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Jason and Will are joined by Luke Schoenfelder, CEO of Latch, to discuss the role of Latch, and how they found innovations in something as seemingly unimportant as—locks. Luke breaks down the origin of Latch and their innovative eye for how to revolutionize a common household item. Luke and his team started with taking a look at the next steps for infrastructure, and they ended with Latch. Tune in for the full story!
Luke’s upbringing in Pennsylvania set him up for a non-linear path to Latch. He has worked in a range of companies and areas of expertise, from modular housing in Haiti, to time spent at Apple. He discusses the origins of building out his team at Latch and their inspiration to focus on the hospitality industry. By going straight to the customer Latch brought in a business model innovation that set them apart, one of many that aligns with Latch’s vision.
Welcome to the Perfectly Boring Podcast, a show where we talk to the people transforming the world's most boring industries. On each podcast, we will be sitting down with executives, investors, and entrepreneurs to talk about the boring industries they operate in and the exciting businesses they’ve built.
Strap in for the most marvelously mundane ride of your life.
Will: Welcome to the Perfectly Boring podcast, a show where we talk to the people transforming the world’s most boring industries.
Jason: I’m Jason Black from RRE ventures.
Will: And I’m Will Coffield from Riot Ventures.
Jason: Today we’re excited to talk to Luke Schoenfelder, the CEO of Latch, one of my portfolio companies. For those who aren’t familiar with Latch’s business, they provide smart access control systems to building owners. They do this through a suite of locks, readers, and intercoms that seamlessly integrate into a user-centric app, as well as a building owner console.
I have been involved with the company since my investment in 2017, so I already know the business inside and out but, Will, this is the first time taking a peek behind the curtains, talking to Luke. What were some of the interesting takeaways from our interview?
Will: I was blown away by Luke and how big his vision was for a company that I thought started and stopped with smart locks. In the discussion, we get into a lot of the complexity and sophistication, both from a product standpoint as well as from a strategic standpoint, in the way that Luke thinks about access as a means towards bringing new features into the physical spaces that we live and work in every day. I frankly, had a total misconception about how big an opportunity it is that Latch has at their disposal, and after this discussion with Luke, I think this is a company that could take over the world.
Jason: In today’s episode, Luke sheds light on his nonlinear career path he took in founding the company, we hear about the fragmented lock landscape, their enterprise-first approach, their new distribution model, and the exciting opportunities that lay before you once you’ve digitized one of the most boring objects in people’s lives: the lock.
Will: And without further ado, let’s jump into the episode.
Jason: Luke, thank you for taking some time to chat with us today on the Perfectly Boring podcast. Really appreciate your time. And maybe as a start for some of our listeners, we could dive in on your background and the genesis of the idea for Latch.
Luke: Absolutely. Thanks so much for having me, Will and Jason. I grew up on a farm in Pennsylvania, which naturally set me up to run a technology company in New York City. But had I had a pretty nonlinear path, but I ended up starting my career at Apple. I started in retail store and then got to move over to the public policy team and worked on a lot of interesting stuff when I was there.
And then I’ve always been fascinated by infrastructure and hardware-software experiences, and so I started my first company in Haiti working with modular housing after the earthquake, and then I also started another business down there in smart metering, which we were working to provide tools for rural electrification. And that was where I started to meet a lot of the hardware folks that ended up coming over to Latch or being involved in Latch. That was the first company—it was called Grid Potential—that I’d raised money for. It was another one of these, kind of, boring problems, if you will, which was, how do you just distribute energy more efficiently in a country where not everyone has electricity? It was a really cool vision.
We ended up raising money; our Series A fell apart in a really unusual and crazy way, but ultimately, we were not able to close our Series A. And all of a sudden, I’m finishing up grad school; I have no money, and I’m like, “Am I going to be an entrepreneur or not?” My then boss from Apple—or my former boss from Apple let me crash in her house for a while. And then I was at an entrepreneur retreat, and this amazing entrepreneur was telling me about her vision to help millennials better plan for retirement and was telling me about how a lot of millennials have 401(k)s and they don’t understand what they are, and then when they hit hard times, they cash them out. And it’s terrible for their retirement savings.
And a light bulb went off and I’m like, “I have a 401(k) from my time at Apple.” And so I cashed it out and I had 4500 bucks. And I convinced Brian, who was the hardware lead at the smart metering company to join as our CTO; met Dhruva, who’s now our Chief Product officer; Matt Thomas, who was an early industrial designer at Apple. We then set out to build everything we build today.
Jason: And about locks? What drew the team, or you to locks as the problem that you wanted to devote your career to?
Luke: Really, it wasn’t locks and in some ways, it isn’t now, as crazy as it sounds. It was really about what is the next level of infrastructure that the world needs, and where is that infrastructure going to need to be deployed, and what does it need to do? And what we saw—and this is sitting, again, fall of 2013, so A lot of these trends seem obvious now—but we said, “The world is going to have on-demand everything.” Airbnb, Uber, Amazon Prime, all of these things were happening, but honestly still very early. But we realized that all of this on-demand investment and all of this on-demand consumer behavior was going to come crashing into the front door of a building or the front door of a residence and not having a way to complete the service, complete the transaction.
