Episode 49: The Stitch Fix IPO

[0] Welcome back to episode 49 of Acquired, the podcast about technology acquisitions and IPOs.

[1] I'm Ben Gilbert.

[2] I'm David Rosenthal.

[3] And we are your hosts.

[4] Today we are covering the Stitch Fix IPO, a one that David and I have been excited to cover since the S -1 came out because it's a fun read.

[5] It's fun to compare and contrast against other S -1s coming out recently.

[6] It's a e -commerce leader that is going up against Amazon in Amazon's absolute heyday and rise to prominence, and we're going to dive into figure out, you know, how can they compete?

[7] How can they differentiate?

[8] How is there still a good business left in e -commerce in an era where Amazon looms high?

[9] Yeah, and this is one that is really tailor -made for our narratives section, because for the longest time, the narrative when Stitch Fix was a private company, was this company is crushing it, you know, it's all up into the right, which, as we'll find out, it was, but then it was actually a disappointing IPO in and of itself.

[10] So we'll dig into the story here.

[11] What happened?

[12] Yeah, yeah.

[13] And for listeners who are new to the show, so we started as just acquisitions, hence the name acquired.

[14] When we added IPOs, we realized we needed to change up our format a little bit.

[15] And there's a big part of IPOs, which are narratives.

[16] And that's both narrative from the company side and narrative from sort of the investor side from the street.

[17] So it's what does the company want you to believe and what is the analyst team or the analysts and media community want you to believe.

[18] You never hear much about that in acquisitions because they kind of happen and then you just hear about the news afterwards.

[19] But with the roadshow and the lead -up and trying to price optimally, depending on your definition of optimally, there's lots and lots of narratives flying around about IPOs.

[20] So we will dive into that.

[21] Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow.

[22] Yes, ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery and increase efficiency.

[23] 85 % of the Fortune 500 runs on them, and they have quickly joined the Microsoft's at the NVIDIAs as one of the most important enterprise technology vendors in the world.

[24] And just like them, ServiceNow has AI baked in everywhere in their platform.

[25] They're also a major partner of both Microsoft and NVIDIA.

[26] I was at NVIDIA's GTC earlier this year, and Jensen brought up ServiceNow and their partnership many times throughout the keynote.

[27] So why is ServiceNow so important to both Nvidia and Microsoft companies we've explored deeply in the last year on the show?

[28] Well, AI in the real world is only as good as the bedrock platform it's built into.

[29] So whether you're looking for AI to supercharge developers and IT, empower and streamline customer service, or enable HR to deliver better employee experiences, ServiceNow is the platform that can make it possible.

[30] Interestingly, employees can not only get answers to their questions, but they're offered actions that they can take immediately.

[31] For example, smarter self -service for changing 401K contributions directly through AI -powered chat, or developers building apps faster with AI -powered code generation, or service agents that can use AI to notify you of a product that needs replacement before people even chat with you.

[32] With ServiceNow's platform, your business can put AI to work today.

[33] It's pretty incredible that ServiceNow built AI directly into their platform.

[34] platform, so all the integration work to prepare for it that otherwise would have taken you years is already done.

[35] So if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to ServiceNow .com slash Acquired, and when you get in touch, just tell them Ben and David sent you.

[36] Thanks, ServiceNow.

[37] Now that reminds me, we have a Slack now with over 1 ,000 people.

[38] If you go to Acquire .fm, you can join the Slack.

[39] You can learn about any news that we haven't really gotten to yet on the show, because we release sort of a week or a week and a half after anything happens and mostly kind of just do historical episodes.

[40] So if your jam is talking about news as it's happening with other nerds like us, jump into the Slack and enjoy.

[41] Yeah, it's kind of awesome that there are over 1 ,000 people in the Slack now.

[42] I mean, this was like an experiment that Ben and I started right in the beginning of Acquired and now it's taken on a life of its own.

[43] So thank you guys for being such great members of the kids.

[44] community.

[45] Maybe our large Slack will help us get an audience with members of the Slack team when we cover the Slack IPO in coming years.

[46] That'll be a good episode.

[47] Yeah, yeah.

[48] Anything else before we dive into history and facts on Stitch Fix?

[49] No, I'll stop interrupting you.

[50] Let's do it.

[51] Sweet.

[52] So, Stitch Fix, before we get into the much discussion that we will have around the narrative section, But first, let's go back just almost exactly seven years ago in late 2010 to when Stitch Fix was founded.

[53] And it was started by two women, CEO Katrina Lake, who was then a business school student at Harvard at HBS, and the wife of a friend of hers from college, she went to undergrad at Stanford, named Aaron Morrill.

[54] Morrison Flynn, and Aaron had been a buyer for Jay Crew.

[55] Katrina was looking for businesses to start, and she didn't really like shopping for clothes, but liked looking, you know, nice and especially professional as a business school student and thinking about starting a business and her career after business school.

[56] So they decide that there might be an opportunity to team up here.

[57] So they started the company to be an online fashion company.

[58] and they decided to call it Rack Habit.

[59] Yeah, I mean, as soon as I read it, I was trying to think, is this actually a way worse name than Stitchfix?

[60] Or have I just heard Stitchfix so many times now where Rack Habit feels like a dumb, ridiculous, silly?

[61] They could never be successful with that name, name.

[62] Yeah, I don't know.

[63] I mean, it sounds a lot like Rabbit.

[64] Yeah, I was like, is that like some kind of like weird TaskRabbit parody?

[65] Yeah.

[66] Also started in Boston.

[67] But the world may never know because it doesn't stay rack habit for long.

[68] But the inspiration for the company and the product is that right around the same time, there was a company actually might be another good acquired episode called Trunk Club that was based in Chicago.

[69] And Trunk Club had pioneered along with a few other businesses, this idea of an online retailer where instead of the customers choosing the clothes they want and buying them, They actually employed stylus, personal stylists, and the stylus would choose clothes and send them on a regular basis to their clients.

[70] And then the clients would try on the clothes and decide if they like them and if they like them keep them.

[71] So it was like having a personal shopper online for you.

[72] And Trunk Club ended up being fairly successful, was acquired by Nordstrom eventually.

[73] But they only did this for men.

[74] Katrina and Aaron thought, well, maybe there's an opportunity to do this for women as well.

[75] So they start rack habit and they first, you know, they sign up a few friends in the Boston area and they decide to be really analytical about what they're doing.

[76] So rather than just, you know, sending them whatever they found that they thought was attractive, they asked pretty detailed questions about the style preferences of their friends and they used an online survey to gather all this data and then they started logging it on a really big Excel spreadsheet and then they would go around to boutiques in the Boston.

[77] in area, fashion boutiques, and buy clothes that they thought matched the preferences that their customers were putting in.

[78] So they do this while Katrina's finishing up her second year at HBS.

[79] And then when she graduates in 2011 next year, they actually raised some seed financing.

[80] So they raise $750 ,000 from Steve Anderson at Baseline Ventures.

[81] And Steve is a great, great, very early seed investor.

[82] He was the first investor in Instagram and many other great companies.

[83] Many of his portfolio companies have popped up on this show, and supposedly he had been actively out there looking for the trunk club for women, so he found it.

[84] Before we get too far from rack habit, there's a great remnant of internet history.

[85] If you go to rackhabit blog .blog .blogspot .com, there's the rack habit effectively content marketing.

[86] And there's just a few blog posts that are from 2011, and it's things like their interns writing posts and blog roundups.

