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 were now faced with the task of fulfilling over 100 orders. Excitement gripped the two, but reality quickly set in.

The Beginning

Gautam Gupta started his entrepreneurial journey as a child in Orange County, California. Growing up, Gautam was largely uninterested in sports and struggled with his weight. In lieu of time spent playing outdoors, he took up an interest in 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 current popular music and selling them to fellow peers. Throughout school, he was an average student; he found far more validation in his entrepreneurial rather than academic endeavors.
Gautam’s entrepreneurial aspirations were largely influenced by his family. His grandfathers both started companies in the steel industry of India. His mother worked for Silicon Valley Bank, which actively supports early‐stage entrepreneurial companies.
His father worked in the technology industry. Family conversations were always around business and opportunities.

College Years

Based on his entrepreneurial aspirations, Gautam chose to attend Babson College. Babson immersed Gautam in all things entrepreneurship. While coursework deepened his knowledge, extracurricular opportunities such as the entrepreneurship affinity dormitory, E‐tower, which grouped like‐minded students together, were a huge influence.
Life at 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 strive to provide resources for entrepreneurs including networking, conferences, speaker series, and mentorship. One of the key events that helped shape Gautam’s collegiate experience was the annual rocket pitch event where students and alumni give a three‐minute business pitch in front of interested investors and collaborators.
We called it pitching to the bullpen. It allowed you to pitch ideas and get feedback from fellow students, professors, experienced entrepreneurs, and investors.
At his first rocket pitch, Gautum formed a connection that fundamentally altered his path. It just so happened that a partner from the venture capital (VC) firm General Catalyst was judging pitches that day. Although Gautam was not actually pitching at this event, he was helping with the logistics and happened to strike up a conversation. The partner was so impressed by his conversation with Gautam that he invited him to intern at General Catalyst. From his junior to senior year, Gautam interned part‐time during the school year and full‐time during the summer. Upon graduation, Gautam was offered and accepted a full‐time position with General Catalyst, where he was exposed to numerous startup enterprises.

General Catalyst

It was 2007 when Gautam stepped into this first full‐time position with General Catalyst. Things were going really well for him and the company right up until the economic crash of 2008.
General Catalyst became very conservative in their approach, as many businesses were struggling at the time.
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 starting “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 their operations beyond Boston.
Gautam was given the opportunity to move to Silicon Valley and open the new office for General Catalyst.
He embraced this experience as he was the sole employee at this newly founded location for about six months. During this time Gautam was tasked with developing the West Coast brand of General Catalyst. He spent his time finding potential investments that focused on e‐commerce and software as a service (SaaS) business models. One company left an impression on Gautam, The Honest Company, which is a direct‐to‐consumer (D2C) company focused on baby products (founded by, among others, Jessica Alba). The D2C business model intrigued Gautam.
In D2C, a company forms a strong relationship with the customer. The Honest Company wasn’t reliant on distribution channels, like Walmart, that often had too much power in the relationship. D2C companies didn’t have to fight for shelf space with other competitors. Instead, companies like The Honest Company had direct connections to the customer allowing them to collect customer desires and modify their offerings accordingly. Gautam wanted to explore this business model more deeply.

