20VC The Memo Scaling to $600M Revenues with No Venture Funding, The Most In Detail Breakdown of Consumer Subscription Unit Economics & Why D2C and Consumer Subscription is Not a VC Backable Model with Mike Salguero, Founder @ ButcherBox

In this episode of 20 VC, host Harry Stebbings interviews Mike Salguero, founder and CEO of ButcherBox, discussing the company's journey to $600 million in revenue without venture capital. They delve into the challenges of direct-to-consumer (DTC) models, the importance of brand marketing versus measurable marketing spend, and the strategy behind ButcherBox's growth. Salguero shares personal insights on his fear of abandonment, its impact on his leadership, and his approach to hiring and firing. The conversation touches on the meat industry's ethical issues, the potential effects of a recession on ButcherBox, and Salguero's perspective on the future of the company and his role in it. Additionally, they explore the current state of the DTC market, the effectiveness of influencer marketing, and Salguero's reluctance to sell secondary shares, maintaining majority ownership in ButcherBox.

• Direct-to-consumer (DTC) acquisition channels are becoming less effective.
• Brand marketing budgets are significant, with Speaker A mentioning an expenditure of $8.5 million.
• Running a DTC business is currently challenging, raising skepticism about its viability for venture capital (VC) investment.

"The biggest problem is the no brainer acquisition channels have really dried up. Last year we spent eight and a half million dollars on brand marketing. It's a really tough time to be running d to c right now. I'm not sure it's a vc backable model."

This quote highlights the difficulties faced by DTC businesses in acquiring customers and the high costs associated with brand marketing, casting doubt on their attractiveness to VC investors.

• ButcherBox's success as a bootstrapped company is notable, reaching $600 million in revenue without VC funding.
• A call for suggestions on Twitter for a bootstrapped company to feature led to over 100 recommendations for ButcherBox.
• ButcherBox has grown to 215 employees, becoming a national leader in its market.

"They're now at $600 million in revenue. The national leader, 215 employees, and all with no venture capital."

The success of ButcherBox is emphasized by its large revenue and employee count, achieved without the assistance of venture capital, which is often considered essential for hypergrowth.

• Sana is introduced as an AI-powered platform for company knowledge integration and sharing.
• It can search through company files and documents quickly and is capable of content generation in multiple languages.
• Sana has secured significant funding and offers various AI-assisted functionalities for businesses.

"Sana is an aipowered learning and knowledge sharing platform. Think of it like Chat GPT, but for all your company's knowledge, Sauna integrates with all of your company's apps in under 5 minutes..."

This quote describes Sana as a comprehensive AI solution for corporate knowledge management, emphasizing its integration capabilities and speed.

• Marketer Hire is a platform for hiring pre-vetted marketing professionals.
• It boasts a high quality of talent, with a rigorous acceptance rate of less than 3%.
• The platform serves a wide range of customers, from startups to Fortune 500 companies.

"The quality of talent on the platform is insanely good. Check this out. Less than 3% of marketers who apply are accepted onto the platform..."

This quote stresses the exceptional quality of marketing professionals available through Marketer Hire, indicating its stringent selection process.

• HMC manages Harvard University's endowment and was an early institutional investor in venture capital.
• They offer partnership opportunities to both new and established fund managers and entrepreneurs.
• HMC is described as providing support and insightful perspectives to help business managers succeed.

"Harvard Management Company is constantly seeking out the next generation of great investors and entrepreneurs."

The quote indicates HMC's proactive approach to identifying and supporting future leaders in investment and entrepreneurship.

• Speaker A reflects on the influence of their past, particularly the absence of a father, on their personal and professional life.
• They discuss the importance of acknowledging and confronting past fears and emotions rather than avoiding them.
• Leadership challenges include the struggle to advocate for oneself and the tendency to be overly accommodating due to fear of abandonment.

"Whereas in the past I've run from those emotions and run from my past, my work now is kind of to sit there and take it and to notice and allow and feel the feelings in my body and then let them be."

The quote conveys Speaker A's personal growth strategy of facing and processing emotions directly, which has implications for their leadership style and interpersonal relationships.

