How to Build a Start-Up — Without VC Funding

Welcome to HBR on Strategy. Case studies and conversations with the world's top business and management experts, hand selected to help you unlock new ways of doing business. I'm Ramzi Kabaz, an editor here at HBR. This month we're highlighting four of the best HBR podcast episodes on strategy from 2023, curated by me. We're used to this idea that entrepreneurship and venture capital funding go hand in hand. But as interest rates have risen in recent years, VC funding has dried up. This raises the question, how can founders grow their companies in this new environment? In this episode, we hear from a founder who was able to grow a $600 million company using just $10,000 of his own money. Mike Salguero is the CEO and founder of the meat subscription service Butcherbox. After a negative venture capital experience in his last company, Salguero pledged to grow his new startup without it. And he did. In this episode, you'll learn how Salguero formulated a growth strategy that had a laser focus on costs and creatively leveraged the marketing power of influencers. If you're an entrepreneur or a leader trying to grow a business without a lot of resources, this episode is for you. This episode originally aired on HBR IdeaCast in June 2023. I hope you like it as much as I did.

Welcome to the hbr ideacast from harvard business review. I'm kurt nickish. It's almost become except accepted wisdom in startup culture. Have a great idea, secure a whole lot of funding, and then burn through cash to scale quickly and build up a large user base as quickly as possible. A combination of the love of first mover advantage coupled with plentiful funding from venture capital made this kind of model make a lot of sense. That is, until interest rates started to rise. Now many companies are looking for other ways of building their businesses. And as it turns out, there are models for that. Even before the VC money tightened in Silicon Valley, there have always been companies that start with smaller budgets, build slowly, bootstrap their way to make profit on their products from the beginning, and they succeed. One such company we'll talk about today is Butcherbox. It's a subscription food service organization centered on delivering meat to customers. It's a $600 million company that CEO Mike Salgueiro founded with just $10,000 in capital that has never taken money from venture capital funders. To learn more about how he did that and how the team aims sustainably, we're joined now by Mike. Welcome.

Thank you.

Did you always want to be an entrepreneur growing up?

I had. I didn't have a father, and I always looked for father figures. And one of the big ones in my life was my uncle. My uncle Steve, who was an entrepreneur. He lived in Spain and actually brought. He brought popcorn, microwavable popcorn, to Spain.

Oh, really?

Under a different brand. And I just saw a different lifestyle. And so at a really early age, I was exposed to this idea that you can, like, build something, create something out of nothing, rather than working for someone. And that was really appealing to me. So I'd say by, like, the age of 10 or 12, I was thinking about being an entrepreneur. Didn't have any ideas, but definitely thought about being an entrepreneur.

Yeah, the lifestyle.

The lifestyle is a big piece of it. You know, I was the youngest of four, and I didn't really like being told what to do. Um, it's one of the things I've worked on over the years with my mom. But I think the idea of being able to be my own boss was really important to me. I also, at that point, was pretty focused on making money. I thought making money would be really cool. And I learned, whether it was from my uncle or from other people, that being an entrepreneur can be a quick path to making money, and certainly is one of the only examples where the more you put into it or the luckier you get, the more your outcome can be. And so those things certainly were attractive to me.

When you started Butcherbox, you vowed not to take venture capital money, which is very much kind of going against the flow, at least at that time, certainly. Why did you do that?

Yeah, before Butcherbox, I ran a company called Custom Made, and we had raised about $30 million of capital in five rounds of financing and lost everyone's money. And in that process, I lost the culture. I lost my place of work. I lost the ability to create the direction of where the company should go. I lost friends. There was some good pieces of raising venture, but I experienced a ton of loss as a result of me raising venture capital. And so when I started Butcherbox, my mentality was, I don't care how small this business is, I'm not raising venture. And it turned out the business could be very large. And I believe as a result of not raising venture, we are where we are today.

The failure of a business sounds normal, like losing people's money, losing your job, like that happens. That's almost the norm, right?

