Mehtab Bhogal – How to Fix a Failing Ecommerce Business

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(5:06) – Mehtab’s background and career

(7:14) – Dropping out of college to flip guitars full-time

(8:40) – Launching a search vehicle

(9:54) – What kinds of deals did you find via Reddit?

(11:02) – When did you get the sense that you were on the right track with DTC brands?

(12:48) – What are the dynamics of a turn-around business?

(14:24) – What are the main reasons an e-commerce business will become a turn-around business?

(15:59) – What companies in a turn-around situations do you steer clear from?

(17:02) – Why are you able to do due diligence so much faster with these types of companies?

(17:52) – The nuance between product issues and marketing issues

(19:15) – The low cost of entry for these businesses

(20:30) – Risk-return vs. Venture

(21:59) – How do you find these companies and choose the best ones?

(24:12) – What happens day 1 after acquiring the business?

(26:00) – What are some easily identifiable expenses that you find and cut?

(28:50) – How do you evaluate managers?

(29:59) – What do you do to shift companies into growth mode?

(31:22) – What changes do you make on the product, sales and marketing side?

(32:34) – A discussion on Lean production

(33:50) – How do you evaluate whether a product is a breakeven bread product?

(34:25) – Are you able to see what order items are added to someones cart?

(36:58) – What are you surprised by that’s missing or not done well at these companies? Any wild stories?

(40:56) – What college class would you teach if it could cover anything?

(42:28) – What’s a strongly held belief you’ve changed your mind on?

(42:59) – What’s the best business you’ve ever seen?

Alex Bridgeman: Thanks, Mehtab, for joining us. I’m excited to have you on the podcast and chat all things turnarounds and Karta and all these other projects that you’ve worked on throughout your life and career. I would love to hear a little bit about your background, but especially the guitar business that you had in college. I play guitar; I haven’t played in a while, but I played a lot in high school and college. And so that’s an instrument close to my heart. I’d love to hear a little bit about that business and then kind of other things you’ve worked on through as you were a kid or in college and early on in your career.

Mehtab Bhogal: Yeah, thanks for having me on. I really appreciate it, big fan of the podcast. I started off flipping guitars in college, just as a nice way to try them out because a lot of these were not available from conventional music stores. So, I started doing that, ended up building a fairly large community on Facebook back when organic reach was a lot better, so you could do something like that without any dollars really. I built that to a couple hundred thousand users. We started partnering with guitar stores and brands to do semi-custom runs of specialized guitars. Obviously, these were easy to sell because they were collectible, etc. And we collected our affiliate commission or what amounted to an affiliate commission. Eventually, I became a little bit frustrated with how slowly some of these retailers were moving. So, in response, we booted up our own retailer. And instead of holding inventory on our book, we actually allowed the community to basically pre-purchase inventory and then put it on commission with us, and we would sell it and they’d take a cut of the profit, if that makes sense. And that was a nice little way around any sort of securities rules. And the legal for it, this is really funny, the lawyer was actually a community member that I bought and sold guitars with a little bit, and he was one of our moderators and just a big fan of the community, so he did the work for free.

Alex Bridgeman: Nice. It is always good to have a lawyer who’s a good friend who can help you through a few things.

Mehtab Bhogal: Yeah, exactly. And then concurrently, I was involved with a men’s hair product company, which is pretty funny because I’m Sikh. It was launched by a really good friend of mine, and I was one of the first people on board. I helped run that while concurrently launching another brand, a guitar pedal brand, which had much higher margin than the retail operation that we were running. The retail operation- Margin on guitars is not very good; they are fairly pricy, etc. So even though our holding cost of inventory wasn’t significant, the guitar pedal business was fundamentally much better, especially because we were the brand as opposed to retail. There’s a lot more you can do with a brand.

Alex Bridgeman: And you dropped out of college at some point in this, right?

Mehtab Bhogal: Yeah. So, I was flipping guitars, and I was making a strange amount of money, probably close to about 80,000 or 100,000 a year. And yeah, I looked at what college professors made, and I decided, hey, this doesn’t really make any sense. It’s a pretty stupid way of running that analysis by the way. I don’t think I’d do that again. But it worked out.

Alex Bridgeman: What would have been the better analysis going back to that decision that you would have made?

Mehtab Bhogal: I just don’t think it’s a good black and white way to look at something. Hey, my professor’s making less than me; I should drop out. That’s probably not a good way of thinking it through.

Alex Bridgeman: Not the best way, yeah. What were your classes in school? What was your major? 

Mehtab Bhogal: It was psych, and I took a variety of classes. I think you have to take kind of general classes for the first two years, which is really annoying to me. I didn’t really like the idea of having to take things that you’re not interested in.

Alex Bridgeman: No business or entrepreneurial classes though?

Mehtab Bhogal: I did take one entrepreneurship class, and I’m actually still good friends with the professor who taught it. I went back to speak a few times, and I actually almost bought his business with my first co-founders. We were initially launching something that was kind of like a search fund as our initial idea. And we were trying to buy his business. The deal fell through, but I’m still really good friends with him, and he pings me about co-invest sometimes, so great guy.

