This Week in Startups - US initiates crypto regulation, Robinhood IPO access, Slack as a Trojan Horse PLUS Magic Spoon CEO Gabi Lewis | E1220

Episode Date: May 21, 2021

Jason hits the recent restrictions on crypto from the U.S. and China, Robinhood allowing users to get in at IPO prices, and Antonio García Martínez's chat with Kara Swisher (1:15). Then in the main segment, Magic Soon Cereal Co-Founder Gabi Lewis discusses the difference between a good product and product-market fit (25:47), how Magic Spoon does influencer marketing (45:25), classic cereal flavors & more!

All right, it's a big news day. Cryptocurrency continues to struggle. Now it's not just China doing the saber rattling. Here in the United States, our government is looking into big transactions in crypto and making their own cryptocurrency to compete with Bitcoin. And is this the beginning of the end of Bitcoin and the crypto movement? Or is this the start or the end of the beginning? We're going to get into that.

Also, Robin Hood is going to give retail investors access to IP. on the first day at the IPO price, an amazing announcement and more. The founder of Magic Spoon is with us, which is an amazing protein cereal, which I love and I buy. And he started with crickets in bars and that failed. But he still loved protein, just not from insects. He tells that whole story on the back end. And I got a special message tree at the end of the pod in the button. Stick with us.

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get enterprise ready by streamlining SOC2 compliance in weeks, not months. Get $2,000 off your first year by going to secureframe.com slash offer slash twist. Let's take the first story. It's been a rough week for crypto and it keeps getting worse. The U.S. Treasury Department has cracked down on crypto or their saber rattling. And the Fed has announced they will explore a centralized digital currency, just like China has announced a digital one. And they're going to start exploring it this summer. So this leads to a lot of people, doom and gloom, is this the end of Bitcoin? Is it the end of crypto? I think if we look at the arc of history, this might be looked at as the starting line or the be the end of the

beginning is how I would describe this. This isn't the end or the beginning of the end. It's the end of the beginning. The beginning will be looked at as the 10 years of the early days of Bitcoin and the 10 years before that of e-currencies, virtual currencies, in-game currencies, et cetera. So we covered Bitcoin obviously on Wednesday after China banned their banks from servicing crypto-related transactions. And now the U.S. is getting into the mix. So this is a lot of news, but not a lot of facts, right? And we were looking at, you know, when I was talking on Wednesday, I made the point that a lot of the Bitcoin maximalists have lost their minds. They're so into this currency that they have no objectivity, which I can understand.

If you bought something at $100 and it went to $60,000, all your objectivity gets lost. Trust me, I've been there. Robin Hood, Uber, Com. I love these brands. You're not going to convince me that they're not the greatest brands in the world. My children are the smartest in the world. Your children are the smartest and most beautiful in the world. In your case, the children might be Bitcoin in mine.

and they might be some of these companies. It's talking your book. I get it. But I told you, and I've been saying for years, if China wants to stop something, they stop it. They wanted to stop the Uyghurs. They put millions of them in jail. They wanted to stop booksellers.

They tortured them and reeducated them. They wanted to stop Tiananmen Square. They ran tanks over their own people. And they wanted Hong Kong back. And they didn't want protests. And they just took those people to the mainland and reinstated or instated their own mainland government in Hong Kong. So I think we can all agree that if China doesn't want Bitcoin to exist,

just like they don't want the New York Times or Facebook to exist, they're capable of doing. If they can stop the New York Times, Twitter, Facebook, and VPNs, and certain books to be sold in China, they can stop Bitcoin in China. It's a very simple thing to do. You execute people, you torture people, you re-educate them, and everybody stops doing that behavior where it goes so underground

that the cost of being a Bitcoin minor or running Bitcoin servers or having thumb drives with Bitcoin on them becomes so great that like VPNs and other things in China, you would just stop doing it. So let's put China aside. How would you stop Bitcoin in a democracy where people get to vote

and you have representatives and you have a legal system? Well, here's my quote. And I've been talking about this for a while. If we feel the U.S. dollar is suffering compared to cryptocurrencies, our government has a very easy way to fix that. A 10% tax every time you buy or sell a cryptocurrency. On top of whatever taxes, you're already paying, a cryptocurrency premium, if you will. This is something that is a very real possibility here in the United States.

And once you put a barrier like a tax in front of a behavior, the behavior goes down. And when you remove barriers, the behavior goes up. I think that's obvious to all of us. We all watched what happened with cigarettes. They ban the ability for you to smoke in a restaurant, and they did it slowly and on airplanes. And you're like, okay, we gave up airplanes or we had a smoking section in restaurants and on airplanes. Then they banned it completely. Then they put a tax on it.

And then the tax became $10 a pack. And then consumption went down. In the reverse, you stop penalizing people or you stop criminalizing or you stop criminalizing or, or you stop people from, let's say, putting people in jail for selling, I don't know, fentanyl on Turk Street. What happens? The price of fentanyl goes down. Because in the price of fentanyl on Turkstreet in San Francisco, in that cost is the cost of getting

your drug dealers in and out of jail and how many days off they have. So if you want the cheapest and the best drugs possible, the best fentanyl, the best meth, you go to San Francisco, which is why every junkie, junkie a term in the dictionary, for somebody who's addicted to heroin and opioids. If you're a junky in the United States, you go to get your junk in San Francisco. Why? The least policing, the lowest price, the highest quality.

So if you discount something, people will consume more, and if you tax it, they'll consume less. This would be the headwinds of all headwinds on cryptocurrency. Just like if you lower capital gains, people get more involved in the stock market, invest more startups. That's why there's this big debate.

Should we increase capital gain? Should we keep capital gains? You know, I can tell you, since I'm on the front lines of this, one of the big reasons people love to invest in startups and in the stock market is because of capital gains treatment. If not, they would just leave their money in other assets like boats, airplanes, and second and third homes. You lower capital gains tax, trading goes up.

