The Internet: a really elaborate way to share pictures of cats.

Build a Business, Not an Exit Strategy

This post was originally a talk I gave at PulsoConf in Bogota in September 2012. Reprinted here for my readers.

How many people reading this have a startup? How many people reading this are trying to raise capital for that startup?

Let me just lay out the odds for you. Only 1% of all companies will ever raise VC. And, of those who do raise institutional capital, only 2% of those companies will have an exit north of $100 million. And if that exit does come, the founders will own, most likely, one-third or less of their own company by that time. Because, by the time you get to an exit of that size, the founders have been diluted down by 3 or 4 rounds of capital. This means that the founders have a 0.02% chance of personally taking home $30 million. And if you have co-founders? Divide that number by 2 or 3. Now, you may be saying “but $30 million is a lot of money” or “hell, $15 million is a lot of money” But that is not the way you should evaluate the risk / reward proposition in this scenario. You have to look at the expected value of that $15 million.

For the uninitiated, expected value is the probability of an event, expressed as a dollar amount. For example, if you have a choice between a 5% chance of winning $1,000 or a 20% chance of winning $300, statistically, you should choose the latter, as that has an expected value of $60, while the first scenario has an expected value of $50.

So, let’s do the math: multiply $100,000,000 by 1%, which is the chance you have of raising VC, then by 2%, which is the chance of $100 million+ exit, then by 33%, which is the average amount of the company that the founders will still own after said exit, and then again by 50%, assuming there are 2 founders. That is an expected value of $3,300. Three grand.

Now, let’s say you start a small web-based SaaS business that solves a real problem for some segment of your market. Let’s say you help entrepreneurs with their taxes at a lower cost than an accountant would charge.

Let’s say you work on this start-up for 10 years, and it becomes profitable after 2 years on revenue of $1 million per year. Let’s say you have a profit margin of 20%, and you exit the business after 10 years for $2 million, or 2x revenue. You never take money, and you are the only founder. Maybe you give away a small amount of equity to your first employees, but you still own 90% of the business.

Still difficult to do, but certainly not impossible. Now, the survival rate for small businesses, according to the United States Small Business Administration is 44%. I know, that sounds really surprising, as many of us are used to hearing that 95% or 99% of all businesses fail. But, in reality, only about 56% of small businesses fail in the first 5 years. Now, not all of those business make $1 million or more each year in revenue, only about the top 25% of small businesses make more than $1 million per year.

Let’s do the math on this one, shall we? Ok, so add up your exit value of $2 million plus $1,600,000 in profit that you have paid out to yourself. That is $3.6 million, now multiply that times the small business survival rate of 44%, then again by 90%, which, in this scenario, is how much of the company you still own at exit. That is an expected value of $356,400. That is over 100x greater than the expected value of a VC-backed, high-growth tech startup. Granted, $3.6 million is not “fuck you” money, but it is certainly more money than I have ever seen.

Now, assuming you have bought into my argument thus far, let’s look at exactly what it might take to build this mythical $1 million run-rate, profitable, web-based business.

There are actually only two steps you need to take to build this business. First, you need to build a product that at least some small segment of the market wants. Ok, that is easier said than done, but if you focus on a sufficiently niche segment, especially if it is in an industry or space that you know well, you are likely to be able to find a problem that you can solve that no one else is solving in quite the way you are. Now, this does not need to be the most amazing business idea ever created, it does not even need to be all that revolutionary, it just needs to solve a problem for some people. How many people for which this product needs to solve a problem depends entirely on the second step.

Now, listen carefully, because this is really important. It may seem a little crazy, but trust me, this is the key to building a successful business: you have to actually SELL your product, you know, for money. Now, how much money? Well, that depends on what you are selling. Are you selling B2B SaaS solution that helps small businesses manage their taxes? Then maybe you charge $30 a month. Or are you selling a luxury consumer product, that only a few people want or can afford? Then maybe you charge thousands of dollars. Either way, the math is simple: number of purchases * price of each unit sold = revenue.

Let’s say you have a web-based business that helps small businesses manage their taxes and you charge $30 / month. That means you only need about 2,800 customers to make $1 million each year in revenue. That’s it, 2,800 people. And to do this in 2 years? That means you only have to add 3 or 4 customers each DAY! 4 people a day. You could do that by just cold calling your existing customers and giving them 6 months free if they get 1 friend to sign-up.

Now, I don’t want to make it seem like building a sustainable, profitable business with millions in revenue is easy, but it certainly a lot easier than most other founders and VCs would have you believe. And that is because, for founders trying to build billion dollar companies and VCs chasing the next Instagram mirage, it IS really, really, really hard to build a business to that size and growth rate. It is 0.02% hard.

But, if it’s THAT hard, why do founders and VCs keep going after these types of “go big or go home” investments? In order to understand why, you have to understand the incentive structure of venture capital firms. VC firms are just like any other institutional investor like a private equity or hedge fund. They have LPs, or Limited Partners, which are usually big insurance companies, pension funds, or university endowments that have billions upon billions of dollars that they must hold for decades. Usually, these LPs allocate some small percent of those funds towards “alternative investments” like venture capital. LPs decide how much and to whom money is allocated. LPs decide whether the Partners at a particular fund get to keep their jobs, and they base these decisions on one thing: returns. Ideally, extraordinarily high returns. These funds all have, basically, the same mandate. They raise a fund, maybe $100 million, and then they will have 10 years to invest, exit, and return the fund. The mandate is to return 3x or more to their LPs within 10 years. This creates some very interesting, and perverse, incentive structures.

First, in order to exit all or most of the fund’s investments within 10 years, the majority of this money must be invested, or earmarked for future investment in existing portfolio companies, within the first 4 years of the fund. Most funds only write 10-12 checks a year. And, with a fund size of $100 million, the partners cannot, logistically, invest in small, profitable, steadily growing businesses, because they would have to invest in hundreds of them in order to put all of that capital to work. It is just not logistically feasible for only 4-8 partners to do this within the first 4 years of a fund.

Second, LPs expect at least a 3x return on the entire fund at the end of the 10-year mandate. Now, consider that, on average, 80% of a fund’s investments will fail. Another 15% will return 2x or 3x. And the top 5% of the fund’s investments will return 10x or more. The fund will continue to invest larger sums in its most successful investments as those businesses grow, while the ones that do not meet expectations, will not receive additional funding, and thus, will have lost a smaller percentage of money for the fund than the big wins will have gained. Even accounting for this, most funds will return far less than 3x, most will fail. The only way to win is to be an early investor in the biggest wins, which, even if all of the fund’s other investments fail, will make up for all of those losses, and return the entire fund.