Alex Bridgeman: So, you said you were going to launch a search vehicle. Was that Karta or was that something else?

Mehtab Bhogal: Yeah, it was basically- so I guess what happened, for more color, I had accumulated a good amount of cash because some of these businesses were throwing off decent free cash flow. My living costs were pretty low – single male, no kids, etc. It’s pretty hard not to have decent savings unless you’re living some ridiculous lifestyle. So, at the time public markets were fairly expensive, or I felt they were – in hindsight, obviously they weren’t. So, I started investing in private companies, did not really know what I was doing, but went to go look for deal flow on Reddit of all places, and I met my business partners. One of them I still work with today, his name’s Alex, great guy. He had quite a bit of hardcore turnaround experience. He bootstrapped a brand from zero to 10 million plus in two years when he was in his early twenties, sold that, and then went to go work for CSC Generation, which is a fairly large private equity firm and turnaround one of their assets inaudible. And I still work with him today extensively. The other one, she was one of the first four engineers at Uber Eats. She did really well when they went public and retired. I don’t blame her at all. And the last one, I think he’s running a search vehicle now, and yeah, I think he’s more focused on the healthcare space, but still talk to him once in a while.

Alex Bridgeman: Gotcha. So, what kinds of deals did you get from Reddit then? I’m curious.

Mehtab Bhogal: Yeah. So, one was a succulent company that Alex ended up allocating into and we’re still part of today. And then, the other ones, we’re actually still in touch with a few of the founders. And the deals we ultimately did, I think we found two or three deals from there, primarily minority equity. And that was our initial thesis was just making minority equity investments. It’s kind of a loose angel group, if that makes sense. We weren’t really doing anything too formal together. Eventually Alex and I decided we really liked working with each other and we spun that into something a little bit more formal and that kind of became Karta, if that makes sense.

Alex Bridgeman: Were those turnarounds at all?

Mehtab Bhogal: No. So we made our first formal investment together in 2018, which was a minority equity investment. And then once we really formalized the partnership, we made a control acquisition in Q4 of 2018, and that was our first turnaround together. But that was his second or third- That was his second turnaround.

Alex Bridgeman: When did you get a sense that you were on the right track with all of these DTC brands and you thought maybe we can make turnarounds more of a main business for us? When did that start to click?

Mehtab Bhogal: Yeah, I guess we were kind of frustrated with some of the minority equity. I guess we’re founders entrepreneurs first, so we’re always tempted to jump in, which is not necessarily a good thing as a minority equity investor. And we were fairly price sensitive. We weren’t about to write a $2 million check. So being able to get operationally involved allowed us to pay a lot less for an asset. I guess we figured out things were kind of going well. Our first investment together actually ended up being between a 10 and 12X within the first year, year and a half. So that kind of gave us enough fuel to go after the next few deals. And at the same time, that other deal we did together did quite well as well. So, we liked the thesis, we still invest across minority and control positions, and it really depends more so on the type of deal than if it’s control or minority.

Alex Bridgeman: Was there anything that besides it sounds like the returns from some early deals were really good, but is there anything else besides that that attracted you to some of these turnaround businesses versus buying or starting something that was more established?

Mehtab Bhogal: Yeah. As an entrepreneur, you can run diligence a lot faster, either that or an operator, you can run a diligence a lot faster than someone with a traditional finance background. They have to bring in external consultants. They cannot build a thirteen-week cashflow that’s accurate because they might not know the industry very well. So, you can jump in and run diligence on something in two to six weeks that would take someone else six to eight months to run. And in a turnaround situation, the longer you wait, A, the closer the asset gets to burning down and, B, the more you’re going to pay for it in working capital requirements to reboot the brand.

Alex Bridgeman: Can we walk through the dynamics of a turnaround and just give us the big overview of what that looks like?

Mehtab Bhogal: Yeah. The biggest determinant of kind of how you enter is what the capital structure looks like. In a lot of cases, there’s a senior secured upside-down lender, and they’re not in the business of running companies. They certainly do not want the equity, even if they have access to it. So that tends to be a popular entry point for companies that are doing let’s say upwards of 15, 20 million in revenue. We don’t really like to go after anything that cannot not be carved down to 2 to 3 million in EBITDA, if that makes sense. And that’s just because the management layer is not there. It’s going to be more work to buy something that’s smaller. And the check size does not materially differ, I guess it does to an extent, but not as much as you would think it would. And that’s just because there’s a shortage of operators on the bench available for a lot of these upside-down creditors to access, if that makes sense. If you control a company that’s really heavy in manufacturing, there’s a lot of executives to pull from. If you try to do that with a DTC brand, you really won’t find anyone. So, it creates an interesting dynamic.

Alex Bridgeman: Is that because there’s just not a whole lot of large DTC brands that have been successful? Or what drives that dynamic where you can’t find executives?

Mehtab Bhogal: Yeah. It’s just a relatively new industry. It hasn’t been around that long, really only since Warby Parker, Bonobos, Allbirds, etc., kind of came into existence. And even those companies are really not that old compared to something like a manufacturing  business.

