Nov 9, 2022
Why we invested in (well, co-built) VERTICAL
At OSS Ventures, we invest in and co-build the software stack of the future of operations. As a venture builder existing since 2019, we created 12 companies of which 8 performed a series A, and are present in more than 800 factories throughout Europe. As builders of solutions for the manufacturing world, we are lucky to be at the forefront of the future of operations and are grateful for it. We took a habit, when a company gets created, to write a short story of how it went and the things we learned. You may find in the writing below interesting as it lays down the early stage story of VERTICAL early stage, and sometimes some great jokes and pictures made the cut.
CAPEX is a sh*show (not us speaking, the user)
One of our first preferred partner manufacturing leaders at a large aeronautics firm walked in the office. She wanted to tell us about her previous job at the same company : head of finance controlling. Conditions were : confidentiality, non-judgmental attitude, and considering the problem seriously.
The conversation roughly went as follows :
“ So, my point is about CAPEX. That’s Capital Expenditure. It’s basically when you invest stuff that has some financial return in the future. In my particular company, it’s about 45% of total sales every year. And it’s a shitshow.”
“ A shitshow ?”
“ Let me detail how it goes. First, every year, there is a budgeting phase. The budgeting phase is telling the rough overall budget of everything we want to do. There is also the carry-over, which is the investment part that is done from previous years and has yet to be spent.”
“Has … yet.. to be spent ?”
“Yeah, the average length of a project is 2 to 3 years. So your spending is multi year. But it’s unclear.”
“Unclear ?”
“Unclear as sometimes we slow down projects, or speed up the projects. Depends.”
“Depends on what ?”
“On project, technology, access to capital.”
“On everything.”
“Everything. So, the budget phase. We basically have those giant excel files with troves of projects. And we say yes or no. With some metrics with some standardized return on investment, various ratios that make us say yes or no.”
“There are 60 sites in your company. That sounds like a lot of work.”
“It is. We’re talking about a process that takes 3 months, spread over 400 people with different timeframes and bottom-up propositions of projects. We have 30 to 40 people only dealing with that process.”
“What tools do they use ? Are they able to carry that task effectively ?”
“Excel and powerpoint. No, they’re not.”
“This starts to feel like a shitshow indeed. How many excel sheets and PowerPoint presentations?”
“My conservative guess is 1000 excel files and 500 powerpoints per year.”
“Holy cow. But also, aren’t there projects or ideas that could be carried out more effectively ?”
“I don’t know. I think we don’t really have the technological acumen to do better for now”
“OK. So, big list of projects, budgeting phase. How do you determine the total ?”
“Total is done relative to previous total.”
“That sounds like a rough measure.”
“It is, but we have nothing else to show for.”
“Okay, so big room, big list of projects, and you decide the total budget. What happens next?”
“Next the project manager gets to work, and carry out the projects. And this is when the shitshow begins.”
“Begins ?”
“You’ve ain’t seen nothing yet. So, the project manager does the thing. New plant, new machine, whatever. After four or five months, for example, they have to pay for the first things. And this is where the shitshow begins.”
“Why ?”
“Well, first, buyers have to say yes to that spending and say which project it is on. But buyers never get the information before. They get it afterwards, sometimes when payments are due.”
“Isn’t there some kind of validation process ?”
“There is, but we had to kill it because it was slowing down everything and we already pre-approved the budget, remember ?”
“Right.”
“So, the wire goes in, the money gets sent. But then the project manager realizes the initial budget, which was an estimate, is actually wrong. Also he realizes that there will be delays so part of the 2021 budget will be done in 2022”
“Yeah, that sounds like a very different beast.”
“So, well, he re-budgets. And gets some approval.”
“Let me guess. Excel files and slides.”
“Bingo.”
“No sure proof way of getting historical data, learning from previous mistakes, getting an accurate up-to-date view…”
“Of course not.”
“Shitshow indeed.”
“So, for the next budget cycle, we’ll basically discover what the carry over is from the previous year. Sometimes we realize that by the time the project is halfway, there are other projects that should be carried over.”
“Woah.”
“Also, one time, we realized we were buying the same kind of machine from the same supplier in two factories. Guess.”
“No standardization, no cost reduction by negotiating the two together, no cross-learning from one site to another.”
“You’re getting good at this game. And last, about our organization being a learning organization. When projects end, do you think we carry a post-mortem analysis to see what went good or wrong, to project learnings to other projects ?”