[87] and trend report and you know what you should be paying attention to in the last post is uh as called packing list top five must haves for sailing and uh it's the very first branding that you see of stitch fix so that's when they sort of formally moved under their own you know platform and uh and off blog spot but you can still uh still up there must haves for sailing yeah yeah i can say i'm guessing that most of their their customers at that time were hbs students if they were into sailing how east coast.

[88] So I guess they, you know, saw the light and Katrina, you know, had gone to Stanford for undergrad and grown up in the Bay Area.

[89] They decided to move back to San Francisco, away from this East Coast sailing after she graduates and they get the investment from Steve at baseline.

[90] And that's when they changed the name to Stitch Fix.

[91] I think we should probably take a pause here and then talk through kind of exactly how the product works in this, this category that they help pioneer that, you know, they refer to as.

[92] assisted commerce.

[93] So the way it works is that consumers, or as Stitch Fix calls them, clients, they come to the site and then they fill out, today they fill out the style profile online on the site rather than talking to a friend.

[94] And David, I actually, I went through it this morning and I can tell you super, super nice, easy process.

[95] The one thing that was surprising and kind of a cool thing is in addition to all of your style preferences and asking the minimum number of really smart questions where they can infer the right things about you.

[96] you know, which of these two things are you more likely to wear?

[97] What tends to fit you better?

[98] Things like that.

[99] There's one that's basically like put in all of your social media handles so we can just go do our own sleuthing.

[100] And so then the stylists have that at their disposal to really understand like who are you and what is your, what do you look like publicly to the world?

[101] And in particular, I think when they were first starting, Pinterest was a huge element of that.

[102] Yep.

[103] Yeah, they say paste in any relevant Pinterest boards you want us to look at.

[104] Yep.

[105] And you can even share a Pinterest board with your stylist that you can both post to.

[106] So this is an important point.

[107] When you sign up, you fill out the style profile and you get matched with a human stylist, a real person who works for stitch fix.

[108] And these are mostly part time remote workers.

[109] They have over 3 ,000 of them now.

[110] That human stylist, you can contact them and say, you can order a quote unquote fix.

[111] And you can have that happen either on a regular, you know, subscription commerce type basis every one month or two months.

[112] Or you can just do it on demand whenever you want.

[113] So you have a job interview or a particular.

[114] occasion.

[115] You can say, I have this coming up.

[116] I need an outfit.

[117] Send me a fix.

[118] And so every time you order a quote -unquote fix, you pay a $20 styling fee for the work that the stylist does.

[119] And that $20 then gets applied to any items that you buy.

[120] So if you don't buy anything that they send you, you still have to pay the $20.

[121] But if you do, the first $20 gets credited.

[122] And each box that they send you fix has five items.

[123] And like I said, you can keep whatever you want.

[124] And you can keep whatever you you can keep one, you can keep three, you can keep four.

[125] If you keep all five, you get a 25 % discount on the entire purchase.

[126] But otherwise, you're paying full price.

[127] So as opposed to a lot of other, well, online commerce businesses in general, but the sort of first generation of businesses that looked like this, like Gilk Group or Zooli and the like, this is not a sort of flash sales.

[128] Flash sales.

[129] This is not a flash sales site.

[130] these are for customers and products that are going to be purchased at full price, except if you buy all five, then you get the volume discount.

[131] After talking to a couple of friends who are avid stitch fixed customers, a lot of them find themselves liking three, maybe four things, and keeping the whole box anyway, just because it's the same amount and they get one more item, and they can either resell that if they want or, you know, keep it and just save themselves the hassle of sending it back.

[132] It's basically like, in many cases, depending on the price point, buy four, I guess, not depending on the price point, but buy four, get one free.

[133] Yeah, it's a really interesting kind of consumer psychology play, and I'm sure they're very data -driven, as we'll get into in a minute, about how they select those items and what the prices are and what they put in the box.

[134] But it's interesting, you know, thinking about the, I was thinking about kind of like who is the Stitch Fix customer, and it wasn't entirely obvious when it started.

[135] I think a lot of people thought, oh, you know, something like truck club.

[136] That makes sense, you know, for men, men don't like to shop, but women, of course, they like to shop.

[137] But it's interesting, you know, if you think about like kind of a two by two matrix, sticking with the business school theme here, of like, do you care about how you look and do you like to shop?

[138] And the Stichfix customer is, you know, in the yes, I care how I look, but no, I don't actually enjoy shopping.

[139] It turns out there's actually a lot more people, both men and women, that are in that category, than you might otherwise think.

[140] Yeah, and a growing sector of maybe people who do like to shop, but don't have the time for it and starting to value convenience and especially when so many other things are getting more and more convenient either shipped to us or last mile delivered to us that we sort of expect that things are more convenient in our lives even if it was something that you know maybe we'll take a Saturday and go um you know go shop it's not going to happen all the time and if we can abstract that away from our lives and make that like you know the thing you only do once in a while instead of the thing you have to do all the time there's there's an opportunity there yeah it was really funny.

[141] I was talking about this episode last night where on the Thanksgiving break and Jenny and I were visiting my parents.

[142] And I was telling my parents about, you know, this episode we were going to do today and about Stitchfix.

[143] They hadn't heard of it.

[144] And I was explaining this concept to them.

[145] And both of them were like, I can't imagine women ever doing that.

[146] And, and they're like, this must be a generational thing.

[147] And I was like, no, you know, I don't think so.

[148] Like, their target customer is actually in their, you know, in their late 30s through late 40s.

[149] opportunities to start new businesses aren't always formed by technological shifts.

[150] They're often formed by societal shifts.

[151] And in the very same way that people would balk at the idea that you would let a stranger stay in your home or you would get into the back of a stranger's car, this feels like a thing that's unintuitive that, you know, quote unquote, women won't do that, that, you know, the world has changed and people value convenience.

[152] And we'll get back into this in a minute.

[153] But, you know, Stitchfix, for all of the growth and the great business they've built and hype, they definitely had trouble raising money along the way.

[154] And I think this was, this was part of it.

[155] But just like any, you know, great business that gets built, you have to find something that's not obvious or else, you know, then why wouldn't have it already been done?

[156] Right.

[157] Right.

[158] Okay.

[159] So diving back in, they had relocated to San Francisco.

[160] So they'd relocated to San Francisco.

[161] the business starts growing, and the next year after they move out in 2012, they make two really key hires.

[162] So the first is a guy named Mike Smith, and Mike had been the CEO of Walmart .com, and he came over and was Stitchfix's first COO.

[163] He then became the GM of the men's business when they launched that, I think about a year ago now.

[164] And now he's back in the role as CEO of the whole company again.

[165] And the second and perhaps even more important hire they made is they hire a guy named Eric Coulson.

[166] And Eric had been the VP of Data Science at Netflix and the chief algorithms officer.

[167] So he was the guy at Netflix, or it was his team, that was responsible for the Netflix recommendation, which, you know, has driven so much of their success and their usage.

[168] I don't know if before that if they were positioning the business as such, but this idea that Stitch Fix is like the Netflix of fashion.

[169] Yeah, it went from you know, trunk club for women to the Netflix of fashion.

[170] And a lot of that, you know, driven by the way that they wanted to be perceived by their customers and the technology they were actually doing on the back end.

[171] Yeah.

[172] So, Ben, you went through it this morning and I know you've also read a little bit.

[173] Like all the data that they collect through the onboarding process then gets married with the human stylist and there's a whole robust product on the back end for the stylist.

[174] Yeah.

[175] Yeah, so a little bit of insight into this.

