UP009: BYBE // the first legal way to discount alcohol purchases

Kevin Mack: 00:00:00

Sources of friction. It is really just the understanding of the alcohol industry. Very few people really understand it and I feel like Ryan drew and I know more about alcohol legal than probably 99 point nine percent of people in America.

Jay Clouse: 00:00:19

Startup investment landscape is changing and world class companies are being built outside of Silicon Valley. We find them talk with them and discuss the upside of investing in them. Welcome to upside.

Eric Hornung: 00:00:47

Hello? Hello. Hello and welcome to upsides podcasts. We’re finding upside outside of Silicon Valley. I’m eric. I’m accompanied by my cohost, Mr. Improv himself, Jay Clouse, Jay. How’s it going, man?

Jay Clouse: 00:01:02

Good man. Go going. Well, I did do Improv last night. Never know what you’re going to go with with nicknames. It’s always a surprise. Didn’t do improv very well. They did a. They did a couple of games. Are you familiar with WHO’s line is it anyway?

Eric Hornung: 00:01:17

I am familiar with Who’s lines it anyway, i love Who’s lines it anyway

Jay Clouse: 00:01:20

Do you remember the three headed Broadway star? No, but that sounds amazing. Essentially they take three people. You kind of lock arms or put your arms around each other and you sing a song together one word at a time and that was the game that I played, but there’s five of us, two of us from the audience, and I didn’t do very well.

Eric Hornung: 00:01:40

Five headed Broadway star. What word did you mess up on the most? Like what did you really screw up? The people in the audience were like got a little squeamish about.

Jay Clouse: 00:01:47

Well, the problem was it wasn’t that I had a poor choice of words. Is that the person directly to my right who proceeded me. I just didn’t hear what word he said and so our topic, it was a song about Eskimo nose kisses and I just couldn’t hear what he said, so I had no idea what to go off from and I, I couldn’t ask him to repeat that, but not how the game works. So I just said the I thing I just said the word Eskimo. Eskimo knows kisses is kind of tough too. cuz, like you really don’t have that much to work off of. You don’t really have a large vocabulary of words surrounding that topic.

Eric Hornung: 00:02:23

Very, very strange topic. Sled dogs, Eskimo kisses. Like that’s it. Really the speaking of whose lines? Anyway, I used to want to be a comedian when I was growing up and I would sneak downstairs and watch whose line is anyway from 1:00 AM to 8:00 AM on this big. Remember those big tvs that were like the original flatscreens except they weren’t flat. They were like 40 inches deep.

Jay Clouse: 00:02:46

Yeah, but what station is playing seven hours of whose line in the middle of the night.

Eric Hornung: 00:02:51

I’ll have to find out which one it was, but that was what I used to do like religiously every weekend. Wow. Yeah. Didn’t work out.

Jay Clouse: 00:02:58

So just always praying and hoping for props. You’re like, please play props.

Eric Hornung: 00:03:04

I love props perhaps is great. So what are. So what are we doing here? Who’s line? Why are we here? What are we doing here?

Jay Clouse: 00:03:11

We are here on upside to talk to founders, starting companies with upside outside of Silicon Valley. Eric and I talk about startups a lot. We talk about making deals, the startup stage, and we said why not bring that to a wider audience? And so here we are, we’re here every week to talk to a founder, learn a little bit about their industry, about their company, and to get smarter frankly. So, uh, we have three segments to our show. Eric, you want to explain those three segments.

Eric Hornung: 00:03:39

So we’re going to walk through three stages of venture capital or angel deal analysis. The first one is research, so that’s thinking through and doing some third party research into what this company in this market look like. So we use articles, databases, whatever we can get our hands on. Really the second is the interview itself. So Jay’s going to talk about in a second who we’re bringing in for that, but that’ll be about an hour in the middle and we’ll ask the founder all kinds of questions about their business themselves in the market. And then finally the debrief. This is going to be done in the form of a verbal deal memo. Very informal, but we’ll talk more about that later. But that being said, Jay, who are we talking to you today?

Jay Clouse: 00:04:22

Today we’re talking to Kevin Mac right now. Kevin is the chief experience officer of BYBE by this who we’re speaking to today, where he focuses on the evolution of the BYBE brand and creating integrated experiences for retailers and consumers. Before that, he was the co founder and organizer of Columbus Web Group. He from Columbus, Ohio BYBE is based in Columbus. Also spent a lot of time in Minneapolis, which I’m sure we’ll speak about and to speak to BYBE a little bit BYBE simplifies digital alcohol promotions for retailers by embedding beer, wine and spirits rebates inside retail applications and websites.

Eric Hornung: 00:04:59

So I’m really curious to get Kevin’s input on this because it’s an industry that I’ve really heard a little about which is alcohol rebates, I’m guessing, and based on the research I’ve done that brands such as maybe a Jim beam or. I think that they have an active promotion right now with bud light in Ohio. Incentivize users to shop for their products and then offer some sort of rebate back. And the BYBE ecosystem is kind of the conduit for that. In my hitting the product on the head there, Jay?

Jay Clouse: 00:05:34

I think so. I want to back up real quick and just say that BYBE has gone through two accelerators to this point. Uh, they went through the lumos accelerator in Columbus, Ohio, which is a very early stage accelerator almost ideƒa stage. And then they went through techstars, their target accelerator in Minneapolis. It’s a retail accelerator backed by target. I should say.

Eric Hornung: 00:05:53

One thing that I’m curious about when it comes to BYBE is what are the engagement metrics on this? Because I think about going and I just want to learn more about kind of the numbers behind all of this because I think about going to a store and buying a 24 pack of Bud Light. How easy is it for me to just claim my $5 back through the BYBE App? Is it seamless? Is it seemless because I’ve, I’ve filed rebates for other things before and it’s just taxing.

Jay Clouse: 00:06:21

Yeah. So what I think I found on this was the user experience through the BYBE app as it was described, was a three step process of purchasing, taking a photo of the receipt in the APP and submitting that receipt through the APP and that would then credit your your card back within 48 hours. So I think that that was a prime focus for buying, from what I’m understanding is the user experience and making that seamless. As far as engagement goes, I don’t know that there’s much engagement outside of that. It seems to be sort of pure utility. Right. Which makes sense for why they would then target actually powering or being integrated into other retailers apps as opposed to a standalone product. At least that’s my understanding. I would actually like to hear that difference in his mind is by have a standalone product. Will there be essentially two products? Is there a white label version that’s inside of retail apps and the BYBEAPP? Is it something like a market place where I can go in and try this? I do think that if it’s seamless and if it works $5 off on a 24 pack of Bud Light, which they’re running right now with the 24 pack of Bud light costone with Eric, like $16.

Eric Hornung: 00:07:34

I’m, I’m in New York. I, it’s like, it’s way more than that.

Jay Clouse: 00:07:39

I haven’t bought a 24 pack of beer in a long time, but if memory serves, I think it’s somewhere between 12 and $18. 12 and $16.

Eric Hornung: 00:07:48

I know that a 24 pack of Natty light is $9.99 and during football season in Ohio. So if that gives you any clarity at all,

Jay Clouse: 00:07:55

it was also the idea. So $5 off could be pretty significant. That’s a pretty significant rebate. I’m not a fan of bud light, but that might push me to buy bud light if I’m, if I’m buying in bulk and that saved me $5. So I think user experience really is key. Kevin’s going to be the guy to talk to about that. As the chief experience officer, the market for alcohol while being regulated and crazy seems to be pretty huge. I think I saw a number of $223,000,000,000 in sales annually for the entire alcohol market. Did you find that?

Eric Hornung: 00:08:24

Yeah, I did a little bit of research and then somewhere between 200 and 300 was the was the number I was finding and then just looking at the market and the regulation and really interested to hear about the expansion strategy because being from Ohio and just going over even to Pittsburgh, which is just two hour drive away, the process of buying alcohol and of distributing alcohol is so incredibly different just between those two states. When you extrapolate that out to 50 different states with 50 different regulations with 50 different distribution models with 50 different. Keep on going down the list. I’m really interested to hear how they plan on attacking that because it’s my understanding that right now they’re only live in Ohio. I could be wrong on that, but there’s a lot of expansion to go from there.