Once you understand this, you begin to understand why VCs hammer home the “pick a big market” and “network effects” mantras, because that is the only way they make money! I’m not saying VCs are bad people or are looking to manipulate you. I’m just saying that VCs are doing the absolute most rational thing they can: they are responding to their own incentive structure, it is human nature. But that does not mean taking VC is the best possible decision for you, or the only way to build a big or successful business. Quite the opposite.

You need to think about the lifestyle you want, and the goals that are important to you. People in this industry act like, if you are not working 80 hours a week and sleeping under your desk, somehow you are failing, or you are “not meant to be an entrepreneur.” Well, I am here to tell you that that is absolute bullshit. Look, if you are so extraordinarily passionate about what you are working on that you can’t wait to hop out of bed at 6am and head to the office for a 14-hour day, by all means, knock yourself out. But don’t do it because you think that is what you are “supposed” to do. Don’t think that, just because you have passions and goals outside of your startup, that somehow you aren’t committed enough or you aren’t going to succeed. I find that if you can just focus for a full 4 or 5 hours a day, uninterrupted, on your startup, that that is enough. Maybe when you have a release coming up, you have to put in more hours, but there is no way to be really productive for 14 straight hours a day, at least not consistently.

A little anecdote: I have a friend of mine who runs a relatively well-known startup in NYC. He literally LIVES at the office. I’m serious, he moved in. And before that, he slept on the couch most nights. And, after working this hard for almost 2 years, guess how much revenue this startup is generating? Zero. Not a fucking penny. After 2 years of work! Now, I understand that they are trying to build a massive user base with network effects, blah blah blah, but, I’m sorry, that is absolutely fucking insane. I could never see myself living my life that way. I am just not built for it. To put in that many years of your life, and thousands of hours of work, for what will most likely turn out to be an unsuccessful startup, is just crazy to me. But, from reading the tech press, you would think this is one of the hottest startups in New York!

Which brings me to my next point: don’t drink the tech Kool-Aid, it’s not good for you. And frankly, it’s not even that tasty. When all you read about is funding, after funding, after funding, you begin to believe that that is the only way to be a successful startup. How many times have you read a story about a startup that took no funding, has only 1 founder, worked quietly for 2 or 3 years, and is now generating over $2 million in revenue? I’m guessing never. That’s not interesting, I suppose. That story doesn’t sell papers. But you know what? Those are the truly successful entrepreneurs, the ones who spent years building a profitable, sustainable business, with not a lot of outside help and very little start-up capital. People like the founder of Subway, who still owns 100% of the company, which is now the largest franchise in the world, or Sara Blakely, who turned $5,000 and a pair of footless pantyhose into a billion dollar business called Spanx. Those are the people we should be talking about, celebrating, and looking up to.

Unfortunately, I had to learn all of this the hard way. In 2009, fresh off of a stint as an investment banker, I started my first company, called ToVieFor, which was in the apparel space, and also happened to be a total fucking disaster.

I think I was stuck in my career, and was really just more excited by the idea of running a tech startup, rather than building a real business. And we did well for a while. We won the NYU Business Plan Competition and received a $75,000 grant from NYU, we were 1 out of only 25 companies invited to launch, on stage, at TechCrunch Disrupt in San Francisco, and then, most impressive of all, we were selected as 1 out of 11 startups to be a part of the inaugural class of the TechStars accelerator program in New York City. Almost 1,000 companies applied, only the top 1% were chosen. I still consider this to be one of my greatest professional accomplishments.

And TechStars is really an amazing program, you meet people you would never otherwise meet, you have access to some of the top investors in the world, and you make lifelong friends with the other founders. But TechStars stays true to its promise of being an accelerator. It accelerates your company in exactly the direction you were already heading. Have a little bit of tension among the founding team? Expect for at least one founder break-up during the program. Putting a ton of money into acquiring users with little success? Expect to get absolutely grilled by every investor you meet and have your competency questioned. Hired an engineer that is not totally committed? Expect her to leave when things get tough. TechStars, like many accelerators, accelerates both the good and the bad. It, like VC funding, is rocket fuel, and if you are not ready, your company will explode upon impact.

And that is exactly what happened to us. A spectacular explosion that included: a very public founder break-up, horrible gossip pieces in the press, and a reality TV show to document it all. Lovely.

So, my choice at that point was either: head back into the safe, warm arms of Corporate America or, take the lessons I learned and use them to build a real business. You can guess that I choose the latter.

I started my latest company, Elizabeth & Clarke, by myself, bringing on a part-time technical co-founder several months in to help build the first product. With only $75 dollars in start-up capital, and 1 month spent building a minimum viable product together, we began to generate revenue. Now, 1 year in, we just hit profitability. I estimate that I sunk in an additional $5,000 of personal savings this past year. But that’s it, I own 95% of the business, have never taken money, and we are profitable and growing at 20% a month.

So, at the end of the day, what does all this mean for you? First, you can do the same thing I did, you can build a profitable, small web-based business in just a few years, take a great salary and work 30 hours week. But more than that, my message is not, “do as I do,” it’s “follow your own path.” Don’t listen to investors or the press or even me. Take advice, sure, but do what you really want to do, and don’t feel bad about it because somebody else may not call it “success.” Second, solve your own problem. No matter what path you take as an entrepreneur, small business or large, this is really the best way to find success. And, whatever you do DO NOT drink the Kool-Aid! You can trust me on that one.

Elizabeth & Clarke: The New, New Thing

On October 5, 2011, Sara Chipps and I launched our new project: Elizabeth & Clarke. We had a number of reasons for starting the business, the most compelling of which was to solve our own problem. Below, a bit of color on our theses around starting the business, and why we made certain business model decisions.

Women Hate to Shop Too

The main reason Sara and I decided to work on Elizabeth & Clarke was to solve our own problem: we hate to shop. I know, it sounds crazy. I work in apparel for god’s sake. But, it’s true, every season we find ourselves running around Soho trying to find a few great basics for the season: a couple of white shirts, maybe some black flats, pants for work. When it comes to the very basic, functional items, we do not want to spend a ton of time or a ton of money. These are not the ‘fun’ items like a beautiful dress for an event or a new pair of Louboutins: that’s when I want to go to Saks and be spoiled and get the champagne. But for the basics, many times the reasons I buy are very mundane: the weather is getting colder or warmer, or my staple blouse just got a stain on it and I need to replace it, or maybe I just got a new job and need a few shirts to wear under my blazers. I just want to get in and get out.

