Halloween Special Edition: Zombie-Flurry🧟

“From McDonald’s McFlurry to the recent IPO of Klaviyo, how the two seemingly unrelated stories might reveal unique insight for start-up founders and VCs ” 

Hymenoepimecis argyraphaga! No, our editor didn’t fall asleep on the keyboard.

Hymenoepimecis argyraphaga, also known as Costa Rican wasp, lay their eggs in the abdomens of orb spiders. A few weeks later, the wasp larva injects a chemical that controls the mind of the spider, making it build a strange, new kind of web which isn’t built for spiders. Rather, it’s meant to support the cocoon for the wasp larva.

Peter Theil once said, “If you understand biology, you understand business.” Zombie-spiders🕷️, being mind-controlled to make web against their free will, is a great business insight.

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But this is too gruesome, even for our Halloween special. Let’s turn to something more cheerful.

What’s better in life than McDonald’s delicious french fries?

McFlurry🍦.

However, for a while now, there has been a conspiracy speculating on the internet that the ice cream machines that make the delicious, velvety Mcflurry seem to be quite often, well, broken.

And people are serious about it. So much so that the Wall Street Journal started to investigate the matter, as it turns out that the machines are not really broken; they are going through cleaning cycles, and the employees tell customers that they are broken out of convenience.

So, why do McDonald’s machines “break down” so often, and why is the 204.74 billion dollar company not fixing it?

McDonald’s uses a specific kind of ice cream maker — C6O2, made by a company called the Taylor Company. Taylor signed a partnership agreement with McDonald’s that all McDonald’s has to use Taylor’s C6O2 machine in all franchises since the inception of McFlurry.

Once a day, C6O2 needs to heat up to 100 degrees Celsius over a four-hour process to ensure hygiene and food safety. When the cleaning process fails, the machine displays a cryptic line of code, where no one knows exactly why the process failed. The machine gets locked down, and the heating process starts again. Since no one knows why the process failed in the first place, the next cycle is unlikely to be successful either.

What happens then?

No ice cream for craving customers, that’s for one. The franchise owner will have no other choice but to call in the technician sent exclusively by the Taylor company; the repair monopoly was agreed upon in the partnership agreement, and the Taylor company keeps the technical manual as a trade secret.

Here comes the conspiracy part.

The theory is that the Taylor company intentionally made the machine prone to failure, and it was hard for users to repair or understand why it failed. A leaked internal pitch deck shows that 25% of Taylor Company’s revenue recurs from repair services.

Conspiracy or not, investors buy it. The Taylor company was acquired and valued at over one billion dollars — an unicorn, no less. A few years later, a startup by the name of Kytch launched a small device that can be attached to the ice cream machine, giving shop owners more clarity into the cleaning cycle and allowing franchise owners to do basic repairs and get it running again. Surprisingly enough, McDonald’s issued a warning to every franchise, in the name of food safety, to ban the use of Kytch.

“…Lay their eggs in the abdomen, and control their mind…turning into a zombie-spider…” 🧟🏻

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Apologies for the overly dramatic start to this blog, but Taylor company is a great example of a company leveraging on a big platform for growth and distribution (Read more). And some, like in the case of McDonald’s, successfully altered the mind of the larger company to irrationally protect them.

This kind of David and Goliath story repeats. And we have identified a great case where small startup companies can successfully make this happen.

In our last blog, we talked about market size, and we said that VC investors love large markets. However, there are many businesses whose market depends on the customer of another company. Just like Taylor, the company’s success depends on the quick expansion of McDonald’s.

Don’t be too quick to dismiss these kinds of businesses that depend on others for distribution. They can become extremely successful, as exemplified by the case of Klaviyo.

Founded in 2012 by Andrew Bialecki and Ed Hallen, Klaviyo helps e-commerce companies acquire, retain, and grow their customers through email and SMS marketing. Serving over 100k businesses in over 80 countries, Klaviyo went public in September 2023.

Klaviyo is a great example of leveraging on a much bigger platform, Shopify, for growth. Kalviyo didn’t start out as a marketing automation tool. It started out as a data storage solution, where businesses can pull all their data into one place, store the data, and make it fast and accessible for future use. In their early days, Bialecki and Hallen tried to sell their solution in different industries. However, since businesses always do a cost-benefit analysis when making software purchase decisions, specializing in a sector where the ROI of the solution can be easily demonstrated is the way to go. E-commerce has an easy-to-prove ROI using conversion rate as a metric. Hence, the reason why Klaviyo decided to specialize in the e-commerce industry.

How did Klaviyo leverage Shopify?

Even in its early days, Klaviyo’s focus on Shopify was a strategically calculated move, recognizing the platform’s fast-paced growth and the substantial pool of entrepreneurs it hosts. Leveraging on the pool of entrepreneurs on Shopify’s platform, Klaviyo often invites users to tag them along with the development of the software to get a continuous constructive feedback loop.

Furthermore, as it was also in the early days of the Shopify APP store, Klaviyo gave Shopify early user feedback in exchange for Shopify introducing their about-to-become large account clients to Klaviyo to get insight into customer feedback. Moreover, Shopify made Klaviyo the default marketing tool on their app store and marketed it to 4.4 million businesses on their platform. There is, of course, an element of luck. Klaviyo was able to ride the wave of Shopify’s growth as Shopify started to gain massive traction post-2015, which is when Klaviyo was ready to scale.

77.5% of Klaviyo’s revenue came from Shopify customers as of December 2022.

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When writing about these two stories, we can’t help but ask ourselves, why can’t McDonald’s switch to a more efficient machine or Shopify create their own Klaviyo?

Shopify makes money by having merchants on its platform and offering core services such as payment and shipping solutions. In 2022, these Merchant solutions made up 73% of Shopify’s revenue. This is why building an ecosystem of apps on their platform is key for Shopify. Shopify’s app ecosystem is one of its key differentiators from other e-commerce platforms. By offering a wide range of apps, Shopify can make its platform more attractive to new merchants, especially those who need specialized features or functionalities. Therefore, Klaviyo’s success on Shopify is used as the best marketing tool to entice even more developers into their ecosystem, making the platform even more differentiated from others. Looping back to our biology metaphor, this is a case of mutualism — a type of symbiosis where both organisms benefit from the relationship. Shopify provides customers to Klaviyo, and Klaviyo provides the best ‘marketing’ to Shopify’s growing ecosystem.

As for McDonald’s, we still don’t understand their decision of not changing suppliers for their McFlurry. For the time being, we still have to believe that McDonald’s has been zombified🧟🏻… 

If you think you have the answer to McDonald’s strange action, please leave them in the comment section or write to us. We’d love to hear what you think!

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We invest in Europe and China. Write to us if you’re working on exciting projects at contact@youngvcdigest.com