Tuesday, January 17, 2017

Lesson #254: Managing For Meteoric Growth--A Home Chef Case Study

Posted By: George Deeb - 1/17/2017

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I am in investor in the FireStarter Fund, and when I received my investor update from one of our portfolio companies, I nearly fell out of my chair.  The company featured was Chicago-based Home Chef, and the company's revenue run rate had increased from $20MM in 2015 to over $200MM in 2016, a whopping 10x increase in one year.  It took me about ten seconds to pick up the phone and call their founder and CEO, Pat Vihtelic, to ask him to share his story with all of our Red Rocket readers, which he was kind enough to do in this post.

ABOUT HOME CHEF

Founded in 2013, Home Chef is one of the leading players in the growing home meal delivery kit business.  Consumers sign up for a weekly subscription of meal kits to be delivered to their home, and the buyers have all of the ingredients and recipes they need to prepare that meal at home, in less than 30 minutes.  They basically have removed the time-consuming need to go shopping for ingredients, and have made it incredibly simple to prepare with pre-portioned ingredients and step-by-step directions.  A great solution for time-started families that want a home-cooked meal, but may not otherwise have had the time to pull it all together.

Home Chef is one of many venture capital backed startups that are racing to dominate this space, including industry leading Blue Apron (estimated at over $1 billion dollars in sales) and Hello Fresh (a division of the publicly-traded Rocket Internet, estimated at over $400 million run rate at their U.S. operations).  But, what Home Chef has had, from the very beginning, perhaps to a greater extent than their competitors, was a data-driven approach to building their business to ensure their business economics were sound and scalable, before they began to hit the gas with their growth.  And, now they are reaping the benefits, as their competitors are still struggling to get their expensive marketing economics to pay back in a timely fashion.

THE CHALLENGES OF METEORIC GROWTH

My first question of Pat was, "how can you reasonably handle 10x revenues in one year, without the wheels of the business falling off?"  And, he detailed three areas of his business, to better educate me on how he was able to grow this fast in the first place, and more importantly, how he avoided growing faster than the business could "digest" (pun intended).  Those areas were: (i) marketing; (ii) fulfillment; and (iii) staff and culture, which I will detail in the paragraphs below.

MARKETING YOUR WAY TO 10X GROWTH

2013.  The company's website launched in September 2013, bootstrap financed by Pat. So, with cash in short supply, it started by getting the product and customer experience right. Where competitors were focused on other gimmicks, like promoting fancy chefs' recipes, for Pat, it all started with what does the customer really want to eat and truly learning their behavior.  With a lot of research and testing with his initial customers, he ironed out a winning customer solution to their day-to-day needs   And, the research paid off; the company's business started to take off with zero paid marketing spend.  In 2013 they were growing 30% month-over-month, driven simply by word-of-mouth referrals from their early adopters who really loved the product.

2014:  With that all-important proof-of-concept behind the business, it didn't take long for the venture capitalists to take notice, and Home Chef completed its first rounds of seed capital, closing $500,000 in July 2014 and a $500,000 in November 2014.  They used the proceeds from these rounds to prove out their paid marketing plan and economics, testing media buys in the search engines and in social media.  It was here they learned their cost of customer acquisition, their best promotional offers (e.g., get $30 of meals for free, if you refer us a friend, who will also be given $30 of free meals), their customer retention rates which drive lifetime customer revenues, which media sites performed better than others and how fast they could grow without hurting their business economics (e.g., no more than 10% new customers a month, relying on 90% returned customers each month).  And, they learned they would need to take the "long view" here, as three years of customer revenues would get them a 3x return on their marketing investment, which needed to be paid back in the first 6-9 months.  The company ended the year with a $1MM revenue run rate.

2015:  Marketing success in 2014 lead to more venture capital attention and monies coming in, raising $10MM in August 2015.  This is where they began to pour the gasoline on their marketing fire, accelerating both their customer referral program and their paid marketing efforts, still focused on the search engines and social media (primarily Facebook).  They learned social media was the key paid channel to focus on, as the industry was still new and people really weren't looking for "meal kit delivery" keywords yet in the search engines.  But, lets not forget, the great product was still driving a ton of free word-of-mouth business, which comprised over 50% of their new customers acquired.  The big increase in marketing spend, resulting in the business ending the year with a $20MM revenue run rate (up 20x in one year).

2016:  The huge lift in revenues had the venture capitalists frothy with excitement about Home Chef, and the company raised a whopping $40MM in August 2016.  Now, the marketing spend was increased to millions of dollars each year and their marketing team grew to 10 people.  The company tested new marketing channels to diversify their media mix and learned that customer acquisition costs per user rise by spending more in the same channels without diversifying the media mix, so they needed to turn the screws in terms of adding even more data-driven discipline to their efforts.  And, it paid off, as the company ended the year with a $200MM revenue run rate with only a modest impact to their marketing economic efficiency.

SCALING YOUR BACK-END FULFILLMENT TO HANDLE 10X GROWTH

Marketing was only part of the success story here, because what good is bringing in millions of new customers, if your back-end cannot support the growth.  The back-end for Home Chef primary means adding new kitchen and warehouse space to process the meal kits being ordered.  What started out as a 2,000 square foot test kitchen in Chicago from inception through September 2014, turned into an 8,000 square foot food processing facility in October 2014 and further expanded to a 50,000 square foot facility in July 2015.  Yes, that was two moves in just over a year, and all the distraction that comes with that.

The company considered adding new locations in the beginning of their growth, but again, to better control the business, they wanted to fine tune everything in one place first, to get their processes fine-tuned at scale.  Then, once they were comfortable they had the right fulfillment model, they began to export that model to new locations, adding a 70,000 square foot facility in California in March 2016 and a 120,000 square foot facility in Georgia in September 2016 (which is currently being expanded to 180,000 square feet).

This growth presented tons of challenges.  To preserve their desired process, they relocated key staff members from Chicago to get those new locations off the ground.  They needed to convince large landlords that Home Chef was worth backing for the long run, a startup that wasn't going to ultimately flame out.  And, in Pat's conservative approach, he would not open up new production facilities until he was 100% sure the sales volume was there to support it, so it had the old facilities running on overdrive, until the new facility could be opened to take the pressure off. Again, all of this expansion--growing to 300,000 square feet processing over 10 million meals a year across three locations--in only three years!!

MAKING SURE 10X GROWTH DOESN'T IMPACT YOUR CULTURE

If you thought growing your production capabilities was hard, imagine having to grow your workforce from zero to over 700 workers during this time, 150 of which in your headquarters.  All, in a way that doesn't negatively impact your desired "scrappy startup, customer centric" company culture.  Pat attributes his success here to a few things.  It was critical to get your initial hires (and subsquent hires) right.  Executives that weren't afraid to roll up their sleeves and lead by example.  Secondly, deal with growing pains as quickly as you can, so they don't last long.  And, thirdly, keep a relatively flat organization, without a lot of layers of middle-management.

IN CLOSING

It sort of takes your breath away, that you could build a business of this scale in just over three years.  And, with the company planning to at least triple revenues in 2017, this train is still just getting started.  A tip of my hat to Pat and the entire Home Chef team.  Yet another rising star in Chicago's exploding digital tech ecosystem.  So, now that we have the blueprint for scalable 10x growth that would have crippled most other businesses, let's do this thing for your businesses!!  Thanks again, Pat, for sharing your incredible story. Deep respect for what you have accomplished here, as I truly understand how hard it was to pull off.

For future posts, please follow me on Twitter at: @georgedeeb.




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