Scaling, Integrity, and the Hallmark of a Real Business

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Kevin Pasco has an informed point of view when it comes to scaling your business. After all, the company he co-founded, Nested Naturals, has grown to $10 million in sales in a scant four years.

Kevin Pasco, Co-founder and Chief Marketing Officer of Nested Naturals

Kevin has been lucky. However, luck favors the prepared, and Kevin and his business partner, Jeremy Sherk, prepared for growth. For starters, they chose to compete in the dietary supplements market that, according to Statista, is a $35.9 billion industry in the U.S. alone and is growing at 8% per year. That’s more than twice the growth rate of the overall economy. Furthermore, they sell their product online to a global market.

On the other hand, they chose a strategy that may well have inhibited their growth in the short-term. They’ve gone high when the rest of the supplements industry tends to go low. Nested Naturals promises evidence-based efficacy, transparent labeling, and certified-natural ingredients. When competitors offer magical results for less, the “good guy” approach can feel like a real competitive disadvantage.

Keeping It Real

My conversation with Kevin got me thinking about integrity, trust, and the hallmark of a “real” business. Sure, with eight-figure sales, Nested Naturals is a real business. But does that preclude small companies from being real? I don’t think so. For me, a real business is one where commercial activity leads to an accumulation of value.

Acting with integrity builds a trusted brand over time. That can accelerate growth and add resiliency to a business. Even small companies can be real to the extent they are a platform for valuable accumulations such as know-how and personal and organizational capacity. In contrast, some of Kevin’s competitors—even large ones—aren’t “real” in the sense they risk a loss of trust in order to maximize short-term profits. They are all flow and no stock.

Kevin’s orientation toward building valuable accumulations over time goes beyond his company’s brand. He speaks of earning the recurring business from hundreds of thousands of customers. Kevin also speaks proudly of Nested Naturals ability to attract, retain, and help develop productive employees.

Taking the long view isn’t easy, though. Kevin admits to periods of doubt, anxiety, and stress. So far though, he’s been able to keep it real.

Read the Transcript

The following has been edited to make it easier to read:

Dave Bayless: Kevin, what’s the short version of the Nested Naturals story? How did you go from two guys and their laptops to become an eight-figure sales company?

Kevin Pasco: Yeah, it’s funny. It’s like one, two, skip a few…10 million. When you look back on it, there are a couple key things. We started this business because we knew there was a problem because we went through it ourselves. The problem was that, when you buy supplements, you really don’t know what you’re getting. It’s also really confusing because your doctor recommends something; your friend recommends something; you see ads all over the place. They seem to all be conflicting with each other. So my business partner, Jeremy, and I had personal experiences of just taking the wrong stuff for the wrong use. We would take a supplement thinking it would solve a problem, and it would create another problem. So we were like, “Okay, there’s something here because, obviously, people need supplements. They need to supplement some vitamins and minerals in their diet. But it can take some real hardcore research to figure out what you really need.”

At the time, we had sleep problems. So, we thought, “There’s a market here. We know that lots of people struggle to sleep. It’s likely only going to get worse given how busy and hectic people’s lives are. So let’s do something around sleep.” So, we got a formulator, and we crafted a sleep product that was all-natural. Long story short, it took off. That’s because we addressed a need in the market, and the product actually worked. It helped people to sleep, and they felt better. We started scaling the company around our sleep product, but we didn’t just want to be a sleeping-aid company because the big problem is around supplements and not knowing what you’re getting. It’s not just about sleep.

We added some other products. We’ve got a greens powder. We added vitamin D and K2 and lots of other vitamins. Around the two-year mark, we crossed a couple million in sales, and we thought to ourselves, “Well, we can continue doing this, working the remote laptop lifestyle with a couple contractor employees, or we can go all-in and scale this to be one of the largest supplement companies of our time.” We just need enough time to do it, and we need enough manpower and people behind us make it work.

