Disruptive food start-ups have increasingly grabbed headlines and the attention of large consumer packaged goods (CPG) companies. The plant-based keto snack company Keho is continuing this trend by offering its savory “real food” bites to a health-conscious market that includes athletes at one end of a spectrum, and people looking to resolve health problems with diet change on the other. Keho founder and McKinsey adviser Tekla Back has long been a food and keto enthusiast, and started the company after leaving her role at PepsiCo as senior vice president for corporate strategy, where she helped lead the company’s transition to healthier products.
In this episode of the Committed Innovator podcast, Tekla talks with McKinsey’s innovation leader Erik Roth about her observations of the process of innovation, finding market fit, and launching products. This is an edited transcript of their discussion. You can listen to the full episode on your preferred podcast platform.
Podcast transcript
Erik Roth: You’ve gone from big companies to now a very small company. What’s that transition been like for you?
Tekla Back: It has been a huge opportunity for personal growth, or otherwise said, super tough initially. It was fascinating having left so-called big food and truly thinking I knew food, having been in it for 20 years, and then suddenly realizing you’ve actually entered a different industry in some ways by joining the start-up world.
Erik Roth: So let’s talk about Keho. Tell us a little bit about what it is.
Tekla Back: I make real-food savory snack bites. They are a kind of snack bar that instead of being sweet—typically almond with mint chocolate chip or berry flavor that is usually not the real thing—we actually put real food into bars. So we have a curry flavor, a Tex-Mex flavor, a pizza flavor—I shouldn’t call them “flavors,” because the taste is from the actual ingredients. They’re very novel. They are minimeals squished into one bar, where we’ve replaced the carbs with fiber. And then we have all of the veggies and the yummy dressing and real spices.
Erik Roth: Walk us through a little bit about what it’s taken, what you’ve learned, and how different it has been from your experience at a large company.
Tekla Back: One of the challenges early on was just getting the things made and, wow, did I miss our R&D function and our food scientists! I have to admit, had I known how hard these things were to make, I’m not entirely sure I would have persisted. But one of the great benefits of not knowing is that you just kind of plow in headfirst and you get things done.
Erik Roth: So how did you know you were starting with a good idea?
Tekla Back: One of the things that gave me faith is that this type of food is very science based, so this was not a fleeting consumer trend that was going to come and go. The name may change from Atkins to paleo to keto to low-carb but the science underneath it is the same. So that made me feel very good about it as a former scientist. And then weirdly, even though I now call them real-food savory bars, they actually started off life as keto bars. They were all about how to optimize keto macros, and by taking the carbs and the sugar out they actually became savory bars. And then I actually learned later that they’re not really savory bars. They’re real-food bars.
Erik Roth: So the idea that you currently have was not the idea that you started with?
Tekla Back: Correct. That’s one of the great insights of the start-up process for me. In my CPG [consumer packaged goods] world, a lot of it was perfecting something to the nth degree, whereas in this I genuinely learn by doing and I still am learning by doing.
Erik Roth: Is it fair to say that in a large company, once you have the concept, it’s about optimizing the concept? What you’re describing is this journey where you allow the market almost to help iterate and dictate where you need to go.
Tekla Back: A colleague of mine had this great visual he would share where he invents a wheel and brings it to the group. Everyone chops away at it, so it’s death by 1,000 chihuahua bites, and they turn the wheel into a square. I think that’s what tends to happen in a big company. Instead of moving things forward, the iterations just strip it back to what is actually executable by the company. The challenge of getting this thing made took so much perseverance to make something fundamentally different and then to make it run on the existing lines. I think a lot of big companies would have given up after seeing some of the early results and just said, look this is not going to work in our system. This is not executable.
Erik Roth: What would you say are the major differences in the way you’re going about launching your product and what have you learned by doing that that you may not have learned in a large company?
Tekla Back: I think a couple of things that have been really meaningful are just how much you can do with very little money. I think the expectation, which partially has to do with how many people you have to persuade, is you need to do all these complicated tests before you go into market. You can learn tons by just getting in there earlier and having more of a direct dialogue with your consumers. One of the challenges with consumer research is that it’s typically a point in time—you go and ask people once or you ask them twice, but you’re not having an ongoing dialogue and you lose a lot of time through that process.
Another thing I learned is the systems are different. So your ability to experiment using a smaller contract manufacturer, or jury-rigging things is very different from trying to do something at scale. For example one trade-off I made very early on is I chose to go slower so that I could go faster later, much like a bigger company would. I think a lot of start-ups gain in the fact that they will do stuff by hand or they will create something new that you can’t do on a big machine because they don’t worry about it later. If you’re a big company, you’re calculating the capex [capital expenditure] investment five to ten years down the line and you might kill the idea based on that before you’ve even got anywhere.
