Zeiad Hussein and Sean Caverly of National Equipment Parts (NEP) are unifying the 100 billion dollar HVAC and contractor parts market and building an e-commerce model. Sort of like Amazon. But way better. Chris Dima of Walnut St. Labs interviewed them on December 17, 2015. This is an edited transcript of that interview.
Why Real Startups Don’t Wait For An Office
Chris: So, tell us where this all began.
Zeiad: It really started with me in my garage. I was literally living and breathing every minute of it in my house, with my two kids.
Chris: What were you both doing?
Zeiad: I was a manufacturer’s rep [for an HVAC company], so my responsibilities were to represent manufacturers at wholesale distribution. My relationships were primarily with distributors, specifically in the HVAC industry and plumbing. I had a pretty big territory from Eastern PA, State College, all the way down to Virginia.
Sean: I was just finishing up graduate school, after working on Wall Street. I met Z through an entrepreneurial event at Lehigh University. My initial impressions were that he had drinking his Kool-Aid because I had no background in industrial parts or anything like that. Low and behold, I came to find out that he wasn’t just disrupting an industry, he was empowering an industry.
Hockey Sticks Actually Happen
Chris: Only 4 months at Walnut St. Labs and you have to move out already because of space!
Sean: I think the growth rate of this is a phenomenal story. There’s obviously things going on in the background. When I came on in August, I think we were doing $70,000 sales per month. In 2015 we did $1.2MM in sales. In January 2016 alone we did 1.2MM in sales. That’s the trajectory we’re on.
We’ve done such in the last 30 days, what the projection was for the year, and getting to the point of what’s in store for 2016. Our projections for 2016, A, our goals are to go out and aggressively seek funding. We are looking to raise, I would say anywhere between $1 and $5 million, on the VC side or Super Angel side. We’re going to use that money to meet our next milestone of anywhere between $15 and $30 million. We believe that even without taking a single dollar of funding, we could do 10 million next year in sales, but we’re going to do 15 to 30, using funding.
“Disrupting” — Why Does It Have to Be So Negative?
Chris: That’s a good difference to have on your side because everyone’s about disrupting. If you put it as empowering, you’re bringing a capability to a demographic that didn’t have e-commerce.
Zeiad: As a manufacturer’s rep,I just kept thinking about the opportunities available with the products. I started asking some of my closest distributors about their plans for e-commerce, and nobody had an answer. These were big businesses: $50M, $100M, $300M, and I’m sitting down with the founder, or the CEO, and they didn’t have answers.
That’s when the light bulb went off. What if I could protect them? The biggest challenge they have is cannibalizing their own business. When they decide tostart selling online, that means they’re interrupting their everyday commerce, which is selling to the contractor. The contractor shouldn’t really be selling to that homeowner. As these questions came up, I said, “let me just start buying some of your dead inventory.” It’s basically inventory that they can’t sell and we can’t make deals on. It just started going from there, you know? A little Ebay store, doing it on the side, becoming a major business with credit lines, inventory rotation, metrics, and etc. It really empowered the market because one of the things I mentioned to these guys is that I know so much about what they do and about what they don’t do. I could become a major competitor to them, but it would take me a lot longer to get to where we need to go because we don’t have the history of credit behind us. We tapped into the existing infrastructure that’s out there.
Chris: Do you think if this market was left alone, would they ever have gotten somewhere with e-commerce? They all could’ve had their own stores, but you’re creating a market — the magnitude that couldn’t exist.
Sean: With Airbnb or Uber, you’re taking a big, old, rickety market that’s been around for hundreds of years. It’s serviceable. Why change it? This market’s exactly the same way. It’s a $100B market just waiting to be disrupted. There is no General Electric in this market either–no monopoly. These hundred million dollar firms are all private, with no shareholders pushing them to do innovative things because they’re all family owned. They’re cash positive, happy, with health care, so there’s no incentive to change the status quo. Further, they can’t change the status quo because they would anger their contractors and the electricians, right? They can’t go to the end-user, so they’re stuck in between a rock and a hard place.
