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[E4C9] How To Attract VC Funders To Your Social Enterprise with Tyler Gage – Runa

Tyler Gage is the President and Co-Founder of Runa Amazon Guayusa tea company, a social enterprise that exports sustainably harvested guayusa tea sourced from indigenous communities in Ecuador. An idea that started while attending Brown University in 2008 Runa is now exciting social venture that has lead Tyler to spend the last five years working with indigenous communities in the Amazon developing fair trade initiatives with generous funding from business plan competition prize money, angel and VC investors, USAID, the government of Ecuador, and many other organizations.

In this interview, Tyler explains the process of founding a social enterprise in a developing country, and offers advice for those interested in starting their own socially-conscious business. He discusses:

  • What it took to set up an tea export supply chain in Ecuador
  • Tips on walking your talk as a triple bottom line business and establishing trusted partnerships with indigenous communities
  • Founding sources (you’ve never heard of) that are available to social entrepreneurs in developing countries
  • What it takes to get funding from USAID
  • How to make your startup attractive to angel and VC investors

Now Tyler and I have a little bit of history. Years ago I introduced him to a family of shamans from Ecuador – the Mamallactas. Tyler graciously allowed us to host a ritual in his home. During ceremony the Mamallactas served guayusa tea to the participants, which was Tyler’s first introduction to the tea, an experience that sparked a company.

Traditionally, indigenous Kichwa families in Ecuador wake up at dawn and gather around a communal fire to drink gourds of guayusa. During this time, village elders teach the youth about ancestral myths, hunting techniques, social values, and about what it means to be “Runa” – meaning “fully alive” or “fully living human being,” in the indigenous cosmovision.

I’ve been impressed by the growth of Runa which started as a business idea while Tyler was in college. But what I’m most impressed by is Tyler’s commitment to sustainability and preserving indigenous traditions. I am most excited by his recent venture – Rios Nete is a healing and research center in Peru dedicated to the practice and preservation of indigenous Amazonian medicine – set to open in the beginning of 2015.

It will be the first institution dedicated to practicing and methodically researching Amazonian medicine. In addition to receiving patients who seek to treat illnesss through traditional means, Rios Nete intends to catalog, preserve,
and scientifically validate the components of this medicinal approach, in order to protect both the plants and the knowledge of their medical uses from extinction.

To check out this amazing initiative, go to RiosNete.org.

Mentioned in this Podcast

Where to Find Tyler Gage

FULL EPISODE TRANSCRIPT

Lorna: So Tyler, I have known you for quite some time and I’ve been really enjoying watching the growth of your business, Runa, from the sidelines. From sharing our mutual interests in the culture of the Amazon, to discovering your initial business idea of importing guayusa from Ecuador and then visiting your company down in Ecuador in Archidona. I’m just so impressed by the amount of growth that I’ve seen over the past couple of years and what you guys have accomplished. I’d love for you to tell us more about Runa, particularly what is guayusa? What sparked the initial business idea that became this triple bottom line sustainable fairtrade social enterprise and all the fun stuff too like what it took to research your market, supply chain, build your team and get your product ready for export to western markets?

Tyler: Awesome. Well thank you so much, Lorna, for the opportunity to share and connect with you and your audience. It’s always a pleasure to talk with you. That was a nice string of introductory questions so I can I guess do my best to fill in about Runa and the guayusa tea.

So ever since, I’m a young guy myself, but ever since my freshman year in college, I was really fascinated by the Amazon. I grew up in the suburbs in California and never really felt connected to any traditions or spirituality or really any kind of cultural heritage so when I was first invited by an ethnobotanist to help him do research in South America I really jumped at the opportunity sort of feeling that you’re [? ] connect with something a bit deeper and more ancient.

So from there I spent a couple years doing primarily linguistic research. I was really fascinated by the native languages and particularly how the language reflect the native communities’ environmental values. So actually language is their way of mediating their relationship between the environment, which is a big part of their identity in turn.

Then I had a lot of experiences where I spend all night in ceremonies that were incredible with music and myths but first thing in the morning at sunrise I hear chainsaws cutting down hardwood trees so the families could get a couple dollars to send their kids to school or just buy rice or yucca just to feed their families.

I really saw that challenge that they faced where on one level they want to maintain their traditions. Cutting down trees, it hurts them in a way. But when it’s their child versus a tree it’s a pretty easy decision to make and they really don’t have any sustainable economic opportunities. They can move to oil fields, they can log trees, they can grow monocrops but nothing that’s really sustainable economically or consistent with their cultural values.

And then one morning I tried guayusa tea. It was in Ecuador and the families there they get up right at dawn, they boil these big clay pots full of these guayusa leaves, make this tea that they dip the gordes into and dip from the gordes and tell stories and talk around the fire until sunrise.

And drinking the stuff gave me a pretty good boost of energy. The indigenous people tout it for its energizing and nutritional effects. We’ve later learned that it actually has more caffeine than any plant in the world and double the antioxidants of green tea. It sort of reflects all the ancestral uses and really nice flavors. Really amazed at how clean and smooth the tea was, compared to other teas I drank.

So kind of stayed in the back of my head as something that I loved and I had recognized at that point that no one had ever commercially produced it. So I went back to school to finish my studies and took an entrepreneurial class during my last semester with a couple of my best friends. We were shooting around ideas for business plan ideas, concepts and I threw out the idea of creating a beverage company to import this crazy, unknown Amazonian tea. So for whatever reason we thought that was a marvelous idea and got to researching what actually making a tea company and a beverage company would look like in the US.

From there we realized it was actually a pretty good opportunity. We realized that in general energy drinks are the fastest growing beverage category beyond anything Coke, Pepsi, beer, whatever it is. And second is tea. So there’s a lot of obviously consumer need in the modern day for energy and also the awareness of tea’s help benefits and the simplicity and taking some time so we saw some opportunity to sort of emerge those two categories in the beverage world.