[176] So after talking with someone who was close to the company for a long time, they basically looked at it as the business really started clicking when Eric came over and when he brought a lot of the practices from Netflix and then ultimately when he brought a lot of his team over as well.

[177] They really saw retention rates go up.

[178] They saw people keeping the packages after they shipped it and not returning as many items.

[179] and they really sort of rework the whole process for how do we learn about people and get the minimum amount of information necessary to basically deliver the best possible customer experience and have them stick for a long time.

[180] And so I was trying to figure out what exactly does that mean because they have 3 ,400 stylists who are working part -time, you know, $15 -ish dollar an hour jobs remotely.

[181] And so that's the huge workforce that they claim every single fix that's sent out is is human assembled, and yet they're claiming their recommendation engine and that they're, you know, the Netflix of clothing, how does that work?

[182] There's actually a whole product on the back end for these stylists where once you become one of the 3 ,400, you basically get all of the output from that data engine where they're collecting everything from your onboarding to what you're sending back and tuning based on that to a lot of really interesting innovations I'll mention in a second on how they store the data to make sure the fit is right.

[183] and then using that to basically pop up options to the stylists.

[184] And then the last step is the stylist actually making the human calls about, do I really feel like this person would like this thing?

[185] And one of the really cool things they do on the back end is rather than storing size information, like this person's a small, so we'll send them a small, they store all the measurements about each article of clothing.

[186] So when they have a piece of clothing coming to the warehouse, they take all the measurements and store it that way.

[187] And so when they are looking up with something, you know, Is this, how far away is this item from a data perspective from something that would fit this person well?

[188] It's not based on a variable thing depending on how the manufacturer's.

[189] Exactly.

[190] Exactly.

[191] And they actually ask you in the onboarding, hey, what size shirt do you wear when it's a button down?

[192] Small.

[193] Great.

[194] Is that usually too big?

[195] Usually just right.

[196] Is it usually fit a little small?

[197] And so they use that as a starting place and then start to tune off of you selecting items over your first few fixes.

[198] that they send out.

[199] Yeah.

[200] Interesting.

[201] Interesting.

[202] So they're they don't make you go through the trouble of like measuring yourself.

[203] But on the back end for them on their inventory, they're not cataloging things based on just like the letter or number size.

[204] They're like actually taking the measurements of each.

[205] Right.

[206] Right.

[207] And so the first thing, the first fix they'll send you was a best estimate.

[208] But then it's really important as part of the process to constantly give feedback and it learns from basically what was just right, what was too small.

[209] And the further off your guesses are at the very beginning, the longer it's going to take to lock you in.

[210] Yeah.

[211] Interesting.

[212] And that's like, well, it would be really hard for a stylist to do that, even if they are like truly your personal stylist, but, you know, on a scale basis to have like thousands of clients, you know, hundreds, two thousands of clients per stylus.

[213] Like, there's no way that could work without this data science backend.

[214] Yeah, yeah.

[215] And a lot of the ways you could argue, you know, a human could never do XYZ.

[216] Right now, with the absolute state of the art, a human is still the best way to do the styling.

[217] But to your point, David, with a scale back end that's storing things in the structured way, a machine is actually way better at doing sizing than a human would be by eyeballing things.

[218] Yeah, interesting.

[219] I mean, the parallels to Netflix are, you know, pretty clear.

[220] Right.

[221] Right.

[222] I have two more comments on their tech just to talk about, well, one is how serious they are about it.

[223] If you go to algorithms dash tour .stitchfix .com, There's this awesome explanation of how the Stitch Fix works on the back end.

[224] And they actually put a lot of time, a lot of front -end engineering work into making this page because it's pretty crazy as you scroll down it to watch it all, fly around and animate.

[225] But it basically talks you through a lot of the algorithms that they use.

[226] And if you click over to their engineering blog, that's called multi -threaded, which is like maybe the best name for an engineering blog of any company ever.

[227] That's awesome.

[228] It's right up there with Slack's blog name of.

[229] of several people are typing.

[230] Several people are typing.

[231] That's awesome.

[232] So they've made these two great hires picking the story back up.

[233] Things are going great.

[234] The business is starting to grow.

[235] But there are a couple hiccups that come along the way.

[236] So first, in the summer of 2012, Katrina and Aaron Flynn, her co -founder, get into a bit of a dispute that results in Flynn and Aaron Flynn.

[237] leaving the company and actually filing a lawsuit against Katrina and the company and Stitch Fix that ultimately ends up getting settled a couple years later in 2014 and terms are not disclosed but not kind of really what you want to have happening in an early startup and and that and potentially also some of the other dynamics we were talking about that like on the surface this might not seem like the most obvious market ends up that the company even though it's growing and doing well and making these great hires, they kind of have trouble raising money and they need to raise another round because they're running low on cash.

[238] So actually, towards the end of 2012, Steve Anderson does a $2 million bridge round for the company, bridges them to the Series A. And this is not uncommon in startups and venture.

[239] But what is fairly uncommon is that a seed fund would lead a bridge that large.

[240] I mean, that's a lot of money for a very small fund to put into a company.

[241] So Steve had a lot of faith in Katrina and what the business was that was being built here.

[242] So that happens.

[243] The company apparently is only eight weeks away from running out of cash and not being able to make payroll at that point.

[244] They do the $2 million bridge.

[245] And then in early 2013, they're finally able to raise a, quote unquote, proper series A. and Lightspeed, the venture firm, comes in, and this is 2013, and companies are raising boatloads of capital then, and, you know, even in the, you know, sort of new e -commerce and flash sales world, you know, Zooli is really large, there's a lot of momentum.

[246] Lightspeed's only willing to put in another two and three -quarter million, so on top of the two that the additional two the baseline puts in, they raise in total a $4 .75 million series A, And that, I believe, was at just under a $14 million post money.

[247] Yet at the same time, like, the business is really starting to grow.

[248] So they shortly after that, they ship their 100 ,000th fix, which is quite a lot.

[249] And right around the same time, ironically, after they close the Series A, Bill Gurley at Benchmark, here's about the company, and here's about the momentum they have.

[250] And he gets really interested.

[251] So he gets in touch with Katrina, and he asks her for a meeting.

[252] And as the story goes, she says, well, you know, we just raised our series A, but, you know, happy to meet with you and show you the business.

[253] So they sit down.

[254] And the first thing that she does is she opens up an Excel spreadsheet, and she shows him a three -year forward projection that she's modeled of both a cash flow and an income statement.

[255] And supposedly Bill gets quoted later as saying that has never.

[256] happened in the history of my venture career.

[257] And Bill, of course, was a former stock analyst on Wall Street.

[258] And so he's used to seeing these models, but these are for much later, you know, like public businesses.

[259] And so apparently he decides, like, right then and there that he wants to invest.

[260] He's seen the momentum.

[261] The numbers are great.

[262] He doesn't care about the category.

[263] It's clearly growing.

[264] He wants to do it.

[265] But unfortunately, they had just done their Series A. So he keeps lobbying Katrina and the company.

[266] And finally, just a few months later in the fall of 2013, he ends up investing $12 million, benchmark does, at a $40 million post money valuation.

[267] So to go from, like, being at the end of 2012, being basically out of cash, nobody's willing to give them money.

[268] They have to go back to Steve their seed investor to do a bridge round.

[269] They finally get the Series A done, but not even like a full lead.

[270] It's just somebody's willing to essentially top up the bridge.

[271] bridge.

[272] And then Bill Gurley, of all people, gets so much conviction in the company that he lobbies them to invest.

