Episode 385: Startup Series – Jeff Shaw, Underground Cellar – Disrupting E-Commerce Wine Sales Through Gamification – Meb Faber Research



Episode 385: Startup Series – Jeff Shaw, Underground Cellar – Disrupting E-Commerce Wine Sales Through Gamification


 

Guest: Jeffrey Shaw is a successful entrepreneur and digital commerce expert with over 15 years experience leading direct-to-consumer companies. As the Founder & CEO of Underground Cellar, Shaw brings his deep experience modernizing otherwise archaic industries through technology-first innovation.

Date Recorded: 1/5/2022     |     Run-Time: 53:11


Summary: In today’s episode, we’re talking to one of the most passionate, gritty, and determined entrepreneurs around. Jeff begins by explaining where he got the idea to gamify the wine buying process. He shares how the company works – the process of buying the wine, the upgrade algorithm, and the logistics of storing the wine.

Then we hear how Mark Cuban turned him down multiple times, and leveraged that to get an investment from Shark Tank’s Barbara Corcoran. We talk about the experience of going through Y Combinator, raising money from Jason Calacanis, and what lies ahead for this fast growing startup.

As a special offer for listeners of the show, visit Undergroundcellar.com and use the code MEB to get $100 off your first order of $150 or more.


Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Colby at colby@cambriainvestments.com

Links from the Episode:

  • 0:40 – Sponsor: The Idea Farm
  • 1:10 – Intro
  • 2:10 – Welcome to our guest, Jeff Shaw
  • 3:46 – An overview of Underground Cellar
  • 11:53 – Launching out of Y Combinator
  • 18:42 – The experience of convincing wineries to get on board in the early days
  • 24:15 – Getting an investment from a Shark Tank host and Jason Calacanis
  • 27:07 – Lessons learned from growing pains along their journey
  • 31:27 – The evolution of the wine selection algorithm
  • 41:52 – What it was like navigating COVID
  • 43:45 – Jeff’s goals for 2022 and beyond
  • 47:00 – Whether or not Jeff plans to expand beyond wine
  • 49:09 – Learn more about Jeff; jeff@undergroundcellar.com; undergroundcellar.com

 

Transcript of Episode 385:

Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

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Meb: Welcome, everybody. Today, we’re talking with one of my favorite startups. Our guest is the founder of Underground Cellar, a new way to discover, buy, and store limited edition wines. In today’s episode, we’re talking to one of the most passionate, gritty, and determined entrepreneurs around. Our guest begins by explaining where he got the idea to gamify the wine-buying process. He shares how the company works, the process of buying the wine, the upgrade algorithm, and the logistics of storing the wine. Then we hear how Mark Cuban turned him down multiple times and then he leveraged that to get an investment from “Shark Tank’s” Barbara Corcoran. We talk about the experience of going through Y Combinator, raising money from podcast alum, Jason Calacanis, and what lies ahead for this fast-growing startup. As a special offer for listeners of the show, visit undergroundcellar.com and use the code MEB to get $100 off your first order of $150 or more. Again, that’s MEB for $100 off your first order of $150 or more. Please enjoy this episode with Underground Cellar’s Jeff Shaw.

Meb: Jeff, welcome the show.

Jeff: Hey, Meb. Thanks for having me. Great to be here.

Meb: Where do we find you today?

Jeff: I am cooped up here at our San Francisco headquarters in downtown San Francisco. Much of the other team today is up at our Napa operational headquarters in sunny and beautiful Napa Valley.

Meb: I’m in L.A., Manhattan Beach, the land of milk and honey. Where are you located in San Fran?

Jeff: Downtown. So like financial district.

Meb: You and I were rapping about this, I think the last time, and maybe only time we hung out in person was at former podcast alum Jason Calacanis’ angel events. And I have a distinct memory. You can correct me if this is wrong or not, but playing poker with you. And I remember you winning. Is that an accurate representation? I remember you just kind of having that luck of the draw and just cranking, or did you give it all back?

Jeff: That’s right, Meb. Yeah. The first time we met was at angel conference or something, one of the events he puts on. And yeah, we had a lot of late-night poker going on. I remember I was the only founder that was sitting with investors at the big 5-10 game.

Meb: The big table. They had an intro table, a low six table, and the other table. I won $800 the first night, went to bed fat and happy, came back and promptly lost it all the second night. So I ended up giving back all my profits, sadly enough, but we got to rap a little bit at the table. As you know, I’m an early investor in your company, and it’s been one of the more unique ideas I’ve heard over the years to a category that has had plenty of saturation on a lot of the same. So why don’t you tell us what Underground Cellar is and then we’ll walk through the origin story and hear all about this topic of vino.

Jeff: Cool. Nice. I love talking about wine and business. So I’m the founder and CEO of Underground Cellar and we are doing something really cool in the world of wine. What I realized, when people buy things, in particular wine, they don’t actually want the lowest price or the biggest discount. What they actually want, Meb, is they want the greatest value. And right now we live in a world where companies are providing that value on this chase to the bottom with who can have the lowest price for the biggest discount. And discounts are horrible for brands. When a luxury vendor floods something to market at a deep discount, say $100 bottle of Caymus, if that wine shows up on the internet or in-store shelves and it says, “$100 bottle of Caymus, today only $40,” it can take years for Caymus to regain their price points. Everyone who paid full price previously is irritated, and not to mention what it does to the distributor relationships and customers wonder what’s wrong with it. And so when I was coming up with the idea for Underground Cellar, the whole premise was just learning that you can provide value to someone in a way without using discounts, without harming the brands that are trying to sell their product.

