How Physna Turned 3D IP-Theft Detection Into a CAD Search Engine With $2M Raised (Interview with Paul Powers)

Introduction and Guest Background

Nathan Latka

00:01Hello, everybody. My guest today is Paul Powers. He's a Forbes 30 Under 30 Award winner, successful serial entrepreneur and B2B technology development SaaS companies. He's got a law degree from the University of Heidelberg in Germany, and a member of the National Small Business Association's Leadership Council, now working on a company called Physna in the CAD search engine space. Paul, are you ready to the top?

Paul Powers

00:21Alright. Thank you.

What Is a CAD Search Engine

Nathan Latka

00:23You bet. Alright. What is a CAD search engine? What's that mean?

Paul Powers

00:26So Physna is best thought of as like an autofill for 3D design. So if you're in the process of designing something, Physna will try to guess what you're designing and search throughout your database, be it through CAD or PLM or whatever you use to see if you've designed something similar to that in the past so that you don't design things from scratch.

Business Model and Pricing

Nathan Latka

00:43Interesting. This is kind of like when people use Gmail and Gmail auto completes your emails when you're typing kind of the same thing.

Paul Powers

00:43Absolutely.

Nathan Latka

00:43Interesting. Very interesting. Okay. Walk me through the business model.

00:53How do

00:54you make money?

Paul Powers

00:55Sure. So we're a a SaaS platform. So the way that we work is that, you know, we work with engineers and manufacturers. They pay us an annual subscription fee to use the software. Typically, Physna is either used as an integration into whatever CAD software or PLM software they're using, but you can also use it as standalone. And we keep it real simple. We don't care if it's used on the cloud or if it's an on prem

01:17server that they're using. It's always the same fee, always the same arrangement. So they pay a one time fee or, you know, an annual fee per user per year.

Customer Size and Seat Counts

Nathan Latka

01:24Okay. And and help me get a sense on average, what's the company gonna pay you per year to get access to this?

Paul Powers

01:30It really depends on how many people they have. So to put it into perspective, we did some some studies on what what we were saving the average customer. We save the average customer $37,440 per user per year that they're with us. But the average cost per user is gonna be 2,500. So it's a 15 to one ratio of savings to cost. So...

Nathan Latka

01:30Okay. And how... I guess

01:53what I'm what I'm really asking is when an org signs up, typically, how many seats are they signing up with? Are these... Is this for teams of three or 300?

Paul Powers

02:00Oh, it's it's all over the place. So we we have people signing up for, you know, a couple licenses. There are companies that have 30,000 engineers, and there are couple... Lots of them that we're seeing that have maybe anywhere between fifty and five hundred. I would say it seems to be the average number, but, you know, it it really does scale.

Nathan Latka

02:17Okay. So you said 50 to 500 might be a good average?

Paul Powers

02:20I would say that's probably the average size that we talked to. Yeah.

Nathan Latka

02:22Okay. Fair enough. Good. So I want make sure I got this right. So so if you have a team of if I'm if I'm running a team of 50 right now, right, let's say it's an architecture firm and I sign up for you, it's going to be $2,500 per user per year.

Paul Powers

02:36Correct.

Nathan Latka

02:36Okay. So about $125,000 for the year.

Paul Powers

02:40Right.

Nathan Latka

02:40Okay. Very good.

Paul Powers

02:41If you look at how much you'd save, you'll be saving us.

Company Founding and Origin Story

Nathan Latka

02:44No, no, by the way, I'm not shocked by that number. Get I get I listen, I was architect major in college, so I get it. I mean, there were so many times where I was copying and pasting like groups of lines and symbols. I mean, I totally get what you're building. It makes perfect sense to me. Put this on a timeline for me. When'd you launch the company? What year?

Paul Powers

03:022015.

Nathan Latka

03:032015. And I mean, where were you? Were you on the engineering side or the architecture side? How'd you get the idea?

Paul Powers

03:09I was on the the nothing side. I was on the legal side. I have a law degree from Germany. My focus is on intellectual property law, and I was writing a dissertation about what's the biggest problem we're gonna have with technology in IP law. And the answer was 3D. You know, we went through this with the...

