Advice Line with Perry Chen of Kickstarter

25:19and then we'll just have checks coming into our bank account and we can just be on the beach in Costa Rica. And we look back at that plan now. We're almost 10 years in and like at first it was a two-year plan and then it was a five-year plan and now it's probably like a 20-year plan. Is it your primary source of income? Is it your primary job? No, no. We have tried to make it our primary job and we just couldn't make it. Like we're saving for retirement and stuff. Yeah. So we both have day jobs. What's your day job? I'm the marketing director for a vacation rentals company on the Oregon coast.

25:52And my husband, Matt, is a chef educator. So he teaches online for Escoffier, a culinary school. Yep. And so give me a sense of what you guys did in sales like last year, for example. Last year was like 157 ,000. So great for us. Our first year we did just under 3 ,000 in sales. So we feel like, you know, it's a lot of bottles of hot sauce sold. Mm-hmm. And you're mainly in, I mean, you mainly sell through grocery or do you sell direct to consumer or do you sell like at farmer's markets? It's about a 50-50 split between our wholesale channels and our direct to consumer. So we certainly started out just selling at farmer's markets.

26:27And then within a couple of years, we got into our first wholesale retailers in the Portland, Oregon area. And now we are carried in all the regional chains around the Northwest. and we did break into some Kroger stores and did some trial runs and like Fred Meyer and King Soopers. But it was really difficult as a tiny company with limited funds to support that kind of scale. So we really are to the point where we want to sustain the business without having to show up in person because we're really tired of setting up 10 foot canopies. All right. So tell us what your pain point is. What are you trying to solve for today?

27:01What's your question for us? Yeah. After nine years of building our business through farmers markets and selling into our regional grocery chains, we would love some advice on how to scale successfully into national retailers without getting significant outside investment. And ultimately, we want to position our brand in the marketplace so we can sell to a larger company. Got it. Okay. Perry Chen, say hello to Catherine. Hi, Catherine. Hi, Perry. Wow. You know, for both of you having very busy schedules, full-time jobs, it seems, outside of this, how is that going? How much is that basically driving everything?

27:35Yeah, yeah. It's been so fun. We love this brand so much. And honestly, it's really fun to go to markets and events and hear people's reactions to our flavors. And so that part of it is very energizing. But I will say this year, I kind of put my foot down because we've been working farmers markets on the weekends for eight years. And we usually work like three to five markets a week. So we're splitting up, hustling. And then when you have a day job, it's just like your life is taken over. And then all summer long, your friends are like, what are you guys doing this weekend? Oh, nevermind. We know what you're doing all weekend.

28:09So we're just ready to step back and also not have our faces be such a huge part of the brand so that if we can sell it to another company, it's not so tied to mostly to Matt because he's the chef behind the brand. One thing I wanted to ask then is your question was like, how do you maybe make it attractive for an outside acquisition without taking outside investment? And so that seems like a constraint that seems important to you. Yeah. So we have gotten a small angel fund investment. Like in 2020, we got$10 ,000 from a local angel fund group. And we used to do a lot of cooking classes online and in person.

28:48And we also like culinary retreat. So we were taking groups to Costa Rica and we did a trip to Italy as well. So we were a little hesitant to bring on investors because we didn't want them saying like, hey, don't do all that fun stuff. just focus on the bottom line with these hot sauce sales. But now that we're wrapping those parts up, I mean, honestly, we are open to outside investment now because we just want the company to be successful and to scale. And like I said, we did a trial run with KHE and two national stores. And what we discovered was without brokerage teams to kind of supervise that rollout among all the stores and without demo teams to show up immediately in all those stores and move those bottles quickly.

29:30It's just really hard to support it with two people and a really limited marketing budget. So I feel like it's a turnkey brand if we could get investment. Catherine, the challenge, I'm just going to be straight up with you because I talked to multi-million dollar and even billion dollar companies and brands. It's a very hard time to raise money in consumer full stop. And you're still too small for any professional investors to really get involved. I think if you're looking for some funding, it's really worthwhile talking to people who know the brand in your area and region who've used it, who love it.

30:07I mean, those are the people that are going to be the most likely to write a check for$1 ,000 or$5 ,000 or maybe more. One of the questions I have for you is, have you, I know, so it sounds to me like you've got it in regional grocery, and how much demoing are you able to do in the stores? Oh, gosh, we did a lot before COVID when the business was newer and we had more energy. So we're currently not doing many demos. We do pay a professional occasionally to do demos, but now we're just not doing many. It just takes so much time and energy. It's worth thinking about taking a risk and cutting into some of the revenue here, the sales or profits, and using third-party samplers to demo the product.