Alex Bridgeman: Got you. So what are some of the most common reasons that an e-commerce brand will go from maybe a growing business and become a turnaround? Like what drives that change?

Mehtab Bhogal: Traditionally, it was incompetence, just like you see in any other turnaround situation where management doesn’t really know what they’re doing. Or you’ll see this a lot too, even in inaudible, the company has really done well in the first place; because the founder was more of a product person, they did really well with the product part. And that’s what propelled company forward. No other function has really done well. Eventually that catches up to you and it bites you. And for some companies, that’s when they’re doing 5 million, for other companies it’s when they’re doing 50 million depending on how strong product market fit was. What we’ve seen as of late is less than competence and more issues caused by iOS changes, which is basically Apple’s changed privacy policy is hurting Facebook ad performance, and a lot of these DTC brands are very overweight on Facebook as a channel. You’ll typically see somewhere between 60 to 90% of their ad spend focused on Facebook. So, performance there dropped off really hard, which hurt these brands. And they’re already going through an odd time because of the supply chain crisis. So, container prices going up to 20,000, 24,000 a pop from that kind of $3,500 to 5,000 a pop range. That really hurt cashflow. And then iOS came in and hit it again. And then concurrently, a lot of these companies had scaled up operations to meet demand in 2020, and a lot of that demand kind of went down through 2021 and is continuing to drop in 2022.

Alex Bridgeman: What kinds of companies that are in a turnaround situation are attractive to you versus ones you would still steer clear of?

Mehtab Bhogal: Yeah, we really steer clear of any of the classic, I guess what people think of when you say eCommerce or DTC, which is something that’s really more of a Facebook arbitrage business, where for a while, it was essentially free money because ads were so cheap and easy to run, and they’re more of a marketing company than an actual brand. So, there’s no customer loyalty, there’s no proven brand driving lower cost of acquisition, etc. We try to stay clear of that as much as possible unless the entry price justifies it. Our preference is for operationally complex businesses with a manufacturing component to them that primarily sell direct or could be sold direct. A good example of that is probably the succulent company where it has 24 acres of farmland in the middle of nowhere, California, completely vertical, primarily selling through marketplaces as well as B2B.

Alex Bridgeman: Yeah, that succulent business sounds really interesting. My wife loves succulents, so she would love to see that farm one day. That’s very cool. One thing you said earlier was you can do due diligence a lot quicker, especially faster than a traditional finance firm might be able to. First off, why is that? And then, what does that due diligence look like when you do it?

Mehtab Bhogal: A is our in-house operating team and then our extensive experience as operators as well. So, a good example of that might be the ability to dive into an ad account next day and see if it’s underperforming because of management or because of a deeper core issue with product. And if you can delineate that, you know if there’s an actual asset there worth purchasing, because something might have strong product, but the marketing end might be poorly managed, and that’s a buy on our end. As opposed to the opposite where there’s an issue with the core product, it’s not really that great, and the marketing was previously well done, and it’s collapsed for whatever reason.

Alex Bridgeman: So, how do you figure out the nuance between those two? Because that seems like it could be- I could see that being a challenging thing to figure out whether it’s a marketing or product issue. Is it a matter of just reading reviews or something like that of how the product actually works or something a little bit deeper?

Mehtab Bhogal: No, I can walk through a few different examples across a few different business functions. So, we can start with marketing. A good example might be a company that’s doing over 10 to 15 million in revenue but does not have a clear approach to attribution. Attribution is essentially how you figure out which ad spend is driving revenue or which part of the customer journey, if that makes sense. And a lot of these brands are fairly amateur with their approach to it. And that’s a dead giveaway that it’s not being done correctly. That’s probably the number one place to catch a bad marketer and delineate them from a good marketer. And then on the finance side, we’ve seen things like extensive finance teams but there’s no thirteen week cash flow model in place. And really if you’re a startup or you’re distressed, you should have one in place. At the same time, just the way cash flow is managed. It’s often fairly poor and there’s room to unlock cashflow. That’s always a bad sign. Well, it’s good for us, but it just means that it’s being poorly done at the company. And given we are so familiar with the model of DTC brands and kind of how they operate, what’s normal, what’s abnormal, etc., it’s a lot easier for us to jump in and find a few red flags and pull at those.

Alex Bridgeman: One other thing you mentioned was the cost of entry for these businesses is fairly low. I think you even compared it to kind of the risk return profile of maybe a venture investment. Can you walk through kind of the low cost of entry? Which I remember on our phone call was like deceptively small relative to like the size of business that you’d get if it was functioning properly. Can you kind of walk through that thinking?

Mehtab Bhogal: Yeah. So, 10 million in equity would probably buy you something doing, depending on how distressed it is, between 40 million to 120 million in top line, which is a lot more than it would buy you elsewhere. And again, a lot of this comes down to how desperate the lenders are. There’s no one they can flip too cleanly. If you Google turnaround DTC, you won’t find a single firm outside of us. There’s maybe a small handful of upstream firms, but they’re fairly specialized. For example, CSC Generation, which Alex used to work at, they’ve launched more of a home goods platform. They acquired Sur La Table as well as Z Gallerie and handful of other home focused brands. So that’s the niche they play in fairly firmly and in much larger brands doing kind of upwards of 500 million a year. So, there’s no real competition, which makes it a lot better than bidding on something that a million guys armed with an SBA loan are bidding on.

