Podcast #230 Zero-Waste Future

TRANSCRIPT

Ken: Good day, and welcome to episode 230 of our Momenta Industrial Impact podcast. Today, we're pleased to host Gilberto Loureiro, CEO and co-founder of Smartex AI, one of Momenta's portfolio companies. Gilberto started his career as a textile factory operator at Celos. Later, he worked at CeNTI, the Centre for Nanotechnology and Smart Materials, where he was responsible for developing and producing smart textiles and innovative textile-related projects. He also worked as an expansion manager at Elsterfelld S.A., a medical and optical equipment manufacturer driving their global expansion strategy. Gilberto has a master's degree in applied physics from Universidad do Porto and a minor in finance from FEP University of Porto. Gilberto and his Smartex co-founders were recognized as Forbes 30 Under 30 for European social entrepreneurs in 2020. Gilberto, welcome to our Industrial Impact podcast today.

[00:01:39]

Gilberto: Thank you for the invitation, Ken. I'm really happy to be here.

[00:01:42]

Ken: We've been investors since 2019, and now it's 2024. What took us so long to finally corner you into doing our podcast? It's long overdue, so I'm happy to have you on. We used to call this the Digital Thread podcast, and the idea was talking about one's digital threads. Of course, our focus today transcends industrial impact. But I still like to ask the question because I always love the answers people come up with. First question: what would you consider to be your digital thread?

[00:02:24]

Gilberto: Ken, we've been incredibly busy since 2019 with all this growth and activity, but I'm genuinely thrilled to be here. Thank you, Ken. Regarding the digital thread, I come from a background deeply rooted in textiles, factories, and manufacturing facilities. Due to my family's background, I was born and raised surrounded by machines, needles, and yarns. We're a very humble, simple Family primarily involved in textile operations. This upbringing naturally led me to work in textiles from a young age. While I can't say I was of legal working age at the time, it was my early introduction to the world of work. My father always emphasized the importance of hard work, pushing me to strive harder with each passing day. Weekends and typical leisure activities were nonexistent in our household. However, during this period, I was also attending school, where I discovered a profound passion for problem-solving, particularly in the realms of technology and physics.

The combination of textiles and physics may seem worlds apart, but I found them intrinsically linked, especially as technology advances. During my college years, I had the opportunity to meet my co-founders. Our experiences living in China and the US created a unique blend of perspectives akin to an explosive cocktail. Textiles, being one of the largest industries globally, still largely operates without the Integration of internet or technology. It's a stark contrast to the advancements we see in AI and blockchain technologies today. Visiting a textile factory, one can witness billions of dollars in production managed using traditional pen and paper methods.

Despite these challenges, my fascination with the textile industry and technology only grew stronger. It ultimately led me to Smartex, where we're continuously exploring ways to innovate and evolve. We have many ambitious plans in store, aiming to push beyond the boundaries of what's currently possible.

[00:04:29]

Ken: Beautiful. It was interesting to look at your background. Of course, we did a lot during the initial due diligence. But if I look, I see three key working experiences dovetailing together. Textile factory worker, smart textile developer, strategic business developer, and behind it, as you reminded us, you're a physics major, right? You'll see how you brought all these together, but to make the jump to do a startup? You could see how, in hindsight, you could dovetail into it, but what was going through your head at the time to create a startup from all these experiences?

[00:05:03]

Gilberto: Sometimes people are running towards something or running away from something, and let me tell you, one of my jobs in the textile factory when I was 16, 17, 18 years old during summer vacation, and such was inspecting fabrics. It involved scanning for eight hours per day in front of an inspection machine with textile rolls that had been produced a few hours earlier. I stood there for eight hours, watching the rolls pass by and marking defects manually. As you can imagine, this was a horrible job, and I developed a personal hatred for these manual tasks. Honestly, that was my 'aha' moment, like, wow. This industry is so manual, and the huge amount of waste it generates because of being manual is insane. I remember my boss being really mad at me because he lost thousands of dollars due to my failure to detect some defects that were invisible to the human eye. He lost the entire order after dyeing, finishing, processing, and cutting for a well-known fashion brand. The guy needed to cover all the costs of the yarn, water, energy, chemicals, and the time to reproduce everything, and his margin was so, so tiny. That was the moment—I was 18 years old—when I thought, "Wow, his margin is like 1%, 2%, 3%." Whenever he loses something, he needs to cover the entire cost of materials. That was a big 'aha' moment, and I started considering the business side of the equation. The business side also excites me a lot; that's also why I went into finance, which has much to do with physics. But that was the angle that I found. Also, starting a company because I am passionate about solving people's problems, solving factories' problems, reducing waste, helping the environment, and impacting lives. I am also making money out of it because we are doing things more efficiently.

