Rich Razgaitis has been passionate about building brands and teams. Since 2002, he has served in CEO/president-level roles in several venture capital backed start-ups, privately held turnaround and growth companies, and he brings insight from those experiences to his work today at FloWater.
Raz was the CEO of several consumer-tech companies, including DealOn, an e-commerce company that developed the Web’s first deal-commerce exchange, and another, MyTownPerks, which built the first PCI-complaint, cloud-based loyalty program for B2B. (Both companies were subsequently acquired.)
In this episode, you’ll learn:
- What is the current problem with the “state of water” domestically and globally?
- What are the challenges of a hardware company when it comes to cash flow?
- How is a hardware company’s growth different than a software company?
- How are “refill stations” positioned as smart devices?
- What is the big vision and big events for the company Environmental Tech in 2020?
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Disclaimer to the Transcripts:
Intro 00:00
You’re listening to The Silicon Valley Podcast.
Shawn Flynn 00:02
On today’s show, we sit down with Rich Razgaitis a.k.a. Raz. Since 2002, he’s served in CEO/president-level roles in several venture capital backed start-ups, privately held turnaround and growth companies. He brings insight from those experiences to his work today at FloWater. Raz was the CEO of several consumer-tech companies, including DealOn, an e-commerce company that developed the Web’s first deal-commerce exchange, and another, MyTownPerks, which built the first PCI-compliant cloud-based loyalty program for B2B. Both companies were subsequently acquired.
On today’s show, we talk about: What is the current problem with the state of water here domestically and globally? What are the challenges of a hardware company when it comes to cash flow? How is a hardware company’s growth different than a software company’s? How can refill stations be positioned as smart devices? And what is it really like to be a founder of a growing hardware company? This and much more on today’s episode of Silicon Valley.
Intro 01:06
Welcome to the Silicon Valley Podcast with your host Shawn Flynn who interviews famous Entrepreneurs, Venture Capitalists and Leaders in Tech. Learn their secrets and see tomorrow’s world today.
Shawn Flynn 01:29
Thank you for taking the time today to be a guest here on Silicon Valley.
Rich Razgaitis 01:33
Thanks, Shawn. Great to be here.
Shawn Flynn 01:36
Now, Raz, you have an amazing background. Can you give us a little history of what you’ve done before your current role as CEO and co-founder of FloWater?
Rich Razgaitis 01:44
Sure. I went to a small school in Indiana and graduated and wanted to live either on the East or West Coast. Ideally, it was going to be New York or San Francisco, but ended up starting my career at a Fortune 500 company. I worked at J&J for a while. I also worked at Eli Lilly, another Fortune 500 company; ironically moving back to Indiana for that job at corporate headquarters. Then, I just got the start-up.
I remember actually flying out to San Francisco for a variety of market research projects, when I was at Eli Lilly. I was working on a product called the VISTA, which is for perimenopausal and postmenopausal women. I think I knew more about menopause than any other person, other than an OBGYN, at the age of around 23 to 25. I remember crying and sitting in these market research groups. There was actually really fascinating stuff, but I would be driving up and down one on one. And you could just feel the energy. You could see the billboards and feel the energy and all the start-up ecosystem that was starting to form. This was from ’97 to ’99.
I got an opportunity to join a startup company in New York City, and jumped at that to pursue entrepreneurial ambitions. From there, that really just changed my full course. I mean, I went from big corporate environments where I got classically trained in sales, marketing, biz dev, and corporate strategy, and moved right into a start-up world. I worked for a start-up in New York City, which ended up exiting to iVillage, which was later bought by NBC. I ran a privately-held consumer products company that I took into retail, and then a moderate-sized consumer goods company, where I worked for the former CEO of Avon for about five years. Then, two start-ups since then prior to FlowWater. Both in the tech space. One was in New York, which was a Groupon competitor. Another was in Silicon Valley here, and then that brought me to FloWater.
Shawn Flynn 03:42
Tell us a little bit about FloWater. What is the current problem with the state of water here in the US, domestically and globally?
Rich Razgaitis 03:50
Well, I’ll start first with FloWater. So, the entire mission of our company is to put an end to single-use plastic water bottles, but the vision is bigger than that; which is to change the way the world thinks about, consumes, and ultimately, how we distribute water. In the US, there’s a multitude of problems. I’m going to start first with single-use plastic pollution. Also, not just single-use plastics, but single-use packaging for water itself.
You know, it’s funny. When we started the company years ago, I think people just saw us initially as a couple of hippies in California that were going to try to do something that was good for the environment. While that might be true, I mean, I’ve been probably accused with my long hair of being a hippie or a bit of a bohemian before. While we did also want to do something good for the environment, there was a much bigger opportunity behind this, which is to really radically change the way that people view water, and to move to a decentralized, democratized, distributed water platform. I’m going to come back to what that actually means in a minute.
