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For the exclusive use of E. Dako, 2020.

BAB242 / SEPTEMBER 2016

Balanced Snacking In a small apartment in Santa Monica, California, Gautam Gupta and Ken Chen found themselves at a crossroads. “Do we pursue this business idea or call it quits?” They had just finished running a simple experiment to test the willingness of the market to adopt their new business idea—healthy snacking, direct to the consumer. Using Facebook to launch an advertisement, the pair sat back and waited to see what the public had to say. Much to their surprise, they now faced the task of fulfilling over 100 orders. Excitement gripped the two, but reality quickly set in.

The Beginning Gupta started his entrepreneurial journey as a child in Orange County, California. Growing up, he was uninterested in sports and struggled with his weight. In lieu of time spent playing outdoors, he began trying to hustle different products on the playground. What started with selling pencils in second grade grew to selling candy and other items that might interest his classmates. In high school, he continued his journey by creating mix tapes of popular music and selling them to peers. Throughout school, he was an average student; he found far more validation in entrepreneurial rather than academic endeavors. Gupta’s entrepreneurial aspirations were largely influenced by his family. Both of his grandfathers had started companies in the steel industry of India. His mother worked for Silicon Valley Bank, which actively supported early-stage entrepreneurial companies. His father worked in the technology industry. Family conversations were always about business and opportunities.

College Years Based on his entrepreneurial aspirations, Gupta chose to attend Babson College, which immersed him in entrepreneurship. While coursework deepened his knowledge, extracurricular opportunities such as the entrepreneurship affinity dormitory E-tower, which grouped likeminded students together, were a huge influence. He explained the effect of the college. “Life at This case was prepared by Andrew Zacharakis, John H. Muller Chair in Entrepreneurship at Babson College, Eric Berglind, Babson MBA 2016, and with support from the John H. Muller, Jr., Endowed Chair in Entrepreneurship at Babson College. It was developed as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. It is not intended to serve as an endorsement, source of primary data or illustration of effective or ineffective management. Copyright © 2016 Babson College and licensed for publication to Harvard Business School Publishing. All rights reserved. No part of this publication can be reproduced, stored or transmitted in any form or by any means without prior written permission of Babson College.

This document is authorized for use only by Emilio Dako in COMM320 - Additional Cases taught by Ronald Abraira, Concordia University - Canada from Aug 2020 to Feb 2021.

For the exclusive use of E. Dako, 2020. Balanced Snacking BAB242 / SEPTEMBER 2016

Babson reinforced my entrepreneurial aspirations. All the businesses I started as a kid were fun, but at Babson I realized I could do something much bigger. Not only were the classes focused on entrepreneurship, but everyone at the school was talking about starting a business.” E-Tower and other Babson student organizations provided resources for entrepreneurs including networking, conferences, speaker series, and mentorship. A key event that helped shape Gupta’s experience was the annual rocket pitch where students and alumni gave a threeminute business pitch in front of interested investors and collaborators. Gupta described the presentations. “We called it pitching to the bullpen. It allowed you to present ideas and get feedback from fellow students, professors, experienced entrepreneurs, and investors.” At his first rocket pitch, Gupta formed a connection that altered his path. A partner from the venture capital firm General Catalyst was judging pitches that day. While Gupta was not pitching at this event, he was helping with logistics and happened to strike up a conversation. The partner was so impressed by his conversation with Gupta that he invited him to intern at General Catalyst. From his junior to senior year, Gupta interned part-time during the school year and full-time during the summer. Upon graduation, he received and accepted the offer of a full-time position with General Catalyst, where he was exposed to numerous startup enterprises.

General Catalyst It was 2007 when Gupta stepped into this first full-time position with General Catalyst. Things went well for him and for the company until the economic crash of 2008. General Catalyst became very conservative in their approach as many businesses were struggling. Gupta noted, “There was a sense of fear that had come over the firm and the venture capital industry as a whole. Every investment decision was met with questions building on more questions. ” During 2008, VC firms were reluctant to deploy capital into new investments and started “pruning the bush,” meaning they cut follow-on investments to all but the most promising of their portfolio companies. However, General Catalyst persevered and in 2010 decided to expand operations beyond Boston. Gupta was given the opportunity to move to Silicon Valley and open a new office for General Catalyst. He embraced this experience as the sole employee at this new location for about six months. During this time, he was tasked with developing the West Coast brand of General Catalyst. He found potential investments that focused on e-commerce and software as a service (SaaS). One company left an impression on Gupta, The Honest Company, a direct-to-consumer (D2C) company focused on baby products and founded by the American celebrity Jessica Alba, among others. The D2C business model intrigued Gupta. A D2C company formed a strong relationship with the customer. The Honest Company did not rely on distribution channels such as Walmart; such channels often had too much power in the relationship. D2C companies did not have to fight for shelf space with competitors. Instead, their direct connection to the customer allowed them to understand customer desires and modify their offerings accordingly. Gupta wanted to explore this business model more deeply.

