· David Senra, Peter Rahal
[00:00:00] S0: Don't go to the acquisition yet. Talk about the fact, what this thing does, why it was a picture of business. [00:00:00] S1: Cool. [00:00:00] S0: And then we're going to go to the fact that you victimized everybody else. [00:00:00] S1: Epogee makes EPG, esterified propoxylated cholesterol. Basically, it's a modified triglyceride. So olive oil is a triglyceride. So triglyceride has three fatty acids attached to a cholesterol backbone. Your body can't digest this unless lipase comes and clips these fatty acids off. What the company did is they figured if they can lock these fatty acids in, lipase can't break it down. And so what that means is you can have the taste and mouthfeel of fat without the caloric, metabolic impact. Why that's a huge innovation is because most of the calories in food are coming from fat. They're twice as much as protein and carbohydrate. This technology was naturally misunderstood, like most food technology, and so it was sitting there, and it's really amazing. You can have your cake and not have the caloric consequences. So think of it as high-intensity sweeteners, like stevia, monk fruit. That sort of level of innovation. So anyway, we were using it for David, and then we were buying. We were like 90% of the company's sales, and then all paths led to litigation. [00:00:00] S0: Hold on. So this is a patented technology? [00:00:00] S1: Yes. [00:00:00] S0: Correct? So you had one source where you could buy it from. [00:00:00] S1: Yes. [00:00:00] S0: You just said you were 90% of this company's overall sales. [00:00:00] S1: Yep.
· Peter Rahal, David Senra
[00:00:00] S1: Yep. [00:00:00] S0: But there's a handful of other companies that saw that same opportunity and want to use this into their product. [00:00:00] S1: Yeah. [00:00:00] S0: Okay. [00:00:00] S1: Yeah. So we started, and the company was struggling, like a bunch of- [00:00:00] S0: Their company, not Epogee? [00:00:00] S1: Yeah. It was like a bunch of cats and dogs trying to like make it work. And it's hard to work with. It requires good product development skills. But we were 90% of their available supply. [00:00:00] S0: And you'd be in a bad position if, for whatever reason, that company went under or they decided to cut you off. [00:00:00] S1: We'd be dead. [00:00:00] S0: Okay.
· David Senra, Peter Rahal
[00:00:00] S0: Okay. [00:00:00] S1: And then eventually we became like 150% of their supply, meaning like they couldn't supply our needs. So anyway, as soon as I started the company and we were using the ingredient, my whole like, just like, "This is a nasty dependency." And on top of it, it was run by older gentlemen, mostly lawyers. So you know how that is. Like, lawyers running companies is not good. I'm sitting there like, "All right, either they're going to kill us, this is going to end in litigation, extortion, or we're going to buy them." But I was like, all my attention was making sure either we buy them or something. And then in February, basically six months into the company, they came to us like, "Hey, you guys are killing it. How about you take it over?" And of course, I'm like, "Let me think about it for a second." But so negotiated, and it was an obvious deal. Like, these food companies need to be vertically integrated. Like, if you're out there making a food ingredient and you're trying to sell to a big food company, it's this hell. Because the food company were like, "Well, you don't have enough supply to meet our demand." And then you're like, "Well, I don't have enough demand to generate supply, and then it's too expensive." And on top of it, you're going to like, "Well, I need redundancy. I need two suppliers." "Well, I have the IP. I can't do that." So vertical integration makes the most sense. [00:00:00] S0: And they could not vertically integrate. [00:00:00] S1: They didn't have a route to market, yeah.
· Peter Rahal, David Senra
[00:00:00] S1: They didn't have a route to market, yeah. [00:00:00] S0: So they essentially just bought this patent as a way to make money. [00:00:00] S1: Yes. [00:00:00] S0: This is not actually a real company. [00:00:00] S1: Well, they developed it, yeah. [00:00:00] S0: Okay. [00:00:00] S1: They developed the process and invested in it. And the entrepreneur, the founder is amazing. It required so much cash that he just eventually got diluted for the lawyers to take over. And it just made sense for both parties to like merge and acquire. And so we did a deal where we bought half the company, and then, or we bought the whole company, but half equity, half cash. And then we got in a situation where it was like, all right, David's growing well above our forecast. And then, so we are 150% of their supply, and at the end of the day, there's all these customers that had no supply agreement. Honestly, their businesses weren't going anywhere. And so if you didn't have a supply agreement, you're just not going to get supply. And by the way, me with David, the first thing I did when we started was negotiating a supply agreement with them. Prior to the acquisition, we had a supply agreement that was good around change of control, that most favored nations on price, most favored nation on inventory. So any inventory that was available was ours. [00:00:00] S0: How did you know to do that?
· David Senra, Peter Rahal
[00:00:00] S0: How did you know to do that? [00:00:00] S1: When you have a dependency like that, you just got to make sure you're covered. Even if the deal didn't go through, we didn't have all the supply anyway. Like, we're the elephant in the room with the customer. If you didn't have a supply agreement, you're out of luck. [00:00:00] S0: So the way it was reported or talked about was there's this very important patentable ingredient he needed. He was using most of it. There was these other companies that also used it that he was technically competing with. He buys the company and shuts off their supply. [00:00:00] S1: Yeah. [00:00:00] S0: But I didn't hear the second half of the story that then I also recruited from the people that I just copied. [00:00:00] S1: Yeah. [00:00:00] S0: You had a lawsuit or something over this, right? [00:00:00] S1: We had an antitrust claim and lawsuit, yeah. [00:00:00] S0: Is that still ongoing? [00:00:00] S1: It was dismissed three times. Because for that lawsuit to function or for them to actually have any merit would mean like, it would be like a landmark case in intellectual property. The big lesson, which I think you've had Lulu on, which if I had Lulu in my pocket, we would have managed the comms differently. Like, we just like, one, we let Epogee manage the comms a little bit, and we just did a terrible job communicating. [00:00:00] S0: Did you communicate at all?
· David Senra, Peter Rahal
[00:00:00] S0: Did you communicate at all? [00:00:00] S1: There was a notice sending out of the acquisition and that if you don't have a supply agreement, there will be no supply. But that comms, I could have done better. I could have done it with more compassion and called the entrepreneurs or could have done it differently. [00:00:00] S0: In what way, though? Compassion doesn't seem to be one of your personal traits. [00:00:00] S1: I think it is. I think compassion is important. [00:00:00] S0: Do you have it? [00:00:00] S1: Yeah. To be a good leader- [00:00:00] S0: Show it to me. Where are you hiding it? [00:00:00] S1: I just don't have sympathy for like... I don't have sympathy for stupidity. I don't have sympathy for incompetence, really. Like, it was so obvious that if you're going to get into it, if you're going to use an ingredient that has a single source, you better make sure you have a supply agreement. It's like fundamental. [00:00:00] S0: This goes back to something that was like second nature to you that you don't even feel special. Like, remember at the beginning of your conversation, you were like, "Okay, well, yeah, I got all this money. I'm going to chill. I'm going to find a wife, have some babies, and then I'll invest on the side." Obviously, you're an entrepreneur, so it's like life and death for you. You'll take it very seriously. You start cutting checks into this company. It's like, "What is this guy doing?" [00:00:00] S1: Yeah. [00:00:00] S0: You didn't know how rare you were. [00:00:00] S1: Yeah, no, totally. [00:00:00] S0: So same situation here.