Your editor has been busy with field research in recent days. The week after Thanksgiving seemed to be an ideal time for every tech organization’s last big meeting of the year, and the calendar was full.
A highlight was the Demo Day of the 1 Semester Startup class, henceforth to be branded as Longhorn Startup Lab. Enterprising student leader Nick Spiller arranged for the appearance of the Texas Spirit, a group including cheerleaders and the Pom Girls pictured in the photo above. I put this photo on Facebook, and I’d like to thank all those who mentioned how good I look. (That’s like imagining my beloved North Georgia cousins at my funeral saying: “Don’t he look natural!) By the way, Nick is the leftmost guy in the photo.
Rony Kahan, CEO and co-founder of Indeed, delivered a keynote talk about his experience in starting and growing that company rather quietly to an exit of approximately $1B this year. He created a Google-like service for searching for jobs across all the listings sites, company job postings, and other sources. If there’s a main takeaway from his remarks, it’s the merit of focus combined with attention to detail. The company stayed very true to its mission over the years until it captured a huge worldwide market share and assembled about 600 employees in multiple offices across the planet. Kahan remarked that the company is constantly running perhaps 100 A/B tests on its offerings and sifting out the small percentage that show promise. And, only after conquering its main goal of being the single source for job listings did the business pursue natural line extensions like resume databases and direct job postings.
The presentations by the 11 undergraduate student teams that concluded the program showed both the progress made by this UT course in its third outing and the considerable polishing of the presentations from practice sessions I saw as recently as 3 weeks ago. There was a range of ideas from web or mobile-based services to marketplaces for html5 games and for investing algorithms to a Facebook app for tutoring and to a 3D printing technology that won the “shiny object” category hands down. Congratulations are due to the student teams, their mentors, and faculty leaders Bob Metcalfe and Josh Baer. Next semester the Lab will be augmented by parallel programs for entrepreneurial professors and a subset of the course for students not yet ready to form companies but wanting to attend the lectures only. I know for a fact that the work being done here is influencing similar concepts at other universities around the country, which is a good thing.
Speaking of cheers, another highlight of the week was a presentation by Deep Eddy Vodka CEO and co-founder Clayton Christopher at the Open Angel Network. A local star like Kahan, he had a previous highly successful venture Sweet Leaf Tea which he sold to Nestle. His interest is Consumer Packaged Goods, not tech deals, per se, but much of the advice he offered is applicable to all startups.
Christopher likes the CPG space and pointed out that all 5 ventures that participated in Austin’s first iteration of Incubation Station got funded and seem likely to be around for years to come. He described CPG deals as having lower risk, capable of being launched and perfected with relatively little capital, easy to analyze (particularly given that you can actually taste many of them), and very appetizing to strategic partners. (Sorry had to sneak in one pun.)
But, as with Kahan of Indeed, he preached the virtue of focus. He launched Sweet Leaf Tea in a small market (Beaumont) where he could start “narrow and deep.” It’s about getting distribution and creating a “love affair with consumers” in one area and then replicating from there. Austin, for example, is then a great place to expand new food and beverage products, given the presence of the Whole Foods mother ship, its pricing power, and the general foodie/health inclinations of the populace. At that expansion stage is where more significant capital can be deployed.
As to the metrics of these CPG deals, Christopher said these companies must have a “line of sight” to at least $20M in revenue, which is the minimum threshold for an exit. Generally $5-10M in growth capital leads to $50M in revenue. At that level there are plenty of potential M&A opportunities. These are the opposite of the tech “acqui-hires” we read about. In CPG deals, if you’ve created a brand with a loyal following and have built some fences around your IP, a major player just wants those elements and not your people. Nestle bought Sweet Leaf Tea after first being a strategic investor, and a company of that size already has the resources to manufacture, market and distribute your concept. Their valuation of the company will be solely based on net revenue that can be transferred to them and not on standalone operating numbers like EBITDA.
Christopher made many other interesting observations, but one in particular that stood out is that packaging has the highest ROI of any form of marketing in the CPG world. I can attest to that from my Peachtree Software days, where we in fact sold a product that was beautifully packaged and appeared on shelves. That company prospers today as part of Sage in no small measure due to our early branding that, as Christopher said: “turns a commodity into an experience.”