don't have any projects to work on. And normally something like this point of sale with the, you know, potential volumes and the lack of, sort of a sense of how big the industry is, you know, they, they would say, your team would say, you're gonna get the D team or the E you're not gonna get the A or the B team. And because of this, this cratering, we actually ended up getting a phenomenal team at Quanta, which really helps because they're, they're very competent, very capable, and they make it very easy to, to go to build. The second thing, which is what you were asking is then where do you actually manufacture where you put these things together? And we, while we started in Suzhou, we actually ended up moving most of it into the Taiwan facilities themselves in Taiwan. And the difference between the two is, is, is not particularly, it, it, it gets into these nuances of like cost benefit. And I'd say that, you know, when you need to ramp up, so like, let's take something like we were in the same facility as like a Apple watch or something like that, right? Like when an Apple watch needs to ramp up, they need to hire like 50,000 people for like three months. And that is really hard to do anywhere in the world except in China, like mainland China.
Raj Suri:
- Yeah. 50,000 experienced people too, right? To some degree, because like, I mean, you can hire 50,000 people in India, for example.
Leonard Speiser:
- Yes.
Raj Suri:
- They wouldn't have the same level of experience, right?
Leonard Speiser:
- That's right. And so, and, and not only hire, but then also let them go like four months later, right? Like it's just kind of part of how the world works there. And, and you can't do that in certain countries and places where, where you can just kinda ramp those people up and down. And China's just one of those places where they're very good at it. Like the whole, like not just good at it, but like everyone expects it, right? So there's this entire industry that allows for that. In fact, they're already used to losing about 40% of their workforce every Chinese New Year. Like everyone goes home for two weeks and maybe 60% of those people come back. Imagine losing like 40% of your company every year. So they're already good every Christmas at figuring this out. In our case, we were a little bit unique because we were building something for businesses, so we were a little bit different model, so we weren't gonna have the spikiness of like, Christmas is either a win or a loss, and you either have a huge gain or you, you, you know, you're, you're, you're bleeding. For us, we were, Hey, we're gonna have basically the same volume every single month, which is, which is really appealing in many ways, right? For people, because now you have this consistency of, of the hiring. What's hard for certain partners in China is they're used to the really high volumes. They're always asking, what's your volumes gonna be? And you're like, oh, millions, billions of units. And then they're like, okay, that sounds great. And, and for us, we, when we first started, we were doing 10,000 units a month, right? So like when we first started it, it was, now that's still a lot for any, any like startup for anyone who, like, their very first month of operation is 10,000 units a month, which, and it grew from there, but, but that's typically not interesting for manufacturers who are used to hiring 50,000 people.
Raj Suri:
- Yeah, yeah, yeah, yeah. Absolutely. You know, it's, it's, it's such a, you're, you're right about this, like building hardware for consumers. There's been some pretty high profile flame outs in Silicon Valley, you know, in building hardware for consumers. Jawbone, right? Jawbone was really hot back in the day and just couldn't make it work. Unfortunately, Fitbit is still around, GoPro is still around, I think, but there, I think Fitbit might be bought by Google or something. Yes. Yeah. And GoPro may still be public, but I don't think they had a, you know, great public journey and, but it's kind of a pity that only Apple's been able to figure it out, right? Like this whole like Christmas, you know, death trap, right? Like, it's like if you don't order enough devices for Christmas, then your consumers are so disappointed that they'll defect to some other brand. And if you order too many, then you know, you have to take a big write off. So only big companies can end up affording it, right? Yeah. I mean, do you see a way around that? Do you see a way like startups can actually make B2C hardware work?