If we really start with what the problem is, the biggest problem is plastics are decimating the environment. That’s unequivocal anymore. Six years ago, people saw this as kind of a cute, little hippie project. Now, investors, consumers, and businesses see this as a clear megatrend. In fact, every time I saw an article on plastic pollution, I used to circulate it to my investors. That was in 2013. There were around three a year that were notable. And then, it was like 20 a year. Now, it’s about 20 a day if you just look at your social media feed alone on Facebook or Instagram, as it relates to this major migration away from plastics.
The problem with plastics is that they don’t biodegrade. They photodegrade. One piece turns into two, turns into four, turns into eight, and then it turns into microplastics. In fact, a recent study in Sunni about a year ago showed that there were over 300 pieces of microplastics per liter of both bottled and tap water. So over 90%, actually, of bottled and tap water. It was like 93% for bottled water, and I think it was 91% for tap water. The ultimate irony here is that we’ve put so much debris, so much trash, so much plastic into the ecosystem, that we are now literally drinking the plastic that we’ve been polluting the environment with.
Single-use plastics are a huge problem and are extremely wasteful. I could go on and on about stats. 50 billion of these plastic water bottles end up in oceans, lakes, rivers, landfills, and the majority of them don’t get recycled. Even with tremendous recycling education efforts over a period of many, many years, recycling is still only done about 25% of the time, even in places like San Francisco, where everyone says they recycle. The reality is the number is much lower than the standard indexes across the United States.
We’ve got a problem with plastics. We’ve got a problem with single-use packaging. There’s a clear, indisputable megatrend away from plastics, and people are running from it. I look at it as the new environmental cigarette. I mean, people look at plastic water bottles, and at some point over the next 10 years, people are going to look at someone sitting on stage or drinking a bottle of water in the same way that we look at somebody today smoking cigarette. The smoking population used to be 46% of the United States in the 60s, and now it’s down to about 16% to 17%. Part of that is due to health reasons, and part of that is due to taxation that’s occurred, but part of that is just social pressure. It’s become a very uncool thing to do.
Then, you look at the other side of the equation. You say, “Well, why are plastics, plastic water bottles, and bottled water such a big business?” I’ll spend a little bit of time talking internationally, but mostly domestic U.S. The problem in the U.S. is that the majority of consumers, and when I say the majority, all the data shows anywhere between 65% and 77% of consumers either don’t like, or don’t trust, or don’t like the taste of tap water.
The problem in the U.S. isn’t that, “Gosh, if there are only enough water spigots across where I could fill up my bottle.” That’s not the problem. There’s water. There’s kind of more water access per capita in the U.S. than there ever has been before over the last 50 to 100 years. The problem is that consumers don’t like it. If consumers don’t like something, they’re not going to do it. So that kind of goes back to this platform and how I see this business and this market evolving. What we’re driving towards is distributed, decentralized, democratized water, where everybody has clean access to drinking water that they love and they trust.
Shawn Flynn 08:14
Now, you talked about sending news articles to your investors about plastic waste. Can you talk a little bit about the investors’ appetite for environmentally, socially impactful companies?
Rich Razgaitis 08:28
There’s a simple answer to that, but I actually think there’s a little bit of complexity behind it. What I generally believe, and when I’m talking to investors, I focus on, number one, a major megatrend that’s happening. That’s undeniable. That is the next shift, right? This is the next oil for the following decade. It’s also kind of the next environmental cigarette. That’s single-use plastic. So, one is a market shift, which is the market was one-way years ago. Something happened, and there’s a new reality today. The second one is a TAM (Total Addressable Market). Water is one of the biggest TAMs that exists in the world. So, you’ve got a clear megatrend away from single-use packaging. There’s a massive market behind it; and there’s nobody doing what we’re doing, which is building, literally, the world’s first branded tap water at the source that’s distributed, and that doesn’t require people shipping water all over the US and all over the world.
When I talk about social impact with investors, I really first focus on the business fundamentals around big market; big megatrend; proof points in our business; 5,000 units deployed; great unit economics; super high take rate on free trials that is over 90%; incredibly low churn, less than 5%. I focus really on driving the story and the narrative around proof points and metrics, and then back it up with the fact that this is something that you can also feel great about. There is certainly a growing sentiment in an investor interest around doing well and doing good. At the same time, there’s, I think, a bit of a juxtaposition with that. I think often investors are conflicted, where they feel, “Gosh, I want to do well with my financial investments, but I also want to do good socially. And I don’t want to compromise the doing well by doing good.”
