How to Launch a Marketplace | Ray Reddy, Founder of Ritual

Pablo (Host) 0:00 This is the bonus episode with Ray from Ritual. Here, we talk about how he launched his marketplace. Check it out. Intro 0:06 Welcome to the Product Market Fit Show, brought to you by Mistral, a seed stage firm based in Canada. I'm Pablo, I'm a founder turned VC . My goal is to help early-stage founders like you find product-market fit. How to Go To Market Pablo (Host) 0:21 One of the things I'd like to dive on a little bit is when I hear the story of Ritual, I heard it many times, what always struck me is just the amount of thought that went into go to market. And you've described here the thesis you had, and you described, you kind of set up the experiment, and so on. That's one thing I see missing a lot, is idea side, and then maybe a scaling side, and this entry point piece of how you're really going to go to market is glossed over. It's like, "well, we'll put up ads or whatever." What led you to go so deep, and have so much thought on go to market? How do you almost...What's your advice, especially the first time founders, on how they should think about entry point? Just the philosophy around it. Ray (Guest) 0:59 I guess my main advice is to think about it. I think that t's easy to not think about it, and to get very excited about things, but I'll give you an example. Building a simple spreadsheet model is very helpful, for most people, I think the minimum amount of work you should do. I'll give you an example of what I mean when I say the minimum. Marketplace, where you have two customers, for example, in our case, you should be able to reasonably answer the question "What is the cost of acquiring a merchant?" Do that now. Are you going to hire a sales person? What do you think the productivity of the sales person is going to be? And often you'll be shocked at the results, and you build that, and some of your basic assumptions on, "we may only need a handful of sales people." Then you're like, "oh no." If you apply any reasonable sales conversion rates, it turns out that you're egregiously wrong on some things. And when you say ads, the moment you take one, it's actually that ads is a bad strategy, but just take it one level deeper. Here's how I think about it. Building products is very difficult. It requires engineering. You are committed once you go down that path. My advice on this point would be, the thing that is free to do is to run business model scenarios. If we, in the sense of, you change variables on a spreadsheet, you don't have to deal with customer support, and ad creators, and brand, you don't do any of that. You just literally change numbers, and you can get a sense of how the business would work. Convince yourself your idea sucks Speaker 2 2:25 For us, we built out a model. We said, "what would the operating model of this company look like?" I guess my advice would be, build a model to try to convince you not to do this. Because otherwise you have only happy data in your model. Everything is more optimistic. And I would say, "what's the point of doing that?" The way that we viewed it is, let's save ourselves from an immense amount of pain and torture if we can prove upfront that this is not a good idea. So, I think that most people go into it saying, "I'm going to do this to further convince myself that this is a good idea." I guess my advice would be, try to talk yourself off using a model. Because by the way, there's opportunity costs to pursuing an idea. Ray (Guest) 3:07 It's the infinite number of other things you could do that you're not doing. So, it was very helpful for us to do that. And shockingly, many of the variables ended up being close to the few ethical values we made up, which was shocking. Things don't tend to work out like that. But, we made assumptions for example, on how often would an active user buy with us, what is a reasonable margin you could expect, what would it cost to acquire a customer, think the payback of that would be, is that even reasonable. It kind of forced us, even before we built the business, we had a rough sense of how would our team be organized in a city, what they need to do, how many people would we have. And you just start to think about, "do you actually need an operations person?" and like "Oh, okay, that actually fundamentally changes the P&L of a city if you need to do it. Is there an option for us to not do it? And to have, blah, blah, blah." And so, there's just a lot of... you can think to go to market in quite a bit of detail. The thing you can't test before you build a product is consumer reception. There are certain things you can do to get a signal around it, but it's pretty hard to actually test it without actually doing something. I think the go-to-market stuff is very easy to work through CAC/LTV, payback models. There's so much data online on funnel conversion of ads spend. And I think for someone who respects their time, it is a very prudent thing If you must, make it free Ray (Guest) 4:38 to do. Pablo (Host) 4:38 Perfect. So, back to the story, maybe my first question is, if you think about that office building, how did you convince those first... because you have that chicken, and egg problem. How did you convince those first 15 merchants to sign up and deal with you guys ? Ray (Guest) 4:50 Just make it free. There are ways of doing it. And so, we saw it as, "let's go get these merchants no matter what." You can do this with no money at all. But sometimes spending a little bit of money, your time is also money. If you try, it's possible to do it with no capital, but that sometimes, in a strange way, that is actually more wasteful resources. For example, trying to convince people to try something may take a long time, but if you just say, "can I buy you a free lunch? " you tend to have a lot of people interested in trying it out. So, spending $10 on a $3,000 investment to sign up an entire building is not a stupid idea. Compared to, how else do you plan on recruiting 200 people when you have an app with no name? And I think the same thing is true with merchants. At the end of the day, even if you have to forget about charging them something, even if you had to pay them a small amount to participate. The way we saw it was the faster we can prove that this works, there's a lot of value because once we prove that it works, we had the conviction to invest for the long term. So, after the first 60 days we got out of prototype product-market fit questions mode, and we're like, "no, this was going to work." We convinced ourselves. The most important people to convince is not your investors, it's yourself. And so, we convinced ourselves that that data was sufficient for us to believe that we were onto something big. Setting clear goals Pablo (Host) 6:20 And did you have clear goals going into it, that if you get this engagement or this many of repeat users or whatever? How did you think about that? Ray (Guest) 6:28 It's hard to set clear goals for a product that doesn't exist. I think that everyone, you have a pretty reasonable sense of what's good and bad. If a bunch of people try it, and don't use it again, that answers your question. If a reasonable number of people use it again... And then one nice thing, by the way, of doing it the way we did was, these people were so close to us, we could talk. And so, we had a beta group of