Financial challenges at one of my companies

A few weeks ago, I told my newsletter readers about the challenges I was facing at my DTC brand, Unbloat.

I said we’re pivoting from “growth mode” to “profit max.” (If you’re new here, welcome! That newsletter is here.)

I promised I’d share the detailed, behind-the-scenes story.

And now I will.

It actually may take a few emails to share the whole story.

This week, Superhuman launched a new team collaboration feature for email.

My team had early access. It’s amazing.

It lets us chat privately about emails before we respond.

It helped us close a $60k deal for this newsletter.

For today’s email, I want to give the backstory of Unbloat and how we ran into trouble.

It starts in 2021. I wasn’t doing anything. I was trying to figure out my next act, after 10+ years at Ampush. (This is before GrowthAssistant, Aux, Twitter followers, etc.)

I tried reading up on the latest trends. I talked to a bunch of companies. Investors suggested I raise money to “roll up” small e-commerce sites. I felt blah. Nothing got me excited.

Finally, one night, it hit me. I need to DO something. I’m an entrepreneur. After spending 10+ years helping others run marketing for e-commerce sites, I wanted to try my own. And mostly, I wanted to learn.

I moved super-quickly (too quickly in retrospect, as you’ll see).

I came up with a name: Poophoria.

Yes, Poophoria, named for the euphoric feeling you get when you have a great poop.

I called 10 suppliers and quickly found an off-the-shelf probiotic and fiber powder. I hired a writer from The Onion, to create some bathroom humor.

I worked with a designer/developer to launch a Shopify site. I found a 3PL. Then I get a former Ampush employee to launch and optimize Facebook ads.

I did it all of this for < $100K.

But it was a total disaster. We barely sold 1000 units. The CACs were horrible. Retention sucked.

But one really positive thing happened.

It got us talking to customers and learning. The GM at the time had a very keen insight.

He kept hearing the word “bloating” from customers describing their problem. More importantly, the GM noticed how emotionally charged it is for the (mostly) female customers.

We started researching and learned a few important things:

  • “Bloating” is searched more often than “Erectile Dysfunction” (and several multi-billion-dollar businesses have been built on ED).

  • This is, in fact, a very emotionally challenging issue. There are actually “bloat coaches” who work with women.

  • This becomes a major issue around perimenopause.

We also learned that powder is a disaster. It’s a disaster for us to ship and for customers to use.

Within 6 months of launching Poophoria (early 2022), we pivoted.

We launched a new “super bloating” pill. A completely new product/formula. We got rid of powder. We switched to pills.

Then we ran “painted door” tests. That’s where you make up 4-5 fake brand names and test “pre-launch signup coupon” ads to see which gets the most engagement. We tested “feather,” “super probiotic,” “lightness,” and “unbloat.”

Unbloat performed 50-100% better than every other name.

So we choose our name, Unbloat. We found a Doctor to partner with, did some branding, and was born. That was roughly 2 years ago.

We put roughly $250k into getting it launched and running.

Then we found a blessing/curse: We started working with Settle to help fund working capital. Settle is amazing BTW, they are not a sponsor but have been a great partner.

It’s important to pause and understand how we worked with Settle and what made it a blessing and a curse.

After we built our brand and product, we started spending on customer acquisition, but I didn’t want to put more money into the business. (I wanted to build a Bootstrapped Giant after all, right?).

That’s where Settle came in. Settle funds inventory, media buying, and really any bills. They give sellers 90 days to pay them back.

Let’s go over a back-of-the-envelope example to better understand how this works:

In June of 2022, Unbloat had $100K in revenue. Our cost of sales, shipping, etc was $35k. That gave us a gross profit of $65k. Then assume we spent $60k on media buys and another $20k on salaries and overhead. That left us with a LOSS of $15k on our PnL.

But let’s look at how June affected cash.

We received $100K in cash (from swiping customers' credit cards). We paid out $20k in salaries and overhead.

But the rest of our expenses (media/inventory/other) was debt, so it didn’t affect our cash. So despite the loss on our PnL, our cash went up $80k.

If you look at our bank account you’d think we were in good shape.

We added $80,000 in cash. But our balance sheet also had $95,000 in debt.

I’m simplifying these numbers, but you get the idea.

