Tips to Reach Profitability Faster

0:28It's like anything in startups. powerhouse with a simple mission. Make a superior snack bar that's powered by plant proteins, fuels you to win the day and not crash after a surge in energy. In just seven years, IQ Bar has exploded to over$60 million in sales with 50 million protein bars flying off the shelves in 2024 alone. We'll cover how you can go from a burnt out corporate employee to a fulfilled founder in this episode. Welcome to the show, Will. Thanks for having me. So great to have you here. I would love to start from the beginning because you had a corporate job, very stable, but you wanted to experiment in the kitchen and create this food item.

1:13What made you want to do this giant pivot? Yeah. Well, I wasn't always entrepreneurial, but I was always obsessive as a kid. I was obsessed with chess and then soccer and for a bit cross country. And I would say that obsession turned to entrepreneurship, probably, I don't know, sophomore or junior year in college as I was thinking about what I want to do with my life. And, but I didn't really know what I was going to create or how I was going to become my own boss. And I became fascinated concurrently with psychology and neuroscience. And so I got to senior year and I was like, all right, I want to do something great.

1:53I want to build something. But I'm also really interested in the brain. And I couldn't square that circle in terms of starting something. And I couldn't even really figure out what job that would map to. And so I just sort of ran out of time and took a job at a software company, selling and marketing ops and supply chain software to predominantly oil and gas companies, but also utility companies. And I'm so glad that I got that job and took that job. I was not at all passionate about oil and gas, and I was not really passionate about software either. But I learned, first of all, I learned all the basic skills of Excel, PowerPoint.

2:33How do you run a meeting? What's it like to have a boss? What's it like to have a hard boss? And just like what corporate America is all about. And just like a lot of people, I was dreading Mondays. And, um, but again, I'm so glad that happened because I have that nice juxtaposition to entrepreneurship, but that was like the, the bedrock of why I wanted to, you know, do my own thing. And concurrent to me having that job, I got really into nutrition for personal reasons. I felt kind of like crap every day. I had a terrible diet. And so I adopted a paleo diet, cut out carbs mostly, and felt way better.

3:15And I was always interested in the intersection of cognition and nutrition. So not so much like losing weight or building muscle, but how do the things I put in my body affect my brain to dovetail with my earlier collegiate interest in brain function. All those things kind of came together. It was like, wasn't passionate about my job, didn't want to do that for 40 years. Got really into nutrition. and then I had that prior interest in the brain. And so I eventually landed on, I'm gonna start a brain food company. And then of course I had no frigging clue how to make things, sell things, manufacture things.

3:50I didn't even know how to set up a company, any of it. So, but that was the impetus originally. Yeah, I love hearing kind of the components that led to your decision. and you also found yourself in the space of bars. And I feel like at that time, there was already a lot of competition. The market was pretty saturated, but to your point, there weren't an offering that was looking after cognition. So how did you begin doing more research, recipe testing and kind of formulating in your own kitchen? Yeah, and I'm also glad that I was an outsider to this space. I don't know anyone who's ever made a food company or even is an entrepreneur, really, in my family.

4:40And so I just started from, like, first principles. So I opened an Excel spreadsheet, and I went to Whole Foods. I bought a bunch of bars. I looked at the back. I said, okay, this is what's in all of these bars. That's kind of the fun thing about Food and Bev is they literally tell you what's in the product so you can categorize all that. And then I said, what are all the compounds that are good for your brain? or have been shown to be good for your brain in research? So omega-3 is vitamin E, magnesium, et cetera, et cetera. And then sub-bullet of that, what are the whole food ingredients that are richest in those things?

5:15Almonds are rich in vitamin E and cocoa is rich in flavonoids and so on and so forth. And then it was just like, here's what's on the market and here's how people get bars made and this is how they get it to stick together and taste good and all that. and then here's all the things I need to combine to make a bar and I'd literally just like brute iterated on that and had tons of misadventures there so like I wanted to originally include curcumin for example which is an extract of turmeric which is really good for your brain but it turns the bar orange it stains your fingers orange it tastes terrible so like okay cross that off the list I wanted to include resveratrol powder which is the component of grapes that's good for your brain.

