Latest episode

Sudden Coffee (S02 Ep10)

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.

 

TuckrBox (S02 Ep09)

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.

Want to share your thoughts? Send us an email to 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 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.

 

Hykso (S02 Ep08)

Could a little sensor designed to measure punches be the next big hit in a long line of fitness fads?

August 2, 2017
View show transcript

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

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.

This week:

Khalil Zahar: We produce wearable technology and we allow people to play combat sports without having to hit each other in the face.

Jillian Manus: Phil, you’re a moron. I have to tell you. And I never say that…

Phil Nadel: Did you just call me a moron?

Jillian: Yeah, I did.

Today, two founders pitch their wearable fitness technology – basically a Fitbit for boxing. Will investors decide that their device is a heavyweight?

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

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

Jillian Manus is here representing Structure Capital. She tends to only go in on companies when she really understands – and appreciates – what they’re doing.

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

Jake Chapman’s here with Gelt VC. He looks for founders who have thought through all the small, boring details.

Jake: There are a ton, a ton of operational issues that you haven’t had to address yet. I think you can address these issues, but we haven’t seen that yet.

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 actually functional.

Here we go.

Khali: Let’s jump into it, I think it’s a good time. Thanks a lot for having us, guys. My name is Khalil. I’m the founder of our company that is called Hykso. We produce wearable technology and we allow people to play combat sports without having to hit each other in the face.

Basically, Hykso is a chip you can wear on your wrist, sort of like a Fitbit. But instead of measuring steps or how many flights of stairs you’ve climbed, it counts punches. How many punches you’ve thrown, what kind of punches, and how fast they were. So if you were taking, for instance, a kickboxing class, you could see how you were measuring up.

Khalil: But we realized that a lot of coaches out there are trying to always gamify those classes, and trying to keep score basically, and they have no way to do it. And right now, the best thing available is a company called MYZONE, which is actually a heart rate monitor that displays the heart rate directly on TV.

Here is Tommy, the other founder.

Tommy: Heartrate is a very tough way to measure output, first of all. Because it’s subject to so many external factors, whether it be stress or caffeine.

Tommy’s the muscle in this co-founding team. No, literally. His hands are wrapped like he’s ready to step into the ring. And on his wrists, hidden under the wrap, sits the technology that brings everyone here today.

Khalil: And the competition aspect is really what excites us. Because you can now create a circuit and connect all of those locations together, within gyms for example.

Howie: I guess I’m having trouble. Can you guys just very concisely tell me where this company started, where it is today, where you see it in the future, and what’s actually built up to now. That would be helpful.

Khalil: It started three years ago. And the idea was just for myself. And then we had a lot of traction with the professional athletes. Because we were working with the national team of Canada, they needed very high accuracy. And basically, what took the most of our time to develop this, is that you have to filter all the different types of data. If you do jumping jacks, you don’t want to count punches. If you clap your hands, you don’t want to count punches. And that was a very big challenge.

Khalil and Tommy explain that because they started out working with the Canadian Olympic Boxing team, the process of refining their wearable technology took a while. They needed it to be precise in measuring punches – and punches only. But finally, they got it right. And it was then that they decided to take their product to a bigger market.

Howie: Target demographic is boxers and boxing gyms today?

Khalil: No, it’s actually wider than that. Right now, the target market when it comes to the users, is actually women between 25 and 40 years old. They’re the big market when it comes to fitness.

Tommy: It was a pivot, to go to the gym model. It just makes a lot more sense for us.

Rather than marketing to individual consumers – or to teams like the Canadian Boxing team – the new plan for Hykso is to sell directly to gyms. This way, athletes taking classes like kickboxing and MMA can all use the wearables and keep track of their progress.

The question is – how well does the technology actually work?

Khalil: You guys wanna see a demo?

Investors: Yeah.

Tommy: I wanna show you a demo, too. I’m dying. Do you want to hold the phone for them?

Howie: You’ll be working with Jake for the demo. He’ll be your sparring partner.

Tommy: Show them that, too.

Jake: Take it easy. Not the face.

Howie: It would have been Sheel, but…

Jake: This is the moneymaker right here.

Tommy: The sensor’s right here. He’s holding the charging dock. Both sensors go within that charging dock. It doubles as a carrying case for you.

Tommy is showing the investors the sensor, which sits inside the wrap that goes underneath his boxing glove.

Tommy: So punch harder, punch faster, punch more, you maximize that intensity score. So I throw a punch – how many punches am I at right now, Khalil?

Khalil: 13.

Tommy: 13, 14, 15, 16, 17.

Tommy is throwing punches now, showing investors how the Hykso sensor can pick up the speed, velocity, and type of each punch.

Phil: So we need a little more velocity. Come on man.

Tommy: I’m retired.

Phil: Let’s get it over 12.

Jake: Oh intensity through the roof.

Phil: Off the charts.

Tommy: See, see what the social pressure does? Imagine in a gym setting, right, when your stats are up on a TV screen?

Phil: Oh right, you’re off the charts.

Tommy: The instructor’s like, pick it up! Pick it up Jake!

Phil: You’re talking and intensity is dropping. Dropping.

Tommy: So imagine you’re in a gym setting now, right. And individual you have that social pressure. The other modes we have are super interesting too. So imagine you can take the gym now, and you split the class into two teams or four teams of equal size. And now you have team one, team two, team three, team four coming together to beat one another.

Phil: And you can tally it by team?

Tommy: The 6:00 class coming together to beat the 8:00 class. Because in a gym, and I spent a really long time in fitness myself, the holy grail in a gym is community. If you can get that community feel in your gym, strengthen those relationships, you drive retention through the roof.

As a rule, investors love seeing a live demo. And they view it as kind of a first hurdle: if the founders can nail the demo, then they’ll move on to the tough questions.

Jillian: Could not any of the other Fitbit or wearable companies come out with this?

Tommy: Good question. But it’s extremely difficult. So what the Fitbit does, it’s a pedometer, right. So if there’s an event, it says there was an event. If there was any kind of movement.

Jillian: Yeah, but Apple’s also working on things. They’re all, I’m not just saying Fitbit, I’m saying wearables in general, as a category.

Tommy: So what we do is full 3D motion tracking. The sensor knows its position in time and space 1000 times per second.

Jillian: Right, but it can be done by any one of the wearable companies?

Khalil: Right. And honestly when it comes to the Fitbit, the angle of the product is completely different.

Phil: But she used that as an example.

Jillian: Fitbit is not an exact science.

Phil: Let’s say I started Phil’s Boxing Sensor company and I did the same training machine learning. What’s proprietary?

Khalil: What is proprietary is actually the algorithms. When it comes to the sports that are very dynamic, it is actually complex to be able to filter what is a relevant motion and a not relevant motion. It’s hard to know if there’s not other brands out there who can do that. We know HBO worked for two years on a similar product and wasn’t able to pull it off.

Phil: Are you thinking of doing like a Peloton for boxing?

Khalil: Yes. Exactly. At a certain point, we want to allow people even at home to connect with the people in the gym.

You might have seen the commercials for Peloton.

Peloton ad: This is what you woke up for. This is your Peloton.

It’s a $1200 stationary bike that comes with a big screen, and you ride it in your home. They have a $50 monthly membership that lets you tune into live classes.

Phil: To me that makes a lot more sense than even having to go to the gym. I’ll stay at home like I do with my Peloton, and I’ll go online and do an interactive class or compete with other boxers.

Khalil: Yep. Absolutely.

Phil: That’s smart. I really like that idea. Because, well, firstly Peloton is killing it. And with your model they don’t have to buy expensive hardware. They have to buy sensors that are a hell of a lot cheaper. And they can get a great workout and still have that interactive training and leaderboards and the whole thing. So it’s smart.

Tommy: And not just that, but I think the at-home fitness market has always been more geared towards women. Women have been more accepting as an overall of the at-home fitness market. And it’s obviously a huge opportunity right now.

Jillian: Do you know why?

Tommy: No.

Jillian: It’s because Jane Fonda.

Tommy: Right.

Jillian: Jane Fonda really opened our eyes into basically taking responsibility. And that was the first one. And then Cher and all the other ones filed up. But it was really introduced to women first. That’s why. And then men were a little bit off put on it. That’s too girly and all that. But now with all the, what is the…

Khalil: Tae Bo was another one.

Jillian: Right

Howie: For the record, I had a jazzercise party when I was three. So I was into it.

Jillian: Did you have a jazzercise!

Jake: I can see that.

Phil: My opinion of you has changed dramatically now.

While Howie might be the lone enthusiast for Jazzercise, all of the investors sound like they are getting kind of excited by the idea Phil brought up – of Hykso as a product that you could use at home.

Jillian: So how does this fit into that model? Because you don’t have really the workouts, do you? It’s just the device right now, just the sensor.

Khalil: We don’t provide the workouts for now. Our first focus right now…

Jillian: Is the sensors?

Khalil: No, it’s actually going into those gyms. Because that demand is there. So we signed two LOIs. And one was actually with the fastest growing franchise in 2015 in the US.

Jillian: Which one?

Khalil: It’s called Title Boxing Club.

Jillian: Oh yeah. I know that.

The thing Khalil is bringing up – LOI, or letter of intent – this is a smart move on Khalil’s part. He’s taking control of the conversation, moving investors into an early success story. Title Boxing Club recently signed a Letter of Intent – an LOI – basically saying that if Hykso builds the sensors and leaderboard app for the gyms, they will buy it.

Khalil: They’re expanding super-fast right now. And they basically were looking into MYZONE, but they didn’t like the fact that it was irrelevant for boxing. But now, with our system, they can measure output. Which means that they can rank all of their members, and create links between all of their locations. So that creates a bigger sense of community with all of their members. And you become part of the Title Boxing Circuit.

Tommy: We recently signed an LOI with CKO Kickboxing, as well. I don’t know if anybody has heard of them?

Jillian: Yes.

Tommy: They put out a press release yesterday. And the COO just texted me today and he said the reaction is just off the hook.

Phil: What do you think the value of that LOI is?

Khalil: $2 million.

LOIs worth two million dollars is nothing to sniff at – though it’s worth distinguishing that LOIs are not contracts. Still, they could turn into contracts if everything goes right for Hykso.

The question on all the investors’ minds now is: assuming this does work, how big could Hykso really get?

Jillian: Do you think this is going to be a trend? Is this trend sensitive?

Khalil: You know, it’s hard to say. You know, I don’t believe so. Spinning has not been a trend, although it started…

Jillian: Oh, it’s a trend now. It wasn’t.

Khalil: It wasn’t. But it’s constant now. It’s pretty solid now.

Phil: Let’s distinguish between trend and fad. Are you talking about a fad that’s going to come and go? Or are you talking about something that’s…

Jillian: Actually, that’s a really good question. I’m thinking more like a fad.

