How to Raise $1 Million Before Your Final Product Even Exists

0:00Shopify Masters is on YouTube and you probably already knew that. So the real question is, have you checked out this interview on video? You can watch this full feature plus a whole catalog of others on Shopify Masters YouTube channel. The link is in the show notes. Enjoy. We're helping more people drink less, whatever that means to them. And that is at the core of everything that we do.

0:27Hey, what's up? I'm Benjamin Gottlieb back with Shopify Masters, your companion for starting and building a business. I'm in studio today with Evan Quinn. We're not going to be here to sell our product all the time. The product needs to sell itself. He's here to talk to you about why you might want to consider fundraising for that next business idea before actually getting started. We were raising a million dollars. And as we got halfway, we paused. We went and reformulated the product into what HIO is today. He is the co-founder and CEO of HIO. It's one of the hottest non-alcoholic beverage brands around.

0:56And yes, he's on Shopify. Evan, thanks for being here. Thank you so much for having me. Excited to be here. You started this business with fundraising, and I'm curious why. Yeah, I mean, I think there's a lot of different directions you can go. The traditional route is to bootstrap it. You know, maybe you're whipping something up in your kitchen and you're fulfilling orders out of your garage, that kind of story. And I think it's more unique to why we started HIO and where myself, my co-founder George and Signe, where we were at that time. So I was getting my MBA at UCLA Anderson and George and I and Signe were creating beverage concepts.

1:29And in April 2019, which was in between my first and second year of school, George and I both had family members hospitalized with alcohol-related incidents. Oh, wow. So we both come from families with pretty bad alcohol dependencies. We were already kicking around some ideas in the beverage space, and we were already kind of creating this mood drink that would elevate your mood and relieve stress. And with that, we kind of fell into the sober curiosity movement when that event occurred, and we kind of cut back our own drinking in our own lives and saw the real problem that was out there for the lack of high quality non-alcoholic options.

1:59And as we did so, HIO became my master's thesis. We flushed out the idea in my second year of business school. We went into a venture competition called the NAP Venture Competition. We won that and we took that$40 ,000 grant and spun it into our first capital raise. We knew that there was a hot category. We were very confident in ourselves as entrepreneurs and we knew we wanted to kind of go big out the gate because there is a speed component to trying to get ahead of the adoption curve and getting yourself ingratiated in the category and in the space at the right time. You mean kind of like riding momentum?

2:32Riding the momentum. Like it's really important when you think about when you're creating your concept in the category to understand the market dynamics. Like where is the space that you're trying to enter? Is it later in maturity? Is it with early adopters? And CPG is hard. Food and beverage is really hard. And you can either do that bootstrap model or you can come out the gate, try to raise money off of the idea, who you are as founders and how big the category can get. And then you raise off of that instead of going out there bootstrapping, going door to door, and then using that. Like I found and our belief is that you can have that data used against you.

3:04If you try to go out and say, I want to raise a million bucks on a$7 million valuation and you have$20 ,000 of trailing sales, investors are not going to be able to put those pieces together and they might be able to actually use your data against you as opposed to you just really explaining and gaining confidence in investors of how big the idea can get ahead of actually launching the brand. Well, let's get back to data a little bit later in this interview, but I'd love to ask you just to follow up on what you just brought up, finding that market fit, understanding like what is the audience for this?

3:34How were you able to do that without actually testing a product, right? Yeah, I mean, I think it always goes back to the UCLA Anderson experience that I had because as part of my master's thesis, I had four of the MBAs working alongside me on my concept. And I also had access to 300, 400 students that were ready and able to do primary research in consumer data. So, you know, obviously the primary research came from a lot of the market data. IWSR was starting to kind of cover the sober curiosity movement. And so there's a lot of things I can find online. And then in terms of formulation and testing flavor profiles, I was really able to use different segments of my colleagues at school to really test out what flavor profiles work.