Meb: Where’d you come up with that insight? Were you, like, sitting on an airplane and like some dude next to you was like, “Oh, I just bought this ticket for 50 bucks,” and you were like, “What the F? I paid $500 for this ticket?” Like, “How’d you get that?” Or was it like a Harvard case study? Like, how’d you come up with this insight and say, “You know what, I think this might apply to wine?”

Jeff: Believe it or not, I came up with the idea for Underground Cellar when I was 8 years old. It didn’t take me that long to build it, of course, but let me tell you this story. And it’s one of my earliest childhood memories that’s really stuck with me. I was really into collecting basketball cards. Meb, did you ever collect basketball, or baseball, or like Pokémon cards, or you kids, or anyone?

Meb: I do. You know, I was a big card collector. I was a child of the ’80s, so I’m 44, and I had a brother who’s 7 years older. And so he was the full-on bubble market in baseball cards. We also did comics. I mean, it was everything at that point. There’s a happy ending to this story, which is relevant that I’ll tell you at the end related to basketball, but I don’t want to interrupt you. I’ll let you go first.

Jeff: I had this really memorable experience when I was 8 years old. I got a Charles Barkley holographic rookie card. And as an 8-year-old little Jeffrey, I was ecstatic. I went over to…They had this book called “Beckett” and you could, like, look up the value of the cards, and the card was worth $100. And as a little 8-year-old, I was like planning my retirement. I thought I had made it big, and it was that experience that really stuck with me, the experience of getting upgraded, the surprise and delight. It was a much more memorable and exciting experience than had I gotten a 20% discount when we bought the pack of cards. And so it was that experience, Meb, that stayed with me and that really ultimately led to Underground Cellar. To answer your question like what is Underground Cellar? So we have created the most exciting way to discover and buy wine. Everywhere else on the Internet, you want to buy a bottle of wine, you search for the bottle, you buy it. You’re probably going to get a discount and the bottle shows up at your door. We don’t do any of that.

Instead of selling specific bottles of wine, we have some of the leading wine experts on our team and we curate wines together into collections and every collection has a theme. So, for example, today’s theme, it’s Napa Valley Cabernet and for $25 a bottle, you’re getting a $20 bottle of Mondavi Emblem Cabernet. If you went to the winery, it’s the same price at the winery, $20, but instead of incentivizing demand by giving everyone a discount on the bottle, instead what we do is we upgrade your purchases. So when you buy into today’s collection, you have the ability, your $20, to get a $5,800 bottle of Screaming Eagle, one of the rarest bottles of wine in the world. There’s like a seven-year waiting list to get a bottle. And if you can’t find one like in a secondary market, they literally go for like $5,000 or $6,000 a bottle. And so when you buy into this deal, you incentivize because you get a better bottle like that Screaming Eagle or any of the other bottles that are in the collection.

And so let’s say you buy six bottles from today’s deal for $20 apiece, half or more of the bottles will be swapped out from that $20 Mondovi and instead, 1 out of 5 bottles will be a $40 bottle, 1 out of 10 bottles a $100 bottle, and then a handful of people are going to get that really rare Screaming Eagle. And so the benefit for a consumer is you can discover wine backed by knowing that our wine experts have curated these together. We taste through over 3000 different wines a year to bring the best wines to our customers. And so you buy in knowing you’re going to get great wine that’s been curated by experts, and you get this variety of bottles of wine that you might not otherwise have known about or been able to access because they might be too expensive or, in the case of Screaming Eagle, you just can’t get the bottles even if you could afford it.

So Underground Cellar, our mission, our goal is to democratize access to the best wines in the world, whether you’re a wine aficionado, whether you’re wealthy, whether you live near Napa or not, everyone can discover these wines and get access to the best wines. And then the other really unique thing that sets us apart, Meb, is when you buy bottles on Underground Cellar, we don’t ship them to you. And you might be thinking, “Well, why would I buy bottles of wine if I can’t have them shipped?” And the answer is because every bottle you buy on Underground Cellar goes to your very own personal cloud cellar where we let every customer store up to 500 bottles of wine for free in our Napa Valley wine cellar. On our website, you can see every bottle that you bought at any point, pick and choose the bottles from your own collection, your own wine locker, ship them on demand, and anytime you ship a case, we’ll ship them for free.

So what’s great about it is our best deals sell out really quickly. And I don’t know about you, Meb, but I live here in San Francisco. I don’t have a wine cellar in my home. I have a 12-bottle little wine fridge. And so I just wouldn’t have the room or ability to really build a wine collection. And our goal at Underground Cellar is to turn every wine buyer into a wine collector. And by allowing people to store their wine in our Napa Valley cellar, we enable that. And so, Meb, question for you. If we were to look at your home, you have a wine fridge or wine cellar, how much room for wine would you have in your home?

Meb: Well, let me give you some context first. I do have a wine fridge. It probably only holds 12 bottles. For disclosure, I have at least one, maybe two cases in my cloud cellar at Underground Cellar already. So I’m growing my collection there as well. By the way, listeners, the team at Underground Cellar has been very gracious to provide a $100 discount on your first order, which is probably the best discount I’ve ever heard. You got to use code MEB, M-E-B. So try it, shoot me feedback, and I’ll pass along to Jeff on the process and see if you get the Screaming Eagle. If you do, you have to email me so we can share it together because I would never buy that on my own. So we’ll see how we did.

