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Scaling Up [S3.E2]: Dog Food, deliberate decisions and durable growth with Mike Frizell and James Edwards, Co-founders of Pet Circle

In this episode, we learn how Mike and James founded and currently operate Pet Circle, Australia's largest online pet retailer. They share a unique perspective on a familiar market. Enjoy!

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Ed (03:32): Mike and James, welcome to Scaling Up. Now, your story both in its genesis and success is largely unknown, but it’s such an inspirational story that needs to be told. Pet Circle’s now Australia’s largest pet online retailer with over 50% market share, and it’s two times larger than your nearest competitor. In my mind, you have built truly a world class business. But let’s go back to the start. I love hearing the inspiration behind starting a business. I love hearing a founding story. I’m going to have to start with you, Mike, because I know that you are at the center of this.

Mike (04:04): Yeah. So, the original start of the business was what, back in 2010/11 probably two catalysts that got us to this point or got me to this point. One was I’d quit the banking and consulting industries and decided I wanted to do something more interesting. Started just searching for businesses with a few people I knew and slowly tip after tip narrowed in on the pet industry being a great industry, but with no great businesses at the time. And I won big business in the UK, Pets at home, which is still going, it had just been funded and I could see a great sector, but no great businesses. So, that was one piece of information. The second was pet owner all my life I could see the use case for having heavy, bulky items delivered to your house. And the third trigger for me was seeing the milk delivery services of 20 years ago, which was just teenagers dropping repetitive items at a door. Those three catalysts went, there’s something here. This is repetitive, this is an industry that’s great. It lacks a business. That really set us on the path of looking at pet.

Ed (05:06): And what did you love about the pet industry?

Mike (05:08): Yeah, interesting one. It was a couple of things. One, it was fragmented. Two, it was recession proof. Three, it was fast growing. And four at the time we looked at it, which was quite early in the pet’s evolution. The largest business was Pet Barn, and they wouldn’t have been at a hundred million yet and a massive vertical. The largest e-commerce company would’ve struggled with being about five. And Pet Barn was what run well, but everyone else were backyard operators. So, there was a lot of space in a great industry.

Ed (05:37): Yeah, you alluded to it there and when they talk about emotional industries, they talk about pets and babies. And when you started, there had been no category killer really in either baby Bunting has obviously done it in baby retailing since then, but there’s been a huge tailwind to the pet industry over the last decade, and I’m sure this was at the forefront of your mind. And I’m talking about the humanization of pets, the growth of pet parenting So, this in my mind has propelled your business into the stratosphere. Is this something that really triggered your thought process, I guess as a pet owner at the time when you were starting?

Mike (06:11): We did actually look at baby and pet and side by side them and say, which one is the better of the two verticals? The three that we looked at. We did look at the two emotional ones. Actually, the reason we went with pets in the end is it’s a slightly more repeatable, it’s a much easier repeat business. Yes, it has less turnover points where you change your items. So, they were the top two verticals. Looking at them, both the emotional ones but it was obvious. You could see from all of the sales data, all of the global trend data that spend on animals was increasing. That relationship was strengthening. So, it wasn’t an epiphany, but it was obvious.

Ed (06:48): Yeah, I think as one in three Australian households now has a pet, and you touched on it, but the predictability of demand in pet goods is off the charts, probably more than any other vertical. So, it’s set up for online retailing as you pointed out. And the largest online retailer at the time was just $5 million in revenue. So, there was just a lot of clear space for you to attack this. I’m going to drag you in now, James, and you can tell your side of the story. Maybe a good place to start is how you and Mike first met and how you became involved in the business.

James (07:21): Yeah, sure. So, I finished up at university in 2010 and very quickly realized that I didn’t want to stay in academia. What I wanted to do was go out and build something. So, I went to a co-working space in Ultimo in Sydney called, called VibeWire. And it was great. But then I met Mike and I felt like there was a real sort of alignment with values and ambition there, but at the same time a complimentary skill set and even way of looking at different problems. Mike has an engineering background trained up in management consulting and in the finance industry and stuff like that. I had a more mathematical dance and came through from that perspective

Ed (08:11): A PhD in mathematics, I think.

James (08:13): Yeah, that’s right. So, that really worked. I think for a while we were just almost helping each other out. Like Mike was having some technical problems with some consultants that I think he had hired to build the website. I was struggling to get traction on a product I’d built a software product that I’d built, even though it was wonderfully designed and all that. No one was paying any money for it. So, we fell into the, into the partnership. And that was, I don’t know, a couple of months before launch. And I still remember sitting there Postlaunch, is the website working? Is the website working? And we get a bing every time a sale came through and it came through every few hours or something at that time, which has changed.

Ed (08:59): Can you talk me through that emotion of seeing that first sale come through? Because having interviewed Kate at Adore Beauty, her elation and how she described it was so beautiful. And she had this idea and she thought it was going to work. And please, please, please, can someone go to my website and just buy something, please. And then it happened. And that moment was just pure joy for her. So, I’d love to hear your version.

Mike (09:24): I’m happy to give my perspective to start with. Yeah, mine, it was actually the opposite. So, we built the site, we actually took a different approach to most. We spent the best part of nine months on logistics, scalability will the technology actually support a medium sized business. Okay, it will and now put a website on it. So, we came from the other way and then we had spoken to lots of people on the way. There was an email list of a hundred pet owners that we knew that were personal friends, and we sent them all the email and said, we’re live and nothing happened. Our first lesson was in this vertical, you can’t force someone to buy. If you don’t need the product, need it, you won’t buy it. So, if you’ve got dog food, you don’t need dog food. We just sat there, and it went first day, nothing.

