FilterBuy: Fresh Air - [Business Breakdowns, EP.197]
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She's head of investment operations and portfolio administration at Geneva Capital Management. Katie and her team at Geneva went live on Ridgeline in just six months after signing the contract. You'll hear a short clip here and then stay tuned for after the episode where Katie shares the full story on choosing Ridgeline and how she benefits most from the offering. We are using our previous provider for over 30 years. We had the entire suite of products from the portfolio accounting to trade order management,

reporting, the reconciliation features. I didn't think that we would ever be able to switch to anything else. Andy, our head trader, suggested that I meet with Ridgeline. And they started off right away, not by introducing their company, but who they were hiring. And that caught my attention. They were pretty much putting in place a dream team of technical experts. Then they started talking about this single source of data. And I was like, what in the world? I

I couldn't even conceptualize that because I'm so used to all of these different systems and these different modules that sit on top of each other. And so I wanted to hear more about that. When I was looking at other companies, they could only solve for part of what we had and part of what we needed.

Ridgeline is the entire package and they're experts. We're no longer just a number. When we call service, they know who we are. They completely have our backs. I knew that they were not going to let us fail in this transition. This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business.

For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you.

To find more episodes of Breakdowns, check out joincolossus.com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers, or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. This is Matt Russell, and today we are breaking down FilterPy.

From time to time, I come across a compelling founder that is willing to cover everything about their business. And David Hecox, founder of Filter Buy, is exactly that. So we covered the wide spectrum here. We got into the psychology of David going from Goldman options trader to starting an air filter business in Alabama just over 10 years ago, and growing that business into something that generates over $250 million in revenue as of today, 2024. We

We got into the economics of air filters like we like to do. And David shares this great story about how he found this specific market and what makes it so unique to something like ink cartridges, which he was also looking at at that time.

We cover various business considerations like manufacturing location, how you handle logistics, direct consumer versus big box. It's really hard not to be inspired after listening to David. He doesn't sugarcoat the grind required, but you can feel his determination oozing through the microphone. I love doing this episode today, but I also love knowing that this is going to act as some type of time capsule as David continues this journey. Please enjoy this breakdown of Filtered By. ♪

All right, David, I am excited to have you here and finally have this conversation. We're going to get into a lot about filter buy, but I think we can't separate the business itself from the person and that's you. And I want to go into just the personal dynamics that led you from being an options trader at Goldman Sachs

And then making the decision to buy a business, this specific business that you eventually built up, just walk us through some of the mindset in the early decision-making process that led you to getting into FilterBuy.

The reality that I realized after doing some soul searching on it is it's an evolution. There is no one moment where something like this happens. It's a culmination of lots of things. And the reality is that I've always been an entrepreneur starting early in life.

I had so many different businesses that I started in. Just each one kept iterating into something new. Early on, I was designing websites in the late 90s when that was a big thing. And then selling on eBay, I actually had my

My username on eBay was Momentum Corpse because I've always been such a big believer in momentum, even from like a 15-year-old kid. And that's something that really carries me through today. But then all through college, I always had side businesses that I was experimenting with, oftentimes that were internet related in some way. That was what was happening at that point in my life.

Fast forward, I studied economics and statistics in college, ended up getting a job at Goldman Sachs, where I was initially on the global macro research. And then after two years of that, ended up moving to the trading desk, where I ultimately ran the emerging market options trading business.

I started Goldman in 2005 and I actually moved to the options trading desk in 2007, right when the financial crisis started to brew. I was very junior on the desk. I just moved to another group and I saw all these people starting to get fired and all this turmoil. I was convinced I was going to lose my job. I was recently married at the time. I was paying for my wife to go to medical school and I did not want to take on any debt.

I started another side hustle at the time where I was effectively an affiliate for StubHub, the ticket site. I don't think they have an affiliate program anymore, but I effectively had a way of driving traffic to StubHub through Craigslist postings and other things. I actually had a whole team of guys in Vietnam that were working for me doing this. And in 2008, I actually made double what I made from Goldman and my StubHub side hustle

That ultimately led to me thinking, oh, wouldn't it be cool if I owned the whole product, the whole offer, rather than just getting the affiliate commission? And that led me to building a business called My Office Delivered, where we were effectively dropshipping office supplies, largely on Amazon, but also on a website. And about 60% of that business was either

ink cartridges or pleated air filters. And that's how I first learned about the pleated air filter market and the potential size of it, because I was shocked. We were dropshipping for this little company in Crayola, Alabama called Filters Now. And we did six and a half million total in that business in 2009. And I think that two million of that was air filters. And that was a real wake up call to me.

But anyways, my career at Goldman actually really took off and it was really a financial crisis ended up being one of the best things for me career wise versus what I feared. And at the end of 2009, I had to shut down my office delivery business because I just didn't have the time to manage that while also having my career at Goldman.

And then you fast forward a few more years to 2012, my family was going through the sale of a family business, which was a small dying industrial supply business that primarily called on the wood products industry in the Southeast because I'm from Talladega, Alabama originally. I was really close with my grandfather who was still alive at the time. He was about 92 and he did not want to see that leave the family. And so I was 29 years old and I

I decided that I was going to buy this business out of pride and figure out what I'm going to do with it. So I bought it having no idea what I was getting myself into and quickly realized that I was going to need to do something different if I wanted to survive and ultimately grow.