Sara and I thought, ‘we must not be the only women who feel this way’ and turns out, we were right. The consistent feedback from our members goes something like this: ‘when it comes to stuff I want, I want to have fun and do the shopping myself; but when it comes to stuff I need…ugh…I just don’t want to deal with it.’

The Goldilocks Principle

Each season, when on my search for The Perfect White Shirt, I traditionally have had three choices:

Too Cheap: H&M, Zara, American Apparel

My first stop is usually one of these retail behemoths, where I search through the racks, on 3 floors, and then wait in line for a fitting room for 27 hours… And, ironically, Zara and H&M do not have a large selection of basics. Because that is not what they focus on. They focus on trend pieces: fashion-forward looks that will be out of style in 2 weeks. No, they do not trade in function, only form. While at least at American Apparel you can be guaranteed to find a tee, that is all they have: ONE fucking tee-shirt. The same ill-fitting cotton V-neck that every hipster this side of the Mason-Dixon line has.

Too Discontinued: J Crew, Club Monaco

Second stop: usually Club Monaco and then J. Crew as they have stepped up their game of late. And I usually have good luck here. Granted, the tees and blouses are a bit pricier, usually in the $50 – $100 range, but I’m willing to cough up the cash if I find something great. Problem is, after I have spent all those hours searching for the perfect shirt, when I go back next year to replace the item (as these things wear out eventually, no matter how high-quality), it has been discontinued! That’s crazy! It’s a white fucking shirt!

Too Pricy: The Row, Theyskens’ Theory, T by Alexander Wang, Kain, James Perse

While I do love me some Alexander Wang and Olivier Theyskens, the $150 – $600(!) price point for a basic tee or blouse is not only not in my price range, it should probably be illegal as well….

To make matters worse, these are the items designers mark-up the highest. For example, I was in a Theory this past Summer, browsing Olivier Theyskens’ new line. I picked up a beautiful ivory-colored, gauzy blouse, perfect for pairing with almost any look. The price tag? $249. Okay, at least I expected that. The garment tag? 100% polyester, Made in China. WTF?? I know that shirt cost $4 to make and the other $245 was going to pay the rent on the store, the commission of the annoying sales girl trying to sell me shit I don’t need, and the multi-million dollar marketing budget of Theory.

A light bulb went off: we can use the Internet to find a solution that is just right.

Don’t You Just Love Paying a 10x Mark-Up?
We Thought So.

While it may seem like highway robbery to charge someone 10x the cost of producing an item, in apparel, that type of mark-up is necessary in order to turn a profit (typically a 4x – 13x mark-up is common in apparel, depending on the category and the brand). Before the Internet, a brand only had two methods of possible distribution: building physical stores or selling at wholesale to retailers. Under both of these scenarios, the brand is forced to allocate a significant portion of their profit margin to something other than the cost of making clothes.

Because of this, we deliberately planned to build Elizabeth & Clarke totally online. No stores, no wholesale accounts, ever. Our unit economics are fundamentally different than a traditional brand (servers are far less expensive than rent for a store in the Village…) We can produce the same quality shirts you may find at T by Alexander Wang or Kain, but at a significantly lower price point and a lower mark-up, while still turning a profit.

Another strategic business model decision we made up front was deciding to sell shirts by subscription only. As a result, customers pay up front for their items, and we order based on demand. We hold no inventory, and do not incur any costs associated with planning, managing, storing, or insuring inventory. That is a lot of money saved for a new brand. Savings, that we pass on to you.

The Paradox of Choice

Many of the reasons behind the decision to start Elizabeth & Clarke run contrary to the conventional viewpoints taken by the lightweight ‘social shopping’ apps launching constantly. The accepted dogma runs something like: ‘more selection, more choice = better’.

Barry Schwartz, a psychologist who’s work lies at the intersection of economics and psychology, wrote a fantastic book and did a subsequent TED Talk on, what he calls, The Paradox of Choice. I would highly recommend you check it out here. He argues that, in modern Western societies, more choice has made us more miserable. Barry walks us through the many steps the brain must follow when a decision is made. Even something as simple as deciding which salad dressing to have out of 20 available choices is extraordinarily cognitively taxing.

Fashion magazine editors and retail store buyers have known this instinctively for decades. They are paid to edit, to cut down, to make the choices for the consumer. This is the service they provide. Or in Internet vernacular, it’s a feature, not a bug. However, the apparel industry at the mass level has grown so rapidly in recent years with the introduction of fast fashion (Zara, H&M, Uniqlo), as a result, the number of SKUs available at the mass price point have gone from thousands to hundreds of thousands to millions. Add to this the fact that, at the mass level, the consumer is expected to do most of the work. The stores are crowded, the sales associates few, the return policy strict. The common wisdom is: ‘well, you are paying $12 for a tee-shirt, and you want customer service with that too?’

This is one of the main reasons we chose to limit our choice of styles to 5 or 6 each season. The white shirt, more so than many items, tends to perform a functional use, rather than make a fashion statement. Even the most chic women will pair high with low, for example, a $12 shirt from Target with a $5,000 Prada skirt. The idea being that the tee or blouse acts as an accompaniment to a look, one that, hopefully, works with many looks in your wardrobe.

At the end of the day though, Sara and I started Elizabeth & Clarke because we are solving a problem we both have and want to work in a space about which we are passionate. Reasons, in and of themselves, that are pretty darn good for starting a business.

Note: Currently, we produce 3 styles each season. We will introduce the ability to choose 3 styles out of 5 or 6 (as well as the ability to reorder older styles) for the Summer 2012 Box.

TechStars, Lies & Videotape

I had high hopes for the TechStars series on Bloomberg. Finally, my mom would know what I do all day! Throughout the four or so months that Bloomberg followed us, we were assured that they were shooting a documentary. “It’s Bloomberg, not Bravo” the producers told us. “Don’t worry, we aren’t using any audio from your private mentor meetings, we just need the footage for B-roll and filler.” “We want to show the real story, nothing will be fabricated.” And I fell for it. Every time a producer or cameraman egged me on, asking me to say certain lines, or do an interview when totally exhausted, I believed they were asking me because they were looking out for me. Yeah, right.