6:00That's why some people say drinking red wine is actually not all that unhealthy, which is kind of a myth. But I couldn't do that because the bar was going to cost$10. So you quickly get into these sort of commercial realities that you have to bump up against. And you're like, wait a second, the market maybe doesn't even want that, even though it's good for them, and doesn't want to pay for that. And so that's what makes entrepreneurship so nuanced is like, it's not even always about the best product. It's about the right product that fits into the keyhole of the commercial opportunity. But more broadly, did people want brain bars?

6:41Like I didn't know, and there was no data on that. So there was a huge leap of faith, which, and I'm sure we can get into the Kickstarter, but that was the point of the Kickstarter was, I'm going to do this thing. I'm going to do this crowdfunding campaign. And that'll tell me if the market wants brain food. And then, you know, I'll iterate from there. Yeah. I mean, it sounds like even before reaching Kickstarter, you were already thinking about the end consumer and making this idea of the bar actually accessible to them. So, yeah, talk to us about validating your idea with Kickstarter and then in the background also scaling from testing on your own to looking for production partners and co-packing facilities.

7:27Yeah, so you have to do the second part first, or I did the second part first, which is, okay, I need to find someone to make this thing. And some people will make it themselves in a commissary kitchen. Or you can actually technically make it in your home if you want to and you get the right permits. But, you know, I was not interested in either of those things. I wanted to go like, go big, do this emphatic test. And either it really works or it really doesn't. And so I went straight to contract manufacturers, which are, you know, they have a bar line. It's literally a line. And at the front of it, you mix your inputs and then you what's called slab them.

8:05It's basically like roll out the dough and then it slices the dough and then guillotines into bars and then they go into what's called a flow wrapper and it gets wrapped. And so I went straight there and I said, hey, I'm a guy with an idea. I think it's a good idea. Here's why you should work with me. What's your minimum order quantity? And a lot of people said no. And then one guy said, okay, it's 20 ,000 bars or something. So then I was like, okay, that's what I have to create 20 ,000 bars worth of demand with a Kickstarter. and it's kind of solving that chicken or egg problem. And so I had like a target.

8:45So then we did the Kickstarter and I researched how do you run a good Kickstarter and there's a zillion blog posts and that was not at all how we actually successfully ran the Kickstarter. Quite frankly, we engage in some, what I would say are like gray hat tactics. Basically, we found, this is kind of a crazy story. I went to Harvard undergrad. I went to the Harvard library because I still lived in Boston at the time. And there are these things called red books. And in the red books, they have alumni details. So it would say, Will Knits lives in Boston, married, has two dogs, and here's his email address.

9:27And then it would go like, Nancy Johnson and blah, blah, blah, blah, blah. Here's Nancy's email address. And so I literally flipped through page by page by page by page. I would spend nights doing this for weeks on end, taking photos of every page. And then I ran it through software that extracted email addresses. And now I had 10 ,000 email addresses. And of all people who went to Harvard from classes like 2000 to call it 2014. And then I got this login to Harvard Business School from my boss who used to go there. And I was able to extract like 80 ,000 email addresses from that. Again, you would never find this on any blog post or anything like that.

10:08This is some crazy hacking here. Wow, okay. Yeah. And I got a MailChimp account at the time. And the reply to email address was my Harvard email address, my Harvard alumni email address. Because if you get a bunch of emails marked as spam, it hurts your domain score. And it's your company domain. It'll hurt your domain score. But if it's my Harvard alumni email address, whatever. So I then emailed everyone, just blasted them. I was like, hey, my name's Will. I was class of 2014. I had this idea. It would mean the world if you check out my campaign, my Kickstarter campaign. And a zillion people wrote back.

10:55They're like, how do you find my email address? Never email me again. A ton of people marked me as spam. But then like an outpouring of people were like, this is awesome. This takes hustle. I just bought two boxes or whatever. And then some people connected me with other people in the food business. Because again, there's just such a high volume of people you're hitting up that just luck starts falling out of the sky for you. And I think we did like$30 ,000 of orders just from those emails. And then the way Kickstarter works is it's a totally momentum base. So if you have a really good first day, you're on the homepage of your sector, Food and Bev, and then you need to stay there.