Then we actually ended up winning Brown’s business plan competition and Rhode Island’s state business plan competition. And subsequently graduated December of 2008. So with that, my business partner Dan had a job offer and I was thankful to receive to go back down and keep doing my research. We decided that not only was this a really cool challenge that was before us, thankfully we had some resources, but also it was really the kind of work we wanted to do.

For me I think research is fascinating and it’s great to document and share about the indigenous traditions on a more conceptual level but really building markets that, one, create real impact for the families. To date we generated about almost $80,000 of income for these farmers in a pretty short period of time and seeing the impact that that makes on their ability to sustain their families and feed their kids is huge.

Secondly, if you’re in the north when we can share our tea with thousands of people and say hey, this is something that the indigenous people drink every morning, it has immense cultural significance and also a lot of potential health benefits and energy for you. How real and tactile and physical that exchange is and it’s almost much more meaningful because there’s something physical to share. It’s just really caught our heart and our mind as something we wanted to create.

Lorna: So you gave up a full bright fellowship to start your social enterprise?

Tyler: Yeah I don’t think a lot of people thought that was a terribly smart decision. My parents included.

Lorna: But hey, look where you are now.

Tyler: Yeah, we’re growing. Things are moving well for now.

Lorna: I think you’ve actually been able to create a lot more positive impact starting a social enterprise that actually provides meaningful employment to a sector of people that in Ecuador are probably the most marginalized people in that population. So the positive impact of starting your company was actually probably a lot bigger than the research impact through doing research with your Full Bright Fellowship.

Tyler: Yeah, I definitely agree with that. You know at this point we’re well on track in our plan in about five years is to be generating about a half million dollars a year in direct income for the farmers. That’s just straight money in their pockets for a few thousand families and that really is going to reach in the truly transformative level that we want to get to. And yeah, I think that’s how we see ourselves too. We’re by no means working with these pristine, absolutely remote indigenous people living in the middle of the rainforest with no contact. The groups that we work with, primarily the Kichwa in Eastern Ecuador, they’re people who are really struggling to navigate that space between the globalized world which is inextricably been linked to their reality and also their ancient traditions. So we really see Runa’s work as a sort of new foundation for them to carry the parts of their culture and their traditions which they want to and which they value, and also really enter the global world and share their products with international markets in a way that is respectful and empowering for them.

Lorna: Yeah, absolutely. Going back to the early days, you won a couple business plan competitions. How much cash did you get out of that plus services?

Tyler: It was about $70k in cash and services.

Lorna: Combined?

Tyler: Combined, yup. Yeah so that gave us a little bit of running room. We moved to Ecuador then. Shortly after started doing a lot of background research and just trying to figure out how the heck to produce this stuff in Ecuador. Guayusa had never been commercially produced in any capacity. So it wasn’t like we could just call up Juan and Quito and say, hey send me a container of guayusa tea, we want to market it.

The first year and a half we really were on the ground day in and day out just working from absolutely scratch to build the supply chain.

We were thankful to make some good partnerships early on with some forestry engineers, some local economists who we started working with. We literally had to figure out drying temperatures, harvesting protocol, quality control, I mean the list was just everything. Every little thing is kind of taken for granted of what it takes to get some leaves from trees in the middle of the rainforest to a consumer product here in the US. Actually when we arrived, when we told farmers we wanted buy guayusa leaves they literally laughed. They’re like oh it’s a funny joke, you know.

Lorna: Why?

Tyler: There’s no market for guayusa. Are you sure you don’t want to buy coffee or chocolate? Because for them the idea of anyone wanting to buy something that was really just part of their ancient traditions was totally weird. All of Ecuadorean society and the world is saying, hey, your traditions don’t mean anything. You should modernize, you should move to an oil field, you should grow corn, you should do things like that, so for us to come and say no, no it’s actually what you guys value, your traditions, these plants, this heritage that there’s the opportunity for them and we can provide some pretty solid income. That was definitely a surprise, I guess shall we say.

Lorna: Okay, so you arrived in Ecuador. The amount of research that you guys did, to me sounds really daunting. I want to try to picture what it was like when you showed up in Ecuador. Did you know at that point what the hell to do? Like oh, I’ve got this research methodology that I’m going to follow. I mean what does it take to really ascertain, especially since you are in a new market, working with a product that has never before been exported. How does one go about doing that?

Tyler: We made a ton of mistakes, for sure. I won’t go into the [list].

Honestly, I think our strategy was very determined. So we had no problem just banging our head against the wall and just working until we keel over every night. So I think honestly that’s really the groundwork that we built Runa, is just a lot of hard work and determination.

Secondly, we really took building partnerships to heart. So I think we were as humble as possible, recognizing that we were two 23 year olds in the jungle and really look to advisors, mentors, experts, industry professionals, people who had done things even remotely similar. To pick their brains, ask questions, take notes, share them around, think about them, follow up. And we really did that for all of Runa, we still do. It’s one of our main focuses as a team. And that was really helpful. I think that even in a few months we were, we built a pretty good network of people in Ecuador. For me, I think it’s one of the biggest weaknesses of development programs and any organization or company operating in the developing world is just the tremendous lack of sharing. I still find it mind boggling how they’ll be, I’m sure you’ve seen it, the seven organizations all building a well in the exact same town with absolutely no coordination or no knowledge of each other. I think so for us to take a strong pension towards building partnerships was pretty unique and I think definitely paid off.

Lorna: Did you do a lot of surveys? You know because with market research one tends to think, oh market research involves a lot of surveying your potential customers or suppliers. Did you run a lot of surveys with your stakeholders? Did that yield any valuable results for you?