Chris: That’s really the unique aspect about your business — but really the unique thing about the market itself.
Zeiad: When you look at Airbnb or Uber, those guys have taken existing infrastructure, and then just empowered it in a sense. How do you empower a market that is engrained in every home in America with hot water, air-conditioning, and heating? Nobody has done it. We take what’s out there, and we look at how we can make it better. This is something that nobody can see, unless you’re inside, or unless you’re really engrained into that marketplace.
Sean: To elaborate on building on the infrastructure, wholesale distributors manage inventory well and they have space. Unlike Amazon, who had to build fulfillment centers and work with the carriers, wholesale distributors already had the space. We’re turning them into fulfillment centers. Add to that, wholesale distribution has their own carrier service as well. They’re delivering every day to contractors and on-site. They know their footprint better than the United States Post Office. We’re leveraging them by using their space, their inventory, and starting in 2016, we’re going to be using their carriers to deliver to the end-user. The end goal of this has got to be to go up against Amazon because these are commodity products that people don’t care about, except for price and getting it delivered quickly. If someone from Northern Michigan messages us that their furnace board is out, that means they have no heat. That means they’re cold. These are very, very significant items that someone will pay a ticket price of twenty dollars on and fifty dollars in shipping to get it the next day.
Who Can Do Same Day Delivery? Someone Who Can Connect All the Neighborhood Shops.
Sean: Amazon Prime often isn’t good enough. Same day has got to be, almost, a goal for us.
Chris: Really, you’re going up the supply chain and optimizing the stuff for other people and that opens an opportunity to you. You’re delivering value, but you’re making the hubs more efficient.
Zeiad: Right. There are a couple things that we’re doing. First, the relationships that we have stretch from manufacturers, to wholesale distribution, to contractors, so there’s a player in every one of those markets. We know who those players are and we try to enhance their strategies, their models, because at the end of the day, the distributor is also handicapped by their territory that they serve.
A guy in the Mid-Atlantic is really only capturing that business. A customer in Chicago who’s looking for a whole house unification would never think of shopping in Texas. We’re giving them this blown-up approach of, “Well, everything is within arm’s reach now.” The system that we have in place is we’re making distributors into global players because the market demand for these products is high. It’s so high that even retail and supply houses can’t keep up when the weather really starts to take on what it does best. Again, what we do is we enhance their operation, we give them business that they would’ve never had. At the same time, we don’t compete with them, so we’re not out there calling on their local contractors. We’re not going to buy big equipment and we’re not going to buy rooftop units, etc. We just want to focus on the industrial parts side of the business.
Chris: One of my most intriguing questions with startups is how much was theoretical and how much was “do a little, get feedback, and then go in that direction?”
Zeiad: Dropship has been around for a long time. Some of the biggest e-commerce players, that’s what they do, it’s like 90% of their business. They have the relationships with the vendors and they channel out to a mass market, and they have the vendors throw a label on there and that’s it. The difference with NEP, is that the relationships are set in stone to the point where we can go to a vendor and say, “Hey we want to buy x, y, z,” and they can come back to us and say, “Okay, here it is and here’s the minimum requirement, it’s going to be $20,000 stock order,” or whatever it is. At that point, we can determine if it’s worth that investment or if we go to our channel partners and say, “Hey, you guys stock this item. Let us piecemeal a little bit to do a test run for about 30 to 90 days, and then make that commitment.”
That opened up the window of opportunity to really blow this thing up with relationships.
Chris: Have these distributors felt the heat from Home Depot?
Zeiad: Absolutely, they’ve put suppliers out. When you look at role call at the Home Depot at 6:00am, it’s jammed. When you look at role call at a distributor at 7:00am, it’s jammed too. There are a lot of contractors out there. They are not loyal. It’s price driven. They are specialty products, but they are going to do one thing. The mixing valve allows you to do this. If it doesn’t work, you’re not getting water, bottom-line. It’s as simple as that.
