Episode 130 – Your Year-Round Horror Show – The Death Funnel

November 15, 2024

A lot of entrepreneurs think they have the next Big Thing. You kind of have to believe this just to push through the fire hose of “NOs” and “that won’t work.” Seriously. 70 to 80% of early-stage brands in food and beverage never even get to $500,000 in sales on their P&L.

Unfortunately, the media’s predilection for covering only outlier companies that scaled exhibits one of the oldest cognitive fallacies known as survivor bias. You’re not seeing the failures and learning from them. Business publications also tend to cover where the investor money is going, which leads to a case study set where each company literally vaulted right over the financial dangers of the early Phases of the ramp. 

You can’t learn anything from these companies about surviving the first $500,000 in sales.

The reality is that most of folks who don’t make it to $500,000 in net sales, aside from the folks who decided that $100,000 is all they ever wanted, those folks generally make unforced errors which an amateur who’s new to the industry is most likely to make.

The most common is not raising enough seed monies to cover the first 2-3 production runs and the first 120 days of operations before distributors tend to pay you. An inability to forecast your early cash burn is a close second. Gary Hirshberg would like to scream “cash burn” into your ears until they bleed and you finally relent. 

I can’t list all the many reasons why you could kill your own business in that first $500,000 of trailing sales. And it would be a very depressing list, to begin with. But the most unforgivable one is trying to grow too damn fast. This was a viral brain disease during the 2010s like nothing I’ve ever seen. It inspired a data science experiment you can find mentioned in my book, Ramping Your Brand, an experiment in which we buried this distribution-alone strategy into a muddy grave via statistics.

The desire to accelerate faster than your operations and balance sheet are ready to handle is understandable if you spent 1-3 years trying to develop your initial product. The impatience you feel is real. 

There’s two basic ways you can grow a business in consumer packaged goods. You can use what’s called the push strategy, which is honestly the mainstay of large publicly-traded companies. Push is expensive. It requires highly mainstream offerings that basically aren’t innovative at all. Think Devour frozen meals. A large calorie portion size in a category replete with mostly low-calorie options.  It requires a sales organization capable of reaching 80-90% ACV or category ACV in 6-9 months to work. That’s just one of the requirements you can’t meet. 

Contrary to what confused venture capitalists preach, even well-funded startups cannot really pull off the kind of push strategy that folks at Frito-Lay do almost every single year. Not with a brand-new trademark. Now, even if you have 10 to 20 million dollars in investor capital, super unlikely you’ll ever get that, but even if you do, you still don’t have the resources that a large firm like Frito-Lay has with its DSD, direct storage delivery trucking fleet, its massive analytical resources and its decades of institutional experience in launching products super-fast to a mass audience. But here’s the stickler. 80% of the time, this mega-resourced push strategy also doesn’t work. Not because they don’t hit initial revenue targets in Y1, but because the sales volume doesn’t last. It’s boring. If you’re a large company, you can afford to string those launches together, and you may still, magically grow the EPS. 

This arrogant BigCo growth model is unavailable to you as an entrepreneur. That’s why I wrote my book for undercapitalized founders. Believing that this or that investment firm can simply fund a magical push up the ramp is incredibly naive and usually results in a sub-par private equity exit. You might get rich, but you sabotaged the business’ long-term potential and you’ve lost all control. Sounds like Wall Street.

So what’s the other way? The other way to grow is using what they call the pull model. The pull model is about designing and marketing so frickin’ cool that it causes consumers to pull it off the shelf, digital or otherwise, tell their friends, pull more off the shelf. A pull growth strategy is a business driven by month-over-month same-store velocity gains, the single toughest KPI to which you can ever hold your team. 

In the industry and in the marketing world, we call this organic growth (i.e., it didn’t use operator-forced techniques like price increases of distribution builds). Now, in the natural, organic industry, this phrase “organic growth” is a nice little pun. 

Organic growth is created by more and more consumers trying a product and more of the consumers becoming repeat purchasers. And I tell you, strategizing and managing a business driven by organic growth, i.e., driven by pull, is the smartest thing that anybody can do with a small business, using their own precious money, which most of you are doing. This is because it forces you to maximize repeat purchases in specific channels and geographies. And this is financially efficient for distribution purposes. Under-capitalized founders need financial efficiency more than anyone in the eco system. Getting more and more revenue out of existing points of distribution is one of your best, and very possible, weapons to steal market share from lazy incumbent brands. 

So how does this all really pan out if you do it well?

What are the principles? Well, first of all, you add your accounts very slowly in the beginning and strategically based on where you think the shopper base is going to be highly predisposed to the innovation you’re bringing to market. That also could be highly localized and regionalized assessment of the shopper base, even in a national chain. Target in Ohio is a different set of Target shoppers than Target in Southern California.

After you’ve added stores strategically and slowly, not thousands at a time, you build a fan base as you’re doing this, so you can learn about your product. When I hear a lot of founders speak, it’s clear that they understand everything about their product as a manufactured widget because they’ve often spent one to three years fussing over it. And of course, they’re sick and tired of fussing over it and want to make money. That’s the temptation. The seed money is draining away. But until you’ve had sustained interactions with hundreds and hundreds of consumers, including your fans, you have no clue what you really have. You just have a hypothesis about why you’re going to grow. 

But is your hypothesis correct? NASA doesn’t send the satellite up hoping it’ll work, not when a launch costs $100M. They test every component dozens and dozens of times in conditions similar to space. This costs billions that you definitely don’t have.

When you can’t manage risks like NASA, you can focus on a pull strategy because it’s cheaper. Start small. Contain the beast and make sure you have an initial fan base and you actually have a product that generate one. Learning from these folks. Iterating.  Getting it right in a contained geography or region. Hold your store count after getting it up to a couple hundred for a year or more. Then measure your same store growth. Feed the brand with out-of-store sampling and in-store displays. Are you growing steadily at the same stores for 12 to 24 months? If you’re not, you seriously need to think about tweaking your product or your market playbook. Don’t add any more stores until you figure that out. 

Now, how long are you really going to grow in the same stores? Well, this is, unfortunately, not a predictive science, at least not yet. Even though there’s no hard and fast rule, I can tell you that in multiple years, the velocity of growth at the same stores is very common for well-designed and positioned premium brands. Now, it may not be explosive growth, it’s often steady and geometric, so you and the buyer might not see the long-term magic unfolding. But the key is that as you’re adding stores, you don’t want the incline of your velocity growth slope to be declining or flattening out because that’s a sign that your new stores are simply not adding efficiency to the business. Declining is the real red flag because it means people aren’t coming back.  Flat velocities in the second year are not great, but not fatal. So you may choose to add stores.

However, if you want to grow, you have to keep iterating either your product line or your Playbook to build awareness in the store so you can have confidence early on in those early couple hundred stores that you’re generating velocity growth. And you want to be able to know why you are growing and how your executional mix, how your Playbook is actually helping that growth.

Then and only then, you’ll want to start ramping distribution carefully. It’s my firm belief that, in 2024, if you are a snack or beverage company or in any category where your units are emptied in 1-3 usage occasions, you should be able to create at least $1-3M business in a large U.S. metro. If you can’t, there’s something suboptimal, usually with your product design. 

By the way, this velocity-based pull strategy is not only a smart system for navigating the death funnel, it’s a smart system for any stage in the revenue growth curve of an early-stage company. It’s just that everything I just described is massively more critical to survival in the first $500,000 than it is for a ten and 20-million-dollar early-stage company which the odds are and the data has shown me can stagnant for years and years and years without folding.

Be safe out there.