I think those two things in balance need to be there, right? I think investors that have impact funds are growing in number. There’s many more impact-focused funds on a double or triple-bottom line today than there were 10 years ago. That being said, when I talk about this business, I generally talk about it both from pure metrics and a market perspective, as well as it doing good perspective. And I think this is one of these great opportunities. One of the things that drew me to this business is that it’s a great business case around putting investment dollars behind something that can have a huge social impact that spans for decades to come, while they can also do really well financially as a result of it, without compromising.
Shawn Flynn 11:04
Now, does your company only raise funding through venture capitalists? What has been the funding up until this point? What are all the different avenues that have been tried?
Rich Razgaitis 11:15
We’ve gone through quite a few. So, seed round capital; not typical for any company here in the Valley that incubates. We’ve been based in Denver, Colorado as of the last three and a half years, but for the first several years, primarily incubated out of Silicon Valley in Burlingame in San Francisco. Angel capital, the first round was a little bit of friends and family from earlier stages, but the first significant round of seed capital came through a million-dollar angel investment, and then we did a bridge round. We did a Series A. We did equity crowdfunding, so not the kind of crowdfunding in the sense that one typically thinks of, but there’s actually an equity crowdfunding platform that we use to raise half a million dollars. We did venture debt, as well, with WTI, which has been a great supporter of us.
They’re typically doing venture debt deals, sitting alongside pari passu with venture dollars. They actually came into the company earlier. I’d worked with them before. They knew the company. They knew me. They loved the product; and so, they actually invested with venture debt. Then, we raised another bridge round and then a Series B. That Series B, that last stage of investment that we most recently obtained, was in December of 2018 for $15 million. So, $22 million to date through a lot of rounds of capital.
I think capital gets easier to raise as you go. Early stages, it’s, I think, a bit more difficult just because you have so many people that are incubating various ideas, and particularly for a new and emerging market, right? Today, I get inquiries from investors every week. Big name investors. I won’t use them as podcasts, but all names that you would know over the last 2 to 4 months have been inbound leads, saying, “Hey, we’ve seen your trajectory. We’ve seen the trends. We know what’s happening in the market. We’d like to talk to you.” That didn’t happen six years ago. When you get a new and emerging category that hasn’t been proven out, I think it’s a little bit harder to raise earlier dollars. And it gets easier as you go; provided, of course, that your metrics are there as well.
Shawn Flynn 13:15
Can you talk a little bit about the crowdfunding for equity and the venture debt, because I have a feeling most people listen to this aren’t really too familiar with those two categories?
Rich Razgaitis 13:27
I actually, to this day, have heard of very few companies that have raised equity through a crowdfunding platform. So, we used the platform called, Mindful Crowd. I don’t know how much activity is actually happening in that platform today. That is one way of doing it. We raised half a million dollars and that helped supplement some other capitalization that we were undergoing at the time. There are a variety of pros and cons to it. I think one of the challenges anytime you raise money is focusing on what’s going to get you the most strategic money where people can add value that is aligned with the mission and the vision of the company, that you have good chemistry with, and that is also kind of the easiest pathway. You don’t want to end up spending two years raising your seed round to capital. You’ll be dead in the water. No pun intended, but you’ll be dead in the water if you end up doing that.
One of the things that I experienced in the crowdfunding with equity was that we got a disparate number of some really terrific investors. I don’t know if I can name them specifically, but there’s some really well-known investors that were very early pioneers around emerging food and beverage categories, for example, which was terrific. It was also really time-consuming. So, there’s a variety of offsets on the equity crowdfunding route.
Venture debt, for those people that don’t know, sits in its own unique glass, but it’s literally debt that is affixed to warrants. It is atypical for venture debt companies to start deploying venture debt dollars in companies that haven’t raised venture capital. Typically, what happens with companies like WTI is that someone will raise a $10 million to $50 million institutional raise of capital through equity sources, and they’ll sit alongside that with $5 million to $20 million in venture debt.
What venture debt does is it enables you to have non-dilutive or minimal dilutive capital. Silicon Valley Bank does this. There’s a variety of other institutions that do venture debt; though WTI kind of pioneered it back in the 80s, I believe. The benefit of venture debt is that it’s non-dilutive or minimally dilutive with capital. You might take 12% hit on interest rate, but if you look at an adjusted return basis, and you also look at what the cost of typical venture or angel capital is, which commonly ranges between low 20s to high 30s as a percentage basis; venture debt can be a lot more affordable. It lets people sit on the cap table with a little bit more proportion of their shares, but you also have debt covenants and debt repayment obligations that are part of that as well.
I’m glad we raised venture debt. It was a super helpful part of the equation at a time that we needed it. We raised around $1.75 million through WTI, using venture debt. In fact, we’re in the final stages of paying that venture debt off, which will be great. Those were two, kind of atypical forms of adding capital to the stock that we pursued as well.
