Zero to One: Notes on Startups, or How to Build the Future

Zero to One: Notes on Startups, or How to Build the Future Peter Thiel

Hello! Who are you and what business did you start?

Hello, my name is Michael Reznik and I am the Co-Founder and CEO of TriFold LLC, the company that invented the UpCart ® line of products. We are dedicated to revolutionizing mobility with innovative products that give people the freedom to do what they love by enhancing their mobility. When people have greater mobility, they can do more and be more productive.

Let’s be real, carrying stuff up & down stairs is the worst. The UpCart ® line of products solve this problem with a unique line of all-terrain folding carts and hand trucks that have been engineered to reduce effort while going up and down stairs and over irregular terrain. Our patented technology also allows all of our products to fold completely flat for easy storage or transportation.

Our newest product the UpCart Versa Trolley (renamed from the UpCart City), the most compact stair climbing cart, won the Retailer’s Choice Award at the 2018 National Hardware Show and was successfully funded on Kickstarter. The UpCart Versa is the only folding hand cart to ever be offered with a LIFETIME warranty!

Our first product, the UpCart Original, became available in August 2015 and promptly sold out of stock within 10 days of going viral on Facebook after Thanksgiving. We did $385,000 in sales from August – December 2015. Revenue continued to grow with $3.2M in 2016, $5.4M in 2017, and we are on track to exceed $7M in sales this year. We are excited to note that UpCart ® products are for sale in Costco, Bed Bath & Beyond, Home Depot, Lowe’s and other major retailers.

What's your backstory and how did you come up with the idea?

Some great companies are started by very unlikely business partners.

I was at my Dad’s birthday party and was sitting next to a long-time family friend, Leonid Khodor (my Dad’s age), an engineer and patent agent. During the course of the evening, after a few libations, Leonid shared that he had invented this new product but wasn’t sure how to turn it into a business.

Many people write/advise that you must be “All-In” to make a business successful… that’s easy to say if you don’t have a wife, two kids, car payments and a mortgage.

He had a rough Frankenstein prototype (made from baby stroller wheels, cannibalized part and some custom fabricated pieces) and showed me a little video of it in action. A light bulb went off in my head, immediately I saw so many applications/uses for this right away. We exchanged contact information that evening.

After conducting some research, performing some due diligence and convincing my wife to let me make the investment of both time and money, I agreed to go into business with Leonid. I applied for our tax ID and trade name and TriFold officially became a company in February 2013. At that time, I had spent most of my career in the Fortune 500 as a Management / Operations Consultant.

I already had a pretty demanding job but always had a passion for entrepreneurship. I had attempted to start a company in the mid-2000’s right before the 2nd stock market crash, but I wasn’t able to get it off the ground before the economy imploded. This time, however, I wasn’t going to let anything stand in the way. I believed wholeheartedly that this idea was going to be successful, we just needed to figure out how to make that a reality.

TriFold started as a “side hustle” while I continued to work my corporate job, but it quickly became much more than that. 100+ work weeks became my new normal. During the day I was the good corporate steward, but evenings and weekends were dedicated to TriFold.

Many people write/advise that you must be “All-In” to make a business successful… that’s easy to say if you don’t have a wife, two kids, car payments and a mortgage. I wasn’t in a position to just quit my day job and commit 100% to the business, and I wouldn’t be until December 2016 (3.5 years later).

Describe the process of designing, prototyping, and manufacturing the product.

Our first challenge was taking Leonid’s Frankenstein-cart prototype and turning it into a real finished product.

Design

We hired a good local design firm that conducted some market research and worked with us on several design iterations. While their designs were beautiful, we had concerns about their practicality and feasibility of manufacturing those designs at a reasonable cost.

We parted ways with the design firm but learned enough through the process to finish the product design on our own. Leonid is a gifted engineer and designer and developed all of our 3D models and industrial designs on his own using CAD software (and still does to this day).

