[00:00:04] Speaker A: Hello and welcome everyone. I'm Peter Lehrman and this is Masters in Small Business M A. This show is an ongoing exploration into the vast and undercovered world of small business m a where we interview both the proven and the emerging owners, operators, investors and advisors whose strategies and methods for transaction success have been put to the test. The show aims to us the nuanced intricacies, the key ingredients, and the important factors that can improve your decision making in your own journey in the world of small business M A. This podcast is produced by Axial, an online platform that makes it easier for business owners and their M A advisors to find, research, and privately connect with a diverse mix of professional buyers of small businesses. In addition to learning more about Axial, you can find this podcast, show notes, edited transcripts, and many other related resources, all for
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Peter Laraman is the CEO of Axial. All opinions expressed by Peter and podcast guests do not reflect the views or opinions of axial. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Podcast guests may have ongoing client relationships with Axial.
[00:01:21] Speaker B: Hey everybody, welcome back. This is masters in small business M A. I'm your host, Peter Lehrman. Super excited to have Matt Johnson join me today. It is very unusual that I get somebody to be part of the conversation related to M A, who also happens to be right in my sort of personal hobby, which is the world of endurance sport and triathlon and cycling. So really excited to have a businessman and an owner operator from that category join us today. Matt, thank you so much for making some time for us.
[00:01:49] Speaker C: Thanks, Peter. Likewise. I'm excited to be here and happy to talk to a feed customer.
[00:01:54] Speaker B: Yeah, just so that the audience knows, I've been a huge customer of Matt's business, the feed, for the last year and a half or so. And I would love to say that, like, had some personal connection to him or relationship to him, but the truth is that I just sent him a cold email on LinkedIn seeing if he would be open to connecting with one of his biggest fans and biggest customers, and he was able to say yes to me. So thank you so much again for making time for one of, I'm sure, many, many thousands of customers that you have, and it's really, really fun to do a little quick interview with you on your business and everything that you guys are up to. I think the best place to just get started is just you were running a Tour de France cycling team and the feed really is at least minimally an outgrowth of that period of your life and that work. So let's just start there. Tell us about what you were doing. Tell us about what it means to run a Tour de France team, and then we'll get into the feed on the backs of that.
[00:02:48] Speaker C: Yeah. So I think it started even sort of maybe a career before that. So I grew up as a bike racer, raced a number of years in Europe with my youth, and then sort of mid 90s, got pulled into sort of the Internet.com sort of craze, and created my first sort of ecommerce company, which was with three other partners, which sold college textbooks online. And we were young kids and sort of learned the ropes of e commerce, and it scaled incredibly fast and then got know more venture capital, and then went to wireless business, which seemed really exciting, but was big in a lot of employees, but not super consumer focused. And then. So I sort of had a decade of sort of running Silicon Valley startups, and then the opportunity came along to join Doug and Jonathan with what was the management company was called Slipstream, which was then very quickly became the Garmin cycling team. And then we were Garmin Servello, and then we were Canondale, and now the team is EF, who became the sponsor and then purchased the team from us. And Jonathan, who is one of my partner, he continues to run it. I sort of transitioned it post sort of acquisition 2018, and I had sort of, along the way, built this sort of business I was super passionate about, but wasn't necessarily spending a ton of time on myself, because the team is sort of an all encompassing sort of business, and most people don't know that Tour de France teams are sort of a $25 to $30 million a year budget, and all that has to come from sponsors. There's no tv revenue, there's no gate. So you have to raise that kind of money every year. We've done it for well over a decade now. So it was a fun adventure, and my backup plan was this feed business, and then it became my primary focus. And it's sort of the merging of all the experience I've had in Silicon Valley, running sort of consumer tech businesses and now the world of sports, and it's just sort of my dream scenario of putting those two together.
[00:04:54] Speaker B: So did the feed get started while you were running the Tour de France team, and it was sort of like this side business, or was there an end to running the team and then you kicked off the feed? Was there an overlap, or were they sort of.
[00:05:10] Speaker C: Oh, yeah, it was definitely happening in parallel. And I talked to my partners. I said, we're going to sort of. I'm seeing this huge need. The need came out, know I bring the riders to these. Whether it was a charity ride or we do, like, office visits, we'd go visit a Garmin headquarters in France or in Olathe, Kansas, and wherever else we were visiting in terms of our sponsors. And we do these town hall type meetings with the employees or people at the charity event. And I always thought they would ask these questions about the racing or the strategy or the training of the riders, and those were sometimes the question, but inevitably, there was always the question of, like, yeah, I know all that stuff, but I have this gel, and I don't really know when to take this. Do I take this before my ride? After my ride? What's in this thing? And then there's like, choose. And what do you guys eat, and how do you eat on the bike? So it was so clear that there was this big knowledge gap. There were a lot of products in the market, but there was this huge lack of knowledge in terms of the endurance athlete knowing how to use these products, because these are well informed people in terms of nutrition and breakfast, lunch and dinner. But when did they ever learn? Before, during and after training, that was not something that they were necessarily exposed to, but something I grew up with, something we really focused on, on the team as a potential competitive advantage. If we could get this right. It's a really meaningful performance advantage to the athletes. I was like, wow, we have all this.
[00:06:37] Speaker B: And when you say, get this right, Matt, you're just talking about just the whole fueling strategy for endurance racing.