Jeff: Whoa, whoa, hold on a moment. We approved a $100 gift card for every listener of the “Meb Faber Show?”

Meb: You did on their first order. So that’s…maybe it never got to your desk. It just went to the marketing. So, listeners, take advantage of it while it lasts. I don’t know how long it’ll last, but check it out.

Jeff: All right. Just don’t tell Jason Calacanis or our other investors. I don’t know how well they’re going to feel about that.

Meb: Well, look, it’s funny because there’s some real psychology here. And again, going back to the airline example, flying in general, as we all know, has gone from a romantic, amazing experience to kind of the world’s worst experience, but the joy of getting upgraded within the past six months, I had someone come grab me out of coach and upgrade me to first class because some status on some airline, which I haven’t had in forever. But the joy of that feeling is so major, again, compared to like had I just bought the ticket for less, wouldn’t have felt the same thing.

And this experience that you’ve hit upon is, A, it’s a lot of fun if you’re going to buy wine, B, there’s some whimsy and uncertainty, it’s like a little bit of feeling the lottery except that you are guaranteed to win. And so it’s a fun experience. What has been the sort of feedback? So you launched this idea with, I assume, an uncertain outcome on how you’re building it. What was the response? Was it kind of an immediate people like loved it? Was it something that you had to, like, play around with how the offering worked? Give us the kind of origin story.

Jeff: We launched Underground Cellar at a Y Combinator in 2015. It definitely was not an easy road. I think any business that is trying to change the world, or change something, or do something in a novel way, there are a lot of earnings and obstacles to overcome, and we definitely had our fair share. I told you the story of the idea came when I was 8 years old, but where the idea that Underground Cellar actually sort of launched from, there’s sort of an interesting story that I’ll share with you and the listeners here. I had started another company when I was in college, had a small exit. It wasn’t huge, like, quarter-million dollars, but, you know, as a fresh, you know, college grad coming out of school, I had a little bit of money and a little bit of time and I was watching, you know, some show on CNBC or something. And I don’t know if you heard this statistic or something different and what they said is that five out of six startups fail in the first year. And I just, like, had this light bulb moment and I’m like, “Well, it’s just clearly a math problem at this point. I need to start six startups and one is bound to be successful.”

And so that’s literally what I did, Meb.” I came up with six best ideas I could come up with out of my brain and I divided my day. I worked 12-hour days and I was, like, really structured about it. I did two hours per company and I told myself, “I’m going to do this for 90 days, for 3 months, and at the end of those 90 days, whichever company, whichever business idea was showing the most promise, I was going to kill off the other five and focus only on that one. And luckily, for all the wine lovers out there in America, Underground Cellar was that business idea. I remember the early days of trying to convince wineries to join the platform and, you know, keep in mind, this is before I had a website to show them. I’m some kid basically, like, college-age kid living in Arizona. I didn’t know anything on how the wine industry worked.

Meb: Were you a wine fan at that point or just more of a passion, or how’d you kind of come to wine as the choice?

Jeff: I enjoyed wine as a consumer. There was this little wine shop near my house in Arizona and my friends and I, we would go…It was a really great deal. It was like 10 bucks, you get a free tasting. They like pour a few wines and then your $10, you get like a credit at the store. So we would go, have a good old time, get a little tipsy and leave with the bottle and continue the evening. And so I just was fascinated about wine but I didn’t know about wine nearly much of an expert as I am today. I just loved it. And I knew that when I sold my previous company, I wanted to be in an industry doing something that was fun, and exciting, and that I love. You know, I had the idea from my childhood of this idea of upgrading value and Underground Cellar, the concept wasn’t initially for wine, the idea was digitizing in an e-commerce model this experience of an upgrade.

You talked about your example of getting upgraded on an airline flight. There is no one else selling anything online, wine or otherwise, in the way that we do it with the upgrade model. But the concept, people understand upgrades. You go on your airline flight and they’re like, “Oh, you know, Mr. Faber, you’ve been upgraded to first class today.” Yeah, you love it. Or, you know, you go to Ritz Carlton and you check in and like, “Oh, Meb, you’ve been upgraded to a suite today.” We’ve taken that same idea that people love and understand and digitized it for an e-commerce platform. Yes, it’s fun and exciting.

Our customers are hooked. Our LTV, the amount they spend, is just through the roof or industry-leading, but the reason we’re doing this is because it solves a really big for these wineries. Wineries have inventory, delicious bottles of wine, and they want to sell it. They just want to do it in a responsible, scalable way. They don’t want to irritate all their existing customers. They don’t want to flood it to market and disrupt their pricing structure. And so Underground Cellar, we’re partnered with hundreds of wineries where we feature them on our platform, we get them liquidity on their inventory, but we do it in a way that is a net positive. It’s a win-win for everyone. The customers love it, the wineries love it, and then when we look at like the entire industry, the industry has really rallied behind what we’re doing because we can really help these wineries move inventory and not just in a way that protects the brand, but we can actually help these wineries get so much more.