Phil: A fad fades quickly.

Jillian: Yeah. I mean, now, Tae Bo was everything, and now it’s gone. Everything comes and goes.

Phil: Howie, what about jazzercise? Has that gone? How’s that going for you?

Howie: Well, I do host some jazzercise parties once a quarter at my house.

Phil: You’re still doing them? Okay.

Howie: It’s more for nostalgic purposes.

Jillian: I mean boxing’s not. But boxing actually as a sport has also hit a low. Not in terms of fitness, but in terms of…

Khalil: Boxing survived more than 120 years already of popularity.

Phil: And MMA is more popular.

Khalil: MMA is exploding.

Phil: That’s picked up the slack more than anything.

Khalil: And then the way we see it when it comes to those fads, is we look at what happened with running, which really got popularized in 2005, saw the peak growth. Everyone started running. People didn’t run before. And then you had all those companies like Strava, Runkeeper, that all suddenly came out. And then you had the same thing with spinning in 2012 and 2011 where they saw the peak growth, and then you had SoulCycle and Peloton. And then in 2015, there’s like multiple analysts in fitness that are saying that combat sport is the new thing.

Jillian: But I’m wondering if it’s a new fad, where this has only a little bit, it’s going to peak similarly and then that’s it.

Khalil: If I had the answer to that, honestly, but…

The conversation is moving in a direction that Khalil and Tommy aren’t totally comfortable with: debating whether or not contact sports is a fad or a trend. So Khalil gently nudges investors towards something a bit more concrete: past sales.

Khalil: Basically when we learned that the sale cycles were so long, and that was last January, we decided to do a pre-order campaign. That was in March, and in 4 months we sold 2500 units. It’s $360,000.

Howie: What did you do it through?

Khalil: Directly on our website.

Howie: Through your website, okay.

Khalil: We didn’t think our community lived on Kickstarter.

Howie: So you pre-sold this next generation product?

Khalil: Yep. That we’re shipping in 12 weeks now.

Jake: How many did you sell?

Khalil: 2500 units.

Howie: And it’s just the sensor?

Khalil: Just the sensor, and the mobile app. That’s direct to consumer. And then in the meantime we got all those discussions with those big gyms. So one LOI with Title Boxing Club is a $4 million LOI.

Jake: And what’s your cost to make a pair of sensors?

Khalil: $32 landed.

Tommy: And it will go down over time.

Jake: In terms of hardware development, it’s basically done, right? They’re making the product. Final designs are done.

Khalil: We already pressed the green button with Arrow. Arrow is our manufacturing partner. And they financed the first production run.

Howie: So you didn’t have to pay anything up front? They covered all the costs?

Khalil: Yeah, exactly. So they offered a line of credit for $175k.

Jake: You guys are kind of scrappy with the cash flow. You’ve got Arrow doing the development, you’ve pre-sold units.

Khalil: Exactly.

Phil: So total revenue’s how much?

Khalil: I’d say right now we’re about $405k.

Phil: How much are you raising and what terms?

Khalil: $500k. And we’re raising under a SAFE capped at $4 million.

Jillian: Oh, that’s really good.

Hykso is valued at $4 million – and Khalil and Tommy are trying to raise a half a million dollars from investors to get their sensors perfected, shipped, and hopefully into gyms.

Phil: How much of that has been committed so far?

Khalil: $175k.

Phil: From whom?

Khalil: So we have $100k that is from friends and family, and the rest is from angels.

It’s decision time. Have Khalil and Tommy talked up these LOIs enough to get investors on board with Hykso?

Here’s Howie:

Howie: Thanks for the demo. That’s actually rare for us. To see a working demo. You guys built something that seemingly just works, which is awesome. For this space, it seems like it is underserved and it feels like you guys are solving a problem. To me, I worry about the total addressable market. Like, the TAM. I think for me it’s a little too narrow, so I’m going to pass.

Khalil: Right, right.

Jillian: Phil?

Phil: Yes, Jillian?

Jillian: Really?

Jake: Phil’s taking notes. I’ll go.

Apparently, Phil’s undecided. Here’s Jake.

Jake: I do box for fitness. I think it’s an enormous amount of fun. And it is the hardest workout you could possibly get. On days when I feel motivated, I want to puke at the end of it, but in a good way. I don’t think it’s a fad. And maybe that’s just because I’m in it, I really enjoy it. I think if I had these at my gym and I were doing it and I showed someone an app, other people would want the sensors. And I know that’s not the market you’re going for because you want, sort of, the gyms to buy it. I think it could work. So I’m in. I think this deal’s a real knock-out.

Investors: Ooooh!

Phil: I had that one queued up. I totally had that one ready.

Jake: We’re working on puns. We’re a smaller fund, but I definitely want to be in. I think probably a $25k commitment from us. I think there’s a future here. I think you can become something like a Strava or a Peloton.

Khalil: Absolutely. Thank you. Awesome.

Wow, so Jake’s in for $25k. Let’s find out if Phil has made up his mind yet.

Phil: I got to tell you. I’m still on the fence. I really like the idea of the Peloton model. But that’s not what you’re targeting right now. What you’re targeting makes a lot of sense, but it also requires sell-through. That’s why for a sort of early stage like this, where it’s pre-delivery of the product, there’s so much more risk.

If for some reason the members don’t bite, then the thing falls apart. So let me ask you this. On the two big LOIs, is the hardware component of those set in stone? Is that guaranteed?

Khalil: It’s not guaranteed since it’s an LOI, you know, to be completely fair.

Phil: So what are the terms? They can cancel at any time at this point?

Khalil: It’s an LOI.

Howie: But if it goes to contract, what are the terms?

Tommy: All of the terms that are laid out in the LOI, so…

Phil: So why isn’t it a contract?

Tommy: We’re shipping in a month.

Phil: But you can have a contract now.

Khalil: The biggest doubt of all of those customers is that it works.

Phil: Yeah. Well, that’s my doubt, too.

If you’ve been paying attention to past pitches, you know Phil is our most cautious investor. He tries to nail down every single detail before he puts a cent behind a startup.

Phil: So you’ve shown them this demonstration you’ve showed us? And they’re like, wow, that’s great. So they see that it works. So what are they concerned about? That it won’t get up on the TV screen?

Jillian: Is it integration?

Tommy: That’s honest pushback, honestly.

Phil: That’s what they’re saying. We see it gets on the app, we’re not sure you’re going to get that information up on the TV?

Khalil: Well, it’s because they didn’t see the exact, they didn’t see the exact context with 15 people, for example, doing it at the same time.

Phil: I just want to understand. What’s the timing for getting these LOIs to contract? Do you have to deliver the product first? Do they want to see it, actually?

Khalil: Yeah, I think those will actually be done, I’d say six weeks after first shipment. So I would say within the next 4 months and a half.

Phil: I’m gonna pass for now. In four and a half months, if there are contracts, I’m in even if it means a higher valuation at that point. Because at this stage, I really like what you’re doing, I really do, this is very tough for me. But I just feel like there’s this big question mark there.

Tommy: Seed stage is maybe a little bit too early for you right now.

Phil: Pre-shipping is a little early. And I’m trying to make an exception here.

Jillian: I don’t think they would have manufactured all of these if they didn’t really feel confident that these LOIs are going to turn into contracts.

Phil: Oh, I don’t doubt that they feel confident.

Jillian: Okay. Can I just say one thing? I just want to address one of your concerns. I think they’re doing it the right way, where they have the gym marketing dollars behind them, and the adoption will be in the gym and then they can expand it into at-home. So I think at a $4 million valuation, um… I’m not trying to convince you. But I would think that going direct to consumers is probably not the best way to go and I’ll tell you why. Because the reason why this in-home spinning has done so well, is because of SoulCycle. And all the other gyms that launched SoulCycle. So people started to be introduced through the gyms and through these franchises. And then it enabled companies to come in and start the home.

Phil: Good point.

Jillian: And so, that said, I’m going to pass and I’ll tell you why, and it has nothing to do with me not being completely excited about this at all. It’s because I don’t invest into devices. I don’t do wearables or any of that. I don’t know anything really about this. And so I never invest in something I don’t know anything about. But I do know about boxing, and I do know enough that this is a very hot space and I am positive, I think that this is a huge opportunity for everybody. And good for you for taking this. Because you’re going to be laughing at all of us. I think what you’re doing is amazing.

Phil: He already is. I hear him chuckling.

Jillian: I absolutely see this. So, thank you so much. And I think your raise will be pretty easy at this valuation and with this incredible product.

Howie: So wait, Phil are you still passing? Or did Jillian convince you?

Jillian: Phil, you’re a moron. I have to tell you. And I never say that…

Phil: Did you just call me a moron?

Jillian: Yeah, I did. You’re one of the smartest men. And you also do, you understand this market. I see such a huge opportunity here, it’s killing me. And of all the people I would think you would be able to scoop up money for this.

Phil: Jillian, you love the deal. Why don’t you make an exception?

Jillian: You want to know something?

Tommy: It would be such a pleasure. I really like your vibe.

Khalil: Especially with Class Pass.

Jillian: Phil!

Phil: Let me say, we can do the whole round.

Jillian: You let him do this to me!

Phil: We can get the valuation lower.

Jillian: The valuation is already 4! That’s the smallest we’ve basically ever seen.

Phil: Right, I think we do a $3 million valuation and we do the whole thing.

Jillian: Phil.

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

Jillian: I can’t. I can’t.

Phil: Jillian.

Jillian: It’s not your money! It’s my money!

Howie: Phil, you shouldn’t need Jillian to go into this deal, to go into a deal.

Phil: I know. So you’re out? You’re passing? You’re done?

Jillian: I’m passing.

Tommy: That’s such a shame. You know business though, very well.

Jillian: But he knows it ten times better and he knows this space and I don’t.

Tommy: So if he comes in would you be in with him? That way he gets…

Jillian: What’s this, like the Trump Hillary thing? You show your emails, he’ll show his tax returns!

Phil: What are you willing to do on the cap?

Khalil: What do you propose?

Phil: $3 million. I’ll do 250.

Khalil: K?

Phil: No, $250.

Tommy: Take out the wallet.

Phil: I got it here for you. I’ll close today. I can close now at $250. The k, I would have to wait a little bit. But the $250 I can close today.

So Phil is offering to come in for a quarter of a million dollars if Khalil and Tommy will drop the valuation of their company from $4M to $3M.

Phil: Jake can ride along at the $3 million.

Jake: Generous. Generous.

Phil: How much did you come in at?

Jake: $25k.

Phil: Okay. So you’d get $275 at 3.

Jake: And then Jillian would come in for, I think she would do 25.

Phil: I think she would do something.

Jake: Because that makes it an even $300,000 on a $3 million cap.