It is the majority.

It's like that's almost the null hypothesis for what's gonna happen to your company when you take venture capital money. Most of them fail. So was it venture capital that caused that to happen, do you think?

There was a moment where I believed that the incentives of the company and the incentives of the venture capitalists were not in alignment. For example, there was a moment where this online marketplace, we knew it just wasn't going to work, but that was what the venture capitalists had funded. And so our ability to say, this isn't going to work, we're pivoting in a different direction. They're like, no, keep doing the thing that we funded. You can't go back to a listing service. Like, we want this.

This is not what we signed up for.

Right? This isn't what we signed up for. There was a time where we said, hey, in order for this thing to survive, we should let go of like 75% of the staff because we gotta go bare bones and we gotta figure out product market fit. Cause this isn't gonna work. And they said, no, keep doing what you're doing, because if you let everyone go, then we can't sell the company or we can't get a. At that point, they were gunning for my head. So it was, we're not going to be able to attract a great CEO in here if we downsize the company. And so really, I lost control while the ship was sinking. We did not control what we were doing or what the outcome was. Our venture capitalists had taken over. That was really hard. It was hard to see that happen and to experience that happening and to really feel like I. It was my fault and I didn't have any way to paddle the boat out.

So There you were, 34, is that it? So washed up a little bit. Right? Forced out a CEO, you immediately start another company and you vow not to take venture capital.

That's right.

Because of this experience.

Yeah. So I was 34, failed. My first company washed up, really felt like a failure. And I vowed for this company, for Butcherbox, that I was not going to raise venture capital and that I was gonna prove to myself and to others that you could start a company for $10,000. And really, like, what I believed in, and I still believe in this, is that the path of an entrepreneur does not always have to mean you're raising money. That is a lie of entrepreneurship that is taught to people. It's like, oh, have a good idea. Go raise money. Well, that's not how it has to work. You can start as an entrepreneur and build a really robust business without raising money. And so my hope was to try to figure out how to do that. And I didn't care how small the business was. I cared about figuring out how to do that.

You started a sort of direct to consumer subscription business. What was the original plan for the company? And you did a Kickstarter, right? To raise money for it.

The original plan was that if we had 1,000 subscribers on a monthly basis that I made a $20 a box off of, it would be $20,000 in profit, maybe pay a few people for customer service, have a few web developers and whatnot, and basically make a salary. That was it. That was the premise.

And the service was, oh yeah, the.

Service is a monthly box of meat delivered to your door. And the problem we were solving was grass fed beef was hard to find. I lived in Boston and couldn't find grass fed beef. And so I started trying to find it. And that was a whole path that ended up like buying from farmers in a parking lot, buying trash bags full of meat in a parking lot. And I just thought bringing grass fed beef to more people could help solve people's problems. I was able to track down this guy who used to work at Omaha Steaks who opened some doors for us. And it was like, okay, I think we're, I think we've got something here. Because I didn't want to raise money and I didn't want to spend a lot of money to prove that there was a market, we decided to start with a Kickstarter campaign. And Kickstarter is a platform where you can pre sell your product. You don't even have to have made it yet, and you can pre sell it. In our business where we're shipping meat, the most dangerous thing is having inventory. That's where your cash can then like literally sit in a freezer instead of being sent out. So we didn't want to do that. We wanted to get pre orders, see how many pre orders there were, see how then cut inventory for them, ship it out, and then try to get them onto a subscription.

You got those pre orders from the Kickstarter, then you have to start doing a business. How could you grow without financing, I guess is the simple question.