We’ve taken this approach where we don’t see ourselves as a traditional wine retailer or e-commerce website. We see ourselves as a partner to the wineries and a winery could otherwise go out and hire a marketing company to hire a social media firm to get them all over social media, hire an email marketing company, buy ads. When we partner with the winery, we are going to feature them, dedicate an email blast to our couple 100,000 subscribers on our email list. We’re going to do original editorial. We have award-winning writers from “Wine Enthusiast” and whatnot on our team in-house. And so we do original content. We blast out through our social media channels. You know, we have millions of followers across our social channels, and we throw all this in for free for the wineries.

Because when we set out to build Underground Cellar…once again, I don’t come from the wine space and the wine space is largely broken. It’s archaic. It’s largely not tech-savvy, tech-first people. These are farmers, most of them, and they’re people of the earth. So we can come in and say, “We’re going to partner with you. We’re going to get you exposure in a meaningful way. We’re going to protect your brands.” And what better marketing than getting bottles of wine to the hands of customers that are willing to pay for it? And so by coming in and reimagining how wine should be sold, how it should be merchandised, and how consumers should engage with wine, we are redefining how consumers experience wine and how wineries engage with consumers.

Meb: How hard was it, in the beginning, to convince some of these wineries to get on board? Was it more of a process that they’re like, “Show me. I’ll get interested at some point that you’re actually like doing it.” Like, did that take a year, a couple years? Were there some early adopters? Was it more the boutiques? Like, what was the experience of actually building this out in the early days?

Jeff: When I started this, I had a very small exit. So I didn’t have enough money to hire a big team or, you know, engineers, or salespeople. So I had to get really scrappy with it. This offshore team out of Pakistan, they’re like the opposite hours. And so I would work all night product managing, conceptualizing the product, I would work all day trying to get wineries and do other, you know, biz dev and partnership stuff. But I had to get really scrappy. And so like another story I’ll share is when I didn’t have money to hire a team, I put out these Craigslist ads for these commission-only procurement representatives and I got a team of 12 people boots on the ground that lived in Napa and I said, “I want you to go out and convince wineries to partner with us and to put their wine on our platform.”

And every week I would hold these calls with these 12 people. If they got wineries to sign up, they would get, like, a commission for getting the winery signed on the platform. And in a world where I don’t have money to hire people, like this is the best I could get, people that would agree to do this. And so I had this squad of like 12 people just going out through Napa literally showing up at wineries without a website to show them or anything. And so we got the door slammed on us many times, the police were called only once but…escorted off the property. So the early days were not easy but I think it really just came down to perseverance, being scrappy, and just figuring out a way just to make it happen.

A couple of those commission-only procurement reps actually got a couple of wineries signed up. We had a few hundred bottles, like, reserved for our initial launch. And I just put up “Underground Cellar coming soon. Enter your email address.” And I had a handful of people really start out just like my family and friends. But as soon as we launched, this MVP where we had a few hundred bottles of wine from a few wineries that we somehow convinced to partner with us, within the first 48 hours, all of the wine sold out and I’m like, “This could be something real.” And this was sort of, I am like approaching my 90 days on, like, my 6 business concept. And I said, “You know what? This is it. There is something here.”

And so convinced a couple of buddies to fly out to San Francisco with me. I knew that if I wanted to have a successful tech startup, I had to get out here in San Francisco. I didn’t know anybody, barely had any money left in my pocket at this point, but rented an apartment month to month, convinced a couple of friends to come out. There were like three of us, all crashed on the floor in this like one-bedroom apartment here in SoMa in San Francisco, and we just grinded. We just put in the time, put in the effort, and then really the inflexion point for us was once again watching CNBC or, you know, some other show. And Mark Cuban was on TV and he had this segment where he’s like, “I love when founders reach out to me and when they email me.” And he’s like, “I often like respond to every single one of them.”

My friends and I that I convinced to come out, we’re sitting in this like little shitty apartment floor here in San Francisco and we’re like, “Let’s just email Mark Cuban. Let’s get him to invest in our company.” And this is before we had any real investors or anything yet. This goes back to 2015, even before Y Combinator. And we just emailed them and said, “Hey, Mark. We’re Underground Cellar. We’re, like, reimagining wine. Invest in us. Like, let us tell you what we’re doing.” And he responded like really quickly within 30 minutes. He’s like, “Sorry, guys. Not really my thing. I don’t do alcohol, not a big drinker.” But, you know, once again, perseverance, and so responded and said, “Mark, hop on your PJ,” your private jet, “come out here to San Francisco, meet the team. You won’t regret it.” And lo and behold, he responded and said, “Nope, sorry, guys. Not interested. “Four more times of responding to Mark and him saying, “Guys, do not email me again.”

We said, “All right, you know what? You see Mark Cuban and Barbara Corcoran and these sharks from “Shark Tank.” And so literally forwarded the email chain to Barbara Corcoran from “Shark Tank” and said, “Barb, Mark passed on our deal. Let’s prove him wrong.” And she just thought it was the funniest thing. I don’t know. I don’t know if it was that funny or not, but whatever reason, she just thought it was so clever, two-and-a-half months of due diligence later, Barbara agreed to invest in Underground Cellar. And this was like our first win, right? More of a win than that first winery that agreed to give us a few cases of wine for the platform. It gave us this credibility to consumers, people knew her from “Shark Tank,” to wineries, and it also who showed me that people are accessible. You can email Mark Cuban and he’ll write back. You can email Barbara Corcoran and she’ll find you hilarious. And I think so many people aren’t willing to just take that leap, aren’t…you know, “Oh, they never respond. Meb Faber will never respond to me.” But like, if someone emails you, if someone emails Barbara Corcoran, chances are they’re accessible. They’re just real people.

