Startup step by step. Part I: How to launch a food product from scratch

0.2 Decide whether you are building a lifestyle business or a scalable business

Typically, when people build companies, they fall under two categories:

Category 1 (aka lifestyle business) — the founders primarily launch their own business to be their own boss, to be free and to live a happy life. This means that they’ll probably not chase growth at any cost. Quality of life for their employees and them is what comes first. This is generally incompatible with raising funds.

Category 2 (aka scalable business) — the founders primarily launch their company because they want to have a big impact in the world, disrupt an industry or even make tons of money. This means that they’ll very much chase growth and scale, most probably try to raise funds and work on gradually reaching a valuation north of 100M€.

There is no good or bad choice there. There are some obvious pros and cons to both. The only mistake would be to have different expectations in the team and not talk about it early on.

1. Understand your potential customer

Get a deep understanding of your potential customers and identify a problem worth solving: to create products that win people’s hearts and minds, you first need to understand their lifestyle, beliefs, values, attitudes, interests, behaviours and needs. This will also help you identify potential competitors and stay focused. In order to get there:

1.1 Pick a niche

Remember that too narrow is better than too broad
It should be a group of people that resonate with your food philosophy
It should be a group of people that you know well enough to have rare and uncommon insights about them. This is typically someone similar to you or people you had previous experience with through work, life experience, research etc.

2.1.2 Run:

• Surveys — offline or online
• In-Home Ethnographies — explore your customer’s viewpoint in depth, potentially even going to their place
• Digital Ethnographies — explore your customer’s viewpoint via a video chat
• Studies of Online Communities — see what people say online on subreddits, Facebook groups, forums, Twitter and other social channels
• Identification of Food Tribes — pay attention to new diet trends. Is there a new habit some communities and influencers picked up?
• Polls in existing communities — find a relevant community where you can post your questions and ask for opinions

1.3 Fully understand your customer, ask them:

• What are their values and why?
• What keeps them up at night and why?
• What are their pain points and why?
• What role does food play in their life and why?
• What does a day in their life look like?
• What is their lifestyle like and why?
• What is their household composition?
• What do their meals look like and why?
• Where do they shop and why?
• What do they buy and why?
• What drives their purchasing decision?
• What is their budget?

If you’ve never interviewed people from a potential target market, check out videos from Justin Wilcox. This particular one is hosted by Techstars and often broadcasted at Startup Weekends:

2. Size the target market

Once you have a detailed target you should understand your product’s market size potential and category dynamics. It’s important to understand how your product might cross over into the mainstream:

2.1 Size the target market and the pain:

• How large is the target market?
• How large can the target market become?
• How much do people care about the topic? Are you in the business of selling painkillers or vitamins?
• What is the potential for crossover to adjacent markets? How big are these markets?
• What is the potential for crossover to mainstream audiences?

3. Work on ideas

If the potential market seems big enough for starting something, try to find a few solutions by brainstorming.

3.1 Go out and explore…

• Supermarkets
• Online retailers
• Blogs
• Meet people in the industry
• Look at the international market. Many products available abroad could also have a good chance in your home country

3.2 Generate many ideas / think outside the box

Organise brainstorming sessions with your friends or even hackathons! Make mind maps or fill an entire whiteboard with crazy new ideas! It’s time to get creative.

3.3 Pick the best idea(s) and challenge it/them against your understanding of the audience:

• Where would it sit on the shelf?
• Which category does it fall into?
• What would it take to remove it from the shelf?

Note: If you have several ideas, it is suggested to spend an average of two weeks on points 4., 5. and 5b. with each idea to benchmark them against one another.

4. Refine the idea

Outline the technical requirements of the product:

• Category
• Ingredients
• Packaging
• Specific Certifications or Accreditations (Bio, Fairtrade, Vegetarian, Vegan, etc.)
• Distribution method
• Safety measures
• Shelf life
• Quality
• Machinery and production process needed

5a. Understand your unit economics and feasibility of scaling the product

Note: There is no one-size-fits-all solution when it comes to whether 5a should come before 5b or whether these tasks should be done sequentially or simultaneously. It depends on which one is more applicable in your scenario because a negative outcome to either of the two is enough to stop the entire process.

There are many costs associated with сreating a product and getting it to market: ingredients, production, packaging, freight, warehousing, distribution, slotting fees, trade spend, marketing and sales.

If our unit economics — direct revenues and costs associated with a product on a per unit basis — don’t allow for a 35–50% gross margin, our business won’t be sustainable. And don’t forget to account for the margin that you’ll have to give to your distributor and/or broker as well.

We should answer these questions:

5a.1 Where will you locate your production process?

The country/region your suppliers come from could have a significant impact on the overall business. Think about:

• Will there be a good/bad impression associated with working with this country for your target market?
• What are your expansion possibilities in the long run?
• What is the impact on costs?
• How do legislation and certifications change?
• What consequence does it have on the complexity of your supply chain?
• Any other relevant factors

5a.2 How difficult is it to get the first deals with your suppliers and start production?

• What are the Minimum Order Quantities (MOQs)?
• How much Safety Stock do they need?
• What is their pricing?
• What are their Lead Times?
• Can you synchronize various suppliers with Just In Time (JIT) method so that the process is streamlined? Think of: ingredients, packaging, production slots etc.

5a.3 If you need to work with a co-packer, check their standards for:

• Production capabilities and actual availability
• MOQs
• Tolling fees
• Equipment specifications
• Certifications
• Lead times / Slots

5a.4 Define the potential targets for your products:

• Pricing
• Minimum production per week/month
• Availability for the different distribution points
• Possibility to scale, grow and expand

5a.5 Evaluate short and long-term unit economics

The goal is to see whether the product can survive at its target Manufacturer’s Suggested Retail Price (MSRP). Consider all the costs that can be involved:

• Cost of goods sold (COGS)
• Production costs: ingredients, packaging and co-packers tolling fees
• Scrap Rate / Return Rate
• Freight costs
• Storage
• Customs duties
• Distributor’s margin
• Retailer’s margin
• Marketing
• Overhead
• Define how you will reduce the cost of quality in the long term.

5b. Test your idea

Note: There is no one-size-fits-all solution when it comes to whether 5a should come before 5b or whether these tasks should be done sequentially or simultaneously. It depends on which one is more applicable in your scenario because a negative outcome to either of the two is enough to stop the entire process.

Find product-market fit as fast and cost-effectively as possible: many startups spend a lot of time and money developing perfect products before ever testing them with consumers. This is especially true for startups working on highly technical food science innovations.

What is the minimal amount of money and time you can spend on developing your product before you start testing the concept with potential customers? Do you even need to develop a product, packaging and branding to test it with consumers, or it would be enough to start off with a prototype?

Do as many of these as early as possible to share your idea and get feedback:

• Run ads
• Get people to pay (e-commerce, food markets, crowdfunding, pop-up shops…)
• Organise giveaways
• Get a co-packer on board
• Sell to independent retailers

This is the first part of the guide. Read the second part here. 

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