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October 18, 2017

#12 Teamable

Entrepreneur Laura Bilazarian has an innovative solution for helping companies find great talent.

August 30, 2017
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From Gimlet, this is The Pitch. I’m Josh Muccio.

Jillian Manus: Carlos Santana and I built one of them, called Casa Noble.

On this show, we venture into the world of startups, to a critical moment, when aspiring entrepreneurs put it all on the line and pitch investors for funding.

Laura Bilazarian: We quit our nice lives and we moved out here to a garage in Palo Alto.

Howie Diamond: So you’re replacing recruiters?

Laura: Most of you haven’t applied to a job since you were in college, like me.

Sheel Mohnot: I mean any good person doesn’t apply for a job, right?

Today we hear from a brash, East Coast founder who is sure she has the solution for helping companies find great talent. But a solution is just the start: she also has to convince investors she is an entrepreneur worth betting on. And that could be a tough sell.

Phil Nadel is the co-founder of Forefront Venture Partners. He’s all about managing risk, and won’t go in on an investment unless the numbers are rock solid.

Phil: $3 million and we do the whole thing.

Jillian Manus is here representing Structure Capital. Her investment decisions often hinge on whether she could be a good match for the company — by bringing value beyond just the money.

Jillian: I see the merit. I just want to make sure that I always add smart money, just not money.

Jake Chapman’s here with Gelt VC. He has a keen eye for the small details, and as a former lawyer, he’ll hold an founder accountable for their every word.

Jake: They’re going to shut you down on that name. It’s definitely trademark infringement.

Howie Diamond founded the VC firm Ranch Ventures. He’s looking for entrepreneurs who think outside the box, someone with that X factor that you can’t quite put your finger on.  

Howie: I dig your mojo, man.

Joining us this week is Sheel Mohnot with 500 StartUps. He isn’t afraid to call things exactly how he sees them. And he’s looking for a founder who can dish it back.

Sheel: As much as I want the business to exist, I don’t know if it can.

Jillian: So I don’t know if you ever tried that. And then we sold it to Crown…

It’s mid-morning in San Francisco, and our investors are waiting on the next entrepreneur. They’re shooting the breeze to pass the time, which, if you’re a big time investor like Jillian Manus, means revealing the details of your latest super bowl party.

Jillian: So, I built the San Francisco bridge, um, it was an acre long in my backyard.

Howie: You built a model of…?

Jillian: Yeah. And then NASA called me the day after my party. And he was like, “Hello, Ms. Manus?” I said, “Yes?” And he said, “This is Lieutenant So-and-so from NASA.”

Laura: This reminds me of my prom entrance or something.

Jillian: Oh, hi!

Laura: Hi, nice to meet you.

Founder Laura Bilazarian enters the room, as Jillian leaves us on a real cliffhanger of a story. Why did NASA want Jillian’s replica? We’ll tell you at the end. But now, we have a pitch to hear.

Laura: Hi. I’m Laura from Teamable, and we’ve built the best way to hire the right teammates via data driven referrals.

Laura explains that she used to work in a Wall Street investment bank. There, like a lot of places, hiring the right talent was incredibly hard, a constant struggle. But she noticed, on average, when they hired people employees knew, those people consistently performed better than people who applied cold.

This isn’t news, right? Companies know that good employees come from referrals. But finding those people is the tricky part. If only there was a way to make it really easy — like to gather all of those friends and associates in one place… like a big… social… network.

Laura: The average person has between 500 and 1500 connections across Facebook, LinkedIn, the oldest social network which is their email. The thing is, they don’t know necessarily who those people are and they’re not thinking about them in terms of positions at their companies.

But with the right technology, it’d be easy for employees to identify and contact qualified applicants through their social networks. Laura decided she had to be the one to build that technology.

Laura: So we did what any normal person would do, we quit our nice lives and we moved out here to a garage at Palo Alto. And so we’re raising $1 million to accelerate our growth.

Howie: Is this your first company?

Laura: Yes. Yeah. But I was an investment banker, you know, so I was in a lot of these meetings with other people’s companies.

Howie: Yeah.

Phil: Tell us more about how it works.

Laura: Well, I’ll just use an example of a company we’re launching in a few days, is Medallia, which is pre-IPO.

Medallia is just one of several dozen Teamable customers — and they’re all using this technology that Laura’s team built over the last couple of years. Here’s how it works: if you’re an employee at one of these companies, Teamable will comb through your networks — Facebook, LinkedIn, even your email contacts — to find matches for open positions. HR flags their favorites, and then you can personally invite those friends to apply.

Laura: And it’s very, very effective.

Howie: So you’re replacing recruiters?

Laura: Yes, we are replacing agencies. We were just talking to Warby Parker in New York yesterday. Their engineers are getting between 20 and 100 messages a day. They’re ignoring them. But when it comes from their friend that they used to work at Google with, they respond.

Howie: So the employee is empowered to reach out to their friends once there’s a match?

Laura: Yeah.

Investor: Are the companies making their employees do this? Because if I were an employee, and someone said, show me all of your friends. Nope.

Laura: Yeah. That’s the biggest hold point.

Laura is very clear about this: no one is required to make their networks available to Teamable. It’s entirely voluntary. Usually, a company using Teamable will send out an all-staff email that goes something like this:

Laura: Hey, we all know referrals make great hires, we all don’t have time to go through our networks every time a new position opens. Can you take 30 seconds and upload your contacts into Teamable. By the way, you’re just giving the names, no one can see your Facebook wall, no one can see your LinkedIn. It’s like a spreadsheet-type thing.

Sheel: I think it makes sense. Like, I never respond to recruiters.

Laura: I’m sure most of you haven’t applied to a job since you were in college, like me.

Sheel: Any good person doesn’t apply for a job, right?

Jillian: That’s not true.

Sheel: I’ve never hired anybody who was looking for a job. I’ve hired people who are great people. Great people aren’t just available.

Sheel: So there’s a huge, the biggest challenge my companies all have is talent right now. So I feel the need. There are other players in this space: Broadly, Jobvite —

Laura: LinkedIn.

Sheel: — doing all sorts of other stuff. I’m still struggling for what you do that’s differentiated.

Laura: Yeah, so a couple things we do that’s differentiated is we tap into social graphs, like GitHub and Facebook, which LinkedIn, for example, can’t do. So we’ve spent a lot of time in stealth building that capability. It’s not easy. The other way that we’re different is a lot of companies have tried to automate the matches. But the problem is if you automate the matches, one bad match and people start hating the software. Right? Whereas if you let the recruiters drive it and pick out the matches, then the matches are 100% correct.

Howie: How’s it going overall, for you? As a first-time entrepreneur?

Laura: I mean, I went through the darkness last year where it was like hell —

Howie: You were in the trough of sorrow?

Laura: — and people were like no one is going to pay you to use their own contacts. That kind of stuff. And I really didn’t know… Everything I did I didn’t know what I was doing. But Silicon Valley has been really great. And so things have been — it’s good now.

First time entrepreneurs: they can be a big gamble for investors, which might explain why Howie asked Laura about it. But her answer — that she’s been through the darkness, this proverbial trough of sorrow — is a surprisingly honest response. It could mean that she’s earned her stripes as a founder, or it could mean she doesn’t have the stomach for business.

That’s just one of the questions investors will need to hammer down before putting any money on the table.

Sheel: So tell me about…

Jillian: Revenue.

Laura: We’ve been growing at 47% month over month. We’re at 42 MRR.

$42,000 in monthly recurring revenue — MRR — is a pretty impressive start.

Laura:  Last quarter, with two sales people, who closed $225k in new bookings. We’re good. [laughs]

Jillian: Take it from the beginning.

Laura: From the beginning? So we’re at 42,000 monthly recurring revenue.

Jillian: No. Take us, back up, back up.

Laura: Okay. We charge on a subscription basis. And we charge per employee, per month.

Sheel: How much do you charge?

Laura: Yeah, we charge sometimes as much as $20 per employee, per month.

Phil: What’s the average, though?

Laura: I actually don’t know the average. But it’s very close to that $20. We’ve done some bigger deals now that are like a thousand people, and that will go down to like $8 per employee, per month.

Sheel: But that’s sort of weird, because per employee… Shouldn’t it be based on how many people they’re hiring?

Laura: No, it’s per employee, per month, because every employee comes with a value, which is the candidates in their network and their ability to influence their network. And then also like, we can’t account for their close rates.

Howie: So this can scale infinitely? You could scale up to hundreds of thousands of employees?

Laura: Yeah. We can do anyone.

Laura tells investors that Teamable’s largest customer has several thousand employees, and pays six figures a year for the service. But most of Teamable’s customers have fewer employees, so they pay a lot less — $12,000 on average. And then she says something that really gets the investors’ attention.

Laura: Customers pay us up front.

Phil: Oh, they pay you all up front?

Sheel: It’s good for cash flow perspective.

Laura: A lot of times, yeah. Because they’re budget conscious, so we use that as part of the negotiation. Okay, great, you pay us up front, you can do $15 per employee per month.

Sheel: Makes sense.

Jillian: I think you’re disciplined. I think that’s actually the best way to grow. What’s your burn?

In this instance, Jillian is asking about gross burn. In other words, she just wants to know how much money Teamable is spending each month.

Laura: What’s our burn? It’s $20k.

Jillian: How many people?

Laura: We have 27.

Wait. Teamable has 27 employees, and they’re only spending $20,000 a month? Even if they had no other overhead costs, that would be less than $800 per employee, per month.

Laura: I made a contrarian bet on Armenia. I’m ethnically Armenian. So I went there and they have a lot of those top engineers like those other Eastern European countries, but no one is tapping into it. And so we’re the best game in Armenia. And so we have great engineers.

Sheel: What do you pay them?

Laura: I’m not saying on the… They’re the cheapest for the region, so — and I’m blaming my co-founders on this. They’re Armenian, so they set the prices.

Jillian: OK. I love the fact that you’re doing that. I love it. That must give you amazing pride.

Laura: It does. That’s how I made it through the darkness. If we’re talking about like, honestly, if it weren’t for creating an opportunity for Armenia, through those periods where things didn’t work and where no one wanted to buy it and all that stuff. I would have just given up. But it was really for that, that kept me through. And it’s created immense pride and hope and things like that over there.

Jillian: Absolutely.

By keeping employee costs low, Laura is doing something companies at this stage don’t often do: turn a profit. But what is all that profit worth, really? In other words, what’s the price tag on Laura’s company?

Laura: Now we won’t take anything less than a $15 million cap.  

Jillian: How much are you raising?

Laura: We would take another 150.

Jillian: So you’re taking a 150 at a 15?

Laura: Yeah.

Phil: What’s your MRR going to be by the end of this year, do you think?

Laura: By the end of this year, we’ll get to that $100k.

Jillian: So 15 is a little bit hefty valuation for…

Phil: I agree.

Jillian: Because you’re not yet at the Series A.

Laura: I mean, it’s a cap, right. So it’s your chance to get in or just not.

Howie: But why are you raising $150k?

Jillian: If you don’t need it?

Sheel: Yeah, I don’t get that.

Laura: Uh, just because I’m on the show and I wanted to give you guys a chance to get in. Like, I really don’t..

Jillian: You don’t need it.

Howie: You don’t need us.

Laura: …don’t need it. Yeah.

[Record scratch]

Phil: So why come on the show?

Laura: Because there’s 40,000 listeners. All of which hiring is a pain point for.

Jillian: I like your strategic mind.

Howie: Very opportunistic.

Phil: Appreciate your honesty.

Laura: So does anyone want to get in at the…

Just moments after Laura revealed that she doesn’t actually need the funding, she’s asking investors if they want in on the deal. Let’s see how this plays out…

Here’s Phil.

Phil: I think the valuation that you’re offering us is a little rich at this stage. I know that you have better insight into where you’ll be in a few months than we do, of course. But I’m very interested. I’m just a little turned off by a $15 million valuation at $42,000 MRR.

Laura: But 47% month-over-month growth.

Phil: Yeah, but you’re asking us to invest at valuation levels three months from now.

Laura: And enterprise deals. Like, people would invest in that if you had just one six-figure deal. Like how many companies have six-figure enterprise deals? Not that many?

Phil: But I can tell you, companies that we invest in at $42,000 MRR, which is where you are today, they’re not getting anywhere near $15 million valuation. I know for you, you’re in a good position, because you don’t need the money.

Laura: They also don’t have the same cash flow profile that we have. Because think about the unit economics plus the cost of engineering is a fraction. So our total engineering costs is $15,000 including office a month. So with the cash that we will throw off…

Phil: That’s all part of we’re cash flow positive, which other companies…

Laura: No, that’s part of also the growth, the cashflow.

Sheel: Look, I look at a ton of SAAS businesses. There are other businesses that take cash up front and are cashflow positive. There are tons of them. And I’ve got a company in my portfolio that’s doing a few hundred K MRR but actually they’re taking million dollar contracts up front. So it’s not unique.

Laura: Are they valued at less than 15 million?

Sheel: No. But they’re doing 8x the business you are and they’re valued at 25 or 30 million. So it’s a different level.

Phil: I want to be in. Right? I want to invest. I’m just having trouble with the number. So, I think, regrettably, I’m going to have to pass at 15 million.

Laura: Is there a number at which you wouldn’t pass?

Phil: Yeah. I think for me at 10 I would do it.

Laura: No. Can’t do it.

So Phil just passed, or wait, was it Laura that just passed?

Either way, they couldn’t agree on the valuation. Because Laura won’t go lower than $15 million, Phil won’t get as much of the company as he wants. So he’s out. Here’s Jake.

Jake: So for me, I think there’s three things. First, I think I’m probably not a great investor for you, because I don’t really know the hiring, referral, talent space very well. So for me, I don’t think I could add a ton of value to your company. Two, like everyone’s saying, I think the valuation is definitely a little high. Maybe it makes sense, from what you’re seeing, you know you can close in two months. But today I’ve got to value you at 42,000 MRR and that’s more like a $4 or 5 million cap.

Phil: Agreed.