Shawn Flynn 16:28
Sounds like many of these pursuits were overlapping, happening at the same time, is that correct? Or was it do this, that finished; do the next one, that finished?
Rich Razgaitis 16:37
Well, a lot of it was happening in parallel. 2013, raise capital; same with 2014 and 2015. Every single year I could keep going on. Every single year was a capital raise for me. This is the first year I’ve actually not raised capital. Ironically enough, we’re preparing to go raise more capital because the market is so good and our performance is great. We’re going to go out to the market to get an injection of some additional growth capital in the first half of next year. So, I’m not actually raising right now, but trying to do some preparation for it. But it’s the first year that I’ve actually not pulled in additional capital.
A lot of this stuff was happening in parallel. I mean, trying to run the company; form it; build the team; get in front of customers; spend a ton of time in front of customers; develop products, get products manufactured; do break/fix items; and product improvements. Raising capital is no small feat. It’s nice to be able to have a good amount of capital today that enables us and me, in particular, to be able to focus on those things that are most important to the business: team formation, executive leadership, company strategy, product development, etc.
Shawn Flynn 17:38
Let’s talk about everything you just mentioned there. But prior to that, real quick question, can you talk about the challenges of a hardware company when it comes to cash flow? Because it sounds like that must have been a big issue for you with having to constantly raise capital.
Rich Razgaitis 17:54
It is. Most of the companies in the Valley are really heavy on the OpEx (operational expenditure) side. The CapEx (capital expenditure) is next to nothing. Not all of them, but most of them. And so, you’ve got your capital tied up in people. In this business, it’s both. So there’s a non-insignificant OpEx component to this business, but there’s also a considerable capital component to it. One of the ways to solve for that that I think is really, really important is to look at unit economics.
Will the dogs eat the dog food, and will they actually pay for the dog food? Right? It’s not just the function of eating the dog food, but you want people to love the product, and also be willing to pay for the product. Early on, even our very first 100 units that we deployed in the marketplace, and I at one point, probably knew the address and the phone number and the names and what the physical layout is of every one of those first locations. We didn’t give away anything for free. We were always charging for the product. Part of it was because it was a really important fundamental to establish a trajectory of belief and conviction and data points that would substantiate investor or proof points down the road.
I think it’s one of the mistakes that hardware companies make, because it is capital intensive, is if you don’t have good unit economics, and you don’t have kind of a model that builds out on a unit of one into thousands that makes sense, you get into a lot of trouble. I won’t name names. There’s a lot of more recent names of companies that have had high capital expenses; that have had terrible unit economics. And they just had this kind of thought, “We’re going to solve it someday,” or “We’re going to be so big that we’ll be a market domineer, and we’ll figure out how to make money.” I’ve just never subscribed to that, probably to a fault.
There were probably sometimes earlier on, when we could have been a little bit more aggressive about taking a little bit of margin compression to grow a bit quicker, but having unit economics, and having gross margin analysis, and being able to have irrefutable data points around this liberty of our businesses and investment, I think was one of the key things in our ability to go raise capital, and then to get a significant amount of capital through Blue, which was our lead and only investor in our Series B.
Another way that we did this was we found a bank. There’s a division of SoftBank that we developed a partnership with that provides for lease capital financing. And so, getting those early data points on and charging for customers early on helped to set up a stage, where we could go and develop a relationship with a banking and a financial institution, so that they might be able to fund in some instances those DOP (Development Operations) paper and buy that paper from us; give us the cash up front, so that we could more efficiently deploy our capital and not need to raise as much equity from the private market.
Shawn Flynn 20:54
With all this unit economics and testing and getting data, what hindered the growth? Has it been the capital? Or has it just been, “Listen, we needed to take all these steps to get where we are. We actually are– the growth is accelerated”?
Rich Razgaitis 21:09
That’s a great question. I feel, today, our biggest constraint is around capital allocation. I’m sitting on still a significant amount of capital that’s left over from the Series B. We’ve made some considerable investments into the leadership team; just hired a terrific CMO; hired a great CSO six months ago; have a fantastic head of operations. I’m in the final stages of hiring a CFO. None of these aren’t expensive hires.
We’re deploying that capital to build out the entire team, not just the executive team. We’ve got about 56 people in the company. We are bringing forward some of those operational expenses and investing earlier on in the market development, product development, partnerships, etc. Right now, where we find ourselves is that the market and the timing is so right for us, and our trajectory is so strong that capital constraints are the primary constraint.