Ed (10:04): Go to the pub, have a beer.

Mike (10:06): We literally did

James (10:06): That’s literally what we did

Mike (10:07): It was across the road, the glass arms. That was our one. And then slowly, so that was the first kind of this isn’t a transactional business. This isn’t a discretionary business that people jump to in you can force people or entice people to buy. You’re solving a need. If the need isn’t there on day one, the need isn’t there. And then slowly it built that hundred slowly started to order and you could see that it would resonate. Then you started to get this, okay, now something’s happening. But it was a different emotion for me.

James (10:35): It was. And I think actually the first sale, which we were excited about, as I recall, she contacted us a couple of days later to return the dog food. So, highs and lows.

Ed (10:46): Sounds like you got that full customer experience of I’m going to buy and return it all in the same breath. What a joy. All right. So, from waiting for that first purchase to growing to a million dollars in that first year, what, just an incredible rocket ship straight off the bat. And you’ve been growing so quickly since between 50 and a hundred percent year on year. I guess the next theme I want to touch on is actually around scaling the business and the business model itself. A lot of people now say it’s never been easier to start an e-commerce business, but I’m almost at the other end of the spectrum and think it’s never been harder to succeed. And as I alluded to the predictability of demand feels as though this is something that you really played to, and it’s really enabled you to scale.

And I know a lot of hard work went into scaling the back end of the business. I guess from a consumer point of view, the customer facing stuff now and detailing is just table stakes. So, in my mind, I just really want to focus on, on the hard stuff and the stuff that makes your business really special in my mind. And that’s around logistics and supply and operations. Getting 20 kilo bags of pet food around the country cheaply, efficiently on time, every time delighting the customer along the way is not easy. I’d love to get your view as to how that has happened. And I know it’s really deliberate in how you’ve attacked it.

Mike (12:14): Okay. I mean, there’s a lot in there. So, that, let’s, maybe I’ll just start with the early phase, and we’ll jump into a few different things. So, one of the things we learned early and really focused on, as you talked about with the predictability of demand, was how do you grow quickly? You grow quickly by removing constraints. And one of our constraints was cash, so we spent a lot of time understanding cash flow of the business. And this is where our diverse backgrounds, I actually remember the day where they came together and we both went, ah, from three different angles, this thing is a good business. I said, for a day or two, if we can get CPAs below $27, an average recurring frequency of 42 days, this thing grows forever, needs no cash. Okay. And we were close to that

Ed (12:55): Cost per acquisition for those.

Mike (12:57): Yeah, cost per acquisition. That was the magical, like first six months equation. I think you went away and ran a different mathematical model on it.

James (13:03): I did a differential equation model of it and came back with the same answer actually. And it was, that’s when I believed it. And that was pretty exciting.

Ed (13:11): That’s just a very low cost of acquisition in the world of e-commerce by any measure, let alone a business with such a high repeat revenue base. And you are sort of at 70 or 80% consistently. So, I guess to see that massive fat tail that you could have of revenue from customers to only acquire them for say 40 or 50 bucks, it’s just such a wonderful lesson. I guess, we’ll get into that a bit later, but maybe we can start with, with the logistics of the business, because as I said, getting bulky goods around the country isn’t easy. I know you had one warehouse to start with and I think you’ve got three now, but how did you think about optimizing logistics?

Mike (13:51): So, there’s two parts of it. It’s the, how we tackle it was the, I’m going to call it theoretical approach and the confidence that there is a solution. And then there’s the getting to the solution that’s kind of two separate steps. So, first step was effectively sit down and determine what it would cost to ship a 20-kilo item from point A to customer anywhere in Australia based on physics, track utilization, fuel rates, labor rates, and figure out what it should cost. So, you do that, and you figure out it can work, it just doesn’t currently. And the second was then how do you make it work? One of our early things was we went to our supplies of logistics and then we went through six in the first nine months and didn’t ask him about a good price.

We said, okay, 10,000 orders a month, what’s the price then? Okay. And break that price up into the three parts from our warehouse to yours, from yours to interstate and from interstate to the door and want to split them because margins are different for each logistic company and each, and then build the technology to allow us to split them. And when you did that, you knew that the physics made sense, you could deliver it, you then knew it was possible to get good pricing on each leg. And then we knew the solution was to weave the technology together to allow it to happen.

Ed (15:02): So, the technology backend then is full proprietary to pet circle?

James (15:06): Yes. That was the product that I was failing to sell. Because as Mike taught me, people tend not to read things. But anyway, so that came in and actually still forms the basis of our, of our ERP system here at Pet Circle. And that internally allowed us to in a way remove technology as an impediment to our operations in the business, which allowed us to do the right sort of things. But I don’t want to underplay, sorry. I think we should reemphasize what, what Mike was just talking about. So, going out and breaking down the logistics, especially the outbound logistics meant that we had a really good understanding of where we would get to. Like, too often I see new entrepreneurs trying to make money now when they’re selling 10 or a hundred products a week or orders a week.

And I’m like, who cares if you’re losing $5, $10 on an order? I mean obviously got to have some money to back you, but that’s nothing. So, we were positioning for when we were doing, I think originally it was 500 or something like that, consignments per week was where we were targeting. And that’s where it all started to, that’s all we were focused on. We weren’t worried about how to make money at a hundred dollars a week. We were selling the bags of dog food for less than we were paying for them.