Jake: 10 million is fairly generous. 15 is really off the charts at that. The last one, which is I think the elephant in the room, is, there was a 30 second moment of brutal honesty in your pitch. And I found that a big personal turn off. So, if you’re here because you want the publicity, and you’re open to raising money, that’s fine. Even though you’re not here really to raise money. But the way it was delivered felt very much like this is just a promotional opportunity for me and I don’t care about any of you here or what value you can add. And so for that, I think that was just a little flub, I think you’re a very nice person, but it was definitely a personal turnoff. And in first impressions, that can kill a deal, at least for me.

So, that’s a hard pass from Jake. Here’s Howie.

Howie: I have a totally different view. I get pitched 60 to 70 companies a month. And I hear the same standard banal platitude rhetoric. Like, it was refreshing to hear that. And I think you’re scrappy, and I think you’re opportunistic, and I think you have grit and like gumption, and I think that’s fucking awesome. That’s rare. I don’t see that in the valley that much.

Phil: Howie, let me ask you a question though. Based on what you’ve seen  — we’re going to talk about you in front of you —

Laura: Fine.

Phil:  — do you see her as a founder who is teachable?

Howie: You know, I don’t see it… It’s interesting, because I sort of pride myself on being a… I started my fund because I think I can identify talent and I think I can read people really well. And that’s when at the early stage I’m mostly betting on people. And as brutally honest as you are, and maybe just because I have a lot of experience, I love working with East Coast founders and companies, it’s just like it’s not an ego or hubris thing. I actually do think you’d be open if we worked together to taking feedback. You don’t seem cantankerous. You actually just seem like you’re crushing it, to be honest. That’s what I get. And I personally, I do think it’s over-valued, but I do think that this could be one of those opportunities where it’s like a half a billion to a billion dollar exit, if not more, based on your hustle, based on all the things that you’ve said, based on your traction; based on you overcoming sort of existential risk and digging yourself out of the trough of sorrow; and then actually delivering results. You’re actually walking the walk. Like, I’m in. I probably want to go in for like, you know, 25 or 30 or something like that. And I’m a creative, and I have empathy for you, and I’m an operator myself. So this gap between venture and entrepreneur is actually very small for me. So I like getting my hands dirty. I like working very closely with my founders.

Howie’s in! Next up…Jillian.

Jillian: Let me understand this, Howie.

Howie: Yes, Jillian.

Jillian: So, what I heard from Laura is, “I’m standing firm at 15.” This is what I heard.

Laura: Okay.

Jillian: Okay. But everybody who has spoken so far has said, “I would come in, but I would come in at a little bit lower.” But if you’re going to give Howie a lower valuation because he’s going to tell you how valuable he is, then you should give that opportunity to all of us. Don’t you think? Or to the ones that you feel will add as much as he will.

Laura: We’re going to map it out with real numbers and stuff. It’s not just, oh hey, the standard pitch that —

Jillian: I can actually, I’ll be very honest, and I’m not going to be humble on this, because pretty much everybody who is listening will know this.

Laura: Don’t be humble, that’s like a woman thing, anyway. I’m trying not to…

Jillian: I’m not a humble person. I can pick up the phone and pretty much call, pretty much get at the highest level, the CEOs, at least to…

Laura: Of which industry?

Jillian: Pretty much any industry. So I’m old. Let me start there.

Howie: I didn’t say it.

Jillian: I’ve been around a long time. But let me just speak about you. You’re a heat-seeking missile. Absolutely. I love your grit. And I love your edge.

Laura: Thanks.

Jillian: I was offended, I got to admit, about what you said.

Laura: Sorry.

Jillian: But this is what I tell founders all the time. You can be tenacious, but stay gracious. Okay. That’s really, really important. Because business is about relationships. Bottom line. So just be a little bit careful. You want to be cocky, you’re okay, that’s all okay. And you want to get marketing from this. Good for you. I mean, yes, absolutely. And I applaud you on that. It was the presentation of the reality of it. It was like, I don’t need you.

Laura: And it’s actually not the reality. Because one of the reasons is that I want to make sure our cap table is filled with female minority founders. And the fact that you were on here is actually one of the main reasons that I wanted to come. Because, really.

Jillian: Oh.

Howie: And totally redeems herself.

[laughter]

Jillian: So, I really love this. I love you. I love the fact that you’re finding jobs for females in tech. I love that piece. Every inch of me wants to put $100 grand into this. I’m absolutely choking on the 15 million. And I’m wondering if there’s any possible way, that you would come down…

Howie: The three of us should get some tequila.

Laura: Some tequila would be good.

Jillian: I’ve got a great tequila company. You get tequila for life with $100 grand.

Laura: No, I don’t need that. You don’t want to give me that.

Sheel: There goes the company!

Jillian: Shots for everyone!

They’re talking tequila but there’s still the matter of how much of the company the investors will get.

Jillian: So I guess the question is back at you. When we said to you 15, you definitely posted it back to us and said, what would you feel comfortable with? Or what would be good? So I’m slinging it back on to you. What do you think? Do you think you could open this up for a couple of us who are interested or whatever at 13? Would you, I mean we’re talking about splicing hairs here.

Laura: Yeah. I’m thinking about the whole chessboard. Not just what’s in this room.

Jillian: And it’s not the money. It’s just not the money.

Howie: At the end of the day it’s actually not going to matter in terms of whether it’s 10, 11, 12 or 15. It’s actually not going to matter.

Laura: At ten? Ten’s like no. Ten definitely no.

Howie: We could fill out that whole 150k at ten.

Laura: I really came in with a real price that I was like…

Jillian: 12? Come on. Give us 12.

Laura: I actually really do want to talk about the real things where you would add value. Because we’ve been having a lot of these conversations for real. And so I do want to…

Sheel: We should all talk. I’d love to chip in as well.

Jillian: I’m going to end this.

Laura: All right, let’s end it. I gotta go. Let’s go.

Jillian: Okay, by saying this. I’m going to give you $100,000 at 15.

Laura: Okay.

Sheel: Wow.

Jillian: Hold on. There’s a caveat here. If after sitting down with me and having a larger conversation, okay, you feel that I add more value than you expected me to, then you will consider lowering the valuation.

Laura: Sounds good.

Jillian: Deal. All right. That’s it.

Laura: Yay! I got another female investor! Woo! Thank you. Welcome to the team. And we’ll talk.

Howie: Yeah and I’m in for $25k.

Sheel: I would say I’m in for $50k at 15 with a 35% discount.

Howie: Next steps, let’s all get tequila, and we’ll figure it out.

Jillian: We’ll go to Poso’s.

Sheel: Jillian’s buying.

Jillian: How is Jillian buying? she put the most money in! You guys all buy! Hey!

A lot just happened there, so a quick recap: Jillian just came in for $100,000. Howie wants in for $25,000, and Sheel’s in for $50,000, for a total of $175,000.

When we come back, Laura leaves the room and we hear what investors really thought about her. And then, I get Laura on the phone to find out, how things panned out after the fact. Stay tuned.

[break]

Welcome back, Laura just stepped out of the studio and our investors speak freely.

Sheel: So meeting her, right off the bat I liked the company. But actually I hated her at the beginning.

Jillian: Yes.

Sheel: She was super, super cocky.

Phil: Very cocky.

Jillian: I didn’t hate her.

Sheel: I hate this person. I definitely warmed up to her over time. But it’s interesting, Howie it sounds like you liked that.

Howie: I got her right away. I didn’t think she was cocky.

Jillian: She was cocky.

Sheel: She is cocky.

Howie: I think it was just a display layer. It was just this thing that she was putting on and I knew that it wasn’t really her.

Jillian: But I have to tell you something. I come against this all the time, when a woman has to pitch, especially to a majority of men, you have to come off tough.

Sheel: That’s fair.

Jillian: You have to. And it’s unfortunately it’s a Catch-22 for women.

Sheel: Either you’re cocky or meek.

Jillian: Yeah. If that was a man standing up here and being like that, you would be like, he is all that. The fact that it’s a woman standing up there.

Sheel: I don’t think I would!

Jillian: I do talk a lot to female founders. And just say, you know what, you don’t have to be that extra, extra tough. Because you do have to be tenacious, but I say this all the time: tenacious and gracious. There has to be — you have to have a kindness about you. I actually saw the kindness when she was saying, “Armenia got me through those dark days.”

Sheel: Yeah, I liked that.

Phil: Yeah, that was really a human thing.

Jillian: And then all of a sudden, I saw her heart.

Sheel: Yeah. Totally.

Jillian: I didn’t see her heart before.

Sheel: Totally, I loved that.

Phil: Yeah, I agree with you.

Howie: I think that she’s an East Coaster.

Jillian: She is an East Coaster.

Howie: And we’re not used to the East Coasters.

Jillian: Oh, I am, I’m from the East Coast.

Howie: You’re from the East Coast. There’s no bullshit. There was no bullshit there. And to your point, I agree, she should have said I appreciate, and thank you.

Jillian: She should have said that. She was like, I don’t even have to be here. I don’t need your money.

Howie: Okay, the tenaciousness, I love. To your point, there should have been a little bit of graciousness. A little bit. A little bit would have been nice but at the same time —

Jillian: I agree!

Jake: It’s okay to be cocky and confident.

Jillian: But not obnoxious.

Jake: That’s fantastic. But the, I don’t need your money, I’m here for the publicity.

Jillian: That was wrong, Howie.

Phil: A turn off.

Howie: I disagree, respectfully. Because I looked at it as being opportunistic, I looked at it as being scrappy. I don’t see that level of entrepreneurship anymore. And I love it because that’s rare to me. And I have a Sunday test. All my founders that I invest in I have to be able to hang out with them on a Sunday, otherwise I’m not going to invest. And I can see myself hanging out with her and just riffing on ideas, brainstorming, hustling. And that’s just the vibe I got from her. She was just a tough vibe, but…

Jillian: She smiled. When you saw her smile, you said, okay. And also she said, “I’m sorry, I’m sorry I said that.” And that spoke volumes to me. Someone can own their bad, I actually think is the kind of founder that I can work with. Because I have a lot of female founders, and they are pit bulls. And they have to be.

Sheel: I think we got to get out of here

Phil: I think we got to go.

Sheel: All right guys.

Jillian: Oh, we’re breaking?

Sheel: Do we have food?

Jillian: Right. Good.

Howie: I liked her.

It’s been almost a year now — and in the world of startups, a year is a lifetime. Look at this show, for instance. Since we recorded Laura’s pitch, we joined a network — thanks, Gimlet! — and we are wrapping up our second season.

But what’s happened with Teamable? After her pitch, did Laura stick to her guns on the $15 million valuation? And of course, the obvious question, did the money come through?

Josh: All right so Jillian committed $100k, Howie $25k, and Sheel $50k. What happened after the pitch was over?

Laura: Yeah, Howie — Howie invested uh, the valuation we discussed.

Josh: The full 25 at 15?

Laura: He actually put in 30. Yeah.

Josh: Oh, oh great. And then Sheel – he put in 50K?

Laura: No, Sheel just took longer than I usually do for these things. And since it wasn’t like we needed the money we just punted.

Josh: Oh really. Did he flake out or you just like stopped pursuing him? What – what happened?

Laura: No, it was pretty mutual. I mean to me if it doesn’t close within 24 to 48 hours I’ll move on. It’s just a test of responsiveness and it’s responsiveness of the partner for…

Josh: 24 to 48 hours?

Laura: Yeah, I believe in closing.

Josh: You are in that much demand that you can ask that from your investors?

Laura: I don’t think it’s demand. I think it’s just good, good business. And so if it doesn’t close quickly, yeah I move on.

Josh: All right so let’s come to Jillian. She committed $100k on the show…what happened after the fact?

Laura: I think she committed $100K invested personally from her fund, whose name I love, is called Broad Strategy. So Jillian. And she also invested $200K from her fund Structure.

Josh: Wow, so you got $300K in total through Jillian, essentially.

Laura: That’s right.

Josh: Alright, bringing the total to $330K on the show.

Laura: Correct. Yes that’s right. Yup.

Josh: Wow she’s awesome. So yeah,  what’s it been like working with Jillian since the pitch?

Laura: Yeah, I mean Jillian, Howie, they’ve all been, they’ve all been great: super great energy, a super great partner. Calls you out when you’re you know doing something irrational or cutting off a process. It’s hard as a CEO that’s doing well to find people that will challenge you with love.

Josh: Yeah. I am curious. Have you changed the like what you’re paying your developers in Armenia at all?

Laura: Yeah. We doubled it. Yeah.

Josh: Doubled it? Whoa. What caused you to do that?

Laura: I mean, pre-series A we were like very lean. Like, I lived off of $1500 a month for two and a half years.

Josh: In San Francisco??

Laura: Yeah.

Josh: What??

Laura: And you know so I actually get the same salary some of them were getting. And you can live really well in Armenia off off like $400. I’ve lived there and done it. So I’m not just saying something like an ass.

Josh: Um, alright, so, if you can remember back to your pitch: what it was like in the room pitching those five investors, what sticks out in your mind?

Laura: That like record stopping moment when I said like I didn’t need them. I don’t remember exactly what I said but —

Josh: Yeah you said, we don’t need the money.

Laura: — yeah, usually when you’re like belligerent like that about, and authentic like that, usually there’s like one that will come, you know, to your defense. Or just like, really like the breath of fresh air. And for a second there I thought there wasn’t going to be any. And it was literally going to be, like a, you know, I was just going to have to shake their hand.

Josh: This is going to be over.

Laura: Yeah. And go. And I remember just being like, you know, keep your mouth shut, keep your mouth shut, keep your mouth shut. Like deal with the awkward pause. I knew that actually like not needing investment is one of the best ways to get investment and so I thought if nothing else, I would at least put that knowledge out there.

Josh: After you left the room, investors said that you are cocky and, like why do you think that is, that they they pushed back so much on your attitude and demeanor?

Laura: I definitely — like I know this. I’ve improved a hundred percent and I still have like 7000 percent more to go. Like I need to pick my words better for people on the West Coast. East Coast style is to like bark something at someone and they bark back and you know. It’s a nontraditional style for my gender, that could be it.

