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Courier Weekly Friday 9 October 2020

Courier Weekly Friday 9 October 2020

Ken Tomita, co-founder of Portland-based company Grovemade, shares his company’s huge successes, epic fails and all the lessons learned along the way. 

DANNY GIAOCOPELLI: Hey guys, welcome back to the Courier Weekly. I'm Daniel Giacopelli, Courier's Editorial Director. Pivoting a small business to survive is super difficult, and it often doesn't work, but sometimes it ends up building a more resilient company in the long run. This week we're talking about launching a company, growing the company and then pivoting the company and the tons of lessons learned along the way. We're with Ken Tomita, the co-founder of Grovemade, a business based in Portland, Oregon, with a massive cult following. Grovemade makes everything from laptop stands and notebooks to wall shelves and coasters, all locally in Portland. But they started by making iPhone cases, way back in 2009 when that was still a novelty. As Ken tells it, the decade since then has been one of huge ups and downs, big successes, and then epic fails and almost running out of cash and going under. So sit back to hear the whole story right now. Here's Ken.

KEN TOMITA: In the beginning, after a meandering path, I somehow ended up as an independent furniture maker. I was designing and making custom furniture, one-off pieces. That career was a lot of fun, but also really challenging. It was around 2009 when the recession hit and construction in particular got hit really hard. I had moved into a new woodshop and by total chance, there was this really interesting dude that lived across the street in this really beat-up house. So imagine this house that's surrounded by industrial buildings, those holdovers, sometimes you find these little rundown houses.

DANNY: You called it the Fight Club house.

KEN: Exactly, that's what it looked like. There was a guy, Joe Mansfield, who was living there with a bunch of his friends. What was really bizarre was that he was running a laser business out of one of the bedrooms. Immediately, I was excited. We'd moved to this industry area, it was kind of lifeless and he was really excited, too, because all the other businesses were like vacuum repair places, so we became instant friends. For a couple years, I was running my business and he was running his and all day, every day we'd hang out, jamming ideas. We'd throw his football, which we still have around on the streets, figuratively and literally tossing ideas back and forth. Most of the time it was just talking and fun and then we'd go back to work. 

But then he had this idea. He really thought the iPhone was gonna go big. I didn't, which is really funny. I remember using the first iPhone, I was trying to call somebody and trying to use the touchscreen to dial a number and I couldn't get it. I kept on pushing the wrong buttons. No way did I ever think this was gonna take off. Obviously, I was very wrong. 

DANNY: I think I still have mine, if not the first then maybe the second one. It's just like a completely different beast from what we have now. I have the 11 Pro now. It's a different machine.

KEN: So he was the visionary guy, and I was the craftsman, if you really want to put us in boxes. He kept talking about how the iPhone is gonna be huge. When the iPhone 3 came out, he was pushing it even more. He really wanted to create a wood case. At the time, only one other company had been doing that, but they weren't really at scale and were really expensive and fragile to make. 

About a year prior, he had started a business laser-engraving moleskins, and that had pivoted into laser-engraving leather covers for moleskine. It was this whole model of putting artists work on the creative tools that people use. He wanted to put laser-engraved art on a wood iPhone case. He looked around for all these people to build it and factories to produce, but nobody wanted to do it. They were scared. I was kind of starting to get bored with my career, it was plateauing and I was ready to take on that challenge. Both of us were at the stage where we had started businesses that were moderately successful, we had very little fear. I bought a CNC milling machine and we hired this guy, Chris Rizzo, as a consultant to teach us how to use it. We went on this adventure to try to make a wood case for the iPhone 3. 

DANNY: And these machines are gigantic complex machines, right?

KEN: Yeah, they're about $75,000, nothing like the work I had done, which was all traditional woodworking. This was using computers, machining, programming. We definitely wouldn't have had the courage if we didn't find that right person to teach us.

This guy, Chris Rizzo, was really instrumental. He was a real go-getter and he really encouraged us when everybody else was shying away from the challenge. I think most people, most businesses stick to their thing, right? They don't want to do the really hard things because it's hard to make it doing the really hard things. But, some people think a little differently. We met the right guy, and we started developing. It took about nine months to develop the first iPhone 3 case, if you remember, it was round. Apple uses really weird geometry, so one of the key mistakes we made is instead of having a 3D scan, we tried to measure it with callipers and try to get something that friction fit, which took forever. 

