Supported by Greenhaven Road Capital, finding value off the beaten path.
When my wife’s first fix arrived the value was obvious. Stitch Fix founder, Katrina Lake’s How I Built This podcast (and other interviews) are another template for startups. It’s a similar path to Instagram & theSkimm, only Lake has taken one further step, straddling the online and meatspace worlds. Let’s see what she did.
Note, Tren Griffin had a typically erudite post on Stitch Fix.
Lake got the idea for Stitch Fix when she was a restaurant and retail consultant. Large retailers wanted ideas from smart young people (like Lake) but they acted on few if any. One of Lake’s ideas was to make a store half museum, half warehouse. Customers could scan items from one side and they would be collected and delivered to a changing room from the other.
“I had all these ideas on what these businesses could do better,” Lake said. Yet, “People looked at me like I had seven heads.”
This is good! Andy Rachleff said Wealthfront was a radical idea. Scott Norton advocated zigging when others are zagging. Peter Thiel asks about what do people not agree with you on. Eddie Izzard puts it this way: “(history + change in society) * change in technology = the future”.
Lake’s job was to suggest new glasses to men who wanted to stay blind. “It is difficult to get a man to understand something when his salary depends on his not understanding it,” wrote Upton Sinclair.
This isn’t to say that the people Lake advised were obtuse or ignorant or illogical. They were locally logical. Their incentives were tilted toward the status quo. No one gets fired for buying IBM and no one gets fired for saying no to a museum/warehouse mutt.
Lake left advising and began capitalizing, but it was “A weird time (2007-2009) to be in venture.” But it was also instructive.
“The most important learning was that all these people were just like super unqualified normal people – just like I was…I didn’t need to be in the peanut gallery lobbying my ideas at other people, I could just do it myself.”
She watched for a company to join. No good fit appeared. Two years later she left for business school.
At this point in her podcast with Guy Raz I was cheering for her to say I knew B-School would be a waste of my time and I could learn everything I needed as I went. Lake did not say this. It’s helpful she didn’t. We advocate for the DIY MBA and collect (minor degree curriculums). But Lake said:
“I was never going to quit my job and have this gap in my resume. I can take these two years and be a mediocre student. My end goal is to have a company funded, paying myself a salary and paying back my students loans on the day I graduate then the risk profile of entrepreneurship is tenable to me.”
When asked if her MBA was useful and worth it, Lake told Bloomberg:
“It was absolutely the right thing for me. I had no history of being an entrepreneur. I loved the classes. I learned to be able to present thoughts quickly, which helped with pitching, leadership, running meetings. I was very deliberate about what I was going to get out of it.”
It’s a great approach. Who could argue when your plan B is an MBA from Harvard.
Shipping up to Boston (from California), Lake considered the hunting and fishing industries.
“I had collected a bunch of thesis in my head. If you look at industries, the hunting and fishing industry is massive, people are super compassionate about it, it’s fragmented but also concentrated. There are elements of fashion, whether it’s technology or actual fashion, things go out of style.”
But it wasn’t a good fit. Lake kept thinking and tinkering. She paid attention. Elle wrote that Lake was part of a Community Supported Agriculture (CSA) group that delivered fresh produce to her Cambridge apartment. Hmm, a regular delivery, that’s interesting.
In her time consulting, Lake noticed that small dropoffs cascaded into large effects. If a business’s revenue decreased by ten percent, then those marginal dollars had to shoulder more fixed cost. “Blockbuster,” Lake said, “is kind of the best example of this.” Netflix didn’t have to gain 50% market share, they only had to gain 15. With that loss, Blockbuster would flounder and the 85% remaining would have to find an alternative. Like Netflix.
“There was also a mass depersonalization in a retail store. You don’t need iPhone chargers or diaper purchases to be personal, but this ignored the category of apparel that’s deeply personal.” Why couldn’t a business offer a personal service Lake wondered.
🔑 “The idea was, how can you deliver a personal experience in apparel and use data and technology to make it scalable and make it better.”
In Boston, Lake started to experiment and talk to her customer. These two small acts; test and question, are crucial. Susan Tynan said:
“At Living Social, I sold a lot of framing deals so I knew customers were looking for a deal in this category…I started talking to everybody about it. Imagine me at a cocktail party or a friend’s baseball game talking to people about it and I kept hearing the same stories about six-hundred dollars worth of framing and I couldn’t believe it.”
