Thrive Market: Nick Green

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29:32Hey, welcome back to How I Built This. I'm Guy Raz. So it's early 2014, and Nick and his co-founders are hoping to launch Thrive Market later in the year. But they're getting nervous that the contractor they hired to code their e-commerce platform might not be up to the job. We were four months in, hundreds of thousands of dollars of development, and started getting the sense that we didn't have anything. And so at that point, I went back to the managing partner at Launchpad. I said, we need help. We're out of our depth. We've made these mistakes. I just sort of like kind of poured it on him because we were desperate.

30:12Not only have we spent a lot of money, so we had the sunk cost, but we had nothing to show for it. So like neither Gnar nor I are technical. We couldn't even assess whether there was any progress being made. So I said, look, I need the best technology person that you know of who has done things at this early stage, who knows e-commerce, like, who is this person? And like, I need to hire them now. And so he pointed us to Sasha, who ended up being our fourth co-founder. This is Sasha Siddhartha? Sasha Siddhartha. And he came by and said, look, I'll help you understand what you have here, what you've built.

30:46Yeah. He went, spent two hours at the agency, said you got nothing. Got nothing. Vaporware, vaporware. Absolutely nothing. You've spent hundreds of thousands of dollars on nothing? On nothing. Did you get your money back? No. no all right no no money back no time back uh no confidence back so deeply humbling borderline humiliating experience and so the next question for us was how do we like where do we go from here and the kind of non-negotiable for ganar and i was we need to have a cto so we made an offer to sasha he said no we made another offer he said uh i'll invest and advise and you know we more or Les locked him in a room and said, what's it going to take?

31:28We basically refused to take no for an answer. He said, all right, let's go. Let's do it. He came on as a co-founder. He, in about 10 weeks, built for a fraction of the funds what we had failed to build over the prior four to six months. And at that point, we were basically a month and a half behind schedule, but pretty good given where we'd sat a few months prior. And in the meantime, did you start to pitch investors to raise money? Yeah. So that's the other humbling side of the stage of the business was we were kind of starting in March or April. We said, all right. This is 2014. 2014. Things are going slower than we wanted.

32:08We're spending more money than we thought we would. And it's all our own. We need to bring in investors. So we thought, well, okay, we maybe haven't been as effective as we thought we would be building the site. But look, we're seasoned entrepreneurs. We have wins under our belt. Surely we can get investors to come support us and get this thing on track. We went to a bunch of VCs in San Francisco. We took a trip out to New York. We visited every VC that we could find in LA. And we got intros to most of them through Launchpad. And we were rejected every single time. And so what were these VCs saying to you?

32:44Like, what was the problem? Why didn't they want to invest? So I think the problem was they didn't understand the problem. That was the first problem. Yeah. So we're pitching affluent, mostly male investors who live in, have a Whole Foods within driving, if not walking distance, and probably don't do their own shopping themselves. So for them, the question was, how would you compete with Whole Foods? For us, the answer was 50 % of people in this country don't live within driving distance of a Whole Foods, and even more of them can't afford the premiums, even if they do. And so that was like problem number one for us.

33:20The second problem, which is totally on us, is we were very naive about the operational complexity, the capital requirements, the margin challenges of building an online retailer. And I think the VCs, you know, if not having direct experience there, had heard the horror stories and said, you know, we'll do a D2C brand that has a, you know, single item, controls their supply chain, and, you know, keeps a pretty simple operational business. But are we going to fund a membership club that has thousands of products from hundreds of brands and is trying to ship those all over the country? That sounds crazy.

33:59The other thing I can imagine they were skeptical about was if you were suggesting that your target market, the audience you were going for were not affluent but were people who just didn't have access to really healthy food, it's hard to make that case because affluent people just statistically tend to be the bigger consumers of healthy food. That's right. And I think their assumption was that was based on, you know, where the demand was. And our hypothesis was that there's latent demand in parts of the country where they don't have access to a health food retailer and at sort of income brackets where they can't afford the price premium.