Josh: Yeah. And I mean they actually said that after the fact. Jillian brought that up, she said, you know, if this was a man in here pitching this with the same attitude you would have not said she’s cocky but it’s because she’s a woman that you said that. So she called him out on that and they said no no no no that’s not what happened. We wouldn’t have done that.

Laura: I really don’t want to get into this narrative of, like competitive disadvantages because I think there’s so many competitive advantages to being a woman. But, to me, words are words right. That’s great that she called me cocky but she invested. And I definitely don’t want like any woman that’s listening to this to think we have like a competitive disadvantage because there are so many competitive advantages. What would be worse would be my engaging in the narrative of, like, I have a losing hand because I’m a woman. It’s just like, that would be, you know, then I would have lost. Right. Like there’s always competitive advantages.

Josh: Yeah like, what are your competitive advantages, you feel?

Laura: I think one is that people trust me right. And so it’s like you know if people trust each other they’re willing to be more open, more collaborative, take risks, and all these things.

Josh: And you think like, as a woman, like finding that you know maybe maybe it’s not that people trust you. Maybe it is. But like finding whatever your unique competitive advantage is and just embracing that and not even thinking about like, the sex side of it.

Laura: Yeah, that’s right. Yeah I mean it’s like any — I mean I was a rugby player right. And so like there were advantages I had because I was low to the ground, right? And that was like a low center of gravity. Right so there’s going to be advantages that you had just from your structure. And then there were advantages I had because it was me, which is like, I knew what people were going to do before they did it, right? And that’s like a very unique-to-me advantage and I use that. So I always look like the fastest person. But actually if you looked at my 40 time, it was slow. Right, and so you need to figure out what are your women advantages and then what are your unique advantages.

Whether you’re playing rugby or pitching to investors, there are always a lot of subtle dynamics at play — strategy, attitude, gender. And you never know which will prove to be the deciding factor.

Laura told our investors she didn’t need any money, yet she still walked away with hundreds of thousands of dollars in funding, more than any other startup on our show so far.

How did she do it? I tend to agree with Laura, that she got this funding because investors trusted her. And they trusted her because she was brutally honest.

In every pitch, investors try to see behind an entrepreneur’s mask, to see who they really are as a founder. Laura made that easy with her blunt delivery. That can be a polarizing strategy, but polarizing isn’t always a bad thing. The investors who do appreciate that approach won’t need much more convincing.

This is the final episode of Season 2. We’ll be on break until October 25th, when Season 3 starts. We just recorded those pitches earlier this month — and let me just say, you’re not gonna want to miss ’em.

Oh and before I go: remember that Golden Gate Bridge replica that Jillian was talking about earlier? NASA did buy it and they’re now using it for wind tunnel testing. Pretty cool.

All right — thank you SO much for listening. I’ll see you this fall.

 

Our show is produced by me, Josh Muccio, Asthaa Chaturvedi, and Rob Szypko. We are edited by Devon Taylor with help from Alex Blumberg.

Special thanks to Colleen Pellisier and Allison Behringer, who originally produced this episode back in our indie podcast days.

Our Theme Music is by Breakmaster Cylinder, with original music composed by The Muse Maker, Bobby Lord, Jeff Broadski, Christian Bjoerklund, John Kimbrough, Louis Weeks, Bienart and Edwin. We were mixed by Enoch Kim.

Thanks to Lisa Muccio for planning the Season 2 recording event last fall.

And a quick disclaimer: no offer to invest is being made to or solicited from the listening audience on today’s show.

Also, I want to say a quick thank you to the original sponsor of Season 2, the It’s Worth Doing Right Family.

All right — you’ve been listening to The Pitch from Gimlet Media. I’m Josh Muccio. See you next season.

#11 Tesloop

Haydn Sonnad pitches his plan to revolutionize regional transit on the back of Tesla’s electric charging network.

August 23, 2017
View show transcript

From Gimlet, this is The Pitch. I’m Josh Muccio.

On this show, we take you into the room where entrepreneurs pitch investors.

Phil Nadel: He’s a quitter. There’s no room for quitters on The Pitch.

The stakes are high. Today’s founder hopes to walk away with the money he needs, to grow his business.

Haydn Sonnad: We’re kind of like South-West on the ground.

Howie Diamond: Are you worried that school is going to get in the way of running this company?

Jillian Manus: All we’re saying is that we think you’re onto something. That’s the good news.

Howie: I think you’re leaving money on the table.

Jillian: We think you’re leaving money on the table. That’s even the better news.

In this episode, an entrepreneur pitches his plan to take on Uber for his piece of the ride-sharing pie. There’s just one catch: he has to run his company between English class and algebra. Will he pass the test with our investors?

Phil Nadel is with Forefront Venture Partners. In pitches, he often steers the conversation back to the cold hard numbers.

Phil: I just want to go back to the revenue model because I didn’t finish that off.

Jillian Manus is here representing Structure Capital. She tends to get really invested in a founder, regardless of whether or not there’s money on the table.

Jillian: As I said, I don’t see this coffee as being so special. But I do see you and you being special.

Jake Chapman’s here with Gelt VC. As a former lawyer, he often obsesses over the tiniest of details. But if a founder can hold up under cross-examination, he might just invest.

Jake Chapman: You need data to say that people do sit and play this for three hours or whatever it is. What sort of data do you have on that?

Howie Diamond founded the VC firm, Ranch Ventures. He looks for scrappy founders who, come hell or high water, get the job done.

Howie: It’s just one of my things, as an investor. I want to know that you can build something that’s like actually functional.

 

Haydn: Nice to meet all of you.

Our founder Haydn Sonnad enters the room…

Jake: How’s your day going today?

Haydn: It’s been kind of long. We had a plane ride out from LA so just got here.

Jillian: Rock our socks!

Haydn: My name is Haydn and I’m a senior down at Agoura High School in LA.

Yeah, you heard that right: Haydn is a senior in high school.  

He’s a clean cut, skinny 17-year old. And he seems aloof in that way that teenagers often are. Behind the mic, he tries to stand up a little straighter. But you can tell he’s nervous.

Haydn: And last year when I got my license, I asked my dad if I could get a car. And he said sure, but only if I could find out a way to pay for it. So I came up with a plan to lease out a car for the summer, and drive people back and forth from LA to Vegas on the weekends to make up for the lease and insurance payments.

And because Tesla offered free charging on all its electric cars, he wouldn’t even have to pay for fuel. By the end of that summer Haydn thought, why not assemble a whole fleet of Teslas to drive even more people around?

Haydn: So that was then, and here we are now. Tesloop is building the world’s leading sustainable mobility service. We’re perfecting inter-city transit between 50 and 300 miles. So we’re here today raising $1 million to do this, $500,000 of which we’ve already closed. So to clarify, we’re here today to raise $500,000 more.

Jillian: Very well done. Are you a senior? You must be a senior.

Haydn: Yeah, I’m a senior this year.

Jillian: Okay.

Jillian: So you were able to lease a Tesla because you’re 18 years old?

Haydn: When I originally leased it, I was 16, so I leased it under my… Well, that’s kind of complicated, but my dad had it leased for me through a third-party service.

Jillian: Because I can imagine a 16-year-old going and saying, hello, I’d like to lease it for three months, and if you don’t like it, happiness. Um so, where are you going to school, do you know?

Haydn: No.

Jillian: Where do you want to go to school?

Haydn: All my apps are due at the end of the month.

Jillian: I know. So what’s your first choice?

Haydn: Well, see there’s two paths I’m either going to take. I’m either going to go out of state, but that really creates a problem with me working with Tesloop, still.

Jillian: Right.

Haydn: Or I can stay in the area and still work with Tesloop. So I’m really undecided where I’m going to go to college. I’m applying to a lot of different universities, and…

Jillian seems more curious about Haydn’s own future than she is about the future of Tesloop. There’s only one problem here: it shows that the investors may not be taking him seriously as a founder.

Howie: Are you worried that school is going to get in the way of running this company?

Haydn: I think there’s going to be a point where I’m going to have to pick one to put all my time and effort into. And the way I’m seeing it, it’s school.

Phil: If that happens, who runs the company?

Haydn: Well, there’s five other people working full time right now. So…

Phil: How old are they? They’re not in school?

Haydn: No, they’re not in school. They’re very seasoned entrepreneurs.

Jillian: He was going to say very old, they’re very old.

Phil: Are they as old as we are?

Jake: They’re in their mid-20s.

Haydn: Between mid-20s to 50s.

Jillian: That old?

Haydn: And everyone’s working full time.

Howie: And what’s your role at the company today?

Haydn: Right now I’m doing, well since school started, over the summer I work full time. And then I just kind of do side-tasks when I’m still working in school. Like today, I still had to go to school.

Jake: How did you bring in your CEO? Where’d you find him and make that connection?

Haydn: The CEO is my dad.

Jillian: That’s great.

Haydn: So I’ve known him for a little bit.

Okay, now the room can breathe a little. Haydn may be 17, but he isn’t running a lemonade stand. He’s got a team of “seasoned entrepreneurs” and a CEO to keep things running while he’s in class.

But he’s still the founder, and his job today is to sell investors on his company.  He’s got some work to do.

Jillian: So I’m trying to figure out, and maybe I’ve completely lost this, exactly what this business is. Is it fleets? Can you explain exactly what it is? Is it just me?

Phil: No, I’m having the same, I don’t understand it.

Haydn: No, it’s a good question.  So we’re kind of like South-West on the ground. Where we drive people from one city to another in Teslas —

Jillian: Oh!

Haydn: — between their pick-up points, for a pretty low economically-priced ticket.

Jillian: So it’s an Uber for Teslas?

Jake: There’s a driver.

Howie: For long distance — long distance trips. Between how many miles?

Haydn: 50 to 300 is our targeted distance. That’s what we call the electric haul, where the economics of electric cars really benefit you. Because further than that you have to charge the car too much. Shorter than that, a gas-powered car kind of benefits you because you don’t have to charge.

Howie: So how does that work? You get free charging?

Haydn: Yeah. We get free unlimited charging at the Supercharge booths.

Phil: But everyone does, not just you?

Haydn: Everyone does.

Haydn says that Tesla will continue to offer free charging… because back when Tesloop was nothing more than an idea, our young entrepreneur made a bold move…  

Haydn: So I brought the idea up with Elon Musk at the shareholders meeting in 2015, and at that point he assured me that Tesla would pay for all of the fuel costs for long distance travel in the Model S forever.

Jillian: Do you mind me asking you how you got to Elon?

Haydn: Just at the shareholders meeting.

Jillian: So your father must be on the board? Or somebody?

Haydn: No. I just bought a couple of Tesla stocks in 2014, and so did he, so we were both able to get into the meeting. So then —

Jillian: That’s so great.

Haydn: — you can just stand in line pretty much and ask questions. And I asked him a question which resulted in him telling us, or telling everyone basically, that Tesla was going to supply free long-distance travel forever on their Supercharger network.

Okay, so he didn’t quite have a sit down meeting with Elon Musk, but Haydn is showing how enterprising he is. I mean, it’s pretty crazy that he got the CEO of a multi-billion dollar company to promise free supercharging for life. Still, a verbal commitment made at a shareholder meeting isn’t exactly a signed contract.

Jake: I suppose there could be, they might draw a line between consumer usage and business usage?

Haydn: As of right now they haven’t drawn that line. We are in somewhat collaborating with Tesla. They’re aware of what’s happening. They’re aware we’re using it for commercial use. And right now, they haven’t said anything about that. And there are a lot of people that work in the Tesla stores as well as executives that are aware that we exist. And they haven’t had any issues yet.

Haydn seems certain that Tesla won’t have any problems with Tesloop. But competition is heating up in transportation right now. There are more than a few other household names that might pose a problem.

Jillian: I mean, it’s a good idea. What’s to say that Uber or any other ride-sharing would not just lift this? Or Lyft?

Haydn: Well, we think there are a couple of reasons why Uber can’t do this. The first is that, for the next four years this can only be done on Teslas. They have the only platform with the big batteries and super charging and nice cars that allows this model to happen. And for strategic reasons, Uber can’t really work with Tesla, because then Tesla would have all the information to their sensory data and Uber would have none of that. So they’d be kind of losing all the information about their cars.

Phil: Are you leasing the cars?

Haydn: Yes. Well, we have a leasing company that leases the cars for us, and then offers us a zero down. It’s around $2500 to $3000 a month for the cars.

Phil: How many cars?

Haydn: Right now we have one Model S and two Model Xs.

Phil: And what cities are you servicing now?

Haydn: We launched between LA and Vegas, well LA and Orange County to Vegas and back.

Howie: How are the routes booked? Does the driver wait in Palm Springs for a few hours if the timings don’t match? And then you’re paying the driver to wait? Just walk me through that.

Jillian: That’s a good question.

Haydn: So right now we have two cars running in Palm Springs, and they leave at 8 am and 1 pm from Palm Springs. And then there’s returns at 11am and 3pm.

Howie: So set times? Okay.

Haydn: Those aren’t specifically set times. How we’ve kind of been doing it right now where is if the first person to book wants it within an hour difference, we can accommodate that. And then the other people booking will just have to go with the first person’s time.

Jillian: Okay.

He may have started this pitch a little behind the 8 ball – but Haydn’s really starting to build momentum. You can tell he’s been in the trenches as a founder and he’s come out with a clear understanding of what it takes to make this business work. Now investors are ready to talk dollars and cents.

Jillian: What’s the cost?

Haydn: So, that’s pretty dynamic on the day and the demand. But for Vegas, it varies between $59 to $129 one way per person.

Howie: But I can book in advance?

Haydn: You can book two months in advance.

Howie: Two months in advance.

Phil: And what’s the Palm Springs cost?

Haydn: And Palm Springs is $39 to $59.

Phil: How long does that trip take?

Haydn: The trip’s about two and a half to 2:45 to three, depending on traffic.

Phil: And somebody could pay $39 for that?

