Honduras GDP vs. the Toy Market

So how much are you raising?  Are you aware that we’re in one of the most painful consumer downturns in American history?  Where does $1.5mm get you?  Is this a for-profit or non-profit?  How much are you going to pay yourself?  You left Goldman and BCG for this?  Shouldn’t you just start the manufacturing somewhere else before making the gamble on Honduras?  What experience do you have in the toy industry?  Sorry, you wanna go direct-to-consumer through the web…how are you going to get to scale?  What’s so unique about this concept?  Am I right in thinking that the uniqueness here is Honduran wood…why not flooring or cabinetry?  Who’s gonna do the manufacturing?  Isn’t China gonna rip this off and deliver to Wal-Mart two months later?  What can you actually make with these blocks?  Hasn’t this been done before?  Do you have your Intellectual Property all buttoned-up?  What happens if you don’t raise the money?

These, and many others, were the very valid questions Chris and I faced in our effort this past winter to convince wouldbe investors that they should commit $1,500,000 of their capital to help us get our socially-motivated consumer products dream off the ground.  In total, the raise took roughly four (4) months, and we had the great (mis)fortune of beginning it the week after Thanksgiving 2008!  At that stage, the S&P had fallen 32% since Lehman Bros had announced bankruptcy on September 15, 2008, and it would eventually bottom-out 21% lower in mid March 2009.  To our great joy and, at times, surprise, despite liquidity constraints, dwindling 401(k) values and the Wall Street meltdown, investment capital for Tegu was trickling in.  By Christmas, we were sitting on $400,000.  From there, Chris and I started a heavy dose of travel in the new year, which actually didn’t yield all that much in the end.  But we were determined salesmen with a puny budget, were hosted along the way by many gracious and well-wishing friends, and, of course, were armed with a story we believed in 100%.  By mid February we’d secured $750,000 and then, as many had predicted, we hit the doldrums.  It was there that we sat until that incredible day late in March when the wire hit the bank.  We were in business, or, at least, were gonna give it a shot.

In case you’re wondering what the pitch was, here you go:

• We believe in profit and social change, and, in fact, that all businesses impact society whether they mean to or not (e.g. Apple, Countrywide, GM, Merrill Lynch…)
• The toy market is large: Lego’s sales would move Honduras’ GDP 13% if they located the manufacturing there (see chart below)
• Toy consumption — less discretionary than you would think — is going back to basics: 2007 was the worst year in toy-recall history.  China has a serious black eye but makes 80% of the toys on U.S. shelves.  Moms are nervous.  Congress is responding.  Natural toys are staging a comeback
• The natural toy market is bereft of any notable innovation: look at what Method did to cleaning products, or Simple Human to trash cans, or Bugaboo to strollers, or, for that matter, what Dyson did to Vacuums.  Who is the Apple of toys?  Why is everything in toys so gimmicky?
• Honduras offers tremendous strategic advantages: 2hr flight from Miami, great supply of gorgeous woods that can be sustainably harvested, and a reputable history of light manufacturing (largest t-shirt and sock manufacturer out there).  We’ll pay above minimum wage ($1.25 an hr) and help moms and dads support their families.  Meanwhile, we’ll combat the Country’s 30% unemployment rate
• Our priority is profit, not growth.  It won’t take more than xx,xxx units to get profitable, and we should get there somewhere between years two and three.  We have three full-time salaried staff in the USA.  That’s it.  We’re intentionally lean
• We’ll do our best to provide a liquidity event in 3-5 years, and our rock-bottom return hurdle is an annualized 30%.  We’ve invested $130,000 of our own capital, so we’re right there with you
• The Tegu team is well equipped to do this job and we’ve got great advisors: special thanks to Kari Boiler (Bugaboo), John Handy (formerly head of product design at Mattel), Eduardo Facusse (Managing Director of Costuras, Honduas), more to come…

Our investor base is a daring and visionary bunch, but we have every intention of building the next Lego, so we’re laboring to ensure it will work out really well for them in the end.  Chris and I have shared with all of them that we consider it a serious honor to steward their capital, I can speak from personal experience that the weight of responsbility here is enormous, and actually far greater than I ever imagined.  What’s most meaningful to me is the chance that they have given us to allocate their resources in a way that generates both financial and social returns.  We’ll document it and prove it by providing a transparency hitherto unseen in the toy space.  Call it social entrepreneurship or transformational capital or whatever you like.  Tegu has been created and now funded as the anti-handout, and I am proud as punch and grateful as ever to be a part of it.  ONWARD!

– Will Haughey, Tegu Chief Blockhead

Tags: Capital Raise, Handouts, Honduras, Lego, Social Entrepreneurship