A Partnership in the Making

Ken Chen had known Gautam since college. Ken grew up in an entrepreneurial family, although the family was entrepreneurial by necessity as opposed to choice. Ken’s family immigrated to America when Ken was young. They came looking for a better life and journeyed to where other relatives had gone. Upon arrival, with little English proficiency, Ken’s parents relied on their family ties in the United States to gain employment. All of Ken’s relatives were in the restaurant business at the time, so by association Ken’s family was in the restaurant business. Soon, Ken’s family started its own restaurant that Ken worked in while he was growing up.
Ken, like Gautam, 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 over all of his other exploits. He mentioned, 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 that merit‐based system. It motivates me to be my best enabling me to contribute to the team effort.
Ken 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. That attitude drew him to Babson College, where he met Gautam. Both students lived in the E‐tower and ultimately become roommates. Even before entering Babson, Ken pursued entrepreneurial ventures. He acquired a Realtor license, and during college, he 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.
Ken graduated from Babson in 2006 and immediately went to work for JP Morgan in real estate finance. While he pursued his passion for real estate, Ken explored other entrepreneurial interests after work hours. Around 2008, he noticed that with the emergence of Facebook and social media, advertising was moving online versus offline. It just so happened that other Babson‐based companies were doing well in this space, so Ken thought that he would pursue it further. Over the next few months, Ken 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 Ken’s revenue from his side activities grew greater than his 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 had an unfair advantage.
With the help of some friends from Babson, Ken launched his online advertising agency in 2009, W Media, which developed a performance advertising platform that empowered its clients to cost effectively access consumers across digital media channels. W Media became one of the first advertisers for Facebook. When W Media hit revenues in the tens of millions, Ken sold the firm and started looking for his next venture.
Throughout his entrepreneurial journey, Ken and Gautam kept in touch. Ken recalls, I saw Gautam as an exceptionally strong team member. He was articulate, was reliable, and carried himself in such a way that he earned respect from all he worked with.
Gautam, likewise, felt deep professional respect for his old college friend and roommate, Ken. They knew that 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, Gautam was ready to pursue his own venture.
However, he wasn’t sure what kind of business to start. Simultaneously, Ken was selling W Media and thinking of his next move. Gautam and Ken connected and started brainstorming new business ideas that they could pursue together. The timing was perfect as Gautam was still working at General Catalyst but trying to nail down the right business idea, and Ken was available to pursue something new. Gautam recalls, 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 mind‐set at the core of their brainstorming, they started exploring shared interests. It just so happened that they both were passionate about food, but this love of food stemmed from very different origins. Ken grew up working in a family restaurant, where he developed a love for working with food.
Gautam actually struggled with food earlier 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 Gautam started attending Babson College, he drastically changed his eating habits and worked hard to bring his weight down. Gautam successfully lost 70 pounds by the time he started college through food management versus crash dieting and extreme exercising. Gautam’s habits transitioned from unhealthy snacking to a more balanced diet.
With Ken’s experience in the restaurant industry and Gautam’s analytical approach to a balanced diet, food was where they wanted to work, but where in this large opportunity space should they launch a new business?
With a mutual 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 some interesting statistics about the industry as a whole. The U.S. snack food industry brought in \($37.6B\) worth of revenue in 2015 and was projected to continue growing by 3.6% annually.2 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, whereas adults were snacking only two times; however, for both groups, this was one more snack per day than in 1977.3 With the steady growth in leisurely snacking, obesity rates in the United States had grown as well. In 2012 the obesity rates were at 34.7% of the entire U.S. population.4 Snacking seemed to be a lucrative industry, but was also the main cause of obesity and associated diseases.
Class‐action lawsuits against the snack and fast‐food industries started to rise. The first one, Pelman v. McDonald’s Corporation, was targeted at the fast‐food giant McDonald’s. However, this case was defended by McDonald’s as the court ruled that eating McDonald’s food and snack/fast food in general is the choice of the individual not the responsibility of the company.5 This precedent has held for the myriad other cases brought against large fast‐food and snack food companies to date. Based on lawsuits and obesity rates, yet a desire to still snack, there seemed to be an eager population searching for alternatives to traditional snacking. Would people want healthy options?
Gautam and Ken 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. There was fresh produce and packaged goods. They quickly decided against entering into the fresh produce area due to the lack of differentiation. Ken mentioned, People pay a premium for branded packaged goods. It doesn’t make sense to enter non‐branded fresh food portion of the market. Margins are low, and it is expensive to brand produce.
With that in mind they decided to analyze packaged foods competitors. This market was much more attractive as all the products were highly differentiated from brand to brand, and there was lots of choice. They found that the margins for packaged foods were much higher than those of produce.
Gautam and Ken recognized that there were plenty of exciting businesses within the snacking industry. They could create a new brand, like a fellow Babson alum Pete Lescoe, who founded Food Should Taste Good. They could get into the huge market of dieting, which brought in \($6.7B\) worth of revenue in 2015.6 The two needed some time to brainstorm. They both flew to Santa Monica, California, where another former classmate offered his offices for them to use. During their long weekend, they started hashing out how they could answer the question of how to make snacking healthier. Taking a break from their brainstorming, the duo walked through the Santa Monica farmers’ market. While strolling by the various vendor stands, Gautam noticed some almonds that had been uniquely flavored and was intrigued. This experience sparked two different ideas where Gautam was thinking of how new and unique flavors could be incorporated into snacks like the almonds he had seen.
Ken was wondering, “How can farmers’ market quality food be brought to the masses?”
With a more focused direction, they went to local grocery stores and observed what consumers were doing when purchasing snack foods. They noticed that customers were consistently checking the labels to determine allergy/dietary constraints. This key finding formed a theory that if they could create a way for people to tell them their allergy and dietary restrictions, then they could offer products tailored to match each individual customer. Another variable that additionally stoked their fire was that they noticed a lot of businesses were moving online (books, electronics, etc.); however, online food was still underdeveloped.