Yeah, so the Kickstarter, we raised $215,000 in pre sales. So it's about $40,000 of profit that we made from the Kickstarter campaign. So we had sent a box to call it a thousand different households. And we called them all up and said, hey, did you like the product? Would you like to sign up for a subscription? And we rolled like 40% of them or something like that so out of the gate, we had like 400 monthly subscribers. I was halfway to the goal that I had set out for the entire company, you know, and it had been like a month and a half of us working on it. We then launched a website, and one thing that we saw during the Kickstarter campaign, so we reached out to anyone who had written about Grass Fed Beef. Like, if people had written about Grass Fed Beef on Twitter or on blog posts, we reached out to, we told them about our company, and we asked them if they would, like, promote us as part of the Kickstarter campaign. And this one paleo doctor named Chris Kresser, during the Kickstarter campaign, he tweeted about us and he was like, I'm a big fan of Grass Fed Beef and here's a great resource for it. And we saw a flurry of activity of people signing up on the Kickstarter campaign as a result of Twitter.

That's interesting.

Yeah. We were like, ooh, what's that? And so what we ended up doing was working with him and working with anyone who looked like him in The Paleo Keto, Whole 30 elimination diet, all of that realm, and got them to promote us. And since we couldn't pay them upfront for the promotion, we offered them a residual. So it was like, we'll give you $10 or $15 a month for every month that your customer that you give us gets a box. And we'll do that in perpetuity. And so our first marketing outlet was these influencers who didn't want money up front or probably did, but we weren't able to afford that.

Yeah. Just to put a point on it, you were. You're pushing out when you had to pay them.

Right, right. And we used to call it being box one profitable, which meant the first box that we ship out, we need to make money on it because we didn't raise any money. So the only way you cannot raise money is if you make a profit on the first thing. Right. And so is that possible? Yeah, yeah, yeah. We were selling for $129 box, and I think we were making like $20, $25 a box. So there was enough float in there for then, you know, to give $10 to the person who referred and keep 15. And not everyone came through that way. So it worked.

Yeah. I mean, this was at a time when there were a lot of meal delivery companies out there, right? Yes. And many of them were raising money from venture capital so that they could sign up, get a lot of Customers for the future. I mean, you must have seen that and wondered, should we do that? Or you just were not even tempted?

No, no. Well, so this is 2015. We start in 2016, we start scaling up, which is right around the time that Blue Apron had raised on a $2 billion valuation. And there was something like 150 Blue Apron look alikes out there. And everyone was in this meal kit space. We thought. I always thought it was pretty funny because we were taking the most important piece of the meal kit, the meat, and just shipping that, which is way easier than shipping like a cubed sweet potato and a ramekin full of ranch dressing and whatever else was coming in those meal kits. I came pretty close twice to raising money. Once I got a term sheet, like, you know, and then at the final hour, actually, twice I got a term sheet. One was from a venture bank and one was from vc. And at the final hour, I was just like. Something inside of me was just like, no, don't do this, and I walked away.

What did not taking venture capital money allow you to do?

I think the most interesting thing is if we raise venture capital, I think we'd be out of business. So if you look at the timing, 2015, everyone was raising because Blue Apron was crushing it. And raising. Blue Apron went public in the summer of 2017, and they did well initially. They sold at a high price, and three months later, their stock lost like 90% of its value when they tanked. When their stock tanked, venture capital for food subscription companies dried up immediately. And so if we had gone out in 2015, done a Kickstarter and then raised money, we would be raising money at that time in the summer of 2017, and we would be screwed. Nobody would have funded us, and we wouldn't have had to build the discipline of running a profitable business. And I truly believe we would be out of business. Nobody's saying, like, increase your profits other than us, like, we're always trying to. We're always trying to improve the business. But I don't have investors or activist investors or people who are saying that we need to do things differently. And that enables us to give the mission some breathing room, which I think is incredibly important. What we do is we sell meat that is raised better, whether it's a pig or a chicken or cow, bison, whole bunch of other products. And so what some companies do, and actually I'm seeing this in the market right now in our space, what some companies do when times are tough is they cheapen meat. The only way to Cheapen the meat is either one, build efficiencies, which is not where people usually go to, or two, you cut corners and you start to greenwash things. And it's not really what you're saying it is. It's like a cheaper version of what you're saying it is. We will never take that step. And because we don't have any external investors, we're able to build out programs that other places are not doing. And we also are able to take a much longer term view on that program building out over time.