11:39You need to keep momentum going. So if your volume of orders drops off, you'll fall off the front page. You want to stay on the front page because roughly half of all of our orders came organically. There's someone who we didn't know or talk to. They just went to Kickstarter. They went to the page. They saw us, and they bought. And so it was key that we stayed on that front page. And we did. And so ultimately we did like 75 grand in orders. And half of that was totally organic. But we kept that momentum going mostly through these emails. Yeah. Well, it sounded like such a brilliant idea, but it also required a lot of manual labor from you to extract all these emails.

12:24Like, was it, I mean, at least you heard the tip that you need a lot of eyes on the campaign. So then you kind of had this idea to look at alumni directory in a sense. There's many ways to get eyeballs, right? The issue I had was I had no money. So, you know, a lot of people would be like, oh, go buy Facebook ads or whatever. And you could, but just think about that. It's hard enough to acquire customers at a reasonable price as a store that can fulfill an order you place today, tomorrow. Now imagine the proposition of, oh, hey, here's this thing. It's a prototype. I probably won't ship it for six months.

12:59And like, I might not even ship it at all. Who's going to convert on that Facebook ad? Like no one. So, and not to mention it costs money. And there's like 10 other examples, right? And you could go PR, but no one at that time wanted to cover Kickstarter campaigns and no press outlet wanted to cover them because there are a couple of high profiles sort of more or less scams. And so the press had soured on it. And so it's like, I have no money. No one wants to cover this. it's not like a groundbreaking product. It's a kind of a cool product, but it's not, you know, we're not inventing, you know, shoes that help you hover off the ground or something.

13:36Like it's a protein bar. So you got, you just have to get crafty. Yeah. Well, you unlock Kickstarter. You can now do the minimum quantity order that the production partner requires. But I feel like this also opens the door of like facing new issues with production and understanding the supply chain. So yeah, talk to us about some of those early learnings in there. Yeah. I mean, like you start learning things immediately because we had 2000 and something or other orders and we're like, oh crap, like how do we fulfill these? And we had planned around it. We had a 3PL that lined up that was going to do it, but still stuff just went wrong and we didn't really have a good customer service infrastructure set up.

14:24And so, you know, orders were delayed. And by the way, we didn't fulfill when we said we were. We were like a month late to that. And so it was just chaos. And also we were producing the product for the first time ever. And so the product didn't turn out exactly as I wanted it to. It was good. But there were a couple like product flaws. And so it was just like drinking from a fire hose on everything. You know, manufacturing. What are the 10 things that went wrong? Got it. There's my list to fix for next time. Fulfillment, what are the 10 things that went wrong? There's my list for that. Customer service, there's my list for that.

15:02And it's just like, okay, I have like a novella of mistakes. And let's just like make fewer of those in all aspects when we produce a second time around. But yeah, and then like we got a website up. And so all the overflow traffic from Kickstarter went to our website. because rather than like back this project, it was go to the company's website or whatever the call to action became. And then we got repeat purchases from people who got the Kickstarter orders and liked them. And so we were off to the races at that point. Cut to the years during COVID, it also challenged you to rethink how your supply chain works.

15:41And it made you pivot to actually like house and invest in your own supplies for the raw materials. How has that shift been? Yeah, I mean, that was such a massive learning. So I guess just at a high level, it used to be in consumer goods that everyone would say you want to become a sales and marketing company. You don't want to become an operations company or supply chain company or manufacturing company, you want to outsource all that and you want to be a sales marketing company, because let's assume you want to get to an exit. and it used to be the case that really you were exiting off your top line.

16:21How much net revenue am I generating? And then some multiplier on that, and that's how much my company's worth. That was the way it was for many years there, call it between 2015 and 2022. And then in 2022, that completely inverted. And so investors all the way up to acquirers said, actually, forget that. It's actually now all about net profitability. And it's hard to overstate just how meteoric of a change that is. The entire engineering of most CPG brands, modus operandi is, has to change overnight and violently change overnight. Luckily, we had always obsessed over operations such that we were ready for that.