people close to us that just gave us a ton of feedback, they were engaged, and the data spoke for itself. When I said, "when you get it right, the first time that is more luck than skill," that's what happened to us. I think it was luck. We thought of the century point strategy. If this didn't work, we'd probably have come up with a few others and tried a number of them. But this idea that we had that coverage was what really mattered, we should just really focus on that, and we have to get that right above everything else. And I still say this today when people join the company, no single app feature is worth more than giving a user all of the merchants. That is the number one thing we can do to give value to users. Basically, it's the same idea of Amazon's increasing assortment, that everything else is an accelerant, but that is almost a foundation of the more you have, the more useful it becomes. Yes, I think we proved that very quickly. And then we started to take a long-term view on things. Then we weren't building for a three-month experiment because nope, we're committed, we're going deep on it. And then we started to take a multi-year view on how we built from that place. Finding PMF post-COVID Pablo (Host) 8:08 Perfect. So, that's Ritual, and number one, you do this test, and it was one building, 15 merchants, 300 employees, it goes well. And then you start going neighbourhood by neighbourhood, merchant by merchant, always worried about coverage, expand. I think you were at 40 some cities. And then if we fast-forward, many years until COVID starts, everything kind of flips around. All of a sudden, you're focused on because you're thinking about coverage, you're focused on the downtown cores - density, density, density. And those are exactly the areas that were most impacted by these office shutdowns. So, now you're in 2020 or so, and the core assumption of your business around Dan's offices totally changes, you have to find product-market fit again. Maybe just walk us through what happens in this time period, and where you ended up shifting towards. Ray (Guest) 9:02 Yes, great question, Pablo. COVID did flip the world around for us. Our greatest strength, part of this inset around coverage was a secondary insight that office buildings were a special entry point into look because the workday routine was basically what Ritual... it tends to be small order sizes, they're not great for delivery, most people, have food courts to buy or merchants at the bottom of their buildings that they want to transact from. And it's really about removing the friction out of the workday. Our growth with office workers was viral in nature. We had a very dense set of merchants in a very small area, so we could support them really well, as opposed to them being spread out across large areas. We really designed the entire company, the playbook, our go-to-market, everything was designed around capture. Capture the office area, and then expand outwards to a city from there. It's almost like that was like the cream of the city that we were trying to get focused on. And in 2019, we took on a very large expansion, and launched office areas across almost seven countries, 60 cities. It was an enormous expansion because of how well things had gone in previous years. And then March 2020, the global shutdown of offices happened, they're still closed. And that was tough on the entire company and the space, even more so. And so, we've kind of had to go through a version of what we had to do in 2014, and we're a much larger company, and we thought, "there's still a meaningful business that'd be supported" but a few things happened. One was, we went from a company where 80 to 90% of our revenue came from offices. And now, even though we took a step back in revenue after offices shut down, and we've been rebuilding. Now 90% of our revenue comes from residential because offices are closed. So, people, their patterns, their workday patterns of buying have shifted where they are still making those purchases, but they're making it near where they Finding PMF gets harder the bigger you are Ray (Guest) 11:17 live, not where they work. And so, we've had to do a lot of work to lean into that. And it's a more difficult problem because the one nice thing when you're a small team, and you're trying to get to product-market fit, is that things cannot be time pressured. The challenge when you're in market with a product, and you've got a fully functioning business that's scaling and the rug gets pulled out from under you, you have a lot of time pressure to figure it out, you can't take... So, I think it's tougher. You have to make bets quickly. It's kind of like wartime, it's more important to make a decision and move it forward than it is to perfectly get the right decision, get the decision right every time, and you've got to move very fast. And that's what we've done over the last 18 months. And it's basically been, we've done it in two ways. One is we've leaned into the fact that growth has now shifted from offices into residential. And we've built a series of products to expand our presence from just offices, including, building online ordering capability for restaurants that they can deploy on their websites. It's still very aligned with our original mission of enabling local businesses to go digital, but a different way. And frankly a much broader way now. But also we see it's starting to happen in Q4, and we think that it's going to happen over the next year, but it's going to be different in the sense that people have now been trained on digital ordering. And so, what used to be something that we were almost the early company showing people a new way of doing things and now becomes the default. A lot of buildings now see this as a necessary amenity, not an optional thing like it was before. And so, I think the good in it for us is that, what uses to be an optional thing is becoming almost a mandatory amenity in buildings. Also had to change our products to more deeply embed ourselves into thousands of office buildings, et cetera, et cetera. We're doing a lot of work to...It's hard to predict exactly what the world's going to look like when we're on the other side of this, but the data is basically the work we're doing Recap Ray (Guest) 13:35 right now. Pablo (Host) 13:35 Awesome. All right, we'll cap it off there, give a quick summary. We went through how, while working at Google, you started to see some interesting insights around local and digitization. And you ended up deciding to build Ritual a pickup app, how you devise the first entry point experiment. And as you said, that luckily that one went very, very well, and ended up getting you to scale across 60 cities worldwide, in many different continents. Only to then have COVID come and really totally changed the game, and force you to go back to first principles, reorient your company, and honestly, come back stronger than ever as COVID fades away and as you now have more presence, even in the suburbs. So, quite an incredible journey, I'm sure founders will learn a lot listening to the way you describe your thinking and all the steps you took. So, thanks a lot, Ray. Really appreciate having you on the show. Ray (Guest) 14:36 Thanks, Pablo. It was a fun conversation. Speaker 1 14:39 Thanks so much for listening. If you want to see more content, check out pmf.show .