A few days ago, TechCrunch published a list of 10 largest Series B rounds of 2016. The 10th place on the list went to Juicero, a juice making machine company, which raised $70 million in Series B. I’ve missed this deal earlier this year, but it still seems worth digging into, as I believe it provides some food for thought on the topic of building businesses that have hardware at their core.
An important note here is that I’m less interested in trying to predict whether or not Juicero will be a success, or defending the company’s strategy, and more interested to try to see the logic behind certain strategic decisions the company made so far.
Juicero was founded in 2013 by Doug Evans, the founder and former CEO of Organic Avenue, a chain of stores selling organic juices. Until 2016, the startup remained in stealth mode, raising over $20 million of funding in Series A and Seed rounds. Shortly after closing $70 million round in March this year, the company announced another cash injection of $28 million, bringing its total funding close to $120 million.
Juicero sells a cold-press juicer of its own design, that fits the countertop and costs $699. Yes, you heard that right, it costs 700 hundred bucks. Sure, it looks nice, is small enough, and even has wi-fi for some reason (what device in 2016 doesn’t have it, after all?) It’s still a lot of money for a juicer, though. But that’s not all. After you buy the device itself, you can only make juice using special packs produced and sold exclusively by Juicero. Those will cost you $5–8 per pack, that yields around 8oz of juice. That’s more expensive than pretty much every other way to get or make fresh juice (even a cold-pressed one) available on the market.
All of that might sounds like a recipe for guaranteed failure. And yet, for some reason, top venture capitalists (including Artis Ventures, Kleiner Perkins Caufield & Byers, Thrive Capital and others) are willing to bet tens of millions on this company.
Connecting The Dots
After coming out of the stealth mode and announcing its massive Series B round of financing, Juicero got a lot of publicity and coverage, and a significant amount of it wasn’t at all positive. Amongst critics, some voiced concerns about unclear target market and overall complexity of Juicero vision, while others discussed the unreasonably high price of Juicero, or even pictured Juicero as “everything wrong with food today”.
Many of the voiced concerns are legit. $700 is a lot to pay for a juicer, and the packs’ pricing makes it even worse. The company’s business model is indeed complicated and would require carefully synchronizing multiple processes to make it work, making it very challenging, especially given the perishable nature of the packs, and the promise of best-in-class juice in terms of both taste and freshness. The number of people willing to pay high prices for top-quality juices still remains relatively small. However, while all of those issues might represent serious obstacles for Juicero to become a viable business, it is still interesting to take a step back, and think for a little bit about why Juicero decided to pursue such a strategy in the first place.
First, let’s take out of the way the question about the market potential. If one believes that the market for high-quality juice is relatively small and the potential for growth is limited, it probably doesn’t make sense to build a company in the space at all, and it’s definitely not worth trying to raise huge amounts of capital from VCs. The willingness of VCs to back Juicero already suggests (at least indirectly) that there should be a significant potential for market growth: venture capitalists might sometimes make huge mistakes misjudging products, teams and spaces, but they are usually good at high-level market estimations. Besides that, the facts are as follows. Cold-pressed juicing was largely unknown to the public until a decade ago or so (even though it had been invented long before that), and it still remains a relatively niche market. There is significant difference in the way traditional juicers and cold presses work, both in terms of the process and the results, with cold presses having several distinct advantages (e.g. being able to make juice from greens, not heating up the produce, and so on). Overall, the demand for healthier food is on the rise.
All of that, of course, doesn’t mean that the market for high-quality/high-price juice necessarily has a huge potential — to determine that, one needs to do a much more serious market analysis. But at least some of the signs are there, and, for the sake of argument, I will assume that Juicero and their investors have done the homework well, and there is indeed a significant opportunity in this space.
Now, assuming that the demand is (or will be in the future) there, let’s focus on Juicero strategy to tackle this market, and first, let’s talk about the device itself.
Cold press machine makes juice by applying very significant amounts of pressure to the produce and thus extracting the juice out of it. While that might sound simple, in practice building a reasonably-sized machine able to do that isn’t an easy feat. In a way, it’s similar to the situation with espresso machines: coffee drippers might be dirt cheap, but a high-quality and compact espresso machine will never be. In this case, same goes for the juicer: there is simply no way to make it really cheap.
Given that, it looks like the company like Juicero would only have two choices: focus on building and selling really expensive appliance, or subsidize the device, and then try to maintain some kind of relationship with the customer post the sale of the device itself, thus deriving additional revenues to offset the lost profits.