[00:06:44] Speaker C: Yeah. And it's constantly evolving. It's probably the area you think that it's fixed, but it's actually the area that probably is the most volatile from year to year, at least even over a two to three year horizon of how sort of France athletes are fueling. Now we're at the. I think relative to the last ten years, we're at peak understanding of the athletes. Like, you see them writing down all their fueling, all the fueling on their stem. They used to write down mile markers on their stem, but now the mile markers are not about the turn or strategic location or the bottom of the climb. They're like, when do I have to have a gel? When should I be drinking? When am I having my high carb drink mix, et cetera, et cetera. So it's really become the focus because the athletes have seen this is the single easiest thing that they can do. Where they don't have to train anymore. They're already training and their maximum. But if they can nail their nutrition plan, it's a significant boost of performance.
[00:07:42] Speaker B: I want to spend the majority of the time on the feed and the opportunities to build that business and some of the opportunities related to M A in the category, but I can't help but just ask a couple of questions related to the underlying subject matter. What do you attribute the current focus and current level of sort of scientific expertise in terms of nutrition fueling to? Do you feel like it's sort of reached like a golden age right now where there's just this sort of breakthrough in terms of visibility and data and sort of scientific understanding for sort of what you should be eating, how much you should be eating, when you should be eating it. Are we in some golden era of sort of scientific breakthrough, or is it just. It's been going like this for a long time, and it goes from being carbohydrate centric to being a fat centric. And there's the keto phase and then there's the carb phase. What do you make of sort of where we are in the pendulum of scientific analysis related to fueling for endurance sports?
[00:08:40] Speaker C: I would say that there's been more change in the last two or three years, practical change of what athletes are really fueling with than there has been in the previous 20 years. But you're right, there is a cyclicality to it in terms of trends and process. So if I had to articulate it for those that are really interested in sort of how this works, the 62nd description is we went in the late 90s, sort of this sort of like high carb era, but the product and the science wasn't there. So people were getting really nauseous and they were getting sick to their stomach. So they were like, multidextrin came along. They're like, let's put lots of multidextrin in it. And then everyone was like, I don't feel so good afterwards. And then a lot of it was in the water bottle. And then what would happen is they would stop drinking. So because they felt sick to their stomach and it was packed with carbs, then they would stop hydrating. And that was a much, much bigger problem than the fueling. Like, yeah, you could not fuel and you won't do as well, but you'll have a gradual decline if you stop hydrating. You fall off a cliff pretty fast in these events. So then there was this movement. I give a lot of credit to Alan Lim, and Stacy sims and some of these sports scientists in sort of the 2000 and 910 era were like, hey, let's get the carbs out of the bottle. Let's focus that on hydration. Let's find other sources for food. So we make sure the athlete, above all else, is never dehydrated. So that sort of evolved. And then we got hit with, in cycling, at least, led by sky, this whole metabolic flexibility or fasted or keto. And everyone was like, oh, we don't need carbs anymore. We should just retrain our body to burn fat because we have infinite supply, which is a great idea. And as you get fitter, you do burn more fat as a percentage of your fuel. But getting rid of the carbs was a terrible idea. And then a brand called Morton out of Sweden came along, sort of like the biotech approach to sports nutrition. And they're like, oh, wait, we can go back to that high carb drink of the late 90s, but now we have the technology to make people not sick to their stomach. And now we're in this sort of high carb era. And now the quest is like, how many carbs per hour can these endurance athletes consume? And it went from like, oh, 80 is good, 80s seems like a lot. And then people are like, oh, I can do 100. And now someone else is doing 130. And they've seen this just massive performance increase as a result.
[00:11:04] Speaker B: Super interesting. Obviously, there are a ton of podcasts to talk about fueling strategies for endurance athletes. This is not one of them, although I find it super interesting. So let's get into thefeed.com. Sounds like it got off the ground while you were running the Tour de France cycling business. It did tell us just about the initial founding when you decided to break ground.
[00:11:25] Speaker C: So we. So I had this idea that there was this nutrition space, and at the time, the sort of box of the month club seemed like a really interesting business idea in beauty and other categories. It's like, oh, let's do that for endurance athletes, and we'll do it with nutrition. And turns out that was an absolutely terrible idea. Within 60 days, we realized that no one wants us to pick their nutrition for them. Everyone has a different dietary need, everyone has a different flavor preference, everyone has different brand preferences. And we're like, okay, we can't switch business models right away, immediately after launch, and we immediately became a marketplace. And we're like, okay, let's not just pick it for people and send them a box every month of stuff they may or may not want. Let's let them come and pick their own stuff. But the thing that we were always frustrated about was having to buy twelve. At that time, you had to always buy a box of twelve or 18 of the same flavor. We're like, I hate that. And the riders on the bus would complain all the time, we have lack of flavors. You'd see by May they'd start the season with the sponsored product and then by May they'd be grabbing bags of food and driving over to another team's bus before the stage and like swapping bars and gels just because they wanted more variety with other teams. I was like, okay, flavor fatigue, which we sort of coined that term, is definitely a very real thing. Why don't we just sell everything as single serves? And I was like, I would love that. That sounds like a great value prop. I wish my MBA wife said, that's a terrible business idea, selling 99 cent cliff bars. That's how many you have to sell before you can make money and break even. So again, we went from a misstep on the subscription box. Then we entered this sort of terrible business model that people loved, but we couldn't make any money selling one dollars items. And then we had to figure out how to pick and pack it so that we was cost effective. And I guess that created all this innovation. We're like, oh wait, if we have to pick and pack it and we only have a buck 50 or $2 allocated to pick and pack the order, how can we do it every single time but let people have like 20 or 30 different sort of items in their box? And so we wrote software, which I'll talk about in a second to sort of solve that, sort of back to my sort of tech background. And then we just sort of wandered around for a few years, sort of consumers loving the service, but not necessarily figuring out how to grow aov, how to grow margin. And then we sort of figured out that, okay, there's a broader need of this endurance athlete. They need both nutrition and a broad based sort of set of need. You know, some performance supplements that are not the sort of cvs or Walgreens quality, but like the pinnacle, the true, almost pharmaceutical grade tested supplements that are effective. Could we curate a group of those? And then we also found out athletes need recovery gear and training gear. So we sort of focus on those three categories right now, nutrition supplements and recovery gear. And then the business really started to take off. And everywhere we could find value, we tried to sort of innovate an area. Example is last year we launched this feed formulas products where we take the same supplements that are in the bottles. And I was always getting trouble for too many supplements on the counter. And then every morning you have to come down and open them up and count the pills. And I was know people would do that for a couple weeks and then they would get out of the habit and they'd stop taking, you know, we said, well, why can't we make those pill pouches like Amazon uses for pharmaceuticals? Let's do those for the same kind of supplements that athletes use, not generics, but the same tested quality products and put them together and then talk to the best doctors and trainers and see what they use with their athletes and make those protocols available to everyone for the same price as buying the bottles. So that there we were trying to sort of add more value to the consumer in the experience.