And so for us, it was, how do we enable that infrastructure in the physical world for all of these services to be provided seamlessly? Once we realized that was the goal, we started looking at where is this problem most acute. Where are we going to have the densest set of users? Where can we provide this value first? And much like electricity, we looked at urban, dense environments and said, “Well, this is where you can build this infrastructure out and where it’s going to have the highest utility today.” And that’s why we started with, you know, urban, dense environments with lots of people to deploy our infrastructure.
Jason: And what was—at the time that you were developing that thesis, what was the current state of play for that infrastructure? And what was, maybe, the history of access infrastructure, up until 2013?
Luke: It was really a story of a bunch of silos. So, throughout the world, there are a lot of different door formats. And so that led to a lot of small regional players building a bespoke solution for the Nordics, a bespoke solution for Italy, and because of that, there wasn’t any universal standard. Again, to keep going back to electricity, there were still just AC and DC; there was, like, 17 other versions of that format war, if you will. What had happened was that private equity had gotten pretty involved in this space, really starting I guess in the late ’90s, early 2000s in rolling up a lot of these companies, but what they did not do was consolidate around common formats.
They had a wide variety of formats. They also segmented further by end-to-market, and so you had these really small pockets of, “We do North American hospitality-focused locks; that’s our thing.” And that’s a business unit at a company. And so, a lot of these little pockets. And because of that, no one was even looking at the building holistically and saying, “Okay. I’m a building in New York City. I just want one system to manage all of my doors.”
No one had really done that. The closest proxy had been what you’d seen in the hospitality space. So, with electronic locks for hotels, they had said, “Okay, we can build a system that works with RFID-based cards and do an entire building.” But the problem with that was, it was really expensive, there wasn’t a good software experience, it was really legacy, and hadn’t really changed. So that’s, like, the hospitality electronic lock space was how people had thought electronic locks may go into multifamily.
That was one trend, and then the other trend was you were starting to see this IoT everything happened in the hardware 2.0 world with Nest, I think, really leading the charge. And I think Nest is a fantastic company, fantastic product, but what they did, which is not their fault, but they sort of legitimized a business model that I don’t think was real. They said you can be a single hardware product, no recurring revenue business, and get bought for billions of dollars by Google. And the reality was, you can do that if you’re Tony Fadell and Matt Rogers.
You probably can’t do that if you’re anybody else. You had this whole swath of consumer companies who were saying, “I’m going to put a Bluetooth module,” or whatever—in all sorts of products. And so there were starting to be a consumer set of folks that were looking at this space. So, August Smart Lock came out of stealth right around the same time we were doing our stuff; Kivo came out of stealth right around the same time we were looking at our thing, but they were focused on how do I get this on to a Best Buy, Home Depot, Apple store shelf, then have a consumer come, buy this, self-install it for their single-family home. And we thought that was totally interesting there was no bigger picture; there was no wide-scale infrastructure value you’re creating with density and network effects.
And there was also no recurring revenue business model that would support continued innovation and infrastructure expansion. As we were fundraising, everyone said, “Well, with your background, why don’t you all just build Nest for locks?” And just win that space? And we said, “Actually, what we’re more interested in building is American Express for access.” I’m going to unpack that analogy a little bit.
So, if all of us were taking a business trip—we’re New Yorkers—we’re taking a business trip to San Francisco in 1950, we had to carry enough cash for the entirety of our trip because people would not take our Chase Manhattan Bank checks on the West Coast. Which is nuts to think about, but it just it wasn’t possible. So, American Express came out with traveler’s checks, which effectively guarantee your ability for your money to be good outside of your region, and then they came out with the credit card and built this whole merchant network where people would be able to go say, “I am this trusted person. I can transact here.” Which was this foundational thing for—you know and it paved the way for online transactions and everything else that we’ve seen in the payment space.
There was no equivalent for that in the access space or in the moving around in the physical world space; it was limited to, “Okay, we’ll just carry cash,” or, “Just get a metal key and have somebody hand that to you.” And we saw the opportunity to change that and be the first digital-first way of moving about in spaces and then building everything else on top of that value.
Jason: And so it sounds like from the beginning, one of the key differentiators in your thinking and approach to the market—and even in the way that you thought about product—was more B2B-oriented than B2C-oriented. And—
Luke: It was always scale-oriented. So, if you look at how do you get the greatest scale, it was definitely going to be B2B.
Jason: And maybe you could talk about, I mean, the incumbents that were already in this space and what they—
Luke: Yeah.
Jason: —were doing at the time. Obviously, they’re keeping an eye on these new startups going into the B2C space; they have a massive distribution network, right—
Luke: yep.
Jason: —[crosstalk 00:11:02] providing the locks to the world. How were you thinking about them as competitors? And not only just what they were doing at the time, but also how you’d find a wedge in that big market?