Meb: And that’s a mistake I think so many young people make about, we call it like not sitting down at the table, referring to an old story we had where a very famous investor was sitting and no one was sitting next to him because as everyone was too scared. They didn’t want to sit next to this famous person, like, “Who am I to do this?” And yet that experience can be so formative and transform your entire business in future. So she invests, what was the story?

Jeff: So Barbara Corcoran invested personally. She also did this thing called a syndicate. And so, Meb, I’m sure you’re familiar, but if the listeners aren’t, basically what a syndicate is, is you take someone like Barbara Corcoran or like you who you have a following of people who know who you are, whether it’s just a big group of friends or people who follow you. In Barbara’s case, they watch her on “Shark Tank.” And she says, basically, “Hey, I’m investing in this company. Any of my friends who want to invest with me, you can invest as well.” So she owned it up and anyone could write a $5,000 check or more and invest in my company. She syndicated out, we raised a few $100,000 to the platform and that’s really how we got Barbara invested. And then Barbara syndicated it out, got a handful of other, you know, notable people to invest and then she was on this trend of just cold emailing people, just reaching out, like putting your best foot forward, putting yourself out there.

Coming off the success of getting Barbara, I then emailed Alexis Ohanian, founder of Reddit. And at the time he also had a venture fund and I just said, “Hey, like, Alexis, really impressed with what you do with Reddit. We would love for you to be an advisor or an investor.” He’s like, “It’s not really a good fit for me to invest personally.” He’s like, “It’s not kind of my deal. But he’s like, “I am a part-time partner at Y Combinator. I think you’d be great for that program.” And so once again, the connections that are made just from reaching out, I’m just some kid from Arizona. I don’t know anything about Silicon Valley or investments or startups, but just reach out to people.

And he said, “Let me connect you with the people at Y Combinator. He referred us to YC. And it was really exciting because I had known about Y Combinator and I had actually applied for the program five times, and five times over a course of three years, denied, denied, denied, denied. But I didn’t let it discourage me. The amount of no’s I heard before Barbara said yes, before I finally applied to Y Combinator with Alexis’s little nudge and they finally like said yes, the amount of no’s were just massive. And I think that’s sort of one of the other learnings is that, you know, once again, like if you’re sending out to change the world, by definition, people don’t see the world the same way that I do. And so their kneejerk reaction is, “No, this is stupid.”

Look at us now, right? We are one of the fastest-growing wine e-commerce companies in the world. We’ve grown more than 1000% in the past year-and-a-half. We’re doing millions of dollars a month of sales through our platform. We just raised a round of funding, $85 million valuation. We’ve raised a total like $25 million. And so just goes to show that perseverance, sticking with it, putting yourself out there, I think are really the foundational pieces that really allowed us to get to the point that we are.

Meb: It wasn’t like a straight line up either, you know? I mean, you guys were hustling. I remember the cloud seller topic was a bottleneck of you guys all of a sudden have all this wine, like your success starts to snowball and then you’re like, “Got to do something with it.” And now you guys have the huge warehouse, but I remember reading your updates over the years and at times there was very real, like, pain points for every entrepreneur, you know, that goes through.

Jeff: There was this time where we definitely had growing pains. We had grown so much and we had the pieces in place and we had this elegant technology solution where we had had this…what’s called a 3PL, a third-party logistics provider, that was storing the wine, shipping it out with an API where we send the orders over and then they would pack it and ship it out. But as we started to grow the business…because remember I mentioned that we offer every customer to store up to 500 bottles. And when we partnered with this 3PL, they said, “No worries. We have this huge warehouse, like, bring all the wine and happy to store it. This is so exciting, what you’re doing.” And so we’re like, “Great.” So we had all of our customers storing this wine. All of the sudden, we get a call from the winery and they said, “Hey, we’re bursting at the seams. We didn’t plan our capacity appropriately. We have this huge winery contract we just signed and we can’t do any more shipments for you.” And I’m like, “Like hell you’re not.”

Our entire business was relied upon this third-party company and like that we went into the scramble mode of how do we not only continue to grow the business because we needed to grow, like, it’s a startup, you’re burning money, you growing headcount, you’re growing everything. Like, we needed to continue to sell wine to make payroll. But not only that, we had all these customers who were storing bottles of wine in their cloud cellar. Technically at that point, it was like a third-party provider warehouse but like on our website, they could see the bottles, they could ship them. Overnight, we couldn’t live up to our end of the promise to our customers. And it doesn’t matter how much we could possibly even explain to the customers, “Hey, there’s this third party who can’t do it and can’t…” Like, they don’t care. They bought bottles of wine at Underground Cellar. We said they can access those bottles whenever they want and overnight they couldn’t.

And so what we ended up doing was we created this elegant solution where we went a new 3PL but they also didn’t have the capacity. So we set up all of these other storage facilities nearby and we created this just in time, like, inventory balancing software where on paper it was elegant and it worked beautiful. In practice, it was horrible. It didn’t work. If you were trying to ship 12 bottles but they were physically stored at 3 different places, by the time we pulled those bottles from those 3 places, one of the other bottles had shipped out. And so we ultimately got to the point where we said, “In order for Underground Cellar to be a billion-dollar company, we need to vertically integrate. We need to bring it all in-house.” And this is what we did. And so the solution to the growing pains is we just had to ultimately bite the bullet and bring it all in-house.