[00:15:17] Speaker B: Right? Tell me about the software. It sounds like software was part of the breakthrough in terms of being able to get the business to work in addition to making the consumer happy, right?
[00:15:25] Speaker C: So we started with the piece of paper in a box and walk down the aisle, grab the items and throw it in. And early on 2014 15, a young athlete was working in the warehouse, and he told the guys, he goes, listen, why don't I write some software for you to run this? So the guys running the feed at the time called me up and said, yeah, this guy says he's going to write us software. We can use, barcodes we can scan. I was like, listen, warehouse management software, it's complicated. There's huge businesses that do this. What's this going to cost? I don't know if we can really build this ourselves. And he says, well, he'll do it for $800. And I was like, okay, for $800, go for it. See what happens. And it's the same software that we use today. So Neil, who's sort of our technical genius, we didn't touch it for about three or four years, the initial product, and it worked so well. And then we're like, oh, we need to make it bigger and better and do other things. And now Neil works in the office next to me writing that software all the time. And we went from a point where we were crazy to write our own operation software to now it's the best thing we ever did because we can now personalize every order. We're super efficient in our picking. We're adding a whole robotic warehouse next door now. So the shelves all drive themselves around, and it's all based on the same platform that we started with. So it was really the key in getting the cost down.
[00:16:45] Speaker B: And how far into the business's life did you guys sort of take that turn?
[00:16:51] Speaker C: I would say we did that about the first version of that was about seven years ago. And then I would say it sort of sat at sort of like the v one level of that software for about four years. And then over the last three years, we've put extensive development into it.
[00:17:07] Speaker B: And robotics, is that underway? Matt, are you already there at the warehouse and pickpack and ship level, or is that the next turn of automation and scale in the business? That's on the come right now? Where are you in that journey?
[00:17:21] Speaker C: Yeah, they're marking the floor and they're driving around in there, but we haven't moved the food products onto the shelves yet. We're still sort of in a testing phase. So we're about 60 days away. And that really came to light post early Covid, where it was just so hard to hire people. Right.
Working in the warehouse is demanding. Average team member here walks about 10 miles a day.
That's working in the warehouse distribution center. And so it's physically taxing. We have a recovery lounge where we have all the recovery shakes that we sell theraguns, normatex, for our employees to come recover, like athletes between on their breaks and stuff. So we treat them as that. And a lot of the people working there are athletes, right. They're training in the morning, and then they're coming in to work at the feed in the afternoon.
So we wanted to minimize some of the walking, sort of get it to a more reasonable level. And it was at the time, a year and a half ago, when we sort of made the decision it was really hard to hire people. Right. And it was really hard to retain people. Now, that's ebbed quite a bit. We have a really great, loyal team now, and we don't need to. This just allows us for that next scale of growth. We're growing 60, 70% year over year. And so these are big numbers that are so when we plan, like, oh, what are we going to have to do next year? At this month, we're like, oh, wow, that's a lot of orders we got to get out. How are we going to plan? So we're constantly planning sort of twelve months ahead, even 18 months ahead. And so the only way for us to be able to do it was to speed up sort of the automation.
So the robotic system is. We partnered with the company, we became a demo site for them. When this is fully evolved, and it's going to really help us speed up our time.
[00:19:09] Speaker B: Is that there in or near Boulder? Or where is the warehouse that is going to be linked to a more robotics enabled fulfillment process?
[00:19:18] Speaker C: Yeah, it's right here. We're in Broomfield. So we're sort of halfway between Boulder and Denver. And, you know, it was funny early on, I was, you know, you could put your fulfillment more central in the country. It turns out Boulder is fairly central because endurance sports is a little more biased to the west coast, especially California, on a seasonal basis. So if you actually picked where this was accidental to some extent, but if we were to pick the drop a pin where the geographic center in the US is of endurance athletes, you'd basically end up in Boulder. And it's not hard to hire people in Boulder that know the products that we sell and live this life. And that's sort of what Silicon Valley is to the tech world. Boulder is to the sports endurance world. So we're sort of in the right spot.