• Speaker A talks about the inevitability of employee turnover and the goal to ensure a positive impact on employees' careers.
• They address the challenges of overestimating an employee's capabilities and the importance of open communication.
• The concept of a "useful life meter" is introduced to assess when to invest in an employee's development or to part ways.

"Your job as the leader is to figure out when people's like old parking meters. When their parking meter is down in the red, you want to throw another quarter in it..."

This metaphor illustrates the leader's responsibility to determine the appropriate time to further invest in an employee's growth or to recognize when their contribution may be diminishing.

• Speaker A shares an anecdote about a significant hiring mistake involving failure to conduct a background check.
• They discuss the common issue of candidates not understanding equity in compensation packages.
• Red flags in compensation negotiation include fixation on titles and reporting structures.

"It turned out a sandwich. It turns out that when you hire people, it's a really good practice to run a background check on them."

This cautionary tale emphasizes the importance of due diligence in the hiring process to avoid serious oversights and potential legal issues.

• Speaker A challenges the traditional emphasis on detailed business plans, advocating for a focus on lifestyle design and adaptability.
• They argue that many entrepreneurs chase a lifestyle rather than a specific business model.
• The conversation touches on the unpredictability of life and business, suggesting that rigid plans may not align with future realities.

"What I find most people do is they spend a whole bunch of time on the idea, like the business plan... And usually you can't really foresee what the future looks like."

Speaker A questions the value of extensive business planning when the future is inherently uncertain and encourages entrepreneurs to consider their desired lifestyle when starting a business.

• ButcherBox's operational strategy involves partnering with experienced companies rather than owning every aspect of the supply chain.
• Speaker A argues against the common practice of internalizing functions to improve margins, focusing instead on partnerships and operational excellence.
• They discuss the importance of reducing waste and continuously improving operations, even in seemingly minor details.

"We don't own our backbone, so we don't own the farms, we don't own the slaughterhouses, we don't own the cutting facilities, we don't own the distribution centers. We don't own last mile shipping. We don't own customer service."

This quote outlines ButcherBox's approach to operations, highlighting their reliance on partnerships and external expertise as opposed to owning and managing every step of the process.

• Speaker A discusses the significance of managing yields and other operational details to improve margins.
• They emphasize the need for bootstrapped companies to focus on margin improvement in all areas, including negotiating supply costs and optimizing operational processes.
• The discussion includes the potential for margin expansion by internalizing certain functions, but also the benefits of remaining focused on core competencies.

"The difference between 7% and 6%, or 7% and 4% is massive numbers... And it's just like, literally being like, hey, we've now decided we're going to weigh this stuff and you're off by 10%. Please fix it."

This quote illustrates the impact that small operational improvements can have on margins and the bottom line, emphasizing the importance of attention to detail in cost management.

• Speaker A contrasts the expectations of VCs with the reality of bootstrapping a business.
• They acknowledge the commitment required when accepting VC funding and the implications for lifestyle design.
• The discussion suggests that entrepreneurs should be aware of the paths available to them and choose accordingly based on their goals and vision.

"I think if you are hopping on the VC train, you need to understand that the train that you're hopping on is not one that you can get off of."

Speaker A warns entrepreneurs about the long-term commitment and potential loss of flexibility associated with accepting venture capital, advising careful consideration before taking that route.## Venture Capital and Entrepreneurship

• Entrepreneurs should not raise funds just because it's a common practice; they should have a clear need and strategy.
• Raising funds early can lead to a lack of focus on optimizing costs and improving margins.
• Constraints can be beneficial; they force entrepreneurs to be resourceful and efficient.
• Startups should be cautious about getting on the "VC train" without a clear understanding of why they need the capital.

"Just make sure you're not doing it because everyone else raises. So why don't we?"

This quote emphasizes the importance of raising funds for the right reasons and not just following a trend.

• Constraints such as limited runway can lead to innovation and better financial discipline.
• Early-stage companies with too much capital may neglect cost optimization.
• Constraints can lead to a focus on key financial metrics like customer acquisition cost (CAC) and lifetime value (LTV).

"That's because you had the constraint of Runway, because you had no money."

This quote highlights how financial constraints can drive a more disciplined approach to business growth.