“I get it. Indeed, that’s a pretty interesting problem to solve. But isn’t there some software to solve this? You looked for something?”
“I looked everywhere. The main issue is : there is software aiming at tighter validation of financial flows. Of course, project managers hate it and put outdated, bad information in. There is no software to link operational information and financial information. Zero. Nada. Why do you think I’m in your office ?”
“Glad you’re in the office indeed.”
The conversation is almost non-redacted. Those two hours of conversation are still in the top OSS moments of 2021. So immediately the urge to do something about this situation got strong in the OSS team. In less than 2 weeks, we assembled a team with Armine, a former operations specialist who conducted cross-country complex CAPEX projects, and Guillaume, the former CTO of a Chinese car-sharing company bigger than Uber in its home country. With those incredible founders and the OSS team, we set out to solve this complex issue.
Blitzbuilding is a thing. So is blitz user research. And Blitz UX ? I don’t know.
Of our more than 80 conversations with various actors of the CAPEX processes in forty factories, it was pretty clear that the situation described in our conversation was indeed the reality in most factories. To put it more elegantly,
- The budgeting phase is a back-and-forth nightmare between a large number of factories and the headquarters. Ability to project and enforce simple rules, return on investment, percentage of portfolio projects spent on climate change versus productivity versus fundamental R&D was incredibly low. Ability to know the carry-over from past projects also was very low and just orders of magnitude ;
- The project managers were managing their projects with a wide range of tools, with excel being the king (more than 90% market share) for operational information. Various ways of trying to get some validation gates were enforced by headquarters with very varying levels of success. Financial information was almost always nowhere to be seen and certainly not up to date ;
- The lack of data-backed decision making and ability to learn from past projects, or even adjacent projects that were being carried out just right next to a given factory was also mind-bending ;
- The overall CAPEX process efficiency gains that could be made out of that were of the order of magnitude of one tenth of the total margin of the companies as an average.
The problem was real. We realize, to truly solve this issue, we had to aim for a very ambitious goal. By owning the operational workflows of all the project managers, we would be able to reconcile financial and strategic high-level data and decisions with what was happening in real-time on the field.
While this can seem like a very ambitious goal that asks for a very long development cycle, leveraging our product shops and designer’s experience, in about 6 product iterations and as many weeks, we had a functional MVP in the hands of our users. It captured the operational flow of the project managers, the financial data, the low-level budgeting as well as the high-level decision making and an always-up-to-date single source of truth for everyone.
By putting the product live in three factories, we learned that :
- Just putting the projects in a single repository allowed for cross-learning in different factories and teams ;
- Processes were different from one factory to another, with different sets of rules and very little oversight from corporate ;
- Headquarter processes were immediately challenged when presented and converged over something very much more appropriate for actual reality on the field ;
- While total variability of the budgeting, re budgeting and general chaos were high, it was relatively coherent over basic types of projects (new machine with no knowledge of technology versus well-known technology, Greenfield versus brownfield, etc…) ;
- … and dozens of other learnings.
In three more short months, Armine closed four more clients, putting Vertical in the race for becoming the fastest startup to reach €1M ARR (hint : less than one year) for a total of €4 billion euros a year of Capex under management (that is a made up term that we love. But the figure is real.) They started recruiting and putting the cogs in motion to have great customer success, developers, product managers and designers. It was a beauty to see Armine putting everything in place at lightning speed while Guillaume was organizing the tech and product teams.
This kind of timing is unmistakably the time where OSS has to back off and let the next chapter of Vertical history be written by the founders and the team alone, even if the guidance and boards and ad-hoc help stays. It is a bittersweet sentiment to outboard one by one the six OSS professionals who were working full time with those amazing leaders, but a known one. So we wired some money to make sure Vertical was well positioned to go to the next milestone and let them be.
Here’s to the next 5 years of CAPEX not being a shitshow anymore. Here’s to inspiring founders. Here’s to incredible manufacturing partners who gift us their issues. Here’s to Vertical.
If you read this far, you’re likely very interested in this story. At OSS Ventures, we fuel on having incredible founders joining, ambitious factory executives taking the leap of faith and working with us, and ambitious investors joining in. If you fit in one or all of the above categories, we want to hear about you. renan@oss.ventures . Hit us up. Maybe we can find another shitshow to fix together.