30:50Because for people to discover the brand, there's a lot of brands and there's a lot of hot sauce brands. You have to demo it. People have to be made aware of it by trying it. And so that is where I think your biggest opportunity is. If you really want to position this for an ultimate acquisition, you might have to take a deep breath and really you and your husband sit down and say, okay, let's think strategically about this. because to be an acquisition target, you're going to need to hit 20 million or more in sales, right? And so to get there, you really have to be in grocery. And to be in grocery, you've got to demo the product and demo and demo and demo and demo.

31:33Yeah. Where you're coming from is that you're like, look, the way we're doing it now isn't sustainable. And so how do we find a way to where we're not putting in this much or even more work on this in perpetuity. And so that's really good. You can use that. And in a way, I think maybe as to what Guy's saying, maybe you just have to come up with a number. You're like, look, let's give it another whatever, year, two years, 18 months. And you're like, at the end of that, if we can't get it acquired, we've had a good run. So you give yourself that emotional safety valve of that you're not going to do it forever and never see friends again.

32:11But within that, You can work backwards to say, okay, if that's what we're trying to do, then what is it going to take to get this in the position where it has the opportunity to get acquired? And so as Guy's saying, that releases you to maybe do things that like over the years you've been hesitant to do because you're like, look, we don't want to raise money or we want to like, you know, preserve capital because we don't know how long we're going to. And maybe it's like a Hail Mary or go all in, figure out what does it really take and take your shot. Even if it's just a, you know, maybe it's a one in five chance that could work.

32:41but you know what you're working towards now. You have a goal in mind that you've already decided on. Yeah. And you just have to backward engineer from that. I do love that because sometimes it just feels like you don't know when it's going to end. Is it going to go on forever? And you're like, I can't keep going at this pace forever. But if you put a goal out there, I think you could sprint for the finish or something. Yeah, I love that. I think you have a real sense of what you're up against. And it is a hard business, but you know, some business is just hard. Yeah. So just take the shot. Don't be afraid.

33:12When it's down to this end, just pull out all the stops to the things that you're like, let's just try it so you know that you feel like you've given it the shot that you're going to feel proud of. Yep. I love that. Can I say one more thing for Perry? We heard in your original interview with Guy that you started Kickstarter because you were trying to raise money to a show for Cruder and Dorfmeister. Is that right? Mm-hmm. That's right. Well, all right. They're coming to Portland, Oregon in September. So we wanted to invite you if you're in the area, please feel free to, you know, we'll get you a ticket.

33:49You can stay. Amazing. I had no idea that they were still going. They're still going strong. All those 90s kids are still listening to Krudendorf Meister today. Catherine Kyrbis, the brand is called Heat You Can Handle. Good luck. Thanks for calling in. Thank you. Thank you. Bye. Bye-bye. Stay with us because after the break, we'll talk to another founder working to take their business to the next level. I'm Guy Raz, and you're listening to The Advice Line right here on How I Built This Lab.

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35:41Welcome back to The Advice Line on How I Built This Lab. I'm Guy Raz, and today I'm taking your calls with Perry Chen of Kickstarter. Perry, you ready for our next caller? Yeah, let's go. All right, let's bring in our final caller. Welcome to The Advice Line. You're on with Perry Chen. Please tell us your name, where you're calling from, and a little bit about your business. Hey guys, my name is Joe Fontana. I am the founder and owner of Fry the Coop. We are a chicken sandwich shop here in Chicago. We fry everything in beef tallow. And right now we got 10 locations and a little shy of 200 employees.

36:18Wow, Joe, welcome to the show. Fry the Coop. So you're growing like crazy. Before I ask you about the story, what are your sales? So last year we finished at$12.9 million, and we're already on track to do$14.5 million coming up this year. How did you get into this business? Are you a chef? I'm not a chef, although I can come to your house and make you a great meal. I love food. I'm just a fat Italian guy who loves to eat. But my wife and I moved to Temecula, California. We grew up in Chicago, and I was working some corporate job that I just really disliked. So I did some soul searching, figured out that I love food and I wanted to open up a business in food.

36:57At the time, there's a little place in San Diego called the Crack Shack. And I was just obsessed with their chicken sandwiches. And at the time I was living down the street from an In-N-Out burger. So I kind of thought like, gosh, like a handcrafted double fried chicken sandwich, like just kind of styled with a really small menu, like In-N-Out. I'm like, this will do well anywhere. But you figured you'd go back to where you're from, I guess. Well, it wasn't actually that. I was trying to raise money in Temecula because we had no plans of coming back to Chicago. However, I couldn't raise any money.