17:14But even being ready for it and obsessing over your supply chain and cost of goods and manufacturing agreements and all that is really ugly to start in consumer goods because volume, we are in a volume game. We just are in bars, but also in drinks, but also in cookies, but also in crackers, like consumer good food and bad is a volume game. And so your unit economics are going to be bad. They just are until you get to call it 20, 30 million units a year. And then they get really good. And then they get really, really, really good once you're at like 100 million units a year. And so when COVID hit, we were still on that first leg of the journey.

17:58So it was not only bad, It was like catastrophically and potentially existentially bad because not only were our unit economics not great still, and we were moving probably 10 million units a year or something like that, but we literally couldn't make product because we couldn't get certain inputs. We couldn't get cardboard. Like, of course, you can find cardboard always, right? No, turns out you can't because there's this global pandemic. Of course, we could get wrappers. Well, no, actually, your wrappers are stuck in a rail yard in Nashville. And now you have 3 million wrappers that you literally can't get out of that rail yard.

18:35You know, crazy stuff happens like that. And so at that point, we shifted from a model, which is known as turnkey, which basically means your contract manufacturer buys all the inputs, they make the finished good, and then they just send you a bill for finished good times price of finished good. And that's great. many ways, right? It's administratively not burdensome on you, the brand. It's good for cash flow because you didn't have to outlay all the cash to get all those inputs. You know, it's just like quite seamless. The downside is when you literally can't get certain inputs, they're not going to go the extra mile to figure out how to actually make product.

19:16They're just going to say, well, supplier XYZ said they can't do it. Sorry, we can't make a product. That's like downside one. And then downside two is gross margin. So when they're – actually, the manufacturer's incentives are perverse, believe it or not, in a turnkey model because typically they are marking up or taking a percentage of the total cost as what's called a materials management fee. So that could be something like 2.5 % or 3%. You know, having control over your supplies and your raw goods also helped with the margins that you were playing with as well, instead of the turnkey model that you worked with.

20:00So turnkey doesn't really work when you're in an environment where you literally can't find inputs because the person at your co-packer who's managing your supply chain just isn't going to go the extra mile when supplier XYZ tells them, sorry, we don't have any supply. And so that leads to cardinal sin number one of running out of product, going out of stock. That is the death knell of any CPG brand. But also more broadly, in a turnkey model, your gross margin is somewhere between 3 % and 5 % lower than if you are actually sourcing all of your inputs. because the co-packer in that turnkey model is perversely incented to actually have you pay a little bit more on inputs because they mark up the inputs and they charge what's called the material management fee.

20:58So A, you can't make product. And B, your gross margin is meaningfully worse. And actually C, your gross margin won't improve. There's no positive evolution of gross margin expansion because in a turnkey model, the co-pactor is not going to go back to each one of your suppliers and negotiate to reduce prices as your volume goes up. Yeah. Well, listening to that, of course, there is the benefit of having better margins, more control of when your raw goods and your supplies would arrive at the different facilities. But now you've essentially made your job a lot harder because there's a lot more relationships, a lot more things that you have to manage yourself to coordinate, to make sure that everything arrives and it could be the symphony that production goes well.

21:48How did you even prepare yourself mentally to shift from something that everything else was taken care of by this person and now you've taken on all this responsibility? You don't. You just do it. It's like anything in startups. There is no preparation. It's existential. The alternative is death. So you'll do anything, right? And there is no preparation. You're like, oh, crap, we need to make X amount of units, and we need to take this in-house. What's step one? Step one is who's the supplier, and what's the contact? Send the contact in email. Then they respond back and say, no, actually, we need you to format the PO in this other way.

22:30Cool, change the PO. It's just like solve mini problems one after another, after another, after another. And then you do that for a couple of months, and you're like, okay, generally this is my flow for how I order all the inputs. And then you do that for years to come. It sounds like taking all of that responsibility in-house was so important to allow you to reach profitability, which is such a great milestone. For founders who are in the middle of that process where they are trying to figure things out, redefine their logistics, any advice there? Yeah, I mean, as I said earlier, we are in the volume game, and the only way to get to profitability is volume, just plain and simple.

