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In 2015 we went a little bit viral and probably only at the time we were making about 15 to 30 a week or maybe a month I think, and then we ended up selling 150 a day over like a week and we’re like, woops. And that was because we hit buzzfeed. CNN got calm and USA Today, all in one period they kind of all picked up the story and at that point we had to go. Our original sort of consultant guy on the ground was wide-eyed and had no idea what to do when our wait time just went to eight months from four weeks,
Jay Clouse: 00:00:33
The 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: 00:01:01
Hello Hello Hello. Welcome to the upside podcast, the first podcast finding upside outside of Silicon Valley. I’m Eric Hornung and I’m accompanied by my cohost, Mr. Want-to-get-away himself, Jay Clouse. Jay, how’s it going man? How was Florida?
Jay Clouse: 00:01:17
Florida was good. I’m excited to be back in Ohio, but I’m going to New York very soon too. It’s been a busy, busy summer of travel. You’ve been traveling too.
Eric Hornung: 00:01:26
I have been traveling. I was just in Greece with my family. I highly recommend the Greek islands to anyone who wants to go. We did Athens, Mykonos, and San Terreni. San Terreni was definitely my favorite Santo winery. Highly recommend everyone. Check it out.
Jay Clouse: 00:01:42
Eric Hornung, my little greased pig.
Eric Hornung: 00:01:45
That’s a weird, weird thing to say.
Jay Clouse: 00:01:49
Speaking of pigs, I’m also going to Germany. Where will you be eating a lot of sausage. I’m sure. Croatia and Austria and Czech Republic and September, so should be a fun little euro trip. Many euro trip, if you will.
Jay Clouse: 00:02:05
You’re much more of a world traveler than I am.
Eric Hornung: 00:02:07
Yeah, I think. I think that’s a fair statement.
Jay Clouse: 00:02:10
I consider myself a global citizen now.
Eric Hornung: 00:02:13
Yeah, a global citizen, but you do a lot of traveling around the United States.
Jay Clouse: 00:02:17
Yeah, well I think part of it is for me, I love traveling, but my lifestyle requires me to be working a lot while I travel and it’s hard for me to rationalize spending so much on traveling and going somewhere where I know I’m going to have to be working a lot anyway and I’ll feel this pressure of like doing it right. You know, like getting the most out of this international travel and I don’t. I don’t think I can deal with that pressure.
Eric Hornung: 00:02:40
You got to do the long travel where you do like a month in one place so that way you can work and then also do the travel experience. That’s a. that’s a common geographically independent type of lifestyle.
Jay Clouse: 00:02:51
Yeah, I think that would be more my speed.
Eric Hornung: 00:02:54
Speaking of lifestyle, today we’re going to be talking with a company that caters to maybe some individuals who have a pet centric lifestyle. Jay, you want to give us a little insight into who we’re talking to.
Jay Clouse: 00:03:06
Yeah, that’s right. I’m excited about today’s guest. Today we’re talking with Jennifer Williams, Co founder and chief cloning officer of Cuddle Clones. Cuddle Clones creates custom pet products and their flagship product is a customized stuffed animal, a plush replica of your pet, whether it’s a dog, a cat. I think I saw some rabbits and some horses. They’ve also branched off into other products using that same sort of replical model, including slippers, Golf Club covers, figures, ornaments, earrings. Before founding Cuddle Clones, Jennifer spent 10 years as a benefits consulting actuary with price waterhouse coopers and started the company in 2010 in Louisville, Kentucky.
Eric Hornung: 00:03:48
All right, Jay, through your research, what’s your first hot take here and Cuddle Clones?
Jay Clouse: 00:03:54
Well, this is a product in a market I would have never thought about. what was very nice, is Cuddle Clones did an equity crowdfunding campaign in 2018, not very long ago at all. And so I have a wealth of research at my fingers. Everything from revenue to number of products sold to the amount they raised and that equity crowdfund and even some industry statistics, but you know, hot take, pet owners love their pets. So if pet owners want to have replicas of their pets all over their stuff, whether that’s an exact plus replica or whether that is on a shirt or on a bag, I believe there’s some market there and apparently to the tune of $72,000,000,000 in expenditures for the pet industry annually.
Eric Hornung: 00:04:45
Yeah. It’s absolutely crazy that people spend so much money on their pets. There’s a per pet spending analysis that was done by fortune and in an average year above the baseline, okay, what do you need? You need your shots and everything. It’s like $275 per pet in the United States for annual spending. That’s Kinda crazy. And that’s just on the pet side of things. That’s not on the human side of things, which is I think where cuddle clones falls.
Jay Clouse: 00:05:15
Not Super surprised given that the human race dedicated, I dunno, centuries to domesticating dogs in such a way that we took one species and made something like, I don’t know how many different strains of dogs do we have now because we
Eric Hornung: 00:05:28
Did you just call the dogs strains?
Jay Clouse: 00:05:30
Yeah. What’s What’s the right word here its not species
Eric Hornung: 00:05:30
Jay Clouse: 00:05:34
breeds, breeds of dogs that we selectively bred over centuries and made so many different types of dogs. So one thing that I can see from our research year since about 2013 when cuddle clone says they launched their first ecommerce website. They’ve brought in 7 million dollars in revenue since that time to the tune of about 30,000 products.
Eric Hornung: 00:05:57
Yeah. So there’s obviously a demand for this product. I don’t know if that. It’s something I would buy personally. I don’t know that I am the target consumer here, but people love their pets. Sixty one percent of people think that pets are a valued member of their family in the same vein as you know, your brother or sister, so people love their pets. People like the idea of doing things for their pets and they have demonstrated that they’re not scared to spend money on their pets. So this idea, while it might seem a little crazy at first to someone like me, kind of makes sense.
Jay Clouse: 00:06:32
Well, wrapping up our research year, I saw a couple of things that I guess you could call shadows, one being Cuddle Clones as a company was profitable in 2015 and 2016, in 2017, even though their revenues broke 2.2 million dollars, their expenditures were at 2.4 million dollars so they actually had a little bit of a loss of 2017, which they attribute to upgrades of the website, preparing for this equity crowdfund, so we’ll be interested to hear from Jennifer what the prospects are for the company moving forward, how they can get past what looks to be kind of a correlated revenue to expense historical trend. I haven’t seen any outsized returns on the revenue side versus expenses in the years of growth. What do you think?
Eric Hornung: 00:07:19
Yeah, I agree. The cost structure is primarily variable. You pay for your inputs when you get orders. I would assume that the overhead and everything like that is pretty low, but that makes sense to me. It’s only a shadow in the fact that you have to grow to get outsized returns or find new ways to sell, but it’s also probably a positive because in the case that you do have a down year, the market crashes and people don’t have as much money to spend on pets. You can adjust your cost structure very quickly and still remain profitable
Jay Clouse: 00:07:49
and maybe that’s what they’re doing. Getting into some of their new product lines that aren’t just the plush pets. Oh, and one last point, I did find two competitors that they also mentioned, one being a company called pet sees that seems to do a very similar product with a, uh, I don’t know. To me it looked like the quality of the product was not as good. It didn’t look like as strong of a replica as the products. Same with the shelter pups, which seems to be primarily a social enterprise that gives money back to animal shelters.
Eric Hornung: 00:08:18
Two quick points on that from a competitor standpoint, when you type in cuddles clones or when I do into Google, the fourth link is eight cuddle clone alternatives on product hunt. So that’s a shadow to me to say, okay, there might be a lot of competition in this space, in which case you might have to compete on price a bit, not ideal. Also on their crunchbase profile, they acquired a company in 2016, which will be probably the first time that we’ve had a company on here that’s already acquired someone else. So I’d love to ask about that.
Jay Clouse: 00:08:50
Cool. Alright. Well let’s get them here and talk with Jennifer.
Eric Hornung: 00:08:53
All right. Here we are. One more thing. Jay, is there something you want to tell the people?
Jay Clouse: 00:09:01
I have good news and I have bad news. The good news is I’ve started to invest more into the podcast in the form of a new laptop. The bad news is because of this investment, I did not reset my audio settings. And so this interview may sound a little different because, uh, I screwed up, I messed up some of the audio settings and we had to do some extra editing to fix it. And you’ll still hear some artifacts of key clicking in the background, which I apologize for it, but you’re in a couple of weeks. Once we get rolling recording again, that will no longer be an issue. So thank you for bearing with us and we apologize for any inconvenience. Okay. Onto the interview, Jennifer, welcome to the show.
Jennifer Williams: 00:09:45
Thanks for having me. I’m excited to be here.
Eric Hornung: 00:09:47
We’re excited to have you. We’d like to start off by learning a little bit about the founder and your background. So can you tell us about the history of Jennifer?
Jennifer Williams: 00:09:55
Yes, the history of Jennifer. So I grew up in a pretty small town outside Seattle, Washington. My parents had moved out there when I was about four. So most of my youth was, was in this little town.