Alex Bridgeman: And can you walk through the risk return versus venture a little bit more too?

Mehtab Bhogal: So, the idea in venture really is you have a hundred shots and hopefully one or two of those pays for the whole portfolio and more. The rest are more or less losers, breakeven, or a fairly good outcome for the founder, but not really the fund because they really need a hundred X to get what they’re looking for. In turnaround, you have a similar dynamic where you might expect something not to go well. We’ve been lucky we haven’t had anything fail yet; I’m sure it’ll happen, but it’s kind of the nature of investing in failing companies. But you have a similar dynamic where there’s a lot of room for an asset to run and return upwards- We underwrite to 10X plus as an outcome, if that makes sense. We aim for 10X plus out within three years. We’ve been able to typically get there within one to two years, if that makes sense, for our smaller deals. Obviously, it changes with more scale. We’re not expecting to buy a company with a $40 million equity check and 10X that in two years; that’d be great, but I don’t think that’s reasonable. So that’s basically the similar dynamic where we can get larger outcomes and the cost of entry is quite low. Again, if you wanted to buy into a company that was growing and it had 10 million in ARR, you’re probably looking at a valuation of 150 to 300 million. Versus being able to own the whole cap table of a distressed company at 100 million.

Alex Bridgeman: Yeah, that’s a pretty incredible difference there. And I want to dive into kind of what your playbook is for these turnarounds, but I want to first ask you a little bit about finding these companies and finding the best ones. Because it sounds like you’re maybe one of half a dozen, maybe in total, who focus on distressed DTC or maybe even fewer than that. I don’t know what the number is, but it sounds like it’s fairly small. I would imagine that gets you fairly decent deal flow for folks who have companies in that situation. But what are some ways that you find the deals that work best for you and filter through all these other deals that come through?

Mehtab Bhogal: Most of the deals we look at are brought to us by lenders. There’s a handful in particular that do a lot of e-commerce and DTC. So, we have a fair amount of deal flow come to us through them. And again, they don’t want to be involved in running the company. They’d rather just take a haircut and get out of a position for 10 cents, 30 cents on the dollar. At the same time, we get a lot of referrals from other private equity firms that are upstream or downstream where someone thought they were profitable, they came to them, the company’s maybe doing 15, 25 million, and for whatever reason, they don’t have accurate books, the private equity firm runs diligence, they find out they’re not really profitable, and they get sent to us. That’s a fairly common occurrence. I’m kind of surprised at how often it happens, but it does. There’s a lot of failed venture backed companies we look at as well, and those were referrals from venture capital firms typically. They want a graceful exit. They don’t want to be perceived as not being founder friendly. And that’s a good source of deal flow. And concurrently, we’re quite active in a few niche communities, like e-commerce field, we get a fair amount of deal flow through those.

Alex Bridgeman: That’s pretty awesome. That’s a really widespread deal flow there.

Mehtab Bhogal: We used to do a lot of cold outreach. So, we built a tool that would basically scrape a few specific data points on some of these brands, pulling data from builtwith.com as well as a few- I think it was inaudible that we were using and their API. We would scrape a few data points and then have someone pull their email address and then basically send out mass emails. And that worked really, really well.

Alex Bridgeman: All right, so let’s dive into a little bit of what you do when you close on one of these new turnaround deals. So, it sounds like within diligence, you kind of figure out a rough idea of what’s gone wrong or what’s not working. So, day one of acquiring the business, what are some of the things you start doing and working on so that three years from now, you can have a close to 10X exit?

Mehtab Bhogal: Yeah, day one, we’ll turn off the bank account and we’ll typically have a new entity, new bank accountant, etc., all ready to go. There is just no point in draining it. We’d rather just kind of upset people and tell them to reach out to us so we can reapprove things. We establish new cadence with the management team or other employees there, for example, manually approving anything over $250 to $500. And the point of that is, A, to control pointless expenditures, which there’s always plenty for companies that are distressed, but more so to show that you’re really serious about tightening the outflow of cash. People take you a lot more seriously if you’re telling them to manually approve a $250 expense. They won’t take you as seriously if nothing’s really changed. If they have to come to you for every expense, it tends to justify it a little bit more and there tends to be better rationale behind it instead of just, oh yeah, let’s grab it. Because that really adds up. You see it across every function, and it can get pretty dangerous quite quickly. So, our real focus on entry is just cutting the bleed and stabilizing the asset. And I feel we’ve become good at this to the point where the turnaround we did in 2019, we probably could have got done what we did in six to eight months in two to three weeks as far as cutting the bleed and being really aggressive about doing that. So that’s kind of stage one. Step two is always stabilizing the asset, and step three is kicking it back into growth mode.

