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What's up with WATT, Pt I (or "What's Wrong with Tech Journalism?")

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Saturday, August 20, 2016

How Is This A Thing?


When talking about what sort of companies get funding from VC, I have a saying: 

Even when you take into account that VCs will fund companies more pointless than you can imagine, VCs will still fund companies more pointless than you imagined.

In that vein, I was amused today to read about Juicero, a company that makes juicers (the things that squeeze fruit and veg and make glasses of juice), and was funded to what was believed to be a total of $120 million. Yes, $120 million. I know it's been covered earlier this year but somehow I missed it, perhaps I assumed it was an April Fool's joke and ignored it, but it's for real.

So what is it? It's a $700 juicer that you buy (yes, seven hundred dollars), and then in the same way you buy different coffee pods for a Keurig, you buy different types of juice packets which range up to $10 each (yes, ten dollars). Hey, pre-cleaning and chopping organic (of course) fruit then putting it in a non-degradable packet is hard work! Pop the juice packet into the juicer, press a button, and a minute later you have a glass of juice. Then you throw away the packet, nothing to clean. But wait, there's more. The packet has a QR code on it (those square, 2D barcodes) and the system reads the QR code to compare with an internet database (it's WiFi connected of course) and see if the packet is in date - if you're in luck the system will press the juice for you just right. If not, or your internet happens to be down, no such luck and the $10 you spent will get you nothing.

So the skeptic in me sees:
  • A solution to a non-existent problem. This solves nothing. No pain point other than a bit of washing up
  • Vastly more expensive and environmentally damaging than the existing method
  • Multiple points of failure and unnecessary complexity
  • At best serves a tiny demographic
Buying the most expensive organic pressed juice in Whole Foods (you know, stuff someone has pre-cleaned and chopped and put in a plastic packet) and putting it in your fridge would be cheaper than this, wouldn't need an initial $700 investment, and you could still drink it when you the WiFi goes down. It's the sort of thing that you'd ridicule an undergraduate student for in their final year "Entrepreneurial Studies" final project, or congratulate them for the best parody startup you'd seen. But it got funded. For $120 million. How?

Industrial Design
The system looks beautiful. Just look at that sleek Jony Ive style design, it's like an iPhone on your countertop, how could you not want that? That alone makes it worth $120 million. OK, you think I'm, joking here? One of the things I've observed in the last few years of watching startup funding is this: Never underestimate the value of the mock-up, it's about the most important thing to show when fundraising. Not the prototype, the mock-up (but be sure to call it a prototype).

As an engineer, I've been more the "show something working even if it's a bag of circuits and wires, cleaning it up later is the easier part". More fool me. What I've learned is that such demonstrations press the 'off' button with investors - instead, show a mock-up or better yet the Industrial Design (ID). Best if you can put it into their hands, but an "artist's rendering" works amazingly well too. Seriously, investors seem to lose any ability to ask questions about the actual product when they're handed a piece of cardboard covered in plastic with a logo on it. "Hey, look how cool this thing is! It's amazing! All the hard work is done, all someone has to do is all the engineering/user design, validation, and testing to make it happen!"

I can see this having been part of the pitch deck to investors, a cool image and saying some ID firm run by ex-Apple designers is on it, and they'll think it's 90% done. Just be sure to accidentally say "prototype".

Market Penetration
Next I can see the slide showing some data on growth in juice bars, which if you live in places like SF or on Main Street in Santa Monica, there seem to be one every block running a 'special' of "4 for $30". I used to sit in the bar or ramen place opposite and count how many went inside during the day. If it got over a couple in an hour it was unusual, I've no idea how they survived. However, if you've got too much money then you all friends know people who 'juice', it's a health thing, and $10 for a juice isn't ridiculous so that's all OK.

Then we get the market equivalent - the Keurig. They'll have some curves showing Keurig's rise to around $4 billion in sales in 2014, and a tag line such as "The Keurig for Juice!". What's not to love about it? They sell the hardware, but then get the lock-in on the juice packets and receive ongoing revenue from that. Even better, the QR code means it won't work with third party packets, and unlike Keurig's failed attempts to create such a lockin, the fact the system is internet connected is the way they'll ensure that it can't be bypassed. Thought it was stupid that there was such a point of failure? No, to investors that's a positive! 

