4 Ways to Run a DTC Company Like a Tech Startup

0:00I think Silicon Valley does give you a framework of the standard startup model. And step one was products. Well, from the first bar in the garage, we made chocolate that we were proud of. And then is their product market fit? Well, then we went to our first farmer's market. We sold out immediately and we knew there was something there.

0:19Hello and welcome to Shopify on Location. I'm Shuang Esther Shan coming to you from our space in San Francisco. How does a startup measure success? For many, it's being bought by a larger company. But what happens after the acquisition and the movie credits begin to roll? For Todd Masonas and Cameron Ring, the answer is making chocolate. Comcast bought their tech company in a multi-million dollar deal years ago. Then in 2010, they opened Dandelion Chocolate, roasting cacao and tempering their two ingredient chocolate bars in the Mission District. Their story is uniquely San Francisco in so many ways, which Todd is here today to talk about.

1:00Todd, welcome to the show. Thank you so much for being here. Thanks so much for having me. So excited to chat. I personally love chocolate, and I understand you went on a chocolate sabbatical. Sounds super fun. What did you get to do? Well, when I had my tech startup, you know, in a startup, you don't really get nights, weekends, vacation. You sort of work 24-7. After we had been acquired and I had some time off, I said, you know, this would be an opportunity to explore the world and do some fun things that I hadn't done in the past. And so I traveled a bunch and ate a lot of chocolate. I had always loved chocolate as a child.

1:35I wouldn't say I had a super sophisticated palate, but I was just sort of on Reese's peanut butter cups and that sort of thing. But I got to see how people were making chocolate, kind of the old traditional style in France, getting to see how people were still roasting cocoa beans, something that had kind of disappeared in America. So kind of went around the world a little bit, got to try some chocolate. And then my friend Cameron and I, we took over a friend's garage and we started roasting up cocoa beans ourselves to see if we could make our own chocolate. At what point did you think to yourself, I want to actually build a business around chocolate?

2:10So when we started, we had not intended to start a company. We literally took over a friend's garage. At that point, there were maybe only 10 small companies in America making chocolate from the cocoa bean. So normally you go into a chocolate shop, they're a chocolatier that might work with chocolate that's already been produced. But no one was really making chocolate from the bean itself.

2:35So it was sort of a fun project. We had our friend's garage. We would go to Home Depot and get PVC pipes and duct tape. I remember one time we needed to build a vibratory feeder, so we went to Brookstone and got a vibrating massager and duct taped it. We were literally just DIY hackers in the garage just seeing if it was possible. And what was really interesting is that sort of craft chocolate, as we now call it, is pretty different than industrial chocolate. Industrial chocolate, you're getting not-so-great beans, you're trying to get the price really low, and you're trying to make it very consistent.

3:05So you get sort of not-great beans, and you burn them, and you add many, many ingredients to them. In our case, we started with some of the best beans in the world and tried to get out of the way, and we started tasting flavors that were unlike anything we had tasted in chocolate. It's more like wine, different harvests and terroirs. And at that point, we started sharing with friends and family and knew we were onto something, and we should do something with it. It also sounds like you were applying some of those hacking skills, some of those tech skills into making chocolate as well. You know, it's not unlike a tech startup in the sense that you kind of don't know what you're doing and you just get going and one foot in front of the other.

3:45We started with some cocoa beans. I remember the first time the UPS guy showed up in a suburban garage with sacks of beans. And, you know, then we had to figure out how to roast them and take out the shell and start grinding them up and tempering them and do all the steps.

4:02But, you know, the beans also don't come with roasting instructions. You know, you actually have to figure out what's your philosophy on roasting. And so we used a lot of techniques that we kind of had used in our startup days with A-B testing and kind of like exploring the search space to find like the maxima and sort of say, OK, like how do we reason through this problem? And how do we figure out the provably best flavor out of a set of beans? So we can all agree San Francisco is known for its tech environment. But you actually described the city as a chocolate city with established brands like Ghirardelli, as well as being home to one of the first bean-to-bar chocolate makers.

4:40How has the city affected the business? And was it harder to compete with all these chocolate makers and start a new chocolate shop in the city? Yeah, so I think San Francisco has always been a chocolate city. If you look back, there was Giardelli, Guitard, Cho, even Scharfenberger started in the East Bay. It's kind of been the place where people get started for the last century, century and a half. I think now we're kind of one of the only small chocolate factories still in the city. I think there's lots of pros and cons about San Francisco. I would say a big benefit is we are kind of in this capital of innovation where people are really thinking about how do you start companies and what are your philosophies of building a business and how do you even get off the ground and access to capital and access to great customers and access to people that are willing to take risks and have dreams.