• Key metrics for subscription businesses include customer acquisition cost (CAC) and gross profit over time.
• A good ratio between CAC and LTV is crucial for sustainable growth.
• Entrepreneurs should focus on delighting customers and improving operational efficiency rather than just increasing prices.
• Incremental improvements in cost savings can be reinvested in marketing to sustain customer acquisition as CAC rises.

"It's customer acquisition cost. And then there's what's called lifetime value, but really is gross profit, dollars over time."

This quote explains the fundamental financial metrics that subscription businesses should focus on.

• CAC tends to increase over time as a company exhausts its pool of early adopters.
• To continue growing, companies may need to invest in creating demand rather than just capturing existing demand.
• Effective marketing strategies, like influencer campaigns, can target specific customer segments to optimize CAC.

"And so over time, you see these businesses, CPA goes up and up and up and up."

This quote discusses the natural progression of rising CAC as a business scales and targets new customer segments.

• Blended CAC is a simple way to measure overall marketing efficiency.
• An accurate attribution model is difficult to achieve due to multiple customer touchpoints.
• Founders should start with basic calculations and adapt as they gain more insight into their marketing spend.

"No, just divide by the number of people that you signed up and that's your number."

This quote suggests a straightforward method for calculating CAC, emphasizing simplicity over complexity.

• Start with small, inexpensive tests across different marketing channels.
• Scale efforts in channels that show promise, gradually increasing investment.
• Focus on one channel until it is optimized before moving to explore additional channels.
• Early-stage companies should be cautious about spreading resources too thin across multiple channels.

"Time to build a rig. But don't build a huge rig."

This quote uses the analogy of oil wildcatting to illustrate the importance of scaling marketing efforts cautiously and based on evidence of success.

• Influencer marketing can be a cost-effective strategy for customer acquisition.
• Affiliate programs align incentives between the company and influencers, creating a sustainable marketing channel.
• Early-stage companies with limited budgets can benefit from performance-based payment structures.

"We didn't even move to really anything else for two years because it was so fertile and such a big market."

This quote reflects on the effectiveness of focusing on a single, fruitful marketing channel before diversifying.

• Higher margins allow for more aggressive customer acquisition spending.
• Startups should aim to be profitable on the first box shipped (box one profitable) to ensure financial sustainability.
• As companies grow, they may accept longer payback periods based on a better understanding of their customer cohorts.

"The higher the margin that you have, the more you can spend to acquire that customer."

This quote explains the relationship between margin and the ability to spend on customer acquisition.

• The first few months are critical for reducing churn in subscription businesses.
• Strategies to reduce churn include empowering customers, offering value, and being transparent about subscription terms.
• Understanding churn patterns can inform customer service and marketing strategies.

"If you get them through that first 90 day hump, you have a customer who will stay with you for a very long time."

This quote underscores the importance of the initial period in a customer's lifecycle for long-term retention.

• Offering well-priced deals can increase AOV by encouraging customers to add more items to their orders.
• Aligning AOV expansion strategies with customer interests can lead to more sustainable growth.
• Understanding customer behavior and preferences is key to effectively increasing AOV.

"What's great is what's worked is also very much in alignment with what our customer is looking for."

This quote highlights the importance of aligning business strategies with customer needs to increase AOV successfully.## Pricing Power and Scale

• Pricing power is crucial for businesses as it allows them to offer better value to customers.
• With scale, costs per meat cut decrease significantly due to improved efficiency and logistics.
• Larger quantities lead to lower prices for meat cuts and other related costs like distribution.
• Distribution centers and transportation costs become more efficient with scale.
• The cost of packaging materials decreases with larger volume orders.

"Businesses that I love are those that have pricing power with scale."

This quote emphasizes the importance of businesses being able to increase their pricing power as they grow in scale, making operations more efficient and potentially increasing profitability.

"So meat is all about efficiency."

The quote explains that the meat industry's costs are highly dependent on the efficiency of operations, which improves with scale, leading to reduced costs for meat processing.

"It's amazing what people who know what they're doing can actually do to the business."

This quote highlights the impact that expertise can have on a business, particularly in the context of purchasing and logistics, where the right knowledge can lead to substantial cost savings.