Mike (16:28): But we had a cash flow positive business, because of the CPA. So, it didn’t burn cash.

James (16:32): Which was massive. So, I do agree with you that logistics, the overall operations were a hugely important part of the early scaling. Equally important was the financial model that allowed us to be cash flow positive. Cause there was no way the business would’ve succeeded without that. But yeah, you’re quite right. In the operational side, there were a lot of small competitors when we were small and using a lot of rubbery figures, it seemed to us that once they got to about a hundred, 200 orders a week, the operations failed. And we could tell that ourselves. Cause we were, we were working all day and then packing orders actually was reversed. We were packing all day and then working all night. So, you got to know that, oh, it’s Ed’s order around the back. It’s just because he wanted a dog toy with it, and it’s just come in. So, you’d go, and once you get to about a hundred cognitively you can’t do that anymore. But we just raced through that. We were starting to get a lot more repeat business at that at that point. So, we just sailed smoothly, pasted all these guys.

Ed (17:30): What stands out to me is the deliberate nature of every single decision that has been made. a lot of people bang up a website, they put some products together, whether it be a white labeled product or their own, whatever it is, and then think they’re going to sell it and work out the financials at the back end of that decision making process. Everything was done up front here. So, you could really see how this playbook was going to play out even before it started.

James (17:57): It felt a lot more chaotic at the time. But that is essentially correct. We were always looking at the later stage. In fact, that’s still what happens now, right? Can’t be looking at today’s situation, you have to be looking at a year from now or two years from now. I mean, there were a lot of changes early on in the business as well with, with what work. I mean, we didn’t sell cat food at the start, right? And we realized we had, we had emails from customers saying, yeah, I’d like to buy from you more often, but I’ve got a cat as well as a dog. And that’s literally why we started selling cat food, because obviously now we have cat only customers and all the rest of it could service them fully. But yeah, at the time it was just basically bags of dog food. So, it didn’t feel like we were hitting every day. We knew exactly what we were going to be doing. But certainly, the big picture was understood to.

Mike (18:45): Yeah, it’s certainly something we’ve been accused of and still are as being very deliberate. Maybe too much sometimes, but very deliberate with our decisions and the big decisions we’re facing now. We pick them and actually culture and workforce composition now is what we’re facing and we think about them deeply.

Ed (19:03): We’ll get to that, there’s no doubt because listeners know how much I love talking about people and culture. The next thread that I want to pull on is around dealing with suppliers. And for those that don’t know, there are really four major suppliers in the pet industry. And I’m not talking about little businesses. I’m talking about huge multinational businesses of the ilk of Mars and Nestle. You are dealing with them across thousands of skews. I imagine a lot of your success is your relationship with them, knowing they do have a lot of market power. I’m keen to unearth some of the lessons that you’ve learned, I guess in dealing with suppliers.

Mike (19:43): I mean, I think that’s actually a really good pickup. It’s one 10 years in now. The first six or seven really did help us a lot. So, our relationships with your Mars, your Nestle’s, your Colgate’s of the world were remarkably good. Remarkably, I mean, the global CEO of Mars would come down and say hi, right? And we’re a business that is 0.01% of their business. And I think the way we approached it, and I thought feedback from some of the supplies is just very candid, very open, very transparent, very win-win between the two of us. And they appreciated that it’s a rarity in the corporate world. So, we still get founders of multi-billion-dollar companies coming to this boardroom and dropping to say hi. Now we are irrelevant on the global scale compared to their other customers like Walmart and Amazon.

But we went in as real people and spoke to them as real people. And that got us a long way. So, that really helped us in the relationship side. Then there’s also the complexity of a small business running 10,000 SKUs and the replenishment and the physical integration with them, which the technology helped us with. But those two sides, I mean, for six or seven years they, and we’re still pretty close to our suppliers really. I was always surprised just how collaborative and engaged our supplies were with us.

Ed (21:01): Another thing that’s emerging, just hearing you talk real time, is the significance and importance of technology in your business. And I’m sure we’ll touch on that further. I guess it’s lucky that your co-founder has a PhD in mathematics

Mike (21:14): And a software engineer

Ed (21:16): And a software engineer, I guess a lot of retailers pitch themselves as having a great text stack, but that’s based on Shopify apps

James (21:25): Equally good is my important is my ability to pack bags of dogs food

Mike (21:29): You’re not a good picker, but you can pack well.

Ed (21:32): That probably leads us to this technical complexity of your business. And it’s only increasing because you no longer what I would just call an online catalog. There are live vet chats that I know that you’re pushing at the moment. There’s advice, there’s content you’re really driving deeper into this customer experience from pet selection to care. And with that comes technical complexity. And imagine the next stage, and correct me if I’m wrong, is around machine learning and predictability of what the customer actually wants.

James (22:04): I mean, the big challenge with technology is not the individual components of it, right? It’s not the ability to get something up and running, whether it’s third party or internal. The problem is integrating it altogether to try and provide a real, both a seamless experience for the customer and an integrated set of knowledge for our operations and ability to engage with those customers. And we’ve actually collected from customers volunteering and a lot of information about their pets, their pets’ names and so forth. And we’ve failed to really make use of that yet because the integration hasn’t been completed. But that’s that one of the many focuses we have. And we’ll get there because it’s about that at side of it. And I love it. I’m a pet owner myself, I’ve got a beautiful little cavoodle and I know it’s a little bit cheesy, but if I got an email for Macaron’s birthday, I would just really like it. I just really want to have that experience shared with everyone else.

