Interview with Tom Tullie, former CEO of EcoATM, and Mark Bowles, the Co-Founder and former CTO of EcoATM
In this interview you’ll hear about the creation and early development of the EcoATM product, navigating through the challenges of raising money, building the business, and successfully selling EcoATM to Outerwall. Despite the recent challenges and management changes at Outerwall and EcoATM, this technology holds the promise to take millions of cell phones and other portable devices out of landfills and into the hands of new owners, while giving cash to the former owners.
https://vimeo.com/156597395
Mark Bowles and Tom Tullie are both serial entrepreneurs that gained significant experience at larger companies prior to entering the startup game. They were both already seasoned executives by the time they started and joined EcoATM, respectively. Both spent many years in the semiconductor industry prior to EcoATM, so they gained a significant amount of experience with technology, growth companies, and competitive environments.
Mark and Tom used EvoNexus, a pro bono startup incubator and accelerator in San Diego, to jump-start the company. To-date, EcoATM is the most successful outcome of the companies that have been incubated at EvoNexus, but there are many more that still hold great promise.
After selling his former company, Mark Bowles was thinking of new ideas for a company, and frequently met with other like-minded entrepreneurs at a local coffee shop. It was during this time that Mark found a survey done by Nokia about recycling used phones. They survey was conducted in the Summer of 2008, in 13 countries and 6,500 households. The results of the survey showed that only 3 percent of people have recycled their cell phones. Also, Mark found-out that there was a giant under-served market for used cell phones. The challenge was to collect the phones and get them into the hands of used phone re-sellers.
The idea of kiosks proposed a fascinating way that allowed consumers to get rid of their used phones securely. Kiosks were quickly becoming popular in retail automation, with many businesses seeing the self-service system KIOSK as a way to improve their customer service and interact with consumers. Using kiosk could be the way forward; however, there would still be challenges to overcome. Part of the challenge was to identify high foot traffic areas for consumers, and develop an automated way to collect the phones and pay the consumers cash. Some of the ideas they explored were malls, grocery stores, college campuses, and cell phone stores themselves. Many technical and legal challenges existed in building the company. EcoATM had to develop a kiosk that electrically inspects the phones, includes artificial intelligence, and has machine vision to identify the person and the phone. They had to ensure that the phones had not been stolen. They had to accurately appraise the phones. They had to validate that consumers would actually use the kiosks to exchange their used phones for cash. After solving all of these issues, the company was able to deploy these kiosks to collect the phones for cash.
Despite overcoming these challenges, it was still extremely difficult to raise money for this startup since the idea was so unique and unusual. Tom and Mark, through patience, self-sacrifice, and lots of tenacity were finally able to raise venture capital for EcoATM.
The company then went through a phase of rapid growth, and was ultimately sold to Outerwall for $350 million. Outerwall also owns Coinstar and Redbox.
Patrick: Hi, this is Patrick Henry from QuestFusion, with the Real Deal…What Matters. I’m here today with one of the founders of EcoATM and the early CEO of the company.
It’s a really interesting San Diego company. I’m a former board member of EvoNexus, which is a pro bono technology incubator in San Diego.
EcoATM was actually the biggest success story, to date, of this incubator. These guys were one of the early companies in. I thought it would be interesting to hear their story. How long ago did you sell the company?
Tom: About two years ago.
Patrick: This is basically a company that got started, built a product, had a successful exit, and these guys are off doing their next set of things now.
This is Tom Tullie, the former CEO of EcoATM, and Mark Bowles, who I would call the lead founder of the company. He had the original idea.
I know you guys, but our audience doesn’t. We’re all former semiconductor guys. It’s like being a U.S. Marine. You’re a former semiconductor person.
Why don’t you guys tell our audience a little bit about your backgrounds and how you got involved in EcoATM?
Mark: For my undergraduate, I had an Engineering degree, but I realized I wasn’t an engineer pretty quickly. I got to Silicon Valley in 1987. I had a variety of jobs at big companies, like product management, sales and marketing.