Testing Ideas

The biggest thing the duo had to do now was prove that 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 for shelf space, called slotting fees. Slotting fees gave power to the distribution channel.
Moreover, it would be difficult to get deep intelligence on a customer if you had to go through the distribution channel to acquire that information. The time it would take to research and develop a variety of healthy snacks and develop partners that would display those snacks on their shelves would take months if not years. They determined there was no way to develop an unfair advantage over the competition with this model. Gautam recalled The Honest Company. Maybe it made sense to go D2C. Why not build a company that provided healthy snacks through the mail to customers on a monthly basis. The next logical step was to test the hypothesis that online snacks would sell.
Utilizing Ken’s deep experience in online media and with Facebook, they set up a landing page with some snack options (see Exhibit 4.1 ). The first test was successful, and over 100 people signed up and asked to join, agreeing to pay a \($22\) monthly subscription fee. Gautam and Ken could either respond with an email explaining that the company didn’t yet exist, which had the potential to frustrate these would‐be customers and possibly lead to an online backlash, or they could try to fulfill these orders; in essence, 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 to five

different types of snack bags to offer potential customers. They packed each type of snack into one box so that each box provided a variety of healthy snacks. With labels bought at the local Staples, they started naming their new products and quickly displayed them on a single‐page website ( Exhibit 4.2 ).
The whole endeavor cost them very little—just 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, would be willing to do so on a regular, monthly basis, but online food had a troubled history.
One of the pioneers in the online food service market was Webvan. This company offered premium food products at reasonable prices to be shipped directly to your home or office.
The idea was to try to save customers time and effort for their regular grocery shopping by taking advantage of the proliferation of Internet‐based startups during the late 1990s. Contrary to what Gautam and Ken were proposing, Webvan gave its customers the ability to go online and order groceries and have them delivered to your home in 30 minutes or less. It seemed that Webvan was set to fl ourish with one of the largest predicted IPOs in the Silicon Valley history but unfortunately the company went bankrupt in 2001 due to high capital costs and over‐expansion, spending over \($800\) million in the process.
Amazon has since acquired the company and is still operating it today, however with some constructive changes. 7 Gautam and Ken thought that the problem with Webvan was that it was just a distribution channel. It sold goods that you could buy in a grocery store, meaning that there was little margin and very high operating costs. With recorded business failures in the market, Gautam and Ken had to answer, “Why can we do this better?”

What’s Next Lots of other questions still had to be answered. Would, as they expected, a D2C model like The Honest Company work for snacks? How would you scale such a business, especially sourcing raw ingredients? How many different varieties of snacks would you need? Would they need to be changed every month?
Could you build your own branded snacks, which would allow higher margins, or would people prefer brands they already knew? Gautam put together a simple pro forma income sheet of what the business might look like (Exhibit 4.3), and it seemed promising, but there were lots of assumptions that needed validation. Gautam and Ken wanted to proceed, but how could they start validating these assumptions at a low cost?

Discussion Questions

1. How should Gautam and Ken address the questions they’ve raised? What kind of hypotheses, prototypes, and market tests can they run at a low cost to further prove the business model?

2. What other questions should Gautam and Ken be thinking about?
3. When and how should they scale the business? Will they need to raise outside capital? Where would it come from?

Transcribed Image Text:

EXHIBIT 4.1 Snack Options Photo Credit: Brian Macdonald/ Getty Images