“Shark Tank”…? You have to be fucking kidding me.
Even if he was too polite to say it, that’s what John Frankel was thinking five months ago when one of his limited partners called him to suggest he try to invest in UniKey – a company he’d just seen on the popular TV show.
Frankel is a real VC after all. Someone given millions to invest on behalf of major pension funds and endowments because of his proprietary deal flow and investment savvy, right? Not exactly the kind of guy who needs to get his investment tips from ABC’s prime time line up. Even if the company was interesting, surely it had all the capital it needed after pitching to five investors — on national television. Indeed, Mark Cuban had agreed on the show to make an investment already. Frankel could think of better ways to spend his time.
But Frankel didn’t say any of that, because he’s polite, and this was one of his limited partners talking. Instead, he rolled his eyes and sent a note to UniKey.
Fast-forward to today, and UniKey is announcing a major deal with Kwikset, the largest residential lock maker in the US. It’ll be on sale later this summer. It’s great news for UniKey and its largest investor… John Frankel.
How the two got to this point is anything but the typical Silicon Valley story. And it’s a textbook case of how software is snaking out well beyond social media to disrupt and reinvent even the most tangible real world of objects — the key to get in your home. That means software deals are no longer just found in the usual places either.
First, let’s talk about how UniKey got to “Shark Tank.” It was started in the not-so-techy hotbed of central Florida by Phil Dumas — a guy obsessed with digitizing locks.
Back in college his senior design project for his engineering degree was something called OnCar — a system that could unlock your call by calling it. He had one in his own car and was always tinkering with it.
That lead to a job at a startup where he developed a product called SmartScan that could open a door lock using biometrics. It was there that he first worked with the Kwikset team. Big problem: It didn’t always work on the first try.
Digital keys are one of those things that have to work every time, or you’ll stick with the convenience and habit of just carrying around a physical key. There’s a reason keys have been the dominant “technology” to get us into houses for more than 1,000 years. They are small, portable, require no learning curve and they don’t require batteries or crash. To compete, something has to outdo keys on convenience and reliability, not simply be cool and futuristic.
Dumas wound up leaving that company for a stint in private equity. But the product’s shortcomings haunted him until 2010, when he decided to try solving the lock problem through a different angle: Your smartphone. The phone — not your fingerprint — is the biometric identifier for UniKey. The lock detects it in your pocket, but you don’t actually have to interact with the phone to open the door, you just have to have the phone on you and touch the lock. It comes with a key fob as a back up.
Dumas didn’t have a lot of VCs to chose from in Central Florida, so he applied for “Shark Tank.” On the show, all of the Sharks made offers with Cuban and Kevin O’Leary made a commitment to invest, and TechCrunch even reported the Cuban investment later on. Only problem: They were misreading an SEC filing. That deal never actually happened. In subsequent negotiations after the show, Dumas couldn’t come to terms with the Sharks.
That made Frankel’s out of the blue call pretty welcome, although Dumas says he could hear the skepticism in Frankel’s voice from the first call and it took a good deal of due diligence for the two to get comfortable with one another. He says Frankel was far more aligned to the way he thought about building the company than the Sharks were. “He’s more understanding of the early stage process and the decisions we have to make,” Dumas says. The whole thing was bizarrely serendipitous. “I guess you never know where a deal will come from,” Frankel says.
Indeed, some of the Sharks speak a different language than most Valley investors, with one seemingly balking at a $1 million pre-money valuation for a product already in talks with the largest distributor of locks in the country. Says another Shark on the episode, “$500,000 is a lot of money!” In VC circles, neither are exactly an outrageous ask for a tech company with a big market opportunity.
Today, the company has raised about $2.3 million with an option for another $1 million on the table.
Dumas still raves about his experience on the show, but I have no doubt he got more reasonable terms from Frankel.
The best thing about being on “Shark Tank”? A lot of potential customers see your product. The worst thing? A lot of potential competitors see your product.
Part of what attracted Frankel to the company was Dumas’ industry knowledge on locks. Plenty of kids could throw together a mobile app, but building a credible product requires understanding the nuances of locks and the market dynamics in an industry that even electricity hasn’t changed much. Little things, like the phone needs to know what side of the door you are on. The last thing you want is to go to the door to see who it is and accidentally unlock it.
There’s a lot of promise here beyond the simple act of digitizing a key. You can give out temporary keys or conditional keys to people — letting a neighbor into your home only when they are watering your plants or a housekeeper in between 2 pm and 5 pm on Fridays, for instance. There are clear advantages for users of a site like Airbnb or anyone running a company out of his home, like I am. And you can imagine other verticals that would be interested in the technology, like car dealers or hotel chains.
While digitizing locks may seem outside of the domain expertise for a venture firm like Frankel’s ff Venture Capital, the business model isn’t. It’s essentially intelligent hardware backed up by a software as a service recurring revenue model, that varies based on what features customers want. The actual digital lock is just the way of getting a user base. The real value is what the software running in that lock can do, which includes a lot of premium services like notifications, remote entry, or unlimited keys, Dumas says.
Because the value of UniKey is really software, Dumas was happy for Kwikset to do the heavy lifting of manufacturing and distributing the locks. It means they make less on residential lock sales, but it gets the product in the market faster and allows his company to focus on the software.