How Ecommerce Brands Can Fund Growth: Winning DTC Math

20:26You're Curtis who's being nice to them. And that gives you the power. I used to go back every year to all of our leather suppliers because right now in my building, I have 2.8 million square feet of leather, okay? So I have six to seven million square feet just in this building, not counting all the product and all the stuff that's in ships on the way. And I would tell everybody, hey, guys, I'm a wonderful guy. I love you to death. You're not getting paid from October 15th until December 2nd, until the money is in my account from Thanksgiving, Black Friday that weekend. I'm building product to sell.

21:06I'm not paying you anything. and you tell them a head of time and you joke around about enough and you treat them well, they'll say, okay, we trust you. Well, you'll just pay us in a couple months, right? Sure. That's just people dealing with people. And all of that is needed. Every one of those things that you can do, get a tool at a better price, get someone to work for less, extend those terms a little bit more, everything you can do, you need, you know, if you're going to double. because the math doesn't work. I'm dealing with, Matt, you had something to say there.

21:41Matt Bertulli:No, I'm just wondering at what point did you develop this sort of, there's like, I feel like when you're early in the journey, you're much more reactive when it comes to cash cycles, working capital. You're basically, it's impossible, but you do it anyway. Then at some point you develop a bit of proactive, I'm more thoughtful, I'm thinking through things, I'm like, I understand the company's working capital calculations. Like basically like how does all that connect together? I'm just wondering like, when did you develop that Curtis? Cause like clearly to build out where like manufacturing facilities, like at some point you had to go from, I'm just responding to, oh, I'm going to think this through a little bit.

22:27Matt Bertulli:Like, here's how we're going to deploy capital. Like what size were you when this started to get a bit more disciplined? I'm looking for a better word here I don't know what it is yeah don't throw out disciplined in terms of me I feel like that's not a good one for you but like thoughtful maybe I don't know I would say I learned a lot of this in the last six months I learned a lot more the six months before that the six months before that it's not like magically in 2018 it all came together like I'm better this year than I was last year I remember being on stage at Commerce Roundtable speaking and Nick Shackelford was there and he seriously asked a question like, what if I don't feel like I'm ready to do the jump I need to do?

23:17And I said, none of us are ready. None of us have ever done this thing before. Like the thing that Operators Podcast does better than anything is you guys talk at a high level from experience of actually doing things to a lot of these companies that are 1 million and 2 and 4 and 5. and they're looking for something that you guys say that's going to help them in their day-to-day life. And I really think the number one thing that I've told people that's helped is you've never done it before until you do it. So when did I learn it? I sure as hell didn't know it at the beginning. I didn't know it the second year.

23:56I didn't know it the third. Each year I've gotten a little bit better. And now looking back, I feel like I've got it more in hand. but I'm just entering the new room where things are bigger and people are talking billions instead of hundreds of millions, just like I was entering rooms where people talking millions rather than 50 ,000. You get better as you go along. The money side came because you had to learn because you're squeezed down. You're squeezed in June when you have no sales. You're squeezed when your revenue is picking it up. You're squeezed when taxes come. like you're squeezed all the time so you just get better at forecasting that out everyone thinks i look ahead five ten years i don't i look ahead one year that's it i figure if i do that one year

24:43Matt Bertulli:the rest is gonna come together that's been a common pattern i've in in founders i talk to at scale is they actually don't look that far out right it's like typically six months back six months forward and they're just rolling all the time like the forecasts are rolling there's none of these like you know three-year business plans none of that it is straight up like here is the furthest i can see in my business and even then there's a lot of assumptions into those forward

25:11Sean Frank:looking statements like a lot some of the worst hires i shouldn't say worse hires they're good people but the worst culture fits a ridge were traditional finance people who wanted to do a three-year finance like like a three-year projection right being like hey like here and And they're trying to build our projections based on website visits and stuff. And this is not how we operate. I'm going to do whatever is best in the moment right now to make the most amount of money. And it is just a series of hopscotches to try to figure out what the best idea is. It is not like this forward path like, this is exactly what we're going to do.

25:47Sean Frank:Because you can't predict the future in this business. Who would have saw tariffs coming? Who would have saw Silicon Valley Bank blowing up? You know what I mean? Who would have saw this stuff happening?

25:56Matt Bertulli:Day to day, there's just so many changes in this business. Like Sean, over the last 10 days, for a bunch of reasons, we're producing, one of our lenders asked for like an updated three-year forecast. So we're getting on a call with them and I'm with some of my investors. And I get asked this question. Every time I get asked this question, it's like, here's a three-year budget. They're like, well, what's your confidence level on that? I'm like, zero, bro. Like if I could see 36 months in the future, I wouldn't be talking to you right now. Totally. What I say on that, Matt, is my confidence level that we're going to hit that goal is there.