Luke: Yeah, so there was three really large players: Assa Abloy, publicly-traded; Allegion, publicly-traded; Dormakaba, publicly-traded. All greater than $10 billion in market cap. Their business had been buying all of these smaller regional players and integrating them in some ways, but often leaving them kind of federated. What we saw was that because of the way that those companies had grown, which was largely through acquisition, the weak spot they had was that they didn’t have an integrated solution that worked for an entire building or for an entire customer. And that was what we saw was the pain point.
And part of that was—this seems like this was strategic; it honestly wasn’t—we just didn’t know that all of these products were sold through large distribution channels, exclusively. Basically, big lock company X sells exclusively to a distributor; they don’t actually know any of the end customers, any of the real estate owners. They just know the distributor. So, for us, we didn’t really know that when we started so we just went to the end customer and said, “Hey, we bet you want one system to manage everything in your building.” They’re like, “I do want that.”
But we didn’t realize that that, in and of itself, was a business model innovation. Going direct to the user of the product was just our natural inclination. And I think because of that, all of our conversa—it was very funny; early on—it played out like this so many times—we would walk into a meeting, we’d tell people what we wanted to do, they would trash talk our solution, “Oh, this will never work.” You know, the big real estate owners. And then I’m getting walked out of the conference room, and somebody pulled me aside and be like, “Hey, could we put some money into your company? I know all that stuff we said, but it’s kind of interesting. Maybe we’ll put some money in.”
The reality was that we had found this really big problem and they wanted to be a part of the solution, even though they didn’t fully understand what that meant yet because they had never bought these products before. And so because of that, we built up this strategic investor network, but also the strategic customer network that enabled us to rapidly understand new needs, new problems, and deliver the products that would work for them. We could talk a little bit about the product development and how that came to be, but that was the initial insight about how our distribution was going to be different, in that we had that end relationship with the final customer.
Jason: It’s a super interesting thing to dive into because the mantra goes, “Hardware is hard.”
Luke: Yes. [laugh].
Jason: And particularly if you have to go through distributors, where you’re a degree of separation between your product and all the feedback that your customer could potentially feed through. So, you had kind of short-circuited that. Walk us through actually developing that MVP. What does an MVP look like for this access system?
Luke: Yeah, unfortunately, we couldn’t really do an MVP. We had to just build the final thing, and I think that was one of those interesting challenges to our business. I mean, ultimately—Jason, you all participated in our Series A—we ended up raising about $26 million before we had any meaningful revenue. And that is because building three discrete hardware products and entire system around it is really expensive. That was something that everyone said, “Hardware is hard. It’s going to take more money than you think.” And we said, “Cool. We’re going to build three completely unique products and the entire software ecosystem, and then hope it works.”
And that was the bet that a lot of our investors took, but they did it knowing that we had so many of our customers saying, “I want this. This is a pain point for me.” And many of those customers invested their dollars behind it, as well. So, I think that’s what enabled us to get the resources to attack this problem. With those resources, we said, “We’re going to deliver the right solution, not just the MVP if you will,” because, with the compliance requirements that are in this market, you need to meet all—and again, we didn’t know any of this stuff when we started; we figured it out as we went.
It was like, “Oh, UL 10C. That’s a compliance thing we’ll have to do.” “What does that mean?” “Oh, it means that our locks have to be in a 2000 degree furnace for 90 minutes and not catch on fire.” Like, “What? That’s hard.”
So, a funny story about that; my uncle has worked on products for NASA for, like, 30 years, and so we get the requirements back, and I’m like, “Hey, I need a plastic that can last to 2000 degrees Fahrenheit.” And he’s just like, “Uh, there are no plastics that will last to 2000 degrees Fahrenheit.” And so at that point, I’m like, “All right. We’re going to need a different solution.” And so we ended up coming up with this really unique solution where all of our plastic parts turned to ash, and just ash away.
They’re not flammable, they ash away, and then it’s all the metal superstructure that stays in place. But it was like, all of these little things we have to solve along the way to deliver this end solution that is fully compliant, meets the needs of every stakeholder, and it just got more and more complex as we went. But ultimately, we had a team that was just so committed to figuring it out that we figured out.
Jason: Are some of the considerations that you had to take into account in going completely full stack from, kind of an early product standpoint, maybe other than some of the compliance stuff. I mean, one of the things—we spent a lot of time investing in companies at that intersection of hardware and software, and supply chain ends up being a major consideration for them.
Luke: Big time.
Will: And, you know, you’re now shipping product at a pretty remarkable scale. What were some of those considerations, from just a manufacturability standpoint, that you ran into in the early days?
Luke: We basically realized that we were going to make a highly complex consumer electronics product and a highly complex mechanical locking system. And so we knew that no vendor was likely to have done both, and so we knew from the beginning that we were going to have to find a best-in-class vendor in both of those spaces. So, on the contract manufacturer side, we just did a lot of supply chain diligence and we found one of the contract manufacturers that builds many of the devices for the Assa Abloys, the Dormakabas, the Allegions of the world operating at that scale, partnered with them for the lock components. And then we said, okay, we want to build best-in-class electronics products. How can we go and just u—a lot of the team came from Apple; how can we use our connections here to go and find the right vendors to work with?