Tyler: Yeah, definitely, running surveys, a lot of interviews. We’re building a head-up now, we have a, we’re actually using Salesforce to create a database of all the farmers. So right now it’s about 1200 farmers and we’re building this really cool, obviously cloud-based system to track the benefits over time that we’re creating, and the changes in their socio-economic livelihoods.

Again, so we’re really on kind of just started with bits and pieces of that.

Lorna: So you did all your research and at some point you decided ok we’ve done enough research, it’s time to actually hit the road and start something. So what did it take to create your supply chain? Were there some general stages that you guys went through before you knew without a doubt that you could provide quality guayusa and export it to western markets?

Tyler: Yeah, good question. Honestly, we really did it bit by bit. I think one of the things we took seriously earlier on was trying to set little progressive milestones that we could accomplish.

So for example we got a grant from a government ministry, the ministry of export pretty earlier on. Just to do initial research and development. So one of the things, we literally got this tiny little oven dryer. We could process like ten pounds at a time every five hours. It gave us a good base to start drying leaves and testing temperatures and humidity and all that sort of stuff. And literally we put this thing in our regional director’s garage. I mean it was like a pretty dinky operation.

You know those grinding meat processors? The ones that have the little…

Lorna: Yeah, the little funnel at the top and the meat comes out and it extrudes the meat at the other end in like spaghetti ribbons?

Tyler: So we bought one of those at some meat supply store to grind the leaves and you can get a good picture of what this was like. But it was basic. We knew that without starting with something and without getting a basic understanding of these core components, you know, particle size, humidity, quality control, that sort of stuff, we couldn’t go anywhere.

And then from there once we could have that, we could then promote that hey we have a functioning R & D facility in the works. So I think in setting, in retrospect quite little and potentially unimportant milestones but really using that as a barometer to show progress, it helped us for internal planning and also for raising money and bringing on new partners.

So from there I think it’s always been back and forth. Even still we’re close to outgrowing our current factory that’s producing about 5,000 pounds a month and building one that will produce 50,000 pounds a month early next year.

So it’s always that process. I would say it’s never like, great we’ve done our research and now it’s implementing. Then honestly I think a lot of entrepreneurs can get caught up in that. You want to kind of wait until you have the perfect plan and then execute. For something that really involves a high level of innovation it’s just not possible. You always have to get as much information as possible and then really ride it out on some faith and some guestimates and then sort of fill in that whitespace and create new whitespace in the process.

Lorna: So in order to get your product right do you actually rely on scientists who study the quality of your leaves and help you deal with pest issues or fungus issues? I mean how technical and scientific does producing your product get?

Tyler: It’s getting more scientific. Again early on for our blends we literally bought some herbs and planted them in Dan’s kitchen to figure out the first blends.

So I mean it’s kind of gone from simple to more robust. At this point we use labs in Quito and across the US and Europe to do both QC testing and investigation throughout the different components that guayusa has. We’ve kind of discovered it has a ton of polyphenols. Basically antioxidants. And we’re doing some research to piece out which ones those are and discovering some pretty cool stuff in the process.

I would say that’s a big bulk of it, and then there’s the sort of this logistical bucket of all the export regulations and port regulations, brokers, warehousing, FDA. All that which we deal with.

Lorna: So what does the supply or producer side look like? You work with the Quichua farmers so how do you have those guys organized?

Tyler: Yeah so part of our model as a social enterprise is that we don’t actually grow any of the guayusa tea plants. Basically what we do is we train farmers to harvest from the trees that they have in their own forest gardens and also to reforest degraded lands with guayusa trees and other crops to sort of rebuild these forest gardens on their lands.

So we have a team of field staff that’s trained to provide technical assistance to farmers and then we have another harvesting and production team which then works with the farmers every day and buys the fresh leaves. So every day we’re buying from ten to fifteen different farms and they harvest fifty pound sacks of fresh leaves, we go, we pay them on the spot, bring the leaves to our facility, where it goes through withering, drying, milling, sifting and packing. Until we’re exporting big palettes full of basically loose leaf tea. That comes into the US, we then send that to our copacking facilities. So we have a third party that makes all the tea boxes and then we have another third party we’re working with now to produce our bottled drinks.

Lorna: Wow, that’s pretty cool. Do you find it really challenging to work with the indigenous community because I would imagine that their level of financial literacy is not that high and there also might be a lot of cultural differences too that might make working with a western company challenging.

Have you found certain challenges that you guys were able to overcome in terms of working with indigenous communities and what their expectations were in how they tend to do business or maybe not do business?

Tyler: Yeah, that’s a good question. Yeah, the indigenous mindset is very different. And even locally you compare the sort of mestizo farmers. The ones that aren’t indigenous with the indigenous farmers. The indigenous farmers say this that they don’t have the same sort of tools and resources and even just ways of thinking about farming. Where the mestizos they think about it like a business. They calculate input, they calculate outputs. Sort of we might assume farmers do. But the traditional style of farming for them is basically selective. Well basically what they do is traditionally they’ll burn down like a small chunk of rainforest, and let it grow back. And in letting it grow back they’ll cut down the species that they don’t want and just let the species grow that they do want. So there’s no planting, there’s no real management, it’s sort of this stewarding and carving out of nature’s own reproductive process. You can see how that’s a different mindset, and even too these farmers who very recently were part of a cash economy, don’t have bank accounts, many of them don’t have IDs. Most of them sign receipts with a thumbprint. So in terms of doing business, also these are communities who have been incredibly discriminated against and ripped off endlessly by foreigners. So from our end I think we recognized it would take a lot of transparency, and just a lot of time. Just to really prove people that we’re doing things right, we were really here to build partnerships, we weren’t seeing this as a short term project, we weren’t seeing this as a way to get rich or we were going to pull any tricks on them. So we’ve been really diligent to build in receipt systems, different weighing systems and make sure weighing is transparent, and just being there. Really taking it seriously that if we say we were going to be somewhere we do our absolute best. You know it is Ecuador so we can’t be perfect but taking that seriously.