Nine months in, we finally developed this case. Do you remember when the Apple engineer lost an iPhone 4 at a bar? This was back in the day when leaks never happened at Apple, when Steve Jobs was ruling with an iron fist. So that was a big deal back then, this is 2010. What happened is the day we launched our iPhone 3 case, that hit the news and nobody cared about iPhone 3s, everybody was thinking about iPhone 4. 

DANNY: Literally the same day you launched your website?

KEN: It was an epic fail, basically.

DANNY: I'd love to be a fly on the wall in that meeting where you guys realised what had just happened. 

KEN: It was a terrible feeling. Our product was a flop. It turned out to be a blessing in disguise, because we had no idea what we were doing, and the case we had designed was almost impossible to make. We probably would have lost money on each unit. So we wouldn't be talking today if that hadn't failed, because I would have gone bankrupt 10 years ago.

We sulked for a day or so but then we thought about how to turn it around and into a real opportunity. Now that we knew what the iPhone 4 looked like, we started engineering a case so when it came out, boom, we had a product. We had made a physical prototype based on what we thought it was like, but of course, we didn't have the actual phone and didn't know if it would fit. We photoshopped an iPhone 4 in and we put it online, which back then was kind of revolutionary. This was pre Kickstarter, people didn't sell things that didn't exist. But we just went for it and it blew up. It was a case of the right time, right place. We got on a couple big blogs like Gizmodo, and it blew up overnight into thousands of orders. 

DANNY: How are you able to meet that demand? Do you have to bring in some more resources for production?

KEN: The first step was that we didn't have a product or a functioning product. I remember I was in line to buy an iPhone just like everyone else and my phone was set to give an alert every time we got a sale, because we'd get around two a day. It was going ‘bing, bing, bing, bing’. At first, it was exciting and then it started picking up pace, and we were like: what have we done? 

DANNY: Wait, you haven't even gotten your hands on the actual phone yet?

KEN: One thing people always ask is if the phonemakers give you the specs. The answer is no. For Apple, they don't even give it to the huge companies. So all these case companies, they're getting the phone as soon as possible, going back to the prototype shop, making tweaks to make sure it fits.

DANNY: Because Apple wants you to buy from Apple itself.

KEN: Exactly. They have a near monopoly market edge. That's a different conversation. Certainly they have power there. That was really intimidating, selling thousands and not having a product. It was the most stressed out I've ever been in my life. I woke up probably at seven, we'd work all day post midnight until we'd figured it all out. There were unforeseen challenges, technical issues. And also, I'd never done this before – it was not a great time to learn. 

We had thousands of customers waiting, and the pressure was on us to deliver. We did pull it off – we did figure the case out. Then the challenge is what you just mentioned. How do we produce these? We were the manufacturer. I had no experience in manufacturing at such scale. I was used to making things one at a time. I had never managed anyone besides one employee. That was extremely challenging in a different way, more on the culture, HR management side, which is a big deal once a company starts scaling. Suddenly, we had to have 20 to 30 people. We were hiring like crazy, friends of friends. We hired my friend's brother who went to Reed College, and then suddenly we were hiring all his friends. We had all these Reed College kids on board.

DANNY: To do what, though? 

KEN: To do a production. That's where Steve Jobs dropped out of. 

DANNY: It's a super-hippie place, right? There's quite a lot of political hippies.

KEN: It lives up exactly to the stereotype. We had these really smart kids in our mini factory trying to figure out how to make this. It was pretty painful for a couple years. We had to eventually hire a professional manager. It really helped to have an ops person with real experience and to get our company functioning instead of a helter skelter every day.

DANNY: A couple years later, you decided to pivot the company away from just those cases and become what you are now, which is a home-office goods company, among other things. 

KEN: Joe and I were both riding on the shoulders of Apple, and saw that this business model was really flawed, the way that we were tied to somebody else's product. The whole time, the business plan was not to become a case company. It was to use that in order to catapult us to some sort of scale where we could do whatever we want, and make cool stuff. It turned out to be much harder to do that than we thought. But that was the vision. 

We already knew that we weren't gonna stay in cases. From 2012 to 2014, the case business has really taken off worldwide. Everybody was jumping in, everybody was telling us to produce for the Android device. Instead, we started playing around with other vertical markets.

In 2014, we made a huge pivot away from a company that was all about iPhone cases with artwork on them. We got rid of the artwork, which was 85% of our sales, completely one day and then pivoted to a product company. If you looked at our Facebook page, everybody thought we were going out of business. Everybody was really angry, all our current customers, because we were completely shifting identity, but it was the right move. The case business became really commoditised and you can buy iPhone cases that are laser engraved in the mall now. We made a very good move to get a head start.