26:32But all of these numbers in the middle are just made up, right? Like, I'm flying to L.A. today. And I'm talking to a potential equity partner that I've been working with for four years, okay? And I flew to L.A. on December 12th. And it's fun because it's going to be three months. And we gave them all of our numbers and our projections for next year. and now they have all these people in their rooms hitting keys and working with our financial people to make sure our finances are right. They've missed the three months of me saying, I saw where we were on December 12th. I didn't like it enough, so I'm making major changes.

27:09Those numbers on that screen are not going to show what I've done in three months. It's major stuff. It is major, major. But they don't see the day-to-day and the week. They just say, we start here, and to get here, the computer goes here, divide those months by 36, and here's you got. It's such bull****. It is the broken way that finance people and linear minds look at things. Drives me crazy.

27:35Matt Bertulli:I understand why, though, guys. I really do understand why, because a lot of consumer, there's a lot of history in consumer. And most of that history has been in traditional B2B wholesale retail agreements. So it actually was easier to know what Target's going to buy from you over the next 12 months or 18 months because Target tells you, this is how much we're going to buy over the next 18 months. So there's a lot of muscle in the analyst side or the banking side around what they think a consumer business should be able to tell you. They're just not up to date with like, listen, man, we've been algorithmic for a while.

28:18Matt Bertulli:right i get hasn't like the news hasn't made it to you yet but like there's this e-commerce thing and things fluctuate a lot in this e-commerce thing and like zuckerberg can't really tell me what my return is going to look like in in three months you know there's no guarantees so i i think curtis part of the problem is like you're dealing with a bunch of people with like to sean's point on like these hires are tricky even if you don't hire them you're going to deal with people like this. They have a lot of muscle built up over a long time that is just not the right muscle. Every SaaS company says they are AI powered, but very few can explain what it actually does for the revenue of my brand.

28:56Matt Bertulli:This is why PostScript's approach stood out to us. They don't just build AI for demos or buzzwords. They built it to drive real incremental revenue. PostScript's AI called Shopper, it shows up inside of SMS at moments with real buyer intent when shoppers are likely asking questions, hesitating, maybe even about to drop off. Shopper can answer product questions instantly, answer questions about fit, availability, recommendations, order issues, the kinds of stuff that people usually bounce for. This means more conversions, higher A, less lost demand. So you are driving more revenue and doing it more efficiently.

29:28Matt Bertulli:Check out Shopper from PostScript. We use it at PILA, which is why I am telling you to check it out.

29:36Sean Frank:Yeah. The flexibility in e-commerce is that like, you have to be flexible enough that if you see something, you can exploit it. Right. You know, our biggest product line this year, it'll do$40 million. It didn't exist 12 months ago. So it's like, you know, we've added a new product line to our business. It is, it is our, our third or fourth biggest product line didn't exist 12 months ago. And so if I had a 36 year, I started a 36 month chart, it wouldn't be on there because it didn't exist. Right. You know, we have to find these pockets of, of either demand or low, like, you know, low cost attention or whatever.

30:13Sean Frank:So you actually exploit them and grow. I want to talk about though, the squeeze, Curtis, you brought this up a couple of times. I think the reason why being an e-commerce person is the, one of the worst things to be and why it's such a hard job is like you're getting squeezed by everybody all the time. Right. And maybe maybe just unpack your experience with that. Like, you know, when you're actually trying to fund this growth, you are you are looking for dollars that don't exist and looking for margin that doesn't exist. So what are some unique places you found that while you're getting squeezed?

30:42Well, you're getting squeezed and everyone around you see that you're growing. So they all think that, well, a real business would have all of this money and you've got to be making all this money. you're worth a lot of money so you get employees coming in who are saying wow nice building right that's really nice they don't know that i actually knocked down the wall and built it and paint the whole damn thing myself on the weekends and they're like well i need to make more money because this is awesome and i'm like yeah we don't do that around here that we they're like well there's another job that pays more, but I don't like them.

31:20You pay less than I like you. So I want to work with you because I like you and I want you to pay what they pay. And I'm like, that's the choices we make in the world, dude. You trust me enough that this is going to grow and you jump on this team and you grit it out or you go where someone's going to give you the short term money. So the first thing is your employees. You got to tell them from the word go, hey, go make more someplace else and it will be the dumbest decision you've ever made. I say that in interviews with people. Like they'll be talking, I'll be listening. Yeah, yeah, yeah, yeah, yeah.

