The founders of Innovation Department believe that in the search for the next billion-dollar exit, there are pockets of opportunities being overlooked in consumer brands. Through a unique application of linear commerce, they have built brands like Wellpath by following a different approach to brand building. I sat down with Colin Darretta, the co-founder of the Innovation Department, and James Shalhoub, the CEO and founder of their newest brand Finn, to learn about this approach and how they are applying it with their newest launch.
Dave Knox: What is the background of starting the Innovation Department?
Colin Darretta: My co- founder, Alex, and I started Innovation Department several years ago with the belief that many of the core competencies integral to building digitally native brands could be scaled across several brands if you house them under one roof. Further, we believe then, and continue to believe, that there’s not that many billion dollar exits to be had in the e- commerce world, but there are a lot of pockets of opportunity to build businesses that can scale into the mid eight figures. And many of those opportunities end up being overlooked by the traditional venture community as just not exciting enough to focus on. And so we found that many entrepreneurs were therefore just ignoring these categories that were interesting and could build really profitable, great businesses that also did some good. Alex and I both have a real passion for wellness. To that end, we started with WellPath, a nutritional supplements business. It was not a straight line to success. We had a lot of roadblocks and obstacles that ultimately made us stronger. For instance, we had a hard time figuring out Facebook but that ultimately led to us building a software business in the form of DojoMojo, which helped enable us to build our own audiences.
We are really believers in the value of first party data. Facebook and Google are great channels but they can only get you so far. And ultimately, you are at the mercy of those two platforms if your advertising strategies should stop working. That is what led us to build DojoMojo to collect first party data like opted in email addresses, phone numbers and physical addresses. WellPath has acquired over 2 million email addresses. The second brand we have launched has acquired several hundred thousand. We also run several other media newsletters that don’t have brands attached to them yet, but have hundreds of thousands of subscribers each as well. And we use those as mechanisms for a lot of our customer acquisition because we now own the ability to have meaningful conversations with potential customers. We invest heavily in that content as independent media sites that have a mandate to write wellness content that engages, educates, empowers our readers. We believe in a golden ratio of two to one content to commerce. So no one is going to get bombarded with sales emails from us relative to the amount of content that they are being provided.
The early days of launching a brand are typically the most inefficient spend. You are figuring things out and optimizing your funnels. There is all this friction that is taking place. With our own audiences, our customer acquisition costs in those early days end up being a fraction of what it would be using otherwise expensive marketing dollars. That has a huge amount to do with why we can be so capital efficient and profitable sooner than your standard standalone startup. We believe that is unique to Innovation Department. Even the other startup studios do not really have this kind of content first and audience development engine that we have developed.
Knox: What is the process for building your next brand?
Darretta: First, we aggregate a huge number of ideas. We encourage pretty much anyone in the organization to effectively throw ideas into a Google sheet. Then we run all those ideas through a decision model where each idea is scored across a ton of data points. Some are measureable while others require us to make a judgement such as the ability to building a strong community around the category. Take pets. People love to post about their pets. They love to talk about their pets. They care about their pets. There is a lot of content to be written about it. Some other categories, not quite so much. We also look at data points like the opportunity on Amazon using third-party software tools to pull specific data that we think is a strong indicator of whether there is a big Amazon opportunity for us. Ultimately over the whole process there are three rounds of scoring. The first focuses on macro elements like Total Addressable Market and category growth rate. In the second, we drill down into more micro measures like that ability to build community, competition on Amazon, and CPMs on the major advertising channels. The very last level requires us doing some financial modeling to analyze margins, working capital requirements and kind of the nitty gritty that ultimately becomes super critical to scale a business. At each level, a lot of the ideas drop off so by that last level, there are only a handful left. And once we have done that, we sit down as a leadership team and review those last few and generally make a judgment call based on where we feel the largest opportunity. While there is a ton of analytical metrics that are getting us to making that final decision, it is still ultimately a judgment call that we are making at the end.
Knox: As a real world example of that process, you recently launched Finn. What did you discover in that process?