Jay Clouse: 00:09:12

How does that work with retailers that are across borders? Obviously that’s something they’ve looked into with target. Working with them through the tech stars accelerator. I’m sure I’m just interested in in his responses. I did have a quote here that I wrote down that might shed a little bit more light about the statewide offers. There’s a quote from one of the founders drew night, I believe, that said it’s illegal for stores to have exclusive rebates. Money saving offers must be available statewide, so that is why a one off retailer cannot have an exclusive rebate on a piece of alcohol. It must be available throughout the state.

Eric Hornung: 00:09:51

Sometimes these lawmakers, men, the rules when it comes to alcohol are so crazy and that regulation or what you just that quote that you just read, it sounds like it was just talking about one state, so it might be different in different states. I don’t know.

Jay Clouse: 00:10:06

Yeah, a lot of post prohibition era laws that are still in place. I can’t walk out of a liquor store with a bottle of liquor, not in a brown paper bag here in Ohio for example.

Eric Hornung: 00:10:15

Well, up until like 10 years ago, I think you had to have a drinking card that you paid $5 for and there was a. I’ve actually seen the building, the drinking club in Salt Lake City where you’d have to go and prove that you weren’t a Mormon and you are able to drink and you’re over 21, you pay $5 and get a drink in card and you’d show that instead of your id at bars.

Jay Clouse: 00:10:35

That’s interesting. Anything, any last thoughts from you before we talked to Kevin?

Eric Hornung: 00:10:40

No, I’m excited to get into it and hear more about this. I think it’s going to be a really interesting conversation.

Jay Clouse: 00:10:46

All right, let’s do it. Kevin, welcome to the show.

Kevin Mack: 00:10:54

Thanks for having me Jay.

Jay Clouse: 00:10:56

could you please walk us through the user experience of BYBE?

Kevin Mack: 00:11:03

Yeah, so BYBE it it’s a little bit different of a traditional startup or application. So how we work is we really mirrored the same experiences that our retail partners have. So what BYBE actually does is we integrate directly inside of retailers applications and a user doesn’t even have to know that exists, I guess for us to be successful. So we take our API and our technology and we bet embedded directly inside of retailers applications, websites and loyalty platforms. So the same way that a user would see any promotion or rebate a that exists currently in an application, you’ll see BYBE offers, so that’s really like our experience is really flexible and when we work with retailers, we want to make sure that each of the experience is unique and different and aligns directly to what users are expecting. So it’s really cool for my side because I get to make sure that our technology is scalable and flexible to meet those needs, but then actually sit down with their creative team and their experience teams to make sure that the experience is adhering to all their crazy restrictions on alcohol marketing and advertising.

Eric Hornung: 00:12:15

So something we were talking about earlier is that you guys do have this embedded retail experience, but you also have your own standalone app. How do you weigh those two things?

Kevin Mack: 00:12:27

Yeah, so there’s a lot of restrictions and rules and regulations when it comes to alcohol. It’s actually when you look at any other category that’s out there, it’s one of the hardest ones to overcome, like legal barriers. And so with that, one of the things we have to do is we have to have a standalone application and the reason why we have to do that is so we can mirror the offers. So alcohol has one of these laws and it’s equal distribution. So if we have an offer that’s in one of our retail partner applications, that offer is available within the state, so offers can only exist within a state level, but then we have to make sure that we’re meeting them so they’re not just in the retail application, but they’re readily available and accessible to anyone across the state. So the BYBE, the BYBE application exists so you can get the same offers that we’re showing in a retail partners like target, but you can get a mom pop shop or your local gas station or wherever you may shop for alcohol. So the experience there is, it’s a little bit, it’s not as robust, but where it’s really different. It’s like you see the offer, you save the offer, you take a photo of the offer and then you upload it and then we validate that, you know, it met all the conditions for it so it’s not as great as an experience because there’s not too many steps and that one is really just so we can reward people for the purchases of alcohol as post-purchase.

Eric Hornung: 00:13:52

You mentioned target. In our research we found that you guys went through two accelerators, one in Columbus and one in Minneapolis, so hoping you can kind of talk through the decision to go through both accelerators and the experiences and differences in each.

Kevin Mack: 00:14:08

Yeah, so in Columbus at that time the company had a different name and I came on actually as an advisor and mentor and I was an advisor mentor at that accelerator. So that was limos and Lumos was for Ryan and drew. So drew is CEO and founder and Ryan is co founder as well as coo. Those two didn’t really have experience in product development design and lack technology experience, but those two like had the business idea down. They just didn’t really know how to sell it, put it together or speak on it, and the first accelerator was all about getting that initial seed funding and being around other entrepreneurs. So Ryan and drew came from working more in a corporate setting in a world that wasn’t, you know, technology driven or creative background. Both of them have that, those skill sets naturally and over the past year and a half, I’ve really grown a lot to become startup individuals, but lumos was a way for them to really quit their jobs and do this full time and to start talking about in understanding product development, so heavily on the education side, but also on the funding side and more. I think more importantly, the connection side.

Jay Clouse: 00:15:26

Before you get into target, I want to ask one question on that. So you met them as an advisor and mentor through Lumos. What was it about the opportunity that you were like, I need to be a part of this? This is something that I really buy into and that I want to be a part of.

Kevin Mack: 00:15:40

Yeah, so I’m not going to make the joke that everyone says like we’ve met with probably over during techstars, you have this thing called mentor madness and we met with I think 300 mentors and it’s always the same thing. Hey, so what do you know about the alcohol industry who were like, I know how to drink it. And it’s like, ah, it’s like such a dad joke that, that I now laugh about it when I hear that and we hear it all the time. Uh, so I did not join or you just want to be clear. I did not join because it’s alcohol company. I do, I do like alcohol. We used to even joke about that in the beginning. Like we didn’t just start an alcohol company because we like it. So I was, I also run the Columbus web group and when I was putting on an event I wanted to do an event about accelerators and it was at the time were Lumos was getting started and I had been involved with Lumos and I had Alex Portello speak and at the event we timed it for when the class was wrapping up and Alex and I wanted the best in class to come present. So this is no insult to the other people that were a part of it because there were some actual really amazing companies that came out of that first class. So Alex was like, let’s have reboost come up, which was the initial BYBE and just drew came and presented and you can find this video online right now. And it’s hilarious to look at it because drew has this button down shirt where it looks like he just has one shirt button and his hair’s like all back. And he’s like, oh, what’s up everyone? But drew came and spoke at it and you could just see from the time that I had met him and seeing him up there that there was so much passion and all of this excitement. So afterwards I came up and I thanked him for doing that and talked to Ryan and they were telling me about all these tactics that they were doing and all these approaches in sales. It was like, where did you guys get this? These ideas are like, I don’t know. We’re just trying all these different things to make this work. I think that was the moment where I realized that out of all the startups, because before then, like I had spent a lot of time advising and mentoring startups that these guys weren’t just doing this to do it. They wanted to make a life and a career out of it and they believe so much in it. I didn’t really understand the product even though I had been working with them and seeing them speak and I was just like, I know I can help these guys identify and better tell the story of what BYBE is. And I’m gonna help them with their technology. So I started spending a lot of time with them and we had these little benchmarks in Ryan and drew always went above and beyond. I was just very impressed with these two and we quickly became friends and it was just like, I think we can make a business together and not just a product. So fast forward a little bit, I would say about a month later we heard about techstars, so we were advised to apply to it. So I had known about techstars and drew, gets excited about everything and Ryan’s just the most chill person of all time. And with it I was like, all right, so if we get into tech stars, I will quit my job and do this full time. So that was, that was something I said over drinks one night. That’s the only thing I think I remember from that night, but we partied and we set our goal to do that. And um, you know, we went through the, the layers of auditions and interviews. I forget the exact number. I’m going to say it was 4,000 applicants and then we got it down to the final 75. We went and did it in person, which was optional, but we went in and make sure that we showed that our commitment to it and we wanted to meet the decision makers of techstars and about a few weeks later we get this phone call from Ryan brochure in Google hangout and Google hangout was worse than me trying to connect to skype and all their meetings are only 15 minutes and it took us 10 minutes to get on and Ryan’s just like, hey guys, I got some news for you. And he was like really sad now. Usually don’t fall for anything like that. And he’s like, but uh, I just wanted to let you guys know that if you accept you can be in techstars. And it took us like a few minutes to realize what he just said to us. And I’m like a completely like a hiccuping on how he said it because delivery on it, like I usually don’t get tricked by setups like that. I really was like, wait, what? Just happened. Yeah, yeah, yeah. We’ll do it. And we got off the phone were like, all right, and how do we go do this? All right, so we need to quit our job, like I need quit my job in planning for it. But to summarize because I’m all off track for, for your question, I, I was just really impressed by those guys and I and I became quick friends with them and I knew I could help in. I saw the potential in the product and where they were lacking on the technology and product development side. I knew I could help them and it wasn’t just a let me spend a, you know, a few extra hours each week helping you out. It was a full time job and I believed in those two and I believed in the product that they were trying to make.