It's not even a system where they buy on demand like Keurig, nope here you go on a subscription and you get your supply sent every week. Better not miss your juice intake for the day, it's your health after all. They'll have that hockey stick curve of 1000 sales in year one, 10,000 in year two, and then a million in years three and out, with the consumables revenue from all those sales building nicely to make this a billion dollar company in year 5. Who wouldn't invest in that?

Supply Chain
Next they'll show how they'll corner the market in the consumable preparation, buying in vast quantities from the organic farmers and driving down the price, getting further margins there. They'll probably be something in there that shows how they can shift the content mix in each packet to use the cheapest ingredients available at the time. Something of a logistical nightmare, but it sounds great.

An Impulse Buy
It seems they aim for the "give away the razor, charge for the razor blades" approach of Gillette - except in this case they "give away" the first part for ~$700. Not a necessity and hardly in the impulse buy category, I have a sneaking suspicion they initially targeted a lower price point than this telling the investors it would sell for the price of a Keurig, with an entry level product in the $100 to $200 range, then just utterly failed to hit it. Right now I can imagine they're telling investors something like "This is the premium version, we've got a plan for cost down for the regular version!" when this probably was the standard version. It won't be the first time a CEO has demanded a product with every feature, in a really short timeframe, and then been shocked at the cost. When you're looking at time, cost, and quality, you only get to pick two, and time is never on your side as a startup.

That $700 may even be a subsidised number (though they claim not), but regardless if you assume that their COGs is around 30% of the price then you're looking at parts and labor of more than what an equivalent product retails for. They had two years to get this going, and while supply chain can take that long, without anything exotic in the design, time was not a restriction in getting this made, they should have had time to Design for Cost. Instead, I suspect a series of changing demands, feature creep, and failure to plan before initiating hardware builds made it take longer than should have been.

The Founder
And here we come to the main event, the CEO, Doug Evans. If ever you have a True Believer who is absolutely invested in this product and actually believes in what he's selling no matter how crazy, this is it. He compares himself and his product to Tesla, and that his method of squeezing gets more Chi, life force, and vibrational energy out of the juice. (Wait, vibrational energy? Maybe it can charge your phone at the same time!). 

How can you not believe in someone who can lead and inspire like this?

“Organic cold-pressed juice is rainwater filtered through the soil and the roots and the stems and the plants,” he said. “You extract the water molecules, the chlorophyll, the anthocyanin and the flavonoids and the micronutrients. You’re getting this living nutrition. It’s like drinking the nectar of the earth.”

He had the "Tenacity, Resilience, Perspiration" needed to never give up, so loved by investors. He even had Domain Experience, having run juice bars before. What does it matter this was a electro-mechanical system, consumer product, software app, supply chain, and retail play, none of which he had experience of. At least he later realised what a huge job it was to get it to market:

“I was just naïve,” Mr. Evans said. “I was like Forrest Gump. I had no idea what it took to make a piece of hardware that could ship to consumers safely.”

It's a pity more technically inexperienced founders don't listen to advice from those who tell them their timelines are ridiculous and that there are massive technical and safety concerns that shouldn't be ignored. 

What The VC Sees
Now imagine you're a Venture Capitalist, looking for somewhere to put your money for a possible 10x to 100x return and make your fund profitable, making up for all the other plays that tanked. Do you laugh this "Juicero" out the room, or do you make a mental list of all the positives and evaluate the risk versus the potential returns? If you did that, here's what you might get:
  • A dedicated True Believer Founder
  • A simple tagline, easy to understand 
  • A comparison business model that shows billions in revenue
  • Profit on the product, ongoing revenue from consumables
  • A 'hockey stick' revenue curve
  • No new technology needed, it's really an execution play
  • Digital lockout of third party suppliers
  • First mover advantage
Honestly, I look at that list and think "I can see why someone invested" especially if you can get them salivating over owning a part of "Keurig for Juice" early on and that it's going to be $200 a pop. If you even think there's a 10% chance it could match Keurig's $4 billion a year in revenue, a few million invested actually isn't totally ridiculous. 