For a couple years, we just threw mud on the wall and tried a bunch of different product genres. The first one we did was our desk collection. We designed a monitor stand, put it online and it blew up. We did everyday carry products, we did entryway home products. We did tabletop, so plates, bowls, dishes, cups, that kind of thing.

DANNY: And you were just making these products because you thought that people wanted them or were people asking for these things?

KEN: It really started from realising that our business model was flawed, and we were desperate to get out of it. We didn't really check to see if people wanted these things, which was a huge mistake. This whole time, Joe and I were still in solopreneur mode where we were making stuff that we liked, which is really simple, pure, and it has some good merits, right? That's our business – we make some things we like. You can build a business around your personality. However, reality hit us in the face because we made all these beautiful products that we loved. The tabletop collection is amazing and I still use it, but it was a total failure. There was no market for it – it was too much of a leap for our customer base. Things that are really obvious to me now… jumping into these other product genres is almost like starting a new business, there is very little advantage to having an existing customer base if it isn't all aligned. So a lot of those failed. 

The next three or four years was this race against time. Our iPhone sales were declining and some of the new things we tried were working and growing, but were really small. We were constantly trying to start these other things and trying to get them to grow fast enough to overcome the really speedy decline of the iPhone. There were some painful years in there where the timing wasn't quite right. We knew we had a future, but our revenue was just diving from an iPhone case and we almost lost the business in 2016. We were inches away from running out of cash.

DANNY: Did you take out a last-minute loan or you just managed to make enough sales to survive? 

KEN: What was really painful about those mistakes or the unfortunate timing was that we were losing gobs of money and cash went to zero. I had about $165k in credit, and we had a line of credit that was $200k or so. We were borrowing from all that and then it got to very little liquidity left. In the end, the way we turned the company around was to cut costs. The reason we lost so much money is we were really hell bent on not laying people off. We were trying to grow out of it with more sales, and we blew a ton of money on marketing, almost panicking to increase our sales. Most of it failed. And it made us deplete even faster, right? 

I got some really good advice from a mentor who said, 'You know what, you've just got to stop losing money.' When you're losing that much money, it's almost impossible to think with your head, to think strategically and to make the decisions. So we had to lay off half the team. That was a big surprise for everyone, which was a huge failure on my part. People should know that stuff's coming. I think it's inevitable in business sometimes, but there's a way to do it being rookies, and we didn't really do it that well. 

It was a rough time, both on the people side and financially. But you know what, we got the company to where it wasn't losing money, we just shrank. Then slowly we rebuilt. Last year, we became pretty close in size to where we used to be, but with very little iPhone cases. This year, or about four months ago, we sold our last iPhone case. We just cut it off, which is an amazing feeling to completely pivot our business to workspace, which is what we're focused on now.

DANNY: A symbolic moment for you after a decade of making them. Obviously right now during Covid, most people who can are working from home. How has that affected you? Have you had to ramp up production again, hire more people in?

KEN: Last year, I started feeling pretty good about where our business was going. We were a really niche company in an area that people were neglecting. That was a deliberate, strategic decision on our part to focus on home-office users. Everybody else was ignoring it because it was a really small market and most of the money in that world is tied up in contracts, it's in business sales where you might sell 300 desks to Facebook. That's where all the big money goes. 

Covid hit and, temporarily, we were seeing a pretty big spike in sales. Overall, I think it's more of a threat to our business. Suddenly it's the same game again, where we're in shark-infested waters. 

DANNY: Tons of new companies are launching or offering standing desks, desk accessories.

KEN: Exactly. So everybody else is pivoting into what we were doing and we were pretty much alone in that position. Over the long haul, it's going to get really competitive. Temporarily, we saw a pretty big surge in demand and the challenge became about how do we produce all this? We did something that I thought would never happen, it never even crossed my mind and I really doubt it's taught in business schools, where our sales were rocketing, but we were laying people off because of Covid safety. We do manufacturing and we have to watch out for the safety of our team. We are always going to err on the conservative side of things, because that's our culture: people first. I never thought that scenario would happen, though, where our sales are going up, yet we're being forced to lay off four people. What? How does that happen? 

DANNY: I imagine you're in an industry where people can't produce and manufacture in their homes. They have to be at a physical facility.

KEN: The first set of challenges was with the supply chain, which was totally disrupted. Companies that were providing raw materials to us, they were shut down from government orders. We also get a few of our supplies internationally from places like Portugal and China, so that flow was seriously disrupted. 