Jillian: I can’t even get from San Francisco to Atherton for $39.

Howie: San Francisco to Atherton? I can’t get from the Ferry Building to the Mission some days.

Phil: Is that right? I can pay $39 and go for a two-and-a-half-hour drive to get to Palm Springs?

Haydn: Yep. It is a shared car, so there will be a possibility… We have in the Model X, four available seats to book. In the Model S, three.

Howie: Okay. But even if you don’t fill up the cars, I still pay $39?

Haydn: Yeah, you still pay the same.

Jillian: How did you price this? Just curiosity. Because it seems quite low, and it seems that you could probably price this a wee bit higher.

Haydn: We’re pricing it basically to meet all of our expenses. We’re not, as of right now, because the expenses are going to be trending towards zero in the future, this cost for right now is going to remain the same. And maybe two years from now, that’s when we get really…

Jillian: Create revenue.

When Haydn talks about expenses trending towards zero, he’s betting on future breakthroughs in technology, like self-driving cars. But a few years is a long time in the world of startups; Haydn will have to convince investors that Tesloop can generate enough revenue, the way things are right now.

Jillian: Why would you only price this to cover your costs? When I think the market would bear you charging at least $50 on the low side, and $75 on the high side. I’m just trying to figure out…

Phil: What’s the competition? How can you get from LA to Palm Springs, or LA to Vegas now?

Howie: Plane. Bus.

Phil: What are the competitors and what’s the cost?

Haydn: So for Palm Springs, the only real other travel alternatives would be fly there, which is expensive. It’s almost $200 or $250. You can take an Amtrak, but that’s not a direct route.

Phil: How about a bus?

Haydn: The buses aren’t, we wouldn’t call them competitors, because it’s a completely different experience.

Jillian: But actually you’re supporting, Phil, my question and it’s that it seems like you’re the only horse in town. So why not price yourself a bit higher no matter what? So that you’re actually not just covering your costs. All we are saying is that, we think you’re onto something.

Howie: Yeah.

Jillian: That’s the good news.

Howie: I think you’re leaving money on the table.

Jillian: We think you’re leaving money on the table. That’s the even better news.

When an investor says to an entrepreneur, you aren’t charging enough, you may think they’re pointing out a major flaw. But what they’re really saying is “you’ve created a thing that is so unique that you could raise your prices and people would still use your service.”

And what makes this feedback even more remarkable is the fact that Tesloop is in transportation, a market that is extremely price-sensitive.

Phil: How much revenue did you do last month?

Haydn: Last month we did in total around 27 thousand.

Jillian: With three cars?

Haydn: With three cars.

Jillian: So you raised $500,000 of a million. How did you raise that? And what was the valuation? I missed that. You were raising $1 million.

Haydn: It’s $1 million and a $6 million cap.

Jillian: Six cap, okay.

Haydn explains that his first $500,000 was funded by Clearstone Venture Partners, an early investor in PayPal. With half their fundraising already in the bank and $27K in monthly recurring revenue with just three cars, Haydn has the ear of our investors. But before they cross the finish line—

Jake: I have a question, too. We’ve all sort of danced around, we brought it up a little bit, but you built a company that is, you built it entirely on the Tesla platform. And Tesla is not really a platform company. They didn’t build a platform for other people to build businesses on. I mean, you did it in the name, Tesloop. And I think that if you got really big either Tesla is going to buy you or they’re going to shut you down on that name because it’s definitely a trademark infringement. I think that’s a problem. And then you’ve built your cost structure on using Tesla cars and free-charging, which Musk said would remain free. But that doesn’t mean free for commercial use. And you don’t have a contract with him. I would feel great if you had had a personal conversation with Tesla.  Something to say, we acknowledge that your business exists and we give you freedom to operate. I think if you get big, Tesla is either going to have to buy you or they’re going to have to shut you down.

Jillian: Or they’re going to build this themselves.

Jake: And then shut you down.

Haydn: We don’t think Tesla is going to try and do this themselves. Elon Musk is not about creating city to city transit. Right now, one of his biggest focuses is on automating manufacturing. And there’s a lot of focus on that from Tesla and the rest of his companies. We don’t think Tesla directly will come into our exact model. And I would also differ to say that Tesla did create a platform to be built upon. They have open-sourced a lot of their data. They’re very accepting of use of their Supercharging from us. And they have a lot of future implications that are going to arise from their platform.

Jake: I think this is awesome — this company you’ve built. It’s really great. So don’t take this to be brutal criticism. But they’re accepting of a three-car company using Superchargers. It’s very expensive for Tesla to build out these networks. And if you scale up and you’ve got 100 cars on the road to Palm Springs every day, and the other Tesla drivers who are not commercial drivers cannot get a Supercharger, I guarantee you Tesla is going to say, “No commercial use, you are not allowed to use our stations.” Because they built this network for their private owners.

Jillian: Right. They didn’t build this for commercial use.

Haydn: Yeah. It comes down to if we’re at the scale where Tesla won’t let us operate on this, we’re going to have to pay for electricity. And that will all come into play in the future. But for the foreseeable future, there’s no issues with Tesla and the Supercharging.

Jillian: Okay.

The question of how Tesla might react is starting to swallow up the conversation, and because Haydn’s answers are based on maybes and speculation, this may cast a shadow over an otherwise solid business.

Let’s see what the investors decide. Jillian speaks up first.

Jillian: So I commend you for being so young and having so much vision. In fact, I’m dumbfounded.

Haydn: Thank you.

Jillian: I’m going to kill my kids for not. I’m going to say, there’s this kid, he sat there, he’s 18 years old, and he came up with this business.

Haydn: 17 right now.

Jillian: Oh 17? Gosh. I’m just — I’m gobstopped. I think you’re bright and I give your father so much credit for supporting your vision and seeing the merit of it. And I do think it has tremendous merit. It’s a little early for me to go in, right now. Because I think there are some challenges up ahead. And I’d like to see how the company addresses those challenges. So I’m going to pass, but I’d like to say on the record that choose a school. Because this is not going to be, if you thought this up at 17 years old —

Haydn: Well, to clarify, it would be community college in LA versus school out of state.

Jillian: I’m saying as a mother, I’m saying to you, this company will run itself with your father and everyone else. You don’t need to be a part of it right this second. I would put your education first and try to get into the best school possible because if you’re doing this and you have this vision at 17 years old, you are going to have a lot of other ones. And I would love for you to have the education to know how to build a business because I think you have many more in you. This is personal advice. Prioritize your education. Go to the best school. And you can always say that “I started a company when I was 16 years old.” That’s all I’m saying as a mother.

Haydn: I’ll take that to heart.

Jillian: Please do.

Phil: I want to —

Here’s Phil, with a slightly different perspective.

Phil: Just to contradict Jillian a little bit, I have my older son who while in college took a leave of absence to start a company. Because he couldn’t do both at the same time. And he started a company called Klink, which is alcohol delivery, and he’s crushing it. He’s doing great. And he’ll eventually go back to school. But he’s on leave of absence now.

Jillian: So he took a gap year?

Phil: Gap years. But in any case…

Jillian: Gap years.

Howie: There’s no right or wrong.

Phil: And I want to say that…

Jake: Criticizing parenting styles — that never goes down a happy road.

Phil: I want to say also that I’m a Tesla evangelist. I’ve been a Tesla owner for four years. I’ve had two of them. Love the cars. Love the company. And I think what you’re doing is really cool.  I think you have a lot of challenges ahead of you. I think there’s perhaps more competitive pressures coming in the near future than you’re accounting for. There are a lot of other less expensive electric cars that are going to be introduced in the next year or two that will have the same seating capacity. So I’m just not Supercharged up about the deal. Did you catch that? I got him to laugh. I got him to laugh.

Howie: He’s good.

Phil: He noticed my pun.

Howie: He got the pun.

Phil: So I’ll do what I can to help you, and I wish you all the best. And again, I think you’re a rock star but I’m going to pass.

Phil’s out. Here’s Howie.

Howie: The initiative you’re taking is incredible. You’re incredibly inspiring. I think that you have an entrepreneurial — I mean it’s clear you have an entrepreneurial mind. You speak like an entrepreneur. You use all the right terminology. You’re thinking about things in a very scrappy and creative way, which is awesome. So keep doing that. But this feels like a really cool hack. And you have some revenue. But I would just need to see a little bit more of that before I would go in. So right now it’s a pass, but keep up the good work.

Haydn: All right, thank you.

The only investor left is our former lawyer, Jake. If anyone can navigate the risks associated with Tesloop… it would be him.

Jake: So, to Howie’s hack point, I think a lot of great businesses have been built on the back of hacks. Sort of taking advantage of loopholes in the system. Your first car was a loophole in the system, basically.

Haydn: Yeah.

Jake: So I’ve got no problem with that whatsoever. My problem is that I think you haven’t thought through yet, or you’re not at the stage yet, of figuring out how to move from the hack to the sustainable company. There are a ton, a ton of operational issues that you haven’t had to address yet. And I think you’re super sharp, you’ve got this great team. I think you can address these issues, but we haven’t seen that yet. I don’t even think you know yet what you don’t know. And you won’t know that until you’ve got 20 or 30 cars on the road. And so you’re definitely a little bit early for me, because of those reasons. Without really raising the ire of Tesla you can build a $100,000 a month business. A nice business. I just think to get to that real next level, the $10 million, $50 million, $100 million, billion dollar business, it’s a really different business from what you have now. So for me, it’s a pass.

Haydn isn’t walking away with any money today, but he is leaving with the respect of these investors.

Howie: Wow. What a great kid. I would use this service, while I can. Like when I’m in LA, if I can go to Palm Springs for $40!

Jake: In a Tesla! Like, a nice ride, right?

Remember earlier when Haydn said that Tesla was aware of Tesloop and hadn’t done anything to stop it yet? Well, a couple weeks after the pitch we just heard, Tesla dropped a bombshell announcement. They will not permit Tesla’s self-driving technology to be used on any ride-sharing service except for their own. This should mean the beginning of the end for Tesloop.  When we come back we’ll find out from Haydn himself.

[break]

Welcome back! Since Haydn pitched our investors, a lot has happened to the young entrepreneur. He got accepted into Chapman University in Southern California, but he actually took Phil’s advice, and decided to take a gap year to keep working on Tesloop.

With his college plans all sorted, I had to ask, what was it like to pitch to our investors?

Haydn: I would say for the first maybe fifteen seconds it was a little intimidating, but after I kind of met the investors and talked to them and introduced myself, I just felt pretty comfortable in the room and I was ready to just tell them what we were doing at Tesloop.

Josh Muccio: What was it like pitching these big-time investors in the room, and then you leave from there and you head back home? You were back in school the following morning, am I right?

Haydn: Yeah.

Josh: Was it weird being back in, I don’t know, what math class were you in? Like calc or something?

Haydn: AP Statistics.

Josh: AP Statistics. Was it weird just looking around — I’m guessing none of your classmates knew that you were doing that the day prior?

Haydn: I mean, maybe they saw a Snapchat story of me in San Francisco.

Josh: But that’s it?

Haydn: Yeah. I don’t know. I don’t really see it as a big difference in my life. It’s just kind of part of my life. And school is also. And they’re all just elements that go together. And they’re pretty separate. I don’t even see myself as different, or in a different place. I’m still just a student at Agoura High School.

Josh: Really? It doesn’t feel weird at all to be probably one of the, I mean, you have to assume you’re the only person building a business of this scale at your age?

Haydn: I mean, it feels weirder to be in the investor room than it does at school. That’s where I’m really out of place.

So it sounds like things are going pretty well for Haydn. But of course, I’m really dying to know what’s going on with Tesloop since the news broke from Tesla. The company announced that its driverless cars cannot be used to make money on other third party ride sharing services. You know, like Uber, Lyft… Tesloop?

Josh: That sounds like it kills your whole business model which was relying on the fact that you weren’t going to have driver cost in the future once autonomous Tesla cars were driving.

Haydn: Um, there’s some speculation on that. I don’t know the exact details, but that announcement wasn’t fully true. Because it doesn’t actually eliminate us from using their timeless ride sharing. There’s some weird clauses in there that actually do let us proceed with everything that we’re doing.

Josh: Really? Can you explain this to me?

Haydn: We talked to Tesla, and we just kind of closed it, because it didn’t really apply to us.

Josh: You talked to Tesla? What did — what did they say?

Haydn: It was an in-person discussion that I wasn’t present for, so I don’t have any of the specific details. But I know that it was not directed at us.

Josh: Interesting. So you’ve gotten in their good graces for whatever reason? I mean this announcement seemed, from the outside, to be directed at companies exactly like yourself.

Haydn: Well, how I see it, at least in the short run, we’re really doing Tesla a favor because when you look at the numbers of Tesla’s test-drives and how they’re trying to get customers into cars, we’re actually introducing a lot more people into Tesla’s than any of their marketing efforts have allowed for them. So in a way, we’re kind of a big marketing benefit to Tesla, and they’re not trying to lose that at this point. So in the future I can’t say what’s definite, but at least right now, it has been a good relationship.

Josh: My favorite line from this  — we’re doing Tesla a favor. I don’t know. That’s gonna…

Haydn: I think we definitely are doing Tesla a favor in many ways, but what I said was the most important, in that we’re bringing more customers to their cars.

This is the beauty of being an 18 year old founder. You can confidently walk straight into a tenuous relationship Tesla with an attitude of “we’ll figure it out, we aren’t worried. Tesla likes us and we’re doing them a favor.”

Unlike more “seasoned entrepreneurs,” Haydn has yet to be jaded by years of experience. And with nothing to lose, he’s taking risks that no one else is willing to take. He could make millions, or witness the demise of his first company. You know, normal teenage stuff.

To hear scenes from next week’s episode, stay tuned til after the credits.

Want to share your thoughts? Send us an email at thepitch@gimletmedia.com

Want to hear our thoughts? Subscribe to our brand new email newsletter and get behind the scenes stuff at thepitch.show/email

Our show is produced by me, Josh Muccio, Asthaa Chaturvedi, and Rob Szypko. We are edited by Devon Taylor with help from Annie-Rose Strasser.