[273] And I believe, I don't know for sure, but I was trying to figure out based on pitchbook data and looking at the IPO prospectus, I think benchmark rates the entire $12 million check into the company.

[274] And so it was quite a kind of turnaround for the company at that point.

[275] Yeah.

[276] So great for Stitch Fix there, being able to get enough capital to really run the business for a good amount of time there.

[277] And great for benchmark looking at where Stitch Fix is today to be able to get in at that valuation and buy a nice chunk of the company.

[278] Great on all sides.

[279] And when you look at Katrina opening up the three -year projection to build there, I mean, that's just very emblematic of her as a business person.

[280] When you talk to people who have worked with her, they say she's extremely calm under pressure, she's analytical, she's incredibly level -headed.

[281] She's highly, highly rational about her business.

[282] And very good at reasoning from first principles.

[283] And I think, you know, you watch Bill tweeting about the Stitch Fix IPO and talking about how there was never somebody better suited to run a public company than Katrina.

[284] She's just very, very analytically sound and level -headed and not surprising to me that she had a three -year financial projection there that probably, you know, I'd love to see it and see how accurate it was.

[285] There's like a running joke among early -stage startups of, well, who knows if these will come true, but something tells me that they were, uh, um, grounded in some very solid assumptions.

[286] It's rare, but you can make the mistake of going, you know, overboard on projections and being too, you know, having too much false precision.

[287] But what's really interesting is for this company, like, this is actually necessary.

[288] And modeling not just, you know, oh, I think I'll do this much revenue in three years.

[289] But like the full, you know, three statements of like, you know, the cash flow statement and the income statement and, you know, Bill doesn't say she had a balance sheet.

[290] But if you have a cash flow statement, you also need to have a balance sheet there.

[291] She had modeled, you know, all three financial statements.

[292] it's like part of what kills a lot of companies in this space is like your inventory costs are just massive.

[293] And so like as you grow, you can get underwater pretty quickly.

[294] It's really important if you're going to run this business effectively that you understand, you know, all of the financial aspects.

[295] And clearly we'll get into this in narratives.

[296] I mean, Katrina does.

[297] This is an exceedingly well -run business.

[298] We're going to steal the show from narratives a little bit here, but quite the focus on being unit economic positive and running a profitable business from a very early point rather than being grow, grow, grow, like a lot of companies where quite frankly the business model is predicated on it where Stitch Fix just isn't.

[299] So I think a good early recognition by the management team of that there.

[300] Yep, yep.

[301] And, you know, I mean, they were balancing this growth and profitability and understanding they weren't profitable just yet, but they would be soon, understanding their balance sheet and their cash flow, but they also grow hugely.

[302] So Gurley and Benchmark invest in the fall of 2013.

[303] Now, the company is on a June 31st, or July 31st fiscal year end.

[304] So their fiscal year ends kind of halfway through the year, a little over halfway.

[305] That current fiscal year that benchmark invests at the end of it, which is in the summer of 2014, they do 73 million in revenue.

[306] And this company, was only founded, you know, sort of less than three years before that.

[307] So, so really impressive.

[308] And then the next year, they grow, you know, even more.

[309] So end of fiscal 2015, which is summer 2015 for them.

[310] They do 343 million in revenue and 42 million in EBITDA.

[311] So they're cash flow positive and generating a huge amount, especially for a four -year -old startup.

[312] And so at that point, and I don't know the full story, whether it was the insiders, the existing investors and VCs lobbying to put more money in the company, or Katrina feeling like she wanted to raise a little bit more to have some flexibility as they started building out their other business lines, you know, men and plus size and maternity.

[313] But they raise another $30 million at that point, all from existing investors.

[314] And that's at a $300 million.

[315] post money.

[316] So again, just looking back two years before that, they couldn't raise any money.

[317] They could barely make payroll.

[318] And then they're doing well over 300 million in revenue, over 40 million in EBITDA, and they just raised it a $300 million valuation.

[319] Yeah, you know, when you hear these stories, you got to wonder what it feels like to be an employee at one of these companies.

[320] If you look at, you know, 2012 versus 2013 or 2013 versus 2014, It's like you could have been at the company for only like 12 months, and I feel like when you get a new job or you start something, it takes you kind of six months to feel like, okay, I know where the controls are.

[321] I feel like got my hand on this thing.

[322] You go from feeling like it is a thing that's duct taped together that might work to like, holy crap, the demand is insane and we're actually meeting it and we're actually running our business efficiently here.

[323] It must just feel like whiplash to turn your head that fast and change your mindset.

[324] significantly and constantly be learning all the new tools that your technology team is putting out.

[325] And I don't know, it's unnatural, it seems.

[326] Well, I got to imagine that this is, Katrina, you know, from very early on back in 2012, as we talked about, you know, really put some fantastic people on the management team.

[327] I mean, you know, Mike Smith from Walmart, he was a long veteran there, you know, and then, of course, Eric from, from Netflix on the data science side, You know, these are folks that have run retail businesses, you know, at scale before.

[328] So the next year, fiscal 2016, they do $730 million in revenue and $72 million in EBITA.

[329] And then 2017, so the year that ended this past summer for them, they do just a hair under a billion dollars in revenue and $60 million in EBITA.

[330] So EBITDA actually goes down, you know, but they argue they're investing much more in, you know, infrastructure and fixed costs, and they're adding out new verticals.

[331] So it would make sense.

[332] Throughout the summer, it's rumored that they're preparing to go public.

[333] And then finally, in October of this year, 2017, they do file to go public.

[334] And they're seeking to, they were seeking to price the IPO in a range of $18 to $20 a share, which would translate to about a $1 .8 to $2 billion market cap.

[335] So even, you know, a great, you know, well over 5x return on even the, the Series C, the $300 million round, that insiders did and huge return on the investments that they made before that.

[336] And it seems like this would go great.

[337] The company's got huge growth.

[338] They're doing almost a billion dollars in revenue.

[339] You know, sort of grow even more than that.

[340] Of course, they're going to price above the range and trade up.

[341] But that's not quite what ends up happening.

[342] So they go on the roadshow and we'll transition into the narrative section here in a minute.

[343] But just to wrap up what happens with the IPO, They start the road show in October.

[344] Kind of a whole bunch of questions come up.

[345] They end up downsizing the IPO.

[346] And then on November 16th, they do price the IPO.

[347] They price it at $15 a share under the range that they were shooting for.

[348] And then they do go public on November 16th.

[349] And they end up trading just under a billion and a half market cap.

[350] So still great.

[351] But clearly there was some disconnect between all the momentum that this business appeared to have, and it certainly did, and then how the public markets received it.

[352] So today, a little over a week later, the business is trading at a little over $18 .60 a share, 1862.

[353] So that is within the range that they initially targeted.

[354] It's traded up a little bit, but certainly hasn't, you know, run like I think some people thought it might.

[355] We've talked about this on the show before, but there's a lot of strategy and there's a lot of different parties who, want a lot of different things out of an IPO, and they didn't get a pop.

[356] They ended up IPOing for a lower price per share than they were aiming to.

[357] But I don't really read this as bad news.

[358] I mean, I think there are different businesses that need to do different things around their IPO.

[359] For example, Stitch Fix didn't have a huge pop here, but their customers don't care how their stock is doing.

[360] So they don't need to necessarily create the story of day one trading was amazing because their enterprise customers are going to be buying their, you know, data services.

[361] It's a very different business.

[362] And I think that, you know, would they have liked to maybe price higher and have more demand on day one, I think so?