I was the chief evangelist for Power PC at Motorola Semiconductor and then decided the startup guys were having all the fun, so I started my first startup in the mid-90s.
I did a series of startups, microprocessors, encryption chips and that sort of stuff. I had some successes and also left some $80 million smoking holes in the ground, a couple of those in a row after the bubble and before EcoATM.
I decided I wanted to reinvent myself out of the semiconductor space, because it’s a tough startup game with integration, more gates and software and so-forth.
I was searching for another idea and hit on this. Luckily it worked out, so I didn’t leave another smoking hole in the ground.
Tom: This made up for the hole.
Mark: Exactly.
Patrick: How about you, Tom?
Tom: I have a similar background. I have a BSEE and started out designing circuits and then moved in sales and marketing for Seiko Epson and selling chips.
Then I moved out to San Diego in 1996 to take over the sales and marketing role at AMCC, which was a semiconductor company. It was small at the time.
We did a whole management change and refocused. We took it public in 1998 and then rode that bubble up through to a $35 billion market cap.
We had a really good ride up. I was CEO at the time. I learned a lot along the way and after that decided to run some smaller companies and see how that went.
I ran a video-over-IP company called Path 1 Networks, which I sold. Then Mark and I both were at a company called Vativ Technologies, which is HTMI chip sets, and we sold that to Entropic.
Leaving that, figuring out what I wanted to do, Mark and I were thinking about new stuff and Mark wanted to work a lot harder than I. He was out there getting stuff done.
Mark: He has more money than me.
Tom: When he came upon this concept, I said, “Yes, that sounds pretty cool but I’ll just give you some money and sit on the board and you do all the work.”
He, somehow, convinced me that I should jump in fulltime and run the company and have him do all the cool marketing stuff. He twisted my arm. I’m glad he did, because it worked out really well.
Patrick: That’s awesome. Tell me a little bit about how you came up with the idea for EcoATM and exactly what it is.
Mark: There was a handful of coffee shop entrepreneurs talking about what to do next. We were going through a bunch of ideas, but struck on this idea.
Nokia did a worldwide survey, 13 countries, 6500 households, in the summer of 2008. The main question was, have you ever recycled a mobile phone?
Only 3% of people said yes. As a technology guy, I see these really sophisticated devices and people keep them for 18 months and then throw them away.
That has a lot of life and a lot of technology left and there are people who want that. I did some research and figured out there’s this giant underserved starved channel for used phones.
At that point, I think we were at 55% penetration worldwide in terms of mobile phones. It was going to 85% and it’s even surpassed that now. Those are the 3 billion living on less than $3 a day. That’s a big market for used phones.
It was a collection problem. How do we collect those and keep people from putting them in their drawer?
We just worked backwards from that and said how do you get them in their normal path? Where do they all go weekly? There are grocery stores, malls and high-foot traffic areas that are in your normal path.
How do you take the cost down? You don’t have a human standing there. That could be really expensive. Could you automate that somehow and then give the people what they want, which is money? Cash is not a hard sell for people to turn this latent asset into $100 to $200.
I had a little background in facial recognition stuff and thought we could apply that kind of technology to phones. Then the USB stuff I had a background in so we could electrically inspect them.
We filed a bunch of patents. It turns out it was a little harder than we thought, as it usually is, but we made it work. It worked pretty well.
We had a bunch of bad ideas before that, like, “How about we send the Boy Scouts around to collect them?” Sending little boys to random neighbors’ houses is probably not a great idea.
We went through some bad ideas but struck on this technology. The concept worked. It fascinated people that you could have this artificial intelligence machine vision, and in three or four minutes, get a couple of hundred bucks out for something you were going to throw in the trash. It worked.
Patrick: That’s awesome. You have these kiosks. I’ve actually seen them at the grocery store here next to the Redbox and things like that.