If Robin Hood makes trading free and they do it with payment for order flow, people trade more. So on Thursday, the U.S. Treasury called for stricter cryptocurrency compliance with the IRS, saying crypto poses massive tax evasion risk. I added the word massive. U.S. Treasury Department announced they will require any crypto transfer worth $10,000 more to be reported to the IRS as part of Biden's tax plan. That's a no-brainer. We knew that was coming.

And investors have seen the value of their Bitcoin site 25% of less month. And everybody's kind of realizing this is like maybe a capitulation moment and the end of the overheated movement. So there's probably two things going on here. Stimmy checks and people having excess capital at home because they're not going out. They're not going on vacation because of the pandemic. With the reopening, people are going to buy less Bitcoin. And they might even sell Bitcoin to do things in the real world, like go to an electronic music festival. According to CNBC, a growing number of Wall Street analysts have recently been sounding the alarm

that regulators at the Treasury and the SEC could soon take a more active role in crypto regulation. Quotes from the Treasury Department release. Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly, including tax evasion. So can you stop Bitcoin and people trading it on USB drives? Well, there was somebody doing that in Vegas with poker folks. They were cashing in chips for Bitcoin.

I don't know all the details of the story. You can do a Google search for it. But they pinched that guy and you get in big trouble. Remember, Al Capone, they got them on taxes, not the booze. Story number two, this summer the Fed will take. take another step towards developing a cryptocurrency. The Federal Reserve will release a research paper, sound familiar, this summer that explores a move to a central bank digital currency for a CBDC.

So CBDC is how I'm going to pronounce it. CBD, like the miracle drug and cannabis, with a C at the end. CBDC. And this is what most countries will do. This does not mean they would eliminate the dollar. They would keep the dollar. They would add this and they would test it and make it one or two. percent of, you know, money in the United States. So we probably have two currencies going on

concurrently. It would be a digital dollar, basically. And the Fed has been studying payment systems for several years and plans to release an instant payment service called Fed Now in 2023. Jerome Powell quotes, the effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks and other payment service providers that allow money to flow on a daily basis. Technological advances will offer new possibilities to central banks, including the Fed. While various structures and technologies might be used as CBDC could be designed for use by the general public, the moves of multiple countries, mainly China and the central bank digital currency space,

has sped up the Fed's timeline according to sources. So in summation, if we wrap this all up, the Treasury Department's cracking down on large crypto, the Fed is gearing up to loan its own version, that sounds actually very pro-crypto. It means crypto is here to say. If they want to track it and make sure taxes are paid, they obviously want it to exist. And if they're making their own, this means crypto technology is becoming a fabric of life. So it's a win for crypto. No, is that a win for Bitcoin? Maybe not. Maybe. It could mean that Bitcoin becomes the precursor to the CBDC, and that Bitcoin is looked at as the AOL of the space. I know that I'm going to get a lot of people.

people being upset. But it could be that if the CBDC is more powerful, more accepted and easier to use, and your bank already has it, and Bank of America and Wells Fargo can put your money into that, you might just start using it. It might have massive adoption. And so how big is this risk for the $2 trillion crypto market? It's massive. In the short term, is it headline risk? Yeah, it feels like headline risk. In the long term, it's increasing legitimacy. for sure 100%. The crypto tax, I think, is clearly coming. Now, let's just talk about Bitcoin.

You know, it hit in 2017, and I spoke at a conference when it was hitting this like, you know, $20,000 kind of mark, I think, you know, 19,000 plus. And I told people, listen, this is a great time for you to sell. If you bought a $10, $1, $5, sell half your position, a third of your position, buy your home, buy your second home, pay down your debt, whatever it is, buy some Amazon or Uber or Airbnb stock. and it went down massively. And it stayed down for a long time.

And then we had this huge valley from 19,000 down to 3,000, which is an 80% correction. Bitcoin steadily dropped for a full year to its first bottom of 3,000. And that was particularly painful. And you saw me doing 360 tongues on Twitter, you know, also telling people like, don't be surprised if Bitcoin goes to zero, this is a possibility. And then we had another peak in July of 2019. We saw it race from 3,000 up to 12,000, 4x. And people were really excited about that.

And then the steady bowl, you know, run went to 12,000. And of course, we had another valley after that, 12,000 down to 6.5K, a 50% correction. And so Bitcoin drops again. It bottoms out. It loses 50%. But it was two times higher than the previous bottom, right? Remember we talked about that 3K bottom? Now the bottom 6.5K.

And I'm no chartologist. I don't believe in chartology or any of that stuff. But it is interesting to look at this process. The third mini peak happened in February of 2020, started the pandemic, and I think it was pandemic driven. We have this huge rally, and it goes 6.5 to 10K, up 50%, 53%, in fact. And of course, a third major valley after that,

from 10K back down to 4.9K, down 50% again. And following the rest of the financial markets into that abyss of uncertainty in the end of the world in March of the pandemic, COVID fears it bottomed out of 4,900, lower than the 6,500 previous bottom, but between the 3,000 and 6,500 bottoms. And we have this fourth major peak, 4.9, up to 63K.K. That's what has made people lose their mind in the last year. 13X and 13 months, certainly something to be excited about.

And here we are in the valley, 63K down to 40K. I think even today we were down in the 38K range. which is down a third. And so people who bought really, really had a little bit of a whirlwind here. To put that into context, I just pointed out the 2017 peak, the 2019 peak, the 2020 brief peak, and then this April 2021 peak, all of these peaks resulted in valleys that were 30, 50%, 80%, but the valleys went down less. So you had this 80% drop, 50% drop, and then a 30% drop we're experiencing now.

I think the 30% drop winds up at 50%. So 63 in half is 31.5. I think we could hit the 30K level and maybe even 20. We'll see. So my friend, Zach Collius, a friend of the pod who does Jason and Zach with me on this pod, a friend of yours as well. He says this will be the end game for crypto as a mass market thing. The Fed and the Chinese will launch.

a centralized digital currency stealing all the innovation. Then they will ban the decentralized currency. So he's kind of just going there. I think that these things will be regulated. They'll become underground. They'll probably over time become secondary to the ones that the sovereign nations deem acceptable. And I know that this is going to tweak a lot of you. But this Bitcoin maximalists, you know, in the market today, they're not the developers who've developed the technology. Those developers, I think, have been selling their positions through all these peaks and valleys. In fact, I think the valleys, the smart early Bitcoin holders, I'll call them the, you know, the single digit crowd or the two digit crowd, you know, people who bought it from 10 cents to $100. I think they've been selling this whole time and buying Amazon stock and other things.

