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PCH talks with Ales Spetic, CEO of

Koto

Smart sensors for a healthier home

Koto are the makers of smart sensors that are indoor environment monitoring devices. They originally launched as CubeSensors and recently launched their new brand on Indiegogo. We sat down with Ales Spetic, founder and CEO of Koto to discuss bootstrapping a startup from Europe, boutique manufacturers, and competition between crowdfunding platforms.

What is Koto?

We are designing devices that monitor indoor environments for things like temperature, light, noise, humidity, barometric pressure, air quality, and a few other aspects. We spend the majority of our lives indoors and we know that our environment influences how we feel, how we perform, and how healthy we are. We should know about it. Think of it as an indoor tracker. We track indoor environments, and we try to be as smart about it as possible.

How did you decide that this was the product you wanted to make?

The initial day was in the winter when my, then nine-year-old, daughter was sick yet again when we were supposed to go skiing. She asked me a question: why does she always get sick in winter? Honestly, I did not know the answer. I looked into it and found that our indoor environment significantly influences how we live, and it makes viruses happier if it’s not optimal, which causes our sickness. The whole problem spurred an urge to start trying to figure out what can be done about it. It turns out that existing devices like thermostats, air conditioners and so forth, are fairly dumb about it.

We started to play around with sensors. My co-founder, Marko, who worked with me for my past three companies, and I started to play out with sensors and figured out that there are a lot of things that are going on indoors that can be improved, but first we need to measure them. That’s why we designed a small device, which was called CubeSensors, that we launched at the LAUNCH Festival in 2013. We won Best Hardware award at that time. The whole idea is to make this complicated sensory thing very simple and packed into a beautiful device that you can place on a table or a shelf, and it starts monitoring your environment and telling you what you can do about it.

What made you want to keep doing this after your initial success?

The biggest driver was the response, the support from our customers. At the time, the crowdfunding campaigns pages, like Indiegogo or Kickstarter, did not allow the non-US companies to launch. We just set up our own page, and still we were able to sell out the first batch of cubes within the first three weeks. There was obviously a need.

Another thing that was very important was that we didn’t go out and present a prototype with a few things stitched together, but we really went to a great extent to design a product from the beginning to the end, so that it was actually a final product. There was a great satisfaction to see that people wanted to buy it.

How did you manage to get enough people to your site that in three weeks without the help of a crowdfunding platform?

When we went on onstage in LAUNCH, that obviously gave us some exposure. But then it was all natural, with people talking about us on social media like Twitter or Facebook. People shared the story. And actually, a lot of people just signed up saying, “Hey, I want to have them.” We were actually oversubscribed so much that our waiting list was roughly five months long. The demand was so overwhelming that in our worst period, people had to wait for more than five months before they actually could receive the devices, because we were not funded. We were basically bootstrapped. We funded ourselves from whatever we were able to sell, and the demand simply overwhelmed us. We did not invest in any marketing, any PR, or anything like that.

If you were launching this company today when you have access to crowdfunding platforms, would you have done it the same way?

The crowdfunding infrastructure is definitely great to have. But if you don’t have it, you simply have to make with your own weight with whatever options you do have. Today we would’ve gone with Kickstarter or Indiegogo or something similar where all the infrastructure is in place. That why we launched a campaign on Indiegogo.

“We were actually oversubscribed so much that our waiting list was roughly five months long.”

What made you want to bootstrap your company when you clearly had some traction as well as past experience raising capital?

There were some interesting dynamics surrounding that choice. When we first worked on the product, Nest was not even announced yet. There was no market for smart things. IoT was not mainstream yet, so there was very little interest with investors. On the other hand, when we launched and we got the demand, American investors were very hesitant to invest into a European company, and European investors were very hesitant to invest into a hardware company.