How did you prove the concept? This is something where, when I first heard the idea, like most things, I thought it was a bad idea. How are you ever going to be able to scale this thing? Good luck to you guys. I like you guys.
How did you get to proof of concept, where you actually got investors interested and validate the market size and those kinds of things?
Mark: That was really hard. You have to go test this thing and even after we tested it, I actually went back through all my emails, we pitched 59 VCs before we got any kind of check.
That’s as many as all my other five startups before that combined, which I raised $150 million for. This was an awkward weird duck. “Wait a second, you’re going build a really expensive Capex machine and have all this OPEX and servicing and put it in retail to buy junk from customers and pay them cash?”
It just sounds like a bad idea. What sounded like a great idea was to put a website up, like Gazelle, and just have people send it in the mail. You don’t have to build all this stuff.
They just bought Gazelle’s assets for $15 million a couple of weeks ago. The problem with that model was the customer acquisition cost ended up being $30 to $40 for every phone you got, because you had to advertise perpetually or the stream stopped.
Then the mailing back and forth was expensive. It turns out ours was the most efficient way to harvest these phones and it was the most convenient for consumers and so forth.
Tom: The key to that is to remember that we were trying to raise money in 2009 and 2010. You talk to the VCs and they want Series B metrics for a Series A round.
They would say, “Show me how many phones you collected.” We would say, “I don’t have any machines.” They would say, “How do you expect me to give you that so you can invest to buy machines?”
What we had to do, which I think really worked for us, was we created the business in parallel, all aspects of it.
We built a mock-up machine, which didn’t work for the technical side. It didn’t have vision systems, but it was a machine you could go up and touch a touch screen, pick your phone.
It would price it. We knew what the price was. It would be downloaded. You had a little lever you could drop it in. However, there was a person next to it who would make sure you weren’t giving us a brick.
You got the customer, how many people would go up the machine, bring their phone, put it in and get paid. We collected phones from that, so we built the backend of the channel.
Without any technology in the machine, we were able to see if the customers like it. How do we have to price it? Can we get 50% gross margin or does it need to be 20%?
We could work all that out, what the channels to sell it were, how we get operational, and then we moved on in stages as we raised money.
We built some prototypes and we’d swap. As we built technology, we’d swap it out in the same machine. The machine would be in the field. We’d take out the guts of it and put it in a new camera system as we changed it.
We built all aspects of the business in parallel. That’s how we were able to give Series B metrics at a Series A round, and keep the ball moving up the hill.
I think that’s what saved us. If we weren’t able to do that, if we had to say, “Give me a bunch of money. We’ll go do the technology, then we’ll test it, then we’ll go build it,” we never would have made it.
Mark: Yes. It was incrementally proving it and we had to do it over a couple of years. The first step was getting Tom. We were punching above our grade to get Tom at the point that we did.
We put the first machine in Omaha, Nebraska. Again, it was just a wooden box. It was pretty, but it was empty and had a touch screen on it.
Customers were lining up for 45 minutes. At 9:00 in the morning, when they opened up, there’d be a crowd of people at the door. The manager had never seen it. They’d open it up and they’d rush back to the machine.
Immediately, when we put it out, the press shows up. Everyone loved the concept. I kept telling Tom. Finally I said, “Come to Nebraska with me,” on the last day of the trial, “and see it for yourself.”
Tom was reluctant. He came out. I talked him into it. We got there and there was a 45-minute waiting line. Tom starts talking to the customers and they’re, obviously, really excited.
I got him as a believer because, “Look, it works. This mousetrap will catch mice. There’s a big market for these dead mice.” He got excited. Then we built from there. We built a few more machines and then we built a few more, and replicated that across a bunch of different venues.
Again, it was such a weird idea. We were killing it. Here is a quick anecdote. Kleiner Perkins was really excited about it. They were looking at it. We went up and had little meetings.