03:27Assets. Went through with images. But we kind of adjusted. The market adjusted. We have iTunes. We have Netflix. When it comes to 3D, the problem is that no one can really protect intellectual property. So we thought, okay, we can't just track a file down. We have to actually know what a file is, of what it's similar to, what's what's in it, etcetera. So we have to actually understand what 3D models are. And we looked

03:51at all the technology that was available, and we realized, bless you. We realized that that nothing was actually built to understand 3D from a 3D perspective. Everything was just a 2D technology like point cloud or whatever trying to understand 3D. So we actually created something that would identify IP theft. And then we brought it to market 2016, we showed it to a bunch of companies, and they came back saying, well, that's great

04:17and all, but my god, we could use this in engineering. We could use this in just seeing if we can manufacture something.

Nathan Latka

04:22Because it's all pattern recognition, basically.

Current Customer Count and Traction

Paul Powers

04:25Exactly.

Nathan Latka

04:25Yeah. Really interesting. Okay, so how many users have you scaled to today? How many folks using it?

Paul Powers

04:31That's a great question. So there are quite a few licenses out there being used, the reason it's hard for me to put an exact number on is because we have some institutional agreements with like Purdue, the U.S. Space and Rocket Center, NASA Space Camp, and the latter's case, they have 300,000 people a year coming through who have access to it. So I don't know how many people are actually utilizing it at any given time. In the case

04:54of Purdue, they have 1,400 people who can use it at any given time too. So it's hard to say how many are actually using it at any one time. I could look it up, but...

Nathan Latka

05:01Maybe okay. Let's do a simple... I was gonna say let's do a simpler number. How how many organizations, not seats, but how many organizations are using the tool?

Paul Powers

05:09That's a good question. So I would say right now we're probably talking around if you add between the non government... Governmental and the governmental and the testers versus the actual customers, we're only around 50. We've rolled this out around...

Nathan Latka

05:23Why do you say only, by the way? That's totally respectable for an enterprise kinda company.

Paul Powers

05:27Well, I say only because we just started selling it about a month or two ago actively. We only didn't have a sales force two months ago.

Nathan Latka

05:27Okay. Okay. Got it.

Paul Powers

05:27So we just added one on. So the numbers aren't as exactly where I think they'll be in about couple of months. In January, February, we're expecting to start to see a lot of scaling.

Nathan Latka

05:42Yeah. Well, I mean, if I take 50 organizations and then you just told us a second ago, if we assume the lower side of your average of 50 seats at $2,500 a month, I mean, or $2,500 a year, I mean, that would put you right now, I think at what, like a $500,000 a month run rate, something like that. Is that accurate?

Paul Powers

05:58Most of those companies I included were ones that were using the or they're using Physna. Some of them are testers like Purdue and and NASA stuff. We've said, okay, instead of you paying us, we wanted active feedback, you know, from these people to tell us, what are your users experiencing? What would you like to see differently? You know, let's have a lot of dialogue going on. And we decided not to charge them. You know...

Nathan Latka

06:18Oh, I see. I see.

Paul Powers

06:19Yeah. So the paying customers, there's... Are only maybe a third or under a third of that.

Nathan Latka

06:19Okay.

Paul Powers

06:19And... Yeah. So I would say that next year... Our our goal for next year is to add on probably about, I would think we get to maybe another 100 to 200 paying customers.

Nathan Latka

06:34That's great. So a third of 50, we'll call maybe 15 or something have converted from free to paid. Is that accurate?

Paul Powers

06:34Sure.

Nathan Latka

06:34And I mean, is that the model, you kind of give them a free usage, get them addicted, and then they have to pay? And if so, like, what's the... What's creates the forcing function to move them from free to paid?