That’s when we decided to move to Vancouver. We got an office. We have 20 or so employees. We’ve got full-time payroll and all this crazy stuff that a lot of people are scared of. But, at the end of the day, we knew that we needed that to scale the company and to get to where we want to go, which is a 50-million-dollar-plus business. We want to be one of the top supplement companies in the world while maintaining really high standards. We tell people, “Here’s what’s in your supplements. Here’s why you need them.” Our intent is to make people happy about their buying decision rather than make them confused.

Dave: That’s interesting. I’ve learned the hard way that there’s a big difference between having a successful product and building a successful company. It sounds like there were early indications that your sleep product was going to be successful, and you mentioned crossing that two-million-dollar sales threshold. What else did you see and feel at the time that gave you the conviction that you had a set of products around which you could really build a 50-million-dollar plus business?

Kevin: That’s a great question. I think that what came up was the opportunity to create a company, not just make money online. I absolutely think there’s a stark difference between a nice little business that makes money online versus a real company. What a real company is to me is—from the customer side—a brand. The company looks like it’s been around for a while. It doesn’t look like it’s going to go anywhere soon. Customers are happy with the product; it solves their problem. And the company is growing. But also, from the behind-the-scenes perspective, when you have a company, you have a responsibility. You have a vision towards the future. You’re asking things like, “Are we tax-efficient? Are we doing things the right way? Do we have systems in place to be able to scale from what we’re doing today to three years from now when we’re triple the size—is it going to hold up then?” And you’re asking yourself questions like, “If I were to scale the company 10 times overnight, what are the things that would break, and how can I fix them?” You’re thinking with a much more long-term mindset about the value you can create rather than the monthly or yearly income you can generate.

We used to think that way. We used to think that it was about the short-term monthly numbers. In fact, we had a little spreadsheet of our monthly profits. If we shared it 50/50, that’s what our income would be for each month. I figured out pretty quickly that there’s no way we could grow the company if we just took all the profit out and split it 50/50 like the profit was our salary. That’s because we needed so much money in the business to fuel the growth of inventory and to get where we’re at today, which is around 10 million in sales. In three years’ time, we’ll be at 25 million plus. I don’t think that would have been possible with such a short-term mindset. We had to get rid of that [mindset] and move on to, “Okay, how can we create value? How can we create a brand? How can we really have a company that is bigger than our salaries? How can we fuel that growth?”

Dave: I want to take you back to that critical juncture where you were evaluating the opportunity and thinking about the possible futures for your partner and for your business. I could imagine that, emotionally, you might have been somewhere between, “Wow, that’s really really exciting,” and, “Wow, that’s really terrifying.” What did you actually feel like when you realized that you were at this key inflection point?

Kevin: Yeah, you hit the nail on the head. It was terrifying. It was exciting. Maybe strangely, I felt a sense of responsibility. It’s kind of weird to say that, but I felt responsible for the growth of this company. I wanted a company that is large, that is making a good impact, that’s a lot bigger than just my partner and me. All 20-plus people in this company, their actions create a ripple effect out to the customers and our suppliers and to everybody involved in the company. I always knew that I wanted that. When the day came where all of a sudden, I woke up and had this conversation with my business partner and we went, “Hey man, now is the time. If it’s not now, then it’s gonna be never.” We just went, “Okay.”

It’s interesting how when you crave success for so long and you finally get it, it’s a weird feeling. You’re so used to looking ahead that you feel like it’s never going to come. When it actually does come, you also feel like you earned it. So it’s kind of weird how it was exciting and scary but also it just seemed normal. It seemed like it should’ve happened and it happened. “Okay, great. What’s next?” So that was a really interesting time.

We were also changing our lifestyles. I mean,  my business partner was over in Southeast Asia, living the four-hour work week. So was I, though I didn’t go through it as long as he did. He was about three years into it, I did it for three months. Now we’re talking about going to a city together, getting apartments, putting down roots, signing a lease for years and years for a company office, and committing to employees. That was a big change, but it was also really exciting because I knew that a lot of our competitors wouldn’t be willing to do that. A lot of the competitors wanted a nice lifestyle business that focused on generating cash flow. I knew that we could beat them if we played the long game and created this arsenal of 20-plus amazingly sharp people that we would be gearing up to beat our competitors rather than just going along and generating some nice cash flow every month.