I mean, just for some pushback here. Like venture capitalists would say, yeah, we give you money to grow your company and we are expecting big returns. But we also connect you with great advisors. We connect you with people who other founders who've been in the same situation. We bring in expertise. Yeah, we help you do the stuff that you don't know how to do yet. And there might be better or worse venture capitalists, but ideally they're partners. What do you say to that?

Yeah, look, I think there is certainly a lot of space for the asset class of venture capital. First of all, if you're building something like fusion technology or a spaceship or AI, there's a lot of things that require a lot of investment up front before you can make any money. And venture capital is a great place to go to get that type of funding. And then to your point, having the right venture capital person involved in your deal can be really additive, can be really helpful. You know, when I look back, I really appreciated the amount of support and services that we got from Google, from First Round Capital. These organizations that would really help. They would introduce you to people, they would talk to you, they'd be a resource for you.

They'd you weren't alone.

Conferences, you weren't alone. Like all of those things were like As a young 26 year old founder were really helpful. And I had been an entrepreneur since, you know, essentially since college. And I really felt unsupported in my entrepreneurial journey. Like at the time, this was the early 2000s, there wasn't y Combinator, there wasn't like go on Twitter and ask people for help. Like that stuff didn't exist. And so being in a community of other entrepreneurs, other people who had raised venture capital was actually really beneficial. Also when you're young, you're going to make a lot of mistakes. Like your first time out, you're going to make a lot of mistakes. And if somebody is financing that with their own money, that's pretty good.

You're learning on somebody else's dime.

Yeah. My soapbox is that I believe that most people think it's the only way to start a company. And if you think about what is the average person's interaction with entrepreneurship, it's watching Shark Tank. What is Shark Tank? It's a show where you go out and sell a whole bunch of your company to a bunch of people who they might have value, maybe, but it's interesting. There's no entrepreneurship material out there that doesn't have to do with raising money. TechCrunch is still just writing article after article about raising money. You've got Shark Tank. And the people who are getting congratulated are not the people who are like, just quietly building big, profitable businesses. It's the people who raise a bunch of money and now they're like, quote unquote, a billionaire on paper, but they've just built something and raised money against it.

Yeah. So your box one profitable, but you still go from like raising $500,000 to 600 plus million dollar business in six or seven years. Right. Which is phenomenal scaling. I mean, this is not bootstrapping. This is like boot scaling or something. Right. I mean, there's not even a term for it. Right. How do you achieve that kind of growth? Which is like hard for companies that have resources. Right. Like, what were some of the key things that you decided along the way?

Yeah, so we went in the early years, we went from 300,000 in revenue to 5 million to 33 million to 100 million dol million. So very quick growth. And for the first two and a half years, it was that influencer strategy where we paid the influencers a take, just blanketed the paleo keto whole 30 space.

And then we found something that worked.

And you kept going and we just kept extracting. And I'm a big believer. I have an analogy of wildcatting for oil. And when you find an oil, you just build a rig and then you build a bigger rig and you just man that rig and you just keep extracting until, you know, it starts to pay enough and generate enough that you're like, okay, we could go look for something else. And then you go look for something else. The second thing that we looked at was Facebook and Facebook video in particular. This was around 2017. And I had noticed when I was on Facebook that there were more and more videos. And it was like, I think videos is going to be a thing. We should really like, lean into videos. And so we started producing videos. One was my daughter screaming about how she wanted more bacon and we were able to purchase customers at a low cost. At that point, though, it became clear that we were going to have to bleed into not only box one profitable, but into box two or box three profitable. And so then the question becomes, well, how do you finance that if you're not raising money? And again, if you haven't raised money, you start thinking about things differently. And so what we would do with Facebook, for example, is you buy your customer and let's say you make your money after box two. So you buy your customer on day one. Facebook has like, they'll give you terms. So you put that on like 30 day terms with Facebook. At the end of 30 days, you pay it with a credit card. And then you maybe you have 30 days or 60 days on the credit card. And so you're building 90 days afloat. You basically move from box one profitable into how fast is my payback period? And can I not pay money? Like, can I not use cash to finance the payback period?