Paul Powers

06:50We don't typically go free to paid with companies. We do that. Those were these were earlier deals that we had signed up or alliances that we had formed essentially with these companies who had unique perspective into the software. With larger companies, sometimes we'll do a trial where they'll be able to try it out for know, thirty days, maybe even sixty days or something with some users and see... Make sure that it does what we say it's

07:13gonna do, and it does. But typically, you know, it's... It is a pay to play thing. You you do pay for seats. But we have demos. We're willing to, let people play around with it and make sure that, you know, it really does have the effect that they think it will.

Nathan Latka

07:26That's great. That's great. Okay. So, I mean, 15 instead of 50, that would put your your monthly recurring somewhere closer, like, a $150,000 a month. Is that is that more directionally correct?

Paul Powers

07:35Well, we're looking... It's not 2,500 a month. It's 2,500 a year that we charge our users. And we have... So the the best number for me to give you is gonna be the... Is the twenty nineteen numbers because those are pretty well... I think we're pretty exact with what we're gonna have next year. We should be at least at about 5,000,000 recurring annual revenue by the end twenty nineteen.

Nathan Latka

07:57And how much growth would you have to drive to actually hit that though? What what are you at today?

Paul Powers

08:02We would have to go... Well, some of our... Of that's from customers converting from non paying to paying. Right?

Nathan Latka

08:02Totally get that....

Paul Powers

08:02It's kinda hard to figure that.

Nathan Latka

08:11No. I'm talking I'm talking I'm talking just... I totally get that. I'm talk... Yeah. Yeah. I'm talking, like, double triple.

Paul Powers

08:17I mean, that's probably four x or more

Nathan Latka

08:17Okay.

Paul Powers

08:17Of what we have now. Yeah.

Nathan Latka

08:21Got it. Well, 5,000,000 run rate is about $400,000 a month. So, I mean, I mean, are... Have you guys broken a million yet in ARR, or are you flirting with it?

Paul Powers

08:29We have not broken it as far as it actually received in the bank.

Nathan Latka

08:33I see. I see.

Paul Powers

08:34I So a lot of the stuff is... It takes place later. It's a bit further out. Right?

Nathan Latka

08:34Yeah. You've got pipeline.

Paul Powers

08:34Yeah.

Team Size and Location

Nathan Latka

08:40Makes good sense. Let's let's move on to some other some other questions here about the company. So team, talk to me about your team. How many folks today? Where's everyone based?

Paul Powers

08:48We have 15 people. They're all in Cincinnati, Ohio. They... The majority of them are on the tech side. We have a team of, I guess, come to be eight, including our CTO.

Nathan Latka

08:59Did did you say 15, Paul?

Paul Powers

09:0115. Yeah.

Nathan Latka

09:02Okay. One five, not five o.

Paul Powers

09:04Yeah. One five.

Nathan Latka

09:05One five in... And everyone's in Ohio. That's great.

Paul Powers

09:08Yeah. Everyone's actually here in the office.

Funding and Investor Network

Nathan Latka

09:09That's that's great. How have you capitalized the business? Bootstrapped or raised?

Paul Powers

09:13We raised.

Nathan Latka

09:14That's... Oh.

Paul Powers

09:14We started off kind of a semi bootstrap at the beginning where it was kind of an experiment, but then... And we raised a little bit. Then when the technology started working, we certainly raised money, and we've actually raised about $2,000,000 to date.

09:27All of that's been with high net worth individuals who are, you know, just privately invested together.

Nathan Latka

09:33How did you get connected to them? Is there just a strong kind of angel network there in Ohio?

Paul Powers

09:37I wouldn't say this Ohio any stronger or weaker than the average state. What it is is that, you know, you meet somebody, they they really like it, they invest, and they talk to their friends who, you know, co invest with them on other things, and then they talk to their friends, and it kind of... It grows naturally. As long as your company is, you know, doing well and picking up traction, that can happen. That's kind of

09:56what we've been going through. Also, lot of the investors have reinvested.

Revenue History and Growth

Nathan Latka

09:59Yeah. That's great. Okay. Good. So 2,000,000 raised to date, 15 in Ohio. Hoping to get to 5,000,000 ARR by the end of next year, somewhere a little less than a million bucks right now, at least you have vision to that. What did you grow at over the past twelve months? So where were you exactly a year ago?