Ed (23:02): Yeah, I’m sure you’re not alone there. The next theme I want to talk about is around customer acquisition and retention. And for those that are unaware in the world of online retailing, a lot of marketing channel dollars goes into Facebook and Google. And unfortunately, as more and more online retailers exist, the economics are with Google and Facebook and not with the advertisers themselves. I’m really keen to understand how you control that customer acquisition cost over time. Because essentially that is the key component of making sure that your business is cash flow positive in the long term and eventually making money. And of course, there’s this great case study in your vertical of zoo plus that hit a wall as cost of acquisition skyrocket and they haven’t been able to make money for years. So, I’m really keen to get your little secret recipe here because I do feel like there’s something to uncover.

Mike (24:01): Oh, there’s a lot in this space, but let’s try to do a relatively simple version. The cost of acquisition only really matters relative to how loyal customers are, right? That’s CPA to lifetime values is what really matters. So, I think people underestimate, one, they get a business model that is fundamentally transactional, and they pay for the customer each time. That’s a tough business model. The second is hopefully, like with our business, we call it relationship commerce. Internally, we don’t acquire orders. We acquire customers and we keep them for a decade. So, our spend, like if you talk about our spend on growth as opposed to acquisition, we have much more spend outside of marketing on growth than we do within marketing. Probably got three times to spend outside of, it’s on loyalty, it’s on engagement, it’s on the things that customers value.

It’s on the speed of delivery. We just sent as a nice surprise to our Melbourne customers, 20,000 caramel slices last month because it’s tough. So, is a hundred thousand dollars’ worth of gifts. Small Sydney supplier Little Green Kitchen made them for us. But is that marketing, it’s through existing customers only. No, but it will increase our growth rate because our customers value it. So, I think people think that marketing equals growth. It doesn’t, not when you get bigger. So, that’s one. The second is this idea of I’ll use product market fit as the as the term that you have it or you don’t, you have it then you don’t. It’s stronger or it’s weaker. So, when your CPA goes up, you probably have to change your service. You’re constantly adapting, are you strong on your service and therefore your CPA’s low or you weak on your service and your CPA’s high. So, marketing’s not the solution, it’s the fixed thing. And probably the last one as you called out is if 90% of your marketing is on Facebook and Google, you’re in a dangerous space. So, try not be there. So, we’ve done all those three things.

James (25:54): Yeah. The two biggest mistakes people make with it is calling it a CPA when what they really got as a CPO cost per order. And just, yeah. Not looking at the lifetime value of a customer. When, when they go about these sorts of things, it’s purely looking at the immediate transactional cost.

Mike (26:12): And this is a systemic and e-commerce issue.

Ed (26:16): Yeah. That’s exactly what I wanted to touch on. Because there are lots of people who are listening that run their own e-commerce business that really do need to readjust their thinking. And it’s great to hear that from the experts

Mike (26:29): PNL, standard reporting mechanisms, the way you raise capital, this idea of CPA and payback, they’re all not quite right. You can make them look great, you can make them look bad, but there’s no good way of really understanding a business on a CPA lifetime value. So, I think when you’re first year, think about cost per acquisition. Hopefully you’ve got your loyalty measures really strong. You’re 10 years in it’s much blurrier. Your loyalty rates matter more than your CPAs.

James (26:57): I’m sure there are businesses that have failed because I wanted to keep their 10% growth per month up via CPA like via Google AdWords. As they grow, they have to spend more and more money that acquire more and more customers, of course to keep that growth rate. But there’s diseconomies of scale. At some point, and I forget the exact number or anything, we worked out, there were like 2000 or 3000 or something people in Australia who every month were organically saying, actually, can you buy pet food online? Can you do that? And then finding us that way, if you wanted to get double that, your span is going to go through the root.

Mike (27:32): It’s particularly in that channel. So, internally, we talk about our activities being demand harvesting or demand generating. Facebook and Google are harvesting channels and you harvest them point that are economically viable and then you generate demand in other channels.

Ed (27:46): I just love that mental model and framework, and I think it’s really important to think through, as you say, loyalty is what’s leading to this lifetime value. And that in online retailing is really where the cream is.

James (27:59): It’s also a wonderful way to have a business, right? Like it means that what you get to do each day is make your customers happy. You’re not trying to squeeze them. It’s fantastic.

Ed (28:08): Yeah, exactly and that’s where I want to go here because you need to delight the customer. It doesn’t matter what you’re selling. You need to be at the forefront of their mind. You need to be delighting them every single time you interact with them. And you’ve since employed wonderful marketing people. But I’m keen to know is that what still gets you going? Because you need this deep passion for customer experience to deliver it.

Mike (28:32): I think we talked it briefly earlier today. I think so. I mean, there’s a story where our Google reviews rating dropped from five to 4.9 and I was so frustrated. And the rest of the team, James is shaking his head at me. Like, are you kidding me? Then? I did recalibrate that. That’s okay. But apparently, yes, I’m quite like that. Also just love the, it’s a really unsolvable problem, consumer behavior and trying to understand what drives it, retention, and loyalty. It’s a really fun problem. Working on that problem for me is great.