And because of that earlier experience with dropshipping, I was like, well, I need to explore this ink cartridges thing was actually first. And then I realized for various reasons why the pleated air filter market was actually better for what I wanted to do. And you remember at the time,

Direct-to-consumer was so big. You had the Harry's and the Dollar Shaves Club, and all of these come out, and direct-to-consumer had so much promise early on. And I took that really seriously. For me, that meant if I manufacture a product and actually sell it direct to the end user, then I have a sustainable competitive advantage.

because that's what direct-to-consumer meant to me and still means to me. And I think that a lot of the people that are supposedly direct-to-consumer are really not direct-to-consumer. They're taking some third-party manufacturing and putting a brand on it and using third-party logistics and then expecting to have a sustainable competitive advantage. And I think that it's been proven over and over again that that's not really how it is in reality.

But I created a true direct-to-consumer air filter brand where we're vertically integrated from manufacturing to all of our own fulfillment and whatnot. So I started that in end of 2012 and have been grinding on it ever since.

The chapters there are fascinating. And I did some research on your background, but I didn't have all of the entrepreneurial stints along the way, which I think show some crumbs in terms of the evidence of it all coming together. You made one point there just in terms of pleated air filters being a much more interesting business or making more sense.

for what you wanted to do relative to the in-cartridges. Can you just tap into that a little bit in terms of the insight that was unlocked or what you saw as the opportunity there that wasn't necessarily in in-cartridges?

Yeah. So the thing about both of them that I really liked was one, they're big markets because there's lots of demand for both. But most importantly, they're consumable. If I sell to you once, then I have a high probability of getting to sell to you again. And so from a marketing efficiency perspective, I knew just how important that was. And so the consumable part of it is what made them both interesting to me. I started getting into it

There's so much patent law around how the ink cartridges actually fit into the unit. The aftermarket ink cartridge business is very tricky for that reason because the companies like HP and whatever the big printer companies are make a lot of money off of the ink cartridges. And so they protect it very closely and they make it very difficult. It's actually very similar in the refrigerator water filter market, believe it or not, which is a whole other thing I've studied in the past. But

purposefully have not gotten into for similar reasons.

The real strategy that I thought there early on was remanufacturing cartridges where you actually buy empty cartridges from big companies and then you refill them and you resell them. That was what I was looking at getting into at the time. But I realized the pleated air filter market, because they're so logistically challenged, the big device manufacturers don't actually make money off of the pleated air filter. Honeywell and a couple of others do license their brand, but it's purely a licensing thing.

because they don't actually make money in their filters. This is actually a logistically very difficult product. I knew that unlike in cartridges, I would not have to compete with overseas imports because they're so bulky relative to the shipping costs. So it would just be while maybe it would be cheaper theoretically to manufacture, say in China, the shipping economics would be such that it would be way cheaper to manufacture them here when you take landed cost into account.

And there's lots of variation in air filters.

There may be 15 sizes that are the most common, but we manufacture 300 sizes and we've been able to aggregate demand across all of these crazy sizes that no Walmart or Home Depot or supply store could actually keep, which is what makes the direct-to-consumer part of it interesting. Whereas with ink, they're much smaller, so it's much easier to have a much larger selection on a retail storefront. So those are all of the factors that made the pleated air filter market specifically interesting to me.

I want to go back to the first point you made. It was a consumable business. And to your point, there's a reoccurring nature of sales with these products as they are consumed, which I think a lot of people attach that to software businesses or contractual businesses, but it can happen in traditional consumer-based businesses as well. So that, from a business standpoint, makes a lot of sense. On the other hand, you had experience with digital business with the StubHub platform.

operation, and things that didn't involve the logistical challenges that you just mentioned. So what made you decide to go the manufacturing, the physical product route when you did have experience in the more digital space, which less capital intensity, less logistical challenges? What was a decision or an insight that you had that led you in that direction?

You know, it's multifactorial, but part of it is that we are actually a technology company and marketing company that's hidden in the physical products world. I mean, I manufacture a product for $2 and sell it on average for $12. That's marketing and logistics and lots of other things that go into it. And so I actually have this belief and have for a long time. I'm not sure if you've ever read the book, The Blue Ocean Strategy, but...

In life or in business particularly, you want to go where there's blue ocean or figure out what is it that I have a unique competitive advantage in that nobody else can compete with. And so for me, that oftentimes sits at the intersection of two ideas. So both things can be true.

I can have a technology focus and be a technology first company. I can also be manufacturing product. And if I can combine those two things together, then I have a sustainable long-term competitive advantage, which I think we basically proved out over the time because there's really no other company that's like us. There are lots that rhyme with us, but we've carved out our specific niche or our blue ocean, so to speak, by doing that. And so for me, I just saw that it was a very old school, antiquated industry.

And if I could combine that, but there's also a big demand for it, both from residences like residential homes, as well as commercial. So there's a big demand, antiquated industry. If I can figure out a way to market in a smarter way and manage my supply chain in a smarter way that I would have a big potential sustainable reward from it. The other thing, which is interesting if thinking about my earlier psyche, and I would say it's even more true today than it was when I started, but

Coming from finance, I saw how technology was coming to change things. I actually thought it was going to change much quicker than it has, to be perfectly honest with you. And I think now as a percentage of GDP, you see finance is actually declining as a percentage of GDP. And that scared me. It's like I inherently, because of my finance background,

felt the same way about a lot of these SaaS products because I was just like, is there really a sustainable competitive advantage here? And obviously 10 years ago, the answer was yes. I mean, I was too early and wrong on that, honestly, because I've seen a lot of people do well with it, but it just always scared me because I didn't have the confidence in myself being able to

pick the one idea that I was going to be able to do that nobody else could copy me and just make it cheaper or whatnot. And so for me, having the physical products aspect of it actually was the thing that made it unique and had the potential of scaling into something over time that would be sustainable. And so that was my thought process.