37:32I didn't have any money. So I would see a Bentley on the side of the road and I would put my business plan in the windshield wiper with a note, call me please. And did that work? No, no, it did not work. But my friend in Chicago, who's now my partner, he was a real estate guy. And they had a building. There was kind of an over-the-counter service place that opened and closed within eight months. And they had spent the money to all build it out. So he calls me up one day and he just said, hey, I have a small window for you to move back to Chicago. And you can open up your fried chicken concept.

38:05And so my wife and I just had our first baby and just bought our first house. We had to sell that. I had to talk my wife into moving back across country. And that's how we ended up back in Chicago. Wow, that's amazing. And this just proves that there is a lot of space in the chicken business. I mean, it's super popular. Obviously, you've had in the last few years Raising Cane's and Dave's Hot Fried Chicken. And of course, Chick-fil-A is huge. But there is a lot of smaller regional chicken places. What are your sort of challenges right now? I mean, you're growing. And that's amazing. you have 10 locations, I'm assuming you want to open more in the future.

38:45Yeah. And really like separating ourselves as the best of the best. Frying and beef tallow has been a huge differentiator for us. We just put a lot of love into the quality of the product. We go around and train our team on hospitality. Like touching tables is something that is kind of lost in the fast casual space, fast food. Like no managers are going out and touching tables. Nice. Very smart. And I think, and frying a beef tail probably raises your cost too, right? It's more expensive than frying it in a seed oil, I guess. Definitely. But the taste, it is like a million times better. And I think that's what makes us, you know, ignore the extra expense.

39:25That's awesome. Okay. So before we get dive into this, tell us what your question is or your challenge. All right. So we have been funding all of our growth with our own cashflow, but I have an audacious goal to open up 75 stores over the next 10 years all around the Chicagoland area. We have a huge market, so I think it's something we can accomplish. And what I'm figuring out now is that we can afford to open maybe one to two stores on our own with our current cash flow, but we will not get to our 75 locations in 10 years. It'll take you 30 years. It'll take us 30 years, yeah. So we need to raise money about$30 million.

40:04Our company is not even worth 30 million. So how do we raise money or what vehicle and bank debt is not working to basically grow the company without selling off all of our equity or piecing it together and ending up with like 100 different investors? All right, big challenge. Before we get to that question, Perry Chan, questions for Joe? Yeah, Joe. First of all, congratulations on all your success so far. But I would ask, you know, like very specific plan like I get a big hair, a dash, a skull, 75 locations. Why? How did you come to that? That is a very good question. So I started working backwards from what is a very attractive asset to purchase.

40:46And I kind of learned that if you want to take a company public, you need about 25 million in EBITDA. And so I thought, okay, so how do we get to 25 million an EBITDA. Well, for around$2 million per location, we're doing 15 % of profit. We would need 75 locations to get to that. And then also, there's a great brand that came out of Chicago called Potbelly. They're a publicly traded company, 400 locations. I just thought, how many locations does Potbelly have in Chicago? And you don't see them everywhere. It's not like a Starbucks or Dunkin' Donuts where you're bouncing into them. And I look around and there's 77 Potbelly locations in the Chicagoland area.

41:25That's a magic number. And do you, a question for you, right now, the 10 locations you have, do you own any of the property or do you lease them all? We do. We own four of the buildings that we're in. So it just, I love real estate and I love commercial real estate. I would love to buy all of them. However, it kind of proved to be a little challenging, more time consuming. Yeah. Why have bank loans been a challenge? I mean, I'm thinking right away, SBA loans, you've got assets to back them up. So why is that not an option? Well, so we did use SBA loans to buy the real estate and they have a big mortgage on each property.

42:04So it's not like we own the properties outright. And technically, when you get into the restaurant business, like as a restaurant brand group, we don't have any assets. We have a little bit, but it's nothing that like we don't have a lot of collateral to back up the lines of credit. so we did try that we partnered with a local bank they gave us a first line of credit for 300 000 that we opened a location but it was really bizarre after we got halfway through it they called in the loan out of nowhere like they were like hey you know you guys only owe 180 grand and you still have cash in the bank they were like why don't you just pay it off the bank acts like we're failing you know and as you try to grow you become less profitable and so then they really, you know, they really dag you on that.

