Brian Smiga: Hi, this is Brian Smiga and I’m with Alpha Venture Partners Podcast. We’re looking at a category leading company here with John Frankel of ff Ventures.

John Frankel: Hi, good morning.

Brian Smiga: Good morning, John. Thanks for joining us. John, please tell the audience about ff. How do you define yourself? Start with what ff stands for.

John Frankel: ff is a seed stage firm based in New York. We’re in our tenth year of operation, which is kind of amazing. It only feels like yesterday when we started. We have about 70 active portfolio companies, and we’re a seed stage firm. We start when a company is just getting going. We’re usually the first institutional money. To use another phrase, ff stands for founder friendly. What it really means is we’re an engaged investor. We don’t just cut a check and sit back. Which means we walk in lead rounds, we will sit on boards, we will help companies not just with strategy and connections and everything else you expect from a seed firm. We also have people internally who can help with accounting, community, and other matters, to really help de-risk a company. We only really like to get involved where we feel we can make a material difference to help the company.

Of the 70 active companies we have, around about 17 of them are worth $50 million or more, which to us is the measure of sort like the break out stage for a company. We think we got a good stable of leading companies. Where we look at location, we’re about 40% New York, 25% west coast, and the rest is in between. When we look at industries and areas of focus, we’re about three quarters enterprise, about a quarter consumer, with strong exposure in fintech, cybersecurity, AI, and increasing interest in drones and robotics.

Brian Smiga: I can attest because John and I just did a portfolio review and he’s got a great crop of companies, ten of them that are really attractive and are going to raise rounds greater than 50 million in valuation. So, congratulations, John, on building this and your previous portfolios.

Today, we’re going to focus on a company you’ve helped build and harvest called Plated.

John Frankel: Yes, I guess given it’s in the food space, build and harvest, maybe grow and harvest. Plated is a company that was out of consensus when we invested in it. It was out of consensus when we continued to put capital into the company and I think when they sold it, it was kind of out of consensus. I think it indicates our willingness to sort of independently think about a space and an opportunity.

What can I tell you about Plated? You tell me.

Brian Smiga: Let’s tell the story. The hero were the founders, right?

John Frankel: Absolutely.

Brian Smiga: Then you, John, and your team, when you met them, what was it about them and their out of the box approach to meal kit delivery that made you move in and write a check?

John Frankel: We have seen a lot of something-in-a-box on a subscription basis companies. We passed on everyone. When Nick and Josh came in and explained what they wanted to do there was one dynamic, one aspect of their model that really intrigued us. The notion of mass customization. What I mean by that is they said, we don’t want to deliver a set of recipes, a set of ingredients to people to cook their meals each week where we don’t know what the people like or don’t like. We believe that through data mining, through analyzing past orders, we can put in front of people the meals that will appeal to them. We looked at that model and we said the key thing on subscription models is retention. If you give people more of what they want they’ll retain high, you’ll get a better business model. You can acquire customers cheaper than everyone else and over time, you’ll build the winning model.

That is what intrigues us. If you look at a company such as Blue Apron, their model was 80, 90 percent of the people get the meat box, 5 percent or whatever get the vegetarian box, etc. They would ship out a small single digit number of different boxes each week. Plated’s model was to ship out thousands of permutations every week. It really was something they built up on from the beginning. They didn’t pivot from that idea, they just expanded choice over time.

Two years ago, you could subscribe to Plated and they would have five different meals to choose from. Today, when you go, there’s 20 different meals you can choose from each week plus three different desserts. The increased choice has led to superior retention. Has led to lower cost of acquisition, and allowed the company to grow much more capital efficiently than say Blue Apron.

It was out of consensus. A lot of people, a lot of tech investors looked at this and said, it’s a winner take all market. You needed to find the investors who understood tech, understood that this was a logistics company, and also understood brand. Most tech investors really find it difficult to understand why Heinz can continue to command a premium for ketchup. They would feel it should be commoditizable and so the mealkit space is this intersection of brand and technology and that’s what intrigued us.