We got in the giant conference with 50 people in it. They said, “We’re going to do this deal, but we’re going to switch you from the enviro team to the digital guys. They need to make one more trip down to see it.”
Alright. Good. We have Kleiner Perkins in. They send the guys down, as sort of the wrap up. They said, “Let’s go visit a kiosk and just see.”
We go out to North County Fair with a 30-minute waiting line. Customers are gushing. It’s great. We open up the machine and there are so many phones they spill on the floor. We put them back in. Everyone thinks it’s great.
“Let’s see another one.” We go to another mall. It’s the same thing. Customers are raving. It couldn’t be better. We go to a third one. It was the same thing.
We walk out of the parking and say, “What do you guys think?” “I don’t know if this is going to work, Mark and Tom. I’m not sure about this.”
Seeing it with their own eyes and seeing the metrics and seeing it working, they couldn’t get over their bias of how weird this concept was, this Capex-heavy. It just wasn’t en vogue. It was internet efficiencies and all that.
They didn’t invest and we went through a couple dozen more. It was so overwhelming. We had 20 machines at that point, by the time we raised Series A.
We could have gone from there if we wanted to organically grow, which would have been a bad idea. Finally, we got Outerwall, Coinstar at the time, and then got another VC and we got proper funding.
Then we could make the leap to the final technology, which was fully automated, so we could finally take the staff away. It was a weird one to get funded.
Patrick: It’s fascinating for me because, as I’m talking to entrepreneurs, I always talk about being self-critical. Most ideas are bad. Even a good idea, you have to get a lot of hair off of it, which means you need to have a great team in order to get the concept refined enough that it has real value.
However, once you get there and you really do believe, you’re always going to have skeptics, especially the weirder the idea is. You look at the original web browser company, Marc Andreessen’s company.
Tom: Netscape.
Patrick: Netscape. It was so weird that no one even got it. No one even knew what the internet was, but incredible technology that revolutionized the way all of us live.
One of the cool things that you guys did, which I didn’t realize, is you not only prototyped and validated the technology, you prototyped and validated the customer experience, the market channel.
That does give you much more confidence in, “This thing could really work.” Even if the technology worked and the dog’s not eating the dog food, that’s a big problem. You were actually validating that aspect of it.
Tom: Not only did we validate it, we built in parallel all those different things, and we made a ton of small pivots along the way.
That’s one of the key things. If you look at where we thought we would put these things, like Verizon stores, we tried in a small Verizon store in Hillcrest.
It did okay, compared to the amount of door swings it had. You probably got 50% of people through the door actually sold. That’s a huge amount, but not even door swings to make a big dent.
I remember we had a discussion just before Christmas time. “Let’s go put them in malls.” I remember our sales guy at the time saying, “No, we can’t do that in malls. We can’t control it. We need to be where people buy their phones.”
I said, “Let’s try it. We’ll see how it works.” However, to do that, we have to pay cash, because there’s no one to monetize it with a receipt, like the original plan.
We put some in there to hand out cash after it happened and it killed it. We realized it’s all about how quickly people can see the machine, get back to the store, and bring their phones from home.
We changed our market strategy. We changed our technology platform along the way. We changed how we were going to sell it. We were going to sell to consumers. We were going to sell it to three buyers. We just kept trialing it all in parallel. It worked by doing that.
Mark: The lean startup stuff everyone is talking about is great. It gives a vocabulary and concepts where people can quickly grasp some concepts that are really important.
However, most of that stuff is more easily applied to software and iterating a mobile app, web app or software-as-a-service. We did this on big iron hardware. This is before the book came out.
Good entrepreneurs were doing lean startup stuff forever. Particularly when you’re spending your own money, you don’t want to make mistakes. You don’t want to just guess. You want figure it out pretty quickly if you’re going to fail.
Applying those concepts, again, like good entrepreneurs have been doing forever, to big iron hardware that sits in retail, with the consumer component and all this stuff, it’s hard to iterate big iron hardware really quickly.
