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Case Study: Lining Up Investors for a Turnaround

Dogswell's ambitious plans had flopped. Would its new investors give the company another chance?

Robyn Twomey

DOGFIGHT For years, pet-treat maven Marco Giannini (shown with Dogswell's office pooch, Sophie) itched to take on the big brands.

For Marco Giannini, it was a no-brainer, the next logical move. His five-year-old company, Dogswell, a marketer of natural dog treats, had seen annual sales of items such as Happy Hips and Mellow Mut swell to $17 million. It was time to take Dogswell into the much bigger market for natural pet food.

For years, Giannini had been itching to compete with big players such as Purina and Iams. But by late 2008, just months after launching the expansion, Dogswell seemed pinned under the weight of its ambitions. Anticipated orders weren't materializing. And thanks to an unexpectedly pricey coupon campaign, the dog-food initiative was on its way to costing the company $1 million -- four times what Giannini had estimated. Dogswell was in the midst of its first unprofitable quarter ever -- and it was on its way to another. "I felt like I was losing control of the company," Giannini says. "I felt like I was losing control of everything."

Complicating the situation even more, Dogswell was scheduled to have its first board meeting with its brand-new private equity investors in March. The investors knew that the dog-food rollout had been troubled. Soon, they were going to want to know how Giannini intended to fix things. He had three months to come up with a plan.

Giannini, 34, was no stranger to the high-stress, high-stakes gamble. His previous business, a natural-beverage company called Clear Day, had gone bust in 2003 -- the victim of overspending on an unproven concept -- forcing the entrepreneur to give up his apartment and seek temporary refuge on his father's couch. That was his headquarters when he decided to launch Dogswell later that year. The idea was to create healthy dog treats enhanced with supplements to help fight conditions such as arthritis and hip dysplasia -- something Giannini's childhood dog, Emily, had suffered from.

Giannini found a manufacturer to make the treats and then set about building his brand on the cheap. He personally drove to see some 200 pet-store owners in California, imploring them to give Dogswell's debut product, Happy Hips, a chance. Within a year, revenue hit $500,000 -- all by word of mouth. In 2008, Dogswell debuted on the Inc. 500 at No. 101, with a three-year growth rate of more than 1,800 percent. The company had 21 employees, 60 varieties of treats, and revenue of $17 million.

But Giannini was feeling claustrophobic in his dog-treats niche. "I wanted to become a household name, and I figured, food was the way to get us there," he says. Many of Dogswell's customers had the same idea: For years, they had sent the company's Los Angeles offices e-mails asking when Dogswell was going to introduce a line of dog food.

In the spring of 2008, Giannini looked at his balance sheet and decided he had enough cash on hand to take the plunge. He tapped a couple of food scientists and began working on recipes for kibble, and after settling on one that seemed right, he contracted with a food manufacturer. He sent the kibble to a testing facility to stage a series of canine "focus groups."

The result: Dogs preferred Dogswell kibble 15 to 1 over the leading natural-food brand. "That's what made us press the Go button," Giannini says. Meanwhile, his sales team hit the dog parks and retail stores to quiz people about packaging.

Product in hand, Giannini had to figure out how to introduce it. Obviously, he couldn't personally drive his product to customers, as he had in 2003. Dogswell was a national brand now, with successful accounts at retailers such as Whole Foods and Target. He would need national distribution and a full-blown marketing plan from the outset.

Dogswell invested in an East Coast warehouse and hired 15 new staff members, most of them in sales. Finally, in September Dogswell shipped its first bags of Happy Hips kibble to about 1,000 stores nationwide. To entice customers, the company offered coupons for a free $10.99 bag of kibble with every purchase of a 15-ounce bag of treats, which retails for $16 to $20.

It didn't take long for the rollout strategy to begin straining at the seams. Members of the beefed-up sales force complained that their take-home pay wasn't what they had been promised. Credit memos from stores looking for their rebates from those free $10.99 bags of food were starting to pile up.

Unfortunately, Giannini wasn't around much to deal with these problems. He and Berenice Officer, Dogswell's chief financial officer, were busy making the rounds of private equity firms, in a drive to raise capital to finance the company's brand-building efforts. At least things had been going well in that arena -- especially with TSG Consumer Partners in San Francisco. Most private equity investors had grown cautious, but TSG was continuing to invest and liked Dogswell's track record of rapid growth. By late November, TSG appeared close to signing a deal.

The fact that Dogswell's numbers were slipping wasn't immediately apparent to either party. "They asked for updates, but it was hard to detect what was different," says Officer. Indeed, Dogswell closed a deal with TSG on December 31.

But when Giannini and Officer sat down a few days later with the fourth-quarter results, the damage was clear. They had less than three months to stop the food line from siphoning off the profits from the next quarter. And they had to figure out what they were going to tell their new investors at TSG.

Read more:

Investors Pick the Best Inc. 500 Companies

A Second Chance for a Failed Brand

Nitasha Tiku

Reporter Nitasha Tiku covers technology, finance, green business, and social entrepreneurship for Inc. magazine and contributes to the staff’s daily links blog. Her work has appeared in New York magazine, The Villager, Chelsea Now, and on nymag.com. She lives in Brooklyn, New York.

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