Alex Bridgeman: So just diving into step one a little bit more, what are some expenses that you see frequently that are- I’m sure there’s some that are obviously unnecessary, but I’m sure there’s also a lot where maybe they thought they were necessary or thought they were useful that turn out to actually not have that great of a return. So, what kind of falls in camp one where it’s definitely unnecessary? And then what’s like camp two where some folks might think it goes either way, but you have an opinion on them?

Mehtab Bhogal: One of the first things we do to rationalize the people element and get rid of anyone that’s toxic is we bring everyone in for an interview in the company. And this can take quite a bit of time. If you are looking at a company with a hundred people, a hundred people times 30 minutes, it adds up pretty quickly. But it really is the first thing we do to understand the company and get a true full circle understanding of who’s doing what, who’s doing well, who’s not doing well, who really cares about the company. In turnarounds, you will end up with two groups of people. One is the kind of toxic group of people who really does nothing, they don’t contribute to the company at all. And the other group are people that genuinely care and they’re there because they really care about the company. Even if they’ve had to take pay cuts, they’re still there because they really, really care. And obviously, you want to keep those people around. So, we’ll bring everyone in for interviews, ask them a few questions, make sure- we basically go through the GWC People Analyzer, if you are familiar with those from EOS/traction. And we have a few other questions we layer in. We try to get a feel for who they feel is doing a really good job, who’s not, etc. We’ll start diving through the numbers. A good example, we acquired a company in 2019 that had around 40 to 50 employees, we cut that down to 20 within the first three days of being there, and productivity only fell by about 5% output to give you an idea of how crazy the numbers can get. I’ll give you a really good example in customer service. There was a lady who was doing two tickets a day, and the average for a customer service rep was closer to 200 to 300.

Alex Bridgeman: Wow. That’s a huge difference.

Mehtab Bhogal: I brought it up and said I don’t understand what you’re doing. Like is your time going somewhere else? She said no. And there were really no answers. I said, okay, great, there’s the door.

Alex Bridgeman: Man, that’s tough. Are you willing to share any questions that you’ve found to be particularly effective at figuring out is this person- like which camp this person falls into?

Mehtab Bhogal: Yeah, we ask them what went wrong? What do you feel has done well? What do you feel has not done well? And if you were in our position, what would you focus on in the first 30 days? And what would you focus on the next 180 days? That tends to give you an idea of how capable people are and if they’ve been thinking, and really for any position, if they’ve been thinking about the future of the company and how it can be improved, if that makes sense, and how blocked they’ve been by their manager. Typically, management is most at fault. It’s not the frontline employee that’s packaging orders. It’s not their fault. It’s really the manager above them or two, three steps above them who’s the source of problems.

Alex Bridgeman: So, how do you evaluate managers then? That seems like a multi-sided thing where you have to figure out is this person- like all those same questions you ask everyone you want to ask the manager too, but I would imagine also the interviews you get from everyone who works under that manager probably also informs your opinion of that manager a lot too. So how do you evaluate managers?

Mehtab Bhogal: The most amazing thing we noticed is that the opinions underneath people are always very, very consistent. So, if someone has five direct reports that they’re managing, four of those direct reports will probably have the same opinion of the manager, and it becomes very black and white. This whole exercise is a lot more black and white then I think people initially realize. One of the dead giveaways for us is what’s the cadence of reporting? What numbers are you actually looking at on a regular basis? And what do you do when you notice the numbers trending in a certain way? And we’ll ask them a few questions. Like, hey, we noticed that, let’s say we’re looking at the marketing side, efficiency as measured by spending revenue or MER has been dropping quite a bit over the last three months. What have you been doing to fix that? And if there isn’t a good answer, we know what needs to happen. They’re not adding tangible value. They’re not paying for their seat.

Alex Bridgeman: Interesting. And then once you’ve found the ideal team size for that company and maybe replaced a manager or two here and there as needed, what sorts of things do you do to now shift into growing this company?

Mehtab Bhogal: We generally find once you install EOS or Scaling Up, we like Scaling Up at any company with higher revenue per head, so I were running something like a SaaS company, I would probably be using Scaling Up. If I’m running something that’s more manufacturing heavy, EOS tends to make more sense because it’s a faster and lighter install. So once you install EOS, a lot of things just become apparent by way of looking at scorecards, looking at the main leavers in the business, etc., and a big part of it is shifting the mindset out of war time mode into not what I would call peace time but more of a growthy war time as opposed to defensive growth time, and just driving the team really hard, ensuring that incentives are aligned. There should be a strong bonus structure in place that rewards people for growth. We’ve had people- a good example, we had someone who was working for us in customer service. I think she was making $12 an hour. Within a year, she was making close to 70 to 85 grand a year, which is pretty good for within a year for someone who’s in customer service. And I think she’s on track to get to 100 or 120; I’m not too active in the asset anymore. But that’s what we look for is creating the incentive for people to keep performing, and then we’re happy to double down on them.

Alex Bridgeman: Okay, so we have incentives for team. What happens on the product sales or marketing side? What kind of changes do you make there typically?