Early on, in a completely new space and a completely new category, it’s a bit more difficult to raise the capital when you have not proven out enough unit economic directory; number of units deployed. We’re at the point now where a lot of that stuff is just irrefutable. I’ve got five plus years data and 5,000 different units that are out in the market. I’ve got backlog of certain orders we’ve got. So, today, I think it’s capital constraints. Probably, every entrepreneur feels like that to a degree. But there were certainly times in the past that I would not have taken in more capital, because I didn’t feel like we could responsibly deploy it. I only wanted to take in amount of capital that I really, convictedly, believe that we will be able to invest it appropriately and not take in too much dilution out of a protectionary measure for the current shareholders, as well as just the unknowns that would have become knowns over a period of time. We’re now at the point where I feel like I can check all of those boxes quite easily.
The other area that I was going to talk about is simply scaling hardware is really, really difficult. There’s this kind of adage that hardware is hard. It really is. It’s really frickin’ hard. I think it’s a good barrier to entry. There’s been some great postmortems done on hardware companies and what some of the problems are. One of the biggest problems is people go to build hardware, and they never actually can get it built. They have a proof of concept, or they have an idea. They go to design, and they take it to the manufacturing, and they try to get it to production. And there are a number, a number, a number of failure points along the way.
This is very unlike having run some CPG companies in my past or having run some tech companies in my past. CPG kind of sits in the middle between hardware and tech, but I mean, one of the great things about tech is that you launch. You launch your code quickly. You get out in the market, and then you make tweaks. You identify what the bugs are, and you can adjust all this stuff real time, and you might be open in 50 cities across the U.S., but the code’s sitting up in AWS. Upload new code, and it drops down to 50 cities. It does not quite work that way with hardware, when you’ve got a 120-pound piece of equipment, and you’re building it overseas in Asia, and you’re getting it shipped, and the tooling and molding has been made. That tooling and molding has to be pretty damn close to perfect, because you’re going to be living with that for years. Once you start commercial batches you identify, “Well, we didn’t think this was going to happen in the market with this product. We got to go back and tweak and adjust it.” In fact, it’s one of the reasons why we went more slowly.
Initially, our first production run, no joke, was four units. We did four units, then we did 16 units, and then I did like 30 units. I remember someone asking me, “Why you are you slow rolling this thing? Unleash the turbo here. Let’s go get 300 of these and put them out in the market.” And the answer is, “I’d love to do that, but I don’t know what’s going to happen with the four in the market. I know what happens in the lab and in our four walls, but I don’t know what happens in the market.”
We certainly didn’t do everything perfectly, but I think we did a lot of things right along the way. We took those first four units. Put them out the market; tested the daylights out of them; had customers give us a lot of feedback. And we went back, we identified that we have to tweak A, B, and C. Because once you have that equipment in the market, you’ve got to live with that. When you get 5,000 units in the market, or more importantly, 50,000 units out in the market, that stuff better be pretty well dialed-in, because you’ve got, in our case, 120-pound piece of equipment. You’ve got to get it from point A to point B; from the manufacturer in Asia, land it in the US, and do QA on it. Then, you’ve got to re-deploy it. You’ve got to have a tech go drop it off, install it, deliver it, and have a seamless experience. And then, have consumers fall in love with that product after it gets into the ecosystem. That’s complicated.
Cloud-based businesses are complicated too, but they have different levels of complexity. This one is logistically very challenging. The team has done an amazing job. I got a great group of 56 people today. For a long time, it was three to seven people for years, right up the road here in Burlingame. They did a great, great job of executing, but that is another challenge: the scaling. Any hardware business is challenging because of the very nature of the fact that you’ve got a physical product, and it’s got to be shipped and delivered in some cases installed and deployed, etc.
Shawn Flynn 26:10
Can you talk about that? How did you go about finding your manufacturer at the beginning? Were you just flying back and forth? What was that like?
Rich Razgaitis 26:18
In my past, I’ve probably manufactured or overseen or purchased, I’m guessing, half a billion dollars’ worth of nutritional products. Primarily, those were supplements; dietary supplements; protein powders; shakes; some liquids. And that manufacturing was frequently in Asia; sometimes in Mexico; a little bit in the U.S.; and a little bit in Europe, but that was the most minority portion of it. So, I had a bit of background in manufacturing; however, I’d never manufactured hardware before. If you look back, many entrepreneurs have a tendency to believe that their strategy goes and executes according to plan, and that they’re brilliant, and we’re all rock stars. That’s just not the case. I think the case is that there are many really brilliant entrepreneurs. There are some really important strategies that you put in place. But along the way, I think all of us that have experienced some degree of success, whatever the varying degrees are, have had some really wild strokes of great luck or good fortune that have come our way that have added grace to the equation and also some continuity.
