Reference no: EM132279532

Case 2 Bark & Co.

Can a subscription service aimed at dog owners grow fast enough to satisfy the demands of the venture capital companies that have invested in it?

After Matt Meeker, Henrik Werdelin, and Carly Strife met through mutual friends, the trio decided to launch a business together. They noticed that consumer spending on pets in the United States had grown by 33 percent between 2006 and 2011 to $51 billion, two-thirds of which owners spent on dogs. The entrepreneurs also saw the success that Birchbox, a company that sells cosmetic and beauty sup-plies through a subscription model, had achieved and began soliciting valuable advice from that company’s cofounders about their business model. In 2011, while still working in their day jobs, Meeker, Werdelin, and Strife used their own money and investments from family members and friends to launch Bark & Co., a business that for about $20 per month ships boxes of dog treats and toys to subscribers. In their first month, the trio shipped 94 boxes to friends and acquaintances who had signed up. To differentiate their company’s products, the entrepreneurs scoured Etsy, The Grommet, and trade shows, looking for items that pet owners could not find at large chains such as PetSmart and PetCo. Each box follows a theme. For instance, one April, the BarkBox included baseball-shaped cookies and toys that resembled baseball caps and bats. The boxes have a gross profit margin of about 36 percent of sales, and the company has shipped more than 4.5 million of them. Sales began to grow, and in 2012, Meeker, Werdelin, and Strife landed $1.7 million in venture capital; they received another $15 million from venture capital firms over the next two years. Meeker says that with its blend of unique products, Bark & Co., which is based in New York City, tapped into a large and growing segment of dog “parents” who treat their pets like children. Today, pet industry sales are $70 billion per year, and Bark & Co. has extended its product offerings beyond its original BarkBoxes to include BarkShop, an e-commerce site that allows dog owners to purchase a variety of products without committing to a subscription. The founders say that BarkShop has sold 25 million products. Its BarkPost blog, filled with dog news and feel-good stories, attracts 10 million unique visitors per month and is supported by advertisers such as American Express, Procter & Gamble, Subaru, and others. BarkLive sponsors events aimed at dogs and their owners, such as BarkFest, a day-long festival in cities across the United States that features live music and fun events. The company’s product extensions carry gross profit margins that average 50 percent of sales, but 75 percent of Bark & Co.’s revenue still comes from its BarkBox subscriptions. Bark & Co.’s annual sales have doubled in each of the last two years and now total $100 million. The company employs 150 people but owns no warehouses, choosing instead to outsource the packing and shipping of its BarkBoxes. Although Bark & Co.’s subscription business is profitable, the company as a whole is not yet profitable but is cash-flow positive. The company has built its customer base primarily through social media, landing 1.2 million Instagram followers and 2.1 million Facebook likes.

In 2016, Bark & Co. raised an additional $60 million in funding from venture capital companies, including August Capital and Resolute Ventures, to fuel its growth. Competitors, including PetGiftBox and PawPack, have entered the market, but Bark & Co. remains the dominant player in the industry segment. The entrepreneurs recognize the importance of constant innovation and have created BarkBeta, a team that is charged with developing new business ideas for the company. BarkBeta’s budget is 1 percent of the company’s revenue. Several of the company’s innovations have failed, including BarkCam, a mobile app designed to connect peo-ple with rescue dogs, and BarkCare, an in-home concierge veterinary service launched in New York City and San Fran-cisco. Bark & Co. currently is exploring BarkAir, a chartered jet service that allows people and their dogs to fly together in comfort and style, and an Ancestry.com-style DNA test for dogs (“Any wolf in your genes?”). The company also is testing “pup-up” retail stores that will allow dogs, each equipped with RFID technology and unaccompanied by their owners, in shifts of five to enter the store and “shop” for their favorite toys and treats while their owners watch. Meeker, Werdelin, and Strife are feeling pressure from the company’s venture capital investors. Because of the risks associated with their investments in young companies, venture capital firms expect to receive returns of at least five times their original investments. For the venture capital firms that in-vested in Bark & Co. to get back five times what they invested, the company will have to grow to an estimated $500 million in sales within the next three or four years. Meeker says that the founders’ goal is to give the investors a return of 100 times their investment by becoming the next “Disney for dogs.” The question is: Can the entrepreneurs produce those challenging results, and, if so, how do they do it?

Questions

1. What advantages does a subscription pricing model offer a business?

2. Notice that several of Bark & Co.’s ideas for new businesses have failed. Is this unusual? Why is it important for businesses to continue to innovate, even when their founders know that many of the innovations will fail? What steps can Meeker, Werdelin, and Strife take to encourage creativity in their company?

3. Explain the advantages and disadvantages of using venture capital to finance a company’s growth.

4. Because of the risks associated with their investments, venture capital firms, which become part owners of the companies in which they invest, demand big returns within relatively short time frames. What impact do these expectations have on business founders such as Meeker, Werdelin, and Strife? Do investors’expectations affect entrepreneurs’ decisions about their businesses? Explain.

5. What strategies should Meeker, Werdelin, and Strife use to continue their company’s impressive growth rate? Are there other related businesses that they should enter? Explain.