And I think this has become religious. I think it's become a mania. And I think the people who were, you know, seeing on Twitter from accounts that are anonymous or pseudo-anonymous, a lot of these could just be accounts created by people who have large positions. who are pumping, pumping, pumping, and trying to clear positions before this whole Ponzi scheme bottoms out and gets replaced and the technology gets basically co-opted

by governments. That would be the most cynical take on all of this. I think it could be a long slow decline for Bitcoin, or maybe Bitcoin keeps going. Who knows? The majority chance, I think, is that Bitcoin will see 25,000 before it sees 100,000.

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of course, apply because they're giving you a free job posting. Okay, let's get back to this amazing episode. In other news, Robin Hood, which I'm an angel investor in, just for clarity, and to do a little mini-flex, announced IPO access. They're basically going to allow retail investors to buy IPO shares before the company officially lists. In a blog post on Thursday, Robin Hood titles, Robin Hood is democratizing IPOs. Robin Hood announced they were rolling out IPO access to retail investors with no account minimum. This is super important and amazing because obviously IPOs pop on the average of 36% in 2020, according to Deologic. And retail investors usually don't get involved in that, so there's a little more democratization here. Some notable one-day pop, snowflake, 104%, lemonade, 139%, Big Commerce, 201% Airbnb, 100%, Door Dash 85%, JVrog, 62% in Palantir, 38% all on their first day of trading.

So how is it going to work? Well, Robin Hood users will search the upcoming IPOs from a list of participating companies that plan to distribute their shares to Robin Hood. So Robin Hood is going to go to each of these issuers and say, hey, can we get an allocation just like a bank would? And I think that they will become the preeminent bank for this. And you probably didn't see this coming. Obviously, I did see this coming because I've heard about it from the Grapevine as an angel investor

that they might continue their path towards democratization. If this is their path, boy, Robin Hood as a clearinghouse for IPOs sounds pretty compelling if they have tens of millions of members that would cement even more people using the services if you could get in there and get that first day buy or pre-order, as it were, a reservation. So you request to buy your shares at the initial listing price. When the final price is set, you can review, edit, or cancel before the shares are allocated. So watch and wait, IPO shares can be very limited, but all Robin Hood customers will get an equal shot at the shares regardless of order size or account value. So that's the key here.

Robin Hood, you know, despite some of the stumbles and trips and falls they may have had during these peak outages or peak moments of trading or unprecedented, you know, short selling battles versus the longs. Robin Hood has always stood for trying to democratize and make the financial system. more equitable. And here is a perfect example of it. So how are they going to do it? Robin Hood will not be an underwriter, but they will get an allocation of shares by partnering with investment banks. I wouldn't be surprised if Robin Hood bought an investment bank. I have no inside information on that. But why not? I mean, the reason why not would be they would be competitive and it would limit their ability to get other underwriters. But it's possible that they could buy an underwriter. Are they the first movers? Nope. So-Fi made a similar announcement in March,

but they will act as an underwriter require $3,000 account minimums. And the old guard has offered IPO investing with a much higher barrier to entry. You may know about that if you have a Morgan Stanley or a Goldman account with 7, 8, 9 figures in it, but you would not know about that if you didn't. You would be getting those offers by email or on the phone from your money manager who you pay a Vig to. So if you look at Robin Hood and SoFi and you compare them to the old guard and the barriers to IPO access, Robin Hood no minimums. SoFi, 3K account minimum. Fidelity, 500K account minimum. TD Ameritrade, 250k account minimum.

Charles Schwab's 100K. And Ameritrade and Schwab got sued by Goldman in 2018 over IPO stock sharing after Goldman attempted to end the contract with the brokers. Goldman wanted to sell more shares to its own clients rather than lending them to TD and Schwab to sell to investors. So this is pretty amazing news. And just a quick hit, I got to listen to Antonio Garcia-Martinez on Karas Swisher's Quitter space. You know, he talked a little bit. He kind of agreed with me that Slack is the Trojan horse that went into every company.

And it basically, I loved his metaphor. I always said, you know, Slack is just not the place or any electronic communications for political discussion, religious discussion, any charge topics, just like you shouldn't discuss. your relationship or your finances or religion or any politics over SMS messages or on message boards because it eventually devolves into somebody calling somebody Hitler, Goodwin's Law, if you want to look that up. And so he has the same exact feeling that a lot of the Coinbase and Basecamp issues, and in fact his issues at Apple are part of this. You have employees who have a venue inside of a company to debate. They didn't used to have. of that unless maybe at a Friday meeting or, you know, in all hands or during a lunch.

But when you put it on electronic communication, that's the big thing that's causing this chaos. Obviously, Trump being president for four years made a lot of people lose their minds as well, understandably. And, you know, Kara has a very good point in all of this. And I give her a plus one for this, which is, happily Google coddled employees for decades. And, you know, she's pretty objective about this saying, listen, you know, don't be afraid to yell at the CEO or tell us what you think. and they gave everybody kombucha and snacks and bring your whole self to work and all this stuff.

But it turns out that might have been a really bad strategy or disingenuous because you give employees all this empowerment and then all of a sudden they have power in the Slack room or on a message board and your company hits scale, man, it could blow up in your faces. And, you know, all these non-essential perks and keeping people, you know, like kids We're going to take care of your gym.

We're going to take care of your dry cleaning. We're going to clean your clothes. We're going to drive you to work on a school bus. You know, and you're going to be in an open office plan like kindergarten. We're going to have time on the rug to tell stories. Like all this nonsense that, you know, people did and to toddle employees and keep them, you know, nurtured and in this cocoon or womb at the Apple or Google headquarters or Facebook headquarters. I think we're starting to realize, like, work is work. Your life is your life.