Jillian: Fine, Jillian’s giving a 25.

Phil: There you go. $300,000 at $3 million.

Tommy: So three. Jesus Christ. It is so much lower, though. Okay, what do you think?

Howie: Do you want to phone a friend?

Jillian: You don’t have to take it.

Khalil: Let’s do it.

Tommy: You wanna phone a friend? Let’s do it? Let’s do it?

Phil: We’re doing it?

Khalil: Yeah.

Jake: Are you phoning a friend, or are we shaking on it?

Tommy: Thanks for coming in. At 4.

Howie: Oh, at four. I’ll still shake your guys’ hand. Congrats.

Jake: Howie’s going to lose out on this one.

Phil: You did a great job.

The investors have promised $300K to Hykso – all it took was some serious strong-arming by Phil to get the founders to drop the price of their company to $3M and convince Jillian to ride along. So now they all own a bigger piece of the pie than they would have, if Hykso had kept its 4M dollar price tag. Now that’s some smooth talking.

Everyone shakes hands, and the founders head home, leaving our investors to debrief.

Phil: Did you consider jumping in at the end? After we got the valuation down a little bit?

Howie: No. It wasn’t about the valuation. I didn’t get a sense that they were closers. To me, LOIs, those are just bullshit. If they’re exciting, if like the CKO gym, if these gyms are really excited about utilizing this technology, where’s the contract? Where is the money?

Phil: Are you guys worried about that? The aspect that they have LOIs, why don’t they have signed contracts?

Jillian: You know what, usually, and this is the only thing I do know about devices, wearables, they do like to see things that are shipped, so that they know that nothing goes wrong in the production.

Phil: I think we can push them off and say, we want to see it.

Jillian: But then we hammered them down on the valuation, right?

Jake: $3 million is a great price, too.

Jillian: $3 million is a great price.

Jake: I got to say the move of, Phil, you really need to get into this deal, here’s all the reasons why, but I’m gonna pass.

Howie: It backfired.

Phil: I’m out though. Yeah. What was that? You’re a moron, but I’m not a moron for passing.

Jillian: You know why? I don’t know anything about wearables!

Phil: Neither do I!

Howie: Are you guys having regret? Are you guys having some investor regret?

Jillian: I’m actually not having regret. I actually feel more confident. I’m blowing so much money on this podcast. I’m going to kill you. If you’re listening to this!

Howie: It’s all your fault Josh.

I may be responsible for making the investors a little poorer after today’s episode, but we’ve also made one company a little richer. In a moment, we’ll get Khalil on the phone and find out what happened in the months following his pitch.

Welcome back. So I got Khalil on the phone to hear how things are going with Hykso and find out what became of the investments.

Josh: First, Jake committed $25,000, then Jillian talked Phil into going on. Then Jake, the first guy who came in, talked Jillian into putting $25k in and making it an even $300,000, I think. All the while renegotiating the valuation from 4 down to 3. So, what happened after that?

Khalil: So after that, we started getting into due diligence with all three of them. Jillian actually discovered that she had a conflict of interest with one of her portfolio companies, so unfortunately she had to pull out. We kept going through due diligence. And then, at a certain point, we started getting another offer from 500 Startups. I was looking to close the round, especially at that valuation. Because the program was starting. And I basically asked Phil and Jake if they were ready to move forward. Phil had a few things that were kind of, he wanted us to go through shipment, that would have de-risked the deal a little bit from his perspective. And then we decided to basically revisit once we will have been through shipment. But Jake decided to invest.

Josh: Okay. So Jake’s in?

Khalil: Yep. Jake came through. And you know, he’s awesome. We’ve been talking, we added each other on Facebook, we’ve been like texting each other at weird hours, that you usually don’t text business people. So super glad to have him on board. He was a great addition.

As so often happens, the due diligence period weeded out some of the investors. But not all of them. Jake hung on with this $25K investment – and as it turns out, he wasn’t sorry he did.

Josh: You wrote that 25k check last year and then how are things going this year?

Jake: We’ve stepped in, stayed in really close contact. So I talk to them at least once a month sometimes more often than that and they’ve just been growing like gangbusters. So their direct sales through their website – well, first of all I should say that they started shipping product early this year, I think back in February. So that was a big initial hang up that some of the other investors had. But the product came through – very, very few complaints from customers almost nobody shipping it back. Their sales are —

Josh: For real on their first version?

Jake: Yeah, it’s amazing

Josh: On a hardware product?

Jake: Very, very few quality control issues once they started shipping. I mean they worked really hard at the factory to get it right.

Josh: Yeah.

Jake: But yeah, their sales have been growing incredibly fast. They started rolling out to gyms. The gym members love it. So those pilots that he talked about have started expanding into larger pilots or full-blown contracts. I think every month it’s just, it’s growth. And, you know, good news. So I mean there’s always setbacks in every startup but these guys are just doing incredibly well.

After those initial sales, the investment in Hykso started to look even better to Jake.

Jake: So they went out to do some more fundraising, and based on all this progress we decided to increase our investment. So, you know, our initial commitment was $25,000. Relatively small. But we just committed an additional $100,000 to their round.

Josh: Oh, this just happened?

Jake: Just happened. Yeah. Last month.

Josh: Oh fantastic.

I’ve said it before: pitching is a little like a first date – and an investment is like deciding to go steady. All of it is done in the hopes that one day you might say: I love… your company.

Jake: You never really know exactly what the relationship is going to be like before you invest no matter how much diligence you do. But once you invest sometimes you figure out that this thing that you thought was great is like mind-blowingly great. And whenever you can increase your investment in a company like that like you’ve done a great job for your investors and hopefully a great job for the company.

Here’s to Jake and Hykso – may their relationship be long… and profitable.

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

Come join the conversation on social. I’m @joshmuccio on Twitter and Facebook and the show handle is @thepitchshow. You can also send us an email at thepitch@gimletmedia.com

Our website is thepitch.show, and you can 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 Chathurvedi, 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, Bienart and Jonny Cool. We were mixed by Enoch Kim with help from Matthew Boll.

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

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, for taking a leap of faith on us, when we were just a little independent podcast.

Finally if you’re enjoying The Pitch, please leave us a review and a rating on Apple Podcasts. It really helps us others discover the show.

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

Alex: 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?

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

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

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

Shimmur (S02 Ep07)

The social media landscape is a veritable graveyard of failed startups, but Matthew Peltier believes his company, Shimmur, is different.

July 26, 2017
View show transcript

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

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.

This week:

Matthew Peltier: Right now, the way it works, is it flips kind of the way social media works.

Howie Diamond: How do you address every comment, every fan, on a daily basis when there’s hundreds and thousands of messages coming in?

Phil Nadel: But does that mean a lot to the fans? Just that they liked it?

Jillian Manus: I was one of the investors in Myspace.

Howie: Were you?

Jillian: Yes. Need I say more? Like, Myspace!

Today we hear from an entrepreneur who’s built an app designed to bring social media stars — and their fans — into conversation. But the founder needs to convince investors that, unlike most social media startups, he has a plan to actually make money.

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

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

Jillian Manus is here representing Structure Capital. Even more than other investors, she looks to make a connection with a founder and their company.

Jillian: There is no doubt in my mind that you’re going to do this. I really feel that.

Jake Chapman’s here with Gelt VC. Sometimes it feels like he has an angel and a devil sitting on his shoulders — one thinking about the morality of a company and the other focused on the financial opportunity. But when he can get those two to agree — he’s all in.

Jake Chapman: I think you’re making a difference in the world. And I think you’re going to make a boatload of money. And when I can combine those two things, it really gets me excited.

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.

Alright, here we go.

When today’s founder — Matthew Peltier — strides into the room, it’s easy to overlook his breezy air of confidence or his prominent man-bun, and that’s because everyone is focused on something else. Something you don’t see a lot in a pitch meeting: the guy is barefoot.

Jake: You don’t walk around barefoot on the streets of San Francisco, do you?

Matthew: Not in SF, but I do in LA a lot.

Jake: No, LA’s fine. San Francisco’s special.

Howie: On the west side, I’m assuming.

Matthew: West side, yeah.

All right, well shoes or no shoes, it’s time for Matthew to make his pitch.

Jillian: Okay. Go ahead. Shimmur us.

Matthew: Yeah, so, I’m Matthew Peltier from Shimmur, and we’re building a social engagement platform that lets influencers and fans interact at scale.

Matthew explains that the idea for his company all started when Matthew met a guy named Brent Rivera, who had over 22 million followers on various social platforms — 22 million followers who were regularly vying for Brent’s attention through comments and tweets.

Matthew: And working with him, started to realize what social media did well, what it did poorly and how him and his community engaged. Through that, we saw that social media, well-served, is content distribution, allows these creators to build their following, establish their brand, their trade, really build their stardom.

And so he and his cofounders built Shimmur, an app designed to help social media stars interact with their fans.

Jake: So how does it work?

Matthew: The platform itself is very simple. Right now, the way it works, is it flips kind of the way social media works. So rather than influencers creating content and fans reacting, the community creates the content, they up and down vote the good and bad content, and the influencer is able to interact.

Imagine a Reddit-style app, where users in a particular group upvote posts they like. Except instead of communities focused around things like gaming or shower thoughts, each community on Shimmur is centered on someone who’s known as an influencer. Users upvote posts that are directed to or about that influencer.

Matthew: Would you guys like to see a little product demo?

Howie: Yes, please.

Investor: Absolutely.

Matthew: So yeah, I’ll start over here.

Matthew pulls out his phone and walks over to the investors to demonstrate how the app works. The front page is populated with the faces of various influencers. Click on one and it takes you to a page devoted entirely to that person — known as their “tribe.”

Matthew As a user, you’re joining tribes of the influencers you love. From there, you can go into the individual communities. Almost think a paradigm like Reddit and subreddits. From there, we allow the community to create content.

Howie: I click into one of my tribes and this is content that’s being produced from other tribe members?

Matthew: Exactly. So here’s somebody asking about how this influencer refers to his girlfriend. Originally, we thought we’d see a lot more Q&A type content, and there’s a ton of that. But there’s almost an equal volume of just content creation, memes, favorite photos, even just admiration, things like that. And then the…

Howie: Yup. I get it, yeah.

Matthew: And the last piece is kind of up and down voting.

So presumably if enough people upvote the question about what nicknames Brent likes to call his girlfriend, then Brent would see — and answer — that question, and all the followers in his tribe would see his response. In this way, an influencer is able to “interact” with thousands or even millions of followers in a scalable way.

Howie: What qualifies someone as an influencer?

Matthew: Right now we really use how many followers they have. It’s a bit of a vanity, but it shows that they have people that care about them.

Jillian: How many is the average?

Matthew: I’d say on the lower end, like 150,000 plus, but on average we probably have half a million to a million, at least on a single platform. But from there, we really look at engagement.