Jay Clouse: 00:20:34

That’s awesome. Thanks for that context. So you met them, you got into tech stars, you go to the techstars retail accelerator, which is not just the typical blanket techstars accelerator. Can you talk about that experience in what it means to be a retail accelerator versus a different type of accelerator or anything you learned about the tech stars model of doing sort of labeled accelerators?

Kevin Mack: 00:21:00

Yeah, and I. I skipped over your first question. I explained the limo, so all answered that. That also about techstars and I won’t get to storytelling here. I’m just trying to paint the verbal image in my head, you know, or verbalize what the made was, so techstars. I think there are referred to as the number two accelerator in the world and y combinator I think is number one. Two amazing programs and I would say if you have the opportunity and you think your product are companies at the spot to apply and you build really want to do this for your life without a doubt, don’t even hesitate apply to it. It is a life changing experience to go through techstars, so techstars as opposed to a lot of the accelerators that we have in town or you hear about and you probably talked to people about. The program itself has the educational piece to it and that’s fantastic, but you really break away from the world and for four months we shifted and Co located to Minneapolis, which would not be on my list of places that I would ever decide just to fall in. It is a beautiful city, but I ended up being there for four months and we lived and breathed around entrepreneurs. Everyone was in the office at seven, 7:30 in the morning and we would all maybe go out for dinner around six or 7:00 and then we’d come back to the office until about 12 and then we go back to the BYBE House and work until about two or three in the morning and started all over again and there was just like this energy of not competition between the other startups but how we can support each other, but then also this competition of like hitting the goals and the kpis and be like, Oh man, air tailor is doing better than us this week. We totally have to beat them next week. And with that it was just like this. This drive of being around other people and healthy competition in between the grow, but more importantly the support of the techstars team, so they have dedicated individuals, so Brett roll, Ryan Brocher and Sarah Bain that were there to help you out in any which way from businesses if you were cracking mentally a lot, whatever. They were there as your support, but then there are other individuals that were there to support the team and making sure that you know all your needs were being met and if you had any wants that they would help connect you with it. And then they had a. I can’t think what we called them but about four individuals that were just there to help on design and technology pieces like to be ramble resources for your team. But what it’s really different with techstars is the mentors and the advisors and the investment. And that’s really what techstars is. It’s a network and we have access to all the previous a techstars companies and can ask them for advice or connections. So the sales cycle of, of some of the stuff is maybe nine months at best. Two, three years, but with the connections of techstars, we can go from a conversation like, Hey, I want to meet someone at a retailer, acts to talking someone that’s at a director or even executive level within a two day time period and that’s what’s super powerful about techstars and then the mentor side of telling your story and that was what we really wanted to get out of techstars was it used to take us a half an hour to explain what BYBE is and we narrowed it down to say what BYBE is in a few breaths.

Eric Hornung: 00:24:35

How would you do that right now?

Kevin Mack: 00:24:38

Yeah. BYBE Is the first and only legal way to discount alcohol and we do this by embedding directly inside of retailers applications and mirroring them inside of our standalone application to meet federal law and state to state compliance and consumers benefit by this because they can get money off of alcohol that they’re purchasing. Retail has benefit because they can be directly embedded in seamlessly integrated inside of their applications in loyalty platforms and brands and manufacturers benefit because they can advertise and have a new way of reaching out to customers. Overall, we bring awareness, drive traffic, and engage consumers on

Eric Hornung: 00:24:38

how does BYBE make money?

Kevin Mack: 00:25:19

What’s so we model our business model is we do a transactional fee on what we refer to as disbursements, so we have redemptions and disbursements, so every offer that we have has rules and conditions around them and when a consumer purchases a product and it hits our API, it goes through all the different rules. If it is accepted it. So that’s called a redemption. Like you’re trying to meet the the rules for it. If all rules are accepted, you get a disbursement. So you go from redemption to disbursement. A disbursement comes in the form of either an open loop or closed loop gift card and it happens within a few minutes.

Jay Clouse: 00:26:04

What is a, what is an open loop versus closed loop Gift Card?

Kevin Mack: 00:26:09

Yeah, so that’s. That’s something that we have to do a certain states. You can’t have a closed loop, but a closed loop means that it is retailer specific, so something like a target gift card versus a mastercard gift card. So open loop means that you can use it anywhere, uh, that’s available.

Jay Clouse: 00:26:27

Got it, Earlier you said something along the lines of, if I’m using the straight up by APP, the individual BYBE APP, if I see an offer and take a photo of an offer, then I upload a receipt and that’s how I get the, that’s, that’s the redemption. And then if it meets conditions, I get a disbursement. When you say see and offer, what do you mean by seeing offer? Where do I see it?

Kevin Mack: 00:26:52

inside of our application. So the BYBE, if you go there and you download it from the APP store Ios, you’ll see a listing of offers that are available inside your state. In the state of Ohio right now we have six offers. They range from wine to beer right now. I currently know spirits in the state of Ohio and we are growing our clients and partners that we have. So you were asking about how we make money, our actual customers are the brands and manufacturers and we worked directly with them to create these offers and then embed them in our app and you can actually see them in there and the details and the restrictions and you can buy it anywhere in the state and we make money off of a transactional fee from the purchasing and the disbursement. So that’s why I’d explained what we, uh, uh, everything with BYBE is a little bit more complex than a traditional startup. And I said that from the beginning, from the way that we integrate to the ways that we make money and the ways that we could even speak about ourself because primarily all of our spend goes to legal fees. And the reason why no one has ever done anything like this is the technology itself is probably the hurdle where people stop. But the legality and the complexity of the rules, regulations and even the wording that we can say is very complex and difficult for people to understand. And it’s all because of a federal law and state state restrictions. Alcohol.

Eric Hornung: 00:28:24

What percentage of your fixed costs as legal fees?

Kevin Mack: 00:28:29

Uh, I would say right now probably about 60 percent of our cost right now. So we’re in a stable spot with development right now. I’m overseeing and actually doing all the technology at, at this point to keep costs down. So really zero cost right there. Besides the cost of me being alive. Uh, and

Jay Clouse: 00:28:51

which is expensive, I’m sure.

Kevin Mack: 00:28:53

Yeah. Yeah. Jay has been out with me. I, I buy rounds February one and I’m like, here I am guys who wants to drink, but uh, I would say about 60 percent right now. So each state we have to get approved in each state has its own laws and rules that we have to apply to. And what does an individual

Eric Hornung: 00:29:08

looking at moving forward? You guys are active in Ohio right now as you expand. There’s obviously legal costs with that, but what, how, what’s the expansion strategy look like? Because it is so different from state to state?