There were difficult decisions to be made, like whether we want to simply to move everything to the States; stop everything, move to the States, go and do fundraising for a couple of months, or stay back home and simply work with whatever we had. We chose the latter version. Basically, we had a running product in the market. We were making money, so that was great for us. That was the decision we made.

What made you ultimately want to stay in Slovenia rather than try to do it in the US or somewhere else?

It turns out that we are very cost-efficient in terms of burn rate. Obviously, the talent here is way more inexpensive. The production facilities are great, and cost-wise, on par with the Chinese ones. And it’s within European Union, so you have a whole bunch of benefits over here. If we move to the United States, first of all, engineers would be three to five times more expensive. That’s number one. Production would have to be moved to China, which is a whole other layer of problems. In Slovenia, we have our factory really close by, about a 15-minute drive away. We can really tackle all of the problems very fast. The development cycle is almost software-like for us even though we are developing hardware.

In the early days, what was the biggest challenge that you had to overcome?

The biggest challenge for us was actually the fact that the manufacturing facilities, the manufacturers of actual physical goods, are not adept to a small batch requirement. What we found is that until you order 10,000, 50,000, or 100,000 units of anything, you are below the ground on the totem pole of importance. All of those factories obviously want to build economies of scale. They want to build big batches. For a startup, you need 1,000 units or you need 2,000 units. And that’s, for majority of the facilities, simply a number that’s too low. We have to beg and find a way around it. There are not a lot of really good boutique manufacturers. On the other hand, if you find some of those, which is possible, they’re expensive.

At the end, when you build your product, which you put half a year or two years of your life into, you have a small electronics product that is state-of-the-art. When you give it to the customer, the customer compares it to other products that have been built by a really big manufacturer like Philips, Samsung, or Apple. They think, “Oh, this is not quite polished to the end,” “This is a different quality than I expected,” or my favorite, “This is too expensive.” The thing is that when you go into a boutique shop for a jacket or for a dress, you are willing to pay a premium for the handcraft. When you buy a product from a startup, this differentiator does not exist. Customers simply want to have the cheapest thing, the lowest price they can get. This is a very tough dynamic for a hardware startup, basically competing with the big guys.

“The development cycle is almost software-like for us even though we are developing hardware.”

What made you want to accept Bitcoin as payment?

One of the main reasons why we started to do that is because the two angels that we have are the founders of Bitstamp, which is the largest Bitcoin exchange, and it would be very unfortunate if we wouldn’t do that. But to be honest, it’s a very straightforward thing. You can put whatever kind of currency on your page as long as you have the service behind it that converts the currency you get from your customers into the currency you need. For us, if you buy Koto in Bitcoin, we get the cash out within 24 hours, and that’s very easy.

Do a lot of people opt to buy with Bitcoin versus regular PayPal?

No, that is still fairly small. We do sell some through Bitcoin, but that’s by far not the majority of the cases. I would say below 10% of our sales go through Bitcoin.

What made you guys want to go with Indiegogo versus Kickstarter?

I cannot disclose everything, but let’s just say that the market for crowdfunding platforms is competitive. The fact that there are not a lot of campaigns that have shipped on time and were started by an experienced team that have done this before already, that helps a lot when you are deciding on one platform or another. The platforms compete for the projects. It’s very simple. It’s a market, so you go wherever you get better tools. That increases your chances of success.

We are fortunate that we are in a position where we can actually prove that we built the product already, that it was shipped, that we have users in more than 50 countries, that we’ve already collected half a billion indoor environmental readings around the world. Ours is one of the largest indoor databases in the world, which makes us probably the smartest device there is about the indoors. Obviously, the big thermostats have more data in terms of numbers, but they don’t have more data than we do in terms of complexity. For every room, we measure at least five dimensions, if not six, which is something completely new. If we have all that, we are a fairly safe bet for a crowdfunding campaign.

“To my big surprise actually, after two years on the market, we still don't have a real competition that can do what we do.”

What do you do with the more than half a billion data points you’ve collected?