Leonard Speiser:
- I really hope so, because I think we have, we have not seen, like innovation in hardware has just been, I say the innovators, but the ability for innovation to make its way into homes and, and even workplaces and other places has been really disappointing. Like how, how far we just, You know, look in your kitchen and it's the same devices from, you know, 30 years ago. And I, I think I, I really hope there's a way to do this, but I think the, the challenge of course, that people tell you is, is twofold. One, the sales channel is very expensive. So, you know, you either have these channels like Home Depot or, or Best Buy or, or whatnot, or Amazon or you have to figure out how to build a, a following directly. And building a follow directly is very expensive. And, and more, more importantly, it's very slow, right? You have to sell it, someone has to use it. They have to become a fan, they have to tell their friends, they have to find the right friends to tell. So it's just slow. And remember, if you couple that with manufacturers who make very little money per unit and wanna see high volumes, it's very difficult for them to help you without charging you a large upfront amount of costs to sort of cover things, Which makes hardware startups. Like, I'll, I'll have friends come to me and say they wanna start a hardware company and I'm always willing to support, but, but they'll say, I'm gonna try to start a hard company with $300,000. And I'm like, I, I, I don't wanna say you're gonna fail, but you're, you're gonna fail. Like you're, you're, you're gonna run outta that money so fast because the upfront hardware costs are so high that really, if you really wanna give this a go, you gotta be starting with like $5 million. And, and that's hard for people who, because how many of us can raise $5 million, like for hardware that, and venture capitalists are like, I don't, I don't really wanna be in hardware. So I, I do think we have some trouble there. That said, do I think, do I think there isn't a way forward? No. Because look at history, like in, in history there have been breakthroughs and there's been growth in, in hardware and there are some amazing success stories. I just don't think we found maybe the, the platform or the enabling technology yet that's gonna like open up the doors to a, to a wide range of success. But it could be, it could come next year for all I know.
Raj Suri:
- Yeah, yeah. It's been, I think also just a business model issue, right? Where you have these manufacturers who need, you know, large sums to even spin something up, like the, the business model doesn't, doesn't lean it or lend itself to like a, a lean structure, right? Where you can iterate quickly and do stuff. But it, it is encouraging to see that there's more and more companies doing, you know, trying at least some more difficult things. I think inspired partly by Elon Musk and like, you know, Tesla and SpaceX and those are hardware companies that have, you know, been very successful, hun, worth over a hundred million or a hundred billion each, right? Yeah. So it's, there's so many companies now doing space stuff. I think there's a lot of startups in that, in that space, right? Pun intended. And there is, you know, there's robotics companies, you know, one of the B2C companies that I see a lot now in hardware, is it Oura, the ring?
Leonard Speiser:
- Oh, I got, I got my, I got mine here.
Raj Suri:
- Yeah. Oh, there you go. There you go. It seems like it's done doing well. It's like they've built a direct following, is that right?
Leonard Speiser:
- I think so. I don't, I don't know deeply their, their sort of history. I, one of the things I love talking to entrepreneurs about is like, how'd you get your first a hundred customers? 'cause everyone knows you when you have like a million customers, but no one knows how'd you get the first a hundred? 'cause that's pretty hard to do. It was interesting watching the difference between people who were willing to put on like a, a, a watch type device and, and a ring device. The reality is, is I didn't go out and buy my ring, mine was a gift, but I've really enjoyed it. It's very low effort, but who, who can guess those things when it's happening, right? It's like, I mean, one of the challenges is we actually need a lot more hardware startups out there, you know, trying to break the ground and get through. And for VCs it's really tough and it's tough in the same way that it's tough to start a company in a country that doesn't have a lot of tech, let's say. And, and the, the tough part about it is no matter how much VCs want to be involved with entrepreneurs and helping them and so forth, in the end, there are investors who need to seek a return on investment. And when they look at who's gonna be the next check in, or who's gonna really, in the end, who's gonna acquire the company. There's only so many companies that can acquire a hardware company. If there were a hundred companies out there that were like Apple and Google level kinds of companies in hardware that were acquisitive and aggressive, you would see an amazing flourishing number of startups being funded by VCs. But there's so few exit strategies for a hardware company, forget about even like, if they're successful, like Aura could at least go now and say, I have all these users and so forth, but just say like, the majority of startups, you didn't get the users, but you built a great technology. There's nobody who can then take it and plow it. There's not nobody, but there's only a tiny number of people who can then plow it into their channel and, and get, get some volumes up. And even they struggle to do it when there's something new.
Raj Suri:
- Yeah. That, that, that's always a big challenge. And it was very hard for me to get any funding for Presto, you know, for, for a long, long time. And probably the whole company's history was very difficult to get funding. And Clover, you actually sold it pretty early, but then you had a night, you had like a kind of a, a model where it's basically like still a lot of upside for you, right?