[00:07:02]

Ken: Win-win, my friend, all the way around. You guys describe Smartex as building the tools for the modern textile factory. What does that mean in practice?

[00:07:14]

Gilberto: Ken, I used to say we are building the textile factory of the future. But this is not the present, so why do we say modern textile factories? One of the things we noticed is that few investors are working in the textile industry. Momenta is one of the crazy ones who believe in this industry, its size, and the way it will be transformed. If you think about it, most industries have already made that step toward automation and traceability. You go to an automotive factory, electronics, or even food, and you'll find many more technologies, AI, and many other things than in the textile factory, which is stuck in the '70s in many ways. When I see fashion brands and all the marketing that they put in the sustainability, traceability, and lots of beautiful, amazing buzzwords, it's fine. We want that. The industry needs to transform towards that, of course. But you can never achieve sustainability or traceability if you go to a textile factory. Everything is done in pen and paper, and you have people inspecting with their eyes, and you have papers in the middle of the fabrics to track the origin of the materials and things like that. Super unreliable. There are thousands of stories; I can be here all day with you, talking about stories of people cheating the system. There are a bunch of certification companies around to protect fashion brands that they sell guiltily. They sell auditing services, but the auditing is also super misaligned in terms of incentives. It's a mess.

What we mean by the modern textile factory is we go to a textile factory, we apply some existing technology, nothing crazy, no blockchain, no whatever- really basic stuff: sensors, Wi-Fi, connectivity, and we start tracking a bunch of processes. We also help them reduce the waste, track all of this data, and then carry it to the next one. Ken, when we look at the food chain, for example, you have three players: the farmer, the distributor, and the supermarket or something like that. For textiles, you have 20 players. You have the farmer for fibers, the spinner; then you have the knitter, the weaver, the dyer, the finishing, the embroidery, the cutting, and the garment. You have hundreds of people here involved, sometimes in different continents, sometimes in places without connectivity. The odds of this industry being fully digital are huge, and that's why you still have garments- I'm sure the garments we are wearing today, we have no clue where they were made or where the yarns come from, and there is no way to prove it. How can we improve things if we don't know where things are made? How can we produce them more sustainably if we don't even know where they come from? We are bringing these tools to the textile factories to become modern, clean, sustainable, and traceable. But we are not going to do it alone. We need to have more and more players around.

[00:10:17]

Ken: I love your focus on sustainability and traceability as longer-term goals. In fact, you stand as one of our strongest portfolio companies in terms of exemplifying industrial impact in action. I've personally really enjoyed your regular investor updates outlining your passion for impact and your actual impact. Can you share some of the impact highlights you're most proud of?

[00:10:40]

Gilberto: A few weeks ago, we reached 1 million kilograms of fabrics saved. For those unfamiliar with Smartex, we install cameras inside textile machines to conduct real-time inspections, enabling us to intervene immediately instead of relying on manual detection by inspectors like young Gilberto. We act in real-time within the machine to save fabric with each intervention. We achieved this milestone thanks to our 100 clients in Bangladesh, India, Turkey, Italy, Portugal, and Brazil. This resulted in a collective impact of 1 million kilograms of fabrics saved, equivalent to over 100 million liters of water. However, tracking precise figures in this industry is challenging, as water usage varies depending on factors like the origin of the cotton. Therefore, we use industry averages for estimations. Nevertheless, this achievement is significant, and we take pride in the fact that even a small percentage of market penetration has such a substantial impact. Our current market share stands at a meager 0.01%, fueling our determination to expand and make a greater dent in the universe. This drive not only motivates me but also inspires our employees and investors. While we could focus on projects such as optimizing luxury sales or website conversion rates, the impact wouldn't compare to what we achieve in the textile industry. That's the beauty of working in sectors like textiles—making a tangible difference in the world. I'm sure you see similar impacts across your portfolio as well.