[00:20:04] Speaker B: So I want to get into M A and M A in the context of the feed. Obviously, that's the sort of name of the show. But one last thing, just on the robotics decision. That's a decision that a lot of business owners are looking at in one way or another as they think about labor availability, thinking about the price of labor. So it sounds like the precipitating event for you to consider robotics and a robotics investment with a third party partner. And I'm sure a lot going into it sounds like the precipitating event for you was labor availability through the COVID period. Is that correct? Or was it the cost of labor? The availability of labor, what is the ROI?
How do you guys think about the ROI calculation there? Just because it's happening in all these different industries, whether you're a manufacturing company, whether you're a digital ecommerce retailer like you are, there's just lots and lots of business owners right now are thinking through some version of robotics and robotics, automation in some part of their supply chain or their value chain, or the way they deliver the product to the customer. So it'd be really interesting to just hear the way you thought about the ROI calculation, the time horizon for payback, just all the inputs to the decision.
[00:21:19] Speaker C: No, that's a great question. It's something we thought a lot about the driver, not so much labor. That was sort of a catalyzing event or maybe crystallize our focus of like, how are we going to solve this problem? Our driver is how fast can we ship an order to the customer. So we're competing against an Amazon that has a distribution center down the street from you. But fortunately, during COVID they got a lot slower in shipping stuff. Right. Much less likely it's coming the next day for a lot of my orders, at least. So what we realized is, well, for a long time, I thought people, why are they in a rush to get their sports nutrition? You know what I mean? They should just plan ahead. They know when they, it's not urgent that you get it the next day. I was completely wrong about that. It turns out everyone waits till they eat their last bar gel, drink, scoop of drink mix. And they're like, oh, no, I need to order, and I need it tomorrow before my ride. So we're like, oh, no, this is super urgent to our customers. They want this as fast as possible.
[00:22:19] Speaker B: That's really interesting.
[00:22:20] Speaker C: And we looked at and said, listen, I can't compete with the remote centers because we were a self financed business. I can't replicate millions and millions of dollars of inventory two or three times around the country. That's just cost prohibitive to us. Plus, I really want to make a great personalized experience.
We now have a digital printing press, and we create personalized booklets that it's personalized to your order. We now do personalized water bottles. We used to give it water bottles with orders, and we said, what would make a water bottle better? We're like, why don't we put your name on it? This is like a misprint. So some guy named Daniel didn't get his bottle because there was something wrong. So I just used these in the so and then we make them for clubs, teams, all this stuff. But this was all expensive infrastructure. But I was like, if I could do it in one place, I could afford to do it, but I can't afford to do it in three places. So I said, that means I have to ship these orders really fast. And our internal goal is to ship every order within 2 hours. So I looked at it and said, the amount of time and cost to ship an order 12 hours after someone places it is not much more than if I had enough people and speed that literally as the order came in, someone starts running to go grab that order and it goes out the door before the next order comes in. My goal, and we're not there yet, but my goal is that once you place an order, the next email you get or the next three or four emails is that your order has shipped. So I want to really, that I could affect and can be better than Amazon and better than others. The speed that I could turn around that order and get it out the door. And so that's where we focused. And then fortunately, UPS also had a bunch of innovation locally here, where now we could hit the entire country within two days. So the combination of those put us on par with Amazon if we got it out within 2 hours. And so that's the driving factor. And then I look at the volume that we're predicting, and the largest time of getting the order out is the walking through the warehouse and the picking. And I said, how can I let people pick more orders simultaneously and reduce the walking time? Because these robots drive really fast, like you don't want to get in front of one of them. So they're like hauling in the work. And so it was sort of a no brainer decision. But then the ROI comes in and again, this is all my money at this time. And I'm like, I don't have more than a six month horizon. I need this thing to pay for itself in six months. And those are the kinds of things that we look at. And so far we look at, we're like, okay, it's going to pay for itself in six to twelve months, but every time we've done one of these, they actually wind up paying for themselves within 90 days. Almost every time, literally, we've complete, like the bottle printer paid for itself in 30 days. Don't tell the people that we buy the bottle printer from, but hopefully they're not watching. But yeah, it was unbelievable how fast the sort of ROI is on some of these things.
[00:25:12] Speaker B: And so with the robotics effort that's underway right now, that's like 60 days out.
Are you purchasing equipment or are you renting equipment? Like, what is the primary expense? And how is that structured in your PNL?
[00:25:28] Speaker C: Yeah, so we always look at that at the time when we did this, we've been planning this for over a year. The problem know, with all the lockdowns in China, the robots were more delayed and took longer to get here and everything else. But we look at more as like a robot, as a service type model. So I'm looking at it more of sort of what's my offset of labor costs? We're scaling labor quickly, so we're not removing people, we're still adding jobs as aggressively as we can. But this allows us to that one part of the business go from what ten people are doing per shift to down to literally three people doing per shift. So I'm cutting seven people per shift out that can then focus on other parts of the business. So it's incredible sort of efficiency. So we look at it as literally on a daily basis. What's the reduction of labor that these robots are there? And are they allowing us to make sure we can make that two hour promise? Because as volume goes up, it gets harder and harder to sort of meet that problem without almost exponentially scaling people.