But more than that, what could have been an honest story about the ups and downs of entrepreneurial life, was instead manipulated into some unrecognizable reality TV show with fabricated drama, outrageous caricatures of the founders, and the forced element of competition between the teams.

In just the three episodes that have aired thus far, it has become clear that Bloomberg had a character in mind for each of us – and edited footage according to the story they choose. I happened to get it the worst in Episode 3, but I’m sure another victim will emerge in future episodes.

You can catch-up on all the episodes here: TechStars TV

But I posted the real story below.

(1) The meeting we had with Be&D in their showroom in Episode 2 was shot as if we are pitching them, and they turned us down. That is 100% untrue. Be&D had been a vendor of ours for months, we had already placed a $10,000 order with them for SS11, and we were there to simply place our Pre-Fall 11 order. We ended up talking some strategy with them while there, as well. This was in the very beginning of the program in January, we had not pivoted or changed our idea at all yet (as the footage implies) but we were exploring offering a secondary data product to our vendors. An idea to which Be&D was very receptive, even giving us great ideas for the types of data that would be useful to them. It’s also implied that we were asking them for some kind of discount in buying their goods (similar to what Gilt does when buying overstock). This is also a manipulation: we never, ever asked a vendor for a discount. Being such a new company, we knew we were in no position to negotiate terms with brands.

(2) In Episode 3, when Jana is brought into the picture, it is edited as if we ignored all of our mentors advice to hire a gaming expert, and instead hired a buyer. Also, 100% untrue. Jana had been working with us for 8 months at that point, and had been instrumental in getting 15 of the 17 brands we had, on board. Yes, she may have been a bit difficult, but that’s fashion. Ask any retailer, small or large, and I guarantee you that they will tell you their buyer is the most instrumental person in their business. Even stores like Bergdorf Goodman (that only has 1 store) employ a team of about a dozen buyers. It is critical to the success of any retailer. Jana, ultimately, was not that person for us. And I was overjoyed when one of our mentors, Adam Ludwin of RRE, introduced us to Lily Kwong about a month later. Lily became the buyer at ToVieFor, and was solely responsible for getting Lanvin, Proenza Schouler, and Dior on board – brands, mind you, that do not sell to Gilt, Rue La La, Ideeli, HauteLook, or RentTheRunway, hell, Lanvin doesn’t even sell to Moda Operandi. To somehow imply that we had no brands on board is crazy. That was the entire reason we pivoted, and got the industry support of the CFDA, so as to move from smaller vendors, like Be&D, to brands like Lanvin, which we knew would drive an incredible amount of traffic.

(3) Um, LinkedIn for fashion?? What?? TOTALLY. JUST. MADE. UP. THAT. SHIT. I have never, ever put the words “LinkedIn” and “fashion” in the same sentence when referring to a business idea (which is why they do not have footage of me saying it).

There was a 3-day period where we were playing around with an enterprise SaaS solution for the fashion industry. We were wandering in the desert, and definitely were having an identity crisis. And it was probably a bad decision on my part to let the sweet siren song of a new idea seduce me. All the back-and-forth whiplash was bad for team morale. And I’m sure the Davids thought I was crazy. But to take the tiny sliver of footage they have of this and put it next to the footage from Coterie (the trade-show we went to almost a month later) is just manipulation by the producers.

Which brings me to…

(4) Coterie. The largest accessories trade-show in New York. It’s like fashion week for accessory buyers. Coterie took place near the end of February. We had already decided on a direction for ToVieFor, had full mock-ups of the new site done, and were full speed ahead on development. Vendors LOVED the new idea, which focused a lot less on discounts. We got 3 huge brands on board that day: DVF, Rebecca Minkoff, and BCBG. I did a 45-minute interview about how well Coterie went for us that season, and how happy I was to finally be moving away from our “identity crisis” and having a focused direction. Yes, Jana was being a pain in the ass that day, and that was shortly before I let her go. But to focus only on Jana, and not on the awesome success of that day is just disingenuous.

I have no idea what is in store for me (or my friends at Immersive, Homefield, Nestio, OnSwipe, or Veri) next week, but I can only hope that the blatant lies and manipulation of our story was only a short-term misjudgment…

Tech & Fashion: Really? Can’t We All Just Fucking Get Along?

This post originally appeared on BetaBeat

As you all know by now, the grim reaper has paid ToVieFor a visit. Sad face. I want to talk a little about the root cause of the closure, in the hopes that someone else just starting a new business does not make the same mistake. Also, some broader industry thoughts below – as I’m sure no one wants to hear me keep yapping about my failed startup for weeks on end.

The reason ToVieFor failed is the same reason almost all businesses fail: we did not build something that people wanted. I know it sounds like a *facepalm* moment, but truly following the steps of the Lean Startup to understand what people want is so easily said, but so hard to actually do. While we all worship at the altar that is Steve Blank and the Lean Startup Movement, I have noticed that it is somewhat rare to find entrepreneurs truly applying the principals of Customer Development. I know we didn’t do this at ToVieFor, not even close. In fact, in the beginning, I had never even heard of Steve Blank or Eric Ries. What? Blasphemy you say? Yes, I know it is a little shocking to those in startup land, but for many aspiring entrepreneurs, recent MBA’s, or those leaving industry to start their own thing, there may not be anyone around to enlighten one of the wisdom of The Four Steps to the Epiphany and the beautifully simple formula to starting a business.

In addition, as much as those in the startup world pay lip service to these ideas, and as much as we *thought* we were implementing them at ToVieFor – we were not – in fact, by the time I had even heard of a Lean Startup it was already too late, we had passed that golden time period that every startup has: the time when nobody knows your name, when you have almost no users, no press, no investor will give you the time of day, it’s the perfect time when you can massively fuck-up over and over and over again, and no one will be the wiser. It won’t affect your branding, your user acquisition targets, or your next board meeting because you do not have any of those yet. We squandered this time away winning a business plan competition, when we should have been trying to find out what our users actually wanted.