And so, one of the ones that was really important was cosmetic plastics. So, we ended up working with the same vendor that makes the Nest thermostat because that screen is optical quality plastic, highly, highly user-centric as the user is literally touching it. We went and found those best-in-class suppliers, and then married the two, the best of both industries. It was not easy because neither of them, “But we make locks.” Like, “Your quality standards are crazy because you’re looking at computer standards, sort of, smartphone standards.”
And then vice versa: “Well, I wasn’t expecting you to put this next to all of this metal. How are you going to do all the RF requirements, et cetera?” And so it was really just working through with those vendors and having the right vendor base. And ultimately, on the electronic side, we started working with Foxconn, which was a—it was a big step for us because they’re the real deal, they’re the big time. And ultimately, we’ve now worked with other Taiwanese-based manufacturers as well, but that was a big stepping stone for us.
When we were trying to land the Foxconn deal, it’s really important to just show that you’re committed to this partnership. And I think I flew to Taiwan three times in six weeks—or something like that—from New York. You know, fourteen-and-a-half hours each way. So, if you think about total flight time for an hour or two, or maybe more than that, but a couple on-the-ground meetings, it was just our team really expressing a commitment to their team, that we were there and we were going to we’re going to really follow through with everything. But it was important to do that to get the right vendors on board.
Jason: So, how did you know, given the number of products you needed to build—three hardware products, effectively, two software products, one for the tenant and one for the building owner—
Luke: Three because we have service providers as well.
Jason: From the outset, how did you know when to go live? When to say, “You know what? It’s ready. We’re going?”
Luke: So, when we looked the first product in the ecosystem, we had 57 pages of user stories for that first product in the ecosystem.
We knew that we were going to have to draw a line somewhere on these 57 pages and say, “This is the shippable version, and this is something that’s going to go in a later release.” I think the things that we were never going to compromise on were: security, reliability, privacy. Those things were core. Bluetooth unlock time has been something that we always wanted to be as fast as possible. It was a lot of small things that you needed to do to decrease that time, and that was an area where we said, “Look, unlocking with your phone, it’d be awesome if it was instant; it’s not going to be instant. What’s the thing that we can ship with?”
And I think we ended up shipping… I think we ended up shipping with about five seconds unlock, which sounds like a long time, and it is a long time, but the difference in our user flow and why we felt like it was the right decision to make was that people were pressing unlock before they got to their door, so the perceived unlock time was a lot less because you hit unlock, you walk up to your door, it’s unlocked. It—you just—the user behavior is [unintelligible 00:20:46]. Jason, I know you had an early device and lived through five-second unlock. If you shut the door and lock yourself out, and you’re sitting there right in front of the door and have to wait, five seconds is a long time. That was one of those things where we said, “Well, this is an area where we’re going to have to compromise in order to get this out, but it’s an area where we want to continue to invest.”
Jason: And maybe now that we’re kind of getting to where the rubber meets the road, or the locks meet the doors, maybe you could walk us through what the lifetime of a lock looks like, and how building owners think about their pre-existing more traditional lock suites, any considerations they have there and kind of the logistical overheads and costs.
Luke: A few things. One, I would say we look at a statistical ten-year replacement cycle as being pretty reasonable. If we’re off by a year or two—there’s 47 million rental units in the United States—there’s a big market there, right? And so we think about that replacement cycle, that’s when the infrastructure turns over. But then within that infrastructure, you have different requirements for just ongoing operations.
One of the biggest ongoing requirements is rekeying. So, in a rental property, when somebody every 18 months moves out, they have to go and they—or they should—go and rekey the lock so that the previous tenants’ keys no longer work. That is a recurring cost, recurring expense, that every landlord has that we were able to get rid of by making it all digital. So, that was one. The other one that I didn’t fully understand or appreciate until we got further into that, sort of, customer discovery was just how big a problem lockouts were.
So, we’ve all been locked out; it’s annoying, of course, you don’t want to get locked out; it’s annoying for the tenant, but I didn’t realize how annoying it was for the manager. And so we were working with a big owner in New York City, and they said that their maintenance person was going out on a Friday and Saturday night between, like, four and seven times every Friday and Saturday night, overnight, to let somebody back in. And that was a pain point that I just never thought about. So, imagine a person who every Friday and Saturday has to wake up four to seven times in the middle of the night to go let somebody in, that is a massive labor and morale cost to your team, but that was something I never even contemplated. And so there were all of these hidden costs.
Another one that we didn’t think about was, “Okay, you have a maintenance request. Fantastic.” You’re in Kansas. You need to get the plumber into a unit that’s 45 minutes from your central office. You were driving—someone was driving from the central office out to just go click, “Here you go. Go on in.” And that type of, like, inefficiency was rampant in the traditional infrastructure. And so we were always looking for ways to eliminate those inefficiencies.
Jason: You just hit on a bunch of really awesome, tangible examples of how some of the different stakeholders around this access ecosystem benefit—
Luke: Yeah.
Jason: —from Latch.
Luke: Yeah.
