Transcript – Why VEEV Vodka Went for More Than 7 Times Revenue
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John Warrillow: Hey. This episode of Built To Sell Radio is brought to you by the Value Builder System. I had the opportunity to interview Stephanie Breedlove the other day. She sold her $9-million payroll company for a cool $54 million. How did she do it? She focused on the eight things that drive company value, things like what we call the Switzerland Structure, monopoly control, recurring revenue, all things you’re going to evaluate in your own business using the Value Builder Score. Takes about 15 minutes to complete the survey. Go to valuebuilder.com.
John Warrillow: Next up, you’re going to hear from Courtney Reum, who left Goldman Sachs in 2007 to start VEEV Vodka. He built it up over that 10-year period to more than $10 million in annual sales, and he sold it for a cool seven times top-line revenue, in fact, over seven times top-line revenue. In this episode, he talks a lot about raising the money for VEEV, which I found fascinating, the importance of having connections and deep-pocketed connections and that process and how not to get diluted in the process of raising money. Listen for the section where he’s describing how at M13, his investment firm, they think about investing in certain companies. I loved when he talked about what he calls so-what sales and the danger of growing your company and doing too many things. Great little pieces of insight there from Reum.
John Warrillow: He talks about the sale of VEEV and how he actually got six different businesses that he thought might be willing to buy his business, how he whittled that down to a group of three and ultimately chose one. He talks a little bit about some of the dirty tricks that venture capitalists play. He talks about cram downs, preferences, and ratchets. He gives little definitions of all this, so lots of tidbits and good stuff in here from Courtney Reum.
John Warrillow: Courtney Reum, welcome to Built To Sell Radio.
Courtney Reum: Thanks so much for having me.
John Warrillow: I’m excited to hear about this. Now, I must confess I do like vodka. I’ve never tried VEEV. Isn’t that terrible?
Courtney Reum: That is terrible, but I’m going to forgive you because we only sold it in the US, and we never quite got that deal done with he Canadian PLCB or whatever they’re called.
John Warrillow: Yeah, the mafia up here in Canada, for sure.
Courtney Reum: Right, and they really are the mafia. They wanted me to sell it to them at a loss so, as you can imagine, that was a tough, tough deal to swallow.
John Warrillow: For an entrepreneur, that’s a no-go. Well, listen, I’m looking forward to hearing about it. Tell me about VEEV. This was kind of a vodka with a bit of a twist. Maybe tell me about your idea.
Courtney Reum: Yeah, it was kind of the idea that people are always going to drink, especially here stateside. Things like prohibition didn’t work. If you start from the assumption people are going to always drink, let’s try to have them drink better or give them a better option. My brother and I are pretty health-conscious guys. We were always really shocked by seeing friends of ours who were incredibly healthy in every aspect of their life yet, like a lot of people, myself included, we wanted to enjoy going out and having some drinks, but then you drink certain unnamed alcohols that are really practically carcinogenic.
Courtney Reum: We felt like if we created something that was unique as a product, both in the bottle and as a company, it might have a shot, so that was kind of being the first organic product. We were infused with a bunch of ingredients like the acai berry from Brazil when no one knew what that was. We had prickly pear in there, which is a natural hangover remedy. Of course, disclaimer, you can get hungover from anything if you drink enough of it, but all things equal, it will definitely make you less hung over if you drink what you usually drink.
Courtney Reum: Then, as a company, we did a ton of things around sustainability. We had the first distillery powered by renewable wind energy, gave a dollar from every bottle we sold, which was a huge percentage of our, quote, unquote, profits back to the Brazilian rainforest and different local environmental causes. It felt like it was something different and people would respond well to it.
John Warrillow: How much of the difference was kind of vapor wear? I mean the prickly pear, the ingredients. I mean is this real difference or is this more marketing difference?
Courtney Reum: No, it’s real difference for sure. I mean you’re correct in saying that, at the end of the day, alcohol is largely water. I mean there’s a ton of water in there, but also just having better quality in there. You’d be shocked the lack of quality water that’s in a lot of things like vodka or other white spirits, alcohol or whatever you use to distill a grain or something like that.
Courtney Reum: Then it comes down to the other ingredients. I don’t think we ever claimed that having a VEEV cocktail is the same as having a superfood smoothie, but again, we felt like it was healthy from a bunch of different angles or healthier. It was lower calorie, and the ingredients were organic. They’re very, actually, strict, about the organic labeling in alcohol because you can imagine the health claims. You have to be very careful and really, really walk the walk.
Courtney Reum: We say to people, “Hey, if you usually had three drinks and that was your limit, you had three vodkas, have three VEEVs, and I promise you’ll feel better the next day. If you start acting irrational and have five VEEVs, then I can almost guarantee, conversely, you’ll be more hung over than you usually are too”, so that’s always the caveat.
John Warrillow: Got it. I mean the booze business is notoriously expensive to get into, right? There are significant capital outlays, so how did you kind of raise the money to get going in the first place?
Courtney Reum: Yeah. You are right. I often joke that the phrase it takes money to make money was invented by someone who started an alcohol brand because there is no scaling. There is very archaic laws, especially in the US, in terms of how these things are distributed. It’s really guerrilla warfare and hand-to-hand combat, and that just requires sales teams and marketing expenses, and it’s very expensive.