[00:12:59]

Ken: I tell people we're not impact investors. We're not directly investing in ESG mandates, but as you said earlier—sensors, wiring, connectivity, bringing it all together—then all of a sudden, you're providing what many like to call a digital twin for the plant. The things that you can do on top of that enable Industry 5.0 are sustainability, resilience, human-centricity, or as I like to call it, productivity, people, and planet. But the beauty is that it is a predictable outcome of the areas we invest in technology and the work that you're doing. Industrial impact is kind of—we're happenstantial impact investors, I like to say. But the beauty is that our portfolio makes a greater impact than many of your direct ESG investors who are literally just looking to invest in the impact. It's sustainable impact if you want to call it that. In some senses, not only have we enjoyed your investor updates, but from time to time, and of course, with your permission, we share those as best practices with some of our other portfolio companies and our ecosystem. Anyway, so you founded the company in Porto, Portugal. Tell me, what's the startup scene like in Portugal?

[00:14:15]

Gilberto: It's a small country with a relatively small economy, but there is a particularity here. I live in Porto, but my family is originally from another place. But Porto, together with Istanbul, might be the only two places in the world where we could have all the checkboxes to build such a company because we need access to talent and software like world-class companies here, like Revolute Software. Many international software companies are around, so we have the software talent and a massive textile hub next door. We are an hour's drive from the second largest textile hub in Europe, also because Inditex—Zara, Massimo Dutti, Bershka, Pull&Bear, all of these brands—are from Inditex, which is a two-hour drive from here in North Spain. It makes this hub very interesting regarding time zones to work with the US and Asia. It's a nice place; we can convince people from the US, Canada, Brazil, and the UK to move to Porto. We are still old-fashioned, Ken. We still ask people to come to the office most of the time. We have hardware, software, network, so we prefer everybody in the same place. These factors combined make Porto a very special place for this type of business. But because it is a relatively small economy, whenever we start the company in Portugal, we are already looking to the US or Asia because everybody knows we need to be abroad as soon as possible. It makes it special on that front. I was reminded about one thing you said about the impact. Funny enough, when we speak about the fashion brands and the impacts or even the factories, the problem of the factory is not the waste or the ESG.

I remember I went to Bangladesh many times and spoke to the Bangladeshi business owners. Many times, they studied in the US, and they were very well-educated. I ask them, "What is your problem?" Textile waste is never the problem, Ken. Nobody cares, unfortunately. It's good for us, it's good for our communications. It's good for the mission and the talents. But our clients, the textile guys, don't care about the waste. We always talk about waste with them but in a different way. We talk about their margins, workers, or other things they are losing because these conversations of kilos of fabrics or liters of water usually do not ring a bell to our clients. I just remembered this because from Porto and Portugal, we see many Portuguese manufacturers caring about that, but most of the world's textile production doesn't happen in Europe. It happens in Turkey, India, Bangladesh, and China, and that's a different mindset. Creating a company from Porto but selling it abroad, we need to be very flexible mindset-wise because we speak with people with completely different ways of thinking and operating. It also brings some cool challenges for us.

[00:17:21]

Ken: I've been lucky to be part of the EU Commission's work on Industry 5.0, and of course, I mentioned sustainability, resilience, and human centricity. I recently read a new report from BofA, a Wall Street analyst firm, and literally on the third page of all trends globally that they're tracking—Industry X in some sense. But the beauty is how they refer to it: Industry 1.0, mechanization, Industry 2.0, electrification. Industry 3.0, automation. Industry 4.0, digitization. Industry 5.0, humanization. I guess the first time I've seen one term be used to predict where things are going to go. So, when you start talking about the workers, that's part of the human-centricity aspect of Industry 5.0, but it's something that I think people are beginning to see the future will, in essence, become more human-centric. Factory workers, right? The use of AI to augment skills and things like that. It's interesting to hear that, as I just read this forecast yesterday.