I think we really did it the right way. It was about as efficient as it could be done, improving all of it as we went. It still wasn’t fast enough for our potential investors, the 59 who walked away.
Patrick: That’s the whole thing. Once you did convince yourselves and you continued to listen and incrementally evolve both the market channel and the product, you were believers.
If someone comes to me and they’re not on fire about it, even if it’s an idea I can immediately wrap my mind around, if you’re not excited about it, how can I get excited about it and put money into this deal? This is crazy.
You guys had a passion for this and you really did believe. That gave you the tenacity to go out and knock on the 59 doors.
I’ve been through those post-downturn, after 2001, money-raising opportunities for startups. I’ve been in similar situations where you’re knocking on 30 or 40 doors and no one wants to do it.
The first thing you do is pull the person out from underneath their desk, just to get them to talk to you. Once they do talk to you, they want to operate like a bank, not like a venture capital company. It’s about capital preservation, not taking any risk with my money. Kudos to you guys for getting that done.
Mark: Before the first trial, I believed in the idea strongly enough. I knew my other ones would work, and they ended up being smoking in the holes in the ground, too. You’re always excited about it.
But I knew this one would work and sold my house at the bottom of the market, to be able to fund myself and the company going forward.
I took my kids out of private school and sold their college funds. I got it all back. It worked out. They’re fine. They’re in college. I believed in it early. To your point, you have to really believe. If the entrepreneur doesn’t believe in it, who else is going to? You have to start there.
Patrick: Absolutely.
Mark: Then you get people like him to believe in it.
Patrick: That’s getting a good team. You have a good team. You get hair off the idea. You continue to refine it. You continue to listen to your customers and then you are tenacious. You’ve done all these things.
That was a big part of the success, not just the original idea. A lot of other people, even if they had this original idea, they wouldn’t have gotten it to the place that you guys did, because of who you are.
Mark: In the capital part, most entrepreneurs would give up at 29, 30 or 40. We were just piling on proof; piling on world-class people. Everyone in town wanted Tom. Everyone in the Valley wanted Tom, and I talked him into doing it.
He added a lot of gravitas to the whole thing. It still took us another year or so to get it funded, but we wanted the right terms. We wanted to be able to prove what we could prove to have the right valuation we wanted. We clung to it like a couple of barnacles and got it to the point where it was undeniable.
Patrick: I remember early on there was a big green movement. I guess there still is but you just don’t hear about it as much now.
You guys jumped on the green bandwagon. How did that work? Was that resonating with investors or the business community?
Tom: I think it did. I think that was one of the key things we were talking about, “What do we do next?” You have to be able to go to a market that you can get funded in. We talked about semiconductors. We said, “We’re not getting funded even if we had a great semiconductor out here right now.”
Where are people funding? What’s the hot thing? It just helps you if you get a great idea in that space to make it work for us.
I think it definitely helped get us in front of the right people, because it was such a different idea for solving the environmental problem. It still was hard because of the technology side.
Also, a lot of people had been burned in kiosks and self-serve and all that, almost like the telecom side. People thought it was a telecom play. Even though it’s not telecom, people didn’t want to invest in that.
Mark: I think from a consumer standpoint and a retailer host/partner standpoint we had a tailwind that was good.
From an investor standpoint, there were a bunch of people clean tech investing. The thesis for all that money wasn’t us. It was solar. It was alternative energy of different kinds. Some of it was big Capex kind of things, but it wasn’t retail consumer stuff.
We didn’t fit the thesis of any of it. We learned that along the way with talking to those guys. We were an odd duck to them, too. From a VC’s standpoint, this is a weird deal that doesn’t fit anyone’s thesis. That was one of our challenges.
Tom: Until after Series B, when we were going to raise Series C, which we ended up raising mezz round, until that point, because then it was all about green, as in green money.
All the Kleiners and Sequoias and all the guys who said no to us earlier were trying to figure out, “How do we get into this round now?” It’s about showing revenue and showing profit.