Every time I thought: “Oh, we need to raise money” or “We need to get more press” or “We need whatever-the-fuck-we-do-not-actually-need” – I should have been focused on the product. Lesson learned for Company #2. We thought we were doing Customer Development, we truly believed in it. We were looking at our own “vanity metrics” as per the industry vernacular. But the reality is that we were afraid to ask our customers the tough questions and get the hard answers: we don’t like your product (or worse, who are you? what do you do again?). That fear of your own customer is more common than one might think. Many times, when I speak with other first-time entrepreneurs – clearly more in tune with startup land and its golden principals than I was – there is a lot of lip service paid to Customer Development, but not a lot of action. But in the hopes your startup does not receive the next visit from the grim reaper, please please please, get over it.

We did do one thing right though, one thing that I see so many other fashion Internet startups get wrong, which was to build a balanced team of technology talent and apparel industry experience. That included my Co-Founder Eric Jennings, an enormously talented engineer who spent the previous four years hacking on the eCommerce company, MyShape, and Lily Kwong, who has worked at every fashion house from Dior to Altuzarra, is a model, a Vogue contributor, and just a general Conde fav.

Over the past 2 years, after probably a couple hundred meetings with people involved in either tech or fashion in some way, I have noticed a distinct and divisive cultural attitude of one towards the other. I have found it enormously common to sit with a first-time fashion entrepreneur who constantly complains about her outsourced tech team, “I asked them to do this a million times, why don’t they get it?” “I don’t know what’s wrong with them, I told them they need to add Facebook Connect, why is this taking so long?” “It’s just an eCommerce website, I don’t know why they can’t build it faster” ad infinitum. There is a clear lack of respect for the technology and the (typically outsourced) developers who are building it.

Luxury brands are among the worst offenders. I challenge you to find a luxury website without (1) a black or dark “sexy” background color, (2) a crazy-long, unnecessary Flash-intro, (3) infinitesimally small font everywhere, (4) and impossible-to-click, 3-level drop-down menus. It’s no wonder brands like Calvin Klein, which generate about $6 billion in revenue annually, only produce about $60 million through eCommerce.

However, technologists do not escape scrutiny either. I can’t tell you how many times I have talked to a previously successful entrepreneur in gaming, video, social media – or maybe a recent alumni of Google or Twitter – that is now starting something that is going to “revolutionize shopping on the web.” The distinct attitude is “I worked at Facebook and sold my last company to Google, how hard can this fashion thing be? This will be cake.” Ha. Talk to anyone who has spent a day of their life in apparel, and I’m pretty sure the last word used to describe the industry would be “easy.”

In fact, to quote a wonderfully eloquent commenter on my last post:

“Instead of listening to this writer’s advice, any company going into fashion should look at how backward thinking most people in the industry are, how little they understand technology, and how they are unwilling to admit the core purpose of fashion. The easiest entry is discoverability and influence and that’s also the most powerful element of the fashion ecosystem. If you become the discovery engine and the decision engine then it’s game over for everyone else. If you become the decision engine (something Google and Bing are trying to do with there [sic] Flight Search and other initiatives in various verticals), then you can easily take over the entire business. If people are coming to you and you help them decide what to buy – then you can start selling them that stuff. You start off as the starting point and then you start taking over more and more until you start producing the products you were originaly [sic] only linking to.”

“The Internet is destroying entire industres [sic] – yet she thinks fashion internet startups should instead compete in the real world. That makes no sense. We should all play to our strenghts [sic]. While she’s trying to do backend stuff and help existing Fashion [sic – again] companies, some ‘only 3 to 8%’ earning Internet startup is going to disrupt the entire industry. A hacker, in my opinion, is not meant to figure out how to solve the problems the existing industry power players created or want solved. A hacker, again in my opinion, should solve the most elegent [sic] things and solve things for actual people.”

While it is difficult to defend an argument that is not rational, in this case, I do not need to, the words speak for themselves.

There are very few companies that have been able to conquer the cultural divide of apparel and technology and, instead, bring together top fashion industry execs and talented technology entrepreneurs. Ironically, the company that has been so far ahead of this curve, is also over a decade old: Net-a-Porter, the Platonic Ideal of the fashion Internet company, and also the one that has paved the way for every flash sale website in existence. Typically, new apparel startups fall distinctly on one side of the other: Moda Operandi has very deep connections and industry experience, but no engineering talent. Inporia has incredibly successful technology entrepreneurs behind it, but couldn’t pronounce “Rodarte” if their life depended on it. The problem is that both think the other’s job is easy or unimportant: ‘the technology is not core to the product and can be outsourced’ or ‘fashion is so simple anyone who is a consumer can understand it’.

If we (we being the collective ecosystem of fashion entrepreneurs and investors) have any hope of solving the difficult supply chain and remnant inventory problems in apparel, disrupting a 100+ year old industry, and building amazing companies we have to realize that each function, both engineering talent and apparel expertise, is equally important and needed. The ability of your company to build a brand and an emotional connection with your consumer is just as important as your engineers who churn out lines of node.js each night so your site can handle concurrency issues and RACE conditions after runs a fabulous piece on your new brand.

With all this said, there are a few startups I am super excited about, and believe can cross this divide: Edition 01 (deep fashion expertise + some excellent East Coast technology investors), The Lookk (one of Carmen Busquets’ first investments since the sale of Net-a-Porter), and The Runthrough (a way for stylists to request samples for shoots without having to send interns running all over town to physically hunt them down) are a few. In addition to the more established fashion startups like Warby Parker and Bonobos, I am incredibly excited to see how they change the industry, and hope that many others will follow suit.

Building a Fashion Company on the Internet? Please Stop. Just Stop. And Read This.

It seems like every time I read TechCrunch, some new “Fashion 2.0” business just got funded. Investors love these lightweight “new retail” businesses that do not carry inventory or manufacture anything. Many investors find it hard to resist a deal utilizing an old world business model (retail) with none of the old world problems (inventory risk, high working capital requirements, large start-up capital requirements, significant dependancies on partnerships). However, these old world problems, from which most investors shy away, are actually where energies should be focused. These are the areas where the big problems in apparel lie and where true disruption can occur.

In fashion, trust me, that are MANY problems that need to be solved: a highly antiquated supply chain, non-standard, un-linked computer systems, non-standard sizing that varies even within the same line, inefficient pricing methods. For christ’s sake, buyers still buy clothes based on what they look like on anorexic people! Discoverability is NOT one of those problems. Yet, it seems that every new fashion start-up is focusing on some derivative of “discovering and sharing” new products. The problem with business models of this type – the ones that do not touch the supply chain and instead make money from affiliate fees or advertising – is that it is incredibly difficult, if not impossible, to build a large, scalable business in this way within the apparel industry.