Special thanks to Colleen Pellisier and Allison Behringer, who originally produced this episode back in our indie podcast days.

Our Theme Music is by Breakmaster Cylinder, with original music composed by The Muse Maker, Bobby Lord, Donny Carma, John Kimbrough, Louis Weeks, Keen Collective and Edwin. We were mixed by Enoch Kim.

Thanks to Lisa Muccio for planning the Season 2 recording event last fall.

And a quick disclaimer, no offer to invest is being made to or solicited from the listening audience on today’s show.

Also, I want to say a quick thank you to the original sponsor of Season 2, the It’s Worth Doing Right Family.

Alright — you’ve been listening to The Pitch from Gimlet Media. I’m Josh Muccio. See you next week.

Next week on The Pitch:

Laura Bilazarian: we did what any normal person would do, we quit our nice lives and we moved out here to a garage at Palo Alto.

Sheel Mohnot: I think it makes sense. Like, I never respond to recruiters.

Laura: I’m sure most of you haven’t applied to a job since you were in college, like me.

Sheel: Any good person doesn’t apply for a job, right?

Laura: Is there a number at which you wouldn’t pass?

Phil: Yeah. I think for me at 10 I would do it.

Laura: No. Can’t do it.

New episodes drop on Wednesdays at 12pm EST. Make sure you’re subscribed so you don’t miss a thing.

 

Haydn Sonnad pitches his plan to become the number one transit service using Tesla’s technology. There’s just one catch: he has to run his company between English class and Algebra.

 

Haydn Sonnad pitches his plan to revolutionize regional transit on the back of Tesla’s electric charging network. But there’s a catch: this entrepreneur has to run his company between English class and Algebra.

 

Haydn Sonnad pitches his plan to take on Uber for his piece of the ride-sharing pie. There’s just one catch: he has to run his company between English class and Algebra.

#10 Sudden Coffee

Two entrepreneurs believe they have the secret to making premium instant coffee.

August 16, 2017
View show transcript

From Gimlet, this is The Pitch. I’m Josh Muccio

[Studio sounds]

On this show, we venture into the world of startups, to a critical moment, when aspiring entrepreneurs put it all on the line and pitch investors for funding.

Kalle Freese: my passion is making that great coffee really easy and fun and accessible to as many people as I possibly can.

Jillian Manus: You can have the most incredible product, but if you don’t know how to talk about it, if it doesn’t have a brand identity, okay, you’re going to have a problem accelerating it.

Today we hear from two co-founders who think they have figured out the secret to making premium instant coffee. Now can they get investors to put their bucks behind their beans?

Phil Nadel is the founder of Forefront Venture Partners. In pitches, you’ll hear him put the focus on the hard numbers.  

Phil Nadel: I don’t like the model. I’m not seeing the path to recurring revenue.

Jillian Manus is here representing Structure Capital. When she invests in a company, it’s because she believes in the founder and their mission.

Jillian: I always tell founders that early stage investors are actually co-founders.

Jake Chapman’s here with Gelt VC. He has a keen eye for detail, and makes sure to dot his I’s and cross his T’s before he invests.

Jake Chapman: There are a ton, a ton of operational issues that you haven’t had to address yet.

Howie Diamond founded the VC firm, Ranch Ventures. He’s not afraid to push founders to really defend their company and sell him on why he should invest.  

Howie Diamond: Everything you described can happen on an iPad, but you’re saying that it should happen on a mirror on a wall. That’s not convincing to me.

Jake: She says it’s the best deal she’s ever gonna do in her life…

Jillian: No it’s the biggest thing I will ever do in my life.

Our two founders — Kalle and Josh — are all set to pitch to investors. They seem loose and relaxed. And right before they head into the studio, I find out why: they’ve been pitching a lot lately, and it’s gone very well. In fact, of the 3 million they’re trying to raise, they’ve already secured 2.9 million.

Of course, the investors don’t know that yet — but they will — soon enough.

Jillian: We heard you’ve absconded with all my hot water. I wanted a cup of tea and they we’re like nope the founders have it. Ok, rock our socks!

Phil Nadel: Rock-your-socks Jillian.

Jillian: Oh yeah I could be rock-your-socks Jillian. It’s a little bit sexy, don’t you think?

It’s pitch time.

Kalle: My background is pretty heavily in coffee.  I’ve been a barista for almost ten years. Originally from Helsinki, Finland, where I started working in coffee.

That’s Kalle, the co-founder of Sudden Coffee.

Kalle: I’m two-time Finnish barista champion and I was ranked as the —

Phil: Two time what?

Kalle: Two-time Finnish barista champion.

Jillian: Barista?

Howie: Barista?

Phil: You have barista championships?

Kalle: Coffee making champion. Yes.

Kalle got the title of coffee making champion by making the best tasting coffee in a competition where he had to make twelve drinks — four espressos, four cappuccinos and four signature drinks — all within a fifteen-minute period.

But, for Kalle, coffee-making is not just about winning awards.

Kalle: And to me what I love coffee – it’s really a concrete way of making somebody’s day better – by serving them a great cup of coffee. And my passion is making that great coffee really easy and fun and accessible to as many people as I possibly can.

Kalle is not just any barista. He is really particular about his coffee. And he knows most people don’t know how to brew it the right way.

So he had an idea — he’ll sell instant coffee, where all anyone has to do is add water and voila — they’ve got the perfect cup of coffee.

Kalle: So Sudden Coffee is instant coffee that you’ll actually want to drink.

Once Kalle had his idea for Sudden Coffee, he headed to San Francisco in search of a business partner.

Joshua Zloof: So yeah – so, I’m Josh. I’m the CEO of Sudden Coffee.

Phil: So Josh, Kalle is admittedly a coffee ninja. What’s your background?

Josh: Yeah. So I guess I’m sort of…

Phil: Are you a coffee champion?

Josh: I’m the 10th best, actually.

Phil: You are?

Jillian: Are you?

Phil: You’re trying to catch up.

Josh: No, no. No, I’m not.

Joshua Zloof is the business side of Sudden Coffee. Previously, he was a consultant at McKinsey doing supply chain, then he went to Groupon and then another food startup.

Josh: Yeah, so my background is half operations, half tech. And so for me, I’m really passionate about how you can deliver really awesome offline experiences using technology.

So Kalle and Josh joined forces and they were all set to start selling instant coffee. But I know what you’re thinking: doesn’t instant coffee taste really bad?

Kalle: Fundamentally, instant coffee is liquid coffee that’s dehydrated. And it’s been around for a long time and everybody knows that it’s not great, right? And how it works is that the huge companies that make it so far get basically the cheapest, crappiest coffee around, roast it very dark, and then they extract it at very high temperature and pressure, actually twice, so that you get three times as much of it out of the bean as you would normally get when you brew the coffee. Then that liquid, which is really woody and bitter, is boiled down and sprayed with hot air, so you get rid of anything delicious that might be left in there. So you have a lot of this powder for very cheap, but it doesn’t taste great.

Basically, we’ve all gotten accustomed to bad instant coffee because it’s always made as cheaply as possible. But Kalle figures out how to dehydrate high quality coffee into a powder that is way better tasting.

Josh: And that turned out to be Sudden Coffee.

Phil: So tell us about the process. Did you develop the process?

Kalle: Yes.

Jillian: Is this a patented process?

Kalle: It’s proprietary. It’s a trade secret.

Jillian: So it’s not patented?

Kalle: It’s not patented currently.

Jillian: So there’s no patent around it. There’s no defensibility, really.

Kalle: Well, I don’t think that having no patent means that there’s no defensibility.

What Kalle means is that his process of making instant coffee is what’s special. They don’t need a patent, because they have a process that’s a trade secret. Kind of like how KFC doesn’t have a patent on their fried chicken, they just have a secret recipe.

Once they developed this secret process of scalably producing their instant coffee, Kalle and Josh were ready to launch Sudden Coffee.

Josh: And we’re now at the point where we’re trying to raise a $3 million round to really help us get to the next level of scale, both from a capacity standpoint, but mostly from a marketing standpoint. Yeah, who wants coffee by the way?

Howie: I don’t drink coffee, full disclaimer.

Phil: I don’t either.

Jake: I’ll drink some.

Jillian: Funny thing is, I don’t drink coffee, but I used to drink coffee. So I figure I’ll take a sip because I used to love coffee. So this is not going to kill me. I’ll take a sip.

Only one of our investors actually drinks coffee. This is not great news for our founders who are trying to sell them on how good Sudden Coffee is.

Nonetheless, they proceed undaunted, with Josh pulling tubes of sudden coffee out of a box. He pulls off the lids, empties the powder into a couple of mugs, and adds hot water. Then he hands them out to Jake and Jillian, the only investors who volunteered to try the product.

Phil: The question for me is, to you guys, how did it taste?

Jake: Normally I drink coffee with some cream and some sugar. And this is just black. And it’s actually not bitter at all. It’s really drinkable. And it’s not – a lot of instant coffees are like Keurig coffee, which I guess is not instant, sort of instant. It’s pretty watery and really light. And this has — this is definitely a better product. It’s more full-flavored.

Phil: Does it taste like what you get at Starbucks?

Jake: I think Starbucks coffee is atrocious. I think their brewed coffee is atrocious.

Howie: So is this better than Starbucks?

Jake: Better than Starbucks.

Howie: This is?

Jake: Yeah. The brewed coffee is better than Starbucks. The other stuff at Starbucks is delicious but it’s because they put all the other stuff in there, right? It’s good. It’s not as good as like a great cup of coffee at Philz would be, I think, or Blue Bottle.

Okay, so according to Jake, Sudden Coffee is better than Starbucks. And if you’ve driven down a street—any street—lately, you probably know Starbucks has a pretty impressive market share.

Can Sudden Coffee be the Starbucks of instant coffee?

Jake: How big was the instant coffee market?

Kalle: $35 billion.

Howie: In the U.S. or global?

Kalle: Worldwide.

Howie: Didn’t I hear that the US is the lowest market for instant coffee?

Kalle: That’s correct. But we’re not targeting the people who drink instant coffee. We’re targeting people who go to Blue Bottle who kind of realize that they first of all are willing to pay several dollars for a cup of coffee.

Howie: Right. So where do you fit in that model? I’m just confused. Where does instant coffee fit in that model? Is it for that — is that the target demographic? Who you are really targeting?

Kalle: I think, ultimately, we’re creating an alternative way of drinking good coffee. So it’s not meant to replace going out to a coffee shop when you have a chance to do that. It’s not meant to brew coffee at home. And like most people we talk with drink two cups of coffee a day. And the first one is very entrenched in their morning routine. And it’s about getting caffeine. It’s about the ritual that gets your morning going. And then the second cup, more often people have a problem with that. If you’re stuck at work and you only have capsule coffee that doesn’t taste great, we can help you drink good coffee when you’re there, when you’re travelling.

Jake: You’ve been selling since when?

Josh: January. January 2016.

Phil: How are you selling it?

Josh: It’s online only. As subscriptions.

Howie: How much is a subscription?

Kalle: Currently, it’s $2.50 a cup. Basically, the whole value proposition that I had in mind when we started working on this is making a cup of coffee that is as good as you can get at cafes. I mean, realistically, it’s not — it’s never going to be better than the best freshly brewed coffee. But it’s already better than 90% of what I get in good cafes. So you can have a great cup of coffee for half the price of what you would pay in a coffee shop. And you can have it anywhere.

Howie: How much sales have you generated since January?

Josh: So we’ve done about 100K since January. We’re at 20K recurring.

Phil: How many subscribers is that?

Josh: So our peak was in July, we had 500 subscribers. I think now we’re closer to 400.

Did you catch that? Over the course of just a few months, Sudden Coffee has lost 100 of its monthly subscribers.

A declining customer base is obviously not an encouraging sign. Although it isn’t all that uncommon for an early startup. After the initial launch, there’s a spike in sales and then things often slow significantly, which can be really scary as a founder. But no matter how scary it is, our founders’ job right now is to project confidence to investors.

Howie: What do you guys — when you raise this round, what’s your go to market strategy? Where do you go from here?

Josh: So there’s kind of a short-term and a long-term plan. Long term, our real vision is to build the world’s largest specialty cafe using technology. Sort of abstract all of the things you get from a cafe.

Howie: So sorry. Start building a physical cafe? A brick and mortar?

Josh: No, a virtual cafe. The world’s largest virtual cafe. So this could look like an app, it could be through our website. So like how do we scale the things that Kalle would do in a cafe, to everyone in their home, either through their phone or through their computer, and kind of connect the online and offline experience.

Howie: Do people get brand loyalty and emotionally attached to coffee brands? Like Nescafe? Are there people, like — I don’t know. I don’t know the coffee market that well.

Jillian: There is and there isn’t. In one way, there’s loyalty until the next best thing comes along.

Howie: Like loyalty to the extent of let’s download an app and talk about coffee together?

Jillian: So they’re talking about a coffee community.

Howie: Right.

Jillian: Building a coffee community. There’s community formed in coffee shops organically, but I think, and I might be wrong, that’s really not around the coffee but it’s around just the place, a destination.

Howie: The environment.

Jillian: Right. It’s a destination.

Howie: That ritualistic aspect of getting coffee, I think is really important to the coffee ecosystem and the coffee community. And I don’t know if you virtualize that.

Jillian: I’ll tell you what I see this as. And I kind of say it as I see it. I think this is good. I wouldn’t say I would drink it and say, wow, this is an amazing cup of coffee. Okay. I’ll be honest with you. However, what I see this as is not the best —  It’s actually a marketing play. I don’t see anybody going around saying this is the best cup of instant coffee I’ve ever had. But it’s getting people to accept it as the best instant coffee they’ve ever had because it has the authority, one of the leading authorities behind it, saying I use a special process, I am this and that. And when you tell people that –

Phil: You can romance it.

Jillian: You can romance it.

Howie: Yeah. To extend on that, I was actually thinking along the same lines, to roll this out, have you guys thought about doing a crowdfunding campaign?