Prototyping

The second major challenge was how to turn the designs into a working prototype. We explored many options ranging from 3D printing to full custom fabrication.

The challenge was the exorbitant cost associated with all of these options. Due to the nature and complexity of our product design, the prototyping process would cost about 33% - 50% of the cost of the actual production tooling.

So after much deliberation, and 3D modeling in CAD software, we decided to take a huge gamble and move forward with the production tooling without going through the prototype process first. Our logic was actually very sound. The cost of modifying and adjusting tooling would actually be less expensive than the cost of developing a working prototype.

Moreover, by working directly from the production tooling, our samples would be real load-bearing fully functional samples. This also had the benefit of saving us months of time and allowed us to bring the actual product to market sooner.

Finding a factory

Once the decision was made, we set out to find a factory to help make our vision a reality. With the aid of an experienced sourcing consultant (who later became our sales manager), we visited many factories in China, asked for quotes from three and selected one to work with.

Note: we did explore manufacturing in the USA but found the cost would have been at least 3-times higher to produce in the USA. One big advantage to the factory we selected was a very low minimum order qty, provided that we paid 100% for the tooling and assembly fixtures.

Describe the process of launching the online store/business.

Our plan was to get working samples from the factory and present them at the largest hardware show held annually in Las Vegas. There was one small problem, we were quickly running out of money.

I made product video on my MacBook and posted to Facebook. I boosted the post for $20/day and it ended up going viral. The video ended up getting 7.5M views and over 15.4M organic reach.

Despite countless pitches and meetings, at this point, we had very little success in raising capital. Everyone wanted to invest in tech, biotech, SaaS or mobile. In late 2014 we attempted to go to Kickstarter to raise capital. We rushed in and didn’t do it the right way. Our funding goal was too high and while we did raise over $27K we didn’t hit our funding goal, so no funds were received. We were quickly running out of operating capital.

Fortunately, I cultivated a relationship with one of our backers who later became one of our angel investors. After closing our angel round, we had enough capital to pay for the remainder of the tooling, stand up a basic website, pay for a trip to the factory to finalize the samples (and pack them to take home as our check luggage) and pay the costs to attend the National Hardware Show in a tiny 5x7 booth in the Inventor’s Spotlight Area.

We were the bells of the ball!

From the moment the show opened, we had a crowd at least two deep at our booth almost the entire time. The UpCart won the “Most Innovative New Concept” award at the show and I was invited to a pitch contest hosted by QVC. I won the pitch contest and was live on the air three weeks later doing a live-sell on the QVC Sprouts program.

Please note, these were still production samples – no actual product had been produced yet.

This was May and we told QVC that we would not have actual product in the USA until August of that year. QVC was good with that and noted “Will Ship August 22” during the program.

The UpCart sold out in 5 minutes and started taking wait-list orders! This was immediate validation that we had something customers wanted.

Later that same year, I made product video on my MacBook and posted to Facebook. I boosted the post for $20/day and it ended up going viral. The video ended up getting 7.5M views and over 15.4M organic reach.

This all occurred in about 10 days between Thanksgiving and Christmas. The UpCart completely sold out, we had zero inventory left with a couple weeks of Christmas shopping left. We weren’t complaining too loud, we were out of cash and purchased as much inventory as we could afford to head into the holidays. We were able to take the revenue from those sales and reinvest back into the business.

We have bootstrapped this business from day one. After our initial angel investment round, we never did another funding round. We have been fiscally conservative and managed the business well. Due to our early profitability, I was able to work with small micro-lenders at first and then consolidate our debt with Huntington Bank through the SBA lending program. As we grew, Huntington continued to be a fantastic partner to us with additional lending when we needed.

The faster we grew, the harder it was to manage cash flow. I never realized that being a manufacturer of a physical product meant that you would also act as a bank for your customers. Everyone takes payment terms ranging from NET 30 to NET 120! We have to pay for the inventory before it leaves the factory while the clock doesn’t start on payment terms until the customer physically receives the goods so in some instances (such as with QVC), we wouldn’t receive payment on the goods for up to 6 months!

