Why Seed Stage Startups Should Join the Capital Factory Accelerator

Over the last few months, Josh and Gordon from Capital Factory have introduced a few startup founders to me to ask me about my experience as a founder that's gone through the Capital Factory Accelerator program. I'm not writing this post because they asked me to, or because I'm sick of talking to founders on Capital Factory's behalf (in fact, I would love to help out more if I can). Rather, I'm writing this blog post to provide written clarity to founders who are making a decision that will materially impact their baby.

But first, some history about my startup, Pristine. It's important to note our history and thus my bias in writing this. So here it goes:

Pristine builds software for Google Glass for remote collaboration in field service, training, and audit environments in life sciences, industrial equipment, and healthcare. As of the time of this writing, we've raised $5.4M, have more than 20 employees, and 30 customers. We are an enterprise SaaS company, with the caveat that we also deploy some unique hardware. The key challenge that the hardware presents is that because of it, we fundamentally change how businesses provide field service to their customers. Unlike most software companies, our customers cannot absorb 400 units in one day; they start with 5, then work their way up to scale.

My cofounder Patrick and I met in high school computer science class. Patrick and I started Pristine on May 15, 2013, a month after I turned 23, and couple of months before Patrick turned 21. Prior to founding the company, I was leading design and development of an electronic medical record (EMR) for hospitals. Patrick was doing freelance technology and data science work.

I started blogging on January 1, 2013 knowing I would start a company in 2013. My reasoning for blogging was simple. I had no money and no credibility. Why would employees work Pristine, why would customers buy from Pristine, and why would investors in Pristine if the cofounders were so young and inexperienced? We used blogging as a foundation to showcase to the world that we knew what we were talking about to raise money and attain our first customers (it worked; I highly recommend blogging). When Google announced Glass in February 2013, I immediately knew what I wanted to do - build software solutions for Glass in healthcare - and recruited Patrick to help me start what would become Pristine. Overtime we would change gears a bit, but we started in healthcare first.

Patrick began coding in May 2013, and I began looking for a beta customer and raising capital. We locked down our first $100,000 at the end of June, and raised another $125,000  by the end of July, bringing our total past $225,000 raised going into August. Meanwhile, I somehow (I can't remember) got introduced to Gordon in June 2013 and met him for coffee. I had no idea what Capital Factory was. He was intrigued by what we were doing and said I should meet Josh. So I came in and met Josh in early July 2013, and he offered us a spot in the Accelerator shortly after the first meeting. Apparently the application process to the Accelerator program has changed since then; I think it's a bit more structured now.

We actually considered not taking the deal for a couple of weeks. At the time, I had some doubts: I really thought the 2% equity-take was significant. I also didn't recognize the value of the Capital Factory workspace and network, or the signal that being in Capital Factory sends to prospective employees. I was really just full of myself and thought I could do it all.

But over the course of a couple of weeks, I spoke with some personal mentors. They made something painfully clear to me: the likelihood of failure at the "your product doesn't even work yet" stage is so high, you should do anything you can to maximize the likelihood of success. If you do fail, the 2% take doesn't matter because it's worth exactly $0, so just do what you can maximize the likelihood of success.

We joined on August 4th, 2013 right when our first hire, Mark, joined the team. Over the next year, we raised $1.1M in seed funding, and then raised $4.3M in our Series A led by S3 Ventures in September 2014. During the Fall of 2013 while working in Capital Factory, we grew to 9 people, all of whom worked out of coworking space. We were the loudest group in the room and we annoyed everyone else in the space; naturally, they all hated us. We moved out of Capital Factory on April 1, 2014 into our own space 1 block away.

Alright, so with my bias out in the public, here are all of the reasons you should join the Capital Factory Accelerator program:

1) Free credits for AWS, Azure, Rackspace, GCP, and more. These credits total more than $100,000 (upgraded to more than $500,000 since I joined). At the seed stage, every dollar is precious. Your mental state should be "holy shit, that's $500,000 for 2% of my company. That's a steal! That means my company is worth $25,000,000!" Obviously the valuation doesn't mean anything, but $500,000 is a lot of money at the early stages. This is reason enough. to join. I cannot conceive of any reason to turn $500,000 down at the seed stage. If you have an offer from Capital Factory right now, you should immediately stop reading this blog post now and accept his offer for this reason alone. I cannot overstate the importance of cash. Cash (equivalents) is/are king.