Eric Hornung: 00:10:09
What’s the town called?
Jennifer Williams: 00:10:11
Uh, it’s called Sultan Washington salting Washington. Yeah. And it’s known for its bakery, people going up to Stevens pass to ski and to do other things. Always stopped at the bakery. So. So that’s what it’s known for. But yeah, we’re about 40 miles from the summit of Steven’s pass. So kind of an old logging town near the mountains. So it was, it was a nice. Well actually this is going to be appropriate. My dog in the background is playing with the chew a squeaky toys so this will be good. Anyway, so I went to college at the University of puget sound and that is in Tacoma, Washington and was able to be, it was a small liberal arts college and I was able to play basketball so we were a division three basketball team so you know, it didn’t, didn’t get a lot of playing time, but I made the team and it was really good experience. So that’s when I found out about actuarial science and so I was really a math nerd and I learned all about the career of being an actuary and decided to do that. And so I was a math major and a business major just from the math side. You had to do the math and the actuarial science kinda got into the time value of money. So you hadn’t your finance side of things too,
Eric Hornung: 00:11:24
Did you take any of your tests?
Jennifer Williams: 00:11:25
Oh yes. So I was just gonna say that I graduated with a couple of exams under my belt. I had a few internships, one at Mercer Consulting and Seattle, and then between my junior and senior year I had another one at mercer but in New York City. And so when I graduated I, uh, had some pretty good offers I could have ended up in la or Chicago or New York. And this was in 2010. I graduated from college and decided to go to Chicago and this gets me a little closer to where I am now in Louisville. So who knows why a person from Seattle would end up in Louisville, Kentucky. But, so I started out at a company called Chicago Consulting actuaries, CCA and we were a consulting firm, mostly working on large pension plans for companies. And so these aren’t your 401k’s, but your traditional, what they call defined benefit plans, you know, where you work for a company for 30 years and get a pension. And those are dying out now. But there was a lot to do with that and we were on the liability side. So we didn’t really deal with the money but more of projecting the potential benefits that have to be paid out from the plan and dealing with all the government regulations for funding and whatnot. So that’s what I did for about 10 years in the middle of that I moved to Jacksonville, Florida for a time because we had a partnership with a company down there called City Street and we were providing pension benefit plan administration and so we had a few people down there and we just decided to open up an office. But then back in probably 2003, one of the partners at the firm decided to go out on his own and start a actuarial consulting business. And so this is probably my first foray into entrepreneurship and I didn’t really hesitate when he said he was leaving and he lived up in Chicago and so I ended up moving back up there. But I’m like, oh great. When did we start? This sounds fun. And so we did some pension work, but mostly we are focusing on stock based compensation consulting work. So this is around the time where companies that have started expensing their stock options on their income statements and some companies, you know, had done it forever, love it. Most companies had just kind of put some notes in the footnotes and you know, went on their way. They weren’t really expensive so there was a whole bunch of consulting work around that. So I moved back up to Chicago and did that. And then my business partner and I, you know, I didn’t really know anything about starting a business so I was just doing the work. He was getting the business and it kind of just fizzled out and I think he wanted to do some other things. And so at that point I decided, well, I really liked that, you know, maybe I should go get my Mba and you know, I needed a little more structure and homework and things to push me along. And I started out at Kellogg at northwestern for my Mba, but then at the time the guy I was dating said, Hey, do you want to move to Kentucky? So I said, oh, well, can we have a horse? He’s like, yeah, let’s do it. So I ended up moving from downtown Chicago to a farm down near. It was actually in southern Indiana, but near Louisville and had chickens and goats and a horse and it was, it was pretty funny. Um, but I had to decide whether or not I wanted to go back up to Chicago every Saturday to finish out my mba or just kind of looked for other things and start over. And I ended up starting over because what I found was the University of Louisville Mba program, but it was focused on entrepreneurship and so I decided to do that and it was great. I mean, that’s how, that’s really where Cuddle Clones got started and you know, in the very first week or so we had to stand up in front of the class and give what we thought were our top two business ideas. And one of mine was always, oh, I think we should make stuffed animals of people’s pets. So that’s how it started.
Jay Clouse: 00:15:18
When you’re growing up and that small town outside of Seattle, did you have a farm or were you just at this stage in your life saying, I want to have a farm?
Jennifer Williams: 00:15:27
Well, you know, I always loved animals, but I did not live on a farm in the small town mean we were just like in the town. Uh, I think we had five acres. No, it was not a farm and we only had a dog so, but I used to trade, you know, horse riding for babysitting and all kinds of things.
Jay Clouse: 00:15:42
I was going to ask where your affinity for horses and chickens came from.
Jennifer Williams: 00:15:47
Yeah. No, I mean, I love animals. The goats were actually my favorite. They’re, they’re very curious and interesting and always in your face that they’re awesome.
Eric Hornung: 00:15:55
So you’re in the middle of your MBA program at Kellogg. You’re living in what part of Chicago at the time?
Jennifer Williams: 00:16:00
Like the south loop. So right downtown
Eric Hornung: 00:16:06
You’re literally in the heart of it all. And then some guy says, hey, you want to move to a farm in southern Indiana? And you’re like, yes, absolutely.
Jennifer Williams: 00:16:17
Well I was now working at price waterhouse coopers in Chicago, so I did that after the little entrepreneurial gig fizzled out. Well, I think I like adventure. Definitely. I’ve been one of those types that would move every year just because I like to new houses and new roommates and new people in my life. So I think that was part of it. I wonder too if there was some weird destiny because I think my second choice for colleges, even though I was out in Seattle, was centre college in Danville, Kentucky. So it’s very strange. Like maybe I’m supposed to live in Kentucky. I have no idea.
Jay Clouse: 00:16:53
So tell us about the origin story of this idea you pitching in business school of people having stuffed animals of their pets were where and when did that idea come to pass?
Jennifer Williams: 00:17:03
Well it happened when I lived in Chicago the second time and at the time I had a great Dane and his name was rufus and he had two different colored eyes. So he had a blue eye and brown eye and he was Harlequin so white with like black patches everywhere. That’s kind of the name of the pattern and I just was laying on him one day, like just talking to the person I was with and I was like, we were talking about getting ourselves frozen and you know, taking our dogs with us, you know, in the next life. And, and I thought well you know what, I was just laying on him and I was like, it’d be cool just to have a really big stuffed animal of him. And I thought, Huh, that’s interesting. And normally, I mean, you know, now as an entrepreneur like everyday that you have a new idea, you go google it to see if it exists. So that’s like the first step of advice, go see if your idea exists. And I googled it and there really wasn’t anything out there which is just weird because that never happens. Normally you find 10 companies that are doing it and you know, they might not be doing it well but they’re doing it enough to discourage you from moving on with the idea. So I found one lady out in California or maybe Arizona who was making sort of movie the doubles, so when they would need a prop for the movies and hers costs about $800, it took four months to make and it was just her, you know, so it was like her hobby or her skill and I thought, Huh, this, this could probably exist better. So. So I did not do anything with the idea until I was back in the MBA program at Louisville. So I probably just sat on the idea for like three years to be honest.
Eric Hornung: 00:18:38
Do you have a stuffed version of rufus now?
Jennifer Williams: 00:18:41
I do. I have several. We’ve got sorta the first versions and then we made a new one last fall that I have. And um, I can send you those pictures if you want. Well, the podcast, right? We have to have him here with me. I wish I had, I wish I could show it to you.
Eric Hornung: 00:18:58
But you said you had a dog growing up. Have you had a dog pretty much your entire life?
Jennifer Williams: 00:19:01
Yes, but I will say that I didn’t really have the emotional connection to a dog until I was an adult. The dogs we had growing up, my dad had a hunting dog and you know, we, she actually lived outside, which I think it is an abomination now, of course, like to sleep in the bed with me. Of course they do. But no, she was just a chocolate lab and she was really sweet. She just lived outside and you know, she got to go hunting and stuff. And then um, we had a loss of opposite name’s Zach and he pretty much lived his entire existence in like our big kitchen area. Like I guess my mom didn’t want him on the carpet so he, he knew not to go on the carpet, but he lived, you know, in our kitchen area and he was sweet and he got to come out. I’m under the Christmas tree to get his treats. Like at Christmas time he got to go on a blanket out in the living room. So, you know, it wasn’t really until I had rufus and now my dog Izzy, who say Chihuahua Mix, that I’ve really kind of said, oh yeah, these are my children.
Eric Hornung: 00:20:00
You went from great Dane to Chihuahua Mix.
Jennifer Williams: 00:20:02
I did like, yeah, izzy stumbled upon me. Some neighbors found her and she only had a flea collar and no identification, no chip or anything. And so we turned her into the metro city and got to keep her after five days when nobody claimed her. So yeah, she’s my little baby now.
