#113 HILOS: Is This The Perfect Business?

Josh: The Pitch, day 3, pitch 2

If I was to imagine the perfect business… what would that business look like?

I’d take a huge market with tons of inefficiencies and I’d completely turn it on its head. I’d build a platform by which other businesses could grow their businesses. And they’d grow so dependent on me, well my business, that they couldn’t live without it. Kind of like Amazon.

But what if it’s better than Amazon?! And I wouldn’t hold or fulfill any inventory myself. I would just build the software that lives in the middle. 

Oh man, and if it worked, it could have a huge impact. It’d better for both the customer AND the planet.

Imagine the possibilities!

 Today's founder… actually has this perfect business. 

… HOW could the investors say no? 

I’m Josh Muccio, welcome to The Pitch. Where real entrepreneurs pitch to real investors for real money. 

Neal Sales-Griffin: Hey y’all, I’m Neal Sales-Griffin, Managing Director at Techstars Chicago and I’m happy to welcome y’all to my city

Phil Nadel: I’m Phil Nadel, I’m the Managing Director of Forefront Venture Partners

Jillian Manus: Hey, I’m Jillian Manus, Managing Partner of Structure Capital

Mark Phillips: Hi, I’m Mark Phillips, Managing Director of 11 Tribes Ventures

Victor Gutwein: Hello, I’m Victor Gutwein, I’m the Founder and Managing Partner of M25

The pitch for Hilos is coming up after this

[break]

The information provided on this show is not intended to be investment advice and should not be relied upon as such. The investors on today’s episode are providing their opinions based on their own assessment of the business presented. Those opinions should not be considered professional investment advice.

Elias: But, great to meet you all. Great to meet you all. I don't know if we can shake hands.

[yeah sure]

Elias: I'm Elias.

Jillian: Elias. Jillian.

Mark: I'm Mark. Elias. Great to meet you.

Phil: Elias - what's your company?

Elias: So I'm Elias Stahl. I'm the cofounder and CEO of HILOS and we're building the technology to power the next global supply chain. And we're starting with the most wasteful and inefficient industry on the planet - the fashion industry.

Jillian: Oh it is.

Elias: Clothing, footwear. We make 24 billion shoes every year, one out of five goes straight to the landfill. And why is that? We massively over produce. Every brand has the hard choice between being out of stock and missing a sale or overproducing. So HILOS is a design development and infinite restock platform, allowing brands to make only what they need and never miss a sale. So I'm wearing a pair of Emmett slip-on mules, that is sold by a brand called Helm Boots. And that is a line powered by our technology. Always in stock, made only after a customer orders, with 72-hour turnaround. without waste. So what HILOS does, at our core we have developed and engineered a completely new method of make with low component parts and low labor and no tooling. So they can launch whatever kind of styles they like rapidly. Not 18 months development - we're talking as little as 90 days. So we went through Techstars’s accelerator, the AI and manufacturing accelerator early last year. We actually are right now in a $4 million raise. We've already closed the first two and so right now we're subscribing the last 2 million of that round. Can I take you on a tour?

Jillian: Please.

Neal: Yeah. Let's check it out.

Jillian: I'm intrigued. 

Elias: So brands come to us asking for us to make a slip on mule or 

[wow]

Elias: - this beautiful open-toe clog.

Neal: That looks good. 

Elias: Heeled clog. That shoe is actually three component parts. A 3D printed piece that's printed on demand and then a leather upper that's cut without any tooling and then a new assembly process that allows it to be assembled on demand with low labor in market and able to be disassembled and every part to be recycled. That's an example of one of our patterns right there.

Jillian: So 3D printing. 

Mark: Simple leather cut.

Jillian: - sustainable. 

Elias: Essentially we're simplifying the manufacturing process so it can be made locally by our production partners with infinite resupply, restock potential. And then we have this software around it that allows brands to rapidly adopt and design within those new methods of make. 

Phil: So they outsource the manufacturing to you -

Elias: Not just the manufacturing - everything. Brands do what they do best. They design and they market. And we take care of the rest.

Elias: HILOS is the software platform that allows for brands to adopt the technology of this new method of make and design within it. And then we've assembled partners, that are printing partners, and assembly partners, that actually allow -

Phil: Okay, so you're not doing the 3D printing either?

Elias: No.

Phil: Right.