Jillian: Howie, you can be an influencer.

Howie: I’m in.

Jillian: You’re in.

Matthew: Sold.

Jake: It looks a lot like a mobile Facebook feed.

Matthew: Yep. We wanted it to be a feed, where the influencer could scroll through. And that’s where that read receipt functionality gets really scalable. Every post they see, all those fans are notified that he had seen that. So really able to interact with hundreds, even thousands of people in a single session.

Jillian: Do they really have time? Or do they really have… Most influencers don’t do this themselves. They do some of it, but a lot of times they have others who…

Matthew: It really depends on the class of influencers. Social influencers are all authentic. Everything they create on every platform they do, everything they’re engaging with, it’s all them.

I think it’s worth noting that what Matthew is talking about — the “class of influencers” might sound kind of ridiculous — the idea that there is a whole world of people who have built careers out of getting a bunch of likes and having a ton of followers — but it’s not at all. If we’ve learned nothing else from Kim Kardashian, it’s that you can be famous for being famous.

Here’s Howie.

Howie: So an influencer wants to be inundated with all this from their fans? Don’t you think at some point it’s just not scalable? Well, I know the platform’s scalable. But as an influencer, me as a person, I don’t scale. How do you address every comment, every fan, on a daily basis when there’s hundreds and thousands of messages coming in?

Matthew: Really, the whole thesis is we don’t aggregate content. We’re not pulling in all the spammy things created in comment feeds and stuff like that. Really, it’s about quality, not quantity. And that’s where the upvoting mechanic gets really scalable. So as the community upvotes it, when the influencer interacts, all those people are notified.

Phil: But does that mean a lot to the fans? Just that they liked it?

Matthew: Yeah. I mean, uh, for social influencers, and really what it’s become is a place where influencers are more directly connected to the fans, right? What fans feel like they’re missing is understanding whether that influencer cares about them, or whether he has a presence. And, a lot of it is about almost the gaze into the eyes of an influencer. What are they looking at? What are they responding to? You know, the fact that they’re not necessarily being directly engaged, but they’re getting this more intimate look into the influencer, has been really powerful.

“The gaze of an influencer” — according to Matthew, this is why fans come to Shimmur. If they post something other fans upvote, they might just get a response from a social media star.  

But what’s the draw for the influencers themselves?

Jake: Can influencers use Shimmur to grow their own tribe via other tribes?

Matthew: Yep. So a lot of the functionality in our roadmap is how do we integrate communities?  Um, we’ve seen a lot of tribe growth both within the product, but also influencers’ social followings elsewhere have grown.

Howie: What are your numbers?

Matthew: Yeah. We just passed, I think yesterday, 166,000 users. We’ve done no paid marketing or promotions, it’s all been, you know, organic. Influencers coming to our product. Naturally, they want to let their fans know that they have this way to better engage with them.

Howie: So these are 166,000 registered users?

Matthew: Yep. We’ve had about 185,000 downloads or so, so good conversions on the signup. Retention has been strong. And typically on a daily or weekly basis we’re seeing anywhere from 25 – 30 plus percent active. So, getting good engagement metrics.

Howie: How many influencers are there out there in the market right now?

Matthew: It’s really an interesting question. I guess one of the things we’ve started to realize is there’s new influencers popping up every day. A lot of our bread and butter right now is really young and up and coming influencers that really need to cultivate their community and grow, stay highly engaged. A tremendous amount of this is really developing. I’d say a lot of the influencer space is very much so a wild, wild west.

Phil: Sounds very cool. How are you monetizing it?

That’s Phil, like usual, he’s getting down to the numbers.

Matthew: Monetization, I think, is really what our focus is post-seed. So really it’s about building different avenues for an influencer to monetize. Um, Kristen Hancher, she actually has a ton of fans that will screenshot her photos from Instagram or Musical.ly or things like that. They’ll share it and they’ll actually ask her where she got every piece of that outfit. And she’ll go through and respond and it’s a really organic way for her to influence spending decisions. And then obviously we can provide much deeper analytics. Could we do things like buy buttons or actually track conversions? Things that I think are struggling on other products.

Phil: So you’d have to pay or incentivize the influencer in that case to interact with that paid content?

Matthew: 100%. All of these things are all revenue splits. You know, even advertising now on Twitter or YouTube, it’s all about splitting revenue with the influencer. Obviously, it’s a motivation for them to continue to use the product, but it drives revenue to both the platform and the creators.

What Matthew means by “revenue splits” is an influencer has the opportunity to sell things through their posts. Say a tribe member asks an influencer where she got her sunglasses. She can tell them the brand, and then there might be a little “buy” button for fans to click and go buy the same sunglasses. The influencer and Shimmur could get a cut of any sales generated this way.

It seems “influencer” very quickly means spending influencer.

Phil: So you’ll give influencers tools to monetize?

Matthew: Yep.

Phil: And you’ll get a piece?

Matthew: Yeah.

Jillian: How do you track that then? If she’s…yeah.

Howie: Some kind of affiliate model?

Matthew: I’d say that’s one version. Another big thing we’re really focused on is directly monetizing the users. So having fans even pay premiums to guarantee their post gets responded to or engaged with. And we’ve already had some offers for five, six figure brand deals from major agencies to come through the product and advertise products or work on campaigns.

Jillian: Did you take it?

Matthew: We haven’t yet.

Jillian: Okay. What type of deal is this?

Matthew: It’s a brand integration. So it would be partnering specific influencers that match that product or the goals of that campaign and doing a campaign that is through Shimmur and also through their other social channels, too.

Jillian: And what does that look like in terms of the revenues from that? What’s the contract look like?

Matthew: Yeah, um…

Jillian: Is it $25,000? Is it $10,000?

Matthew: As far as revenue for Shimmur?

Jillian: You said it was a six figure? So it’s $100,000?

Matthew: They vary. So my cofounder Max has managed an influencer Brent Rivera. He’s done everything from five, six, even seven figure deals.

Matthew isn’t being very forthcoming with his numbers — maybe he just doesn’t want to overcommit. But what he’s saying is: there’s money to be made in the world of influencers. And through these influencers, Shimmur could be the first social media platform since Facebook to actually crack the code of capitalizing on its users. It’s a big risk, but with a potentially even bigger reward.

Jillian: What are you raising?

Matthew: Right now we’re doing a, oh I forgot that in the introduction. [laughter]

Jillian: We love having you here, but you know…

Matthew: Yep. We’re doing a seed round. And we’re raising $1.5. Really oriented towards giving us a comfortable 14-16 months to build a lot of the features that we know will drive that depth, the longevity, the deep vested interest in the product.

Jillian: And what’s the valuation?

Matthew: We’re doing right now a $7 mil pre, and those terms have been worked with Greycroft.

Jillian: So Greycroft is in?

Matthew: Yep.

Ah, Graycroft is in. So investors are thinking: if we invest we won’t be the first money in. And Graycroft is a reputable VC firm at that. This could be the final nudge needed to get our investors to take the leap.

Jillian: How much of that is done?

Matthew: Yeah. So we have about $1.1 hard committed.

Phil: Let me ask you this. For you, what is your big hair on fire question? Your big issue?

Jillian: Yeah.

Matthew: Yeah. It’s definitely a good question. I think right now, a lot of the challenge in any social product is longevity. Can you build a real experience that drives long term value that people feel like they have a vested interest in the history they’ve had in that product, or in the relationships they’re building? And can we really capture that? And I think that’s really what we need to build for in our product roadmap. With confidence, I think we’re thinking about it absolutely right.

And with that, Matthew makes his final case for why he thinks Shimmur could be the next big social media app. He’s got users. He’s got a plan to make money. Now, can he get the capital he needs to keep refining his app to make it indispensible for influencers and their fans?

Jake’s up first.

Jake: Well, Greycroft is in already, obviously, and is leading the round, so I think raising money is not going to be a concern for you. I think, for me, we’ve never invested in a social company before. We don’t really understand. So it’s very hard for me to take your engagement numbers and your retention numbers and input that in my brain and have that spit out: this is a top 99 percentile company or what. Very hard for me to process this on the fly. But ultimately I don’t think we’d be a great investor for you because of that. We just don’t have a lot of background in this space. For those reasons, I think I’m going to have to pass.

Matthew: Cool.

Jake’s out.

Here’s Phil

Phil: You know, for me, I think it’s a cool concept. I really like it. But for me it’s a fairly easy decision because it’s pre-revenue. I’ve got to pass. But I wish you luck with it. I think you’re onto something kind of cool. And it seems very, sort of, you know, cutting edge. It’s really, you’re in a good place. I don’t know if you can succeed long term. Like you said, the longevity question, we don’t know. But keep doing it. I think it’s really cool.

Phil’s out.

Now the ball’s in Jillian’s court

Jillian: I’m on the fence on this a bit. I think that your background is very impressive, and obviously you’re a high executor. And in a very short amount of time you have already some good traction.

Matthew: Thank you.

Jillian: Absolutely. I’ve worked a little bit in this space, but not enough to feel like I’m an expert. Potentially because I’m so old, maybe that’s one of the reasons.

Matthew: Twenty-one?

Jillian: What?

Matthew: Twenty-one?

Jillian: Oh, you see that was really, really…

Phil: Now she’s in.

[laughter]

Jillian: You’re such a darling. So, I think that I’m going to be out just because I don’t know if I can add value. I really worry about that. But not because I don’t think this has huge merit. And I see the merit. I just want to make sure that I always add smart money, just not money. And I don’t think you’re going to have any problems raising the rest of this. Like, zero.

Matthew: Okay.

Three of our four investors are out.

Perhaps Howie, the one investor with a vibe chill enough to rival Matthew’s no shoes policy will go in on Shimmur.

Howie: I dig your mojo, man.

Matthew: Appreciate it.

Howie: Yeah. You’re thinking about things in the right way. And I like this idea of nurturing these influencer-to-fan relationships. I think that’s…

Jake: This is your wheelhouse, Howie.

Howie: Why is that?

Jillian: Because you are an influencer, that’s why.

Investor: You’re a musician. Howie was a rock star.

Howie: When I was a musician, there was Myspace. So…

Jillian: I was one of the investors in Myspace.

Howie: Were you?

Jillian: Yeah, we were there…

Howie: Oh cool.

Matthew: What are you talking about, you can’t add value?

Jillian: No, no. That’s why! [laughter] Need I say more? Like, Myspace!?

Howie: She can tell you all about Myspace.

Jillian: The fact that you even know what Myspace is, is a shocker.

Howie: I, uh. Yeah. The only issue, the only problem I have is this just doesn’t fit really my, the thesis of what my fund, Ranch Ventures, is doing. Like, one of my portfolio companies is trying to cure cancer in space, stuff like that.