I want to understand what it was like to step into the manufacturing process. And I know the business looks a lot different and that there were changes just in terms of what you were doing from a product perspective, but then also from the logistical side of things. Can you walk through, you have your impressions and what you described there in very textbook fashion, just in terms of market opportunity, technological change, doing things different. And then you actually show up

whether it's through the manufacturing facility or whatever it is. And it's a little bit different. So what was that like just getting up the curve in terms of running that business? And you can walk through this however you like, just in terms of the various chapters there. We could make this probably a 10-hour podcast if you want it. The reality is that it was meaningfully more difficult and challenging than I ever could have imagined.

I think I was lucky to be naive going into it because if I knew what I was getting myself into, I would never have had the guts to actually do it. It was quite hubristic in retrospect, keeping in mind I had never stepped foot in an air filter manufacturing facility before making this decision. I basically just decided to go and build it and reverse engineer it myself.

The thing about air filters and part of the reason why I was so confident misguidedly early on is the equipment to manufacture it, at least at a base level, it's not very expensive. So you can get started as an air filter manufacturer, particularly when I started for probably under 100 grand if you really wanted to, which I effectively did. But that doesn't mean that you're going to be efficient or successful with that.

Early on, I realized as I bought a couple of machines, I thought, oh, I'm going to get started and start manufacturing it. But I realized that this business, it only works if you can do it at scale, because that's the only way that you can get your per piece cost down. And the problem is if you want to have a catalog of 300 sizes at scale, you've got to have scale to be able to come back and run them often enough so that you can constantly be replenishing your inventory. All of these things that

were not particularly well thought out from a manufacturing perspective for me in the beginning. But the thing that I underestimated the most, which I'm reminded of quite often, is the difference between buying a business versus starting it. When you buy a business, even if there are a lot of

thorns on that business. There's a lot of institutional knowledge in terms of the employees or just little things that get taken for granted, I think, later on that make a huge difference. And I really underestimated that. The story I often tell with this is

It took me probably four years to get to where we were actually manufacturing products cheaper than we could buy it from somebody else. So it was a lot longer learning curve than I hoped. I mean, we were lucky that because of the direct model, I was able to sustain that because we were not selling at...

commercial, like traditional manufacturer prices, but I could have purchased filters for the first four years cheaper than we were able to manufacture them. And maybe two and a half or three years in, I remember we had a May in Alabama when it was extraordinarily humid and we could not get our media, which is the stuff that goes in the inside that filter itself. There's a part of the manufacturing process where you have to put a little like chicken wire,

and glue it onto the media at scale. And the laminator, which is the machine that we were using to do that, we were using cold glue rather than hot glue. And what that means is that it's supposed to dry before it actually gets rolled up. But because it was so humid, that glue was never drying. And so we had all these rolls of media or raw material in this case that were effectively going to waste. And so we were wasting like a third of our raw material or more in this period. And

I was basically about at my breaking point because not only were you wasting all the money for that, but then you have orders that you have to fulfill that you can't because you can't make the product. And it was a real disaster. Somehow I was calling around and I found a hot glue laminator, which I did not even know existed until a couple of weeks before that. I found one that was in stock for $55,000.

It's the only time in my career that there's actually been a machine that was in stock on somebody's floor, but they had it by some act of God. And I rented a Penske truck on a Thursday, got up there Friday morning, got trained on this machine. I drove from Alabama to Indiana, got trained on the machine, then drove back all Friday night and trained my team on this new machine on Saturday morning. And that was really the turning point for me in manufacturing and in the business.

Because if that machine had not been in place and we had not been able to fix that part of the problem, I think I actually would have given up after being in it already for two and a half or three years at that point. But that was really when we started digging out and then figuring out how to do things. But manufacturing is incredibly difficult. And I learned that the hard way. I would not want to have to start it again.

That's an unbelievable story. One that they put in the books well after the fact that you read about just in terms of what it takes and inflection points, turning points. Fascinating.

You mentioned team several times in this. You have this group of people that you're essentially tasked with leading. You're coming into this with maybe less experience in a manufacturing facility than they have. How was that just in terms of building the team around you, having a culture where they didn't look at you like, what is this guy doing? And just when

When you think about that whole fear that somebody might have in terms of stepping into the manufacturing world and not having a lot of experiences with it, being nervous about what it's like to build the team, what were some of the things that stood out just in terms of your ability to do that and grow with the group? Early on, like the first...

eight to 10 years that I was in the business, it was largely me and then people doing the work more or less. And I was very much involved. I now have a thousand employees, give or take, and there's not one job that any of them do that I have not done at some point. I mean, that goes to the manufacturing line all the way up to anything finance related or whatnot. Part of the way I was able to bootstrap this business was I basically did all those roles myself.

all the management roles. I did have a person who actually still works for me. His name is Gary McDowell. He's now 82 years old. And when he started with me, he was 70. I hired him as a consultant to help me in the air culture space. I was paying him a nominal amount. He retired and had

I had some experience in the filtration industry, but not nearly in like the scale or what we ultimately ended up doing. But he was really critical in helping me keep that part of it together. Like he was there every day and still is largely because he loves the business.