Let’s start with the first option. Selling premium appliances can be a legitimate business model, however, it comes with several “buts”. First, it’s usually not a high-growth business: e.g. VCs would unlikely be eager to invest in, which might screw you up, if you need significant capital to build the device in the first place (it might be easier to build an innovative appliance inside a large corporation, but that’s out of scope of this discussion. Second, you can only sell the appliance to the customer once, which means that you’ll need to look for new customers all the time. In case of cold-pressed juice market, which still remains relatively small, that might represent a significant problem. Finally, the hardware can be (and usually is) eventually commoditized, if the market is attractive enough. This proved to be true for numerous companies in the past, and remains true today.
All those issues suggest that for a new startup like Juicero going into the business of selling appliances might not be a good idea. Let’s now dig a little deeper into the second possibility.
In many publications, Juicero was being compared to companies like Nespresso and Keurig, and their single-serve coffee businesses. This is an interesting line of thinking, as Juicero does have a lot of similarities with those. Both Nespresso and Keurig have demonstrated that one can build a successful business selling coffee machines cheap (or even at a loss) and then compensating for the lost profits by selling users capsules/pods to be used with their devices to make coffee. What Juicero is trying to do, however, will take this concept to a whole new level.
In case of Nespresso and Keurig, the challenge they had to solve was arguably simpler than the one ahead of Juicero. Coffee pods can be stored almost indefinitely without the coffee inside significantly deteriorating in quality. That allows to take most logistics issues out of the picture. Moreover, Nespresso and the likes of it might be promising its customers rich and strong cups of coffee, but the positive health effects of using their capsules versus getting your coffee any other way were never specifically highlighted. For juice, especially so highly priced as in case of Juicero, health benefits are of outmost concern for most of their customers. That hugely exacerbates the importance of building superb logistics (and controlling the whole chain, from purchasing the product from farmers, to getting it to the end consumer) for Juicero. Next, the device itself is another part of the challenge, with Juiceiro juicer being significantly more complicated compared to a typical Nespresso/Keurig machine.
But while those challenges are indeed complex and hard to solve, they also represent an opportunity for Juicero, especially combined with the learnings from past successes and failures of Keurig and Nespresso. Building proper logistics operation might be tricky, but then it would also provide a serious barrier to entry to the market, shielding Juicero from new entrants. The importance of getting top-notch ingredients to the consumers as fast as possible would help against third-party pack producers offering cheaper alternatives to original ones, as the brand trust would be crucial here. Juicero’s idea of building in QR-code reader into the juicer is also very smart, as it allows to prevent users from switching to third-party packs (something that remains a huge issue for Nespresso, for example), while also helping the users to track if the packs they are about to use are still good enough.
There are still many questions that require answers if we’d attempt to completely decipher Juicero vision. For example, why does the press cost $700? In one of the interviews, Doug Evans mentioned that they don’t intend to subsidize the press, as it would harm the viability of the business. But $700 is a lot of money, and minimizing profits/ssubsidizing the machines has previously worked out great for players like Nespresso. Doing so to get more users buying into the ecosystem might have helped Juicero a lot. But the key take-away here is that the overall complexity of the market and the challenges the company faces might sometimes also mean that there will be opportunities that are absent in other spaces. And, in case of Juicero, the company seems to be cognizant of and willing to capitalize on those.
Is Juicero’s success guaranteed? Not at all. Yet I personally am inclined to believe that it has a decent chance to turn into something big. Doug Evans probably has more experience in the field than anybody else. The trend for the growing popularity of cold-pressed juice is apparent. More importantly, the idea of building an integrated service in such a market is smart. You don’t win over this space by building yet another appliance, however perfect. Hardware is replicable. Integrated ecosystem that includes everything from manufacturing the device to shipping packs to the end customer? No so much.
Sure, most people will never shell out $700 for a juice press. Some would never consider using pre-packed produce, instead of buying fruits and vegetables at a grocery store. And that’s all right. It’s impossible to convince everyone to buy into your vision. The price for the appliance itself could probably be brought down eventually. Packs could probably become cheaper too, once the company reaches sufficient scale. But in order to do all that, you need to ensure that the company stands a chance to turn into a viable business in the long-term. The intergrated offering Juicero is shooting for has the chance to guarantee that. And that in turn makes supporting Juicero a pretty good bet to make, if one believes that the demand for cold-press juice is about to continue growing.
Even if Doug Evans does fail to turn his ambitious vision into a viable business (which is still very much possible, given the risks involved), the strategy Juicero has decided to pursue is still worth noting. In today’s world gadgets are often designed and manufactured only to be copied or to become obsolete in a very short time. This makes finding ways to build long-lasting and predictable revenue streams, instead of receiving one-time payments for selling the hardware, crucial. And that’s exactly what Juicero is aiming to do with its proprietary packs of juice, wi-fi enabled juice press and sophisticated logistics.