Okay.

And so that's how we got into like box two profitability, box three profitability. The other thing that's like, really important to mention is I'm only talking here about, like, how do you market, right? How do you, how do you like, free up money to be able to pay? But the real magic is in figuring out how to make the product more profitable. So because we hadn't raised money, we were doggedly focused on driving as many costs as possible out of the box. Whether that's negotiating with shippers, negotiating with pick pack, negotiating a different cardboard box, negotiating with the company that we did credit card processing with. All of those people, we were constantly trying to get a better deal, better deal, better deal. And not only you want to save money and improve the customer experience at the same time. That has always been the charter is like, save money and improve customer experience.

So things are progressing. You're finding a way to keep winning at every point in the chain, which can work for a lot of companies until a shock comes or a recession comes. And in your case, the pandemic came along really kind of during the heart of this growth. How did you navigate that?

Yeah, the pandemic was an interesting time for sure. I'm a big reader of trends and I guess healthfully paranoid. And I had a friend who was from China. She was stuck in the United States in January of 2020 and she was complaining about how like, China would not let her back in because there was this Covid going around and, and that the factories had shut down. The factories had shut down. The stores had shut down. And she worked for a major apparel company, US Based apparel company. I just got really paranoid about COVID And so we started calling all our manufacturers, being like, what's your Covid plan? And they're like, Covid, what's that? And we're like, all right, well, we think Covid's coming. Please stock up on inventory.

It was a big deal at meatpacking plants.

Yes, it was. And when we were asking them about their plans, they didn't have any plans. It's funny because, like, a month later, they're like, here's our Covid plan. And it's like, where were you a month ago? So we asked them for about a month and a half to stock up on as much inventory as possible, because I believe that the factories were going to shut down. They actually didn't shut down. The factory stayed open because it was considered, like, nationally important and national security and food is important. Sure. So they were stocking up their shelves with our inventory. We were bringing a lot of inventory in, and we were, like, ready for the plants to be shut down. Covid hit in March of 2020, and what I didn't anticipate was that there would just be this massive surge in demand. And so what happened was it was like. I remember it was right around St. Patrick's Day. We're just getting, like, we shot off all marketing. We were just, like, trying to keep people, like, away. And we just had thousands of signups, Tens of thousands of signups a week.

Wow.

I think at the time, we might have been doing, like, 15,000 signups a month, and we did, like, 60,000 in one week or something. Crazy.

Ouch. And this is because everybody's at home with their sourdough starters and their. They're cooking at home.

Well, this was because people were like, the meat shell. The. The shells at the grocery store were. Were empty.

Wow. Okay. Yeah.

And then the other thing we saw, the other behavior we saw is all of our members were asking for a box, like, right now, rather than, like, getting it on their traditional cadence. And so, you know, we had this choice. It was like, well, do we just keep signing people up, or do we maintain some meat for our members? And what I told the company, it was actually a pretty easy. Easy choice for me to make. What I told the company is like, look, my family only eats butcherbox, and I'm not about to go walk into a grocery store. And so, like, and I bet there's a Lot of people like me out there. And so we are going to put ourselves on a wait list, not sell any new product to people and keep our product and tell our members we're keeping our product for them. Which was very, very much appreciated at the time. I think our members, even to this day I get thank yous from our members. Being like you were with us through Covid and I'm never going anywhere. And you know, I think if we had been funded differently, cutting off growth would probably not be what we would do.

Yeah, they're salivating for literally.

Free subscribers is like always great. But we chose, you know, I believe one of our core values is member obsession. And I believe that the times to really show your core values are when times are tough. And that was just one of those times where I'm really proud of the decision we made, which was, let's just make sure our members are taken care of first and if there's any excess, we can sell more people, but let's make sure that the people we have are fed first.

