We caught up with the brilliant and insightful David Downing a few weeks ago and have shared our conversation below.
David, looking forward to hearing all of your stories today. Let’s jump right into the heart of things. Outsiders often think businesses or industries have much larger profit margins than they actually do – the reason is that outsiders are often unaware of the biggest challenges to profitability in various industries – what’s the biggest challenge to profitability in your industry?
Creating a profitable food business is incredibly difficult, especially during times of uncertainty and global unrest. As a small food business, there are so many layers of costs to take your product from an idea in your mind to someone’s mouth or plate. Some basic components; 1) Raw ingredients – this is what your food product is made out of. The problem with ingredients is that their costs can fluctuate wildly depending on the global market. For example, if there’s an outbreak of salmonella in the United States, all of a sudden the cost of eggs may triple. Or if there’s an international war (like the one in Ukraine), global supply chains will get disrupted causing ingredient costs and transit times to spike. One way to overcome the price uncertainty is to stockpile ingredients, but this will require a lot of cash. Another tool is to try and lock in prices (i.e., a futures contract) with your suppliers. Basically, you commit to buying a certain future quantity of something but at a set price. It protects them from the risk of prices dropping and protects you from the risk of prices rising.
2) Packaging – much like raw ingredients, the packaging is subject to raw commodity prices and the availability of packaging can easily be disrupted by things like pandemics or wars. You also have to recognize that if you want more eco-friendly (recyclable) packaging, you will have to pay a premium which either forces you to decrease profitability or charge higher prices to your customers.
3) Production labor – you either need an in-house team or an outsourced partner to actually create your food product. If you have your own team, labor costs simply will increase over time as they become more efficient and gain tenure. Inflation is a huge component too as you want to make sure your team members earn a liveable wage. The key here is to focus on improving efficiency via processes and automation. If you can boost efficiency 50% with a new piece of equipment, then that allows you to pay your people more while still being more profitable overall.
4) Overhead & equipment – To create your food you may need your own facility which comes with built-in costs like rent, insurance, utilities, and maintenance. For a small business, it can be hard to overcome these overhead costs until you’re revenue base is big enough. No matter how much you sell, these costs are relatively fixed, so if you don’t sell enough for the month that can lead to big losses.
5) Marketing – As a small food business, it’s a real challenge to find customers (whether that’s individuals or businesses). You have to invest time and money into marketing and sales, and if you don’t keep an eye on what you spend and the return on that spend, you could easily find yourself in a cycle of burning cash without it generating enough revenue to generate a profit. For early companies, I recommend doing as much organic / bootstrapped marketing as you can (i.e., do things that don’t cost money but maybe just your time – stuff like organic social media posts, blogging, PR / Media outreach). Companies that raise outside money often find themselves dumping thousands of dollars into marketing and it can create a financial downward cycle that will require a constant influx of capital (which adds a lot of stress to the founders and business).
David, before we move on to more of these sorts of questions, can you take some time to bring our readers up to speed on you and what you do?
I’ve always been a blend of someone more interested in humanities (history, literature, art, etc.) and someone more interested in business (marketing, accounting, finance). I studied Ancient Mediterranean Civilizations and Economic at Rice University and then ended up getting a Master’s in Accounting from the University of Texas at Austin. I truly believe accounting is a CRITICAL tool for anyone interested in running or starting a business. Accounting is the language of business. If you can understand how to read and interpret financial statements, you can literally understand ANY industry no matter what they do. I was very fortunate that I had an amazing professor for my first accounting course in college and they pushed me to pursue the field further.
