Supported by Greenhaven Road Capital, finding value off the beaten path.
Peter Rahal and Jared Smith founded RXBar in 2012 and sold to Kellogg in 2017 (for 650 million dollars). Rahal shared his story on the How I Built This Podcast and no podcast is the antithesis of 28 Lessons from Startups that Failed as this one.
Peter Rahal didn’t know he was dyslexic until late in his academic career. “From second grade to age twenty-two I just thought I was not successful.” Malcolm Gladwell suggested dyslexia was an advantage but I think it’s something different. Successful entrepreneurs are prosocial deviants. They want to dent the universe. They want to shape the future. They want to do something their way because they believe it’s better. It might be why many founders don’t like formal school.
Josh Wolfe does one better than ‘not liking formal school’.
There are ranges of tendencies that don’t help in K-12 school. In that setting they’re weaknesses, but for each weakness has a strength. Ben Thompson said, “I’m a strong believer that for anyone, their strengths are their weaknesses.” Think about where you live, Thompson explained. There are advantages to be in SF or DC or USA but there are disadvantages too, like insularity or biases.
Rahal guessed that dyslexics trend towards entrepreneurship because they tend to see the whole better and, “A lot of entry-level jobs require sequential thinking and I think that’s why you see a lot of entrepreneurs who are dyslexic.”
What does someone do if they can’t do some of the Level One job?
Rahal bounced around after college. He worked for a family friend. He went to Lebanon. He said about the time there, seeing his family’s history, “I had to be there. You gain a lot of empathy from seeing how people live.”
In early 2012, Rahal attended a class at his CrossFit gym. While there he wondered why they sold water and t-shirts but not protein bars. He told Inc.com, “The (bar) category was so competitive in places like Whole Foods,” but not at CrossFit.
He went home and tried a batch. The RXBar recipe includes dates and figs but was made with anger, hunger, entitlement, and a short temper. Peter Rahal was not complacent. He pitched his friends on the idea. He wanted to see what they thought, but he also needed help. “One of the advantages of being dyslexic is knowing very early in your life what you’re not good at. I knew I couldn’t do it by myself. I couldn’t do a lot and Jared (Smith) could balance me out.”
The RXBar team (neé Peter and Jared) started their market research. WholeFoods didn’t stock anything as simple, nutritious, or delicious. So Rahal and Smith fired up a red Cuisinart blender and got to work. It wasn’t any more difficult than making cookies.
The duo tinkered in Rahal’s parent’s basement and invested five thousand dollars each for supplies and raw materials. Their low overhead was essential, especially for a business with inventory. William Thorndike concluded, “There’s an apparent inverse correlation between the construction of elaborate new headquarter buildings and investor returns.”
Then there was the advice they got from Peter’s father. “I remember asking my dad, ‘Do you know any rich people you could connect me with?’ He’s old school, super traditional. He told me, ‘You need to shut the fuck up and sell a thousand bars.'”
So they did.
“I remember showing up at the CrossFit gym I was a member of with a Tupperware of this stuff all the time. I did this all the time. We collected data all the time. It was; ‘Do you like this? What about this?’ We just asked a ton of questions.”
Talking to your customers is essential.
Fellow HIBT guest, Ron Shaich did almost the same thing. Before he started with bread, Shaich sold cookies and like Rahal he beat the street asking people what parts they liked and what parts they didn’t. Listening to customers led to Panera Bread.
Tiffany Zhong said, “Anyone who does stuff in product, design, engineering, or wants to start their own company should know how to talk to and interview users or potential users.” Jenn Hyman bought one hundred dresses from Bloomingdales and hosted a pop-up event at Harvard. “The idea behind this was to see if: Women will rent dresses. What will they rent? How much will they pay?”
At CrossFit, people liked the bars. Rahal’s idea sprouted in August 2012 and with the first sale in March 2013 the seedling broke through the surface. Now it just had to survive.
They kept their costs low, designing packaging with PowerPoint. They assumed, hoped, and neglected the stability of the product. “In the early stages of business you can’t break the laws but you have to break the rules a little bit. We were eating it and we were fine.”
They kept selling the bars at CrossFit. They WANTED to sell the bars at CrossFit. “I think a lot of people look at niches and (think) it’s not big enough for them.” The strategy was to be in a CrossFit in Chicago before being in a grocery store in California. The early days were a combination of sales hustle and ingenuity to keep costs low. “Instead of moving to a kitchen we moved to my parent’s basement. Instead of going to a designer we used PowerPoint. Instead of going to a printer we went to Staples. Instead of a third party website designer, we went to Shopify.”