34:40And I had that experience because I grew up middle class in the Midwest and I saw how hard it was. I think we also didn't understand how difficult it was going to be. And so a lot of the feedback, frankly, was really spot on. All right. So you went to approximately how many VC firms did you pitch? Do you remember pitching? Dozens. Dozens. Dozens. So our confidence is waning. We're getting slapped in the face every day with no's from VCs. It was an existential moment. And so you still had money. I mean, you could have still poured more money into this, although you don't want to deplete all the money that you made from your previous business.

35:17presumably you wanted to have some cushion for yourself. So how are you going to get the money? So at that point, we were pretty desperate. And we had been kind of the one bright spot in terms of progress we've been making on the business was conversations we'd had with health and wellness influencers. So a friend of mine, John Durant, who I knew from college, had recently written a book called The Paleo Manifesto and become a thought leader of sorts in the burgeoning paleo movement. He became friends with a bunch of other authors, bloggers, early social media kind of folks at the time it was on Facebook.

35:52So he had introduced us to a number of these folks. We had talked about doing marketing with them. They were excited. They were engaged. They understood the mission. Their audience was the target that we were going after people that are trying to get to this lifestyle, but it's really hard because of where they live or because of how expensive it is or whatever. So out of desperation, We went to these people and said, how about you invest too? And to our surprise, a lot of them said yes. You asked for checks. And I know one of them was Mark Sisson of Primal Kitchen. That was the first one. That's right.

36:23He was a first check. First check. We met with Mark Sisson at a coffee shop in Malibu. We walked in at that time, you know, all the background that I already described around where the development was, the rejections we'd have from VCs, our expectations were like could not have been lower. and he essentially wrote a check on the spot. Wow. So how many checks would you end up collecting? And how big were these checks, by the way? They were all over the place. Many of the influencers had never written an angel check in their life. So we had, you know, one of our first checks was from Wellness Mama.

36:59She was at the time 26-year-old mother of four in rural Kentucky. Huge audience, super authentic content, ended up being a huge promo partner for us. I remember we had a call with her accountant who asked us what our ticker symbol was. I was like, oh, we're not quite there yet. So yeah, it was anywhere from five, 10, 15, sometimes$25 ,000. I think Mark wrote a$50 ,000 check and that was probably one of, if not the biggest, yeah. And going to all these wellness influencers, how much did you end up raising? So we raised a million and a half in the seed round. Wow. And then had more demand. So we opened up a convertible note and ultimately brought in, you know, hundreds of these people.

37:41So you raised all this money from basically many first-time investors. I mean, the upside is you don't have to deal with VCs. The downside is having VCs is actually really helpful because they're so experienced. That's right. But I think the benefit for us, besides the fact that we actually got money, which we needed and couldn't get any other way, was once they had skin in the game, now we were able to work with these influencers as real partners. So they were on the same side of the table with us. They understood the story because they had underwritten it for their own investment. They were already passionate about the mission.

38:15And when they did talk about us to their audiences, it was just that much more aligned from an incentive standpoint. So the other big benefit was that had we had VCs, they didn't care about the mission. So their focus would be how do you make the business model work? and I think they would have looked at that in a very short-term way. The influencers cared only about the mission and that allowed us to bake in things early that I think VCs probably would have vetoed. Like what? Like carbon neutral shipping. Like doing our own fulfillment so we could control the quality experience and use sustainable packaging.

38:50Carbon neutral shipping meaning you would buy credits? We would buy credits for our carbon footprint and then we did, from the very beginning, a lot of things to try to reduce that carbon footprint, the biggest of which was absolutely prohibiting the use of air shipping. All ground shipping. All ground shipping, no expediting. I mean, ground shipping is still, unless you go on trains, it still creates carbon. There's still a carbon footprint there, no doubt. But it's, you know, an order of magnitude less than on a plane. And while you're, because we're going to get to the launch, which is in November of 2014.