Our early success on QVC was both a blessing and a curse:

The blessing

I can’t think of a better way for a new product to get market validation than selling out on the air your first 5 out of 6 times Even better, once it sells out on QVC, your sales on your direct channels spike as customers look to buy it elsewhere.

Also, when talking with prospective buyers or retailers, no one wants to be ‘first’, they want validation that your product can sell. Having the ability to tell our story about our sales on QVC was a big advantage for a small startup. It also helped keep our factory happy to be getting large orders at once.

The curse

Curse – QVC is VERY slow to pay. The larger their order, the longer you have to float the cost of the inventory, and cash is king for a growing startup.

QVC has MUCH higher than average customer returns and all the returns come back to you. In most cases (especially for new vendors) everything they buy is consignment, meaning that at any point in time they can return the goods to you.

However, the greatest curse is the visibility your success gets to the wrong audience. The vultures who make their fortunes by stealing the ideas of others and making cheap knock-off As-Seen-On-TV items.

Since launch, what has worked to attract and retain customers?

As with many new products, the biggest challenge is educating the customers about your product and how it is different. While a picture is worth 1,000 words, a video is priceless. Without question the best platform for that is online. Ever since going viral on Facebook in late 2015, we have relied heavily on Facebook paid ads.

No other platform provided a lower customer acquisition cost. Equally important, Facebook allows you to engage with potential customers and address questions, concerns, and complaints. However, it’s not as simple as boosting a post and sitting back to watch the customers come in.

We made a lot of mistakes along the way and learned a great deal about managing audiences, optimizing ads, and refreshing creative to keep relevance scores up.

We followed a 3-tiered strategy for advertising on Facebook comprised of Prospecting for new audiences, managing the core through lookalike audiences and retargeting. Each tier is allocated a percentage of our budget:

1. Prospecting: 10% - 25% of ad spend

Prospecting is the process of searching for potential customers in order to develop new business.

You should always allocate a percentage of your budget to Prospecting for new audiences/customer groups. We try to think through what specific group of individuals would benefit most from our product.

A strategy that works for us is to think of specific audiences that we believe we can be #1 in that market. Then we test it with targeted ads. There will be a lower conversion rate and higher acquisition cost on these ads, but that is by design because not all audiences will convert. The goal is to find a new core audience.

This assumes of course that you know and understand your core customer demographic, otherwise, ALL of your advertising will be prospecting ;-)

2. Core Advertising: 60% - 70% of ad spend

Advertising to your core audience should be where the bulk of your ad spend goes and should have the best conversion rates and lowest acquisition costs. We handle these two ways. The first is to create ads that target the specific demographics (age, gender, geography, income, etc.). The second is to leverage information from existing customers to create “lookalike audiences”.

Lookalike audiences are arguably one of the most powerful tools that Facebook offers advertisers. Facebook will take a list of your current customers and analyze their demographic information to find new potential customers that look like the list you provided them. So, if your customers are 25-35 year old’s living in apartments and very active in outdoor activities, Facebook will create a population of potential customers with the same interests and demographics.

It is important to monitor and optimize these ads on a regular basis. Also, refresh the creative on these ads to keep them current and relevant.

3. Retargeting: 10% - 20% of ad spend

Retargeting, also known as remarketing, is basically getting your ads in front of potential customers who visited your site but did not make a purchase. For most websites, only 2% of traffic converts to a sale on the first visit. Retargeting is a way to try and reach customers who don’t convert right away. Many people don’t make the buying decision the first time they see something new, they need to see it several times before they are ready to make a purchase. For this reason, retargeting is very important. This should have a better conversion rate and acquisition cost than prospecting and ideally better than core advertising.

A cautionary note on SEO (Search Engine Optimization)

SEO is basically the process of getting traffic from the “free,” “organic,” “editorial” or “natural” search results on search engines.