Dave: In my experience, when companies are at a really early stage, a lot of things are uncertain but really, at the end of the day, not terribly risky. But when you go through this transition, when you start adding employees, you start signing leases, you start having these accumulations, you’ve got something to lose. That combination of the uncertainty that comes with rapid growth and the uncertainty that comes with change, that really translates into a lot of risk. So tell me about how you and your partner went through analyzing the puts and calls of your strategy. Was it largely an intuitive, just a sense that you always had, or did you go through a more formal process trying to think about the good, the bad, and the ugly?

Kevin: That’s another great question. It was a mix of data and intuition. We would gather data from our competitors, from the market, from the growth of our own company. We would also talk to advisors and smart people who are better at certain things than us. When it came to hiring or negotiating leases for our office, or even from the finance side, we’ve learned so much from talking to smart people and getting them on our side in order to help us make our decisions. Then, we wouldn’t just use the data, we would also use intuition. We had a sense for what was right and what was wrong and what we needed and just trusted that. It’s hard because there’s always uncertainty, especially once the stakes are high. When you’ve got a five-year lease and payroll is higher than you’ve ever seen it before, yeah, there’s risk; there’s uncertainty. But there’s also the feeling that our job—if we do it well—is just to fix any problem that comes. So the way that I approach it is, “We’re just going to keep charging forward and charge through this uncertainty. But, as long as we can fix the bad things that happen, we’ll always win.”

We’ve had some incredible problems thrown at us. We’ve had ups and downs of revenue and profit in the company, but we’ve always been able to solve the problem. And I think that’s the one thing that’s carried us through. Because, at the end of the day, a lot of business owners want to believe that they know exactly what’s coming next, and they want to believe that they know what’s right and what they should do. But sometimes you don’t know. That’s the thing: your company’s growth will be different than what you think it’s going to be. I mean, it should be consistent with the vision you prescribed. However, some of the things that have happened to us I could not have predicted. There’s just no way I could’ve known that we would’ve gone through certain scenarios. That’s why it’s important to develop this mindset of, “We will do whatever it takes, even if it means crazy unconventional things that most people wouldn’t normally do, but as long as we get through it and move on to the next level, we’ll be okay.”

That’s the way we’ve approached uncertainty and risk. It definitely takes a big appetite for risk, and you’ve got to feel like a little bit of a daredevil. But if you can stomach that, you’ll be able to get through almost anything. Then once you get through one thing after another, you start to be unstoppable. You start to feel real momentum and success, and the growth of your company starts to get faster and faster. That’s because you’re then pushing through barriers that you never thought you’d be able to make it through.

Dave: When you think back to a couple years ago when you had made the commitment to grow the company as aggressively as you could, what were the things that really concerned you about the future? What worried you?

Kevin: You know, it’s such a blessing and a curse: the industry we’re in, the mystery around supplements. Our job is to try and demystify supplements and try to make you feel good about your purchase. It’s important that you’re confident they are going to work for you. It’s our job to have the product actually work for you. It gotta do what we say it’s gonna do so expectations are aligned, and you become a happy customer.

But because most people don’t understand exactly what they’re getting, that lack of understanding is something that can be very easily taken advantage of. That’s why the supplement industry seems so shady. If you’re a marketer and you open up a little supplement brand, you can make great claims. You can say, “This is the best thing ever.” You can say, “This one little pill will solve all your problems.” Because people don’t really understand the science or exactly how the supplement works, they just go, “Oh, I’ve got this problem, I really need it fixed. This looks good. It’s the right price. Boom, I’m going to buy it.” Consequently, the brand is able to grow immensely from that type of misleading marketing. You see supplement companies get in trouble all the time over the claims they make. What’s claimed to be inside the product wasn’t actually inside—it was rice flour or something weird. That mode of operation has been able to thrive because of the misalignment and misinformation.