Kevin Mack: 00:29:22

I’m trying to think which ones I can talk about right now. I don’t think there’s any harm in saying this. We were just traveling to Minnesota last week, so we met with the state of Minnesota and the primary decision maker and put our case in front of them. So different states have different rules so we can operate 41 out of the 50 states and with that some states just require written approval, meaning that if we write them and send them are, you know, what we are and who we are as a business and really held the state benefits and the government benefits off of by big existing, we can get an email back or a letter that says, Yep, you guys are approved and that’s all we need to do. And we can bring that to retailers as well as manufacturers. And then their legal teams usually have to approve it too. So there’s Minnesota is, is the one that we want because there’s various reasons, uh, some of the brands that we have, even some of the local brewers that have huge distribution network, similar like Columbus, uh, we want to do some pilots with them and the retail partners that we currently have engaged with a have full wine beer, wine, spirits in the state of Minnesota, uh, after Minnesota. Uh, we are also looking at these. We’re currently, we’re currently working with the state of California. We’re having discussions with Florida due to some of our other partners that we have. Nevada seems like a really good option for us and we’re hoping any single day that will hear approval in Illinois. So those are the kind of ones there are strategic and they’re different types of states that are resulting there. This is the one thing that we hear from people. They’re like, oh, just because you’ve got one state isn’t going to be easier to get the next day. It’s like, no, there are certain states that, that people are surprised when you do get them. Like California, if we get California, we can use that. And it’s, it doesn’t help us speed up the process, it’s more like validation than anything because they have some of the strictest or they have one of the longest processes for approval. And if you go through that ringer it’s not. It means that you’re serious. And the funny thing about legal for us is we are personally reaching out to regulators and being like, hey, come meet with us. We want to tell you about our business. We’re going to tell you how you’ll, how your state will benefit from it too. No one ever does that. A lot of people in the alcohol industry or like I don’t want to talk to regulators keep me as far away as possible and it for them it’s a little bit. It’s very, very backwards to be like, let’s have a conversation and demanding these conversations because it’s usually the other way around. Like, Hey, you guys are doing something illegal. And we’re like, we’re not a. So we wouldn’t be as transparent and we want your approval and blessing.

Jay Clouse: 00:32:14

You said a second ago that you can operate in 41 states. What’s what’s the deal with the other nine? How do you know that you can operate in 41 but not the other nine?

Kevin Mack: 00:32:24

We just don’t like those states. Uh, yeah. So by business model and the way that we actually operate is we are based off a were derived from concept of how paper coupons work. So that is the foundation of where we’re creating the digital side of it and tweaking it. So the business model is derived from that side and there are nine states. There used to be 10 states that didn’t have. They were a no rebate states. So with that, if it’s not to say that we can do those nine states, it just doesn’t make sense because we’d have to create a lot more first first for them. Yeah.

Jay Clouse: 00:33:13

So what does this look like if it goes well for you guys? What does winning really look like getting into these states? He goes state by state. How big is this opportunity? Obviously I’ve seen that the alcohol industry in general is huge. What does that mean for rebates

Kevin Mack: 00:33:31

in 2017 The average spend for alcohol, just marketing and advertising was $8,000,000,000, and then on paper coupons, 3 billion were spent, so a ridiculous chunk of spending on alcohol was done on paper coupons where redemption was on average less than two percent and people are still doing it because of legal restrictions. And what we’re trying to do is take the spends that have existed from paper coupons and shift them over into our platform and make them digital, uh, for us, like our expansion is to have more retail partners and to be more approved and more states and to have creative ways of doing offerings.

Jay Clouse: 00:34:14

Just to point a point of clarification, $8,000,000,000. Does that marketing spend or like advertising spend?

Kevin Mack: 00:34:19

Yeah, it’s marketing spend. Okay.

Jay Clouse: 00:34:22

So $8 million in 2017 marketing deals on alcohol, 3 billion of which was for paper coupons, two percent of which was actually redeemed.

Kevin Mack: 00:34:22

Yep. Yep.

Eric Hornung: 00:34:33

What’s like an equivalent redemption percentage through, but is it around that two percent or is it higher or lower?

Kevin Mack: 00:34:40

We’re still really, really early on and of course tracking the metrics of everything. Our numbers have been really, really great though, so we’re tracking our analytics from impressions, so the views of the offers that we have, so if you’ve seen it and then we have something called a clip, which means that you’ve saved that offer so when you go buy it, it’s in a spot that you know, if, if the pos system has an integration to the save location that they can scan it and then that’s all the consumer has to do and that’s also how we trigger off the, the send to our redemption disbursement API. But we’re seeing really great numbers from impressions to clips and then from clips to redemptions and redemptions to disbursements are in the 90 plus at this point and the missing there. We think that some of the offers are like buy three bottles of wine and get $5 off. You May, once you, you go to the store and you’re like, you know what, I really don’t need three bottles of 14 hands. It’s a, it’s a good wine, but I just need one. So a failed a disbursement doesn’t mean anything. And primarily the reason for why they’re being missed as quantity limits so people haven’t decided and we sell it with Bailey’s too. So we had a really great offer on Bailey’s, but you have to buy three Bailey’s, I love Bailey’s a, they have a Vegan version of it. So I have it right here.

Jay Clouse: 00:36:09

Oh, here we go.

Kevin Mack: 00:36:09

Product placement here.

Jay Clouse: 00:36:16

thirty minutes into the interview is usually when the guests start breaking out the booze.

Kevin Mack: 00:36:20

The savings that we’re seeing are high percentages. The numbers, again, we’re, we’re really only, we’re going in there six weeks of being live and not just having one offer available. So we’re still tracking those and you know, some of the redemptions are, we’re seeing from the low end, like three percent, but we’re on par if not accelerating or higher than some of the other categories, uh, inside of our retail partners. So I kind of danced around that question. It’s a range because some of the offers that are like crazy good, like budweiser is doing an extremely amazing job in the four days that it’s been live. They have more disbursements than some of the programs we’d been running since day one, so

Jay Clouse: 00:37:09

that’s crazy how much we were talking about this in the intro and Eric and I are too far removed from buying a 24 pack of Bud light to know how much does a 24 pack of Bud light cost before the $5 redemption.

Kevin Mack: 00:37:21

So with alcohol and advertising, I’m not technically allowed to put that out there, but this is kind of a different case. Let me. Let me look that up.

Jay Clouse: 00:37:31

Okay, well no worries. We can do our homework to.

Kevin Mack: 00:37:36

Well, what, I’ll tell you this, and I’m. This is a on the record, but generally speaking, the savings for the consumer and it’s all post-purchase is between 20 percent to 30 percent even though you’re buying three bottles of wine, it is a huge savings for the consumer and for the state government. This is what’s really, really cool, especially in the state of Ohio. Alcohol Sales Fund education as well as rose and many other things for. For us living in the state of Ohio, what we do is we provide rebates from manufacturers to consumers without reducing the cost of the item itself, meaning that the items being sold and the taxes are higher without it being discounted, so there’s more money going to the state and the money that is being discount is coming directly from the manufacturers to the consumers but delivered from us.

Jay Clouse: 00:38:37

That’s a really fascinating ecosystem of players there who benefit in different ways. Would you still. It sounds like you’re classifying the brands and manufacturers as the core customer though, is that correct?

Kevin Mack: 00:38:52

Yep. Our customers to us, are brands and manufacturers.

Jay Clouse: 00:38:57

And so acquiring those customers, you have a legal team. I assume you have someone who’s focused on talking to the regulators, state to state who’s focused on talking to the brands and building those relationships to actually do that customer acquisition.

Kevin Mack: 00:39:12

Yeah, so drew a came from a distributor background so he can, he can, uh, it’s so funny to watch him talk to them because he gets like all giddy. It’s like when you put me in the room with a bunch of designers or developers, I just nerd out. I’m like, I’m in my, I’m in my element. I can, I can nerd out and no one’s going to tell me like, stop. Uh, so he, like he gets into is like, oh, it was going to Kroger and Costco. And He’d be like, Oh yeah, you bring up this person. They’d be like, ah, ah, yeah, I don’t know him. Oh yeah, we went golfing. It’s like, oh my God, you’re just, please stop. Like, I, I snap chat him like talking on those too. Um, but uh, so Drew handle handles the brands and manufacturers. Ryan is focused on retailers and then I’m, I work on the integration team to experience the design, marketing and technology with all of them. But the three of us kind of divide and conquer in different ways. But for retailers, I’m always involved with with them, if I’m not on the first call, it’s usually the second call when we’re in techstars, it was we had this rule and it was like, all right, because I was building on our product in in the months that we were there, so I couldn’t be in every meeting. If the conversation was worth having, then let’s bring in you to talk about the technology and it wasn’t to shield me or like, hey, you’re going to the next level. It was making sure that we are talking to the right people that needed to be discussing because we may be talking to someone that is a decision maker, but we have to bring in various people to to get approval from a retailer side. So we need marketing involved, we need technology involved, we need user experience involved, we need loyalty involved, we need to know who is the pos person and how they’re involved. And then we needed to know from the buying side. So the adult beverage buying team at the company as well as their legal team and whoever else is involved inside there. So there’s really different practices that need to come together and that’s what’s, you know, our sales cycle is really long, but we all have to be involved in all those conversations, require technology, marketing experience, legal understanding of the retailer side as well as the manufacturer side

Eric Hornung: 00:41:38

with all of those parties, including regulators. Right. And that’s you were just talking about the customers and then you have regulators on top of that. There’s bound to be some sort of push back. What have been the areas that people have historically maybe pushed back a little bit or had a little bit of friction.