Leonard Speiser:
- It was interesting, when we first met with KKR, there were, so we were, we were like the 60th company to say, let's do point of sale. Like, like there were so many companies out there doing it, which seemed kind of like crazy. Like, why would we like decide now as the 60th company, we have something different. But our situation was a little different. We, we, we kind of got our, we let ourselves get pulled into the industry. So we actually had not originally built a point of sale. We had built just before the point of sale, we had built a, a wallet that looks just like a, a Google Pay and an Apple Pay does today. But it was, it was pre those and the people who were selling point of sale systems, the traditional vendors at point of sale, the big payment companies said, how do I connect your wallet to my device? And, and we said, I, we, we don't know. We were thinking this was an online thing, not an offline thing. And, and so, but multiple were coming to us multiple. So like, one of the things I've learned is like, if multiple people are coming to you and pulling you in, like just pay attention. Like wherever there's pull you want to go, you don't, you don't wanna always be pushing your way into something that's not ready. So we allowed ourselves to get pulled. We started talking to these groups and we went back to 'em and said, there is no way to connect to any of these systems today. They're, they're all closed. What you really need is an open platform. And by the way, we even went and talked to our, I had friends who were doing point of sale, and I was like, Hey, do you have like an open platform? Could, could you allow us to plug into your platform? Like, I started there, like, I just, can I, can I push you guys into this channel? And they're like, no, we don't wanna do that. We just wanna build our own point of sale system. And I said, all right, well don't have an open platform, so let's, let's build, let's actually, what I told them was, I said, Hey, there is no open platform buy, I told all these people like, we can't, we can't connect the wallet. And they said, well, what is this open platform? Could you, could you, we are the ones selling point of sale, could you give us this thing? And they didn't really understand it. So we were like, yes, we can, we can absolutely build that for you. And I was very fortunate 'cause John Beatty, who's my co-founder on, on Clover, he was, he was his DNA was platform building. And, and so when KKR approached us, we asked them like, why are we more interesting than the other 59 companies have been doing it longer and are further along and have more customers and so forth? And, and they basically said to us, look, we have this company First Data, and they are in everything everywhere, every industry. And when we go talk to a point of sale company today, that's building the, what we find is, oh, I used to be a chef and I know how to build the best, you know, restaurant point of sale system. And, and so they find these sort of like vertical experts, but we need to transform the entire platform of everything from doctor's offices to, you know, to gas stations, to to to restaurants and so forth. And you guys think about it like a platform with developers building apps on it that we give us the ability to go after each and every vertical. And that was really appealing. Can we invest in you? Is what they said, can we make an investment? And I said, that'd be great. Let's do something. And they give us a term sheet that says they'd like to invest to, to own 95 to a hundred percent of the company. And I go,
Raj Suri:
- Typical KKR, minority investment.
Leonard Speiser:
- I think your definition of investment is different than my definition of investment. And they're like, well look, here's why. And one of the great things about working with the KKR team, so, so this is Dean, most of this was actually, it was the whole team, but like most of the time for this, it was the, the what they call the capstone team. And, and Dean Nelson had started the capstone team within there. And he was, he was amazing. And there was Vinny and Sarah and Anne and a whole bunch, Jeff and a whole bunch of folks that were just great to work with, Rushe. And they, they, Dean came back to me and, and what was great, one of the things I, I talk about is like, if you could just lay your cards out of what's important for you on each side, you can get to a deal that is good for everyone. It's sort of that pareto optimal kind of exercise. And, and Dean was really good at laying his cards out, and I was really good at laying our cards out as far as what we needed to be successful. And so he said, I said, if you acquire us, there's 20,000 people First data, there's nine of us in a little house on Caster Street and Mountain View, you, you're gonna crush us. And he said, okay, I don't want that to happen. 'cause we want to, we wanna transform this company, but what if all of a sudden we've distributed your stuff everywhere and then someone acquires you and it's not us. And so I said, okay, that makes sense. So let's come up with a deal structure where essentially you're gonna invest a large amount into us every year, and at the end of four years, you'll essentially own and control. But until then, what will happen is you will be the exclusive distribution, we'll be the exclusive, so you'll be the exclusive distribution, we'll be the exclusive product that you work with. So we're tied at the hip, but we, we are an independent company that's got getting investment. You're, they're independent and if for some reason the the there, there's just a falling out, something's not working. We created this concept of a Founder's Clause. And the Founder's Clause was like, you can still basically buy the company and own it and we'll go away, you know, John and I and, and whoever else doesn't wanna stay can go away, but you're gonna write us a really big check, kind of a prenup, huge amount that's so large that you better be really certain that this is not working out. And we never had to go there because what it allowed us to do is really just stay in that operating process of we will do what we do best and First Aid will do what they do best. And it worked really, really well. And so it didn't, you know, for four years that I was there, you know, when I'm recruiting new hires, I didn't need to convince them to go work at a, at a, at a First data, which for Silicon Valley person, like, I don't even know who this company is and it's 40 years old, and what is this thing? All I had to do is convince them that we have this amazing Clover experience that's like every other experience. But on top of that, unlike most startups, we also have this incredible distribution, which for those of us who've been in Silicon Valley, like getting the distribution and the sales is usually the thing that people don't get. And that's usually what kills the company. And so it's, it was sort of like the best of both worlds. It's like, I can kind of work, you know, in something that's safe a little bit, but I can work like I'm in a startup. And so it was, it was very easy to recruit and it was very easy to retain people.
