How to Build a Start-Up — Without VC Funding

RAMSEY KHABBAZ: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts — hand-selected to help you unlock new ways of doing business. I’m Ramsey Khabbaz, an editor here at HBR. This month, we’re highlighting four of the best HBR podcast episodes on strategy from 2023, curated by me. We’re used to the idea that entrepreneurship and venture capital funding go hand in hand. But as interest rates have risen in recent years, VC funding has dried up. This raises the question: How can founders grow their companies in this new environment? In this episode, we hear from a founder who was able to grow a 600 million-dollar company using just 10 thousand dollars of his own money. Mike Salguero is the CEO and founder of the meat subscription service ButcherBox. After a negative venture capital experience in his last company, Salguero pledged to grow his new startup without it. And he did. In this episode, you’ll learn how Salguero formulated a growth strategy that had a laser focus on costs and creatively leveraged the marketing power of influencers. If you’re an entrepreneur — or a leader trying to grow a business without a lot of resources — this episode is for you. This episode originally aired on HBR IdeaCast in June 2023. I hope you like it as much as I did.

CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch. It’s almost become accepted wisdom in startup culture. Have a great idea, secure a whole lot of funding, and then burn through cash to scale quickly and build up a large user base as quickly as possible. A combination of the love of first mover advantage coupled with plentiful funding from venture capital made this kind of model make a lot of sense. That is until interest rates started to rise, now many companies are looking for other ways of building their businesses, and as it turns out, there are models for that even before the VC money tightened in Silicon Valley. There have always been companies that start with smaller budgets, build slowly, bootstrap their way to make profit on their products from the beginning and they succeed. One such company we’ll talk about today is ButcherBox. It’s a subscription food service organization centered on delivering meat to customers. It’s a $600 million company that CEO Mike Salguero founded with just $10,000 in capital that has never taken money from venture capital funders. To learn more about how he did that and how the team aims to grow sustainably. We’re joined now by Mike. Welcome.

MIKE SALGUERO: Thank you.

CURT NICKISCH: Did you always want to be an entrepreneur?

MIKE SALGUERO: Growing up, I didn’t have a father, and I always looked for father figures, and one of the big ones in my life was my uncle, my uncle Steve, who was an entrepreneur. He lived in Spain and actually he brought popcorn, microwaveable popcorn to Spain, under a different brand. And I just saw a different lifestyle, and so at a really early age, I was exposed to this idea that you can build something, create something out of nothing rather than working for someone. And that was really appealing to me. So I’d say by the age of 10 or 12, I was thinking about being an entrepreneur, didn’t have any ideas, but definitely thought about being an entrepreneur.

CURT NICKISCH: Yeah, the lifestyle.

MIKE SALGUERO: The lifestyle is a big piece of it. I was the youngest of four, and I didn’t really like being told what to do. It’s one of the things I’ve worked on over the years with my mom, but I think the idea of being able to be my own boss was really important to me. I also, at that point was pretty focused on making money. I thought making money would be really cool, and I learned whether it was from my uncle or from other people, that being an entrepreneur can be a quick path to making money, and certainly is one of the only examples where the more you put into it, or the luckier you get, the more your outcome can be. And so those things certainly were attractive to me.

CURT NICKISCH: When you started ButcherBox, you vowed not to take venture capital money, which is very much going against the flow, at least at that time certainly. Why did you do that?

MIKE SALGUERO: Yeah. Before ButcherBox, I ran a company called CustomMade, and we had raised about $30 million of capital in five rounds of financing and lost everyone’s money. And in that process, I lost the culture, I lost my place of work, I lost the ability to create the direction of where the company should go. I lost friends. There was some good pieces of raising venture, but I experienced a ton of loss as a result of me raising venture capital. And so when I started ButcherBox, my mentality was, I don’t care how small this business is, I’m not raising a venture. And it turned out the business could be very large, and I believe as a result of not raising venture, we are where we are today.

CURT NICKISCH: The failure of a business sounds normal, like losing people’s money, losing your job, that happens. That’s almost the norm, right?

MIKE SALGUERO: It is the majority.

CURT NICKISCH: That’s almost the null hypothesis for what’s going to happen to your company, when you take venture capital money, most of them fail. So was it venture capital that caused that to happen, do you think?