Brian Smiga: So this is a chance to examine a little bit how ff, with your star team adds value when a company’s really early and then adds value later when decisions need to be made. So what are some of the ways the ff team gathered around Nick and Josh and supplied them with other smart brains and hands to get things done in the early days?

John Frankel: The first thing we do is we put two partners on every deal, so it was myself and Ryan Armbrust. That gives you two independent perspectives and two people who connect into the firm. We then had probably another four or five people within the firm who were engaged with multiple people on their side from community and PR through to accounting and financial planning and analysis. That really gave us a lot of understanding of the company, it helped us have conviction when we needed to step up and cut checks at times when others were skeptical and really gave us insights about the company that allowed us to talk with other VCs we know to explain the story and get over the knee jerk reaction that a lot of people had in tech about emerging positions and markets.

Brian Smiga: So then there’s this staying the course part or the important shifts you make to reach that goal. In this case it was mass customization and logistics to deliver very bespoke food kits. There had to be some surprises along the way and were there any changes that you and Ryan helped the team make along the way to realize that goal?

John Frankel: I think there are a lot of micro decisions along the way. We had monthly board meetings all the way through. There were fascinating conversations. We had a team who was driven to provide the highest quality food. For instance if you look at organic chicken there’s six different grades of organic chicken. Just if you look at the antibiotic use, this chicken has never in its life, never ever had antibiotics, which is called never-never, which is the highest grade, to they get antibiotics at birth and never again, to they get antibiotics up to a month before the chicken is killed, to … there’s all different degrees of this and you know, we talked about how you communicate it.

Plated never claimed that things were organic because maybe 90 percent of what was in the box was organic but one item that was added was not. So they never overreached on claims. We ensured that we had the highest standards. There were no standards in this space with regard to food preparation. There are for restaurants, there are for factories but not for meal prep companies. The company spent an inordinate amount of time and energy working around that to ensure there was never spoiled food that would cause a major problem for the company.

There were lots of those kinds of things happening. There were lots of crazy situations that happen when you’re actually running a company that sort of surface. I would say the biggest thing that we did to help, and you should really talk to Nick and Josh and ask them, but what we tried to do was because we’ve seen companies go through different stages, was guide them at which stages they really needed to build up certain business processes, such as when they should have inside accounting, we helped them a lot with recruiting, helping them form their metrics and the like.

Brian Smiga: And you helped with the funding as well right?

John Frankel: Yes, we helped them with funding.

Brian Smiga: And this was a company that was out of consensus, needed capital to grow into it’s opportunity space and I think ff played a big role in assisting with subsequent rounds. Isn’t that true?

John Frankel: Yeah, That is absolutely true. I don’t really like to talk about this kind of stuff but we try to be there when things are at their darkest. Eight months into our investment when we had $850,000 into the company we get a call that, for various reasons beyond their control, they were going to run out of funding in three weeks and they weren’t going to be able to make payroll.

Brian Smiga: Right.

John Frankel: We sat down as a team, and because we had a half dozen people who really understood them and because we knew their cost acquisition and lifetime value and we had multiple points of contact we as a group came to the conclusion that we really wanted to back them, so we sent them a check the next day, actually a wire. We told them there was more money behind that but let’s now work to put together a round, which we led and then we continued to back them into the Series A where we were the largest check into the Series A, even though we didn’t lead the round. It was a company … there were just a number of times where we really felt we had a good understanding of the company and what they needed and we would help them articulate the story to other investors and we ended up having a phenomenal team around the table, including Graycroft, Formation Eight, Kite, you know we had some really, really great investors that stood there and backed the company all the way through.

Brian Smiga: There’s no doubt John that you and Ryan and your team are noted for your rolling up your sleeves and doing whatever it takes and living up to being founder friendly and so, so many of these companies we met when they were smaller, you guys added tremendous value.

John Frankel: Look I’m blushing a little bit here, but look understand, in the world of VC you expect a third of companies to fail, a third to be boring and not sort of deliver the returns you want and the last third deliver the returns and a third of a third, or ten percent of the portfolio is really what defines the portfolio. Most firms because they run with fewer people they get overpowered and they move from being active investors with their first firm to being passive investors later on because they’ve just got too much going on.

