Across The World With A Startup

Today’s entrepreneur and storyteller: Chen Levkovich
Chen is a passionate technology executive, entrepreneur, and internet visionary with an intense interest in voice and chatbots, mobile, Fintech, the Internet, and security. He has over 15 years of practical experience in R&D leadership, product management, software architecture, machine learning, network security, mobile, cloud computing, and constant evaluation of technology divisions to further the vision of the company.

Name of the project: Conversation.One
About: Conversation.one helps businesses to automate their customer service on conversational channels by increasing the accuracy level of machine-lead interactions, using a combination of deep-learning and crowdsourcing.
Year started: 2012
Year closed: 2018
Location: New York, NY
Industry: AI, SaaS
Category: Enterprise Software
Stage: Seed
Who were the investors: Angel investors

Traction reached: The original company started in Israel, we were very successful in the market. Among our users were the third-largest bank, half of the insurance companies, and many telecoms, but the Israeli market is very small, it’s approx. 8 million people. So when I say half the insurance companies, it’s two or three — that’s half of the market. Very quickly, once we were successful, we reached almost $1 million in yearly sales. We understood the market is too small and we have a viable company. We decided to expand it to the US, so my co-founder (who is also my wife) and I moved to New York to extend the company to a bigger market.

Target market, market situation at the time of start: Target market consisted of financial institutions like banks, credit unions, insurance companies. The target customers in the US turned out to be smaller institutions without internal development teams which dictated the need to pivot the product. Alexa was a new trend at the time and we saw an opportunity.

What inspired the idea: The company was actually a pivot from a previous product we built — and that’s kind of a spoiler since it’s one of the reasons that caused the company to die. The previous product was a mobile adaptation platform for enterprises, mostly finance, and helped optimize the website to mobile. When we started it the concept of mobile was new. We completely changed the product. First of all, the new platform allowed financial institutions to create and deploy automated conversations on top of third party channels, which was a big step because when we released it, it was very new and they didn’t know how to do it. Secondly, it allowed them to optimize it because people provide feedback after having these automated conversations that lack quality. It’s one thing to set it up but then you have to maintain it which requires a huge effort.

Success parts, what worked: We launched a new solution in the new market and it actually became very successful financially. We signed a large quote from Long Island, New York just three weeks after the launch — it wasn’t a pilot or something, it was really a customer. The user experience was very smooth — just a few steps and that’s it, you have a ready-made solution. We made sure to connect with the backend API, the templates covered all the questions and were optimized for the specific use case. And so it was nicely done. We had acquired Geico Insurance company as a customer. And after three months after the launch, we got a new customer again. Then we had a partnership with Amazon — we were the only platform that was certified for launching financial tools on top of Amazon Alexa. We became a sort of gateway for smaller banks.

F*ckups/Challenges:

• Having success in the Israeli market, we were expecting a similar path in the US. When we talk about financial institutions like banks and credit unions, there are a lot of them in the US, I would guess, at the time, it was around 11,000. Most of them are very small and they operate in a different way compared to other places in the world, when we talk about finance. You have a much smaller number of such institutions and they are much bigger, they also think bigger. We talked to a credit union in the US and they tend to think small, even if they manage high volume in assets because it’s a huge market. And our pitfall was that our platform was helping developers to optimize the websites while in the US most of the banks and unions didn’t have the developers because they were buying ready-made solutions from vendors. And that’s something we were not prepared for.
• I have to say we didn’t have enough knowledge about the US market. Also, the competitors were more advanced. That’s why we decided to pivot to Conversation One. Alexa was a new thing at the time and we saw interest in the element of conversation for the platform. We decided that we understood how to fix all the pitfalls we had with the previous product. We adjusted it for the smaller banks or credit unions and turned it into something that they can handle without internal developers. The new value proposition is very clear and fit for the US market.
• When you open a company in Israel, as a first time founder, you go to local lawyers and they set you up within the local regulation. What they wouldn’t tell you is that if you want to transition to a US company, they couldn’t help you and you will face major issues.
• We had outside investors into our Israeli entity, the valuation for the deal and the percent that the investors got on the cap table were based on local benchmarks, which are drastically different from the US or European markets. As founders, I thought we had enough shares which was about half of the company. We relocated to the US, we were generating decent revenue in the new market and had promising paying customers. So naturally, we were focusing on growth and started fundraising conversations. So first of all, the one thing we figured out is that we were not ready for Series A since it was a completely new product built from scratch. Our previous success with a different product in a different market wasn’t applicable here.
• I decided we should try to raise money on the West Coast but we ran into an issue — we were not local and didn’t have a robust network yet to help us through it. We didn’t know anyone but what we did, I think, is very smart. We started networking and socializing and met a great guy who liked what we’ve built. He liked the team and became an advisor to the company and opened up his network. He came with us to the meetings, which helped not only with opening the doors to start conversations but also get candid feedback. Usually when you talk to investors and they give you feedback you don’t really know what’s real and what’s not. So in this case, since he knew those investors, he could quickly get genuine feedback right after the meeting.
• And then it comes back to the original story of having an Israeli company — VCs and angels rarely want to invest in the early stage companies from outside the US because they don’t know the laws in those jurisdictions and they don’t want to pay for a foreign lawyer to evaluate such an early-stage deal. They don’t understand the terms, the cap table looks weird to them, the deal is expensive to facilitate — it all comes into account when they make decisions. And that’s what we had to face being an Israeli legal entity. Flipping the company from an Israeli to a foreign, specifically US entity wasn’t possible because of all kinds of taxation issues. I know now that it is not an issue for a lot of other countries — but that was our case. So people should consider that and check before going to the US. They need to set up the company in the US and you know the process.
• The other problem was the cap table. Since we had two previous rounds of funding outside the US, based on West Coast standards, we as founders had too little of the company to keep fundraising and stay incentivised. And that’s a problem neither we nor our investors we were not familiar with. We got some feedback from Series A investors on what they expect to see on a cap table, all the investors from the Seed phase stage shouldn’t have more than 30% together, to keep the founders happy and in control of the company. This is very different in Israeli market where the number of opportunities is much smaller so you end up giving up more of your company shares for early-stage funding. Our early investors were ready for some changes to fix the cap table and adjust to the new market but after a few attempts the changes were too cardinal for them to agree. The company’s previous investors were willing to invest more but they didn’t have enough money to put millions and millions of dollars into the growth stage. Keeping the company alive was possible, but you know, just keeping a company alive is not the goal in creating a successful startup.

Key causes of failure:

• Major differences between the US and Israeli markets, especially on the investment and valuations side.
• Differences in target customer behavior in the US vs Israel, lack of knowledge about the new market → Successful pivot.
• Legal hurdles for international companies moving to the new market and transitioning legal entities.
• Couldn’t fundraise because of the international legal entity transition issues, different benchmarks for valuation and captable.

Grateful for/Key Learnings:

• I’m a software engineer, I love reading software and I love the business stuff, but the legal and corporate requirements, especially international, were new to me. Making sure you don’t give up too much equity is my advice.
• One thing I learned from Conversation.One is what to expect from building a successful product. Not just because it’s fun but you also learn what success looks like. And you never know if and how successful you are because the path to success is very unique. So the next time I’m building something, I know what I should expect based on our customer acquisition. And I know that if I don’t get it that fast next time, it’s probably not that great.

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This information’s purpose is to help learn from the mistakes (and pivots) of others, as well as to encourage founders to openly speak about things that failed. Look at it as a shared f*ckup depository for resilient brilliant minds.

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