23:16Unless you're selling perfume or certain beauty products. If your gross margin is 85 % right out the gate, even at low volume, yeah, you're probably going to get to profitability pretty quickly. If you're selling pretty much any food or beverage item, you just have to get to extreme volume. And I mean, it's why it's such an incredibly difficult business. Like I said earlier, that threshold is roughly, call it 30 million units a year. And so what happens when you hit 30 million units a year is, and by the way, it's not just volume. You actually have to do something about it when you get to that volume.

23:57So let's say you get to that volume because you have product market fit and you're really good at sales marketing and all that. Now you have to do a series of things to exploit that volume, meaning you need to go back to every one of your vendors and say, hey, now that I'm buying 10 times more product, I need you to ship in trucks instead of less LTL, less than a truckload, a couple pallets on a truck that has 500 other items. because that's going to reduce my freight costs per bar. And I need you to give me this price break. And then you go back to your manufacturer and you say, hey, now that I'm producing 10 times more product, I need you to reduce my labor cost per bar from X to Y.

24:44And you systematically go through your entire value chain and just twist dials in every single spot. and then magically you wake up the next day and you're like whoa okay like we're profitable i would say the other thing too is how you know obviously the next question is how do you get that volume and and i would say find channels and this is different for different people find channels that are ultra scalable that you can grow into tens of millions of units with Don't add up 10 channels that in aggregate get you to 30 million units. If you can get to 30 million units with one channel, do that.

25:31And then the second best option is getting there via two channels. And the third best is via three. But like less channels, more volume is really the trick. Well, that brings the question of the relationships you have with retailers. You have to make sure that people actually want to sign POs with you and they will receive this massive volume that you build. What's your advice there for developing those retailer relationships? My advice is build a great e-commerce business, which maybe is counterintuitive, right? So order of operation matters a lot. I think a lot of people think, okay, food and beverage product, you know, 93 cents of every dollar is spent in those categories at brick and mortar stores, right?

26:17We all, we got a Trader Joe's or whatever. So I guess you go pitch Trader Joe's, right? Actually wrong. The way to get into a retailer, at least the way we found the best way, the most streamlined way is build a great e-commerce business because every retailer today looks at e-commerce because e-commerce moves faster than retail. Just the laws of physics dictate that, right? Digitally, things move faster. You can refresh product display pages much faster than you can refresh a physical store. And so they'll look at, okay, what's doing well online and where am I lagging in my set, my bar set or my yogurt set or my alternative milk set or whatever it is, where do I need to pull in innovation?

27:05Because retailers need you just as much as you need them. They need to refresh their sets because they're competing, just like I'm competing against Clif Bar, they're competing against, you know, whatever, Trader Joe's versus Whole Foods versus Walmart versus Target, yada, yada, yada, yada. So they need innovation. And so if you start with e-commerce and build up a great business there, they will literally come to you. They will literally email you or call you. That happened to us with Walmart, for example. Then you got into Walmart. Had we inverted that order of operations and just knocked on Walmart's door all day long, you're never getting into Walmart.

27:46Because you built a great e-commerce business, you flip the script. Yeah. There's a proof point for your demand, and therefore they can take that and actually bring it into their stores and hopefully expand that demand even more. Yeah, that's really great to hear. And I know that you're also initially IQ Bar started with the focus on brain, and it's now for body and brain. Talk to us about just kind of the evolution of the thesis of the brand as well. Yeah. I mean, this is why starting digitally is, it's not just better for the reasons I mentioned as it relates to brick and mortar. It's better as it relates to finding product market fit.

28:28So, you know, we started with Kickstarter and then we rolled out a Shopify site and we started selling on Shopify. And one of the primary benefits of all that is we got a ton of feedback very, very quickly via reviews, post-purchase surveys, et cetera. and once you hear 500 people say hey this should be sweeter well it should probably be sweeter right and you tried it in your kitchen and you gave it to your neighbors and they thought it was good but now 500 people just told you it should be sweeter so great make the product sweeter and then 500 other people told you hey this was cool this brain food concept but what if it had protein and so on and so forth and you get all this feedback and the answer isn't just to take feedback, even feedback a lot of people gave you, and just do it, right?