We like to remain active investors and what that mean is, when you have a company that looks like it’s failing we put a lot of energy into, should we step up or step back? It would be very easy if a company calls you up out of the blue, just a name on a list, and they say look we can’t make payroll in three weeks, it’s very easy to just say okay that’s in our loss column. For our fund size we can take a 850,000 loss, we love you guys dearly but nothing we can do. We’ve got the resources to be able to dig in and some occasions we kind of like say, look guys there’s nothing we can do because we don’t think the space is, the opportunity is, we don’t think the team has delivered what we think they can do, we don’t like … the business model hasn’t evolved the way we think. We, like any other Venture Capital firm, if it’s not working we step back we can’t fall in love with companies because we can’t be like King Canute trying to push the tide back.

There are situations like Plated where we had a company, which we really believed in the team, we believed in the model, and we really felt that the space had a ton of opportunity. We continue to believe that meal kits is a massive space and we think that Plated under Albertsons, Albertsons ended up buying them. Plated under Albertsons is probably going to be one of the big dominant players in the space for a number of reasons. We’ve decided to step up and back them because we had the bandwidth to understand the problem.

Brian Smiga: Right and it paid off and it paid off over a relatively short period of time.

John Frankel: Well it returned half the fund.

Brian Smiga: So congratulations on this great exit.

John Frankel: Thank you.

Brian Smiga: And standing by these founders who I’ve met and are great guys that would achieve this mission and did. It’s great to know who you and your team played the role. Now since Plated sold to Albertsons, where it’s going to become a national brand and grow even further into the bespoke meal delivery business, couple things have happened. Do you have any reflection on either the Blue Apron IPO or on Amazon’s decision to enter the food business?

John Frankel: Well, I look at the food business in this way. It’s a trillion and a half dollar business in the US. Dinner is $450 billion, Meal kits last year were $2-$3 billion and I think they can grow to being $20-$30 billion so I think there’s a lot of up side. The space depends on retention and I think Blue Apron’s decision to not innovate as they were growing rapidly cost them, not because … really because they didn’t watch what the competition was doing.

Plated and others were innovating around choice and that really meant that though CAC and retention held up, it didn’t hold up to /Blue Apron. Then they’re in a bit of a box, they raised less money than they wanted to, they’re saddled with a couple hundred million of debt, they’ve got a stock price trading below five dollars where a lot of institutions don’t like to play so they’ve got a number of issues they need to resolve. They’re trying to innovate, but innovation takes time and the market will see if it gives them time to innovate. The space itself I think is fascinating. I think you’re going to continue to see significant innovation around this.

I’m a believer … so if I look at my five year view, I put on sort of my five year hat here. I believe that personalized medicine is something that’s going to come. That you’re going to run DNA, Biom Analysis tests and you’re going to say these things are good for me and these things are not. I think it goes from medicine all the way through to food. You can run blood tests today to see where you have antibodies to which types of foods and could be emerging allergies for you or things that irritate you at a subconscious level or a level that you’re not conscious about.

Let’s say you have that and you learn that you can have Brazil nuts but you can’t have Pistachios. It’s very difficult to deal with that, say you go the restaurant and order around your peculiarities. It’s very difficult to go to a supermarket and order stuff but if you take Plated, which today has twenty different options, let’s say they have a hundred, let’s say they have two hundred, five years from now and let’s say you have a feedback that says these are the things that I should eat, these are things I should minimize or avoid, wouldn’t it be great if there was a meal kit service that delivered to you the five or ten meals that week that really were right for you or the intersection between yourself and your significant other. I think that’s where the world’s going and I think that the sort of data systems that Plated and others will build up, will enable that.

Brian Smiga: I think we’re going to leave it there John. I think it’s a great ending note that mass personalization is going to be a theme for tech in the years to come. Maintaining a five year outlook as you are doing is critical to investing and also that you guys really live up to your name, which not everybody knows stands for founder friendly.