Kevin Mack: 00:41:59

It’s tough to say, I haven’t said this yet. So legally we have to be free to retailers. We cannot accept a penny to retailers. We cannot give a penny to retailers. Even the technology and integration, it has to be available to everyone. So that value of what it is, if someone needs to integrate with us, we can do it and we help them integrate. We connect them to it. We walked them through our technology and assist in how to utilize it. So anyone that’s a retailer can use our software for free and we help them integrate inside of it. So sources of friction. It is really just the understanding of the alcohol industry. Very few people really understand it and I feel like Ryan drew and I know more about alcohol legal than probably 99.9 percent of people in America and the other point five are probably the two law firms that only work in alcohol and then the, the distributors of the world as well as the buyers. Even distributors don’t understand all the legal because there’s some of those, you know, there are a lot of great distributors out there but some people are just doing their job and they don’t realize it. That’s been the biggest, I think hurdle or source of conflict is the understanding of what you can and can’t do. And a lot of people were like, well why can’t we do that? It’s like, alright, well let’s educate you on this. And I think the, the, the overall like conflict or hard pieces is just getting all the right people in the right room at the right time. And that’s true with every, every business, but more so with a product and what we’re trying to do. Uh, so we, we try to explain it to the marketing user experience team and the product teams and loyalty and webs people as think of it as a contract that you would have with Google analytics and the integration with it. So Google analytics is free, but it does take time to understand what it is. And for us we have full documentation but we’re a little bit more complex on the integration side out of box. Like it’s not like just drop this clip and you’re ready to go.

Jay Clouse: 00:44:15

Can you talk about that a little bit? Because you’ve, you’ve, you’ve talked about integration for retailers, you’ve, you’ve talked about pos systems at times. Can you explain to me a little bit more technically how a retailer integrates with BYBE? And I’m talking like, what are the calls? I’m like, what’s it, how does it work?

Kevin Mack: 00:44:33

Well, let me tell you one of these responses. I’m going to try not to go down a rabbit hole and explained too much to them. Forget what the question was. But yeah, so we have really three main integration points. We have our offers api and that is where we’ve created the offers in our own offer management tools or an administrative tool. Those become available to anyone and it’s publicly available. A API can be digested. So first integration point is the offer is api typically that is going inside their mobile application website or could go into their offer management tool if they just want to validate a few things on their site or control it. So it may be live April first, but they may not want it to go live until April third for various reasons. So that’s the first one is offers. The second one is disbursement redemption. And that is where we get transactional information from the retailers. The big thing about BYBE is, we do not collect or store consumer data, nor do we care about it. And the reason is we are tracking alcohol data. There aren’t any true alcohol data collection firms. And a byproduct in a core product that we have is data on alcohol. So with this, what we’re getting from retailers is a temporary way to identify the consumer and this is typically an email for the disbursement option and we destroyed that after six months. The only reason why we keep it for that time period is if it failed and it’s all hashed and secured away. We don’t even get their first name or last name and that’s just a pure proxy and email and if I wanted to dive in there it’d be just as much a difficulty to dive in and find someone’s password. So very secure what we’re getting as the quantity of items purchase. So the products that were purchased as well as the location of where it was purchased and store location and there’s one other piece that is really minor but it’s all on the product side and then that gets sent to us and then we look at the offers and go through the rules inside of it. So so far our integration is on the offer side, usually on the upper management tool or directly inside their application or website. So it’s an API. The second is this disbursement redemption, which is usually from the backend side from a retailer, so not directly to the pos system, even though we could integrate to a pos system if they had api capabilities, but it’s usually a post connection on their side and a lot of retailers do what’s referred to as a data dump and they have some kind of job that’s dropping transactional information, so their analytics and data team are collecting it so we could create an ftp drop point for them and then pull that data and run our redemption disbursement. And then the third one is a connection. It’s an optional connection that says, alright, this redemption was sent to us. It is being dispersed and the disperse has been sent. So it’s a callback, a web hook to the retailers so they can notify the consumers, be like, hey, check out your, your mailbox, or hey, this, this rebate is available. And I don’t know if I clearly said this, but all of the rebates we have currently, and there’s only a few states that have instant rebates. Uh, they’re all post-purchase rebates. So after you buy them a I briefly talked to on that, I just want to be clear on this. So they come in the form of, you know, open loop, close loop and I will drop this that we are about to do a API integration with paypal.

Jay Clouse: 00:48:30

Interesting. Okay. I was just going to ask, and maybe this gets that paypal point, what does the actual cash flow mechanics of this look like? The retailer collects the payment from the user. You just run the checks and then you give the retailer the okay for them to disburse the payments still from their account. You guys don’t have an escrow or anything?

Kevin Mack: 00:48:53

No. So, uh, retailers are not legally allowed to pay a consumer for buying alcohol. The cashflow and the money. So the offers, the disbursement, the redemptions is all on our side. The only thing the retailer does is they utilize and take our technology, our application and make it available for consumers to see. So that’s the only thing retailers do.

Jay Clouse: 00:49:19

So this $8,000,000,000 of marketing and advertising spend $3,000,000,000 of which was on paper coupons. Some of that $3,000,000,000 coupon spend is essentially going to fund this effort where it’s like we, this is the, uh, I don’t know how you want to call it, it’s the rebate, but that’s, that’s where the money’s coming from and they’re given. That’s going to you guys and from you guys.

Kevin Mack: 00:49:40

Yup. Yup. And the summary of what we do, and this is like the seven second description, is we’re the first and only legal way to discount alcohol and we do it by post purchase rebates in with it. It’s not coming from the retailer. So that is one of the number one big thing. So we get this information, we approve the transaction and then we work with our disbursement partner. That’s who generates the open loop and closed loop. So for us, the reason why we, you know, at this stage of the game, we have a really great partner that helps us with that. We don’t have to be PCI compliant because they handled that and those handshakes are all very secure. So the payment, the validation, and then the disbursement to the consumer all happens on our side. The email that the consumer gets is actually from BYBE, but it’s branded like the retailer so we keep it in the same family so the consumer is not confused but it is actually coming from us. At no point whatsoever. Does the retailer touch money and it’s all pure. It’s 100 percent funded from the manufacturers.

Eric Hornung: 00:50:48

What do the contracts look like in this? Is it like you guys sign long term contracts or is it just ad hoc?

Kevin Mack: 00:50:55

We had each at this stage, each offer that we have with manufacturers are on a month to month basis on the individual offer. So almost like I would say those are similar to a contract to hire at this stage because we were early on and also we don’t want to lock down some of the, you know, the pieces and parts. We don’t want to be like, like the joke that it’s not really a joke that the piece was like why do we charge them like a penny for an offer? They can manufacturers because we expect so many or do we take a percentage of it? So for us, we’re, you know, we’re still looking at those numbers and even the legal ways of accepting money from manufacturers for their marketing and advertising because we are very strict on it. We are kind of breaking new ground with our technology and our business, so we have to like really be cautious on everything that we do, even our business model at this point.

Eric Hornung: 00:51:55

you answered it perfectly.

Kevin Mack: 00:51:55

Yeah. Cool. Cool.

Jay Clouse: 00:51:57

What’s been the feedback from some of these partners in the campaigns that you’ve done with the brands and manufacturers?

Kevin Mack: 00:52:02

I’ve never seen people be so happy. Uh, you know, tears of joy, tears.

Jay Clouse: 00:52:07

I’ve never cried.