Raj Suri:
- It's a very, it is a super cool structure and and model that you guys figured out. I I feel like it should be like a, like the default for most acquisitions, but you know it, do you know why? Why don't more people use it?
Leonard Speiser:
- Yeah. So it was funny when, when we were doing the deal, Gordy who, who runs Fenwick and Steve Levine and others that we were working with at Fenwick were, they were fantastic, but Gordy has, has done so many deals. He's, he's kind of all the big company's lawyers. And so we asked him like, Gordy, have you ever seen anything like this work? And he goes, well, I've never seen anything like this before. But most of the time it looks like most of the time the way people try to structure this as an earnout. And he said, 99% of the time, earnouts don't work. And he said, but this this thing that you're doing. He's like, I, I've never seen it. I don't even know how, like someone would agree to it. And, and it did work and it worked really, really well. I'll tell you the challenge with it, the challenge with it is the motivation of the acquirer. The, the motivation of KKR was to turn this company around and make it wildly successful. It, there was no emotion to it. There was no am you know, am I the person who's coming up with the idea, am I able to execute as the CEO? Am I a capable person to make the right choices? And I think what ends up happening is, you know, for them, they're just very myth, you know, methodical about it. And that's also why a lot of times, you know, a a PE firm comes across as not, didn't have it lacking some of the soft skills, but I, I found it to be extremely effective and extremely successful and, and honestly transformative for that company and to make it successful. But most CEOs will go in and go, I don't worry about this stuff. We'll, I'll make sure it gets done. I'll make sure the team works together. I'll make sure that all the, the hurdles are, are taken care of for you. And they can't, usually when a company gets to a certain size that CEO or the management team really isn't in a position to force change, unless they're like a Steve Jobs type type person who just goes, I don't care about Apple. I'm gonna build this Skunk Works Mac group and Apple team, I don't care if you feel like you're the abandoned step, you know, abandoned child, doesn't matter. I'm going all in, I'm burning ships. There's very few CEOs who are willing to do that. But as a PE firm, a PE firm's able to do that. So I, I don't know, I think that a CEO would have to, that wants to really do this, would really have to step out of themselves a little bit. Because think about that structure of saying, I'm going to put something in place that protects, protects almost like you from us by putting this framework in place. It's like an acknowledgement that I have to do that. That's hard, that's hard to make that acknowledgement.
Raj Suri:
- Yeah. And, and you don't get, you know, as a founder, CEO or founding team to selling to another company, you don't get that release of just, oh, I've sold the company, now I can kind of relax. Right? You actually have to deliver. Yeah. Right. With this structure. And, and so that's a lot of pressure, and you probably did this earlier on in your journey, right, of Clover? Whereas most founders are several years into it before they're like selling the company. So they're like, I just want, you know, I want my...
Leonard Speiser:
- Right. They just wanna get, they just want an exit…
Raj Suri:
- Signing for this thing is not that easy.
Leonard Speiser:
- That's a really good point, right? We, we had, we had no interest in exiting at this point. We, we were super early in our journey, and I remember Jim White, who's our partner at Sutter, and he, he asked me just one question. He said, what is gonna get Clover everywhere? And he was asking us that because our vision was to be the world's biggest platform for developers to build applications for small businesses. It wasn't to be the biggest and point of sale we built. We didn't even know what point of sale was before this, right? So, so for us it was how do we get every small business, the world's best apps by building the best platform? And anyone who's, who's done platforms knows that like if you wanna convince developers to build for your platform, you have to have a bunch of people using your platform, right? The, the classic catch 22 of, of, of how do you grow? And so he, he understood that, and he asked just one question. He said, what will get Clover everywhere is this deal the best way to get it everywhere? And by the way, we had negotiated a deal with the next largest player in the space that I was holding their side of a signed copy of an LOI to pre-purchase. About 3 million of our, our, our hardware and distributed. And I had like two weeks to negotiate everything with KKR. And the reason we chose the KKR and First data approach versus the commercial deal we had was KKR was really motivated to transform all of these dumb terminals into something modern. And when you're saying you wanna be the biggest platform, the what matters most is the belief of who's gonna distribute the most. So even though the number two player had written, it was like, here's, we're gonna give you a $3 million check upfront for all your stuff to, to as just commercial. I didn't have the same confidence in their ability to distribute it effectively and get the largest platform. And so the, the, the decision was let's actually go with the player who is really motivated to get Clover everywhere. And, and that's what made it so easy. So that's why we weren't, we weren't looking at it as what's the best deal? What's the maximum dollar value we can get out and so forth. We were only optimizing everyone, including our VCs, was only optimizing on how do we get Clover everywhere.