Lorna: Yeah, I know because in Latin America everyone shows up pretty late. No one’s ever on time. Do you find that really challenging?

Tyler: It’s different. Yeah, it’s also, I guess in that level, it’s one of the things that I always make a point of with our management there. Locally most things like [?] are there projects. So the government or an NGO or someone will come in and do a coffee planting project that’s like a six month project and then it ends.

So in many ways some of the local farmers, they call us the [?]. Guayusa like the guayusa project. We try to make a serious point and say we are not a project. There’s no end date, there’s no end sight. There’s no limitation to what we do. We are a business and we’re here to build a longterm partnership. We see ourselves doing this for generations to come. And we’re not working for any short-term profits or there’s no deadlines saying great, bye 2012 or 2013. Things are done and good luck. This is really a longterm thing for us. I think it’s taken some time to really change that mindset just because it’s such an ingrained part of the communities history with NGOs, government projects. It is interesting in that way too how we have to break some expectations and carve out our own role and identity.

Lorna: Cool. You got your supply chain ready and now it’s all about tackling the western market. What did it take for you to get your product right, first of all? I mean did your product go through several iterations? I was just talking to the mushroom guys, Back to the Roots, and their first product was in a bag. And their first partner looked at their product that was in a bag and the guy was like that is disgusting. You guys need to go back to R & D and come up with nice packaging. Did you guys go through that process too where your product went to several iterations of packaging before you were able to get it to a point where it would be well received in stores?

Tyler: Yeah, the Back to the Roots guys are awesome and they’re some of the best entrepreneurs that I know. And also a lot of great stories.

On our end, yeah, we launched our first product was tea box with pyramid tea bags. We had this idea that we really had to be super premium and really make it the nicest packaging ever. It was very expensive, for one. Our starting price on the shelf was like $9.99. It was also very big. Logistically we had to put these big over-wraps like the envelope the tea bag comes in over the pyramid tea bags. So it’s kind of where we put ourselves and we realized hey, we’re taking up a lot of shelf space, retailers don’t like that and the price point is quite high.

In retrospect that was definitely an error. And then we redid our packaging, it’s a much smaller box, we’re using natural paper tea bags and in stores now anywhere from $4.79 to $6.19 at the top. And by the end of the year we’ll probably have everything high about $4.99 which is a really competitive price for an organic and fair trade tea.

Yeah, so it took us some time to work out those kinks. Being in the market we do a ton of product demos. So we’re always in the stores, talking to consumers, working with the grocery teams. That gives us ability to have our eye on the ground and really see what people respond to.

Lorna: So in the very beginning was it you and your partner just calling up a bunch of different gourmet grocery stores and trying to pitch them on carrying your tea? Or did you have another process?

Tyler: Yeah, good question. We brought on team brokers. So a third party agency that’s been really helpful getting new accounts for us. They’ve been really fantastic. They have the retail relationships.

We also brought on a VP of sales who has pretty tremendous experience in the industry and he’s helped land a lot of our major accounts. And then we also supplement that with our internal team going store to store and pitching the product.

Lorna: So you brought in professionals from the beginning?

Tyler: Yup.

Lorna: Okay, that’s awesome.

Cool so what I have been really impressed by in seeing your company grow over the past few years is the amount of money that you raised and the different sources of investment you’ve received. Can you tell us a little bit about that? How can another small social enterprise replicate your success and raise the VC funding and tap into alternative sources of funding in order to grow their business?

Tyler: Yeah. So we’ve been really thankful to receive a pretty diverse stream of funding to help us grow the organization. We raised a round from angel investors, through a convertible debt structure. We closed out a little while ago, and had a few dozen angels from pretty much every industry you could imagine who invested to support the company. It kind of started more as friends and family and then moved into professional angels the last few months of it. And then we also receive about $500,000 from USAID, from the US government, the Andean Development bank, the German government, a couple other NGOs who were very impressed by our model. In the way that we have a pretty distinct model to support the indigenous people and also our growth. We’re now working with about 1,200 farmers and we’re part of this USAID program in Ecuador, and among the 20 organizations that got funded we had twice as many families benefitted from our project as opposed to any other organization in the mix.

So that’s been really helpful. Super thankful for their support. And then we recently received a $500,000 investment from Ecuador in government. So actually the government in Ecuador took a minority stake in our subsidiary in Ecuador. And that’s really fantastic, obviously having them on board and so bought into what we’re doing to create economic development is huge. The other resources and ideas that they bring to the table have been really valuable. And the cool part of that is it’s a business social impact investing fund. And within 5 years their plan is to sell their shares to the farmers that we support and our employees. Part of this Ecuadorean vision to make businesses more democratic and more democratically young which is parallel to our mission and intention. So that’s a pretty cool setup. And then we’re just as of next week opening our first equity route. We’re raising a few million from angel investors so that’s one of the big things that I’m working on right now.

Lorna: So these grants that you receive from these government organizations and NGOs, they’re pretty much just straight up cash grants? You don’t have to pay them back. What does it take to actually qualify for a US aid grant?

Tyler: I think from our first call with them to finally getting money was about fourteen months. I mean tons of due diligence, tons of site inspections and reviews. Kind of the full deal here. They’re very thorough, very serious and very professional.

Lorna: And how much did you get from those guys again?

Tyler: It was about 250.

Lorna: That’s not bad. You know, fourteen months, $250,000. That could be worthwhile.

Tyler: Yeah, we’ll take it.

Lorna: [laughing]

Tyler: Yeah we’re definitely not complaining.

Lorna: Yeah, so how would a social entrepreneur working in a developing country be able to tap into such a vast wealth of funding sources. How did it happen for you? Was it all through networking and referrals? Or did you do research, hire a professional to help you fund these sources and actually get funding?