39:22But while you are preparing for it, who are you negotiating with? Are you going to like Haines Celestial? Are you going to individual brands that only make one SKU? Are you, like, that's a lot of conversations. Yeah, we brought more than 400 brands in. I can remember in the spring of that year, Gennar and I went to the Natural Products Exposition West, which is the largest in Anaheim. The big one, yep. 65 ,000 people. So you just went and walked the floors and just started talking. We walked the floors and we just hit everyone up. And I think there as well, we had the benefit of the mission really resonating.

39:59Like these brands, like the influencers, they understood that there isn't a lot of access. They knew where their distribution was with brick and mortar. They knew who their consumers were and they knew they weren't accessing middle-class middle America. So for them, it was like, wow, from a business standpoint, we can access this whole new consumer set. And from a mission standpoint, this is awesome. So you had, how many products did you have ready at launch? I think we had probably 4 ,000, 4 ,500. 4 ,000 products. And so help me understand, where did you get a warehouse? Our warehouse was in our office.

40:32So the first office was in a Hare Krishna church. We literally rented out the rectory. In LA. In LA, in Venice. And obviously not going to ship out of there. So we looked around. This is still before we had been able to successfully raise money. And we found an old garage that had been used for, you know, like an auto mechanic shop. We moved in. And when we did launch, we were working in the office during the day, and then packing boxes at night. And I imagine you didn't have to spend a dime on marketing because all your investors were bloggers. That's right. This is kind of pre Instagram influencer era.

41:17It's early, early days. Most of your influencers. They were bloggers, right? Pre-Instagram, pre-YouTube. They were bloggers. They had email lists. They were, in some cases, best-selling authors. And the first promo that we ran was with Katie Wells, whose site Wellness Mama was one of those. This is the blogger in Kentucky. Blogger in Kentucky. She's in her mid-20s. And she wrote a post about Thrive. And within 24 hours, we had orders coming in from all 48 states in the continental US. Wow. It was, you know, way beyond what we expected. And it happened way faster than we expected. Okay. So, and how much was a membership at the beginning?

42:03$60 at the beginning,$60 today. 60 bucks. Okay. So I think it's similar to Costco. Not a coincidence. Yeah. And so 60 bucks. And do you remember, I mean, you launched in November of 2014. Yep. Do you remember in the first full year of business how much revenue you guys did, roughly? I think it was in the$30 million range, so tens of millions of dollars. $30 million in year one. Yeah. So we had gotten just ridiculed left and right by investors when we went out with our projections. And I think our projections had us doing$15 million in the first year. So we doubled what we thought we would do. And honestly, we were constrained.

42:44right operationally we couldn't scale fast enough because you didn't have the capital we didn't have the capital and we didn't have like at first we didn't have the facility right so our 6 000 square foot warehouse was bursting at the seams within a month and a half we moved to a 40 000 square foot building in los angeles and that was bursting in the seams within another six months so it was very very challenging to scale operationally i mean your projections to investors a year earlier was maybe we'll do 15 million and most of them were skeptical. I would be skeptical. Doing 30 million in sales in that first year, I have to imagine you were profitable, very profitable.

43:24Not remotely. Not remotely. Not remotely. Not remotely profitable. So we didn't know. I think that this was the, again, the naivete coming in. We didn't realize how difficult it would be to do this profitably. So when you layered in the shipping costs, the packaging costs, the cost of goods for buying from all these brands at relatively low volume. It was really, really challenging. Because shipping was free. It was free for the customer. Shipping was free. We had and still have a$50 minimum order threshold. But it was at the time we were actually losing money on each order that went out the door, which means the more that you grow, the more money you lose.

44:03Because every sale, you might make money on a jar of peanut butter. but once you're shipping it, you're losing money. Yeah. Once you load in all the costs to get that order out the door, every item ordered is negative margin. And did you expect that to happen? We did not expect that to happen. And the other challenge was just the speed at which we were scaling. You know, we like, I mean, at that point, we were burning more than a million dollars a month. And so that was a challenge. Why don't we come back in just a moment? how a marketing effort to win more customers completely derails, leaving Nick and his co-founders stuck with over a million dollars worth of coconut oil.

