Robert Goodman of MBA Cocktail talked with Foodem.com CEO and founder Kash Rehman about his experiences starting up a successful B2B marketplace. See below for the video, or after the cut for the full transcript. After you’ve seen it, please feel free to log in and join the discussion at MBA Cocktail, the best source for jobs, networking and information for the MBA community. The thread for the interview is here.
Bob: I’d like to introduce Kash Rehman, who’s the founder and CEO of Foodem.com. I wonder if you could first tell us a little bit about yourself and about Foodem.
Kash: Sure, so as Robert, as you mentioned, thank you for inviting me to your show, I’m the founder and CEO of Foodem, an online business trading and intelligence and process automation solution, we’ll be doing $650 million per year in food distributions, we are essentially a marketplace that connects food distribution companies, small local farms and specialty food manufacturers with buyers such as restaurants. We can service any establishment with a kitchen in it. Schools, hospitals, daycare, senior living homes, they can all become buyers at Foodem. My background, I actually graduated at the University of Maryland about thirteen years ago, I’ve been consulting for 3 years after I got out of college and then I got into food distribution, I actually ran a distribution company to 600% in growth in 6 years, and also formed a restaurant, I actually sold that restaurant. So I’ve been through the business supply chain. I have sold food, working at the food distribution company, and I’ve also bought food when I owned the restaurant, so I saw an inefficiency on both sides of the procurement process, and I came up with the idea of Foodem, and build a marketplace that connects both parties online, so in a way we’re the Expedia of food distribution. We bring all kinds of sellers onto a single platform where you can get better pricing on your food because of price transparency, you can save time, instead of calling local vendors, or sending out faxes for orders, in less than 5 minutes you can get your ordering done and still get competitive prices, it completely eliminates the problems in procurement, since you’re not leaving a voicemail, we also supply a full analytics tool on top of it that tells exactly what the food cost is letting them see what they paid last month versus this month, and I can see what the food cost is per category or item, or from a specific vendor.
Bob: It sounds great. It certainly sound like something there’s a great need for out there. I understand you just got a round of angel funding didn’t you?
Kash: Yeah, we just completed our second round of angel seed funding, of $600,000, we were trying to get 250 and got 600, we got a good valuation, and so that was our second seed round, our first was a small one, $75,000, last August from TechWorld, which is a Maryland technology development corporation, and they gave us $75,000 to expedite development of our product and then the 600 is being used to build additional features and also build out our sales and marketing team.
Bob: Are you focusing on specific geographic areas for your marketing or are you going nationwide, how are you approaching the region problem given that you’re dealing with a situation where it’s goods that can’t necessarily travel far, like produce and things like that?
Kash: Right so our focus is on local, right? Distributors deliver to between a 50 and 100 mile radius, and we want to grow locally in one metro area for many reasons, one, because the trade happens locally, and two we want to learn from this one metro area and replicate our success in other metros so our goal is to bring NY in by the end of this year but it could very well be that we’re in 5 metros by the end of the year because we’ll also of course have first mover advantage.
Bob: Now, how did you market in these areas to both sides of the equation?
Kash: We have a feet on the ground sales team that focuses on distributors and buyers, initially before we launched on May 14 we were on a closed beta for about a month where we only went after distributors to build out the marketplace, because you know, we didn’t want buyers to come on and only see two distributors selling meat. We wanted to give them a variety, so right now we have about 20 22 distributors on Foodem, we’ve just been selling to distributors for about 2 months, and restaurants we just opened on May 14th, so it’s been less than 3 weeks since we opened up the restaurants, but on the distribution side, the value proposition is very strong, right? We lower the cost of sale and we increase their market reach, so right now, the way distribution works is that a small to mid-size distributor has anywhere between 200 to 500 accounts that they service, by accounts I mean restaurants; the dc metro market itself has about 26,000 independent restaurants, so we increase their market 10,000 times than what they can do on their own, and we also lower the cost of sale, so each sale that a distributor gets right now comes through a sales source. And the sales sourcing costs a lot of money, anywhere between 70 to 80 grand. Because they have a base salary, a commission on each sale that they bring in, benefits, car, gas allowance, and stuff, a sale for a distributor costs anywhere between 5% to 7%, so a distributor gets a sale for $100, you’re looking at a cost of sale of about $5-$7. Foodem reduces that to a fixed 2% commission on each transaction. So not only have we increased their market share, we lower their cost of sale, and their dependency on a large sales team.
Bob: You’re going up against some competition that’s pretty big, you’ve got Sysco in that space, you’ve got other similar people in that space, how have you gone about finding those pain points where Sysco and people like them aren’t and sort of taking advantage of your nimbleness to get around them?
Kash: Sysco I don’t consider them our competition. Sysco, you know, is a distributor that has tons of overhead. They have trucks, they have salespeople, they have warehouses. We are a marketplace, we actually one day think that Sysco will join Foodem because they would want to get more customers via our platform, or they would have customers that are currently buying from Sysco, who would hear about Foodem and come on to Foodem and not see Sysco on it, and their customers are going to be the ones telling them, why aren’t you on a platform like Foodem where I can complete an order and compare prices. So I don’t see Sysco as competition, I actually see them becoming partners with us in the future.
Bob: Well, that certainly sounds like it would be great both for them and for you.
Bob: Now, you said you got the rounds of angel funding, other than that what kinds of funding options did you pursue?
Kash: Well, I knew I didn’t want to go for VC funding, we are a very early stage startup, and VC’s try to invest in companies that have some revenue, we are a pre-revenue company, we just started out a few weeks ago on the restaurant side, and so, we’ve just seen some sales, we’re far from becoming cash flow positive, but I have invested my own money, about $250,000 in the business, and I wanted to go the angel round, and that was my goal, to get angel funding, build it out in the DC Metro area, learn from our product, and then implement those findings into our product before we take it into other metros.