MIKE SALGUERO: There was a moment where I believed that the incentives of the company and the incentives of the venture capitalists were not in alignment. For example, there was a moment where this online marketplace, we knew it just wasn’t going to work, but that was what the venture capitalists had funded. And so our ability to say, “This isn’t going to work, we’re pivoting in a different direction.” They’re like, “No, keep doing the thing that we funded. You can’t go back to a listing service. We want this.” There was a time where we said-

CURT NICKISCH: “This is not what we signed up for.”

MIKE SALGUERO: Right, this isn’t what we signed up for. There was a time where we said, “Hey, in order for this thing to survive, we should let go of 75% of the staff, because we got to go bare bones and we got to figure out product market fit because this isn’t going to work.” And they said, “No, keep doing what you’re doing, because if you let everyone go, then we can’t sell the company or we can’t get a…” At that point, they were gunning for my head, so it was, “We’re not going to be able to attract a great CEO in here if we downsized the company.” And so really I lost control. While the ship was sinking, we did not control what we were doing, or what the outcome was, our venture capitalists had taken over. That was really hard. It was hard to see that happen, and to experience that happening, and to really feel like it was my fault and I didn’t have any way to paddle the boat out.

CURT NICKISCH: So, there you were 34. Washed up a little bit. Forced out as CEO. You immediately start another company and you vow not to take venture capital. Because of this experience.

MIKE SALGUERO: Yeah so, I was 34, failed my first company, washed up, really felt like a failure. And I vowed for this company for ButcherBox that I was not going to raise venture capital, and that I was going to prove to myself and to others that you could start a company for $10,000. And really what I believed in and I still believe in this is that the path of an entrepreneur does not always have to mean you’re raising money. That is a lie of entrepreneurship that is taught to people. It’s like – oh, have a good idea? Go raise money. That’s not how it has to work. You can start as an entrepreneur and build a really robust business without raising money and so my hope was to try to figure out how to do that. And I didn’t care how small the business was, I cared about figuring out how to do that.

CURT NICKISCH: You started a sort of direct to consumer subscription business. What was the original plan for the company, and you did a Kickstarter to raise money for it?

MIKE SALGUERO: The original plan was that if we had a thousand subscribers on a monthly basis that I made a $20 a box off of, it would be $20,000 in profit, maybe pay a few people for customer service, have a few web developers and whatnot, and basically make a salary. That was it, that was the premise.

CURT NICKISCH: And the service was…

MIKE SALGUERO: Yeah, the service is a monthly box of meat, delivered to your door. And the problem we were solving was my wife and I started cleaning up our diets and really focusing on the type of food we were eating and got really into grass fed beef. And grass fed beef was hard to find. I lived in Boston and couldn’t find grass fed beef, so I started trying to find it, and that was a whole path that ended up buying from farmers in a parking lot, buying trash bags full of meat in a parking lot. And I just thought bringing grass fed beef to more people could help solve people’s problems. I was able to track down this guy who used to work at Omaha Steaks who opened some doors for us, and it was like, “Okay, I think we’re got something here.” Because I didn’t want to raise money, and I didn’t want to spend a lot of money to prove that there was a market, we decided to start with a Kickstarter campaign. And Kickstarter is a platform where you can pre-sell your product, you don’t even have to have made it yet, and you can pre-sell it. In our business where we’re shipping meat, the most dangerous thing is having inventory. That’s where your cash can then literally sit in a freezer instead of being sent out. So, we didn’t want to do that. We wanted to get pre-orders, see how many pre-orders there were, then cut inventory for them, ship it out, and then try to get them onto a subscription.

CURT NICKISCH: You got those pre-orders from the Kickstarter, then you have to start doing a business. How could you be… The Kickstarter wasn’t that much money that you raised by doing that, essentially just paid for the first round of orders. So grow without financing, I guess is the simple question.