Take, for example, a traditional retailer such as Opening Ceremony. After shipping, merchant fees, packaging, and COGS, they produce an average gross margin around 40% (the industry standard) – after accounting for photography expenses (which most affiliate sites do not have), let’s say the margin is around 30%. Whereas a fashion site that generates revenue mainly from affiliate fees will collect only 3-8% of the revenue on each sale. That means that the new, lightweight fashion site must sell 4x-10x more inventory than Opening Ceremony in order to produce similar profit margins. On the hierarchy of risk, figuring out a way to sell 10x more than your competitor in order to just stay in the game is a much larger risk than the inventory management issues of a traditional retailer.

VCs and Angels who have traditionally focused on consumer Internet investments and are now dipping their toes into retail, tend to amplify this problem. They see a lightweight business model without all of the “problems” of traditional retail and they think, “this is cool, it’s getting a ton of new users, let’s just focus on getting millions of users and worry about refining the business model later.” However, in retail, the business model is not one that needs to be “figured out” or “refined.” Sell a better product, at a lower price, and with better service than your competitor. That’s it, you’re done. While the “get a million users, worry about revenue later” strategy has worked well for businesses that have created entirely new markets (i.e. Facebook, Twitter, etc.), in apparel, the market and the business model are clear: sell physical fucking products. If you are not directly dealing with the supply chain in some manner (either by making products, transporting them, or buying and selling them) then you are not in the business of fashion – and you do not have a sustainable competitive advantage.

Why so few people focus on the real problems in apparel boggles the mind. I could understand if fashion was a super-small market – but apparel sales in the U.S. reached $160 billion last year – so what gives? My guess is that the “back-end” supply chain / software / inventory management problems are just not as sexy as the “front-end” consumer-facing problems, or maybe the consumer-facing problems are just more intuitive.

To be clear, this is a trend that I am seeing, and in no way encompasses every fashion start-up. There are some notable exceptions: Bonobos, Warby Parker, One King’s Lane, to name a few. These are all very much retail businesses, with well-managed supply chains and inventory plans. And each has been able to use the web to get an enormous amount of low-cost distribution on a level at which their predecessors can only dream. However, these types of business models – you know, the ones that focus intently on creating a better product – do not make up the majority of fashion companies I see being talked about, funded, or built.

This is bad for the entire fashion ecosystem: if the majority of fashion start-ups that receive financing ultimately end up failing because of a poor understanding of the market, then what does that mean for the fashion start-ups that actually have a great product and full understanding of the market? Do they get lumped in with all of the other failed fashion deals and get passed over for funding because “we already invested in two fashion companies this year” or “we feel like it’s just too hard to make money in the apparel business” or some other bullshit investors doll out when they want to avoid an industry?

In the end, Fashion 2.0 is really not that much different than Fashion 1.0, in order to win, one must focus intently on building a better product that solves a real problem – you know, just like every other successful business in the world….

Leather. Wool. And Snark.

The ever controversial and brilliant “critical shopper,” Cintra Wilson, who penned the glorious (or evil, depending on who you ask) review of the JC Penny that landed in Manhattan last year, has published her final column for the New York Times. Sad face. A collection of the best kind of snark (biting, brilliant, and self-deprecating) from her column over the years below.

Chloe store – 850 Madison Avenue

“Unlike the Justin Timberlake album that oozed from start to finish over Chloé’s airwaves, Mr. Andersson apparently has no intention of bringing sexy back…Getting out of one black dress with a high swoop neck and a structured waist proved nearly impossible. The wool constricted violently; I could smell the agony of other women who had been trapped in that dress before me, and had possibly died in it ($2,400).”

Chloe is Back, In an Angry-Funny Mood

Dolce & Gabanna – 660 Madison Avenue

“Sitting among suitcase-size handbags made from giant robot snakes was a crocodile bag the same size, shape and color of a human torso. This seemed to be deliberately marketed toward women who prefer their husbands disassembled, and in the overhead compartment ($49,000).

An example of superlative service: You have selected over $30,000 of garments — and there are three of them, total. They are carried into the “special” dressing room (the one with — no lie — what I believed to be actual cheetah fur covering the doors). You remark: ‘I’ll be in here for a while. I am going to do a pile of blow and clean my gun.’

The sterling professional, instead of dialing security, quips that you’ll be ‘needing another drink.'”

Animal Instincts Most Costly

Eva Gentry – 389 Atlantic Avenue

“Lying in a white box surrounded by tissue was an interesting Margiela collector piece: a black Victorian-style mourning coat, apparently made for someone 18 inches tall — the preparation, perhaps, for an American Girl funeral.

“It’s taxidermy-esque,” I commented to [the store clerk].

“We love that stuff,” she gushed.

“Dead kids,” I agreed.

A Spirit in a Material World

Ann Taylor – 2015 Broadway

“The line has always offered tasteful middle-management office classics in wool with just enough spandex to vaguely suggest a Sarah Palin strip-o-gram. My shorthand for the look was always ‘capitalist burqa’ or ‘corporate office submissive’: cubicle-wear of so-so quality for the single girl in her late 20s whose self-esteem has been almost beaten to death by the beauty industrial complex and whose decent education has been punished with a thanklessly demanding office job…

[F]or this dreaded excursion, I paired my newly mutilated motocross pants with a black 82nd Airborne ‘Death From Above’ T-shirt and boots from my ‘Frankenhooker’ collection — an outfit loosely translated as ‘No, I’m not interested in a Michelle Obama-inspired, stretch satin, office-party ‘mistletoe moment’ dress, thank you very much.'”

At the Office, A Job Well Done

Agent Provocateur – 133 Mercer Street

“I guessed that a rack of short see-through plastic raincoats were designed for something akin to intimate pudding wrestling. Then I realized they probably were really designed for … I can’t remember what, because when I got home, I snorted Clorox and bleached the thought right out of my mind.”

Dressing For Success, on Valentine’s Day

Barney’s Co-op – 194 Atlantic Avenue

“The affable staff — primarily wispy, 20-something hipster boys with conked neo-rockabilly hair, jeggings, buffalo-plaid shirts and dainty little sneakers in silver or leopard print — tends to look like a skateboard team composed of the cast of ‘Glee.’

