Thanks for introducing me to this company, Joyce. Sounds like a concept that is working (particularly love the subscription model), and growing rapidly ($150 Mn in revenues already).
I am just curious as to why existing baby foods companies (e.g., Nestle) with decades of marketing muscle, distribution expertise and top-quality talent, cannot step in and crush companies like these over the long term. Building consumer brands (esp. on high sensitivity areas like food for babies) is super hard, and a PR disaster around quality or efficacy of products can really doom the company. I know they go out of their way to convey the safety aspect which is a good thing, but creating a negative buzz, even if done so nefariously, can seriously impact the brand. At $150 Mn they are probably not hurting the biggies as much yet, but once they scale to say $500 Mn in revenue, it could be a different ballgame altogether. Just curious as to how you would assess this company once it starts competing with the bigger and more established players in the real sense.
But thank you for this post, I will begin to track this company more actively.
Avi, this is a great post and makes for a fascinating read. I have been a skeptic of the YC model, despite its notable successes, but thought you may be well-positioned to answer a couple of my questions:
1) They are one of the prime catalysts behind fuelling crazy valuations right from the angel/seed stage. “Paper napkin” valuations of $1 Million to seed valuation of $5 Mn to Series A valuation of $50-100 Mn seems to be their default success path. However, the way I read it, it is predicated heavily on the “greater fool theory” (i.e. I will buy a pig for 100, apply lipstick on it and sell it for 500 asap, and some greater fool will be willing to do the same going forward, so he will come and buy it). So YC and the first 1-2 angels exit as soon as possible to achieve “liquidity”. What would give me confidence that this is not the case, if they hold on to their investments until say Series C or D when the model is actually proven out and the company achieves some degree of profitability (or atleast a path towards profitability). So my question is — do you think they are good investors or just that they appear to be in the right place at the right time, and have been significant beneficiaries of the macro around (i.e. Tech Bubble in Silicon Valley)?
2) Many of the ideas they seem to fund appear to be of the “mobile app — x for y” variety (i.e. AirBnb for pets), and not ideas that propel the society towards genuine innovation (e.g., Tesla batteries, pharma/healthcare R&D etc.). How do you think about that?
Once again, this is a great overview of their model and appears to be working super well for them.
Brian, this is an insightful and eye-opening analysis, and the points you have articulated indeed sound very compelling.
I am just curious as to what the margin sensitivity is, on a couple of counts:
1) How do they think about competition from grocery e-retailers (say: Instacart) — because it amounts to erosion of their own margins, since products are offered at the same retail price to the end-consumers, therefore someone is bearing the cost of order fulfillment, bagging and delivery. Instacart is performing this function today, and is admittedly operating at a loss. But going forward, how do you think these are likely to pan out? Does Trader Joes gain or get hurt? Where to “steady state” margins settle at?
2) High private label penetration is usually accretive to margins. I am wondering why competing players do not have this level of private label penetration and how would Trader Joe’s margins get impacted, once the others (say Whole Foods) start doing so in a more aggressive manner i.e. how defensible are these private label margins?