But he was the day-to-day person that helped me with that. And then I did all the marketing and finance and all that kind of stuff myself, as well as most importantly, and we touched on it a little bit earlier, I built the ERP system that runs our whole business. So we basically outsourced development team that I led that built the ERP of the business, which allowed us

to do what we're doing, which is so complicated. It's actually a lot of moving pieces to our business, making sure you have the right thing in stock, that you're manufacturing the product correctly, that you're using the right shipping label, that you're optimizing the logistics. And it still is the system that runs our business today. But now I was actually just in a finance place

planning meeting for next year. And we have 100 corporate level employees now within the business that help me now for all of these things. I'm still more involved probably than I would like to be or should be in certain cases. But now I have a team. But my guess is, if you looked at those 100 people, there is only maybe one or two that was here four years ago. So like the first eight years in this, there was not really much of a team. It was more me just figuring it out if I was perfectly honest.

I want to transition just into some of the insights that you had or ways that you were unable to unlock that economic advantage that you talked about. And,

And talking about cost per filter versus price that you're able to sell, you mentioned scale being incredibly important, maybe the most important thing. But you also made some interesting decisions like manufacturing in the US and deciding to go the direct route. So can you talk through just a little bit about the cost specifically and how you focused in and zoomed in on the cost and maybe the leverage that you would point to as being most important here for this business? Yeah.

That's a great question. What I oftentimes tell people is I'm really not in the air filter business. I'm in the logistics business. Ultimately, what matters to a customer is the price to get it to their home or their front door. That's what a customer actually cares about. I knew that from the beginning. And so I always optimize around that. An early example would be

In the first few months of the business, I actually was buying filters from somebody else until we could figure out the manufacturing and whatnot ourself. When I'm doing that, I'm buying them in packs of 12, cases of 12, having to take them out, repackage them and send them to a customer, which means I'm throwing away a cardboard box. I used to call that the 13th filter, because if I want to operate that business model, I'm effectively throwing away a filter every time I do that.

On top of that, I've had to truck it in, which is not free. I've had to unload it, which is not free. So that's all a cost that if you're manufacturing that you no longer have to deal with. So that's an easy example. But then let's think about the distribution of an airfoil.

If I want to sell my product through first party Amazon, for instance, we're a top 50 Amazon seller. We fulfill everything ourselves. If I wanted to send it into their fulfillment network, what I have to do is I have to package that in a case quantity box. I then have to palletize it. I have to put it on a truck. I have to send it in to them. They're going to move that around their DCs to get it closer to customers. They're then going to pick that. Then they're going to put it in another box

and then they're gonna ship it to the end consumer. And our model effectively takes away all of those steps. We manufacture it, we do not box it, we palletize it. It ships from either direct from a manufacturing facility or we have an additional four distribution centers that are close to our manufacturing facilities that we're constantly trucking back and forth to just keep what's needed to be able to then do the last mile delivery with the shipping partner. So we do all of that just for air filters,

better than anyone else. Amazon can do that for all types of products and they're great at it, but for air filters, which are very bulky, I can confidently say we are the best at that. And it's because we've been able to basically internalize all those costs

So those are all the things that really go in. Like every time a filter is touched, it significantly increases the cost that you're going to have to charge an end consumer. One dirty secret, in my opinion, that everybody gets uncomfortable when I talk about, but most other big companies that are distributing air filters online are losing money if they were going to take into account the logistics cost of getting it to the end customer, in my opinion.

And they do that because they have to maintain market share and this kind of stuff. But it's just if you take into account all the costs that are associated with actually getting that filter through your network into the end customer, there's no way that they're profitable on those items.

Yeah, the cost of production versus full cycle costs. There's a lot of ways to play around with these numbers across business. Do you have any sense of what that saves you having it done inside the business versus Amazon? Just the sense of when dollars and cents, what you think that might save you on a per filter basis?

It's not an answerable question because two thirds of our catalog is so big that effectively Amazon publishes their FBA fees.

It's actually public knowledge how much they would charge you for certain items. And it's something that I've spoken with them quite a bit about before, but there's a whole subset of our catalog that if I were to ship it using their FBA fees, I would lose money even if my product cost was zero because it's that expensive to fulfill because it's such a low dollar value relative to the bulkiness of the item. And so that's just factually true. And so you can go and actually do the math on some of these things.

So how do you talk about it in that? I don't know. What is their actual cost of fulfilling it? You'd have to dig into that. You answered it well there, I think. But then we used to use FBA for a subset of our catalog. To their credit, we worked with them to move where we're fulfilling everything and still using their seller fulfilled prime program. So we offer prime delivery, but we handle it ourselves.

We were in the neighborhood of a 20% top line differential on the SKUs that we moved back to internally versus paying those fees. It's that big of a difference because when you take into account the shipping costs of them, how they oftentimes lose stuff within their systems, we could not run our business profitably if we were using that model.

It makes a lot of sense. And it echoes what I've heard just in terms of the fulfillment dynamics, opaque nature sometimes, but very, very cost prohibitive and eaten to the margin.

I want to transition a bit into the sales dynamics and the competitive dynamics. Can you just talk about the competition that existed in the market when you entered it? What did that look like in terms of it being dominated by key players, fragmented? And how much has that evolved over the years? Obviously, you staking out a major piece or place in the market.