42:48Yeah. Is there something in the middle here? Like, you know, you're painting a picture maybe where you're saying like, okay, if you feel to open up 75 locations in the period of time that you would hope to do it, I'm guessing that what you've estimated is that the capital you might need to do that given your current revenue and assets and all that stuff would put you in a position where, you know, your equity would get watered down well beyond where you'd want. Is that an assumption? Or is that something that like you've stress tested? And so that's just how it is. I think you're kind of hitting it where it is a little more of a paranoia.

43:22And let me paint you a picture that I think would be a perfect scenario is possibly we brought on an investor or a maybe a family office, sell maybe 20 % of the company to them, but then get almost a line of credit or a loan from them. But the catch would be that we would try to avoid principal and interest payments. So say I need$30 million to grow these 75 stores. They would say, all right, here's the$30 million over the 10 years and we're not going to charge you principal and interest. But then we can accumulate it maybe on an Excel sheet, so to speak. And then when we exit the company in 10 years or set it up for an exit or to exit them, That's when they'll get their principal and interest on the loan of it.

44:09And there are plenty of family offices in the Chicago area. It's an interesting idea. I mean, it's essentially raising minority equity, right, from aligned investors. I wonder, have you heard our episodes on Dave's Hot Chicken or Raising Cane's? I have. I've listened to both of them. So you know how they went about it, both of them in different ways. Dave's went the franchising model. And of course, here's the big F question. What's your view on that? because that's a way to supercharge growth and it doesn't require a whole lot of upfront capital. A year ago, I would have told you, absolutely not, no franchising.

44:43We want to own it, control it. But now I am starting to change my tone a little bit. I'm starting to think, well, hey, maybe through franchising, we could raise the capital to accomplish our goals and then maybe franchise outside of Chicagoland area. I don't take it lightly though. I've learned that if you franchise, you have to be, It's almost like opening up a whole separate corporation and you really have to take it seriously. I don't love being on planes all the time. I have three little kids at home. So, you know, I don't want to have to be living in hotels either, flying all around the country.

45:17No, that makes sense. I mean, look, franchising is, it's risky, right? There's a reason why every time you go to an In-N-Out, it's the same. It is consistent because they don't franchise. It's owned by the company. And it's the same with Raising Cane's. And there are franchise models where you do see inconsistency from location to location. So it's tricky, but it can also be a great option. Exactly, Guy. You know, I think it always comes back to that, Joe, which is, what do I want? Yeah. And it seems really important to you that the customers experience the business in this way. That is your vision.

45:57It seems like, obviously, that's why there's tension with franchising. And what it comes down to is like of all these things that you want to achieve and how you want to feel about them, which are more important than the other to you. Yeah, it's very true. Yeah. I care deeply. I want everyone to be happy. Yep. I think you have got essentially three big options. It's either some kind of bank loan, right, which you've tried and maybe you can try. There are other banks that actually have restaurant lending divisions. The other one is you could do franchising Actually, there are four options The other one is you find some aligned investors To get some minority equity and give you a loan And then I think the fourth option Actually, there's five I'm going to give you two more The fourth option is Part two of option four This is complex But could you do like a sale of one of the properties that you own Or two of them and lease them back So you get cash in hand and then use that cash to finance more locations?

46:59That's risky. And then the last one, which is, I mean, things like operational efficiency, right? Can you centralize the food prep? Can you also negotiate better prices on supplies? I mean, anyway, there are five different things that you can do and you're just gonna have to choose one or more of those or a combination of those. What I would say is you got this big, hairy, audacious goal and you've got clear reasons why you think that this is something that is worth going after. And I wonder if you kind of like, you know, you figure out more ways that that might be attainable, whether it's loans, whether it's investors, and you give yourself time, you know, whatever, nine months to like really kind of like build towards that, work towards that.

47:39And you also have like a plan B. You're like, okay, if that doesn't happen, then I think that where I can get to, that's a step to that. And a goal I can now focus on is something in the middle. The reason I say that is with raising money, one of the big things is, it's like, how long can you keep your mind in fundraising brain versus operating brain? And fundraising brain is really, you know, it's really stressful and your eye isn't on the ball. And also, you know, you don't want to hear no all the time. You know, it's not how anybody wants to live. So give yourself some box, some constraints, some time box around plan, you know, plan big.

48:16And then, okay, if that doesn't work out in this amount of time, I'm going to shift my my mind. I love that. Is it there? Because we did 1.5 million in EBITDA last year. Do you think we should wait till we're at 2 million or 3 million EBITDA? Or is there like a number you think that I should then kind of switch over to that? You know, I'd almost defer to guy like it's so industry specific, I think, in a way, like with the internet, it's not even real. Sometimes they're like, don't make any money. It's better if you have no revenue at all because you can always sell the dream of. Yeah, the restaurant industry is not like that.