Raj Suri:
- You know, it strikes me that, you know, in the history of point of sale, right? Like there's actually been very, I mean, there's a huge graveyard of, of, of like dead point of sale companies, right? Like, must be hundreds of companies. I mean, you know, I used to be introduced to like a new POS company that wanted to sell to us. Like every week it, it was crazy, right? Like, but, but there were a few companies that emerged, right? And so Clover was one, toast is another one, which I, you know, is still doing very well today. And Square was in the space for a while. Who are, yeah, what were some of the other ones? Point was…
Leonard Speiser:
- There were so many around.
Raj Suri:
- You know, there was, there was a few that kind of made some products but didn't get all the way right?
Leonard Speiser:
- When we sat down with KKR, they had evaluated 60 companies in the space and, and they do a really good eval. I've actually only had due diligence done twice that I was like really blown away with KKR's due diligence was incredible. They were flying people all over the country to talk to our customers. They brought in just amazingly smart people to do an evaluation of the tech. Amazing. The only other person who ever saw do as deep a dive was actually when we built Bix, the, the contest site before we got acquired, Walt Mossberg, who was still at the Wall Street Journal, decided to do a deep piece on us. And wow, he hammered and his team hammered on our product. And that was so different from every other writer who'd ever, like, you know, most of the time just takes the press release and does a little bit of research. But these guys spent a week just hammering on the product. And I'm like, okay, I really respect when somebody actually does the deep dive. That other partner of ours who I, I won't say who it was that, that wanted to work with us and give us the 3 million, we could tell when our devices were turned on, they never turned our devices on. We gave them devices, they never turned them on. Right? So that was just like the indication that like the due diligence, if the due diligence isn't there, I start to get a little nervous. When there's really good due diligence, I'm thinking, okay, these are the kind of people who are being discerning about who they wanna work with, and I wanna work with those people.
Raj Suri:
- That's a great lesson there for founders is like evaluate VCs and investors and partners by their own due diligence, right? It shows how much they care and, and it shows also their attention to detail. I think that's a great lesson, which I I would say 99% of founders probably don't even, they're like, oh, how do I pass the due diligence versus like, how do I evaluate this due diligence process? Right. You know, I had one other thing before, I wanna move to what you're working on now, but it's one other thing that just, you know, you and I as like old, you know, hard school, I would say old school payment terminal guys, right? Like, I mean, Apple Pay, it's really taken over. No one talks about it anymore, but it's, it's, it's been amazing to see, like I use Apple Pay everywhere now. It's, and just like, just, you know, contactless payment. It's just so much better. I mean it's, we've made it, I would say as a society because payments have been somewhat solved, I would say from this, from this perspective, right?
Leonard Speiser:
- We saw the trend lines, it was hard to do something about it, but like if you looked at Europe, you know, the, the tap to pay, you know, first chip card, but then the tap to pay was pretty prevalent there. People liked it, it was great, it was a great experience. And in a way they were too early. Like they were so early on the card side that they didn't get the mobile side as much, plus they didn't own the operating systems, but that was a good indicator that people liked the tap to pay, right? Like there was a lot of that there. And then the second place I saw that was ahead of us was if you went to like Ali, like Alipay, you went to like certain places in China and, and Hong Kong and places like that, every restaurant I go to would, would have their normal payment stuff, but then they would have some crappy phone that could accept the, the, the payment through like an Alipay or whatnot. So you could, you could already tell like trend line wise that it was moving that way and maybe in a way because we didn't have chip and and tap to pay for so long that that mobile was able to become the, the default way. And so there's a little less competition with the actual tap to pay cards. But, but you know, it's interesting. Like I've even moved, you know, my kids moved to not having a wallet and just having one of those little attachments on the back with a couple cards and so forth. And I've moved to that as well. It, I I think we're moving to a world where we really just want to carry around one device with everything on it.
