Anna Tolmach pitches her inventory forecasting startup Fuse to angel investor Pete Kazanjy and Neil Devani from Rothenberg Ventures.
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Episode transcript
You’re listening to The Pitch, a podcast where we take you behind closed doors and into the world of startups. I’m your host, Josh Muccio.
Anna Tolmach: In the US, companies are wasting over a trillion dollars on inventory every single year.
This is Anna Tolmach.
Anna: I just graduated from Stanford’s Graduate School of Business.
Anna’s building software to help e-commerce companies make more money by better forecasting demand. This keeps them from running out of stock of popular products as their company grows.
Anna: The challenge with smaller companies is they’re growing really quickly. They don’t realize that they have to coordinate.
Their startup Fuse is trying to help these smaller companies communicate better internally so they can handle inventory better. But their solution doesn’t really work on its own, because it requires people to change their behavior before it can be useful.
Pete Kazanjy: Behavioral change is always a disaster.
Neil Devani: Are you doing something that either doesn’t require the behavior change, or makes it so easy that people will do it?
But Anna does make a compelling case for her startup. I’ll let my co-host Sheel Mohnot take it from here.
Sheel Mohnot: Hey guys. All right, let’s get started here.
Anna: Imagine you’re at a small company and your company is featured in Oprah’s Favorite Things. Sounds like a great thing, right? Except, it turns out that your PR department, which has been working on this for months, has not told Operations. So as a result they didn’t forecast and plan for it appropriately. So this can cost companies up to 25% of their revenue. And the way we’re solving it is, first and foremost, we want to get folks out of Excel and Google Sheets. And those are the primary tools that they’re using. Secondly, giving them a process for collaboration. The challenge with smaller companies is they’re growing really quickly. They don’t realize that they have to coordinate. And larger companies that do inventory planning really well, they actually get this. They have weekly meetings, and they have email chains with hundreds of people on them, and they understand that they have to actually communicate. But smaller companies don’t get that. So we want to try and help them develop that process.
Sheel: It sounds like you’re primarily replacing Excel and Google Sheets, but there are surely other competitors in this space?
Anna: There are a ton of competitors, or companies in the fulfillment and tracking side of the supply chain. So they don’t really compete directly. We eventually might run into them, but there’s so much depth in the fulfillment and tracking verticals alone, and we’re really tackling the forecasting vertical. I would say in our space there are competitors on the higher end. So one example is JDA, Sterling, Manhattan Associates. You might have seen JDA was just acquired for $3 billion. The issue with those types of companies is that they’re super expensive still for an SMB, and really hard to implement and take a really long time. So there’s nothing really in that… If you can’t afford a tool that costs hundreds of thousands, if not millions a year, you’re really stuck with making something yourself.
Sheel: So what do you charge?
Anna: So we charge $1250 a month with a one-month free trial.
Sheel: Got it. What are the size of customers and what kind of customers do you have?
Anna: Typically, companies should have at least 25 employees, because that says something about their growth trajectory, first of all. From a revenue perspective, it really varies a lot, just because in the prior funding environment I think we’ve seen a lot of companies get funded that don’t necessarily have a ton of revenue but have a lot of employees. So one company I spoke to had 12 employees and over $10 million of revenue. Which is great. And then I’ve talked to other companies that have 40 employees and a similar dollar amount of revenue. So that’s a little bit trickier to pin down. But I think the key is they have to be using Excel and Google Sheets. And right now we’re doing a pilot with three different companies. So one is a men’s athletic wear brand. Another one is a high-end diaper subscription service. And then the other one provides snack foods as well on a subscription service.
Sheel: Cool. Tell us about the rest of your team.
Anna: My other team members are Rachel. Rachel is our COO. So she’s our internal voice of the customer. She used to be a software developer but then transitioned into operations, managing supply chain at several e-commerce startups. So she’s intimately familiar with the problem. And then our technical co-founder Bridget was EE at Stanford Undergrad, has a CS Masters and then spent the past few years at Google working on Waze and just launched the Waze Carpool product.
Sheel: How do you guys know each other?
Anna: I actually met Rachel through Collaboration, which is an internal Stanford forum. And I was searching for the chupacabra. I said I wanted someone who knew something about software and also supply chain. And somehow I stumbled upon Rachel, and she was the only person that fit that criteria. And then Rachel and Bridget worked together on several CS projects during their time at Stanford.
Pete Kazanjy: I have a question on how much potential opportunity there is within a given customer.
That’s Pete Kazanjy. He’s an angel investor and recently wrote a book about sales for startups called Founding Sales.
Pete: So you cited that 25% is the opportunity cost. If you were an amazing process excellent organization, that has done this in-house through the blood sweat and tears, what would that 25% number go to? Would it shrink to 5%?
Anna: Yeah. I think we should be able to get that figure down to at least 7% and do a really good job improving it.
Pete: Got it. And then so relatedly, with your customers, is that what you’re targeting when you go to someone and you say, “hey, you have $10 million in revenue”, how do you pitch that to them?