Mehtab Bhogal: Yeah, I think one of the lowest hanging pieces of fruit is SKU rationalization, especially for any company with a large amount of SKUs and manufacturing component. Sometimes there will be, well, there almost always are SKUs that are strangely difficult to manufacture. Maybe they have long lead times for the components or a complex supply chain just for that SKU or group of SKUs. If you’re familiar with the inter six sigma, a lot of those practices carry cleanly over even into marketing, but really, we apply that logic into the kind of manufacturing, production, and product side of things quite quickly. And that tends to trim quite a bit of fat. A good example, there was company we were involved with that was making frames, like wooden picture frames, for one specific SKU, but the frames would take way too long. It was something outrageous. I think it was four or five X cost, and there’s no real reason for them to assist. The owner previously felt it brought a lot of people to the website, but when you looked at the data, it really didn’t map out. And we have a matrix that we use and deploy on a regular basis.

Alex Bridgeman: Can you talk about that matrix a little bit?

Mehtab Bhogal: How familiar are you with lean? [RD1]

Alex Bridgeman: I’m familiar with the concept, but I’m not familiar with any of the details.

Mehtab Bhogal: Okay, great. So, there’s a few different areas we basically evaluate a SKU across. There is the kind of production, manufacturing, supply chain side. What are your terms with the manufacturers you work with for that SKU? Whether that’s getting your BOM in or the actual finished product, obviously, it depends on the company. And then any sort of ancillary work you have to do once it gets to your facility. And again, this is for more of a production type business. And then the space it takes up, and anything else that needs to go into it. On the marketing side, we’re looking at kind of classic levers, like turn rate, conversion rates, or how often that specific product appears in a cart. And that’s just because you might accidentally cut something that’s milk at a grocery store. Everyone goes there- Well, I don’t think people really drink milk anymore, hopefully, but bread. Let’s call it bread. You don’t want to cut the bread by accident, and suddenly you have no traffic coming into the website. Because it was a product that was kind of basically breakeven, but it was bringing a lot of traffic to website, so it’s critical to make sure you don’t cut those. We look at other things like margin, etc. There’s more; I can pull the list. I have one. But that’s a high-level overview.

Alex Bridgeman: So, on the bread product idea, that’s kind of interesting, how do you evaluate whether a product is breakeven but is like a bread product versus breakeven and it’s just some random thing that no one really buys that often?

Mehtab Bhogal: Yeah. That will usually- the dead giveaway is you can get traffic that’s looking for that product extensively to your website and a lot of carts have that product inside of them. So probably the classic example of this is Diapers.com. They famously were breakeven or losing money on diapers and making their money off of the ancillary baby products that people would buy from the website.

Alex Bridgeman: Are you able to see what order, like not just someone’s cart, but in what order items were added to the cart? So, you could see like the bread product was added first and then a bunch of other stuff was added later?

Mehtab Bhogal: Yes, you can. It’s really painful, but yes, you can.

Alex Bridgeman: I was going to say that would be kind of cool because you could see like what’s the average position of this product. Like on average, it’s added the first or second product in a cart or it’s like the third or fourth average added item to the cart or something like that. I imagine you could get pretty- If you had the data, you could probably get pretty close to some interesting insights there.

Mehtab Bhogal: Yeah, absolutely. There’s a lot of things like even the merchandising onsite in collections, or just reorganizing things by gross profit per click, etc., can drive quite a bit of wins. A good example, this one site we owned where if the collection sort, and by collection sort I just mean following the established logic that the company came up with, you’re seeing something like gross profit per click with a few slots for testing new products. But let’s say you go to diapers on a website, on a retailer’s website, in what order do the diapers appear and where did diapers initially appear as category for you? And why? And diving into that merchandising. But with this specific company we noticed I think it was a $15 or $20 swing in average order value, which is really significant when the average order value was close to kind of $70, $80. And that was just driven by better merchandising. You won’t see anyone really merchandising properly typically until you look at companies in the 30 to 50 million size range, even then a lot of times it’s overlooked. I don’t know why. We’re really surprised when we see someone actually pay attention to merchandising. And what you brought up with the order in which things are brought to the cart, you probably will not hear anyone other than the CMO of a company doing between 50 to 100 million mention that. I was really surprised you brought that up. It’s like you’d be really surprised, but anyways.

Alex Bridgeman: Why is that? Is it just because they don’t have enough margin to build a team that can analyze that stuff? Or is it just kind of still too early in that company’s history and it’s just been overlooked long enough that it’s not shown up yet?

Mehtab Bhogal: I mean, I guess for color, we typically look at bad companies. So, there’s usually someone incompetent at the helm, and that’s a big reason for it, but you’re kind of surprised they could scale to that size without knowing what I feel is- I mean, you mentioned it, and I don’t think you’re super deep in e-commerce, and it’s kind of a sign.

Alex Bridgeman: That’s interesting. What else are you usually surprised by that is either missing or not done well in any of these companies?