So that was a threat to us. You know, we’re trying to be the good guys here. If we don’t think a product is actually going to help you, then, well, we’re not going to sell it. But other companies are selling the product because they’re not so concerned about helping the customer. They’re more concerned about selling a bottle of something. They’re able to make a killing. If someone wants a fat-loss product and it’s claimed this little pill is going to help you, there’s a pretty good chance that a lot of people are going to want that product. But if we can’t believe in the product, and if we can’t back it up, then we are not going to sell that product.

That was a struggle for me: taking the long road versus the short road. If we took the short road, man, we could’ve gone all-in on those quick, cheap, dirty products and scaled a huge company. But we’d also expose ourselves to massive risk. And we wouldn’t really accomplish our goal, which is helping people, demystify supplements, making people feel great about their purchase, and actually creating a company that does what we say it’s going to do.

If you have anything that you’re going through with the short versus long-term mindset, it’s very difficult to, at least it seems difficult, to compete with your short-term, short-sighted competitors that always seem to be doing something quick and dirty or shady because they’re playing the short game. You’ve got to play the long game in order to get where you’re going. Oftentimes, that ends up giving you stress and worries and anxiety around what your competitors are doing and how that could impact you. Another cause for concern is the results your competitors are getting and how it looks like they’re more successful than you. In reality, you just need more time to get to where you’re going, and that’s okay.

Dave: If that was your strategic concern going into the aggressive growth phase, in retrospect, what kind of significant challenges have popped up that you hadn’t anticipated?

Kevin: I mentioned bringing on smart people for finance. We ran into a very interesting issue where we wanted to come up with a program to incentivize real results in the company. We didn’t want to give out bonuses for no reason. We wanted bonuses to be earned and have merit. So we wanted a system where we could do some sort of a profit share or share the growth of the company with our employees. As we started looking into that more, we found a huge, huge hole in our finances related to how the finances were done.

We had, like most people starting a company…once you start to get some sales coming in, you generally look around in your local city for a decent accountant. You get them on board. You might go to meet them for coffee or go to their office every now and then. Maybe once a quarter they’ll send you a P&L and a general ledger, maybe not. Maybe they’ll just do your year-end statements. They’ll send them to you for approval, and you’ll sign off on them. You’ll submit them for tax purposes. We did exactly that, and it created a massive problem related to how our initial accounting firm was reporting our numbers. They didn’t understand how the sales were happening. They didn’t really fully understand e-commerce, where the money was going, and how inventory was allocated. They basically created a big mess. We had to go bring in real, true experts, hire a finance team, and go back and clean up the whole thing.

Now, this has led to an amazing result for our company. We have incredible (sound) numbers. We can go to any bank, any investor, any accountant, and we’ve got amazing numbers with which to back up our story, to get financing, to get investors. Anything kind of seems possible with the right numbers. But the cleanup involved was huge.

There’s something that I think a lot of people can resonate with. When you’re so focused on growing the company and growing sales and just getting to the next level, you need to be able to take care of your numbers. And if you’re not the person for that, that’s completely okay. I’m not the person for that, but you need to go find an expert who is. Ideally, you want to get someone who, as you’re growing, is a little bit more experienced and a little bit more higher-end than just an accountant. You might want a controller or even a part-time CFO who you’re able to retain for not very much and get incredible insights and direction into the finances of your company.

Dave: Unfortunately, I don’t think your experience is that unusual. But it’s also not that surprising. The people that start businesses like yours tend not to be lawyers and accountants: people who deal with the infrastructure of the business. It just goes to show that having an eye on some of that business hygiene, if you will, getting the foundation or reporting in place as you start to grow, almost always turns out to be well worth the effort.

Notwithstanding the challenges that you’ve faced and the strategic uncertainties in your industry, to what do you ascribe your success so far? You’ve talked a little bit about your sense of a collective ability to problem-solve, but what other attributes of your company are you the proudest?

Kevin: I’m really proud of how much value we’ve been able to create. We’ve served, I wish I knew the exact number, but it’s getting close to half a million customers in four years. I’m really happy that the huge, huge, huge majority of them are happy with our products. That’s been something that, even when we go through a hard time in the company, at least I got the goodness that we’re doing for the customers and the value that we’re creating.