And maybe it's good that you have your own. home life after work. And so finally, you know, Antonio makes a, you know, good point. And he was basically talking about his own mental health on how he lost his mind just over the last couple of years on Twitter because he's a full contact person. I don't know if he's being satirical. He tends to be a little satirical. But his quote from that Twitter space, I think Twitter Trump at a year and a half of lockdown has made everybody crazy and nobody knows how to fix it. I know how to fix it. I'm going to go see the Knicks for two games in New York next week. and I hope to see you there.

Okay. Next up is the founder of MagicSpoon, a great cereal, a great story. He started with crickets, and he ended up with protein cereal. Stick with us. It's time for our crowd's deal of the week. Right now, you can join our crowd's investment in Cytoreason.

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All right, welcome back. And a great founder on the program, a founder who fell that is last startup building cricket protein bars. Yes, cricket protein bars, I kid you not. I got pitched on a lot of cricket startups, a great source of protein. but his second company after the protein bars made of crickets is one that I am absolutely delighted by. And if you try this cereal, I guarantee you you're going to love it too. It's quite addicting.

And from what I understand, if you're into keto or maybe not spiking your blood sugar, magic spoon is magical. And that founder is Gabby Lewis. Welcome to the program. Thanks for having me. Good to be here. So as I rib, ribbed you a little bit there in the opening,

you started with crickets. I did. How did you even find out about cricket protein? And I was going to ask you why that failed, but I think it's pretty obvious people don't want to eat bugs. Did you figure that out? It was too tall of a mountain to climb. It took us five years.

Eventually, it sunk in. You know, that was actually half of it, and we can get into it. So part of it was the demand side, obviously. hard to sell people to eat something they think is not only weird, but downright gross. So a bit of a marketing hurdle there. But the harder part actually was the supply chain. So when we started that business and just to sort of get into why we started it,

the idea was the insect protein in general, crickets in particular, extremely sustainable protein source compared to pretty much anything we conventionally eat for protein. And we thought it would be an interesting idea if we could convince people to move some of their diets away from traditional animal. protein towards sustainable proteins like crickets. And our idea for convincing people to sort of make that leap was to develop a line of protein bars that turned the cricket protein into a flower that had no taste and sort of create this Trojan horse of sorts. And the Trojan horse was a little bit harder to get in than we thought it might be. And then like I said, even the harder part was creating a supply chain from scratch with insects that you have to optimize the feed and the

temperature and the water and everything around that. I would just imagine like you're, it must be like a hundred crickets in each bar and chasing around the forest trying to find a hundred crickets per bar must have taken forever. You know, they weren't wild caught or forest. Oh, these weren't free red crickets? You know, these were, I know, farm raised, but the upside of farm raised, whether it's fish or cattle or crickets, as you can control the feeds, you can optimize the omega 3 profile and so very healthy crickets despite not being free range.

I mean, it was a really great idea. As a founder, when you think about it, everybody wants sustainable protein. We know how horrible, you know, factory farming is in terms of cruelty, sustainability, bacteria, and, you know, anti-b... I mean, this is a long list of why that's not a sustainable protein source. And it seemed like a really good idea. And we were pitched on many different companies doing it. And the sourcing of crickets was always a problem. and of course getting people to not be grossed out buying it.

It was like a really unique set of people who wanted to buy into this. But you sold it to Aspire Foods and then you started Magic Spoon back in, I think, the beginning of 2018 and raised a little bit of money for that. What was the initial concept there? And then tell us what you learned from the protein bars that you carried over into Magic Spoon and the formulation of this. next company and idea? Yes, I think first learning is sell something that people actually want, which sounds flippant, but I think a lot of founders don't quite appreciate product market fit. I think especially in the food world, there's this idea that you can take a cutting edge ingredient, whether it's maringa or kombucha or, you know, an obscure mushroom with amazing benefits.

And if it makes logical sense and you're a smart, capable founder, you can brand it nicely and convince people to buy it. And that was sort of what we were trying to do with exo protein. The idea made sense logically. We thought with some clever marketing, we could just make cricket protein mainstream overnight, or at least in a couple of years. Turns out it was a little bit harder than we thought. And so this time around for our next business, we wanted to do something a little bit less niche than crickets. And what could be less niche than cereal? It is the only food group, basically, where you wander into the grocery store, there's an entire aisle dedicated to it. Yes. And from kids to adults, everybody loves a bowl of cereal. It's like a go-to food. But cereal is the worst thing you could possibly eat historically. Shugery cereals are flour and sugar and do what to your blood and do what to your chemistry? Yeah, 100%. So it's this whole aisle just stuck in this old paradigm of sugar and carbs and grains. But it's a product that everybody loves. Everybody's got amazing childhood associations with being carefree.

watching cartoons, having a delicious bowl of sugary cereal. But most people, including myself, when they grow up, they stop eating it as often. Maybe it goes from every morning, so a couple of times a week, or a guilty, lit, nice snack. And what we wanted to do, or at least see if it was possible to do, was recreate that same taste and texture we all love from the classic cereals, but doing it a way that's guilt-free, grown-up ingredients, optimized macronutrients, meaning high-protein, low-carb, zero-sugar. And that was really the idea for MagicSpoon. And how does one as a food entrepreneur actually formulate something that I think, you know, really didn't exist before you did it? There were very few people in this space.

How does one go about making a product? I'm curious. Like, is there like a laboratory you go to, resellers? How do you do it? Yeah, it's very different for different types of foods. So for most products you see in the grocery store, the way somebody would start to formulate it is they would start in their own home kitchen. So let's say it's a protein bar like our last business. You start in your own home kitchen, you'd order maybe nut butter, dried fruits, get a vitamin mix, blend it together, form it by hand.

Next stage is you rent space in a small commercial kitchen. Rent it by the hour. They've got some larger scale machinery. Maybe you can make a few thousand protein bars there, for example. Then you find a small co-packer, contract manufacturer, outsource partner. they've got bigger machinery. Maybe they make 10,000 bars, and you scale up from there. Serial, though, there's no version of making it at home.

You can't just puff. You can't puff the whatever they made and greedy might be. What you described was how RX bar grew, correct? Like they, it was like dates and eggs and whatever, and they literally handcrafted them and then made small batches and then co-packers. Yeah. And you can do that with most products you see in the grocery store, if it's a beverage, a snack product.

