A Product Market Fit Show | Startup Podcast for Founders
00:23:26 · Dan Novaes, Pablo Srugo
[00:23:26] S0: So basically, the thesis was like, look, we're the closest company to make the smartphone career better. At the time, we had launched our earned phone. We got it into Walmart. We got it into Best Buy, Target, all these places. And we're like, look, you know, people are spending, and this is, this is actually true, like, even till this day, it's like, if we're spending 40 to 60 hours on their phone every week, right? If you sleep eight hours a day, there are only 112 waking hours left. If you were spending one third to one half of your waking life on this device, where is the money you're going to? It's going to the things that you almost bought, the ads, like, you know, that's why these companies are worth trillions of dollars. Thesis was, hey, of the 7 billion smartphones out there, the largest percentage are actually for more budget conscious consumers that actually need a little bit of extra money. And this phone could actually be free at this point in time. If you take everything someone does and share that revenue back with them, you can make this like a piece of gig income, right, of some sort. And so that was the idea is that we are going to make phones for your better and subsidize that entire cost. It's the eighth biggest expense in the household is the phone plan. [00:24:26] S1: it's not just the device, like, you're talking about the monthly plan?
00:24:29 · Dan Novaes
[00:24:29] S0: Yeah, yeah, because if you think about it, if you're earning $100 a month, that is more than enough to cover your, you know, family plan, the phone, et cetera, right? And so, and that's a low, like, you know, that doesn't include savings. Like, you know, you can save way more than that. So it actually extrapolates quite significantly. So that was the thesis, right? And, and still is part of our underlying thesis. And so that was the vision. And you're like, growth at all costs kind of mindset as well, because that's what everyone else in the market's doing. And, uh, for us, we were like, okay, we kept extending payback periods because we were like, well, we're making so much money off of these companies that are paying us. It's like, so initially started out as three month payback period. Then it's like four month payback period. Then we're like six months, then nine months, then eventually 12 months. And then in April, May of that year, the bottom fell out, dude. And it was like right around, so basically Terra Luna, I remember we had nothing to do with Terra Luna, but that crypto, you know, failed. And then one of our largest advertisers was Voyager at the time. They owed us millions of dollars and they went bankrupt. FTX went bankrupt, another advertiser. Aspiration, which wasn't even in crypto, it was like a, uh, neobank went bankrupt. Everyone that was going to go public suddenly couldn't go public because all the VCs are underwater. And then, so we started getting all these clawbacks of like people trying to like, you know, change the terms of what they were going to pay us. And we were basically left holding the back, millions of dollars. And I didn't collect enough money to pay for my 12 month payback period. Like, and I'm only like two or three months in. So we had to cut half of our staff. We were in this no man's land because we were not a series A or even a series C company. We have a unique business model that is not kind of like repetitive and kind of pattern recognition that probably VCs are going to see. And on top of that, now I'm maybe was a series B company is now a declining series B company and all the growth investors are underwater with their portfolio company. So they're only going to save the best ones, you know, not to mention the ones they've already given money to. So you're literally in no man's land, right?
00:26:21 · Dan Novaes, Pablo Srugo
And that was where I had found myself. [00:26:23] S1: What kind of runway were you looking at?
00:26:26 · Dan Novaes
[00:26:26] S0: So by making all those cuts and doing all that and trying to extract whatever type of revenue we could think of to do and kind of also re-stabilize the business, we had maybe like a year and a half like at best. So it wasn't like I have three months but I had like I think I had about 15 months. We had to rethink the business because revenue concentration is really what killed us, right? We had a lot of revenue concentration with certain key advertisers and that really hurt our business. So one of the things that we came out with or came up with an idea with was like, hey, how do we pay our users less without having them churn? Very difficult. The reason people are here is because they want our money. And so I had this idea. I was like, well, I wonder if we could give them shares just to like, you know, we'll still give them cash but maybe we can give them shares to kind of make it or sweeten the deal and, you know, we won't lose as many users. And the only way to do that legally was what I eventually found about was crowdfunding, right? And in order to do that, we'd have to get audited financials and we could launch like a reg CF which allows you to raise five million bucks. And I was like, I'm a good consumer marketer. I understand how user acquisition works. I know growth and this makes sense because I can get my community, you know, involved in this and let's try it out. And I highly underestimated how long and how much work it would be to get audited financials. It took me the better part of a year to get it all done. And at that point, you have like five months left of, you know, runway. We had found some revenues there so maybe I had extended it to like seven or something. Pulled back all UA, right? So to give you context, revenue went from 25 million, 22 down to eight in 23.
00:27:53 · Pablo Srugo, Dan Novaes
[00:27:53] S1: Painful, man. [00:27:55] S0: Yeah, it was painful. But we pulled back all UA. Effectively, you know, we were spending, like we were spending one, two million a month down to like 50K, right? At best. So we launched that crowdfund in 23, end of 23. And in three months, we raised $5 million, right? Yeah, mostly through newsletter marketing and things like that. And I was surprised. I was like, wow, like we crushed it. Like very few companies go out and like launch and then raise that fast. [00:28:19] S1: They're also usually like 100K, 200K. Like these crowdfundings tend to be small. So 5 million, you know, in three months is, you know, top 1%. I mean, I don't know the numbers, but it's probably around there.
00:28:30 · Dan Novaes
[00:28:30] S0: Yeah, I mean, probably there are a few companies that have raised like 50 million plus in crowdfunding. It's rare. It's very, Yeah, it's like the 0.1%, 0.01% probably, you know. It's usually like really big ideas that have a good marketer or a founder that's founder-led marketing. Or it's these little baby kind of startups that have, you know, raising a few 100K type stuff. And the middle doesn't really exist that well, right? So anyways, we did that, saw good product market fit and enough that basically now I was like, okay, we should do the bigger version of this, which is called a reg A, right? Which that lets you raise $75 million in capital. More work, you got to get qualified by the SEC. I mean, it's a whole other undertaking. And we launched that a year later. And nine months after that, we had raised another 75 million or sold that out for 75 million in capital. And so, you know, there's a pattern there, right? And then I remember thinking to myself, even before, right, even before, because it's been 24, we ended up doing 12 million in revenue. So we grew 50% of this good. And we cut our burn from like, I think the previous year was like 5 million or something down to like three. So we grew 50% and cut burn. So getting more efficient, but still not quite where I wanted to be. And I remember thinking, okay, if we ever had the opportunity to raise this larger amount of capital, I am not going to fall in the same pattern and problem that I felt in last time, which is extend, pay by period, everything at all costs. What we did was, I basically thought about my business model and I was like, okay, unless we can get, like we should move into like licensing our technology, kind of like what Roku does. Like, let's go to the big carriers. Let's go to the Samsungs of the world. Let's license them because we get their distribution and then we do a rupture. That's what Roku does, right? And they've been able to build a tens of billions of dollars business off of that business model in the smart TV space. It's very similar. And so we basically, we're like, we're going to play really intelligent on user acquisition costs.