In addition, our company culture, the people that we’ve hired, and the team we’ve been able to build for our first, real company is incredible. We have incredibly low rates of people getting fired or quitting. We have justified many promotions within the company and have seen huge growth from the people within. We’ve also pushed people to do things that they’ve never done before. As a result of them working for us, they’re now better. So I hope that they stay with us for a while, but if they don’t, they’re able to get an even better job because of us. I think that’s really important as well.

It doesn’t matter where you start. If you want to become that type of company, if you want to become that type of employer, you just have to set that as the vision and go after it. Hopefully, within the next three years, based on the size of our company and what we’re doing then, we should be able to qualify for some top workplace awards. It sets us up for a lot of great things that we can do with PR and how we look to other employers and other employees in the city. So I’m really proud that we’ve been able to create something that people genuinely like,  and it’s not a fluke. It’s not just us being biased either, you know, I think that people really love working for this company. We’ve been able to do that really well, pretty much from the get-go.

Dave: Kevin, if you could go back in time a few years and meet your younger self, what advice would you give that younger self?

Kevin: I’d probably tell him two things. One, don’t freak out so much, because you freak out a lot, and it’s not helping anyone. More concretely, remember to focus on the things that drive the business. There are a lot of things that you can do every day, but there are only certain things that grow the company. Of those things, some of them grow the company in the short term and others in the long term. If growth is really what you want, then look at the things that really push the needle, and then just do more of those. Try not to focus on the other things that seem great—they make it seem like you’re busy, they can even seem fun at times—but they might not get you what you actually want.

Brand as Accumulation

We can get confused about what “brand” means. In his Forbes essay, What is a Brand, Anyway? Jerry McLaughlin notes, “In the first sense of the word, then, a brand is simply the non-generic name for a product that tells us the source of the product.” However, he goes on to distinguish between a brand name and a brand: “Your brand name exists objectively; people can see it. It’s fixed. But your brand exists only in someone’s mind.”

The Nike swoosh and the Coca-Cola logo are visual representations of their respective brands. Just as a map isn’t the territory, a logo isn’t a brand. A trusted brand represents the accumulated experience of customers and users. Trust can be hard to accumulate and quick to dissipate. That’s the challenge—and opportunity—Kevin perceives when he thinks about growing Nested Naturals. In the short-term, selling snake oil can be very lucrative. However, as no less than Shakespeare observed, “At the length, truth will out.”

It’s relatively constraining, difficult, and expensive to develop, source, sell, and guarantee efficacious supplements made from natural ingredients. That said, consistently delivering such products to the satisfaction of consumers will, over time, contribute toward building a brand perceived as trustworthy. Such a brand will boost marketing and sales efforts over time. It may also provide Nested Naturals with some critical goodwill.

Building a Real Company

Rapid sales growth is a collaborative choice by a business and its customers. In addition, scaling is not unambiguously good. After, all, scaling is often painful and almost always risky. Furthermore, not all businesses benefit from economies of scale and scope. As John Hagel and Marc Singer observed in their seminal Harvard Business Review article, Unbundling the Corporation, innovation-based firms face diseconomies of scale. Consequently, I chafe at the notion that the only real companies are those with rapidly growing revenue.

Many human-scale businesses thrive due to a meaningful connection with their customers and the capacity to innovate. Neither are conditions conducive to scale. However, they can foster a valuable brand when carefully and respectfully cultivated.

So, I respectfully disagree with Kevin when he says, “I absolutely think there’s a stark difference between a nice little business that makes money online versus a real company.” I believe Jeremy and Kevin could have had a very real business—given their emphasis on making and selling products with integrity—as “two guys and their laptops.” They chose to respond to the perceived opportunity to grow their revenue rapidly. So far, they are off to an impressive start. As Kevin acknowledges, multiple accumulations—a trusted brand, skilled employees, and loyal and enthusiastic customers—have contributed to their success in growing their revenue rapidly. I hope and expect they will continue to experience success along their chosen path.