Courtney Reum: My brother and I were lucky in that we both were previously Goldman Sachs investment bankers, so had come into contact with a number of people who had given you the old, “Hey, if you ever start something, kid, I’d back you.” Luckily, we circled back to them. I worked on things like the merger of Procter & Gamble-Gillette. I was part of the team to help take Under Armour public. I worked with Vitaminwater very early days. When you’re around some founders like that, besides being inspiring, they know how to be entrepreneurial and they back people. We tended to keep our investors by name fairly private, but it was something like probably 90% of the money we raised, and it was an eight-figure amount when it was all said and done, came directly or indirectly kind of through our relationships at Goldman Sachs.
John Warrillow: Fantastic. A lot of people listening will have never raised money before. The whole idea of raising money is such a black hole. I wonder how do you go about raising money for an idea? How do you put a value on it? It just seems like such a shot in the dark to figure out, okay, what’s this thing worth when it’s really nothing more than an idea. How did you guys do it?
Courtney Reum: Yeah. I mean, obviously, times have changed and valuations are probably a little bit higher, especially out of the gate. I think there’s a bunch of factors you touched on there. For example, if you’re a second-time entrepreneur, whether you’ve been successful or not, but especially if you’ve been immensely successful, it’s a different valuation for just drawing some sketches on a piece of paper than it is if you’re a first-time entrepreneur, and your experience, and all that good stuff.
Courtney Reum: It’s funny. Just to touch on what you said, I mean we, my brother and I, actually just wrote an entrepreneurial book, and one of our tenets in it is that time is the new money. It’s hard to get your arms around that idea, especially when you’re strapped for money, but there’s a lot of ways that didn’t exist when we did it, like crowd funding and just general access to people, that does exist now. We really encourage people, in our experience, that you should always be prioritizing your time over your money because that is the new currency, and a lot of great ideas are about speed to market and then, ultimately, execution.
John Warrillow: Got it. What kind of proportion of the business did you have to give up in that angel round?
Courtney Reum: As someone once told me and I believe, once you start taking the house’s money, you want to keep taking it but, obviously, early on is when you can get diluted quite a bit, so we tried to raise the bare minimum every time and then go out for more raises. We were fortunate in that we had investors who … One thing that, in my experience, we see people do a lot is they raise money and they say, “Hey, this will last for a year,” and then it only lasts for six months, and investors are kind of shrugging or shaking their head.
Courtney Reum: What I like to do is raise money based on milestones versus time. If I said, “Hey, I’m going to raise $1 million to get my first 1,000 customers,” and if that took a year and three months or it happened much sooner and took four months, you’ve set the expectation that, when you hit certain milestones, you’re going to go raise more money. What we did, and I think this really worked out well, is we laid out a directional road map which ended up being not totally accurate but definitely directional saying to our investors, “Here’s the inflection points where we think we’re going to need capital.” We ended up being roughly right so that we said to people, “Hey, I would like to try to have you invest $1 million,” or pick a hypothetical number, “but I don’t want you to invest that now. I would like you to invest that over the next three years in several tranches.
Courtney Reum: We also had new money, and then we also had a big pool of investors that re-upped a couple times as we went because I think they felt like, “Okay, they laid out the plan. They laid out the vision. This is how much it’s going to take.” It was a big number, but it seemed more palatable to kind of deploy it almost the way you would with a venture capital fund or a private equity fund over a three-to-five-year period. That’s what we did.
John Warrillow: Is the valuation going up? As you hit each of those milestones, is the overall valuation going up?
Courtney Reum: Yeah, absolutely. I think the valuation kind of goes up commensurately. In what we do, I’m a big believer that … We’ve been on both sides of it now. We’ve started several companies and been fortunate enough to exit. We also do a lot of advisory board work and angel investments. We’re in over 100 companies, so I think we can kind of relate to the operating entrepreneur side as well as the investor side.
Courtney Reum: The one mistake that I feel like I see people make, if I’m being objective, is that trying to maximize your valuation for that first round or two is, in our experience, a big mistake because I believe you should always reward the people who backed you first. Whether your valuation is, again I’m making up numbers, but two million or three million, of course it matters a little bit, but it matters less than when you get to bigger rounds if you’re doing a series A, series B, series C and raising bigger amounts, 5 million, 10 million, 15 million. That’s when you really want to stretch your valuation because you get the growth.
Courtney Reum: When you try to set the valuation too high on those first rounds, people think it sounds great because you say, “Oh, my company’s worth seven million now,” and that number wasn’t thought out. Then you have to go raise money two years later when you’ve made all this progress, maybe not as much as you thought, but you’ve made progress. You have to raise money at $10 million, and all the people that backed you early and took a big risk went, “Whoa, that’s not much appreciation.” That’s, I think, how you kind of turn off your early supporters is when you get too aggressive too early without focusing on bringing in the right people who can unlock value and be good value-add investors.
John Warrillow: Did you ever second guess your decision to bring on so much outside money? I mean were you ever tempted to grow more slowly and stay within, basically, the cash flow the business could generate?
Courtney Reum: Well, VEEV, our first venture, was a unique example in that there was almost no way we were ever going to be profitable, but that wasn’t the game. It was prioritize the top line over the bottom line, meaning really go for the growth because the exit multiples usually range from 5 to 10 times sales, I mean even a little bit higher to give people out there just a directional data point.
