Finding the Side Door: Startup Lessons from RXBar, 5-hour Energy, and More
This guest post is authored by Guy Raz (@guyraz), the Michael Phelps of podcasting. Guy is the creator and host of many popular podcasts, including How I Built This, Wisdom from the Top, and The Rewind. Guy is also the co-creator of the acclaimed podcasts TED Radio Hour and Wow in the World, a podcast for children. He’s received the Edward R. Murrow Award, the Daniel Schorr Journalism Prize, the National Headliner Award, the NABJ Award… basically all the awards.
His brand-new book is titled How I Built This: The Unexpected Paths to Success from the World’s Most Inspiring Entrepreneurs. Past podcast guest Adam Grant has this to say about it: “[This book is] the mother of all entrepreneurship memoirs. It’s a must-read for anyone who wants to start a business, grow a business, or be inspired by those who do.”
What follows is an exclusive chapter — “Go In Through the Side Door” — from How I Built This.
A funny thing happens when you start to find success with a new business. You suddenly find yourself face-to-face with a host of people who are none too happy to see you. These people have a name. They’re called competitors. And whether they’ll admit it to you or not, many of them will try to do everything within their power to legally — and sometimes not so legally — shut you out. It’s a strategy deployed by the big fish in every pond once they notice a new, young fish swimming around and getting bigger by gobbling up the scraps they previously considered too small to care about.
In 1997, as the personal computer business approached 100 million units in annual sales and the dot-com bubble began to grow in earnest, Microsoft was one of the biggest fish in a pond that was about to swamp the world. Late that summer, a Microsoft group vice president named Jeff Raikes sent a now-famous email titled “Go Huskers!” to Warren Buffett, a fellow Nebraska native, describing Microsoft’s business in an effort to get him to invest in the company. In the email, Raikes likens the sturdiness and growth potential of Microsoft’s operation to that of Coca-Cola and See’s Candies (which Buffett had owned since 1972), in no small part because Microsoft’s revolutionary flagship product — the Windows operating system — had created a “toll bridge” that every PC maker would have to cross if they expected consumers to buy their machines.
The graphical user interface that made Windows revolutionary also made it wildly popular, which had the additional effect of creating a “moat,” as Raikes described it, between Microsoft and its competitors in the marketplace — one it was able to widen considerably with a 90 percent market share in productivity software applications (Word, Excel, PowerPoint, Access, etc.) that were built on top of Windows and were equally popular. This, in turn, gave Microsoft tremendous “pricing discretion,” not just for its applications software but also for the licensing fees the company charged to other computer makers for Microsoft’s operating system software.
What Raikes did not say in his email, but what Buffett surely understood from his decades of experience, was that the wider the moat and the longer the toll bridge, the more aggressively Microsoft could wield its pricing discretion in order to cement its growing advantage in the software industry. They could use it as a carrot, by lowering the licensing fee for Windows as an incentive to get their browser and applications software preloaded onto as many new PCs as possible. They could use it as a stick, by withholding volume Windows licensing discounts to punish PC makers that refused their sweetheart deal, or by offering their applications software at cost or below in order to drive competitors such as Lotus, Novell, and Corel (remember them?) out of business.
Microsoft employed each of those strategies to great effect. A year after Raikes’s email to Buffett, Microsoft would surpass General Electric as the world’s most valuable company and stay in that position for five consecutive years.
Toll bridge. Moat. Pricing discretion. These are euphemisms for the economic term barriers to entry, which is itself a kind of euphemism for all the ways existing businesses shut out competitors and make it difficult for new businesses to compete in a given industry. These barriers are not just conscious strategies deployed by old guard blue-chippers; they are also natural forces that rise and shift within a market as competitors enter and exit, grow and shrink, evolve and pivot. They can become the biggest obstacles you will face as a new business looking to grab, secure, and expand your foothold in a market, because they are the mechanism by which you will either be crushed (if your competitors see you coming) or ignored (if the market doesn’t).
This is why if, like most new businesses, you aren’t doing something completely novel or you aren’t doing it in a totally new way or new place, you should be thinking long and hard about how else you might enter your market besides knocking on the front door and asking for permission to come in. This is something that female and minority entrepreneurs have long had to contend with, whether it means breaking through glass ceilings or breaking down walls built by prejudice. All of which is to say, figuring out how to sneak in through the side door is not new ground you will have to break. A legion of resourceful geniuses have come before you. And what many of them have discovered is that the side door isn’t just less heavily guarded, it’s often bigger. Or, as Peter Thiel put it in a 2014 lecture at the Stanford Center for Professional Development titled “Competition Is for Losers,” “Don’t always go through the tiny little door that everyone’s trying to rush through. Go around the corner and go through the vast gate that no one’s taking.”