31:53And then I'll say, hey, if I offer this job at 20 ,000 less, your smartest thing is to take this job because in one year, you're going to be a different person because we're going to stretch and grow and you're going to get skills and you're going to be awesome. So part of that money comes from you can't have a labor force that is overpaid, that has high expectations of getting fed at the end of the year, unreasonable amounts of money that you may not have. That's number one. Then it's the supply chain. What I did differently, and Matt, I really loved what you said there, is, hey, Target, they got this stuff figured out 12 years ahead of time.

32:30That's because they're ordering materials that are going to factories, that are being men, that are on boats that are taking two months to come across, that are going and they're seasonal. So they've already chosen 12 months ahead of time. We had a new ad hit on TikTok and we moved it over to Meta and it just skyrocketed everything. So a bag that was going to sell 110 ,000 bags is now projected at 300 ,000 bags this year. An additional 190 ,000 bags on a line that makes 1 ,000 a week, you got to make changes, right? If I was dealing in China, I'm screwed. We ran down that day, changed it up, and had within five days those things kicking out in a truck on the way to Dallas.

33:16So part of, Sean, your answer to your question is when cash is doing it, is like, how can I turn my product into cash faster and more efficient? I can't spend money on product that's not going to sell. I just can't spend it on there. You can't, I can't be as far ahead on that. I have to make the exact right product at the right time. That was one of it. I used credit cards I used American Express I you know that's it you make it work we don't have the money what I used to say to everybody is if you want to make more money if we want to get here then we need to do this and it was one of the biggest changes in my company we were an Etsy company we were paying everybody like$12 an hour I think to make our little journals in Portland there was only a few employees and my young lady I was working with said we need to get everyone up to$15 an hour and I said look at the money we only bring this in we can't like there's no money to pay them $15 an hour this was years and years ago she said how do we pay them I said if you could sell from this many totes to this many we can give the cash flow that we can then give them the raise when they had that motivation the way to make them to make them cheaper to make the right bags to do the photography to get it online on etsy to start receiving the cash within seven days we tripled the amount of totes we did and we gave everybody a race so what we did is we tied performance and money to the success of the company you get more when we do better by being transparent about the money i don't know if that answered your question because i don't know hey i'm gonna be honest with I don't know how I did it.

35:02I really don't. Like at times I look back and I'm like, we should have been knocked down a business a bunch of times.

35:08Sean Frank:No, dude, I I'm right there with you. You know, on the people point, but before we leave the people point, um, you know, Ridge spends 8 % of revenue on all people. So that is bonuses, uh, 401ks, taxes, insurance, salaries, whatever, 8 % of revenue. It includes all of our executives. We have a very large executive suite, includes our in-house lawyer or whatever else. I'm just curious where you guys track towards that 8%. We're exactly 8%. Oh, cool. So Curtis, you're right there with us, brother. Well, our projections are 7 to 9, but we're currently at 8. And with the retail growth, with the income growth, we should stay right around 8.

35:49I was talking to Maverick. He's like, wow, that seems pretty low. Everyone's more than that. And I'm like, well, that's our advantage, dude. are advantages to not hire those people and can build out. You don't, just because your income doesn't go up doesn't mean you build your company to fulfill that. You don't start spending money because that's what other companies do. I like the 8%. It feels really, really good. To me, I'm gonna be an asshole here. It feels high. I wish we could have, right now we're in the world where can you get one person to do three people's jobs? It's like when we started the company and there's only five of us and everybody had to do three or four jobs, I want to return to that world.

36:28I want to return to say, hey, you know more about this. You should be overseeing this because these two work together. And if we had you just doing that, I could get rid of a salary. You could make more. The company will be more successful. It's just me. I'm just, I guess I'm kind of thrifty.

36:45Matt Bertulli:Our target this year is eight. Some of that's going to come from right sizing. Some of it's going to come from growth, productivity. There's a bunch of stuff, but eight is what we want to get to. I think right now, Chris, when you say eight, are you including your factory workers? Do they all go into cost? No, this is all cost of goods. Okay. All of the folks in Mexico are cost of goods. Yeah. But the cost of goods by making here is much less than if we buy from somebody else. If I could buy the product - No, no, I get that part. It's more just how you account for people costs, right? So all of our executives in Mexico are on that 8%.

37:24Okay. So it's like non-production labor.

37:28Matt Bertulli:So basically like full-time equivalent sort of workers that are not making the goods. We have design here. Design is part of that 8%. We have photography here. It's part of that 8%. But the actual workers who are actually physically making the bag are part of a cost of goods. Yeah.

