When Jeff Hagins told the Smartthings story he left out a few things. It’s understandable. Hagins tells the story of what they do far more than he explains how they did it. He’s out of practice – or maybe he left out these secrets on purpose. When my mother and her sisters traded recipes, they always left out an ingredient. It was how they discovered new taste sensations.
In the beginning was the flood
Here’s the story in 154 words. Alex Hawkinson’s family trip to the ski cabin is ruined. Why? A power failure led to a burst water pipe. When the power came back on the water started running and destroyed the interior of the cabin. After ruminating for a year on how this could be avoided, Hawkinson has an idea. He invites some of his friends, including Hagins, for a weekend at the ski cabin to work on the idea.
Their solution is a platform for the Internet of Things (IoT). Since the platform will make dumb devices clever, they decide to call it Smartthings. Developers will use Smartthings to make common household items smart enough to live on the internet. Consumers will use Smartthings to run those gadgets. It’s part hardware, part software and very ambitious.
Thirty months later, Smartthings grew to 55 employees and sold to Samsung for $200 million – having raised $20 million in venture capital along the way.
In VC speak, that increase in the value of their investment is a “10 bagger.”
The seven ingredients of success
Hagins lists six ingredients of success “besides throwing people and money at the problem.”
- BHAG, a Big Hairy Audacious Goal. In fact, Hawkinson, Hagins and company had two BHAGs:
- Become the open platform for programming the physical world.
- Become the leading platform for the consumer Internet of things.
- Not shy about raising money and taking equity dilution to get it.
- Phenomenal public relations.
- A product that encouraged storytelling.
- A great team – with 150 combined years of working together before they started.
- A fun product to build.
What did Hagins leave out?
- Go against the grain.
- Deliver value from the get go.
- Keep it simple.
Go against the grain
Hagins showed a picture of the Smartthings pod in the Zigbee booth at CES in 2013. Hagins sounded a little embarrassed that Smartthings borrowed booth space from a big partner.
This is wrong. I have made the mistake myself. Instead of proof of poverty, the right partner is a sign of strength. When a partner invites you into its booth, you get a huge credibility boost. For early-stage companies, the value you get from the right partners can exceed your entire engineering budget.
Why am I making a big deal about partnerships when Hagins says they considered and rejected another partnership, with a telephone company?
It’s all about timing, strategy, and tactics. When Smartthings first considered partnering it was pre-MVP. Their first plan was to ask a telco to fund the prototype. It was a logical choice as the founders had worked with telcos alot. “But Kickstarter was going crazy, just exploding,” says Hagins so they decided to kickstart the company. Kickstarting proved the market was there and the customers were keen. So when the founders finally pursued venture capital all they needed was funds to scale the business. It’s a much stronger negotiating position.
Partnerships are still vital tactical weapons. However big you think your marketing budget is, it’s puny compared to the halo effect of a partnership. When you have momentum, partnerships magnify it.
Deliver value from the get go
Easy to say, hard to do, especially when you are launching a platform. A big part of the value of a platform is that it stitches together many parts into a useful whole. Only when all the parts are there do network effects kick in and amplify growth. How do you get there?
Keep it simple
The way to do more is to do less, and put a human face on it. To build the platform for everyone, Smartthings built a platform for someone. The target first customer of Smartthings owned a second home. People like Alex Hawkinson and his ski-cabin neighbors. They needed a way for their ski cabins to monitor their vital signs and to call for help if they got sick.
Why is a human face and story so powerful? It gets the team to focus on why. Why does this person have this problem? It’s a subtle shift in thinking. Instead of asking customers what they think of a feature, or what the want, dig into why the customer is having problems. The stories customers tell lead to deep insight.
How powerful is a good first-customer story?
- Kickstarter. Hagins says platforms are hard to sell on Kickstarter. “If we’d done a door lock we could have done much better.” Yet Smartthings’ save-your-cottage-from-disaster story was the second-most successful tech campaign, to that point.
- Dublin Web Summit. Smartthings won first place, even though the hardware was “really awful prototypes.” Hagins credits victory to the story.
- Time to market. To meet the Kickstarter obligation, Smartthings had six months to design, build, get FCC approval and make five components, plus the Smartthings Cloud and an iOS app. It was a huge challenge — and they did it.
It turns out that when you set a goal, deadline and budget, and then design to those constraints, magic happens.
It all seems backwards. Example: Hagins notes that the shipping deadline forced them to bypass much of the deep analysis of a traditional design-budget-build process. Hagins is still amazed that he, the CTO, agreed that an operating system was an unnecessary frill. This insight never would never have occurred to Hagins without the constraints of goal, time and budget.
Another feature that was deemed unnecessary in the initial MVP: the developer tools. True, the developer tools only trailed the initial shipment to Kickstarter backers by 60 days. But still — a platform for developers was half of the BHAG.
In a follow-up email Hagins explains: “We had a Kickstarter tier that was specific to developers, and we had far fewer of those backers than others, so we focused on the initial product shipments that would satisfy the most backers. Our general sense was that claiming victory on shipping to our backers was the most important thing.”
For more on the magic that goals, deadlines, and budgets work on design, see this blog post.
The final word: timing
This chart is fascinating. It maps headcount (in green) and capital raised (in peach) versus time and milestones.
One milestone that’s not on Hagins’ timeline is Jan. 14, 2014. That is the day that Google bought Nest for $3.2 billion.
Hagins says Smartthings’ goal is to be in 80 per cent of homes worldwide. It’s a true BHAG. It became even more hairy when Google showed it would be a very aggressive competitor.
The moment Google threw its brand and distribution into Nest the value of Smartthings began to decline. Even if they raised alot more money that only jump starts distribution. It takes time to build brand. Smartthings needed a partner with global brand and distribution, fast. And Google’s competitors needed to catch Google before it established too big an advantage.
And so, just seven months after Google bought Nest, the founders of Smartthings sold the company — and themselves — to Samsung.
It can take six months just to paper a deal like Samsung-Smartthings. The deal proves that when Hagins says he and his co-founders are “not shy about raising money and taking dilution to get it” he means it.