Tyler: You mean for the for-profit site?

Lorna: Well yeah, through the NGOs and the government organizations. How were you able to discover so many different sources and actually get the funds? Was it just through referrals and networking that you discovered the German organization, for example, that funded you guys? Or did you actually sit down and hire a consultant and say, hey we want to find all the different sources of funding that we can get for our company in grant funding. Can you help us identify some targets and negotiate those agreements?

Tyler: Yeah, I think it goes back to our point too of we were just very determined to meet people when we got to Ecuador. And still are. So we just built a network and talked to everyone we could. So through that process we’d always get suggestions of talk to this person, talk to that person, hey there’s this new fund that sprouted out through GIZ and work things that way. Yeah, just a lot of follow up, a lot of follow through and a lot of pushing pieces forward.

Lorna: Yeah, so how is it possible as a for-profit company to receive grant money?

Tyler: Well it’s a mix. So we’re also a hybrid. We also have the foundation which more directly supports the farmers. It does a lot more environmental programs. As a for-profit though, the thinking behind it, if you’re USAID, is your mission is to support the poorest people in developing countries, in short. Historically the way an ID has done that is through grants through non-profits and short-term projects. Kind of back to that whole project mentality. There’s all these stories in the developing world of a USA ID funded project where they built these toilets, or sorry, they built these water systems, these filtration devices. You go back a year later and they’re being used as toilets. Very narrow minded. Very limited in their approach to creating impact. Kind of myopic and ineffective, therefore. So basically when they take a step they’re like, hey who is really creating benefits for the most disadvantaged? Who really is making an impact in these regions? If you look it’s largely businesses. They’re the chocolate companies, the coffee companies, that are providing jobs and income for these farmers and for people in these remote areas and that’s kind of back to the previous points. It’s sustainable. Businesses aren’t designed to go away after a certain period of time. And from an aid perspective they can provide strategic interventions to say, hey, you need to make plantain chips. What if we help fund a project to help you export? And therefore if you can export you can increase your production. If you can increase your production you can increase your farmer base and therefore create more impact. So they can say maybe we can leverage some resources to provide these focused interventions and support networks for these companies. And therefore allow them to create the impact which they’re really designed to do in ways an aid agency are not. I guess in short in the economic development lens and I think taking pretty smart strategies and it’s still a decent trend but I see only getting deeper because the results are pretty clear across the board.

Lorna: So USA ID is actually supporting Runa the for-profit directly? Or is it still all going through your foundation?

Tyler: Actually most of the grant money has gone through our Ecuadorean company. The for-profit.

Lorna: Okay. So most of the grant money is going to the for-profit and in terms of the foundation then, what when you receive grant money for the foundation, what kinds of projects do they typically go to in order to support the operations of your for-profit?

I’m really intrigued by this whole concept of the hybrid company and how an organization can make that model work?

Tyler: Yeah, I think it really depends. I mean honestly like in our perspective it depends on the project that we’re executing, you know, if we’re doing something which is related to the farmer development that’s really about strengthening the farmers. Almost [to cut that] with us, that’s clearly something for the foundation. Or the foundation wants to make them stronger as producers and give them more power as opposed to us as a company. When there’s foundations that really focus on that the non-profits in a very non-profit lens.

The for-profit side then there’s the development funders who are more interested in economic development. We’ve gotten some funds from the Andean Development Bank where that’s what they do. They support economic development.

So I think it’s just sort of classic scenario of finding the meeting ground of shared interests. Looking at what priorities funders have and aligning themselves with those.

Lorna: Do you recommend that social entrepreneurs create a hybrid structure in order to be able to attract grant money from foundations and government organizations?

Tyler: No. I think that’s actually an idea that’s floating in the social enterprise space which I pretty strongly disagree with. In the sense that I think you should create a hybrid model if that is clearly the most effective way to accomplish your mission. I think if you have a business that, like truly the most effective way to both create a sustainable enterprise and create the impact that you want through a hybrid structure, that’s definitely what you should do. I think there’s a handful of businesses. One of my favorites is a new organization in Kenya called Sanergy who has a really amazing hybrid structure to solve sanitation issues in the slums of Nairobi. I think that’s a great example of their truly leveraging the benefits of a hybrid structure to create their impact.

I think the route of the like, again it’s sort of back to the classic NGO issues is when you start making yourself a pimp for money, and you’re like, oh we’re an NGO and oh there’s money for this water project. Yeah we do education but oh we could totally do a water project. We’re going to apply some money for that. It’s just you really get mission drift on not leveraging your core capacity. You’re not really accomplishing your true mission of why you exist.

So yeah I think there’s definitely opportunities and I think the funders are smart too. I mean they’re, it’s quite difficult to fool them especially the bigger ones. If you kind of seem like you have some sort of offshoot. And also too I honestly don’t consider an organization a social enterprise if they really run a business and have some sort of corporate social responsibility initiative or have something sort of secondary and offshoot to their core business. I mean that’s great, that’s amazing. More companies should do that. And that’s what I would put in the CSR bucket, which is great. Everyone should do that, no question. But the real social enterprises I think have impact built into their model. Whether that’s a non-profit, whether that’s a for-profit, whether that’s a hybrid, impact is created in them doing what they do, and not doing something else in addition to what they really do at the core.

Lorna: Absolutely, that’s a very good distinction right there.

So can you help us demystify the whole process of raising angel and VC funding? What did it take for you guys to ready yourself to become attractive to angel investors and then that whole structure you had the death swap round and then the equity round, can you tell us a little bit more about what the differences are and how to become attractive to investors at those different levels?

Tyler: Yeah, I think in part it goes back to my previous point about just hitting milestones and achieving them. When even when our milestones weren’t major we had them. And if someone said we met someone in March and said hey we’re going to do this in April and May and we did exactly that or we did more than that and came back in May and said, hey we’re raising some money now, they could say, great actually they said they’re going to do something, they did it. They have another plan, they’re going to do that too and I have some faith in what they’re doing. Just to try to take out some of the speculative element.