And so we…I’ve never driven a forklift in my life, but very quickly I had to learn how to store wine, and access it, and hire a staff, and do all these things that I never expected our business to do. But it’s sort of one of the elements as a business, we had to pivot, we had to be malleable, and we had to just roll with the punches. There were times throughout that where my team of people they’re like, “We’re screwed. There’s no 3PL that can support us. We don’t know how to ship wine. We don’t know how to store wine. We don’t know how to do any of this.” But we just put our heads down. Literally, I don’t even own a car. I got an Uber and we just started driving around Napa looking for little warehouses to do it. And then ultimately built out a team. Today we have a warehouse that’s over 100,000-square-feet in Napa Valley. We have a team of 15 people in the warehouse. In total, we’re a team of 60 people. And we figured it out. And, you know, came with throwing the punches.

But I will tell you, Meb, when everything was imploding during this period, we had to get creative. We were days from insolvency, like literally. We didn’t have money. Like, you know, what we were going to do?

Meb: We’ve definitely been through a lot of the lean times as well, so this certainly resonates and I’m sure with almost any entrepreneur listening to this. As a quant, I would love to hear the evolution. Listeners, if you go to the website, you’re looking at a deal. So, for example, the Screaming Eagle which may not still be there by the time this publishes, but something similar, you can see there’s a couple of choices, 30 bucks per bottle. You can either buy 3, 6, or 12 bottles. The cool part is for the 3 bottles, 2 are upgrades, so 60%, but for the 6, 5 are upgrades and for the 12, 11 are upgrades. So you obviously get better odds the more you upgrade. The more bottles you buy and the highest bottle up here, there’s a $5,800 bottle, a $1,200 bottle, $850 bottle, but it tells you how many bottles are left. So there’s an element of scarcity and a time element too. In the early days, was this like an Excel random optimizer you’re doing every time an order came through, or how did the algorithm evolve all over the years? And was there some like college kids in Indiana trying to hack this and like figure out how to scheme the system?

Jeff: I’m sure there are people trying to figure out how to scheme it all the time. So what’s unique about how it works is it’s not random. There’s all these signals that we built-in. And the goal of the upgrade algorithm is to you increase the lifetime value of the customer and the way to do that is just give the users a great experience. So we can buy into that deal, you know, the one you explained $30 for the Mondovi Emblem, you could get up to a $5,800 bottle of Screaming Eagle or the Bryant Family for $1,200, or Opus One, or these other bottles. When you buy in, there’s this algorithm and the best way is just give you great value no matter you get the Screaming Eagle or not, you’re still going to get a variety of wines and you know they’re going to be great and you’re going to get great value.

We’re a team of 60 people now and we generally don’t hire from the wine industry except our procurement team and our wine-tasting team. We hire from tech. Our COO, Jeff Hardy, he was an executive at Yahoo and Google. Our VP of revenue came from Venture Investing. Our CMO was at Open Table and StubHub. We’re hiring from these tech-first high-growth startup-type companies. And so we have a team of data scientists and business insight analysts and like as we are like upgrading bottles and building the offers, we have all these models and playbooks driven by data and we’re just super smart about it. And I think that’s one of the reasons why we are the fastest growing wine e-commerce company because we’re doing things so different. We really operate the business as an open book. So happy to share some of this with the listeners. So as a testament to…you know, I say, customers love our platform. I’ll back that up with data. In the first 30 days, a customer spends over $400 on our platform, and in the first year, on average, they spend nearly $2,000 on our platform.

Meb: I would think just by guessing that it would be somewhat binary. It’s like the people who sign up and they like it, they’re like, “This is great. I’m a wine drinker. I love this way of going about it.” And I imagine they just stay forever or it’s just people are just like, “No. I tried it once. I’m not interested.” Does it end up being that, sort of, fork in the road or is there a little bit of everything?

Jeff: There is a little bit of churn from like first purchase to second purchase. But if we get people to a second purchase, 80% of them are still buying after 6 months and 60% are still buying after a year. Our limiting, inhibiting factor has been, can we build the infrastructure like we were talking about before, the warehouse, and the team, and the knowledge, and the processes, and the playbook, and can I build a world-class team to keep up with this growth and not only keep up with what we’ve built today, but can we continue to innovate and continue be a product-first company that can be a meaningful contributor to change the way not only the wine industry is done, but we see ourselves as changing all of commerce by being value-focused and not discount-focused?

Meb: What are the broad preferences on the platform? Is it people who just want collectable reds? Are they white drinkers? They like champagne. Do you have requests for like various box wines? What’s the insight and what do people actually want and get excited about bidding on?

Jeff: What’s interesting about our model is that our audience maps almost one-to-one to the drinking age population of the United States. So whether it’s age, or income, or geography, we’re really mapping across the board. So, you know, whether you are a 40-year-old female who drinks $20 bottles of rosé, or you are the 50-year-old baby boomer who drinks $100 bottles of Napa Cabernet, we have things on the platform for everyone and our audience really is everyone. With the caveat of, we’ve never sold box wine on the platform and we never would sell a bad bottle of wine. We taste every bottle before we put it on the platform. That’s the only criteria, it has to be a great bottle of wine. So if you’re someone who loves great wine, we have something for you.

Meb: Of those, sort of, vintages, does it skew red? I would assume.