Kevin Mack: 00:52:10

Well, let me tell you these, these brands, manufacturers, they call us up and they’re like, I need a video skype you or they’re just crying and they’re like, I’ve never seen anything so amazing at it. That’s it. That’s, that’s the feedback we get. And we’re like, sure, do you want to do another? They’re like, how about 500? They’re like, all right. Uh, now it’s uh, uh, it’s, it’s been really great. And so right now we’re in the traction state of where we are in the business. I, I’m, I were all hardcore realists with the exception of drew. The attraction that we’re seeing in the short amount of time that we’ve been alive as a company is absolutely amazing. And I had this realization about two weeks ago, I was like, oh my, this is, this is working and the data and the pieces that we saw are actually coming together. Like I was always confident in this idea and the three of us being able to put it together. But it, it’s different than actually seeing it in real life. It’s like if I knew what it was like to have a kid and see this kid grow up from age one to 18 in a matter of a year, go to college and be applying to college and starting getting accepted. That’s where we are in our business world. Like we went from one to 18 year old, apply to college and they’re starting to get accepted. Yeah. But, uh, I don’t know, it’s, it’s been a very, very crazy, amazing year. And seeing all this row is more than what I ever imagined.

Eric Hornung: 00:53:35

So I read an article that you only sleep two hours a night. Is that true?

Kevin Mack: 00:53:40

Yeah. Uh, I almost texted jay around like four in the morning last night and I was like, yeah, he’s probably asleep. And then I was like, what’s an appropriate time to text someone on a Saturday? Because I wanted to make sure, like this was still happening because I know there was some schedule conflicts, so I was like seven, 15 and. Okay. Time to text someone on a Saturday. Luckily Jay, it seemed like he was up. I don’t know if I woke them up. Yeah, I, I’m, I’m wired really weird. My mom is the exact same way so I can call my mom at 3:30 in the morning. Hey Mom, what’s up? And have a full out conversation. And I didn’t wake her up and then I could be like, you know, it’d be great right now to have coffee. Who’s up right now? Six in the morning, I’m going to call my mom. Hey Mom, do enough coffee? She’s like, I’ll be over in a few minutes. She’ll be over.

Jay Clouse: 00:54:28

He’s also not kidding. I got a text at 7:15 on the dot this morning.

Eric Hornung: 00:54:33

So what time do you actually sleep?

Kevin Mack: 00:54:35

I don’t know. I’m usually, I, I’ve been trying to sleep a little bit more recently. Uh, it’s primarily like there’s, you know, there’s good stress and bad stress. I’ve had a really amazing year. I would say, uh, I don’t like to say necessarily success, but we’re on the path of success right now for all the businesses that I’m involved with. And with that it’s been kind of a little bit draining for myself, a lot of emotional energy and just overall energy. So I’ve been having to sleep a little bit more. So usually, um, my schedule is around like two in the morning. I’m like, all right, I need to start calling it a day and I take a, usually it get distracted and look at facebook for about an hour and then take a quick shower because you never go to bed dirty. And then I’m usually asleep by between 2:30 and 3:30 in the morning. And then get up around five, 5:30 every single day. So usually a meeting starting off around seven, 7:30.

Jay Clouse: 00:55:36

That’s exhausting to even to even hear that as completely exhausting. I had one more question on the BYBE front that we didn’t get to you. You talked about legal fees being about 60 percent of your costs and I imagine they have to be high. You also said at one point there’s like two legal firms that own the market of alcohol law. Are you guys generating revenue to offset those costs or where? Where is that coming from?

Kevin Mack: 00:56:02

We are at the stage of our company. We are having revenue but it’s the revenue there is just to show traction. At this point we are showing traction, we are showing our business model. We are really focusing on breaking new ground with our technology, our platform and having examples out there. So right now we are in the sales cycle and proving it all out. I don’t want to say revenue is not, you know, we talk about all the time. It is a, a source of heated debate inside the Mack shack where we work out of and a revenue is not there to offset. So, you know, we have amazing investors and our, we’ve been very strategic about the investors that we have. We consider them partners and really close to us individually. Like, you know, we text them on a day to day basis. We joke around, we send them animated gifs. Uh, we go visit them, we have, you know, personalized calls, usually facetimes and zoom calls. But yeah, we’re all, we’re all funded by investors, a small amount of revenue right now.

Jay Clouse: 00:57:17

Okay. Eric, do you have any more or less questions? I had one closing question I want to make sure we have time for, but if you had anything on top of your mind, go for it.

Eric Hornung: 00:57:26

I’m ready for the closing question. Let’s do it.

Jay Clouse: 00:57:28

All right. So Kevin, the last time you and I hung out, we talked about your own idea for a podcast. It’s called, I believe the painting. Yes. Can you talk about the painting and if you’d like, we can do an episode right here right now?

Kevin Mack: 00:57:42

Yeah, it’s actually changed the name, it’s called the painting is not for sale. So this is with Todd Novak who runs guitar knobs. Uh, so that’s uh, another successful podcast and a tod’s also a co founder of one of my other businesses one day I was at my house, so it was, or one day I get this phone call from todd and I talked to todd all the time, but todd was like, out of breath, excited. He’s like, oh my God, I was just at a thrift store and I found the best painting ever. And he’s like, I’m going to buy it. I was like, okay. And he kept saying, and I see todd almost daily and Todd’s like, I need to show you this painting. And he kept forgetting it and he’s like, I was like, just send me a photo of it. He’s like, I will not send you a photo of this, uh, this, this painting is something you have to see in person. And one, like a week later he was just like, you know what? It was like 8:00 AM on a Saturday. He’s like, I’m just going to drive over. And he lives about a half an hour away from me and so he drives, brings the painting and he’s like, here it is and there’s this little reveal. And I see it. I’m just like, Oh, oh, I get it. And then I’m just looking at it and like looking at it like behind, like underneath a light, looking at from different angles and being like, I have never seen anything like this. I’m like literally lost for words. Even thinking about it, like it’s hard to describe it. Um, it’s like no other painting that you could ever imagine. So, um, uh, todd then left. I thought he was going to give it to me as a gift. He, he doesn’t, he didn’t. It’s actually stored somewhere very awesome Right now it’s on a ceiling somewhere where we don’t tell anyone about it. So if you lean back, like if you’re like working, you lean back, you’ll see on the ceiling and it’s like, there, it is a. So I won’t, I won’t tell where it is because we don’t want to reveal the painting. But the idea. So we came up were like, why don’t we do this as a podcast, let’s get people to come out, we have this little gate and we have like this little, like, you know, reveal, kind of like a west anderson film where it opens up and then the painting just in there. And then people, uh, we, we filmed their reaction and they just talk about it and like how it makes them feel and like describe it. So we want to do a full series and try to get like really awesome people, uh, like celebrities or like a definitely like a local Columbus people, but we to like hit up, like try to get something like Brad Pitt to be like, Hey, can you come do this painting? Fly Him out here. Yeah.

Jay Clouse: 01:00:10

It should be easy.

Kevin Mack: 01:00:12

It should be easy. Like weve got those connections and that’s all it is. And then, uh, after doing maybe about, you know, 14 episodes, we’re gonna sell the painting a blind auction. So you won’t ever see the painting.

Eric Hornung: 01:00:24

So the painting is for sale.

Kevin Mack: 01:00:27

Yeah. But you see, spoiler alert. That’s alright. No, no, that’s fine. Uh, yeah, that’s, yeah. Ironic part of a that’s, that’s the goal and I think there’s something funny about this, this painting in general, but the idea to create hyper on something that you can’t see and we never reveal and we never show until it’s actually sold at the end.

Jay Clouse: 01:00:54

All right, thanks Kevin. We’re going to talk about. We’re going to do our post interview. We appreciate you joining us and we’ll talk to you soon.

Kevin Mack: 01:01:02

All right. Thank you. Appreciate it.

Jay Clouse: 01:01:07

We just spoke with Kevin Mack of BYBE. Eric, what are we about to do here?

Eric Hornung: 01:01:12

So we’re going to go through a hypothetical deal memo. A deal memo is essentially the notes we would send lps if we had lps. I’m done in a formalized process, but here we’re going to go through a verbal, informal version of that and we’re going to focus on four questions to crystallize our thinking. Jay, is there anything that I’m missing before we get to those four questions?

Jay Clouse: 01:01:39

No, I don’t think so. We, we want to use this period as taking a note of what are the things that we thought were interesting about this, this prospect, about this company, about this opportunity, what are the things that we think still need more exploration or may give us pause. This is something that we will look back on six months, 12 months down the line and say, how did we do, how we’re our instincts? What were you thinking now that we see BYBE six months or 12 months post interview, how have they been doing? Did we predict that or they’re doing something completely different and what does that mean for our ability to gauge founders and their companies?