James (29:08): And it’s probably one of the problems that can be best addressed at this scale that we’re at now. As you mentioned earlier on in the, in in the business, we really had to find the right logistics provider the right co service, the right website provider, so that now we can look at hiring vets to provide content. We can look at well a bunch of other initiatives that really do help also create a competitive mode to the people who might be coming in.

Ed (29:53): The next thing I want to touch on is around omnichannel retailing. And at the moment you guys are pure play online and you always have been at the moment we’ve got lots of bricks and mortar moving to the online space and some slower than others. And Covid has accelerated that. And at the other end of the spectrum, we’ve got retailers moving to bricks and mortar more so maybe in a flagship manner, but it’s just a great way for their customers to be able to touch and feel the products and have that sensory experience and get a feel of the business that way. How do you think about omnichannel retailing? Is it ever something that you two would consider as pure play online retailers?

Mike (30:38): I’m happy to start. My view of the omnichannel is yeah, if we go back, I’m going to make it up, but let’s say middle 2013/14 our board pack would start with, fundamentally the pet retail world is broken, right? It just doesn’t make sense. It’s not good for the customer, it’s got not good for supply chain. Our solution was to tackle it through e-commerce because that allowed us to do the food side and the barky stuff first. I still fundamentally think the rest is broken, which is the experiential and discovery. And if that requires us to go into physical to solve it, we will. So, it’s not really about is it omnichannel or not? It about is that the solution to the problem? The problem is it’s really hard to discover the right products you want and find the information. Now, if we can solve that online, we will, if we can solve that through vets, we may, but if it requires omnichannel, then I think we would do it.

James (31:26): Yeah. We don’t, obviously we are an e-commerce business, but we don’t call ourselves or think of ourselves really as an e-commerce business. We, we think of ourselves as a digitally enabled business, right? There would be no internal or philosophical issue with us going. We wouldn’t even make a big deal about it. We’d just go and go into stores.

Mike (31:45): If we had stores, it’d be okay, we have stores. Why? Well, the customers value it, and it allows us to do X.

James (31:49): That’s only one thing we wouldn’t do stores the same way that pet stores are right now.

Ed (31:53): When Amazon did grocery, they didn’t imagine Whole Foods would be their customer facing experience. I’m sure. I’m equally sure like every other decision that you’ve made, you’d be optimizing for the experience. I guess the next theme that I want to touch on is people and culture. And you started building this business to fundamentally solve a customer problem, as we’ve already discussed, but now with 400 people and you’ve grown 4x over the last two or three years in line with revenue now across three sites. But the problems that you now face most likely, and I’m going to have a guess, here are people problems that need to be solved. And that wasn’t the case when you started out. So, let’s talk about the people and culture of the business and how you’ve built that. I’d love to know how you think about building pet circle’s culture.

Mike (32:42): I think there’s a couple of elements that have always stuck with us. I’m just trying to remember the early days and how we’ve evolved to here, which is the core of the business. We’ve always, there’s actually a big poster out behind us, which is a photo of our warehouse and it’s called the Engine Room. The core of the business is the people that touch the goods or the customers. So, that’s the first part of our culture. We’re out at our Eastern Creek fulfillment center yesterday. We’re out there every week. That is what makes us succeed or fail. We’ve personally worked in that probably seven different Christmas’ when we pinch hit on volume not for a couple years. So, the culture is born from that perspective, that that’s the engine. And then we are sitting in the back office here that support that engine.

That’s been hard to keep, to be honest, when we split the sites and now, we’re in a lovely CBD office. Keeping that culture has been very deliberate. Before Covid days, we have monitors on each, on our wall here in Eastern Creek and our Perth facility and our manila facility that are two ways. So, you can see each other, you can walk up, you could wave, he can talk to each other, you can remain connected. So, we’ve been quite deliberate about trying to keep the company connected. The other thing we have in the company is company, over function, we are solving a problem. As a company, we’re not solving a problem as a function or as an individual. That’s really hard to, to scale, to be honest. But that’s been another thing that’s allowed us to tackle problems that are systemic for our customers, like if logistics is hard and it requires three or four teams to work on it, we work on it as a company, not as a function. So, we’ve been trying to keep that in our culture. And I must have admit at about this scale, I think we’re going through another change where we have to figure out new tools to keep that alive.

Ed (34:19): And underpinning that is obviously the values of the business. At what stage and scale did you actually deliberately sit down and say, these are the values that we hold dear to us and we’re going to impart on the company? Or was it more of a bottoms up, this is what’s important to everyone and this is how the business can evolve from here?

James (34:38): I think the first time we sat down was just after we hired our head of P&C because he made us, and also that was not a coincidence though. We brought in that person in order to that role I should say, because it had gone beyond the ability to organically instill the same values, to hire for the same values. It wasn’t any longer Mike and I doing all the hiring and speaking to pretty much everyone in the business all the time. It was becoming more and more remote. So, we needed to sort of formalize what we valued and how we thought about these sorts of things. And that was probably only three years ago or so.

Mike (35:16): I mean, we quite deliberately held off. I remember that, yeah. Let’s say seven years ago sitting down and everyone saying, start, you need to find your culture and what you should do. And we sat down, and we should do this. No, we shouldn’t. And we never got comfortable with the idea of writing values or culture because our belief, and we probably didn’t articulate at the time, was it has to be real, and it has to be us. Writing something down and seeking input in a small company from what everyone wants it to be, wouldn’t be real. So, it took us a long time to resolve what’s made us a good team and what makes the people around us a good team is what is the culture. Our job was to reflect that this is the culture, and it came out and we’ve got five now.

