Founder Forum: David Joseph of Davo Technologies

Before co-founding a software company that automates the sales tax collection and payment for small- and medium-sized merchants, David Joseph was a restaurant owner in New Jersey. He hated keeping track of how much sales tax he had to set aside for the state each month and worrying about missing the payment deadline. He hated it so much, in fact, he decided to leave the restaurant business and build a software company from scratch that would automate that process for other fed-up business owners.

Today, Joseph and his co-founder Owen Brown have grown Portland-based Davo Technologies to a point where it employs nine people and is on the verge of a few milestones that could shift the company’s growth into overdrive.

It has been a long process for the pair to get to this point. Joseph and Brown began discussing the product, now known as Davo Sales Tax, way back in 2000. The pair spent a decade batting the idea around and, as Joseph puts it, “waiting for the technology to catch up to us.” They received a patent in 2010, moved the business to Maine in 2014 after received a development loan from the Maine Technology Institute and officially launched the same year. I first covered Davo Technologies that year for the Portland Press Herald.

In our conversation, Joseph discusses what it takes to be an entrepreneur, his idea for helping more Maine startups get through that chasm between startup and profitability, and why he never wants to be the smartest person in the room. This interview has been edited for length and clarity.

Maine Startups Insider: Have you always thought of yourself as an entrepreneur?

Joseph: I don’t know if I’ve thought of myself as an entrepreneur, but I think what I’ve done in the past has been entrepreneurial. If I look back at the jobs I’ve had, I’ve probably had two situations where I’ve actually worked for someone else and took home a steady paycheck. And those were both relatively short stints; never more than two years. I’ve always worked for myself and always followed a dream, followed a passion. I think you have to love what you do and do what you love. If you don’t have the passion for it, it’s not fun and not worth doing. And so I’ve always followed that rule.

Historically, I went into the restaurant business. I never went to culinary school. I had actually only worked at one restaurant in my entire life, and I’d never worked in the front of the house. I worked in a kitchen and it wasn’t even a full restaurant. It was a pastry shop opened by my brother. And from there I decided to open a restaurant. What naiveté! ‘How hard could it be?’ I thought to myself. They order food, you make food, you bring it out to the table, you collect the money. That was the beginning of my restaurant. And I grew it to 25 seats, and then to 160 seats. We were in business 16, 17 years, made national acclaim. We were written up in Gourmet magazine, the New York Times. If you have a passion for something and stick through it and stick with the grind and work it, you can be successful.

It was while running your restaurant that you first became intimate with the challenges of collecting sales tax on behalf of the state. Tell me about the genesis of your idea.

Sales tax was always the bane of our existence. It would always seem to come around on the 15th of the month in New Jersey. And my bookkeeper would come in on the 13th or 14th of the month, drop off an envelope and tell me my sales tax return is in there and that I’d need to write a check for $6,000 to the state of New Jersey and put it in the mail by the 15th. And I’d be standing there going, ‘Oh my God, my dishwasher didn’t show up. I just did this. I just did that. We just had to put tires on the van. We don’t have $6,000.’ So, we’d invariably be late and we’d just get behind because as a small business, as an entrepreneur, you’re pulled in so many directions. And the restaurant business is incredibly complex. There are so many things going on and so it’s easy to lose track of mailing the sales tax. I struggled with it. We’d get behind and at some point I’d have to go to the state and I’d have to wait until an amnesty—if you come forward we won’t charge you on penalties or interest. We’d always take advantage of that. But in the meantime, it was a constant thorn in our sides.  

My manager at the time, who is now my wife, said that at the end of every day we really should just put the sales tax in an envelope and put it in the dropbox and that she’d be the only one with a key. This way at least it’s put aside every day and I didn’t have access to that money. So we made the adjustment and from that day on we were always on time.

One day I was kind of putting things together in my head. We had a cash advance from the New York Times card. You’d get a cash advance and every time someone came in and used a New York Times credit card it would get paid back as a percentage to Visa and Mastercard. So I knew they had the ability to split off percentages of credit cards. I looked at the credit card terminal and I said, ‘You know, somewhere in that terminal is a solution to this problem.’ And I went to my bank, to Chase, and asked if they could split off a percentage of my credit card receipts every day when the batch comes in, put 7 percent in this account and the rest into my regular account. This way I knew I’d be 80 percent of the way on my sale tax. The rest was cash and I could come up with the other 20 percent pretty easily. But they said no, there’s no easy way to do that.