Mehtab Bhogal: I’ve seen everything from – you’ll love this – a finance team where the accountants were not really using any software. So, they weren’t using anything like QuickBooks. It was, I think, a 12-person accounting team, and they were manually entering things in Excel, but they weren’t using formulas. So instead of doing 2 plus 10 equals 12, right? Or, sorry, in Excel it would be equals 2 plus 10. But they were manually entering all the numbers, and there was no formula usage at all. And that’s why it was taking them 12 people instead of what was really honestly a one-person job.

Alex Bridgeman: How could they possibly have done that accurately if you’re not using formulas?

Mehtab Bhogal: I don’t think it was that accurate.

Alex Bridgeman: Yeah. Like dollars and cents would get messed up so quickly.

Mehtab Bhogal: Yeah, I really don’t know. We didn’t bother looking at it. We just built our own 13-week model, if that makes sense, to get an idea of kind of the unit economics and the way the business truly worked. The financials are usually wrong, unfortunately.

Alex Bridgeman: Was some of that done on paper too, or is that at least all on Excel, so at least you had some sort of digital copy?

Mehtab Bhogal: I think it was a mix. There were a bunch of red flags to that company. When we asked for the formal financials, the guy sent us tax returns, but he said he only did his financials once a year, and he didn’t really know what went into them. They just kind of showed up. And if they’re doing 30 or 40 million a year and they had no mobile website, and this is like very recently. This is probably 2018, 2019. So, there’s no mobile website and he was trying to figure out why revenue was going down, but you could see it correlate almost one-to-one with mobile device usage. This is all really easy to see in Google analytics, by the way, everyone’s running it and it’s free. And you can see the correlation one to one with mobile traffic increasing as a percentage of total traffic and essentially conversion rate taking a hit because there was no mobile website. You cannot shop on it from your phone.

Alex Bridgeman: Oh, my gosh. And that’s terrifying knowing that you’d only get financials once a year. Like you just have no clue until end of the year how you did. That just sounds terrifying. Any other interesting examples or stories you can share about wild things you’ve seen?

Mehtab Bhogal: Oh yeah, absolutely. So, this is one of my favorites. We acquired a company, one of the managers there, she was fairly solid, and it turned out she had an Only Fans account. We found out because a customer had randomly emailed customer service about it to complain. And I don’t know how that customer even knew this person worked for us. So, I didn’t really have an issue with it, didn’t really interfere with the work she was doing for us. I thought it was really funny and a bit of an odd problem, never run into that before. We’ve seen things like that ranging to the previous owner of a distressed company we purchased coming in and screaming at employees, getting drunk the middle of the day, etc. And another time we terminated someone who was just clearly not doing much, and their wife threatened to kill one of the managers with a softball or something similar. I just remember I was out on a date or something similar, and I looked at my phone and it was a text from my manager saying, “Hey, so-and-so threatened to kill me with a softball.” I said, “Call the police. I’ll try to help you, I can pull chat logs, whatever you need. But this is a good time to call the police.”

Alex Bridgeman: Oh my gosh. It was a softball?

Mehtab Bhogal: Yeah. They all played softball together. And apparently the wife’s plan was to throw a softball really hard at this person’s head when she wasn’t looking.

Alex Bridgeman: You’d have to throw it really hard, I imagine, or be extremely accurate.

Mehtab Bhogal: I don’t know. I just thought it was kind of comical. What else was good? We’ve seen really, really everything. We had someone threaten to shoot the place up when we acquired a different company in 2018. So obviously the cops were called. But yeah, all sorts of fun.

Alex Bridgeman: That’s nuts. Moving into some closing questions. What college class would you teach if it could be about any subject you wanted? 

Mehtab Bhogal: I think either history or entrepreneurship.

Alex Bridgeman: What kind of history?

Mehtab Bhogal: I’d probably go for something odd, maybe something a little bit more obscure. I really like Southeast Asian history, specifically some of the island countries like Indonesia, etc. I had a lot of fun learning about those.

Alex Bridgeman: What made it fun learning about them?

Mehtab Bhogal: Yeah. I didn’t realize how unique those regions are, how far back they went, how many times they’ve kind of shifted hands, etc., between a few major kind of cultures. And then they’ve always been majored trade areas as well, which has made them a lot more interesting.

Alex Bridgeman: Absolutely. On the entrepreneur class side, what would a class look like if you were to arrange it, or what would your curriculum look like?

Mehtab Bhogal: Good question, probably teaching people how to look at and think through business models before they dive in and create something. I think that was the biggest mistake with the guitar retailer, even though our fundamentals, we weren’t really paying for inventory, etc., the business was not nearly as profitable as the men’s hair product company or the guitar pedal company just because the way the margins played out, etc. And you don’t really think through these things when you’re a kid, but obviously the more margin you have, the easier it is to grow faster. If you’re at 70 to 90% margin, you can reinvest in inventory much more feasibly then if you’re at 20 to 30%, even if the inventory carrying costs are not significant, it still hurts the business quite a bit.

Alex Bridgeman: Very true. What’s a strongly held belief you’ve changed your mind on?