Our product, cereal, it's an extruded. product. So basically, you take a flour or in our case, a protein powder and you put it through an extremely expensive, large-scale piece of machinery. And so there's no small-scale way to test it out. So we had to go around the country and visit all these different cereal manufacturers and convince them basically to run trials for us and help us develop that initial formulation. So we went through probably every protein source you can think of except for crickets, actually. But everything else from P-protein to weigh protein, college and everything in between, we tried every natural sweetener you can think of in various permutations, and after about six months of testing endless formulas, came up with a texture that mimicked the texture of classic cereals, and then we moved on to the flavoring and worked with a bunch of different flavor companies, testing, for example, dozens of different cocoa flavors with slightly different, lighter dark, or vanilla notes, and eventually we sort of dialed in the various formulations.

I have to say, you know, the magic spoon flavors are absolutely delicious. And there's a peanut butter one, which I think is my favorite right now. We got the variety pack at some point, and I tried them all. There's a fruit loops type one, like a fruity one, and there is a frosted one and a cocoa one. But they all kind of look like Cheerios, that size. Yeah, they're all the same. Round O's, right? Yeah, they're all the same shape.

They're all round. We have five or six of evergreen flavors, and then we launched limited edition flavors every six weeks. I didn't know about that. And that's incredible. And when you look at it, the major difference I noticed is there's almost no protein in, like, your frosted flakes, like one gram per serving. Somehow you figured out how to get like, I think it's 15, 14 or 15 grams?

Yeah. In a serving? So it's literally 10 times, 14 times the amount? It is. And it's funny. One of those large cereal companies I won't name, they came up with a quote-unquote high-protein version a few years ago and they increased the 1 gram to 3 grams. So they literally tripled it, but you did 14.

That was the sort of level of innovation. Is that a cost issue? Is it really expensive to put protein in it? Is that the issue? I think it's a number of things. Protein powder is massively more expensive than wheat flour or sugar that other brands are using. And I mean, it's funny to look at cereal as a category, traditional cereal. It's sort of a microcosm of everything that's wrong with the food system, right? It's industrially processed,

subsidized grains and sugar. It's sort of the, if you could try and create a tasty, but it's cheapest possible food, just to like quickly satisfy people and give them a quick energy bump, there's going to crash later. That cereal, just in a box and then marketed to children. So very cheap ingredients, very cheap formulations. Protein is more expensive. And then there's also some formulation hurdles. So once you generally get the base formula to be around 40% protein and we're much higher than that, it comes out quite hard. And so it takes many months of formulations for us to figure out how you get the light, airy texture as well. So that's like you have to blow some air into it or something? I mean, some airation occurs. Yeah, something like

that. And then I think the other piece as well is these large cereal companies, whenever they've tried to make healthier versions, it's backfired. So Lucky Charms famously removed artificial flavorings from their cereal a few years ago. And the sales plummeted. And so they were like, oh, maybe we shouldn't try and make this thing healthier. Really what happened is that everybody that didn't care about nutrition, they didn't care that there were no artificial flavors in there anymore. It just tasted a little bit worse to them. So they lost those customers. And people that do care about nutrition, it's still terrible for you. So they didn't get anybody to you either. Yeah. It's like if somebody's walking into McDonald's, no offense to McDonald's, they're not

thinking about their nutrition. So making a big, Mac healthier means nothing to the McDonald's customer, you know, all of respect intended. Like maybe adding a salary to bring in extra customers, but it actually makes total sense. You know, and making a Coke, making a Diet Coke, yeah, maybe that's like a different, it's a different product line, right? And I think that's probably the mistake. What they should have done is just said, hey, we own, you know, Frosted Flakes. We're going to make a different brand. Like magic spoon Look

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think nine or ten dollars for a box of cereal the equivalent for frosted flakes would be like three bucks so you charge three times as much a bowl of cereal goes from you know 50 cents to a buck 50 something in that range um how do you overcome that with customers or are they're just is it just that frosted flakes are just too goddamn cheap and and uh it doesn't matter matter to people? Most of the latter. I mean, there's a lot of categories where we've seen this happen, right? Whether it's personal care or beverages, there's like the cheap Coca-Cola, and then there's the kombucha or the healthier beverages that are massively more expensive or even just to look at juice, right? You've got the tropicana orange juice and then cold-pressed

juice comes in several years later and it's much, much more expensive. And so time and time again, we've seen that people will pay for a higher quality product. What we tend to do to get people over the initial shock is explained, and this is right when we say it, what we're selling is not really cereal. I mean, it's literally not cereal. There's no cereal grains in our product in terms of a strict initial definition. What we're selling is protein powder in the shape of cereal. And so when you compare it to a protein bar, per gram of protein were cheaper than a protein bar, and nutritionally were the same. You're 10 cents a gram of protein, 12 cents a gram of protein.

Yeah. And so once you frame it like that and you compare it to an RX bar, a Quest bar, a protein shake, whatever, it's a much cheaper breakfast option. That makes complete and total sense. Do you only sell direct-to-consumer? We do. We actually just launched on Amazon about a month ago. But we're... Whoa, whoa, whoa, really?

Yeah, we can talk about that. You did like three years of direct-to-consumer, and then you go on Amazon. Do you go on Amazon because they reach out to you? So we're two years into the business. We... Yeah. Yeah, Aldi to C, we decided to go on Amazon for a couple of reasons. One, there's just a lot of people that only shop on Amazon, and we were losing them to copycats that are popping up.

Okay. So you had a gun to your head, basically. Yeah, I mean, we didn't have to do it, right? Plenty of brands have copycats on Amazon, and they decided it's still not worth them doing for, you know, I think if you're in apparel or fashion brand, there's good brand association reasons, potentially not to go there. For food, I don't think that matters at all. but for us we just saw the monthly search volume for MagicSpoon cereal and we saw these other brands that were just copying what we're doing taking that and so we figured who might as well just take that share there as well and so I see I'm looking at it right now 44 bucks for subscribe and save when you do it on your site it's 36 bucks so there's a super incentive to go direct and is that part of the idea in managing the the, you know, when a brand is going to manage Amazon,

as opposed to having Amazon manage them, you're going to just charge, you're going to give a discount for coming to your site, and it's just a little more expensive. So for me, if I did subscribe and save, we're talking about an $8 swing. If I'm going through this monthly, I'm going to get $100 a year.