[00:26:32] Speaker B: Should we cut into M-A-A little bit and just sort of what M a looks like in the world? Know, nutrition products, recovery products, training products for athletes. So, yeah, let's dive in. I mean, if it's okay with you, I'll explain just briefly how this came on my radar. As I said at the beginning of the show, one of the products that you guys offer through thefeed.com, you were introducing, and as part of the way you introduced the product to your customers, you were like, we love this product so much, we ended up buying the product from the original founders. And that was what sort of made me really interested in having you come on the show, is that you were clearly thinking innovatively about just what you were going to merchandise through thefeed.com. You weren't just thinking about, how can you be sort of like a distributor of these products, but how can you develop an even more tight integration with some of them? So that's kind of how my wheel started turning and why I ultimately wanted to reach out to you. But that was just the tip of the iceberg. So tell us a little bit about what you did there, and then tell us just sort of how you're thinking about acquisitions more broadly.
[00:27:36] Speaker C: I had to go Google it because I remember the tv ad, but I wasn't sure what brand it was for. The guy in the 70s sitting behind the big desk, and it was the razor. He's like, I love this razor so much. I bought the company. I think it was know was the original ad from that. So I sort know pulled that from when we tried to introduce Kyoku, which is the product you're talking about. So you have to take a step back and sort of say, what is the feed? And the feed is really this marketplace platform, right, for endurance athletes. So my goal is to give you everything that the endurance athlete needs before, during, and after your training, your race, your workout, or your big event. So those are the categories we're interested in. And one of the things that's been the most challenging on the m. A is we'd see some really good offers, and they'd be a little more farther afield, like they might be in more equipment space or indoor training or other things. So the first thing we had to set out was figuring out what our North Star was, because we'd look at these deals, we'd look at everything that was coming in and we're like, it just doesn't feel right. So we determined that our North Star was human performance. And so if we were the human performance company, what are the brands and products that help push human performance? And if the business that the other companies in isn't fall underneath that umbrella, then it's not a fit for us. So that was the first thing is just have a really clear vision of where we're trying to go in the long run. And that allowed us to cut out all the things that were coming in the door that weren't interesting. And then when we look at, because we have this marketplace and we've got half a million sort of regular endurance athlete customers coming in the door, we all of a sudden now have more products. Like they have this insatiable demand to try new things and get new products. So we're constantly speaking to vendors, whether they're international products that aren't available in the US, but have a great history and performance story or new innovative brand that we can bring into the US for the first time, new startup brands that are coming into the space, that have a unique value prop. We curate the brands we bring in fairly heavily from a marketplace standpoint. And then I'll get to the, you need to understand that before you understand why we would buy some of them. But we don't carry everything because if we don't feel we can tell a differentiated story, it's hard to market it. And if we can't market it or tell our experience of the product, or we don't know why it should exist, because it's not as good as the other one we already sell, or we don't like it as much, or the flavor was bad.
Not that they're bad companies, but we just avoid putting them on the platform as a marketplace. And again, I call it a marketplace, but we carry inventory, right? So we buy wholesale from all these vendors and we're the primary seller and we only sell on the feed. We don't sell on Amazon or other third party channels. So our vendors like that because we don't want to sort of step on their toes. So every now and then, and certainly a lot more now, we see brands that we're already selling or brands that we'd like to be selling, come along and say, listen, we've built this business. Maybe we got it to a couple of million dollars, maybe we got it to $10 million, but we're sort of struggling to scale it. And this became much more in focus for brands. Post sort of the iOS 14 changes, Facebook ad spend going up. Maybe they had a big. We've seen a lot of brands that had a big Covid bump and then have saw a huge fall off after that. If it's a product that fits human performance, if it's a product that is an Athlete focused brand, we're interested.
If we feel that there's a spot in the marketplace where it's differentiated from the other brands that we're selling. And Kyoku on the breakfast shake, just to use that as an example, that was a great. We knew the plant based marketplace was interesting. Two guys did a great job formulating it. They had venture money, and it's quite difficult to get a plant based shake that tastes delicious. And that was the first thing I noticed when I tried it. I was like, wow, this thing is not just good as a plant based shake. This is great as any shake. I drink this every day. And then I look at the ingredients. Wow, this is really good for me. And I was like, how'd you guys do this? And they're like, we did like 300 iterations of this. They spent their entire focus building this great product, and they were marketing it. But they're like, listen, for us to get to the, we want to get to your 500,000 sort of endurance athletes. And I was like, listen, this is a better combination as part of our platform, where we're not stepping on any of our vendors toes. We've got a great value added product. We know there's demand in the marketplace. And so rather than you going out and spending all this money to acquire customers, we can bring that brand in. We can now take over the distribution, take over the manufacturing pieces, take integrate it into our existing marketing team. And then we don't need to spend 50% of revenue like they were spending on customer acquisition. We can just cross market it into the existing audience on the platform. So when we look at these businesses, we look at sort of what they're doing today, but then what can we do from a cost infrastructure standpoint to move them into our world where a lot of the businesses, depending on the existing team, we can go down to two or three. Or when we acquire them, we sort of put a product manager, dedicated product manager, on that brand. Brand manager. Product manager. And then they're really using more of a shared infrastructure in the team we're always hiring, so it's also a great source to bring in new talent, but they will be more cross functional, so they'll go into marketing or to content creation or social media, and then they're part of a shared infrastructure with one lead on each one of these brands.
[00:33:17] Speaker B: The assumptions that you make in terms of cross functioning and sales, how do you make those assumptions? How do you figure out sort of what your uptake is going to be when a brand like Kyoku comes onto your platform? Because there's many brands on the feed. And in the case of Kyoku and that acquisition, were you selling that product prior to acquiring the business?