5:30So that part has been amazing. And I think that Dandelion really only got off the ground because we were part of this set of people who kind of believe in what is possible. At the same time, you know, unlike a tech startup, I feel like the tech startup, you just start typing, and then you get users, and then you're off to the races. But we have to build buildings and get permits and get machinery and move actual atoms around. And so it's just like a much slower process, and you deal with a lot more government regulations and a lot more sort of challenges of kind of the actual sort of real world.

6:03But on the balance, I would say being in San Francisco has been amazing. And one of those early big challenges is finding the right farmers, the right sourcing specialists to actually get you the beans that you wanted. How did you go about tackling that? Yeah, it's interesting. When we started, we thought, oh, you know, it'd be easy to get beans. There's all these beans on the market. And what we didn't realize back then is that all the cocoa beans are commodity. It doesn't matter where they're from or the quality levels. They're all just kind of considered the same. But when we started, we wanted to form relationships with the farmers.

6:35We wanted to know what was going on with the beans, how they tasted, how are they being farmed. So we had to build our own relationships. We had to build our own sourcing network. We publish a sourcing report every year with every farm that we visit. We visit them all. I think the only one we haven't made it to was Liberia because they had an Ebola outbreak.

6:58But for the most part, we are boots on the ground. We are meeting with the farmers. And our chocolate is pretty different than industrial chocolate. Our chocolate is two-ingredient chocolate. So that means we just use cocoa beans and sugar. And in fact, we make a 100 % bar that is a one-ingredient chocolate bar. It is literally just ground-up cocoa beans, ground-up seeds. And so what that means is you have to get some of the world's best ingredients with the best genetics that have been fermented properly. And then we have to figure out how to roast them properly and then process them and conch them.

7:28So it just means that you have to get every part right And you actually have to do all the real work on the ground to get those great beans. How did you know the right points to scale up? And how did you even tackle this process? Because it is so labor intensive. Yeah, well, I mean, I think that when we started, again, we weren't intending to start a business. We were just doing something because we thought it'd be fun. And we thought it'd be awesome. And we thought it'd be great to change the world of chocolate. And, you know, the youngest companies in this space are at least 100 years old, right?

7:58Like, this is an area that's been pretty industrialized and pretty set in its ways for a long time. And we wanted to set out to change that. So we were just kind of hacking way in the garage. And then we built a small factory on Valencia Street, a factory and a cafe. And I didn't think it was going to be very busy. But then, you know, I remember the first month we were open, we had to ration our chocolate bars. We had signs up saying you couldn't buy too many bars. Because I think that if we were solely motivated by the economics, there's a lot of things we would do differently to really sort of industrialize.

8:26If all we did was become industrial chocolate, then kind of what's the point? And so not only did we need to figure out how to grow, but kind of like how to do it the right way for the right reasons and keep our integrity.

8:42We were always looking at ways of as we get bigger, how do we get more control over the process? How do we make better chocolate? How do we hone our craft? And so when we decided to scale up, it was really sort of, I think Silicon Valley does give you a framework of kind of the standard startup model. And, you know, step one was, you know, product. Do you have a great product? Well, from the first bar in the garage, we made chocolate that we were proud of. And then is their product market fit? Well, then we went to our first farmer's market and we didn't make a lot of chocolate. We sold out immediately and we knew there was something there.

9:10Well, then the question is, well, can you scale it? So what do you need to do to build a larger facility so you can actually sort of get there? You know, if you have a small facility and small scale machinery, maybe you can only get to a certain size. Then there's a question of unit economics. You know, if you're making all this chocolate, but, you know, you're losing on every bar that you make, then that's going to be a challenge. And then it's like, how do you get to channel profitability and then EBITDA profitability? And so you're just like, you're kind of walking up that progression. And that's kind of as it's been from day one, just making great chocolate, making people happy and turning it into a business.

9:40Because I think founders in the food space challenge themselves with this balance all the time. you try to scale a production, but you're also trying to grow demand and making sure that this perishable good is actually consumed in the right timing of things. What tips do you have when you're trying to manage production, logistics, and growing demand as well? I mean, I think we've been pretty lucky in that the chocolate that we make has a very long shelf life. So we're not sort of as beholden to things expiring in a day or two, which I think would make it much harder logistically. But I'd say for us, it's really been about, yeah, how do we scale but keep our integrity?

10:17You know, again, like there is a playbook for industrial chocolate. There is a playbook for going big. There is a playbook for making sure the farmer doesn't make any money. But that's not what we set out to do. We set out to be part of this new American craft chocolate revolution, you know, to change what chocolate can be. And, you know, we're part of, you know, when we started, there were only maybe 10 of us in America. And now there's over 200 craft chocolate makers in America alone. And the movement's gone global. So it's a lot like what happened to Kraft Coffee and Third Wave Coffee, but we're just maybe 20 years behind.