Some of them have been always communicate with trust, respect, but transparency. You’re not allowed to hold something back, but you’re not allowed to be an asshole. So, that’s a fine line, but we sat down the first time, and you’ve seen the usual startup stuff. It’s all about the same people doing the same things. We didn’t like that actually, remarkably different people. It took us a while to sit down and be comfortable with what the commonality was. And it’s actually not what most startups are commonality is to be individual. We don’t, you had good words. You didn’t call it a culture, we called it like a work contract.

James (36:30): Ways of working or something like that.

Mike (36:32): This is a contract between you and your peers about how you’ll treat each other.

James (36:36): We thought about it as what you do at work, when you turn up to work, what can you expect from the business and from the people you’re working with within the business. So, it’s a two-way, I guess three-way street if you like. And that’s where we want to start and end it. So, yeah, as Mike was saying, like honesty and clarity and these are very startup type virtues. But they’re all about how you work within the business with each other.

Ed (37:02): And now I guess it’s about attracting and retaining and motivating a large group of people with over 400 staff. How do you think about this piece?

Mike (37:13): We have multiple cultures; we have multiple ways of working and they’re all right for the people that they serve. it took us a while to realize forcing our culture, which is a different history onto one team, now we actually have about four different cultures in the company. Doesn’t make sense. We’ve got to figure out the culture that makes that team feel comfortable, engaged, and productive and sit under the core values of the business. But they can be quite different. That’s how we’ve thought about if they can’t be the opposite of our values, they have to fit in, but they can be different cultures.

James (37:45): So, we have a large team in our warehouse, and the fact of the matter is that they as a group everyone’s different, but as a group they have different values, and they want more different things out of their work than a lot of the team centered in the city do. So, we have to respect that a lot of startup places will simply say work really, really hard and progress within the business. Okay, that’s great. But that doesn’t help someone who’s doing a part-time job stacking shelves at night for a few years while they save enough money to go back to university or something like that. We want to respect that as much as anything else.

Ed (38:27): I’m really curious as to how your relationship as co-founders has evolved. Sometimes you hear of these fractured co-founding relationships, sometimes it brings people even closer than they were when it all began. I’m curious to hear your stories.

Mike (38:46): I’d say all of the above genuinely. I mean if you think through the history, the business is tough on an individuals and expectations on each of us. So, I use one example, which is the easy one, which is capital raising. When I did the series B or whatever it was

James (39:03): 2017

Mike (39:05): I wasn’t here for about a year. Right. If you think you can do a big international round in three months, you’re better than me. What that is a catalyst for is our roles shuffle have shuffled over the years a lot. I think the only function you probably haven’t around is merchandising. The only one I haven’t around is technology.

James (39:26): Yeah.

Mike (39:27): But we’ve swapped all the others. And so, relationship wise, we’ve been through phases where it was, we mentally said, mine is my goal is to make sure there’s no reason we don’t grow and yours to make sure there was no reason we don’t crash. That works for a while. And they go through different phases. One you rebuilt the entire website in three months where you almost exploded, I did a capital raise are almost exploded. Highs and lows I think the main element, this is my view anyway, is no matter how good or bad it gets, the one thing I personally feel is we can stop, and the other person never thinks, or I certainly don’t that the other, the other side has an agenda or is lying that is, that is never it. And whether or not you like what you hear is a different thing. But that’s the basis you can have a conversation upon. For me anyway.

James (40:19): Yeah. I think like people often is a bit of the thing that people say is a co-founding relationship is like a marriage. And when you, I think, it’s really, really true. I was reflecting on this the other day because you go into that and it’s actually, it’s great. I really enjoy working with Mike, but especially at the start, it was wonderful to meet someone who, as I say, had those same shared ambitions and values and we would finish each other’s senses and stuff like that. But as it progresses and we’re heading into our 10th year now it’s also like a marriage because you fight like cats and dogs, but there’s always that respect and trust that you can do that. And especially as the business becomes more successful, you actually need that.

Mike (41:05): You do. I mean, that’s a really good call out. The ability to just say you’re being a dick, is very early days lots of people tell you that. The more successful you get; the less people tell you that. So, it’s actually really useful for us to be able to say, I know what you’re doing. Think you’re the wrong side on this one.

Ed (41:24): And that probably leads to the next theme that I want to talk about, and that’s the impact of Covid. This is the first interview that I’ve done since the outbreak of a global pandemic. And as we all know, ravaged small businesses, not only around Australia, but around the world. E-Commerce has seen massive tailwinds because of Covid, and you’ve been a beneficiary of this. But something that you touched on and something that’s probably more interesting, I think is around the impact of the people inside your business. With the backdrop of Covid, how have you been able to still test and debate ideas and how have you collaborated? We’re, we’re sitting in your office today and there’s no one here, so I’m going to assume that everyone is still working from home in terms of people and culture. How is Covid impacting your business?

Mike (42:12): I think it’s too early to really tell. I think the positive comes early when you move to remote work and the negative comes late. So, I don’t think you’ve seen the negative yet. My personal view on what’s going to happen with workforce over the next five to 10 years is we’re going to see first phase, which I’m going to call the next 12 to 24 months where we’re in, which is people are enjoying it primarily. We’ve done a lot of surveys, enjoying working from home. They’re not missing much from their own personal perspective. The company is starting to feel, in my opinion, less collaborative, better in team, worse cross function. So, we come in as an executive team and a senior management team every week and try to keep that connectedness. But that’s going to be the crack that starts to grow. That cross functional collaboration is going to be a crack. And I also think individually people are going to start to miss elements of their life that they don’t have anymore from being more isolated. But I think that’s going to take 12 to 24 months for that to dawn on, for everyone to feel that emotion. And then I think that’s the new world coming.