37:47Sean Frank:And warehouse staff should be the same thing, right? Like, you know, if you have a they're all part of logistics, you know, on the 8%. So, Curtis, I'm with you that it also feels high. I think the future is 5%. And for a very long time, it was 10. 10 % was like the gold standard. I think eight is the new 10. And I think five is going to be the new eight. So I think I'm right there with you, brother. It's not being thrifty. It's just with AI agents. It's where the future is going.

38:16Matt Bertulli:Yeah, those are hard. I'm doing the math on my side because I got to back out the factory that I'm trying to do it. But eight, I think, is the right number. Like, we just talked about this yesterday here.

38:29Sean Frank:And, Ridge, we're not going to cut headcount. What we're going to do is grow. It's like if you can keep headcount the same and your business doubles, that eight becomes four. And I think keeping your business with no additional hires is hard, but it's going to be very few additional hires. I think these businesses are going to just get way, way, way more efficient. Um, okay. So you're using credit card points. You're, you're, you're convincing people to work for you for less because you are more likable throwback to a previous episode. Um, but yeah, that squeeze it's so hard being an e-commerce merchant because like you have to get the supplies, you have to get the raw goods, you have to transform them.

39:07Sean Frank:You have to pay for ads. And then you have to get the inventory in people's hands and then you get your money from Shopify, but then you got to buy more inventory to do it again. And as your business scales up, it's really hard to do that. If you ever take a flat year, you will make a ton of money. You'll have a bunch of cash that have no idea what to do with it. So Curtis, let's go back to that 2021 meeting. Wells Fargo totally screws you. You end up, you're like, I'm going to figure this out, right? Since that point, your business has quadrupled, right? Or tripled. Your business is way bigger than the 2021 point.

39:39We're way bigger and we're way more profitable. That's just the game uh i i used to i think as an entrepreneur i was more of a salesman so i always thought i could sell my way out of any problem or just market my way out of any problem like oh we need to pay for that i will make more money and we will pay for that and then you look back at the end of the year and like where's the money at right and i realized it's kind of like you see these lines behind me if you're watching this on youtube you get to see that there's a stitching factory behind me. If you're just listening to it, you don't get to see that.

40:15And what we found out is if you just start a line every week and they say, make as many as you can, they'll make a certain amount. They'll say, that's the most we could make. So we put up computer screens and interlocked on every single line. So it has a big screen, like a big screen TV in colors. And each hour, it changes colors to see where they are on pace. are they in white are they in green ahead or are they in red and what we found out by marking that down efficiency went up 28 without saying or doing anything just keeping track hour to hour of where your money is going or in their case what they're actually making made them all more efficient they were dropping efficiency where they didn't know it same thing in money it's the once I finally said whoa whoa whoa whoa let's really start let's break the year down here's what it is logistics you only have that cost of goods not good enough we cannot be at that we need to be two percent lower no no no no no we need you to be there you cannot get our mer cannot be above this once we did that gave them goals and that they could use every week every month all of a sudden cash just starts spitting out the other end and if I had not done that we would have worked just as hard, thought we were doing the same things, and the cash wouldn't have been there at the end.

41:37Sean Frank:Yeah. No, well, dude, it's an amazing story, and I'm so glad you were able to bootstrap your way through all of that, and now you have this big profitable asset you own at the end. What's up, operators? Welcome to the RichPanel ad read. RichPanel has been a sponsor for over 12 months. I've been a paying customer for over 12 months, and guess what? I just renewed to pay again for another year. We have cut our SaaS bill in half, and automation dropped our cost per ticket by 70%. Our CSAT has also improved from 88%, which is still really good, to 96%, best in class, all powered by RichPanel. I told them last year, hey, you guys need to do the same thing with returns.

42:13Sean Frank:And now RichPanel has a returns portal. It's built to cut down your tickets and convert more refunds into exchanges. They do the heavy lifting, data imports, self service, retention flows, team training, all of it. And they'll be live in two weeks. If you want to save 30 % guaranteed on help desk and now returns, book a demo. Yeah, Matt, I just want you to explain venture capital to us, right? So me and Kurt is bootstrapped. And so the question is, Matt, you funded growth a different way. How did you end up funding growth for your brands and why did you choose venture capital?

42:46Matt Bertulli:Okay, so we bootstrapped to about$10 million in revenue. Bootstrapped being like, I put up the first capital, like most of the first working capital. I had another company that like Pila basically grew up inside that business. So like we took office space. We used an actual office as a warehouse. That was also interesting. So it wasn't a garage, Curtis, but like I was on the sixth floor of a brick and beam building in a 110 year old like brick and beam building in Toronto. And they used to have to come up the damn elevator, which is 100 years old, to get the packages every day to go up to customers.