I came out of our kitchen one day and, as the legend goes, I don’t remember saying it but supposedly I did, I said, ‘I want someone to do our sales tax the way ADP does our payroll.’ And that was really the germ of the idea. Why can’t someone just take care of this for me? Why do I have to do this? I didn’t open a restaurant to be a tax collector for the state of New Jersey. And I can assure you 100 percent of small businesses out there feel the same way. Necessity is the mother of invention. This idea came from my experience in the restaurant business and dealing with sales tax.

I’m fascinated with what it takes to go from idea to execution. How did you, a restaurant owner, take that idea and actually build a software company? Where did you get that confidence?

I think the first thing is that Owen and I have never faltered from the fact we have a great idea. We have never doubted it. So that is to me as an entrepreneur incredibly important. If you don’t believe in your product 1000 percent, you shouldn’t be an entrepreneur or you need to change your idea.

We presented at Finovate a couple years ago—a financial conference in New York. Someone came up to us afterwards and said, ‘You know, I heard a lot of pitches for solutions looking for a problem. You guys were the only ones that were pitching a solution to a problem.’ For us that was gratifying.

So how did we get here? It has not been the two of us alone. Neither of us are software people, neither of us are point-of-sales people, nor were we experts in the merchant services business. We hired a couple great consultants who have been opening doors and educating us. We hired a great CTO. He actually came on as the architect of our technology. A third party built the initial product that we have, but Peter, our CTO, who was a consultant, has now come onboard on as our full CTO and has taken all of that over, so now all our technology is being built in house. But it’s a day-by-day process. There’s no roadmap that we can use to say, ‘Okay, we’re going to get from Point A to Point B.’ You plant a stake out there and hope you come close to it. And your stake is going to constantly move, and you have to keep moving with it, and moving in the right direction.

Starting a company is already hard enough when you’re doing so in an area where you have experience. In your case, you and Owen started a company in a space where you had no specific knowledge. Did that pose greater challenges?

In terms of not having the knowledge, I wouldn’t agree with that. I think I had vast knowledge of what we were doing, just not how we’d build the technical end side of it. I have no technical computer skills whatsoever. I check my email and I text. I know the very basics, but I don’t need to know the technical side, and I don’t want to know that. The skill set I bring to our business is I understand what it’s like to be a small merchant. I was a small merchant for 20 years. I understand the daily stresses of owning a restaurant. I understand you have a dishwasher who didn’t show up and you have to get on the phone to find someone. I understand what it’s like to make a schedules. I get all that. What I bring to the table is that knowledge and that perspective, which is vitally important when you go to sell your product because you have to convince people that your product is better than anything else out there.

In our particular situation, we don’t sell to our end user, we sell to a channel partner. So we compete in a marketplace of 200 apps. I have to convince all our partners that my app is the best app. That my app is better than 199 apps in that marketplace and you should lead every pitch with Davo Sales Tax, because you’re solving a huge problem for your customers. We’re now one of the top selling apps on Clover [the first POS provider with which Davo partnered], so I know that what we’re doing is right. We’re getting that recognition and people are realizing that solving someone’s sales tax problem is a much better selling tool than telling someone, ‘Hey, I have an app that prints your fortune on the bottom of every receipt.’

If you look at the scheduling app, which is one of our big competitors in this app marketplace, it’s a great app, but if the restaurant owner screws up the schedule, who does he hurt? He hurts himself because now he has to come in and cover the shift that he did not cover, or get someone to cover the shift because he messed up the schedule. If he fails to pay his sales tax and then forgets about it, then fails to pay the next month, or is late the next month, then he gets three months behind… if he happens to be in the state of Florida, that’s a felony offense. The state will show up and put you in jail for a week. That’s pretty serious. Or you missed your sales tax filing in California, where the penalty for missing the filing and missing the payment is 20 percent! So if you owe $5,000 like our average customer in California, you just hit yourself with a $1,000 penalty. For a small business that’s a lot of money. For $1,000, they could actually buy a Clover POS. That is the experience I bring. How stupid of me to be a restaurateur and be behind on my sales tax. I was opening my wallet to the state of New Jersey, saying, ‘Here reach in, take my money. What do I care?’ That’s really stupid and if someone had walked into my restaurant and said I will collect, file, and pay your sales tax for you, I would have dropped to my knees and kissed his feet.