You know, it's quite significant. It's like two free months if I go direct. Yeah, part of it is the subscription program we have on our site. Part of it is also we have the core flavors on Amazon, but the limited edition flavors that we lunch every six weeks. Only on our website. And so last month we launched maple waffle and cookies and cream. They sold out in a couple of days.

Next week we're launching two new flavors. What? Yeah. I didn't know about this. This is making me like get hungry just thinking about it. So can I subscribe just to the new flavors? Or do I have to come to the site and it's like a drop and it's like I got to be there on the right time?

It's the latter. I mean, we'll email you. It's X you. We'll make, we'll make you aware. But because they don't occur with sort of like a. definitive frequency, there's no subscription just to those. I think it's a terrible idea,

respectfully, Gabby, I think it's a terrible idea. I think what you should do is there should be a VIP program and you, uh, if you subscribe for the year, I give you all my money for the year for five boxes a month or whatever,

you know, what would that be? Yeah, I buy 40 boxes a year. You guarantee me I get every special edition. Can we make a deal? Like a VIP product? Because 40 a year is 400 bucks. I give you $400 at the beginning of the year. Yeah.

You buy it up front. Yeah, you just get all that cash up front. No cancellation. Boom. You get guaranteed. Good for cash flow too. Love it. When you brought this idea to venture capitalist, did they think you were nuts?

How do you get a venture capital firm to agree to this? Citi. Yeah. Yeah. It does seem a bit crazy. And you've raised three rounds of funding, I think. So you've raised well over $10 million, right? Yeah, but we're, you know, we were used to.

to pitching crickets. All right. It's a little easier than that. Once you've been trained on that, anything's easier. It was funny, actually. When we spoke to traditional food VCs, there was this conventional wisdom

that cereal as a category was dead. We actually spoke to one investor who said to us, I think it's an amazing idea, but don't call it cereal. Call it puffs or bites or something else. Because people were looking at the category of cereal and they were seeing a decline year over a year.

And it was, but it's declining from 12 bills. to something slightly smaller than 12 billion, still an enormous category. But for whatever reason, people just saw that and they thought, we don't want to get into this declining category, traditional food investors I'm talking about now. And then there was also concerns, I think, as there is often with other food companies that are innovating that this is a category that's dominated by, in our case, three companies. So, Mills, Post, and Kellogg's control about 80, 85% of the market and dominate shelf space. So that was another worry. But I think all of that was sort of alleviated by the

fact that still enormous category, a product that people absolutely love, and really the first true innovation in this aisle in, I mean, since granola, maybe. If you walked the serial aisle 30 years ago, it looked the same as it did two years ago. And so really, it's just been dying for something new. And a lot of the investors personally, what we were doing really resonated with them. Like when we described to them how we wanted to bring back cereal in a way that was packed with good stuff and that none of the bad stuff, I made sense on a personal level as well. And then we also raised most of our funding from investors that actually backed our last business. And so even though most of them didn't get the outcome they wanted in the last business,

they had a lot of trust in us from the five years we'd work together. And so most of them actually backed us again in the initial rounds from Magic Spoon. So you proved that you were a good steward of capital. You're going to make a good run at it. So you had built up that trust for the second company. Now, as a D to C company, you've got to have marketing channels. I've seen you guys, I think on the Insta, and I think I've heard you on podcasts. What works for D to C, and especially in today's market where my understanding is when the economy is really hot, the Facebook ads get too expensive for D to C products, only work for software products, really.

And so I don't know the margin of your business, but it's pretty healthy, I'm assuming. But obviously, you can't be as healthy as, you know, com.com selling software or some video game that has people paying $100 bucks a month. month in virtual currency. So how do you build a D to C business and has that changed now with the Facebook algorithm mobile changes? Yeah, I'll answer that last piece first. Not much has changed for us. We have a very mass product, right? So we haven't typically relied on straight narrow targeting. We've typically done like broad audiences. And that's been, I think when you asked earlier about our learnings in the last business, one of the biggest learnings now is we want to make sure we're building a product with mass appeal. And so some people

like our product because it does work for the keto diet, it doesn't spike blood sugar. But this works just as well for a mother or father or five, they want to give their kids a quick healthy breakfast in the morning. And so we've been very careful not to target just specific niches. In terms of other channels beyond Facebook and Instagram ads that every DTC company is playing in, we do a lot in podcasts, like you mentioned, both larger ones, like Tim Ferriss, Pod Save America, and then a bunch of smaller ones as well. We do a lot of influencer marketing,

and that ranges from tiny influencers that we're just seeding product to, all the way up to major celebrities who became investors in our business, and then a sort of bunch of things in between that that are cash and rev share and any number of different relationships. So when you look at podcasts,

I'm just curious, if your average lifetime value is whatever, four or five months, $200, something like that, who knows what the real lifetime value is, because you're only two years into the business. But you know, these podcast ads on Tim Ferriss or other at-scale podcasts might be whatever, $20, $30,000, $40,000 in ad. And you're selling $40 worth of cereal in a four-pack. Is that even possible for you to be profitable from the get? Or are you looking at it as like half

branding, half ROI? How do you think about that? Well, the flip side of what you're describing is that we have much less consideration, a much higher conversion than these other companies, right? So, yes, like someone might be selling a thousand dollar mattress, the higher margin on that purchase, higher average order value, were five percent of that average order value, but I bet our conversion rate is, you know, 20x their conversion rate. So people, you know, people buy this quickly. When someone sees or hears an ad from us, it's not then a month of us retargeting them in six different places and then making sure you're trying to sell eight sleeps $500

a bed which I'm an investor in. It's well worth it. You've narrowed the audience down to people who really care about sleep and who can afford to spend that. And it takes time. Yeah, exactly. Yeah, and you have to convince them it's a considered purchase and all that stuff. And then in terms of in terms of influencers,

what works there? Because I've heard that nano and micro influencers are super effective and that like the big, huge ones, people with tens of millions are not effective. and that it's really this sort of mid-market. Is that true directionally, or is it, you know, you have a mass appeal product or are you just doing like the people who work out and who are in great shape and, you know, into diet? Yeah, with all this stuff is tradeoffs, right?