Phil: Is that a big problem? Cancer in space? [laughter]

Howie: Yeah. Space cancer.

Phil: Space cancer.

Howie: It’s worse.

Matthew: We could crowdsource feedback.

Jake: Is he using laser cats to cure space cancer?

Howie: Yeah. Sure. I mean, I look for stuff right on the edge of that, like, risk reward curve, kind of thing. If I had more disposable income, I would probably invest personally in you. I lived in LA for eight or nine years; I was in the music industry for a long time; I still have friends in Silicon Beach. And I know that’s like a thriving up and coming ecosystem. There’s an energy down there, and you exemplify that energy in a really good way. And I think this idea is perfect for that type of environment and I think you’re already executing against it, so it’s awesome. Again, if I had some more personal wealth I would probably invest personally. But just because it doesn’t fit my fund I’m going to pass for now, um, but would love to try to be helpful to you in any way that I can moving forward.

Matthew: Yeah. I appreciate it.

Jillian: And you’re going to raise this money, anyway. So I’m not worried about it. And you know as well. And you probably just came here for the exposure. But that’s okay.

Matthew: I just came here to meet you folks.

Jillian: Okay, well really nice to meet you.

Howie: Thanks for coming in.

Matthew: Thank you all very much.

To be honest, this pitch did not turn out how I expected. I THOUGHT investors would see this as the one opportunity in social right now that had a very clear path to revenue. But things didn’t turn out that way. So we decided to do something a bit different.

When we come back from break, I’m going to call up the investors this time, and find out what was going through their heads during this pitch. And why didn’t they invest in a company, and a founder that to me, seemed like a surefire win?

 

[break]

 

Welcome back.

Matthew knew his industry and his product cold, and seemed to have the right answers for all of the investors’ questions. So when they all turned him down, I couldn’t shake the feeling that there were unspoken dynamics at play in the room. To find out exactly what sunk Matthew’s pitch, I called up the investors a few months after.

Please excuse the audio quality. I recorded these over the phone in the middle of the day. You’ll hear the investors typing and phones vibrating and whatnot. What can I say, these are busy people. Unfortunately, the audio quality of Howie’s call was a little too rough, so we’ll just hear from Phil, Jillian, and Jake.

The first thing I wanna know is: what were they thinking when Matthew walked in barefoot?

Here’s Jillian.

Jillian: Wow, no shoes. I wish I could do that. I’d probably kill myself and step on something and get rabies the first moment. But that’s pretty cool.

Josh: Are you thinking anything about, like, his abilities as a founder? Are you making any conclusions about him or is it too early?


Jillian: No, and just the opposite. I’m thinking, here’s a pretty confident person to come out, pitch to a bunch of VCs with no shoes, very very, he’s very cool, he’s, really has a very nice energy about him. He doesn’t seem really to be mister salesman. Um, but we’ll see.

So Jillian was into it. But Phil? Not so much.

Phil: When he walks in barefoot, I’m thinking, who is this bum? Is this guy here to clean up the studio? Or is this the founder? I don’t understand…he’s barefoot and I’m thinking, that’s not very professional and/or he’s not taking this very seriously. And, you know, I don’t know if his lack of professionalism is going to be a good fit for me. Yea, red flag is what I’m thinking when someone walks into a pitch barefoot.

Josh: No shirt, no shoes, no service?

Phil: No shirt, no shoes, no money.

But forget about the shoes. What about once the actual pitch got going?

Here’s Phil again.

Phil: Uh, he starts describing the platform. And what they’re trying to accomplish. And what I’m thinking is, this sounds like a lot of other platforms. Like a lot of failures that there’ve been in this space. I’m thinking, this does not sound like anything new, even though he’s doing an admirable job at trying to spin it as something new, it didn’t really excite me or come across to me as something, like, any kind of a breakthrough or something revolutionary or something really new.

Jillian had a similar take.

Jillian: It seems like a combination of many companies trying to do something different but they don’t have one definitive distinguishing quality. There’s nothing that’s really setting them apart. Um, they’re—you know, you always called them copycats. This is not really a copycat. This is like a garanimal. I don’t know if you remember what a garanimal was, but garanimals were, you had to mix and match different animals. Like the head of a hippopotamus and you put it with the bottom of a, you know, a giraffe.  And this and that, and it was almost like this was a garanimal where there were bits and pieces of great ideas trying to be fit together but not creating a very coherent outfit.

But not everyone saw the idea of Shimmur this way. Here’s Jake.

Jake: So, as Matt’s talking about, you know, the problem he’s addressing, I start to actually get really excited and interested, because I’ve actually invested in a company in the space before, um, that’s trying to help influencers reach their audiences at scale and really build up personal connections between the influencer and the audience member or the followers. So it’s a problem I really get. And it’s something that I think needs a solution. I think there’s a real big market for it. So as soon as I start hearing what Matt’s going after I start to get kind of excited and interested in what’s, what’s coming next.

As Matthew got deeper into his pitch, some of the investors’ minds began to change.

Phil: As Matthew is going through his presentation, I’m impressed with the fact that he knows his numbers.

This is Phil again.

Phil: He knows his product very well. He has a real passion for it. He has a clear vision. And Matthew is really, in my view, the embodiment of the product. Right? He is this product. I feel, I get the feeling that he is living and breathing it. And now, reflecting on the fact that he is barefoot, I feel like that’s sort of part of his persona. And part of the way that he embodies what he’s trying to put out there in terms of Shimmur.

Here’s Jillian.

Jillian: I’m still engaged because, I’m thinking to myself, perhaps because this is not an area of expertise, of investment, for myself, I’m not fully grasping this. Perhaps I’m too old to grasp it. Perhaps this is, he’s not presenting it coherently and I should pay more attention.

Jake: Matt starts talking about tribes. And I’m thinking to myself, as soon as he mentions the word tribes, I hate that word. I just, it evokes an immediate negative reaction to me.

For Jake, this is when things started to go south.

Jake: Maybe I’m jealous and that’s why I don’t like the word tribes. But the idea that you have these, like, young, quote-un-quote influencers who are using an app and just, like, creating memes and then building, like, this rabid fan base and now they’re like the tribes following this chieftain. Like it all seems very perverse to me.

And here’s the thing that fascinates me about the investors’ decisions: they all got to no, but for totally different reasons.

Jake: So as Matt is talking about an influencer being able to touch a bunch of fans and make them happy because the influencer reached out, I start thinking about the kinds of businesses that just really feel icky to me. And I really hate to be this kind of judgmental. But I just, I don’t like the premise. And with certain social businesses, I don’t like that the premise is really all based on, we’re going to trigger, like, a little dopamine high in all of these people and keep them coming back. It makes them like drug addicts. And it literally is a dopamine high. You get a like from the influencer you follow, that you greatly respect or admire, and there’s a chemical release in your brain and that keeps you coming back to the app. Like you get physically addicted to the app. And I don’t know that it’s fair to really be judging Shimmer and Matt on all of this, but these are the things that are like going through my mind as we’re talking about this business.


For Jake, he couldn’t make peace with the business’ mission. And for Phil, it was all about the bottom line.

Phil: I don’t know where the revenue share is coming from. Where is the—how is the revenue being derived so that he can pay the influencers? So, that wasn’t really, that is not really answering my question, in my mind, about monetization. If a pre-revenue Facebook deal presented itself to me, I don’t think I would invest. Because I don’t invest in pre-revenue companies and I don’t know that I would be omniscient enough to know that this new, this Facebook, this company will be able to successfully monetize. So, I like to see evidence, early evidence, but evidence of product-market fit. I’m not that smart. Okay? I admit. I’m not that smart to predict the next Facebook before they’ve generated any revenue.

Jillian: I wasn’t feeling the vibe.

And sometimes it’s just about a feeling.

Jillian: I’m looking at him and saying he looks very together. He looks very confident. I like that. But I didn’t feel him. You know? I wasn’t feeling his excitement. I did not feel his energy and I’m thinking that, how is he going to motivate a team of people if he can’t motivate us to invest in this company. But that’s actually, that’s why I look at people’s energy. My grandfather used to say that if you could sell a fuller brush, you could sell anything. Because in the end, salespeople are really not selling the product, they’re selling themselves first. You have to like them. You have to believe them. You have to trust them. You have to feel their excitement. And I didn’t feel any of this. I did trust him. I didn’t have any reason not to, but I didn’t feel that he was excited. And how am I going to get excited if he’s not excited.

But there was one last piece to this puzzle. The investors had come up with a plan for how they could secretly communicate to one another when it was time to wrap up the pitch.

Josh: Oh wait, this is the one where you guys used your code word?

Jake: Yea yea, Phil used the hair on fire code word. I totally missed it.

Phil [tape from the pitch]: Let me ask you this: For you, what is your big hair on fire question? Your big issue?

Jake: Well he said hair on fire, and I remember while I was sitting there that that was supposed to be the code word, but by the time I remembered that he had said the code word it was like too late for me to jump on board.

Jake didn’t catch the code word — but Jillian did.

Jillian: Oh yea, I did. I, absolutely. I’m great at code words. Yea, no no no. And that was hysterical but that was, that was so well placed too. Because I was thinking the same thing.

After I talked to the investors, I caught up with Matthew to hear how Shimmur was doing and to find out what he thought about the pitch.

And he told me he wasn’t actually all that surprised when the investors decided to pass on the deal – this isn’t the first time he’s heard no.

Matthew: Yeah, um, you know it’s something we definitely expereince a ton of, obviously. And I think the reality of it is social media is very difficult. You’re kind of tapping into something that isn’t as tangible as other products and there is a lot of risk to it. There’s a lot of variability There’s even a lot of randomness and chance. But you know ultimately, it’s risk mitigation that’s what investing is. I think as a product like ours continues to grow and that becomes more evident that there is something here that has the ability to grow or to be a bigger player in this space. You know, that becomes more obvious that hey, maybe that can be that next product. But I think it ultimately comes down to it is a very risky unpredictable space and a lot of people just you know as obvious by you know the lack of clarity around it is they just don’t know what is going to hit next. So it’s, it causes a hesitation.

Josh: How is user growth since since you last came on? Was it a 180, 160, 180,000 users? I don’t remember which one those were active but —

Matthew: Yeah I think we were at about 160,000 active users. Since then, we’ve grown to about 230,000.

Josh: Wow, I can’t whistle but I would whistle if I could.

Matthew: [laughter] But we’ve been getting good, you know, momentum. I think it’s been consistent, at least since we put out the more public version of the product.

Josh: Okay, okay. How’s, did you finish your round?

Matthew: We’re still actually bringing in some additional capital on that. But we have made progress, um, had a few additional commits come in post that, you know, keep making progress and we’re looking to wrap it up here before end of this month.

