Verkada Lead Investor’s Fundamental Errors

By John Honovich, Published Feb 05, 2020, 08:52am EST (Info+)

The man behind Verkada’s stunning $1.6 billion valuation, Aydin Senkut, has been talking up many fundamental errors he made in the investment.

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From fundamentally misunderstanding Honeywell and Hikvision to even Verkada itself, he has made one daring bet.

But that does not mean he will wind up losing money on this risky deal. Inside this note, we examine his errors and, despite that, why his money may help himself and Verkada.

Please **** ** *****

****** ******** **** ******* *** *** need *** ***** ***** ***, ** he******** ** *** ********:

* **** ** **** *** ***** clear: ******* *** *** ** **** of ***** ***weren’t ******* *****. They had plenty of runway from their previous funding.

*** ***** **** *** ** ******** three ******** ***** ** **** **** would **** **** ******* * *** round.We ****’* **** ** **** and they didn’t want to go through a formal process. [emphasis added]

** ********* **** ** ****** **** this **** **** *********. ******* *** not ******. ** **** *** *** the ***** ****** ** *** **** valuation **** ******** *****, **** ** now.

*** **** ** * ***** ** Silicon ****** ****, *.*., *** *** Information's ****** ******:******* *******’* *** ******: ******** ****** and *********** ******.

Marketing *** *** ** *******

** *** **** *********, ****** ******** that:

*** **** ****** ***** ******** ** marketing. *** **** ** ********* ******* the *******-****** *** ** ******, ****** solid.

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*** **** **** ***** ******** ** online *********. *** *******, *** ** their ********* ******** ********* ******** * quarter-million ******* *** ******* **** ** Google:

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******, *********, ******* *** **+************** ******* ** ********:

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***, ** ******,****** **** $*** *** ************ ****** ****** *** *******:

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*** ******** ** ********* **** ******* out *** ********* **** ***** *******:

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******* ** ******* ***** **** *** because **** *** ******** ** ************* amount ** **** ***** *** *********.

Hikvision *** *********

**** *** ***** ***** ** * startup, *** **** ** ******* **. Senkut *** **** **********, *********:

*** ***** ****** ************* ** *** big **** ****** **. ********* ** valued ** $*** *******-****. *****’* * Chinese ******* ****’* **** $** *******. The *********** ** ** *** ********* system *** *** ********* ** *** world? ****** **** **** ****** ******’* be ******.

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*** *** ******* ******* ** ** referring ** ** *********, ***** ** currently ****** ** ~$** ******* ***. Hikvision *** **** ******* ********* *** 3 *******:

  • *** *** ********** ******* **
  • *** *** ********** ****** ** ******* foreign ***********
  • *** ***** ****** ********** *** ********* inflated, ***** ****** ** *** **********.

*********'* ********* ** ** ************* ********* from ******* **** ***** ** ** sense ** ******* **********.

***, *** ***** *** *** ********* about ********* ******** *** ***** ****** valuations,**** *******, * ******* ** ******, ***** ******* *******, ******* *** both ******* *** ** ***** ****. They ***** **** * ****-*******-****** **** valuation. ** *** ****, **** ***** be ***** ** **** */**** **** valuation.

Investor ******

********* ** *******, ******'* ****** ** 'all *** ********* ** *** *****':

**** *** ** ******* ** ****'* this ** **** ***** *********. **'* just *** ****'** ******* *******. ****'** going ** ***** ****** ** **** and **** *** ***** ** ****** the ********* ****** *** *** *** buildings ** *** *****

Still *** ***

***** ** ** ****** **** ******* will "****** *** ********* ****** *** all *** ********* ** *** *****" or **** ****, ** * *******, or * ***** ** *** *****. But ******* *** ***** ********* ** not **** ****.

********* *** ***** ****** ***************, *******'* lead ******** ***** *** **** * good ******.

** ******* ***** ***, *.*., **** $5 *******, ** ***** ** ************* for (***-*****) ***** ************ / ******** security. *******, ******* ** ******** ** unprecedented ******-**, ****-********** *******. ********* ***** conventional ****** ******* *** ***** ************ business ** ***** ********* ** ****** sales (**** * ***** ** *****, sell * ***** ** **** ***** next ****, ***.), ******* ** *********.

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**********, *** ****** **** ***** ********** the ********* ** ******* ****** **** this ***** ***, ** *** ********, the ********** ** **** ***********, *** power ** *******'* ***** ******* *** being ******* ******'* ***** *** ***** to ********, **** *** **** * lot ** *********.