So if you're looking at pure efficiency, I'd say generally the smaller, the better in terms of just return on ad spend. But you can't scale that quickly. So you're not going to build a big DTC business only working with influencers with 5,000 followers. And so if you want to grow quickly, you need to be playing in sort of the next stage. So let's call it 100,000 to 2 million followers. And so that's usually where we're focusing. That's the right blend of efficiency and scale. Once you get beyond that and there's like four different managers involved and much longer contracts,

it gets a little bit harder. And also that becomes more of a brand awareness play. So we're in that middle area. We do it mostly on Instagram, stories and YouTube, actually, and starting to explore TikTok as well. Got it. Your TikTok makes total sense. When the grocery stores must have come calling the Walmarts or the, you know, whatever, Costco's, when they start calling, how do you think about them as a business?

Are you going to take the same approach? Or is there just not enough margin for you to run a robust business? How do you think about them? Yeah, plenty of margin, first of all. You know, we built this business, assuming we're going to go to breaking more. eventually. So actually when we started a couple of years ago, I didn't think we'd be purely D to C two years in, honestly. I didn't think we'd be able to build a business this big, this quickly, only D2C, just because it hasn't really been done in food very much. So we've been developing

relationships with the large retailers since our last business. So we know them all, we talk to them, and eventually we will be everywhere that cereals purchased, basically. We need to be. And then you have one form factor of cereal. which is these o's and this puffiness. They're very light, crispy. They do well under milk dress, I find. They don't get soggy, which is pretty nice. But have you started to think about maybe some other types,

or is it going to just be changing the flavors? And have you thought about other brand extensions, or do you think it's best to just stay focused on cereal and own that? We've thought about it, but really there's no need for us to think beyond cereal in any detail right now. It's an enormous category. I think that was actually maybe one of the one of the differences when we're talking to food investors

versus tech investors early on. Every tech investor's first question was, what's the platform? Where do you go beyond cereal? But when you look at the food industry, very few food brands are able to really move beyond a hero product. So whether you were talking about Quest bars and, like, yes, they have chips and pizzas and all these things, but bars are still the core business.

Or Vega, for example, that's got endless different bars. and shakes and powders, but really there's like one powder that's core business. Usually there's a hero product and that's the main focus. And for us, because cereal is such an enormous category, there's not really a need to start playing in bars or yogurt or any other smaller category that's really just distracting. Yeah, that makes total sense. So what's next for the business?

What are the challenges now that you've gotten to? I'm assuming millions or if not tens of millions of dollars in revenue. You're a virtual company. It's a small company. I think you're trying to keep it lightweight, but what's next for the business? Just more of the same in scaling? Or do you have to do, is there something different that occurs when you get to, you know, really true, true scale?

Yeah, it's a boring answer, but it's really just more of the same. Most things are, most things are working right now. And so we're 22 people right now, currently remote, but we'll be transitioning back to being in the office in New York. So hiring for all of our teams. When are you going to do that? And then how are you going to manage that? Do people want to come back or do people want to stay remote?

It's a great question that we're navigating currently. To all the employees of magic school listening. Get your asses back to the office. You can't negotiate it. Here's the official announcement. No, I think most people have been craving the sort of interaction. We're such a small company. and everyone is in New York,

so we've been seeing each other for sort of outdoor meals the past couple of months and gradually reintegrating everybody and people are just like really excited actually we're finding. So it'll be a process over the next several months,

start off, you know, a couple of days a week probably and we'll play it by year. Yeah, I think most of the companies here in the Valley are starting with the three day a week thing and you pick which three days. You know, I'm talking about

the big at-scale companies, the Google, I think announced they're going to be three days a week. And then other places are just saying, listen, we love saving 10% or 20% on our costs and you save the two hours of commuting. So it feels like maybe people work a little bit more since they're not commuting

because they get to the desks earlier and they leave later. And I feel like the grand bargain here is if you work at home, you have to be a high performer. And because if you're not a high performer, performer, you find out immediately because the person is not getting a ton done. It's just you have to look at the actual work as opposed to looking at the culture. What did you learn during remote work? Did you figure some things out as a manager and as a founder? Yeah, well, I actually think your point about figuring out whether somebody is good, faster in a remote world actually applied to

hiring for us. So we found we were forced to become a lot better hiring, meaning we relied a lot more on projects, on case studies. We, I think we're less prone to any bias from somebody walking into a coffee shop or our office and just being charming in person and seem as smarter than they are perhaps. So I think we've got much better at hiring. It does take out the theatrics and performative nature of interviews, which are, you know, you have to put on your best face, you get a haircut, you shine your shoes, you come in and if you're extroverted, you know, and confident you get the job. And if you're introverted, but an assassin, maybe you don't. Yeah.

And it's easy to sort of fall for that and not realize until it's too late. I think to the prior question just around when it's, what kind of companies is it right to be remote or in person. I think the smaller your company is and the faster things are moving, the more important it is to be in one place. So because we're only two years old, because we're only 20 people, because there's only a couple of people in each function that know what's going on. So we only have a couple of operations.

people, a couple of growth marketers. It's so much easier if they're all in one place and can just overhear each other's conversations. I can see it a much larger company once we're in the hundreds of people, it matters a little bit less because things aren't changing as fast. But for us, given how quickly everything's changing, I think more important probably than for larger companies to eventually be more in person. Stupid question. The boxes in cereal, is that like a standard thing, the size and everything? And, you know, You're tied to that? No,

because I was looking at it and I was like, why don't people send me these, especially since they're coming in Mal, why aren't they sent in some other type of bag? Because I get, who's your competitor? Keto Crunch? I've got the name of it. There's another one that's really good too.