After university, I bounced around between different jobs trying to “find myself”. I did a couple of years in management consulting, then I worked for Southwest Airlines in their finance / accounting group, and eventually I ended up working for a small venture capital firm in Houston, Texas. Throughout my early career, I kept trying to push myself in the direction of the work I wanted to do while also finding roles that would give me the skillset I needed to have more freedom in my life. Management consulting taught me how to communicate to executive leadership, Southwest taught me how to master Excel and PowerPoint for analysis and presentations, venture capital taught me how startups grow and raise money. All of those things culminated in me “feeling ready” to start my own business. I reached a point where I knew I wanted to try building something that was really mine and that I could be proud of, and I wasn’t scared because I had met other entrepreneurs and knew that I had just as much drive and skill inside of me as the had in them.
Fortunately the stars aligned at that time and I met my now business partner Jose Hernandez. He and I were roommates by chance and both got that startup “itch”. His experience managing and reversing type 2 diabetes while in his 20’s led him to try baking alternative desserts that didn’t spike his blood sugar. That ultimately led to us coming up with the idea for our company, ChipMonk Baking. We made diabetic-friendly cookies and wanted to share them with anyone looking to indulge in a healthier way. In 2019 we started it in our apartment and today we have our own team and commercial bakery. Building the team and company is definitely something I’m most proud of so far!
Can you tell us about a time you’ve had to pivot?
I feel like my entire life since high school has been a series of pivots. Basically, until then, my sole focus was “get good grades in school and good things will happen”. I didn’t realize that in order for good things to happen to you, you have to be actively working towards more than just “good grades”. You almost have to manifest it, and a part of that means knowing what you actually want.
I think the biggest pivot was learning that early on and starting to go down that journey of figuring out “what do I really want to do?”. When I first started college, I pursued a computer science degree and absolutely bombed it. All of the kids in my class were lightyears ahead of me and it was the first time in my life where I felt like I couldn’t understand a subject being taught. I felt like a total failure and was miserable because I thought I wanted to do programming for a career. Luckily, I had taken a few ancient Rome history classes and some intro economics classes and I found that I really enjoyed them. My love for those subjects translated to success in the classroom (and a strong friendship/mentorship between me and my professors), and I ended up pursuing those subjects for my degree.
I think the lesson there for me was to look for that feeling of being both satisfied/interested in the work but still also being challenged. You have to have both elements otherwise you’ll either end up burning out from lack of interest/energy or just hating it because you can’t do it well.
The strange thing with life is that things that may meet that criteria at one point in time may not do so at another point in time in your life. We CHANGE. It’s scary but it’s okay, because it makes life much more fluid and interesting. You just have to embrace the change and continue to chase that feeling of fulfillment plus challenge.
Can you open up about a time when you had a really close call with the business?
In December 2021, we had a verbal agreement with a company to invest $300K into our business, ChipMonk Baking. We had been investing heavily into marketing, equipment, and growing our team working under the assumption that that money was going to come into the bank. Well, it didn’t. The investor pulled out the week before Christmas and our cash burn rate was so high we were on a crash course with just 1-2 months of runway. I immediately had to go into fundraising mode while also looking at all our business expenses and figuring out where I could cut down to slow our burn rate (one thing I did was cut my salary to $0 for 3 months). I reached out to all our existing investors as well as new investors and banks. Ultimately we were able to muster up enough funds to keep the doors open and the process led us to getting a sizeable SBA loan that gave us the capital we needed without losing the equity we had planned on giving up to the original investor who pulled out.
Having gone through that, it really committed me and my co-founder Jose to the idea of getting our business to consistent profitability vs. pursuing growth at all costs. For 2022, we’re doing everything we can to get profitable so we aren’t at the mercy of investors (or a lack thereof) again.
- Website: https://chipmonkbaking.com/
- Instagram: https://www.instagram.com/chipmonkbaking/
- Facebook: https://www.facebook.com/chipmonkbaking/
- Linkedin: https://www.linkedin.com/in/david-downing-16784023/
- Twitter: https://twitter.com/ChipMonkBaking
- Youtube: https://www.youtube.com/c/ChipMonkBaking
- Yelp: https://www.yelp.com/biz/chipmonk-baking-houston