Eric Hornung: 00:20:22
Take me back to that classroom in Louisville where you pitched your first two ideas. Yeah. And what were people’s responses when you said, hey, I just want to like start stuffing people’s pets into stuffed animals? Well I think they all kind of nodded. I mean like everyone in the class, you know, they all were kind of absorbed with their own ideas, but there was one individual in particular who is still a part of Cuddle Clones today and his name is Adam, Adam Green. And He loved the idea and he ended up being on our team in class to kind of push the idea forward. So he always thought it was good and I get similar reactions now, like a lot of people think it’s a little bit creepy. A lot of people love it immediately. They’re like, oh my God, like this exists. And I’m like, yes it does. So yeah, I think there’s not really any neutral reaction to the idea. It’s more like, oh my God, I love this or I don’t know about that.
Jay Clouse: 00:21:16
In this class that you met Adam and you pitched this idea and you started as a class group, what year was this? Was this 2009?
Jennifer Williams: 00:21:22
This was 2000, nine to 2011 was the two year program and we spent the academic years doing a business plan doing some industry analysis and you know, all sort of written out plans that are old as soon as you print them, you know, and not real. So our original idea was to use dye sublimation and that’s like screen printing to print, sort of the animals pattern onto, you know, like use computers and printed onto a sheet of plush and then sew it together. That was kind of in our original business plan and we quickly realized that that wasn’t really going to happen. Maybe we could have pursued it with like really short hair and animals, but as soon as you get into medium or long for it’s not going to work. After we graduated, we had actually earned a little bit of money and some business plan competitions and we had about I think 40 grand and this has kind of like your shark tank, but you go around to different schools and maybe you know six to 10 schools that present to the judges and then there’s a winner and you get cash money and it’s non dilutive, which is super nice. And we ended up at the end of the school program. Adam and I were of the only two that that kept moving forward. We had a couple other people on our class that were just like, oh, this is a process or you know, I’ve got other priorities in my life. I can’t really do this right now. And I think that does happen quite a bit in entrepreneurial programs. You know, you think that everyone starts their own business, but you know, that real life sets in and I didn’t have any kids, you know, I didn’t have really anything holding me back. I’m pretty, I’m a pretty good risk taker. So I was like, let’s do this, let’s try it. And Adam and I spent the next couple of years actually trying to figure out how to make the product because we didn’t really know anything about making stuffed animals. We just had the business plan. And so we ended up spending most of our money on consultants and first it was, you know, a consultant to kind of help us find some pattern makers in the us that could do this is, you know, everybody likes us made, but we did not really find that as a solution. And then we ended up, uh, overseas and we had a few prototypes that were really bad. I’ll send you guys those guys to like cuddle clone number one. It was awful. It was terrible and it costs us like $250. But we eventually settled in on this company that was in China that made a couple prototypes for us and we started to say, oh my gosh, yeah, that’s our vision. That’s what a cuddle clone should look like, you know, accurate but cute at the same time. He had a little bit of the soul into the eyes and we had something. But the problem was none of the companies we talked to wanted to be our partner only because they’re not used to making one at a time, you know, they all make 10,000 of the same thing. They have a few sample makers on their staff, which are the talent. But then all the workers you know are doing the leg or do in the airport or you know, whatever they’re doing, they’re just not set up to make one at a time. And so this particular company was saying, well we can make maybe one per week for you. And we’re like, that’s not going to work unless we sell one per week for a million dollars. So what we did was we thought, and Adam will tell you this, if he talked to you, he’s like, yeah, I probably would’ve quit right there, you know, oh, this can’t be done. But I’m like, well no. Like we have these prototypes like we know that someone can make something that looks like your pet. So we just need to start our own workshops. So that’s what we did. This was in April and May of 2013 and right around the time we raised our first round of $300,000. So that was, we might probably get into that. But um, yeah, we have one round under our belts, the $300,000 and that was in 13 that we closed it and it was really to finish the website and to start this workshop. Like that’s what the funds were for. So I went to China for about a month and I had one of our consultants that we had used, gave me a person kind of on the ground there. So he spoke English. He was my translator. And then we brought a girl over from Denver who had her master’s in Asian Studies and so she spoke English and Chinese as well. So I had a few people you know, who I could project on my wishes and they can kind of translate. So that first day in China, the consultant guy had hired five people, five Chinese people, a couple of designers and a sower and a cutter materials kinder. I brought a powerpoint with me and Kinda gave, you know, hey, here’s what we’re looking at doing. And I think maybe two out of those five people are still with us today in China. And we just started making them. And in the meantime we applied for our, what’s called a woofy pun intended, I guess a wholly wholly foreign owned enterprise over in China. So it’s a little bit of a legal hassle and you have to pledge a certain dollar amount in registered capital that you probably can never get back out of the country. But it wasn’t really too heavy for us because we weren’t heavy on machinery or really large assets. I mean we really just had to buy some sewing machines and get some people.
Jay Clouse: 00:26:39
Interesting, that was going to be my next question, opening up a workshop there. What does that actually entail? Do you have space? What type of machinery?
Jennifer Williams: 00:26:46
Yeah, so we have to kind of give them a plan of what you’re doing and depending on what sector you’re in. So we were manufacturing but again not asset heavy, so we didn’t are pledged amount was only $50,000 and you had to put that in over six months and so it really wasn’t hard for us and we probably spent out in the first month just getting all this stuff and you have to set up your bank account so you have a US dollar registered capital account and then you’ve got your sort of operating accounts and those are in Chinese currency and then you have to do a lot of signing of legal documents. So we had a, a law firm lawyer from Beijing that helped us kind of through it. And to be honest, I think we probably weren’t supposed to be operating until we had those scientists legal documents, but we started going and we were probably making clones for about three or four months before we actually had the documents. But we were money over there. What’s interesting is that there are employees, you know, it’s not a third party if it’s great, like in terms of being able to control the quality and the production schedule and you know, they’re not just gonna leave overnight and say we can’t do this anymore for you. And it’s really been a blessing and a source of competitive advantage for sure.
Jay Clouse: 00:28:00
So what, what prevents people from going down that route? Is it because a lot of manufacturing businesses are just really high cap x?
Jennifer Williams: 00:28:07
Yeah. And it’s probably scary to a lot of people like, oh, I have to go to China for a month and started something I’ve never done. I think that, you know, the first look probably is to find a third party that’ll do it for you. I believe that’s one of our competitors does. So they found somebody to, you know, make some, you know, it’s just a lot more difficult to do your own thing probably. So, except we felt we were kind of forced to do it at that time.
Jay Clouse: 00:28:32
As a first time entrepreneur, I would assume it was scary for you to say I’m going to have a wholly owned subsidiary company in China and I’m going to go through all these documents. I mean talking through your, what was going through your head through all this?
Jennifer Williams: 00:28:45
you know, I’m more of a just okay, here’s what we gotta do. And I did have the documents translated so I didn’t, you know, just read them and say okay, I don’t know what this says but I’m signing it. So that was really nice. But yeah, mostly it was okay, we want to make these and you know, our first ones weren’t too good, but the other company that had kind of made the prototypes for us gave us those patterns, which was really nice. And so we had something to start with. And in the beginning, even before or website was out. We did a really, I think it was in 2012 that we did a little indiegogo campaign, just a regular one, not an equity funding one or anything but, and we sold clones to. This was the first time we sold a needed people we didn’t know and in the campaign did kind of say like, oh, this is our first pass, you know, we’ll do it, we’ll get your feedback. And we sold clothes for $25 to our friends and so we just started practicing on a whole bunch of pets and that’s how we kind of perfected, well I don’t know if it’s ever going to be perfect, but you know, improved over the years. So they’re, they’re a lot better now.
Eric Hornung: 00:29:45
So what is Cuddle Clones today?
Jennifer Williams: 00:29:49
Cuddle Clones is a about a 3 million dollar business and we offer anything from a stuffed animal of your pet to golf club covers slippers. We just added our purse product. So now you can have a handbag of your pet if you’re super crazy. We have a variety of other custom products such as three d printed, sandstone figurines, ornaments, jewelry, and so what we’re really about is taking your pet and creating just different unique custom products of your pet. We’ve got a little subsidiary called cartoonized, my pet.com, where you can go and create a little cartoon based on your breed and then project that onto a bunch of different products that are offered by Zazzle right now that’s anywhere from, you know, stationary to a phone case to other such things. And so eventually we’re probably going to kind of integrate the whole thing into one site and really, you know, kind of push this, you know, hey, we’ve got these pet profiles, you know, and so we can kind of show you everything there is to offer you have your pet, you know, because we already have your pictures and stuff. So.
Eric Hornung: 00:31:05
So based on what I did some research on and on crunchbase, it appears that you guys acquired cartoonized my pet, is that correct? We did in 2016, right?