Patrick: Getting to the scalability.
Tom: Scalability. Put money in it and it just happens.
Mark: The other constituent that was important on the green stuff was ourselves. We felt, and people still do, like we’re doing something noble. We’re not building bomb fuses. It’s pretty clear what we’re doing.
I think we’re close to six million phones recycled and I don’t know how much money, $200 million plus paid out.
We’re two people. That stuff would have been toxic landfill. Instead, it’s been sold and it’s in the hands of other people. Those people have cash and they’re spending back into retail.
It’s a pretty big stimulus package that came from, not just the ether, but what would have been toxic waste and now is not.
Everyone believed in that mission and it made it easier to recruit. It made it easier to feel like your day was spent doing things that were good.
Tom: The triple bottom line.
Patrick: I’ve seen a demo of the technology. It’s actually very cool. It surprised me how you interact with the machine, in terms of plugging cords in.
I thought, “How do you even know if this phone is good or not by just imaging, without digging into the guts?”
If you have never seen one of these machines, you plug it and it does the diagnostics. It’s clearly a lot of technology associated with identifying what the phone is. Is it good? Is it bad? Is it in between? You have to value it so that you can resell it and still make money.
I don’t think we need to go into all the details around that. I like to say, “If you have a startup that doesn’t have defensible intellectual property, you have a big problem.”
If you have a big initial market, someone else can come in and duplicate that. It’s easy for big guys to do that. I think in the case of EcoATM, it does have a lot of sustainable, competitive advantages because of those technology things.
Maybe just talk a little bit about that that. Then I wanted to get to another question about the machines.
Mark: I don’t have exact numbers. I think it’s 35 patents we filed around the technology. It’s all in the stuff you mentioned. It’s the combination of machine vision used for this and some of the algorithms.
Identifying phones is not as easy as it sounds. A smashed iPhone 4 versus an iPhone 4 look really different compared to an iPhone 4 versus an iPhone 3. The identifying was harder than the actual grading of the physical damage.
We have a bunch of patents on hold and a bunch in the pipeline. I think there are nine or ten issued now. It was pretty green code when we started, because no one had done this. We had a nice path and we did it internationally.
I think it’s solid. Usually, there are lots of ways around IP. We have such a solid portfolio that it’s a pretty good barrier. There are a lot of ways to accomplish different things, but it was an important piece, I think.
Patrick: How do you prevent or at least try to prevent people who have stolen phones or lost phones? You validate the identity of the person? How does that work state-to-state, municipality-to-municipality? Is law enforcement involved? How does all that stuff work?
Tom: That’s a pretty interesting thing that we learned about very early on.
Mark: Interesting is a good word.
Tom: When you read the letter of the law in some places, it would say that there is no law that would hinder us because we’re too new. The last thing we wanted to do is be successful and then someone decides that we are infringing on some law. We took the hardest of all the laws.
Mark: We don’t want stolen phones, period. In terms of the law or not, we don’t want them.
Tom: We said, “Across the board, a superset of the whole country, how do we become the best game for deterrent if you stop stolen phones?”
If you do get a stolen phone that you can go to the police and say, “Here’s the guy. Go get him.” Not only could we aid law enforcement, we could stop it. We could get people’s phones back to them. We built a system that did that.
Basically what we’re doing is you have to put your driver’s license in. We validate the driver’s license both electronically with the technology in the machine, as well as we’re capturing pictures of the person.
We’re sending back the picture of the driver’s license and the picture of the person to our corporate headquarters where we have people verifying that that is the actual person.
Patrick: It’s not just facial recognition?
Tom: No. We actually have people clicking through and say, “Yes, that’s you. Take off your hat, take off your glasses, we need a better shot of you.”
You can’t hide behind that. We take a picture of all the people around, in case they brought someone else up but there’s a bad guy behind them. We have that guy.