Mehtab Bhogal: Good question. When I was very young, I used to think that everyone should become an entrepreneur, but then I realized that’s actually not a very good idea, and it’s not suitable for most people. The risk tolerance has to be there.

Alex Bridgeman: What switched for you? Like is there a moment or interaction you had that made that switch?

Mehtab Bhogal: Not really. I think I just realized most people don’t- they’re not comfortable with the same level of risk, and that’s okay. I get it. And it works out better for me.

Alex Bridgeman: Very true. What’s the best business you’ve ever seen?

Mehtab Bhogal: My favorite business of all time that I’ve been trying to invest in since 2019 is Josh’s Frogs. He is a friend of mine who I met through e-commerce, and he sells frogs online, which is honestly the best thing ever. They’re very niche poison dart frogs. He sells plants and ancillary pet supplies, etc. Really cool business. You acquire the specialized poison dart frog through him or other- He sells everything – cockroaches, other various gross bugs, and he literally farms them onsite. It’s in the middle of nowhere, Michigan, really cool business, and the dynamics are beautiful. It’s a real brand when you Google it. He’s been in business for 20 years. No one’s ever going to compete with you because it’s such a hard product to stay on top of. A good example, I was watching a video of his on YouTube, just for fun, a facility walkthrough. And they were talking about breeding tadpoles, and some tadpoles cannot be put in the same container because they’ll eat each other, and other ones will not. But when you think about how many species of frogs they carry, you just have to think through a lot to keep that facility up and running. It’s a really impressive business.

Alex Bridgeman: No kidding. How do you mail a frog?

Mehtab Bhogal: This is really funny. He was explaining this to me. A lot of them die in transit and they had a really funny name for it. I think it was fatalities or it wasn’t fatalities, it was something else. It was like errors or something, shipping transit errors or something. And it just cracked me up. But they have a very specific way of packaging their product. They actually look at where the product is being shipped to and the temperature range, and that’s how they build out the guarantee for the customer. So, if you want to send a frog from where he is in Michigan to somewhere really cold, they’ll say no, or they won’t guarantee it. And they have- I watched a packaging video. They just have a bunch of special- I think they put a little heat pack inside of it, etc. So just a wildly interesting business with a very deep moat that hopefully I’ll be able to invest in one day.

Alex Bridgeman: No kidding. I imagine like the cockroaches or other weird specialty bugs could probably be used by like lab businesses or biotech research companies. What was his customer base range? Was it mostly individuals or scientists, researchers, or what did the gambit look like?

Mehtab Bhogal: I think he is primarily selling to hobbyists. It’s just a really cool business because they’ll buy the frog from you, then they’ll buy all the ancillary pet supplies from you to build like the place to put your frog, the aquarium type thing, and then they will buy things like bugs, etc., on an ongoing basis from you. So that’s your LTV component. And then it’s all so niche that Chewy or PetSmart, etc., they can never hope to compete with you. It’s just the math doesn’t work for them.

Alex Bridgeman: Gotcha. So, the bugs were sold as food for the frogs then mainly?

Mehtab Bhogal: Exactly. So, you might buy a poison dart frog and then a container of live cockroaches. I was thinking about buying a container of cockroaches for my business partner, but then I realized there was a 90% chance his wife would be opening it and I would get in trouble. So, I didn’t do that.

Alex Bridgeman: Yeah, no kidding. Cockroaches are pretty big though like compared to a frog, right?

Mehtab Bhogal: I don’t know, I didn’t run through the numbers too much. I did watch a video on his YouTube channel, it’s great. It’s really entertaining. And there’s a lot of similarities between that and the succulent company. For example, succulents have to be shipped in the winter with little cute hand warmers on them to prevent them from dying, and everything’s air shipped. And there’s a lot of unique kind of issues with the execution of the business that have to do with ops and fulfilling orders, etc.

Alex Bridgeman: Yeah. Walk through that one a little bit. That’s clearly a really interesting one to you. What are some other favorite elements of that succulent business that you like studying?

Mehtab Bhogal: Yeah, there’s a very deep moat around it just because no one’s going to boot up a manufacturing facility in the middle of nowhere to grow succulents. The specific area it’s in, in California, it’s so perfect for growing succulents that you don’t need much in the way past coop houses and greenhouses. So, the actual CapEx is very low compared to what you would think of when you think industrial farming. And then fulfilling the orders is very difficult. So, for example, if Amazon merchandises you really extensively and you suddenly have 2000 orders to fulfill on a Monday and you didn’t have any one over the weekend to ship those, you have to go and pick those succulents from the farm. They can’t be pre-picked too much because they’ll die. So, you have to pick them from the farm and then package them and then ship them very, very quickly. So, there’s lots of unique considerations. When you think through inventory, obviously, it’s live, so your two inch plants turn into four inch plants in a two week period over the summer, all sorts of fun things like that.

Alex Bridgeman: That’s wild. That’s crazy. Well, thank you so much for coming on the podcast and sharing all about these wild businesses and stories that you’ve had through turning companies around. This has been awesome. Thanks for coming on.

Mehtab Bhogal: Yeah, no worries. Thank you for having me on. I really appreciate it.