RXBar succeeded because technology allowed them to scale. All of the intangible parts; the software, website, marketing, etc. were enabled by software. Sam McBride was employee #4, (in 2018 he was the COO) and he said their early marketing was him laying in bed at night and sending Direct Messages to Instagram users asking if they’d ‘influence’ the product.
In his Talk at Google, McBride restated the simplicity of RXBar’s early business model. “The business was very simple; make bars and sell bars and that was basically it. In between, there hopefully was enough cash to buy raw materials to make more bars the next time.”
Sidenote: this situation is why Albert Wenger is so bullish on cryptocurrencies. When asked about the necessity of financing, “There’s one and only one answer that’s the correct answer, the timing of cash flows. You need financing if you need to pay people before you get paid.”
McBride had an unconventional path to RXBar. He knew Smith and Rahal but he joined the company because he sold his home security business in rural Kansas. Really? “This has become a filter for me. If any kind of early-stage company or product is not met with enough people that don’t get it or it’s not kind of uncomfortable or embarrassing to explain what you’re doing, then probably too many people are already doing it.”
Howard Marks suggested investors (and entrepreneurs) be different and be right. It’s easier to be different if you’re in a boring business. Michael Ovitz/CAA survived their early days thanks to their unglamorous, though lucrative, daytime television contracts.
Businesses succeed when they make something people want to buy. McBride said, “We were so close to the consumer; selling directly, taking their phone calls, emailing when they had problems, we knew that the packaging would work.”
This is why CrossFit was so important. People don’t call the 800 number on packaging but people will tell you between bites when something is delicious. As RXBar grew they included a phone number and the rule was one ring only said, McBride. Paul English did this at Kayak too.
Through luck and skill, RXBar did a lot of things right for the conditions of the day. Rahal said, “It was an interesting time in CrossFit because the idea of retail was just beginning.” Danny Meyer saw this too, “I would also have the good fortune of entering the restaurant industry during its fertile period of revolutionary change.”
Another helpful trend was online sales. Rahal explained, “When you’re selling online you’re collecting that cash.” McBride noted this too, saying that rather than net-60 terms they had net-1, immediate payment.
Another was online marketing. McBride’s home security business was direct to consumer and explained, “We couldn’t use influencers in the home security business but we could use influencers really effectively for food.”
But they still had to make the bars. They couldn’t keep up with demand from the kitchen basement so they moved to a co-packer. The first one didn’t work out and they had to dump $300,000 of inventory. They kept growing, selling, and making bars. Eventually, they outgrew the American date supply.
In November 2017 Kellogg purchased the company. “We wanted to do a 100 percent sale, because the process takes a shitload of time,” Rahal told Inc.com. It’s almost like he’s read Brent Beshore’s Messy Marketplace.
When asked about his success Rahal said:
“I’m very lucky to be born in the United States, to have my father and mother raise me like they did. I’m very lucky to have met Jared to have a humble partner to do this with. I’m very lucky this is the golden age for entrepreneurship in food. Talent has to be a variable but it doesn’t happen without good timing and luck.”
The sale to Kellog was a finish line for one part of the company’s life but the starting line for another. McBride told his audience that in the early days “We never sat down and wrote out our core values. They just sort of are what they are and everyone knows them.” That’s easy with four people. It’s harder with hundreds and McBride noted that they had to be more thoughtful around hiring as the company grew.
One part of the RXBar culture is clarity. “Super direct, totally transparent, and authentic,” McBride said. To emphasize the point McBride had his annual review at an all-hands meeting. “It was really effective conveying that being vulnerable is okay and that everybody’s got pretty decent-sized-weaknesses.”
RXBar is transitioning from selling and growing to strategizing and gathering. McBride explained:
“I think of it as a continuation from execution to strategy. In the early days, you’re like 95% execution and 5% strategy. You know where you’re going but all you’re doing is executing. But as the business grows you have to spend much more time on strategy because you’re driving a much larger organization towards a goal.”
Kellogs helps with this. Chris Dixon noted that there’s often a race between companies with good ideas and companies with users. Can the company with the ideas generate more users faster than the company with the users can generate good ideas? McBride said that Kellog, “brought a global perspective that would have been hard to build as fast as we needed to build it.”
RXBar is another example of Scott Adam’s slot machine approach. The company was a longshot and in an alternate history was not the category winner. But it this one they were and that happened because Rahal attempted it. That’s a good lesson early into 2019, to make the attempt.
Thanks for reading.