True to form, Matthew doesn’t sound too worried about things. And, as it turns out, he was right to feel confident: in the months following our call, he was able to close out his round with VC investors.

Which brings me to our investors: they passed on this deal, and for a lot of different reasons. Whether it was the revenue model or the social implications of the product or just a weird vibe they got. That’s the world of investing. Not every investor is going to see the same opportunity in the same way. One investor’s no is another’s yes.

And so it’s a numbers game. As an entrepreneur, all you can do is keep pounding the pavement, making those calls, and meeting with investors. Sometimes it takes a while. But nobody ever said this was going to be easy.

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

Come join the conversation on social. I’m @joshmuccio on Twitter and Facebook and the show handle is @thepitchshow. You can also send us an email at thepitch@gimletmedia.com

Our website is thepitch.show, and you can subscribe to our brand new newsletter and get behind the scenes stuff at thepitch.show/email

Our show was produced by me, Josh Muccio, Asthaa Chathurvedi and Rob Szypko. We were edited by Devon Taylor.

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

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

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 for taking a leap of faith on us, when we were just a little independent podcast.

Finally if you’re enjoying The Pitch, please leave us a rating and review on Apple Podcasts. It really helps us others discover the show.

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

Khalil: We produce wearable technology and we allow people to play combat sports without having to hit each other in the face.

Jillian: Do you think this is going to be a trend? Is this trend sensitive?

Khalil: You know, I don’t believe so. Spinning has not been a trend, although…

Jillian: Oh it’s a trend now. It wasn’t

Khalil: It wasn’t but —

Phil: Let’s distinguish between trend and fad.

Jillian: I’m thinking more like a fad.

Phil: A fad fades quickly.

Jillian: Yeah.

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

 

Guru Games (S02 Ep06)

College students Evan Thomas and Troy Pettie have been moonlighting to build a business they hope will bring millennials back into casinos.

July 19, 2017
View show transcript

Troy Pettie: Isn’t this just kind of weird to be…That thing is really trippy. Is this spinning?

Troy: You want to run it a couple times.

Troy: Hello my name is Troy Pettie.

Evan Thomas: And I’m Evan Thomas.

Troy: And our company is Guru Games

Evan: Alright one more time.

Troy: Let’s go a couple more. I mean, we got time…

From Gimlet, this is The Pitch. I’m Josh Muccio.  This week two founders are pitching their casino game startup — and they’re a little nervous. Will practice make perfect for these young entrepreneurs?

Troy: Hello my name is Troy Pettie

Troy: Hello my name is Troy Pettie

Troy: It’s gonna get better in a couple more. Watch it’s just exponentially going. And if it was able to make it on…Smiling helps honestly.

While Evan and Troy work on getting their pitch down pat in studio A, our investors are hanging in studio B having an entirely different conversation.

Jake Chapman: I think we managed to squeeze in a bunch of puns because he had a couple of puns, I had mine, and…

That’s Jake Chapman with Gelt VC, and he gets pretty into puns.

Jake: I tried to do the let’s diagnose the patient, but Howie interrupted me.

Howie Diamond: I have this cool bag. It’s a really cool company. I don’t if you guys have heard of Away.

Bragging about his bag is Howie Diamond who founded the VC firm, Ranch Ventures.

Howie: A built in lock and two charging ports

Phil: I have a Bluesmart bag.

Not to be outdone is Phil Nadel with Barbara Corcoran Venture Partners.

Phil Nadel: It has a usb port, and internal scale. SO you can tell if you get close to 50 pound threshold. you can track it with GPS.

Howie: Mine has a laundry bag.

Before our investors get too carried away, here’s Jillian Manus, with Structure Capital, [here her voice] pulling us back to what really matters.

Jillian Manus: I finished House of Cards! That blew my mind.

Back in studio A, Evan and Troy are finishing up their pitch practice.

Troy: It seems as though nobody can get the twentysomethings to thirty-year olds into their casinos. To solve this problem Evan and I founded Guru Games.

Evan: How was that? Just do that in front of the people and we’ll be fine.

…and now it’s time to join the investors in studio B.

[Studio sound. Hellos from investors and founders.]

At last — it’s showtime.

Troy: Hello, my name is Troy Pettie.

Evan: And I’m Evan Thomas.

Troy: Our company is Guru Games. So growing up in Las Vegas, Evan and I were constantly surrounded by casinos and their games. But as we got closer to turning 21, we realized that there weren’t any games that either of us wanted to play. After some research we realized that this isn’t just our problem. This is a problem plaguing the entire gaming industry. Nobody can find a way to attract the newest generation of gamers to gamble in their casinos playing their games. So to solve this problem, Evan and I founded Guru Games.

Evan: We’re currently raising $600,000 to develop our team as well as cover the legal costs with running a for-real-money gambling studio. And that’s our one minute pitch.

Jillian: Alright. Very good!

After all their practice — when it came time to pitch, Troy ended up pulling out his phone and reading from his script.

But — with their one-minute pitch behind them — it’s time for Evan and Troy to field some questions from our investors.

Jillian: So, tell us a bit about your background.

Evan: So we’re both UNLV engineering students. UNLV is University of Nevada Las Vegas, if none of you guys are familiar. So I actually started my first semester of college at Air Force Academy. During that first semester I learned that the military wasn’t where I wanted to put my resources towards. I really kind of fell in love with entrepreneurship and creating my own ideas. So I took that to UNLV. Me and Troy took a gaming innovation class. The person who ran that class, he was basically our personal mentor. He taught us everything we know about games. If you look in a casino right now, slot machines are just traditional spinning wheels, and you get a payout. There’s no interaction. Millennials are turned off by it.

Jillian: Troy, we do want to hear about your background, too.

Evan: Yeah, go ahead and tell your background, Troy.

Troy: So, my background is pretty much the same, except that I didn’t really get into the startup world until we took that class.

Howie: You’re starting your own… So, you’re going to partner with casinos? Or you’re going to start your own casino?

Troy: So, exactly. We are partnering not so much with casinos. So I’ll just give a quick background on how the gaming industry works. You have your casino operators who are like MGM, Caesars.

Evan explains that, due to regulations, casinos like MGM and Caesars can’t actually make their own games, so they rely on third party vendors. There are those that design the games and those that manufacture them. The manufacturers work directly with the casinos — and what Guru Games aims to do is partner with one of these manufacturers.

Troy: What happens is we’ll actually design the entire theme and the sound and basically all the graphics, the experience of the cabinet. And then they’ll just manufacture it. So all the design, all the creative control of the game, falls underneath us, but they’re just our distributor. They’re our big partner that’s going to get us actually into the casinos.

Howie: And your manufacturing partner.

Troy: Yes, exactly.

Howie: So manufacturing and distributing partner.

Jake: What does the revenue stream look like? How does the split work and how much money would you expect to…?

Evan: So the split, kind of… It changes from  company to company. It all has to be negotiated.

Phil: But what’s the range? Give us an idea.

Evan: Typical deals look like a 70-30 or a 60-40 split. Some can go as high as 80-20 and some can go as low as 50-50 in terms of…

50-50, 80-20, 70-30… the point is, there will be some kind of split between Guru Games and their manufacturing partner.

Jillian: So have you created the software already? Have you created the game?

Evan: Yeah.

Jillian: You’ve created the game.

Troy: Yes.

Howie: So you guys are game developers?

Troy: Yes.

Howie: Both of you?

Troy: Yep.

Phil: Are you both still at UNLV?

Troy: We’re only 20. We’re only 20.

Evan: We’re both still students there.

Troy: So yeah. Yeah.

Jake: So you can’t even play your game?

Evan: No.

Howie: This is illegal. Are we engaging in illegal activity right now?

Jake: We’re contributing to delinquency of a minor.

At 20, Jake and Troy are certainly a little younger than the founders our investors are used to meeting. But they sound like they know their stuff. Now it’s time to find out if the game can hold up to scrutiny.

Troy: So. How many of you guys have played slot machines?

Jillian: All of us.

Troy: All of you guys. Okay.

Howie: I’m really good at them.

Phil: And Howie’s really good at them.

Howie: I’m a good slot player.

Troy: You’re a good slot player?

Jillian: Are you?

Jake: I mean, that’s what Howie’s job is, basically, right? You just randomly pick and just see what happens.

Howie: What? My investment thesis?

Jake: Yeah.

Howie: Yeah, of course.

Troy: So, you’ve all played slots. So you all have gotten some near misses, to where you wish you could just kind of flip it and get it to actually line up on the line, you know, and get paid for it.

Jillian: Absolutely.

Troy: Too many times you get two sevens and then you miss it by like a millimeter. We made a game, right, that… Sorry. We made a game that is completely math verified, but allows you to completely control how you make your lines. So let me give you an example…

Troy says the game is like a regular slot machine where you pull the lever and hope to get a matching row, say four cherries. Except with Line Em Up, the player can actually have an impact on the outcome. After you pull the lever, you might get a chance to swap a couple of tiles around to make a match, just like a typical match 4 game such as Candy Crush or Bejeweled.

Troy: And now you’ve got this diagonal of bars, and this right here, this line of cherries. And then you can also get this. Right. And now you’ve got a little horizontal of bells. So finish. Right. And you won $7.50 from that win. So when it comes to slot machines you can choose things and what not. But you can’t actually affect your wager. This game, you can mess up on and affect your wager. This game, you can maximize your payout if given a good board.

Phil: One thing I’m concerned about is casinos are always focused on velocity of gambling.

Velocity: also known as rounds per hour. When it comes to casino games, the more rounds, the better.

Phil: And it seems like this would slow down the velocity.

Troy: Amazingly enough, for people, the learning curve for this game is very similar to that of video poker. So if any of you play video poker, you’re kind of slow at first, you kind of learn, like, oh it’s better to hold a pair than a high card, right? And then eventually you get to the point where you can play 400 rounds an hour. Evan and I have been playing this game for around six months, and we can play 320 rounds an hour at almost perfect strategy.

Phil: And how does that compare with the regular slot velocity?

Troy: Regular slot velocity is around 450.

Phil: So, yeah, that’s a significant slowdown after months of your training.

Troy: But the problems is is that you get bored from playing the slot machine.

Jillian: Right.

Troy: So, sure, if you get 500 rounds per hour. But that’s if the person plays for the full hour. That’s if it’s always being played.

Phil: So the tradeoff you’re saying is this helps them to keep the player there longer, even though they’re playing slower?

Troy: Exactly.

Howie: I know a little bit about, I’ve read a little bit about the psychology behind these game mechanics in casinos, and to Phil’s point there is something called the zone. You guys are familiar with the zone?

Troy: Oh yep. You just don’t know what you’re doing. You just do it.

