Startup Lessons Retrofit CEO Jeff Hyman Used to Close an $8 Million Series A Round
Earlier this November, Jeff Hyman, CEO of Chicago-based startup Retrofit, picked up an $8 million Series A round led by Draper Fisher Jurvetson. Retrofit is a data-driven weight loss program built for busy professionals that incorporates various elements, including: Skype, Fitbit, wireless scales, and a team of wellness experts. What makes this company — and its CEO — so appealing to investors? Part of it is that, so far, the program has produced astonishing results. About 94% of customers are losing weight, and the average person loses about one pound per week while on the program. Retrofit has maintained a low 5% drop-out rate, compared to the industry average drop-out rate of 50%. Another part of it is the industry potential. Obesity is a national epidemic, and at any given point, 53% of the country is actively looking to lose weight. The market potential is enormous. Of course, market potential and initial results aren't everything. There's always something more intangible — a factor that is difficult to put a finger on — that often accounts for a lot of a young startup company's initial success: great people. And you can't build a team of great people without the guidance of a great founder. I sat down with Hyman recently to learn more about his entrepreneurial journey, his secrets of success, and his honest thoughts on building and funding a startup that is off to an impressive start. You came up with the concept for Retrofit at a health resort. Few people think of a business concept coming out of a resort, and even fewer act on it. What were the steps you took from ideation to execution? I gained about 1.5 pounds per year, which happens to the average American as he or she gets older; the weight creeps up slowly. I tried diets, losing weight and gaining it right back. My wife took me — kicking and screaming — to a weight loss resort, thinking that might be a breakthrough; and it really changed my life. At these resorts, you work with dieticians, exercise specialists, therapists, doctors —it’s amazing. The challenges are that it’s only a week and it’s really expensive — so it’s hard to create sustainable behavior change, and it also isn’t accessible to a lot of people. The basic thing I learned is that everything about weight loss is wrong. So I started thinking, “How could I make this experience available to many people, for longer than just a week?” When I got back, we did focus groups with overweight individuals. I started traveling the country to meet with a bunch of obesity experts to learn about what they thought. Based on what we learned, we built a few prototypes, and I knew there was something there. Probably the most important decision entrepreneurs make is: “Am I going to go forward with this idea?” Most entrepreneurs — especially first-time entrepreneurs — just dive in. They think, “Well, it works for me, so I’m just going to invest the next five years of my life into this.” It can become a hellish endeavor if you don’t stop to really think about it. They don’t run the numbers and ask, “Can this work? Will it make enough money? Is there demand?” I asked myself, “Is this something I’m ready to commit to?” I decided I was, so I met with a bunch of angel investors and we raised $700,000 before we even started working on the idea. They knew there was an obesity epidemic and a market for it. I put in some of my own money, too, and that was the start. That was about one-and-a-half years ago. This is your third startup. What is your process for determining whether a business idea is viable? I think of the key criteria: Is it something I’m passionate about? Could I spend at least five years of my life devoted to this? Is it a large enough market? Can we build something that is truly differentiated in a crowded industry, like weight loss, which is a $50 billion-a-year business with significant market leaders? Will people pay for it? And if so, how much will they pay? By the way, I don’t believe in market research for pricing — it’s wrong all of the time. But, that’s no excuse to not talk to some people and directionally find out what they think about pricing. When we did, we heard two things coming out of the focus groups, which consisted of participants that were about 20 pounds overweight: (1) this is the biggest problem in my life and (2) if you can solve it, I will pay you anything you want. As an entrepreneur, those are two really important things you want to hear: "This is really important to me" and "I have no price sensitivity." If you’re building or marketing something that isn’t high on people’s lists, you’re never going to have a breakthrough. Any key pointers for creating a great business plan? During my first startup, I wasted six months writing a business plan when I could have been working on the actual business. But, all entrepreneurs should create a basic P&L. All of your numbers will be assumptions, but you need to figure out if there is enough margin for error. There was a business I almost pulled the trigger on two years ago, but there just wasn’t enough margin for error. Assessing your error margin is one important reason for creating a business plan. Marketing channels are also important. How are people going to learn about it? You have to think, “Who am I going to partner with? Who is going to sell this?” And then the third thing is your team. I knew I needed a CTO, head of marketing, and head of operations to build the service. You talk about the importance of having a great team. Who is the very first person you brought on board at Retrofit? There were two people. The first was our head of client service, because ultimately we’re a client service business. Within the same week, we recruited our CTO. I didn’t have a CTO in mind, so I did a full search with a friend of mine who runs an executive search firm. We interviewed 45 CTO candidates in Chicago, and Doug Donohoe was my first choice. They both signed about the same week. It takes a lot of patience to interview 45 potential CTOs. How do you know when someone is the right fit? It’s not that