[363] But I'm not looking at the drop before the IPO or the trading immediately afterwards as significantly disappointing.

[364] I think that they got employees and shareholders, you know, the appropriate amount of value out of the equity that they held in those companies or in that company.

[365] Well, yeah.

[366] So let's jump into narratives.

[367] I mean, I think the question is sort of what caused this disconnect, even though I totally agree with you.

[368] Like, yeah, I mean, the vast majority of Stitch Fixes customers probably even have no idea that they did go public.

[369] But what was the disconnect here in it?

[370] And I think maybe let's start with the investor analyst side and then we can get back into the company side, which pretty much will echo a lot of the things.

[371] things that we've talked about already.

[372] But on the investor side, I think there are a few things.

[373] So one, Blue Apron had gone public earlier this year and has been quite a disappointing IPO.

[374] That would be a good one for us to cover in the future.

[375] I think there is definitely a healthy and in some ways warranted amount of skepticism on the investor side of the fence right now about any commerce company, well, really any commerce company that's not Amazon, but any commerce company that is playing not playing tricks with but doing something um the company would say innovative uh with how they sell their products and in particular you know the box that stitch fix sends you know having five items in the box um and you know the consumer psychology to encourage you to keep all of them the question you're just saying there's sort of skepticism around is that a sustainable actual piece of value i think the skepticism is how much of this stuff do people really want or need versus something like Amazon, you know, you can buy, you go find and buy whatever you want or you don't buy from Amazon, but it's completely up to you.

[376] With Blue Apron, what we definitely saw is a couple things.

[377] One, people's desire for just staying subscribed or staying engaged with a regular delivery service like that is actually a lot lower than people thought.

[378] And thus there's churn.

[379] And two, the addressable market for a service like that is also much smaller than people might have thought.

[380] And so as you start to reach the end of your core customer base, the amount of money that you have to spend in marketing to then go acquire further customers ends up being a lot more because those customers are much harder to reach and acquire because they're not your target customers.

[381] And so I think there was there was a fair amount of a fine point that analysts took to Stitchfix in trying to analyze this and figure out, hey, where is Stitchfix on this continuum?

[382] And, you know, to be honest, we're not the first ones to say this.

[383] Obviously, you know, many others, and Ben Thompson have said the same thing.

[384] Stitchfix is fairly mature in terms of saturating their target customer base.

[385] And you can see that.

[386] It's worth diving into sort of why this is the case.

[387] Stitchfish is a great example of a company that basically grew within a narrow segment, and not very narrow, they're over a billion dollar company, but a narrow segment of people that were just crazy for it, so they didn't have to use all the traditional marketing techniques that you would see that are costly and help you really, really scale to the masses, but lots of word of mouth, lots of non -technology -based marketing and we're able to kind of grow really, really cheaply or at least acquire customers very cheaply.

[388] Totally.

[389] And you can see that.

[390] I mean, it's pretty incredible in 2016, fiscal 2016, where they do $730 million in revenue, they spend $25 million in advertising, which $25 million is a lot of money, but compared to that amount of revenue that's minuscule, and especially for the commerce for a retail, you know, e -commerce business.

[391] So that's fantastic.

[392] But then in 2017, fiscal 2017, that jumps almost 3x, the advertising spend, up to over 70 million.

[393] And revenue, you know, again, grows nicely, but not nearly at the same rate that it had grown in the past.

[394] It's 34%.

[395] I mean, it's just not a...

[396] Yeah, 34 % versus over 100%.

[397] And that that's when they 3x their advertising spend and now they're reaching close to triple digit millions on advertising.

[398] So you can definitely see these dynamics at play where, you know, one or two things are happening.

[399] Either their existing customers are churning or ordering at lower rates.

[400] And when you dig into the cohort analysis that they do provide, they don't provide quite the full picture, but you can dig into the numbers.

[401] Both of those things are happening.

[402] And the new customers, you know, the marginal new customer that they're trying to acquire is harder to find.

[403] And so that's why they're having to spend so much more in advertising.

[404] Yeah.

[405] And the moral of that story is they're now spending way more money to acquire customers that spend way less.

[406] And they can still create a great business on that, but that is a very different dynamic than a lot of the A plus companies that we've covered on this show that are just total outliers.

[407] And this is something Ben Thompson pointed out this week.

[408] The aggregators over time, the network effect is so powerful that the lifetime customer value increases and the cost to acquire decreases.

[409] And in this scenario, you know, they basically, it looks more like a traditional business where they saturate a core market and then it gets harder to acquire more people over time.

[410] Yeah.

[411] And what you see exactly like you and Ben are saying is that in the companies like an Uber, like an Airbnb, you know, you're seeing dynamics with your customer base that actually look like the best SaaS companies.

[412] You know, we covered Atlassian, we covered Square, and we talked about how having negative churn for those companies was really important because that meant that as they acquired customers, you know, each year, even though they would have some on a numbers basis, customers churn out, the ones that they already had were spending more and more such that they would spend more every year at that cohort.

[413] You know, Stitch Fix is the opposite of that.

[414] clients, as they call them, end up spending kind of on average less than half in the second year of what they spent in the first year.

[415] And then it continues to decline from there.

[416] So they're having to constantly refill the funnel with new folks.

[417] I'm going to use this as a quick tangent point.

[418] You mentioned something about it.

[419] You can't quite tell from their SEC filing for the IPO, like what, you know, exactly what's going on, but you can kind of tease it out.

[420] The sections that are required in an S -1 are not actually congruent anymore with understanding exactly how that business is doing, because we have developed such better measurement tools where if you're an insider, you can have a much higher fidelity view of the business, and yet we don't mandate some of these newer and more high fidelity understandings of the business in the public disclosures.

[421] So there are ways to be coy and dance around the story without telling the whole story.

[422] I don't know if we need to change this, but it is worth talking about that when companies, and we've seen this in Blue Aprons case, we've seen it in Stitch Fix's case, for competitive reasons and for other reasons, especially if there's a story inside the business that you don't want to be the dominant point for pricing your IPO, you just gloss over some of this stuff.

[423] or you give two non -comparable metrics.

[424] And so, you know, the big thing that's still missing from S -1s is the ability to look at cohort analysis of what was your customer acquisition cost for that cohort, what were the else, you know, what's the LTV for that cohort so far?

[425] And really being able to compare even just a CAC to LTV ratio for a single point in time, let alone change over time, be incredibly helpful for understanding if you want to buy a stock or not as somebody, you know, a member of the American public.

[426] This has been pointed out by several people, and one person, one really great piece that I'll reference later on TechCrunch, it was a guest post called Unboxing Stitch Fix's S -1 by Ezra Galston.

[427] It's begging to have a light shone on it.

[428] And, you know, Stitch Fix does, they kind of do half the job in their S -1.

[429] They do show their cohort, customer cohorts, in terms of how much they order.

[430] and they even go down to they show, which is actually quite helpful, two -year cohorts for two -year purchase behaviors for cohorts that are, that have been around for over two years.

[431] Now, they only show two of those, even though they have multiple other cohorts going back farther, which is a little bit of a red flag, but kudos to them for showing it.

[432] Two -year purchasing behavior, one -year purchasing behavior, and six -month purchasing behavior.

[433] And that's really helpful to be able to see all those different time periods.

[434] And that can help you tease out, you know, as we did, wow, actually, like, the amount of money that people spend in the first year and really in the first six months drops off very quickly.

[435] What Stitch Fix doesn't show at all is their cost to acquire each customer.

[436] This sort of the other side of the equation.

