It’s a common phenomenon that even the savviest entrepreneurs can stumble trying to take their businesses to the next level. Marco Giannini wasn’t new to entrepreneurship and he wasn’t new to failure. While an MBA student at the University of
Southern California (and one of my students I'm proud to say), he launched Clear Day, a natural beverage company designed to take advantage of consumers’ desire for functional beverages. That business failed in 2003 from a lack of customer validation and too much money spent on product development. Not one to dwell on failure, Giannini decided to take his experience in functional beverages into a new area. His childhood dog had suffered from arthritis and hip dysplasia, so he began to study how supplements in dog treats might help dogs live happier lives. After finding a manufacturer to produce his first product—Happy Hips—Giannini began driving all around California visiting pet store owners to get them to try his product. He also handed out samples at sporting events. When a customer wrote to him to tell him that her aging dog was now able to walk normally after two years of Dogswell treats, he knew he had a hit.
In the first year of the business, 2004, revenues came in at $500,000, but by 2008, the company was on the Inc. 500 at position 101, sporting an annual growth rate of 1,800 percent, 21 employees, and $17 million in revenues. Dogswell went from 4,000 independent pet stores to being picked up by Whole Foods Market and Target. It was now a national brand. That’s when Giannini began feeling the pressure to grow the company to the next level, which would make his company a target for the large established pet food companies. To do that, he would need to develop a line of dog food. Giannini determined that he had enough cash to undertake the product development and went ahead, coming up with a kibble that was preferred 15 to 1 by doggie focus groups over the leading brands.
Because he had a brand to protect, Giannini knew he couldn’t bootstrap this launch. He invested in an East Coast warehouse, hired 15 more employees, and in September of 2008 he shipped his first bags. But all did not go well because Giannini had used a very expensive approach to getting customers to try this new line. He offered a free bag of kibble with every purchase of a 15-ounce bag of Dogswell treats. At $10.99 a bag, it was costing the company $100,000 a month for this giveaway and his employees were having trouble keeping up with all the coupon rebates. At the same time, Giannini and his chief financial officer had been out trying to raise money from the private equity market, a job that was taking them away from the business at a time when they were sorely needed to deal with the growth issues that kept popping up. Giannini finally managed to close a deal with San Francisco-based
TSG Consumer Partners, a leading investor in consumer products, but he came back to Los Angeles to discover that the coupons from the new dog food line were eating up all the company’s profits for that quarter. That wasn't going to look good to his investors. Moreover, their focus on the new product meant that they were no long providing samples of their core product—the healthy treats—so sales were now declining in that critical area.
That's when Giannini discovered that raising money is not just about the money. In doing the deal with TSG, he now had a very experienced partner who could help him get through the stresses and strains of growth. Giannini set his pride aside and explained to TSG what was happening. They were not surprised--it is, after all, a common problem in consumer product companies. TSG was able to give Giannini examples of how other similar companies in their portfolio had made it through the growth phase, and they helped him analyze his market data so he could spend his limited resources more wisely. Giannini quickly learned a critical lesson: no matter how important it was to grow Dogswell with new products and new markets, it was even more important to take care of the core business that had made Dogswell a success. Today Dogswell is growing smarter and it's paying off.
Lessons Learned: 1) Raise money before your company launches a new product line and attempts to grow to the next level; and 2) stay close to the core business--don't sacrifice it for the sake of growth.