Courtney Reum: Something like Gray Goose, as a very mature brand in 2003, sold for 11 and a half times sales and 23 times free cash flow, which added up to 2.2 billion. That was one of those data points where you think it’s crazy, but there’s other deals like that that have happened, so we went into this going, “Okay. We can probably get something like 7 to 10 times sales,” which we did. You just have to balance that top-line growth because that’s what the strategics want to see with not running out of money.
Courtney Reum: Now, other ventures we’ve been a part of, to your point, have been much more about kind of running it to break even while we grow the top line and being more thoughtful because we also started VEEV pre-2008. I think now, certainly, when we look at the investment side, it’s much more about looking at the past, the profitability or at least staying within shouting distance of break even so that, should we have another correction or something happens, you don’t have to fire sale it. You can just change the direction of your sailboat a little bit.
John Warrillow: Got it. It sounds like you guys started VEEV to sell it. Would that be fair to say?
Courtney Reum: Yeah, yeah. I think that in our experience, now having seen over 100 businesses, one of the biggest things when people ask me what they should do when they’re starting out, it’s always start with the exit goal in mind. I know that’s hard because not everyone wants to sell their business. I’ve had businesses that I started and didn’t want to sell. I’ve had ones like VEEV where I had the blinders on right from the beginning with every decision in mind knowing I wanted to sell.
Courtney Reum: As I told one of our companies that we work with really closely, it’s an organic Slim Jim called CHOMPS, I told them this recently, “We have to make sure we align that you want to sell this, and we have to make every decision with that in mind.” It doesn’t mean, when the day of reckoning comes, you actually have to sell it, but you have to have that mindset to at least put yourself in position or put yourself in danger of being purchased, I’m saying that facetiously in a good way, and make those decisions. It doesn’t mean you have to if the price isn’t right or if we’re really class flowing, but I think it’s really important to line that up early, and most people don’t think about it early enough.
John Warrillow: What triggered the conversation with the Slim Jim guy about, “You’ve got to run this thing like you’re going to sell it?” I mean I guess the basis of my question is how would you approach decisions differently if the goal was to sell it versus the goal was to just build a lifestyle business?
Courtney Reum: Right. It’s a great question. I guess pick something like marketing spend. Every industry is different, but going back to things that we’ve done a lot of, like beverage, most fast-growing beverage companies are sold as a revenue multiple, so you’re incentivized to push marketing, reinvest, drive the top line because nobody is buying you off EBITDA unless you make some jump and get past 100 million in sales relatively quickly. Even then it can actually end up worse for you because, once you have too much EBITDA, then they’re going to value on that instead of sales.
Courtney Reum: If you are a business that’s a cash flow business versus a high-growth one, I would be much more measured about the marketing spend because it’s spitting off great cash. We have some businesses that I don’t think are ever saleable, but they spit off seven figures of free cash flow a year, and so I’m very happy with, let’s even call it flat growth or very little growth because the cash flow is so good. That’s a good example of the dichotomy between high growth versus longevity and almost like an annuity of the cash flow.
John Warrillow: What would be an example of one of those companies in your portfolio that has seven figure but that you could never sell? What makes it unsellable?
Courtney Reum: Well, so we have a little all-natural liquid sleep shot. Picture a 5-Hour Energy-looking bottle, but it’s an all-natural liquid sleep drink in there. You take it 30 minutes before bed. It’s called reBloom. We only sell the brand online. Without going into all the specific numbers, it does low seven figures of revenue, but my net income margin on it is almost, well, it’s about 40% is my net income margin. I only have a couple people who work on it part time. I only sell it direct to consumer online, and so it’s very profitable kind of per hour spent.
Courtney Reum: I don’t believe that anyone’s going to necessarily buy it. It’s literally one, well, now about to be two SKUs, so I don’t think this a $100-million business, but I believe if I can take it from low seven figures, a million, 2 million in revenue to 5 or 10 million in revenue, that cash flow is a very meaningful amount, and I think that’s very doable. My goal for that one is not necessarily to ever sell it because, if I put myself in the strategic shoes, I’m not sure they would. Now, someone could come along and do it, that would be great, but I’m not planning on that. I’m more just harvesting the cash flow and managing the churn and the burn since it’s very profitable.
John Warrillow: I want to go back to this idea of building to sell because I wrote a book called Built To Sell, and I found that a lot of people were kind of squeamish about it, right? It sounded really like money grubbing, or built to flip became a four-letter word, right, in some circles, that it was just too … money-grubbing is the best way I can describe it. I had to go through all the machinations and describe, “Well, that’s not what I mean. It’s you build [inaudible 00:18:22].” Everybody pushed back and said, “No. Didn’t you read Jim Collins’ book? It’s all about building to last, and you’ve got have values and culture, and that’s what’s important about building a company.” I’m like, “No, you don’t have to have … Those two things don’t have to be separate,” but I fight that fight all the time.
John Warrillow: For you, how do you reconcile it or how do you defend it when people say, “Oh, you must be such money-grubbing sleazeballs? All you care about it building to sell?” Do you get that reaction?
Courtney Reum: I do, but I also don’t because I feel like, to your point, and you know better than I do, I actually think most people want to sell. It just depends what sell means. Does sell mean do it a year from now, five years from now, or 20 years from now? Most people want to, in most successful companies, at some point, have a chance to sell. I tend to push people when they say they don’t want to sell. It’s like certain political issues. They say one thing and do another. I find that, when I really push most people and it’s a one-on-one conversation there in a safe space, they admit they want to sell. They don’t know when or they don’t know how, but that’s what they say.
