Why nello failed
After almost 4 years, nello had to file for insolvency in July 2019 and to cease operations in October 2019. In this post, I want to discuss why nello ultimately failed from my point of view.
For those of you, who don’t know nello too well yet: nello has been an IoT startup that enabled keyless access to the hallway of multi-family buildings by a retrofit upgrade — called nello one— that tenants could install to their intercom unit inside their apartment. nello one could trigger the buzzer at the main entrance door, detect bell rings and was connected to the cloud via the apartment’s Wifi. When we launched in Summer 2017, this was a world’s first unique approach. In total we sold 12,000 nello ones, had 16,000 monthly active app users, some of the best customer review scores for smart home products on Amazon and opened more than 3,000,000 times a door for our users.
On the surface nello one seemed to be just a hardware gadget or a complimentary product to a smart lock for apartment tenants. However, we always saw it a bit differently: Our mission was to simplify urban lives and we saw nello one as the key enabler for providing unattended services to urban dwellers by providing third parties access to the hallway or the apartment (then in combination with a smart lock). In our vision, you would get all your parcels delivered while you are at work, your apartment would get cleaned and your fridge refilled and your dog would be taken for a walk by your dog-walker. Obviously this creates a lot of value for all parties involved and would allow us to charge a recurring fee for every door opening. A way more attractive business model than just selling hardware.
Reasons for failure
A new product in a new market
nello one had intentionally been designed as a B2C product as we were (and still are) convinced that scaling a B2C product can be done much faster and with a higher maximum penetration compared to trying to convince property managers to centrally install a keyless access solution. It is the tenant who has a pressing need — for the property manager this is just prio #25. However, we were selling a totally new product concept to consumers. In such a case it is normal that only a very limited amount of people search for your solution, making it generally expensive to acquire new customers. The lack of organic search traffic did make marketing a challenge. Nonetheless we managed our customer acquisition costs to average at 24€ at a gross retail price of 129€.
Even less people search for “unattended parcel delivery” — something nello one enabled right from the beginning through setting up time-windows during which anybody who rings is buzzed in and leave-at-instructions for the courier. As a result you could magically receive all your packages at your apartment doorstep. I have to admit: somewhat hacky, but it worked like a charm for many of our users. Besides not being able to leverage any meaningful organic traffic, we also learned that there is a really low willingness to pay to solve the parcel problem: Consumers simply expect it to be solved by the online shops and the parcel carriers as they already pay them for the products ordered and shipping.
A new product like nello one also comes with inherent obstacles during the purchase decision. Obviously a lot of our users had never before opened their intercom unit to wire some upgrade device. They were also afraid whether they needed permission from their landlord for installation and / or usage (usually not, but of course it was an issue because nobody had experience with this). So, we faced two more barriers for adoption.
Last but not least the amount of different intercom systems, was a big challenge that we had not fully overcome (yet). We have been aware of 1,700 different intercom units across the world — using different technologies, using different wirings. I believe we have built the most comprehensive knowledge on intercom systems, but the lack of compatibility in the first product generation cost us a lot of money. Our first product generation had a good compatibility across Germany and a few other European countries, but overall it was only mediocre. This cost us an unknown amount of lost orders that where never placed due to the negative compatibility check result and a 20% return quota from people who bought nello one without having checked their compatibility before placing their order. This was also the main reason why we had been working on a second product generation with a vastly increased compatibility.
Overall, we did develop the market to some extent but nello one remained a niche product with limited sales and limited value to the vast majority of the population by the end of 2019. So far only few people see the value in keyless access or are willing to co-create a solution to their package problem. It remains to be seen how this evolves over time with an increasing penetration of smart home and new service offerings.
Raising not enough money
In total we raised 3.5m€ from KPN Ventures, KfW, SOSV and other investors. Not a small amount for sure. However, this clearly hasn’t been enough — otherwise we would not have had to file for insolvency, right?
Even though we sold our products with a positive contribution after customer acquisition and customer service costs, we had to invest into developing the underlying technology further to increase our compatibility and to stay ahead of the competition. Even though we sold up to 700 units per month, the generated contribution has not been enough to cover the costs of our development team — even though it was really small. The development team had only 5 full-time engineers (on a side note: I think it is pretty impressive what this small team was able to achieve…).
In hindsight it might have been better to develop and sell complimentary products such as a smart lock or an alarm system to our customers in order to make more cash per acquired user. On the other hand this would have required more funding and was not inline with our focus on building installed base for unattended services in cities as the vast majority of smart home revenues are being made with people living on the countryside in single-family houses.
Zooming a bit further out and taking the grand vision into account, keyless residential access is a race for biggest installed base: Whoever has the biggest installed base of accessible households wins. Consequently we should have raised a much, much bigger amount to leverage our time-to-market leeway and to be able to focus on building installed base without considering short-term profits. To be honest, we never really dared to go for this pitch given the generally difficult funding situation for hardware startups in Europe and the lack of a US role model which is unfortunately still key for European investors — especially for justifying big rounds. So, we rather focussed on raising smaller rounds, leaving us with less money to educate the market, less money to accelerate the development of the second product generation and a higher dependency from third parties.
Chicken-egg problem for unattended services
Given our limited funding, we tried to collaborate with unattended service providers such as logistics companies, e-commerce companies, online supermarkets, cleaning services and others. However, it turned out that none of the companies were willing to “bet” on one technology because the market penetration of any hallway access or smart lock player is too small. This makes complete sense in short-term oriented organizations as the impact of any cost-savings and convenience-benefits only become impactful as from a certain scale.
Unfortunately none of those companies was even willing to grow together with us. The reasons had been manifold:
- having an IT system that is not able to connect to state of the art APIs within less than 1 year,
- mobile terminals that are not online yet,
- not being able to exclude the competition from benefiting as well,
- having too little 1:1 consumer interactions to justify a subsidy,
- a too large workforce to justify additional trainings,
- being active in an ultra low cost market with very limited margins.
At the same time we had to learn multiple times from market research that our users and especially their (less innovative) family and friends expect exactly this kind of seamlessly integrated services. Thus, we were facing a typical chicken-egg problem. In our last investors pitch we tried to overcome this by starting our own unattended delivery service. However, this pivot obviously came pretty late and had not been proven on scale (except a pilot with about 100 Munich customers in early 2019) or a US role model.
Conclusion
Even though we made plenty of mistakes on our way, I don’t think that they ultimately caused the failure of nello. They might have become challenging in the long run, but until now they did not have any significant effect on the company. Thus, I would argue that our timing has not been right or maybe it was but we would have needed to have more cash to bridge the time until the market is finally ready for unattended services.
This post solely expresses my personal opinion. I have been CEO & co-founder of nello. I would like to thank all of my team, our investors and all nello customers for joining me on this incredible journey. Despite the outcome it was a very fun ride and I could learn an incredible amount of new things. Thank you all! 🙌