Jeff: It does. So the number one selling varietal on our platform is cabernet sauvignon, bold, dark reds. People also love red blends. So you look at red blends, also pinot noir is a very highly sought-after wine. And then when we look at the whites, chardonnay is our bestselling white varietal. And then, of course, people love sparkling wine. So there’s not necessarily too much seasonality in revenue in our business, but there’s seasonality in merchandising. So leading up to the end of the year, sparkling wines have been selling really great. I think it’s very like festive time, people have sparkling. As the weather gets a bit cooler, then people like those big, bold, dark reds. And then when the weather is sort of heating up a bit, they love the cool rosés and whites. And so we’ve gotten really smart, built out a merchandising team based on data, so we understand what wines people want on an individual basis, also a macro basis.

And, you know, one of the experiences, when you talk about like what wines we feature, what wines people like, one of the experiences that used to cause me so much anxiety, if you’re sitting at that nice restaurant and the sommelier comes over and they’re like, “Mr. Faber, what kind of wine do you like?” And for so many people, it’s like this anxiety moment because it’s like there’s a way to talk about wine, and I don’t want to sound dumb. And I don’t know how to answer that. Do I just say red or do I say…? People don’t know. And I find, like, even on websites like wine.com or other things, it’s like you have to pick a category. Like, do you want red wine? Do you like cabernet? And for most people, they don’t know. It’s a super uncomfortable question and will be fine. Even people who think they know don’t actually know what they like.

And so using our technology background and our data science, and AI, and ML, we are building our offers and presenting offers to users in a way where we are analyzing like these 60 million data points and we are able to get really great at putting wines in front of you and wines in your hand that you’re going to love without ever asking you, what wines do you like? One of our goals is to never ask our customers what wine they like.

Meb: Have you ever done a, like, super high-level offering where you’re like, “You know what, the collectors out there, these are going to be $500 bottles, you’ll get upgraded to…” whatever it is. Have you ever targeted that into the market or is there sort of a ceiling where you feel comfortable on that side?

Jeff: We’ve continued to push this, and it’s really funny. Every week we’ll do one or usually, two higher-ish end offers. So we’re talking 100, $200 buy-in per bottle and you’re going to get upgraded to bottles, you know, worth several hundred or several thousand dollars per bottle. So we definitely have this, sort of, high-end aficionado collector market. And that audience is buying from us once again for the access, right? Because we protect the wineries’ brands because we’re a partner for them on the marketing and partnership side, we just have access to amazing bottles that even if you are a wealthy individual who can afford to spend $100 or $200 per bottle, they just don’t have the access that we have. Not only do we have bottles of Screaming Eagle on the platform, but we work directly with Heidi Barrett, the original winemaker for Screaming Eagle, and we get her to autograph bottles.

We work directly with Caymus and we get Chuck Wagner to autograph double magnums of Caymus Special Selection. And so the aficionados on our platform because they’re getting access to these bottles. But then we’ve also pushed you to where like we’ve done offerings where it’s $2,000 per bottle buy-in, and so it exists. But I want to point out, Underground Cellar is for everyone. If you are the person like I was before I started this company where I believed that there is great wine for $20 or $30 a bottle, you can buy an Underground Cellar at a price point you’re comfortable with and still get these upgrades thrown in. And so it’s not just for really wealthy people. It’s really for the masses.

Meb: Twenty, 30 bucks a pop, you know, you’re getting good wine, like you said, kind of no matter what. What was COVID like? I assume that was like a lot of wine and booze, sort of, companies. Was that a positive tailwind for you guys? Was it your own struggles on headcount? How did kind of like the last year go? And then once you walk through that, let’s take a look to the future and what do you see on the horizon?

Jeff: My heart goes out to everyone who’s affected by COVID and the pandemic. You know, many people in our company, our teammates, and our families have been severely affected. If it’s any consolation, it also allowed us to step in as a company to help these wineries in this time of need as well. And as you might imagine, people are stuck at home. They’re not going out to the bars, and nightclubs, and restaurants, and cruise ships, and hospitality which drives so much revenue for so many of these wineries and how so many people were accessing their wine, sort of, pre-COVID. And so we, as I mentioned, our metrics like how much growth we’ve had…And once again, my heart goes out, but like, we were a winner of the pandemic if that’s not too offensive to say, right?

Meb: The way I phrase it, death and destruction aside…I just lead in with that. I say death and destruction aside, ignoring the human toll, look, there were some real impacts on both sides for everyone.

Jeff: But we had the opportunity to step in and help so many of these wineries who had relied on these non-digital, non-e-com, direct-to-consumer channels that relied on all those hospitality cruise ships, bars, restaurants, whatnot, and really come in and help them and get them liquidity that they needed. I can tell you, like, there were some wineries where when we came in and we said, “Hey, you know, we’re going to move $40,000 of wine through the platform for you,” they literally like teared up because for them…You know, keep in mind, like, there are thousands of wineries in the United States, many of which are in California, and most of which are not the big conglomerates, the Constellations and Gallows of the world. These are small family wineries, boutique producers where their ability to sell through their inventory is literally what puts the roof over their head, is what feeds their family and allows them to continue to create their art and bring their passion to the forefront.