Mark: Then you have to give a thumbprint. Then we have a camera on that to make sure it’s not someone reaching around. We put all of that in a big report and report every transaction we ever do to the police.
If they don’t want it, we put it in a database that they can search, private ones and public ones. We’re as thorough as you can get. One of the problems, though, is that law enforcement is underfunded in budgets in different places.
Unfortunately, the truth is that most law enforcement has gone to, “If it’s a violent crime, we go do it.” If it’s petty theft, a stolen thing, they just don’t have the resources.
As a blunt instrument, instead of trying to chase down every bad guy, some municipalities just say, “We don’t want anyone selling any phones period. We don’t want you here.”
We ran into some of that where they just wanted to shut it down from a high level because they didn’t have time for any of it.
We ran into some of that. I wish I didn’t know what I now know about how local, municipal, state and county governments work. It was really disappointing. I wish I were still naïve. Once you see that sauce being made and how it all works, you can’t un-see it.
Tom: Even if it’s not the police doing it, we offer a service to the consumer. We’re getting a serial number off every device. If you had your phone stolen or lost, you call us and say, “Here was my serial number.” If we have it in the system, we’ll give you your phone back.
Mark: We kept everything for 30 days before we sold it, at great expense to ourselves, in case the cell phone was stolen and we could give that back.
Patrick: You were touching on something, Tom, as you were doing the assessment, limiting the liability of the company. You were trying to find the most difficult law?
Tom: Yes. It would have been easier to go into these states where the laws were easier. We don’t need to have all this technology and the people in the background. It’s expensive and hard to get that right.
We knew that, “We’re going to be successful. I want to start on the hard problem now, not later when we have to run to catch up.”
We started on the hard problem right off the gate. California laws, I think, were the worst of anyone, in terms of the most critical and what you had to get and timing.
We built that all out. Then we went into areas even where they didn’t have laws and offered stuff. We called the police and we called the city.
We said, “By the way, we’re here. Here’s all the stuff we can offer you. If you have a list of bad guys you want us to not buy phones from, we can do that.” We went forward and said, “We’re going to be the best thing for preventing stolen phones and for helping you.”
Mark: Police love this and still love us. We have great relationships all over. We do joint training with them about how to handle stolen phones and how to prevent that.
If there’s a bad guy, we have all the information for them to have the evidentiary chain to prosecute them every time. They love us. Every now and then a politician who wanted to get some press, that didn’t go well for us. The police would go back us up in almost every place and say, “These are good guys.”
Patrick: Cool. You guys decided to sell the company. Were you profitable before you sold the company?
Tom: No. The plan of profitability, but the actual time when we closed the deal, we weren’t.
Mark: It was close.
Tom: I think we went profitable within a month or two of actually closing the deal. It was pretty easy to see.
Patrick: That was while you were still making pretty substantial investments in market expansion and technology.
Tom: When we were in there selling the company, we had just raised in February 2013 a $40 million mezz round. That was to go from 300 machines to grow fast.
We knew how the different areas worked within the country. We knew how the machine worked with the technology. We could scale without having to be afraid that we’d have to pull all the machines back.
Mark: We had some big deals in the pipeline.
Tom: We had big deals at Wal-Mart and other places going. We were going to roll about 900 out that year, and we needed about $400 million to $500 million to get profitable.
That was where that curve was. It had a lot of money. We didn’t need to sell the company. Once you’re raising mezz, as long as you’re spitting out the cash, you can just keep raising it. It’s a very non-diluted type situation.
We had a lot of money. We didn’t need the Series C. We didn’t need to be sold. We could control our destiny. We had thousands of opportunities of where to place. We weren’t running out of market. It was a perfect opportunity for us to put the pedal down and go.
It was easy to see when you could cross profitability because each machine would spit out an average of X amount of profitability and what you need to feed the rest of the business. That’s where we were.
Patrick: You made the decision. How much total money did you raise prior to selling the company?