44:48Stay with us. I'm Guy Raz, and you're listening to How I Built This.

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46:26And particularly there's a moment where he's describing a scene sitting in his driveway and he receives a call with some last minute funding and he just breaks down into tears. And I found that was such a powerful moment because it really highlights the emotional roller coaster that it can be on the founder's journey. And I've subsequently started my own company after listening to your podcast for many years. And it's really comforting to know that other people have gone through the same experiences and that you're not in this alone. So thank you so much for all that you guys do. You have a wonderful show and you're an inspiration to so many people.

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47:38Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2015 and the launch of Thrive Market has been a blowout success. Yes. The problem is they are growing so fast that they're running out of cash. So we are bringing in as much money as we could, but that wasn't enough. We wanted to continue hammering the gas because it was working. And that was the time that we really got out over our skis. And what we did to solve the problem is we said, all right, now we got to go back and raise more institutional money. And the conversations couldn't have been more different with the VCs. Everyone that rejected us now wanted to invest.

48:17And so we raised$30 million. This is literally six months to nine months later, those same VCs were like, wow, this is actually pretty interesting because you proved the model. We proved the demand. We weren't as focused at that point on the model because we were so exhilarated. And I think VCs, especially that early stage, when they see that you've got a tiger by the tail in terms of growth, they want in. And the challenge with that is we were not under any scrutiny on the unit economics. We weren't under scrutiny to really make the business sustainable. And then we threw the hammer and tried to grow even faster.

48:54To me, I hear this story and I think, God, what a gift that they all rejected you six to nine months earlier. Because you would have taken pretty much any terms that they threw down. 100%. You need the cash. Yeah. And you would have been diluted to, you know. Diluted to oblivion. And more importantly, we wouldn't have had the influencers to come in and actually drive that growth. So who knows whether we would have been as successful. Right. And so you would have had to pay for marketing and all kinds of social media strategies. And it might have worked, you know, but who knows. Now they're coming to you and you guys can call the shots.

49:27If they all want in, the terms are going to be way better. So we created our own terms. The valuation was 20 times higher than it had been six months earlier. Wow. We got to pick the VC to lead that we wanted. And then we went back and kept trying to grow. All right. So with$30 million, you've got a huge war chest. But the goal is don't worry about profitability, right? Because this was the model at the time. Just focus on growth. So what did that mean for you guys? Yeah, I think the challenge was we were growing so fast. And then when we raised that money on really advantageous terms, it just vindicated the strategy of grow, grow, grow.

50:08And so our approach was let's blow the doors out. We hired 100 people over the course of the next six months. We moved into a 25 ,000 square foot office. So this is like a over-the-top office with mirrors on the ceilings under the floating conference room. Everything you'd expect from an overfunded Series A startup. We leaned into sort of crazy funnels where we would, if you signed up for a trial membership, we'll give you a free jar of coconut oil. But that was actually the moment where the wheels almost came off. What happened? People that came in for a free jar of coconut oil weren't necessarily interested in being long-term members.

50:50Oh, you offered up like a trial membership for people? So at the time, every membership started with a trial. And the funnel that we landed on that drove the most growth was if you gave a free gift when you started your trial. So we would ship a jar of coconut oil. They didn't have to buy anything, and they would get the membership free for the first month. How much did that cost you? It costs a lot, especially when we had to shut down the coconut oil program a few months later and got stuck with a million and a half dollars of coconut oil inventory. So it was very expensive. You know, nominally, you had the member count going through the roof.

51:23But under the surface, you know, the engagement of those members wasn't what it needed to be. They didn't actually buy a membership. Or they bought the membership, but then they didn't actually use the membership. I mean, what was the path to profitability for you at that point? Was it to really pivot and to start making your own products like the Kirkland model? Was that how you were going to get there? So one of the first things we did there, and maybe one of the only good decisions we made at that stage of the business, was to start working on private label. And so that rapidly grew to 15 % of our sales.