2) Access to the Capital Factory network. We did not go through the matching program by getting 2 partners to commit $25,000 each, although we tried. What we do is pretty unique among the Capital Factory companies and I think that, coupled with my brazen personality and arrogance, didn't resonate particularly well with the Capital Factory partners. We did however systematically go through the partner and mentor network. The indirect relationships that came from those meetings has generated several hundred thousand dollars of revenue for us, and will likely generate several million in the coming years as we grow. You should be as selfish as conceivably possible and meet with every mentor and partner. Going into each meeting, you should know exactly what you want - money, or a specific connection. Never ask for advice. They will give it regardless. Ask for what you need most: money and access to people who will invest in you or buy your product. The value of the network can be tremendous. Take advantage of it.

3) Work space. I know some people can work from home, but I cannot. Even if you can, that's no reason not work at Capital Factory. The workspace is phenomenal, and it inspires you to work harder. I loved working in Capital Factory. The workspace is a a place you should be proud to bring prospective customers and employees to. It's better than our work space today and we've raised $5.4M! Enjoy it.

4) Validation. Good luck hiring engineers as an early stage tech startup in Austin that's not in Capital Factory or Techstars. If you miraculously find an engineer crazy enough to work for a super-early stage startup, you'll have to convince them not to work for a Capital Factory startup and instead work for you. Good luck. Put Capital Factory on your side. It will help in recruiting.

And now for the downsides:

1) The classes weren't that helpful for me. The only thing that matters at the seed stage is achieving product/market fit. You should do anything you can to get there. You do need to "learn," to get there, though. I would instead recommend that you read like hell. The single best source of information in the tech startup community is the Mattermark daily email. If I could only read one thing per day, I would read the Mattermark daily email. It's absolutely the best source of tech information on the Internet by 10 miles. If you're running a SaaS business, you should also read SaaStr.

2) Capital Factory maximizes the personal value you can extract from your startup in the event of failure; if you fail but went through the Accelerator, you'll have a lot more friends and connections in the Austin startup ecosystem that you can leverage for your own future (e.g. work for a startup that is successful, identify mentors, make friends, etc). Do not discount this. Your odds of success are low; the least you can do for yourself is mitigate downside risk.

3) Parking sucks. Good luck.

4) Coworking sucks because you can't make it your own space, but that's ok. You're early stage. Deal with it. There are worse problems to have.

Recommendation: join Capital Factory. You won't regret  it. I think it's hilarious that for a time, I actually thought we would be fine without Capital Factory. In retrospect, I can say with 100% certainty that Pristine would have failed if we didn't join. So stop reading my silly blog and do whatever you can to convince Capital Factory to make you an offer. If you have any questions, you can email me at kylesamani@gmail.com. I'll be glad to help however I can.

What Infrastructure Do Manufacturers Need To Implement Servitization?

This post was originally featured on the Field Service USA blog.

This is the third post in a three-part series exploring servitization. The first post dove into the underlying problem that begat the need for servitization, and the second post dove into what servitization is and the impacts to manufacturers (OEMs) and their customers. This post will explore the infrastructure OEMs need to build in their organizations in order to bring servitization to life.

We’ll start with the implications of servitization on financial infrastructure, then dive into org structure, and lastly technology tools.

At the most basic level, servitization is about growing long term, recurring revenue while reducing short term business risk. More specifically, this is about moving from just selling capital equipment to selling equipment and services on top of that to maximize the value that customers can extract from a given piece of equipment. In the most extreme servitization models, this may even involve subsidizing capital equipment sales with service revenue, incurring a short term cash hit for even more long term recurring revenue.

The move to servitization has substantial impacts on cash flows. Traditional OEM cash flows tend to revolve around end-of-quarter as capital equipment purchases can take significant time to approve and typically revolve around quarterly budget meetings. Note that the numbers below are for a hypothetical OEM.

This stands in stark contrast to a more typical servitization based cash flow model, where revenue between equipment sales and service blurs and normalizes.

Although there is still seasonality in the servitization model, the month-over-month cash flow changes are tempered significantly. This reduces cash flow risk to the OEM, normalizes customer payments for the customer, and presents an opportunity for greater long term revenue capture per customer. Everyone wins.

Although every organization is different, it’s possible to paint broad strokes on the management structure needed to deliver servitized performance. The key to delivering servitized product delivery is organizational alignment. The lines between sales and service must blur: sales teams must learn, appreciate, and sell the value of service and customer-value-extraction. Service, on the other hand, must recognize that the company’s financial performance will depend on their ability to execute and ensure that customers extract the expected value from the OEM’s equipment.