Bob: You mentioned that you went to Smith Business.
Bob: So did I actually, and I guess that one thing that a lot of MBA and business students always wonder is which of the classes that they try out are actually going to be applicable to starting up a real-deal business as opposed to a classroom, what would you say were the most valuable areas that you studied there that actually ended up helping when you really did a startup?
Kash: Well, see there was a big gap between me graduating and actually starting a startup. I actually worked in corporate America for 8 years after I graduated. So, you know, my goal back when I graduated in 2000 wasn’t to become an entrepreneur. I didn’t even know what entrepreneur meant at that time! My goal was to get a job. Back in 2000 when the economy was tanking, there weren’t many jobs available, and I was lucky enough to get two job offers, and I picked the one that I thought would be the best career move for me. Hindsight, I should have taken the position at the supply chain management company, I had an offer from them too, because my passion has always been supply chain. And I’m lucky that I ended up in a field that actually touches a lot of aspects of the food supply chain.
Bob: It sounds like regardless of where you started out, you ended up following up towards where your passion was, which I guess is what a lot of startups end up going towards.
Kash: So, you know, when I graduated back in 2000, a lot of people weren’t really looking to start their own companies at that age, right? The internet wasn’t as readily available, I had dial-up at home, at school we had DSL. So for tech companies you always thought it was just Yahoo and Google. And then there were a lot of software companies, not SAAS companies like Foodem, because the Internet had to grow a lot, there weren’t these mobile phones available, forget about these smartphones, we didn’t even have cellphones readily available! Now, with the implementation of so much technology and with the Internet speeds being so fast, there’s this wave among the younger generation. I can see a lot of startups, small new startups that are build and then being acquired for a lot of money. So I think that a lot of younger generation students that are graduating or just graduated, they see that you know, maybe they’ll come up with a great idea, and it’s going to get bought. That’s the wrong reason to get into a startup business. The right reason to get into a business is to solve a problem, and you should certainly be passionate about solving that problem.
Bob: Well, you certainly came up with an innovative solution. How did you first think of the solution? Did you see the problem and brainstorm solutions? Did it just come to you? How did you go about coming up with that initial great concept?
Kash: Every great concept comes from the things you’re working on. When I ran the distribution company, we were a small company, and like any other distributor we relied on sales people to do our business. We had about 220 accounts, and I saw a niche in contracting, and that’s how I grew my business. But on the commercial side, and by commercial I mean restaurants, I heavily relied on salespeople. And the more salespeople I threw in the market, the more accounts I had, which was a very expensive proposition for me, because as a small business I didn’t have a lot of liquid cash sitting that I could just hire 10 salespeople for the market like Sysco and US Foods do. So I started talking to a lot of smaller distributors and midsize distributors that fit my category, and I started talking to them about how we can grow our business and compete with the big guys. When a new restaurant opens up we don’t even get a chance to send our salesperson in, and Sysco already has that account because Sysco has so many salespeople in the market. And it sort of went to brainstorming ideas as to how a smaller/midsize distributor can effectively grow a business without the added overhead for a sales team or marketing budget. I started looking online and couldn’t find a solution, where effectively an online marketplace would bring distributors and farms together. So that was a validation there that there was something that a lot of distributors were asking for and there was nothing available. But I still wasn’t convinced enough that a restaurant would use me. And that was my only reason behind buying a restaurant. Because I wanted to see the other side of the supply chain before heavily investing in an online concept. So I went and bought a restaurant, and did procurement myself and learned the hard way that if you are computer savvy and time is valuable to you, the only way you can save money during procurement is calling multiple vendors. Call 2-3 seafood vendors. Call 2-3 meat vendors. Call 3-4 produce vendors. And compare prices over the phone and with the fax sheets they’re sending you. An average order would take an hour to an hour and a half to do, which is a lot of time in a restaurant business. And we placed orders about 10 times a month. That’s 15 hours I was spending just on procurement. A month. And Foodem effectively lowers that to 5 minutes an order. So if you’re placing 10 orders we lower that to about 50 minutes in a month and get you in and out. So the restaurant definitely validated my idea on both sides, the distributor side and now the restaurant side that a solution like Foodem was necessary in the marketplace.
Bob: It certainly is a brilliant idea, and I wish you luck in having it take off, I guess it already is taking off. What’s next for you guys? Do you have plans to expand into new features? Where are you planning on going next?
Kash: Yeah, we’re getting a lot of feature requests from our current suppliers and buyers, and like any startup we are very agile, we have four programmers now, full time working for us, and we go through a process of any feature request that comes in, we prioritize it based on how many buyers and sellers are requesting it. Then we build it out in about a week’s time, test it out on our development server, through QA and testing, and then push it out to our production server.
Bob: So that’s a pretty fast turnaround time.
Bob: The results speak for themselves, it’s a beautiful site. Did you find the developers through a job site? Were they people you knew? How did you assemble your team?
Kash: Actually, I was fortunate enough, all my developers reached out to me. My lead in engineering sold his second startup in the bay area out in California and reached out to me and asked if there was a job opening, he wanted to join Foodem. He’s the one who built 2.0. The other two developers that I hired right after we got funding also reached out to me. Then this last one that we just hired, I actually found him on angel list.
Bob: Well, we certainly hope to see great things from you in the future, and I’d like to thank you very much for joining us.
Kash: My pleasure! Thanks again for inviting me to the show.