Jillian: It's the software.

Elias: Yeah. 3D printing is a very capital intensive -

Phil: Right.

Mark: Yes.

Elias: - endeavor. So we have incredible partners that the largest most industrious scale 3D printing partner in the world that we have an exclusive relationship with.

Phil: So if you're working with partners and each partner sort of does a different part of the process, you know, for each shoe, how do you achieve that 72 hour turnaround? It seems very fast.

Elias: Absolutely. It's shockingly fast.

Phil: Yeah. 

Elias: It's because empires and corporations are all built on one thing, one real thing. Supply chain. Logistics. It hasn't been as - whether it's Rockefeller or whether it's Amazon, logistical strength is the backbone of any business worth its salt. And building that kind of resilient yet rapid supply chain is what we're all about. So the way that our supply chain works is we essentially have printing partners that maintain very shallow levels of inventories at assembly partners that are each around a certain product type. They're able to then turn around things in 72 hours. 

Phil: And so then do you - do the partners dropship -

Elias: Exactly. They dropship directly to the store, or to the customer's house if it's an ecommerce purchase.

Mark: How many customers are you working with? We've seen shoes from Helm.

Elias: Yeah. So we're a three-year-old startup based out Portland. We started this by launching our own concept lines to show what this technology meant for brands and their customers. So the first brand we launched was with Helm Boots. That launched in October of last year. Within six months of that launching, we signed another four brands. and we went to South by Southwest to showcase this new model of collaboration of industry and won World's Most Innovative Technology and Best in Show.

Mark: Congratulations.

Elias: Thank you.

Phil: That's great.

Victor: So we need to walk through the economics of this whole thing. So what is the - from sale price of the shoe to the consumer, what goes to you, what's the cost of the goods, what's the cost of the manufacturing, the shipping? Just walk through all of the different pieces of that. 

Elias: So as a platform, we take a passive unit margin off of every product sold. For the brand, if you're a Nike or an H&M, you're used to a gross profit of 45 to 50% after all cost of goods sold are factored in. So if you're used to spending, you know, charging $200 for a pair of clogs, then your gross profit you're used to getting is $100. We price at the same level. 

Victor: But so what is that percentage?

Phil: Yeah, so how much do you make? 

Elias: 15% of the unit cost for the brand. So if it's $100 let’s say, it'd be $15 of every thing sold that is 100% margin because we didn't actually pay to fulfill that in any way. 

Victor: And it's a $200 shoe?

Elias: On a $200 shoe.

Victor: What's the cheapest shoe you could actually run through this process? Because you can't really do the lowest cost shoes.

Elias: Yes. we don't go below 200. It doesn't work. We can't get cost structures to work below 200 with today's technology this year. We have a pathway to do that in the next two years. 

Neal: So are these better, worse or the same for your feet as traditional shoes? And then two, how long do these last, wear and tear wise, compared to whatever's market?

Elias: So much better than legacy production. We sent the Georgia on a 300-mile joy ride and it came out without a scratch. And a big reason for that is because we're using far more advanced materials and we're using a completely different structure of build. With these, you have low component parts that are really made to integrate together, to fit together. So durability, comfort and lightweighting have been hallmarks of the technology. 

Phil: So it's more comfortable and more durable than traditional shoes.

Elias: Yes.

It sounds like the shoe fits...but when we come back… the laces start to come undone. 

[break]

Welcome back. Before the break, Elias was selling the investors on his perfectly laced up business. But how does one value the perfect business..? The investors are ready to talk numbers… and I mean a lot of numbers. So strap in. Here’s Mark: 

Mark: We're talking a lot about the 3D printing, but at the core, HILOS itself is a software company though. Right? 

Elias: Yes. 

Mark: Can you talk to us a little bit about the momentum of the business from a sales perspective and revenue?

Elias: Yes. Absolutely. So right now, we're looking at 3 million in revenue next year from the brands we currently have signed and under contract. And we believe we have a very strong pathway to get to 16 million the following year.

Phil: Well, how much -

Neal: Sixty?

Elias: Sixteen.

Phil: How much revenue will you do this year?

Elias: About a quarter of a million.

Phil: I'm sorry, going back, you said 3 million is your projection for revenue next year -

Elias: And isn't that insane? Only in Portland, right. 

[laughter] 

Victor: And so you're taking, of that three, you expect to like net what out of that 3 million that you've signed?