If service fails, revenue will be negatively impacted. As a result of this interdependence, sales and service organizations need to work more closely together. These two organizations should report into a single unified head - with a title such as VP of Customer Success - whose two largest components of variable comp should be service delivery and sales, in that order. It must be clear from the top down that customer service is king.

Lastly, OEMs will need a new set of tools to succeed in a servitization world. Traditional field service management software will not be enough. Servitization is about customer service; as such, OEMs will need new tools to more effectively engage and support their customers. On demand support tools such as those offered by Pristine will become ever more important. So will tools that empower customers to diagnose and repair equipment on their own. These tools will become mission critical as OEMs won’t be paid if their equipment isn’t working as advertised. OEMs must find and implement the right tools so that their customers can service equipment on demand with OEM support and guidance.

How Can Field Service Organizations Reconcile The Incompatible Business Models of Yesteryear?

This post was originally featured by Field Service USA.

This is the second post in a three-part series exploring the two incompatible business models that coexist in most field service organizations. In the first post, I described the incompatible business models in depth. In this post, I'll outline how some of the leading field service organizations are reconciling the diverging business models of field service.

How can service organizations align these models into a single model that rewards their best and highest margin customers, while encouraging their lowest margin customers to invest and improve? To answer that, we must first understand the crux of the problem.

The vast majority of equipment manufacturers organizations aren't selling what their customers are buying. This sounds like an inflammatory statement, but it's not: customers are buying a capability - which happens to manifest as a physical tool - in order to accomplish a task. Customers extract value from the capability each time they use the capability. Customers are buying value extraction, not tools and service contracts.

On the other hand, vendors & suppliers are selling capital equipment and service contracts. These two items are enablers for customers to extract value, but they are not perfectly aligned. For example, customers often have to invest hundreds of thousands of dollars - or in some cases millions - before they can extract a single dollar of value. Once a customer buys a piece of equipment, they have transferred all of the leverage over to the manufacturer by paying a large fee up front. Once the manufacturer has been paid, there is a lot less incentive to guarantee that the customer extracts the expected value from the system.

How can service organizations rectify this discrepancy? In a word, servitization.  Servitization is a not a new concept, but one that is still only being pioneered by the earliest .1% of service organizations. It's a material shift from the traditional model of selling capital equipment and service contracts.  So what exactly is servitization all about? It's about aligning what equipment manufacturers sell and what customers buy to be 100% aligned. It has material impacts on cash flow, revenue recognition, business operations, hiring, culture, and more.

Let's walk through a few examples of servitization to understand what exactly it is, and what the impacts are:   What if airlines didn't buy planes, but rather paid Airbus for a certain number of flight hours, with Airbus supplying the necessary equipment to achieve the request number of hours?

What if hospitals didn't pay for MRI equipment, but bought a certain quantity of clinical hours per year?  What if manufacturing facilities didn't pay for conveyer belts, but paid for hours of belt rotation? In each of these examples, traditional capex is converted into opex.   What does this mean for the manufacturer?

1) The traditional payday from the sale of a piece of equipment now becomes amortized over the course of many years. This has serious cash flow implications.

2) Ongoing revenue from a sale indefinitely.

3) An incentive to ensure uptime at all costs.

4) That the solution needs to deliver value as quickly as possible; otherwise the customer will return the solution.

5) Solution vendors can generate more revenue per customers (over time) by providing a potent combination of equipment and associated service.

What does this mean for the customer?

1) No capital budgeting or capex.

2) Reduced risk associated with purchasing equipment.

3) Closer collaboration with the vendor.

4) Ability to return equipment without eating a massive sunk-cost.

But perhaps most importantly, the servitization model aligns incentives completely. In this model, customers pay as they extract value from the product, which means that manufacturers are incentivized to ensure that customers can extract as much value as possible. In this model, service organizations are incentivized to work with their customers to ensure success, rather than simply minimize service cost (whether by shaving staff or trips). Rather than look at service trips as a cost with no marginal revenue, service trips become revenue enablers for all customers.

So, what companies are implementing servitization models? How are they doing it? What are the outcomes? I'll explore that in the third post of this series.

Field Service Organizations Are Burdened With Incompatible Business Models

This post was originally featured on The Field Service Blog.