Jennifer Williams: 00:31:14
Yeah. We found it and we were actually, we had an idea of creating a little mobile game out of the assets, which we haven’t done. We kind of integrated it into our old site where you could just, it was just part of our products listing and we’ve crossed shared some things with the email list and we haven’t done much with it. I will say we tried but we haven’t. We’ve concentrated a lot of different things. So we launched a new website this year. Our old site was not even mobile friendly if you can believe it all the way through 2018 and now we have a mobile responsive site, like people actually place an order on their phone, which is where all of their pet pictures are. And so that was really the concentration over the last year or two was getting that site out and it took us forever just because we had one developer in house that was working on it. Um, we try to view agencies to do some things over the years and got a little discouraged from that. So we decided to kind of bring a developer in house and try to make it ourselves. So we did that. But now we’ve got some outside help as well.
Jay Clouse: 00:32:17
I’m interested in talking a little bit more about the cartoon eyes, acquisitions. Sure. What that decision process was for you? Like why did you say I see these guys, I want, I want that.
Jennifer Williams: 00:32:28
Yeah. And it was actually the suggestion of one of our investor. We were just talking about it because when we had found it, we’re like, oh this is super cute. It could probably lend itself well naturally as an extension, you know, that people give us their pictures and we give them products of their pet. Now in this case they were able to kind of make the Avatar of themselves. We don’t have every breed on there, but we do offer like a custom and if we don’t have your breed will kind of make the custom cartoon for you. But we liked him and and one of our investors said, well why don’t you acquire them? And that was kind of his statement with like a lot of different companies were like, we can’t just go choir everyone, but this particular one we looked it up and it was only one lady, it was only one owner and you know, she had been, I contacted her, you know, kind of try to see if she’d be willing to work together on a project or something and, and you know, also maybe potentially get acquired and she, she didn’t know what to do at first, but then, you know, she had another baby on the way and she’s really the artist. She’s the one that creates all the pets, but yet, you know, she hadn’t done a facebook post in two years so she didn’t really have the business side of things. And so we came to an agreement. It was not a large acquisition by any means. It was, you know, mostly just a five figure check to her. She got a little bit of royalties, you know, going forward as well as a few shares of Cuddle Clones. And so right now we still work with her. She’s kind of doing a couple of the base pet still and then we’ve got a little bit cheaper graphic design folks kind of defend doing all the color iterations because if you go on the site, like you pick your breed and then there’s, you know, 50, million cut color iterations that you can do. So. So yeah, I was just kind of an opportunity that one of our investors is like, oh you should buy it. And we’re like okay. Once we looked into it, you know, it was a pretty decent deals.
Eric Hornung: 00:34:14
So talk to me a little bit about your financing model so far. We’ve gone through kind of your, your process and you know, there’s $50,000 that’s kind of non refundable in China, plus setting up a workshop in China then sure. That’s all. Just one time cost. You just said five figure check to this lady. He hired a bunch of consultants in to date. I can only see that you’ve raised $500,000. So are you guys just so profitable that you’re funding your own success with your own profits or is there additional investment from a founder’s standpoint? How’s that all work?
Jennifer Williams: 00:34:47
Yup. We did the original round of 300,000 and that was able to kind of get us through till about last year. Our costs have gone up because we’re doing a little bit of investment right now and some people we hired a project manager last year. We actually hired a CEO this year so I am no longer the CEO, which is kinda crazy. So we can get into that if you want. We signed to do. I’ll get back to that. So as far as the financing, we have a pretty good little tax credits here in Kentucky for Angel Investors. So we had a few people put in $200,000 at the end of last year to get their tax credit in. So that’s probably the 500 that you’re aware of. But we did just close on August 10 an indiegogo.com equity crowd funding. And the idea was that we were actually middle of fundraising. We’re actually looking at doing a couple million just for some expansion stuff, so some of it is offering a lot more products and getting those on board, so that’s kind of one of the big pushes for our expansion, but the other one is to start getting into content and you know, a little bit more seo juice on some articles and things like that. So I don’t know if you guys are aware of Iheart dogs. They’re a good example of providing a lot of great content. So it’s iheartdogcom, but they’ve got articles on every breed and every species and I think they have iheart cats and my heart birds and horses and they’re a couple of the other domains as well. So we kind of like their model, you know, that they do a lot of content and they’re just now starting to offer some products. We’re going kind of the opposite way of okay, we’ve got some really cool products. We’ll see if our followers, you know, when people want to read some of our content as well. So that’s part of the expansion in the middle of me. Kind of going around and doing pitches, somebody told us to try equity crowd funding and so we looked into that and we’re like, okay, this might be fun. You know, pets lend themselves well to the crowd and you know, it’s a pretty cool story and so you can kind of look up our campaign and we made a little video for it and we only ended up raising about $211,000 and 150,000 on it was our people, like people that we knew. We had one guy put in 100, you know, the first day so that it would look like it was funded. And so after all the fees and the stuff that they take out of it, I think they provided maybe about $50,000 in value. And so I’m not sure if it was worth it from our standpoint, you know, to now have 300 additional people potentially on your cap table. They’re not there yet because it’s a convertible note. But it was a good experience. And so, you know, I can now tell other entrepreneurs that are thinking about doing the equity crowdfunding, you know, what it’s like. So with that said, we’re about 700,000 in, but we’ve mostly funded our own stuff. I mean we could’ve been, we could’ve settled in and kind of being profitable and not hired some new people, but we really do want to grow. We think there’s a lot of fruit left on the tree only because if for us it’s kind of an awareness problem. I mean if you ask 100 people, hey did you know you can get a stuffed animal that looks like your dog and, and this would even be like a 100 dog people, maybe only one or two would actually know about it. And, and so part of the expansion as well as to really put some of the fuel onto the marketing dollars marketing spend, you know, and just general awareness stuff.
Eric Hornung: 00:38:12
I think my girlfriend’s spends easily 30 to 60 minutes a day looking at dog pictures on instagram. I just asked her about it this morning if she had heard of stuffed animal of her dog and she, she had not so very anecdotal, but
Jennifer Williams: 00:38:26
did she have a good reaction?
Eric Hornung: 00:38:29
She thought it was interesting. I wanted to show her the website but I didn’t have my phone on me. So.
Jennifer Williams: 00:38:32
Jay Clouse: 00:38:33
So I’m interested Jennifer and hearing once you launched the initial flush product and then you started getting into more products, did those product ideas come from the customers and what were they asking for? First? Because I see some of the products on your website and I was thinking to myself, well I wouldn’t have thought about that. So I’m interested in hearing your, your product strategy.
Jennifer Williams: 00:38:56
I’m not sure if it was very scientific. The plush obviously was the first one, but we had the three d products almost within the first month of launching and it was right around with three d printing was kind of getting cool and so, you know, I had gone to our engineering department at the university and looked at their different printers and they had given me a little figurine of like a chess piece or something and I’m like, oh this is cool, like maybe we can do this of your pet. And so it was mostly just like opportunities of, of you know, ideas that people have in a different space that I’m like, how can I apply this to your pet? And so that’s always how I’m thinking and I would love to expand that line into, you know, salt and pepper shakers or who knows what. Like there’s probably all kinds of different things you can print in three d as the prices come down as well. So that’s nice. Sandstone is a pretty decent material in terms of price and you can print anything from gold to platinum and you know, that gets up there. But. So we’re always kind of looking at new ideas. The most recent one, which is our purse purses are kind of big in Asia, you know, like especially animated cartoon and pets and things. And in Japan it’s crazy, you know, people make their dogs, you know, they cut them to look like cubes and they put a whole bunch of colors on them. That was pretty interesting. So we think maybe that will appeal to our Japanese market and actually Japan is about two percent of our sales, which isn’t, you know, a huge number, but it’s definitely the country that is the most in terms of non English speaking typically. I mean obviously second is Canada and the UK and Australia, but Japan is close after that. So we also did a little bit of an experiment on online. We were going to do a backpack product but we couldn’t really figure out the look of the backpack. And we had tried to get people’s votes and uh, it was pretty split and some people were just like, no, this, this backpack thing is not a good idea. So I don’t know what we’re going to do with backpack video.
Eric Hornung: 00:40:57
So there’s all these ideas, there’s all these products, there’s all this stuff going on. You’re international, you’re two percent of your sales are from Japan. It was just like all these addressable market. How big is this idea? How do you guys quantify the total addressable market?