Ed (43:13): And do you have plans to, to move people back into the office?

Mike (43:16): The most recent plan was we’re not in the office until December. No, not at this stage. I mean, I think we’re in a tough transition where it may be better for some teams to be more co-located, but the individuals aren’t quite there. We’re seeing that yet. So, you have to balance between what’s better and what’s enjoyable and then you have to do this across. Is it for the company, for the team?

James (43:38): Well, people are coming in often one day a week and within their own teams. So, we come in as a management team on Tuesdays and so on. So, there is a little bit of still that, that cross pollination, but I don’t think it’s the stable state at this point. I also think it’s been I mean; some people are in circumstances where it’s much better. So, both Mike and I have nice houses and families and this sort of stuff. We’re pretty happy to take a bit of a break for a while. But some of the younger people just entering the workforce, they seem to be struggling a lot more. They don’t necessarily have families at home.

Ed (44:16): Or all the infrastructure in their house, they might be working from a shared bedroom.

James (44:20): That’s right. They’re also lacking as much ability to learn from people who’ve been in the business longer and have more experience in general. And of course, we’ve been, been hiring and it’s noticeable that people who have been hired since Covid started and the working from home are still struggling to integrate within their teams I would say.

Ed (44:42): Yeah, that’s my next point. It’s very different trying to maintain a culture in Covid when a business like yours is seeing massive acceleration in terms of top line growth and you need to keep hiring and these new hires are no longer getting that immediate connection with their coworkers or even that sort of cultural foundation of the business.

Mike (45:03): So, we have tactics that try to address that, but it’s never as good as bringing teams together. The tactics are newer. Teams are actually in more often than more established teams. Onboarding is now here, so if you knew you come, and I believe the first onsite onboarding was actually this week or were remote, yesterday. What else did we do? Early days in Covid was daily, if not then drop to three times a week. You just hear me talk for five minutes about what’s happening and just send videos out to everyone. So, we tried a bunch of tactics to just increase that connectivity and I think some worked. But it’s really just an ongoing what’s the problem? The problem is new teams are struggling more. Okay. How to readdress it and then work through it. I don’t think there’s a good solution at the moment. It’s just about listening to people and listening to the cracks and execution the company marrying the two. So, but just navigating it as we go.

James (45:56): Some decisions have been made and are going quite well. I think customer service, we call our customer experience team are now fully remote and that’s not changing and that’s, that’s going great. So, that means we can get talent from all around Australia and of course potentially the world. So, it’s fantastic. So, that’s made big, big benefit. I’m setting up a team and I’ve gone remote to start with, so I only want one person so far, but she’s in Perth, so isn’t going to make it into the Sydney office very often and really try to commit to that and make sure it works, but it’s different level of collaboration that’s required on that front.

Ed (46:37): And have you upped your game, so to speak, on taking the pulse of your employees through engagement surveys or, or other tools?

Mike (46:46): Yeah, engagement surveys more frequent first on and out. That was quite useful under a new pulse. Personal management things I’ve changed. I used to have one-on-ones with let’s say 10 people and I have 20 to 25 one-on-ones now a month. I’ve taken my direct reports the next level down and sporadic other ones. So, the way I keep Pulse is there might only be 15 minutes, but I’ll have lots of one-on-ones and encourage most of my senior team to do the same. It just, it’s more organic way of actually hearing one to one than this broadcast approach.

Ed (47:19): The last theme I want to touch on is around sources of capital and funding. And for a business of your size, you haven’t really taken on a huge amount of capital, but I still think there are lessons to be learned from your story and the types of capital that you’ve taken on. And the main source of capital at the start was from Blue Sky. And for those familiar with the Australian investing landscape, that story didn’t end well. Then Air Tree came in and Craig Blair one of the leading venture capitalists in Australia. Since then, you’ve had a large international growth fund as an investor. So, you’ve had three very different dynamics, but underlying this is, I guess, venture would’ve expected supercharge growth. And I’m really curious how the source of capital has affected the inner workings of your business. And I guess the larger question is what are the lessons you’ve learned along the way and the tips that you could pass on to other entrepreneurs who are thinking about raising money when it comes to the choice and quality of investors and why it’s important?

Mike (48:23): So, lessons, I’ll do my one quickly. The first round, which was privates really helpful, like as individuals, really great people really helped me along the way. We’ve brought a couple in in that last round in Series B as privates as well. So, me are super useful, some D2C consumer guys out of the US, some retailers. So, one lesson for me was if you have the chance to raise capital, use it also to bring great people in. So, some of our best advisors that I chat around the world are minority investors. Between the other two, your venture, many ventures and this growth fund, they’re different. What would I, what’s the advice? We dug in pretty heavily in 2014 15 against the advice of most of our board who wanted us to push harder, have a bigger loss, and grow faster.