Yeah I think also, honestly, one of the things I don’t think we did terribly well, I think we did okay, was really piloting things. I think to some extent we did, and other instances we really just did a lot really fast and we took pretty big bites. I really respect entrepreneurs that really pilot what they’re doing.

Lorna: What do you mean pile?

Tyler: Pilot.

Lorna: Pilot. Pilot.

Tyler: Yeah. And so like hey, I want to be a big cow farm and I have this great business plan to have 10,000 cows on this farm and it’s going to be amazing. It’s like well could you basically take the business model, shrink it down for one cow and basically prove that it works with one cow and prove that it’s profitable and sustainable and efficient and the market’s there and all that sort of stuff, and then scale it to 10,000 cows. As opposed to buying 500 cows and realizing that they all get sick and the market’s terrible and all that sort of stuff.

I really think that entrepreneurs who can bootstrap a little bit, the Back to the Roots guys are definitely the pros at bootstrapping and growing organically, I think that ultimately leads to a much more sustainable business model or you just proved to yourself that it didn’t work and you didn’t waste anybody’s money or not that much time.

Lorna: Cool, so lets say we have an example social enterprise. They’re growing, they’re meeting their milestones. They’ve been operating based on funds generated from a social enterprise business plan competition and now their funds might be starting to run out and they’re looking to find investors. So what do you have to do from the moment you decide that you’re ready to actively seek angel and VC funding?

Tyler: Yeah, the structure that we created is called convertible debt. Legally and logistically it’s pretty easy to get set up. Highly recommend it to entrepreneurs in early stages. It basically helps you avoid having to set evaluation for your company. When you’re growing and just really putting basic pieces together it’s substantially difficult slash impossible to really value your company. Most people would say it’s near impossible to value it at any point reasonably, but definitely in the early stages.

Basically how it works is you give people a discount to a future round. So they get basically a bonus on whatever the share price is at a future round, and an accrued interest at the same time. So I really recommend that structure, it worked quite well for us. And then just having good materials. I think we started out having pretty poor investment materials. A slide deck, [pro forms], things like that, and at this point we have really polished, really well reviewed and really professional materials and it just makes a world of difference. Because people look at you as a real company instead of, you know, hey Dan and Tyler put this together in Powerpoint at 2am and sent this to me an hour later.

So I think investing a little bit of time and money and having some professional materials makes a big difference. And then having your financials and spreadsheets and all that to back it up when people really dive in.

Lorna: Yeah, definitely. Once I actually received a business plan for review that was printed out in fuchsia ink.

Tyler: Oh really?

Lorna: And I highly recommended to my friend to not invest in that company and unfortunately she did and lo and behold a few years later that company went out of business. But it was the fuchsia ink that was the dead giveaway.

Tyler: Yeah that seems like maybe questionable.

Lorna: Yeah, yeah. So did you actually hire a consultant to help you set up the convertible round structure? Did you need to get a lawyer involved? And then who produced all the really fancy investment materials? Did you also hire out a creative person to help you out with that too?

Tyler: Yeah, we hired a creative firm. They did a great job with the designs. We have a legal firm in Providence who’s amazing, outside DC. Really fantastic, really affordable as well. Yeah. So I mean we just kind of general business. Find good people. Make sure they’re good at what they do and make it work.

Lorna: So there are legal firms whose specific business is to help small growing companies like yours attract venture capital funding?

Tyler: No no no. Oh sorry. There are firms that do that. I haven’t met any good ones really. Our lawyers more there, they do the legal backend. So we say, hey we need to talk to you, and they produce it. But they don’t help us fundraise. Yeah, that’s the entrepreneur’s job. I’ve never seen a case when any entrepreneur or any companies been able to raise money where the vast majority of the weight hasn’t been on the entrepreneur’s themselves. They’re the ones who people are believing in. In many cases they’re most of what they’re believing in let alone the business itself.

Yeah I think there are people who are fundraising consultants or brokers and that maybe kind of works sometimes. But at most all they’re doing is getting you leads, getting you meetings and then you’re pitching, closing, everything else. So yeah I think it really takes an entrepreneur to really believe in what they’re doing and not be shy.

Lorna: Okay, so you have your professionally produced beautiful investment documents that you are going to present to potential investors. You have all your financial documents and everything in order if they want to really look underneath the surface. You have your lawyer that is creating contracts that can be executed in the appropriate way. Now where do you go to find these investors?

Tyler: I guess back to what we did in Ecuador. Just talk to everyone you possibly can. Really leverage your network. Ask people for help. I think it just takes a lot of humility to say, hey you know what? I’m looking for help. Maybe you’re interested. Maybe you’re not. Maybe you know people. Maybe you have tips. Maybe you have advice. There’s always the cache, when you’re really asking for money you ask for advice. Which seems to be pretty common [and of course back to practice]. I know we’ve used it pretty endlessly. Yeah, I think just being authentic. Wanting to learn from people. Wanting to make connections. Being generous. Being open. And then once you get people in, you know, have them get more people in and have those people get more people in. It’s our classic runaround.

Lorna: So you didn’t actually go to a, I think there are certain organizations that really put you in front of a lot of VCs who are actively looking for start-ups to invest in. Like organizations I believe like the Investors Circle in the Bay area is one.

Tyler: Yeah. We actually just received and investment from Investors Circle. Or the angels through Investors Circle, who is a really incredible group, I recommend them highly. At the same time, we applied to Investors Circle three or four times and got denied. And just closed an investment with the Philadelphia group.

So I think that’s tricky. It really depends on two things, in my experience. One is the size of your company and two, the industry you’re in.