Erik Roth: Your point that it’s a learning journey is a really powerful idea. All too often in large organizations we don’t see the journey—we see the points in time. So there’s a consumer test, or a technology efficacy experiment, or some other aspect of the value proposition that is validated or QA’d, but the journey itself and the knowledge that goes along that journey is often harder to see.
Tekla Back: It’s funny, even just your talking about it reminds me of stage-gate processes, and structured steps for things. All of those steps have to link up with planning cycles which means you may be waiting three to six months for an approval for a budget because your idea has to be assessed relative to someone else’s idea and someone else’s returns. My decision-making process is me and a few folks on a call. We can say, “Should we launch a new product in Q1?” when a big CPG will still be waiting for approval on whether to go fund it.
Erik Roth: So is the strategic planning process perhaps one of the Achilles’ heels of large companies or the innovation process?
Tekla Back: Honestly it is. And I think one of the challenges that I have come across more than once now is that strategic planning processes are not always linked to the innovation processes, which are not linked to the financial processes. So it’s not even the challenge within one process, but the integration between all of those. Without a doubt the decision making is incredibly challenging in a larger organization.
Erik Roth: We can certainly understand the comfort and the predictability of results so you can tell your shareholders, “We can confidently forecast what we are likely to deliver at a given time,” because investors want to have that security as they think about where to put their investments. That said, you could imagine a world in which time is really taken to figure out how to derisk innovation. At a company like a PepsiCo, is that the philosophy that they’re operating against or are they more sophisticated in how they think about their innovation portfolios?
Tekla Back: I’d like to think we got to be extremely sophisticated. There was a very major initiative during the time I was there where we basically had all of senior management integrate innovation into the core processes, and delivered some extraordinary results in terms of innovation as a percent of revenue, and scale of the individual innovations, which were billions of dollars. I’m clearly biased, having been part of that group and driving that process, but it actually does show that if you get a big company to focus on innovation in a structured way, you can create phenomenal things. That said, I think it’s very hard to accelerate some of those decision-making processes, because they still have to integrate to the core business. Your point about derisking is great because in essence, that’s what all these steps are trying to do with the consumer research and the prototyping and testing on the lines and all of those things.
Erik Roth: Do you think all of those things actually derisk, at the end of the day?
Tekla Back: I think what has happened over time in a number of companies, is you end up with the 80/20 rule, which is you can get 80 percent of the way with 20 percent of the work, and there ends up being a lot of bureaucracy and protocol and process around the rest of it, which just leads to a lot of elapsed time running through your fingers when others are moving faster and tinkering and iterating throughout. Even if I think about the product I launched with Keho a year ago, in that year we reworked all the recipes, all of the packaging, all of the brand hierarchy, all of the messaging. It’s because you’re constantly iterating as opposed to doing this bigger stepwise process where you have to bring something for approval. You’re constantly tinkering.
Erik Roth: Why did you leave PepsiCo, which is arguably one of the world’s largest and probably well-known innovators in the food space, to go start something new?
Tekla Back: I joined PepsiCo on the vision of performance for purpose, which was transforming the portfolio to healthier products, and that was the focus of most of the work that I did there. And then, like any strategist who puts their money where their mouth is, I saw the trends and made the jump and followed those trends into the start-up world, where I believe most of the value creation is happening, and where I thought I could make the biggest change to how people eat.
Erik Roth: What about the start-up world today seems like the better place to drive positive change, versus a large company that has so many resources and so much scale and so much reach to consumers around the world?
Tekla Back: It’s funny, you literally just articulated why I joined PepsiCo and why I’m so proud of the work that I did there—because the scale of impact that we could have in taking sugar out or taking palm oil out, or in other ways improving sustainability. It was just immense. But I also think the start-up world reached this point of inflection where the change is actually bigger here [in natural food] than it is there [in big food] now. I think last year was one of the first years when the growth in the natural channel exceeded fifty percent of all food and beverage growth despite only representing a fifth of the sales. So you could actually say I’m now on the scale side in terms of growth.
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Erik Roth: Well, don’t the big food companies talk about these trends that you’re describing? What is it about their aspiration that prevents them from actually innovating in the way that you can accomplish in the start-up world?