The problem with the pleated air filter market specifically or air filtration in general, traditionally is very bifurcated between residential specific product and commercial specific product. What's unique about us is we only manufacture and sell commercial grade products.

product. And we're actually able to compete on price with the residential specific product because of our distribution model. When somebody is purchasing from us online, we don't know if they are a hotel or if they are a residence. And even if we did, the differential for us and having to inventory all of that and keep extra SKUs and whatnot just doesn't make sense. But basically, nobody else in the market understands this because of their different distribution. So when you

So when you talk about competitors in the residential space, by far the biggest in the market is 3M, who has the Filtrete brand. And we've taken a decent amount of market share from them on public data, but they still really have a foothold in the retail space. Online, we've really caught up, if not overtaken them. But retail, they've had distribution in major retailers for 30 plus years.

We actually just launched in 505 Walmarts. And I was there last week meeting with them. And retail is a big part of my strategy of building the world's leading indoor air quality company. It's something that we had stayed away from for a long time, but we're going after in a big way now because 84% of transactions still happen in store, only 16% online for retail as a whole. So I would be crazy as a...

CPG not to be having a retail strategy. So we're really going after it in a big way now because we can afford to go after it in a big way now, whereas before I couldn't.

But anyways, they were the big brand that's known. And then there are a number of other smaller brands. Like I told you before, Honeywell, to my understanding, licenses their brand to a third-party manufacturer that gets sold into certain players like Home Depot, largely private labels under their HDX brand because their strategy within the store has been to go 100% HDX or at least close to that is my understanding. And that's their model. I don't believe that works for air filters for a lot of reasons, but that's outside of the scope of this.

So that's really the more traditional residential space. 3M is by far the biggest. And then you've had a lot of smaller fragmented players that are making residential grade only. They're flimsy and cheap if you go into a grocery store and you feel it. And then on the commercial side, you have a couple of really big players or a few really big players, American Air Filter being the biggest. They're the largest commercial filtration business in the world. And

We're competing with them in the business-to-business sales space. One of my biggest initiatives in the last couple of years is we built a large sales team. We have about 26 outside salespeople in the U.S. that are throughout the U.S. that are calling on hospitals, hotels, that kind of world where an American air filter would be a competitor.

So we compete with, whereas like 3M and American Air Filter would not likely think of themselves as competitors because they're in very different worlds. Whereas we're able, because of our unique business model, to play in both of those worlds. And we're in the process of really rolling out a number of higher end filtration products

This year and going into next year, we sell HEPA filters and rigid cell filters and ring panels and these type of things that are more commercial type stuff. But we're also in the business of manufacturing them. We just don't talk about it as much online because it's more of a traditional B2B focus. So that's kind of the general landscape of the air filtration market.

It's interesting to hear the differences between residential and commercial and the B2B dynamics make a ton of sense. When I think about a new unit install, I have my, I guess it's an air handler in the attic and that filter is

is going to need to be replaced every so often. Is that original filter tied to the original equipment manufacturer? Just in the sense of the initial filter that's in your system, is it usually sold by the same manufacturer of the existing equipment?

It depends on what type of equipment you're buying. For the most standard equipment that you would buy, particularly in a place like Florida or mid-market type stuff, no. I mean, a lot of times they just put a cheap polyester pad in there as a placeholder. It's generally how it's shipped to you. I actually own an HVAC service business that we are expanding. We're based in Florida now, but called Filter by HVAC Solutions. Basically, all of the units that we buy there come with just a cheap poly pad that's put into them.

Unless you're in a colder climate, if you have like a whole house system, like a train or something like that, then sometimes they do come with an OEM, they're bigger five inch filters. Sometimes they'll be accordion style filters that have a plastic frame that customers hate it seems, but they manufacture them that way. And so those are generally attached within OEM, but that's a small subset of the actual filtration market.

And when you were looking to build market share, grow sales, it sounds like you brought an interesting background in terms of doing different e-commerce related things. But was there anything unique that you did to really stand out and take the business up to the next level, build some momentum in the sales function?

One thing that I think I got right that is really carrying us to today is it was important to me from the beginning that we were going to build a brand. And a brand encompasses a lot of things, but we do not cut corners on any of our products or our product costs. And that's been important. We focused on good packaging from the beginning and quick service and standing by our product and all this stuff from the very beginning. And early on, that was particularly costly in a lot of ways.

It sounds small, but it was very much a differentiator for us. So I would say brand and logistics were like the combo that really gotten us to where we are today. Is there anything that surprised you in terms of being important to the actual sale that you wouldn't have expected just in terms of customer preferences that came as a surprise?

The thing that surprises me the most from early on, although it's not so surprising to me today, I guess, is how much delivery speed matters, even for an air filter. Because early on, I thought, early on, we only shipped from Alabama, one location. And I thought, if you get it in three to five days, that's good enough. Who really cares they get their air filter today or not?

Anytime we're able to increase our delivery speeds, we see our conversion rates go up across the board. And so that's why we focused on it so much and have leaned into the logistics. We're actually partnering with UPS. FedEx is our largest carrier that we do business with, but UPS, I think very smartly bought a company called Rody, I believe last year. And Rody is

Right there rolling out is these hubs where if you, as a shipper, ship it into that hub by 2 p.m., it'll get delivered same day. So it's their same day delivery platform. It's very smart.

