Thursday, July 18, 2024

NC trend: Durham startup promotes sustainability with toy deliveries.

Tiny Earth Toys Founder and CEO Rachael Classi

Traditional toy retailers depend on October to December as their make-or-break holiday selling season. For customers of Durham-based Tiny Earth Toys, it’s like Santa shows up every two months with a delivery of
age-appropriate playthings, through the startup’s subscription service.

Founder and CEO Rachael Classi launched this unconventional purveyor of fun in early 2021. It now employs 16, has annual revenue topping $1 million, is nearing profitability and has backing from a notable N.C. investment group. Sales continue to climb, even in
summer months.

Tiny Earth has several thousand subscribers, who live in every state in the continental U.S., with a 92% monthly retention rate. Toys are delivered every two months: five toys cost $35 per month; eight for $48; or 10 for $65. Roughly 60% of customers have a child under the age of 2, which should lead to a lengthy relationship with most customers.

“Traditionally, July is slow for the juvenile industry, but we hit 110% of our sales goal when we were only 77% of the way through the month,” says Classi. It was a record sales month for Tiny Earth with about 1,500 packages shipped.

Classi is a Spokane, Washington, native who came to North Carolina to attend Duke University’s MBA program in 2012.  She envisioned the toy subscription service concept in the fall of 2020.

The pandemic had prompted her to leave her job as vice president of strategy and marketing at Teamworks, a Durham-based digital software company serving athletic organizations. She wanted to stay home and care for her daughters Donna and Lucia, then 3 years old and almost 1, respectively. 

She encountered problems faced by many families with children under age 6: a never-ending cycle of toys becoming obsolete as kids progress developmentally. Her home became a repository of plastic clutter. 

“Since we were no longer in classrooms or a daycare center, I was spending a lot of money to create an enriching environment in our home, but it was constantly a mess, and there was a lot of waste coming in and out,” she says. Ever a problem-solver, Classi started a toy exchange with other neighborhood families. 

One parent offered her money to buy more toys and create an ongoing community sharing of resources. 

“Somebody has got to be doing this already,” Classi thought. Nobody was.  

So she and her husband, Peter, dipped into savings to buy inventory in September 2020 and create a website. (He’s an executive at United Therapeutics in Durham.) Ten initial customers signed up as she tested the idea, starting with about 20 different toys.

After raising about $275,000 from several angel investors, she opened the website to the public. Now, Tiny Earth offers about 400 different options and has tens of thousands of units stored at a 10,000-square-foot warehouse in Durham.

CEO Classi and Chief Operating Officer Catherine Bhattachar, third from left, are Duke MBA graduates

By August, they
had raised more than $3.3 million, led by the Bull City Venture Partners investor group in Durham.

“We see 1,500 to 1,700 companies a year and pick two to four,” says Jason Caplain, Bull City Venture Partners
co-founder and general partner. “We put a very heavy weighting on the person and the team running a company, and Rachael is one of our best founders at being able to hit all of the goals that she lays out — revenue, customer growth and hitting all the numbers that she puts forth to the board,
which is amazing.”

Caplain, who has three children, relates to Tiny Earth’s mission. “She’s solving a big problem and customers are really happy, plus it’s fun to work for a toy company. But this is one of the most complex businesses we’ve invested in,” he adds, referencing the unique
logistics challenges.

Tiny Earth is one of Bull City’s bigger investments and its fastest-growing company, based on revenue growth. (Caplain won’t disclose how the fund invested.) 

Ironically, Classi initially declined his offer to invest.

“We met for coffee and she walked me through the problem she was solving,” he says. “She had raised a small amount of capital — all of the founders at Teamworks where she worked before wrote checks to her — and I said we might want to write a check, too, but she had just closed up [fundraising].”

Safe and sturdy
Classi says toys have to be durable for the rental system to work, able to withstand shipping back and forth between families and the company. 

“As a parent, something that really mattered to me was the materials used in the toys,” Classi says. Her biggest supplier among about 20 companies is PlanToys, a family owned, 40-year-old business based in Thailand.

PlanToys makes its toys from wood reclaimed from rubber trees and uses non-formaldehyde glue, organic color pigment and water-based dyes. It’s all safer than
lead-based paint or chemical dyes. 

Most of Tiny Earth’s toys are made from natural wooden materials, which Classi says
are more sustainable and more attractive in homes. No plastic is used, enabling the packaging to be recycled. The same box is used for shipping and returning used toys, which limits waste.

When toys arrive back in Durham, they are sanitized, inspected to ensure there are no loose parts or damage and packaged for the next family.

“We’re able to cultivate a relationship with the families over the course of six years,” Classi says. She’s studying how to support families after children age out of the existing products.

Recently, the company launched a website tool that asks about a child’s development and recommends products tailored to that child. 

“Every child develops differently, no
two 2-year-olds are doing the same thing
or are interested in the same things, so this recommendation engine helps with the alignment of interest and readiness,”
Classi says. 

While Tiny Earth now handles inventory and shipping in Durham, Classi is considering adding distribution centers to cut travel time for products. She’s also looking at different customer delivery options in major customer hubs such as Durham, New York City
and Boston. 

As she grows her own North Pole, Classi is evaluating a future. “The one place that
will always be a challenge is how do we scale our operations? How do we go from the 10,000-square-foot warehouse we’re in now to a 100,000-square-foot facility?”

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