Courtney Reum: Again, I just emphasize it doesn’t mean you have to. I just means you want to have the option. Part of what makes us excited and part of why we do what we do at M13 is we think this is a unique inflection point in the world where brands are being started. The barriers to entry are down for starting brands, a lot of ways to get capital, so starting a brand is kind of democratized, but doing it well in the competition out there is the trick.
Courtney Reum: I believe way more brands are getting started, way more will fail, but the ones that work, it’s just hard to say what will be around 25 and 50 years from now when you look at things like what’s in the Russell 2000 or some of these … what’s in the Dow Jones now versus what was in it 25 years ago and 25 years before that. Even among these big companies, there’s a lot of changes, so I think, although I definitely believe in longevity, I also think there’s something to be said for being smart with your product in the here and now because very few things are built to last for a half century or more.
John Warrillow: What’s your brother like?
Courtney Reum: What’s my brother like? Similar to me. He’s very Type A, fast-talking. We have an interesting partnership because I think if I was … It’s the only partner I’ve truly known in the business sense. We both grew up together, played sports together, literally both went to Columbia and Harvard. We went to the same schools. We both worked at Goldman Sachs, and we’re now work together, so-
John Warrillow: You guys are inseparable.
Courtney Reum: We’re inseparable.
John Warrillow: You’re like twins.
Courtney Reum: We’re two years apart, but we’ve-
John Warrillow: That’s unbelievable.
Courtney Reum: We kind of followed each other. It’s interesting because I think most people would say, okay, if you’re going to start a business, you want to find someone with complementary skillsets, left brain, right brain, or the technical person versus the sales-y person. Although we’re different, we’re more overlapping where it’s a little bit of divide and conquer but try to be like 80/20 rule, like I could kind of hop in on anything he’s working on on short notice if it’s scheduling or I’m in a certain city and vice versa. Although we are very mindful of not being duplicative, we actually are able to kind of hop in for each other and take over different projects or deals, and it works pretty seamlessly. That’s our advantage despite the fact that we’re not polar opposite complementary partners.
John Warrillow: It’s funny. I’ve got two sons, and they’re two years apart. I could never imagine them running a business together. It just [inaudible 00:21:48]. It’s unbelievable, cats and dogs.
Courtney Reum: Yeah. We’ve been lucky. It’s not always easy, but we’ve definitely been lucky. The joke that my dad used to say was he used to say, “I have two sons that work at Goldman Sachs.” Then when we left to be entrepreneurs, people would ask, he’d be like, “I have two sons.” Thankfully, over time, he ended up … some of our brands got out there, and he was proud of us, but it was a little bit of a risk and a jump leaving a secure job.
John Warrillow: Yeah, “I had two sons that went from Goldman Sachs to selling booze.”
Courtney Reum: Right, which is why he would just say, “I have two sons.”
John Warrillow: Yeah. It’s interesting because I think, if you canvassed college campuses around America, the idea of landing a job at Goldman Sachs must be … for a lot of people, that’s a dream job they would aspire to for a lifetime, right? I mean how did you walk away from that?
Courtney Reum: Yeah. In some ways, it wasn’t easy. In other ways, it was really easy, believe it or not, because I always wanted to be entrepreneurial, but I don’t know, I’m late 30s. I don’t feel like the word entrepreneur truly existed or I didn’t know anyone who was an entrepreneur in my teens and even really through college. I had this feeling that I kind of wanted to do my own thing, but I don’t even think I knew how to articulate it or go about it.
Courtney Reum: I thought about doing something entrepreneurial right after college and, as my dad once told me very nicely and lovingly, “Well, just to take quick inventory, you have no real contacts, no real money, and no real skillset to speak of. People have done it with less, but that’s what you’re up against.” As a 22-year-old, yeah, that kind of sunk in. Don’t get me wrong. It’s changed because I meet 22, 23-year-olds now who have much more than I had at that point, so it’s different and, obviously, we’ve seen big companies like Snap get created by people of that age, but it was just a different time.
Courtney Reum: For me, I guess what I’m saying is those feelings were always kind of dormant but there. I just didn’t know they were there. We did these little polls when I first started Goldman, and it was like most likely to quit the first two weeks. I think I won that, so the fact that I stayed for a number of years after that, I was pretty proud of it because, of my analyst class of 100 and something people, I was probably one of the last 10 or 15 standing.
John Warrillow: Oh, there you go.
Courtney Reum: I outperformed my own expectations by a little bit.
John Warrillow: By a long mile. Tell me about the exit of the … You’re growing fast. You’re investing a truckload in sales and marketing. What was the trigger that made you think, “Okay. Now’s the time?”
Courtney Reum: To sell, you mean?
John Warrillow: Yeah.
Courtney Reum: Yeah. I think, for us, it was understanding that this is a business that whatever words people are used to hearing, “Oh, the scales,” or, “This backwards or forwards integrates,” and all that good stuff … Alcohol is a funny one in that it really does none of those. It’s kind of just there. We knew who our buyers were. We looked, and we were very proud that we built something from the ground to a certain point. You can’t see my hands, but it’s like 80% of the way there, but we knew that there was a ceiling on it, and we were approaching that ceiling, so it’s the balancing act of selling it while there’s still some runway but not holding on too long. We were very cognizant of that, partly because of our burn rate and partly because we felt like the person who’d buy us, it’s not exactly about every case or every last dollar at this point.