There are many ways to improve your SEO results and many companies/consultants that will offer you paid services for improving your SEO results. We hired a very good SEO firm and they did everything they promised they would. However, we realized too late we would have a very hard time monetizing the results sufficient to justify the cost of the services.

It takes a very long time (12-18 months) to move up ranking on competitive keywords/search terms. You end up paying every month for SEO services but there just wasn’t a good enough ROI on the investment. Moreover, by trying to ‘game’ the results, you are locked into paying for SEO services forever. Once you stop paying for the SEO activities, your rankings will start to fall off.

The best advice I can give someone about SEO is to focus on having good, meaningful and relevant content on your website. Follow the basic design rules for good SEO (submitting your schema, appropriate use of H1/H2 tags, alt text, <div> sections, etc.).

Partner with good sites to get high-quality backlinks through blogs, articles, etc. Don’t waste your money on paid SEO services.

Amazon - a knife that cuts both ways

If you are selling online, you MUST be on Amazon.

It’s hard to attribute actual sales, but without question every time we increase our ad spend on Facebook/Google we see a corresponding spike in sales on Amazon. Many customers just feel more comfortable making a purchase through Amazon vs. [your name].com. For that reason alone, it is important to have your product listed on the platform… on Seller Central.

With that said, I would STRONGLY discourage anyone from moving to Vendor Central and signing Amazon up as a direct wholesale account. If you have good sales volume on Amazon through Seller Central, you will most likely be approached by Amazon to let them buy direct from you and have your items listed as “Sold by Amazon” on their platform.

They will sell you on all the benefits and claim that your sales volume will go up dramatically. Here is what they won’t tell you:

You lose all control of pricing

Amazon will not be undersold. If your product is listed anywhere on the internet for less, their automated bots will find it and automatically lower the price on Amazon. So if you have a MAP policy and ever do a sale with one customer or on your website, Amazon will find it and match it. Worse yet, if any of your distributors/retailers lower the price on their own, that will also trigger a price drop. On Seller Central, you control the pricing, on Vendor Central you don’t

You lose control of your product

We sell internationally and have exclusive agreements with distributors in other countries. We told Amazon that they could only sell in the USA, so you can imagine our shock when we found Amazon selling our product in Canada, Mexica and Europe?!?

Good luck ever making sense of your billing and figuring out if you are actually maintaining margin.

Pretty much from day one, we were buried in paperwork, false chargebacks and shortage claims, obnoxiously inefficient processes, and general frustration. It was almost a full-time job trying to stay on top of the amazon process and paperwork… and DO NOT fall behind else you will never get caught up and they will never pay you fully. They claimed shortages on so many orders that we had to submit documentation to try and prove that we actually shipped the full amount. Heaven forbid if the trucker didn’t sign the bill of lading and give you a photo copy, because that would be grounds for denying payment.

How are you doing today and what does the future look like?

As noted above, we went from $385K our first year to $5.4M our 3rd year and are on track to close around $7M this year with our highest margin thus far.

We had always hoped but never expected this type of rapid growth. We have released several new models and are getting ready to re-launch our new UpCart.com website before Thanksgiving with a renewed focus on growing our direct channel. Additionally, for 2019 we are looking to increase our international sales by growing presence in Europe.

I understand the importance of raising capital and cash flow more than most. But I never understood why so many people were so eager to give away equity in their company, take on investors and relinquish partial control.

Historical ad spend has only been about 10% of revenue because a lot of our revenue comes from retail accounts vs. direct to customer e-commerce. When we first started, our direct vs. retail was about 50%/50% because QVC was such a large part of our revenue. As we continued to grow, each year a larger part of our total revenue shifted to retail. Today, our direct channel only comprises about 10% of total revenue.

Direct to customer channel has seen a steady increase in acquisition costs. We started around $18-$20 per acquisition and have stabilized around $34-$38 acquisition cost, but at the same time, our average ticket value has also increased from $80 to about $105.