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For the exclusive use of E. Dako, 2020. Balanced Snacking BAB242 / SEPTEMBER 2016

A Partnership in the Making Chen had known Gupta since college. Chen grew up in an entrepreneurial family, although the family was entrepreneurial by necessity rather than by choice. The family had immigrated to America when Chen was young. They came looking for a better life and journeyed to where other relatives had gone. Upon arrival, with little English proficiency, the parents relied on their family ties in the United States to gain employment. All Chen’s relatives were in the restaurant business at the time, so by association Chen’s family was in the restaurant business. Chen’s family soon started its own restaurant where Chen worked while he was growing up. Chen, like Gupta, found extracurricular activities more fulfilling than his studies. He was elected student council president and enjoyed playing basketball in high school. He found identity and philosophy in sports, stating, “Sports teaches about hard work and merit. There is not much luck involved. If your coach yells at you, you learn not to take it personally. He is trying to help you improve so that the team will win. If you’re benched, it means you’re not as good as the player in front of you. I like this merit-based system. It motivates me to be my best, enabling me to contribute to the team effort.” Chen viewed business similarly to sports; it should be merit-based. “If you’re the best you can be and you have a strong team, you can win.” This attitude drew him to Babson College where he met Gupta. Both lived in the E-tower and became roommates. Before entering Babson, Chen had pursued entrepreneurial ventures. He acquired a realtor license and during college, continued to pursue real estate in addition to involvement at school. He had a particular interest in residential real estate and was easily able to raise funds via credit cards to acquire, renovate, and flip homes. Chen graduated from Babson in 2006 and immediately went to work for J.P. Morgan & Co. in real estate finance. While he pursued his passion for real estate, he explored other entrepreneurial interests after work hours. Around 2008, he noticed that with the emergence of Facebook and social media, advertising was moving online. A number of Babson-based companies were doing well in this space, so he decided to pursue it further. Over the next few months, he moonlighted by working with advertising agency companies on improving their online advertising for clients. He learned how to execute online advertising more effectively than the agency companies for which he moonlighted. The inflection point came when revenue from his side activities exceeded income from his day job. He thought to himself, “I have to create my own agency. This is a new industry, and because I’m young and unbiased by how things have always been done, I have the ability to learn it better than a seasoned marketing veteran. Experienced ad people are stuck in their offline world. My youth and understanding of the online world will allow me to leap ahead of existing players. I have an unfair advantage.” With the help of friends from Babson, Chen launched his online advertising agency in 2009, W Media, which developed a performance advertising platform empowering clients to access consumers cost-effectively across digital media channels. W Media became one of the first advertisers for Facebook. When W Media hit revenues in the tens of millions, Chen sold the firm and started looking for his next venture. Throughout Chen’s entrepreneurial journey, he and Gupta kept in touch. Chen recalled, “I saw Gautam as an exceptionally strong team member. He was articulate, reliable, and carried himself in such a way that he earned respect from everyone he worked with.”

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Gupta likewise felt deep professional respect for his old college friend and roommate. They knew they wanted to start a company together, but the question was, what kind of company?

The Seeds of an Idea Armed with years of investor experience and industry knowledge, Gupta was ready to pursue his own venture. However, he wasn’t sure what kind of business to start. Simultaneously, Chen was planning to sell W Media and thinking of his next move. They connected and started brainstorming new business ideas to pursue together. Gupta was still working at General Catalyst but trying to nail down the right business idea, and Chen was available to pursue something new. Gupta recalled, “We met up and started laying out the criteria for our new business idea. We wanted to work on something we were passionate about, but most of all we wanted to love what we were working on.” With that mindset at the core of their brainstorming, they started exploring shared interests. They were passionate about food, but their love of food stemmed from different origins. Chen had grown up working in a family restaurant where he developed a love for working with food. Gupta had struggled with food early in life, given that he was not very active and had poor dietary habits. He developed a weight problem that plagued him until his senior year of high school. Six months before Gupta started attending Babson College, he drastically changed his eating habits and worked hard to bring his weight down. He successfully lost 70 pounds by the time he started college through food management versus crash dieting and extreme exercising. His habits transitioned from unhealthy snacking to a more balanced diet. With Chen’s experience in the restaurant industry and Gupta’s analytical approach to a balanced diet, food was where they wanted to work. Where in this large opportunity space should they launch a new business? With a shared mission, they proceeded to do as much market research as possible. They formed a new question, “What is not being done in the food industry?” Their secondary research showed interesting statistics about the industry. The U.S. snack food industry brought in revenue of $37.6 billion in 2015 and was projected to continue growing by 3.6% annually.1 A study conducted by the University of North Carolina analyzing snacking trends between 1977 and 2006 showed that children were snacking as many as three times a day while adults were snacking only two times. However for both groups, this was one more snack per day than in 1977.2 With the steady growth in leisurely snacking, obesity rates in the United States had grown as well. In 2012, 34.7% of the U.S. population was obese.3 Snacking seemed to be a lucrative industry, but it was also a main cause of obesity and associated diseases. Class action lawsuits against the snack and fast food industries started to rise. The lawsuit Pelman vs McDonald’s Corporation targeted the fast food giant McDonald’s. However, the court ruled that eating McDonald’s fast food and snacks was the choice of the individual, not the responsibility of the company.4 This precedent held for other cases brought against large fast and snack food 1 http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=271, Snack Food Production in the US, August 2016. 2 Crowley, C. The Snack Food Nation: A culture of near-constant eating contributes to the obesity epidemic. March 26, 2012. Retrieved from: http://www.timesunion.com/living/article/The-snack-food-nation-3430561.php. 3 Obesity Rates & Trends Overview: Obesity Rates Still High. September 22, 2016. Retrieved from: http://stateofobesity.org/obesity-rates-trends-overview/. 4 Wilensky, S., and O’Dell, K. Where’s the Beef?-The Challenges of Obesity Lawsuits. Bloomberg, July 18, 2013. Retrieved from: http://www.bna.com/wheres-the-beef-the-challenges-of-obesity-lawsuits/.

