Welcome to Scaled and Failed! My name’s Amil Naik and I’m an aspiring VC and founder at The University of Texas at Austin. I write about startups that scaled and startups that failed to draw insights about the patterns of startup failure and how to avoid them. Everything is clearer in hindsight, so it’s worth looking back.
If you haven’t subscribed already, do it here:
TLDR
Today’s Topic: Chocolate
Scaled: Mid-Day Squares; Incredible hustle and documentation of the company’s journey for consumers to engage with on social media has led to a loyal following, well-developed brand, and strong growth.
Failed: Hey Tiger; Several lofty objectives and a business well developed before true product-market fit led to no path for sustainable scaling towards profitability without compromising on the company’s values.
Lessons Learned: Unorthodox growth hacking that meets consumers on their terms and provides real value through content is an awesome way to promote a CPG business. Building a whole business before testing MVPs in a limited scope to determine viability can lead to a larger failure down the line.
Today’s Topic: Chocolate
Few treats bring people across the globe as much delight as chocolate. With a market size of over $200B, it’s hard to deny people enjoy indulging in chocolate often. From giants like Hershey’s to smaller, local brands, there is no shortage of it either. Unfortunately, the industry and most major manufacturers in it are reliant on child labor and slavery in West Africa to maintain their supply chains, facing few consequences. Promises of slave-free chocolate from “Big Cocoa” have been made and broken over the years, but there are smaller brands that have successfully established an ethical supply chain.
Mid-Day Squares got its start several years ago in Canada and has caught attention for turning down an acquisition offer from Hershey’s and its unorthodox marketing on Instagram featuring the day-to-day of building the business. Hey Tiger was a social enterprise dedicated to selling ethically sourced, handmade luxury chocolate with part of each sale going towards charity. Facing difficulty scaling towards profitability, it shut its doors earlier this year. Both companies are serious outliers in the chocolate industry that showed strong promise but had very different outcomes.
Scale: Mid-Day Squares
Mid-Day Squares kicked off its journey in Canada 3 years ago in 2018, with much of it captured on Instagram (@middaysquares). Founder and CEO Lezlie Karls Saltarelli developed the signature Mid-Day Square as a protein chocolate bar snack that her husband, COO Nick Saltarelli, would enjoy. They were set on starting a company together, but it was some time before they realized that this chocolate would be the basis for that business rather than another idea. The duo later brought in Lezlie’s brother (after months of persuasion), Jake Karls, to help build the brand. The raw, honest depiction of entrepreneurship through social media was his idea for promoting Mid-Day Squares and building a community around it. Some of the company’s first hires were media professionals and a videographer to capture the story and put it out there for customers to connect with. The months up until launch centered on perfecting the recipe. The bar for quality was high from the beginning: no preservatives, gluten-free, vegan, dairy-free, and plenty of other health-conscious product decisions have been at the center of Mid-Day Squares’ brand and story-telling.
Just a few weeks before launch, Jake Karls was finally convinced to join as a cofounder and set to work immediately on creating value through their story on camera. His strategy was to make a lot of noise through social media, a podcast, and other platforms to get attention and then let the product do the work once eyes were on the startup:
Get yourself and the product out there. If you have a solid product to back up your noise, then you’ll grow.
In the beginning, the bars were being produced in the team’s condo. They knew they’d come to hate the space the longer they worked out of there, which Karls said provided them the incentive to hustle and grow out of it as fast as possible. To drum up demand, they provided a sample program through their website for 25 cents per bar; the small amount of money paid was meant to drive commitment. The strategy worked, as MDS sold 2,000 bars within 10 days of their official launch. To connect better with customers, get data to improve the product, and convert consumers into MDS evangelists, the founders hand-delivered each order accompanied with eccentric Polaroid photos of the team dressed up while making the bars and hand-written messages. Strategies like this and the charisma of the founding team won the hearts of their early customers, sending these consumers to social media to praise MDS. Demand continued to grow rapidly, and within 2 months MDS had outgrown the condo office and hand-delivery.
MDS’ next step was a real production facility that they moved operations into by the end of 2018. From availability in 45 retail locations at the time of the shift to 125 by January of 2019, demand warranted a full production team to staff the facility along with support staff for the rest of the business functions. By summer, MDS had its products sold in stores from coast to coast in Canada in addition to online. As MDS scaled, it faced new challenges: malfunctioning temperature regulation in ingredient storage rooms, cramped offices as a result of ingredients being relocated, fridges breaking down, mold in the facility halting production, shortages of key ingredients, and the death of an early team member. Despite these setbacks, the MDS team hustled and overcame, succeeding in raising a $3.4M Series A round near the end of 2019.