Paul Powers

10:15So up until end of August this year, we were primarily focused on proving out all the different software applications because we had switched from IP protection to engineering. So we had all these companies switch over, test it, test it, make sure we can integrate it. And then also, we were going through with some very, large companies, some of the largest companies in aerospace, etcetera, manufacturing medical devices and whatnot. We were working with them on proving out

10:43the concept going through one layer at a time, and working our way up to the C level in each of those companies. And so to do that, we said we were primarily focused on not adding on too many small... What was called smaller customers at the time because our concern was, since we were so small, our support staff was our development staff. And so we said, let's think long term here. So we didn't... We wouldn't allow

11:05any more... We kind of cut... We kinda kept the lead list quiet. We kinda said, we're not gonna be trying to actively sell to too many of these people until after that happens. And then after August and September, we start... We said, okay. Now we can open up the channels now. We can actually start to have the sales happen. So And we started recruiting for our sales team.

Nathan Latka

11:22So so... Sorry. Is that all... Does that all translate to... It was zero revenue per month a year ago?

Paul Powers

11:27Yeah. Pretty much. I mean, there's no actual revenue.

First Customer and Sales Channels

Nathan Latka

11:30Yeah. Mhmm. That's great. And and so landing the first 15 customers, you've talked a little bit about how you run some pilots and how it's kind of manufacturing stuff. Talk me through how you got the first paying customer. What channel did you use?

Paul Powers

11:42Direct sales. So we met with... Typically, the way that we get leads is that we actually meet with people at events or they hear about us online. You know, they read about us in the paper or something.

Nathan Latka

11:53So which event did your first customer? Where'd you meet them?

Paul Powers

11:55That would have been out of an I... An event up in Chicago, an IMTS event.

Nathan Latka

12:00Interesting. IMTS event. IMTS in Chicago. And walk me through that, how that happened. Did you have a sponsor booth, or how'd you get the connection going?

Paul Powers

12:09We did. So we actually paid money for it to have a booth there set up. And, you know, being a new company with new technology that's not really paralleled by anything else, They weren't even sure where to put us, so they kind of put us in the wrong aisle. But that ended up working out okay too. We met a lot of people. We got a lot of leads out of it. And some people... You know, the

12:28smaller companies are really a lot easier to work with. They're faster than the larger ones. Right? So the large companies, we've been selling to them for months and we're still going through that process. The small companies, they can kinda turn around and say, hey, let's do this. So we... So in exchange, we kinda cut them a little bit of slack, and some of them who started off really early, they got a little bit of a deal.

12:47We had pay a little bit less, but now things are starting to normalize.

Nathan Latka

12:50And are you burning capital or profitable?

Paul Powers

12:52No, no, we're definitely burning capital.

Churn and Customer Retention

Nathan Latka

12:53Yeah. Yeah. That's what I figured considering you've raised and you're trying to drive some growth.

Paul Powers

12:53Correct.

Nathan Latka

12:53Insurance critical in a SaaS business. Have you lost any customers? And if so, kind of what's your annual revenue churn, would you say?

Paul Powers

13:03Well, since what's so new, you know, the actual sales side of our business, we have luckily, you know, knock on wood, not lost any customers.

Nathan Latka

13:10Has anyone downgraded? They paid a grand a month and went down to 500 a month?

Paul Powers

13:15Not to my knowledge. No. That's not happened.

Nathan Latka

13:16Okay. That's great. Yeah.

Paul Powers

13:17I would say it's probably too early to look at most of that stuff. Even even CAC.

Nathan Latka

13:21Right? You don't you don't have

13:22a good sense of CAC this early, do you?

Paul Powers

13:24No. I I think I think it's really hard to make any... I mean, I mean, I could guess at a lot of things, but I don't feel like it's really helpful.

Equity vs Venture Debt

Nathan Latka

13:30Yeah. No. I agree. Okay. Very good, Paul. Let's wrap up here with the fame... Oh, wait. Actually, before we wrap up, I mean, have you looked at... Is all the 2,000,000 been equity?