Phil: You said 15% is your take?

Elias: So you're talking about what our profit would be expected next year?

Victor: Yeah.

Elias: I believe it would be around 250, 300,000.

Victor: Okay. 

Phil: You said that you're projecting 3 million of revenue next year. And earlier you had said that your end, your take on that is 15%. So wouldn't that equate to $450,000? 

Elias: So yeah, let me clarify. The profit from unit sales should be around 250.

Phil: Why?

Elias: Next year.

Phil: If it's 15% of 3 million, that's 450.

Victor: Is it a scale thing? You just don't have it at scale yet? 

Elias: No, no. It's 15% on an average. But it doesn't mean that the lines - for instance, next year might be weighted more towards slides, which are lower volume and therefore we have a lower unit margin. It might be more of a 10% unit margin earlier in that year, because of the products we have going out -

Phil: So you're projecting -

Jillian: Break down the 3 million. 

Phil: like an 8% margin next year? Because 8% on 3 million's 240. 

Elias: Yes. I would have to get back to you with exact numbers, because we just revised these every quarter. So of 3 million, there's development fees recurring development fees from brands that are scoping in, about to sign, currently signed, in development. And then there's launches that we have planned for the year. 

Victor: Are these contracts signed? They are gonna be live? 

Elias: Yeah. They're signed. The way that we contract, we have signed MSAs. And we make it very easy for brands to expand into new product categories by just adding addendas to those signed MSAs. So they can -

Victor: But how sure - how sure are you that you're gonna do $3 million next year?

Elias: I'm very sure.

That was a numbers tornado… but just you wait. Elias’s company is raising at a 16M dollar valuation, a price set by their lead, Better Ventures. But to the investors in the room, that seems pretty high.

Victor: Phil, are you thinking the same thing about just the 16 million pre with such - even like next year's revenue, that's still at least a 20 or 30x revenue multiple on next year's revenue?

Phil: I am thinking that. It concerns me.

Jillian: I'm actually thinking that too. So can you tell us how you landed on 16 pre 

Elias: So there's two fundamental ways I think you can look at a business. I think the way that we've had investors come in and value this business and it was Better who set the price, is that they're getting in - they look at the team, the technology, the execution and the upside potential, and they see massive upside potential. They see a team that's been killing it. They see a massive problem that needs to be solved.

Victor: Did you say they were an impact fund, though, as well?

Jillian: Yeah. They are.

Victor: Cos that would be another factor they're looking at in their -

Elias: Of course. Well, massive problem to be solved for the good of the planet. And then there are those that are very focused on revenue multiples. I think revenue multiples for a seed round is too early. That's more of a Series A conversation, 3 million next year and we have a 16 million the year after we have our eyes on, that's when we want to go out and raise a really big round that is very focused on revenue multiples. At this stage, I don't feel it's as appropriate. 

Victor: And so what multiple do you think you'll be able to defend to a Series A investor at that point?

Elias: In some ways, it'll depend on the market, but I think at the floor, 10x. So we're looking at valuing on topline revenue the - if you look at profit, we are operating profit. By next year, it'll be over 40%. More profitable than Google or Amazon, because we don't fundamentally invest or hold the cost of the things that we fulfill for brands. So you can see a very rapid scale up with very high operating margins in this kind of a platform business. It's also an infrastructure business. We are fundamentally the infrastructure that allows brands to launch product the way that they will be launched for the next century. We own the language by which they make the product, we have exclusive supplier relationships, and brands are incredibly dependent on that, and dependent on us, which allows us to have a huge amount of leverage in that relationship. So this is an infrastructure monopoly position in the market with very high operating margins, and you need to be looking at this much more as an AWS play. 

Victor: Well, operating margin's at 40% on what? That's not on the 3 million next year?

Elias: No, that would be on like the 16 million in 2024. By then, we'd be -

Victor: You're taking 40% -

Elias: Operating margin. Yeah. 43%, I think, to be exact.

Jillian: I think my pen's running out. 

Elias: That’s how you know it’s been a good day. 

Mark: Elias, I'll jump in. It's gonna be a pass for me. I really - I love what you're doing, I love your background. I think - I think it comes down to some economic questions right. But understand and watching that model move in to how are retail channels moving forward? How many orders are you receiving on a monthly basis? So we'd just want to see some more development on that side, so for those reasons it's going to be a pass for me.