Jennifer Williams: 00:41:12
That is a really, really good questions. Sample sort of market that we have is the, this company called my twin and it’s no longer in service, but what it was was you could get a doll that looked like your daughter by matching clothes and things like that. So it wasn’t necessarily, but they probably had about 50 skews and so you pick like your skin tone and then your hair style and heritage and then you know, the clothes and whatnot. So one of our consultants used to work for them and back and they were just cattalog, like they weren’t even really ecommerce and back then they got to like $30, million dollars a year. And you know, I didn’t know about them. I mean, I don’t have a daughter, but this was back in 2000, maybe 2009 and like it existed when we were in school still, but I think it died like in 2011 or 12. But anyway, so this guy worked for them and who’s also on our board, you know, he tends to think it’s at least 30 million, like if my twin can do it, why can’t you, you know, pet or even probably a better marketer than daughters. Uh, well I don’t know, but a lot of their money to was gained on the accessories. And so the clothing, you know, maybe their base market was like 10 to 15, but then the other half came from all the accessories and so we haven’t really tapped that, you know, do we make clothes for your cuddle clone? I don’t know, you know, matching for your clone, Andrea real pet. Maybe. Maybe. And so that’s one thing if we try to look at top down, you know from the pet industry, which is 70 billion in the US, you know, and maybe about half that is food, you know, food and treats where the other half is not the needle getting into products of your pet, like products for the owner that our of your head and kind of celebrating the love they have for their pet. Like that little segment is growing. We get this huge fat book every year. That’s the American pet products association, sort of pet industry, you know, statistics and whatnot. And there’s maybe like one little page in there that’s like, people who purchase things to celebrate their pet, you know, and their example is a mug or a calendar or something. But that little segment right there is probably a good indication of how that might grow in just the pet industry in general. I mean you might have heard it’s really good, like it’s kind of recession proof. More and more people are owning dogs. More and more people are considering them as part of the family for grilling. Having real children to having pet children, especially with millennials, they’re like using pets as their tests and so I think it can be huge and that’s why like we could probably settle in. I mean we have really good profit margins and we could probably settle it and make it good, you know, pay out to the founders and the investors every year. But I don’t really like to think that small. I think we could, you know, my eyes, my eyes on, oh I can be the chewy.com of products of your pet instead of four year pet. So that’s kind of my vision
Eric Hornung: 00:44:18
from the grandiose big picture kind of dive down unit economics. Can you, how much does a cuddle clone cost, what are the variable costs associated with that material? Things like that. What’s your fixed costs were.
Jennifer Williams: 00:44:34
So we’re a little different in that, you know, the whole thing is ours. So we’re not paying a third party a fixed price. So for us it depends on if we’re at full capacity or not. You know, like there were a couple times in the first couple of years where, you know, June, like the middle of the summer where it’s the lowest, you know, before the holiday season kicks in, you know, we actually had to pay some people to take a little bit of time off as long as they didn’t leave permanently. So we do have to have some staff management there. But now that we’re getting close to sort of operating at capacity, which is very nice, we can get the cost down to probably about a $70 to $80 us and you know, I’d love to have my customers listening to this, you know, understand that we cannot make a clone for $10. Like that’s what everyone wants. But it’s tough. So we’ve got the variable cost of materials is actually quite low. It’s probably about 10 of that 70. The majority of it is labor. And so we’ve got different segments of folks. So the designers make the most money and they’re sort of the talent that can look at two d pictures and sort of frame the pattern on how that’s going to change. And you know, we have dogs and strange sitting positions all the time or their front feet are sitting on the ground and their back feet are outside ways and that’s what the customer wants. And so that’s what we do and we’ve got an airbrush team that does a lot of the effects at the end, you know, like gray muzzle or different scars and things, you know, that we have to get the that are super customed to the pet. And then we’ve got the people sort of in between. So we have our, we have a laser cutting machine that cuts the patterns so each year we sort of invest in some more infrastructure. So before we would cut every pattern by hand and now we digitize the patterns so that they’re all on the computer and we can send the pattern right to the plush, the cutting machine. So that’s nice. So each year we kind of improve a little bit on our efficiencies. Then we have a couple of management people in 2015 we went a little bit viral and probably only at the time we were making about 15 to 30 clones a week or maybe than a month I think, and then we ended up selling 150 a day over like a week and we’re like, oops. And that was because we hit buzzfeed, CNN.com and USA Today, all in kind of one period. They kind of all picked up the story and at that point we had go. Our original sort of consultant guy on the ground was wide eyed and had no idea what to do when our wait time just went to eight months from four weeks and so we went through a recruiting firm in Hong Kong to find kind of a head of operations and his name is mark and he’s been with us since 2015 so he’s great. Anyway, so he’s always. He’s an industrial engineer by trade and so he’s always figuring out ways to make the workforce a little bit more efficient and specializing here and there. Should one team have all the Chihuahua’s or should all the teams chihuahuas. That’s what we’re always doing. Little experiments like that and that’s really nice and you can do that when you have your own workshop, which is Super Nice. So back to the economics of workforce is definitely um, 85 percent of that money, of that $70 and the materials of the shipping is the other two pieces. We ship everything to Louisville, Kentucky first. A lot of times people have another product that they’re bundling with it, like a collar or a figurine and all those are in the US. And so we don’t want to ship people three different packages from three different locations. That just doesn’t work from a brand perspective. And we’d like to look at all the clones and we take our group pictures and and all that. So what we call our litter picks on facebook. People love those.
Eric Hornung: 00:48:09
You mentioned four weeks. So at capacity it takes four weeks from order to delivery.
Jennifer Williams: 00:48:15
Yeah, we quote about six only because we have rush options available than here in t two, four or six weeks. So we kind of keep it at that level. I’m the fastest we can do from door to doors is it’s two weeks and half of that is to the shipping time.
Jay Clouse: 00:48:29
I’m curious to hear if you’ve come across any interesting or surprising data points in what people are looking for for their animals. Like you mentioned a Chihuahua team. Do you guys have like an outsize percentage of these things that are chihuahuas? What sort of trends do you see?
Jennifer Williams: 00:48:44
Yeah, well our top five breeds, I just looked at it the other day are Chihuahuas, pitbulls, golden retrievers, which is crazy because you could probably find a decent stuffed animal. Golden retriever at a store. But you know, we get the. We tried to get the shading, right? So there’s a whole bunch of different shades, but you know, ours has the name of the pet tag on it’s sewn in label, so it’s very personalized. But I’m Shitzu was fifth and I’m missing what was fourth in my head, but. So we definitely see. I’ll tell you the story. So when we first made our business plan, we thought this would be people we thought our customers, our market, we’d be people with disposable income, you know, we had a pet and thought that the product was pretty cool. That is not really our market. Our market is people who absolutely love their pets and will spend $250 on a stuffed animal of them and then call to cancel their order next week because they had to fix their car. Like it’s literally a choice between, you know, fix my car or buy a stuffed animal of my pet. And so these people are crazy into their pets and it spans across all income levels. Like it is not your people with just disposable income that by cuddle clones, which is neat. I mean it’s cool and maybe that’s why you don’t pit bulls are up there. I’m not sure. But you know, let people love, you know, they get really loyal to these breeds, you know? And, and, and now that I’ve had a chihuahua mix, I kind of love Chihuahuas. Mine’s a little bit bigger. She’s like 16 pounds. So she has something else in her, but you know, they’re just enthusiasts have dogs and they love dogs and you know, there’s nothing like when you come home and your dog greets you, you know, like most people probably our demographic probably loved dogs more than they love people. And I will say that dogs are about 85 percent of our business. So, you know, I keep talking about dogs, but we’ve done any kind of animal you can possibly imagine. Turtles. We’ve done fish. We’re really good at parrots. Like they just turned out really pretty well. You’ve done a camel, a zebra and then every now and then we have some special things. You know that I said in the beginning that lady made some movie doubles. We’ve actually made a few things for movies. I think there’s a Nicholas cage movie coming out where he’s holding a dead monkey and so they wanted us to make the monkey but really to not have much stuffing because it had to look like it was dead. So we’ll see if that makes it into the scene’s
Jay Clouse: 00:51:12
amazing. I do want to spend a little bit of time talking about your decision to hire a ceo in the past year and what that has been like for you guys.
Jennifer Williams: 00:51:21
Yeah. So Adam and I are both really into the details. You know, like I love my spreadsheets because I’ve got the math background. I’m always down in the weeds and you know, always talking to my operations people about like, hey, why is this order from three months ago not marked as shipped, you know, things like that. So, and Adam is the same way but on the digital side. So he’s marketing, he’s re optimizing our ads every day and just were just super into the weeds. And so the decision, we went back and forth on it a long time where hey, we need to either step up and stop doing this and hire people below us, you know, kind of a mid level manager type role so that we can focus on the strategy more and like the bigger picture or you know, we can kind of continue what we’re doing and work a little bit on the strategy, but hire someone above us to really take that on. And so that’s where we ended up where we can kind of continue to do what we’re really good at, which is, you know, moving the operations forward. So I’m coo and CFO now and hr and you know what legal we do. So I still wear a lot of hats. Then Adam is more marketing still. And we hired a guy named Brendan. He was recommended to us in Louisville from the CEO of El Toro, which is an it marketing company. And we talked to him and our board liked him. And so we thought, okay, well let’s give this a try. You know, things like totally permanent. But his responsibility is to do some fundraising. Um, I’ll probably still concentrate on the female founder sort of leads, you know, who people want to invest in those and there’s groups that just do that. And also business development is his thing. So that’s good for us because neither Adam and I really had business development experience and that’s to me, that’s not really our little affiliate program that we have, but it’s better like business partners, you know, like, and I heart dogs are Barkbox, like our way of getting into someone at barkbox is emailing a general email and be like, hey do you want a partner with us? And so hopefully, you know, he can make a little more progress on those types of initiatives. Then we could just because we don’t know many people, you know, the other thing is he’s installing a few sort of more formal processes and things, you know, stuff that entrepreneurs really don’t like doing a. I mean we’ve got a pretty good system in place but he’s, he helped us too with like a lot of it. So we just moved into a new office and I heard it, it was really bad at the old office and I never knew how to fix it and send our Internet’s fast.