MIKE SALGUERO: Yeah, so the Kickstarter, we raised $215,000 in pre-sales, so it was about $40,000 of profit that we made from the Kickstarter campaign. So, we had sent a box to call it a thousand different households, and we called them all up and said, “Hey, did you the product, would you like to sign up for a subscription?” And we rolled 40% of them or something like that. So out of the gate we had 400 monthly subscribers. I was halfway to the goal that I had set out for the entire company, and it had been a month and a half of us working on it. We then launched a website and one thing that we saw during the Kickstarter campaign – so we reached out to anyone who had written about grass fed beef. If people had written about grass fed beef on Twitter or on blog posts we reached out to them, we told them about our company, and we asked them if they would promote us as part of the Kickstarter campaign. And this one paleo doctor named Chris Kresser, during the Kickstarter campaign, he tweeted about us. And he was like, “I’m a big fan of grass-fed beef and here’s a great resource for it.” And we saw a flurry of activity of people signing up on the Kickstarter campaign as a result of Twitter.

CURT NICKISCH: That’s interesting.

MIKE SALGUERO: Yeah. We were like, “Ooh, what’s that?” And so what we ended up doing was working with him and working with anyone who looked like him in the paleo, keto, Whole30 elimination diet, all of that realm, and got them to promote us. And since we couldn’t pay them upfront for the promotion, we offered them a residual. So it was like, “We’ll give you $10 or $15 a month for every month that your customer that you give us gets a box, and we’ll do that in perpetuity.” And so our first marketing outlet was these influencers who didn’t want money up front or probably did, but we weren’t able to afford that.

CURT NICKISCH: Just to put a point on it, you’re pushing out when you had to pay them.

MIKE SALGUERO: Right. And we used to call it being “box one profitable,” which meant the first box that we ship out, we need to make money on it, because we didn’t raise any money. So, the only way you cannot raise money is if you make a profit on the first thing. And so-

CURT NICKISCH: Is that possible?

MIKE SALGUERO: Yeah. We were selling for $129 box, and I think we were making $20, $25 a box, so there was enough floating there for then to give $10 to the person who referred and keep 15. And not everyone came through that way. So it worked.

CURT NICKISCH: Yeah. This was at a time when there were a lot of meal delivery companies out there, right? And many of them were raising money from venture capital so that they could sign up, get a lot of customers for the future. And you must have seen that and wondered, “Should we do that?” Or you just were not even tempted?

MIKE SALGUERO: No, no. Well, so this is 2015. We start in 2016, we start scaling up, which is right around the time that Blue Apron had raised on a $2 billion valuation, and there was something like 150 Blue Apron lookalikes out there, and everyone was in this meal kit space. I always thought it was pretty funny, because we were taking the most important piece of the meal kit, the meat, and just shipping that, which is way easier than shipping a cubed sweet potato, and a ramekin full of ranch dressing, and whatever else was coming in those meal kits. I came pretty close twice to raising money. Once I got a term sheet, and then at the final hour, actually twice I got a term sheet. One was from a venture bank and one was from VC. And at the final hour something inside of me was just like, “No, don’t do this.” And I walked away.

CURT NICKISCH: What did not taking venture capital money allow you to do?

MIKE SALGUERO: I think the most interesting thing is if we raised venture capital, I think we’d be out of business. So, if you look at the timing, 2015, everyone was raising, because Blue Apron was crushing it and raising. Blue Apron went public in the summer of 2017, and they did well, initially, they sold at a high price and three months later, their stock lost 90% of its value. When their stock tanked, venture capital for food subscription companies dried up immediately. And so if we had gone out in 2015, done a kickstarter, and then raised money, we would be raising money at that time in the summer of 2017 and we would have been screwed, nobody would have funded us. And we wouldn’t have had to build the discipline of running a profitable business. And I truly believe we would be out of business. Nobody’s saying increase your profits, other than us, we’re always trying to improve the business, but I don’t have investors, or activist investors, or people who are saying that we need to do things differently. And that enables us to give the mission some breathing room, which I think is incredibly important. What we do is we sell meat that is raised better, whether it’s a pig, or a chicken, or cow, bison, whole bunch of other products. And so, what some companies do, and actually I’m seeing this in the market right now, in our space, what some companies do when times are tough is they cheapen the meat. The only way to cheapen the meat is either one, build efficiencies, which is not where people usually go to, or two, you cut corners, and you start to greenwash things and it’s not really what you’re saying it is. It’s like a cheaper version of what you’re saying it is. We will never take that step. And because we don’t have any external investors, we’re able to build out programs that other places are not doing. And we also are able to take a much longer term view on that program building out over time.