43:26Matt Bertulli:So we would pickpack beside the desks of all the software developers that worked for me in my first company. So we funded the first bit of Pila's journey off of my own personal balance sheet. So I guess in that sense, it's like also a little unfair because I wasn't really starting from like zero. I put, I think, a quarter million bucks in or 400 grand in like pretty easily at the beginning. Like spread out. I didn't just like write the check. It's like I could just afford the, I could cash flow it. So that was the first 10 million bucks. We brought on venture. I would say in hindsight, I shouldn't have done it.

44:05Matt Bertulli:We should have just figured out how to bootstrap the way that Curtis did it. Because for Pila, the only reason we needed outside capital was when we decided to start building our own factory. Then it was like, oh, this is expensive. Like buying injection molding machines and printers and building out a facility, like all that just takes cash. So we raised a bit of money for Pila. And then along came the idea for Lomi. Lomi were like, oh, we're going to need money. Like hardware, firmware, software, like this is a nightmare product to develop. That's when we raised real venture capital. So that's like the sequence of things.

44:45Matt Bertulli:I am not a fan of venture and consumer. I think these are just incredibly hard companies to underwrite to. the outcomes just aren't as big. Like they're just, compared to like what tech used to be. Although I don't know, maybe SaaS multiples coming down is going to make consumer look really good for venture. So Sean, I think, you know, my view was like high CapEx gave us a reason to raise outside capital. Like I could justify it that way. Like, oh, I'm going to spend like tens of millions of dollars on CapEx and R &D and building facilities and all that crap. that's why we did it in hindsight i would raise a lot less money if at all for pila how do you

45:26Sean Frank:how do you fund growth right now is it just a cash flowing machine you're now now yeah now we're uh

45:33Matt Bertulli:pila produces cash um it's like good free cash flow like that's a good business right uh and for the reasons that curtis is highlighting like when we get a winning product it's very easy for us to scale up because we own the production. So my working capital needs in PILA are extremely low. Like I'm probably as close to negative working capital as you can get in consumer. Without like negotiating 180 payment, like day payment terms with a factory, like or with another supplier. So like we largely sell and then make and ship is sort of a sequence of events for our direct consumer business.

46:17Sean Frank:Yeah, I want to go back to the equation that makes cash flowing a business very difficult and assume zero day terms on everything, right? So like you pay a supplier and then they give you inventory. Well, that inventory has to translate. Even if you're not doing what Curtis is doing and building it yourself, if you're just buying from China, putting on a boat, you're waiting 30 to 60 days and then you're selling it. Let's say you sell all the stuff immediately, right? you know, then you have to take that money and then go back to the supplier and buy more things. And like that handover, that cash conversion cycle is what ends up killing you, right?

46:54Sean Frank:And it's why you need some sort of unfair advantage. Like where are you putting leverage in the system? You either can have a bunch of money, right? Matt took his own personal money and put into his business and that's how he got it off the ground. Or you can use debt or investors or whatever, somebody injecting money into the system, right, to add liquidity, or you can go to your supplier and you can make them give you it before you can start selling it. But something has to change or break in that system. Because when you're talking about paying people yet, we're not talking about paying taxes yet.

47:25Sean Frank:Like the reality is you, the equation doesn't work unless there's some sort of slack or leverage in the system. And you have to get that from somewhere. Either you bring the money, someone brings the money, or you change the payment terms.

47:38Matt Bertulli:That's what, what made Lomi so difficult as a business was that because it was a new thing that no factory had ever made before we effectively prepaid for all of our inventory for the first year and a half or two years and like at$240 a machine in like per to buy and cost at really fast scale uh yeah we needed outside capital. I'm like, I can't write a$12 million check. Sorry. So I think I don't know how useful that is for people listening because like most product in most consumer companies are going to come out of factories that know how to make the thing. Like they make lots of that thing. So you should be able to get far better terms than like prepaying for inventory.

48:31Matt Bertulli:Although when you're a new business, I don't know, maybe that's like actually just part of it too. It's like there's no relationship there so like show up with cash right um yeah also if you're new

48:43Sean Frank:the best factories don't want to work with you and they don't want to give you terms so you're going to be stuck working with a bad factory uh and if they're giving you terms then things are really bad they have no other clients so yeah that factory that i i think like for most brands

48:58Matt Bertulli:what curtis hit on around like partnership with your supplier the the i would start investing in that relationship really early. Like make yourself a good partner. Um, and then it'll build, right? Like you'll get better terms. Uh, sometimes you're going to have to help them out too. Like we've definitely had situations where we would working with our factories, because we still have some factories that supply us some products, right? Where I've done what Curtis is talking about. I've, we've sat down with them and just said, okay like what do you need from us to extend us better payment terms and we've had times where it's like look if you can give us some amount of cash now that'll show our bank that we're a better borrower in china right and then we'll be able to extend you better terms because we'll get better terms from the bank so we'll extend then the cash up front say like here's a hundred thousand dollars they'll go get better terms and then immediately cycle that back to us.