Tekla Back: It’s so hard! We tried so many things. I think the challenge is that the system is built for scale and it’s really hard to take a well-performing, high-velocity, familiar brand off a shelf and replace it with a small, new product. You don’t have the time and patience to wait for those velocities to build. So you need a different operating model, and I think we’re in that in-between world right now where there is a big food/big CPG model and a smaller start-up model, and the two haven’t yet quite merged.
Erik Roth: Does it come down to this theme that we’ve explored multiple times in this podcast series around resource allocation being the critical determinant of whether a company is innovative or not? And the big companies just can’t help themselves and reallocate resources back to the core over and over again?
Tekla Back: I think the metrics are different, which is also part of the challenge, because if you’re a big CPG company, you are expected to deliver margin, or a line of sight to profitability in a couple of years. You are also unlikely to get $5 million or $10 million or $15 million of funding because you don’t have a 4X to 6X revenue multiple on top of it when you’re valued internally, so it’s super tough and there are now comparable resources available outside of that system too.
Then finally, I think there are some limits just in terms of what standards are applied, like in the food space. The little start-ups are able to make some outlandish claims around health and wellness and metabolic boosts, and all those things that a large scale company can’t do or can’t claim, so the metrics are different, which also makes it super tough.
Erik Roth: Looking back on your big-company experience and taking all the lessons you’ve now learned from your small venture experience, what messages would you like to give to the big CPGs of the world as they pursue innovation?
Tekla Back: I think there has to be an element of allowing yourself to test different channels. I think there’s too much focus on trying to force new products through existing channels. There needs to be a different way of building up new brands that doesn’t take away from your core business. I think historically, it’s been about the biggest, loudest megaphone shouting occasionally what your marketing messages are, and the trick is more of a dialogue. By dialogue I don’t mean collecting followers on Facebook. It is the idea that the face-to-face conversation at a conference or the late-night chats on Instagram are really how you truly connect and learn from people.
Also, I think there’s been so much focus on cost cutting and scaling and shipping and distribution, and I think we need to go back to really remembering that a brand truly stands for something, which means that you also don’t stand for something else—being big and brave and courageous and saying that you’re anti-sugar, or you are pro-fat, which in our case even goes against dietary guidelines, and genuinely standing for something. My favorite example is Marmite. It’s not a product that’s for everyone, yet it’s a phenomenal product with a massively loyal followership. I would always bet on the Marmites of the world ahead of the generic fit-for-all brands these days.
I honestly think we should be rebuilding every single model, including the ones in business school, around acceleration, not around growth anymore. It’s the momentum that is much more meaningful.
Erik Roth: So where do large companies get it wrong in terms of metrics?
Tekla Back: So many places—if you’re trying to launch a smaller niche product in the health space and you’re then testing that among mass consumers, it’s unlikely that your mass consumer who’s habituated to eating sugars or salts is going to like a product with less sugar or salt, so you can’t use the old metrics and old numbers for mass [consumers] for a new product that is more niche. I think one of the key challenges of analytics in a fast-moving world is that they tend to look backward as opposed to forward, and they’re static. I’ve never worked out for example, what to do with a metric like “brand I love.”
Erik Roth: As you look forward, what are the evolving trends in CPG that you’re most concerned about? In particular we hear a lot about the changing makeup of consumers.
Tekla Back: I’m focused on the keto consumer, and it is very different from the traditional language around demographic segmentations like age and gender. We talk about millennials and women, but in my mind, millennials are not a segment; they’re a huge generation. The keto customers really bring it home to me because at one end I have these biohacking hyperperformance-focused customers and at the other end I have people with chronic illnesses such as diabetes and metabolic issues. I think what is happening from a consumer perspective is microsegmentation where what you are in food is not what you are in fashion, or who you are, or where you live, or your race, your gender, or your sexual orientation.
Erik Roth: Are most products mistargeted and likely to fail because they’re not getting that sensitivity to what’s actually happening?
Tekla Back: I think the concern is they’ll just end up being average, because they’ll get nibbled at from the top and the bottom. They will become a product as opposed to a brand because a brand will reflect more of who an individual is and what an individual wants. Those products will slowly just get diluted away by more and more microtargeted products, assuming they can hit meaningful scale so that the price isn’t off-putting. You’ve got to be more than a product—you’ve got to be a brand and that requires appealing to something pretty specific.
Erik Roth: Almost by definition then, large successful products at large CPG companies have to be average, just to get the size of a segment. They can’t possibly cater to every microneed or microbehavior that’s required within a large segment in order to be relevant.
Tekla Back: You end up not offending anyone as opposed to appealing to someone. I actually think what will have to happen is that the brands will have to bring scale to the marketing efforts versus the operating model through smart advertising and marketing, ROI optimization, or microtargeting online. You’ll build a different set of skills where you’ll bring the scale.