Jay Clouse: 00:53:59
What was attractive to Brennan about the opportunity to join and lead cuddle clones?
Jennifer Williams: 00:54:04
I wouldn’t say so. He’s got dogs, so you know, he could kind of resonate with the product. He spent some time in the gaming industry, like slot machines and stuff and he actually grew. I think it’s the challenge for him to grow something that has a lot of opportunity, you know, take that challenge on and really make it happen. We have a lot of vision and you know, we execute things but not quite as quickly as we’re hoping he can do for us. And so I think he looked at that and he looked at our vision was like, yeah, there’s, you know, there’s definitely some low hanging fruit we can do. But then there’s some definitely big initiatives that he can take and move forward and attribute that to himself. I think that’ll be good for him. So
Eric Hornung: 00:54:47
and what does the team that Brendan is going to be overseeing? What does that look like? I know that you have the workshop in China, which I think it was five people and then what’s the staff like around the rest of the world?
Jennifer Williams: 00:54:58
Yeah. And the workshop has 32 people just get it. Yeah, sorry. Thirty two there. And then we have 14 in Louisville. So I’m kind of overseeing the operations and the customer service team and the shipping. So sort of our day to day folks. And then the CFO role for me, I’ve got a couple of girls that do bookkeeping but they also do operations so everybody kind of does a little bit of everything. And then on the marketing side is adam we’ve got, we’re going to be looking at so more content people and then we’ve got an in house graphic design person, our social media folks and then probably a pretty good chunk of it is the development side of like, you know, getting the new products on board, finding vendors and that we have one main project manager working on that. We hired him in December and then building out kind of that team and sort of the new product development team if you will, so that’s Kinda what it looks like now and we’ve got a little bit of room at our party office to kind of support that growth.
Jay Clouse: 00:55:58
Want to spend a little bit of time talking about your decision to build cuddle blondes in mobile and what that meant and what that has meant to you. Whether that was by happenstance or whether there’s a competitive advantage that you see doing that
Jennifer Williams: 00:56:10
there is no competitive advantage. As far as I know, it’s only because I lived there. It really had nothing to do with anything other than I got my mba there. Adam lives their, you know, the other people that were working on the business with us. Even our original 300,000 round, maybe 60,000 of it came from Louisville and the rest was out out of state people that we knew. I will say it’s an advantage because if you do show some success like we have, like we get a pretty good amount of press. I mean I’m very. I do love Louisville because it’s a small entrepreneurial community and we all know each other, but you know, there’s some stuff like, oh well you can’t get fundraising and Louisville are, you can’t, you know, you can’t really grow fast and Louisville because you don’t really have the network that you need. And there, there’s probably some of that. But if I tried to start Cuddle Clones in say Palo Alto, there’s no way. Like we’re not a scale will tech business. So it’s nice to have our own little home in Louisville where we’re actually making a product. You know, that people want like a tangible thing that people literally want a hug and it feels nice and you know, the, the questions that you get from the silicon valley investors is like, you know, what’s your ip? What’s the tech behind this? And I’m like, well it’s, we have digital pattern. You know, they, I guess they’re just clouded by the fact that like, no, we’re trying to build a brand. And do any of your tech companies ever have someone write them a handwritten letter and say, thank you for starting Your Business? No, they don’t, so you know, we’ve built something that’s a feel good business and despite, you know, some of those limitations with potential investors, like I think we’ll be fine. What’s Nice is, you know, I have lived in a couple different places now in New York, Florida, Chicago, Seattle, so at least I’ve got some personal contacts, like a couple of our investors are from New York, so if I need to I can probably go after some of those contacts, so that’s nice. But you know, some people in Louisville have never really left so I think that probably the best group of people or people who grew up there and baby and left and worked on one of the coasts and then came back to raise their family. There are several people like that in Louisville as well who, you know, I tend to gravitate toward because when they say what school did you go to? They don’t mean high school. Like people in Louisville say, I don’t know if that’s how Cincinnati is.
Jay Clouse: 00:58:40
That is how Cincinnati is.
Jennifer Williams: 00:58:40
Jay Clouse: 00:58:42
That’s great. Well Jennifer, we appreciate you coming on the show. after the show If people want to learn more about you or Cuddle Clones, where should they go?
Jennifer Williams: 00:58:50
Oh yeah. They can check out our website at cuddleclones.com. Or they could take an email me they want. So you’ve got my email. You can share it. It’s Jennifer.Williams:@cuddleclones.com.
Jay Clouse: 00:59:02
Great. Thanks again for being on the show.
Jennifer Williams: 00:59:03
Jay Clouse: 00:59:04
Alright, Eric, we just spoke with Jennifer of Cuddle Clones, hot take, What’d you think? What’d you think of clones as an opportunity or where would you like to start?
Eric Hornung: 00:59:18
Well, I want to start with something we didn’t address. We tried to on the upfront, I don’t think we hit it in the interview market size. I still don’t have a good pulse on that do you?
Jay Clouse: 00:59:29
No, I agree. Jennifer was using the comp of my twin, which was doing $30,000,000 in revenue per year. That’s a comp. I don’t know if I would really look at that as a market size, so no, that’s definitely a big outstanding question for me. It’s hard for me to understand. You know, they, they’ve had a lot of growth over the last few years from a revenue standpoint, but I don’t have a good sense of where that could or would top out based on the market size.
Eric Hornung: 00:59:57
And that gets me kind of to my second question, which is around this idea of expansion, which seems to be a focus right now, their fundraising and she said the primary reason is for expansion. They’re gonna expand into content. They’re going to expand in new products. Does that mean they’ve tapped out on what they think the market is for these Cuddle Clones and just going to grow organically? There’s no real huge growth expansion on that single product or they feel like they have to diversify their product portfolio. I don’t know. I just. The market size has such a. it’s such an important number here because their whole growth philosophy is based on expansion and that I think her words were, there’s still a lot of fruit left on the tree, but what does that mean?
Jay Clouse: 01:00:40
Yeah. It’s hard to say. And something else that I think was lacking from the conversation. Not to say that Jennifer doesn’t have it is more insight into the market size and this expansion based on the feedback and data from customers. I. I didn’t get a great sense that all of the products were determined by the customer so much as are some products we could do.
Eric Hornung: 01:01:05
I know this is going to sound a little weird, but did you get like an apple vibe from this company in terms of like the apple story or is that just me?
Jay Clouse: 01:01:12
No, but I’d love to hear why you say that.
Eric Hornung: 01:01:15
So you say not a lot of emphasis on customer feedback that just like clicked another thing in my mind, like the whole job’s quote with you don’t really listen to your customers, but that’s not what I was talking about here. More so this idea that you have someone who just loves the product so much in Jennifer and loves the marketing so much in Adam and they bring in this professional ceo to scale the business and then you think about like apple in the eighties they had hundreds of different products. They had two computers that were competing with each other with the Lisa and the macintosh. You had Mike Markkula who was the CEO, the professional CEO. It just has like this kind of similar vibe to me where there’s so much expansion and growth going on horizontally and the founders are like a Wazniak. They are really focused on this one product that they really love and like experimenting and they just liked the industry. I don’t know if the metaphor holds up all that well when you look at scalability, but the idea to me that like this narrative follows similar to apple is kind of interesting
Jay Clouse: 01:02:20
and I do want to touch on the hiring of a ceo and what I think that means for this as an opportunity and as a company because I think it’s really interesting, but something that I think bodes well for Cuddle Clones is something Jennifer brought up related to customers being aware of this product. It seems like an unintuitive or not necessarily obvious thing to exist in. Something that as she mentioned, people just aren’t aware that it’s available as an option and when they are aware it’s a very polarizing response. Some people are super into it, some people think it’s creepy. Usually that’s a sign of a pretty good sticky product too is when you have raving fans and also some people who are pretty against it. So the question is, and this is probably why they’re going down the content route, how do you increase awareness to grow the market opportunity or at least make the market opportunity more addressable? Right. So if they’ve, if they’re hitting 2.2 million dollars in 2017 and revenue without really feeling like people are aware of the product, that does bode well for me in terms of total market size, but it’s just very hard to put a finger on and really make projections against.
Eric Hornung: 01:03:32
Yeah, I completely agree. The other thing is, and it’s the flip side of content marketing. They did go viral once in 2015 with buzzfeed and they immediately addressed that they had scalability issues. So this content marketing push, like let’s say every dog person, every dog lover on Instagram, all of a sudden started seeing a sponsored content by Cuddle Clones here and there, you know, in posted, they already follow in accounts they already follow and in cuddle callens own accounts. Well, if those orders shoot up again, are they operationally capable of sticking to that four to six week window or are they going to have that backlog that they had when that buzzfeed article pushed out?