49:58Matt Bertulli:That only comes from having a good working relationship with the supplier. So I think, Sean, most brands that are going to listen to this, your best source of funding is going to be, like working capital leverage, is probably going to be your supply chain. For sure. It's most likely.

50:13Sean Frank:And that's, and like, you know, Ridge's story is that's how we were able to do it, right? We've never taken any investment. We barely have a line of credit. All of our leverage came from suppliers. So from$2 million a year to$200 million a year, it's all come from suppliers. Look, we talked about payroll as a percentage of revenue. I think the next thing we should talk about is gross margin because this whole thing doesn't work unless you have good gross margin. And I'm going to explain my definition of gross margin. I'll give you guys richest gross margin numbers. And then you guys can chime in with what you think the minimum requirement is.

50:48Sean Frank:So, you know, if you have an MSRP of$100, okay, and it costs you$10 to make, that is a product margin of 90%. But you have to factor in what you're actually selling it for. So your MSRP is different than your sales price if you have discounts or whatever, right? And then also, it doesn't count for gross margin unless you're getting it to the customer's door, right? Right. Like if that includes wholesale fees, if that includes payment processing fees, if it includes shipment to the customer's door, it doesn't matter if it only costs you 10 bucks to make. It's what when is the customer fulfilled with that order?

51:25Sean Frank:And then when does the money clear? So that's the actual gross margin number people should be talking about. Public companies do this a bunch of different ways. Hermes puts the cost of their machines and their buildings inside of that gross margin because they make all their own stuff. They're like, if I don't buy this machine, if I don't buy this building, I can't make the thing. So it's part of my cost of goods, right?

51:47Matt Bertulli:Oh, interesting. They don't capitalize that?

51:49Sean Frank:No. I mean, look, I haven't looked at their earnings in a long time, but French company, French company stuff, I don't really know how they're doing it.

51:57Matt Bertulli:I suspect that the way that we work, Sean, like, so yes, gross margin is like the total cost to make and deliver the thing to the customer. Like make, sell, and deliver the thing to the customer, not including marketing costs. That's not inside of your gross margin, right? That's like, then we're going to move over to contribution. But I would suspect that Curtis and I financially probably do very similar things. Like we take all the labor costs and overhead associated with the factory. And then that basically get, that's your COGS number for us. So like, we don't buy a product from a factory.

52:35Matt Bertulli:It's like all of that stuff. If I made a hundred thousand cases this month, it just gets divided amongst 100 ,000 cases. In Curtis math, I do it a little bit opposite. I say, what's our cost of goods? And we're getting that down every year. So from some bags that are at 28, 29 % to small other goods that are less, we want to up that. We want to be at 25.2 % of cost of goods throughout the year for a couple hundred million in sales, right? So 25. And we say all money that comes down here to Mexico to make this product or goes international, has a strict budget to be at that 20.5. That's how much money they have.

53:15They have to make all the product we need, okay? Logistics, we had a couple bad years in logistics. Because we're expanding retail, we have to send things that are more expensive. We've added that in and that can be a pain in the ass, but the marketing is different there. But we were about 16 % because we sell big packages for low margins. we have moved over to a company called flexport met the ceo great guy we really got along had some really good things and they said hey we'll pay you two million dollars and they ran our numbers and they said we'll save you six million dollars next year guaranteed on your shipping two million plus six million so we're like okay sounds good we'll we'll take that money So we'll be about 12.5 all in with logistics this next year.

54:04So with the product plus that, we're going to be under 33 % with the making the product, getting it to Dallas, shipping it to the consumer, all in product, everything about 33%.

54:21Sean Frank:Yeah, which is fantastic. I think those are public company numbers. I think Yeti's at 54 % all in, right? So you're mogging them, Curtis. Ridge is a lighter weight good and typically probably starts at a higher margin good than you. So we're at like 75 to 80 all in. That includes logistics shipping to people's doors. And if these numbers we're saying scare you, this is probably what you need to be at. Somewhere between Curtis and me to actually be able to cashflow your business. like or else you're just going to be setting money on fire and not be able to grow you you really need margins like this 66 to 75 all in including cogs including fulfillment including everything like payment processing put it all in there right like this number should scare you but that's what you need to be at matt do you agree or disagree i completely agree i think

55:14Matt Bertulli:we're talking about durables right now like consumer durables uh or i guess i don't know cards if you call yourself durable, but like non-consumable, right? So it's not food, it's not beverage, it's not supplement. Like it's none of that stuff. I think that is, I mean, I can, we are very close to you, Sean. Long time sponsor North Beam is launching Incrementality later this quarter. This means that you can now have the trifecta of marketing measurement all in one platform. That is multi-touch attribution, media mix modeling, and incrementality holdouts all inside of Northbeam. You can automate that lift testing end-to-end, unify results with your MTA and your MMM.

