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Kim’s Korner by Ballard Spahr

Lessons from the fold: An entrepreneur’s perspective of winding down a successful brand

Founder Dan Zeplowitz speaks with the legal experts at Ballard Spahr about the decision to close his business and lessons for other companies.

Sometimes closing a business is the right decision. (Pexels/Tim Mossholder)

The challenges entrepreneurs face in launching a startup are well documented. Roughly one out of five new businesses fail in their first year of operations, and nearly two-thirds stall at some point in the venture funding process and fail to exit or raise follow-on capital. The Wall Street Journal recently reported that the “pace of startup shutdowns, fire sales and sharp business-strategy pivots is picking up,” suggesting that the current economic climate is exacerbating an already-difficult task.

It is therefore more important than ever to learn from experience and understand the reasons why startups wind down. By examining these stories, entrepreneurs (and the business community at large) can learn from the missteps and mistakes of others and gain a deeper understanding of the pitfalls to avoid. Sharing these stories also fosters a culture of transparency, encouraging open discussions about failure, which in turn leads to a more informed and supportive entrepreneurial ecosystem. Ultimately, winding down stories offer a rich source of wisdom that can help shape future endeavors and pave the way for long-term success.

Dan Zeplowitz is the cofounder of Philadelphia-based Tuck-Ins Foods, LLC, a manufacturer and seller of Inside-Out S’mores. Dan served as the company’s CEO from its founding in 2017, growing the business to nearly $1 million in revenue in 2022 before making the decision to wind down less than a year later.

Here, Dan discusses the ups and downs of running a consumer packaged goods business and why he believes he ultimately had to shutter the business, despite having garnered some much-envied brand traction. This Q&A has been edited for length and clarity.

How did you get into this business?

Dan Zeplowitz: One of my friends from college, Dr. Jerry Martin, first thought of the idea over 10 years ago while camping. He simply put a piece of chocolate and a piece of a graham cracker into a marshmallow and roasted it over a campfire. He recalled the idea several years later and developed the first prototype. I’ve always had an entrepreneurial spirit, and when Jerry approached me in the summer of 2017 with the prototype and an offer to cofound and run the business as CEO, I quickly agreed.

What made you feel this could be a big/investable business?

I thought the concept of the product itself was brilliant and that the numerous potential markets represented a huge opportunity. We saw quickly that the product connected with a wide array of customers.

How did you engage your team and investors on the business proposition?

Selling out quickly: In the beginning, due to logistical issues (which would ultimately plague the business), the company was only able to produce a few hundred units a week which quickly sold out at public street festivals. Publicity from the street festivals led to orders for private events. At the time, our entire production capacity was dedicated to filling orders between those two sales channels. With the main focus being to maintain and grow production goals, there was little discussion of the overall business proposition.

Raising growth capital: Once we hired part-time production help, we saw a need for more capital in the business to help sustain our growth trajectory. I put together a business plan, pitch deck, and brought on counsel to assist with raising a convertible note. I gave in-person and virtual pitches and provided supplemental materials to the initial round of investors which included family, friends, and friends of friends. I began providing monthly updates to these investors of all relevant aspects of the business. We went back to this investor pool to raise another round two years later. We also included new “outside” investors, some of whom had industry experience. I had one-on-one meetings with some investors to give specific updates as well to seek guidance on various operational, financial, and logistical issues.

At the height of success, how many units were being ordered? What was the brand/revenue traction?

At the height of the business (Q4 2022), we were selling over 1,000 units a day. However, due to our still-limited production capacity, we were turning down multiple orders of over 10,000 units per order.

The brand was well established in the Philadelphia area, largely from our public events as well as our strong online presence. We had also started to receive national media attention with a few opportunities to be on nationally broadcast shows. In 2022, we did just under $1 million in revenue and I projected us to break $2.3 million in 2023.

What were the major turning points that caused the business to decline?

Seasonal business: The company encountered financial difficulties during Q2 of 2022. One reason was the cyclicality of the business — a majority of our sales came during Q1 (Valentine’s Day and Easter), Q3 (fall festivals), and Q4 (public festivals, private events, Halloween and Christmas).