A year earlier, in Chicago, without fully realizing it, this is precisely what Peter Rahal had begun to do with his idea for a minimalist Paleo protein bar. Peter hadn’t started out looking for a side door per se, but he knew that with RXBar he was trying to enter a very busy space. Remember, Peter had already conceded that “the market didn’t need another protein bar.” It was a conclusion that was more or less inescapable when he and his partner, Jared Smith, did their initial fact-finding tour of Whole Foods. If there was one fact they were sure to find, it was that protein bars were among the most crowded sectors in the entire food business. Long gone were the days when only one main brand existed in this segment, as Gary Erickson had found in the early 1990s when he developed Clif Bar to go up against PowerBar. Even a decade later, ample opportunity was there for someone like Lara Merriken in a way that did not exist for Peter in 2013.
Can you imagine what the shelves of that Chicago Whole Foods looked like when he and Jared walked in? How many linear feet of shelf space were choked with multiple flavors from how many different protein bar manufacturers? Can you envision Peter even being able to secure as much as a hello from a Whole Foods regional buyer the way Lara Merriken did? Especially when the buyer learned what Peter was pitching? Yet another protein bar?
Peter knew he wasn’t getting into Whole Foods through the front door. Fortunately, that was never his plan. “From the early days, the whole strategy was to make a product that is for CrossFit and for the Paleo consumer, and build it online,” he said. “We’d build a web store and sell directly to gyms. Consumers would be coming directly to us.” That meant a bar with no grains, no dairy, no peas or bean protein, and no sugar. Nothing quite like it existed.
It was just the kind of advantage that a startup could identify and exploit but a larger competitor couldn’t (or wouldn’t) see. “A lot of people look at niches, or look at a small segment, and it’s not big enough for them,” Peter explained. “But we would rather have a CrossFit customer in California than a local Chicago independent grocery store, because in the grocery store we’re among the sea of competition. Whereas in a CrossFit gym, we were by ourselves. RXBar was literally engineered and designed for that occasion. It was perfect.”
It was his side door. Those niches — CrossFit, Paleo, and direct-to-consumer — which were then on the verge of exploding and truly becoming the kind of vast gate that Peter Thiel was talking about, were the combination that unlocked opportunity for Peter Rahal and allowed RXBar the chance to take root, to stand out, and to grow, before his direct competitors could notice and stamp him out. By that point, those competitors included major multinationals like General Mills and Nestlé, which had acquired Lärabar and PowerBar, respectively, and they could have easily shut him out by erecting any number of barriers to entry into the protein bar market.
For Manoj Bhargava, the founder of 5-hour Energy, his side door into the energy drink market did not take the shape of a small niche, but rather of a small product. In early 2003, a few years removed from his retirement from a plastics business he’d turned around and made profitable, Manoj was attending a natural products trade show outside Los Angeles looking for inventions he might acquire or license in an effort to create a business that would generate an ongoing residual income stream for him in his post-plastics years.
Walking the floor of the show, he stumbled upon a new sixteen-ounce energy drink that produced long-lasting effects he’d never experienced with other energy drinks. “Well, this is amazing,” he said to himself, exhausted from a long morning of meetings and now energized enough to continue walking the trade show floor. “I could sell this,” he thought. The drink’s creators disagreed. They were “science guys with PhDs,” while he was “just a lowly business guy.” They refused to sell their invention to him or even offer him a license on their formula. When they effectively told him to hit the road, Manoj decided to hit the lab instead and to create his own version of the energy drink that had fueled him up and blown him away.
“I looked at their label and said, ‘I can do better than this. How hard can it be? I’ll figure it out,’” Manoj said. With the help of scientists from a company he’d founded for the express purpose of finding inventions just like this one, he had a comparable energy drink formula in a matter of months. It would turn out to be the easiest part of the process.
The hard part would be getting his invention into stores. “If I make another drink,” Manoj said of his thinking at the time, “I’ve got to fight for space in the cooler against Red Bull and Monster [Energy]. I’ve also got to fight Coke, Pepsi, and Budweiser for space. So you’re pretty much dead if you want to try that.”
He was dead because he would be fighting for a finite amount of space in brick-and-mortar stores, against the competition not just in his own niche but in the entire beverage industry, which is dominated by some of the biggest companies in the world. If you own a 7-Eleven, or you’re the general manager of a grocery chain like Kroger or Tesco, are you really going to turn over a Diet Coke, Mountain Dew, or Snapple rack to a new energy drink that no one has ever heard of ? Especially when, in 2003, energy drink sales had yet to really spike and there were already two major players — Red Bull and Monster Energy — in the nascent market. Even if you were inclined to give a little guy like Manoj Bhargava a shot, once the regional sales reps and distributors from Coca-Cola and PepsiCo got wind of your decision, they would likely wield their Microsoftesque price discretion against you like a baseball bat, or just pull their products from your store altogether.
Those were the barriers to entry that Manoj was looking at. If he was going to get into this market, he’d have to find some other way. That’s when it dawned on him. “If I’m tired,” he asked himself, “why am I thirsty also?” By which he meant, why should we have to chug ten to sixteen ounces of a cloyingly sweet liquid in order to get an energy boost? “It would be like Tylenol selling sixteen-ounce bottles,” Manoj explained by way of analogy. “I just want to do it quick. I don’t want to drink this whole thing,” he thought. This is how Manoj arrived at the idea of shrinking his product down from the standard sixteen-ounce drink to a two-ounce shot.