Jason: But maybe it would be good to just talk about how you guys think about that ecosystem philosophically, and then—
Luke: Totally.
Jason: —how each of those stakeholders is currently benefiting from using Latch, and how that’s influencing your product roadmap going forward.
Luke: Totally. And I mean, a lot of people look at Latch, or have historically and said, “Oh, it’s this really cool enterprise lock company.” We’ve never had an interest in being a lock company, or frankly even, really just an access company. It was about all of the things that our infrastructure would enable. I remember a conversation with one of our first engineers, and they were talking about Bluetooth unlock time or something.
And I’m like, “I don’t really care if people even unlock with their phone. I care about getting groceries delivered to the fridge.” And that was one of these moments where people were like, “Oh. The aperture is much wider here and I understand why we’re not spending cycles and cycles and cycles on Bluetooth unlock time.” Although that’s important, getting groceries delivered to the fridge, it means that we have to build out all of our partner APIs and build out all of that infrastructure in parallel.
And so we’ve always seen making the building a better place to live, to work, to visit as the core thesis. And so to the extent access does that—and it turns out access is a big component of a lot of those experiences—it’s important for us to focus on it, but it meant saying no to a lot of things along the way to see that broadest ecosystem of adding value for all the stakeholders at a building: the building owner, the building resident, and the service provider going there, and keeping their needs in harmony and in balance as we move forward, that’s been what our strength and our success has resulted from. Because now I’ll give an example of UPS or work with UPS. Now, we designed our intercom and our delivery experience based on in fieldwork with UPS. I actually was wearing a UPS uniform for walking along doing deliveries, and that’s how we came up with this insight that touchscreens on the front of a building are actually not, in many cases, the best answer because delivery people wear gloves all four seasons.
Because they’re carrying packages or carrying crazy stuff, they needed a way to operate a digital interface physically. And so if you look at our intercom, it’s four big metal buttons. And that’s how they get around; that’s how they call people, and that’s not something that if you’re just sitting in a conference room, you’re going to get. But that means because we accommodate people to wear gloves, it means that more deliveries get completed the first time, which means that the resident is happier living in that building, which means that they’re going to stay longer in the building, which means that there’ll be higher ROI on that tenant for the landlord; because we have metal buttons on the front of the building, right? And it’s like, those little details that when you’re building this ecosystem for everybody, you have to consider. Metal buttons, they’re important.
Jason: They definitely are. Maybe you could walk us through the tenant experience and the engagement that you see with Latch, and what opportunities that opens up for you as well.
Luke: Totally. So, the historic experience has been, you sign a lease, you get an email from your property manager from Latch, “Saying here, download the app, get your keys, and you’re ready to move into your space.” Now, we’ve said that’s the, sort of, onboarding moment. How do we grow in both directions? And so now, you’re starting to get that email if you just want to go look at an apartment.
So, you haven’t even signed a lease yet. People are using Latch to view apartments without anyone needing to be there. So, you go on a website, you’re like, “I want to go look at this apartment.” You’re actually getting an invitation from Latch to go and see that apartment; download the Latch app and go in and see an apartment without anyone having to be there. Then let’s say you sign the lease; they just convert your existing Latch account and your existing access, which was for two hours on a Saturday, to now the next year, for your lease period.
Their account works for every door in the property. But it then can control a whole bunch of other sensors. So, they walk in, their Nest thermostat control sit directly in the Latch app, their lighting controls sit directly in the Latch app, their ability to get package notifications all are within that Latch ecosystem. And today, the average Latch app user interacts with our app 4.6 times a day.
And if you think about the number of apps that you touch 4.6 times a day, it’s a pretty short list. And for us, we now get to build all of these new experiences that just make the environment easier, more efficient. So, if you think about all the things that happen when you move: renter’s insurance, setting up your internet, all of these sorts of capabilities are things that we can deliver over time. And I always go to that, like—I don’t know if either of your iPhone users; well, I know Jason is, but that moment when you scan the blue cloud, and all your stuff ports over.
What would it be like if you could just blue cloud your apartment and have everything just move over? That would be awesome. And I think really, that’s the North Star on the tenant experience that we want, which is everything moves with you and you can fluidly move throughout space, and everything just kind of automatically happens.
Will: It would be great if you could do an integration with the internet providers.
Luke: Yes. We will have some fun announcements to make there very soon.
Jason: Yeah, I actually—I love that initial tenant experience being one of the key points because there is so much friction in that initial touchpoint with an apartment building and you’re already moving stuff, physical stuff, in and out. Frequently moves happen really quickly and then you’ve got all this other overhead that creates a big challenge and pain point. Maybe shifting a little bit is that, that touches on the ecosystem and in the role Latch plays there, both for first-party and third-party. Now that you’ve digitized the growing number of doors and access points, what are some of the more interesting ecosystem plays that you’re either working on or have inked partnerships with that you could talk through. And where do you think that ecosystem could head in the future?