James Shalhoub: We did our typical decision-making analysis, but it also came from a more personal place as well. Before I joined Colin at Innovation Department, I was working on Wall Street and was kind of going through my own personal health and wellness journey after experiencing that typical Wall Street grind. After joining Innovation Department and working on the WellPath, I was also working on the Pet Focus newsletter. It occurred to me that if we are giving our dogs birthday parties and Instagram accounts, then people will also probably want to hold their pets to the same standards of wellness and nutrition. The more I looked into that and spoke to our most engaged email subscribers, I looked into the actual category itself and realize that there was so much we could do into building a premium product and brand. We became excited about not only the market opportunity that that decision making framework showed us, but that we could build a real brand around it and make something that was going to make pet parents and actually pets, in this case, happy and healthy.
Knox: Why have major players in the Pet Food space missed the opportunity that you have seen with Finn?
Shalhoub: I think many of them are now so far removed from their end customer that they are losing sight of the importance and value of speaking with them. And in this case, the end customer is actually the pet itself, which the kind of big companies have also lost sight of. And while they have a lot of corporate strategy groups and people speaking with market research firms that giving them this information, ultimately we literally went to dog parks. We spoke with other dog owners to see how their approach to pet parenting has changed.
Darretta: Our content community focus means that we have that one-to-one relationships through hundreds of thousands of people who read our newsletter. Our products were developed in partnership with a hundred thousand subscribers that the Finn Newsletter had before we ever went into the product development life cycle. We started asking them what was important to them, what delivery methods were important to them, what flavors their pets wanted. It was a truly born, not just from of us sitting locked away in a room, but born out of a partnership with our community. Because of the traditional distribution model in CPG, which hasn’t been direct to consumer or community focused, it means these traditional players have not developed that muscle in the same way that startups like ours have.
Knox: With Finn launching during COVID, were there any unanticipated Second Order Consequences?
Shalhoub: Like many companies there were definitely some supply chain setbacks that came as a result of COVID-19. But we also saw a rise of dog ownership during COVID-19 that made us more excited and more energized about getting the brand out there as much as possible. It also changed the way that we approached the launch. Success for Finn is to help pets everywhere live healthy and happy, and our supplements and wellness products absolutely help, but we knew that there was so much more we could do. In the early days of COVID, I was speaking with a several different foster shelters where the staff was trying to deal with the good problem that everybody was starting to foster and adopt dogs. So now Finn is looking for ways to engage this new out-sized roster of foster pet parents out there. Knowing there was so much more that we could do, I wanted to work with these foster shelters and help us mutually achieve our missions. We have started to donate product to foster shelters for their animals, but also as gifts to foster parents to keep them excited and active and engaged. And we often pair that product donation with monetary donation as well in our broader mission of just helping pets everywhere live healthy and happy.
Knox: Where do you think the next five years is going to take us when it comes to the invention of brands, the growing of brands and the consumer space in general?
Darretta: I believe that the early Direct to Consumer, the Caspers of the world, were building models were the messaging was “instead of going the traditional retail route where you are going to spend 2X the cost, we are going to sell it to direct.” That was the value proposition. It was more cost oriented of you are going to get the same quality product and you are going to get it cheaper because we are cutting out the middleman in the form of the retailer. And that was a really compelling message. Warby, Casper, and Dollar Shave Club all built companies worth hundreds of millions of dollars. But that ship has largely sailed. There is not going to be many more of those, “Hey, we’re just disintermediating somebody” businesses.
I think what that means now is brand and product are going to matter ultimately a lot more. Either you have to have real product innovation or you are going to really connect with the community around your product. I think this most successful brands that we’re going to see are brands that have figured out a way to really capture people’s imagination. They will build a community of people that really love it. And I think the big winners will be the people who can seize on that. And that alchemy is a significantly more complicated and challenging formulation to create than simply, “We’re just going to be able to sell you the same thing you used to buy, but cheaper.” There’s going to be a lot more art than purely science going forward. And people are going to have to figure out new ways to connect with their individual consumers that extend beyond just Facebook and Instagram ads.