And so for us we’re in the consumer packaged goods industry which, honestly, is a very different set of investment criteria and expectations compared to the tech world. I would say 95+ percent of the investors I’ve ever met only invest in tech or largely invest in tech for obvious reasons.

Yeah, so I think too is just one is that in the CPG world the expectations of what constitutes a quote “early stage” company is much higher. So I mean in our world basically like 1 to 5million in revenue is called a quote “early stage” company for a consumer packaged goods. In our world, 5million in sales, we’re doing pretty well. And we’re on track. Won’t be there for a little while. So when we were basically doing maybe 100,000 in sales and looking for money those people are like, yeah great, give me a call when you’re at 5million in sales. We’re like thanks, that’s great, but you’re not really helping me right now.

But in the tech world, people raise insane amounts of money with literally an idea and maybe a business plan. It happens less nowadays, from what I’ve seen in my very limited experience, but it definitely happens. So if you’re in the tech space, or healthcare space, or the energy space you can raise tons of money with just an idea, just a concept.

Lorna: So you know how business plans have different sections or components entrepreneurs need to address like your financial projections, your executive statement or mission, your marketing plan. In terms of creating an investors packet, what are the different components that a start-up needs to actually create in order to attract VC investment and are there any particular areas that you would recommend an entrepreneur really focus on? Like in your experience of running your investment packet to various investors and I’m sure some of them are very savvy and looking through all your documents with a fine toothed comb, what would you advise entrepreneurs seeking investors to really focus on and make sure that section is really tight?

Tyler: Honestly, in our experience it has to be everything.

Lorna: So what are the different components?

Tyler: And honestly too, if anyone listening wants to see a copy of our slide deck I’d be happy to send it around as an example. I’m absolutely sure it’s not the best but I think it’s pretty decent so I’ll give my email and stuff at the end so feel free to reach out.

Yeah, we have the executive summary slide, basically the kinda summary of how much money we’re raising, who we are, what we’ve done. You know summary of the industry trends, the whitespace, our core technology which is our tea, for us then it goes into the summary of the supply chain, what we’ve built in Ecuador. Then all of our sales, the 1,700 stores and whatnot that we’re in. New product launch, growth of stores, competitive set, you know, management advisory board, funding and revenue projections. Sources of use of fund, end of the deck. This is our long deck so we have a shorter deck which is like 8 slides which takes out some of that. But I think the key slides are definitely retained. Most investors will say they’ll invest in an A team with a C business plan. But they never invest in a C team with an A+ business plan.

So really making sure that your management team and your advisors can shine. That’s most, and I know a lot of people who they’ll open the deck and just go straight to the team, and they won’t even look at anything else. I think that’s big. Just clearly communicating what you do. I’m still surprised and I think we did this not great in the beginning but entrepreneurs that can’t really just communicate clearly and just simple language what they do. You know if there’s some innovative technology there’s this, there’s that, often times even among charts and graphs and all that, you just can’t figure out exactly what the business does, and exactly how it makes money. So just making sure that its exceptionally clear what your business does, how you make money, and what’s your plan.

It sounds very simple but actually when you get into it it’s very easy to [delegate] those three points. And we’re very serious one of our advisors is quite strict around not having any text that’s less than I think it’s 36pt font and making sure you have one major point per slide. Like when you start getting into multiple points on a slide and complicated graphs and charts and small text and paragraphs it’s like, it’s not what a slide deck is, it’s not what a presentation is. You want to just create bold information, really high level, clear points, move to the next point. So at the very least that’s what’s worked for us.

Lorna: Cool so it’s very much like you’re actually in a business plan competition pitching the panel?

Tyler: Yeah I guess maybe to clarify that, we actually have two different decks. We have one which we send by email which has more text in it, and then we have one which we give for presentations. The one where we do presentations has almost no text. Just because when we pitch we want people paying attention to us and not a screen. It’s really our personalities and what we’re communicating to get people inspired. So we basically take out all the text and that’s what we say. But obviously if you’re emailing someone there’s no audio recording that goes along with it.

Lorna: Got it. Cool.

So where then, if the attention or if the management team is actually a hugely important part of whether or not your company would be considered an attractive investment, where do you recommend start-up founders go to find really good team members?

Tyler: I think it depends on your industry. For us, you know, I guess back to the same point that we just really use our networks. You know whenever we’re looking for a new position, the first thing we do is blast out the post to everyone in our network that we know knows someone in the space. I think that’s number one and then if you’re hiring people there’s always the job boards in your industry and whatnot.

Lorna: Yeah I’ve heard they’re actually these online dating sites for people seeking co-founders or board members or partners. Have you ever tried anything like that?

Tyler: Never. I’m not familiar with those myself, so I couldn’t speak to ‘em.

Lorna: Okay. So in your long and exciting journey of entrepreneurship, have their been any moments that were particularly life changing for you. A story or experience of inspiration or failure or success or amazing mentorship that you’d like to share with our audience?

Tyler: That’s a really fantastic question. First, I mean our entrepreneurial journey hasn’t been that long. We’re only 26.

A specific moment?

Lorna: Like what actually, you know, was there any experience that you had that solidified in your mind or gave you the sense that beyond a doubt you’re a social entrepreneur. This is your path, this is your purpose, and this is what you’ll do for the rest of your life.

Tyler: I would say, I mean, it definitely is constant. I don’t think there was ever any one moment and that’s just like endless. I do think that for me, right when we were deciding to start Runa and kind of deliberating back and forth of should we do other things or should we start the organization? I really remember, we had tons of conversations with people that was intellectual on many levels, but I really remember just kind of sinking down to my heart and checking in and really feeling this depth. Like really strong depth and power and some sort of faith that there was some reason to do this and it’s what I was supposed to be doing. That waivers occasionally but when I need it I can always check back into that and its stayed strong. I think that’s consistent with anybody that does something that they love and really believe in. You can feel it. There’s something strong. Something rooted. Something inside which can’t really be taken away. And yeah I can pretty vividly remember the first time of checking in to that feeling and feeling it so strong and being surprised but just knowing there’s nothing else I could do and I couldn’t not listen to whatever that voice was inside.