10:45So we're just kind of doing our part to show what's next in chocolate. And I know the team gets to be very involved in the process with Origin Trips, which I'm very excited to get into. I'm chatting with Todd Masones, co-founder and CEO of Dandelion Chocolate. I hope you're enjoying our conversation. And if you haven't already, please subscribe or follow Shopify Masters wherever you get your podcasts and leave us a review or feedback for the show. Thank you. So, yes, we talked a lot about also the fact that COVID had an impact on the business. It certainly forced all of food to move solely online.

11:22How has your experience shipping internationally and launching and managing this direct-to-consumer arm? Yeah, I mean, COVID changed a lot for us. Pre-pandemic, we were almost entirely a retail business with cafes and retail stores. And it's funny, even though we had a tech background, we really liked sort of that retail aspect because someone's coming in. They've never tried good chocolate before. They've never tried Kraft chocolate. It's also very expensive. You know, you want them to taste and to, you know, maybe they'll like one bar, not the other. We'd like to show them how we're roasting and explain how we're different.

11:54And so we really believed that that was sort of the main way. And during the pandemic, we had to close all of our stores in one day. All of our revenue essentially went to zero overnight. But speaking about the team, you know, we tried very, very hard to keep the team whole and employed. And during the pandemic, we raised everyone's health care to Kaiser Platinum. We said that, you know, pandemic is a time that everyone needs the best health care. Like, we need to do the right things.

12:21And so during the pandemic, we turned into an online business. We retrained baristas as web developers. We really got serious about our Shopify store and our pickup and delivery and all of that. And it's funny, we did about the same revenue in 2020 as 2019, but it was all this massive shift. And the thing that was funny, or I don't know what's funny, it was scary at the time, funny in retrospect, is the retail sort of cafe business, people come in every day and they'll get a hot chocolate or a chocolate bar. It's pretty day in and day out, whereas the online business tends to be primarily seasonal gifting.

12:54And so all of 2020, we were making chocolate. We weren't selling any chocolate, and we weren't sure if we were going to make it. But then we sold all of the year's chocolate in two weeks online. So we sort of had to do this big bet on online. And now that we're out of the pandemic, we sort of now have two businesses. We have the retail business, which has come back sort of with a vengeance, and then the online business. And those tend to be pretty distinct businesses. So now, in some ways, even though that was a hard time, we came out stronger because of it. And I think Dandelion Chocolate is also about that in-store experience.

13:25I visited the Mission District store, also the Venetian store in Las Vegas. It definitely feels very zen, peaceful. So how did you take that in-person experience and bring it online and also intertwine a bit of education and entertainment in the shopping experience online? Yeah, I think for online, maybe we're not doing things the right way, but we're doing the way that we think makes sense to us, which is, you know, we try not to be too salesy. You know, we don't have lots of join our newsletter and 20 % off and discount, discount. It's really just, you know, we make some of the best chocolate in the world and we try to educate people on why our chocolate's different and why Kraft chocolate in general is good and have opportunities for people to experience it.

14:08And, you know, actually most of our online sales comes from a really core engaged base that, you know, we'll have these limited edition, like even right now we have a limited edition four ingredient cake that we just flew in from our Tokyo kitchen. And you can only get it once a year and it's made with these eggs where the chickens mostly eat paprika and, you know, basically the most absurd sort of purest cake you could get. And so our core base, you know, we'll sort of announce the new thing and it'll sell out immediately. And so we're kind of not just trying to sell everything to everyone. We have our own point of view and like people who want to be along for the ride with us.

14:43And then part of that ride is also having those relationships with farmers and getting to know them very well at Origin, which is something you allow anyone in the company from barista to accountant to actually go on these trips. So, yeah, talk to us about the relationship with farmers and helping those local economies. Yeah, for sure. So as I said, we like to actually be boots on the ground and become friends with the producers who supply us with our most important thing, which are the cocoa beans. And so part of that is we have a sourcing team who's always there. But we also open up trips to our own staff members.

15:19We do origin trips a couple times a year where people can go to the farms. We actually have customer trips where customers can pay and come along. We even do sort of exchange programs between our factories or sometimes to origin. Again, we started the company because we just wanted to be awesome and we wanted to do the right thing. And part of that is people should go to see Origin and see the beans and get different life experiences and see new things. And maybe the return is not always instantaneous or the return is not obvious. But I think in the long run, just doing things for the right reason ends up in a good spot.

