he first day of New York Comic Con is usually relatively quiet, but today the Jacob K. Javits Convention Center is jam-packed, and Brian Mariotti, the CEO of Funko, has to shout. Mariotti is in town to preside over Funko’s 2,500-square-foot booth, a pop-up store selling limited-edition licensed character figures and collectibles. Workers in Funko T-shirts restock shelves while a long line of Funko fans wait behind crowd barriers. On the other side of the ropes, Mariotti shows off the list of items that have already sold out. The creepy twin girls from The Shining went quickest, followed by an orange-chrome-colored Batman and a Notorious B.I.G. with a crown.
“It’s like fast fashion,” says the 51-year-old, who’s dressed (as usual) in shades of blue—sport jacket, shirt, pre-ripped jeans, two-tone leather shoes. “We’re the Zara of pop culture.”
The traditional toy business is in trouble. Digital distractions have grabbed kids’ attention, and Amazon has destroyed the old distribution models. Hasbro and Mattel are struggling, and Toys “R” Us is bankrupt. Funko, an 800-employee company run out of a former department store in Everett, Washington, about 40 minutes north of Seattle, has resisted that downward spiral by specializing in niche products it can bring to market cheap and fast (not toys, Mariotti stresses, but “collectibles”) and by selling through a range of retail outlets, few of which are traditional toy stores.
Notwithstanding a disastrous first day of trading on the Nasdaq last November (“the worst IPO in 17 years,” Mariotti admits; the proceeds went mainly repay debt taken when Funko’s private equity backer had bought the company), the $800 million market cap company has seen sales grow lately. In the third quarter, net sales hit $176.9 million, up from $142.8 million a year ago, largely on the back of its signature Pop! figures, which made up 76% of sales for most of last year. Although Wall Street has remained lukewarm on the company, Vulcan Capital, the investment firm founded by the late billionaire Paul Allen, bought a 5.1% stake in September.
Rather than attempt to set trends, executives say, Funko can take an endlessly replenished stream of pop-cultural intellectual property, both new and evergreen, add its own look, and sell the resulting products to an audience that is increasingly mainstream and, it says, 51% female. This October, for instance, Walmart took Pop! figures (and products by other collectibles manufacturers like rival McFarlane Toys) out of the toy aisles in 3,500 of its U.S. stores and put them in new collectibles areas in the entertainment section. Brent Duwe, a Walmart senior buying manager, says the target audience is not little kids but the millions of teen and adult fans of digital games like Call of Duty, movies like Deadpool 2 and TV shows like Game of Thrones.
That approach appeals to Cliff Su, the portfolio manager at Vulcan who is overseeing the firm’s investment in Funko. Su thinks of the company not as a toy maker or even as a manufacturer. As with a nascent Lego or Disney, he says, Funko’s real value is in its intellectual property—for instance the simplified features and big pupil-less eyes of most Pop! figures—which can be adapted to movies, TV shows, games, clothing, accessories, housewares, etc., ad infinitum. According to Su, Funko “is a content play.”
Funko: By The Numbers
Funko was born in a garage in Snohomish, Washington, in 1998. Mike Becker, a designer at a T-shirt company, loved hunting for kitsch collectibles, particularly those with a 1950s feel that reminded him of childhood. Convinced there were enough tchotchke enthusiasts like him to support a modest-size business making figurines with a vintage vibe, he used $35,000 in savings to launch a bobblehead company, which he called Funko because he wanted to create a business that was both fun and funky. His original product: “Wacky Wobblers,” a line of bobbleheads that included the Bob’s Big Boy mascot and an original character, Freddy Funko, who would have looked at home on a 1960s cereal box. They were sold in souvenir emporiums like Sparky’s, a store at Universal Studios in Orlando, Florida.
“The first year out I think we did almost a million in sales, which to me is still crazy,” Becker says. “That was the hardest I ever worked in my life and the most stress I ever had in my life, but, boy, it was the most fun and the most gratifying.”
One of his early customers was Brian Mariotti, a former Washington restaurant and nightclub manager who as a high school kid had amassed a collection of Pez dispensers large enough to partially fund the down payment on his first house. By the early 2000s, the relentlessly energetic and positive Mariotti was trying to reinvent himself as an online marketer when he and his wife visited Universal Studios and a Flintstones bobblehead caught his eye. He bought eight of them and soon discovered that the company that made them was practically next door. In 2002 he cajoled Becker into a round of golf. Over the next three years the two men bonded over their shared love of old toys and cartoons.