I felt queasy seeing so many luxe faux-military fatigues, in Brooklyn’s fanciest new retail establishment. It felt a little too disconnected from the fact that we still have an actual war going on to be surrounded by rich Brooklyn moms pushing four-digit sticker-price strollers, chatting on new God-phones and fondling $965 Helmut Lang leggings while dressed like extras from ‘Apocalypse Now.'”

Where the Well-Heeled Dress Down

Pierre Hardy – 30 Jane Street

“At first glance, the shop might be the front office for an international weaponry brokerage, an illegal plastic surgery cult or perhaps an entertainment law office-slash-sex dungeon. The (presumed intentional) effect is to cause the shopper to question her own validity. Should she potentially corrupt the space inhabited by these rarefied shoes by insinuating herself into it, or should she should let all her credit cards slide from her fingers into the middle of West Fourth Street, lie down on them and succumb to a coma of existential ambivalence?”

The Fun House Awaits

Dior – 19 East 57th Street

“A pair of $1,850 toeless peek-a-booties made of stiffened black lace seemed too fragile for a memorable night in Manhattan, but perhaps if you were carried from limo to sofa, you could get a couple of months out of them.

“Dior splashes shamelessly into the theater of spectacle, for those in a position to flaunt conspicuous consumption. Today’s new look isn’t aimed at shaping an independent new woman, but at adorning mistresses and new trophy wives in the sartorial equivalent of hula skirts made from 500-euro notes.”

At Dior, A New Look That’s More of a Sneer

JC Penny – 901 Sixth Avenue

“J. C. Penney has always trafficked in knockoffs that aren’t quite up to Canal Street’s illegal standards. It was never ‘get the look for less’ so much as ‘get something vaguely shaped like the designer thing you want, but cut much more conservatively, made in all-petroleum materials, and with a too-similar wannabe logo that announces your inferiority to evil classmates as surely as if you were cursed to be followed around by a tuba section.'”

“[D]esigners seem to be enjoying a post-shame era… Liz & Co., an offshoot of Liz Claiborne, key provider of looks that say ‘I have been in a senior management position at this D.M.V. for 34 years.'”

Playing to the Middle

Want to Build an Internet Company? Go Work in Finance.

Ok – so now that I have your attention with that title, it is a bit disingenuous. Obviously, finance / investment banking / private equity / hedge funds are not the ideal place to learn how to build an Internet company. However, I am going to make the case that it is also not the worst training ground in the world either, and that finance does actually have a few redeeming qualities. Also, I want to talk about some of the dangers of finance as an entrepreneurial training ground.

First, some background: I used to be a finance douche bag. I know, sad. In my defense, at the time when I was in college and discovered the (what seemed at the time to be) prestigious, selective, and elite world of high finance it seemed like a perfect way out of the small town future that lay ahead. However, since I did not attend a Top 20 school (not even close), it was incredibly difficult to break in. I spent about 2 years pounding the pavement – heading to NYC on my own dime to beg the few random contacts I had to just give me an interview. That is a big sunk cost of time. So when I got into a top investment banking program, I convinced myself that it was going to be my career. I had finally clawed my way out of the lower-middle class and I wasn’t leaving. Unfortunately, that all changed when I realized (along with my Associates, VP, and Managing Director) that I absolutely hated finance. The work is soul-sucking, every review I ever had said “Melanie has a problem listening or following directions,” and my work ethic suffered as a result. When I finished the 2-year program I was not extended an offer to continue. Huge blow to my ego and I was sort of a lost soul for a number of years. Then, I managed to move to New York, get involved in the tech scene, start a company, and get selected as basically one of the top new start-ups in NYC this year by the prestigious incubator program, TechStars. As I reflect back on the skill sets that I  gained in finance that are now helpful to me as an entrepreneur a few points come to mind:

Good Things

Building Financial Models Is Not All That Different From Writing Code.

Ok, just go with me here for a minute. Ultimately, what are the skills that make a successful engineer? Typically, one must have the ability to build many sets of complex logic statements that all need to interact in a way that is simple, elegant, and complex at the same time. You also need to understand the performance trade-offs and limitations of the tools you are using in order to optimize performance. You need to have a vision for the architecture of the product, while being able to come up with creative solutions for the inevitable roadblocks. Building a financial model from scratch, typically on a pretty tight time frame, for a company that is totally new to you and where you have no idea “where the bodies are buried” requires all of those skills (assuming you are actually good). In finance, you learn the base logic statements needed to form complex models – now all you need to do is learn a bit of Javascript and Ruby and you are good to go… 😉

You Learn How to Work Incredibly Hard for a Long Number of Hours With Very Little Sleep.

People say they work “long hours” all of the time, but, I’m sorry, If you have never worked in investment banking / hedge funds / PE / big law firm – you do not know the definition of long hours. By long hours, I mean: your day starts at 9am and ends at 9pm two days later. Sleeping under your desk, not seeing sunlight for days on end, going months without ever having a meal outside of the office: welcome to banking. While this lifestyle is obviously not sustainable for more than a couple of years, developing the ability to churn out models on no sleep comes in incredibly handy when you are trying to meet a release deadline or prepare for a pitch meeting on 2 hours of sleep.

You Have a Better Understanding of Investing and the Technical Aspects of Fundraising.

Granted, VC’s and PE/HF guys do look at different stages of investment and do not necessarily focus on the same thing  (i.e. team is much less important in a later-stage company) but, really, who are we kidding? Institutional investors are all basically the same. They all want to know how much money you are going to make them. Period. End Stop. Learning some of those basics in finance, how to: evaluate an investment, model returns, write an information memorandum (basically, a business plan for later-stage companies), and value a company, all come in pretty handy – especially when a VC thinks they can offer you a higher valuation than a competitor to win the deal but then increases the option pool by 10%…

You Can Do Your Own Books!

Yay! You get a sticker. You have just figured out your only truly transferable skill in your new start-up.

Bad Things

Don’t Get Drunk off the Kool-Aid.