[437] We can triangulate with the fact that they tripled their advertising expenditure in 2017 and they only grew revenue 30%.

[438] even as Ben Thompson also points out while they're adding new categories like men and maternity and plus size so that's a little bit of a red flag too I wouldn't lump them in with the blue apron S1 but they're also not where like the Atlassian S1 was either totally and you know it's hard to fault any company for doing this everybody is doing as much as they need to but if you're supposed to be a member the spirit of the law being you're supposed to be an informed member of the American public making a decision on if you believe in the future of this company or not whether or not people actually, nobody actually reads as ones except for people at investment banks.

[439] But you can misrepresent if you want to how your company is doing.

[440] And the only thing that people have to go off of is reading into this lack of information is a bad thing.

[441] Now, on the other hand, though, clearly folks in the investor community picked up on this and a few other things on the road show.

[442] And that's what led to the downsized IPO.

[443] But maybe let's switch back over to the company narrative here, which I think is also a really equally valid narrative.

[444] And it's it's two things in my view.

[445] One sort of a direct rebuttal to what we were just talking about is like, hey, we are an extremely well -run company.

[446] And we've done a great job managing this business.

[447] We've raised only $42 million in venture capital.

[448] Actually, I think it's a little more than that.

[449] But most of that, we didn't even need that $30 million.

[450] round that we raised from our insiders.

[451] We've built this business, you know, to at this point run rate over a billion dollars in revenue.

[452] We're very large.

[453] We've done something that, you know, at the outset seemed crazy that we would find this quadrant of the two by two matrix of people, you know, of all, you know, genders who who enjoy looking good but don't enjoy shopping.

[454] And, and this is a cash flow positive business with really meaningfully positive EBIT.

[455] I mean, what other startup.

[456] And we've done all this, by the way, in like less than seven years.

[457] You know, what other startup these days could say that?

[458] And all that is very true.

[459] Yeah, pretty amazing.

[460] I mean, it's so capital efficient.

[461] They were funding, acquiring new customers largely with profit for the last few years.

[462] It's just, it's impressive to watch.

[463] I had this down in tech themes, but I'm going to talk about it now in narratives instead.

[464] And again, this is from that tech crunch article where if you're interested in this episode, go read that article.

[465] It's super, super well done, super analytical.

[466] It's really the anti -Amazon.

[467] Like Stitch Fix is succeeding in an era where they're doing profits first.

[468] So they're profitable on every customer, at least every customer or every cohort.

[469] And it's about making sure that they have good unit economics before they grow.

[470] And it's just a very different tack than a lot of these other companies are taking.

[471] Like Amazon has, I don't know what this, it's like over half of America or half of U .S. households now.

[472] And, you know, they make, I think their margins are like 2 % or less.

[473] And you look at a company like Stitch Fix that says like, well, we provide a great service and we charge for it and we make money on it.

[474] It's interesting looking at what can succeed in this era of Amazon where you're focusing on the Stitch Fix tack of products, not growth, doing things that Amazon can't because Amazon's margins are so thin.

[475] So they have this assisted, I think it's assisted commerce.

[476] Is that what we're calling it?

[477] Yeah.

[478] This basically assisted commerce niche where it costs some of their margin in order to match you with a stylist and have that stylist do work for you.

[479] And it granted, it costs $20.

[480] So the people are paying for that stylist, but it does cost stitch fix something to provide that service.

[481] And that amount that they're spending on a stylist is something Amazon really just can't do because their margins are so thin.

[482] And so whereas Amazon caters to, you know, everybody in the world gets exactly the thing they want, they can't really layer in this highly curated thing because it's not their business model.

[483] And so that is where you sort of have niches left for the stitch fixes of the world.

[484] And I think, you know, a really important sort of supporting detail under that is they don't talk about this in their S1, but if you do some analysis you can figure it out and is that their contribution margin positive profitable on the first order that a new customer makes with them so they're making enough margin out of the very first time that somebody orders a fix to pay for you know all of the all the variable costs all the fixed costs that go into serving that that customer and all of the customer acquisition costs so I can imagine stitch fix.

[485] and Katrina here saying, like, yeah, like, I see all your points in your math, you know, investor community, but like, I'm being so responsible here that I'm not only am I not losing money on customers the first time, but I'm actually making money the first time.

[486] And then so any further orders that they make with me is just gravy.

[487] Um, you know, that's positive cash flow for me. I think that begs the question of, okay, why do they need to IPO?

[488] That this is, this is our, what would have happened otherwise section.

[489] Um, yeah.

[490] Yeah.

[491] So I think, I think let's marry maybe the what would have happened otherwise with what I think is the other part of the company's narrative around their IPO, which you alluded to a little bit, Ben, but I just want to call out more clearly, is that the future of Stitch Fix is the future of any commerce company that could, in theory, compete with Amazon and that we are a personalized commerce company.

[492] and personalization is the next wave in commerce and retail.

[493] And the way we do that is through this huge investment that we've made in data science, marrying that with human judgment and being able to provide, you know, today experiences to our clients that they can't get anywhere else.

[494] Yeah.

[495] And I think there's a tremendous amount of truth to that.

[496] I think personalization is the puck where everyone's skating, but Stitch Fix has the resources to do it.

[497] Now, of course, not to say Amazon isn't also going there as well.

[498] Right.

[499] But that's for, you know, we'll get into that later, perhaps.

[500] But I think that's part of the reason why they would want to go public.

[501] I mean, one is clearly liquidity, you know, is, as we've talked about many times on this show, a good thing for founders, for investors, for employees.

[502] But two, you know, I think if they're really going to, and this is sort of my take on these competing narratives, I think if Stitchfix is really going to end up realizing the totality of their vision, they're going to have to become even more like Netflix where they're making their own quote -unquote content as well.

[503] They're taking all the data that they get from all the people watching or buying from them and all of the films or, you know, fashion brands that supply them and then they take that data and can make better actual you know fashion items themselves and they're already just starting to do this so there's a really small line in the s one that i think they clearly buried because they don't want you know find them i don't want my suppliers to get uh you know my brand partners to get too worried right now but there's this line that says in October 2017, we purchased certain knitting, cutting, and sewing assets in Pennsylvania to experiment with making very small quantities of apparel to test with our clients.

[504] At present time, we have no plans to manufacture apparel in any meaningful quantities and anticipate that we will continue to rely almost exclusively on 30 -party vendors to supply our merchandise.

[505] You can imagine Netflix saying the same thing five years ago while they were in the background, You know, investing.

[506] Disney, we're only delivering your content and other people there's no way.

[507] And so that might be why they need to go public now, you know, to get both the capital, but also the, you know, the public currency.

[508] They may need to make acquisitions.

[509] They will need to hire a lot more to be able to do that.

[510] Yeah, this is one, you know, so the history of acquired, we wanted to only start with companies that.

[511] that we had a long, long lens on and had spent, you know, had a decade to understand what the company did with the acquisition capital, or I'm sorry, by acquiring the company, or in this case, did with the capital that they raised in an IPO.

[512] You know, sticks fix just happened.

[513] And so we don't know yet, but foreseeably, yeah, it's M &A, it's ramping up production.

[514] liquidity to employees is super important, as we talked about in the Square episode, where suddenly because they basically did a down -round IPO, many of their recent employees were very, very undercompensated.

[515] So super important for retention and recruiting great people to make that stock worth something and worth something in the very reasonable time frame.

[516] but I don't think we yet know why, you know, what are they going to do with the cash they raised?

[517] And it wasn't a huge IPO either.

[518] That's worth touching on.