different from dating, which is a very hard process. Instinct counts for a lot. Reference checks count for a lot. Job interviews are notoriously not strong predictors of success, whereas reference checks are. It’s got to be about more than just the money; it also has to be about the mission. When you’re having a discussion with someone, if they’re not so passionate or engaged in the topic or domain of your startup, you know it’s not the right fit because startups are so hard. It gets harder before it gets easier. They have to love what you’re building. I look for experience, which is controversial. Some founders look for young people who can work 24/7. In a startup, you’re already working 100 hours a week. You can’t spend too much time on the learning curve of teaching someone how to work if they’re just recently out of college. A lot of the people on the Retrofit management team are in their 40’s. They’ve made a lot of mistakes before and know how to get things done. So I do interview for experience, but also passion and a shared sense of values. You’ve done a few startups before Retrofit. Right before that very first startup, how did you make that leap from working at someone else’s company to building your own? I had an idea for internet-based recruiting. It sounds obvious now, but it 1996, it wasn’t. I knew the Internet was going to be great for connecting people. I showed it to my boss at Intuit at the time, and he said, “If you can get this funded, I think you should do it.” So I met with about 60 VC’s in Silicon Valley. I was very close to giving up because I had just come out of Kellogg [Business School] and had student debt. I was doing all of this while keeping a full-time job. Then, I met with a VC named Brad Feld, and he shared that same vision – that recruiting was going to go online. His firm gave us about $500k, under the condition that I quit my job. So I quit, took 5 engineers from Intuit with me — which didn’t make me very popular at Intuit — and we started the company. It was something I was totally not prepared for. We ended up having about 120 employees, and I had never before managed anyone up until that point. Everything was a painful lesson. With startups, a lot of it is figuring out the category that is going to take off. If you’re smart, you’ll iterate once you launch and find something that works in that category. It's better to start with big macro themes, like Internet recruiting or weight loss. The problem that a lot of entrepreneurs run into is that they start with too small a theme; something that only a limited number of people need, so startups often sink before they start. How did you find the courage to take that initial leap into entrepreneurship? Fake it until you make it. You learn lessons, make a lot of mistakes, and hopefully have the support of investors and other people around you. To this day, I hire people who know more than I do — certainly about their own domains — and let them run. If you don’t do that, they’ll quit. I also stayed very close to the customer. If you know more about what customers need than even the customers themselves, it’s pretty hard to screw it up. You can, but you know what they need, what they’re willing to pay, and what options they’re choosing from. You make yourself the expert; you don’t use young age as an excuse. Becoming an expert, regardless of age, builds credibility with your team, your customers, your investors, and the media. Entrepreneurs often focus too much on the product. The product is a path to the customer, but it starts with the customer. One of the hardest things B2C entrepreneurs struggle with is building an audience. What’s your advice for building the right audience? I’ll use Retrofit as an example. We built the product. In theory, we knew it should work — people should lose weight. But, we needed to take the idea on the road, because who is going to spend their money on an unproven weight loss program? So, we gave it away. We chose 50-100 people, with a couple of conditions: they would give us feedback, tell their friends if it worked and they loved it, and understand that the product isn’t perfect. That stage lasted around 3-6 months. Then, we got to a formal beta, and charged about $500; we got more feedback. There’s a big difference when people pay something versus nothing. With weight loss, paying is actually important because it means that people are taking it seriously. Finally, we increased to our regular price of $2,900/year. So, the price increased over time as we learned from the pilot. Are you looking to launch any lower cost versions of Retrofit? One of the most significant mistakes entrepreneurs make is underpricing their products. If the product is great and it works, people will pay. It’s really easy to lower your price, but it’s hard to raise your price. We wanted it to be a premium priced product. People can pay us monthly, so it’s $250 a month. That’s less than Nutrisystem and Jenny Craig, both of which are $1 billion businesses. It’s less than a personal trainer, which costs about $4,000 a year. So, we didn’t randomly pick the number. We asked, “What are people currently paying for weight loss systems?” Two-thirds of the people in this country are overweight, and 53% are looking to lose weight at any given point in time. You don’t need every customer out there, you just need enough to build a business. I think entrepreneurs go free or cheap way too soon — assuming, of course, that it’s a great product, which it has to be. Retrofit is a highly personalized weight loss program. Personalization is sometimes hard to scale. How to do measure for quality control when you bring new weight loss and health experts on board? Retrofit clearly isn’t as scalable as a software company, but we’re not trying to be that. We think part of the reason our outcomes are as good as they are is because of the personalization. As s company, how you do quality control is very important. We built that into our business from the very beginning. Each of our practitioners — and we have about 70 of them now — go through Retrofit University, so they have to learn the same