When Lucas Walker lost his day job in March, he and partner Riley Wallbank made a gamble on their small business: If Treats Happen, their all-natural dog-treat company, made money at the Canadian Pet Expo, they would see how far they could take it.
Less than a year later, Treats Happen is booming, and Ms. Wallbank is winding down her day job, too.
What started as a way to lower the cost of healthy, single-ingredient treats for their growing family of boxers – they have three – has taken over Mr. Walker and Ms. Wallbank's lives. They began by dehydrating meat for their dog-loving friends and family, making an average of 10 bags a week. Today, their Toronto basement is filled with food dehydrators as they produce 400 to 700 bags in the same time frame.
Demand is growing but their basement isn't. Bigger dehydrators, meanwhile, would also require their own production facility and quickly jump in cost from three figures to five or six. Scaling up is the next step – they're just not sure how.
The partners first met at a bar in 2011, when Mr. Walker, who had an Australian Cattle/Labrador mix named Dolly, noticed Ms. Wallbank's phone wallpaper – her boxer, Diesel. Both worked in sales and marketing, but it was their love for dogs that led to a first date – a dog walk with Diesel in tow.
Two years ago, both Dolly and Diesel died suddenly, just a few weeks apart. The couple soon took in a pair of new boxers: first Bentley, then Charlotte. (They also adopted York, Charlotte's dad.)
The pet parents quickly grew frustrated at finding healthy treats at a reasonable price. "I don't want to put anything into my dogs that has anything I can't read on the label," Ms. Wallbank says. "We realized every time we went to get them natural treats that we were paying an arm and a leg."
They picked up a dehydrator and began making treats from duck feet and beef lungs. Friends and family began to ask for some, too. Ms. Wallbank's aunt mentioned the treats at her local pet shop, and soon Treats Happen was in retail stores. But their main outlet is a Shopify-run store on the Web; they prefer an inbound sales model to avoid losing margin to stores and distributors. Online, shoppers can find a growing variety of treats, from $11.99 bags of 10 chicken feet to 250 grams of beef liver for $16.99.
Treats Happen is nothing short of a success. At the Canadian Pet Expo in September, the pair won the prize for Best Independent Booth. They have six dehydrators, but they need more and bigger equipment to keep up with demand.
But with dehydrators, Mr. Walker says, "you very quickly go from a $2,000 option to a $40-, $50-, $100,000 option. There isn't too much of an in-between option that can do more of what we have now that isn't 12 times the cost."
Save for a little bit of bank debt, Treats Happen is self-financed. But the owners know that must change. They're considering buying new equipment through a financing plan directly from the manufacturers.
They've received a few offers of capital, but they want to keep things in-house as long as they can. "It's not just about the rate of growth; it's about maintaining control of your company as well," Mr. Walker says. "It's about taking the capital from the right people, who have the same goal alignment as us, without selling half the company for six months of runway."
The Challenge: What's the smartest way for Treats Happen to finance scaled-up operations?
THE EXPERTS WEIGH IN
Nicole Troster, Ontario director of provincial affairs, Canadian Federation of Independent Business, Toronto
Treats Happen is already self-financed, which from our research is the No. 1 source of financing for small business. The next most logical option is to look at getting a business loan or line of credit. About 60 per cent of small and medium-sized businesses use these.
One of the challenges small businesses have when applying for a loan or line of credit is that if they don't have a long history or are too small, it may be difficult if they don't have collateral. Making sure you have a business plan, marketing plan and cash flow plan can make it a lot easier for banks to provide financing. They want to see where you're going to spend the money and how you're going to pay them back, because it's all about risk.
Crowd-sourcing may work. There are probably a lot of dog lovers who are really interested in seeing this business expand because of the value propositions they offer.
David Sparling, operations management professor, Ivey Business School, University of Western Ontario, London, Ont.
If they could find a business partner with the same values and different experience, then they'd have something to bring to the table beyond money. They need to think about what the next step looks like, and who's actually going to manage all this.
For the next jump, they could probably manage the production. They seem to have some flair with marketing because of the award they won. What they really need is somebody who makes sure that their supply chain works from the beginning to the end. And they should not spend too much on equipment if they don't have the money. Even if they get new equipment financed, that's going to be expensive, and a potential liability if anything goes wrong. I would recommend looking for used equipment, then finance that, so it's cheap.
They've been basically a kitchen-type operation, which doesn't really get much regulatory oversight. When they become a food manufacturer, then they will have to meet any regulatory requirements. That's something they should at least find out about.
Josh Fine, chief brand officer, Manitobah Mukluks, a Shopify-powered store that had to raise capital to scale up, Winnipeg
It is too early in their business to give up a piece of their potential.
For a profitable business, it makes sense to maximize control and ownership, grow in a way that's manageable and minimize risk. Selling direct from manufacturer to consumer allows you margins and profitability that would not have traditionally existed for manufacturers – especially early-stage ones. Leverage this advantage by flowing this increased profitability into brand growth rather than seeking outside equity to do so.
With profitability, you also have access to debt that other startups may not be able to leverage. Your direct-to-consumer model removes a lot of risk of a sudden change in business (traditionally, a few retailers could make up a large percentage of a company like yours' revenue). You own your consumer and can count on a revenue stream spread among hundreds of consumers in order to support a monthly loan payment.
If you stop growing or stop being profitable, then consider a strategic partner that would allow you to own less of a bigger thing. But for the time being, keep growing organically, and feel comfortable taking on financing from the supplier/bank in order to purchase your equipment.
THREE THINGS THE COMPANY COULD DO NOW
Get their ducks in a row
Hone their business, marketing and cash flow plans to reassure potential bank lenders that they are ready to grow.
Get a loan
A small business loan or line of credit could give Treats Happen access to capital without depending on a credit card or selling a chunk of their business.
Consider strengths and weaknesses to determine whether a partner with the same values and a different skill set might help Treats Happen grow.
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Interviews have been edited and condensed.