4:13Are you feeling the functionality? Do you think this is a viable concept? Get kind of an NPS score? Like, would you share this with friends? So it was a really good testing ground to live like an entrepreneur without having to be distracted by, you know, I was a full-time student. So being distracted by I need to make my income and, you know, keep up at work and stuff like that. And so the ideas of like what flavors we should have or what should be in our drinks, those are probably discussed, but they weren't as important, it sounds like, as selling the opportunity, the opportunity size of a company like yours to potential fundraisers, right?

4:46Yes and no. Okay. I think it is really important to have that consumer data in terms of like how you're going to position the company into what it is today. And then if we're getting into our first round of funding, I think the one story I'd love to highlight is we were coming off of a lot of momentum having won that competition. And we thought, you know, oh, we're going to raise this money so fast. Everyone's going to say yes. We're going to be done really quickly. What we did is we raised the$40 ,000. We did our first production run because as a food and beverage product. You got to make something.

5:15You got to be able to make something. They need to test it, right? If they're older, they're going to have their kids test it and make sure their kids like it and give the approval. And as we did, we started to see how hard it was to raise. We got some yeses, but not as many yeses as we wanted to or as quickly as we thought we were going to. And as we did, we kind of asked, like, what's wrong? And people were like, we love you. We love the concept. We love how, you know, the market. The product's just okay. And we're like, oh, wow. Like, I think it's really important when you're going through fundraising to have both a 30 ,000-foot view and a three-foot view where, like, you're so close to your concept, but you still need to have a 30 ,000 foot view where you accept feedback and you accept that loop.

5:52And as we did, we actually, in the middle of the fundraise, we were raising a million dollars. And as we got halfway, we took a step back and we're like, wow, we're not gonna be here to sell our product all the time. The product needs to sell itself. So we paused, we went and reformulated the product into what HIO is today. And when we did that and went back to those same people that said no, we batted a thousand. Everyone said yes because they loved the new product. They also loved that we were like open to feedback and willing to take that and actually acted on it. You acted on it. And clearly it's been successful for you, not just in fundraising, but where you guys have gone now.

6:23Today, I want to take a step back and go to the origins of the company. And you mentioned before we started that there's a personal connection to this idea. We know that alcoholism affects many different families, many different people. And you alluded to the fact that you had something like this happen, not just in your life, but in your co-founder's life as well. Tell me a little bit more about that. Yeah, yeah, the origin story is so impactful for us. Again, I was getting my MBA at UCLA. We were trying to create a beverage concept of some kind. And then, yeah, we both had family members hospitalized in April 2019 with alcohol-related issues.

6:58And as we did, George and I both cut back our drinking and kind of were looking at the landscape of non-alcoholic options. And again, this was April 2019, so very early on in this sober, curious movement where there are more brands today. We saw there was a real problem. You know, when you're going out with friends, You could drink a sugary, you know, Red Bull or energy drink. You could drink an unhealthy mocktail that's primarily just juice, or you could have like a really boring soda, water, and lime. And so there was really no options that like celebrated people who were drinking less, whatever that meant to them.

7:28And so we thought we'd create a brand that celebrates those people, flavor profiles that were fruit forward and down the middle, a functionality that left you feeling good in the moment and had no hangover the next day. And we also want to make sure we were a USC organic product that helped accompany like a lot of the different diets that are out there, like HIO is vegan, HIO is non-GMO, HIO is gluten-free. We just really wanted to make sure it was a drink that you could feel cool about holding your hand, but also was really easy to reach for. Because I think accessibility and convenience is a big issue in this space.

7:59And so the goal for HIO is not to eliminate alcohol. Alcohol is not going anywhere, but there is a moderation movement. And we believe HIO and other drinks like HIO need to be sold everywhere that beer, wine, and spirits are. And that's happening here in Los Angeles and across the country and the world, I would assume as well. I mean, you have your products and you mentioned Air One and Whole Foods. Those are dreams for many small business owners to get their products in places like that. How did you make that happen? It's a really interesting thing to lean into because I think being on the Shopify podcast, I first want to start with Shopify.