With that capital, MDS was able to retrofit a larger, better production facility with the machinery they needed and move once again. The team explored co-packing facilities, but found none could meet the requirements for their complex products; they decided to continue to own their manufacturing as they scaled further. In pursuit of efficiency, they also took much of 2020 to install various automated machinery to speed up the production process. Business was booming, with the year’s sales reaching $3.3M. 2021 is also shaping up to be an explosive year for MDS: a $4M Series B funding to support a US launch (they’re already in Sprouts in the US if you want to grab a bar), a denied acquisition offer from Hershey’s in March, and projections of $10M in revenue for the year. In an uncommon move for food CPG companies, MDS is seeking an IPO (in the footsteps of Oatly). The reason? So that MDS can tell its story on its own terms rather than be censored by a larger corporation and lose its brand following an acquisition. From the beginning to the present, from the core to the surface, MDS is unapologetically unorthodox and honest; and they’re absolutely killing it.
Fail: Hey Tiger
Across the Pacific (I seem to end up in Australia often), entrepreneur Cyan Ta’eed, cofounder of Envato, was building her own chocolate company in 2018. Aware of the many problems prevalent in the chocolate industry described in the introduction, Hey Tiger was built to be an ethically sourced, hand-made luxury chocolate brand with a large collection of interesting flavors that donated part of each sale to a charity called The Hunger Project. Ta’eed funded the startup herself to start, with $500,000 from her own pocket paying salaries, research, packaging, and initial inventory. Hey Tiger pursued many interesting marketing campaigns of its own, ranging from celebrity collaborations on flavors to having artists design special packaging for holidays.
The traction Hey Tiger saw wasn’t abysmal: over 700,000 bars were sold with around $3M of product moved each year it operated. It had its small, loyal following but wasn’t able to grow beyond that scale. At the core of the shutdown in May of this year was the struggle in scaling towards profitability and the conflict between what was the best for business and best for mission-driven impact. Had Hey Tiger compromised on its fundamental values of ethical sourcing or its continued donations to grow, it would have been much easier to become financially viable. To Ta’eed, that would be a failure as well for the social enterprise. Hey Tiger did a lot to raise awareness about the problems in the chocolate industry and did donate $400,000 to The Hunger Project over its three-year run. These small wins ultimately did not translate to the growth needed to validate the business.
Lessons Learned
Mid-Day Squares is one of the best examples of the mantra “do things that don’t scale” repeated to early-stage founders. They hustled and wore every hat to drive the business further and were brutally honest about how difficult it was to be a founder in their marketing. That humanized them and made the story feel real to their customers, pushing their popularity higher. MDS’ growth hacking techniques were incredible; I only listened to their podcasts and watched their Instagram content to research for this article, and it wasn’t long before I felt like I was a part of the community. I tracked down and bought some bars this week just because of how real the brand felt to me, and the product’s taste validated my feelings for MDS (Fudge Yah is a great flavor). Seeing how well it worked on me, I can see how its consumer-oriented media strategy of storytelling has been a huge factor in the company’s success. Increasingly, consumer products demand engagement and connection to incentivize the consumer. Coupons, SEO, and other old strategies are important, but social-media-savvy consumers want to be met on their level without feeling like they’re just being sold to. Real content is important, and MDS has delivered an unfiltered experience that delivers value in the lessons it tells about entrepreneurship. While old-school enterprises have many years of history and are the standard household names, the same tactics that help them maintain their presence at scale won’t work for a food CPG startup. Connect with your audience on their terms and bring more to the table than an ad or discount; the intrinsic content value will drive presence and sales farther than anything else today.
Hey Tiger fell into the False Start pattern of failure with how quickly it developed its entire business. The wide variety of flavors, artist and celebrity collaborations (MDS never had these and resonated with its customers much better), and the funding available from the start delivered much of Hey Tiger’s potential quickly, but the problems with scalability could’ve been discovered with a smaller product line and launch over a shorter period. Behind the scaling towards profitability challenge lay the many objectives of Hey Tiger’s fully realized vision, all executed from the start. Ethically sourced chocolate, donations to charity for each sale, and an extremely wide and complex product line are tough to pull off all at once early in a company’s life. Any one of these alone would be much easier to align with (and ethically sourced chocolate seemed to be the most important for the social enterprise’s mission). Even if Hey Tiger couldn’t scale its business focusing on just one major objective, at least it would’ve identified what made the logistics impossible and failed faster. And if it could sustainably scale focusing on one goal, there would be nothing stopping the company from expanding its vision in the future as it secured its footing. Focus is hard enough to drive with a succinct mission; don’t divide attention during the early stages and keep your eyes on what’s most critical. Experiment with MVPs and a limited business model to find product-market fit before developing everything you envision. If your product doesn’t resonate, you can go back to the drawing board until it does.
More Reads and Info
Thanks for reading! Anyone else really hate Hershey’s chocolate? I think the best way to describe the taste is “dusty.” If you found this interesting, consider sharing it with friends and subscribing if you haven’t already!
Cheers,
Amil