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Interview with a Successful Startup Founder

ToyGaroo: Burning $250K Building the Netflix for Toys

Phil Smy
Phil Smy
March 17, 2018
Category of startup
Country of startup
United States
Revenue of startups
Interview with a Failed Startup Founder

ToyGaroo: Burning $250K Building the Netflix for Toys

Phil Smy
Phil Smy
March 17, 2018
Category of startup
Country of startup
United States
Cause of failure of the startup
Bad Business Model

Toygaroo was the Netflix of toys. Funded by a great group of people based in Los Angeles, the company appeared on Shark Tank asking $100k for a 10% stake. They ended up raising $250K in 2 funding rounds, but after some months, they had to shut down the company. Inventory and logistical costs were too high, so capital rapidly disappeared.



Hi Phil! What's your background, and what are you currently working on?

I started out as a musician but after deciding I also like to have food on the table, I got into writing software in the early 90s (yes, I am old). I wrote traditional software - Macintosh applications - in the beginning, but starting in 1996 I got into the fledgling internet. Since then I've worked in Canada (my homeland), US, and across Europe starting in 1997 (writing software is a much better way to see the world than joining the military, in my opinion). I always was a consultant and started lots of companies. Back in the early 2000s, I co-founded a company that wrote gambling games for mobiles (WAP - remember that?!). Other companies included Filmamora, a DVD rental by mail company, in Spain. A kind of Netflix for Spain. That led to my contact with Team Toygaroo.

Right now, I am living in Japan and I own and run two large websites - the first is Zonmaster, an after-sales support service site for Amazon sellers. We provide auto-responders, financial views and the like.

The other is LotteryCanada, a site I’ve been running for 20 years. Oh god!


What was ToyGaroo about?

Toygaroo was an exciting twist on the “rental” phenomenon - we called ourselves the Netflix of toys. People would sign up for a “toy box” subscription and pick how many toys - 2, 3, 5, whatever the subscription level was. They could have x number of toys out at a time. If they returned one we’d send a new toy from their list. That way there could be a near constant stream of toys coming into the house. And if the kids really loved a toy they could buy from us.

How did ToyGaroo worked

The company was founded by a great group of people based in Los Angeles. They had good marketing experience, but needed the software. I came in, licensing the Filmamora software to them and modifying it as needed - which essentially turned into a re-write of the code.

How did you build it?

We had the Filmamora codebase and I had a lot of experience in the concepts as I’d been running Filmamora for a few years by this point.

We had a small warehouse in the Los Angeles area that we ran all the logistics from. We had a very spiffy toy cleaning device. Toy cleaning was the #1 concern of our customers. (top tip: listen to your customers! it’s not about you, it’s about them.)


Which marketing strategies did you use to attract ToyGaroo first customers?

We never really had an issue with attracting customers or press. We were on national TV shows (including GMA, if I remember correctly) before the SharkTank appearance even. I think that everyone could see the idea had potential. Really it was a matter of contacting the right people - once they heard the idea they were on board.

I am not the marketing guy, so I can’t really get into the nuts and bolts of that side of it.

How was it like to participate in Shark Tank?

I think inside Toygaroo there were 2 camps - the “go on SharkTank” side and the “don’t” side. I was on “team don’t”. We were already growing and getting exposure. We hadn’t really worked out the finer details - like shipping pricing and toy sourcing. It was the latter that we were interested in finding help in. Toy companies didn’t like us as they saw us as depleting sales by offering rentals. (I myself had a meeting in Tokyo at Konami where I was told point blank they would never cooperate with such a scheme).

I honestly can’t remember how the SharkTank thing came about - I wasn’t living in LA at the time, but I vaguely remember that it was a friend of a friend who introduced us to the production team. I know that it was a matter of weeks between the initial chat and the taping.

So, we ended up going on SharkTank, and getting investment from O’Leary and Cuban. I wasn’t there at the taping - I was actually in Hawaii at the time. But I was on the other end of the phone during the negotiation process. The show takes a long time to film - I think our team was in there for 4 hours or something like that. It gets whittled down to 10 minutes of TV time, but there was a lot more negotiation and back and forth than what ended up onscreen.


