OLC attended Founders@Fail on Monday, February 4, 2013 featuring Spinback founder, Corey Capasso. He also launched Add the Flavor, Exchange Hut and Nomi. The serial entrepreneur discussed horror stories and the lessons learned.
Moderator Schuyler Brown started the conversation, introducing Corey Capasso as a four-time entrepreneur who has "lived through hell and back." Capasso took the time to explain that he started his first "legitimate company at 18." Capasso thought of creating flavored plastic after he noticed that people chewed on pen caps. "I thought, why not flavored pen caps? It's so simple and easy—or so I thought. I went to a manufacturer to make prototypes and the guy there said it's going to be really easy to do. Two weeks later, I get a phone call from him telling me that there's no possible way it was going to work because there was no such thing as flavored plastic. It turned out that dental companies had been trying for 20 years and they had yet to find a solution."
"Mind you, I have no plastic or engineering background," Capasso said. "I went and tried to find a solution to create flavored plastic. After doing some research, I found a company in Akron, Ohio that specialized in polymer compounding and got them to make prototypes for me. I signed an NDA [non-disclosure agreement] and they told me it was going to cost $25,000. I needed funding so I looked for an investor. I was introduced to a local venture capitalist and I pitched my idea without a deck and a business plan. He told me that next time, I'd have to create a plan, but he liked my enthusiasm and ended up funding the entire company for a third."
He revealed that he faced many challenges when building the company ground up. "I went to the bank to deposit money and the teller said I should create a business account, and when I tried, the banker told me I needed to have a registered LLC, and I was like, 'What is that?' so there were a lot of things I learned from just going after this idea." The biggest obstacle Capasso faced was finding out that the results were all negative. "The tests didn't work," he said. "But they said they could suggest 16 other tests from the failed test. You know, the lab learned 'XYZ' and this went on for two-and-a-half years and about half-a-million dollars later, the venture capitalist said, 'Let's just keep going,' because he was so deep in it. Later, the technology finally worked, but I found out that there are over 250 types of plastic...."
"I tried to sell the plastic to companies, but when they asked me if it was safe, I didn't know what to say." Capasso revealed that the simple question stumped him because he didn't realize at the time that he needed to comply with FDA measures. "I hired a safety firm—and our product passed, but it took one-and-a-half years and almost half-a-million to complete. So basically, we didn't have customers for about three years," he said.
"So you're trying to sell to conglomerates like Procter and Gamble—how did you sell without credibility?" Brown asked. "You're as weak as your weakest link," Capasso said. "For P&G, it takes anywhere from 18 months to three years to get products on the shelves after selling it to them. I realized that it was too long of a sales line. It felt like I exhausted the number of companies I can pitch to. We had a technology that worked, but no money. We didn't know it was going to be financially viable. A lot of the times, you need a big customer to build credibility and create your own customer base. We took a look at the mouthguard space and realized that there was one company that had nine percent share because it was such a small market. We immediately pivoted the business from b2b to a product company."
"How did you start to form yourself?" Brown asked. "I started at the end and went backwards," Capasso said. "We raised $2.5 million and hired a CEO who had 10 years experience in sporting goods. From there on, we had immediate credibility."
Brown asked how entrepreneurs would be able to vet a CEO that looks good on paper. "Well, the CEO we hired had startup experience. He knew what he did at Reebok and I made him take a two-and-a-half hour personality test and he passed. I'd never ask someone to take that again."
Capasso said that he created a StubHub for college campuses called Exchange Hut. "It was acquired when I was a senior in college," he said. "The concept was that people can sell their ticket—it was a marketplace for student to student exchange. The transactions were dealt physically. I leveraged Facebook groups and spammed the ones dedicated to campuses in the Big 10."
"From what I understand, a new competitor sprung up—how did you deal with that?" Brown asked. "We had about 60,000 users," Capasso said. "We got a phone call from Chegg and they tried to buy us out by offering us their stock, but we refused the offer. They couldn't even enter their college campus, mind the rest of the colleges, but a year goes by and they raise a significant amount of money.... Now they're worth almost $5 billion today."
"To diversify" Capasso said, "we installed ads. The website got around 14 million page views, but in the end, we ignored our core customers. We lost focus by trying to expand horizontally. We felt like we missed the boat, so we sold the business."
Regarding Spinback, Capasso said that he loves technology. "There's a lot of energy in the tech space. Spinback is a database of millions of products. If a customer shares an item and someone buys it, then Spinback gets an affiliate fee. I saw social media blow up and when I looked at retail, I knew they weren't going to invest in Facebook, but that they would have Facebook aspects on their website, so I went ahead and pitched the idea of sharing buttons. I took the Spinback model—the idea of sharing products and pitched it as a b2b model. It can literally tell retailers how much was getting sold."
"But what's the horror story? You took over a failed company—did you structure a deal?" Brown asked. "I structured a deal, gave a little bit of equity to someone who was hesitant... It turned out that the code base was completely useless—that's the first horror story. The market had completely changed and the timing was different. We had to rebuild the code to demo and try to sell the product."
"How did you build credibility?" Brown asked. "The problem was timing and the market. I thought we were selling a solution," Capasso said. "I looked at the Fortune 500 list, called up the list, starting from No. 500 and eventually got someone to try it for free and we built a website to sell it to other customers. We soon realized, though, that it wasn't scalable. We raised a little bit of money and signed another consultant—BuyWithMe, a social commerce company like Groupon. They were using ROI [Return on Investment] and we made a case study of it and blasted it out to retailers. This brought us some traction and hired more developers, but from June to September, we scraped by with independent angel investors."
"With the credibility of the first customer, we established enough credibility to create investor interest," Capasso said. He also described the horrors of running out of money. "We had only one developer, paying off structured debt, and a contractor we paid hourly. We didn't know when our funding round was going to close. The developer quits all of a sudden because our iffy financial situation, but we managed to get him back by offering a 90-day full-time position," he said. "We raised $500,000 in C-round, but we signed the wrong term sheet and they thought we were pulling a fast one on them and the pulled out. I thought about quitting, but I floated the company for a month and decided on a hard cutoff. We still had some traction in the retailer space and got good data! I finally asked a venture capitalist that I had met a while ago for some money. I got $15,000 from him and was able to run the company until mid-January," he said. "I always base my decisions on the client, so I hired another developer, which upped the monthly spending another $30,000. My co-founder wanted to kill me.... We got a $100,000 injection while networking for investors and we got lucky and signed QVC, AmEx and gained a lot of traction and buzz. We signed 22 clients and then got an offer from Buddy Media to buy us. The offer was too good to refuse, so we acccepted," he said.
"The investors must've not been too happy about this," Brown said. "Some weren't, no," Capasso said. "It's hard to say 'No' than 'Yes.' It's really difficult to break bad news, but always be honest. People respect you more for your honesty and integrity. I mean, the investors were obviously disappointed, but they were understanding," he said.
January 2013 Founders@Fail Recap: http://www.officeleasecenter.com/articles/january-7th-2013-foundersfail-featuring-a-conversation-with-adaptly-founder-nikhil-sethi.html