How much would you pay to get rid of a hangover?
Los Angeles-based startup 82 Labs got the answer to that question last month: the company, maker of a hangover detox shot called Morning Recovery, closed a $8 million round of fundraising at a $33 million valuation.
In a call with BevNET, 82 Labs founder and CEO Sisun Lee, said that the majority of the investment came from three venture capital firms with strong backgrounds in technology: R7 Partners, Slow Ventures, and California-based Altos Ventures, with the latter leading the round. Lee said the three firms contributed a total of $6.25 million.
Altos will also take a seat on the company’s three-member board of directors. Slow Ventures had previously participated in a $425,000 seed round of funding, along with venture capital funds 500 Startups and Strong Ventures.
The remaining funds were raised from a variety of other investors, including William D. Smithburg, the former chairman and CEO of Quaker Oats Company.
“Our thinking was the biggest value add that we can get from investors would be non-tech, so people who have created beverages, who are in the CPG space, or even VCs who are more into beverage,” he said. “With these guys, we sort of work with the guys where we personally connected and liked the most.”
Lee said the investment would be used to support research initiatives, help grow the company’s retail presence and boost marketing efforts ahead of this week’s launch of the new version of Morning Recovery, which will feature new packaging and a new formulation that improves the efficacy of its unique natural ingredient.
Beverages and supplements such as Hangover Joe’s, PartyAID, and Life Support, a 3.4 oz. shot which also uses the same active ingredient as Morning Recovery, have all positioned themselves as tonics for rebounding from a night of heavy drinking, but the broader viability of a hangover-based category is still unclear. By taking a science-based approach to treating hangovers, Lee is betting that Morning Recovery will be the brand to unlock what he views as a $113 billion global market opportunity.
While working as a project manager at Tesla, Lee discovered dihydromyricetin — aka DHM, the active ingredient in Morning Recovery — during a trip to Korea. During the course of nights spent drinking with the locals, he noticed that alcohol detox drinks made with DHM — a flavonoid extracted from the fruit of a Japanese raisin tree (Hovenia Dulcis) with a long history in traditional Asian medicine — were everywhere. “Everyone was obsessed with these hangover drinks,” which are meant to be consumed before falling asleep, Lee said.
Upon further investigation, Lee discovered research by Dr. Jing Liang, MD, PhD, a professor at the School of Pharmacy at the University of Southern California (USC), which showed how DHM could help minimize the effects of alcohol in animals. Liang subsequently joined the company as a partner, and has helped give 82 Labs the scientific foundation needed to explore hangovers in a way that hasn’t previously been done. The brand has developed an extraction method that it claims produces a DHM extract with higher bioavailability than other processes.
“Part of the funding is also to understand that we need to take some of the money and flip it around; instead of going for solution first with DHM, we need to look at the problem first and understand fully what’s happening on a molecular level to your body when you consume alcohol,” Lee said.
That commitment is backed by financial resources; around $1.8 million from this round of funding will be directed towards research projects, supplementing a $250,000 contribution to support DHM studies at USC that occurred before the investment. Lee’s interest in the subject goes beyond how the body actually deals with too much alcohol; he talked about exploring the economic impact of hangovers, which he said cost the U.S. economy $170 billion in lost productivity annually.
That approach will fuel 82 Labs as it extends beyond hangover remedies; “The idea has always been that we are going to create products that foster mental sharpness and productivity,” Lee said. However, he noted that any other potential SKUs are over two years away, giving the company time to focus on building Morning Recovery.
“At the end of the day, we’re a business, not a research unit,” he said. “[Research] has to have a clear goal of how we can use what we’ve found so we can come up with a better formulation that helps people detoxify.”
In addition to its background in science, Morning Recovery also had another card to play: access to a network of influential contacts in Silicon Valley.
“We didn’t use Silicon Valley because they were a perfect demographic; it was just where I worked,” said Lee. But as he began pitching the concept to potential investors and sharing samples with friends, Lee saw a small but potentially influential community of supporters emerge. Through a dedicated Facebook group, early users produced a wealth of valuable product feedback on the product, sharing thoughts on efficacy, price point, taste and other factors. Further confirmation of the brand followed with a successful IndieGogo crowdfunding campaign which brought in over $250,000.
More than the product efficacy itself, Lee said early adopters and investors responded most strongly to Morning Recovery’s branding, packaging and positioning. The brown glass bottle, for example, is associated with premium health products, while the liquid format, in contrast to a hangover recovery pill, gives it a different personality. In moving from an emphasis on “hangover” to “recovery” in the name, the brand tapped into a more aspirational, high achieving type of audience. The tagline — “Do more the next day” — also fits along those lines.
“It made a lot of sense: as much as we want to think our science is better, because there is so much noise out there, for consumers that is not the differentiating factor,” Lee said. “You can do something that’s fun, that’s available, that’s easy to consume and something you can do as a chaser. These were things that we didn’t think too much about that become to our advantage.”
Early results suggest that premium positioning may be helping Morning Recovery find a foothold with more affluent consumers. Aggregated social media data revealed that the brand skewed towards higher income individuals, and a recent customer survey found that 86 percent of respondents were employed full time, while over 43 percent indicated a household income of over $120,000 annually.
“That wasn’t our intuition — actually we thought in the beginning we would attract a lot of college students,” Lee said. “But a lot of what our partners have said is ‘you are different, you are premium. This is something that a lot of rich wealthy people who want to be productive will use.’ We just kind of nodded, but when we looked at the survey results, we were pretty surprised ourselves.”
The intriguing backstory of Morning Recovery and its unlikely founder has also helped the company win over consumers skeptical that the product actually works.
“There has to be some story around why this could be legitimate, even if it’s not logical,” he said. “For us, it was the story of ‘Tesla Engineer Creates Hangover Cure.’ We learned early on that a story that’s more meaningful and is something that you can grasp on to can really help people reduce their skepticism of trying the product.”
Since formally launching in July, Morning Recovery has recorded explosive growth mainly through direct-to-consumer sales via its website. A 6-pack sells for $29.95; a 12-pack for $54.95; a 24-pack is $99.95. The company has brought in $6.8 million in revenue and has generated over 40 percent in repeat purchase revenue since January.
Lee expects even bigger things from the new and improved “version two” of Morning Recovery, itself a testament to the company’s scientific approach towards product development. The original product, which the founder called a “brute force mechanism,” was essentially a water infused with a high-bioavailability DHM extract. With further research on the effects of DHM, the company was able to determine that a higher dose would be safe, while also bringing water solubility to close to 100 percent. The result is a lower sugar, higher efficacy product.
In traditional retail, Morning Recovery is in approximately 200 stores nationwide. Lee said Chicago, San Francisco and Los Angeles will serve as the company’s three pilot markets for retail expansion, marketing initiatives and sampling activations.
Morning Recovery is also working informally with Convivialite Ventures, the venture arm of liquor company Pernod Ricard, on product placement and building relationships with regional distributors. Pernod Ricard is not an investor in the brand.
“We are trying a lot of different things to increase the playbook of how we scale this thing across different cities, and what we learn that works we will replicate [in other locations],” Lee said. “A lot of the growth for this is going to be dependent on word of mouth, which has to be condensed in a small geography, so we start with big cities.”
Correction: This story originally stated incorrectly that the total investment in 82 Labs was $8.2 million. It also incorrectly listed actor Patrick Schwarzenegger as an investor in the brand. This version has been corrected.