Jay Clouse: 01:04:13
Yeah, good question. She talked about their costs being mostly labor and that they have. Was it 32 employees in the factory? So do you just, if that were to happen, do you hire more employees in? Does that just scale your costs right alongside the extra revenue coming in? I think it’s kind of a question of of those 32 people in the, in the warehouse, are they at capacity right now or not? Because if they’re not at capacity, they’re kind of just eating a cost anyway.
Eric Hornung: 01:04:45
Yeah. And I also think the long wait times are, those are just gonna be rough from a customer perception space and I do want to talk about the customer and the audience that was addressed here. One thing that I have a question about what the audience is the repeatability factor. So she mentioned that the audience is really into dogs, really into cats, really into animals, whatever it may be that cannot be more than 20 percent of the population. It’s just like parato principle, like 20 percent of the people or 80 percent the most into something, right? It’s probably less than that to be honest. Who people who would think about as she put it, a payment for your car or buying a stuffed animal of your dog. But the average life span of a dog is 10 to 13 years according to Google. So that customer only buys from something from you, assuming they have one dog, they probably have more once every 10 to 13 years if they are repeat sticky customer.
Jay Clouse: 01:05:43
The counterpoint I was going to make that you just addressed was those same people are probably the people that have dogs on dogs and dogs, Lasa cats, you know, lots, lots of pets in general and they’re probably staggering when they acquire the pet that was it, that the way you put it or you know, bring the pet home, but that point is probably at the core of why they’re expanding into different products to say, I already have my rufus cuddle clone now i want My roof is key chain on my roof. The shirt on my roof is bag. That makes some intuitive sense as to it could work. Again, what I was really looking for was we talked to our customers and they really wanted these five products. So these are the five products that we’re going to make. And again, that’s not to say that that wasn’t the case. I just didn’t get that from the interview.
Eric Hornung: 01:06:29
Yeah. I. Once you jump into one more thing on audience and then let’s get into the CEO and the founder and that whole dynamic. How’s that sound? Sure. Asia, she mentioned it’s two percent of their sales, mostly centered in Japan, and that was just kind of a little nugget that was left out there that we didn’t really attack more in depth, but I could see that being just a monstrous market for them. So I’m curious, and this will segue us in to the CEO, how the CEO is looking at that opportunity in addition to a bunch of other opportunities.
Jay Clouse: 01:07:00
Yeah, that’s a good point. I made that note as well. That was a spicy little nug that we didn’t touch on, which we would have, but you know, that is. We also didn’t talk about international shipping and what that does to the costs, but since they’re already shipping from China, right, they’re probably already doing most international shipping. Anyway. Interesting. Speaking on that point now, segwaying into the founders and the CEO here, something that I really loved about this team is this wholly owned subsidiary warehouse in China and their willingness to really roll up their sleeves and figure out how to make that happen. I think that was a really good indication of this team’s resourcefulness and ability to problem solve because as she said, most manufacturers want to manufacturer in bulk and these are pretty much custom jobs every time and so to find a solution and to control their manufacturing process in that way and still do it in a country where I assume the labor is more cost effective, I think was just a good indication of their team. Did you have the same sort of feel?
Eric Hornung: 01:08:04
I did and I’ve spent a decent amount of time in China. I lived in Hong Kong for three months. I lived in Shanghai for three months and China is hard. It is impressive to go over there for a month and come out with a deal that works and works well and appears to work almost seamlessly. That is very, very impressive, especially on your first attempt. So the consultant that they had must have been amazing and like they just did a very good job with that for not having any Helen China type stories
Jay Clouse: 01:08:35
two of the original five employees are still on the team.
Eric Hornung: 01:08:38
Jay Clouse: 01:08:39
Which, you know, I’m, I’m speaking anecdotally here, but it seems like the turnover and China is very high, so it must also be a pretty good work environment I would guess.
Eric Hornung: 01:08:49
Likewise. Yeah. I think that they probably set up a nice warehouse there in comparison to some of the other warehouses in China. Seems like they got some great people on the ground who really have a dedication to making the product the best possible, which I think is huge. It’s not line item. It’s higher skilled people who want to make something look perfect.
Jay Clouse: 01:09:11
There was a line that Jennifer said in the interview that I didn’t write down verbatim and I wish I would have when she was speaking about why they went this route of the holy on subsidiary and she said something along the lines of we just had to figure it out. Like I’ve always been someone to go in and just figure it out. Which is something that you look for in founders and I think. I think again, that was just a really good sign tied to this, this warehousing solution and alternative for them.
Eric Hornung: 01:09:37
Let me ask you a quick question as we look at expansion and I do, I know we’re going to get to the founder and the CEO here in a second, but I just want to get your kind of just keep.
Jay Clouse: 01:09:45
Just keep teasing.
Eric Hornung: 01:09:46
I know where I just couldn’t keep teasing it. I don’t want to forget about it, but I want to get your take on what feels like the overall business strategy right now, the idea that they are going to expand horizontally into a bunch of different products. How do you feel about that versus the alternative of getting really, really good at making just these dogs and then using content marketing to raise awareness?
Jay Clouse: 01:10:10
Well, at the end of the day, I think the good thing about this strategy is that it seems relatively low risk and probably low cost because for one I think they already are really, really good at making these replicas. It seems every anything I’ve seen they’re the industry leader in that will continue to improve with time. But as far as expanding it to other products, it seems to me like they. They just kind of found, I don’t know if I’d call it an integration, but the ability to create new products with one of the suppliers who creates these products already without taking on inventory risk or what have you. It seems like it’s more of a marketing of new products than development that encourages costs and inventory costs, so I do want to put that out there that that was my understanding, which seems relatively low risk. The content side of things as someone who creates weekly content with this podcast and daily content with my blog. Subtle plug there.
Eric Hornung: 01:11:10
Yeah, that was nice.
Jay Clouse: 01:11:11
The content is so hard, so hard both from the discipline of creation but also from a level of strategy that frankly I don’t have because it takes a ton of time in its own to structure content in such a way that it is going to grow and be found and shared organically and also lead into the product mix that you want to sell naturally. So when it works, it works really, really well and I think it could work here. I just know how difficult that is and you need someone who is really good at it, can lead the strategy and also make it happen and it would have been awesome. Well, maybe we take buzzfeed as an example. It would have been awesome to say already here we started playing around with us in blog posts and we tried this out and we saw that that got shared a whole lot and that led to the sales. I, I hope it’s not just kind of a a line out to say we hope this works because that will certainly be a cost intensive effort even just for staffing the person putting the content together. Your thoughts.
Eric Hornung: 01:12:21
Well, I agree with, with all that, I think that it just comes down to focus various experimentation for me and I think you’re right that they make an incredible product, but I would want to see that product, that stuffed animal type product. Just be seen, known, knowledgeable everywhere and then have experimentation going on in the background and maybe that’s what the CEO is going to bring. So let’s talk about him.
Jay Clouse: 01:12:48
Yes. Let’s. So I love the idea that I’m Jennifer, I’m Adam, I’m the founders of this. I realized my weaknesses. We go and hire somebody that compliments our weaknesses. I think that’s a great thing
Eric Hornung: 01:13:02
and not even just weaknesses but our passions, right? It’s like I really like experimenting with the product. If you’re a jennifer or I really like experimenting with the marketing. If you’re Adam and it’s like, okay, I don’t want to do business development. I don’t want to go out and create this. This isn’t in my life, this isn’t what I want to do, nor is it my skill. So let’s let someone else do that so I can focus on making things that I do the best, which it goes to that focus and experimentation kind of dichotomy.
Jay Clouse: 01:13:31
Right? So she said his focus is on fundraising and also business development. So, you know, it could be. I don’t think they’ve started down the content path just yet. It’s certainly something that they’re considering. And you know, this is one of the things that I’ll say in our question of what do you want to look for six to 18 months from now? It’ll be what has that business development strategy become and what’s sort of caught hold because they may try some pilots that way they may try some pilots and other way where they’re looking at channel partners or strategic partners, whatever way it is to create the awareness of the availability of this are the people who care, you know, that could be content. It could also just a different product in the mix of pets that introduces people to that possibility, whether it’s something like barkbox.
Eric Hornung: 01:14:20
Yeah, I definitely agree with that. What did you. I think looking at our founder centric questions about Jennifer, what were your takeaways on Jennifer?
