Bear Naked ambition: The inside start-up story

Submitted by Dmitri Davydov on Fri, 2008-02-08 11:00.
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(FORTUNE Small Business) -- A casual shopper might think that the last thing the world needs is another snack food company, but that didn't stop Kelly Flatley and Brendan Synnott, two high school friends who wanted to redefine the natural-foods market with their homemade nutty granola.

They launched Bear Naked in 2002, when consumers were becoming increasingly health-conscious. Flatley and Synnott bombarded cart pushers and store managers in the cereal aisles of Connecticut supermarkets, passing out Bear Naked in its minimalist packaging. By the end of last year the duo had talked their way onto the shelves of more than 10,000 retail stores, including Sam's Club, Target, and Wal-Mart.

They also caught the attention of big competitors: On Nov. 1, Kellogg bought Bear Naked for roughly $60 million. Flatley, 28, and Synnott, 29, who will stay on at least to manage the transition, tell us how they did it.

FLATLEY: After graduating from the University of Virginia, I worked as an events marketing coordinator for Sports Illustrated during the 2000 Summer Olympics in Sydney and the 2002 Winter Olympics in Salt Lake City. But I wasn't satisfied. I wanted more out of a career - and life.

I've always felt that there is a connection between what I eat and how I feel and function. I made granola in college - it was fuel for my daily life as well as my recreational activity, which then included running and yoga.

I started to wonder if I could make a go selling my own recipe. Granola is like pizza - it's the quality of the fixings and the way you bake it that differentiates one pie from another.

I conducted a few informal taste tests with friends and have never altered the core recipe. My cereal stood out because it was soft-baked and moist. Most other brands were dry and teeth-breaking hard. I also didn't skimp on the extras, using whole almonds, raisins, and walnuts (no chopped nuts). I launched my company in 2002 and named it Bear Naked. The ursine reference evokes the outdoors and hardiness, while "naked" suggests the absence of additives.

I used my savings to rent a commercial kitchen in the back of a local market in Rowayton, Conn. I made the granola from 8 p.m. to about 2 a.m. and delivered batches to grocery stores and health-food shops the next day.

One day I ran into Brendan, an old high school friend, at a deli in Darien, Conn. At the time he was working in the talent department at Saturday Night Live.

We decided to meet for dinner, and I brought along a bag of my granola. (We have never been romantically involved.) He was the first person who expressed any enthusiasm for what I was doing, and he invited himself to my kitchen that night. I was flattered that he preferred joining me at work rather than hanging out at a bar.

The next day he asked if he could accompany me on a sales call. From then on, Brendan had much bigger plans for Bear Naked. While I was contemplating how to expand outside of town, he was talking about setting up assembly lines and the best way to approach Wal-Mart.

I'm the more reserved of the two of us - Brendan is very strong-willed and opinionated. I appreciated his ambition and thought we could create a complementary partnership, but mentors advised us against it. They didn't think that friends could make successful professional partners.

A marketing expert we visited in our hometown seemed alarmed by our inexperience and said, "You'll blow up in six months. Get out of here!" Despite our different personalities, we've managed to muddle through.

SYNNOTT: We didn't see eye to eye when building our website.

Kelly didn't want one right away - she thought it was more important to focus on getting the product into stores. I insisted on an online presence with photos of ourselves, to show customers there were real people behind the brand. We could never compete with Kellogg or General Mills - we needed a way to stand out.

Kelly suggested pictures of us with nuts and fruits. I wanted to position ourselves in a way that was literally "bare naked." That meant posing and showing some skin from the shoulders up. While Kelly was initially uncomfortable with this, I thought it was a brilliant way to market the company. Kelly finally relented.

For the first two years Kelly and I were the accountants, the distributors, the producers, and the kitchen cleaners. We worked seven days a week until 11 p.m., when we couldn't bear the sight of another oat. We were green, but we were enthusiastic.

In the early days distributors wouldn't sell us ingredients because we weren't ordering huge bulk amounts. We haunted Costco, filling carts with almonds or honey or canola oil. The Costco in Norwalk, Conn., awarded us its "Customer of the Month" title in fall 2003.