way of doing things, which was a process developed by our advisory board. They have to pass a test and we give them two clients to start. We wait to see how they do with those two clients and get feedback from them. Then, if all goes well, we give the experts a full load of clients. We also do background checks. Then, we monitor their progress. It’s data-driven, so I know at any given point how each practitioner is doing. The system gets to a point where it self corrects. That’s how you know the culture is actually working. That’s when the DNA of a company takes hold. I would argue that building a great culture is one of the most important parts of my job. What advice do you have for other entrepreneurs regarding funding? Funding is a tactic; a means to an end. Some entrepreneurs see it as a victory. But, raising money is the easy part; building the actual business is the hard part. Raising money is like getting a loan from a bank. It’s like being in debt. That said, sometimes you can’t build a business without a significant amount of capital. For an entrepreneur, raising money should not be the first thought — it should come after you think about the market, the team, and so on. But, there comes a point when you need money, and the first person you need to look to is yourself. You have to remember that raising money is the most expensive thing you’ll ever do. You’re giving away a part of your business, which is potentially a really valuable thing. And, if you aren’t convinced that it is, then something is wrong with your idea — you should have that kind of conviction. So, fund it as far as you can by yourself. Save on salaries and office space. Eat soup instead of real food. Beg, borrow, and steal resources — anything that can get you as far as possible before you raise money. Once you tap yourself out, go to friends and family because ultimately they’re backing you. Then, you have to assess how much further you can take it with that money. Venture capital should be your last stop. It’s the most expensive kind of money and the terms that come with it are quite severe. These are professional investors, and it’s not personal — they have a job to do. They are stewards for other people’s money. With money from friends and family, I’ve learned the hard way that you don’t want to take checks that are too small, because the smaller the check is, the more important the money is to that person. I’ve told every single person who has invested in me that they need to be prepared to never see the money again. People who are putting in $5,000 or $10,000 checks can be very high maintenance, and you can wind up spending a lot of time on investor relations, which is no value add. Other things I’ve learned: there’s a lid to every pot. If you have conviction about your idea and you’ve made some progress, you will find the money. There’s just too much capital out there for a good idea. But, it is about networking, pitching a thousand times, and finding investors who have some personal connection to what you’re creating. You’ve used AngelList. Do you have any advice for other entrepreneurs who are thinking about using it? We posted on AngelList during one of our first rounds, and sure enough, we got checks form people — not VC’s, but true angels. It was a great, efficient way to get the word out. I didn’t post on Angel List until we launched. I probably wouldn’t recommend it pre-launch because you don’t want to give anyone too much of a head’s up on what you’re doing. But, it was a very effective channel post-launch. You should reference check all angels who are interested in investing in you in any way, though. Ask them who they’ve invested in over the past 12 months, then I would go to the CEOs of the startups they invested in to ask for their feedback on those angels. Don’t be so eager to take someone’s money. Once you’re in bed with an investor, VC, board member, employee — it’s hard to get out of it. Make sure you do your research. Do you have any strategies for being productive and efficient? A big part of balancing everything is being maniacal about your priorities. The most important part of my job that no one else is doing is the people part. You can’t delegate culture. An entrepreneur gets pulled into a million different directions. I say “no” a lot. I don’t speak at a lot of things, go to a lot of conferences, or serve on any boards. It’s also about being comfortable with the press release or web page that isn’t perfect. You have to let go. It’s hard to do, especially as an entrepreneur — and especially if you’re a perfectionist like me. But you have to let it go so the business can scale. You need to build a business so that, as quickly as possible, it’s able to go on without you. Unplugging is also important. Don’t bring your email to bed. Get enough rest. You can’t lose weight without sleep, and I can’t run a company without sleep. There are bursts where you have to do with less of it, like right before a product launch. Building a startup is like running a marathon — you’ve got to take your time. It’s not a 40-hour-a-week job, but it doesn’t have to be a 100-hour-a-week job, either. What’s the one question you don’t get asked, but wish you did because you have a great answer? One question people don’t ask as often as I thought they would is, “Retrofit seems so simple. All you did was take some wireless devices, add some experts, and Skype calls. It's an obvious idea, isn't it?” And to that, my answer would be, “I totally agree.” Startups don’t have to be rocket science. They can be; there are the "rocket science" startups like Tesla, Space X, and Google. But, there are also "non-rocket science" startups — the dry cleaner that does things a little bit better, or the weight loss company that integrates different pieces to drive better outcomes, or a car wash that has a special twist. Most new companies build on previous companies. And, your odds of success are much higher with that kind of startup because you don’t have as many market and technology risks. There are fewer assumptions. Ultimately, startup success is about beautiful, simple, and consistent execution.