Raj Suri:
- I know, the dream has come true. We talked about it like eight, you know, eight to 10 years ago. And I picked Apple Pay was like stagnant at like one to 2% or something of payments for a long, long time. And then the, everyone was be like, you have to wait. The terminals have to get there and the terminals take a long time. Yeah. And you're just, you're always waiting, right? And, but then it happened and now every terminal has it. It's like, I, I don't think I've ever seen a terminal recently.
Leonard Speiser:
- Yeah. And for a while there's just like this one company, I'm trying to remember the name, like Vivo Tech or something like that, that like had done the tap to pay and they, they had, they had were way ahead of their time, but again, because there was no one actually tapping to pay, they, they kind of struggled and, and they didn't, they kind of flamed out. But those, those terminals were all out there. And then as we were building our modern point of sale system, you know, our take was always enable as many things as possible, right? It again, from our point of view, we're like, we're a platform, so what's every way possible we can enable? So we put tap to pay in and I'll tell you, tap to pay on a, on a mobile device is hard. It is really hard. And it's hard because the associations that approve you for tap to pay, they give you this enormous list of situations you have to be able to support. And we had to buy multiple robots to sit there and put cards down and tap. And it's like, you have to be able to handle a 1976 card from this distance, this way and that way. And so on top of that, I was a big fan of good form factor and I didn't want big, huge chins or foreheads or whatnot of tap to pay. I wanted to go through the screen and we were talking to these people who had worked at Vivo that, that were like the experts at it. They were all like, it's impossible to put tap to pay through a screen. It won't work. It's the physics just won't work. And, and, and so I'm like, well, we're gonna try. And they were almost right. I, I'll tell you, we, we got, we barely got it working on our first mobile device and then we sent it off. We had to go, we, we sent one of our team members to north of France, which is where the lab is. And along the way our, our one device for testing had a loose wire. And she's sitting on a boat going from England to north of France and over video conferencing. She's attempting to open up the device and reconnect the wire because if she doesn't, it's gonna run outta battery and we're not gonna be able to run this test and get approved for our device, which is supposed to go out like in a couple of weeks. And so it was...
Raj Suri:
- That's a great payments hardware story. Very specific.
Leonard Speiser:
- Too, too specific probably. But it was really hard to do those things. And again, it goes back to decisions like, do you make the decision to put it through there or just stick a chin or stick a this or that or not have, or not have to have to pay at all because no one has a card yet. And so it made, it made adoption really hard, but now, now it's here to stay. And if anything, what I'm hopeful of is that both Apple, Google and others get more and more open about using the platform of tap to pay for other things that other third party developers can use. There's some security rules around it that make it a little hard to do as far as protection of the card and you know, all the regulation around it by the, by, by people like Visa and MasterCard for good reason. But, but like imagine how many other things you kind of wish you could tap to pay. They're just start, I think they're just finally really starting to open that up to developers and that's gonna enable a whole bunch of other really neat things.
Raj Suri:
- We've thought about that a lot, you know? Yep. Obviously like things like loyalty cards or any kind of, like anything you would do even in a theater. Like, you know, you have your ticket on your phone, you just tap in.
Leonard Speiser:
- Lots.
Raj Suri:
- Right? There's so many things you can do with, with tap to tap to transact right. To any kind of transaction, right? So yeah, that's the dream. We'll see. We'll see if Apple and Google loosened their grip, you know, on on, on this really important interface. Let's move to what you're up to now. It's also a really unique thing, you know, maybe tell us a little bit about, it's super cool model. It's a venture studio, right?
Leonard Speiser:
- The thing I loved about the Clover experience, which of course, of course I'm gonna love this. Part of it was, you know, when you're doing a startup, sometimes the technology's hard. I'm not gonna say not, not, it's not not hard. But most of the time you're, your, your, your inability to hit technology targets is not what causes the company to, to, to, to shut down or fail. Usually you just can't get the customer traction going. That customer traction is still a very non-tech like process that's very difficult to get the flywheel going. And I've had many startups, I started the first sort of, you can almost think of it as like instant messenger back in 96, we didn't even call it instant messaging. User generated content in 99. And, and the ones where I've kind of failed there, you know, multiple reasons. But getting that flywheel started of getting customers was really hard. And when we did Clover and all of a sudden we had distribution, man, it was fun. It was really, really fun. I loved that experience because we could just focus on building great products and we had the distribution.