We're rolling out same-day delivery with them in certain markets. If you told me that five years ago, I said, who really cares about same-day delivery for an air filter? But it makes a difference because consumers want that instant gratification, even in a commodity product like an air filter. And so that's probably the thing that surprised me the most relative to what I would have believed rationally 10 years ago.

On the big box retailer point, can you talk through the different dynamics in selling through that channel

Yeah, it's a completely different business than our direct-to-consumer business. And if you asked me five years ago, I probably would have told you I have no interest in ever going into retail because I don't see how you could possibly make money selling air filters in retail. It's just a completely different dynamic. Rather than selling that filter for $12 on average and getting it delivered to the customer, offering a lot of value with that, I'm selling it for maybe $4 or thereabouts.

If you have a product, you're like, I can either book $12 of revenue or $4 of revenue. What are you going to choose when you've already made the investments to allow you to do the $12? But the reality is that a lot of consumers still choose to shop in store. And the way I pitch it to retailers or talk with them about it is we're really targeting two completely different people. If

If I am selling you a filter online because of the shipping economics, I'm going to incentivize you to buy a four pack or more because that's really where you get the cost per filter down, the logistics cost per filter down to where it makes sense for you as a consumer to buying it. With retailers, when we're working with them, I tell them that they should be targeting their one pack or their single filter price to be equivalent to what we're selling a four pack for delivered per piece online.

If a consumer wants to go to the store and do the work of their own delivery or whatnot, they should be rewarded for that. And also that's where the retailer has a competitive advantage over us because I cannot profitably ship to you a one filter and because the shipping economics be compatible with Walmart or whoever's selling it. So I view retail as another type of channel and it's getting it reaching a different type of consumer.

And they're really not competitive because it's just different use cases in reality. So that's generally the talk that I have with retail.

I'll tell you, I started conversations with retailers 18 months ago, and we got into Walmart physically in the stores two and a half months ago. And now we have a team that's going after some other ones that we're bringing along next year. It's a much longer process. I could not imagine starting a business with retail being my first and only channel. I think it's one of those that you have to really have the infrastructure and the brand and the staying power to be able to successfully work in that world.

I look at the capital payback periods and stuff for that period.

space and it's much longer than our direct-to-consumer space. You have payment terms that are quite onerous. There's a lot of upfront cost. You have to make sure that the shelves are managed appropriately. Oftentimes that comes at the vendor's expense. You got to do all the marketing and all of this kind of stuff. I think long-term for us, from both a brand perspective and ultimately as a business perspective, it will pay off and it makes sense. But the upfront cost to doing that is very high.

You're certainly pointing to a lot of the challenges that are associated with it. I understand the brand element, the marketing, there's a different customer there. Is there anything else? Is it truly just those dynamics, the size of the market and extending who you are as a brand to get into that? Because if I took your answer, I'd be like, well, no, all of these dynamics sounds like a lot of work for less dollars coming back in.

Well, for me, it's about building the world's leading indoor air quality company and building the brand that is consistent with that. In order to do that, I have to have a holistic strategy. If I was just looking to maximize my lifestyle and my profit today, it's not something that I would do. But if I publicly am out there telling everyone I'm going to build the world's leading indoor air quality company, then my actions have to back that. And I cannot ignore the whole retail segment.

if that is my goal in mind. So that was really the turning point when I really decided I wanted to take this business to the next level and commit really the rest of my life to doing that. Then that's when I really started pursuing that as well as our service business. With that goal in mind, what are the things that you would like to do in addition to what you're doing now? It sounds like service business might be another piece of it, but what else is included in that vision?

I basically have four pillars to the business that I think at least get us on our way there. And I think it will expand again over time. But as you know, our direct-to-consumer filtration business, which we spoke about, our business-to-business commercial filtration business, which is more than just pleated air filters. It's any type of commercial filtration within that. The third is retail, which we just spoke about. And the fourth pillar is a residential HVAC service business, which is a

which I intend to build the first national HVAC service brand. What that means to me is if I wanted to, could I run a Super Bowl ad that would be impactful because people would be able to buy a service from me? And there's not one other HVAC service business as it stands today that has. What's happened is private equity has effectively rolled up a number of local HVACs.

HVAC brands and they can't afford to change the brand name of that HVAC company because there's so much goodwill that's associated with that.

Whereas we already have 10 million or so end users that we have a relationship with. And we're growing that in our brand every single day. And now we're in places like Walmart, where we have 10 to 20,000 potential new to brand consumers a week that are buying our product and more probably seeing it. And I intend to take that brand and build an HVAC service business that is consistent with that. So that's probably the biggest challenge.

part of my longer-term vision. We actually are operating Filtered by HVAC Solutions in South Florida, where we cover from Miami up to Port St. Lucie. I'm in West Palm, so I'm kind of in the middle of that. We're really getting our processes in place and our systems and really understanding and learning the market in a deep way before we really go out and expand. And it's going to be a long road. I mean, we're at the beginning of that, but it's probably one of the things I'm most excited about over a long period of time.

And do you have a vision in mind in terms of whether that's organic expansion or whether that is through acquiring some of the other service providers?

To be perfectly transparent with you, I don't know if I've talked about this anywhere else, although I will more. Part of the reason why I'm building a personal brand is to put me in the situation where people that have a like-minded vision or want to partner with a company that's maybe not a traditional private equity company and really doing something, I hope they're going to choose me. And so I'm early in that stage, but ultimately, I think it's going to come through using the power of our brand and our customer acquisition, which we're very strong at, and it's one of the biggest costs of these companies. And then...

being able to partner with people that have the kind of infrastructure in place, then we can together come in and then really expand that with our expertise, our backing, and our customer acquisition, which is what we're really focused on. So that's the long-term play for why I'm starting to become public-based.