CURT NICKISCH: I mean, just for some pushback here, like venture capitalists would say, “Yeah, we give you money to grow your company and we are expecting big returns, but we also connect you with great advisors. We connect you with people who’ve – other founders who’ve been in the same situation. We bring in expertise, we help you do the stuff that you don’t know how to do yet and help you succeed with that.” And there might be better or worse venture capitalists, but ideally they’re partners. What do you say to that?

MIKE SALGUERO: Look, I think there is certainly a lot of space for the asset class of venture capital. First of all, if you’re building something like fusion technology, or a spaceship, or AI there, there’s a lot of things that you require a lot of investment upfront before you can make any money. And venture capital is a great place to go to get that type of funding. And then to your point, having the right venture capital person involved in your deal can be really, additive can be really helpful. When I look back, I really appreciated the amount of support and services that we got from Google, from First Round Capital, these organizations that would really help. They would introduce you to people, they would talk to you, they’d be a resource for you that-

CURT NICKISCH: You weren’t alone.

MIKE SALGUERO: … the conferences, you weren’t alone. All of those things, as a young 26-year-old founder, were really helpful. And I had been an entrepreneur, essentially since college, and I really felt unsupported in my entrepreneurial journey. At the time, this was the early 2000s, there wasn’t Y Combinator, there wasn’t like, “Go on Twitter and ask people for help.” That stuff didn’t exist. And so being in a community of other entrepreneurs, other people who had raised venture capital was actually really beneficial. Also, when you’re young, you’re going to make a lot of mistakes your first time out, you’re going to make a lot of mistakes. And if somebody is financing that with their own money, that’s pretty good.

CURT NICKISCH: You’re learning on somebody else’s dime.

MIKE SALGUERO: Yeah. My soapbox is that I believe that most people think it’s the only way to start a company. And if you think about what is the average person’s interaction with entrepreneurship, it’s watching Shark Tank. What is Shark Tank? It’s a show where you go out and sell a whole bunch of your company to a bunch of people who they might have value, maybe, but it’s interesting. There’s no entrepreneurship material out there that doesn’t have to do with raising money. TechCrunch is still just writing article after article about raising money. You’ve got Shark Tank and the people who are getting congratulated are not the people who are just quietly building big, big profitable businesses, it’s the people who raise a bunch of money. And now they’re a billionaire on paper, but they’ve just built something and raised money against it.

CURT NICKISCH: So, you’re box one profitable, and you’re getting this financing help from your partners to grow, but you still go from raising $500,000 to 600 plus million dollar business in six or seven years, which is phenomenal scaling. There’s not even a term for it. How do you achieve that kind of growth, which is hard for companies that have resources? It is just staying on top of it. How do you that without taking financing? What were some of the key things that you decided along the way?

MIKE SALGUERO: Yeah, so we went, in the early years, we went from $300,000 in revenue to 5 million to 33 million to a hundred million. So very quick growth. And for the first two and a half years, it was that influencer strategy where we paid the influencers a take and we just blanketed the paleo, keto, Whole30 space. And then we start-

CURT NICKISCH: You found something that worked and you kept going.

MIKE SALGUERO: And we just kept extracting. And I’m a big believer, I have a analogy of wild catting for oil. And when you find an oil, you just build a rig and then you build a bigger rig and you just man that rig and you just keep extracting until it starts to pay enough and generate enough that you’re like, “Okay, we could go look for something else,” and then you go look for something else. The second thing that we looked at was Facebook, and Facebook video in particular. This was around 2017, and I had noticed when I was on Facebook that there were more and more videos, and it was like, “I think videos is going to be a thing. We should really lean into videos.” And so we started producing videos. One was my daughter screaming about how she wanted more bacon, and we were able to purchase customers at a low cost. At that point though, it became clear that we were going to have to bleed into not only box one profitable, but into box two, or box three profitable. And so, then the question becomes, well, how do you finance that if you’re not raising money? And again, if you haven’t raised money, you start thinking about things differently. And so, what we would do with Facebook, for example, is you buy your customer, and let’s say you make your money after box two. So you buy your customer on day one. Facebook has, they’ll give you terms. So, you put that on 30 day terms with Facebook. At the end of 30 days, you pay it with a credit card, and then maybe you have 30 days or 60 days on the credit card. And so, you’re building 90 days of float. You basically move from box one profitable into how fast is my payback period, and can I not pay money- can I not use cash to finance the payback period? And so that’s how we got into box two, profitability, box three, profitability. The other thing that’s really important to mention is, I’m only talking here about how do you market, how do you free up money to be able to pay? But the real magic is in figuring out how to make the product more profitable. So, because we hadn’t raised money, we were doggedly focused on driving as many costs as possible out of the box – whether that’s negotiating with shippers, negotiating with pick pack, negotiating a different cardboard box, negotiating with the company we did credit card processing with. All of those people we were constantly trying to get a better deal, a better deal. And not only you want to save money and improve the customer experience at the same time – that has always been the charter. Save money and improve customer experience.