Identifying our manufacturer was one of those. Literally, it started with Google-searching. I wish I had a more interesting answer, but I mean, it was Google-searching, and then I’d be on Skype. All the Chinese I know is “ni hao,” so I would Skype someone. I would “ni hao” them in China, and Korea is “annyeonghaseyo”, and then I would try to formulate a dialogue with people that were generally not very proficient in English, and talk to them about manufacturing, and how we might be able to manufacture, and if they did OEM or ODM manufacturing. Weeks and weeks and weeks were spent just doing online recon of “Where’s water purification done? Where does supply aggregate? Why does it aggregate there? What companies do this on a contract basis?”
As I was doing all of that, I came across a trade organization called Aquatech. It happened to be in Shanghai in 2013. I believe it was in June of 2013. This is basically an aggregation of some of the world’s leading suppliers around water purification, water technology, and water manufacturing. I think there were about 100,000 people that attended this, over 1,000 different suppliers. I went there for three days, and was at that convention for about 12 hours a day, and I was the only American and white guy that was there. I mean, this is largely specific to the Asian region, but particular Shanghai as well.
I got an MBA in water, water manufacturing, and water hardware through that experience. I remember a lot of them. I would show them the designs and ideas and the pricing and the timeline. There were more than a few of them. There would be a little bit of translation back and forth. I could hear the head of product development laughing, like pointing at me and laughing, and then they’d all start laughing, and then I’d be laughing, but they were really just laughing at me. So, I was laughing at myself as well; that this is an audacious idea, or we could never get it done in time, or the cost was exorbitant, or I talked funny. Whatever it was that they were laughing about, it was not a positive affirmation. Through that process, I was able to weed out a lot of non-targets. I narrowed it down to about 12 to 15 targets, and I actually found our manufacturer at this Aquatech convention.
One of the things that I learned is that what Silicon Valley kind of was/ is to tech and innovation is very much what Korea was and is to water innovation. So, if you look at a lot of the development that’s happened in water purification, water technology, water manufacturing, a lot of it is done in Korea.
I’ve done manufacturing before in Korea, and I had some great experiences: extremely reliable; relentless focus on quality; sometimes painfully slow, because it’s so methodical. But I ended up narrowing it down to two suppliers in China, about four or five different suppliers in Korea, and through all that effort of online searching, a lot of phone calls, and a lot of recon. I called up the head of operations for a major water company, and I would just pick their brain. I’d say, “Hey, look! This is what I’m trying to do. I need some advice. Are you willing to give it to me?”
I would just cultivate from wherever and whatever sources that I could information around water technology, water manufacturing, and the companies that would do that. From there, I narrowed it down to a great partner that we’ve been working with for over six years. A group of 60-70 people; they do all their own CAD development. We own all of our IP. We’ve been a long-standing partner with them. They’ve done a fantastic job. We’ll end up getting secondary and tertiary manufacturers as we start to grow and scale domestically, as well as internationally. But that was the process that we used. A lot of it was just figuring it out.
When I bring people into the company, I think one of the dangers in scaling companies is that there’s an ethos within the company that gets potentially lost. That ethos is figuring difficulty out by just deductive reasoning, critical thinking, and being an absolute relentless Pitbull to getting the source of information and weaving through all of this stuff to get to your pathway. A lot of times as humans, we want things to be easy. We want someone to dish it up and say, “Here’s what you need to do.” This is why, when you go back to Facebook after this podcast, you’re going to see now the Inc. magazine. I like Inc., but you’re going to see like, “Here Are the 10 Things You Need to Be Successful,” “Here Are the Three Things You Need to Look for When You Hire,” or “Here Are the Five Things That You Need to Do to Get an Exit.” But the reality is a lot of times there aren’t just 3, 5, or 10 things. A lot of it is you don’t know what the things are, and you’ve got to really splice everything apart, and then put it back together. A lot of that just comes through really hard grinding.
I think that was one of the things that came out of manufacturing. There was luck; there was a huge degree of luck in going to that Aquatech convention, but also, it required a lot of critical thinking. I’ll give you an example of that. I had probably a 10-page RFP, request for proposal, but I also had a two to three-page operating document of what we wanted in a manufacturer. And so, it was privately held; 50 to 80 people. I wanted them to do all their own internal R&D. I wanted them to have 10 plus years in the water experience. I wanted them only doing water. In fact, I remember a note in one of my guidance documents was I didn’t want them manufacturing anything that would be contrary to our mission, like plastic utensils.
I remember in one of the finalist manufacturers that I went to go visit in China, which obviously we did not end up selecting. I saw a bunch of boxes lined up in pallets that were getting ready to be shipped. It didn’t look like it was water purification equipment; and so, I kind of just wandered over outside of the guidance from being escorted around. I kind of wandered in the plant to where they couldn’t find me. I peeked through one of the boxes, and I literally saw plastic forks that they had manufactured, which I did not know that they’ve manufactured. I kicked that manufacturer out exactly after that moment as a result of that. That came from having a really defined operating guidance of what I’m looking for and what was going to be important for the business to be able to scale.