Tom: We raised about $30 million to $31 million before the mezz round of equity and a little bit of debt. Then we took the $40 million mezz round, of which I pulled $20 million and never pulled the rest, because we sold it before we could pull it.
Mark: Actually, taking the mezz was the thing that triggered the discussion of acquisition, because now we had a clear path to IPO.
Patrick: That gave you leverage with potential acquirers that you didn’t need them.
Tom: Right, we didn’t need the money.
Mark: We were going to be way expensive by the time we finished.
Tom: They couldn’t come back to us and say, “You can Kleiner and do that instead and lose half your equity.” No, we don’t. I can raise more mezz at 1% equity dilution in that business.
People wanted to buy us, at that time, for about $100 million. I just kept saying no up until they got to $350 million.
I finally said, “Okay, let’s do that math where we are now, where we want to be, when are we really worth $350 million. What’s the risk to get to $500 million and above?” At that level, I said, “The risk/reward, where we are now.”
Mark: Also, it was good synergy.
Tom: It was with a partner who could accelerate it. It was good for my staff.
Patrick: Outerwall was the eventual acquirer. They had Coinstar. By that time, they had Redbox.
Tom: They had Redbox even before.
Patrick: Basically, there were a lot of channel synergies and scalability.
Mark: They had 60,000 kiosks in our marketplace.
Patrick: It was good for your employees that they were going to have a good home with a company that could really scale the company. What was the ultimate price that you guys sold the company for?
Tom: $350 million.
Patrick: $350 million.
Mark: Cash.
Patrick: $350 million cash. You had effectively $40 million or $50 million in?
Tom: Yes, about that.
Patrick: Close to a 10X.
Mark: The last $40 million was mezz.
Patrick: However, only $20 million of that came in. From an exit standpoint, it was a 10X.
Tom: Yes. The early investors got $15 million, the angels and Series A. Series A+ got 10X. I think Series B got about 7.
Patrick: You guys are the mythical 10X.
Tom: We’re that.
Mark: We’re not a unicorn. Maybe we’re a goat with two horns.
Tom: The reality about being able to do that is using convertible notes early properly, where you’re raising enough to get you to the next step, where you can raise a Series A at the right value and raise a Series B at the right valuation.
Hopefully, if you don’t need that next round to be equity, you can do debt. That’s when you can really scale the value for the early investors.
Patrick: You just had warrant coverage on the mezzanine financing?
Tom: We did 3.5% warrant coverage and straight debt out of $40 million.
Patrick: Awesome. That’s great.
Mark: We’re not a unicorn. We’re a goat with one horn broken off.
Patrick: You were actually on the path to profitability. That was a good thing. Did you guys have anything else you wanted to mention about EcoATM? What are you guys doing now? What fun things are you involved with?
Mark: I’m working on another one. I hate stealth as a marketing guy, but this is the right thing to do, so I can’t say anything about it. It’s a really interesting play.
I’m really excited about it, even more so than I was EcoATM back in the day. It’s really exciting, so I’ll come back and tell you about that someday when I can.
Patrick: Alright. Sounds good.
Tom: Once again, I’m trying to continue the triple bottom line type of concept. What can we do that’s a great thing for capitalism and also a great thing for the world in general?
I’m working with a company. I’m the executive chairman of a company called Everyone Counts. We’re in electronic voting and voting modernization and trying to create a software-as-a-service model for voting.
Patrick: The elimination on dangled chads?
Tom: No hanging chads. No old technology. It’s crazy when we can put man on the moon, we can put rovers on Mars, and we’re using paper to do voting, one of the most important processes that we have in the country and the world. We’re trying to change that in a big way.
Patrick: I’d love to talk to you about that. You’re CEO of that company. That sounds super exciting as well. I really appreciate your time today. This is Patrick Henry from QuestFusion with the Real Deal…What Matters.
We hope you enjoy the story of EcoATM and think through many of the challenges and potential rewards of entrepreneurship. As always, we welcome your comments.
This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.