[00:33:37] Speaker C: That one, we hadn't started selling it. We had already ordered it. It was coming. One of the challenges that they had was they were doing a personalized formula. So you do a survey and then they would say, oh, you could have one of six versions of the shake. And the problem was the science wasn't super strong between the differences, and 80% of the people wound up on the same formula, like when they answered the survey questions. So we're like with Mo, and at the time, they sold out of the first version that 80% of the people had, and then they had a ton of inventory of the other versions, and then they weren't making moqs and they didn't have enough money to sort of manufacture the most popular ones. So we narrowed it down to sort of a single version that was by far the most popular. We sort of reformulated a little bit to get the benefits from the other versions that were out there and put it all in one. And what we don't do is we don't overly produce or, sorry, promote a first party brand over a third party brand. All of our promotion on the homepage is based on gross margin dollars. That branding brings in emails, marketing, everything's managed on gross margin dollars. So a low margin vendor with an unpopular product is probably not going to get a lot of promotion. A third party brand that has a decent margin and is super popular is going to generate more absolute gross margin dollars and will be promoted over a first party brand. So it's very, even in terms of how we market it and what we're looking for is category expansion. So products that are more novel in the space, we're looking for brands that have very high loyalty. So what we're interested in is if that product is only available via the feed and it's a product that people are super loyal to, then they're going to come back to the feed and they're going to cross shop other products at the same time.
[00:35:27] Speaker B: Yeah. I was going to ask you a little bit about the relationship and how you're going to manage the relationship between vendors or your third party brands that you're selling through the feed. Because before we push record, you were saying that you're very much active right now looking at other acquisitions. How sustainable is acquisition as a strategy for category expansion, given that you have really significant relationships with a bunch of these branded products, like the Swiss. What's the swiss one?
[00:35:58] Speaker C: Swiss RX? Yeah, it's sort of our higher end sort of supplement brand.
[00:36:02] Speaker B: Right. There's Swiss RX, there's Morton. There's a lot of these. You've got a lot of really high end products that you're distributing through the feed. Where do you feel like there's white space to keep making acquisitions without stepping on toes, I guess, is the real question.
[00:36:19] Speaker C: Yeah, I think we're looking for people that have sort of fit into the portfolio of products in a sort of off and up to the right in a particular sort of category. So we have seen opportunities with higher quality ingredients, but they're more expensive products where the mass market brands are saying, I would never go there. There's not enough consumers that are willing to spend two x or three x, my product for hydration, for example. But we often find that there is. If the reason the price is higher is that it's a higher quality product, more manufacturing. In the case of Swiss RX, the story there is that they're using mostly, almost exclusively, the patented form of each ingredient. And typically when you see a clinical trial, they use the patented form because that's the company that can afford to run the clinical trial. And then we would be getting questions from trainers and doctors and saying, hey, yes, we want this collagen, for example, but we want it with these patented ingredients. And we're like, we can't find that in the marketplace. And that's sort of where the swiss brand came in. But it was a more expensive ingredients for a particular purpose, with more efficacy around the product, but that necessitated a higher price. So we were able to introduce that without necessarily upsetting the range of other products. So sometimes price is a question, sometimes new science, like the science you asked, are we in the golden age of nutrition? I actually think while we're in this sort of high carb fueling phase, that's actually opened the door more doors than were answered before. So now I feel like there's 50 open doors.
What should sodium levels be for better performance? How do ketones take into effect what's better for recovery? How can we use certain supplementation like nitric oxide for performance? It's actually opened all these open questions and it's been fascinating to sort of see the change. So there's innovation, I guess is my point. So we'll see a product that's come in that says, whoa, this is super innovative and no one was doing this before. That doesn't necessarily step on the toes of other marketplace, other vendors that we have.
[00:38:25] Speaker B: How are you typically finding out about acquisition opportunities?
How are the conversations coming about how does the pipeline of potential acquisition opportunities, what does that look like and how does it work given your position as the founder and the CEO of the feed?
[00:38:46] Speaker C: Yeah, so we'll always give time a day to anyone that's sort of coming in the door. I think we do more and more just in terms of bandwidth. We're looking for businesses that are more minimum of 2 million and that's probably on the low end. Our sweet swap would be businesses doing sort of like five to 10 million in revenue, just showing that they sort of have a loyal customer base. We're not just buying a product, we're also buying a following and a loyalty of an audience that could also be introduced into the feed. So we look at that so good.
[00:39:19] Speaker B: Are they coming to you directly? Are they typically already looking for somebody to buy the business and they've hired somebody to represent them as an intermediary? I mean, what have you been experiencing in terms of m A conversations in the category?
[00:39:34] Speaker C: We haven't had a lot of brokered sort of deals come to us. Typically they reach out to some investors that we might be friendly with and they're like, hey, these guys came in looking to raise capital in this space and they've got something that's really interesting. But we might be more interesting for you guys to acquire them than necessarily to be a standalone business. And so that's a pretty big source. We do make it known to most of our vendors. Before you ever sell or you go to sell to someone else, like talk to us, we might be a great partner for you. So the 300 plus vendors we have on the platform is another area that we can always have that conversation with. It's always more like, is this the right fit for you as the founder of the other company?
Is this the next step for you to come here? Is your next step that you want to move on to something else? Like, you got it as far as you wanted to go, and it's been a labor of love for ten years, and now you want to see it grow further. Could we help that out? We always sort of keep it as more of an open door. Like, listen, if you can go raise money and you want to keep scaling the business, go do that. But know that if you ever sort of, that doesn't work out anymore or you're not interested in pursuing that, we're basically a backstop. We might be an interesting business for you. I would definitely say we're not going to pay super high multiples. We're trying to get leverage on these deals where we're valued at x multiple. We definitely want to be buying at sort of half that multiple in terms of these businesses. So we can sort of immediately make them at least accretive from a market cap standpoint.