The question then became, is there any other model besides the raise money, wander the desert for five years and, and hope you can get enough customers. Is there any other model that we should explore? And I, while you can't exactly replicate the Clover, you know, KKR First Data story, I asked myself, is there some way to jumpstart startups with a first customer? One challenge with that is it's very hard to do that with consumer and small business because there's no one customer who can really, really jumpstart you and give you, get you enough traction. So I started moving my way towards more enterprise and started talking to a lot of large companies about like, how could we get a win-win where we, we are building something that you need, but you're sort of the first customer.
And the example I would give wasn't really the Clover experience 'cause it's a little different, but I would, I would give the AWS coming into Amazon example, which is, I don't need it to be core of your business. In fact, I don't want it to be core of business. I want it to be something that's sort of like a back officey kind of thing. But that's holding you back and if somebody built it that it would solve a lot of problems for you, how, how you run your business. But also it would allow that company to go off and offer it to other people. So like AWS I mean, it's not like AWS blocks other e-commerce companies from using it. Now, if you were a CEO of any company having a spin out of your, of something, the first thing you would do is block anyone who competes with you from using it. You, you wouldn't wanna do that. But if you pick a, if you pick something that's back office, like you're less, it's less important to you. You don't look at it as your secret sauce of your company. And I think AWS did a brilliant job of this converting an $80 million hardware spend every year into something that was a much bigger investment that could generate revenue, that could actually build really world class cloud-based products, which were basically lacking at the time.
So I wanted to do that with corporations and I started to sit down with different companies and explore the possibilities here. And I had a couple friends, Mihiri Shi, they had, they had built a mobile app way back in the, they were basically, they built a mobile mapping app that got used by this little ride sharing company that had like three people at it that had just got started. And they, they took a little bit of stock and, and, and cash for building the, the mobile map app that no one really had at the time. And that was Uber. And then even then it took Uber a while to take off. And while that was going on, they got acquired and, and ultimately sort of moved into long story into real estate and they ended up getting this position where they were going to run and build a technology team for JLL. And so they had the DNA of startup people, but they also were trying to figure out how do I transform the world of real estate? And that's what they were tasked with doing.
And I sat down with 'em and we basically kind of crafted together. What would a corporate venture studio look like? Well, one thing is can't really be inside the company because whenever you try to do innovation inside of a company, you're beholden to the rules that that govern their, their day-to-day business, their brand and legal and all these, all these other elements that make it really hard to be truly innovative. You also are competing with the budget. So do I invest a million dollars into something that's a sure thing that's gonna help me hit my numbers or I'm gonna invest a million dollars into something crazy new that might be an interesting business for the future. You always lose on the latter one. So we needed to come with a model that allowed us to put the investment in without it being competitive with the P&L for, especially for public companies. And so we came up with a model where instead of them investing or paying for anything here, we would invest in each company from the balance sheet. So you're not competing with a P&L. So now you're putting in x millions of dollars into a startup. We are then building that startup. So we're not investors. Our team, our engineering product, go to market. We're actually going and starting jump starting the company, but we also are working inside of these large corporations to figure out what we should build, who we should work with, how their systems work so that we can get them jump started. And by creating this model, we were able to start, basically start companies up where we started from the point of view of the problem statement, Hey, I run procurement at this company and here's the things that are lacking for me.
Then we ask ourselves a second question and it has to be a big enough problem. Then we ask the second question, like, can we tackle this in a way that hasn't been tackled before? Are there enough good vendors out there? Are there people who could do this? And then the third question is, are there like a thousand other companies who need the same thing? And if the sort of all three of those questions are answered in the affirmative, then we found the company, the investment comes in, in the form of like safe convertible type structure and we start building. And as we are going and sort of seeing the line of sight of where there, there's good traction, we start to talk to founders, Hey, do you want this company? Like, do you wanna go take this thing? So for a founder, especially someone who's done a company before where they wander the desert for a long time, they can kind of visualize this and say, okay, instead of picking any idea I want, I have to pick this idea, but do I like where it's at? And am I excited by the vision and where it could go? And if I am, I basically get to skip a whole bunch of steps. I save five years of my life and, and I basically get to where I would've gotten anyways as far as equity, probably better than, than where I would've been with equity as far as how much I get of the company. So that was sort of the, the concept behind the model. And we started it with JLL and we've expanded from there.