What has been your biggest challenge in starting your company.

The biggest challenge? Money. The single biggest challenge is raising funds. Talking to investors and getting people to fund your idea, because there’s ton of competition out there. And talking to other entrepreneurs I think the biggest challenge for everyone is funding. We feel we’ve been lucky; we’ve done pretty well, but it’s expensive to do what we do, really expensive, and we need to get to scale. That’s our next biggest challenge: Getting our product to scale to market and how you go about doing that.

How have you gotten past that challenge when it comes to raising money. I know you received an MTI loan, but have you sold equity?

Yeah, we’re constantly raising money. We have raised to this point a little over $3 million in four and half, five years. We have had MTI money twice. We’ve had some business accelerator grants from them, as well. We’re are now in another round to raise another $2 million that’s going to go towards marketing, because we know we have a product that works really, really well. We needed to make sure our product worked perfectly before we went to scale. It’s much easier to fix something when you have 500 customers than it is when you have 8,000. So we have been building for scale for the past year and a half. Now we’re confident with that and ready to go to the next level, and that’s what the next round of funds will be for.

How many customers do you currently have?

We are just about to a 1,000 signups now. Last year at this time we were at 300. So there’s definitely an acceleration of growth now. Unfortunately we lose customers due to either dropping off Clover, which is the POS system that we’re integrated with, or going out of business. There is an attrition, it’s not that much, but there is certain amount of churn in what we do. Our feeling is that as we get to customers a bit higher up the food chain, have a little bit more stable cash flow, we will definitely not be losing as many to going out of business, and as we broaden our integration with other POS systems, we won’t lose a merchant if they move to another POS system. So if they move from Clover to Square, who we’re doing an integration with now, we would not lose that customer. We have another integration with an aggregator of legacy POS systems—a legacy system is not cloud-based—primarily in the restaurant industry. If you think about it like a wheel with spokes, each spoke is a different POS system and they’re the hub. We will get the data coming through the hub. So an integration with them will give us an integration with I think 13 different high-end POS systems. So between Square and that integration we will probably have 75 percent of the restaurant market, which is pretty big for us.

You and Owen actually founded the company in New Jersey, but you eventually moved to Maine. What attracted you here personally and what ultimately led you and Owen to base the business here?

I moved here in 2003. I was out to dinner with my accountant one night when I owned the restaurant. We’d been at it for 16 years. We had a new landlord in our building and I wasn’t really happy with that and I told my accountant, ‘You know, if someone made me an offer on the restaurant, I’d sell it tomorrow.’ And he said, ‘I know someone who wants to buy it.’ And three months later I was unemployed. My wife and I went down the list of places we thought we’d like to live—we had a two-year-old daughter at the time. We were both from New England, we had friends in Maine, we vacationed here, and Maine came out on top of the list. We moved here, I had a couple other businesses here and when Davo started getting going, MTI was brought to our attention and I went over and met with Joe Migliaccio. Joe’s family was in the restaurant business, and he got us in a second. So he went to bat for us the first time around, and when we went back a second time for another development loan. MTI has been very very helpful, and I’ve taken an active roll in Portland’s startup community. We’re doing some stuff with Venture Hall and Steven Sperry who’s advising us and helping us. I think being involved in the community in Portland is really important.

I wanted to ask you about the resources you found helpful, and how important a healthy startup ecosystem is to help individual entrepreneurs to succeed.

I think it’s really important. I didn’t do a Top Gun program, but I wish I had a mentor from the very beginning who talked about valuation, for instance, and what are you getting out of this funding, and how much of your company are you willing to give up. You know, there are a lot of books out there, but personally the ones I’ve read I think are a lot of BS, at least from my standpoint. I think there’s some really good books out about it, but I think it would have been really helpful to have someone who has been there and done that, and said this is what you need to think about and do it this way. I mean, we’ve learned it. We’ve made our mistakes and none of them have been fatal, fortunately. But it’s a constant learning curve.