Elias: You got it. 

Jillian: It's gonna be a pass for me. The valuation is a little hard for me to swallow. I'm sorry. But umm yeah, I think I'm gonna have to go out. 

Elias: As long as next time I see you in your Georgias -

Jillian: But I'm actually - I am, and I'm gonna order some of those for my sons for Christmas. 

Elias: Yeah. I appreciate that.

Victor: So we are, you know, 100% ROI seeking firm. And I'm not seeing a great markup in a couple years from just kind of what we talked through. And I think there's probably just easy to disagree on that from what the potential valuations are, if you hit these goals in the future. But I think this was priced with maybe some other things in mind as well, and I just don't think we can defend that. So it's gonna be - it's not gonna be one for us. So. Yeah.

Phil: I see tremendous benefits for the shoe companies. And from an environmental impact perspective, it's tremendous what you're doing. And I agree with you that this is the future. For some of the reasons expressed by my fellow investors here, I need to pass too. I just can't - I can't get there on the valuation. I can't make that work. If I were truly just an impact investor, You know, I'd say, okay, the impact, I'm willing to pay more in terms of valuation, but that's not our predominant focus. And I just feel like it's still relatively early. And you know, so I think the next - you know, next round, if the valuation works, then that might be reasonable. But I love what you're doing and I just can't make it work right now.

Elias: Yeah. No. Appreciate that. Well, I mean, if we're too expensive for you this round, I don't think we'll get cheaper next round.

Phil: No, but - not cheaper on overall valuation basis, but on relative to -

Mark: As a function of revenue. Yeah.

Elias: Yeah. No. Completely understand. 

Neal: Well, as a Techstars MD I'm really excited to share in the upside [inaudible] Personally, I'm priced out, so I'm out of this. I'm not able to invest at that valuation either, like the others. But Thank you. 

Jillian: Thank you, Elias.

Phil: Very cool concept.

Mark: Thank you.

Elias: No, thank you guys.

Neal: This was great, man.

[byes]

Well I guess that answers my question. That’s how an investor says no to a perfect business. After the break, I catch up with Elias to hear what he thinks happened in The Pitch Room. 

[BREAK]

Welcome back. Elias’ business, HILOS, seemed perfect. Almost too perfect…and definitely too expensive for our investors. Shortly after his pitch, I called Elias up to get his take.

Josh: Your pitch to the investors on our show was more about the numbers than I think you were expecting and more about the numbers than you probably wanted. Were you disappointed by that? And you know, I think, what are your thoughts on how they evaluated the business in the room?

Elias: Yeah, I, I mean, I wasn't disappointed. I think the, everyone in the room got the value of what we were building and was excited by it. The difference was where our valuation was versus. Where a fund, their size would be able to invest. Right. And there's just a natural law there. I mean, everyone there had no one there had a fund over a hundred million. I think most people had between 30 to 50. And so they're really pre-seed to seed stage investors. The fact that we have product market fit and brands as customers already positions us in a lot of investors minds as kind of post seed and more into the series A, but we are also in a market where even if we can launch products very quickly, Brands still moves slow and physical product moving into the market can take 9, 12, 16 months. And so, and if you want to have impact on the physical world and you want to really change the impact of these legacy industries, you. have to that's what we're in this for. But it does mean that you’re right, there's a 12, 18, 24 month period wherein you have a ton of traction, but not a lot of revenue to show for that traction yet.

Josh: Right. 

Elias: And at the value we were where we've raised this round that priced out most of the funds in this room. And I think that's what was the contention? You know, if we had been half as expensive. There would've been a great fit, but the fact is we had other investors that have much larger funds that see the value of what we're building just priced us differently because they weren't pricing us on revenue multiple yet. They were pricing us on the market, the tech, the moats around it, and the team we built to execute. 

You know, I’ve seen the VC’s on our show invest in companies at much higher valuations than $16m.

But the bottom line - our investors in this pitch wanted to see more traction right now to justify the price. While Elias wanted the investors on our show to value his company based on the team, and the potential upside of the business. And, in the months that followed, he found investors that did.

Elias over-subscribed on their round, raising a total of 5 million. HILOS also brought a few new team members, including an executive from Nike. 

Things are looking pretty good for HILOS.

