Discover more from Outliers with Daniel Scrivner
Spotting and Owning Trends, Wedge vs Ramp Shaped Businesses, and Discovering $800,000 in Missing Revenue
Welcome to another edition of Cheat Sheet, where each week, we compress 6+ hours of research and interviews into 3 Big Ideas you can read in 5 minutes.
This week we’re profiling Justin Mares, who built 3 direct-to-consumer brands in Kettle & Fire, Perfect Keto, and Surely Wine each with tens of millions of dollars in revenue. All by finding and owning emerging health and wellness trends.
Here are our 3 Big Ideas as we break down Justin Mares' winning strategy:
Framework: How to spot trends and build businesses to own them.
Concept: Wedge versus ramp shaped businesses.
Reminder: It pays to hire a Head of Finance early.
How to spot trends and build businesses to own them.
Since 2015, he’s launched Kettle & Fire, Perfect Keto, and Surely Wine. All of which are direct-to-consumer (D2C) businesses, built around an emerging trend, with the strategic goal of building “the brand” that owns that trend.
Here’s how he does it:
He recognizes when trends are forming. With the advent of Google Trends, we can all see trends emerge and grow in real-time. But there’s also the good old fashioned way. Justin Mares decided to launch Kettle & Fire after he kept hearing people at his CrossFit gym talking about how they were using bone broth for recovery. He hated to cook, so making bone broth from scratch was out of the question. And no matter where he looked he couldn’t find any organic, travel size, high-quality bone broth. So he knew there was a market, even if just a small one, and no products to serve it.
He moves quickly to gather data and test. Once Justin decided to launch Kettle & Fire, he wasted no time launching a bare bones product. Within two weeks they had a simple website up and were selling online. In their first month, they did $20k in sales. In Justin’s view, you will find out quickly if you have product-market fit. New trends create captive markets that are starved for great products.
He creates the leading brand in the space. Once Justin finds a trend and launches a product with real traction, he builds a moat. Trends create passionate customers who shop by vibe—looking for the company and product that speaks to them. Which is why brand is everything. From your company’s name, to the look and feel of your packaging, to the way you speak to customers, every detail counts. Your goal is to build the Oatly or Bulletproof of your space—the brand that your entire industry is known by.
He reinvests to stay ahead of the competition. As Justin scales his businesses, he never stops reinvesting in them. As trends grow, they inevitably bring a lot of competition—from other motivated entrepreneurs and incumbents that want a slice of the space. If you’re right and you’re early, you’ll be ahead of the pack. But the only way to stay there is to continue investing today so that you can offer the best product tomorrow. As Justin said, “We've spent a lot of our time not sitting fat and happy on money that we're making, but reinvesting into the business, making a better product, making a better packaging, getting better distribution.”
Wedge versus ramp shaped businesses.
One iron-clad law of business is that there are really just two “shapes of businesses” you can build:
Wedge-shaped businesses require a lot of capital to run and scale. Their revenue and expenses are very tightly coupled. Selling more units always requires additional investment and/or expenses. As a result, margins are thin, revenue can only grow linearly, and profits are generated by “growing the wedge” between top-line revenue and bottom-line expenses over time.
Ramp-shaped businesses don’t require much capital to run and scale. Their revenue and expenses are not tightly coupled. Selling more units requires very little, if any, new capital or expenses. As a result, margins are large, revenue can scale infinitely, and profits are generated by “scaling the ramp” between top-line revenue (which can scale infinitely) and bottom-line expenses (which only scales linearly).
Wedge-shaped businesses are often brutal to run because growth is hard-fought and profits are hard-won. And all direct-to-consumer goods, especially food and wine, are wedge-shaped businesses by nature. What’s remarkable about Justin Mares is how successful he’s been at scaling wedge-shaped businesses.
What’s his secret?
He understands that his businesses are wedge-shaped and focuses on cash flow management. Every expense is scrutinized and made to compete dollar-for-dollar against every other expense so each business knows they’re spending as strategically as possible.
He pays close attention to the size of the wedge between revenue and expenses in each of his businesses. And he treats finance strategically, knowing that because every dollar is precious, each has to be put to its highest and best use to grow the business over time..
Why it pays to bring on a Head of Finance early.
One of my favorite moments from our conversation was this story about how Justin didn't see finance as important or strategic, until one day an advisor dug into his company’s books and found $800,000 in missing revenue that Justin didn’t know about:
“There was a long period of time, multiple years, where I didn't think that a finance team was important. And so we didn't have a finance team, we didn't do any cash projections, we didn't know our numbers that well. We didn't have billing, collections, we didn't have anything.
Luckily, I finally had an advisor knock some sense into me. He had a bookkeeping team that he knew well dig into our books. And I was like, fine, whatever. We can do this. I don't think this is necessary. I think this is stupid.
Finally, we get on the phone and he's like, ‘So you realize that you have $800,000 that different customers owe you that they haven’t paid and yet you’ve already sent them product?’ We were a tiny company at that point. And I was like, ‘I didn't.’ I had no idea. Collections were a thing I hadn’t even been thinking about at all.”
What’s remarkable is that what Justin talks about here isn’t uncommon. I’ve seen many companies with great products and growing sales implode because they didn’t treat finance as a strategic function early enough.
Here is Justin’s perspective on why finance is so important:
“It's everything. How do you make budgets? How do you make investment decisions? How you decide where to allocate resources across the company?
It's running scenario analyses. For us, margin improvement is a big thing. How do you make the decision between investing in X source for organic carrots versus investing in an organic carrot mash blend from another supplier?
You just have this matrix of decisions that you make every day, every week, every year as part of a company. I think finance gives you the tools and the ability to actually make those decisions in a way that's intelligent versus just guessing.
And for so long, we were just guessing and we didn't have a rigorous plan, we didn't have a rigorous model we were operating off. We didn't have any rigor around how we were making decisions. I think that finance really provides that strategic lens and that way of thinking about where and how you should invest your limited resources.”
What trends do you see that you can own?
Until next week,
Creator of Outlier Academy
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Listen, watch, or explore more of this week’s episodes:
#143 Kettle & Fire's Justin Mares | Identifying Trends, 5-Minute Mini Workouts, 6 To Dos Per Day, Favorite Books, and More
#144 Kettle & Fire, Perfect Keto, and Surely Wine: Spotting Trends and Building D2C Brands to Own Them | Justin Mares, Serial Entrepreneur