Luke: Now, in my soon-to-be public company role, I cannot disclose all of the things that I normally would be able to, but I can speak about things we’ve already done and relationships that we can extend over time. We’ve been doing automated deliveries and unintended deliveries with UPS and other national carriers for years, so current flow: UPS delivery driver doesn’t know anything about Latch, they go, they walk up to a building that has Latch, they scan the package barcode and on their DIAD device, a temporary code pops up that they can enter on our touchscreen to get into the building and drop that package off. That’s a really, really unique experience, which delivers—UPS has publicly stated—double-digit efficiency gains on delivering to Latch building over another building. So, if you think about that, at scale, it’s a pretty exciting efficiency for last-mile services across the board. And now with our Latch delivery assistant—this was something we announced late last year—any service provider can walk up to any Latch’s building that has delivery assistant and speak to a real person and verify who they are, who they’re there to make a delivery for, and get into the building to make that delivery without anyone having to be present on site: not the resident, not full-time staff at the building.
And that opens up this entire new world of possibilities. And just speculating a little bit, like, who doesn’t want to come home to a warm dinner? The number of times when I’ve been in the subway trying to time an Uber Eats order or whatever, it’s an amazing experience to just be like, “Nope. Your dinner will be there, irrespective if you’re there for plus or minus four or five minutes.” And those types of experiences are possible when you can get anything into the building for a resident or for a building owner.
Jason: You’re hitting on kind of an interesting evolution in cultural norms here, which is—
Luke: Yeah.
Jason: —how you provide strangers with access to your home. It’s sort of I guess, cliche at this point that, you know, we’re riding around in strangers’ cars all day, and we’re sleeping—
Luke: Yes.
Jason: —in strangers’ houses. But it does feel like a particularly intimate evolution of that to provide strangers access to your home when you are not there. How do you guys think about that?
Luke: Yeah, totally. And this is where the fact that we went enterprise first, that’s given us this huge advantage because we can get into a space that is personal to you, i.e. The hallway or the package room that is not private, but it is secure. So, you get into the building entrance, I drop something off in the building lobby, I take the elevator up and drop it off on your doorstep, I haven’t had to go into your private space, but I’ve given I’ve gotten into a secure space that you have access to.
That was a big advantage that we had because we don’t need you to believe in groceries in the fridge, but anyone will believe in package in my building when I’m not there. And I think that was it’s—becau—but if you start at the two poles, everybody is willing to share access with a friend or a family member when they’re not there. Everybody’s willing to do that, and everybody’s willing to get a package delivered into the common area of their building when they’re not there. Is a UPS delivery person, where do they fall on that spectrum? Well, for most people, they probably fall closer to the like, “I’m cool with them coming to the building, but not my space.”
But you’d be shocked. I mean, UPS, the relationship that a lot of people have with their UPS provider, they’re like, “Oh, yeah. Of course.” Like, “They know the back door is always unlocked. I can just put it in there.” And I think it—but by having that flexibility of saying there’s a personal secure area versus a private secure area, it gives us so much more latitude for user comfort with whatever services they want.
“Oh, you’re not comfortable with groceries getting delivered directly to your fridge? No problem. You don’t have to do that.” Don’t order, like, milk and ice cream if it only can get delivered into the lobby. You want to order, like, cereal and bananas and it only gets delivered to the lobby? All good. But it gives the user the ability to self-select with what they’re comfortable with.
Jason: On top of that, now because you have digitized access, we now have this audit trail—
Luke: Correct.
Jason: —of who has accessed these spaces, which, you know, I think was probably the key to enabling us as a society to get into strangers’ cars, is to say there is something—there’s an auditable trail of—
Luke: Yes.
Jason: —whose car I got into—
Luke: There’s accountability.
Jason: —and where I was supposed to go. Yeah, yeah. Exactly.
Luke: Yeah. There’s accountability. And I think having that trust and building everything around trust was really important for us. So, what was the right amount of information that we needed to provide a resident to feel comfortable trusting someone? And what was the right amount of information that we needed to give a building owner to trust a resident to let someone into the building.
And that was one of the things that was a big step that people just accepted very quickly. So ordinarily, building owners don’t love tenants to invite their guests because of like, “Well, I don’t know who has a key to my building.” But we were able to make them comfortable with that because they could see, A, that it was temporary, B, which tenant was responsible for that guest. And that has enabled us to create this new experience which is access sharing that just works without you having to call the front desk, set up the visitor list, get permission. It all just flows.
And the building can set the rules about areas that they’re not comfortable, like the gym; they don’t want people sharing access to the gym. I understand that; there’s liability, you don’t want people abusing the gym, but to a personal space, why shouldn’t a tenant be able to invite whoever they want with the right constraints around it? And that was—like, to your point, that’s a big evolution.
Jason: What’s interesting here, too, is trust is also built on proper privacy and security. And I know you guys have been very deliberate—I mean, background at Apple; a lot of your team background at Apple, which is, kind of, a famously privacy-first company. I know that’s been ingrained in the team for a while. Maybe you could talk a little bit about how you guys have managed that more nuanced space, frankly.
Luke: It’s a new frontier. No one has really thought about what should the privacy policy for physical spaces be that you’re renting. And so it’s been an interesting opportunity to work with landlords, work with regulators, to help craft those policies. And then also making sure that we’re setting standards for what is acceptable for security and privacy going forward. And we invest a lot in security and privacy because this is so important.