*** **** ********* **** *** *** now, *** **** **** *** *** them ** *** ****** ******* ** fire ** ******** **** ******* **** next, *** **** ****** ***** ********* will ** **** ******* ** **** and ****** ** *** **** *** complexity ** ****** *** ** ***-**-*** Verkada ****** **** ** *********** ***********.

*******'* *** *** **** ***** **** but**** **** **** ****:

******* ** ************* ******. ****’* *** mainly ** *** ****** ** *** system. **** ******** **************, *****’* *significant ******* ********** from the customer: she has invested both in the hardware and the labor to physically install a system throughout her buildings. [emphasis added]

******, ******* **** *** **** ** generate ******** ** ******* ** ** worth ******** ** *******. *** *********** guaranteed **** **** **** *** ******-** Verkada ***** *** *** ********* ** be *** **** ********** ***** / access ******* ****.

*** ** **** ***** ***** ******* to ***** ** *** ******* ******, Verkada's **** ******** *** **** **** make **** ***** *** ***** ****.

Comments (34)

Can someone get me Mr. Senkut's email address please? I have some swampland in Florida that he might want to invest it. It might not be worth much now, but once we drain it and put up a shopping mall it will be worth millions. Getting in now is the smart thing, and it seems like this kind of investment might be up his alley.

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Have you used the product?

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I'm very familiar with the product, it's interesting. I just don't think they have a long term business model in this industry.

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Have you used the product?

The Florida swampland?

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I can’t find it again, but this morning I saw comments from someone normally associated with low end manufacturers who installed a 100 camera Verkada mall.

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Wow. It is scary to me how comfortable people are spending money on things they don't come close to understanding. I guess that is fundamentally the majority of venture capitalists though right?

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they don't come close to understanding

In fairness, venture investing is about making bets on the future where you can never really be certain what will happen. Most investments turn out poorly but the few that are home runs make it. Will Verkada be a 'grand slam'? It could. He's bought himself a lotto ticket and the rest of us have not.

For example, the Honeywell comparison is just incompetent. On the other hand, he said it to TechCrunch, which has zero interest in doing due diligence or asking obvious questions. 'Software eats the world'. Software eats buildings. Maybe Verkada eats buildings. Or maybe not.

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Verkada eats buildings

I'd like to see the marketing campaign for that one

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Elon Musk understands Mars.

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why does verkada always have such a small booth at the shows.. you can barely find it...lol

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The small booth question is interesting.

I think they are right about that. Why wait a few times a year to spend hundreds of thousands of dollars to then have to follow up later? Verkada is effectively running a non-stop trade show online by its continuous heavy social media advertising campaigns.

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How much space do you need to have 2 sales reps handing out Amazon gift cards?

:)

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I wonder how their lead generation is going, throwing tons of money into marketing can be very dangerous when there are only a few qualified leads handed over to sales. I also wonder what relationship they have with installers and integrators...

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when there are only a few qualified leads handed over to sales

I think there's every reason to believe they have a lot of leads. Most importantly, Verkada can almost certainly justify spending far more per lead than conventional companies. Let's say Axis has a lead - that's a one-time camera sale, with solid but not certain probability of selling some more cameras in the future. With Verkada that's a camera sale + a very high probability of an annuity in camera licenses for years to come plus expansion sales of both cameras and more recurring licenses.

I also wonder what relationship they have with installers and integrators...

What does it matter to Verkada? As Verkada's CEO told IPVM:

Sales always own the relationship with end customers

There's few integrators that love Verkada but that does not matter. Verkada is overwhelmingly nurturing these deals themselves and there are certainly companies out there that are happy to be handed the install / local support work.

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Love my free Yeti!

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I love mine, my wife loves hers, my brother in law loves his........ They are not too discriminating in who they allow to participate.

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If there is one thing Verkada is indisputably the best at in physical security, it is spending money on marketing.

"spending money" or "spending money effectively" on marketing?

Genuine question - not implying it is or isn't effective.

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effectively" on marketing?

Let’s say they spend twice as much to acquire a customer as the next highest spender in the industry. To be clear, I don’t know but as a thought experiment.

They likely can afford it because they know, unlike their traditional competitors, that they are effectively locking in a very long term stream of profits. VCs are excellent at funding the scale up of such businesses.

Net/net, I think their customer acquisition economics are sound based on the long term profits reasonably expected, even if they are paying some salesmen a million a year - Make A Million In 2020, Become A Verkada Salesperson

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I am wondering if Verkada's GTM strategy is like that of alarm companies - give away the hardware and rely on the RMR. While Verkada hardly gives away their cameras, they lock you in with the promise of new and exciting features and proprietary hardware.

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There are similarities though Verkada’s model has better recurring margins because they do not have to provide monitoring and the video is stored on-site.