If you look at how the indoor environment works, and if you looked just at one thing, again, like temperature, it’s very easy to just say, “Okay, I want this room to be 72 degrees. And if it’s below that, turn off the heater. Or if it’s above that, turn on the air conditioner.” But when you start to combine different parameters within the room, like temperature, humidity, and maybe illumination, all of a sudden, you can detect occupancy in the room without actually interfering with the privacy of the inhabitants. We don’t need a camera to understand whether somebody is in the room or not and if a window is broken or not.

With all this data we can see the trends. We can see when, for example, the environment in the nursery gets worse. And this is really important, for example, for kids who have some sort of respiratory sensitivity, like kids with asthma. There are almost no devices in the world that can actually tell you when a room is unhealthy for people with asthma. There are some devices, but they are extremely expensive and they are professional devices. We have a consumer device that you can put in a room, and within 15 minutes, we can actually tell you what’s wrong there, for somebody who has asthma or any sort of respiratory sensitivity. If you put our cubes in an office, we can actually tell you how the environment affects productivity in the office and what you can do about it. These are all the things that you can do when you combine different types of environmental dimensions together and correlate them to each other.

What made you decide to go the route of creating an all-encompassing product at a price point that’s higher than some other sensors that might be out there?

The decision is opportunistic. If you have a lot of working capital, then you can go into a cheaper device where you have to make tons of them, put them into stores, and make money out of that. If you don’t have a lot of working capital, you need to build a premium product so your profit margin is bigger. This is one of the reasons why we went after that. The second rationale is that the more complex the device is, the more defensible your position is. To my big surprise actually, after two years on the market, we still don’t have a real competition that can do what we do. Honestly, we do have people who do great in the market, in most cases due to a lot of marketing, the branding and all that. But in terms of tech, we are still the leaders.

How do you create a device that integrates into your customers’ lives but doesn’t become annoying for them?

There are a couple of answers to that question. Number one is that if you want to improve something, you need to measure it. We like to think of ourselves as positioned as the food industry was 50 years ago. Fifty years ago, there were no food labels. Today, every single food product that you buy in stores has a label on it. People understand what they have to look for when they want to assess what kind of food they consume. It’s the same with personal trackers. Ten years ago, there were no personal trackers except a few pedometers. During the past six or seven years, everybody wears a wearable that can track their own physical activity so that when they measure it, they can actually act on it.

The next step, at least what we believe, is indoor environments. Your own environment, if you measure it, then you can start acting on it. Obviously, the next step, and this is what we are announcing with Koto, is that we integrate that knowledge that we have about the indoor environment to the actuators, so things like thermostats and the smart house. We are actually one of the few companies that understand what needs to be done, not just when some thermostat needs to be switched on or not. If you have Koto trackers, you will be able to connect them to a whole bunch of other devices that actually adapt your environment to your needs without a tedious notification and things that you need to switch on by hands and so forth.

What’s your current state of mind?

Stressed.

When and where were you happiest?

When my daughter was born.

What do you consider your greatest achievement?

Bootstrapping a hardware startup that's still a leader in its own niche after two years without funding.

What is your idea of misery?

Delay.

What is your greatest extravagance?

Food.

Which talent would you most like to have?

To be able to learn languages more quickly.

What’s your favorite quote?

“Just take it slowly.”

What is your greatest regret?

I regret things I didn’t try out, not the ones I did.

What do you consider the most over-rated virtue?

Visibility: being loud and visible does not equal competence.

What book are you reading right now?

Diplomacy by Henry Kissinger

What is Koto looking at doing over the next few years?

We want to be the first player or the biggest player in terms of understanding indoor environment. We like to think of ourselves as building the brains of indoors. It’s very easy for other companies to have their own sensors, but they have simply no way of combining all this together and seeing how different devices influence each other. If you have an independent measurement device, which we are, you can actually do that. You can understand how your environment behaves. This is where we want to place our utmost efforts.

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