CURT NICKISCH: So, things are progressing. You’re finding a way to keep winning at every point in the chain, which can work for a lot of companies until a shock comes or a recession comes. And in your case, the pandemic came along during really during the heart of this growth. How did you navigate that?

MIKE SALGUERO: The pandemic was an interesting time for sure. So, I guess first and foremost, I’m a big reader of trends and, I guess, healthfully paranoid. And I had a friend who was from China, and she was stuck in the United States in January of 2020. And she was complaining about how China would not let her back in because this COVID going around and that the factories had shut down. The factories had shut down, the stores had shut down, and she worked for a major apparel company, US based apparel company. And I just got really paranoid about COVID. We started calling all our manufacturers being like, what’s your COVID plan? And they’re like, “COVID what’s that?” And we’re like, “All right, well, we think COVID coming. Please stock up on inventory.”

CURT NICKISCH: It was a big deal on at meat packing plants.

MIKE SALGUERO: Yes, it was. And when we were asking them about their plans, they didn’t have any plans. It was funny because a month later they’re like, “Here’s our COVID plan.” And it’s like, “Where were you a month ago?” So, we asked them for about a month and a half to stock up on as much inventory as possible, because I believe that the factories were going to shut down. They actually didn’t shut down. The factories stayed open, because it was considered nationally important and national security and food is important. So, they were stocking up their shelves with our inventory. We were bringing a lot of inventory in, and we were ready for the plans to be shut down. COVID hit in March of 2020, and what I didn’t anticipate was that there would just be this massive surge in demand. And so, what happened was, I remember it was right around St. Patrick’s Day. We shut off all marketing, we were just trying to keep people away, and we just had thousands of signups, tens of thousands of signups a week. I think at the time we might have been doing 15,000 signups a month, and we did like 60,000 in one week or so, something crazy.

CURT NICKISCH: Ouch. And this is because everybody’s at home with their sourdough starters and they’re cooking at home.

MIKE SALGUERO: Well, this was because people were… The shelves at the grocery store were empty.

CURT NICKISCH: Wow, okay.

MIKE SALGUERO: And then the other thing we saw, the other behavior we saw is all of our members were asking for a box right now rather than getting it on their traditional cadence. And so, we had this choice. It was like, well, did we just keep signing people up or do we maintain some meat for our members? And what I told the company, it was actually a pretty easy choice for me to make. What I told the company is, “Look, my family only eats ButcherBox, and I’m not about to go walk into a grocery store. And so, I bet there’s a lot of people like me out there. And so, we are going to put ourselves on a wait list, not sell any new product to people and keep our product and tell our members we’re keeping our product for them, which was very, very much appreciated at the time. I think our members, even to this day, I get thank you’s from our members being like, “You were with us through COVID, and I’m never going anywhere.” And I think if we had been funded differently, cutting off growth would probably not be what we would do.

CURT NICKISCH: Yeah, they’re salivating for those.

MIKE SALGUERO: Free subscribers is always great. One of our core values is member obsession. And I believe that the times to really show your core values are when times are tough. And that was just one of those times where I’m really proud of the decision we made, which was, let’s just make sure our members are taken care of first, and if there’s any excess, we can sell more people, but let’s make sure that the people we have are fed first.

CURT NICKISCH: You could afford to do that because it wasn’t growth at all costs essentially.