Raj Suri:
- Again, very creative, kind of like your First Data deal. It's like you, you kind of have a knack for figuring out these like, creative structures with big companies. Which, you know, having worked with enterprise myself, like I, you know, there's a lot of opportunity there. These guys want to be innovative. Oftentimes the people at the top of these big companies are, are pretty smart, right? Like they're, you know, they, they got there for a reason. They're running a big company, they have a lot of impact, but they, they want to innovate, but they can't, you know, innovator's dilemma is too, too tough. And so having a structure like this helps, is a different way to innovate. And again, it's a model that that could, could scale to other, other like spaces and industries. But of course you gotta find the right partner, right? You gotta find the right, you know, team to to, to lead it. And so is that still like the model today? Like it's, has it evolved in any way? Like do you have a set of companies right now that founders can, can jump on and, and take to the next step?
Leonard Speiser:
- So we started with JLL, started a number of companies with them. We've added Prudential, the life insurance company, and, and there's different types of problems you solve for different kinds of companies out there. And so it's, it's a, it's a really nice range. I'll say typically it's either FinTech or software as a service. 'cause again, we're working with enterprises. A couple of our rules are like, again, we don't try to go work with the end consumer. We don't ever try to mess with the sales channel or new sales products because of two reasons. One, it's very hard to ever convert change someone that, something someone is selling to a different product to sell. Because it's sort of like, why would I switch as a salesperson? And then also because that tends to be their secret sauce. That's the core of their company. They can't let that go. And so we tend to focus in on a lot of enabling technologies. How would I get the margins of these companies significantly better through technology? How would I speed their time to market? How would I get them to be a really super efficient organization? And we really try to focus in on those areas the most. And then yeah, as we go, we start to recruit founders. There's no real, like magic to when we recruit them, but our, our, our tendency has been kind of, when you get that it's not product market fit, but like you've, you've kind of got that, think of them almost like a design partner that you're like, okay, I think I have the basic moving pieces. There's a lot of work we have to do to go beyond this, but at least I kind of have a framework that looks right. And at that point, I really wanna recruit in a phenomenal CEO and whoever they want as their founding team. And I want to, I want them to come in and just immediately start working on it and take it over. But again, they can come in on day one, they can come in a year later. There's no magic to it. And, and as far as when those companies are available, it's, it's, I wish I could do it like every quarter on the quarter so that there's like always a rolling thing, but, but unfortunately, what ends up usually happening is it's more like we don't find anything interesting for three quarters, and then we have three companies. We try to start simultaneously and then we try to figure out how to juggle it. It's just sort of life is, is not necessarily in our control, but, but yeah. We'll, we'll have companies that we'll bring founding teams in for,
Raj Suri:
- I mean, it strikes me that it could be a good partnership with like someone like a Y Combinator, because Y Combinator actually has a lot of, you know, companies that die very quickly, right? Like, they're like, and then their founders are looking for what to do. And it's, as you, as you point out, it's very difficult, especially for, for, you know, for folks who, you know, maybe no specialize in like the zero to 0.5 type of thing that you guys are doing, right? Like, and a lot of people like to operate companies or like, like the creative or like the early part of companies. But as you said, it's, it's, you know, finding the first few customers is very difficult. I would say in enterprise, going from like zero customers to one single customer is extremely difficult for an enterprise company, and that is where the most of the value is. So like the, the fact that you're getting someone, the first enterprise customer so they have a logo, you know, on their sales deck, you know, that is the hardest part. And like, so I, I think the model is really exciting. Again, creative and yeah, I'm excited to see where, where you guys, you, you guys don't do much publicity. I feel, you know, you should be talking more about what you're doing.
Leonard Speiser:
- Yeah, probably, I guess I've always sort of, even with Clover, right? Like no one knew where we were at as far as the volumes and when we passed Square, and I guess I kind of fit more in that bucket of like, that function team that doesn't even put the name of their company up in front. Just people know who, who they are, and they bring 'em in when they, they need to, and not sure that's the right, right move, but it, it tends to be the way we go.
Raj Suri:
- Yeah. I, I mean, I have a similar tend to kind of mentality. Like I, I don't like to talk too much about, about, about myself, so I don't like to toot my own horn. There's other people out there who love to talk about themselves and do a lot of like content marketing and things like that. So my thinking is I should partner with those people, you know, to talk about us.
Leonard Speiser:
- Yes, that's right.
Raj Suri:
- Yeah. Even despite the fact that I have a podcast, I still don't, you know, talk too much. I don't like talking about myself or like these type of stories I talking about. So yeah, I have the same, same sort of, you know, inclination. But I know we're at the bottom of the hour here, so I, I think we should wrap up even though I think we could talk for another couple hours. Hope you had a good time and you know, I'll see you around the next Founders meetup. Sure. Thank you everyone for listening today to The Founders in Arms podcast. Follow us on all the regular channels and join our Tribe group.
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