(Image: Greg Katz MD (right) Co-founder of 2 Armadillo’s and Chief Resident at NYU Internal Medicine, with Jimmy Edgerton, his co-founder)
(This post was originally published on the blog of the Society of Physician Entrepreneurs and Dr. Arlen Meyers was my second author. You may find the original version here: www.sopanet.org/blogs. Below is the full version of my interview which includes more tips for entrepreneurs)
Most of us who are interested in healthcare entrepreneurship are drawn to it because we hope to make a positive impact on the health and wellness of others. Healthcare innovation, however, is not limited to the popular realms of digital health, medical device, biotech, and pharmaceuticals.
Recently, I sat down with a medical resident, who somehow found time during his training to co-found a start-up using his medical knowledge. Greg Katz, M.D. took an outside-the-box approach towards healthcare entrepreneurship: he pursued a less-hyped but more traditional method of improving the health of others. Greg created a healthy snack and co-founded a company to offer consumers healthy and nutritious options to turn to. In the interview below, Greg describes why he feels natural food companies are just as important to improving overall health as other innovations, and along the he way provides pointed insights into the nuances of creating a natural food company.
What does 2 Armadillos make?
We consider ourselves a natural food business. We cook a crispy, semi-salty chickpea snack that is roasted in organic olive oil to satisfy the cravings of anyone looking for a healthy option on the go. It is simple, but we are committed to using just a handful of non-processed ingredients to create a healthy snack product. (http://www.2armadillos.com)
Why did you get into this?
I am passionate about health. I am a doctor, an avid weight lifter, a hopeful cardiologist, and a former personal trainer. I took a year off during medical school to work for the Dr. Oz show, and during that time, I became obsessed with simple and sustainable ways for people to automate their own healthy lifestyles. After experimenting with natural healthy recipes in my family kitchen, I came up with a chickpea snack that I couldn’t stop eating. I noticed pretty quickly that all of my co-workers kept stealing the chickpeas from me and asking me to bring in more, so I realized I was onto something.
Eating healthy is hard for people who are busy, and even consumers who try to eat well are limited by the options available to them. I joined up with my co-founder, Jimmy Edgerton, and we decided to try to make the world an easier place to eat healthy.
How does this company align with your mission as a physician?
As a physician, I have seen firsthand how food and lifestyle choices are some of the biggest determinants of health status. People are catching on and trying to eat better, but the concept of ‘healthy’ has been completely distorted by the food industry. Most ‘healthy’ snacks today are actually filled with cheap soybean oil or packed with hidden simple carbohydrates. People are limited by what is on the shelves of their local stores, and even when people think they are eating well, often they are being fed over processed junk that has been mislabeled as healthy. As a physician, my goal is to improve health in any way I can, and I think by providing consumers with truly healthy and delicious options, I can make a larger impact than I might otherwise when interacting with one patient at a time.
How did your medical training help prepare you for entrepreneurship?
Besides providing a strong background in physiology and nutrition, a medical training can both help and hurt you in a business. One of the great benefits is it provides you with a rigorous framework in which to approach problems in a systematic way. The constant ups and downs of an early start-up require you to regularly make snap decisions with limited information, and often on little sleep. Most will agree that medical residency trains you to do just that.
On the other hand, our medical training stresses adhering to rules and protocols and minimizing risk. In business, you need to do just the opposite: take risks and embrace unconventional and imperfect solutions. Initially, my background in medicine made me uncomfortable with this, but I quickly learned to accept these gray areas.
Overall, medical school teaches you the discipline to work harder and longer than you initially thought you were capable of, and this is invaluable when starting your own business.
Besides all the typical challenges of starting a company, which are well documented in blogs all over the web, what are some challenges that are specific to starting a natural food company?
First, converting a small-batch recipe to a product produced for the masses is not as simple as adding ingredients in greater proportions. It involves a bit of trial-and-error, chemistry, and a good deal of patience.
Like any industry, there are a number of requirements that in retrospect may seem straight-forward, but if you haven’t done it before, can cause you to stumble. My overarching advice is to speak with everyone you can who has started a similar company. Read the small print on every government website, like the USDA and FDA, that might be associated with your industry. A good place to start is speaking with a lawyer who has knowledge of your industry.
With the natural food market, there are number of certifications to consider, and the process is different for each. First, you need a food handler’s license. Next, for every label you add to your packaging, there are USDA obligations that must be met. For example, there are requirements for calling yourself organic, for using the labels high fiber or low fat, and, in general, for any way you describe the health benefits of your product. It is amazing to me that in spite of these stringent requirements, manufacturers are able to continue to label foods as healthy that are factually not. Next, you must undergo inspections by the health department, and all of your ingredients must be purchased through certain approved suppliers, depending upon the certification superlative a product hopes to achieve.
That sounds complex; how did you navigate all of this at first?
I recommend seeking out a shared kitchen space. It is the food analog to a start-up incubator. Small manufacturers use a shared industrial kitchen to help start their business. We started out working in a place called Union Kitchen (http://unionkitchendc.com), and for months that was where we made our snacks. There were lots of resources for us, and we were surrounded by other entrepreneurs who were at different stages with their food start-ups, and everyone was willing to share their advice. The initial network we built and the support we received were extremely helpful to our success.