It makes a lot of sense. And it actually connects the dots with some of the big box stuff as well. When you mentioned brand, I think you said it pretty straightforwardly. But I think all of these things are very much connected. And people talk about flywheels or these frameworks, but sometimes they really do exist inside of business. And I think this is a good example of that happening. Well, it takes time to

I just think it's so important. This focus is so important. And all the mistakes that I've made up to this point are when I've lost focus. And I opened up a freight business that I ended up having to shut down. And I've done lots of stupid things in retrospect, but I've learned a lot along the way. But every time that I would give up on those and double down, triple down, quadruple down on my focus when I've been successful. But that's why...

For me, I had to reframe it to building the world's leading indoor air quality company. And then I'm lucky I'm in the position now where I can have people that help me on each of these pillars. And so I have a more robust team. Our guiding light is the indoor air quality company. And then really focusing on these four pillars that we already have bases to build on. And so everything we do is going to be consistent with one of those things.

Can you talk about just the freight business startup and shutdown, not to pour salt in a wound, but I think it's insightful when somebody takes conviction in something and then ultimately decides to pivot out of it. There's, I think, more to be said about that than anything else. So original insight and then what ultimately played out.

Yeah, that's a great question. And I've talked about it a little bit. Long story short, COVID was a huge tailwind for us. And I really used it as an opportunity to expand our business in a major way. And we had so many problems with freight during that period. And I basically ended up buying 50 tractor trailers that I managed to get my hands on and decided I was going to manage all of our own internal freight as

as well as take freight for other people to get economies of scale in my freight world. The reality is, is that freight is an awful business. And there are a lot of reasons why. But the primary is that you have all these owner operators that are basically driving for a paycheck and you have to compete with them. And managing drivers is incredibly difficult.

difficult and all types of problems. And there's huge liability and big insurance problems around, right? I could go on and on and on. And it also just is a distraction because you have 50 people you have to manage and we did not have the right processes and people in place for that.

And it's like a hubristic move like I've done many other times before. It's like, oh, how hard can it be? And you learn just how hard it can be. I ran it for four years and actually shut it down at the end of last year, finally, fully shut it down at the end of last year. Tried for a year, year and a half, but I was not the only person shutting down a freight business last year.

So the price of the equipment really tanked. And so it took me a while to really unload it. And I was running. And when you have physical assets, you have to run them and maintain them because otherwise they rot. And so you have no choice but to continue to do that. And I quickly realized why the freight business was so hard and ultimately unwound it.

It's interesting and I can understand why having stepped into a manufacturing business that you thought the freight business would be something reasonable. But yes, I think that there's a lot of people who have had challenges in the freight world and the broader logistics world.

When you think about the key things to get right inside the business, you can call them the key risks, or you would likely view them as the key opportunities. What really stands out? I think you mentioned some of the initiatives that you have going on. But is there something that's core in your head in terms of near term, let's say the next 12 to 24 months that are most important to execute on? The thing that we have to work on constantly, which is just advice I would give to anybody. And when

When we're at our best, we're doing it is really thinking about the systems that you're building and whether or not they are getting you that repetitive desired outcome consistently or not. And if not, then you as the business owner or we as an organization need to go in and really hone in those systems and tweak them. Because I just view any of these businesses that we go in, you have to have...

a repeatable process that is going to get you an outcome consistently, and then you can keep tweaking it and making it better. But that is ultimately what a business is.

Part of the blessing and the curse for me, at least where I am in this point of this journey, is I've largely built all the systems that got us to where we are today. And now I have a management team that I'm really excited about that I've worked really hard with building over the last couple of years. And what I'm talking about with them is really thinking about the business in that way or the part of the business that they own, like, okay, you know, what is our process? What is our system? How do we make it better? That's really what

I'm encouraging my team to focus on and think about because that's what a business is at the end of the day. And I think something a lot of times people lose sight of. It's been an excellent conversation. We try to close these discussions out with key lessons that stand out

For you, if you were to just pass on a lesson that really stands out from your experience, getting into this business, building this business, for other people that might be in your position prior to making the leap, what stands out or is there a key lesson that you would point to? The thing that I always come back to, and it's because it's so important, is we all have a tendency to overestimate what we can do in a year and underestimate what we can do in a decade.

And what that means to me is I go in excited about something and I work on it for a couple of months or a few months and I'm not getting the desired outcome that I want and I get frustrated as we all do.

Sometimes that's a hard cycle to go through. But the reality is, is that these things take time. And so you need to be patient, but you also need to be consistent. And so like what I think about is on a macro, I got to be patient. I have this big vision of building the world's leading indoor air quality, for instance, that's mine, but everybody needs to find for them, whatever that guiding light is, it can be anything. If you can have

consistency on that and know that it's going to take you a long time to get there. But then short term, you have to have a massive bias to action because you have to constantly be pushing and pushing and pushing, knowing that you have to hold both of those things, which is so hard for people. You have to be patient, but you have to be constantly taking action. And the sooner you can accept that, the better off you're going to be because

If you really accept that and you're consistent with that long-term vision, I promise you, you wake up in a decade, you're going to be shocked how far you go. It's happened to me time again. I used the retail example earlier where I'm 18 months in and we're just starting to get in retail. And I see a big future in that. I think five years from now, it's going to be massive.