Shawn Flynn 33:38
Do you recommend all founders of companies to have that operating guidance list? And what would be some suggestions to go about creating that for your company?
Rich Razgaitis 33:48
There are so many unknowns in the start-up world that what I typically like to do is I try to isolate variables. I’m really comfortable with dealing with variables for which there’s no known answer. I like it. I actually find it way more interesting, and it’s part of the challenge. And that’s the job. I also do not like trying to figure things out that other people, previously, have already figured out, because I think it’s a waste of time.
One of the things I would advise entrepreneurs to do is, this sounds perhaps a little trite and Pollyanna-ish, but I would start with the operating vision and mission of the company. I would start with fundamental principles. If you’re developing an RFP, ultimately, what is it that aligns around the mission and the vision of your company?
And then I would, secondarily, look at “What are some of the behaviors and attributes that you believe based on where you are in this moment that are going to be important to your success?” And so for us, just as an example, kind of pulling it back, is having someone that attended 20 years plus of expertise and water manufacturing or water production of water equipment was really important, because I wanted them to be able to isolate variables for us and have experiences that could have been learned lessons over a period of time.
The third is to put in place as best you can feature and product attributes in a very clear and concise way. So, when I was delivering stuff to manufacturers, I was delivering to them: here’s the problem in the market; here’s what we’re solving for; here’s the use case of this product; and then, all of the features and specs that were desired as part of that. I guess I would really go back to the vision-mission of the company, fundamentals, operating principles, some of the behaviors, and feature specs, use cases, and intended use applications of that. And then, you revise as you go.
I think this is one of the challenging things about running a company. I was thinking about it on the way here. Life just doesn’t work for any of us the way that we expect it to, and that’s probably a good thing. In most cases, even when you like to control things, and you like things to turn out the way you want them to turn out, it doesn’t always feel like that’s the case. But I really, fundamentally believe that one of the things you have to do is you have to be fluid with the learnings that happen in the marketplace.
And so, what I would say to a founder is you can’t go and outsource really critical functions that are strategically important to the company before you go, and do them yourself. An example that would be manufacturing. I’ll still go, “Today, we’re in the process of looking at alternative manufacturers for secondary products that we’re in the process of developing. I’ve got my head of operations that just took three trips to Asia in the last 12 weeks to source manufacturers, but I’m going to go visit the top two to three myself. And I’ll make sure that I’m pressing flesh, testing it out, and validating what they believe to be true.” Same goes for sales.
I think a lot of people that are founding CEOs tend to think, “Oh, I’m just going to go hire somebody and they’re going to go sell it.” Yeah, and maybe they will, but you might also get a false negative. You might be getting potentially a bit of a false positive, but usually more often than not, you’re going to get a false negative. And so, I think the key is to develop the template, but then you’ve got to go battle test that template. And the only way that you can really battle test that template is by getting out into the market, having the experience, and hearing it firsthand; hearing it from manufacturers; hearing it from people that have failed at it; hearing it from people that have been successful at it; hearing it from customers, so that you can make real time adjustments. Because in this market, the thing that we bring to the table is the ability to operate with speed. But speed is part and parcel to having know-how, knowledge, market assessments, and validation around all those things.
Shawn Flynn 37:25
Now, it sounds like you’ve done an amazing amount of work with your company. Can you talk a little bit about the real story of what some of the sacrifices a person might have to make to be a founder of a company? I mean, most of us just hear these tech start-ups, these founders making millions, and that’s it. We don’t hear the whole story.
Rich Razgaitis 37:42
We do not. When I talk to entrepreneurs, I kind of answer this in two different ways. I have a general perspective, but then I also have an answer that I give when entrepreneurs call me and say, “Hey, I’m thinking about doing X, Y, and Z. Should I do this?” I try to be really careful to never discourage the idea at all. I might give them some things to think about. I think people are very often consumers. People are just very quick to say what’s a good and a bad idea. In many cases, we don’t know what is a good and a bad idea. I think probably 90% of innovative ideas have probably been seen as a bad idea by the majority. I think battle testing ideas and providing people critical feedback on, “Here’s what I think is good about this idea. Here are some of your risks or challenges with this idea that you should think about” is a really healthy way of trying to help move someone along critical thinking without crushing it, because, really, what do I know about their particular idea and the research that they’ve done?
I will, however, be pretty vocal with them about what it takes to be an entrepreneur. I try to offer a healthy enough dose of encouragement that should they desire to do it, they probably can do it and attempt it; but the reality is for ~90%, probably 95-97% of entrepreneurs, they don’t make it. And these are all the stories that you don’t hear about on Facebook. You hear about all the great outcomes and all the parachutes, or the liquidity events, or the IPO. That once the founder got unlocked from an IPO and got tens or hundreds of millions of dollars. Reality is that that just doesn’t happen. That is the reality, and the majority of cases.