Field service organizations encompass two distinct business models that are intrinsically incompatible, yet the norm. How is this possible, and how can service organizations reconcile these models?

I’ll start by explaining the business models that service organizations are burdened with. They have two types of customers: those on contract, and those off contract. Sales divisions are asked to sell service contracts because they’re intrinsically high-margin, and in some cases, 100% margin if the customer never calls for support. And yet, once the equipment sale has been made, if the customer is on contract, the service organization is incentivized not to come out and actually service the customer. Why? Because the trip is purely a cost and is eating into what was 100% gross margins. I’m not suggesting that service organizations act unethically and violate service contracts by not sending staff out; rather, I’m saying that on a marginal basis, with a service contract in place, service organizations would rather not come on site to service a customer than come on site because on-site trips incur significant costs that cannot be recouped on a marginal basis.

On the other hand, service organizations are happy to service customers who are off contract. Why? Because the service organization can gladly mark up the cost of the ad-hoc visit to cover the marginal costs of the trip. For off-contract customers, service organizations profit from every service trip. The irony of this is that although service organizations profit from servicing off-contract customers, service organizations are always trying to upsell service contracts!

Thus is the paradox of service organizations: they’re incentivized not to service their best customers – those who have agreed to pay for a service contract – and are incentivized to service their worst customers – those who won’t pay for a service contract.

How did these incompatible models come to coexist?

In short, the current divergent business models are based on legacy assumptions. Decades ago, field service was different than modern service:

1) equipment wasn’t as complicated, and was thus more capable of being fixed by local technicians rather than experts employed by the manufacturer

2) there were fewer electronics. Electronic components are increasingly difficult to fix by non technical experts, requiring professionals with entirely new skill sets

3) customers were less demanding in terms of guaranteeing reduced downtime and response time

Over the last few decades, these assumptions have broken. Equipment is more complicated than ever, and businesses are increasingly less willing to deal with downtime. Despite these changes, the field service model hasn’t materially changed. Service organizations still try to up-sell service contracts, and still do everything they can to avoid on site trips since on-site trips are so expensive on a marginal basis.

The output of the structural changes is that field service has for many organizations devolved into a cost center, or at best a marginal profit center. But given the antithetical models that service organizations have to house, service has lost strategic relevance.

In the next post of this two part series, I’ll explore how some of the leading equipment manufacturers and their service organizations are re-inventing their service models to align with customers more effectively, and as a result, drive strategic value of service organizations.

Do Next Generation Reimbursement Plans Align with Healthcare’s Business Models?

This post was originally featured on HIT Consultant.

In The Innovator’s Prescription, Clayton Christensen identifies one of the core problems in healthcare delivery: a mix of intertwined business models that create massive operational overhead and inefficiency. He describes three distinct business models in hospitals.

Healthcare’s 3 Distinct Business Models

1) Diagnostics and non-linear treatments – the process of diagnosing and treating many complex patients is a non-linear process. There are often many unknowns that cannot be predicted or understood without sophisticated testing and experimentation. With enough time, money, and energy, physicians can usually diagnose and treat the problem.

Christensen compares the diagnostic and treatment business to the strategy consulting business. Strategy consultants are rarely paid based on outcome, but rather based on the time and energy they put into solving the problem at hand. Consultants can’t guarantee an outcome on a pre-determined schedule because they simply can’t understand the depth of the problem prior to committing to solving it. They rely on specialized training to determine the root cause of problems and devise elegant solutions that balance the needs of all stakeholders.

2) Repeatable, known procedures – unlike the diagnostics described above, there is a massive sector of medicine that is highly knowable and repeatable. Physicians can guarantee outcomes for many procedures because the diagnostics and treatments are extremely well understood and formulaic. Providers can diagnose quickly against explicit, easily measurable criteria. With a well understood diagnosis in hand, providers can prescribe a treatment plan, and patients verify everything independently online; patients don’t need to rely on their physicians prescription, although many do. This is particularly common in surgery, as well as many office based procedures and cosmetics. Using Dr. Google, patients already do this today en masse. Dr. Google helps patients keep providers in check.

Christensen compares the procedural medicine business to the manufacturing business. Factories guarantee 99.X% of the widgets they produce will come out to spec. They even typically warrant that the widget will work for at least Y days, and offer refunds in the case of failure. Manufacturing businesses take a set of inputs and guarantee a set of outputs at a known cost. Similarly, many treatments have knowable inputs – the patient, diagnosis, and tools for the treatment – and can guarantee results with precision.

