Not 'How to Start a Startup': Gregg Kaplan at Chicago Founders Stories

On September 17, Pat Ryan of Chicago Ventures / Incisent Labs interviewed Gregg Kaplan of Redbox fame as part of a series called Chicago Founders' Stories; Gregg's story is a bit atypical and especially a bit at odds with a good amount of wisdom more aligned with 'how to start a startup,' so I've recapped some of my notes below. 

When the video becomes available, I will link it  ->here.<- 

So - who is Gregg Kaplan? Gregg is likely best known for founding Redbox (Redbox Automated Retail LLC) in 2002, selling it to Coinstar in 2009, and then serving as Coinstar's President and COO from 2009 to Spring 2013 (name change to Outerwall was later, in July '13).

Before founding Redbox, he was an early employee of 2 venture-backed startups in the Web 1.0 era (after finishing HBS in '97). 

In 2001, he took a 'less risky' role with McDonalds Venture/Innovation group. They spent their time sizing up two things and seeking their overlap:

  • What is McDonald's good at? 
  • What are big consumer trends happening now? 

Gregg chose a few McDonald's strengths to rattle off the top: distributed operations, global brand, convenience (physical distribution network, presumably). Big consumer trends of 2001 they picked up on were consumers' increasing time scarcity/feeling of time-starvation, technology replacing people, and a general rise in vending in some parts of the world (though not in the US, with the exception of ATMs). 

What would become Redbox, then, began as a very small scale experiment alongside other vending or "automated retail" concept(s). As the winner, 'Tik Tock DVD Shop' began to expand through the McDonald's network and prove impact (my notes say Gregg cited Denver as the major test market where they cut their teeth, proving same store sales increase by nearly 5%, though the Redbox site doesn't seem to mention that market.) 

Below is a chart of the McDonald's Corp stock price from Jan 3 2001 to Feb 27 2009 (Redbox -> Coinstar closed in Feb '09). It's an important accompaniment to Gregg's story, since McDonald's owned a significant portion of the company (at least 46%) during this period. As the McDonald's core business struggled to secure its footing, Gregg's innovation fought for its life in the 2003-5 era, eventually begging its freedom and attempting to seek 25-30MM in funding on 20-25MM in revenue in 2005. 

McDonald's Corp Stock Price: Jan 5 2001 - Feb 27 2009

McDonald's Corp Stock Price: Jan 5 2001 - Feb 27 2009

VCs weren't having it, but Coinstar was in for 32MM, purchasing a 46-47% stake in the company. 

There were many other fantastic notes in his talk for those interested in automated retail / vending as distribution for physical products, Gregg's takeaways as an early web 1.0 leader, recommendations based on what he did wrong (even as a former investment banker!) in fundraising, and how think about capturing real-world-only data (aka the hardest kind to structure and capture.)


Since both are on my mind, the juxtaposition I'd like to make in this piece is Gregg's story alongside some of the (excellent) wisdom of the first session of "How to Start a Startup" aka CS 183B - Sam Altman and the YC-universe's class, currently underway & available 100% free, online (you should participate! I put in a button!)

I've only been 'officially' learning about startups since ~2009, so I'm still personally progressing past treating the most widely endorsed ideas about 'how to do things correctly' as orthodoxy. I thought it would be a useful exercise, then. to contrast some of the elements of Gregg's story with the YC approach.

So, how is Gregg's Redbox success story not aligned with the YC approach?

  •  Most obviously, he went big to go little - after experience on his own/in smaller startups, he joined McDonald's Corporation.
    • Internal innovation at a large company is clearly not the path of every entrepreneur, but EIR roles come up 1304 times as past or present positions for people in my own UChicago/Groupon/Startup-heavy network, and Rocket Internet, currently pricing their offering at "up to" 8.4B, relies heavily on the EIR/internal founder and talent development process to build its' businesses. We often glamorize the parts of startups' origin stories that match how we think they are supposed to come about, but neglect the relationships, deals and structures that kept things on track when they faltered.

 

  • He didn't begin with a problem he experienced or with passion, but with analysis of markets, skills, and at-scale direct consumer testing.
    • I would imagine that B2B businesses more often defy this convention, but Gregg's approach to matching consumer trends, McDonald's competencies, and experimentation was decidedly not born out of a personal passion. I'm not a designer, but if I were able to peek into their innovation processes, I wonder if they jumped right over the 'personal' hurdle and used many of the principles a great designer might in considering ideas that would serve users (including their corporate parent) best. 

 

  • He didn't build something that was designed for a small number of users to love obsessively, abiding by Sam's 'law of conservation of how much happiness you can put into the world.'
    • Gregg didn't spend as much time discussing any reaction early customers had to their product in a personal way as I'd have liked (I asked a question about users and pricing that wasn't popular enough to be answered ;) - but by definition the business was built on convenience, ease, and relatively low investment from consumer users (renters). Since Redbox sold the its machines to franchisees of McDonald's, etc. later in the lifecycle of the business (once they "nailed" the concept and its economics), Gregg explained their proof/value in terms of their contribution to sales at a single store McDonald's location.

 

That last point about customers is one that gave me some pause; in the initial stages of the Redbox company's founding story, Gregg was matching a consumer trend & a corporate skillset/set of competencies, but the question "who is the customer?" seemed to have a clear answer - the individual consumer renting their dvds and games. As his story unfolded, my thinking about the business evolved - the priority customer seemed to be the franchise owners driving the company's expansion.

Gregg's story was a fascinating picture of successful internal innovation turned independent and also highlighted some of the challenges of fundraising in a recovering startup economy (even with an HBS network, a successful business, and experience in banking) at very least, so I recommend checking it out and will add the link accordingly when it's available.  

Kathleen MeilComment