[00:18:25]

Gilberto: Yeah, it's funny that ChatGPT looks like it's threatening more accountants and lawyers.

[00:18:30]

Ken: Exactly. That's it. That's it. I saw something in the last couple of days about the number of young people in the United States who are going back to traditional trades now: electricians, plumbers, welders, that kind of stuff. This may be a very different future than what we had predicted. Anyways, look. I know you guys have had quite a trajectory. Most recently, you closed a $24.7 million Series A round roughly about a year ago. Of course, we've been proud investors since 2019 and enjoyed being part of your growth. To what do you attribute this strong interest from investors?

[00:19:11]

Gilberto: Our main investors are Lightspeed Ventures, Tony Fadell, and SOSV. We always optimize for the quality of the investors, then the valuation or the percentage of the evolution, and things like that. In general, that's good advice for every startup. Whatever your bottleneck is, try to find an investor that helps you there. When we were starting, we needed lots of investors with hardware, electronics, and industry experience, and that's why Momenta was a big investor in the beginning. SOSV, a hardware accelerator, and DCVC Data Collective, a machine learning AI expert. I advise founders to optimize for investor quality, not for anything else, and things will flow in the right direction. That's first. But the other thing that everybody is looking for, and I feel when I speak with investors, is that we are solving a real pain. We are not inventing here like some nice-to-have vitamin.

No, no, no, no, no. We are talking about an aspirin that is a pain. People are losing money, losing resources. Nobody knows about that massive hidden problem because nobody goes to textile factories; it's not the sexiest place. If you are an engineer, you might prefer to work for Meta or Google than work for the local textile factory in Turkey. There is a massive hidden problem of hundreds of billions of dollars of impact. There is clear pain from the clients; the timing is not a detail here. If we had tried to do these types of solutions ten years ago, it wouldn't have been possible because of all the connectivity and the internet in the factories would have been a huge problem.

Also, the price points - cameras are now much more affordable than ten years ago because of all this smartphone thing. Tony Fadell, the father of the iPod and iPhone, is helping us with cameras, lenses, and suppliers so we can provide a price point that is finally possible for textile factories to afford. They will not pay hundreds of millions of dollars for an automation solution; it's a very price-sensitive industry. All of these combined may be an explosive cocktail. Fortunately, we have been having lots of success when we fundraise. We're always oversubscribed, and fitting all the investors in the round is always tough. One last thing: we have a strong culture of no massages, no dramas. We have a very frugal type of mentality. We are very hardworking: Sundays, Saturdays, and nights. It's part of our DNA; some people love it; some people hate it. But this is fundamental to change an industry like textiles. It is not easy to find people willing to travel to Bangladesh, India, and Turkey or to the middle of the jungle in Brazil to install hardware, install, deploy software, etc. It is a tough life. We are a 'dirty hands' type of people. We need to roll up our sleeves, and if you want to change the world, you will not do it from Paris or London. You need to go to the places where the actual problem is. I think because we have that angle in Smartex- we are implementing high-tech technology like machine learning, cameras, and PCBs in these places; I think that's also attractive for investors because not many startups will be able or have the courage or the grits to do this. I usually tell my investors that if competition comes, it's not coming from Silicon Valley. Most likely, it will come from a place like Turkey, India, or China because you cannot solve this industry with certain standards that engineers in Silicon Valley have. I'm not saying bad things about them; they are great, but finding a software engineer willing to spend two months in the middle of the jungle or travel in economy class to Dhaka, Lahore, or Karachi is not easy. These things attract investors, and we do them with pleasure because they are part of our DNA

[00:23:25]

Ken: When we first started Momenta, the term 'Internet of Things' certainly was hot, and of course, we made some initial investments in companies like ThingWorx, which probably brought a lot of that trend together. But because we have an industrial background, we constantly remind ourselves that IT is the Internet of OT, right? We forget that the 'Internet of Things' requires exactly what you said. You have to be out there and roll up your sleeves. You have to install equipment. The 'Internet of' is a nice part of it and certainly partially required in that, but it requires that whole formula to be an industrial tech company like you guys are, so I like how you've described it. I know Smartex is almost seven years old now. Knowing what you know now, what advice would you have given yourself at the start of this journey??

