Latch: Creating the OS for buildings

Highlights from ✨Hot Deal Time Machine✨⏳ -- On Clubhouse

Below are highlights from last week’s Clubhouse episode featuring Luke Schoenfelder, Co-founder and CEO of Latch, and Jason Black, Latch Series A Investor at RRE.

Sign up for show reminders about ✨Hot Deal Time Machine✨ here and listen in on June 15th to hear the Plaid story with NEA GP, Rick Yang who invested in Plaid’s Seed and Series A

🔮 The Vision: Be Cisco, not the end device

When Latch was founded in 2014, CEO Luke Schoenfelder was thinking about much more than just building a better smart lock. However, as Schoenfelder recounts, 2014 was at the height of hardware 2.0 when Nest was acquired by Google for $3.2B and Dropcam was subsequently acquired for $500M. As a result, most investors Schoenfelder spoke to were pushing for Latch to be a consumer product business, believing no one would pay for a recurring software subscription for a lock.

But Schoenfelder had a long term vision of enabling an entire ecosystem around this smart access device: partnering with UPS, enabling home sharing with AirBnB, grocery delivery, integrating with smart home systems and more. He even included these use cases in Latch’s initial patents back in 2014. “We never thought unlocking your door with your phone was that interesting,” said Schoenfelder. “We always knew that if we were successful, we would be the Cisco system for buildings.”

💨 The Headwinds: Hardware is hard for a reason

It took the Latch team 4 years to develop their initial product - a timeframe that sounds like ages to most software investors, but for Latch and its connected hardware/software (HW/SW) offering, this timing was actually on plan. As Black pointed out, connected HW inherently has risk given the time and capital needs: “You have supply chain issues, it’s difficult to iterate on the product quickly, and on top of that the software suite takes a lot of time to build.” While Black had spent time with Latch from the seed stage, the optimal time for him to invest was at the Series A-1. At this point, the product was complete, and while there was only 1-2 months of sales, there was also data from 250-500 beta apartments. Black shared that as soon as Latch moved into the territory of a post-product, post-revenue business with the first inklings of growth and demand, Latch’s risk profile as a HW/SW business became very appealing for an early stage investment.  

🔪 The Edge: B2B > B2C

While many VCs were pushing Schoenfelder to take Latch the B2C route, Black saw the consumer angle as just a nice-to-have. A consumer would buy a smart lock at Home Depot, have it installed, it would work seamlessly, but then what? Do they really need it? In comparison, when thinking about the B2B opportunity, building owners could own 10K multi-family units across a number of portfolios with tenants going in and out multiple times a day. For a building owner or property manager digitizing access wasn’t just a nice-to have - it was a need-to-have. Compared to tens of thousands of physical keys, Latch provides heightened security with much lower logistical overhead - not to mention the myriad other services that could be offered once smart access was enabled. The B2B opportunity also meant sales for Latch could be dramatically larger, selling thousands of locks at once to a single account. These large B2B deployments enabled Latch to scale quickly with their initial product and subsequently layer on many of the additional software services that Latch had envisioned from Day 1.

🔥 The Oh Shit Moment: Withstanding a furnace at 2000°F

Schoenfelder detailed a critical step to certification for all locks and access devices: a life safety test in which the lock is placed in a furnace that is 2000°F for 90 minutes and must not catch on fire. Everything on paper indicated that the Latch device should survive the test - but it continued to fail. The reason why? These tests were designed for metal products - not for a computer that you were attaching to your door.  To add salt to the wound, these tests cost $30K a pop - a huge amount for Latch as a seed stage start-up. After multiple failed attempts, Latch finally zeroed in on the issue - a single part out of hundreds in their supply chain where the manufacturer had replaced one plastic resin for another without disclosing the change. The Latch team soon engineered a way to resolve the issue and, in a final test attempt in 2017, while Schoenfelder and his team nervously ate deep-dish pizza near the Illinois testing site, the new design passed.  Latch was finally in business and, while painful (and costly), had also developed a design and testing moat to further set them apart from competition.

👉🏼 Up next on June 15: Hear the story of how Plaid transformed financial services with its suite of APIs that integrate with bank infrastructure, now worth $13.4B - featuring Rick Yang, GP at NEA and early investor in Plaid.

👉🏼 ✨Hot Deal Time Machine✨⏳ is a 30-minute bi-weekly Clubhouse show where we travel back in time to the early stages of some of today’s hottest deals. Hear from founders and investors on the original pitch and thesis…and how things actually played out