When we entered the market, we created a segment that didn’t exist, and the acquisition costs were very low. Over time, as competitors entered the market, the cost to acquire a new customer has gone up.

Additionally, as we increased the number of retailers selling our product, we found that we were competing with our own retailers for ad space. We would see ads from Home Depot, Lowe’s and others bidding on the same keywords.

So, while Facebook remains the largest part of our advertising spend, the increasing acquisition costs have led us to start exploring additional avenues of advertising that won’t have us bidding against the same ad space as our retailers and distributors.

Additionally, as we re-launch our new e-commerce site, we have made a strategic decision that all new products will be launched exclusively on UpCart.com first for at least 6 months before they are released to retail. This will allow us to continue to grow our direct channel without competing with our retailers and distributors.

As we look to the future, we will stay true to our mission and vision. We will continue to innovate and develop new products that make people more productive through improved mobility. Our product roadmap includes expansion of our products into different industries.

Through starting the business, have you learned anything particularly helpful or advantageous

It would be impossible to summarize all the lessons learned in a couple of paragraphs, so I will share what I believe to be two of the most important characteristics of a successful entrepreneur.

Be a “Life-long Learner”.

You will be required to make countless decisions almost daily on things you are not properly qualified to answer. You will never have all the information or knowledge necessary to address the various topics and challenges you face.

Get good at finding information quickly and qualifying the relevant facts. You must be able to learn quickly and never stop learning. At every stage of growth of your business, you will encounter new challenges and dynamics. What you thought you knew may no longer be relevant or apply to your current situation.

I find that I'm reading a lot more about entrepreneurship after I started a company!? I'm learning how much I don't know about starting a company, LOL

Manage to your vision and convictions.

Opinions are like rectums, everyone has one and they don’t usually smell too good.

Early on, my natural inclination was to seek advice and guidance from the "entrepreneurial community" and people who have been down this road before. Sadly, most of the advice I received was 'wrong for me' and my company. To be clear, I don't believe people were intentionally providing bad advice. With rare exceptions the reality is no two companies are the same, no matter how similar. Therefore, one person's experiences will rarely translate the exact same way to your unique circumstances and situation.

For your company to be truly successful you have to do something unique or different… otherwise why are you staring a business?! Your strategy must be uniquely your own. You are solving a problem for your customers in a new and special way. Your vision for your company must guide the decisions you make and the approach you take. No one else has ever had to balance the specific set of circumstances, constraints and variables you are required to contend with.

By no means am I advocating anything other than trying to seek out as much advice and guidance as you can. HOWEVER, it is your responsibility to evaluate any and all "advice" you receive as a data point. Each data point must be analyzed and evaluated taking into consideration the source and context surrounding the data. What is the fundamental message or lesson behind the advice? Distill the advice down to the cause and effect and see how closely, if at all, those lessons apply to your actual situation. Further, you should never make your decision from just one data point… even a trusted source. It is your responsibility to seek out multiple data points and gather sufficient information before making a critical business decision.

I've seen colleagues spend countless hours researching what TV to buy. They will go to multiple websites, watch YouTube reviews, go into the store and look at different sets, then ask everyone they know about what TV they have and why they purchased it, then return to online reviews again before making a final decision. Ironically, I've then seen those same individuals make significant financial business decisions based on 'advice' from one source or based on only one data point.

Whatever your vision for your company may be, ultimately you have to live with the consequences of the choices you make. It's easy to get bullied down one particular path or cling to what seems like reasonable advice when it's the only source of information you have. I strongly encourage you to always evaluate the advice against how well the underlying lessons apply to your particular situation and if it aligns with your vision of the future.

My absolute favorite tool has been Microsoft OneNote. This is ironic since I am a die-hard Apple/Mac fanboy (note, there is OneNote for Mac and web-based).