Anna: So if you think about pricing as 10% of the value you create, our current pricing of $15,000 a year implies that we’re saving companies $150,000. I think that’s pretty low. So if a company has $10 million of revenue, and one company has told me that they basically whiffed on 25% of revenue last year because they couldn’t optimize their sizes – it was a combination of stock outs and overstocks, and that’s 2.5 million. So if you take 10% of that, that’s $250,000 a year for us. So I think there’s actually a lot of room on the upside. That’s assuming to your point that we capture the entire 25%. And I think it might not be entirely capturable, but I think 7 to 10% is a good benchmark for us.
Pete: Maybe raise prices.
Anna: Yeah.
Pete: Or align them with revenue size.
Neil Devani: I think what you’re focusing on is definitely a painful problem, one that we’ve seen with some of our e-commerce companies.
That’s Neil Devani. He’s an investor at Rothenburg Ventures in San Francisco. He has appeared on our show before, way back on episode 8 with Ironclad.
Neil: One of the biggest things in solving the challenge is the data that you use to do the forecasting. I’d love it if you could a little more about that, especially internal data. What you’re doing to integrate data from across different organizations. Because in any company, early or late, that’s a management failure. That’s something that could be saved, like the example of Oprah’s Favorite Things, just really good leadership should be integrating that data in some way, manually or technologically. So what are you doing to make that happen?
Anna: I think what’s really interesting about this, too, is we think there’s a tremendous opportunity to integrate with other productivity platforms like Asana and Slack. Initially, we’ll just use a system of email tagging, so that if you’re a marketer and there’s a particular promo on a category or a skew, you can actually just tag your emails with the relevant tags and the system will automatically read and interpret them. So we want to make it as easy for the user as possible, and in particular the folks that have the information on the marketing and merchandising side who don’t necessarily realize that they have to proactively tell operations. Just integrate into their workflow such that it’s a tiny incremental step for them to make everyone’s life easier.
Neil: Great. So the question I was going to ask to follow up on that was, what do you do about the behavioral change required? Where if you’re a marketer and you’re already not communicating with operations, why would you do it through software?
Anna: You know, best in class marketers realize that if they’re doing their job and trying to drive revenue but there’s not enough product to sell, it’s going to be a bad end result. So I think it takes a couple of these crises for that to really sink in for everyone, but people learn pretty quickly.
Neil: Okay then last question on this piece, are you guys creating a projection engine where you’re giving the operations user a very firm number or range? Or are you giving them all the data so they can put their thumb on the scale and figure out what the number should be based on the data they have?
Anna: So we are actually generating the projection for them. Right now, it’s one line with the projection based on historical growth rate, rolling average, or smoothing. But down the line we actually plan to have two lines in the charts, where the user can actually have their own forecast and then see Fuse’s forecast and understand the delta. But typically people don’t really want to get into the weeds. They just want to have a forecast and feel confident that it’s right.
Pete: I think a lot of the times we focus on some of these sexier problem cases, like, “oh my gosh, I was on Oprah’s favorite things”. But I wonder if instead a lot of the value to be delivered here is more in the prosaic day-to-day, oops, we should have had 20 pairs of these skinny jeans, and instead we had 10 pairs of them. And you just kind of die a death of a thousand cuts. Is it more of that? Or is it actually the Oprah case?
Anna: I think it’s both. I think initially we’re focusing on the initial case. But I also think the collaboration piece tends to, in our experience, during our customer interviews, cause the biggest crisis events. So it’s not necessarily the day-to-day. Those things are annoying and troublesome. But when you have a big crisis like this, it also causes a lot of emotional strain, and a lot of difficulty for the team in working together, which, as you can imagine, is critical to the success of the business.
When we come back, Anna steps out of the studio while the investors come to a conclusion.
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Welcome back to The Pitch from Fuse. Let’s head back into the studio.
Sheel: What do you guys think?
Pete: I thought it was fantastic. This would be a great example of… The pattern I’m seeing here, is this feels like a big pain point that best in class organizations either solve by having their act together with NetSuite or SAP or what have you. Obviously, big on-prem stuff like that is, you have to be at a certain size before you implement them.
Josh chiming in here. ‘On-prem refers to on-premises software, which is basically the polar opposite of today’s cloud or SAAS solutions. Software that is on-premises, runs on the company’s own private servers, and can also be referred to as ‘shrinkwrap’ software.
Pete: My wife used to be a buyer and a planner at Pottery Barn. So I am definitely familiar with the pain points associated with that, and the 100-person email threads and so on and so forth. So it definitely seems like an opportunity for software that’s hanging out, paying attention, and just raising its hand and saying, “hey, you need to order more skinny jeans”.
Sheel: Is this something you would invest in?
Pete: I don’t have a lot of context on this. But this seems very similar to some of the pipeline management, predictive analytics that you’re seeing in the sales operations space. So I would definitely be interested in digging in more. Because it seems like a very similar application of a technology to solve a problem that is not small.
