This article is the second chapter of The Entrepreneur's Journey, a collection of stories about startup companies and the entrepreneurs who built them. To continue reading about key startup themes and lessons learned, check out the entire series here in The Seraf Compass, or purchase the book on Amazon in paperback or Kindle format.
Over the past twenty years, I’ve heard thousands of entrepreneurs present product ideas that will change the world in ways both small and large. In the end, only a tiny percent of these entrepreneurs are able to fulfill their vision for the product while meeting the customer’s needs. What sounds like a great idea upon first blush often ends up on the scrap heap of failed ideas. “Why,” you may ask, “does failure happen so frequently?”
There is no one answer to this question. In fact, entrepreneurs invent new ways to fail every day. However, there is one common theme I see over and over again in failed startups. Very few entrepreneurs truly understand their customers’ needs and priorities. Founders rarely spend enough time getting to know their future customers. This lack of market knowledge almost always leads to a product that doesn’t solve a critical problem for the customer. Such was the fate of Jim Keck and his company, SepSensor.
Born and raised in New York, Jim was an outstanding math and physics student. In 1944, while still an undergraduate at Cornell University, the US Army drafted Jim and assigned him to the Manhattan Project in Los Alamos to work on the first atomic bomb. Working closely with some of the most brilliant minds of his era, Jim developed the skills needed for a successful career in scientific research. During the immediate post war period, Jim completed his PhD in nuclear physics, and spent three years as a fellow at CalTech, followed by eight years in industry working on ballistic missile research. From 1963 until his retirement in 1989, Jim taught thermodynamics as a professor of engineering in the Mechanical Engineering department at MIT.
Jim’s talents extended well beyond math and physics. His ever optimistic outlook on life, his enthusiastic personality, and his passion for designing and building eventually led him down the path to becoming an entrepreneur. One day, in the late 1990s, he was complaining to a friend about his septic system. Jim was frustrated by the frequency with which his septic system was pumped out by the local septic company. “How do they know when it’s time to pump it out?” he asked his friend. “They can’t tell how full it is since they don’t have a way to visually inspect it.”
Because of his thermodynamics research during his years at MIT, Jim knew how to measure the differences between liquids, solids and gases. So the question he asked himself that day was, “Can I develop a low cost sensor to tell whether it’s time to pump out my septic tank?” Thus began Jim’s journey as the founder of SepSensor.
Having spent most of his career as either a researcher or as an academic, Jim wasn’t familiar with the process needed to launch and build a company. However, due to his past affiliation as a professor at MIT, Jim was able to take advantage of a free service at the university called the Venture Mentoring Service (VMS). By matching prospective entrepreneurs with skilled volunteer mentors, VMS provides practical advice and coaching needed by MIT affiliated entrepreneurs to get their businesses off the ground. One of Jim’s VMS mentors was Erik Pedersen. Erik had a successful career as a software entrepreneur, and he provided Jim with critical advice needed to launch SepSensor. In addition, Erik was so enthusiastic about the company, he decided to join Jim as a co-founder and became the company’s CFO.
Jim focused much of his energy in the early days at SepSensor designing and building the sensor so it could accurately measure and report the status of a residential septic tank. He focused the majority of his time and efforts on product development and very little on speaking to potential customers. Jim researched the potential competition to his sensor by checking at the patent office. As there was none, he patented his design. He felt the path to the market would be sales to each homeowner through retail establishments such as Home Depot.
As you can imagine, the sensor was located in a pretty tough environment, certainly not a place anyone would like to spend time. Jim had to solve this environmental problem, and he had to figure out a way to get the data from his sensor to the septic tank owner. Running wires from the sensor into the basement of the house where power was available was an acceptable solution. All of these engineering challenges took time to solve and increased the cost of building the device.
By 2003, Jim had built a working device and was getting ready to launch the product. But the company needed a CEO to help run the business. Jim might be a great inventor, but he knew he wasn’t the right person to run the day-to-day operations of the business. Through his MIT connections, Erik introduced Jim to Mark Terrell. At the time, Mark was a seasoned executive with over thirty years experience building and selling instruments in a wide range of industries. His background and leadership skills were a perfect match for SepSensor. And, having both graduated with technical degrees from Cornell University, Mark and Jim had a lot in common from spending their undergraduate years in Upstate New York.