So, the pressures do come for that grow fast when you’re in the venture world to both of their credits. The board members at the end of that said, good call. Thanks for not listening to us. So, that was, one, it was very much that ventures grow fast your CPAs and out time lifetime values are good. Don’t worry we’ll back you when you need more money. Glad we didn’t, because obviously there’s a history there. We remained, I think, remarkably capital disciplined. Despite that experience. I think people can be turned in the wrong direction by that. The growth fund stuff Neil, who’s our original board member from Francisco Partners, Neil Tolaney, he knows consumer and he knows eCommerce like no one I’ve ever met. We sat down and had many people that were looking at the business.

We said, pro good, he knows it well. Con shit, he knows it well. Mainly that last round was to get someone that really understood the business incredibly well and had the ability to be there for as long as required and that was our decision. What’s the lesson out of all of it? I think what we did well was we raised late, we held off, we used our cash flow as much as we could. We always raised when we didn’t need money every single time, rather making money and cash flow positive or just cash positive, but usually both and raised from position of strength be in control of your business. Don’t ever let capital be in control of your business.

James (50:47): Yeah. Use the capital to continue being in control of your business.

Mike (50:51): Of your business.

James (50:51): You don’t want to just grow and then be forced to take more money to pay the bills. We rejected a number of really good businesses who wanted to invest. It’s not just about the valuation. That’s the sort of headline and it can get quite excited about that at times. But you got to look at the rest of it quite closely, both the terms and what the fund wants you to achieve. So, as you mentioned VCs about, about grow, grow, grow, and then come back for more money and continue growing that can be fantastic. And that can be the right path, but you got to work out whether it’s the right path for you,

Ed (51:28): An addictive drug for those that sometimes take it.

James (51:29): Yeah, absolutely and you could have a huge success and walk away with not a lot to show for it at the end of a long time.

Mike (51:37): I remember, I think it was a discussion we had going into that first venture capital round. And there was private, it was to stay private, or do the venture capital thing or go slower. And one of the catalysts for me on taking that was if we want to be backed into a corner, it’s a force you can bring on the business if you want it. If you want to be pushed to grow, take venture capital. You’ve got to hopefully the gumption to know when to stop, which I think we did. This is enough. A hundred percent is enough. We’ll stop at a hundred because there’s cracks, but if you want to put pressure on your business you can use capital sources to do that. This last round, series B one of the catalysts was it’ll professionalize us, it’ll turn us from a high growth startup into a great, on a global scale business. So, bring people in that’ll force you to do that. May not be comfortable cause it’s a force, but you can use capital to force you to change

James (52:27): The other like sort of relatively minor difference, but it’s noticeable. Is that local VC, and this is changing quite quickly, but local VC, when we started with them, were relatively unsophisticated in being able to provide extra analysis and reporting and stuff. Whereas when we went with Neil you would get that whether you wanted it or not at times. They have rooms of analysts who work through stuff and identify things and ask hard questions and you might disagree with their take on it, but it forces you to understand your own business a lot more and perhaps how other people are perceiving it. So, that is changing locally with some of the increased sophistication that we certainly see from Air Tree now, I would say. But yeah, that’s a thing to pay attention to. Just know what you’re getting into when you take money.

Mike (53:16): I agree. Probably not dissimilar to any other partner. Know what their objectives are, know where you’re going to have to dig in if they’re misaligned.

Ed (53:22): One last question and it’s this. If you could give one piece of advice to your founding selves looking back on your journey. So, if you could turn the clocks back and give just one piece of advice to Mike and James 10 years ago, what would it be?

James (53:38): I mean, there’s been a few things, tactical things that it’d be nice to have worked out sooner. I mean, whilst the philosophy hasn’t changed and we’ve always been a hundred percent committed to, to, to customer experience ongoing loyalty we perhaps didn’t always have the right tools and right visibility to ensure we were doing good job of that because a lot of the push factors can take in the other direction. So, I probably say something about, I’d probably give myself some advice, I’d probably also ignore it if I went back in time and stuff. Another one would be to think a little bit more as you start to get successful, to think more about the structural changes in the business from people who’ve been there, done that. We’ve learned to value so much the experience and advice of people who haven’t even come out of e-commerce but just have years of experience in large businesses working with real situations. I think at the early days we were why would you do something so stupid? And now we find ourselves doing exactly those things and going, oh, this is why they did it. This is why everyone else does it. This is why big companies do this sort of thing. So, to understand that and get someone like that in earlier on and we now have a fantastic guy who does exactly that on our board would be probably number one

Mike (54:59): That’s very similar to what I was thinking. I mean, advice going back would be twofold. Talk to people whose opinion you deeply value and the experience is valuable. That’s one. And two is don’t be afraid to ask because more often than not, they’re happy to spend the time. I’ve been in the last few years, very surprised by getting to email someone that you wouldn’t expect you should be able to talk to. Yeah. Come you can tour the warehouses, come up, spend some time like you’re the second or third largest e-commerce company in the world. Yeah, sure. Come on. Yeah, of course. I think the first few years, maybe five or six, you second guess yourself, but if you go with the right, I think now if you go, I really want to learn, I’m really authentic. I find often they’re trying to learn from you as well because you’re the newer version of where they are. They’re 20 years into their journey. People will give you the time and they’ll give you the insights and they learn from it too. So, have the confidence to actually go and reach out to people. Sometimes they’re busy, but more often they’re not and they’ll make the time.

Ed (55:57): That really is wonderful advice, not only for founders and entrepreneurs, but for the general public at large who are always looking for connections to people who can help them and support them on their own journey. Thank you so much for today. It’s been an absolute pleasure. I just can’t wait to watch the Pet Circle story continue from here.

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