And then the thing that turns us off is debt. If there's a lot of debt, that's just complicated to deal with. The ones that we've turned down mostly have been where there's such a high marketing spend relative to revenue, it's very hard to peel back the layers and know what really is the steady state of that business. So I would say the majority of businesses that we have coming in are spending above 40% of their gross revenue on marketing, and many at 50 60%. I hope they're not still doing that because that seems very aggressive. But the problem with that kind of marketing spend is, hey, we're not going to continue that kind of marketing spend. And what happens when that marketing spend comes off? What is the real retention of that customer? So we want to see like a repurchase rate, a twelve month repurchase rate of at least 35% that are placing a second order, maybe 40%. And that's in a high growth business, right? Like if it was a low growth business, that might need to be 60 70%. But most of these businesses are growing quite quickly, so they've got a lot of new customers that they're sort of exploring the marketplace and they have high customer growth. That 35 40%, twelve month repurchase rate is pretty important to us. And peeling back what the marketing spend is really doing to the business, because a lot of them, the marketing, we've seen a lot that have now stopped the marketing spend, and the business is now a quarter on revenue of what it was. So I don't want to be catching the falling knife on some of these.
[00:42:39] Speaker B: Business with the ratio of the marketing spend relative to the revenue that the businesses are generating. Do you feel like when the marketing spend is quite high relative to revenue, is that usually a commentary on the product that they have created and attractiveness and just of the product or the quality of the product? Or is that a commentary on the marketing chops that they are executing?
When you see that high ratio of spend relative to revenue, does that make you think that their product is questionable, or does it make you think that their marketing is ineffective?
[00:43:15] Speaker C: I'm not sure either of those. I think you can be in a very successful product that is getting a lot of marketing dollars and be growing top line really efficiently. I'll use an example of a brand that I'm very envious that we sell called LMNT. It's like a high sodium hydration drink. Single skew. They spend a ton of money on marketing, but they're also growing really incredibly.
Even because they were doing a crowdfunding thing, they had to file with the SEC, their financials. So as a private company, it was an interesting glimpse. They had very high marketing spend, but they were still profitable. So that's another scenario where you have a great product, they are spending it, but they're actually making money too, at the same time. So that works, right? They've got a flywheel going that's phenomenal for them. The other businesses are more. They didn't take enough time to get product market fit, and so they sort of forced the product market fit by spending on marketing, if that made sense. So I feel like they didn't build that loyal sort of foundation. Customers with really high loyalty, and then they said, okay, let's go find more of those people. They just had relatively cheap capital, they had external pressures, that the focus was all on gross sales, and then they basically just spent on relatively inefficient channels. In my opinion, Facebook is sort of incredibly inefficient, but in some cases, maybe their only path to finding that as comparison, we aim to spend less than 8% of gross revenue on marketing. Eight? Yeah, under 8%.
When we look for product margins between 51% to 54%. Sort of product margins with the acquisitions.
[00:45:00] Speaker B: You just mentioned just casually, like earlier in the conversation, just that the feed has all been basically a bootstrapped business since day one. So how do you guys finance acquisitions? Or how do you think about financing bigger acquisitions that might come your way in the future? What have you done? What will you do? How do you think about just financing these bigger bytes?
[00:45:22] Speaker C: Well, part of the last summer, I did bring in some partners that were investors in the business. The majority one is lira, who is Charles Chang, who was the founder of Vega. So he had a lot of great experience. It's its own personal money. It's not a fund that came in. Actually, while we had three sort of funds participate in it, it was always the partner's personal capital. So it was never LP money that came in. They all invested as partners or like yourself, that was a customer that knew the business. It was like, oh, this is a great fit. They told their other gps about it, and let's just do this personally. So I wanted to avoid necessarily having sort of timing and return timing pressure that an LP based fund is, and I wanted more patient capital. So we sort of brought in a handful of individuals. So that helped us one fund, the build out that we needed to do to handle growth, twelve to 18 months out, because that's just a much larger investment at that point that I wasn't able to juggle credit cards anymore to handle. And we were paying credit cards down every single day. Right. So it's a lot of balance to get to that point. And then that also provide us a little bit of liquidity to sort of help on some of these acquisitions. We do want to use equity in a lot of these acquisitions, if that's the right fit for the brand, and also to keep the founders and the knowledge base that they have vested in sort of the continued success of the business. And then, where necessary, we'll spend capital as well. But we put a pretty short term horizon on when we want to get that capital back.
[00:47:01] Speaker B: So when you say equity, you're saying issuing equity in the feed as a vehicle, as a form of financing for the acquisitions.
[00:47:09] Speaker C: Yeah. And a lot of these brands, I think that's really attractive to a lot of them because they've been really successful. But what is the likelihood in this sort of health nutrition space that they're going to get to 80 to 100 million in revenue and be able to reach a liquidity event? Sure, there might be some acquisitions along the way. That's sort of an unknown. I like to focus just on a path that I can control, which is probably eventually getting to the running a profitable business and getting to the public markets. But for a lot of them are like, listen, I can be really successful to 10 million or 20 million, but I'm not going to be able to go public at that size of business. And so for them, what we're really doing is helping them sort of parlay that investment and time and energy into something that is large enough scale that they can have a win with us on a much larger exit or going public down the road. So we sort of open up a new liquidity path for some of these brands.