• The health of customer cohorts is crucial for subscription-based businesses.
• Referral cohorts and influencer-related customers tend to be the best in terms of performance.
• Referral customers typically order more and stay longer than other types of customers.
• Understanding and segmenting customer cohorts can lead to better treatment and retention strategies.
• The company acknowledges a lack of sophistication in measuring and optimizing cohort health.

"We know that the best cohorts that we can get are referral cohorts."

This quote indicates that referral cohorts have shown to be the most beneficial for the company, suggesting that current customers referring new ones leads to higher value customers.

"Referral customers tend to perform really well."

The quote supports the previous point by specifying that referral customers not only bring in additional revenue but also have a longer retention rate.

• There is skepticism regarding the sustainability of DTC companies funded heavily by venture capital.
• Successful influencer marketing is becoming more challenging as influencers create their own products.
• The conversation critiques the DTC model and venture capital funding, using examples like Allbirds and Warby Parker.
• The effectiveness of traditional acquisition channels is questioned, with a shift toward creator/influencer marketing.

"Have a generation of VCs just burnt a load of VC money on these D to C companies."

This quote questions the effectiveness of venture capital investments in DTC companies, implying that there may have been a misallocation of funds in the sector.

"It's amazing. I love that."

The speaker expresses enthusiasm for creative marketing ideas, which suggests that thinking outside the box could be a better strategy for brand marketing than traditional methods.

• The company has had mixed experiences with brand marketing, questioning its measurable return on investment.
• There is a discussion about the potential for creative and unconventional marketing strategies.
• The company has shifted from traditional marketing channels to more innovative and cost-effective strategies.
• The effectiveness of different marketing channels is debated, with some like out-of-home advertising performing poorly.

"Last year, we spent eight and a half million dollars on brand marketing."

This quote reveals the significant investment made in brand marketing and the speaker's skepticism about its effectiveness due to the difficulty in measuring returns.

"That's amazing. That's a good idea."

The speaker's response to a creative marketing suggestion implies that innovative and potentially viral marketing strategies are being considered as alternatives to traditional brand marketing.

• There is a discussion about the pitfalls of over-customization and insourcing in the DTC space.
• The company has learned from the mistakes of others, like Blue Apron, and has focused on avoiding unnecessary complexity in operations.
• Resource allocation mistakes, such as excessive spending on brand marketing, are acknowledged.
• The conversation highlights the importance of focusing on core competencies and outsourcing when appropriate.

"A lot of founders try to boil the ocean really fast by worrying about everything at the same time."

This quote suggests that founders often make the mistake of trying to do too much too quickly, which can lead to inefficiency and a lack of focus on what truly matters for the business.

"It seems like that D to C model of like, we need to own it all ourselves and insource it. It doesn't work."

The speaker reflects on the direct-to-consumer model and the trend of insourcing, concluding that complete ownership and control over every aspect of the business may not be the most effective approach.

• The company has experienced significant growth without venture capital funding.
• There is a preference for slow, sustainable growth rather than rapid expansion fueled by outside investment.
• The conversation includes a critique of the venture capital model for consumer subscription businesses.
• The company is open to acquiring distressed subscription businesses, especially in the perishable shipment space.

"The number of people who have told me that we would be growing faster if I took venture over the past, like five or six years, although I've just been a broken record of, like, not interested, not interested."

This quote indicates the speaker's resistance to venture capital funding and their belief in a different growth model for their company.

"Yes, we are a buyer. We would love to find distressed subscription, ideally perishable shipment businesses."

The speaker expresses an interest in acquiring other businesses that may be struggling, particularly those in the subscription and perishable goods space, indicating a strategic approach to growth.

• The company's early equity distribution strategy was generous, leading to widespread ownership among early employees.
• Share buybacks have been used to allow employees to realize some financial benefit from their equity.
• The company has avoided selling secondary shares to external investors to maintain control and avoid external pressure.
• The speaker's personal experience with raising capital has influenced the company's approach to funding and ownership.

"Everyone gets equity to date. Like, virtually everyone has equity."

This quote demonstrates the company's philosophy of widespread equity distribution, which has been a part of its culture since the beginning.