Elias: Now we're not outta the woods because 2023. Is only four months old and it's already a crazy year. I don't think anyone who's lived through the past few years can ever rest on their laurels and think that everything's, you know, it's all uphill from here and I think what's important is having. A team that is resilient and a direction that we know, uh, in our heart of hearts is the right one for the company and the world.

Josh: How big's the team now?

Elias: we're about a dozen so far and growing quickly. We're lucky that we also have a very scalable business model, uh, with such a small team that caliber brands we're working with and the amount of work we're able to put out by automating the ordinary and focusing on the extraordinary. Is insane. The - 

Josh: do you just come up with these catch phrases on the fly? Automating the ordinary…

Elias: focus on the extraordinary, and that's, that's a lot of what the capability that we're building is when it comes to working with designers. Because there's been a huge excitement and appreciation for what AI can do to augment and accelerate fundamental human creativity. And that fits very well with our digital tool chain So the designer focuses on really new, interesting creative textures and geometries, and our software is able to push them and empower them to think faster and broader and more creatively than before, while delivering a product within minutes and hours instead of weeks and months. 

Josh: So in theory, like I could start designing a pair of kicks, like if I wanted to create some limited edition, like pitch branded sneakers. 

Elias: Yes

Josh: In theory that's possible. And I could design it in a ChatGPT type prompt where I'm saying, you know, Sneakers, white sneakers with some gold embellishments, you know, with the pitch logo on the back. And it could like, mock that up and give me some choices as far as like, you know, textures and things like that. That that's, is that what you're describing? 

Elias: Be a little more creative. Josh, I'm gonna push you here. 

Josh: It's my first time designing a shoe elias. Gimme a break! I'm trying my best here.

Elias: Gimme the dark side of the moon. Right? Um, but if it was seen in infrared and, and then warp that around like a, you know, candy crush theme, uh, and I want that on, I want that [00:04:00] on an Air Force silhouette. Air Force one silhouette, and you can generate something that is exciting and compelling. But then there's a lot of. Development, engineering testing that comes downstream that we automate. 

Josh: That's what you mean by automate the ordinary. Like, okay ,we're working on the processes in the background so that people designing shoes can just think outside the box. 

Elias: So that the, the Josh Kicks V1 is not that far away. 

Josh: Have you thought of the effect this could have on influencers or personalities, podcast hosts? Like, Basically th those influencers now have to partner with brands, right? But if, if Hilos exists and it's that easy as a, uh, chat g p t style prompt, like that, that changes the game. That, that's kind of crazy if you think about it.

Elias: Yeah. It completely disintermediates brands in a way that's pretty significant for the industry and. That's something that we're already beginning to do, but in a very thoughtful way rather than just, you know, throw up a website and say, come one, come all start playing with making shoes. Sure. Um, we're beginning to collaborate with very interesting and very innovative designers just to show this is what someone dreamed up and this is what it can do. And that's what you're gonna see a lot more of in this coming year.

Josh: When you think about this business five years from now, like. What does it look like?

Elias: Looks like the ability for an individual designer, someone with a creative spark, regardless of what their day-to-day looks like. To be able to dream of creating product and show that to the world in a way where it's not just a render or a sketch, but can be made real and can be made real quickly, but without waste. And where we as a civilization no longer have to overproduce to sell and where we can deliver something that is very unique and inspiring to a customer that was made only after they bought it. 

Josh: Very cool. I'm excited for that world. I'm excited for the pitch kicks. 

Elias: I think that's why you had me on, right? Because you wanted pitch kicks at the end of the day so {laughs}.

Huh. What would a pair of pitch kicks look like? The obvious answer would be a big green shoe, maybe that’s too predictable.

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Next week on The Pitch… AI for crafting a more persuasive pitch. 

Kelvin: And as a result of going through our software, organizations have raised millions in capital. And we've had over 30 first placed pitch competition winners. And now we believe it's going to become a common phrase to hear worldwide

Max: Are you pitching with Brevity?

Jillian: Did you use your own product to construct this pitch?

Kelvin: Absolutely.

Max: - show you right on this - 

Jillian: Okay.

Max: This pitch scored a 90 in our pitch intelligence.

Jillian: Okay.

That’s next week in The Pitch Room FOR OUR LAST EPISODE OF THE SEASON. See you on Wednesday.

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