Quickly, everything changed. In less than six months, he’d hired a designer to make his distinctive label, and he’d found a bottler who could produce two-ounce versions of his energy formula. “And at two ounces,” he said, “it’s really not a drink, it’s a delivery system.”
This was 5-hour Energy’s side door. It wasn’t a drink, so it wasn’t an immediate threat to Red Bull or Monster Energy. At two ounces, it also didn’t need to be refrigerated or given a large, dedicated shelf, so retailers didn’t have to worry about space. They understood that the perfect spot for it would be at the cash register, right next to the Slim Jims and pickled eggs!
“It just belonged there,” Manoj said. “You could tell it just looked that way, that it should be there.” Moreover, because the ingredients that went into 5-hour Energy were actually less about energy and more about focus — “vitamins for the brain,” Manoj called them — he could position his product beyond the beverage verticals and outside the grocery or convenience store channels. In fact, the very first place he went with 5-hour Energy in 2004 was the largest vitamin store, GNC, which decided to put the product in a thousand of its stores.
GNC turned out to be a genius side door into the energy “drink” market for a couple reasons. The first is obvious — there was much less competition compared with grocery and convenience stores — but the second is more interesting. “It turns out GNC is always looking for new products, because once a product gets mass distribution, GNC is sort of out of it,” Manoj explained. “If it’s in Walmart, nobody’s going to buy it at GNC.” Essentially, GNC was an easier route to retail distribution than a place like 7-Eleven or Safeway, and thankfully the tolerance for a slow start was higher as well, because in the first week they sold only 200 bottles. “Which was horrible,” Manoj admitted. But they waited it out, manufacturer and retailer together, “and at the end of six months it was selling 10,000 bottles a week.” From there Manoj went to drugstores like Walgreens and Rite Aid, which snapped it up, and now 5-hour Energy is near the cash register in most stores basically everywhere.
Today, RXBar, which was acquired by Kellogg’s in 2017 for $600 million, is one of the fastest-growing brands in the protein bar space, and 5-hour Energy has a 93 percent share of the energy shot business. It is a market dominance that Manoj has enjoyed from nearly the beginning, with only a brief dip to 67 percent when all his competitors — Coca-Cola, PepsiCo, Monster Energy, Red Bull — flooded the market with their own two-ounce-shot offerings . . . and failed. “Whenever people ask me what product are we like, I say we’re WD-40,” Manoj said near the end of our conversation, as we talked about 5-hour Energy’s phenomenal success. “We own the category. We’re the guys.”
This is the great irony of circumventing the barriers to entry that your competition’s apparent monopoly power constructs and then fighting your way in through the side door. If you’re successful, you stand a very good chance of achieving market domination of your own. Of digging and widening your own moat and building the toll bridge that crosses it. Of massive, unbelievable success. For many entrepreneurs, that is the goal.
Four days after Jeff Raikes sent his famous “Go Huskers!” email, Warren Buffett responded. His reply contained the normal conversational pleasantries, glowing commentary on Raikes’s analysis of his position on investing in Microsoft (Buffett wouldn’t), and an envious description of the company’s monopoly power: “It’s as if you were getting paid for every gallon of water starting in a small stream, but with added amounts received as tributaries turned the stream into an Amazon.” At the very beginning of his lecture in 2014, Peter Thiel echoed this sentiment in his own way. “I have a single idée fixe that I am completely obsessed with on the business side,” he said in his characteristic, hitched speaking style, “which is that if you’re the founder-entrepreneur starting a company, you always want to aim for monopoly, and you always want to avoid competition.” You want to be the only one directing traffic and collecting tolls across the widest moat possible.
I mention all this because being really good at going through the side door is an amazing, and sometimes necessary, skill. But it can also be a double-edged sword. It can get you off the ground and set you up for fantastic growth, but it can get you in a lot of trouble, too. Indeed, that tension is present whenever you search for the Raikes-Buffett emails online. They are often held up by aspiring entrepreneurs as brilliant examples of business acumen and strategic analysis, but what many of those people don’t realize is that the entire reason they are able to read those emails at all — most often in the form of pdf versions of a printed-out email chain — is because they are part of the public record, submitted as deposition and trial exhibits in a class action antitrust lawsuit brought against Microsoft in the early 2000s by consumers in multiple American states. This email exchange became a key part of the plaintiffs’ opening statement in that suit, which was settled not long afterward for more than a billion dollars.
All of which is to say, Go through the side door, please! Do everything within your power to find your way into the market where you are likely to have the most success. Just make sure when you get inside and set up shop, you avoid becoming what you fought so hard against in turning your dream of starting your own business into a reality.
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Excerpted from How I Built This: The Unexpected Paths to Success from the World’s Most Inspiring Entrepreneurs by Guy Raz. Copyright 2020 by Guy Raz. Published and reprinted by permission of Houghton Mifflin Harcourt. All rights reserved.
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