Eric Hornung: 01:02:16

And to do that, we’re going to look at these four questions today. The first is how committed is this founder? What are this founder’s chances of success in this business and in life? What does winning look like in terms of revenue and our turn and why has this founder chosen this business? So Jay, what are your initial thoughts on. And I know Kevin is not technically a founder, but he did come on as they changed into bybe. So what are, what are your thoughts on, on Kevin and his commitment to BYBE.

Jay Clouse: 01:02:55

It’s difficult to pull out some of my own personal bias and ex experience with Kevin over the years before BYBE and maybe that’s not even necessary. Maybe. Maybe that’s a good thing for me to have. He’s got a really deep background in technology. He’s really connected in the community and respected as a, as a leader in technology and in design, user experience design and startups. I think Kevin as a founder is a very committed guy. He, he doesn’t sleep. He’s running the technology from himself and his company to help keep their technology costs low, which is meaningful because there’s a huge opportunity cost to him personally and also his company to be the essentially technology arm of BYBE. What were your initial thoughts?

Eric Hornung: 01:03:44

Yeah, I think that his ability to turn the light switch on when he saw an idea and commit to it is amazing. When he said, if we get into techstars, I’ll quit my job and I will come join you guys as essentially your cto and we’ll go through the techstars program together and then it happened and he did it and he’s still there and they are making what he said were significant strides within a year, so it seems like that ability is, is rare and he sees the idea and he is committed to the idea.

Jay Clouse: 01:04:22

It’s a small team and it’s been a small team from the outset and there are a lot of people to speak with and get buy in from an a whole ecosystem of this bybe play, which seems difficult for a small team, but I think also speaks to their commitment a little bit. That was one of my major takeaways from this conversation. You and I both had kind of a a, an infantile understanding of the APP and the. The opportunity from the intro and after talking to Kevin, there’s, there’s so many more moving pieces and stakeholders and aspects to this that I didn’t understand it all. It’s a very complex.

Eric Hornung: 01:05:01

Why do you think tech stars chose them out of the 40,000 applicants applications they got?

Jay Clouse: 01:05:07

Well, I think it is one important to remember that this is a specific targeted retail accelerator run by techstars in Minneapolis and so I would that all 4,000 applications had some retail bent to it, but for them, I’m trying to think of target as a retailer. They want to sell more alcohol. They have stores all over the country. I’m sure it behooves them to just increase their volume of sales and alcohol and this is kind of a promise to help them do just that. So to me as target as a retailer, as techstars, if we’re looking for technology that can be immediately applied to retail and help retailers make money, this seems to promise to do that and it’s novel, you know, part of their pitch itself is we’re the first legal way to discount alcohol and they do that by after purchase rebates, which must be a pretty good pitch because I just said it almost verbatim from memory and so I think that probably resonated with them. What are your thoughts? Why do you think they got it?

Eric Hornung: 01:06:09

So when you look at it from a target standpoint, it’s not something I’ve really thought of, but in one of the articles I read about the targrt techstars retail accelerator, they mentioned that target was looking into making their own alcohol. I don’t know if that’s a generic brand or something, but that would put them both as a retailer and the manufacturer, which maybe makes BYBEs proposition make a lot more sense

Jay Clouse: 01:06:33

or maybe less sense. To me, that’s almost concerning because as a retailer you cannot pay for the consumer. Like you can’t pay, pay the consumer to buy the alcohol, so if they’re playing both part of brand and retailer and the brand side of things is essentially paying the paying customer. I don’t know that. Doesn’t that seem cloudy to you? Doesn’t that seem like cloudy,

Eric Hornung: 01:07:00

but dealing with lawyers every day. In my day job, I just have a feeling that the target has some pretty good lawyers who can figure out a way to set up a legal structure that they can get the best of both worlds, but that’s when the target side. Looking at the tech star side, I think it’s fascinating because to me this is a, and you don’t get these very often in the startup space, especially in the tech space, but this is a a deep moat kind of startup. Right, and it’s going to be the first or second company that can dig these moats. It’s just going to be really, really hard to replicate it. It costs 60 percent of their fixed costs go to legal and we didn’t ask about what their customer acquisition costs was specifically, but it seems like that’s everything else, right? So they’re. They’re talking to regulators, they’re talking to customers, and they’re digging these modes that I don’t think the next version of BYBE that wants to do this is going to be able to go and do it quickly. He said their sales cycles long, the regulator pitching is long. It’s not a smooth, consistent process across states, so I think techstars looked at this and said, you know, it’s gonna be really, really hard to do this, but if they can do it and have targets backing and techstars backing, then it’s going to be non replicable and that exit multiple is going to multiply this little pun there.

Jay Clouse: 01:08:25

Yeah. One Hand. I think having Bob go through state to state and start to get regulators and state officials comfortable with the idea of sort of a near instant electronic rebate on alcohol, that’ll probably make it easier for people to get legally allowed to operate in a similar way in those states. But I think the deeper moat is the relationships to the retailers and the, uh, the technology itself in this case, because they’re not a pure b to c consumer play, you know, they’re not out there marketing. Just the BYBE and saying, consumers download this APP and see offers near you. They’re play is going straight to their consumers, which are the brands and manufacturers that have the $8,000,000,000 annual spend on marketing and advertising for these brands. There’s not a ton of those and I think if they solidify those relationships early, especially if there’s significant legal and compliance to get through with each of those, those customers won’t be excited to jump in and start that process over again would be my thought. That’s that’s a really good point on the moat

Eric Hornung: 01:09:33

and technological integration, right? Because everyone who they’re talking to, they need to integrate into those retailers. Technology, it’s probably a little bit different each time, so when you look at companies in a completely different industry, but who looked to switch from oracle to something else, it’s such a big project, so the switching costs are high, which is awesome if they are the first movers as well. So looking at this as a potential exit, right. What are the potential exit strategies who might be interested in buying something like this without arising conflicts of interest? Is this an IPO-able strategy? Do they have to expand into other restricted areas? As Kevin hinted at in our interview, to be big enough because it’s really not a massive, massive space as we first talked about.

Jay Clouse: 01:10:33

Well, and I was trying to wrap my head around some of the Napkin math too. If the 2017 average spend was $8,000,000,000 on marketing for these customers of theirs, 3 billion of which was on paper coupons to percent of which were redeemed. It’d be easy to look at those numbers and say, okay, one, I want to know how many individual companies are a part of this average of $8,000,000,000, but if 3 billion is already going to the paper coupons, you can say, okay, that’s. That’s really up for grabs and if they’re seeing a really good return then that would open up more of the 8 billion or they might increase the spend entirely. So to me that seems like it’s a pretty sizable market and could be a pretty good business on its own if they’re going in servicing individual manufacturers and brands. I’m trying to also think of who would be the exit partner, the acquisition partner that wouldn’t just want this solely as their rebate system themselves and maybe that is the exit. Maybe there’s a company that just like, nope, we want to win on alcohol sales and so we’re just going to buy this technology, we’re not going to make it available to other retailers. Although it seemed like they legally have to make it available to other retailers.

Eric Hornung: 01:11:46

Exactly. So there’s deep moat that you have to dig, but you also have to keep it essentially open looking. Let’s jump back into the numbers a little bit because I do think they are really interesting. So the essential pitch is in a perfect world, they would overtake all of the paper coupon spend, right? So that’s $3,000,000,000, but they can only do that in 40 out of 50 states essentially, which is 80 percent or 2.4 billion dollars. Now he mentioned offhand that they might take a penny or they might take a percentage. They haven’t really solidified their business model on that yet. So let’s say they take a penny out of every dollar, one percent, that’s $24,000,000 in revenue a year. In a perfect world where they win everything. So the opportunity from what we initially saw as a $250,000,000,000 top line number actually looks a little bit smaller,

Jay Clouse: 01:11:46

a lot a bit smaller,

Eric Hornung: 01:12:50

a lot a bit smaller than we initially thought. So either they’re going to have to find some sort of synergistic play for an exit, in my opinion, to get a multiple that’s high enough to make sense. Someone who wants to really captivate, captivate, this, uh, this sector. Yeah. Capture capture. I was looking for, they can be captivating to,

Jay Clouse: 01:13:13

they can just like capture the hearts and minds of these brands and retailers and just be really captivating. Yeah.