At IDEO they talk to customers a lot. CEO Tim Brown said that people tour their offices and ask where is everyone? Good designers said Brown, go out and talk to the users. When Fashionista asked Lake for advice she said:
“I would really focus on product/market fit and really understanding your client. I think this is a world where it’s very hard to get people’s attention and it’s … the customer is the most honest. You can come up with all the ideas that you want and then customers ultimately vote with their dollars. So I think the quickest way that you can get feedback from your clients and listen to your clients, and evolve to be able to have the right products for them: All of that is the right place to start.”
What did Lake find out? Surveys worked. Ten items were too many. Brands weren’t sticky. How did she do this? A credit card or two and free online survey tools. Specifically:
“I was buying inventory from boutique stores in Boston and would keep track of their return policy. Then when someone would fill out their profile I would put together a box of things that were relevant based on what they shared in their profile. If they liked it they would write me a check. If I didn’t sell it I would return it.”
“I wasn’t making any money, I just wanted to see if this would work.”
Businesses have to have customers, this is the iron law of the market. Don’t try to sell seven-fingered gloves said Tony Hsieh. Lake told Bloomberg:
“That ‘working mom’ profile is our bread and butter. Someone who is time-starved feels like she is super-busy and doesn’t have time to shop but is excited to have fresh clothes. The time-starved mom is, on average, 39. We also have the working gal profile, she’s more like 30. We have a lot of teachers.”
First, there were ten, then twenty, then thirty-five customers. “We had a wait list for a long time because we didn’t have clothes to send to you that were relevant and demand outpaced what we had.” For people who did get the boxes, Lake sent PayPal request and paper surveys.
The business grew and more people signed up. Stitch Fix expanded into places customers had queued up. “We had 80,000 people on a wait list for plus size before we even launched the business.”
Though a technology company, much of Stitch Fix’s early work wasn’t technical. I was reminded of simplicity in a podcast between Maria Popova and Tim Ferriss. As he often does, Ferriss asks about the tools Popova uses. It’s fun to see the what which is easier to adopt than the why or the how. But Popova is remarkably simple. For exercise on the road, she carries a weighted jump rope. For edits, she emails her post. For hosting it’s WordPress. Lake started simply too, with Paypal and Google Docs. That’s how super unqualified normal people start.
Lake pitched her idea. Venture Capitalists hated it. It was too different for them.
“When you’re doing something nobody else is doing you are either the smartest or the stupidest person in the room.”
Part of the reason may have been that it was a service for women and Lake needed capital to buy inventory. “Raising money was really hard.” Another headwind was the company size. The home run approach to venture capital was “another dynamic, they want you to be a zero or a billion and everything in the middle is not that attractive.”
Stakeholders influence decisions. How many teams passed on Stitch Fix because they were focused on a round number? How many teams passed on Stitch Fix because – as Lake put it to Elle – “They were like, ‘You want $2 million to buy dresses?’”
Yet, maybe the lack of fundraising helped. On Exponent #143 Ben Thompson talked about Dropbox and Twitter. In some ways, Thompson notes, those companies were too successful. They weren’t forced to figure out a business strategy. Maybe the opposite occurred for Stitch Fix. Without venture money, the company was forced to excel at inventory management, balance cash flow, and crush marketing. They kept serving customers, one of whom was Amie Fineberg. Lake told Elle:
“One of those loyal clients was Amie Fineberg, who happened to be the executive assistant to Bill Gurley, a general partner at the venture capital firm Benchmark. “She was like, ‘I think you should know the staff is spending a lot of money with this company,’” Gurley recalls. He set up a meeting with Lake, and although he was skeptical at first, having worked with Nordstrom.com and experienced the pitfalls of e-tail, he was “blown away” by the company’s financials.”
Benchmark led a twelve million dollar B Round in 2013.
By 2014 Stitch Fix was a profitable company.
What helped get them there was good data. “We were always a data company,” said Chief Algorithms Officer Eric Colson. How do data and fashion go together? Lake explained what Tyler Cowen wrote, “We see it as both are uniquely good at different things. The stylist should never worry about whether or not you hate yellow, the data will take care of that.”
“We don’t have opinions here, we have hypotheses,” Colson told BuzzFeed News. “And we test them to make sure we’re acting in our clients’ best interest.”
Stitch Fix went public in November 2017. Lake and her son were there to ring the bell. Initially, she didn’t want to be seen as a Woman CEO, just a CEO. But:
“Being part of what opens peoples lens of possibility is really powerful. Now I’m proud to be part of that and wear that label and it’s good that people can see more examples of what success could look like that maybe are different from what it’s looked like in the past.”
Thanks for reading.