I really believe that. But I came with a very far along starting point. I already had a brand, already had a lot of infrastructure. And even for me, it takes time to build something within that. And I see that time and again, anytime I start something, it always takes longer than I want. And I just think that you got to have that patience and that long-term vision, but still don't use that as an excuse. You got to be constantly pushing. That would be my advice.

I like it quite a bit, particularly because of that time horizon, which I think you often hear you overestimate what you can do in a day versus underestimate a year. But I really like the year versus 10 years because it really puts it into focus. And it is that balance against that bias towards action and urgency that needs to be involved. But I like that. It's a new, fresh way to look at things. David, this has been a pleasure. I probably could talk to you for another eight hours on the supply chain dynamics here, but I appreciate you sharing the knowledge.

Well, thank you. It's great speaking with you. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out joincolossus.com. That's J-O-I-N-C-O-L-O-S-S-U-S dot com.

We hope you enjoyed the episode. Next, stay tuned for our conversation with Katie Ellenberg, Head of Investment Operations and Portfolio Administration at Geneva Capital Management. Katie gets into detail about her experience with today's sponsor, Ridgeline, and how she benefits the most from their offering. To learn more about Ridgeline, make sure to click the link in the show notes. Katie, begin by just describing Ridgeline.

what it is that you are focused on at Geneva to make things work as well as they possibly can on the investment side. I am the head of investment operations and portfolio administration here at Geneva Capital. And my focus is on providing the best support for the firm, for the investment team. Can you just describe what Geneva does? We are an independent investment advisor currently about...

over $6 billion in assets under management. We specialize in U.S. small and mid-cap growth stocks. So you've got some investors at the high end, they want to buy and sell stuff. And you've got all sorts of investors whose money you've collected in different ways, I'm sure. Everything in between, I'm interested in. What are the eras of how you solve this challenge of building the infrastructure for the investors? We are using our previous provider for over 30 years. They've done very well for us. We had the entire suite of products.

From the portfolio accounting to trade order management, reporting, the reconciliation features. With being on our current system for 30 years, I didn't think that we would ever be able to switch to anything else. So it wasn't even in my mind. Andy, our head trader, suggested that I meet with Ridgeline. He got a call from Nick Shea, who

who works with Ridgeline and neither Andy or I heard of Ridgeline. And I really did it more as a favor to Andy, not because I was really interested in meeting them. We just moved into our office. We didn't have any furniture because we just moved locations. And so I agreed to meet with them in the downstairs cafeteria. And I thought, okay, this will be perfect for a short meeting. Honestly, Patrick, I didn't even dress up. I was in jeans. I had my hair thrown up. I completely was doing this

as a favor. I go downstairs in the cafeteria and I think I'm meeting with Nick and in walks two other people with him, Jack and Allie. And I'm like, oh,

Now there's three of them. What am I getting myself into? Really, my intention was to make it quick. And they started off right away by introducing their company, but who they were hiring. And that caught my attention. They were pretty much putting in place a dream team of technical experts to develop this whole software system, bringing in people from Charles River and Fax at Bloomberg. And I thought, how brilliant is that to bring in the best of the best?

So then they started talking about this single source of data. And I was like, what in the world? I couldn't even conceptualize that because I'm so used to all of these different systems and these different modules that sit on top of each other. And so I wanted to hear more about that. As I was meeting with a lot of the other vendors, they always gave me this very high level sales pitch. Oh, transition to our company, it's going to be so easy, etc.,

Well, I knew 30 years of data was not going to be an easy transition. And so I like to give them challenging questions right away, which oftentimes in most cases, the other vendors couldn't even answer those details.

So I thought, okay, I'm going to try the same approach with Ridgeline. And I asked them a question about our security master file. And it was Allie right away who answered my question with such expertise. And she knew right away that I was talking about these dot old securities and told me how they would solve for that. So for the first time, when I met Ridgeline, it was the first company that I walked back to my office and I made a note and I said, now this is a company to watch for.

So we did go ahead and we renewed our contract for a couple of years with our vendor. When they had merged in with a larger company, we had noticed a decrease in our service. I knew that we wanted better service.

At the same time, Nick was keeping in touch with me and telling me updates with Ridgeline. So they invited me to Basecamp. And I'll tell you that that is where I really made up my mind with which direction I wanted to go. And it was then after I left that conference where I felt that comfort and knowing that, okay, I think that these guys...

really could solve for something for the future. They were solving for all of the critical tasks that I needed, completely intrigued and impressed by everything that they had to offer. My three favorite aspects, obviously it is that single source data. I would have to mention the AI capabilities yet to come.

client portal. That's something that we haven't had before. That's going to just further make things efficient for our quarter-end processing. But on the other side of it, it's the fact that we've built these relationships with the Ridgeline team. I mean, they're experts. We're no longer just a number. When we call service, they know who we are. They completely have our backs.

I knew that they were not going to let us fail in this transition. We're able to now wish further than what we've ever been able to do before. Now we can really start thinking out of the box with where can we take this? Ridgeline is the entire package. So when I was looking at other companies, they could only solve for part of what we had and part of what we needed.

Ridgeline is the entire package. And it's more than that, in that, again, it's built for the entire firm and not just operational. The Ridgeline team has become family to us.