55:59Matt Bertulli:This is a lot of letters, but if you know, you know. And you can start to cut what doesn't work, and you can scale what works. And you can do this all with confidence. This is why this is such an incredible add to Northbeam. Northbeam's incrementality measures what results marketing is actually generating, not just what they're claiming credit for. As a CEO, that's like music to my ears. Sign up now, and you can lock in 50 % off unlimited tests for the year. Yeah.

56:24Sean Frank:And you make the distinction around consumables because, yes, the reason why these numbers have to be like this is because we're all paying a meta tax of 25 to 50 % of our revenue, right? And the idea with consumables is you're going to pay a meta tax of 100 % of your revenue, but then you're going to stop acquiring new customers at some point and just rake in the cash from these beautiful cohorts. TBD, if that happens to you, you know what I mean? That is the 36-month game plan that we were talking about earlier. It's like, you really have to be believing in the future to pull that off. You have to have those cohort values.

57:00Sean Frank:But anyway, the reason I bring this up is this is about funding growth, this whole episode. You can't fund growth if you have broken unit economics, right? So the reason why Curtis talked about 8 % of revenue going to people and that number going down over time. That is the reality. You're probably listening to this and you're probably at 15 % or 12 % or 8%. There's a reason why I was broke until Ridge did$100 million a year. Curtis, I assume you were broke until you guys were doing $100 million a year too, right? Absolutely broke. Yeah. It's because it's very hard to extract capital out of this machine, especially if you're growing.

57:39Sean Frank:Now, if you want to take a down year or a flat year, you should be rich as hell. And the reason for that is because there'll be a pileup of capital in the system, right? Right now, the system's incredibly lean because all the capital goes to buy new inventory to keep the whole machine growing. And if you ever want to just not grow for a year, you'll find yourself being incredibly rich, right? At Ridge, we call it the waterfall theory. And it's because we're always chasing that waterfall. It's like, dude, at some point, there's going to be a bunch of money we're totally going to get. It hasn't happened yet, but we're counting on it.

58:12Sean Frank:And then, Matt, because you're venture capital funded, when do you get money? Do you never? Well, this is why I don't think you should...

58:23Matt Bertulli:The pref stack becomes your problem when you're venture funded, right? So depending on how much money you bring in, your preferred shareholders on an exit, they get more. Well, sorry, they get their money back first. They don't necessarily get more. There's a lot of other terms that go in there. So in my case, Sean, I think I said this in like the first three episodes we ever recorded. Like when we built this company and we decided to take venture, the minute you do that, you're basically committing to a hero or a zero. And that's like, that is the world you live in. We're trying to move the company more to a private equity.

58:58Matt Bertulli:Like we want to just be consistently profitable and generate cash. And that's how we provide returns to our shareholders. That is a whole other set of battles, guys. like trying to get investors to like change the way that they've underwritten your company after they've underwritten your company is a diff like we don't need to talk about that today but that is like really hard to do um no sean i mean the reason i'm doing this like forever i'm already rich like i've already sold a company like i wouldn't go and raise venture capital and try to like do something really hard where you get paid nothing if I didn't already have all the money.

59:38Matt Bertulli:Like, like, let's just be really honest that there's a giant safety net. Uh, I just, I think it's insane of a path. Like don't do it. It's the best advice I could give you. Like, unless you're already rich.

59:54Sean Frank:Yeah. If you want to change the world, venture capital is a great way to do it. But if you want to sell phone cases or bags or wallets, I think it's one of the worst ways to go. Yeah, 100%. Five minutes left. What do we want to talk about? Curtis, what did we miss that you think is incredibly important for the audience to know? You didn't miss anything. I came on about episode 81 or 2, so we're about halfway through the journey so far. And Matt said something important about manufacturing. He's like, hey, everybody, don't just think that starting a manufacturing is the way to go. It's hard. He said earlier, hey, when you get a product that really takes off your manufacturing, it's easy.