8:31Sure. So we launched the brand in May of 2021, primarily on Shopify. Yeah, we got into Erewhon and a few other places in our backyard of Venice, California. But it was really important for us at the time. We were in the middle of COVID. People were drinking a little bit too much. And this category hadn't necessarily been adopted in retail. So the only place to meet consumers was online. And so we leaned into it, one, because that's where customers were. But two, in the early stages of any brand, you need to have a really strong feedback loop. and you don't have that on Amazon and you definitely don't have that in retail.

9:03So we needed to work out like, why are people drinking us? What do people like? What do people not like? Are we gonna run into operational issues as we're trying to like match supply and demand and have stock outs? Like you can't really do that in retail. Learning who our customer was, why they're drinking the product was really important in the early stages. And we didn't launch in retail with like a focus in retail until October of 2022. And what was really impactful is we were able to use and galvanize our online community to send them to store. So like that was a part of our selling pitch was saying, we have this massive online community of hundreds of thousands of customers that are either new to your store or gonna increase their basket size and you need to be carrying a product like Hyo because we'll be able to drive customers to your store.

9:45So - And this is what's so different about how consumers shop today, right? You mentioned before we got on camera here that about 50 % of your sales are still coming from D to C, right? Right, yeah. Yeah. And so how do you kind of balance those two things? Because again, for food and beverage, for the big brands, right, they're looking at some of these bigger distribution places, like a supermarket, for example. Yeah. I mean, I think you have different value props of like which consumers wear, right? Beverages aren't traditionally sold online. They are bought up and down the aisle in store, or if you're at a restaurant, a bar or, you know, hotel or what have you.

10:18And I think you really have to have a different value prop for each channel. So So obviously retail is your grab and go. It's your local supermarket. It's where you are discovering new brands and maybe testing them out because you can buy a single can as opposed to 12. Whereas online, you know, as we've become more mature as a brand coming up on our fourth birthday, you know, subscription is huge. People want the convenience of a 12 pack of Hyo being dropped on their doorstep every 30 days. So you really have to tailor each channel to what is the consumer looking to get out of that channel. And that's how you, you know, how we scale the business.

10:48Right. And it speaks to this concept of finding your customers where they want to be found, right? Do they want to be found on social? Do they want to go to your website? Do they want to shop at the high-end market? And you have been very successful, you and your team and your co-founders in doing stuff like this. So clearly it's been a success. Evan, I want to take a step now back to this initial ideation phase where you were tinkering with the products, trying to determine, you know, I really like what you said about how your investors loved you, loved your team. The product was just okay, is what you had said.

11:20When you went back to the drawing board, how did you first come up with that right taste, that right product? There was a lot of tinkering. There was a lot of testing. I mean, first we started with like the botanical blend, right? HIO has adaptogens, nootropics, and botanicals in it. And a lot of those ingredients don't taste very good. So we started with the feeling first, the functionality of wanting people to feel this kind of stress-relieving, mood-boosting feel that we have claimed to call the float. And from there, we worked with the medicinal herbalist to make that synergistic botanical blend.

11:49And we took that to a beverage formulation team and said, we need this to taste good. We need it to be no more than 30 calories, USD organic. And then you just iterate on different flavor profiles. Is that fun? That was super fun. I mean, it's creating your baby, right? It's creating your product. And I think you take a little bit of a look at the category of what you're trying to achieve. I think a lot of brands in our category are either trying to mimic the taste of alcohol or not. And they're either trying to have functionality or they're not. And we wanted to really nail the intersection of functionality and flavor.

12:19And so that meant down the middle, fruit forward flavor profiles that were still elevated. So Ohio has blackberry lemon, watermelon lime, peach mango, strawberry guava. And for us, it had to be kind of a combination fruit forward profile so that it was still sophisticated and elevated so it can be used as a substitute for a cocktail. It wasn't boring like a cherry or orange or something like that. You're very good at selling your company, this brand. That is a huge part about being successful, right? It's one thing to have an incredible product. It's one thing to have a market for it. You have both those things, but can you talk about your brand confidently?