Eric Hornung: 01:13:19

Most people aren’t captivated when they’re captured, but

Jay Clouse: 01:13:23

that’s when Stockholm Syndrome kicks in. Yeah.

Eric Hornung: 01:13:26

But they might need to expand into something else eventually. And then this whole dig a moat and grow and then dig a moat and grow becomes a little bit more difficult.

Jay Clouse: 01:13:39

But you know, if you think about major players in this space, their customers are the brands and manufacturers. One of those would be like Ab Inbev, which owns bud light. Bud light. Yep. Yep. They could say, you know what, we want to increase our volume on these already high volume types of alcohol. They’re buying up craft distilleries all over the place. Maybe they’re saying we actually want to crush craft beer because craft gives us a bad name and helps us sell less. So that is like a strategy of Ab Inbev is they buy craft breweries to devalue the brand equity of craft beer, so they may say, we want to make this stuff cheaper. We want to be the sole provider of essentially legal discounting of our products and we don’t want Cors Light to be able to do that. That could be something that’s legitimate, in which case they would pay a multiple on the annual revenue. That’s happening for five as a sort of independent. But again, if the technology has to be open to all retailers, that’s where I get kind of stuck.

Eric Hornung: 01:14:49

I could see this being and I know that in today’s Day and age everyone just always says, oh yeah, Amazon would buy that, but I could see like an Amazon or a walmart or something who wants to get more into the space and kind of expand their reach taking this over, but I don’t want to hypothecate on who might buy this looking at them as a standalone company. I think that there is a lot of upside after you dig that first moat and even at, you know, $20 million is that what we said? Twenty million a year in revenue. It’s a decent size business that

Jay Clouse: 01:15:32

rebates in general. If you. If you think about the different verticals available, whether you’re going into other highly regulated industries like cannabis or whatever, rebates in general, they’re probably some opportunity to. Because the rebate process is still pretty inefficient and gross. I mean, most of the rebates that I do, I’m still mailing in a postcard with a proof of purchase. It’s not seamless, so it could be that they target a much larger and potentially easier market of legal rebates that are already being already happening as just expanding and utilizing the technology they’ve built in this area where they can kind of own.

Eric Hornung: 01:16:10

Yeah. And also I think that the numbers we use in our assumptions are probably a little low. Is there. He made a statement that they’re essentially doing last leadership right now, right where they are digging this moat and essentially paying for it or the investors are paying for it and they’re still finalizing their business model which is on these month to month contracts. Um, but as they can increase that redemption from two percent, that’s the industry standard right now to what did he say? Something like budweiser is like five x anything that they’ve done recently.

Jay Clouse: 01:16:43

Yeah, all time. Cumulative.

Eric Hornung: 01:16:44

Yeah. So it’s, if they can do something like that where they were, they’re turning two percent into 40 percent or 20 percent or even 10 percent. It’s like that is going to be game changing for marketing people within brands and manufacturers because if they can put their dollars to work more efficiently that they’re gonna be able to have a lot bigger markup on that penny contract

Jay Clouse: 01:17:09

and I think there is something to be said about just the pure knowledge that’s necessary to operate in this space. He, he ballpark their own, you know, relative knowledge of the alcohol industry to be above 99 point five percent of people or something that he said which, which may be hyperbole, but still I was encouraged by the fact that is the other founders of Bybe, drew and Ryan drew came from a background at distributor. Ryan came from giant Eagle. Those are two good parties and pieces of experience that will really help them in their journey. I think from helping to dig those modes but also continue to understand that industry and the more that you understand an industry, especially a regulated industry, the more you start identifying other opportunities that nobody else sees. So there. There’s probably more that can come out of this six months from now, 12 months from now as they continue to live, eat and breathe legal discounts through post purchase rebates. All right, so eric, what else here? What, what are you looking for from six to 18 months from now? What would be a good sign of their growth or where do you want to see them? You know, a year, year and a half from now?

Eric Hornung: 01:18:20

I think there’s two things that I would really want to focus on as I, as we evaluate BYBE, maybe six to 18 months from now. The first would be expansion by state. So are they outside of Ohio? Are they in Illinois, Minnesota. Maybe one of the other ones that haven’t mentioned. The second is the engagement numbers. So Kevin mentioned that they didn’t have a longterm enough view to give some really solid numbers when I asked about the two percent versus what they’re seeing, I would love if in six to 18 months those numbers are a little more robust and can be demonstrated through a little bit of sample testing or through their platform. So those, those two things, I’d love to see what, what the outcomes of expansion and that engagement number is.

Jay Clouse: 01:19:20

I would agree with that. I’d be interested to see how this budlight campaign, for example, continues to proceed and what the case study on that looks like for a super, super major retailer who was running a pretty major rebate on a, on the market leading beer, you know, it’s a $2,000,000,000 per year product. So interested to see what the case study is on that. If they re up for more deals, what that means because if bud light’s doing it, you know, cors will follow suit and Miller or follow suit. What real retailers they’re in I think is interesting. The states I think is a great point. If they get through the process of California, which he says is a little bit of a ringer, that would be a really good indication. Also, you know, I’m, I’m looking to see if he was talking about all the costs have they’re generating revenue but it’s to show traction right now. It sounds like they’re, they’re destined to need to raise in the future. So I would want to see where that conversation goes six to 18 months from now and you know, is is that going to be a series a, is it going to be a major seed and where’s their attraction in terms of revenue at when that happens, I think are all signs that we would want to look for.

Eric Hornung: 01:20:34

Major seed would be an awesome name for like Dj Khalid’s venture capital fund.

Jay Clouse: 01:20:43

major seed. That’s awesome. That is awesome. I saw a car driving recently from a dealership called major key dealership and I thought this was when I was in California, I thought did they start a dealership that was spun off from a Dj Khalid reference car dealership. That’s crazy.

Eric Hornung: 01:20:58

There’s definitely been businesses that have started on worse means. So

Jay Clouse: 01:21:01

personal life goal is to be named dropped in a hip hop song. Doesn’t have to be a major name. It doesn’t have to be like Kanye, but you know, if some hip hop artists drops my name or upside in a in a song, then that’s. That’s one thing off the bucket list.

Eric Hornung: 01:21:16

That’s a cool life goal. I like that.

Jay Clouse: 01:21:18

And if I write some songs myself, then I can just do it myself. Also in life goal is to drop a rap album.

Eric Hornung: 01:21:24

Maybe we could drop an upside outside mixtape.

Jay Clouse: 01:21:30

Yeah. Alright. Well that’s it for today guys. We’d love to hear your thoughts on this. This is a complex business, a complex episode. I’m sure we’re missing some things and not thinking about everything. So we’d love to hear from you. Tweet at us @upsidefm or email us. Hello@upside.FM. We’d love to hear from you. We’d love to join the conversation. If you love our show, please go and rate our show on itunes, preferably fivestars. It’d be great. That helps us a lot. But that guy that does a lot for us in the way of helping us bring high quality guest to the show. Eric, am I missing anything?

Eric Hornung: 01:22:02

No, that’s it. We’ll see you guys next week. All right. Later.

Jay Clouse: 01:22:06

That’s all for this week. Thanks for listening. We’d love to hear your thoughts on today’s guest. So shoot us an email at hello@upside.FM, or find us on twitter @upside.FM. Will be back here next week at the same time talking to another founder and our quest to find upside outside of Silicon Valley. If you or someone you know would make a good guest for our show, please email us or find us on twitter and let us know and if you love our show, please leave us a review on itunes. That goes a long way in helping us spread the word and continue to help bring high quality guests to the show. Eric and I decided there were a couple of things we wanted to share with you at the end of the podcast, and so here we go. Eric Hornung and Jay clowns are the founding parties of the upside podcast. At the time of this recording, we do not own equity or other financial interest in the companies which appear on this show. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinions of Duff and Phelps Llc and its affiliates on your collective llc and its affiliates or any entity which employ us. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. We have not considered your specific financial situation nor provided any investment advice on this show. Thanks for listening and we’ll talk to you next week.