This is not what our founders want to be hearing. When an investor starts suggesting crowdfunding, it’s a subtle signal that they think the company hasn’t yet found its footing. And Kalle and Josh haven’t given them much reason to believe otherwise — they’ve pointed to declining sales, but not to the 2.9 million Sudden Coffee has already raised.

And let me be clear — that money matters. When a startup has raised most of its round, it lets investors know it’s been carefully vetted and establishes credibility. It also means everyone can move on to more advanced questions.

Now is the time for Kalle and Josh to jump in and get this conversation on track.

Howie: There’s a way to tell your story that is really interesting that could differentiate you, and that could also allow you to get some credibility in the market, and it could also allow you to presell your product so you could actually gauge demand without having to take any sort of inventory risk or anything like that. I think that’s a really great way to get this out there.

Jillian: Absolutely.

Jake: That’s a surprisingly great suggestion from Howie.

Howie: Yeah, very rare.

Phil: There is no great leader in this space, and you have that opportunity. It’s wide open for you.

Jillian: This is like a superbrand. And I think you have the opportunity to put a cape on it and just let it soar. You can have the most incredible product, but if you don’t know how to talk about it, if it doesn’t have a brand identity, you’re going to have a problem accelerating it. You have a good product, and it might be great, but for me right now it’s just a solid product.

Howie: So I don’t think they need much money for all of this.

Jillian: No, I don’t think. I really don’t.

Howie: I mean, we’re talking about a couple hundred K, maybe.

Phil: Well, especially because they’re only four weeks away from launching at scale in terms of their production, so they can keep up with the demand.

I have to say, at this point I’m sitting in the control booth listening to this pitch thinking, “Kalle! Josh! Take control and tell the investors how much money you’ve already raised.”

Howie: But I think you need to tell your story at scale. Like, tell your story to the masses, and you have a platform now to do that.

Josh: So and we keep debating this internally. And by the way, we should come back to, we have fundraising news that we should disclose at the end.

Jillian: They’ve already raised 2.7!

Howie: They’re like, we’ve finished the round! We’re out.

Jillian: And they’re only after a couple of a hundred!

Josh: But we keep coming to this debate internally about should we do a crowdfunding campaign. And Kalle has always been pushing hard that we should do a crowdfunding campaign. And my question is always at the end of the day we’re still going to have a problem driving impressions to the campaign.

Jillian: Now you’re going to tell us that you’ve raised 2.7 million dollars from Sequoia.

Howie: Give us the reveal.

Jillian: And piss off!

Phil: They have some news percolating.

Jillian: Yeah, I can see.

Howie: Yeah, what’s your big news?

Jake: Oh! Percolating!

Phil: Tell us what’s been brewing.

Jillian: Oh! I hate you.

Howie: There it is!

Jillian: Tell us what’s been brewing. Oh bother.

Josh: We purposely left room on the round.

Jillian: What, like 100?

Josh: Yeah. There’s 100 left on the round.

Jillian: No, really, how much is left on the round? There’s 100?

Josh: There’s 100 left on the round.

Jake: So you raised 2.9?

Josh: We raised 2.9 from Charles River Ventures is our lead. And this is our second round. So we raised 500k a year ago.

Jillian: At what valuation?

Josh: The valuation on this round is 6.25 pre.

After spending half the pitch coming up with crowdfunding and marketing strategies, the investors find out that Sudden Coffee already has 2.9 million in the bank. But it’s late in the conversation, and there’s not much time to talk about it. It’s decision time. Here’s Phil.

Phil: Well, let me just say that I’m not a coffee drinker, so I don’t have a lot of passion about this space. Also, as a result, it’s difficult for me to get your big vision for the idea of the virtual, what did you refer to it as? A virtual coffee shop kind of thing. It’s difficult for me because I don’t go to coffee shops, I don’t drink coffee. And I think the brand is very powerful, and that is extremely cool. And I’m going to pass.

So Phil passed. Here’s Howie.

Howie: I mean You could have probably launched a crowdfunding campaign, come back around and raised money at a much higher valuation. Because right now you’re diluting yourself by like, you’re giving up half the company. I don’t drink coffee. I don’t really do a lot of consumer-product good companies that much, so it’s probably not the right fit for me.

All right, so Howie passed. Only Jake and Jillian remain. Maybe the founders have some hope with Jake, though. He hasn’t said much, but he’s the only one in the room to actually finish his cup of Sudden Coffee.

Jake: I am a coffee drinker. I drink at least two cups a day, probably more like three on average. I think it’s a good cup of coffee. It wouldn’t replace a Philz or a Blue Bottle for me, but I know that’s not the market you’re going after. My biggest problem though is that for me, place is very important. It’s physically being there. And it’s because I want to get out of my home office for a while, or I had a meeting somewhere and I’ve got another meeting in an hour, and I need a place to park it. I’m just not the right consumer, so for me it means I’m probably not the right investor. So I’m going to have to pass.

So Jillian is the only investor left. Of all the investors in the room, she’s the one who had the clearest vision for how to build the brand of Sudden Coffee. Or as she put it, put a cape on it and let it soar.

Jillian: I am on the fence. And the reason is, as I said, I don’t see this coffee as being so special. But I do see you and you being special. And certainly, you don’t need our money. You know, 100 grand you could fill up, you could go anywhere and fill up 100 grand. So the money, this 100 grand is going to hopefully —  I would say leave it open for somebody who is going to bring some huge, huge value to this, if that’s all you have left.

Josh: That’s exactly, we’re specifically looking for brand help. That’s specifically why we left cash open. Literally. That is our goal.

Phil: Smart.

Jillian: Yes. Right. Well, here is the thing, I no longer drink coffee. And I just, I’m really, really sitting on the fence on this.

Phil: That’s painful.

Jillian: And I’ll tell you the other reason is, you have only 100 left, okay? When I get involved with a company, and especially one that has such a bold brand and that is where I want to direct my energy to, but I just, for $100,000 it’s not, I can’t say it’s not worth my time, but in a lot of ways I would need much more of the company to give you 100% of my attention. So, I’m going to pass for that reason, pretty much.

Phil: We appreciate you guys coming in, and honestly really do appreciate you having the courtesy to save a piece for us. That was, you know, that’s great.

Josh: Yeah.

Phil: I think you’re smart to go for a strategic investor who can add a lot of value. Unfortunately, we’re not it, but that was great that you made it available to us. And you guys are going to crush it. I think you’re onto something.

Jake: Amazing team, right? For this company, you couldn’t have put together a better team.

Jillian: Really, like a dream team. And interestingly enough, one of the things I look for is I always look for two founders. I mean, I invest in more companies with two founders, and that’s kind of a philosophy of Structure, is that we definitely look for two founders. Exactly the composition you have here.

Josh: Okay.

Howie: I’ll just leave you with a little bit of advice. Just make sure, keep grinding.

Jillian: Oh my God. That is so unfair.

So all of the investors passed on this deal. This was one of those pitches that feels like—on any given day—it could have gone totally differently. Maybe if Josh or Kalle had mentioned their fundraising earlier, the investors would have taken them a bit more seriously right from the start. Or maybe not. Maybe pitching coffee to people who don’t drink coffee is just too hard of a sell.

After the break, we’ll find out who is drinking coffee — Sudden Coffee, that is.

Josh Muccio: Hey Josh.

Josh: Hey! How’s it going?

Welcome back to The Pitch. Almost 10 months after this recording, I got Josh on the phone and found out a lot has happened happened since we last met.

Josh Muccio: It’s been almost a year since you came on the show. So much has to have happened. But first I kind of want to just like revisit what happened in the room from your perspective. What do you remember about the pitch, being in the room with Kalle and pitching the four investors?

Josh: I think that one of the biggest things that stands out was realizing that none of the investors drank coffee or only one of them drink coffee and we’re like, “okay, this is going to be tough.”

Josh Muccio: Surprise, surprise.

Josh: I mean this is even when we have customer you know we’re pitching when we pitch vendors who want to buy and we talk to the purchasing guy and we walk into the meeting and I get I only drink coffee but you know I like the smell and we’re just like, “okay this is over.” Yeah, so a little bit of that obviously. You know, I think the standout moment of that of that interview or that pitch was me not being up front early enough about the allocation left in the round so that was fun.

Josh Muccio: They kept telling you to raise some crowdfunding. And you’re like we’ve already raised most of our round.

Josh: Yeah like I remember trying to hand gesture like just like point to like get in there which is like a nervous tic I have and I just couldn’t get it. I just like couldn’t get their attention and be like okay guys hold off. Let’s come back to you. you know it’s one of these ideas are just building off of each other. So I think one investor talking other was like yeah it’s a really good idea and you should do this this and this, and another person is like and you know and that turned into this you know few minutes of kind of brainstorming and the energy in the room got really amped about doing crowdfunding. And then when it finally came back to me it was like, “Yeah, so you know I agree with the group. I think you should really skip raising a round and go for crowdfunding.” And I was like, “Okay, let me let me reorient a little bit.”

Josh Muccio: Now that we’ve come to that conclusion, that’s never going to happen.

Josh: Right. Exactly.

Josh Muccio: So, let’s talk about — since you came on the pitch, what’s happened in your business like it’s been a year –

Josh: Yep.  

Josh Muccio: What’s happened since then?

Josh: It’s been super interesting so you know when we started the business we were targeting sort of like the millennial, male coffee drinker – you know, these are people who go to Blue Bottle, um, we were going after them. And we spent four months and this was through Y combinator trying to go after them again and again. And so finally our our chairwoman Caterina Fake was like, “Hey, you guys got to go through your customers one at a time on Facebook. Ignore everyone who has not been with you for four months. Filter out San Francisco and New York because those markets are going to be influenced by your social networks and see who your customers are. Go really deep in customer research.” And realized, hey our customers are actually 35 to 55. They live outside of cities. They tend to live in suburbs. They have big houses, they’re well-educated. A lot of them are doctors, professors, etcetera. But they live you know in a suburb of Nashville for example. And and that was an entirely different segment that we were going for.  And and you know all of a sudden made a ton of sense. These are folks who probably their alternatives or Starbucks or Dunkin Donuts. They don’t have a specialty café around them. They have to drive to get there. And —

Josh Muccio: It sounds like in the beginning you guys were targeting yourselves.

Josh: Exactly.

Josh Muccio: This happened how long after you came on our show? So like when did you have this realisation?

Josh: So this happened in April and then we haven’t really  — so since then we’re like okay, now we have to use an entirely different marketing approach. So part of it’s like telling the user story, where you show the routine of a potential customer like a doctor and they get this package in the mail and they make their coffee in the morning. And then they go do their job and then they go to their hobby. And the coffee fit into their day as an awesome moment, but they also have other interests and they do other things.

There was something else I needed to ask Josh. When we were emailing to set up this call, he happened to mention that Kalle — the award-winning barista, slash co-founder of Sudden Coffee — was no longer working full-time with the company.

Josh Muccio:  So Kalle — was he just not on board with this new focus was he, was he tired of working on Sudden Coffee? Like, why? What happened?

Josh: I think he got down to the point where we were – To shift this marketing strategy. It was just an entirely different skill set. And I think it was also, got to be a slog of hit it of like doing the same thing over and over again. And I think, you know, Kalle is an amazing inventor type. He loves coming up with new ideas, creating new innovations in coffee, and so we were shifting where you know we kind of figured that part out and we didn’t have the capacity to focus on, you know a bunch of new different flavors in coffee just yet. And so it kind of made sense to say hey you know take a break like you know take a break from this. You know he’s still a founder still we still you know I saw him just last night actually.  So he’s still involved. And I think you know for him personally I think he wanted to explore different things and and take a break and have some fun for a little bit.  

This is the exciting thing about meeting founders as they’re growing their companies: watching them discover what they’ve actually built. Often they start out like Sudden Coffee, trying to sell something to a customer exactly like themselves — and they’re kind of stuck in that mentality. And then, you come back nearly a year later, and they’ve made some serious adjustments, they’ve got a way more nuanced vision of their company, and then you know — the fun is just getting started

Josh: It feels like we’re about to just bring something to the world that that will bring a lot of joy.

Josh Muccio: Coffee and joy they do go hand-in-hand.

Josh: Coffee and joy – our new tagline.

Josh Muccio: And energy. There you go!

Josh wasn’t ready to announce his company’s subscriber numbers quite yet, but he did share this: as of Spring 2017, they’ve sold over 100,000 cups of Sudden Coffee.

To hear scenes from next week’s episode, stay tuned til after the credits.

Want to share your thoughts? Send us an email at thepitch@gimletmedia.com

Want to hear our thoughts? Subscribe to our brand new email newsletter and get behind the scenes stuff at thepitch.show/email

Our show is produced by me, Josh Muccio, Asthaa Chaturvedi, and Rob Szypko. We are edited by Devon Taylor.

Special thanks to Colleen Pellisier and Allison Behringer, who originally produced this episode back in our indie podcast days.

Our Theme Music is by Breakmaster Cylinder, with original music composed by The Muse Maker, Bobby Lord, and Edwin. We were mixed by Enoch Kim.

Thanks to Lisa Muccio for planning the Season 2 recording event last fall. 

And a quick disclaimer, no offer to invest is being made to or solicited from the listening audience on today’s show.

Also, I do want to say a quick thank you to the original sponsor of Season 2, the It’s Worth Doing Right Family

All right — you’ve been listening to The Pitch from Gimlet Media. I’m Josh Muccio. See you next week.

Next week on the pitch

Haydn Sonnad: Tesloop is building the world’s leading sustainable mobility service. We’re perfecting inter-city transit between 50 and 300 miles.

Jake: How did you bring in your CEO? Where’d you find him and make that connection?

Haydn: The CEO is my dad.

Jillian: That’s great.

Haydn: So, I’ve known him for a little bit.

Jillian: All we’re saying is that we think you’re onto something. That’s the good news.

Howie: I think you’re leaving money on the table.

Jillian: We think you’re leaving money on the table. That’s the even better news.