Are you able to tell me about revenue figures or, at least, if you’re profitable yet?

We are not revenue positive, but our goal is to be revenue positive in the next 18 months. We’re at 1,000 merchants now. At 4,000 merchants we are revenue positive. We’re well within shooting distance of that. Like I said, we have some pretty big initiatives coming, we have a few big, huge trade shows in the next few weeks. The New England Restaurant Show and the New York Restaurant Show. Between those two we’re going to be in front of 30,000 restaurateurs, so that’s pretty big exposure for us.

Becoming revenue positive within 18 months is a relatively short-term goal. Tell me about your long-term goals for the company.

We are not building a legacy business. We are not building a business to pass onto our kids. Nor are our investors; they’re not investing in our company as a legacy. They’re investing in our company for an exit. We are building a company and tailoring it to prospective suitors. For instance, Intuit. Intuit is everything tax. They want to be everything tax for small businesses: payroll, income, all the back office. They have a lot of money. It’s all in the tax universe. So there are potential suitors out there. In our scope we are trying to maneuver and put ourselves in a position for that. The question always comes up when talking to investors: What’s the exit? When do you want to exit? We haven’t put a time or money amount on it, but an exit is the ultimate goal.

Have you had any suitors approach you yet?

We have not. We’re not ready for it. We were actually just on the phone with a potential investor yesterday. He’s had a couple exits and he said, ‘You’re going to turn down your first five offers. Be prepared for that. You’re going to walk away from your first five exits.’

Have you had success attracting investors from outside Maine? It’s one thing to get money from MTI, Maine Angels, or CEI Ventures. BUt it’s another thing when you’re trying to attract the attention of a Boston VC. Have you had success there?

Yes. So, we have a couple things there. Besides MTI, we have investors in Florida and California, all angels. And family and friends. We have one institutional investor, a bank out west, and the accelerator in St. Louis that we were a part of.

To me, the problem with Maine right now is the Maine Seed Capital Tax Credit. Here’s the problem: If you’re a Maine resident you get a 50 percent tax credit on any investment you make in a startup, or however they define that. If you are outside the state, you have to be a venture fund to use this program and you will get 50 percent of your investment back to you over four years. Here’s the problem: To be a venture fund, they want to make a minimum of $5 million in revenue because otherwise it’s not worth it for them to do the due diligence on a company. So, for us, that program outside the state of Maine doesn’t make a whole lot of sense. They should open up that program to angels outside of Maine just like they do for venture funds outside of Maine. Maybe not 50 percent, but if we went to an angel group in Massachusetts and said, ‘Hey, do you know you can get 25 percent of your investment back over four years for investing in a Maine startup?’ That would drive more money here. It might be smaller amounts, but the money would go further and it would also help companies like ours. If we were at $5 million in revenue we don’t need the Maine Seed Capital Tax Credit anymore. Companies that are in the position we’re in—what’s classically described as the chasm between startup and positive revenue—need the helping hand and they should be able to attract that money from anywhere around the country.

What keeps you up at night? What’s a nightmare scenario for you?

The nightmare scenario is that we have just screwed up someone’s tax return.  Actually, I’ll tell you what recently kept me up at night. I had this lightbulb moment because there are certain states now that charge sales tax on SaaS products, of which Davo Sales Tax is one. So in certain states we’re going to have to collect sales tax and pay it. So I was thinking that it would really suck if five years from now we didn’t realize it but we weren’t collecting sales tax and the state came back to us and said, you’re a SaaS company, you owe us XYZ thousands of dollars in sales tax that you were not collecting.

And money. I think that will be there until we are revenue positive, until we are not out there with a tin cup, so to speak.

Do you have any advice for people thinking of starting their own business?

This is the one thing I live by: If you’re the smartest person in the room, you’re in the wrong room. You have to take that attitude. You have to believe in your product and believe in what you’re selling or building, but you need to depend on people to help you along the way. You need to have people in the room who are smarter than you at what they do. Is it better to be jack of all trades or an expert in one? You need to be both. You need to be an expert in one and a jack of all trades, but you also need to be very open minded about bringing people into your organization who are going to help you move forward.