4 This document is authorized for use only by Emilio Dako in COMM320 - Additional Cases taught by Ronald Abraira, Concordia University - Canada from Aug 2020 to Feb 2021.

For the exclusive use of E. Dako, 2020. Balanced Snacking BAB242 / SEPTEMBER 2016

companies. Based on lawsuits and obesity rates, and also on statistics about snacking, would people want healthy alternative snacking options? Gupta and Chen were intrigued. They continued to investigate the industry, now focusing on competitors and what they were doing in the market. Walking around a grocery store, they saw a clear division in foods that were for sale: fresh produce and packaged goods. They quickly decided against entering the fresh produce area due to the lack of differentiation. Chen noted, “People pay a premium for branded packaged goods. It doesn’t make sense to enter the nonbranded fresh food portion of the market. Margins are low and it is expensive to brand produce. They decided to analyze packaged food competitors. They found this market more attractive; products were highly differentiated from brand to brand, there was an abundance of choice, and margins were higher. They recognized the opportunity to create exciting businesses in the snacking segment. They could create a new brand, as Babson alum Pete Lescoe had done when he founded Food Should Taste Good. They could enter the huge market of dieting, which earned revenue of $6.7 billion in 2015.5 They needed time to brainstorm, so they flew to Santa Monica, California, where a former classmate made his offices available for them to use. During a long weekend, they examined the question of how to make snacking healthier. Taking a break from brainstorming, they walked through the Santa Monica farmers’ market. Strolling by vendor stands, Gupta noticed some flavored almonds and was intrigued. Gupta was thinking of how new and unique flavors could be incorporated into snacks like almonds, and Chen was wondering how farmers’ market quality could be brought to the masses. They went to local grocery stores and observed what consumers did when purchasing snack foods. They noticed customers checking labels to determine allergy or dietary constraints. This finding led them to a theory that if they could create a way for people to tell them their allergy and dietary restrictions, they could offer products tailored to accommodate individual customers. They noticed that although businesses were moving online, for example with books or electronics, online food was still underdeveloped.

Testing Ideas The biggest goal now was to prove they could garner interest in their new ideas. They quickly ruled out trying to develop a product that would go on a grocery store shelf. Grocery stores charged slotting fees for shelf space, and this gave power to the distribution channel. They reasoned it would be difficult to get deep intelligence on a customer if they had to go through the distribution channel to acquire information. The time to research and develop healthy snacks, and to identify partners who would display these snacks on their shelves, would take months if not years. They determined there was no way to develop an advantage over the competition with this model. Gupta recalled The Honest Company and wondered whether it made sense to go D2C; why not build a company that provided healthy snacks through the mail to customers on a monthly basis? Their next step was to test whether online snacks would sell.

5

http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1719, Weight Loss Services in the US, August 2016.

5 This document is authorized for use only by Emilio Dako in COMM320 - Additional Cases taught by Ronald Abraira, Concordia University - Canada from Aug 2020 to Feb 2021.

For the exclusive use of E. Dako, 2020. Balanced Snacking BAB242 / SEPTEMBER 2016

Using Chen’s experience with Facebook and online media, they set up a landing page with snack options as shown below.

Source: © Gautam Gupta and Ken Chen 2016. Used with permission.

The first test was successful. More than 100 people signed up and asked to join, agreeing to pay a monthly subscription fee of $22. The partners saw two options for a reply: respond with an email explaining the company did not yet exist, which had the potential to frustrate would-be customers and lead to an online backlash; or try to fulfill these orders, testing the hypothesis that they could produce a product that customers wanted. They ran to the local Costco and other bulk food stores to pull together enough product to start creating four or five different snack bags to offer customers. They packed all snack types into each single bag so that each bag provided a variety of healthy snacks. With labels bought at the local Staples store, they started naming their new products and quickly displayed them on a single-page website.

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For the exclusive use of E. Dako, 2020. Balanced Snacking BAB242 / SEPTEMBER 2016

Source: © Gautam Gupta and Ken Chen 2016. Used with permission.

The whole endeavor cost very little—only the cost of buying and repacking the snacks, and the personal time to put up the webpage and Facebook sites. This small test seemed to confirm that people would be willing to buy snacks online and better yet, on a monthly basis. However, online food had a troubled history. One of the pioneers in the online food service market had been Webvan. This company offered p...