The second challenge was about how to scale to meet demand if we can't have people. We kept our team to a certain number based on the square footage of our building or what I deemed reasonably safe and had to deal with that limitation. That meant pivoting to outsourcing a lot more, which we aren't very good at, historically. Because we're a manufacturer, we're used to working in a way that's vertically integrated. We had enjoyed all of the advantages of being vertically integrated, and when you have to outsource, it becomes hard to communicate the precision of manufacturing drawings, to get things exactly right with testing and all that stuff. Usually everybody's right here in this building and we can adapt on the fly, but we had to change personalities as a business. We're in the middle of that still, we're still kind of working on shifting the business model a little bit where we can scale without adding people to our facility.

DANNY: It seems like you are a really small little community in that. On your website, you have a lovely day in the life, virtual walkthroughs of your facility to meet the various people in the company and to learn about what they do. So you're not running a giant company. It's quite a close-knit community.

KEN: Yeah, even now we have 21 people.

DANNY: What about not taking on any investment? You've grown this thing without taking on venture capital. What are the advantages and disadvantages of that?

KEN: For Joe and I, it's not really a choice, because it conflicts with why we started the company to begin with, why we show up every day. The reason our company is so funky and weird and produces interesting products is because it goes all the way back to why we're here. We started out wanting to have fun. That's why we go to work every day, enjoying what we do – and getting big is not the goal. So, first of all, there's that. The biggest disadvantage is that we have to be profitable, we have to grow with our own profits, which means it's going to be slow. We don't really think about it as a disadvantage, we think of it more as an advantage.

DANNY: I'm sure most business owners would do that. If you can make it happen, why give away equity when you can grow a business with your own revenue?

KEN: It's about control and having the interests aligned. As of right now, since I own 100% of the company, there is no conflict on alignment between owners. Inevitably, if you have investors, they deserve a return. That's the point. Sometimes that's not the priority here. What would we do if we had somebody where that was the priority? There would be tension there, and it would affect our decisions. I think it's a huge advantage strategically, but in a subtle way; it allows us to take unique positions. The way we position ourselves in the market, if somebody wanted huge returns, they wouldn't allow this, because we're going after these small niches so we can be really good at providing products to a really specific segment. But it's limited because we're so focused. For somebody else who maybe had 100 X aspirations, it introduces a situation where you're maybe not differentiated and obviously the risks go up. Fundamentally, the way venture capital works, they expect that and they expect companies to fail. So suddenly, the possibility of our company disappearing someday just skyrockets. 

DANNY: Yeah, you're just one in the large portfolio of companies. You might be one of the bets that wins, or one some man will write off. 

KEN: The trade-off isn't worth it to us. I'm also not interested. I'm happy, I love my job, our company's a great company for the people that are here. Sometimes I do feel like we need to be a little bit bigger, because there can be challenges financially when you're at that awkward size but we don't have aspirations to be gigantic. We want to have a strong company where we can make great products, have a team that enjoys their work, and have a strong business model. We need to be profitable, but we don't need to be big.

DANNY: And your customers are really obsessed with what you make, too. What advice would you give to founders of new businesses who are trying to foster that customer loyalty?

KEN: I think it's just about differentiation. For a while, I thought you could do that with brand, but now everybody has strong brands. I think it's going to shift back to product. It's got to have the compelling product that people will care about. That sounds overly simplified, but people lose sight of that sometimes.

DANNY: Do you think a good product is harder to achieve than a good brand? 

KEN: It's a different animal. For us, it comes much more naturally because we're product people and we love it. But it's about designing something that people want, not just that you want. It's got to be compelling in a way that's memorable and which means the customer is not then comparing between seven things on Amazon. Then you've got to be able to make them produce in a way that's sustainable for the business. 

DANNY: Looking ahead at the next few months, what's coming up? What's keeping you up at night, and what's making you excited?

KEN: Well, we're growing, which is a nice problem to have. So figuring out how to do that in a healthy way, so we don't get upside down in terms of cash flow. Right now, because of Covid, we've hit the gas pedal on production capacity, and now some of the other departments are out of sync. That's what I'm thinking about a lot, is how can we get back to smooth? Where the business is running smooth, the way it should be, instead of where everything is helter skelter. We call that war time and you can't be in wartime forever. It's not healthy for the staff or the business. 

DANNY: And that's it this week. As always, if you've got any questions, just get me at daniel@couriermedia.co. The Courier Weekly is back again next Friday. Thanks for tuning in.