Courtney Reum: It was about proof of concept, the proposition, where it fits in their portfolio. As I alluded to before, one of the things that I think most people underestimate when you get sold to a big company like we did, a multi-billion-dollar company, is they’re so into runway, right? As important as where it is is where it isn’t because they look at that and think, “Wow, look what we could do with it and plug it into our model.” Making sure we conveyed that sort of stuff was as or more important than the actual sales to date.
John Warrillow: When you talk about runway, just to be clear, you’re talking about there’s still more sales to go capture in a market.
Courtney Reum: Right. For example, we sold VEEV in all 50 states but, at the end of the day, we really focused on no more than 10 states. We were in other states because we were in national accounts like Disney, or airlines like Virgin America, or hotel chains like Marriott but, really, we had a credible story to say, “We’re only focused on these 10 states. The other ones are window dressing. Look what you can do in the other 40 states. And oh, by the way, beyond that, our neighbors to the north in Canada or to the south in Mexico, we’ve done nothing there much less rest of the world, and this proposition will resonate there too, so you have the whole rest of the world to work with as well.”
John Warrillow: Painting that picture was important. You said that you had a sense of who your buyer was going to be. Did you mean to say singular, like you knew there was just one buyer out there, or did you mean generically there were a lot of buyers and you knew who they were?
Courtney Reum: No. I mean that pluralistically, but it’s a good point. Plural, but very finite plural. I would say there’s probably a dozen people that we thought were buyers. Almost half of those get eliminated just based on where they’re at, right? If Diageo was a potential buyer, which they were, but they were having their own issues and their stock price was slumping, no one’s going to get fussed about buying VEEV for X millions when they’re potentially losing billions on their market cap. It’s just not generally how these things go. Some of those buyers were eliminated due to macro things or conflicts.
Courtney Reum: At the end of the day, we probably had a pretty focused list of about a half dozen companies that we actually … We were strategic about it, but one thing we talk about in our new book here is really kind of keeping some mystery and being coy but really trying to pre-court the buyers because I think, too many times, people say, “Well, no one broke down my door, so no one must want it,” but that’s, as you know, not really how it goes. Now, with few exceptions, it doesn’t mean they don’t want it. They just kind of have to be fed the breadcrumbs, if you will.
John Warrillow: How did you pre-court them? I love that term, by the way, pre-courting. Are you drinking vodka right now? I just heard the glass and the ice.
Courtney Reum: Oh, you heard a glass. Sorry. Yes, it was just my-
John Warrillow: I did. Are you having a VEEV, a double VEEV and soda?
Courtney Reum: Right. Sorry, you snuck me. I always have to have just one shot of VEEV in the middle of the day with my vitamins, so now that I’m re-juiced, yes, apologies for that, but yes.
Courtney Reum: We say pre-court the buyers because it’s not showing up and saying, “Hey, we’re for sale. Do you want to buy it?” It’s leaving them the breadcrumbs because it was just establishing relationships, acting like you know all is very well, but it’s the old you want someone to buy your company not go out and try to get sold, and so it’s just about having organic conversations, finding reasons to build the relationships. Then, honestly, part of it’s just getting out and telling your story because we found, and I’ve continued to find this with other businesses since VEEV, the perceptions of, a lot of times, brands, especially when they’re small or up-and-coming, certainly there’s ones that are right and wrong.
Courtney Reum: Listen, there was perceptions I heard about VEEV and other companies we’ve had that were too far positive that were very wrong, but perceptions can definitely be out there, and so it’s important to try to control the message and make sure you control the perceptions to the best of your ability. If it’s even finding an excuse to go chat with someone who’s a strategic buyer and you don’t have a meeting, but let’s just say you have a casual drink at an industry trade show, it’s about just dropping those breadcrumbs of things that you think might be hot buttons for them or misconceptions they might have about you and just subtly bringing those into the fold. I think we found that made a big difference in getting people’s interest.
John Warrillow: Interesting. Love it. Love it. You shortened the list from a dozen obvious guys down to six who you thought had the capacity to buy, and the willingness, and the time was right, and you’re laying in the breadcrumbs. Love it. What next?
Courtney Reum: Can I just throw in one-
John Warrillow: Go ahead.
Courtney Reum: One thing that I think’s important is that, you probably see this all the time too where we always say success doesn’t equal a successful exit, so it’s very much about strategic fails or strategic whatever your play is with your company because we see so many businesses now that get to a big number, 10 million to 20 … I saw a business the other day that was at 25 million, and he kind of acted dumbfounded that no one wanted to buy him. I said, “With all due respect, I don’t see why someone would because it’s great you’ve gotten to 25 million,” but in my view of the industry he was in, it was 25 million of very unstrategic so-what sales, and I didn’t understand how someone would view it and go, “I need to have that,” based on the sales he had accumulated.
Courtney Reum: The reality is, other than the few exceptions we all read about in the press, most of these acquisitions tend to be what I’ll call nice-to-haves not need-to-haves. If I’m being honest, VEEV and some of our other brands that we’ve been involved with are nice-to-haves not need-to-haves. If it’s a need-to-have, that’s when they break down your door. If it’s a nice-to-have but not a need-to-have, that’s where I think you really need to feed the breadcrumbs and pre-court people.
John Warrillow: I love this example, but I’d love to know more about this $25-million business who’s got a hodgepodge of sales. When you say so-what sales, what exactly do you mean by that?