Also, the churn is virtually certain to be much lower than the residential alarm business, especially if they get businesses to buy video and access.

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Here is a great article on what appears to be a similar situation evolving with Verkada..Not saying they will see the valuation tumble like WeWork but at some point you must become profitable, not just barely profitable but wildly profitable.

The Money Men Who Enabled Adam Neumann and the WeWork Debacle - WSJ

This also shows how some of the worlds most respected wealth funds were drawn into a risky investment model...

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Both WeWork and Verkada are targeting buildings but, from what limited understanding I have of WeWork's business model, Verkada's model is better.

VCs specialize in flooding markets with money to hyper-scale growth. WeWork is an example of it failing, surely there are many others where it works.

I think Verkada fits because it wants to grab land before anyone else in their model, knowing that once the land is taken, it will be hard for it to be lost.

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Btw, anyone knows whether Verkada makes their own cameras, or their cameras OEMed?

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Remiel, they develop their own firmware / software and are contract manufactrued by Vivotek, covered in Vivotek Revenue Soars.

Btw, here are Verkada's most recent import records. They really are not importing that much product which raises questions of how much they are actually selling:

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There has been a fair amount of discussion here about the effectiveness of Verkada's marketing.

Concurrently, a corrections end-user in this thread has discussed evaluating Verkada ("My initial rollout is for 128 cameras, and all-in it will be 272 cameras by the end of next year"). The end-user decided not to go with Verkada but it's still an impressive story of how Verkada even got a shot with this end-user:

I did one of the webinars from a Facebook ad. I had I believe three different cameras for more than a month

That's a good example of their funnel in action: social media ad -> Yeti webinar -> inside sales person -> free trial cameras. Verkada did not win this one but I am sure they won many others using a funnel very few industry manufacturers use.

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In terms of marketing they are doing a great job, probably their digital marketing people got paid pretty well.

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TechCrunch had a podcast talking about the investment where the hosts laugh at the investor (auto transcribed):

First question has to be they dropped 80 mil at a 1.6 they picked up five percent, the investor picked up 5%. Who buys 5% of a company? Like why didn't they put more capital? And why is it so slim that the ratio just blew my mind when I read this?
Yeah, I mean, it's it's just again, it's something we don't see that often. I mean, so the question is, is this may be the early announcement, it might be crunched, just speculating here not doing anything. But like one option is maybe they have another 80 million available that the company can take at the same price in three to six months, right?

The only thing about putting in more capital is - what would Verkada do with that money? This market is only so big and only moves so fast. But it does raise an interesting point. What if Verkada raises another $100 or $200 million in the next 2 years? What will they do with it?

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Buy Crestron or some similar acquisition for building automation.

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The model:

Verkada's model is basically this:

Secure funding, hire a sh*t load of sales reps that target paid-for end-user leads.

They don't use rep firms or distribution and their reps bring the deals to the integrators they want to work with (in hopes of switching their business)

Their sales team are by far and large, poorly educated on competition and the security market in general. Most have come from Yelp, copier sales, etc - none from the traditional security market (former Yelp, office supply sales, etc). The end result? Ramp up as much and as fast as possible and sell.

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Their sales team are by far and large, poorly educated on competition and the security market in general.

That's true but they are also super confident and polished. A lot of buyers key in on that, especially if the buyers also are poorly educated on the details of the product / offering.

Ask a Verkada salesman about WDR or compression or whatever and I assure he will confidently dismiss it, in a manner, that an unknowing end user will accept. Leaving ethics and accuracy aside, it is an effective way to close deals.

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Their sales team are by far and large, poorly educated on competition and the security market in general. Most have come from Yelp, copier sales, etc

Hey... hey! Wait a minute! Many of Avigilon's sales team hired in the past two years come from Ricoh, Xerox, etc. Clearly, the proper path to enter surveillance sales is via selling printer supplies.

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Perhaps. But I've been told that Avigilon has a tough time keeping employees around as well. If so, maybe that's why they're digging into that field for future representatives - or perhaps hiring from that field is where they feel they'll find the "hunter" that will grind out 60-80 cold calls a day for 18 months before burning themselves out as well.

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I don't know what kind of training Avigilon puts its people through, and I have seen the evidence of the revolving door of sales people through there. However, I have never heard anyone say that an Avigilon sales guy doesn't know what he's talking about. From my experience, and from what I've heard, the Avigilon guys are all fairly well trained on not only their product, but they also are aware of what's going on in the market.

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the Avigilon guys are all fairly well trained on not only their product, but they also are aware of what's going on in the market.

Note: this is actually from an Avigilon competitor. At first, I wondered if this was an Avigilon employee patting themselves on the back but no.

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