Difficulty scaling to meet demand: Knowing that demand in Q3 and Q4 had historically outpaced supply, we continued to produce as many units as possible and store them frozen for the busier months. The combination of extremely high labor and production costs and even-lower-than-expected Q2 income put us into a harsh financial situation. To maintain operations, we took on a couple of high-interest loans, which ultimately harmed the business, while also raising another round of investment to bridge us to our busy season.

Expenses outpaced growth: At the start of 2023, we moved into our own 3,000-square-foot kitchen and purchased an automated packaging machine that we hoped would double if not triple our production capacity. Unfortunately, the machine did not work as well as we had hoped and the overhead costs of the space were higher than expected. These two issues, combined with reduced 2023 Q1 revenue and repayments on our high-interest loans, caused an unsustainable cash outflow. We made the very difficult decision to stop operations instead of continuing to invest more and more capital in the business.

Do you blame COVID-19?

No, COVID was actually a turning point for the business. When COVID hit, we were operating with only a few part time workers in a commissary kitchen that we rented by the hour. Our overhead was so low that we were able to halt production for nearly two months and use that time to improve the product, rebrand ourselves, create a new website, and begin advertising more on social media. These changes led to a robust direct-to-consumer business which became one of our main sales channels.

Do you think that there was something you could have done that would have resulted in a different outcome, i.e. a silver bullet you failed to implement?

I think sacrificing operational efficiency for the sake of continued and rapid growth is the biggest mistake we made. In hindsight, I would have liked to focus more on efficient production while still at a smaller scale. Instead, we went the “brute force” route and continued to produce as many as we could by hand, often to the detriment of profitability. I would have also focused on fewer sales channels instead of trying to cast such a wide net.

Did you disagree with cofounders about how to run the business or when to wind down?

No. When we made the decision to wind down, everyone agreed we had done everything we could physically and financially do to try to make it work, and we unfortunately could not.

How did advisors help shape the path you took?

One of the major lessons I’ve taken away from this experience is the need to seek out and utilize advice from advisors and others who have been on a similar path. We did not officially establish a board of advisors until about three years into the business. The advisors were helpful in figuring out what channels to focus on and provided industry knowledge regarding finance, operations, logistics, and even HR issues.

How did you engage professional service providers, and was that helpful or hurtful?

We used professional service providers several times across the life of the business, usually with success. During COVID, we hired a marketing professional who taught us the basics of social media marketing, and we used those lessons to develop a deeper understanding on our own. Once our D2C channel started taking off, we worked with a logistics provider to help with our shipping needs. We outsourced graphic design and legal support as needed, all of which was beneficial.

We also worked with a food scientist organization in an attempt to improve the product. Unfortunately, this arrangement did not yield any beneficial improvements and cost the company nearly $10,000.

What is the wind down process like?

The worst part of the wind down has been laying off my employees. That in-person conversation was one of the most difficult things I’ve had to do as an entrepreneur. I also held one-on-one meetings with each of my investors and explained what had happened. I felt it was important to be face-to-face and be there to answer any questions they had. We let our customer base know as well through our website and social media.

What were your takeaways from running the business/winding down?

Lesson 1: Unsustainable growth is, in fact, unsustainable.

Prioritizing growth over becoming a leaner, better run, and more financially healthy organization was ultimately the cause of winding down.

Lesson 2: Use your advisors.

We did a lot of flying by the seat of our pants early on, which to an extent can be beneficial by encouraging innovation and forcing the team to figure things out. However, we had a robust network of advisors, family, and friends who had decades of experience in the space and business in general. I did a poor job of taking the time to speak with them, listen, and implement what ideas and solutions they might have.

Lesson 3: Separating church and state.

One thing I struggled with (and still do) is separating the business from my own personal self. I’m sure a vast majority of entrepreneurs feel the same, with the success of the business leading to highs in their personal life and the failures being a cause for the lows. After going through this gauntlet once, I’m trying to take this lesson to heart. Not to say that entrepreneurship doesn’t require passion, drive and sacrifice — it absolutely does — but it does not require you to become a one-for-one embodiment of the daily successes and failures that come with it.

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Kim’s Korner is a series of articles by Ballard Spahr’s emerging company and venture capital attorneys. The column is not legal advice. The substance of the column is derived from our experience working with founders and details many of the current critical issues facing startups.

Learn more about Ballard Spahr

This is a sponsored guest post by Ballard Spahr. Ballard Spahr is a Technical.ly Ecosystem Builder client.

Companies: Ballard Spahr

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