Home Depot has invested in technology. They’re almost like a tech company. Their biggest risk is overhead: a lot of inventory and real estate, etc.
Chris: It seems like that gives you an advantage over Amazon since they don’t have partners at the local level — just access to national carriers.
Sean: The two advantages in this market are number one, it’s commodity market, and number two, it’s based on the speed you get to the customer. Our pricing is better than Amazon and Amazon’s is better than everyone on the street, including Home Depot or Walmart. We see Amazon buying our product and selling it on their site all the time. The factor that determines whether this is going to be a 20 million dollar business or a billion dollar business is if we can get the carriers to deliver it in a day or a day and a half.
Chris: Well, that’s where the regional piece comes in because you’re going to have products where it make sense to have products. Does Amazon have folks who did what you did prior to launching this business? Like go out and have relationships with all the distributors?
Zeiad: Everybody that’s selling HVAC or plumbing parts on Amazon is a distributor. At the end of the day, they are somewhat limited in how far they can take the relationship with Amazon, because a standard everyday distributor has inventory, real estate, counterpeople, and salespeople over all of it. For a distributor to make a commitment to a vendor, and get those products or have those products available to their contractors, at the same time, sell a little here, sell a little there online, no biggie, no problem. But at that time you’re limited by margin, because you have to cover your overhead. Then there are other ways to really get the awareness out there by having FBA, Fulfillment by Amazon, which no distributor in America will do. The reason is because there’s no paperwork. There’s no purchase order that’s cut. There’s no payables, receivables, etc, for distributors. Why distributors love to deal with us is because there’s paperwork between national and between distributor A, and that’s a binding agreement right there. What we do with the product is our business at that point. Our business is solely to support the online demand, and that is the big, big gaping hole why a distributor today cannot do what we’re doing, because they still have to serve their local licensed professional contractors. We don’t have that responsibility. We are just taking our product and channeling it out, whether it’s FBA, our site, or other channels. People will find us because they are searching for the product.
Amazon Has Consumer Goods. Could It Compete On Customer Service?
Chris: What’s the best defense against Amazon?
Zeiad: Amazon is not in a position to provide technology support, and that is huge in our industry.
Unlike Amazon, we have data that measures failure rate products. We know that certain boards that ICM makes or Honeywell makes, whoever, certain thermostats, certain humidifiers, have a failure rate, and that’s provided by the manufacturers, not us. When we have these returns that come back, every distributor has a TSA, Technical Service Advising Team. What they do, is they are certified by all these vendors, hours and hours, and hours of training to support contractors, so that the manufacturer doesn’t get involved constantly, because the manufacturer has … Again, the vendor is managing inventory. It’s its projection, it’s sales plans, etc, etc. What Amazon can’t do, is they can’t provide technology support for a customer, that might be as simple as miswiring a cord. It might be as simple as not connecting it to the right terminals. It might be was simple as melting it in the wrong direction. When we look at the return rate and we look at the national average, we know there’s a major discount. This isn’t as simple as SC Johnson, Windex, or anything like that. This is a board that has to be placed right and wired correctly.
That’s our advantage. Every distributor that we partner with, has access to their technology support team, which then represents us to ensure that the failure rate that is standardized by the market and the manufacturers meets either closely or almost the same with what’s published and with what’s out there. We shouldn’t be getting 18 boards back when we know for a fact that maybe out of 500, you’ll get 1 back.
Sean: On the User Experience side, nobody knows it better than Amazon. We are constantly infatuated with what Amazon is doing, because it’s the best of the best. We jokingly call Amazon the Mother-ship here every day. We are constantly looking to mimic and approve upon that. Our advantage, though, is that we can match the customer with product specialist if need be.
Chris: Yeah, that seems like a real solid defense.