The other dose of reality is that you’re going to be putting a huge portion of your life on hold. I mean, I look at my own personal life. Actually, that’s probably one of the things that’s most negligent in the whole spectrum of myself. I have tripled down my focus on my two daughters, Royce and Zoey, who are teenagers. One’s a freshman and the other’s a junior in high school. And I’ve super focused on the company. Being there for the company and operating at my highest capacity as best I can. It certainly doesn’t mean I’m flawless. I’ve made many mistakes along the way, but my intention right now is all efforts focused on a bit of personal development, my daughters, and work. And that leaves very, very little time for other things. This idea of like “you can have it all” is total B.S. That sounds great in an article that gets posted on Facebook to drive clicks, but that just is not real life. Real life is having to make very definitive, tough decisions of what you are willing to sacrifice to go after what it is that you want; that might be that bigger thing.
I mean, it’s funny. They see my social media. I’m not a celebrity in the Valley, but people see Rich Razgaitis on social media. They’re in my network and they say, “You guys are blowing up and this must be fantastic. You’re traveling all over the place.” But what I’m not doing is I’m not posting pictures of me inside a manufacturer at 3 a.m. after I’ve been up for about 21 hours. What I’m not doing is posting Instagram stories of pulling all-nighters to work on a pitch deck or an investor follow-up piece. What I’m not doing is posting pictures, where you’re alone on a Friday night because you haven’t developed that many personal relationships, or you’ve forsaken unfortunately a lot of your personal friendships because you’ve had to make tough decisions. And so, you just end up working on Friday night as well, even though there’s plenty of work to always be done.
There’s a whole amount of, not only sacrifice, but also loneliness that comes with being an entrepreneur. I think that ends up being a pretty considerable amount of grit, because you’re going to get the s**t kicked out of you along the way. It’s not in the ways that you expect. You’ll get all the expected ways, but you’re also going to get a healthy dose of unanticipated, unexpected kicks. It’s really difficult. That’s why my counsel to the people that are looking into going into entrepreneurship is it’s not, “don’t do it,” but it’s “do it, but make sure you really know what you’re signing up for.” And if, for example, you’re married, make sure that your partner knows what you’re signing up for. Don’t do it if you can’t get buy-in along what that looks like, because if you don’t get that buy-in, or they kind of think they’re in, but they’re not really in on it, it’s probably not going to go well.
I think one of the issues that we all have as entrepreneurs is we’re optimists. I try to have a healthy dose of pragmatism and reality and think through worst case scenarios. But the reality is, I think I can pull everything off, you know? I think I can pull off like doing X, Y, and Z. Let’s throw A, B, and C in there. I have to really guard against my optimism around what I think I can pull off versus, “All right, what can you really do? What are the sacrifices you’re going to have to make along the way? And for those people that are on that journey with you, are they also prepared to make it?”
Shawn Flynn 42:42
Is there any way that if anyone wants to find out more about your company or yourself, is there any way for them to get a hold of you or research this knowledge? Is there anyone also that you want to give a thank you to in this process?
Rich Razgaitis 42:54
Great. Thanks, Shawn. In terms of obtaining information from or about FloWater: info@myflowater.com, is the best way to submit an inquiry. If you’d like to get a free trial, you’d like to get a FloWater unit, or learn more about the company, go to myflowater.com. Another way is Instagram: @flowater. And then, your last question, in terms of more about me, @richrazgaitis on Twitter and Instagram are also ways to be able to access more information about me.
From a gratitude perspective, I would like to just mention that there are a lot of people that were believers in this. I am incredibly grateful for the first two to seven employees that came on board, believed, drove through this, and built this name. That extends now to 56 people that we have at the company. And we’ve had some terrific advisors, and some great early on investors.
Shawn Flynn 43:57
Great. I would also like to thank Jerry at Tech Futures Group who was the one that actually made the introduction to Raz. So Jerry, thank you.
His [Raz’s] contact, and all the information that Raz just mentioned will be in the show notes. So, if you’d like, visit our website at theinvestorspodcast.com, and click on Silicon Valley to access those show notes. Raz, thank you for your time today on Silicon Valley.
Rich Razgaitis 44:18
Thanks, Shawn. It’s great to be on the show.
Outro 44:21
Thank you for listening to The Silicon Valley Podcast. To access our resources, visit us at TheSiliconValleyPodcast.com and follow our host on Twitter, Facebook, and LinkedIn @ShawnFlynnSV. This show is for entertainment purposes only and is licensed by The Investors Podcast Network. Before making any decisions, consult a professional.