Neil: On the lower end of the market it’s something that’s being done by the payment processors. Where they’re providing this sort of solution.
Sheel: Sort of.
Neil: It’s not great.
Sheel: It’s pretty bad, usually.
Neil: But it’s something that, they’re not going to pay $15,000 or $12,000, or what was it? $1250?
Sheel: $1250 a month. $15,000 a year.
Neil: Right. So they’re not going to pay $1250 a month for that.
Pete: Does Shopify do something? There’s got to be some basic, basic, basic, but it’s probably pretty…
Sheel: Is she selling through Shopify?
Pete: It sounds like that’s one of the e-commerce providers. But I would imagine the sweet spot here would be people that would be running off of Demandware.
Sheel: Yeah. Shopify stores, to pay $15,000 is probably a non-starter for most of them. Once you’re doing millions of volume you’re typically off of Shopify and on to your own.
Pete: It feels like a great example of a mid-market solution that you would have to eat a bunch of opportunity costs and get your ass kicked by the market until you either hacked it together yourself, or got big enough that you were buying it off of one of these on-prem providers.
Sheel: Yeah. Maybe she gets in with these guys and as they grow they stay with her. I mean, I think her pricing right now is probably not optimized. You know, $15,000 a year. But ultimately as you said it probably scales with revenue.
Pete: I think this is why, the coordination overhead stuff, I get it. But to the extent that this is something that could just plug in to a Shopify via its API or Demandware or what have you, and then at least be able to say like, “hey look out! hey look out!” And just be hanging out and aligns with the GMV that the organization ships.
Sheel: From my standpoint, I agree with you guys, I like this replacing Excel and Google Sheets thing. I think what I would want to dig into is how big is this opportunity and this middle market? That’s the question mark that I have and I’d probably want to ask her more on that. But beyond that I think I would probably ask her to join our accelerator. I think she’s a great fit. I thought she was an excellent, like, she had great responses, a great pitch.
Pete: Oh yeah. Anna presents excellently, and she also really seems like she knows the problem space inside and out.
Sheel: Yeah, I felt that way too.
Neil: I would want to learn more about the rest of the team and the product features around coordinating with other folks. Right? The failure that she brought up as the initial use case just shouldn’t happen.
Sheel: Yeah.
Neil: If you’re running your business well, even if you’re startup, you’re the CEO, you’re the COO, and you know everything that’s happening. And if you don’t, you’re not a good leader. And you should be closing that loop on your own. And if you are using software to do this, you’re still asking for some behavioral change or some integration. So I really want to understand, are you doing something that either doesn’t require the behavior change, or makes it so easy that people will do it in a way that data moves around and doesn’t get stuck with management or leadership and there’s that slip-up.
Pete: Behavioral change is always a disaster. To the extent that you could, the thing that I would hope is something they could actually do – and I don’t know if the existing solutions would allow for this – but if they could just hook in Demandware on the one side and the warehouse management system on the other side, and then essentially just be the programmatic stand-between, understanding how many sales are coming in and then flagging, exactly what Anna was saying, “oh some promotion clearly has happened because our sales of this thing is way above norm right now, but it’s not so bad that we’re out of stock yet. We’re just going to be out of stock in a week instead of in three weeks like we thought, so hey order now.” If they could just stand between two systems like that and be that analytics layer, you don’t have to require any behavioral change, and now all of a sudden you’re avoiding those stock-outs and you’re improving ROI.
Neil: That would be huge. The thing I really liked was that they’re swinging for the fences and saying “we’re going to put a firm projection out there”. I think it should be more open in terms of how they came to that number, so that if you have a sophisticated user they can figure out do they need to adjust it for some reason. But there’s also liability from that. Where if the projections are wrong, and you pay for this software and you end up understocked or overstocked, you’re going to feel like you lost twice.
Sheel: Yeah.
Neil: It’s good they’re taking the risk, but you want to make sure that if you’re doing it openly at least the user has some responsibility to make sure the projection makes sense and they understand where the projection is coming from. If you’re just providing a number without explanation you’re taking the risk on. Which again, could be great, if it works well, it’s magical. But if it doesn’t, then you probably are going to have some churn.
Sheel: Cool. Sounds like you’re overall pretty positive.
Neil: Yeah.
Pete: Definitely. You guys should get them in here at 500 Startups.
Sheel: Maybe we will. Peter’s head is so big that he broke my headphones.
Pete: Did you run over your headphones with a chair or something? Why are they all taped up?
Sheel: I don’t know. I don’t know.
Pete: They were already broken.
Sheel: They were already broken. Damn it. Podcast listeners, Peter’s head is actually large.
Pete: Just gigantic.
That’s all for today’s show. Thanks for listening.
You can find me on Twitter, Facebook and Instagram @joshmuccio and Sheel is @pitdesi or follow the show handle @thepitchfm. To join our weekly newsletter and get behind-the-scenes stuff that we don’t share on the podcast, go to thepitch.fm and subscribe by email.
We’ll be back with a new episode next Wednesday. I’ll see you then.