[00:48:05] Speaker B: How do you think about the feed and the feed's valuation, particularly if you continue to make brand acquisitions? You've got the feed as this marketplace that is distributing products, third party products. But if you were to continue to make a variety of your own acquisitions, you would be a hybrid, right? You would own your own brands and you'd be distributing some of your own brands through your own first party capability, but you'd also be distributing third party brands. Is there a big contrast in the way that high quality branded consumer products get valued versus the sort of ecommerce distributor? How are you thinking about just valuation when you mix your distribution capabilities with being an owner of the brands themselves?
[00:48:50] Speaker C: I try to keep it pretty simple because I think what we're looking at is gross margin. So typically, if we're the owner of a brand, we're going to be at a higher gross margin than we are with third party products. So I would never want the majority of our sales to be first party brands. Like we still need to be the marketplace and curating and supporting our vendors and growing those businesses. So it's not necessarily that that's all we become is a family of first party brands. So the way we look at it is, hey, this is going to add 510 points more gross margin than if we were a reseller for this brand. And that's beneficial to us. Is there a loyalty, like a passionate, loyal customer base with this audience that may not already be feed customers so that we can bring them in because they love this XYz gel chew bar hydration drink, recovery drink, breakfast shake, bring them into the fold and then know that they're already buying these other products, maybe in other places, and now they'll start to consolidate that purchase along with us. So that's another part of it. And then if that brand only becomes available, maybe. We're always happy to sell these brands to retailers because retailers are great marketing vehicles to sort of have these brands out there. And if they can make money reselling these products and have people in their stores, that's great. So we never turn off that channel. But we're not a big fan of having these brands also on Amazon or Walmart or other sort of retail channels. So we want to have more proprietary sort of products on the feed that increases our retention and loyalty with customers. So when that's also part of the story, that's a great fit.
[00:50:31] Speaker B: And when you think about the feed, are you working backwards, potentially, from taking the feed to an ipoable business? Is that what's in your mind, or how are you thinking about just the feed and where it goes and what you want to see come out of it?
[00:50:45] Speaker C: Yeah, I guess I have two pieces of, you know, coming from. We're running tech, Silicon Valley companies, where you always have an existential crisis every six months of some new tech that's going to put you out of business. The feed feels very stable. It's very predictable. We're predicting revenue that honestly is a bit of a like, we have really good data. We work with this company, Bainbridge, and they do great cohort analysis. They tell us exactly what to expect as recurring revenue from returning customers. And so we do have good data models, but we're predicting revenue at the end of a month, within tens of thousands of dollars of what we're anticipating is going to happen. So it's incredibly stable. It's incredibly predictable business, and that's at a 60, 70% year over year growth rate. So I love that part of it. And that makes me more confident that you could have stable financials and stable earnings. And the stuff that made me nervous about tech businesses, where it was so unpredictable and lumpy. So that part's really intriguing for us. And I think, I really emphasize employee ownership, and I think it's really important to give them an exit. Right. Well, I might love to keep it as a private business forever. Right. That would be great for me. It's not great for them. Right. They need to be working towards some liquidity event for their stock to be there, to be worth something that they can cash out. And I think that's part of my responsibility as sort of leading the team, is leading them to that liquidity event. That can be sort of very life changing for many of them. So I think in that case, the only thing that's in your control is potentially going public when the business is ready, when the markets are ready, et cetera. But you got to be building towards some goal. And so that's the goal I would always build towards. If it turns out that M A is a better option or there's other offers that come along, you can always entertain those, but you can't ever plan on that. That's not a reasonable exit that I'm building this business for. Someone's going to buy it that I don't even know who that is. So the only thing within our control is to make a great business, great loyalty, great financials. And then we have the opportunity to get to an exit, and we should be running towards that exit or sprinting towards that exit, not just sort of walking.
[00:53:01] Speaker B: Matt, we could definitely keep going on and on, but you had recommended that we shoot for about 45 minutes. We're more or less at that. Mark, it's been great to sit down with you. It's really cool to hear about. There's many more layers to the story than what we covered today. But really interesting, really interesting to hear about this corner of ecommerce. And I think the endurance sports category probably has some really nice growth tailwinds which you can ride in addition to all the work that you guys are doing in terms of the way you're running the business. So I've learned a lot. Really enjoyed getting the time with you. I think the M a aspect of the business is also really interesting. If anybody is interested in getting a hold of you, having heard this and listened to this episode, either because they want to sell their fantastic company to you or because they want to come and work for you, I mean, what's the right way to get a hold of you if somebody is really compelled by the conversation today?
[00:53:51] Speaker C: Yeah.
One, you can always message me on LinkedIn. As you know from personal experience, I do reply to those. I don't get too many of those. I look at all them. May take me a week or two. I'm not on there all the time, but I always get back to everyone there. That's a great easy way. But my email is just Matt Matt at the feed and any anyone's also welcome, just email me directly.
[00:54:12] Speaker B: Thanks again. Learned a ton. Great to have you on and maybe we can do it again in a year or two and hear about the next set of acquisitions that you've done. Been great. Thank you.
[00:54:21] Speaker C: Thanks, Peter. I appreciate it. Bye now.
[00:54:28] Speaker A: If you enjoyed this episode, check out axial.com. There you'll find every episode of this podcast as well as our recorded Axial member roundtables, some downloadable tools for dealmakers, axial's quarterly league table, rankings of top small business acquirers and investment banks, and lots of other useful content that we've created over the course of time. If you're interested in joining Axial as either an acquirer, an owner considering an exit, or as a sellside M a advisor, you can get started for
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