Zeiad: Exactly. Amazon is everything to everybody, everywhere. We want to be everything to everybody in this market. It’s a big enough market where we know the weaknesses of everybody that’s trying to sell it, but what we try to do is we try to make them better. We also know their strengths and their strengths are our weaknesses, in a sense. We’re a young company, so we don’t have the 50 or 25 years relationship with vendors like Honeywell or these guys, but we can get the product. We can get it out there and we can move it. Again, it’s a very even trade-off, because what they don’t have, they need, and what we don’t have, in a sense, we get from them. It’s a very even trade-off, and it’s a relationship that just continues to thrive.
When Your 5-Year Plan Is Done In 12 Months
Chris: You said a 5 year plan blows up in 12 months. Is that really what’s going on?
Zeiad: Absolutely, yeah. When I first started this business, the first year was about $6,000, just kind of playing here, playing there, mixing around with some products.
Chris: You’re still in year 1 though, right?
Zeiad: Yeah, from the NEP side, we’re still in year 1.
Sean: You mean you were still working?
Zeiad: I was still working, so this was just on the side. Year 2 was still on the side, but became a $90,000 business. Now, as we get into the first full year, in the sense more like a half year, our projections were $500K. We’re probably going to be doing right about $1.1M, $1.2M, with steady growth. We have yet to introduce major lines. We have yet to really dig into our data. We have yet to reach out to a handful of customers that could be repeat buyers, whether it be commercial customers or residential type contractors, etc.
Yeah, initially when I put the business plan together, I said that if I can get the cooperation of the market, I can turn this market into just a basically one distributor on steroids, at that point.
Why Not Bootstrap?
Chris: Why seek funding if you could bootstrap?
Zeiad: Coming from the market, I think that one of the most dangerous things an individual can have is market knowledge and understanding and forecasting, and seeing patterns as they develop. This is my third startup, my second in this industry. I’ve seen how things can just change so fast. If you are not ready to take this thing on, it will just crush you, and I’ve been crushed already. All that’s going to happen over the next decade or 20 years is that the delivery of this comfort is going to get more efficient. It’s not going to change. Like public restrooms: It’s all about using less water, but the concept is still the same, and that’s not going to change. Our ability is to really take the bull by the horns and get out there as fast as we can, because we have the distributors and the market behind us.
Why Sales Cures Just About Everything
Sean: We just came from the Entrepreneurial Summit in New York City, where everyone and their mother is selling an app. It was almost laughable. Like, what’s the sales model here? There are no sales. We sat in one meeting with VCs and it went very well, because sales basically cures all. We are looking for the right team of other VCs or Super Angels to partner up with, at CR Vision and CR sales growth. You don’t have to understand the industry to know hockey stick growth. That’s what we’re hoping for in the next 6 to 12 months, because yeah, we can make this into 10 million in sales in a year, but we want to be at 20, we want to be at 25, and then the year after that, we want to be getting into series B and be in a hundred. We want to seize that growth in a market that’s over 100 billion in size.
Chris: Say you raise $5 million in Q1, what is that money going towards?
Zeiad: I think it’s a little bit of everything. We have yet to look at enterprise solutions. We’re doing enterprise numbers, $500K to $600K a month. We’re not a small business. We are an enterprise level business.
Sean: I think from a marketing standpoint too, it’s crucial to get out there, not just in terms of AdWords. We have our first executive level individual coming on board next week, a marketing veteran. One other item to touch on is that the growth of our footprint is obviously setting our system up in a distributor, and then moving on to another distributor, and moving on to another distributor in different regions. That’s how we keep our freight down.
Zeiad: Exactly. When you look at the travel budget, you look at integration budget, you look at everything. Really, you look at just the starting an operation. You know guaranteed sales are there, because we’ve proven it, but now it’s looking a whole different region. It’s looking at integrating our carrier systems. Again, that’s where the funding helps. This will change the HVAC industry forever. This is almost like printing a new catalog and letting it sit there for 100 years and nobody can penetrate.