New episodes come out on Wednesdays at 12 pm eastern. Make sure you subscribe so you don’t miss a thing.

 

#9 Tuckrbox

The founders of TuckrBox need to convince investors that their healthy food delivery service is more than just a noble idea.

August 9, 2017
View show transcript

From Gimlet, this is The Pitch. I’m Josh Muccio

[Sound of investors chatting before the pitch]

On this show, we venture into the world of startups, to a critical moment, when aspiring entrepreneurs put it all on the line and pitch investors for funding.

Jillian Manus: Okay, what makes a good business? Not just a mission. Not what makes a good mission. What makes a good business?

Sheel Mohnot: As much as I want the business to exist, I don’t know if it can.

Today two founders pitch a food delivery service built on the hopes of making kids healthier and reducing headaches for parents. But noble ideals can only take you so far — and then… you need a solid business plan.

Phil Nadel is the founder of Forefront Venture Partners. For him, a pitch all comes down to the bottom line.

Phil Nadel: When you’re investing your own money, do the right thing. When you’re investing my money, pay the minimum you can pay.

Jillian Manus is here representing Structure Capital. She really champions entrepreneurs — especially when she can get behind their mission.

Jillian: I do think you’re onto something, and the fact that you’re trying to help young people, good for you.

Jake Chapman’s here with Gelt VC. In pitches he really gets in the weeds with all the details of a startup.

Jake Chapman: You need data, right, to say that people do sit and play this for three hours or whatever it is. What sort of data do you have on that?

Howie Diamond founded the VC firm Ranch Ventures. He invests in founders as much as their startups — if he can believe in them, he’ll believe in their company.

Howie Diamond: If I had more disposable income, I would probably invest personally in you.

Sheel Mohnot is with 500 StartUps. He tries to keep it real with founders, letting them know exactly how he sees things.

Sheel: There’s going to be days where they don’t show up. There’s all these nightmares that you’ll have to deal with.

[Sound of investors in the room]

Our investors seem to be enjoying themselves.

[Sound of investors saying hello to founders in the room]

In walk our founders today, Meghan and Alex.

Meghan: I’m Meghan.

Alex: And I’m Alexandra.

Meghan: And we’re the co-founders of TuckrBox, the first farm-to-lunchbox meal delivery and food education app for kids. So one of the biggest problems that we face in this country today all starts with what we send our kids to school with in their lunchboxes. I’m talking about the peanut butter and jelly, the sugary yoghurts, the juice boxes. One in three American children are obese. One in five will develop an obesity-related disease. And all of this really stems from the fact that they’re not learning healthy eating habits in their childhood to feed themselves well as adults.

Everyone agrees that the biggest contributor to childhood obesity is kids’ eating habits. But Meghan and Alex think the issue runs even deeper.

Alex: And I think the big problem there isn’t that it’s a problem for kids, it’s that it’s an issue for families. So parents are already spending over 700 hours every year buying foods and prepping foods for their kids. It’s time consuming. It’s challenging. How do you balance creating a nutritional diet against picky eating habits? So we really asked ourselves, how can we create a healthier generation through food and technology? And for us, the answer is obvious. It’s putting kids in the driver’s seat and seeing them as active eaters.

I gotta say, calling your answer to a pervasive problem like childhood obesity “obvious” — that takes some confidence.

Sheel: What are your guys’ backgrounds?

Meghan: So my background is in advertising and design. I worked on lots of different tech and Fortune 500 companies as an art director for six years in New York City at big agencies.

Alex: And I kind of come from a different world than Meg does. So my background was in urban planning, and I spent a long time doing food systems works. All of the last, especially five years of my life, have been looking at how our food system is sort of broken and the different inroads that we have to change it.

After seeing these broken food systems up close, Alex teamed up with Meghan to create TuckrBox.

Alex: On the TuckrBox app, kids go online, and they get to choose their own lunches every week. They’re healthy and they’re kid-centric. And then they’re also able to go and play and learn about food in a way that’s fun. Plus, all of those meals get delivered right to their homes, which is convenient for parents.

Meghan: We’re raising $800,000 to build out the rest of our app, to develop our food menu, and to launch our beta back in New York.

Jillian: So you haven’t launched yet?

Meghan: Not yet.

Jillian: Got it.

If they can raise the $800,000 they need, TuckrBox will launch as an app that parents and kids can use to learn about healthy foods, and then have those foods delivered right to their door. It’s like a kids’ version of Blue Apron — but with a health education mission.

Howie: What’s the age group that you’re looking at targeting?

Meghan: Yeah, so we’re targeting elementary school kids. That ranges all the way from pre-K to sixth grade.

Phil: But didn’t you say you’re gonna have the kids go on and make the choices themselves?

Howie: Yeah, so that’s what I was going to say. Like, are they going to have phones? An elementary, kindergarten kid is not going to have a phone. And so are you selling to parents? Or are you selling to kids? Or are you selling to both?

Alex: Well, generally we’re selling to both, because any sort of economic decision isn’t being made by a child. So the point is, you’re first marketing it to the parent. Especially in urban centers, where both people are working, it’s more and more difficult for parents to navigate their daily lives, and also making healthy lunches for kids.

Meghan: You know, if we were making a persona of the target child, it would be like, seven or eight years old. Because we think that’s when they’re developing these habits that they take with them.

Sheel: How often will you do deliveries?

Alex: So right now, we’re looking at doing deliveries twice a week. There will be a Sunday delivery for the first half of the week, and then we’re toying with either a Tuesday or Wednesday delivery for the second half of the week.

Sheel: Got it. So you’re delivering to the home.

Jillian: So if you only do two drop-offs a week, how are you going to keep these foods fresh? You have a Sunday meal and how are you going to keep that, which is prepared usually probably on Saturday, and then you’re going to, the child’s going to be able to eat it on Wednesday?

Alex: Yeah. I mean, if I’m completely honest with you, basically our R&D is around a lot of how do you create fun and interesting cold leftovers? Right now we’ve been testing a couple of different things with a chef that I know through Blue Hill. And she’s been working with us basically to develop kind of, cold burgers, or cold veggie burgers. Things that will hold up in their own right.

Jillian: That kids will really like to eat? Because kids are very —

Meghan: Yeah, she has a daughter, and her kid is just, like, loving this food. So we’re kid-testing all of our food.

Jillian: Okay. See, this is where I have a disconnect, a bit. Because nutritional, I mean, I made my lunch for four kids. And my key was to make sure that things were fresh. I’m not seeing a nutritional food for a child that they’re going to want to eat that’s four days old.

Alex: So I think, a couple of things. I, one, don’t think that kids are necessarily making the connection with how old it is —

Jillian: No but I am, as a parent. Because the nutritional value actually minimizes after something is cut, something is wa— You know. So unless these are heavily prepared foods with a lot of salt to preserve them, I worry about the actual nutritional value after four days.

Alex: Yeah. And I mean I think that’s part of the recipe development that we’re working on right now. So we have the chef who is creating these recipes for us now. And they’re going to be working with us to look at them and say, okay, like, yes, you created that, that’s nutritionally balanced, what will that look like in a couple of days? So you’re completely correct; like there’s a lot of testing that needs to be done around that. I don’t think that that is something that’s insurmountable.

Jillian’s bringing up a big issue. But that might end up being a good sign for Meghan and Alex. When investors raise concerns about your product, it means they’re really engaging with your pitch. So as long as you’ve got convincing answers ready, you’re in good shape.

And Jillian isn’t the only parent who’s keyed in to this pitch.

Phil: If you had this same kind of technology, the same kind of app, but you gave them creative ideas for recipes that parents could make based on the kid’s taste and healthy decisions…And you get the parents more involved with understanding how to properly feed the kids healthy foods, which then they could carry over to dinner and what not.

Jillian: And you have a menu of all the stuff. Like, every child is individual. Right? So, if you had a whole menu of what each child loves, some don’t like meat, some don’t like cheese. Some won’t eat this, or this. Because that was actually always a problem of mine. Oh my gosh, I don’t want to repeat what I did yesterday. And now, you know, Brock doesn’t like cheese, and Maddy won’t eat this. And Nick won’t eat that. And so I’m just wondering…

Sheel: Sounds like you have really picky kids.

Jillian: What? [laughter] Well, you know what, every kid is picky.

Sheel: I’m just kidding, sorry.

Jillian: Every kid is picky. That’s the bottom line.

Phil: I do lunches for my younger son every day. He’s vegetarian, and very picky as well. And I always worry about repeating stuff for him. And I don’t want to make it boring for him, and I want to keep it interesting, but give him stuff that he likes that can also be served cold and carried in a lunch bag during the day. You have all these constraints. And I’m always searching for ideas. I wander through Whole Foods looking for ideas.

Alex: That’s exactly the problem, for sure.

Phil: I search online for recipes, for lunch for kids who are vegans and are picky, you know, whatever.

Alex: And it’s very time consuming.

Phil: But if I had an app or a site that would help me find ideas that were customized for him, that met his tastes, and his dietary preferences, and that were healthy, I think it would be wonderful. I would pay, I would pay a decent amount for that. And I wouldn’t buy the delivery.

Sheel: Phil, if there was a company just offering that, you know, let’s say it was $10 a month, first of all that’s a lot, but would you…

Phil: $10 a month? I’m in!

Sheel: Yeah?

Phil: Oh yeah.

Sheel: And you would invest in the company?

Phil: I’m in, in terms of a customer.

Sheel: Ha ha.

Phil: I don’t know…

Sheel: So that’s the thing. Is there a business to be had around that?

Before the investors can get too far off course, imagining some alternative recipe generating app, Howie steers the conversation back to what TuckrBox is actually trying to do – deliver healthy lunches for kids.

Howie: So what kind of, can you give us an example of what the meals are? I don’t think we’ve talked about that.

Meghan: Yeah, sure. So this part really excites me. We, like I said, are really trying to be very kid-centric. So it’s not about, for me, reinventing kids food. If kids love mac’n’cheese, why can’t we give them a mac’n’cheese that they can feel inspired by and make it out of quinoa and call it a surfer’s quinoa mac’n’cheese.

Alex: So one of the big things that we’ve been working around is themes. And so right now we’re working with this idea of like a picnic party lunch. We’re experimenting both with a veggie burger for a non-meat option, and a turkey and kale burger for a meat option. All of our meals have an entree, and a healthy side and a healthy dessert. It’s not giving kids things that they don’t want to eat. It’s reimagining the foods that they already want and creating things that they’re excited about, that they look at the pictures of and they say, ‘okay, that looks like something I’ve had before.’ And it’s introducing them to new ingredients like that. It’s saying, like, here’s this thing that you know and you recognize, and then the next time you get it maybe you notice, oh, that’s weird, I didn’t know I liked butternut squash, or I didn’t know I liked beans, or I didn’t know I liked whatever. For us, it’s about creating those kinds of things.

Phil: When you pitch, you should bring samples.

Jillian: Yeah.

Maybe it’s just that we’re getting close to lunchtime, but the investors sound like they could go for a TuckrBox right about now — which could be promising for Meghan and Alex.

But it’s one thing to sell investors on the food. Can they also sell them on the business?

Sheel: What’s the price point?

Alex: $13 lunch. $65 a week.

Phil: $13 a lunch?

Alex: Mhm.

Sheel: So the way I think about it is, half of Americans are packing lunches. A big part of that is a financial decision. So take me through your justification for $13.

Meghan: Yeah. I’d love to talk about it a little bit. So, the average school lunch, packed lunch, is between $6 and $7. The reason that TuckrBox is far more quality and it’s a nutritiously-balanced chef-prepared meal delivered straight to your door. Um, parents are spending, on average, in New York City, for instance, $15 on similar products like Maple, Munchery…

Jake: So I use Munchery for dinner. And I’ll have like a steak dinner and it will be $11. Like $11.95. And I guess there’s a delivery fee there, but it ends up being maybe $12 because I’m getting a meal for my family. So $13 for lunch, for me, is expensive.

Jillian: For one kid.

Jake: And I’m relatively price-insensitive for most of these things, but —

Sheel: Money bags over here. [laughter]

Jillian: Most of the people who are packing lunches are actually doing that to save money. And you can pack a very, very healthy lunch, you know, with even just a cheese, tomato, lettuce on bread, and you can do that really fast, and you can do that really inexpensively. So I’m not quite sure where the $13 comes from. And there are also a lot of people who have more than one child. Most have two to three. So now you’re talking about, you know, pretty pricey for lunch.

Meghan: We’re starting at $13. You know, we’re working with driving that cost down as we scale.

Jillian: What’s your cost?

Alex: Our cost is about, our cost is about $11 to $11.50 right now.

Jillian: For a box of food? Can you break that cost down even more? So the food…?

Alex: Sure. About 20% of the cost right now is food. Really, the largest flexibility and one of our biggest costs right now is shipping. Our target demographic is people who are in homes that are earning $150,000 plus a year. They are people that we have seen are already spending this kind of money not only on themselves, but on things like classes for their kids. So there are definitely people who are willing to spend this money for their kids.

Howie: Doesn’t that severely limit your total addressable market when you just focus on $150k annual households?

Jillian: And those are the parents that actually can afford buying a higher quality of food and packing it. Where actually if you’re talking about how you first pitched, where one out of every 3 or 6 children are obese in this country, those are the low-socio-economics. We’re talking about those are the, you know, most people who are not making $150k.

Meghan: That’s actually a common misconception, though. Because there are lots of kids, you know, one out of three kids and one out of five developing obesity-related disease actually has nothing to do with socioeconomic — it’s…

Jillian: I’m going to challenge you on that. We’ve done a lot of studies around that, I have, or my foundation has. And that’s one of the biggest problems. Because fast foods are so easy and they’re so cheap.

Just a quick note — Meghan is saying that many kids who are obese actually are not low-income. And she’s right. The CDC reports that about 60% of obese children in the U.S. live above the poverty level.

But to Jillian’s point, low income children are far more likely to be obese than their higher income counterparts. This is important because the founders began the pitch saying they wanted TuckrBox to help solve the problem of childhood obesity. But if their service is geared only towards families making over six figures a year, are they really addressing that problem?