Courtney Reum: Well, one thing we talk about in our new book is do what you do best and outsource the rest, or we say things like you really have to ruthlessly take advantage of your unfair advantages. Most startup businesses, I believe, are founded on one or two key insights. This was a retail company, and the problem I had with it is we’re involved with a smoothie company that has gone from zero dollars in sales two years ago to 40 million in two years, but the best part of it is they’re only sold direct to consumer online. There is no retail sales.
Courtney Reum: A buyer could very easily look at that and go, “Oh, my gosh. If I put this into grocery, and I do this, and I do this …” It’s not hard to pencil out what those numbers look like, but when you’ve gotten to … This was a retail apparel brand. They had sold a little bit through some stores, but it wasn’t great sell through. They had opened a couple of their own stores, which was not bad but not super compelling. They had done some direct to consumer. They were still not profitable at 25 million, and they just kind of got into this hodgepodge where I think that this market …
Courtney Reum: The world we live in now is so much about finding your tribe and your niche and your consumer, and this brand had sold to so many different consumers that they had … it had been death by 1,000 cuts, so although the big number rolled out, it wasn’t like we could say to someone, “Hey, if you’re looking to find 45 to 50-year-old moms who wear a size whatever and like this style, this is your brand.” We had to say, “Oh, it appeals to everyone,” and by appealing to everyone, it appealed to no one and, thus, why they had no interest.
John Warrillow: Yeah. We talk about the idea that the most valuable companies sell just a few things to a lot of people, and the least valuable companies sell lots of things to a few people. It’s a similar idea, but yeah.
Courtney Reum: Right, and that’s what I mean. Yeah. It’s always about geographic … If you’re doing a business geographically these days, it’s always, in our experience, we try to say, “Hey, let’s go deep in before we broaden. Let’s nail it in a couple cities rather than try and go everywhere. If it’s channel, let’s make sure we figure out direct to consumer before we do a bunch of retailer or vice versa,” but too many people kind of sprinkle it out there too much, and then it doesn’t tell the right story.
John Warrillow: What kind of sales are you doing when you’re actually in the process of going to market? I mean what’s your annual revenue or kind of some proxy for size at this point?
Courtney Reum: Yeah. It was in the low eight figures in US dollars so, give or take, $10 million. The way spirits sales are calculated is very different than certain other categories, so that’s why the multiples paid tended to be in that 7 to 10 times sales range because getting to 10 million in spirits is very different, in our experience, than getting to 10 million in a nonalcoholic beverage or even a snack. It’s probably more like getting to about 25, which is why people paid up for it.
John Warrillow: Got it. Got it. You’ve got these six companies. You’re laying out the breadcrumbs. Did you hire an investment banker to take the company to market? Did you fall into one company’s hands pretty quickly? How did that all go?
Courtney Reum: That’s an interesting story. As I said, we’re reformed Goldman Sachs bankers, not that I claim that we were the best bankers when we did it, or we left probably before we were too senior, but we, at one point, had some inbound interest a couple years before we sold, engaged a banker. It didn’t work out, and we learned some stuff from it and ultimately realized that, per my other comments, if we were going to sell this business, we had to get someone to want to buy us, and the only way someone was going to have the passion, tell the story, and see the right message is if we did it ourselves.
Courtney Reum: The second go-around when we actually got bought, I just made it my business for 12 months to kind of get around, 12 to 18 months to get around and chat with some of these people I thought were potential acquirers so that it was a personalized call. It was a reach out. It was something organic versus, hey, bankers calling you, “We’re running a process. You have until next week to get your bid in,” because we did it once and it didn’t really work, truthfully, and I don’t think we would have had much better results the second time, whereas when we did it ourselves, we were able to kind of have multiple options and offers and create a little bit of tension but nothing that you would try and do if you were a banker for a larger company.
John Warrillow: Why didn’t it work the first time?
Courtney Reum: It didn’t work the first time, I think, for several reasons. One, I don’t think we had unreasonable valuation expectations, but it was at the high end of what people wanted. Secondly, the minutes … Listen, the banker we worked with is a great, great guy and a very well-known guy in the industry, but I think he tried to kind of make it a process where it just needed to be higher touch because these companies are usually family-owned, generational, southern gentlemen if I was painting a picture, and you’re not going to … Again, unless they’re breaking down the door, you’re not going to force them to do something on someone else’s timeline, and we just kind of lost that personal touch.
Courtney Reum: Then I think the last thing was it was important learning because people had some misconceptions that ultimately kind of killed the momentum and, true or not, they were enough that it slowed things down or it delayed things. Ultimately, that just made it like herding cats and wasn’t the right time.
John Warrillow: What were the misconceptions?
Courtney Reum: Let’s see. There would be misconceptions about how much we discounted our product, which was next to nothing because everyone does, how much we had spent on marketing, what markets were our strongest, who our consumer was, things like that.
John Warrillow: Got it. Got it. You’re having these conversations. You’re doing it all yourself. How did you approach those conversations? Because I think a lot of people listening would be saying, “I would love to enter into a conversation with a potential buyer, but I just don’t know how to start the conversation. Do I send an email saying, ‘Hey, Bob. Do you want to buy our company?'” What does this email say to the CEO of a billion-dollar company that … with the intent that you want to have a strategic conversation with him?