Paul Powers

13:38Yes.

Nathan Latka

13:39Have you looked at, you know, using, like, venture debt so that you don't have to keep taking dilution?

Paul Powers

13:43We've looked at it. You know, we've kinda... This is a great debate. We've been going back and forth on this in fact the entire time. Do we do it now, do we keep on going with equity? You know, with the people being high net worth individuals who are investing, we've kind of chosen to kinda keep it simple, and equity just seemed to be the simplest option. Just straight up common stock.

Nathan Latka

14:03Well, yeah. But it's still it's still... I mean, of... Yeah.

Paul Powers

14:06I totally get that when it's dilutive. Yeah. I know.

Nathan Latka

14:09That's all give and take.

Paul Powers

14:10I know. It's it's a trade off. It... It's got... You know, there there are pros and cons of both sides. So we've... This just ended up being the way that we'd ended up going.

Nathan Latka

14:17Where is there is there a point in time where you feel like it would make good sense for you to use venture debt? Or or what do you not like about it?

Paul Powers

14:25Yeah. I think what we're gonna do is probably look at doing that for the next round. So we've finished up everything that we would consider seed to 2,000,000. And then now we're looking probably doing a larger raise around May that'll be more of a series a type raise. And for that, we are considering doing it in debt.

Nathan Latka

14:42Yeah. That's interesting. Okay. Very interesting.

Paul Powers

14:45Yeah.

14:45Yeah.

Famous Five Rapid Fire Questions

Nathan Latka

14:46Very good. Let's wrap up with the famous five. Number one, what's your favorite business book?

Paul Powers

14:50That's a great question. I actually would say that one of my favorite books is The Happiness Advantage. I think it's a great book to read.

14:56Yeah.

Nathan Latka

14:57Number two, is there a CEO you're following or studying right now?

Paul Powers

15:00I... That's a good question. There are a lot of CEOs that I follow on LinkedIn. I've read a lot from Bill Gates. I think he's a great person to model a lot of the practices after. So I've read some stuff from him and have been kind of trying to incorporate that into my work schedule.

Nathan Latka

15:14Number three, what's your favorite online tool for building the company?

Paul Powers

15:18It's a great question. I would say right now, one of my favorite tools is actually Trello, which is kind of funny because it's not one that we pay for. It's just the... It makes it really easy to know what everyone's up to and where things are in the process to simplify things a bit for me.

Nathan Latka

15:35And number four, how many hours of sleep are you getting every night?

Paul Powers

15:39That varies quite a bit. I would say I probably average around six, maybe five to six.

Nathan Latka

15:44Okay. And situation, Paul, married, single, kids?

Paul Powers

15:48I've been dating my girlfriend for eight and a half years, so we might as well be married myself.

Nathan Latka

15:52Yeah. Not married.

15:53So no kids?

Paul Powers

15:54No kids.

Nathan Latka

15:55No. And how old are you?

Paul Powers

15:56I'm 29.

Nathan Latka

15:5729.

15:58Last question. What do you wish your 20 year old self knew?

Paul Powers

16:01My 20 year old self.

16:05That's a great question. What did I... What I wish we can do.

16:10I guess if I knew more about how the markets were gonna perform in the future and what things I should focus on more, but I really can't look back and say, I wish I had known that back then. I I kinda feel like I'm kinda glad that I made all the mistakes that I made in my life because I think that's kind of what helped me get where I am right now. So I wouldn't go back

16:27and try to prevent them.

Nathan Latka

16:28Guys, Physna launched 2015, making architects, engineers, anyone using CAD, their life simpler. Started off trying to make sure and trying to prevent essentially copyright or fraud or IP protection essentially. Now in a much different space, 15 enterprise customers doing about, you call it, pushing a million bucks per month or per year, sorry, in revenue up from nothing a year ago. They've just really pivoted to this space. They are burning capital. They raised about $2,000,000 to date,

16:5015 people in Ohio as Paul looks to scale the company. Paul, thanks for taking us to the top.

Paul Powers

16:55Thank you. It was nice talking to you.