15:51I think your story is so interesting and special. You did go through a successful acquisition and now you're making chocolate. What about dandelion chocolate makes it feel like it's a business that you still want to run and manage and grow along with it? I think in the chocolate world, there are so many new problems that you deal with every day. You know, you've got, are you getting the right beans? Do you have the right equipment? Do you, have you trained people the right way? Do you have the right retail experiences? Are you doing things online correctly? So it's just a really, really deep problem.

16:25I think the other thing that's a little different than your normal sort of startup play is, you know, normal startup might be around seven years and then past that it's kind of ancient history. It's sort of like it's because of the VC portfolio construction model, you know, you need a certain IRR. You've got a very traditional type of VC business that can exist. But we're part of a very different sort of business where the youngest company in our space is Valrhona. And I think they're turning 100 this year. So if we're successful, we would like to be part of that pantheon of companies that is around for a century or more.

16:54So we're trying to build something to last. We're not here for a quick flip. We're not here just to find a large company to buy us out. We want to do something real and we want to see if we can build something that's going to be around for a while. And most of the growth with Danny Lyon is self-funded and self-sufficient. How come you didn't go through the process of looking for external investors or like more of the typical scale up story? So we actually do have a bunch of investors. A lot of people have supported us. They tend to be venture capitalists, but not their firms, because your traditional VC model wouldn't fund something like this just because you have to be extremely patient.

17:33But if you actually look at some of the most successful companies in the world, like LVMH, those are the ones that the VC model would never fund because they just take forever to build and you have to be incredibly patient and you've got to really think about a premium brand. And so you kind of need to find people who believe in the vision and believe in being patient. And so we've been incredibly fortunate to be in a place like San Francisco where we can find like-minded people who would like to support us. And you mentioned that there is locations of Danny Lion chocolate in Japan and then also locations within California.

18:07Where else can we see Danny Lion chocolate and how do you pick the locations to expand to? Yeah. So we have three in San Francisco, Valencia, the larger factory in the Ferry Building. We have Las Vegas, and then we have two in Japan. And then what's next for us is we've been trying a lot of pop-ups to see what works and where it works and where things resonate. And based on kind of the pop-up information, but also looking at our customer data on Shopify, it seems like New York is the next big one for us. So we're really seriously considering trying to find a great space there and build out kind of like a small Valencia-style factory.

18:43That's kind of the next one we're really thinking about. So Dandelion Chocolate is also experimenting with a lot of different product lines. You've expanded from the two-ingredent bar. There's that really cool chocolate cake you just talked about from Japan. And as well, you've been making chocolate truffles. Yeah, so confections is now a big part of the business, especially online. And so I actually brought some truffles for you to try today. These are our single origin truffle collection. And basically what it is is five different origins. So these are just like our chocolate bars. Each one is from a different country.

19:16And so we've roasted and processed them differently. But they're essentially just the beans and sugar chocolate and with different flavor profiles per origin, but in truffle form. And actually, this was sort of a pandemic experiment for us right after we created it. Consumer Reports actually had said this is one of the best boxes of chocolate in the country. And so it's sort of a different way of experiencing chocolate. Yes. Yeah. It sounds like you get to travel around the world and experience some of the different locations you source for chocolate beans. Tell us about the different flavor profiles and the different regions that these cacaos are coming from.

19:51For sure. So different origins have different flavor profiles. And so some can be sort of what we just call chocolatey. You know, they taste like a normal chocolate bar, but maybe a little higher end. But some beans have a little bit more acid and taste like fruit or are a little bit more floral or nutty. And so when we get a bag of beans, we have to roast them in many different ways, do many different taste tests to figure out how we want to process them. We never know what the bean wants to be, but we have to check it out. We tend to work with a lot of centralized fermentaries. So these are people who work in the community, they collect the wet beans, and they're very good at fermentation.

20:29And then we get the beans and we turn them into chocolate or truffles. Yeah, I think a lot of people don't understand the fact that fermentation actually has to happen at the farm location. And that process actually affects the flavor a lot. Oh, for sure. Yeah, some of the largest drivers in flavor and chocolate, or at least in craft chocolate, where we're actually sort of minimally processing the beans is first the genetics. You know, we tend to work with farms for the most part in Central and South America, where there's going to be more of those heirloom genetics, unique and interesting flavor profiles on their own.

21:01But then how they're fermented will affect kind of the flavor precursors that show up when the roasting happens. So the farmer has to be really good about how they are actually fermenting the fruit. And then they have to dry the beans. And depending on how aggressively they dry the beans, that might also affect the flavor profile. You might end up with more acid in the bean. And then once you're already fermented and dried at origin, we get them. And then we have to figure out, okay, how are we going to roast these? Is it a heavy roast? Is it a light roast? And so we roast them in a particular way to get out the flavors that we like.