12:55What advice might you have for any of our folks who are watching who maybe are struggling there as entrepreneurs with talking about their brand, selling their brand to investors, for example? Yeah, there's two pieces of advice I usually give for this type of question. One, you have to be passionate about what you do, right? When we were trying to create a different type of beverage before we fell into HIO, one of my teachers asked me like, why should someone care about your brand? On the big wall of Erewhon Beverages, call it. And I really didn't have - That's a big wall. It's a big wall. And I really didn't have an answer.

13:26I'm like, it was a cool concept. It was like this activated charcoal coconut water, which would have been hot at the time, but I didn't have any passion for that brand. And when this event happened in April, 2019 with our family members, And George and I and Sydney, we were just like, this is something we can absolutely get behind. If we become bigger, that means we're helping more people drink less, whatever that means to them. And so there's always this altruistic motivating component to it. So if you're not passionate and motivated to carry on your brand and see it scale and succeed, like that, it'll burn out, right?

13:58There's ups and downs in entrepreneurship and you will burn out if you don't have that underlying fire to you. And then the second piece of advice is being an entrepreneur, especially in food and beverage is hard. And if the world doesn't need your product, you might not want to give it a go. If it's one degree of separation from something that already exists, or it's a flavor profile you think is subjective, brands eventually like don't have that novelty to them anymore. And they need to have lasting power beyond just like answering a trend. And so if the world doesn't need your product, I would highly suggest really thinking like taking a step back and thinking about, is this what I really want to like lean into with the next?

14:33two, five, 10 years of my life, because if it doesn't, it'll find its way to fizzle out and entrepreneurship is hard. So really answering those two components should help people ideate if it really is something they should move forward with. A recognition that this is difficult. That's something that I actually had the chance to talk to Toby Lutka, our founder, last year on the podcast. And by the way, if you all want to watch that, check out our YouTube channel. He said the same thing. This is the founder of our company. That entrepreneurship is hard and you have to be okay with that. right? You have to be able to sit with that and be like, I'm okay doing the hard work every single day.

15:08And it's not an easy thing to convince yourself about, right? Yeah. I mean, that's not a new idea by any means. Entrepreneurship has always been hard. The risk reward profile is the way it is on purpose because very few see it through. And I think people think starting a brand is very sexy. And when you actually peel back the layers, especially of a product company, you're actually just lugging cases up and down the street, selling in from store to store. And there are a lot of ups and downs and the downs are hard. So if you don't have that passion for what you're doing, or you don't have a product that truly needs to be in the market, you're just going to feel like it's beating you down.

15:42And you also need to make sure you have a really strong inner circle to help pull you up. Like I wouldn't be where I am today without my two co-founders, my inner circle, my fiance, people that kind of have seen me in the ups and downs and help carry me through it. But yeah, it's a tough journey getting in the space. It's not sexy and it takes a lot of grit and perseverance to break through. It's really inspiring. And I think as well, this idea of trying to find out, is there a market for this, right? Maybe I love the product. Maybe it really resonates with me, but what about everybody else? And that is the benefit, kind of bring this back to your approach, looking at fundraising first.

16:17That's potentially one of the benefits of taking that approach initially, right? Yeah, I mean, obviously having capital is the name of the game. The number one question I get asked is like, how do you fundraise? which is different in every stage. I've raised four rounds. The first round, like I said, is about confidence in yourself, confidence in the size of the market, and confidence that you have the right positioning within that market. And I just closed my Series A and that dealt with like negotiating complex deal structures. So it's never easy to fundraise. And I think there's just two different approaches.

16:44You can either bootstrap in the beginning or you can try to raise out the gate. You may be like, I really like that concept and that approach, but maybe I don't know the right people. Or maybe the idea is a more niche product and it doesn't need that much capital to get off the ground. So every capital raise is different. And it's really hard to say, like, here's the exact blueprint for it. I would say the three things I always want to highlight for someone raising their first round is, one, it's going to take a lot longer than you think. I've never penciled in, in my financial model, like an accurate assessment of how long it actually takes.