That’s June. Let’s skip to September. That’s when the June debt was due.

In September, our revenue was up maybe 70%. (We were growing fast.) But we were also spending a lot on media buys. So we had a loss on our income statement.

But despite having to pay our June debt, our bank account was growing.

If you were paying close attention, you noticed that we increased our debt by $160,000.

Again, I’m simplifying the numbers to illustrate what we were doing.

This system is called “negative working capital” - it's common. In fact, it's how Amazon grew with very little outside capital.

Vox had a good article on it too, and even included a chart of Amazon’s profit and cash flow. If you look carefully at the early years of the graph you’ll notice negative profits and positive free cash flow.

All this works, as long as a few things are true:

  1. You keep growing your business (so future revenue > than past revenue)

  2. Your lender keeps raising your credit limit

If it feels like a Ponzi scheme… well, it kind of is.

But the plan was: to keep growing aggressively while trying to improve your economics. If you can get the PnL to be profitable (by improving marketing efficiency) while scaling, you can reverse the Ponzi scheme (because you get profitable and use that to pay down your debt!).

For most of ‘22 and ‘23, this was working VERY well.

The business grew steadily, and despite the increase in debt, it was generating cash flow.

Number 1 from above was in our control. We kept growing.

Number 2 was not. Our lender didn’t keep extending the credit limit.

The key thing that the lender looks for here is the business’s CONTRIBUTION MARGIN to be positive. (Put yourself in their shoes and it makes sense.)

That means: (revenue) - (inventory and marketing) = positive.

We were also CM-positive during this run. The reason is if you can pay for your inventory and media, then you can presumably pay the debt back.

And EVEN better, we saw return on ad spend (ROAS) moving up.

Above 1.4 ROAS and we were profitable on the first order and home free. And things were moving in that direction.

Then disaster struck…

Q4 of 2023 was a shit show.

It turns out, in Q4, people like buying cool gifts and indulgent purchases but NOT supplements.

We were a bit uneducated and naive, I think. So we pushed hard during Q4 of last year. And all the metrics went in the wrong direction:

Contribution margin went below zero, due to too much discounting.

Even then, ROAS was WORSE than Q3 (likely a seasonality issue).

And we SPENT more – which racked more debt.

This is where the debt line became a curse… for two very specific reasons:

  1. If we were truly bootstrapped, we never would have spent faster than our ability to achieve first-order profitability. It would have been slow and maybe boring, but we would have grown with a stronger foundation. The cash let us skip a step.

  2. Now that we had racked up debt, our ONLY way to pay it back was to “perpetuate” the Ponzi scheme. I.e. we started focusing on GROWTH over ROAS.

Another mistake I made when we took the debt was agreeing to have Gateway X guarantee half the debt of Unbloat!

Gateway X is my venture studio, from which I launch companies.

This was really my way of using Gateway X to finance my business while lying to myself and pretending I wasn't…

Up to now, I showed you simplified numbers to help you understand how we got here. It’s time to look at the actual balance sheet.

By Jan 1st, 2024, here’s what our balance sheet looked like:

Total liabilities of $1,720,955.78. That’s well over a million in debt!

To deal with it, we hatched a plan. We had to grow ad spend and ROAS at the same time. That’s tough to pull off together because one is scale and the other is efficiency.

But if we accomplished that, we’d pull out of the nose dive that started in Q4. We had a good plan in place with a small but mighty team.

The first couple of months we saw some good improvements.

But by March, things started looking bleak. We came together and agreed that if we couldn’t achieve our target of 1.4 ROAS within weeks, we’d need to make some major changes.

Despite a few Hail Marys and some small wins, we just didn’t get there.

As April closed out, this was our balance sheet and the PnL:

We owed $1.5 million to creditors and had lost $100k in April.

Worse, this debt wasn’t confined to just one of my companies.

Gateway X was on the hook for >$500k of this. It had a huge risk of putting a hole in our balance sheet and eating up the profits from other businesses.

It was a huge mess. I haven’t felt “stressed’ in a while but I definitely felt stressed about all this.

We also had two amazing people working full time and it was clear that had to change quickly.

Regardless, it was time to take decisive action. Here is what we did next…

[Tune in next week for how we restructured the business in May.]