I think this is the most dangerous possible side effect of working in finance. I distinctly remember having a conversation with two of my Associates and another Analyst one day shortly after we closed a deal where the Founder / CEO cashed out for a nice $10mm. Everyone was basically saying “must be nice” to be her…but then immediately backtracked, “well, starting a company is way too risky” and “at least in banking you know you will get rich if you just work hard for a certain number of years” and the like. Within banks, hedge funds, and private equity – the people who work there – especially the people who have spent years at these places – this is the way they think at a very fundamental level. Fundamentally, finance attracts the risk-averse. And as a young, impressionable Analyst, you look up to your Associates, VP’s, MD’s, etc. (well, at least the ones that are not complete assholes), and generally tend to adopt their worldview. The ability to “think outside the box” in finance is rare, and it is very easy to get sucked in.

The Golden Handcuffs

While drinking too much Kool-Aid affects the way you think about the world and your career, the Golden Handcuffs are what physically keep you there. You keep telling yourself “just one more year, just one more bonus cycle, just another $200k – and then I’m out” but, unfortunately, that very rarely happens (excluding the period from 2008 – 2009 when everyone got laid off) and generally, if the choice is left up to the Analyst / Associate, the status quo is the path most taken…

You Have No Idea How to Think Like an Entrepreneur, Your Worldview is Fucked.

If you do manage to leave banking and start your own company, your first instinct is to: get everyone to sign NDAs before you tell them about your idea, patent the amazing new business model you just came up with, build out a really fancy market analysis, or come up the most awesome list of potential acquirers ever. None of these things involves building a product. You may even think that you can just delegate building your product out to an agency or freelancer. In fact, I get emails like this all the time from former finance schmoes wanting to know “how much does it costs to build a website?” It goes without saying, but, this worldview is fucked. Please, do not think like this.

Obviously, I am biased by my experience. And I would never recommend finance for a kid coming out of college that knows that he / she wants to be an entrepreneur. But this post is really for those already trapped in it, and trying to get out. Have some confidence, you may be more prepared  to be an entrepreneur than you think.

My One True Love: Louboutin

Some of my favs from over the years. Some I own, some that got away.

Louboutin for Rodarte S/S 09

Also Louboutin for Rodarte. But I actually own these :)

The Anemone – a Classic from F/W 07

My favorite version of the Prive

Who doesn’t love a military-inspired shoe boot?

150 millimeter, metallic, studded amazingness

Starting Your First Company? What to Read When You Don’t Know What You Don’t Know

When I first started my company, ToVieFor, I did not know what I did not know. I came from the finance world and I just thought that you:

1. Find an idea
2. Pick a name
3. Incorporate your business
4. Build a website
5. Sell your company for $1 billion…


So I put together a package of materials below – books, blogs, specific blog posts, and people to follow on Twitter – that I wish I had before I began working on anything at all. So, if you are thinking of starting a company and you *just* need a technical person to build your website for you…STOP, just fucking stop it. Take a few days, read all of the below, take it in, and then go learn how to code. At least then you just might know what you don’t know.

Enjoy kids.

Step 1: Can You Even Hack It As An Entrepreneur?

Newsflash people: Not everyone is cut out for this shit. Find out if you are, read this first, and then see Suster’s 11-post series on the characteristics of successful entrepreneurs.

Step 2: Have an idea for “the Next Big Thing” but want signed NDAs before you tell anyone? OMFG. Just. Fucking. Stop. It.

Want to discover what your “amazing” idea is worth? Read this.

Ok, so maybe your idea is kind of okay. If your idea were to become a successful business, can you see yourself doing it for the rest of your life? No? Then don’t start it. Read The Monk and The Riddle instead (suggestion courtesy of my good friend @jasonlbaptiste) and go back to the drawing board.

Step 2a: No idea? No problem.

Practical solutions for finding an idea from the ever-popular Chris Dixon.

Step 3: Do you know how to code? No?

Do Not Pass Go. Do Not Collect $200. Read this.

Step 4: Got Co-Founders?

Great. People actually want to work with you. Maybe even for free! You get a sticker.

Now read this and then this.

Step 4a: Incorporate.

Debating between an LLC or a Corp? Do not be cheap, hire a good lawyer, and form an S-Corp. If you never plan on taking a dime of money from anyone other than your mother – then you can form an LLC. Explanation here.

Step 5: Get Traction. Find Product-Market Fit.

So this section could be an entire series of detailed blog posts. In fact, this section could be (and is) stacks and stacks of books on the subject. But the point here is just to get you on the right path in the way you think about building a product and getting initial traction. This list is in no way, shape, or form complete or all-inclusive.

Start by reading Steve Blank’s Four Steps to the Epiphany, or better yet, the Entrepreneur’s Guide to Customer Development (which is basically the Four Steps to the Epiphany in fun, bite-sized pieces).

Next, add to your RSS feed (I heart Eric Ries).

Third, in your quest for world domination, your goal is not to get a million users. Your goal is not even to get 100,000 users. Your goal is to get your first 1,000. Vin has a good post on this here.

Step 6: Raise Seed / VC Financing (notice, this step comes AFTER you build a product).

Raising money from VCs and seed investors is just like dating. I Repeat: raising money from VCs and seed investors is just like dating. All you need to do is remember this whenever you are interacting with any investor and you will pretty much understand how to react to any situation thrown at you.

How to Pitch a VC: Suster has a nice little package of blog posts on this here.

Once you get a term sheet, you will need to familiarize yourself with all of the terminology and financial machinations of VC and Seed investing, read Brad Feld’s seminal Term Sheet Series. This is not optional reading.

And finally, always remember: when you want money, ask for advice!!

Step 7: Sell your company for $1 billion. Rinse. Wash. Repeat.

Yeah – no posts here. Because this is not what you should be focused on or thinking about. If you get an acquisition offer, great. You probably will not – at least not in the foreseeable future. If you do get an offer, just do NOT say anything along the lines of “Sounds great! I just need to run this by my board!” If you do, then you deserve the valuation you get.

And finally, add the following to your bedtime reading.

Paul Graham’s Essays: The guy invented the modern start-up incubator, Y Combinator, is widely considered a godfather of seed investing, and WROTE A NEW FUCKING PROGRAMMING LANGUAGE called Arc. Read them, all of them. And then go read Founders At Work. You’re welcome.

RSS it:
Suster’s blog, (come on, I had to…)

Read these books:
The Four Steps to the Epiphany
The Entrepreneur’s Guide to Customer Development
The Monk and the Riddle
Do More Faster (I heart TechStars)
Founders At Work
The Art of the Start

Follow these people on Twitter:


Marchesa F/W 11 RTW




The always brilliant Georgina Chapman. My favs from F/W 11 RTW.