"We create this company, and again, we didn't raise money, but my early people, I gave away equity like candy."

The speaker reflects on the early days of the company and how equity was used as a tool to engage and reward early contributors, though later recognizing it may have been overly generous.## Impact on Meat Industry

• The speaker believes they can impact the broken meat industry.
• They discuss the potential of transforming an industry in need of disruption.

You sell the thing at the very moment where it's starting to deliver the things that you always dreamed of. For what?

This quote reflects the speaker's reluctance to sell their business just as it begins to achieve its transformative potential.

• Skills gained in DTC (direct-to-consumer) subscription models, such as ButcherBox, are somewhat transferable to other subscription-based products.
• The speaker has experience advising companies that are not perishable but still subscription-based.

I do a lot of investing and advising in companies that are not perishable, but are some sort of subscription. And turns out I can be pretty helpful.

The quote indicates the speaker's confidence in applying their expertise in subscription-based business models across various sectors.

• The DTC economy is experiencing difficulties, with distressed companies emerging post-COVID.
• Many companies are trying to tighten their belts and are generally smaller than they were before.

And I do believe that the DTC economy is kind of falling apart right now. It already has or is about to.

This quote highlights the speaker's perspective on the current instability and decline of the DTC market.

• During a recession, people tend to downgrade in terms of meat quality due to financial constraints.
• Data shows a willingness to trade down on claims about how meat is raised.
• ButcherBox has not seen a significant customer loss; instead, customers see value in cooking quality meat at home.

The only thing we have to look at is like 2007, 2008 in general, when there is a recession, people, in terms of the meat quality that they're looking for, they're willing to take a step down in the quality of meat.

This quote explains the consumer behavior during economic downturns, where they opt for lower-quality options to save money.

• The speaker agrees with vegetarians and vegans that the meat industry is problematic.
• ButcherBox aims to provide meat that consumers don't feel guilty about eating by focusing on animal welfare and environmental impact.

What I like to say, we agree with vegetarians and vegans. I agree. The main complaint is that the meat industry is broken.

The quote shows the speaker's acknowledgment of the issues within the meat industry and their company's alignment with some values held by vegetarians and vegans.

• There's a lack of third-party auditing for worker welfare in the meat industry.
• Consumers generally prioritize their own needs, animal welfare, and the environment over the welfare of workers and farmers.

There's nobody in this country that I can hire to go in and third party audit these facilities.

This quote points to the absence of systems for monitoring worker welfare within the meat industry, which the speaker sees as a significant issue.

• Freezing meat, especially grass-fed beef, can improve tenderness and quality.
• Frozen meat reduces food waste as it can be stored for a long time without degrading in quality.

What happens in the freezing process, especially with grass fed beef... you can actually break down some of those cellular walls and make a more tender product.

The quote clarifies a common misconception about frozen meat and explains the benefits of the freezing process.

• The speaker disagrees with the notion that one must work non-stop to be successful in startups.
• There's a critique of the excessive work culture often glorified in the startup world.

You're not working hard enough if you're not working 365 days. Twenty four seven.

This quote challenges the unhealthy expectation of constant work in the startup industry.

• The speaker has embraced fasting as part of their lifestyle.
• They have addressed personal fears, such as fear of abandonment, through therapy and self-discovery.

Have really? As we talked about at the beginning, I've held a lot of fear of abandonment my whole life and I've actually come to grips with that quite a bit.

The quote reveals the speaker's personal journey and the emotional work they have undertaken to overcome personal challenges.

• Trump's policies, particularly tax policies, were beneficial for the speaker's business.
• However, the overall impact of Trump's presidency is seen as negative due to social unrest and distraction.

Some of Trump's policies, certainly on the tax side, were very helpful for the business.

The quote acknowledges the positive financial impact of certain policies on the business while also recognizing broader negative implications.

• The speaker has ambitions to grow the business to a billion dollars in revenue.
• They anticipate a shift in their role from day-to-day operations to potentially working on something else.

So I'm really in the. With this idea of running this to a billion dollars in revenue also, I think at a certain point, I'm probably not going to be the guy running this on a day to day basis.

This quote outlines the speaker's long-term vision for the business and their personal career trajectory.