Jay Clouse: 01:14:30
Well, I do believe that she is obsessed with this idea. She sat on it for three years and then she started making it happen and now it’s growing and now she cares about it enough to try and go up more. She said she doesn’t like to think that small as a quote. She said in terms of they see a certain size market in front of them, but they think it could be bigger, so I think that’s really promising. One thing that did bother me a little bit towards the end of the interview, on one hand I. It resonated with me. On the other hand, I thought I don’t. I don’t know how I feel about this as looking at a founder it might invest in when she’s talking about the dichotomy of what they do versus what happens in Silicon Valley and talking a little bit about, you know, this is a, this is a physical product, which I agree with. It just. I just got the feel that the sense of urgency and growth wasn’t as intense as I would be looking for. How about you?
Eric Hornung: 01:15:27
Yeah. It’s interesting. I think that the. Her quote was, we’re not a scalable tech company when she was talking about Silicon Valley and they’re definitely not a tech company, but the idea that you should be scalable as a business. I don’t know whether or not that fits. I think you should look at yourself as being scalable, especially if she did mention growth so many times throughout that interview. Scalable has to go with growth even, and it’s a. it’s a tough path to walk because you are doing high quality work. This brings back the apple metaphor. How do you scale and also have one of the best products on the market, the most beautifully designed, right? That idea is very, very hard to do and it’s why Tim Cook is the CEO of Apple, the former coo and not johnny ive is the design guy, so I agree with that. I agree with that idea of growth. When I look at Jennifer as a founder though, I see a lot of persistence and resourcefulness taking this idea from the classroom, moving it forward, churning through some individuals who were interested, not interested in going to China, coming back from China saying, what are my shortcomings? Okay, we need a CEO to move this thing forward to keep on kind of pushing that ball forward. I do think that Jennifer has done a great job being persistent and pushing forward.
Jay Clouse: 01:16:41
Yeah. I’m becoming more and more aware of this point in particular as we interview co founders of companies. I wish I would’ve learned more about Adam. I wish I would have asked more about Adam. Is the way I should put it
Eric Hornung: 01:16:53
and how do we, how do we do that better going forward?
Jay Clouse: 01:16:55
I think we spend a little time, you know, we, we asked the first question of tell us the history of, of Jennifer, of, of person, right? I think asking specifically some more questions about their co founders and for our founders credit, they always bring up their co founders. We just don’t dwell on it, so it will be nice to spend some more time talking about the other co founders of then accompany little note for us.
Eric Hornung: 01:17:18 So when we look at this idea, what does winning look like to us? What is revenue? Is it $30 million? Is that the COMP is once it hits 30 million, that’s like kind of where we see this or how do you even look at something like this and say, okay, what? What does, what does revenue or an exit look like in this? In this sense?
Jay Clouse: 01:17:36
Great question. And that is the biggest shadow for me in this opportunity is there’s too much ambiguity. For me personally, I think to align myself with an opportunity that I don’t quite understand what the size of the opportunity is or I don’t have my own method for walking into something that I can reason to be the opportunity. Right. So if, if we are looking at the comp of my twin at $30,000,000 per year, that could be depending on the margins and it sounded like 43 percent was about the gross margin. It could be a good cash cow returning dividends every, every so often that are pretty nice. And again, it just kind of comes down to what you are as, as an investor in your fund size looks like as to whether or not that is enough for you.
Eric Hornung: 01:18:25
Yeah, I think that you kind of nailed, nailed it here. I think that this feels more like a growth equity play to me than a angel investment type of investment. I don’t know that you’re going to see 100 x returns on this play unless that Asia market just takes off and they become, you know, that becomes 98 percent of their sales and it’s everyone in Japan thinks that it’s like the coolest thing to do, to have the stuff that version of your dog and that just might be a fad, might not be a fad. Who knows, but I don’t know that I see 100 x potential. I do see the potential for a very solid business that is returning very solid profits and is growing at a steady, consistent double digit clip every year and there’s nothing wrong with that type of business. I don’t know that it fits an angel investor’s portfolio in the VC context. Not to say it doesn’t fit in Angel Investors Portfolio for certain angel investors because everyone’s different.
Jay Clouse: 01:19:24
I do love the vision of the chewey.com for products of your pet instead of for your pet. I think that’s compelling. I just want to know if that was to come true. What does that mean? How big is it? Right, and I totally agree with you as a founder, this looks like an attractive, profitable cash rich business. I just. I got to know how big it is.
Eric Hornung: 01:19:45
Yeah, if I’m petsmart or Walmart, I could see myself looking at this opportunity if it’s growing like we just mentioned at that double digit clip every year and say this is a business that I think will really benefit our core consumer. I can see this being a walmart purchased on their recent path to conquest to take over the ecommerce space. They’ve been buying out a lot of smaller company so I could see that as a definite possibility.
Jay Clouse: 01:20:10
I agree with you. Let’s talk about Cuddle Clones decision to be based in Louisville because we spent a little bit of time talking about this. This is always a hot question for us. Why are you stationed where you’re stationed? What did you think of Jennifer’s response?
Eric Hornung: 01:20:25
It didn’t seem like it was a decision to be based in Louisville so much as we were in Louisville and that’s where the team was and I think her initial response to that question is there’s no competitive advantage to us being based in Louisville and I. I liked that self awareness. You can build a great company anywhere. I don’t know that there is or isn’t the best place for cuddle clones. I’m sure that as we continue this podcast will find out that some city somewhere in America has 95 percent of all like pet store supplies or something and that might’ve been the best place for them, but off the top of my head, I don’t know that there’s a better place for them or a worse place for them. I do know that she was adamantly against cuddle clones being in Palo Alto or silicon valley because she didn’t feel like they fit
Jay Clouse: 01:21:11
well. Not the heart of this business is based in the manufacturing which is based in China. Right. So really it to be based in Louisville is the choose, in my opinion, the ability to operate administratively in Louisville versus somewhere else and I think that does make some sense from a cost of living standpoint is we’ve talked about time and time again,
Eric Hornung: 01:21:33
right But if you’re going to be doing so, they do all of their shipping from China to Louisville. I have to believe that on your question of international shipping, I have to believe that there is a more cost effective center somewhere in the United States that has. Or Canada, I don’t know, but that has a. An ability to ship most cheaply logistically, right. This is the logistics play most cheaply from China to the United States and from the United States throughout the United States there. That to me feels like probably an added expense of getting Louisville, although I’m not sure if Louisville has a great distribution system to China, which it might not.
Jay Clouse: 01:22:15
Right. Theoretically there is some perfect logistical point that just by pure statistics is probably not doable. A lot of places that aren’t Louisville, there’s one place that is
Eric Hornung: 01:22:26
and one other thing that I thought was interesting is that only a fifth of their funding so far has on their initial raise came from Louisville. I feel like they’re consistently going outside of Louisville to come back to it and there again, there’s nothing wrong with that. It’s just something you have to be kind of conscious of you. You might have to be going to Chicago and to Columbus and to the Nashville and New York to get funding
Jay Clouse: 01:22:49
Louisville, the word you say like or trying to not say it. All right. We already talked about this a little bit, but I want to just be thorough here. Six to 18 months from now. What are you looking for from cuddle clones and I’ll start. I’ll give you a second to think about it. I’m looking at these business development and marketing strategies and what have they learned and what they’ve tried. I think that’s going to be a big tell for how big the opportunity can be or you know, at least a confirmation that there is a larger opportunity out there.
Eric Hornung: 01:23:22
I’m looking at two things. One is kind of macroeconomic. The market, as I think we’ve said before on this podcast, is on its ninth, eighth, Ninth Year of being a bull market, we are in a full employment economy, which means that the people who have $250 to their name and they can either buy a stuffed dog or they can go fix their car. They have that $250 right now to make that decision. If employment decides to fall off at all or the market crashes and people start losing jobs, the disposable income that the evangelists for this brand might have may dwindle, and that is a real concern in any luxury. Good. How do you overcome the macroeconomic trends? Luxury goods tend to correlate almost perfectly with the market and their demand, so if the market goes down, this is a luxury good as far as I’m concerned. Did they scale at a time when they were forecasting demand and behind demand takes a hit and their fixed costs are larger. The second thing that I’m most interested in is Asia. I really do think that the future of this company is diversifying geographically and Asia offers a huge market opportunity and also their manufacturing centers in China, so to the extent that they can get Korea and Japan and India even into this kind of ecosystem, I think that that will be a monster win for them.
Jay Clouse: 01:24:56
Love It can always count on you to bring a macro economic perspective and international perspective, something that I’m blind to too often. Cool. All right guys, well we’ll talk to you next week. If you guys have any thoughts on this episode we didn’t touch on, please let us know by tweeting at us @upsidefm or leave us a comment on breaker with our podcast here. Upside breakers are preferred podcasting platform. If you or guests would be great for our show, feel free to email us. Hello@upside.fm and let us know. Eric, I’ll talk to you next week
Eric Hornung: 01:25:26
Jay Clouse: 01:25:27
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 @upsideFM 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 here we go. Eric Hornung and Jay Clouse 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 for 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.
Cuddle Clones creates custom stuffed animals of your special pet as well as a variety of other unique pet gifts. The company is based in Louisville, KY.
learn more about Cuddle Clones: https://cuddleclones.com