What's the name of it? You know, Hitler Crunch. There's a few. Yeah, there's Catalina Crunch. So I think there's like, and I don't know who came. I don't know who came first or if it matters, but I would say their cereal is like really hard. Yours is very soft.

So I actually, and it's going to break your heart, I kind of have both in the house and I alternate between the two. I unplug my mic and walk away right now. Absolutely. It is storm off the set. But I will say, like, I do think like they compliment each other nicely. Theirs is more in a flaky kind of way and yours is more in the cereal kind of way. I find yours is lighter. There's a little heavier.

So it's kind of nice to switch them back and forth. But you're, I guess... Box, yes. It's a good question. The box thing and the size thing, because they're coming in these little pouches. You're coming in the big classic box. How do you think about that? I think from a purely practical function perspective, boxes are not the optimal choice.

We chose a box mostly for branding reasons. Yeah. We want to convey this sense of nostalgia. We want to make people feel like the routine classic box of cereal and all this slight frustrations of ripping it accidentally as you open it that come with that sense of nostalgia. You know, another thing just more practically, eventually when you're thinking about retail, the standout pouches are typically for granola. And so when you talk to a retailer, if you're selling cereal in a standout pouch,

it's very confusing. As confusing as if you were selling granola in a box, they don't quite know what to do with that. I've got a very important cereal question. All right. What flavor is classic Captain Crunch? Oh. That was always my, and I'm not talking about peanut butter, Captain Crunch, because that's peanut butter version of Captain Crunch. But the original Captain Crunch, the golden one, that's made out of Crunch Berries, which are a fictional item.

What flavor is Captain Crunch? That's a fantastic question that as somebody born in Scotland who grew up there, I don't really have the child in memories of eating it. So I can't help you there. It's like a yellow orange. It's sweet. It's delicious. But nobody knows what is Captain Crunch actually, what is that flavor actually closest to when

you think about it? It's sweet. It's savory. It's crunchy. But that's about it. You can't really figure out what the flavor is. Is it slightly corny, perhaps? Would you describe it as?

Mm-hmm. I'm not sure. It doesn't know. Corn flakes are corny. Frosted flakes are sugary corny. This is not that flavor. And I don't know. I'll give you another question.

Go ahead. Your classic favorite fruity cereal. Do you know what flavor that actually is? That's interesting. So frosted flakes comes to mind or fruity pabbles. Now, I'm sorry, fruity pabbles or fruit loops. Now, fruit loops are similar to yours. They're like Cheerios.

a circle. And then fruity pebbles are just tiny little flakes. And they don't taste like any one particular flavor. I'm feeling the crunch in my mouth. Yeah, they're not citrus. They don't taste like apple. Lominy, orangey? No, I don't know. What flavor are? Yeah, close your eyes next time. They're mostly lemony if you close your eyes. Are they mostly lemon? Yeah, very citrusy. It's kind of strange. Is it citrusy? Is it seriously? It's kind of strange the first time you realize that. Yeah. Because the milk is countering the citrusy. But is there actually citrus in like a fruity pebbles type thing?

Or is it just a lot of fish or flavor? I couldn't speak to exactly what they're using. But if you close your eyes, it tastes surprisingly citrusy. Wow. That's interesting. Huh. All right, listen, continued success with the business. Congratulations on raising 10 million last year or just late last year.

That's going to take it for a while. I assume who'd you do the 10 million with? Was that an inside round? Yeah, mostly an inside round. Oh, very nice. So things are going well. It was a preemptive inside round. They offered you before you went to market.

That's how it went down? Taking advantage of the momentum. Yeah, I'm working with people we know and trust. So you didn't have to go out to market. When you're a founder, tell me about that decision to not go out and try to optimize maybe for price and go on the road show and instead do an inside round. For me, it's a no-brainer. I mean, when I think about my life running.

a company, you know, whether the valuation is up or down a few percent doesn't matter. And ultimately, if there's a successful outcome, it's not going to matter to me whether I own a slight amount more or less. What is going to matter is whether I know and trust my investors, whether we get on well day to day. And so to continue working with people I've known for several years, just as a sort of You have Jeremy Liu from Lightspeed, which is a perfect investor for you because he was super overweight and chubby.

And then he went on a keto diet and he's diesel. now. Yeah, he's an amazing guy and a fantastic investor. You found, uh, you found investor product fit. There we go. There we go. No, it's a serious thing. I mean, I know Jeremy and he literally struggled with Wade. He was very public about it. And then like he went on like a crazy diet and worked out and he's diesel now. So he understands keto. That's, you don't have to really convince him that this should exist in the world because he's your target market. Pretty great. Yep, exactly. All right. Listen, continued success. Everybody go try. magic spoon. It's pretty

great. I will tell you. Oh, sorry. Bleep that out. Pretty freaking great. And my kids love it. Good for kids too, right? Yeah. Yeah. Good for kids to not have this big sugar. Many of them don't even realize this healthy, which is the great thing. They do not. They do not at all. And if you want to just go

J-Cow style, get the vanilla and the peanut butter and you go 50-50. That's what I do. Is it vanilla or is it frosted? I guess it's frosted. Yeah, it's frosted. I actually go chocolate and peanut butter. is my cool. Yeah, you know what? That's just, that's obscene. I mean, you're, that's like so hedonistic. I mean, you're, that's just over the top. What I used to do was when I was a kid, I would have frosted flakes and then I would take, I loved honey for some reason and I would drizzle honey on my frosted flakes. That was truly degenerate. Wow. That's a lot. That's a lot. That's a lot. Listen, continued success. Congratulations. And we'll see you all next time on this week. Thanks for having me. Bye. All right. Just a little button here at the end of the pod. I'm doing an event. A reverse down. demo day called Meet Our Fund. It's taking place in June, online, virtual. Go to Meet Ourfund.com. You'll have 25 different venture firms pitch you, and those firms will take 20 minutes to

pitch you founders on why you should take their money, and then they'll have 10 minutes of Q&A. It's going to be a great event. You can come for free. Just make sure you apply right now, because it's going to basically fill up. Meet ourfund.com.