[00:24:17]

Gilberto: Everything is more difficult than it looks. We are having a board meeting next week, and I was watching some of our board slides from three or four years ago, and we were still very naive. Sometimes, it's good to be naive because if you want to change an industry, you need to be an outsider and think out of the box. But everything is more difficult than it looks. The growth, the hardware, the reliability, the scalability are a bunch of punches in the face from clients, from - we need to deal well with rejection or political stuff, for example. We threaten the textile workers sometimes. Sometimes, they think that technology will replace them, so sometimes, we have people in the factory trying to kill our system. There are lots of challenges. I would maybe say the advice for the younger Gilberto would be to focus on culture and people as the priority zero type of thing because if we have the right people in place, assuming we have a great mission and a great product, which we do - if we have these two things, great people to work with and a great mission, great products - these two things also create an amazing combination that makes people happy. I have this definition of happiness: happiness is the delta between the expectations you have about something and the reality, how it happens to be. If you keep your expectations very well managed, usually is half of the way to be happy. But of course, you need to always work on the output, so the reality is always higher than what you think. From what I'm seeing in Smartex, my clients, and the industry, people having an amazing team around should always be priority number zero for us. It has been, but I would reinforce that advice for my younger self.

[00:26:15]

Ken: Well said, and I love your pragmatism about managing the expectation gap there. Again, your humble upbringing and, certainly, your location in Portugal helped to bring in that level of pragmatism, and we look for that in all of our industrial tech companies. The reality is the factory floor is never going to change as fast as people would want it to, and it tends to be a laggard in terms of adopting technologies because you don't mess with running processes, especially in regulated industries.

[00:26:46]

Gilberto: You can come to the factory with beautiful slides and designs; they don't care. They care about stuff working.

[00:26:55]

Ken: If I get one more pitch that says you can rip out all your programmable controllers and put Arduino boards in their place.

[00:27:02]

Gilberto: Exactly.

[00:27:03]

Ken: You got to live in the factory for a bit.

[00:27:06]

Gilberto: Exactly, exactly. Sorry, Ken, but this is to finish here. These are the cultural things and the people things. This is tough, and it's tougher than it looks because it means you need to fire people as well, very quickly whenever and because CEOs and guys like me, I would say, tend to be very energetic, they tend to be liked by other people. It's very difficult to deal with rejection or reject someone. I even have some stories, even reasons for firing people, that I was sweating and shaking. This is always more difficult than it looks, but it's got to be done, and someone has to do it, so here we are.

[00:27:42]

Ken: Once you get enough experience, you realize in hindsight that the way you measure the stress of letting somebody go is what happens after. Do you miss them? Did anything change? Once you've done that enough times, you realize, "Yeah, I need to rip off the Band-Aid sooner." That's my philosophy.

[00:27:58]

Gilberto: Totally, totally, totally. It always gets better.

[00:28:01]

Ken: You mentioned when you talked about Future Factory and such, I'm curious. What do you see as your top growth opportunities over the next couple of years?

[00:28:10]

Gilberto: We are very careful with that question because there are so many things to do with textiles. I told you about the 20 different players: the yarn, the spinners, the knitters, and we are receiving inbounds from everyone. 'Hey, we also need cameras here.' 'Hey, we also need internet there.' The opportunities in textiles are everywhere: for automotive fabrics, for technical fabrics, for woven home textiles, for finished colors. There are so many things to do and such a lack of technology penetration that we need to be careful because if we want to boil the ocean, we won't do it, right? We are very laser-focused on a very specific part of the textile industry, which is knitting production. Of course, we keep an eye on other areas. We see lots of great things happening on the traceability front because of less isolation coming. The European Union and the US are forcing brands to disclose all of their suppliers or the ESG impact of each garment, and they have no clue how to do it, so they need to start connecting with the factories. Guess what? We have cameras, sensors, and everything in factories, so we have privileged data to feed these types of systems, legislation systems, digital product passports, and all of this stuff. They will need to be built on top of the data from our factories. These types of things are amazing opportunities that I love to discuss, and they build amazing slides, but they can also be a distraction if you are building a business and counting on legislation to help you. You are going to serve the tide and not the wave. Be careful because the runway can also kill you. We are being very careful in these discussions and focusing a lot on what makes our beer taste better, which right now is reducing waste. Especially in times of crisis, which we are in now; there is a big global crisis because of the interest rates and energy prices. Textile factories have not been doing well in the last few quarters. Our product must also change to be more of an aspirin and less of a vitamin. Cut costs, save money, and not so much about - become more efficient with new dashboards, whatever else. We also need to adapt to these times. There are many great opportunities around; it's just a matter of timing and focus for us now.

