For even the most well-connected first-time entrepreneur, pitching investors can be a rejection-filled exercise in angst. Now, swap the stereotypical Stanford education for a four-year stint in federal prison, and replace the quintessential Uber-of-X app built for professionals with a photo-sharing platform designed exclusively for inmates and their loved ones.
Talk about a barrier to entry.
It was fall of 2011, and this was exactly what Frederick Hutson was up against. The then 28-year-old had just been released from prison, where he had served 51 months for distributing marijuana via UPS and FedEx trucks from Mexico to Florida.
A natural-born entrepreneur, Hutson used his sentence to develop a business idea: For inmates, receiving photographs from loved ones is tricky because the pictures have to be physically mailed in (there is no Internet access in prison). Why not, he thought, create an online platform that allows friends and relatives to upload photos, which are then mailed directly to the inmate for a flat fee. That would make it far easier for loved ones to send in photos and, as he knew from personal experience, significantly improve inmates’ lives.
Upon his release, he needed to develop a prototype and convince venture capitalists to invest, no small feat for any untested entrepreneur, not to mention one whose business idea was conceived in jail. But Hutson was able to accomplish the highly improbable. Today his Las Vegas-based startup Pigeonly, which sends photos but also works to make phone calls more affordable for the 2.3 million inmates currently doing time, has sent more than a million photos, raised $3.2 million in VC funding, and is growing by 30 percent month over month in sales. This January, the startup joined the prestigious Silicon Valley tech accelerator Y Combinator and, last month, pitched investors at its Demo Day.
The genesis to all of this was another accelerator, albeit a less prestigious one. It was 2012, and Hutson, along with his co-founder Alfonzo Brooks, had forged connections with a photo printing company and launched an early version of Pigeonly with money collected from friends and family, but needed additional funding and a support system. "When I first learned what an accelerator was, I shotgunned all of them," Hutson says. Only one accepted him: NewME, a Silicon Valley-based residential tech accelerator for startups founded by underrepresented groups. Once there, he started pitching investors, an often thorny experience.
Hutson quickly learned that a large percentage of Silicon Valley venture capitalists were used to hearing pitches from the same flavor of companies, primarily apps that solved Silicon Valley-esque problems such as convenient laundry pickup or alcohol home-delivery. Because his pitch was so far outside that realm, he says the burden of proof was on him. "I needed to have the numbers and the metrics, and show that we had a lot of early traction."
Early on, he and Brooks tested the concept, sending 500 picture postcards to inmates advertising the service, directing them to tell their friends and family to visit their website. It was classic junk mail, but as Hutson told NPR’s Planet Money podcast, he had 135 paying customers by the end of the month (for junk mail, a 1 percent response rate is typical), which confirmed what he already knew in his gut: The need was real, and the business plan was viable.
If investors could overcome that first hurdle, the next one was more daunting: "I lot of people would bluntly say, 'I can’t wrap my head around someone who has been to prison, or a company that works with inmates,'" Hutson says. He would deliver the statistics – research has shown that when inmates maintain contact with friends and loved ones, recidivism rates decrease – but many potential investors would check out completely after learning about his past and/or Pigeonly's target market. Out of the 60 investors Hutson approached, six participated in Pigeonly's seed round. "I heard a lot of nos."
Beyond the tech bubble
The pitch process taught Hutson the difficulties in convincing investors to think beyond the communities they typically serve and fund startups that focus on solving problems they were previously unaware even existed. For the majority of Silicon Valley investors, on-demand delivery services are easily digestible; it solves a problem they are familiar with. Meanwhile, Hutson says, "the folks I know don’t have the expendable income to send a text message to get a pizza delivered."
And yet, untapped, underserved populations can be money making opportunities. Ridesharing services such as Uber, while primarily used by a particular demographic, also create jobs "for thousands, millions of people at this point," Hutson says. He also points to Y Combinator-backed Shift Messenger, a startup that makes it easy for service industry workers to swap shifts, as a company helping an often overlooked group of people.
Overall, Hutson's experience has left him optimistic. Despite the rejection he got from dozens of investors due, in part, to his unconventional backstory, six investors did take the plunge because of it, which gave him unique insights into the needs of an ignored market. If an idea is good enough, there are people out there who will recognize its merit and push past the discomfort of the unfamiliar.
For entrepreneurs who don't fit the Silicon Valley mold, Hutson recommends leading with what sets them apart from their peers. "Use the fact that you don't fit in as a strength, and lead with your unique background…that gives you insider knowledge."
The burden of proof, however, is high – higher, perhaps, than for people who look the part and come with the connections to match. "Don’t go in with an idea on the back of a napkin,” Hutson says. “You do have paying customers, some sort of social proof...You have to know your business through and through. The last thing you want is for an investor to ask you a fundamental question, and you don’t have an answer. You need to prove that you’ve thought through your business from every angle.” Basic figures like how much it costs to acquire a customer should be worked out in advance, and “roll off your tongue.”
Now, Hutson is fully immersed in the Silicon Valley entrepreneurial community. Last month, he participated in Y Combinator’s Demo Day, where each of the accelerator’s current class presented to an audience of hundreds of investors, a group that included elite Silicon Valley VCs as well as celebrities such as Ashton Kutcher and members from the band Blink 182.
At this point, Pigeonly is more established than the other companies in its Y Combinator class, but Hutson says he joined the accelerator to get the company in front of a broader audience, and prove once and for all that it is “a legitimate company solving legitimate problems.”
But there was another, more personal reason. “I wanted to shine a light on the fact that all companies don’t have to look the same. There are people out there who may be attracted by my story, who may finally be able to identify with a startup story. If we could use [the Y Combinator] platform to motivate others, I thought: Let’s go for it.”