Howie: It’s not even about winning or losing. It’s just the mechanics of the game, and the lights and the sound are completely, have been completely calibrated scientifically to make sure that you sit there for hours on end. It seems like, are you saying this enhances the zone? Or can this possibly take you out of the zone? Because there’s been years and years of research to get people into this “zone.” And now this seems a little bit more interactive.

Troy: You definitely get into the zone playing this game. Once you get used to the mechanic, you definitely get into the zone.

Howie: But how long until you get used to it? Because this is sort of modifying a little bit of human behavior, in terms of this is a new thing, you know. How do you get people to get in?

Jake: I don’t know if it’s that new, Howie. I mean this is for people who play social games, right? You play Candy Crush or Bejeweled. It’s that mechanic.

Howie: I’m saying people who play slot machines.

Evan: The zone works for the traditional baby boomer gamblers. That’s the bread and butter of the casinos right now. But the casinos are worried about how are they going to attract that new gambler, how are they going to attract that underserved gambler that doesn’t currently have a game in the market for them. They don’t want to just go and sit mindlessly at a slot machine and get in the zone. They want a more interactive experience. And that’s what we’re trying to bring to the table.

Troy: Essentially this would be what the casino calls ‘found money’. Because these people aren’t gambling now. So any amount of money that they spend gambling on our game is found money. It’s money they wouldn’t have made anyway.

Found money: now those are the kind of words investors like to hear. It sounds like Evan and Troy are slowing getting the investors to take them and their company seriously.

Evan: Right now we’re in talks with one of the biggest gaming equipment manufacturers in the country about a distribution deal where, exactly what I was talking about, the studio distributor deal. So, we’re in early talks there. And then we’ve been approached by multiple online casino, online casino, the people that run the online casinos, the operators, in that space.

Howie: So, you’re game developers and you have relationships in Vegas that can find manufacturing partners and distributors, and they will potentially pay you for your software, for the games that you’re developing. I’m curious: why are you raising money?

Evan: The reason we’re raising money is because we’re basically, we’ve been bootstrapping this entire time, and we’ve gotten to the point where  we need a bigger team and a full time graphic designer as well as a sound designer, to start working on the full design for this game.

Jake: But you said, if you’re working with some of the distributors that you could take a lower split today in exchange for having them do some of the final touches, right?

Evan: Yes. We lose a lot of the creative control in that aspect, and that’s one of the things we’re really worried about. Because innovation is so stagnant in the gaming industry, we would hate to lose creative control to one of these big manufacturers and then see them tarnish our game into something that we didn’t want it to be in the first place.

Jillian: I still don’t understand why you need the money? If you actually created a game which somebody wants, why would you not just license it to them and start creating revenue?

Evan: That’s a good question. You want to tackle this one?

Troy: Yeah. We’re trying to build a brand. This isn’t just a product.

Jillian: Go ahead answer.

Troy: So what I’m saying is, we want our own team of graphic designers, our own team of sound designers, and for the other ideas that we have and we want to make games that are Guru Games.

Jillian: Do you think that might be a good idea to try to sell your first one, to bring in some revenue, to support that?

Evan: That’s what we’re currently, that’s what some of the talks that we’re having now.

Jillian: That’s what you’re doing?

Evan: Yeah, exactly.

Troy: Yeah. Yeah.

Evan:  It’s the difference between the game getting on the floor at the beginning of the year or the game getting on the floor in a year and a half.

Jillian: So the game is not ready to put into casinos yet?

Evan: No, it’s not.

Jillian: Because it’s not at the level that you need, correct?

Evan: Yes.

Jillian: In order to get it to the level that you need you need to add additional expertise, right?

Howie: Or you get partners on board that can accommodate those?

Jillian: Yes, but he’s saying that they lose control that way.

Howie: Right. But in the beginning, just to get this thing developed, get it into the casinos, get some money being generated. Maybe just proof of concept. Get it out there.

Investors are seeing the potential this game has to be huge. But they aren’t seeing eye to eye with the decision to forego the help from game manufacturers. They want to see this thing get out on the casino floor and find out if it could be a hit. But Evan and Troy are pumping the brakes.

Evan: We have a lot of interest from heads of, high up positions, in these casino companies who are begging for innovation.

Jillian: Well, you can also launch this online. For online casinos, right?

Evan: Yes.

Jillian: You would think you could enter that market even easier.

Evan: And actually the online casinos is actually less work for us. We’re approaching online casinos as we speak. But the problem with that is we have to figure out our deal with the big guy first, because we need to see how much of the pie the big guy wants. The big guy might want to say I want social casino, I want online casino, and I want land based casino rights. I want all those distribution channels. So we want to make sure we pleasure that person first, because they’re our main source of revenue and landbased is the main source of gaming revenue.

Jake: Have you done any like, have you pushed this game out free in the app store?

Evan: Yes.

Jake: Just so someone can… 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?

Evan: It’s basically, we’re not promoting it, it’s basically word of mouth around our friends, we’re keeping it small to start. All of the feedback we’ve gotten from our players so far is this game is addictive. Like, I can’t stop playing it, I would love to play this in a casino.

Jillian: Remind me again what you’re raising and the valuation?

Evan: We’re raising $600,000 and we are not going for a specific valuation. And then down the road we can talk more specifics about how that convertible note looks.

Jillian: How much have you raised?

Evan: We actually, today is our first day that we’re starting fundraising. So we’re kicking off with a bang, I guess you would say.

Right at the end of the pitch, Evan and Troy drop a bit of a bombshell: these investors are the first investors they’ve pitched, which would explain the nerves. But once you get past the stumbles and stammers, they have a good product.

Let’s see if their first try was enough to hook our investors.

Here’s Jake kicking us off.

Jake: I like what you’re doing . I know that casinos have a huge problem with millennials. And millennials prefer table games, but the table games aren’t generally as profitable. And the slots used to be the bread and butter of the casinos and they’re sort of dying out, right. So I get that. And I think this is a really interesting solution to that. I would recommend you either sign a deal with a third-party game studio, just license the game out. Or get into one of these online casinos. And not make this one game, like what you’re trying to stake your whole business on, like take a haircut on it, but get the revenue through the door, and focus on that as your fundraising. Keep most of the company to yourselves. You don’t need to sell a bunch of equity with this kind of business. You have one decent hit and you get your name out in the world with the revenue coming in, and then that second game you hire the full team and then you really build the brand. I don’t think you have to do that on the first game but we need to see some sort of traction first. And so like for that reason, I’m going to pass.

Jake’s out, here’s Howie

Howie: You have some anecdotal validations with these conversations, which is awesome. Those are great signals. That doesn’t happen every day, when these casino heads react the way that they do. And I also think, believe it or not, your age, you should use that to your advantage. There’s people that want to help kids. You guys are taking initiative. It’s amazing. You’re still in college, but you’re thinking entrepreneurial. You should leverage that to get people to help you. I think that if you continue to explore this and like get the data, like Jake was saying, put it into casinos, start getting those metrics in terms of time at machine, velocity, all that sort of stuff, then I think that becomes a much more exciting and interesting thing for me to want to get involved in. Because it’s like, wow, this is kind of on the bleeding edge of where casino games can go. But for all those reasons right now I’m going to pass, but I’d love to see where it goes and maybe revisit in the future.

Evan: Awesome. Thank you.

Howie’s out, Here’s Phil.

Phil: I think it’s a cool idea, and I applaud you guys at such a young age for pursuing it. For me, it’s a simple decision, because I don’t invest in pre-revenue companies. So I’m going to pass. But keep up the good work. You guys are onto something.

Troy: Thank you.

Three out of four investors have passed. Only Jillian remains.

Jillian: So, I have never played Candy Crush. I’ve never played Bejeweled. I don’t know anything about games. I have played a slot machine, that’s true. And with my late mother I did play some online poker. But other than that, I have really no great, really no deep knowledge of this. And so because of that I am passing. But I want to say, because one of the things that we all like to do is with early stage investors, you’re really going to need people who add value. It’s not just the money. So I know you’d like my money, I know you’d like all of our money, but the fact is that with that it comes nothing. I like have an empty head about this. So seriously. And when my children listen to this podcast they will all be nodding their head like, you do not want her on board. But I do…

Jake: That’s true about every investment.

Jillian: Ooh. That will come back and haunt you.

Jillian: I’m just thinking to myself, why don’t you know about this space? It is such a huge space. Thank you so much.

Evan: Thank you guys for your time. We appreciate it.

Jillian: We’ll definitely be watching out for you on the cover of a magazine.

When we come back, our investors speculate on what makes a casino game a success — and I’ll talk to Evan and Troy about what it was like to pitch in the white hot spotlight.

Welcome back! Now that our young entrepreneurs have headed home, let’s hear what the investors were thinking during the pitch.

Jillian: You know, this is such a deficit of mine. I know nothing about gaming. And it’s killing me. Zero. I don’t play them. I don’t, the video games I don’t do.

Howie: It’s a big, especially with VR, it’s going to be, I mean, it’s already a big space, but it’s going to be bigger.

Jake: The content creators are really hard. I mean, I think these guys are sharp and they’re working on an interesting niche, for sure. But when it comes to new social games, like mobile apps, basically, I think predicting which next studio is going to be huge, I mean, how could you have picked Angry Birds? Or Candy Crush? Candy Crush is the exact same game model as Bejeweled.

Howie: Or Pokémon.

Jillian: See Pokémon, I know!

Phil: That’s the problem.

Howie: But would you have predicted that Pokémon would have done…?

Jillian: No. But I play the game.

Phil: It’s like investing in movies or broadway shows.

Jillian: I do play Pokémon.

Howie: Yeah. It’s an amazing game.

Jillian: Because it’s, you know… I love the Pokémon.

Phil: It’s just like gambling. You try and pick winners. And then six months later someone comes out with a game that’s a similar concept but a little better, a little cuter, boom! You’re out.

Howie: their game, did it, it seemed like it was helping you increase the probability of you winning?

Jillian: Which I agree.

Howie: But that’s fake.

Phil: They still have like the cap on it. They control, if you saw how many times it took him, they control how often the Line Em Up opportunity comes up, and then within that you have four options, you can only get so far. It’s all math, it’s all controlled by math.

Howie: I feel like the player will start to figure out that it’s kind of a gimmick at some point. Like, it’s not actually making me win more, it’s just, kind of like…

Jillian: But don’t they all? Isn’t that the whole thought?

Phil: I’m just more concerned about the velocity. I know that they said that people are going to play longer. But you know what, if you slow down play, that’s a…

Howie: There’s an amazing book, I think it’s called The Zone, that talks about how much science goes into getting people to sit. And seriously the most astonishing takeaway from that book was that, when you’re in the zone, as a player, and when you win, when you actually win a jackpot or you win, they are upset. Because it takes them out of the zone. It’s not actually about winning or losing. It’s just about a departure from their life.

Jillian: Really? Really?