By 2005, however, Becker was exhausted. As CEO of a growing merchandise company, he was not only doing the usual dickering with licensors, suppliers and retailers but was also organizing and attending fan events, where he acted as Funko’s ambassador, emcee and main cheerleader, a kind of Stan Lee for the collectibles world. He wanted out. Mariotti asked his friend if he would sell him the company. When Becker said yes, Mariotti enlisted two high school friends as silent partners and installed himself as CEO.
“He’s the great relief pitcher in the toy business,” says Becker, who recently rejoined the company in 2017 as vice president of apparel.
Mariotti’s track record supports that claim. Since taking the reins, he has professionalized Funko, bringing in private equity backing and hiring a CFO and other key executives who have been crucial for growth—though the full-size replica Batmobile and several metal playground slides connecting floors of Funko’s headquarters ensure it’s far from a typical corporate environment. And it was Mariotti who introduced the Pop!, now Funko’s best seller, in 2010.
Warner Bros. had contracted with Funko to make a Batman plush doll for children, something whose look would say “I am cute and cuddly” rather than “I am vengeance. I am the night.” Mariotti and his artists thought the design they had come up with, which owes something to the simplified look of anime and Japanese toys, would work better as vinyl figure. DC Comics agreed to give it a shot. The original Wacky Wobbler fans hated it. Eventually though, Pop! found a wider audience and took off. Today almost everything Funko makes has something of the Pop! look.
Now Mariotti’s biggest challenge is speed—crucial for a business based on pop culture. He likes to tell a story about how Funko was first to market a few years ago with a figure based on Baby Groot, the dancing plant creature that appears only for a moment at the end of the first Guardians of the Galaxy movie. The day after the film opened, Mariotti came into the office and saw that a Funko designer had already taken the initiative to sketch out a Pop! version of the character—simplified features, a roughly rectangular head, black dots for eyes. “I asked her, ‘What are you doing?’” he recalls. “She said, ‘I’m doing what you would want me to do.’” Within a day, Funko had a design and approval from Marvel. Within two months, the item was in stores and sold out. Funko makes everything at factories it contracts with in Vietnam and China. Mariotti says an item can go from the design stage to shelves in as little as 70 days, since launching a new product requires little more than securing the licensing rights and shelling out several thousand dollars to create a new vinyl mold.
“They have shown an ability to bring products to market quickly so they can leverage short-lead opportunities better than most companies in the collectibles space,” says Julian Montoya, senior vice president of global toys for Warner Bros. Consumer Products.
Mariotti’s vision for Funko is that it be much more than the bobblehead company it started as, or even the Pop! juggernaut he has grown it into. In 2017 the company acquired Loungefly, a southern California-based licensed clothing and accessories company in an effort to further diversify its revenues beyond vinyl figurines. Funko already sells key chains, backpacks and wallets.
And while Mariotti says licensing will likely always make up the bulk of Funko’s business, he also wants to become less dependent on intellectual property he doesn’t own. The typical licensing contract requires Funko to pay a 15% to 16% royalty, which cuts into profitability. That helps explain why Funko’s 38% margins are in the same neighborhood as the less nimble giants it competes against, such as Hasbro, which rely less on licensed product.
To that end Funko has developed its own universe of characters, called Wetmore Forest, aimed at preteen kids. Mariotti hopes to eventually develop the property into a film or a TV series. Plus this June Funko announced a partnership with Microsoft for a mobile version of the combat game Gears of War, done in Pop! style and with what Mariotti describes as merely “cartoon violence” (which means no grisly sprays of blood). In this case, it was Microsoft licensing the Pop! look rather than Funko licensing a property owned by Microsoft. Here Mariotti says his model is Lego, which has successfully lent the look of its products to digital games and movies based on other people’s characters, including the blockbuster Lego Batman Movie.
For 2019, Funko has high hopes for a line of Pop! using characters from the video game sensation Fortnite, which hit shelves at the end of 2018. Whatever the pop-cultural phenomenon, Funko has built just the right machine to cash in on it, which means a virtually endless supply of new product ideas.
Does Mariotti ever worry about the well running dry? Not a chance, he says. “Everybody is a fan of something.”