MIKE SALGUERO: Right, yeah. And that year was remarkably profitable for us because we shut off marketing for six months, which was just…

CURT NICKISCH: Yeah, your CAC was zero.

MIKE SALGUERO: CAC was zero, and we were signing up people. We went off a waitlist. So we put on a waitlist, I think at the beginning of April, and we went off at the mid-July. So we spent a good three months being dark.

CURT NICKISCH: No regrets.

MIKE SALGUERO: No, no.

CURT NICKISCH: So, you’ve been able to grow this company without outside money, built it into multi hundred million dollar business. You are able to focus on your customers, you’re able to stay core to your values and not erode those. You’re able to take care of your employees, and you’re doing this as an internet subscription business, which is a little bit wild. It feels very old school for something that’s very, very new and modern and of today.

MIKE SALGUERO: Yeah. It’s funny that that’s considered old school. I think capitalism obviously has been around for a long time, and my belief is that capitalism really needs to embrace, if that’s called old school, the idea of taking care of your employees and taking care of the environment, and the world, and taking care of your customers. I think that the incentives around capitalism have caused people to really focus on shareholder value to the detriment of everything else. And that I believe is what will cause capitalism to fail. And I think that if, I was born in 1981, so I’m the oldest millennial, and if I think about the millennial population and then the generations behind millennials, people care way more about the brands that they’re consuming and what those brands stand for. So gone largely are the days that people are going to church on the weekends. And what’s here to stay is, “Hey, if I take my dollar out of my pocketbook or my Apple Pay, I want that dollar to be spent in a way that aligns with my values.” And people’s values, they matter to them a lot, obviously, and they are changing very quickly. And I think that companies are way behind the curve in terms of how they’re thinking about customers as dollars, and how the customer is thinking about their buying decisions. And so, what we spend a lot of our time talking about and thinking about is this mission. And I used to say the mission was to transform meat that we have this opportunity to go in and transform an industry that is desperately needs transformation. And as we’ve gone forward, it’s kind of like, “Yeah, we’re doing that,” but we’re also taking this approach that’s trying to transform capitalism, trying to transform how companies can be built. You don’t need to take outside investment. You don’t need to just focus on top line revenue. You don’t need to screw over your employees so that you can make more profit. You can take a different approach. You can treat people like human beings, and you can treat the world in a way that is more sustainable and more future focused. And that’s what gets me out of the bed in the morning, is really the opportunity to not only build this great company, but also to be a beacon of doing it differently. Is just a unique and really cool and really special opportunity.

CURT NICKISCH: Entrepreneurs can take a lot of lessons here, venture capitalists too. There may be opportunities for investors to think about how they invest differently in companies too go forward just based on these consumer preferences.

MIKE SALGUERO: Yeah. The challenge with venture capital, one of the challenges with venture capital, is the way in which their funds work. So, you raise a fund and usually it’s like a 10-year fund, and then they’re raising another fund off of the first couple of years of the first fund. And so they’re set up in a way that they want another round to happen, and they want you to keep raising money so you can get a step-up in valuation. There are some people who are thinking about that differently where it’s not like, “Look how great our fund is doing,” but they’re talking about how sustainable the company is or how… And really with this recession happening, it’s a really great time, because these step up rounds aren’t happening. So really it does become about free cash flow and about profit, and there is a mentality shift happening right now in venture capital, and I just hope that continues to move because gone are the days of really cheap, free money and here to stay are companies that need to be resilient because it’s pretty tough out there.

CURT NICKISCH: Mike, thanks so much for sharing your story.

MIKE SALGUERO: Thank you for having me.

RAMSEY KHABBAZ: That was Mike Salguero in conversation with Curt Nickisch on HBR IdeaCast. Salguero is CEO and founder of the subscription meat service, ButcherBox.  We’ll be back next Wednesday with another hand-picked conversation about strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. And while you’re there, be sure to leave us a review. We’re a production of Harvard Business Review. If you want more articles, case studies, books, and videos like this, find it all at HBR.org. This episode was produced by Mary Dooe, Anne Saini, and Hannah Bates. Ian Fox is our editor. And I’m your guest host, Ramsey Khabbaz. Special thanks to Rob Eckhardt, Maureen Hoch, Karen Player, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.