Sean: To investors out there too, we haven’t sought really any funding beyond just friends and family type thing. This isn’t your traditional seed opportunity. This is a turn key solution. We are up and running as it is.
Attracting the Right (Crazy) People
Chris: You guys don’t have to give away that much equity, because you’re so far along in such a short amount of time. What else?
Zeiad: For me, I had taken this thing single-handedly with 2 kids and a mortgage, and a house, having $50,000 worth of inventory in my basement, and just absolutely crushing it every day. I didn’t have a life.
Sean: Side note on that, that was one of the big driving forces that got me on board. I came into this guy’s garage, and he’s got 2 infant children running around, and a wife who is a stay-at-home mom. I say to myself, this guy must be serious because he’s got a mortgage, kids, a wife. He’d better not be crazy.
Zeiad: Even now, at this stage, our business titles mean nothing. Everybody is working together. It’s all about the synergy that we can create with one another. For me, I was in my office, I was up at 5:00, I go take a nap at 3:00, and then I am back at it. There was just so much going on, and there were so many things, so many hats that I was wearing, that when Sean came onboard, he really took a load off. He was able to really use his skillset, which is the backend, Magento, developing relationships for subcontractors that allow us to delegate. Ever since then, like Sean said, I got it up to about 70K. A month out of my house, it was probably 40 to 50 orders or packages that were going out per day, UPS and USPS, but I couldn’t scale it anymore. That was kind of the max. I wasn’t able to do my job anymore. I was just catering to orders.
That’s the true essence of a startup, and I think any CEO in a startup environment has got to be able to delegate. You can’t control everything. Mistakes are going to happen as you delegate. They are not personal, but in the end, in hindsight going 3 to 4 months, it was the best thing that we ever did, because now look at our team, look at where we are, look at where we’re going, and look at the numbers. There’s no way that could have happened with just me.
Why West Chester, and Why Walnut St. Labs?
Sean: A colleague in Wilmington, Delaware said, “You’ve got to check out Walnut St. Labs in West Chester.” I had re-settled to the Norristown area, and Z’s in Pottstown, and neither one of us wanted to commute to Philadelphia. We wanted the atmosphere, mentorship, coming in to meet the right people. Walnut St. Labs satisfied all of that. I can speak for both of us that coming into West Chester, you think you’re in Downtown Brooklyn, for God’s sakes. You don’t think you’re in Pennsylvania, and I had lived in New York City for a while, so I can see that in sense, that the vibe here is different than Allentown or really anywhere else than Pennsylvania.
Zeiad: Prior to Sean even coming onboard, I didn’t even know what an entrepreneur incubator was. I didn’t even know they existed. I just figured that I needed to go get an office and overpay and have this huge building, and just not know what to do with it.
Sean: Also, when we started at Walnut St. Labs, we were basically in the corner. The issue is, how do we forecast our growth. It’s exponential right now, so if we even settled on an office space, I have no idea if it would be too big or too small 6-12 months from now. We couldn’t even get calls back from commercial real estate people. I hadn’t had no experience. I called a few people, didn’t even call us back, and I assume it was because we were too small on the radar.
Human Capital Optimization?
Chris: Yeah, you would have been stressed out whether you planned incorrectly on the low side or the high side.
Sean: I think one of the big things that … I hate to get too political, but one of the big things that has unleashed that, is Obama Care, because before you’re linked through the employers through healthcare. Right now we start with everyone we bring onboard, we can walk them through Obama Care. It’s a very easy sort of intuitive thing to get. Both him and I are in Obama Care, we have families. There’s no way, I don’t think we could afford this 6 or 7 years ago.