So when you pitch your awesome idea to a VC and they don't invest, and then that VC pours a ton of money into a juicer company for a product that no-one is going to buy, have a look at how your business model compares to theirs. 

On paper, Juicero ticks all the boxes and makes sense as a VC investment. In reality, it's totally dumb. Do you see now why this is a thing, and you're not getting funded?

Update - Here's a link to a great Youtube video doing a breakdown of the Juicero. TL;DR - No cost constraints lead to lack of careful thinking, so overbuilt and clearly losing money on every one, to be made up for with the ~$2000 per year pack subscription.

14 comments:

  1. What does the juicer actually do? You could just cut open the packet and squeeze it out yourself. Either VC's are extremely dumb, or they realise that the average consumer is retarded and will buy anything if it is marketed well enough.
    Really enjoying the blog. Thanks

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    1. Is there anything you can question Juicero on that wouldn't also apply to Keurig? That comparison business model will have helped sell this pretty damn well.

      Where this really fails, and what Keurig got right, is on the price point. If they sold the hardware at $150, and the juice packs at $2 to $3, then it might work. But $700 up front and up to $10 a drink? Just ridiculous.

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    2. Of course there is something I can question that doesn't apply to Keurig:

      Why buy their $700 machine when I can squeeze their packets by hand?

      Can't do that with a Keurig.

      And yes, you can squeeze the packets by hand. No wi-fi required.

      Delete
  2. I couldn't believe this one either. :)

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    1. This comment has been removed by the author.

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    2. I set out to write a piece showing how ridiculous it was to fund this, then as I wrote it I realised that by the metrics most funding is done on, it's a winning bet.

      Hardware and supply chains are tough, but $120 million for an internet connected press and chopping some organic veg and putting in a bag? I'd love to know the various pitches on why that was needed and where the money went. At $700 for a press, someone went overboard in the spec, no-one with experience reviewed, and may even have been 100% outsourced to the design firm on a cost-plus contract.

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  3. I think "Keurig for juice" is not a legitimate comparison point for the company or the VCs. First, coffee is drunk by about half the population of the planet. Juice is not. Second, coffee is addictive. I don't think I've ever seen anyone go crazy in the morning because they couldn't get their juice. I have seen that many times with coffee. Third, most of the Keurig users are coffee drinkers first and environmentalists second, if at all. The trash their process creates is easy for most of them to accept. Lovers of pure, fresh juice are probably a lot closer to being environmentalists. The trash will bug many of these people enough to not buy the product, even if it were at a Keurig-like price point.

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    1. I don't disagree that the market for coffee and the market for juice are very different. In another regard, real 'juicers' want to blend the fruit/veg to keep the fiber, not just press it. But all that is irrelevant, you're thinking too logically and about building a sustainable business, silly you. The question is - can you find someone with deep pockets who thinks that this *might* just work, and they *might* get in early on the 'next Keurig'. In many cases, it's not about building a sustainable and growing business, it's to make something that looks good enough you can sell it to a 'greater fool' and make your return. In that regard, this pitch could tick all the right boxes.

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    1. I was about to reply to your comment but it seems to have gone. Check out my post here - http://liesandstartuppr.blogspot.com/2016/08/mock-ups-industrial-design-and.html - I agree that money gets raised on the flimsiest of support sometimes.

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  5. excellent in-depth review of the technology https://www.youtube.com/watch?v=_Cp-BGQfpHQ

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    1. I just spent 40 minutes watching someone take a juicer apart - awesome video, now linked in the main article. Thanks.

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  6. Honestly, this smells like a scam setup from the outset. The scam works like this, I have two companies, company A that makes the device and sells it to company B at an exorbitant price. Company B is the one that gets the VC funding, sends a big chunk off to company A for the worthless product and then goes broke. Investors in company B lose their money and I am sitting pretty with their money in company A.

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