This is an installment of Startup Year One, a special series of interviews with startup founders about the major lessons they have learned in the immediate aftermath of their businesses’ first year of operation.
To paraphrase an old adage: Some people live to eat, and others eat to live.
In the case of the Naked Market, its founders likely fall within the former category in ethos, but they’d like to eat better to live better, too.
The San Francisco–based company was founded in 2019 by three friends—Harrison Fugman, Alex Kost, and Tim Marbach—who say they were inspired by their collective love of food as well as displeasure with the lack of healthy snack options on the market, particularly from familiar household names. Within less than a year, the company has produced three new snack brands: Flock rotisserie chicken chips, Beach House ready-to-eat açai smoothie bowls, and Avo Crazy avocado puffs.
The Naked Market raised more than $3 million in its initial seed funding round with investors including Holtzbrinck Ventures, Econa Capital, and Sequoia Capital’s Scout Fund. Its advisory board comprises seasoned food and beverage executives, including FreshDirect founder and former CEO Jason Ackerman, and Gardein Protein and Yves Veggie Cuisine founder Yves Potvin.
Fortune recently spoke with Fugman, the Naked Market’s CEO, to learn more about the startup’s first year in business, the lessons learned, the hurdles overcome, and its plans for 2021.
The following interview has been condensed and lightly edited for clarity.
Fortune: While it does sell culinary provisions, what the Naked Market is might not be as obvious, based on the company name alone. What inspired the launch of the Naked Market?
Fugman: Prior to starting the Naked Market, I spent the first seven years of my postcollege life in finance. I most recently ran Credit Suisse’s venture capital coverage business. However, entrepreneurship has been in my blood from a very young age. My first “business” was importing wallets from China and selling them to my classmates in high school. (Alex and I then ran an events business together in college.)
Throughout my time in finance, I was consistently looking for my next business venture and wanted to be sure it was something that I was incredibly passionate about, that it was a massive opportunity and a pain point I felt in my own life, and that I would be doing it with people I trusted and admired.
My background as a foodie and health and wellness maniac, combined with my time at Credit Suisse, led me to become giddy over the opportunity to get involved in the food and beverage space. We specifically wanted to bring a portfolio approach to the startup world where we could build the infrastructure to quickly and efficiently launch multiple brands, identify winners among the brands that we launch, and then scale the winners to become household names.
In terms of how we got the actual name, we wanted something that represented the clean and healthy nature of our products (i.e., Naked), reflected our multiple brands (i.e., Market), and was memorable (i.e., The Naked Market).
Beyond tapping into dietary trends like non-GMO and keto-friendly, how has technology shaped brand development at the Naked Market, whether it be the influence of big data or social media?
Previously, incumbents in the food and beverage world were shielded from competition via expensive shelf space in grocery stores and limited marketing channels. With the online channel opening up and consumers shifting their behavior to purchasing goods online, it has created a massive opportunity for new age brands.
For us, the bread and butter of our business is direct-to-consumer e-commerce. It has enabled us to quickly get our brands into consumers’ hands, collect massive amounts of data, and make the appropriate decisions as to resource allocation (and product changes) based on that data. For example, the way we determine what brands ultimately scale versus what brands get shut down is through an internally developed benchmarking tool which compares all of our brands’ (and select third-party brands’) performance data. By comparing each brand against each other and external brands, it enables us to identify which brands we believe have massive potential (e.g., Flock) and where there may just not be product and market fit (e.g., Beach House bowls).
The Naked Market has launched three new brands within the past six months. That sounds like an incredible feat—one that must have come with a lot of ups and downs. Aside from data, what else goes into the brand development process, and what lessons have you learned, postproduction?
Our brand development process is premised on U.S. consumers’ expectations to consume personalized brands. That means every product we launch needs to tell an authentic story to a specific group of consumers, as well as be strong enough to stand on its own.
Another key part of our process to launching multiple brands is the benefit of their shared back-end services. For example, all of our products run on the same technology, use the same supply fulfillment centers, and often leverage the same network of offline buyers (among many other things). So once R&D is done and a new product is produced, it can seamlessly integrate into our existing infrastructure.
As it pertains to our learnings, we have set up our launch strategy to optimize for a quick feedback loop with the consumer. This is done online through our direct-to-consumer presence and offline through our localized ecosystem of retailers. Both of these channels enable us to get the feedback we need about each brand to make the appropriate decisions about what the future of each holds. For example, some of our learnings in our first few months have led to flavor changes (reformulated Flock BBQ; it was too sweet), new charitable initiatives (crowdsourced ideas, which led to us making a $15,000 food donation to first responders and shelters), and new product line extensions we had not previously considered (e.g., launching a panko bread-crumb iteration of Flock per customer suggestions).
Obviously, amid the coronavirus pandemic, consumers’ purchasing power, habits, and even their relationship to food are going to change. How does the Naked Market plan to adjust and fit into whatever this new normal might be?
As a new age brand, it is vital we stay nimble, both in regards to the types of products we create and the channels in which we sell them, especially at a time when the world goes through a dramatic event such as COVID-19.
In terms of what that means for the future of the food and beverage world and our business, a few things are on our minds. First, the proliferation of online grocery penetration. Pre-COVID, the U.S. was still vastly behind other nations with regard to its online grocery consumption behavior. Only 2% of U.S. groceries were bought online versus mid-teens in China and South Korea and high single digits in the U.K. With the increased adoption rate of grocery-ordering online we’ve seen since COVID began, this channel is poised to shortly reach levels we previously thought would take multiple years to achieve. This is reflected in our business, which is up 155% since January. This growth has been completely driven by our direct-to-consumer e-commerce business, which has offset the decline in our food service revenue that went to zero overnight.
Second, food at home. More than 50% of the U.S. food budget is spent away from home. This number is double what it was 50 years ago. Given potential sanitation concerns around eating in crowded places, associated cost savings to cooking and snacking at home, this trend of at-home food consumption may very well reach historic new levels.
Third, new types of products. As consumers focus more on trends such as immunity, sanitation, and at-home cooking, there will likely be a new set of products and services developed to meet these needs. This will be reflected in our new set of product launches, which will hit in the back half of the year.
Looking beyond the post-pandemic era, which could be anywhere from a year to a few years from now, how do you plan to grow the Naked Market and what do you want the business to look like five years from now?
Our long-term goal is to create a portfolio of brands that are beloved household names across the U.S. and Canada. To do that, we will focus on scaling up existing winners in our portfolio, such as Flock, as well as continue launching highly innovative products with massive potential.
Learning and adapting are part of our brand’s DNA, and we’ll continue to shift our products to keep pace with the world and what consumers want. Right now, it’s chicken chips. In a few years, it could be something completely different. We’re dedicated to listening to that trend so we can remain increasingly relevant as the years go on.
More must-read lifestyle coverage from Fortune:
—The coronavirus puts the craft beer industry at risk
—Georgia’s staple cheesy bread is more than Instagram bait. It’s an economic indicator
—These dry ciders are made like wine and packaged like beer
—Listen to Leadership Next, a Fortune podcast examining the evolving role of CEOs
—File your taxes, get a free case of Natty Light
—WATCH: Can San Francisco Be Saved?
Follow Fortune on Flipboard to stay up-to-date on the latest news and analysis.