And so we were able to come in, help these wineries get liquidity throughout the pandemic. There were also many wineries who, hey, you know, pre-pandemic, maybe wouldn’t really return our phone calls or, like, you know what, or wouldn’t respond to our cold outreach emails. During the pandemic, lo and behold, they dug up an email from, you know, a year or two ago and said, “Hey, is the offer still on the table to work together?” And by all means, with open arms, we welcomed them in. And so although COVID was so difficult for so many people, it was really an honor to help so many wineries, so many which were family-run, make it through the pandemic and really set them up with the tools for the digital age to really help them move wine in the new normal.

Meb: We’ve made it through the pandemic, 2021, ’22 has now begun. What’s your focus on the future? You guys have obviously scaled. You’re starting to really find your moment in time. You got this business model that works. What are kind of your goals for this year and beyond?

Jeff: So it is now 2022. We are on this crazy momentum and trajectory. I just hired a CMO, a VP product. We’re building a product team. We’re building a marketing team. And if you look at us on paper, you’d say, “Wow, this is an amazing e-commerce company.” And if you were to say that to me, I would be offended because we are not an e-commerce company. We are a product-first innovation company and I’m really excited for what 2022 has in store. And I’ll drop some hints and your audience is going to be some of the first to know about this. But I mentioned already how in Napa Valley we were storing and for Underground Cellar customers. Right now in Napa valley, I am storing over 400,000 bottles of wine, some of the best bottles from around the world, first-growth, premier crews from Bordeaux, magnums of Screaming Eagle, and Opus One, and Harling, and Bryant Family, and all of these coveted wines are physically in our wine cell in Napa valley.

What we are releasing very soon this year is the ability for our customers to trade bottles with one another. Just like you have your stock portfolio on an app like Robinhood or E-Trade, people will now have their wine portfolio on Underground Cellar. You can buy bottles, get upgraded, store it. And we live in a world today where there is this collision of the virtual and the physical worlds. You look at things like NFTs and like digital assets and the metaverse, Underground Cellar is on the forefront of that because you can buy bottles. It’s represented virtually. You can then trade that virtual unit of that bottle of wine, store your wine in our Napa Valley wine cellar, watch the value portfolio grow as an investment over time, and trade that bottle amongst each other.

I don’t know if your listeners are familiar with marketplaces like Goat or StockX for shoes. We are going to be the StockX for wine in 2022. It’s going to fundamentally change our footprint, going to fundamentally change if a winery is not on Underground Cellar, they’re going to be at a significant disadvantage in the market, and we are fundamentally changing our margin economic profile. Because if I can get that bottle of Opus One, the 3-litre quadruple magnum autographed bottle of Opus One to trade hands, similar to like an NFT would, and we take a cut of the sale every step of that process, fundamentally changes our business. And that is why I say we’re not an e-commerce company. We are building something novel that is going to change the wine industry this year and the next three years is going to change commerce.

Meb: I’m personally waiting for Underground whiskey Cellar. When are you guys are going to start cranking out some of these Pappys? I’ll build out the seller there too. The bad news is I’m assuming I’m going to have more wine than I can ever drink. So I’ll have to start hosting some in-person gatherings when those are allowed again.

Jeff: So would love to join you for a sip of some Pappy. I’m a whiskey drinker myself. There are vertical extensions of the technology, and the data, and the playbooks, and data models that we built. However, wine in the United States is $70 billion a year. There are more than enough wine drinkers in the United States to make Underground Cellar, in the U.S., in wine, a multi-billion dollar company. With that said, the technology we built can and likely will apply to many more verticals, in particular, luxury verticals. Gourmet food, fashion, travel, sporting event tickets, the possibilities are endless. And so as we look at building this trading marketplace, creating this extreme value for the wineries and for the customers on the platform, expanding this throughout the United States, getting a major foothold in the wine space, and then from there potentially branching out to luxury verticals, it all the sudden takes us from a potential billion or $2 billion market cap and brings us into something that could be world-changing, change all of commerce, attack all these luxury verticals that are so plagued by discounts and fundamentally change, I think, so much and create a lot of value in the world in a way that is meaningful for all the participants in the ecosystem.

Meb: No, makes sense and well said. It’s always a challenge when entrepreneurs, you have this big, huge, massive market in front of you but also a lot of attractive ones adjacent too. So only so many hours in the day as you mentioned, but now you have one business with like, going back to the very beginning of our discussion, six different ideas. Well, we have six different verticals you could easily do within one big hairy idea too. Jeff, I could keep you all day. This is fun. I love chatting with you. Listeners…Where do people find the best places to find you guys, what you’re up to, Twitter websites, all that good stuff?

Jeff: Sort of the theme of the early part of the conversation was about reaching out and just putting yourself out there. And so what I’d say is if anyone’s listening to this and you want to reach me, my email address is jeff@undergroundcellar.com. Reach out to me. See what happens. Second thing I’d say is if you’re a wine lover, undergroundcellar.com, enter promo code MEB, M-E-B, it’s going to get you $100 off any first order on Underground Cellar. And third thing, if you are somewhat passionate about changing commerce and you want to be on a team that is doing things differently and is unique and you’re interested in working here, we are hiring across the board from engineering, and product, and marketing, and operations. Reach out. We’d love to talk. And as we head into the New Year, we are going to be raising a Series B. And so if you happen to be an investor that writes large checks and wants to lead around, reach out. We’d love to chat.

Meb: And best of all, you can prove Mark Cuban wrong. Jeff, it’s been a blast. Thanks so much for joining us today.

Jeff: Really appreciate your time, Meb. And I’m going to go pop open a bottle of wine and celebrate.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.





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