You could afford to do that because it wasn't growth at all costs, essentially, Right? Yeah.

And that year was remarkably profitable for us because we shut off marketing for like six months, which was just, you know.

Yeah, your CAC was zero.

CAC was zero. And we were signing up people, you know, we went off a wait list. So we put on a wait list I think at the beginning of April and we went off it at mid July. So we, we spent a good three months being dark.

No regrets?

No, no.

So you've been able to grow this company without outside money, built it into like multi hundred million dollar business. You are able to focus on your customers. You're able to like stay core to your values and not erode those. You're able to take care of your employees. And you're doing this as kind of like an Internet subscription business, which is a little bit wild. It feels very old school for something that's very, very new and modern and of today.

Yeah, you know, it's funny that that's considered old school. I think capitalism obviously has been around for a long time. And my belief is that capitalism really needs to embrace, if that's called old school, the idea of taking care of your employees and taking care of the environment and the world and taking care of your customers. I think that the incentives around capitalism have caused people to really focus on shareholder value to the detriment of everything else. And that I believe is what will cause capitalism to fail. And I think that I was born in 1981. So I am the oldest millennial. And if I think about the millennial population and then the generations behind millennials, people care way more about the brands that they're consuming and what those brands stand for. So gone largely are the days that people are going to church on the weekends. And what's here to stay is, hey, if I take my dollar out of my pocketbook or my Apple pay, I want that dollar to be spent in a way that aligns with my values and people's values. They matter to them a lot, obviously, and they are changing very quickly. And I think that companies are way behind the curve in terms of how they're thinking about customers as dollars and how the customer is thinking about their buying decisions. And so what we spend a lot of our time talking about and thinking about is this mission. And I used to say the mission was to transform meat. That we have this opportunity to go in and transform an industry that is desperately needs transformation. And as we've gone forward, it's kind of like, yeah, we're doing that, but we're also taking this approach that's trying to transform capitalism, trying to transform how companies can be built. Right. You don't need to take outside investment, you don't need to just focus on top line revenue. You don't need to screw over your employees so that you can make more profit. You can take a different approach. You can treat people like human beings and you can treat the world in a way that is more sustainable and more future focused. And that's what gets me out of the bed in the morning, is like really the opportunity to not only build this great company, but also to be a beacon of doing it differently is just a unique and really cool and really special opportunity.

Entrepreneurs can take a lot of lessons here. Venture capitalists too, right. They may think about how they invest differently in companies going forward just based on these consumer preferences.

Yeah. One of the challenges with venture capital is the way in which their funds work. So you raise a fund and usually it's like a ten year fund, and then they're raising another fund off of the first couple of years of the first fund. And so they're set up in a way that they want another round to happen and they want you to keep raising money so you can get a step up in valuation. There are some people who are thinking about that differently, where it's not like, look how great our fund is doing, but they're talking about how sustainable the company is or how. And really with this recession happening. It's a really great time because these step up rounds aren't happening. So really it does become about free cash flow and about profit. And there is a mentality shift happening right now in venture capital and I just hope that continues to move because gone are the days of really cheap free money and here to stay are companies that need to be resilient because it's pretty tough out there.

Mike, thanks so much for sharing your story.

Thank you for having me.

That was Mike Salgueiro in conversation with Kurt nickish on HBR IdeaCast. Salguero is the CEO and founder of the meat subscription service Butcherbox. We'll be back next Wednesday with another hand picked conversation about strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify or wherever you get your podcasts. And while you're there, be sure to leave us a review. We're a production of Harvard Business Review. If you want more articles, case studies, books and videos like this, find it all@hbr.org this episode was produced by Mary Dew, Ann Sanny and Hannah Bates. Ian Fox is our editor and I'm your guest host Ramsey Kabaz. Special thanks to Rob Eckhart, Maureen Hoch, Karen Player, Nicole Smith, Anne Bartholomew and you, our listener. See you next week. Sa.