Before agreeing to sign on as CEO, Mark did a fair amount of market research to make up for the limited information Jim provided on the target customer. First, he looked into the potential size of the market. In the US, there are over 26 million homes with residential, on-site septic systems. He concluded that even a modestly priced system could result in a $1 billion dollar market opportunity. The general concept for the sensor and the pending patent on the device impressed Mark. But, he wanted to make sure there weren’t any competing products or patents already on the market. So he researched the competition question, as well. Finding none, Mark viewed this as a good thing. He dove right in and became employee number three at SepSensor.
As an experienced CEO, Mark knew one of his first tasks was to undertake a thorough assessment of the market opportunity. According to Mark, “I wasn’t going to make the common mistake so many entrepreneurs make by not talking to the customer and assessing whether we could achieve product-market fit.” Mark realized selling through a retail channel was going to be difficult and expensive. In addition, after talking to a few potential homeowners, it was clear they didn’t want to have anything to do with installing a sensor in their septic systems.
He started filling his calendar by meeting with executives at septic tank manufacturers along with owners of septic tank pumping companies. Within a short period of time, Mark started to get the lay of the land. “What I discovered was a fragmented market,” said Mark. “Most pumpers were mom-and-pop operations with a small number of trucks covering their local territory. It was a low tech industry with limited interest in any sort of new technology.”
Continuing his story, Mark said “I did find one septic tank pumper who found the idea behind SepSensor to be intriguing. I spent four months going over different business models with him. However, no matter what we did, we always ended up with the same result. Fewer pump outs meant less revenue for their septic business. If I was working so hard to get product-market fit, and was not developing a business model that makes money...hang it up. I knew it was time to cut our losses and pivot away from the residential septic tank market.” Mark went from someone building a solution to a specific problem, to someone with a solution looking for a bigger problem to solve.
For an early stage company, pivoting away from your first idea can be a rough moment. Jim, Mark and Erik were discouraged, but they weren’t ready to give up. Mark spent his days researching potential new markets for SepSensor. A short while later Mark relates, “While doing my research, I ran into another small company that built a sensor for the restaurant industry. Restaurant kitchens produce large amounts of grease, and most restaurants have a large-capacity underground tank called a grease interceptor. Just as with a residential septic system, the grease interceptors need regular pumping.”
Mark discovered that pumping a restaurant grease interceptor is a fairly expensive proposition. Depending on the tank size, a pump out costs anywhere from $600 to a few thousand dollars. And, most restaurants play it safe and choose to have their tank pumped every three months, whether they need it or not. Furthermore, the last thing an owner wants is to shut down their restaurant due to a backup in the grease interceptor on a Friday night. That would be one expensive mistake. But, wouldn’t it be better to know when and how often you need to pump the tank? To Mark that seemed to be a logical question to ask and answer.
Mark relayed his discovery to Jim. With some modifications, including moving to a wireless sensor that could relay data nightly via a cell phone connection, Jim’s sensor could measure levels of grease solids and liquids. SepSensor embarked on a new journey to convince restaurant owners to use their sensor.
With a focus on the restaurant industry, Mark filled his days with meetings at restaurants. He met with restaurateurs who owned one or two restaurants. He met with owners of large chains. In the end, a decision was made to focus on chains. In theory, a single sale to a chain would result in deploying sensors in dozens or even hundreds of restaurants around the country. The price was set at approximately $1,000 to install the sensor at the restaurant, and then an annual service fee of $400. By eliminating one or two pump outs per year, a restaurant would save enough money to more than pay for the service contract. It was a win-win scenario… the restaurant saved money and SepSensor made money.
Mark found his first beachhead customer with Ruby Tuesday. With over 600 family restaurants in 43 states, Ruby Tuesday was an ideal customer to test out the SepSensor solution. During an initial trial at six different sites, SepSensor was able to cut the amount of grease interceptor pump outs in half. Ruby Tuesday was able to realize true cost savings shortly after installing the sensors. It looked like they had a potential success on their hands.