Later that year, when we were running the company out of Kelly's parents' home, the driver of a delivery truck started unloading our order, and we noticed that he was placing boxes of dog food and tofu in the driveway instead of the fruits and nuts we needed. Pressed for time - we had an order due the next day - we drove to the nearest Wild Oats store and emptied its bulk bins of almonds and raisins.

FLATLEY: We were scrappy about spreading Bear Naked's word. We crashed triathlons in New York City and passed out granola to athletes at the finish line. We lugged balloons, banners, coolers of yogurt, and tons of samples. Brendan drove an old Jeep, and our samples didn't fit properly, so we used shrink wrap to secure the products and drove to Long Island. That was in 2004, when we had seven employees (six were high school friends). We slept five to a room. It felt as if we were on a two-year road trip.

SYNNOTT: Our first big retail break was landing an account with Stew Leonard's, the four-store Connecticut grocery chain. For months we bugged the buyer via phone. He ignored us. To get his attention, we decided to bring him breakfast one day.

We woke up at 6 a.m. and dressed in Bear Naked T-shirts. We borrowed china from Kelly's mom, which we used to display fresh fruit, our granola, and Stew Leonard's brand of yogurt. We were the first car in the lot at the chain's headquarters. After we climbed the stairs to the office, the receptionist told us the buyer was on vacation. We were deflated!

But then, as we were walking away, we recognized Stew Leonard Jr. "Stew!" we yelled. "We brought you breakfast!"

He seemed impressed by our youth and enthusiasm and asked us into his office. He said he was used to brokers pitching 55 products at a time and that it was refreshing to meet young kids so eager to sell a bag of granola. After talking with us for two hours, he said he wanted to help us out. He decided to place our granola in his stores.

Many food companies fail because once their product makes it into stores, they figure the hard part is done. For us, it was the beginning - we used Stew Leonard's as our classroom. We spent hours on the loading dock, helping unload boxes and talking with department managers. We learned the vocabulary of the industry (we didn't know that the terms "pallet" and "skid" are interchangeable), which helped us pitch our products to stores. We learned to recognize shopping patterns. (Sunday was the busiest day of the week). I'd stand in the aisles at Stew Leonard's, flagging shoppers down and asking, "Do you want to get Bear Naked?"

We didn't take a salary for the first two years. We had no responsibility except to ourselves - no car payments, mortgages, or kids to take care of. We mooched from our parents. In early 2003, I was able to secure a $200,000 line of credit from a local bank - an amount that was proportionate to our accounts receivable and inventory. I used Intuit's QuickBooks to keep track of finances - the checking account column consistently computed negative $110,000. I wasn't balancing things properly, and occasionally our bank accounts were overdrawn. I'd call our banker and say, "I promise we're doing okay, but can you let this check clear?" Those types of relationships - people who believed in us - allowed us to get by.

We flirted with raising venture capital from a firm that focused on health- and wellness-minded companies. By the end of 2004 sales hit $2.2 million, up from $600,000 in 2003.

I visited the offices of a firm where I sat surrounded by six potential investors. They talked about convertible debt and used other terms I didn't understand. We sat in my mom's living room deciding whether to accept the deal. Kelly asked if we were ready to give up control. We decided the money wasn't worth it. After we said no, the venture capitalists came back two months later offering us twice the money. Kelly's father told us that our ability to hold on to the company was equivalent to our tolerance for pain. Ultimately, we raised money from friends and family.

Regional press brought us a lot of business after we landed at Stew Leonard's. We hit a turning point when a senior manager at A&P - a large East Coast grocery chain owned by the Great Atlantic & Pacific Tea Company - called us after reading a front-page piece in the Stamford Advocate. He wanted our granola on his shelves.

FLATLEY: In late 2006, Kellogg called us, unsolicited. Its executives were impressed by Bear Naked's market penetration and thought our brand was complementary to its Kashi products, which appeal to an older demographic.

We debated selling and looked at alternative options. After five years of growing this company, we feel like proud parents - last year we turned out 30,000 12-ounce bags of granola a day and watched sales hit $65 million. We've come a long way, but we decided that the largest cereal maker in the world could put Bear Naked in places we could never reach.

[Via - CNNMoney]

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