Lorna: Yeah I think it’s always really healthy to really take a step back from what you’re doing and check in with yourself and ask yourself is what I’m doing really feel like an authentic expression of who I am? And do I feel good about what I’m doing at every given moment? And if there isn’t that unshakeable doubt, then I think it’s a really good moment to question and to reconsider the path that you’re on.

Tyler: Definitely. Yeah, I couldn’t agree more.

Lorna: So have there been any mistakes that you’ve made in your entrepreneurial journey that you would advise other aspiring social entrepreneurs to do differently?

Tyler: Yeah. For sure. Yeah we’ve made a lot of mistakes.

I mean I think the piloting point is something that I definitely believe in. I wished we would have piloted things some more. We could have saved ourselves some time and money if we would have. I think that’s a big one.

The other one, be really diligent about hiring contractors. As a young company, you need a lot of external support. Most likely you’re not going to hire a lot of staff but you’re going to find a contracted accountant, contracted lawyer, contracted web designers, contracted consultants. I mean there’s tons of it, it’s kind of endless honestly. And we’ve made a handful of mistakes around hiring contractors. Mainly not negotiating contracts thoroughly. For our first website we honestly were just kind of naive and not very thorough. And didn’t really negotiate the contract well or review it. We were just really needed to get the project going and kind of blew it off and just signed the document. That ended up getting us into some trouble. That if we would have taken the time, reviewed it, and really made a careful decision we completely we could have avoided. We’ve done that a few times. Thankfully been able to work our way out of. And also due diligence. Becoming a really big believer in getting references from people. Never hire any employee or contractor you haven’t talked to some client they’ve worked with. Preferably multiple clients they’ve worked with. Also a really good tip that one of our mentors gave us was always to do backdoor reference checks. So I can never tell how [?] maybe not new news but often times people say great, yeah I’m a consultant, I’ve worked with these two companies. You should call them. Of course they’re going to give you the names of people who they worked well with. Why would they give you a bad reference? So to do one of two things.

One is either call that person and say hey Bill, you know, Ted said he’s worked with you doing this project. Is there anyone else in the team who also worked with Bill, worked with Ted who’s not in your department or who had a different role that maybe I could talk to. Because maybe Bill and Ted are friends but Terrel who also worked on the project is going to tell you that Ted’s a total dick and an asshole and he did a terrible job. But Ted and Bill are best friends and obviously Bill wouldn’t tell you that. Or you can say hey, great, yeah you know I see on Ted’s consulting CV that he also worked with Meyer Enterprises. So he didn’t list them as a reference but it’s not that hard to call the mainline at Meyer and say hey I’m Tyler from Runa, I’m thinking about hiring this guy, you know just wondering if anyone there could talk to me about what your experience was? And they’d be like, “oh yeah! That guy was amazing, he was incredible.” Or “that guy was a total crook. Don’t hire him please.” And I think that’s a really smart way to do it. Just because you really cover your butt.

Lorna: Great, well thank you so much for all your awesome advice and helping us understand the behind the scenes story of Runa’s success and rapid growth. I’m really appreciative of your willingness to be so honest with our audience and I think your story will certainly help and inspire many of the entrepreneurs in our audience.

Tyler: Awesome! Yeah, I mean, I’ve been so thankful for all the mentors and other entrepreneurs that have taken time to help us grow and we’re still making our mistakes and have a long way to go. But it’s really always fun to be part of the entrepreneurial community and always amazing to get to share the few lessons that we’re learning.

Lorna: So as we close this segment is there anything you’d like to share with the audience in terms of your most recent product lines or projects that you might be working on that you’d like the audience to know about?

Tyler: Yeah, our goal from the beginning was to be a bottle beverage company. We really saw the big growth opportunity to be a bottle tea. And on Monday we’re producing our first batch of bottle teas. Beginning shelves in Whole Foods about probably 30 to 40 Whole Foods New York to Boston. They’ve accepted a line next month. So that’s really exciting and really fulfilling to see that original vision coming to fruition. And our tea boxes as well are hitting shelves in a lot of bigger stores like Stop and Shop, Giant, Fresh Market. We’re in about 1,700 stores now. Also our website, we’re launching a new website soon but if anyone wants to get some Runa tea through the website, I can offer the discount code. RUNANATION. R-U-N-A-N-A-T-I-O-N. Will give you a 10% off your online order if anyone feels so inclined to try our product, we definitely welcome that. And we do a lot of cool stuff through Facebook, a lot of giveaways, all that sort of stuff if anyone wants to follow us through social media.

Lorna: And how is social media marketing working for you guys?

Tyler: I’d say it’s good. We primarily focus on trial for the product, being a consumer product we want people to try it but you can’t really do through digital means for the most part. But we did a cool thing actually, not last weekend but the weekend before, where we had 60 people for part of this Spanish language group. People trying to learn Spanish in New York come to our office. And we did a tea tasting and a live Skype chat with the farmers in Ecuador so they could ask questions and practice their Spanish and really create that engagement from the producers and consumers. So we sort of used digital technology if anything to build those bridges.

Lorna: So people can also connect with you through Facebook and Twitter?

Tyler: Yeah Facebook it’s facebook.com/drinkruna and Twitter we’re @runanation same as the discount code.

Lorna: Fantastic. Thank you so much.

Tyler: Thank you so much, Lorna. Big hugs to you from New York and hope to cross paths soon.

Lorna: Awesome. Me too. Let me know when you’re in San Francisco.

Tyler: I will.
[END OF RECORDING]

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