48:51It's not this different game. No, and, you know, you've got to hit profit and growth to be a target for acquisition or to go public. I mean, that's really the name of the game. Now, it wasn't five years ago. Five years ago, it was growth, growth, growth. And so you had a lot of brands that did grow and didn't have to worry about staying profitable. Now it's different. So, you know, a slower approach, I don't think you either, it's either or, it's either a slow or a fast approach. I think there's a middle ground, which is you might only be able to open up one or two locations for the next year or two, while you are searching for the right partner who can help you really expand.

49:29expand because there's a scenario where you open one or two in the next year or two, and then year three from now, you're opening 15 to 20 locations a year, right? I mean, there's a realistic scenario where that can happen if you find the right partner or you find the right financing model. Yeah, I would love that. And I'm okay with that. If it takes a couple of years and then we can really run, that sounds great. Yeah. Joe, I can't wait to try a sandwich or fry the coop. Thanks for calling in. Good luck. Thank you, guys. Good luck. Honored. Perry, before we let you go, a quick question that I like to ask all of our returning guests, which is if you could go back to the Perry Chen from when you were just starting this idea, when you were starting to really find people to support you to build Kickstarter, and you could go back to him now knowing what you know.

50:18What advice do you think would have been helpful? Oh, man. I don't know. I would say this. You know, I'm dodging the question, but it's truth in it. The delusion that I had, and I think the delusion that we all have as entrepreneurs, if I cut through that delusion with some common sense from the future, to be honest, who knows if I would have gone through with it. Fair point. Fair enough. I don't think enough founders and entrepreneurs are honest about that. But I do think it's worth – it's a question worth asking yourself, which is like in 10 years, don't want to look back and say this was worth it.

50:49I think for the most part, the answer is yes for most people. I think it's still the answer for you because you built something of incredible value, cultural value. It was absolutely worth it for me. I think a lot of what I picked up on this show too and kind of just in general engaging with entrepreneurs is that there's a lot of interesting conversations to have around, you know, like should I keep going? I think so many entrepreneurs just drive themselves to not fail, not fail their employees, not fail their investors, not fail success, and will add years and years and years onto businesses that they're running, 70, 80 hours a week, that they really wish they could have back in the future.

51:31and the off-ramp seems impossible to them. And I've talked to many entrepreneurs like that. Most entrepreneurs statistically end up in that category. And it's not something that really gets talked about a lot. And I think because of that, often the people in that situation, it's really soul-crushing. Yeah. But not for you. Not for you. Are people ready for the soul-crushing business podcast? I'm not sure anyone will listen to it. One star. That's Kickstarter co-founder Perry Chen. Perry, thanks so much for coming back on the show. My pleasure. And by the way, if you haven't heard Perry's original How I Built This Episode, you can find a link to it in the podcast description.

52:12Go back, check it out. It's a great episode. And here's one of my very favorite moments from that interview. Weren't you getting stressed out that somebody else is going to beat you to the punch and do the same thing? I think that certainly comes to mind. But I think there's also like we couldn't have tried to go any faster. there was just not that much was in our control. We didn't have a lot of money. We didn't have a lot of influence. We didn't have a lot of connections. So we're moving as fast as we could. And that's kind of as, that's as much as you can do. Thanks so much for listening to the show this week.

52:47Please make sure to check out my newsletter. You can sign up for it for free at GuyRoz.com. Each week, it's packed with tons of insights from entrepreneurs and my own observations and experiences interviewing some of the greatest entrepreneurs ever. And if you're working on a business and you'd like to be on this show, send us a one-minute message that tells us about your business, the issues or questions you'd like help with, and hopefully we can help you with them. And make sure to tell us how to reach you. You can send us a voice memo at hibtid.wondery.com or call us at 1-800-433-1298 and leave a message there.

53:29And we'll put all this in the podcast description as well. This episode was produced by Alex Chung with music composed by Ramtin Erablui. It was edited by Andrea Bruce. Our audio engineer was Neil Rauch. Our production staff also includes Chris Messini, Carla Estevez, JC Howard, Casey Herman, Sam Paulson, Carrie Thompson, Catherine Seifer, John Isabella, Neva Grant, and Elaine Coates. I'm Guy Raz, and you've been listening to the Advice Line on How I Built This Lab.

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