3) Wellness and chronic disease management – most of the attention and innovation happening in healthcare today revolves around wellness and chronic disease management. The premise of this business model is predicated on tracking and understanding one’s health on an ongoing basis to make better lifestyle decisions to avoid interacting with business models #1 and #2 described above.

The fundamental problem with chronic condition management is assuring adherence to the prescribed therapies. Most patients unfortunately don’t adhere to the prescribed policies that are intended to – and are generally effective at – preventing costly hospitalizations. Thus, the challenge of chronic condition management is really one of behavior modification and change. The most effective therapies for behavior change have been social in nature. Patient networks such as PatientsLikeMe, Alcoholics Anonymous, and others have proven extremely successful in changing behaviors at scale.

Unfortunately, healthcare insurers today don’t financially support and providers rarely prescribe these programs. Thus patients who need a chronic disease management system are forced to interact with a system that’s designed to treat acute conditions.

Christensen compares the chronic management business to other online-enabled networks such as eBay. The goal of the marketplace provider is to ensure rich, dynamic, and meaningful interaction between the market participants to maximize mutual value for both sides of the marketplace. If the marketplace provider fails to facilitate interaction, the market fails.

Do changing reimbursement models align with the underlying business models?

Providers are increasingly assuming risk for patient outcomes. There are a number of reimbursement models that allow providers to assume risk – capitation, bundled payments, shared savings, and more. Do these reimbursement align with the underlying business operations? Remarkably, the answer is “yes.” Below I’ll provide a broad description of the reimbursement models that the Center for Medicare and Medicaid Services (CMS) has authorized, and how each of those models works with the operational business models outlined above.

Shared saving models are reimbursement models in which providers bill in a traditional fee-for-service model. However, at the end of a given time period, typically 3 months, providers compare their billings with a predetermined benchmark given the risk-pool and size of the population they’ve been treating. If the provider bills less than the benchmark, the provider shares in some percentage of the savings (the insurance carrier – in many cases Medicare or Medicaid – shares the remainder).

Bundled payments is a model in which providers received a fixed payment for all care associated with a given episode of care. If the patient has complications or requires extra care as a result of the procedure, the provider must incur all of the costs associated with that care without additional reimbursement.

Capitation models are models in which providers receive a fixed amount of capital per patient per month that providers must care for. The rate is adjusted to accommodate for the risk associated with the patient population and regional differences in costs. Integrated delivery networks (IDNs) such as Kaiser Permanente and Geisinger are among the few delivery models that have achieved global – or in other words, 100% – capitation because they are both insurers and providers. Let’s revisit our three healthcare business models:

1) Diagnostics and complex treatments – it’s always been difficult to account for risk in consulting businesses. After all, the premise of consulting is to solve a challenging, not-yet-fully understood problem. Shared savings models are aligned with the consulting model. Shared savings models* accommodate the intrinsic risk associated with consultancy by not forcing providers to take on risk they can’t control for, but at the same time create upside opportunity for innovative providers who excel in diagnostics and complex treatments.

2) Repeatable, known procedures – bundled payments align incentives for knowable episodes of care. Bundled payments are analogous to warranties that come with widgets that factories produce. If the widget is bad for some reason, the manufacturer warrants that they’ll provide a new widget at no cost to the consumer. Similarly, bundled payments create incentives for providers to find ways to lower costs, improve efficiencies, and ensure repeatable, scalable quality. This model encourages quality and scale, enabling profitable privatization without fear of rationing and unethical, short term profitability-centric thinking. If there are complications, the provider must address the complications without any additional reimbursement. This model incentivizes providers to deliver high quality results every time. Patients win in a big way in this model.

3) Wellness and chronic disease management – capitation aligns with this model reasonably well, although capitation is plagued with a number of intrinsic incentive problems: capitation models create incentives for providers to fight with one another over the distribution of payments; capitation models also create incentives to ration care to achieve desired financial return. On the other hand capitation models create incentives for providers to pro-actively monitor and care for patients to help patients lead healthier lives and use fewer healthcare resources. If providers can work with patients change behavior to adhere to clinical prescriptions, hospitalizations can be avoided. In turn, providers, as the patients’ guide through the support groups and functions, can reap material financial reward.

It appears that the leadership at CMS has read Christensen’s writing. They’ve created reimbursement models that align with the three major business models present in healthcare delivery.

If only it were that easy.