Meghan: You know, this price that we came up with, it’s not like it came out of anywhere. So we did a lot of research and surveys of parents, and we had parents telling us that they would pay upwards of $15, $16 a meal in New York City for this.

Jillian: In New York City, though.

Howie: Probably 2% of families in the U.S.

Jillian: I don’t think you’re getting the nutrition to the people, the kids, who you should be getting the nutrition to, who are those families who are turning to fast foods instead of… You know, or throwing together the Pop Tart and the cheese…

Meghan: And definitely. We definitely strive to get there and make a bigger impact in that way. I think getting into the schools and teaching kids hands on and being able to influence them more and more. I just was at Brooklyn Grange last week, which is a rooftop farm in New York, and we can envision taking kids on field trips up there, and showing them how you can live in an urban setting or a suburban setting, and still be exposed, and be involved in…

Jillian: But then their parents can’t afford these meals?

Alex: And you’re right. We’re not addressing the poorest of the poor kids. And the reality is that the product that we’re creating exists in a time when that kind of a product maybe can’t address those kids. And that’s why all of that’s very important to me. But what if I can affect people on another end of it? What if I can take money from people who are more affluent and use that to create programming that does the things that those parents can’t do?

Meghan: We have a system in place where a portion of our profits goes to our TuckrFund, and works to teach kids full circle where their food comes from, with hands-on food education in the classroom, as well as seeing how to prepare fun, creative meals, you know, in that class demo, while getting to eat TuckrBox lunch in low-access areas.

For a lot of venture capitalists, this is the sweet spot: where profit meets public service.

Let’s find out if our investors think TuckrBox can deliver on that promise.

Here’s Howie.

Howie: The food education aspect is really intriguing to me. Because I grew up, my mom was a nutritionist and a dietician. And I grew up in the 80s when no one was talking about, like food education… I just wanted to eat candy and fast food, and I mostly did. And my mom would cook, instead of spaghetti we’d have spaghetti squash. And instead of hamburgers we’d have veggie burgers. I would always complain about it, because I just didn’t know. Right? And she didn’t do a good job of educating me on why we should be putting these things into our bodies. And why—

Jake: Sorry Howie’s mom.

Phil: Throw mom under the bus!

Howie: Yeah, sorry mom. Thank you for trying. Um —

Howie: But I think in terms of this business, um, yeah I just don’t think the per unit economics make sense right now. And this is something, by the way, that every food delivery and meal delivery, subscription or on-demand, or whatever company deals with. Right? This is like, a pervasive problem in this space. So this shouldn’t be news to you, right? But I think the way to solve that is to reach scale. And what I didn’t hear is the ways that you’re going to acquire customers, how much you’re going to be able to acquire customers. I think investors are going to want to see something in terms of market penetration, in terms of you guys going out and doing this and then coming back and showing us those numbers to say, ‘hey, yes this is a problem, but look we figured it out.’ I want to be helpful. And good luck. But I’m going to pass for now.

All right, so, Howie’s out.

Phil’s next — though TuckrBox is pre-revenue, so if you’ve been paying attention to past episodes, you can probably guess his answer.

Phil: I said before I’m passionate about what you’re doing. I love what you’re doing. And you seem to be passionate about it.

Meghan: Thank you. We are.

Phil: Which is evident. For me it’s binary. You’re pre-revenue. It’s too early for us. So I’m going to pass.

Meghan: Okay.

Here’s Sheel.

Sheel: For me, I like you guys. I think actually your initial pitch was, you came off very solid. The trouble I have is, so first of all, I think it’s going to be hard to get a lower price point. I think you can probably play with the numbers and get your costs down. But I think you’re trying to do too much. Like, the app seems like an entirely different business than delivering food. And I don’t think you need to be doing both. And then on the food delivery, I think in general it’s going to be tough to raise money right now with a pre-revenue food delivery company. I think the price point is high, so there’s a certain demographic. You don’t need to set up your own infrastructure. Um, shipping is expensive, but not as expensive as you think. You can get your costs down. But, it’s totally unproven. So I’m going to have to pass.

Phil, Sheel and Howie have all passed on TuckrBox. And the founders are down to two investors, Jake and Jillian.

Here’s Jake.

Jake: So, um, I really love the mission. Like I said, I’ve got a five-year-old who I really wish would eat healthier and have these apps. And you know, my daughter goes to school five days a week. She needs to eat lunch five days a week, 40 weeks out of the year. Right? So if you had a product that really caught on, that was affordable for families, I think you’d get five meals a week for every kid, right? But I just don’t think the unit economics work at $13 a lunch. I mean, I don’t think you’re going to be able to get it down to $5, which would be amazing, I think that would be an easy sell all across the country. But it’s gotta be under $10 for you to have mass adoption. And especially to be able to reach the people you’re trying to reach which are the ones who have trouble getting healthy food as it is.

Sheel: The converse is, like, under $10 you’re not going to make any money. And that’s why, like, as much as I want the business to exist, I don’t know if it can.

Jillian: So, we never want to say to anybody that your business can’t exist.

Sheel: Yeah, sorry.

Jillian: Because I had a Russian grandfather who said, even at 106 years old, where there’s a vill there’s a vay. And so I know you guys have the will, and you’re going to try to find the way. Meg Whitman talked a long time ago, she always said to me and everyone, “don’t boil the ocean.” Okay? Don’t boil the ocean. Right, I can’t stress that enough. Hit one thing, do it well, and then expand from there. Don’t try to educate everybody, don’t try to create a game, don’t try to do this and that. Focus in what is the most viable way to be able to deliver the healthiest meal. So if I were you, I’d look at that one problem and really zero in and say, “You know what? This piece might not be making sense.”

Meghan: Got it. Yeah, we will definitely revisit that. I appreciate it a lot.

Jillian: Okay. I’m going to pass, all right, because you’re not there yet. Bring down the price come back to me. Come back to me. I do back female founders all the time, not because they’re female, because I happen to think they’re amazing. And they’re task masters. And your mission, like everybody said, to provide healthier food for children, why wouldn’t anybody back that? So, I want you to put your super business head on and say, “Okay what makes a good business?” Not just a mission. Not what makes a good mission. What makes a good business? Okay. So go do it.

Howie: Also, I have one last word for you: Lunchables. They changed my life when I was a kid. Can you make them healthy?

Jillian: I’d like to see what you guys do with this feedback.

Meghan: It was definitely nice to have so many parents in the group.

Jillian: Yeah, a lot of parents.

Alex: Yeah, and people with different perspectives.

Jake: And Howie’s like a big kid.

Jillian: So we parent Howie.

Meghan and Alex head home without the funding they were hoping for. Back in the studio, investors continue to chat about their pitch.

Howie: Look, none of these companies are making money I don’t think, these food delivery companies. So it’s not really about profitability; it’s about scale.

Sheel: Wait, what does that mean? Lose money on every order! Make it up in volume?

Howie: Yeah, in the near term. Sure. I mean, you think Blue Apron and Plated are profitable?

Sheel: No. I know they’re not.

Jillian: No. In fact, VCs and everybody’s looking away from these companies right now, because they’ve lost a lot of money. I didn’t even bring up insurance. I didn’t even bring up the liability aspect of this.

Sheel: There are so many things that we could have brought up and didn’t. This is an operationally intensive business. I don’t get the sense that they’re going to be…

Howie: Yeah, they’re not operators.

Jillian: They weren’t business people. They had no operational experience. Right. One was a designer and one ran a farm.

Phil: They need a partner, one of the founders, who’s into the logistics, the operations.

Howie: Also, like, when I see these companies with these types of, like this is a hot space.

Sheel: Is it? It was a hot space four years ago.

Howie: Well, maybe, yeah. But, it’s still alive. And then when I see companies that kind of take a derivative stance on it but like do it in like, a micro-sector under that space, it gets smaller, it becomes fragmented, and it’s not as exciting as the general space itself. Like their total addressable market kept getting narrower and narrower as they kept talking about their price going up and there’s like…

What Howie is talking about — it’s like the Uber-for-puppies-eating-ice cream phenomenon. In other words, a company that takes a really narrow approach to an already niche market.

When we come back, I’ll ask the founders how things are going with TuckrBox and find out if they’ve been able to bring their service to a larger market.

[Break]

 

[Phone ring]

Welcome back. All right, so let’s get Meghan and Alex on the phone.

Josh: Like, when you look back on that pitch, what do you think about? What are your feelings?

Alex: I feel, from my perspective, like we just got a lot of feedback at a point where some of it we were expecting, and then some of it was really helpful in how we kind of tuned things moving forward.

Meghan: I definitely agree with what Alex said. And I guess the biggest thing that we were hearing was we needed to prove traction, and further prove our concept. Which we knew walking in. And that’s exactly what we’ve been doing. So it was super helpful in that way.

Alex: Yeah I think in the long term just understanding what some of the processes are for how foods can be packed has allowed us to change the model from shipping twice a week to shipping once a week. Which basically cuts our shipping costs in half at any given time. So that’s been really great.

Josh: Have you been able to bring the price down from $13?

Meghan: Actually, we’re launching at $9.99.

Josh: That’s really good. That’s the biggest hold up the investors had, was price.

Meghan: Sure, yeah.

Josh: And has your target market changed?

Meghan: Not dramatically. I guess the main thing is how we would like to release the product. So we’re starting to think about zip codes. Just like another sort of shipping end of things, it makes more sense to launch in certain areas. And that has kind of helped us think about the market and what schools are in that area, and what type of families, and the economics that way. So not hugely.

Josh: Yeah. No. So, it’s still families that are well off?

Alex: Yeah. I would say relatively well off. I mean, I don’t think I would say that at $150k, I mean, we’re not reaching people who are impoverished, and that’s for sure. And that’s the side of the company that aims at nonprofit. So that’s where the percentage of profit is going, because we would like to reach those people. But I think quite honestly, in a business model, that’s just not a possibility. We’re not going to create $2 or $3 lunches that are delivered to the home from farm-fresh foods.

Josh: Right.

Alex: It’s unfortunate that we can’t reach more people. But the question is also can we make a successful business that can at least serve some people? I don’t think that a business model like this can help people in those other situations.

Josh: I guess I think the fear is, and I feel like this is what the investors felt in the room, is that the mission of helping families that need the most help, the fear is that the people you’re helping the most with your subscription lunches aren’t the people that need it the most.

Alex: But I think that that’s never what we advertised ourselves as. Like, I think that from the very beginning, not because we don’t want to be able to help other people, and that’s very much similar to maybe a Tom’s model or something else. What we’re trying to do with the nonprofit side of it. But our mission from the beginning was kids’ nutrition and their understanding of their food and their diets. So we never specified that we only want to help kids who are lower income. Like, what TuckrBox is, is farm-fresh lunches for kids, delivered.

Josh: Do you think the investors jumped to that conclusion on their own and put you in a box that they wished you were solving? And then—

Alex: Yes.

Josh: Really?

Alex: Yes. No, I definitely think from the beginning we were fighting this battle of, how are you going to serve poor kids food for $10 or $13 a meal, and that was never what we were saying. I think we made it very obvious, also, you know, I think because we ended up in that pigeonhole we also didn’t talk much about what our actual market was and sort of what that plan was. Because I think it becomes, I think the conversation kind of got side-railed into, well, these parents are never going to be able to afford $13 a meal. And our push back was sort of well, we’re not saying those are the parents we’re going to. Obviously as TuckrBox gets bigger, the amount of profit that goes to the nonprofit foundation side gets bigger, and we’ll be able to do more with that, you know? But I think right now the idea is to really focus on making a successful company, and then what we can do, you know, once we have that platform.

Josh: Well, thank you ladies so much for coming on and answering some of my tougher questions.

Alex: Well, Josh, thanks so much. It was actually, it was a really interesting experience. I think it’s like, it was a little bit challenging, but I think in, like, we were prepared for the pitch, but we weren’t at a point where… You know, I think if we had more traction, it would have made more sense, right Meg?

Meghan: We shouldn’t have even, even if they had offered us money, we weren’t ready to take a check, when I think about it.

Every founder dreams of walking out of a pitch with a six-figure deal. But sometimes not getting that investment is exactly what they need. Their company isn’t ready. And for those entrepreneurs, a pocketful of feedback can go a long way.

Since we talked, Meghan and Alex have started their pilot program, are accepting preorders, and are launching the TuckrBox app in September 2017.

 

To hear scenes from next week’s episode, stay tuned til after the credits.

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Our show is produced by me, Josh Muccio, Asthaa Chaturvedi, and Rob Szypko. We are edited by Devon Taylor.

Special thanks to Colleen Pellisier and Allison Behringer, who originally produced this episode back in our indie podcast days.

Our Theme Music is by Breakmaster Cylinder, with original music composed by The Muse Maker, Bobby Lord, and Keen Collective. We were mixed by Enoch Kim with help from Matthew Boll.

Thanks to Lisa Muccio for planning the Season 2 recording event last fall.  

And a quick disclaimer: no offer to invest is being made to or solicited from the listening audience on today’s show.

Also, I do want to say a quick thank you to the original sponsor of Season 2, the It’s Worth Doing Right Family

All right — you’ve been listening to The Pitch from Gimlet Media. I’m Josh Muccio. See you next week.

Next week on the pitch

Kalle Freese: I’m two-time Finnish barista champion and I was ranked as the —

Phil: Two time what?

Kalle: Two-time Finnish barista champion.

Jillian: Barista?

Phil: You’re a barista champion?

Kalle: And my passion is making that great coffee really easy and fun and accessible to as many people as I possibly can.

Jillian: You can have the most incredible product, but if you don’t know how to talk about it, if it doesn’t have a brand identity, okay, you’re going to have a problem accelerating it.

New episodes come out on Wednesdays at 12 pm Eastern. Make sure you subscribe so you don’t miss a thing.

 

Hosted by

Josh Muccio

Josh is an entrepreneur-turned-podcast host for The Pitch. He currently resides in Sarasota, FL, with his wife Lisa and three kids.

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