[519] I think it was, what, a hundred and, um, I think they ended up raising, $120 million.

[520] Yeah.

[521] So they sold less than 10 % of the company.

[522] Right.

[523] Right.

[524] So it's not like they're going to go out and make a, you know, gigantic, gigantic acquisition with this, but they could start ramping up a big loss leader for now and eventually have a dominant.

[525] line of their own.

[526] Well, don't forget, too.

[527] I mean, and, you know, Katrina talks about this.

[528] She talked about this in an interview after the IPO.

[529] This is a company that has always, for whatever reason, had a hard time raising money, including in the IPO.

[530] And if you need both resources and the ability to go make, you know, be they cash or stock acquisitions, having a public currency for your stock is certainly much better than if you're having to argue.

[531] about your valuation.

[532] Well, here's another thing is, do you think that they'll shift a little bit, since they do appear to have saturated their coordinate a little bit, do you think they'll start being more aggressive on growth and use the IPO capital to finance growth a little bit and take some losses?

[533] Well, I don't know.

[534] In a little bit, they're between a rock and a hard place here because they need to grow, and growth, as we alluded to, has been slowing.

[535] And in particular, when you look at it on a quarterly basis, growth has been slowing significantly every quarter for the last several quarters.

[536] So they're going to need to grow to please Wall Street.

[537] But at the same time, Wall Street is also heavily focused as we've been talking about on the economics around that growth and how much they're investing in marketing and customer acquisition.

[538] So they're definitely going to have to strike a delicate balance for a while.

[539] for me, it just comes back to the question that I think will decide, you know, whether Stitch Fix is, you know, a one to two billion dollar market cap company in perpetuity, which is great.

[540] I think they're an incredibly well -one run company.

[541] They've proved that.

[542] Or if they can break out, you know, and like Netflix, go from, you know, being valued kind of on a certain level to something much bigger is, I think, whether they can execute on this, you know, being able to create their own supply that is differentiated and much better suited to what their customers want than third -party brands.

[543] Yeah.

[544] Yeah, I think that's right.

[545] One of the thing to discuss here before we move on to tech themes is they want the IPO route.

[546] I mean, they could have not stayed an independent company.

[547] I don't know anything in particular about who might have tried to acquire them or when, but we're in this era where brick and mortars are paying tons of money.

[548] acquire online, you know, e -commerce companies that are doing really well.

[549] We saw bonobos.

[550] We saw Jet .com.

[551] Trunk Club, their sort of sister -brother company got acquired by Nordstrom.

[552] I mean, I assume along the way there were opportunities to do that, but, you know, clearly stayed the course and put the stake in the ground that we believe that this is an enduring thing that should be an independent company.

[553] You know, it's a little bit like, how much do you believe that?

[554] Right, right.

[555] remembering your quote on our episode about the Snapchat IPO.

[556] Because if you really believe that, this is the route to go.

[557] I mean, if you don't, you know, you should take Walmart stock or Walmart cash.

[558] Right.

[559] Or, you know, don't take AOL stock.

[560] Yeah.

[561] Somehow I don't think Stitch Fix is anywhere near.

[562] The Stitch Fix IPO, we haven't created it yet, but it won't be in that league.

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[583] Should we move on to tech themes?

[584] Yeah, per usual.

[585] I think we've talked about a lot.

[586] Yeah, yeah.

[587] Go ahead.

[588] A big one, you know, well, here's one that we just haven't, there's one little piece at this one talked about yet.

[589] The decline of brick and mortar and the rise of e -commerce.

[590] This is one where it's in every freaking eye -banking deck that you see now and research report that you see now, and it's, duh, completely obvious.

[591] For a long time, people, some people were claiming that this would happen, and other people were sort of like, yeah, well, we'll see when it does happen.

[592] Katrina was one of those people when they started Stitch Fix and when she would speak on stages for the first few years of the company that was just saying, like, we're a year or two away from this and just nailed the timing of it.

[593] I mean, this is something that lots of people have been forecasting for a long time, but I think Katrina went out there and did something about it and stood by it, and it was just perfect on timing.

[594] Yeah, I mean, I don't think it's any coincidence that during the time of Stitchvix's sort of founding and growth, you know, we've had and, you know, J .C. Penny on the verge of collapse and Macy's and Sears and so many of these companies, you know, whether they are bankrupt now or, you know, are trending that way.

[595] Really, there have been a lot of dominoes to fall.

[596] And the timing is great.

[597] Yep.

[598] Yep.

[599] My other one is this business, and again, everyone should check out Galston's piece in TechCrunch, a fast cost of customer acquisition payback period.

[600] It's, tough to see exactly what it is from from the s one but um the bottom line is that it's it's really fast and this is a combination you know it's it's on the order of nine to 18 months the important thing to to look at here is is why and you know the goods they sell are pretty expensive they make a nice margin on the goods and it's about about 45 % which is in line with sort of traditional retail margins um and uh they you know through all their data science they have the ability to actually send people things they want so So over time, the amount that people are keeping stuff they send goes up, and so they end up spending more with Stitch Fix on each order and then sticking out and staying a customer for longer, too, so lower churn.

[601] And it's just a business that, you know, you can grow more quickly because your customers pay back those acquisition costs very quickly.

[602] I think it's even quicker than that, like we were talking about, that for most customers, I think they're paying back.

[603] it obviously depends on how much they how much they keep in their first fix but immediately on their first fix now the question is how long it doesn't take them from the time that they spend the marketing to acquire those customers to when they order that fix but that's and this is one where I don't want to throw out exact numbers because those were derived and I think that depending on how you define things yeah and it would be nice if they had put that in the S -1 yeah Yeah, I mean, I think the only the only theme I'd add is one that I think I've talked about a few times on the show.

[604] But really this concept of, you know, is the stock market a voting machine or a weighing machine?

[605] And I actually think, I mean, based on the amount of buzz that Stitch Fix, the company has had in Silicon Valley over the past few years, you know, they have a great team.

[606] There are phenomenal people that work there.

[607] they compete and win for talent against the very best companies in the Valley, you know, Airbnb, Uber, Google, Facebook all the time, especially on the data science team.

[608] I mean, they are really, really, you know, the team Eric is built incredible.

[609] And so there's a lot of hype about the company and a lot of it deserved.

[610] But the stock market didn't vote based on hype.

[611] They, you know, they voted based on some really, I know, rational.

[612] I I think, as we've discussed, concerns about the future prospects of the business and its growth prospects.

[613] So I just find it really interesting that, like, this is to me another example of there's this meme in Silicon Valley that, like, Wall Street and the stock market is all, you know, short -term focused and they don't get these companies.

[614] And I think we've actually seen on a number of the IPOs that we cover, they get them sometimes better than Silicon Valley does.

[615] and still, you know, this has been a great outcome for Katrina, for the employees, for the investors, you know, I mean, the last round was done, you know, at a $300 million valuation, and they're trading in almost $2 billion now on the public markets.

[616] It's awesome.

[617] This is a fantastic outcome.

[618] Yeah, Lake picked up $17 million in cash the morning the IPO.

[619] She owns 15 % of the company, so post -IPO, her shares were worth about $250 million.

[620] dollars like great you know lots of good things for everyone and actually if you look at what lake owns of the company it's it's at some point we should do a show and talk about sort of where different parties end up from a ownership basis around IPO owning 15 % of the company and and isn't bad especially if if you really believe as we were talking about earlier that there is an opportunity to grow the company you know through through taking the Netflix approach to grow the company 10 or 100x in the public markets, you know, owning 15 % of a $100 billion or $200 billion public company, you know, as Jeff Bezos and Mark Zuckerberg approved, is a lot of money.