51:57What did you start to make? The first product we made was olive oil. The olive oil was single source from a fourth generation family farm in Crete, different form factor coming in a tin instead of a bottle. So we innovated on the packaging. We innovated on the sourcing. At the beginning, it was mostly staples, right? So it was like the cooking staples, the snacks. Then we started creating new innovative products. Like one of our best selling products today is called Fruit Circles, but it's basically healthier fruit only ingredient, fruit by the foot. Like a fruit roll up. Like a fruit roll up.

52:29How was the working relationship between you and Gennar? It was great. It was honestly great. You were the CEO and he was the, what, COO? We were co-CEOs, actually. And so through 20, he stepped away from day to day in 2017. So pretty early on. Yeah, so it was a combination of really specific situation with his family. His father had late stage cancer and he wanted to spend more time with him. And then the other side of it, which, you know, he and I talked a lot about into his credit, he was really open about was just sort of the business was changing so fast. And the needs that kind of skill set that was required at that stage was was really different.

53:12So we had this period after we raised the 30 million that we're going full speed. We grew way too fast. We made a lot of mistakes. What were some of the biggest mistakes you made? One, we hired way too fast. And when you hire that quickly, you can't integrate people effectively. You make mistakes in hiring in terms of fit. And that really caused us to suffer because it's a lot easier to hire people than to fire them. We were way too aggressive with marketing. We spent too much for individual members and did things like the coconut oil funnel. And then we just, I think, underestimated how difficult it was to scale operations.

53:50You know, you think about a technology business grows exponentially, but a physical goods online retail business is technology enabled, but fundamentally it's still an operating business. And we had to open warehouses. We had to grow our inventory and all of that was expensive and it was complex in a way that we just didn't appreciate until it was upon us. I wonder, given that you had all the influencers at a certain point, did their promotion of Thrive kind of fizzle out? At a certain point, we had to tell them to stop promoting. Because? Because we couldn't handle the volume. We were, at that point, just operationally really compromised.

54:29As the business continued to grow, we were approaching a$100 million run rate. We were dealing with, one, how do we make sure we have enough capital to grow operationally into the demand that we now have? And then just how do we keep the organization functioning effectively when we've brought on 100 new people and, you know, people are kind of running around trying to do their job, but we haven't really been clear about what their job is. And, you know, we've got so much changing so quickly. As co-founders, we didn't really know, like, what to do and when. So, I mean, you raised a Series B, and I think this is about over$100 million.

55:09Yeah, and that was a turning point for the business. because, I mean, there's a lot of money. It was a lot of money. So it gave us the runway to step back and think more long-term. And then because the partner that we brought in, so we brought in a group called the Invis Group. They're a evergreen fund. So they don't have a timeframe where they're trying to sell a business. And they were the one group that we talked to at the Series B that was sort of brutally honest with us about what was not working. And that resonated. So it was strange. At the Series A, you had a lot of VCs that are telling you everything you're doing right.

55:44At the Series B, we had this one investor that came in and said, here are the things that you guys aren't doing right. And as we looked in the mirror, it was like, yeah, you're right. Did you find that you had to start to spend money on advertising as well? At that point, we were. Yeah, we were starting to spend money on paid media. And we were also at a scale where to keep growing at the rate we were growing, it was going to require more than just the influencers. And the biggest thing though, by far was focusing on the quality of the product in a way that made our members the evangelists. So, you know, our number one acquisition channel today is unpaid.

56:21It's referral. It's members telling members. And I think that was another place where we saw the mission made people want to evangelize more when they felt good about the things that we were doing with packaging and shipping policies, when they knew their membership was sponsoring one for a low income family. Yeah, let me let me ask you about that because you you buy membership and you can and then you guys sponsor a membership for low income family. It's a buy one give one model. Yep. And that was, you know, that was one that we was also very popular at the time Tom shoes was another LA company doing that or be Parker.