With this cost savings data from Ruby Tuesday in hand, Mark was able to convince an additional twenty restaurant chains to sign up for his service. The team at SepSensor was confident they found true product-market fit. According to Mark, “At the time, so many people told me this is a slam dunk. With over one million restaurants in the US alone, we were looking at a half billion dollar market opportunity. In the early days of SepSensor, we raised all of our funding from angel investors. Now, with some market traction, we were able to bring in investment from venture capitalists.”
The market traction from a few forward-looking chains proved to be illusory for a number of reasons. Although Mark was able to sign up more than twenty restaurant chains, he ran into a number of unexpected operational challenges. First, the product was more difficult to build and install than originally projected. Mark said, “I knew I could use a manufacturing rule of thumb where you achieve price reductions on a product by building a greater quantity of the product. We found it extremely difficult to reduce the cost of each sensor unit down to less than $100. Without a lower price for our bill of materials, there was a serious negative impact on the projected capital requirements of our business.”
Furthermore, SepSensor ran into issues when installing their sensors. “It’s a lot harder than you might think to put a wireless sensor in an enclosed tank that needs to make a cell phone call every night from below a manhole cover in a back parking lot,” said Mark. “We found the solution by cutting a thin slot in the manhole side collar and out into the restaurant’s parking lot and then laying an antenna in the slot. However, when contractors grind the lot to resurface the parking areas, it would damage the antenna.”
These product costs and installation issues were the least of Mark’s worries. What really kept him up at night was how difficult it was to roll out their service after they convinced a restaurant chain to buy into the SepSensor program. Although chains might have a corporate office that manages the overall business operations, the restaurants each have varying local regulations and regulators have little concern that the operators save money. The facility manager might oversee multiple restaurants within a geographic territory. But, there are limits on their reach due to the need to convince local regulators to approve the use of the sensor.
When a national restaurant chain signed up with SepSensor, Mark and his team had to reach out to dozens of local regulators across the US. This was a time consuming and frustrating process, and it resulted in an extremely slow rollout process for SepSensor’s product.
These operational problems plagued the business, but in the end, it wasn’t the cost of building the sensor, or the difficulty of installation, or the slow rollout process that resulted in the downfall of SepSensor. It was something less obvious to everyone involved at the company, including management, employees and the board of directors. This last problem came to light shortly after the Great Recession. As restaurant revenues dried up, restaurants focused on their front door, and cut many of the back office costs. Although SepSensor represented a cost savings for the restaurants, reducing the cost involved in properly maintaining a grease interceptor wasn’t a top priority for the facility manager, or for anyone involved with the restaurant.
Yes, the cost savings were nice, but they weren’t enough to move the needle. Saving a thousand dollars or so per year wasn’t enough value to offset the time needed to oversee the service that SepSensor provided. It was easier to overpay for a pump out truck to show up every three months and get the job done. ‘Just set it and forget it’ … that’s how most of us prefer to operate, particularly in fast paced businesses with a ton of other pressing daily problems like managing shifts and food inventory.
It turned out SepSensor had some product-market fit with a few early adopter customers, but the reality was they did not have a compelling enough value proposition to land and onboard customers in a sustainable way. The fact is, when they initially rolled out their solution, they did not truly understand their customers’ business needs.
SepSensor shut down during the summer of 2012. Mark was able to find a home for the company’s intellectual property. CiDRA Holdings, a product development company based in Wallingford, Connecticut, wanted to apply the core sensing technology into other industries. They purchased the SepSensor IP and hired Mark to oversee the building of sensors to increase the efficiency of copper mineral processing and paper production in large industrial plants.
Although the company was not commercially successful, Jim, Mark, Erik and the rest of the team at SepSensor undertook a big challenge and learned much along the way. What they learned about their market would have been more useful to know before they sunk so much time, financial capital and effort into a value proposition that just didn’t have enough heft. Hopefully their story is a powerful reminder to all entrepreneurs of the importance of really understanding the customer and the customer’s critical needs.
Interested in reading more stories about key startup themes and lessons learned? View the entire collection here in The Seraf Compass or purchase the book on Amazon in paperback or Kindle format.