[00:30:27]

Ken: Sure, and all good answers from a VC investor perspective. Focus, focus, focus. I love that. Along the same lines, you mentioned AI earlier, but what technology trends are you watching these days relative to your space?

[00:30:41]

Gilberto: There are not many companies or startups in textiles. You have a lot of incumbents, like old companies, some of them very modern and innovative. But usually, it's a family business. The textile industry is full of family businesses- for the machinery, technology, and software. There aren't many great things coming there- a few things. However, I would divide the most interesting textile technologies into three buckets. One bucket would be new materials like new cotton, recycled materials, or better materials that are not pollutants. It depends on how you count, but the textile industry is still responsible for 20% of the water pollution in the world. 20% of the water pollution in the world, it's insane. One t-shirt takes thousands of liters of water to grow, dye, color, and things like that. New materials are an area in which we see some cool developments. Some startups are going there, recycled fibers, and so on. The second bucket is better production, which is where we fit as Smartex: better machines that are connected and traceable, things like that. The third bucket would be retail. There is still room for improvement in retail. We start seeing some startups doing these AI things to generate designs, or you can try clothes at home without really trying them. It might still be a few decades from there because people like to touch fabrics before buying them, and it's still a small percentage of e-commerce. The e-commerce of fashion generates a lot of returns, which is like cancer for the ESG metrics. But these three buckets are where I'm expecting to see more technologies coming. Indeed, more startups are needed, and more crazy investors are needed to invest in textiles. Ken, if you find more tech startups, go ahead.

[00:32:41]

Ken: There we go. Well, with the anchor with you guys, I can see that having strong potential. As we wrap up, I'm curious how you maintain your edge as a leader. Do you have any recommendations that you'd like to highlight for the audience?

[00:32:57]

Gilberto: I usually surround myself with my coaches and mentors; I ask for their help on WhatsApp and calls. Tony Fadell is one of my big mentors; I talk with him almost every day. But also lots of books and podcasts. For example, "Crossing the Chasm" is still among my top three books. You suggested that to me a few years ago. It changed my life in the way I still do business today. But other amazing books like "The Great CEO Within" are some of my Bibles. "Build" from Tony Fadell or Ben Horowitz's books. "Hard Things About Hard Things" or "What You Do Is Who You Are." "Thinking Fast and Slow" by Daniel Kahneman. He died a few days ago. I'm now reading one that is like my new bible, which is "Fall in Love with the Problem, Not with the Solution." I'm always consuming content- books, podcasts, mentors. Keep asking stupid questions. Keep humble, and don't play smart. If you are the smartest guy in the room, you are in the wrong room. I continue to consume this type of content. "SPIN Selling" is also one of my favorite new books to help me sell with questions and leave with questions. I also love another book called "The Messy Middle." It's more of a product type of book on how to build products for these industries. It's about these pieces of content. Of course, this podcast, Ken. I have been a loyal follower for a while.

[00:34:21]

Ken: I appreciate that SPIN is selling. Well, that's a great list of books, and for the listeners, we will have that as part of the transcript so you can see all the great books Gilberto has recommended. Gilberto, thank you for this time and for these insights today.

[00:34:39]

 Gilberto: My pleasure, Ken. Thank you so much.

[00:34:41]

Ken: This has been Gilberto Loureiro, CEO and co-founder of Smartex AI. Thank you for listening, and please join us for the next episode of our Industrial Impact podcast. We wish you an impactful day. You've been listening to the Momenta Digital Thread podcast series. We hope you've enjoyed the discussion, and as always, we welcome your comments and suggestions. Please check our website at momenta.one for archived versions of podcasts, as well as resources to help with your digital industry journey. Thank you for listening.

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