What’s so great about this tool is that it allows me to organize the most critical information necessary to run my business and be able to find/access it quickly and from anywhere in the world. I have also found that it is a remarkable tool for organizing the creative process, anything from writing blog posts to brainstorming marketing plans or user personas. Another good alternative is Evernote.

A close second is Dropbox. I live on Dropbox. I keep every important file, picture, video out there. We have a Team account and all of my team members share the same team folders. This has been one of the best productivity tools for us.

I am able to instantly create shareable links of files or folders and send them to retailers, reps or distributors. I also use Dropbox links to send files to my factories and partners overseas. We work remote very often and being tied to network drive only accessible at the office would not have worked for us.

Honorable mention is QuickBooks Online. It is a fantastic accounting tool that is easy to use, integrates with our banks, credit cards, etc. and is reasonably priced for small-medium sized businesses. It allows me to grant access to different users for maintaining PO’s, Invoices, Inventory, and payroll.

For most of our operations:

What have been the most influential books, podcasts, or other resources?

Books

The Lean Startup by Eric Ries – my background was in management consulting and operations. I am a certified Lean Six Sigma Black Belt, so the concept of applying Lean principals and Lean thinking to innovation and startup was extremely interesting to me. While the book was slanted towards IT/Tech innovation, the principals are applicable to any startup.

Zero to One by Peter Thiel – As one of the best known and most successful venture capitalists and co-founder of PayPal, Peter knows a few things about entrepreneurship. The lesson that resonated most with me was competition is a looser, monopolies are the path to success.

The 4 Hour Work Week by Tim Ferriss – While a lot of the suggestions/tools in this book are a little dated and many of the principals are extremely difficult to implement in a practical setting, the core message is spot on and aspirational. There are countless nuggets of brilliance and valuable insights that I took from this book that I put into practice every day. More importantly, it allowed me to discover the best IMHO Podcast on the planet…

Podcasts

Tim Ferriss – I started listening to his podcast after reading his book and I’ve been hooked ever since. Topics covered are not only relevant to my professional life but to my personal life. Tim has interviewed top performers in every discipline and profession and I have learned more from these podcasts than I ever imagined possible.

Business Wars – If you are an entrepreneur then you love this podcast. It tells the backstory of some epic business battles such as Coke vs. Pepsi, Nike vs. Adidas, Marvel Comics vs. DC, etc. Just a fantastic and entertaining series.

Advice for other entrepreneurs who want to get started or are just starting out?

Run a good business first and foremost.

I speak with many new entrepreneurs that have grand aspirations of raising lots of capital and hiring their ‘dream team’. A disproportionate amount of their efforts is tied to pitch decks and selling their vision. Trust me, I understand the importance of raising capital and cash flow more than most. But I never understood why so many people were so eager to give away equity in their company, take on investors and relinquish partial control.

The best way to raise capital is to show that you can generate cash flow. Investors and lenders alike are interested in a return on their investment, not doing charity work. They want to make sure you have a sound business based on strong fundamentals. An impassioned pitch with a beautiful vision of the future might keep them awake, but it won’t open their checkbooks. A solid business plan with accurate figures and projections and real cash flow will.

Everyone needs an angel, so did we. But after our angel round, we focused on running a good business first. We watched every penny spent. We looked for creative ways to be more productive and efficient without throwing capital at things. We didn’t take salaries, paid our own cell phone bills and cut costs wherever we could. We outsourced things that didn’t make financial sense to own and put sweat-equity in instead of hiring extra help. We kept the ego out of it and managed our Balance Sheet and P&L… and when we couldn’t go any further without extra capital, we were able to borrow the funds instead of giving up equity.

The funny thing is that once we no longer needed outside investment, we kept getting approached by people wanting to invest. As long as you continue to grow, there will always be a need for additional capital. If you are running a good business with strong balance sheet and good cash flow/receivables, you should be able to take on debt to finance your growth.

NOTE: There is absolutely a good time and place for raising capital through equity/investors, but you should do it for the right reasons and at the right time.

Where can we go to learn more?

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