We also made decisions—going back to the system architecture—to really try to build reliability and security in. So, if your building has Latch devices installed, in most cases, the power can be out, the internet can be out, and the internet on your phone can be out and you’re still able to unlock your door with a smartphone in a secure and private way. Which is pretty unique, and there’s not too many infrastructure examples where you can do that. But that was because we’ve tried to consider all of the scenarios, all of the stakeholders that need to use this space. And we’ve done that; that’s a pretty visible and obvious example, but there’s a lot more nuanced, sort of, behind-the-scenes examples of that type of thinking.
Jason: So, maybe we can transition a little bit towards some of the recent initiatives that you’ve announced. I’m particularly excited about Latch Lens, which you guys recently published—
Luke: Yeah, announced last week.
Jason: —news about. And it kind of circles back to that conversation when you were giving us the lay of the land of the lock market without fragmentation, and how do you get distribution in such a fragmented world? So, maybe you could walk us through what the Latch Lens initiative is and what the impact will be.
Luke: Yeah, the Latch Lens is, frankly, like, our oldest idea, just coming back. And it was we wanted to work with the lar—and we approached, the large incumbent lock manufacturers at the very beginning to say, “Hey, we have certain experience, security, privacy requirements that we’re going to need. What if we just make this little thing and you make the rest?” And nobody was interested at that point in time. And so we said, “Okay. I guess we’ll have to build it all ourselves.” Which we did.
But now we’re at this unique full-circle moment where we’ve been able to condense all of that technology in our most advanced technology module, the Latch Lens, and we’re now going to work with third-party manufacturers to actually build products that work with Latch software. So, leveraging their local market expertise, local manufacturing capabilities to then integrate our hardware, firmware, and software and bring that into the LatchOS ecosystem. So, that was what we announced last week was the Latch Lens module. And that module, which will be the basis of Latch products going forward, will also now enable third parties to build products that work with Latch as well. I, kind of, liken it to electric car skateboard, if you will.
So, we’re letting other people use our skateboard, and our autonomous driving capabilities, and our battery tech, and our charging tech, but you want to put a van on top of it, you want to put a delivery vehicle, you want to put a sports car? All good; you know your market better than we do. But that’s kind of the approach that we’ve taken with the Latch Lens program. And we’re very excited to announce the first products that’ll be built with that.
Will: Maybe it would be helpful to talk a little bit about how the company has evolved since 2013, from a size, from a funding standpoint, kind of leading up to your decision to ultimately take the company public via a new avenue into the public markets with a—
Luke: Totally.
Will: —[crosstalk 00:39:28].
Luke: We really have always been heavily skewed towards research development, and product development. So, even today, more than 50% of our employees are in product development roles. At one point that was, you know, close to 100%, or you know, 95%. But I think now we’ve hit a spot where we’ll probably stay close to 50% of our resources going forward in product development. And that’s really our DNA as a company is as a product development focused company.
So, if you look at, historically, the scope of products that we’re creating, the scope of user stories that we’re solving for has necessitated that we grow the scale of our operations; the scale of our sales teams has necessitated that we grow. We’re just under 300 employees now. I think when we did our Series A, we were about 12 people. So, I mean, it’s—with our Series A. Our Series B, we were between—probably, let’s call it, like, 150 or so.
And so it’s been a pretty linear scale-up to where we are now. But I think what we really want to do is stay focused on the things we do best, which are developing killer products, and this new opportunity to be a public company, it cements our independence and gives us the resources to focus on the long-term and making buildings better places to live, work, and visit. And you’ll see us release a lot of interesting products, partner with a lot of interesting folks, that are all in service of those goals for all the stakeholders that touch the space.
Will: It’s pretty incredible how much you’ve been able to accomplish with a relatively small team, and I think it speaks to—
Luke: It’s by design.
Will: —that relentless focus on product development and innovation, and being able to attract customers and distributors and partners to help you achieve enormous scale at this point.
Luke: And employees. I mean, our goal has always been to get the people who are the best at the world of what they do, who want to let the work speak for itself. And if you look at our team, I mean, we have people that have run multi-hundred-person groups at Apple, who have no direct reports or have one or two direct reports. And it’s because it’s people who are the best at the world of what they do and they want to keep building stuff. And so I think it’s really important for us to stay lean, nimble, and have an outsized impact with a smaller group of folks.
I mean, if you look at the story—a lot of it’s been written about now, but if you look at the iPod team who delivered the iPod, I mean, we’re talking about—it was initially one room of people, and I think in scale when it was shipping, there was probably 50 people. They did it in, I think, four months, six months from idea to, like, somebody’s hand. It’s incredible. And I think it just goes to show you that it’s not just the sheer number of people you throw out a problem; it is the type of people and the relentless focus on what matters. And I want to build products like the original iPod, not just grow to the extent that you’re disconnected from the user stories, you’re disconnected from the problems, which often happens in companies as they scale.