56:56Yeah, for us, we looked at it and said, look, the membership is all margin. So we can give away memberships all day to folks that would otherwise be able to afford them. And the initial model was low-income families, but we eventually expanded it to teachers, to students, to first responders, and to military veterans. But I also wonder – and again, there's nothing wrong with it because I'll just put my cards on the table. I think that the role of a business is to make money for the business, for its employees, for its investors, and to provide a great service to consumers, right? And so if you stopped doing these programs, if you stopped carbon neutral shipping, if you stopped buy one membership will give one to somebody in need, do you think it would have any impact on your business, your bottom line?

57:41In the short term, some of these programs cost money, so it might have a positive impact. I think in the medium to long term, it would have a massively negative impact on the member perception and member loyalty, on our ability to attract great employees who come to thrive first and foremost because they believe in the mission, and on our ability to think long term. That mission is what galvanizes our entire company. And I think it is the reason why members not only purchase on site, but also evangelize. And I think we've also been really, we tried to be really smart about looking for opportunities to invest in the mission that are not zero sum with the bottom line.

58:22Like I said, with the gives memberships, when we donate a membership, that doesn't cost us anything. Right. But yet it brings someone on platform who now can purchase and the business will make money from that. So roughly how many, I don't know if you publicly reveal this, but how many members do you have? Over 1.5 million. 1.5 million paid members. Wow. So that alone is$90 million a year in revenue. That's right. And then I guess, you know, hundreds of millions of dollars in sales a year, presumably. Yeah, well over half a billion in sales last year. And our members every year are getting more active on site.

58:58And where we invest today is how do we just deliver overwhelming value to those members so that the value is growing every single year? How close are you to being profitable? You launched in 2014. We're now 2024. We were profitable last year. You were profitable last year, right? Yeah. So we're running the business profitably, operating cash flow positive. And back at those early days, we were losing money on every order. Today, we're making significant contribution margin overall. Wow. Is there a world where you would explore a sale? Like, you know, Zappos was sold to Amazon and it's still Zappos.

59:36Is there a world where you would be a standalone company as part of a bigger company? I think we see a really clear path as a standalone business. The membership renewal rates are over 70%. We're still bringing in new members at a really rapid clip. And we're still very early in that journey. So we don't see any need to become part of a larger business. To date, we see the clear path as continuing to do what we're doing and continue to grow both the profitability and the revenue. When you think about the journey you took, right, and where you are now and where this business is now, how much of the success of this do you think has to do with the work you put in and how much do you think has to do with the timing and just the luck of fortune and chance?

1:00:23I think it's a combination of all of the above. I do believe that staying at it and being flexible in your tactics and willing to adjust and respond to the facts on the ground is everything with entrepreneurship because, you know, best life plans will be will just be wrong every single time. So that approach, I think, which is probably a combination of luck and work has really worked for us. I think for us, the mission, again, being clear on where we're going, has made us very flexible in how we get there. That's Nick Green, co-founder and CEO of Thrive Market. By the way, remember the story about all that coconut oil that Nick got stuck with after that failed marketing campaign?

1:01:10Well, they were eventually able to offload it. They sold some, gave some of it away to customers, and donated about 100 ,000 jars to charity.

1:01:44produced by Casey Herman and Catherine Seifer, with music composed by Ramtin Erablui. It was edited by Neva Grant, with engineering help from Robert Rodriguez and Gilly Moon. Our production staff also includes J.C. Howard, Sam Paulson, Carrie Thompson, Alex Chung, John Isabella, Chris Messini, Carla Estevez, and Elaine Coates. I'm Guy Raz, and you've been listening to How I Built This.

1:02:22If you like How I Built This, you can listen early and ad-free right now by joining Wondery Plus in the Wondery app or on Apple Podcasts. Prime members can listen ad-free on Amazon Music. Before you go, tell us about yourself by filling out a short survey at wondery.com slash survey.