Wednesday, 19 August 2015

The story of hotel digital check-in and smartlocks part 3

In last week's post we discussed some of the issues hotels had with our digital check-in product which we took to the market in late 2011/early 2012. And these were only some of the 'hardware' issues. Being software engineers we knew that if were going to be able to address these hardware issues, then we would need money to do it.

We had never raised capital before. We figured the best way to learn how to raise capital would be to go through an accelerator program. So we put in an application to an accelerator program run in our hometown Adelaide, Australia, and we got accepted. Our CEO/Co-Founder is quoted in this journal article here, saying, 'the program is the "perfect fit" for our company at its current stage of development'.

When we started the accelerator program in June 2012, the first thing we learned was that the mentors, investors and VC's associated with the program, were not getting our concept and the opportunities. We showed them the surveys from reputable travel companies showing that guests want "digital check-in". We asked them to think about when they last stayed in a hotel, and have they ever been locked out of their room, or queued to check-in. You will never be locked out or have to queue again, we told them. We asked them to think about how convenient their lives would be if they could control access to their homes for certain time periods. "Imagine being able to give a digital key to a contractor/tradesperson to only be able to enter your property for 3 hours on Wednesdays for two weeks", we said. "If you have a babysitter, give them a digital key that only works for the times they babysit". "If you have a family member coming from interstate and only staying for the weekend, give them a digital key that only works for that weekend". We were asking potential investors to back our smart lock/digital key company, before the term "smart lock" had even been coined. This was before Lockitron's record breaking crowdfunding campaign. And it was a year before the August smart lock was even conceived. We tried to convince the investors in the accelerator program that the large chain hotels will soon roll our digital check-in for all of their rooms, but they didn't believe us. Of course this was two years before Hilton Hotels and Starwood Hotels made their $500 million dollar announcements that they would soon be rolling out Digital check-in in all of their rooms - see article here from Nov 2014.

And then a few weeks into the accelerator program, Unikey and Shark Tank happened in the USA.  You might know it as the 'Kwikset Kevo smartlock'. Our elevator pitch was delivered perfectly on US national TV by this guy called Phil Dumas from Unikey that later went on to establish the relationship with the lock manufacturer Kwikset and deliver hundreds of thousands of the Kevo smart lock products across the globe. "Here is the digital key/smart lock concept", we told the mentors, the VC's and Angel investors, and we showed them the Unikey Shark Tank YouTube video. But they still weren't getting it. They weren't convinced that the problem and pain were were addressing was "not that bad", and that the smart lock/digital key concept was simply a 'convenient gadget'.

And then just before the end of the accelerator program, the Black Hat Onity keycard hack occurred (see here). "There is a security flaw, a problem in 4 million keycard locks in hotels across the planet", we said and we showed them the news stories. "People will soon be attacked in their hotel rooms, and have their belongings stolen", we said. Surely this is a big enough pain and problem, we stressed, but still they weren't convinced to get behind us. Sure enough a few months after hotel lock hack story aired, guests were getting attacked in their rooms, and having their belongs stolen - see this article here for more.

Cody Brocious from Black Hat demonstrates the 4 million Onity Keycard lock hack.

We graduated from the accelerator program at the end of August 2012, and then spent the next couple of months meeting with dozens of interested investors, and pitching to angel groups. One of the Angel groups we had pitched too were interested - we agreed on valuations and an investment amount, and the Angel group wanted us to use their investment money as matching funds for the next round of the Commercialisation Australia program (which we had received our first round of funding for the previous December).  We were given term sheets and excitedly we returned them with our signatures. As we waited for the signed Term Sheets to be returned to us, and for due diligence to be completed, and for the cash to go into our bank account, we prepared the second round Federal Government grant application. We would apply for $250K of matching funding from our Government for a $500,000 budget project to solve our hardware issues, and deliver beta trials in chain hotels. We even had some Australian chain hotels agree to participate in the trials. But then after a couple of weeks waiting for the investment money to come, we got an email from the chair of the Angel group, saying that he had to move to South East Asia for his work, and so they would no longer be going through with the investment. We were devastated.

And then around this time when the investment proposal fell through, Lockitron happened.  After being rejected from Kickstarter for their smart lock, because at the time is was considered "home improvement" and Kickstarter didn't allow home improvement projects on their site then, Lockitron went on to raise $1,500,000 in just 5 days. By the end of their campaign, they had taken pre-orders to the value of $2.2 million. 

We showed the Lockitron story to the Angel Group who were now without their leader, but like a snake with its head cut off, they were lost and confused.

After the potential investment fell through with the Angel group, we were tempted to follow on in the footsteps of the successful Lockitron crowdfunding campaign, and do our own crowdfunding campaign. But one of our mentors, a President/CEO of a large global lock manufacturer for 13 years convinced us that "hardware is hard" and we should not go down the crowdfunding path. On the second day of the Lockitron program, our mentor said, "they'll never deliver this as promised - our company invested millions over ten years ago trying to develop the same product, and it failed". And of course in hindsight, our mentor was right. See this article here from early 2015 titled, "A crowdfunded start-up [Lockitron] explains why crowdfunding can be a complete disaster.  At the time of writing, after more than two and half years, Lockitron has still not delivered its orders from its crowdfunding campaign, and had faced setback after setback.

So a year had passed since we had attempted to address the hardware problems the hotels told us about our digital check-in product. At the start of 2013, we were still in the same place as we were at the start of 2012 without any of the hardware problems solved. Yet we had learned a few more things in that year and that was;
-homeowners wanted our product - this was proved by the enormous success of Lockitron ($2.2 million crowdfunding campaign and over 14,000 orders) and Unikey (from Shark Tank) who went to to raise $1.1 million just after the show aired (see here)
-the problem we were addressing had reached a catastrophic stage with Black Hat showing how easy it was to hack open 4 million hotel locks, and people were being attacked and robbed in their hotel rooms. And the lock manufacturers were still not addressing the problem, and now start-ups were stepping in to try and address the problem.

We also learned hardware was hard, and that raising capital for our product (which featured hardware)was hard.

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