[621] As we sit here on the morning after Jeff Bezos becoming worth $100 billion, I can safely say.

[622] Incredible.

[623] Yeah.

[624] All right.

[625] Should we grade it?

[626] Yeah.

[627] I'll start first.

[628] Super high variance because we just, the way that we grade on this.

[629] show is did doing this thing, the IP or the acquisition, was it a long run good move for them and did it enable them to do something that they wouldn't have otherwise been able to do?

[630] We don't yet know what they're going to do with the cash.

[631] Some of it will go to growth, presumably some of it'll go to starting a new line, you know, lots of R &D there.

[632] But of course it was a good move.

[633] Was it a great move?

[634] I don't know.

[635] We don't know yet.

[636] I'd say it was a necessary move and the timing was about right.

[637] I'll go with a B and there's variance to go probably up to an A there?

[638] Do I think there's variance to go up to an A plus and become a, you know, a $100 billion company?

[639] I don't think so.

[640] But maybe worth revisiting at some point.

[641] It's interesting.

[642] These grading on IPOs, like, it's much better when we do it many years later and we can really assess the impact that the IPO had on the business.

[643] And I think there's an opportunity here, as we've been talking about, for the IPO to be a catalyzing event to really take stitch fix from, you know, being a, a commerce company to a, you know, really unique and leading provider of, of fashion, you know, garments to everyone that using data science to do things that nobody else can do.

[644] They're not there today.

[645] What we can grade today, though, I think they probably should have gone public a year ago.

[646] And this is an example of, like, you know, there's so many things about timing that are out of your control.

[647] They couldn't control the reception to the Blue Apron IPO and all the decisions that were made around there and the impact that that had on Wall Street and investor psychology.

[648] And, you know, quite honestly, Stitch Fix was growing much faster and a lot of the economics around their customers and cohorts looked better a year ago than they do today.

[649] So that probably would have been a better time to do it.

[650] On the other hand, it's hard to imagine.

[651] that the company was quite ready at that point.

[652] I mean, it's still only a seven -year -old company right now.

[653] And to argue that they should have been ready a year earlier, maybe even more things would have gone wrong, trying to pushing to go too soon.

[654] So, yeah, I think I also, I think I go B right now.

[655] You know, it was fine, but they certainly could have optimized more.

[656] But again, like these things, like the real grade is something we'll know in five to 10 years.

[657] All right.

[658] Carvouts.

[659] Carvouts.

[660] Let's do it.

[661] So mine, over the break, over the Thanksgiving break, I've been reading Kareem Abdul Jabbar's new book, Coach Wooden and me, our 50 -year friendship on and off the court about his relationship with John Wooden, the Wizard of Westwood, his coach at UCLA, who was just a legend in basketball, but also in all sports and really just in life, an amazing, amazing guy, as is Kareem Abdul -Jabbar, an equally amazing guy, but really, a really fun book about how, you know, when Kareem came to UCLA from New York City, you know, highly, highly, one of the most highly recruited, sought after basketball players from high school ever, back when high school players played all four years in college because you couldn't go to the NBA right out of high school or after one year, and how his relationship with, with John Wooden evolved from, like, you know, coaching him and then helping, you know, further hone his skills and talent into becoming one of, you know, certainly the top three greatest basketball players ever in his MBA career.

[662] But then how that evolved into just this 50 -year incredible friendship and how close they were, even though they came from such incredibly different backgrounds and ages.

[663] Really, really great book.

[664] Well, mine is not a book, not a piece media obvious and almost a fanboy pick.

[665] It's the iPhone 10.

[666] David and I talked about you were getting the iPhone SE and there was nothing impressive about the 10 that you could tell.

[667] It's one of these things where you use it and you are like, oh my God, this is so different and it's difficult to articulate why.

[668] And I'm going to do my best job at articulating why because I feel like I'm using a product that came out two years from now.

[669] And I'm like getting to use it like as I'm time traveling from 2019 to now.

[670] And when you use other, like every other traditional iPhone, they all feel the same relative to this.

[671] Like they all feel like they were foreshadowing that this would be the product one day.

[672] And it's, it's a lot of the gestural stuff that you're like, oh, this is so natural and this makes so much sense.

[673] It's a lot of the, I feel like finally the, display technology and the compute power have made it so that it feels like everything is exactly directly manipulated without any sort of lag, without any sort of distance between my thumb and what I'm actually tapping on.

[674] Things just happen so smooth and so fluid and it just feels like I'm interacting with something directly instead of through, you know, through this piece of electronics.

[675] And I know, I know.

[676] that sounds ridiculous and I know it sounds like I'm like too bought in on something, but I just haven't, you know, I haven't enjoyed using a product this much in a long time.

[677] Wow.

[678] Interesting.

[679] So I've heard that from other people too.

[680] And I still haven't tried one in person.

[681] I'm really looking forward to.

[682] But how do you feel?

[683] So like in the keynote, right, like they definitely positioned the iPhone 10 as, you know, the future, you know, of iPhone, the future of computing, you know, the next 10 years.

[684] Do you feel, and I was thinking in hearing that, like, I don't know that the phone is the next 10 years of computing.

[685] Like, how do you, but how do you feel now having used it?

[686] Um, so I think I've talked on the show before about how I want there to be this world where it's just maybe like the watch and the AirPods or something like that.

[687] I think we'll always have a screen of some sort because as good as voices for input, it's terrible for output.

[688] So it's really good for consumption to have a screen.

[689] I don't think we are three to five years away yet from going phoneless.

[690] I think we're going to continue to have phones for a little while longer.

[691] I think when Apple says that, it's more about like, you know, we're going to use OLED and we're going to use, like, face ID works so effing well.

[692] It's kind of mind -blowing here.

[693] And then when it works in the dark when I have a hood on and I have my glasses on and it still works.

[694] You're like, how on earth?

[695] So there's some of these features where you're just like, if you told me that you were going to try and build this, build this, even with a massive team, I would tell you that like, ah, that's been tried before and it's kind of impossible because it's really, it's always a terrible experience.

[696] Like all those things are not actually a terrible experience and they feel like they're all baked into one device.

[697] Well, well, there you have it.

[698] You've got the 10, I've got the S .E. Next time we get together in person, we're going to have to.

[699] Yeah, absolutely.

[700] I'm going to miss the nice small form factor.

[701] You're going to use this thing and be blown away.

[702] Well, but the 10 is like, it's smaller than the plus point factor, right?

[703] Oh my gosh.

[704] Yeah.

[705] When I go and pick up my 7 plus again, I realize I felt like I was using a phone that was like too awkwardly sized for me and it like turns out I was.

[706] And this one makes - That's totally how I feel now, too.

[707] Yeah.

[708] Yeah.

[709] I also, I'll put this out here, I think the notch is here to stay for a while.

[710] Not only do I not think are they going to be able to get rid of those sensors, but I think the notch is the new home button.

[711] And it's the thing that makes you know that it's an iPhone, if used correctly, which I think most standard OS apps do.

[712] You just don't really, it's, it's not an issue.

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[740] You can click the link in the show notes or go on over to statSig .com to get started.

[741] And when you do, just tell them that you heard about them from Ben and David here on Acquired.

[742] Well, listeners, thanks for being with us today.

[743] If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client.

[744] If you feel so inclined, we would love a review on iTunes.

[745] And we'll see you on the next one.

[746] We'll see you next time.