Jason: Yeah, and I think the proof is in the pudding there where you have had a relatively linear team growth, but certainly not reflective of your revenue and the [unintelligible 00:42:46] growth.
Luke: Yes.
Jason: Pretty dramatically disconnected there, and [unintelligible 00:42:50] in the team that you’ve got super high leverage folks.
Will: While Jason has just mentioned revenue, maybe it would be really helpful and interesting to spend a little bit of time talking about the unit economics here. I think we’ve spent a lot of time talking about the use cases, and the different stakeholders, and everything that you’re enabling, but—
Luke: How do we make money?
Jason: —we haven’t spent a lot of time [laugh] [crosstalk 00:43:11].
Luke: Yeah, yeah. [laugh]. One hundred percent of our devices have recurring software component that’s paid by the building owner. On average, the sort of menu—so LatchOS, you pay for in modules. So, depending on what software modules you need, the average is between $7 and $12 per apartment per month.
That a building owner is signing up for. The average building owner is signing a greater than six-year contract, and 97% of those customers are actually paying for the total software contract value up front. So, we have this incredible high-margin software that people are pre-paying for, which gives us really great ability to reinvest in R&D and continue to be a feature development. The hardware business, we build new devices to serve new customers and to accelerate our growth into new spaces, but really, we look at that as a breakeven or even slightly negative customer acquisition cost in order to then deliver the software experience that we’re really focused on. You know, now we can talk about Latch Lens; I mean, people are like, “So, you’re not going to make a whole bunch more hardware products?”
And it’s like, “Well, we will, but we’re only going to build products that no one else is able to build.” And now with Latch Lens, this opens up this whole other aperture of partners [unintelligible 00:44:28] working with Nest, working with [unintelligible 00:44:31], working with Honeywell. Like, could Latch build a thermostat? Absolutely we can build a thermostat, but why would we? There’s great thermostats, there’s great companies that are already in that space.
So, I think going forward, you’ll see us focus on the software, focus on the experience of the space in totality, and use our hardware toolkit to only solve problems that no one else is able to solve. As you both know as investors, the cost to solve problems, you want to start with software: can I solve this problem with software? Can I solve the problem with firmware—meaning, like, some code that’s running on a hardware device? Or do I have to build hardware? And that is the last thing you want to do.
You want to exhaust all the other options before you say, “Let’s just build a device.” And it’s interesting because now, a lot of people reach out to me for advice about building hardware companies, and I’m sort of like—most of the time my advice is, “Is there any possible way you cannot do this? Because this is going to be very expensive, very difficult.” And it’s cool. I love product companies who are able to build devices, but you really—the world doesn’t need any more just devices that don’t have high utility. It’s really better to see if there’s a software or a firmware solution, to use someone else’s hardware.
Jason: Luke, what you’ve accomplished over the last almost ten years at this point is pretty badass, and on the precipice of becoming a publicly-traded company, how do you think about what’s left to do with this business and where you go over the next ten years? I mean, I would imagine, based on our discussion, that you see this as sort of an interim point in a much longer journey, how are you thinking about the future?
Luke: It’s funny, I built the company to be at the moment I’m at now, it just took us a lot longer than I thought it would, frankly. I mean, if you look at when I cashed out my 401(k), I wrote a provisional patent that was filed and converted to—you know, it’s now been granted and everything. But if you look at just the use cases that were described there, I still haven’t even gotten close to doing all the things I wanted to do seven years ago. And so looking forward, really, this is the most exciting time we’ve ever been in. And a lot of people look at us and say—think we’re building products for apartment buildings, but we’re really turning the apartment building into a product.
And what do I mean by that? We, I think, have the opportunity to become the software interface for buildings, for spaces, for all the stakeholders that need to interact with them, and that is just super, super exciting. I mean, what does an interface for space look like? I don’t know; that hasn’t existed before. And so we’ve invested a lot in new technologies and things we’re excited to share in the future, to really be that interface.
And looking back, there’s the old Steve Jobs quote about, “You can only connect the dots looking backwards.” I mean, my first real company was a modular housing company because I believe that the spaces that you live in change the way that you live, and I was really bought into that thesis, and said, “Okay, cool. Let’s build houses and that’ll make people’s lives better.” And I think now, what we’re going to get to do is build software and sensors that make spaces better, and scale that to the entire world. And there’s a lot of thing—there’s a few people that live, work, and visit in spaces, and a few things that they might want to do, and so we’re excited about, you know, what the future looks like. Spoiler alert: I think everyone lives works or visits in a space to some degree, so it’s a big market. We’re pumped.
Will: It’s a massive market. And I think upon further exploration here, it’s pretty obvious that what Latch is doing is not boring at all.
Luke: Oh, man. That means a lot coming from you guys. Thank you so much.
Jason: We’re the arbiters of boring. Exactly.
Luke: Awesome. Well again, guys, thank you so much for having me, Will and Jason. Great to be here today.
Will: Thank you for listening to Perfectly Boring. You can keep up the latest on the podcast at perfectlyboring.com, and follow us on Apple, Spotify, or wherever you listen to podcasts. We’ll see you next time.