Personally, I wanted Herjavec. I thought he would have been a better fit. But, to be honest, after the whole experience I don’t think there is such a thing as a “good choice”, just a “less bad” choice.

Like most SharkTank appearances, we got a spike when the show aired. Which was not what we needed as a sudden influx into a business that depends on stock is not a good thing!

Which were the causes of ToyGaroo's failure?

There are differing views here, I’m sure. I can only give my opinion and recollection.

Toygaroo was doing well and we were always getting more customers. The issue was getting control of two things - inventory costs and logistical costs. We had hoped that O’Leary would be able to introduce us to people in the toy business, given his past with Mattel. If that ever happened I didn’t hear about it, and certainly, we never saw any purchasing benefit. Maybe he tried and failed, I don’t quite remember. So, we had a pretty high cost for the toys. We were even going to the local Walmarts and ToysRUs to get toys as they were selling retail cheaper than we could get wholesale. That in and of itself is not a bad business model for a startup, but, because of our new partners we were under close scrutiny and high pressure to “grow grow grow”.

We had little to no interaction with Cuban himself, but he did assign an assistant to monitor us. They claimed that the Toygaroo team was infighting, but the truth is we were battling with them. We knew that the model was wrong - we offered free shipping and because toys were so variable in shape and size that was the wrong thing to do. My recollection is that we wanted to move away from the ‘free shipping’ model but Cuban’s team was adamant that was a USP for us and also ‘part of what they signed up for’.

So costs spiraled. I honestly think that had we been able to source more cheaply and change the shipping model we would have kept going.

When it became apparent that the finances were sinking us, and that we weren’t able to fix these two key issues of sourcing and shipping, we approached Cuban (and perhaps O’Leary) for another cash injection, which they declined to do.

Funnily enough though, once we were really down to the last dollars, they did offer to ‘take Toygaroo off our hands’ for essentially nothing. I don’t know what reasoning they had for offering to take a sinking ship. I can guess. I don’t think - knowing those guys - that it was charity.

We decided to close down the company as we were majority shareholders. All of us had other opportunities, and all of us had run other companies. So we knew sometimes you just have to move on.

Which were your investments? Did you achieve some revenue? Did you lose any money?

The SharkTank money was spent, obviously, and unfortunately the other partners, who had funded things, also lost money. I can’t really say how much. It wasn’t millions, but of course, it’s upsetting for all.

The only small sense of satisfaction I got from the whole thing was that O’Leary lost money and I made money, as I owned the software and had simply licensed it to Toygaroo, and that license fee was paid.


If you had to start over, what would you do differently?

Not go on SharkTank, just build organically. Always have a handle on the key components of your business. We just didn’t. We were at the mercy of pricing. I’m sure the shipping issue could have been overcome, I’ve since done it in other ventures. But sourcing toys...that’s tough.

Which are your favorite entrepreneurial resources?

Entrpreneurism isn’t rocket science (unless you’re Elon Musk of course!). People spend so much time listening to podcasts and all of that, when there are some very simple truths.

Come up with an idea, research it, work on it, see what other people think, don’t spend money on it unless you absolutely positively have to, don’t get investors until AFTER you are making a profit, provide great customer service.

For business books, I loved the Sam Walton autobiography. I love Peter Drucker. Books that are more about social phenomenon - like Jonah Berger’s Contagious, Bold by Peter Diamandis, or Ryan Holliday’s The Obstacle is the Way - are also awesome.

It is about a mindset. Create something, make it as good as it can possibly be. Don’t accept mediocrity. 

Where can we go to learn more?

If for some insane reason you want to listen to any more of what I have to say you can find me on YouTube or my website. I tweet on occasion at @psmy, but mostly about how I am getting shafted by Air Canada all the time.

If you sell Private Label on Amazon I can’t imagine why you wouldn’t be a Zonmaster customer already, but if you’re not, head over there.


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