The other challenge has always been that we spend so much time looking at growth and we don’t really mean growth. I think we mean momentum, or acceleration. I honestly think we should be rebuilding every single model, including the ones in business school, around acceleration, not around growth. It’s the momentum that is much more meaningful. It’s the rate of change of growth as opposed to growth in and of itself. It’s a better pure predictor of the rate of change, as opposed to just growth. Also it has your existing scale more built into it, so it’s a more sensitive metric in some ways. I think that the core of what I’m trying to say is that it is not just the speed at which you’re going—some things can be going really fast but the world around them is accelerating. Some things are going at the same pace and they’re outpacing the world around them. So maybe it’s more of a point on relative speed. Just moving isn’t enough. You got to be moving faster.
Erik Roth: How do you get it from where you are today to something that’s truly at scale? What’s it like trying to climb that mountain of scale?
Tekla Back: I think one of the interesting questions just looking ahead at the landscape is the role of online brands versus retail brands. Our choice has been to start doing retail because we believe longer term it is something that is much more defendable, because it is harder to get on shelf. It is relatively easy to develop a product and get it online and get money for it and start building it.
Erik Roth: But does that come back down to your brand proposition and positioning and the equity you build around it?
Tekla Back: I think absolutely, there’s going to be brands that are online only and never have to go into retail, partially because there will always be niches of people who have very specific needs. But I think in order to get truly mass in the world of food, at least over the next five to ten years, it’s going to be hard without getting into the mainline retailers now. Clearly, it’s also a little dependent on what kind of a product you are, and we’re a snack product, so an impulse item.
Erik Roth: What are some of the requirements that you believe you need to be successful and where do you see yourself sourcing them from?
Tekla Back: Is it overly simplistic to say money?
Erik Roth: Well, that’s an important one, obviously capital for sure.
Tekla Back: I think the other thing after that is skill set. I’ve learned that the set of skills for online are very different than the set of skills for retail, and I think I came into this thinking I knew how to do food. I did not know how to do online food and have loved learning about the data centricity of this marketing model. I get a real kick out of being able to do the marketing on more of a micro scale and I would argue it’s a very different set of skills than what gets you into large-scale distribution and retail.
Erik Roth: Do you think that small ventures have an advantage in the digital world today relative to the big companies or do you think the big companies are starting to catch on and leverage those channels effectively?
Tekla Back: I think they’re definitely starting to catch on. I think they should be able to bring some scale to a lot of the back end. A lot of it is very similar once you learn the math of it. I think the challenge is that brands are effectively moving away from being fewer, bigger, bolder. Do you remember all that language from five or ten years ago? This might be a little bit of a food-centric view, but if I think of the differences between the big food model versus say a fashion model, those have got very different operating systems. So one is much more about operational efficiency. One is much more about how you build a brand. And my hunch is that not all companies are going to be good at all of those options, so there will probably be a new wave of food companies that are much more brand-centric sharing a back end maybe for online, but not for distribution, or maybe that will be a different set of players. Because doing branding really well is very different than doing the manufacturing.
Erik Roth: So are there two worlds emerging, one is a brand-centric, relationship-equity world, and the other is optimization of the algorithm, and you can actually operate and innovate in both worlds successfully.
Tekla Back: There’s going to be definitely more of a brand-centric world, which will probably include a lot of the online marketing skill set. I also think we should be looking at what is happening on the e-commerce fulfillment side, and how those companies are going to evolve, and then also on the financing side. I think there is a whole new set of players and infrastructures that are going to be very different from the traditional distribution world. Clearco for example, on funding, continues to innovate on how to fund e-commerce businesses. Or the ShipBobs of the world, and the fact that they provide a distribution system to multiple different brands. As soon as those companies get big enough to rival and scale CPG companies, they are going to begin to deleverage some of those systems, which hasn’t happened yet. When the natural channel represents 50 percent of growth, it might not be that long to when the distribution system scales or gets more challenged.
Erik Roth: What should we be expecting to see from Keho in the coming months and year?
Tekla Back: Well excitingly, we just launched on Amazon. We are building out our retail distribution on the West Coast and we will be coming to New York and Seattle in the new year, which we’re very excited about.
Erik Roth: So you’re actually launching and in specific markets, not trying to go national, which is probably another lesson learned for big companies as well.
Tekla Back: Absolutely. It is this magical combination of bringing the ability to do microtargeting from a geographic perspective and marrying that online marketing with the physical retail. We’ve been playing with it for a while in the LA area now and hope to scale it up over the coming months.
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