17:14It's probably usually double. Two, you need to aspire confidence in your investors, especially the early stage ones. Like they call it like the FOMO, like creating FOMO with investors. but I really think that it's called confidence. Like make them gain confidence in you that you're the right entrepreneur and you're the right concept. Can you deliver? Can you deliver and scale? But also like, how are you going to be during the hard moments, right? Are you going to be able to persevere through or are you going to fold and buckle? Because it's bound to have both the success and the downsides of it.

17:40So can you kind of truly see it through and just persevere through it? Like I think the people you think that are going to invest usually actually don't. And the people that you don't think are going to invest actually are the ones that do. and so it's really leaning on those that do say yes, tree branch off of them. They might know, like now they're on your side of the table. They might know someone else who wants to put in some money and then you go and you get them involved and then they might know two other people and the kind of tree branches from there. Because I think the number one thing I get asked is like, who do you know or how do I talk to someone?

18:09It's really like start with a couple and then tree branch from there. It's not like here's the hundred people you need to go talk to. So there's no blueprint, right? There's no, they're like, these are the folks you have to touch if you want to get your brand off the ground. No, not at all. It is truly dependent on person to person. I was fortunate to have my, I was in my business school. That story I told you of someone who said no, who eventually said yes, he became, him and his partners, became the single largest investors in Ohio before our series A happened. He was one of the judges of the NAP competition that I won.

18:40So it kind of - He said no to you. He said, yeah, yeah. We started talking. He's like, I love it. And he's like, my kids and my wife don't love the product. And so we took that one to heart and we went back and reformulated and came back to him. and he's, him and his partners are the largest investors, individual investors in HIO before the Series A occurred. Did you a favor there? Yeah, I mean, he taught us a great lesson. I think one of the things we've done really well is that three foot and 30 ,000 foot view concept. It is your baby, but you can get so attached to the concept that you don't wanna listen to any feedback.

19:08And so like you are in the trenches every day, so you're three feet to it, but you need to be able to like always have customer feedback. Like we just did a customer survey with our online community last week and we're four years into it. It has never lost on me that my job is to provide value to customers who give their hard-earned dollars for our beverages. And that is at the core of everything that we do. And you're doing it with Shopify, which of course you're on this podcast. So that makes sense. I was struck, you mentioned earlier the resource available to you at business school, not just who you met, but the students, the community.

19:40You were probably, if I could guess, exposed to so many different platforms and ways to host the business. and perhaps had more knowledge than most about what was out there. Yet you chose Shopify. And I'm curious why you made that choice and why you stay committed to Shopify with your business. Yeah, I think Shopify kind of has the lowest barrier to entry in terms of someone who wants to stand up in an e-commerce business that they, you know, don't have a lot of experience in. I also think even from where we were in the beginning to now being on Shopify Plus, we've always made sure that our website was very modular in terms of always being nimble where you need to make changes to it and you're not like a coder yourself or developer yourself.

20:19So having the ability to be flexible in how our website looks and feels. And then also like in terms of that customer value proposition, having the ability to kind of add in all of these different platforms and plugins, like a subscription or a rewards platform or a store locator, like Shopify just makes it super easy. It's the ease despite the fact that you and your co-founders have maybe a sophistication, whether it's with fundraising or in research or in data that some of our other folks don't have yet or are still developing. Yeah, I mean, to be transparent, our first website that we used for the first three, three and a half years of our business was$10 ,000.

20:56And that is a lot of money, but in comparison to the raise of a million dollars, like standing up our storefront that we used for multiple years, you don't have to spend 50, 100,$250 ,000 on a website. It can be super basic and serve the job. One of the things that we haven't talked about is crowdfunding. And I'm not sure if you went the crowdfunding route or not, but that's one way that we've found that some of our merchants, some of our entrepreneurs are tackling fundraising. Is that something you would recommend it? If not, why? It wasn't for us. If I were to recommend it, it is one of those like proof points, right?