Courtney Reum: Yeah, obviously, every experience is different. In ours … and every industry is different. I don’t think I would ever send that email because you just kind of put everyone on notice, and you made it pretty clear what you want. Some cases in some industries I do think that’s the way to go, just be very direct. We tended to go the way, again because we said we started probably two years before we wanted to sell, say, “Okay, we want to sell. We have some time. A gun’s not to our head, but we need to move with urgency. What do we do?” It was more like emailing, “Hey, Bob. This is Courtney Reum, the founder of VEEV Spirits. Hear your name a lot. I’m guessing you’re aware of VEEV. I know we’ll both be at X event next week. Just thought it would be nice to break the ice and kind of tell you a little bit about VEEV,” or just something very low-key.
Courtney Reum: If they have no interest, that tells you something, but I would say 80% of the people that I took that approach with were like, “Yeah, for sure. I know about VEEV. I’ve heard good things. Let’s grab a drink. Let’s grab a chat. Let’s grab a coffee for a few minutes.” That way, when they ask, “Are you for sale?” “No, no, not for sale, just thought it would be a good … Just trying to meet people in the industry. I haven’t been doing this that long,” or however you phrase it. None of it was untrue. It was just much more of a slow play.
John Warrillow: Did you get anybody saying, “Are you guys for sale?”
Courtney Reum: Yeah, one or two people, but it was more … but when I started doing it, I don’t think people were chomping at the bit so much as, once we proved a few things out, they were more eager. Yeah, people would say, “Is your goal to sell it?” Depending on who I was talking to, I would never say no. I would say exactly what I’ve said here, which is that, “Right now, we’re focused on building the brand but, at some point down the road, I think we’re interested in partnering with a bigger strategic to get this brand to the next level, and what that looks like, I don’t know,” or something to that effect.
John Warrillow: Got it. Got it. What happened next? Assumingly, you got a formal offer, a letter of intent from somebody. How many of the six gave you an offer, and how did that work?
Courtney Reum: We ended up, again because we ran it ourselves, formal offer is a relative term, but yeah, we had three our four people who said, “Hey, I could see this kind of deal working.” It was phone calls, emails back and forth. We didn’t ask for indicative letters of interest or non-binding offers or things like that. We just kind of slow played into them because we … What we said to everyone, which was the truth was, “Oh, you know, we have someone else interested, but we want to do the right thing by the brand here, and we’re really interested in talking to you for these reasons, so it’s not an open-ended invite. We’d like to kind of move with some speed if there’s interest, and if there’s not, no worries,” but we did it in a very non-ultimatum sort of way.
Courtney Reum: That worked well. We had about four people that I think gave us some kind of offer, as I recall because it’s been a few years now. One dropped out relatively early, and then another kind of made an offer that, as we dug into it, wasn’t that appealing. At the end of the day, we had two pretty good offers to choose from, which is how I think it goes a lot of the time.
John Warrillow: What made the one offer unappealing?
Courtney Reum: One was that they wanted us to stay on, and we wanted to focus on other things. The second thing is that they were kind of trying to hair … they gave you … let’s just say they said, “Oh, we’re going to offer 100 million for it,” and then they kept kind of chipping away and haircutting and haircutting and haircutting. That’s just not how we generally do business. It’s that, if you have some questions and want to talk about adjusting the valuation, that’s fine, but I think it’s kind of one of the dirtier tricks some people do where they lead with a top-line number but then keep haircutting it where it’s like you knew you were going to get to 70 or 80 from 100. You should really be more transparent about it. It just doesn’t leave a good taste because sometimes you can do that purposely knowing that it will remove other buyers just from a timing point of view.
John Warrillow: You thought they were re-trading on purpose?
Courtney Reum: Yeah, I can’t say if I do for sure, but I think their way of doing it definitely would leave that open to the imagination.
John Warrillow: Yeah, yeah. You got these two offers. How did you distinguish between the two? I mean was it just the better-priced one, or were there other material deal terms in one that made it more favorable, or what made you tip the balance to the one?
Courtney Reum: Yeah. What made me tip the balance, ultimately, was that we actually ended up taking a little less money up front and putting some on the come, meaning we actually opted for some earnout over time because we felt like if they do what they thought, what we felt they could do with the brand, we’d rather bet on the back end. The other person wasn’t willing to give us any stake in it over the next few years, and so we wanted to continue to bet on, I guess not ourselves anymore but on the brand.
John Warrillow: What proportion of the total deal was at risk or on the come, as you say?
Courtney Reum: Yeah. For various reasons, it’s hard to calculate exactly, but it was a quarter, a third of it, meaningful amount.
John Warrillow: Got it. Yeah, yeah. What made you confident that they were going to fulfill their obligations? I just did this interview the other day with this woman, Cindy Whitehead, amazing interview. She invented the female Viagra. She sells it, and the deal was she sold it for $1 billion and a percentage of future sales. The company, Valeant, said, “Yeah, yeah. We’ll sign up for that,” and she made them sign up for a marketing plan and a commitment to invest dollars. Well, Valeant went, as you know, pear shaped, and there were problems, and they never launched the drug, and so she sued them and got the drug back and kept the billion dollars, which is why I ask. It blew my mind, the story, but I’m wondering how you got comfortable that they were going to fulfill on the earnout so that the earnout piece was realistic for you.
Courtney Reum: Yeah. It comes down to, any deal, there’s inherent trust at some point. Yeah, you never know for sure and, at the end of the day once you get far enough along, we’re much more, I guess, beholden to them than the other way around and so, at some point, you’re in too deep. That’s part of just looking people in the eye and believing in the good in people and hoping that they honor their deal. It’s just a feeling, and I think we’re pretty, pretty optimistic but also pretty good judges of people, and so that’s what … We end up taking a leap of faith, but you’re certainly right that it is always a leap of faith.