What did all of this cost, and how did you pay for it?
Jimmy and I have each invested money to finance our expansion every step of the way. We have also reinvested every cent we’ve made back into the business without taking any profit or salary.
For entrepreneurs interested in jumping into this space, the costs are pretty variable depending on what you want. However, you can do a lot of it serviceably, if not perfectly, on your own, if you are willing to take the time. For example, to set up our own custom website, it would cost approximately $10-30,000, depending on how much customization we wanted. Instead, we decided to go with Shopify’s business template (shopify.com). They handle all of our transactions, and we pay $158 per month. They take 3% of every sale we have online, but it was an amazing tool for someone, such as me, without the coding background to make a website.
Similarly, in our business, there are consultants for every aspect: marketing, social media, search-engine optimization etc. These consultants can cost around $1,000 per month. We decided to instead learn how to do this ourselves, and we have learned a great deal and have been relatively successful. I recommend reading resources like ‘The 22 Immutable Laws of Marketing’ (http://www.amazon.com/The-22-Immutable-Laws-Marketing/dp/0887306667), the blog of Tim Ferris (http://fourhourworkweek.com/blog/), and Inc. Magazine (inc.com). If you can spend the time yourself, you can be very successful on a lean budget.
Lastly, legal costs are on the order of thousands of dollars, but not tens of thousands. Everything will have a separate cost, such as obtaining trademarks, copyrights, setting up the legal entity of the business (we chose an S-Corporation). In general, my rule of thumb with regards to legal costs is that it takes longer and always costs a little more than you hope and expect.
As consumers become more interested in their personal health, the nutrition and wellness market is growing. The organic product market in the U.S. increased to $35.1 billion in 2013, which was an 11.5% increase from 2012. Based on your experience in this market, what areas do you expect will have the most growth?
The nutrition market is definitely growing. People are doing a much better job of taking control of their health and demanding more of the companies they buy food from. The biggest areas are gluten-free and paleo foods. The paleo diet was the most searched-for diet in 2013.
What are some of the key differences between a tech-based company and a food company?
The main difference is we have an actual, physical product that we are selling, and you don’t have to imagine where our revenue will come from. That said, in a fast-growing food company, so many variables can change, so it is often difficult to identify inflection points when planning and budgeting. We are constantly growing and changing the scale of the raw materials we are purchasing and are continuously switching our processes to maximize our efficiency and quality. These changing variables often force us to sacrifice short-term profitability in pursuit of growth, which is key for our company to achieve financial sustainability and positive impacts on people’s health.
Another interesting variable is that from a company standpoint, we require a different employee skill set than the traditional tech start-ups. Like many companies, finding and retaining good people is the biggest challenge. For a snack company in particular, many of the jobs require manual labor, such as packaging, cooking, and labeling. On one hand, this has allowed us to employ people who otherwise had difficulty finding jobs in this tough economy. We love this, but it also creates a challenge of learning how to motivate and manage in different ways. Jimmy is amazing with this due to his experience working with all types of people during his construction and development experiences, and it is one area where his background gives him an edge on perhaps your standard MBA student who maybe doesn’t have experience with field/floor jobs and managing a variety of types of teams.
From a business standpoint, are there companies similar to yours that have been successful?
Jimmy and I are absolutely committed to this company and are willing to take it all the way. To us, success is when high-quality oils, such as olive and coconut oil, become the norm and not the exception in snacks, because consumers demand delicious, healthy food that helps them to be happy and productive. From a business standpoint, there are historical precedents of natural food companies with aggressive growth strategies ultimately being acquired, which is one way to measure success. For example, we are trying to follow in the footsteps of Sabra, Honest Tea, and Stacy’s Pita chips.
(*For a comparable, Stacy’s Pita chips began as a company with $100K revenue and reached $65M in 8 years)
Before we close, what is one important lesson you can offer to other entrepreneurs in your space?
One important lesson that I learned is if you have a big rush of publicity and it gives you a one-time boost in orders, you don’t need to change everything about your business. We were fortunate enough to go on NBC’s Today Show in Q1 of 2014 and ultimately won their ‘Start Up to Success’ challenge, which featured Marcus Lemonis of CNBC’s ‘The Profit.’ It provided lots of publicity, and it gave us a large boost in orders. We were tempted to change everything in our business to capitalize on that demand, and I think we expanded production more quickly than we should have. In retrospect, we should have expanded based on our consistent volume, and not just on a one-time boost. I’ve learned that we could have instead communicated with our customers to let them know we were experiencing a rush of orders and that it might take us more time that normal for our product to reach their doors. We may have lost some customers, but it would have kept our growth stable, which would have been better in the long term. Expanding too fast can hurt just as much as not growing, because you take on increased financial risk.
Thank you very much for sharing your time and for the insightful advice. If readers have questions for you, is there a way they can contact you?
Learn more about Greg Katz, M.D. and 2Armadillos Snack Company and be on the lookout for their new certified USDA Organic line of snacks!