Howie: Yes. It’s a departure from reality.

Jillian: That’s really interesting.

Howie: It brings them into this new kind of like digital world.

Phil: And they do everything at the casinos to encourage you to stay in that zone and to continue the pace.

Howie: Right. The pace is important.

Phil: Everything from the lighting to the air temperature.

Jillian:  You want to help them.

Howie: I want to help.

Jillian: Oh, to be 20 years old. And making games. And by the way, good for them that they were engineers, these two kids. Engineers. And I just thought that was just, I don’t know, I love them.

Phil: They’re still in school and here they are pitching. It’s great.

Jillian: You want to give them little hugs.

Jake: He got a little emotional, too, I think.

Jillian: They did.

Jake: Troy looked a little bit like he was tearing up.

Jillian: Oh.

Phil: Oh, no way. Now I want to invest. Now I’m going to write a check.

Howie: That’s part of their pitch. They cry and then everyone gives them money.

Jillian: Oh. Actually I really thought about just saying, listen, I’ll give you $10,000.

Phil: Wait, what was that?

Jillian: I was really thinking of giving them just $10,000.

Howie: Just to kick it off?

Jillian: Just to kick it off.

Phil: That would have been nice.

Howie: That would have been nice.

Phil: It’s not too late. Go ahead. I dare you.

Jillian: I actually might do that.

Jake: I dare you.

Jillian: Oh bite me.

Phil: I double dare you.

Jillian: Really?

Howie: Phil, why are you passing on this deal?

Phil: Well, Howie, it’s too much of a gamble for me.

Jillian: Ooh.

Phil: I’m not gonna take this kind of crap shoot.

Howie: There we go. I think the odds are a little too high.

Phil: The odds are very… There are so many puns.

Jake: They’d be too low, I think is what you would say.

Jillian: Why can’t I figure out these really quickies, that you guys do? What’s wrong with me?

Jake: I don’t roll the dice with my investors’ money.

Howie: There it is.

Jillian: Oh my god. I have nothing.

Howie: That’s the winner. That’s the winner.

A few months later, I called up Evan and Troy to hear where things are today with Guru Games.

Josh: So let’s just start here. I want to know, that was your first pitch, right guys? Like, what was that like?

Evan: It was kind of crazy. It was very different for us. We had only pitched in a controlled setting to, like, advisors and mentors of ours, so it was really crazy to get the chance to actually pitch real investors. And that kind of kicked off all of the pitches we started doing after that. So it was a really good way to, like, get our feet wet and, you know, start to learn how to do these kind of things.

Josh: Alright So I kind of want to relive the pitch from your guys’s point of view, when you came on our show. Do you guys remember the morning of? Like, how were you feeling? Did you have nerves?

Evan: Well, we definitely had nerves. They were pretty bad. I was feeling pretty sick that morning.

Troy: Yeah, I didn’t sleep that day. We just kind of were at the airport and yeah. But yeah, I think definitely it was different because, like, you had such a short amount of time to do the pitch and, like, all the cameras and everything I thought was, like, not the cameras, the microphones and everything, I thought that, that threw me off a little bit. But it was a cool experience, for sure.

Josh: So a lot of firsts, you guys were going into it pretty excited, obviously nervous. What do you remember happening in the room?

Evan: So we walked in, we were practicing, and we were like, “Man, I wish they would just come in already because,” we’d like to start, like, we don’t want to forget what we’re going to say. we knew as soon as they walked in, that all the nerves would go away and it just would be really natural.

Josh: So how many times did you guys practice it?

Evan: Ten or eleven times you practiced that opening, right Troy?

Troy: Yeah, yeah.

Josh: For the record, I was waiting for you guys to finish up before we sent the investors down. I thought you guys were going to come up! And then we would start! And you guys kept practicing. So I figured you needed the practice.

[laughter]

Josh: so I’m curious, there was this moment when you guys were pitching where, it was right at the beginning, you had been practicing with note cards, Troy and Evan? Were you guys both using note cards or just you, Troy?

Troy: Yeah, I think was — no no no, I was using my phone. I had the google notes, I think I had open. And then, yeah, I don’t know, it’s just like, kind of froze up for a second when, you know, with the mics and everyone not saying anything at once, it kind of, kind of made me freeze up a little bit. But —

Josh: Right, and then you whipped out your phone, right? Like, during the actual pitch?

Evan: Oh yeah, I forgot about that, yeah.

Troy: Really? Oh, that’s embarrassing. Yeah, I guess I did. Wow that’s, wow, no, yeah.

Josh: It’s a traumatic memory, is that what you’re saying.

T: Yeah, it’s a traumatic memory.

Josh: So Evan, like, what were you thinking when he whips out his phone during the pitch? Did you think for a second, like, oh I should step in and like start talking?

Evan: No, because I didn’t want to step on Troy’s shoes. I was going to let him —

Josh: Trip on his own shoes?

Evan: And then I would pick him up after the fact.

Troy: Funny story, it’s actually funny you bring that up because literally before the pitch started I said, “Don’t help me in any way!” [laughter] “If I fall on the ground, like, don’t help. Like, I’ll figure it out.”

Josh: Why did you tell him that?

Troy: You know, it’s better to struggle through it. I’m much better, I think I’m much better at pitching now because of that experience.

Josh: Like, what would you say is the biggest difference comparing that first pitch to maybe how you pitch your company right now?

Evan: I believe when we pitched the first time we had pitched it as a strictly we were going after land-based casinos. And there’s just so many other different routes for us to take to get to market that we didn’t realize in the first place, and didn’t really explore enough. We’re working with a social casino company to get basically free-to-play versions of our games up on casinos, say, on, like, your phone or, like, on Facebook. So like, that, it’s really that online side that we really found better for us, a better match for us because that’s where our expertise lie and allowed us to ignore the hardware.

Josh: So you kind of put the casino thing on the backburner. You’re pursuing social casinos?

Evan: Exactly.

Troy: but we haven’t been exactly sitting on our hands, either. We’ve had [laughter]

Josh: Oh, okay!

Troy: No, no, like, during that time that we’ve been trying to market that, we’ve built five or six other games and we’re working on a clash of clans game currently.

Josh: You say you guys have worked on six game since then?

Evan: Yep.

Josh: That’s a lot!

Troy:  What we really learned from the judges after our pitch was that this is definitely hit-driven market, and that we decided to just take as many cracks as we possibly could. So maybe line em up isn’t our biggest success, but we have a lot of other tries to go ahead at.

Josh: So have you been in touch with any of the investors since then?

Evan: I’ve talked to Jake since then, just because Jake offers a lot of really good advice and he’s a very straight shooter so he gives us a lot of good advice about just ways that we can improve, and Phil actually connected us with our, who we’re going to be using for our sound company for our games in the future. It was really cool for them to, for Phil to go ahead and sync us up, because I think our two companies have a lot of good synergy there.

Josh: Did you raise the money you were looking for, that you were asking for on our show?

Evan: So that was something that our new advisor kind of turned us around upon, Randy basically said there’s no reason for us to raise money right now and we should get as far as we need to go without raising money.

Josh: So how are you guys funding your company? Are you, do you have capital, do you have friends and family money invested? Like, how are you guys building this?

Evan: So nothing we do really requires capital. We don’t have any employees right now. Me and Troy do basically everything. The only thing that we pay for is legal. And so we both have part-time jobs we do on the side. We’re still finishing up our schooling. And so we’re just kind of doing this with whatever time we’ve got leftover after that. We’re really pouring in a lot of time after school, between jobs, just trying to make this a success with kind of just bootstrapping with what we’ve got.

Josh: I think there are actually a lot of advantages to being the age that you guys are and building what you’re building, and it’s not like you’re your age but you’re completely unqual — like, you guys are totally qualified to be doing this because of your background and because of even your day jobs, so it’s, it’s exciting but there’s still, like, people are going to root for you more and care about you more just because you guys are young and doing this.

Evan: I think on the other side of things, though, the age has definitely hurt us a lot because there’s been some sales meetings where we walked into where they treated us like we were just college students or, like, they would, like, congratulate us on how far we’ve gotten but never really take us serious, taken us seriously, so in an industry like this where age and connections really determine how far you go, it’s been a big barrier for us thus far.

Josh: That must be really frustrating. Does it happen often?

Evan: Enough to realize that at some point we’d have to address this problem in terms of bringing in, like, a heavy-hitter I would say.

Josh: Or growing some facial hair or something.

Troy: Facial hair.

Josh: Alright guys, thank you again!

Evan: Thank you!

Josh: We should touch base some time. I want to hear how things keep going. When do you guys graduate? How many years are you out?

Evan: One more.

Troy: One more year. Just the fall and the spring.

Josh: For both of you?

Evan: Yep.

Josh: Gosh, that’s crazy.

Evan: I know, right?

It would be easy to write these two kids off as wannabe entrepreneurs. They’re 20, bootstrapping without any capital. But instead of getting drunk at frat parties or god knows whatever I was doing in college, they are running Guru Games between classes and on their weekends. And so maybe they’re having a hard time getting other people to take them seriously — but they’re taking themselves seriously. That makes a difference. And… they’ve got a pretty good head start on their competition.

So I wanted to let you know that we are hiring a producer for our show. If you want to work with our amazing team, head to the Gimlet website.

And, if you have thoughts on today’s episode, we’d love to hear it. You can find us on Twitter and Facebook @thepitchshow. Or send us an email at thepitch@gimletmedia.com

Our website is thepitch.show, you can subscribe our newsletter where each week we send out extra behind the scene goodies. You’ll find it at gimletmedia.com/newsletter

If you’re enjoying The Pitch, please leave us a rating and review on Apple Podcasts. It really helps us others to discover the show.

We are on actively looking for early-stage startups, for our next season, to be recorded in August. So it’s coming up. If you or someone you know is building something unique, go to thepitch.show/apply – and fill out the form

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

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

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

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

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

Finally, I want to say a quick thank you to the original sponsor of Season 2, the It’s Worth Doing Right Family for taking a leap of faith on us, when we were just a little independent podcast.

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…

Matthew Peltier: And we’re building a social engagement platform that lets influencers and fans interact at scale.

Phil: It sounds very cool…How are you monetizing it?

Phil: But does that mean a lot to the fans? Just that they liked it?

Matthew: Yeah.

Jillian: Need I say more? Like, Myspace!

Howie: She can tell you all about Myspace.

Jillian: The fact that you even know what Myspace is is a shocker.

New episodes of The Pitch come out on Wednesdays, 12pm EST.

Make sure you’re subscribed wherever you get podcasts.

 

Hosted by

Josh Muccio

Josh is a 2x founder turned podcast host and producer. He currently resides in Sarasota, FL with his wife and three kids.

Subscribe

Subscribe to the show feed here

You can also subscribe to the show newsletter