John Warrillow: Are you still in the earnout phase right now? How’s it going?
Courtney Reum: It’s going well for the most part. Yeah, it actually ends, well no, we have a little more tail on it. It was always back loaded, so it will really depend what happens in the next year here, but it’s tracking within reason, about as we expected it would.
John Warrillow: Got it. Got it. You’ve been involved with a lot of deals. You’ve had a lot of exits. You’ve been now investing in a lot of companies. I’d imagine you’ve seen a lot, and your time at Goldman Sachs, you’ve seen a lot of dirty tricks. I’m fascinated by this because I think there’s this legion of mercenary buyers who are basically preying on business owners and their relative naivete, and taking advantage of that, and getting businesses for less than they’re worth, and doing all sorts of crazy stuff. Give us a little glimpse into this world. What is the dirtiest trick you’ve ever seen a buyer try and put one over on a business owner, and how do we avoid those sorts of tricks?
Courtney Reum: Sure. Yeah, I think the two that I see very often are what I refer to, which is that sometimes people give you a headline number that you say, “Oh, it’s X,” and that looks really attractive, but when you actually unpack it and go through all the other bells and whistles on it, it’s a much lower number, and so I think you have to really … The devil is in the details, especially when you’re dealing with a big company who has much bigger lawyers than you do, and much fancier XYZ, and can spend against it. I think it’s that. Again, people know how deals work. If they’re able to just kind of have some of the flies drop, then they’re in the [inaudible 00:45:55] seat to get it for much cheaper, and I think it’s unethical and really sad for entrepreneurs because, a lot of times, they’re stuck.
Courtney Reum: The other thing that kind of goes hand in hand with it that I see is that financial engineering and then the way you legally write that up has become so tricky that I personally see a lot of deals where I say. “This isn’t a great deal for the entrepreneur,” but I just don’t think they get it because there’s articles written about people who have sold their company for $1 billion and walked away with like $10 million because they didn’t really understand how preferences worked and getting crammed down, and dilution, and ratchets, and liquidation preferences.
Courtney Reum: Without doing a sermon in all those, there is many companies we invest in now where I do it because I go, “I like this a lot,” but my downside protection is so, so great that there’s no reason not to do it because it’s a free option. Conversely, in some of those, I walk away because I feel bad for the entrepreneur because there’s actually no way that they can make money anymore.
John Warrillow: I love the definitions. I’ve never heard crammed down before. What do you mean by that?
Courtney Reum: Yeah. Crammed down is when you get … I meant crammed down in the cap table, meaning in the ownership table of your company. I think what ends up happening is people don’t understand … They understand taking money, but they don’t understand always dilution, and they don’t understand how preferences work. When you have a company that has a lot of preferred stock in there and that has to come out before all the common and then you … It’s not as simple as, oh, I own 5% of a billion-dollar company. It’s I own 5% of a billion-dollar company after all the prefs, after ratchets and other things, and so that number ends up dwindling quite a bit.
John Warrillow: What’s a ratchet?
Courtney Reum: Those are harder to explain, but I would say that, in general, it’s just different options that investors have, and there’s different ways to do it where they just, again, continue to get their money back or out before anyone else gets anything.
John Warrillow: Yeah. It’s a fancy world if you get into some of these deals that are offered by VCs where they sound good on the headline number but there are a lot of Ts and Cs to cross or review, so I appreciate the education on some of the terms.
Courtney Reum: No problem.
John Warrillow: You guys have written a book. Tell me about the book.
Courtney Reum: Yeah. We’ve written a book called Shortcut Your Startup, which to what you were saying earlier, I think, hopefully, people understand the intent of it, which is that, as I said, time is the new money. I think we’ve written a book just based on our experience saying we’re, hopefully, just old enough and thus just wise enough and have enough experience to talk about some of this yet young enough to get it and understand how companies are built in the new world order here. It’s a book about a bunch of different, we call them startup switch-ups. They’re things that are counterintuitive to the way business has always been done but we think hold to the changing way that businesses and companies are built.
Courtney Reum: It’s a book about that, and it’s definitely a lot of new information that we think we’ve developed or seen over the pattern recognition, but it’s also a good bit of information that we’ve learned from other people or that we didn’t, I guess, invent or put out there. Part of what happens to, I think, entrepreneurs today is there’s no lack of information out there, but there’s definitely a lack of sorting through the information, synthesizing it, and distilling it in a way that’s very easy and usable. That’s what we’ve tried to do here is take new information and existing stuff, put it into what we call a playbook, which is, in essence, what we do at my company M13, and give you a pretty user-friendly manual of how to start a company in today’s day and age.
John Warrillow: Awesome. What’s the best way for people to reach out to you if they want to say hi?
Courtney Reum: Yeah, absolutely. There’s a contact on our book website called shortcutyourstartup.com. You can just find a link to get in touch with us there. Otherwise, our company is called M13. If anyone sends an email to firstname.lastname@example.org, that’s dot C-O not dot com, it’ll get to one of us. We always like new people reaching out.
John Warrillow: Shortcutyourstartup.com. Courtney Reum, thanks for joining us.
Courtney Reum: Thanks so much for having me. I really enjoyed it.