1:00:33No, everybody, none of that is easy. Like, nothing that I do is easy. I do it because it works better as a long-term thing and it works out. But none of this is easy. You get better at it so it looks easier to other people. And then you forget how hard it was. So you pretend like, oh, it was pretty easy. I started doing art festivals and I built a company worth blank amount of money, right? No, no, no, no. This is all hard. So that's number one. Number two, Sean, you were saying so well that, hey, where are your margins at? I am approached by people, as I'm sure both of you are, because the Operators Podcast has become so well known for D2C.

1:01:19Everybody knows it. About people who are at$1 million and$2 million and they're not making money and they come and they say, let me tell you my model. I'm buying t-shirts for 40 and I'm selling them for 80. And you're like, yeah, don't do it. Well, that's the only way I can. The quality is really good and people will buy it at that. And, you know, I haven't done my shipping and my returns or anything else in there. And the model's just broke from the start, right? You've got to get a model that actually works if you want to scale that thing. You can't overpay for your product. have no advantage just to sell it low so you have revenue coming in i have met with companies i was meeting with uh mariana and i met and i'm gonna do make say this really quick i met this guy's doing about 45 million a year and we just stopped in because i like their company and met with them and after about an hour i said hey can everybody leave the room i just want to talk to this guy i'm like dude what's wrong and he's like oh nothing everything's great i'm like something's wrong he's like dude i'm broke i've got kids i don't i'm not making any money all my friends are telling me i'm killing it right everyone's saying congratulations you started an apartment now you're doing 45 million you're in dick sporting goods like you must be killing it's like i'm worried and i'm like yeah figure out your models you know you're not making money here and here like don't listen to the the roar of the applause because you tell people things are good and they tell you you're awesome and you use that to justify not getting better find better margins change your company get a model that works figure out how to be profitable how to scale and how to make money and make the hard damn decisions i think sean the actual thing

1:03:04Matt Bertulli:on what curtis is saying part of the equation is uh you might just be trying to grow too damn fast like if you look at your your operating margins so like there's gross margin there's contribution margin and there's like how much can i actually generate just do the math on how much growth can you actually afford you don't need to triple like you just don't you know like what growth can you afford maybe that's the right answer like like do you do you have to stress the system to the point where it almost breaks every month? Like, I thought you were, I mean, like, the whole point of being a founder and bootstrapped is, like, you can choose.

1:03:50Matt Bertulli:So, like, if you're choosing to break your business by growing that fast, maybe the answer is to choose to grow a little slower and compound over a longer period of time. I don't know. Maybe I'm just an idiot. That seems like an option.

1:04:03Sean Frank:No, Matt and Curtis, you guys are both right. And I just want to say, you know, we're not in the trophy business. like e-commerce is not the trophy business and what i mean by that is you don't get a trophy for telling people how great things are you don't get a trophy for growing fast the only trophy is do you make any money you know what i mean it's like there's like you don't get a trophy be like yeah dude you built a great business and you you took no money for yourself and whatever it's just like we're not that business bro like you have to be able to take money out of this thing and and growing slower or being ruthless about op-ex being ruthless about margins like that that is the only way you survive to play another day so we're you know uh for all for all for a gen z audience it's like this is a battle royale you have to be last to survive okay it's not a high score game if that makes any sense you can win by just staying in the bushes doing nothing and waiting for everybody to kill each other and being the last guy out there that's how you can win so you can't win a game you're not in and i think the goal number one stay in the game as

1:05:05Matt Bertulli:long as you possibly can ideally forever and take a much longer view on a physical goods business uh get the off of x and or whatever the hell we're calling it these days and listening to like i went from zero to 300 million in in i mean we're guilty for this because we have these people on our i'm just gonna say i like just get off of x consumer goods is a very difficult bucket of companies to build they take longer than you think they do like if you're young and you're getting started be prepared for a 10-year journey like go into it with that mentality and just go slower that is like the best advice i could give somebody the greatest quote about time is a bill gates quote and I love this one.

1:05:54He says, we overestimate what we can do in a year. We underestimate what we can do in 10 because no D to C person is figuring out 10. You ask us for a three-year model and we're like, kiss my ass. I'm thinking months. I'm thinking seasons. Don't talk to me about 10. But 10's real. 10 comes along. After eight and nine comes 10.

1:06:16Matt Bertulli:Yeah, man, I've been doing this for 22 years. Like it just, it takes time.

1:06:21Sean Frank:Yeah, this is my 10-year anniversary at Ridge this year. Oh, that's awesome. That's how long it takes, guys. All right, that's been another amazing episode of the Operators Podcast. Curtis, I hear you're going to be able to watch way more of these episodes in the future. You're the new Jason. So we love having you here, Curtis. Thank you for being here. Matt, you're a great guy. Talk to you guys later. Goodbye.