Zeiad: I always talk to Sean, timing is everything. It really is. If you look at the way the economy is coming back or at least the way our market is coming back, they are cash rich today than they were 5 years ago. They are more open to listening than they were 5 years ago. Five to 6 years ago, these guys, some of them were about to go under. I think our timing is perfect now. It’s all about just doing it, making it happen, because our time is limited. Right before we know it, we probably have a competitor that is just looking at us right now, saying, “Hey, we have more buying power than these guys.” But if we’re the first ones in the game, if we really get these relationships in order fast, then by the time anybody figures this out, we’re 5 million ahead, and it just becomes a game of catch-up. Kind of like what Apple does. Despite Samsung, Apple is still making a lot of headway, but for awhile they really had it. I think it’s very similar here, although it can probably stretch out a little further because it’s an industry that changes slowly. We’re looking at the existing infrastructure and just enhancing it.
Chris: You’re applying the best technology to a traditional industry?
Sean: Exactly. It’s really choosing the right market because with NEP, we’re an industrial parts it’s just a perfect market for this. If you can match price, you can turn. If you can turn, you can bring cash. If you can turns on the products, you can hold that cash for 90 and 120 days and not get any investment from banks, and continue to grow. Continue to grow.
Choosing the right market is everything because my first startup was in fashion. That’s the exact opposite, the exact wrong market. Everyone wants to select and returns items and nothing turns, and everyone is just holding product, and the sales cycle, which is the exact opposite market. It’s the market everything.
Chris: You guys are a good mix.
Sean: Yeah, I think so. A lot of times it’s useful to know because I don’t have any product knowledge coming in. I know a little bit now, but I don’t know very much, and I don’t pretend to know very much, but I know how to get the right people in place, I know the systems in place. He has the key rel- We call him the Rain Maker. He’s the key relationship distribution to product. He knows how much he can lean on the supply chain to grow us without cracking it. Without ruining those relationships. How far he can push them on financing, and everything like that, because he’s very sensitive, but because he’s a trusted entity, we can do this. Any outsider would struggle, because good luck getting inventory from distribution. Anybody can put product out, like Zeiad always said, but can people put product out at the price we can, and can they replenish as quickly as we can? That’s the name of the game, really.
Chris: What’s going to be happening a year from now? What’s your big thing on the horizon?
Zeiad: At first, there was a fear of, “Hey, Zeiad knows too much about this, and he is the guy that can disrupt this and make our lives miserable.” I think we’re over that aspect of it now. This is just a really big business that we want to partner with, and to show the guys that said no to me or no to the model, that this was safe play. I think that’s important to me, as the founder and as being from the industry from the last 10 years. I want to carry this market into that next level of commerce, where it’s not just about, hey I need this or I need this. It’s about what everybody in the world is searching for, and how we can get it to them. I think as long as that aspect of having fun remains, then we can continue to grow. As soon as it becomes very corporate, then things change. You’re only a startup for so long. I think we just keep riding it, because I have been here before. I want to make sure that I just enjoy the path, because like all things, it’s just a phase in one’s life.
Sean: There’s a couple things he touched on, one is the growth rate. We talked about opening a second distributor in California, having our West-coast footprint. I think by the end of the year, having a third geographic lock-down, would be a realistic goal to have central Chicago somewhere around there. Again, we’re continuing to build that footprint, to get our Amazon Prime to Amazon Prime minus 1 equals EP Express. I like that equation a lot, and we can do that by continuing to build out our footprint.
Zeiad: There’s a great quote by Michael Andretti that I’ve lived by. “If you’re in control, you’re not going fast enough.” I could tell you that I’m on my toes every day, because we’ve all leveraged a lot. This has to work at this point. There will probably be ups and downs on the road, but right now I am cherishing this moment. Whether they decide to do another startup or not, it doesn’t matter, because you built something so great, and it’s so far out there, that any type of success that you’ll have throughout your life, you’ll always remember this, you’ll always remember like, man, 20 years ago, I helped built NEP, and it sets the standard for the rest of my life, and that’s a story in itself.