Selling Shorter Shorts to a Successful Exit, The Story of Chubbies with Preston Rutherford

0:00Hello, I'm your host, Mike Gelb, and welcome to The ConsumerBC, where we discuss the intersection of venture capital and consumer innovation. If you're enjoying this show, please subscribe on YouTube or whichever platform that you're listening on, Spotify, Apple Podcasts. And if you want the full experience, subscribe to the newsletter at theconsumervc.com. I send fundraising updates of all the latest deals that are happening in consumer, and you'll be the first to hear about a new episode on the Consumer VC Podcast. All content and episodes are for informational and entertainment purposes only and is not investment advice.

0:37Our guest today is Preston Rutherford, who's one of the co-founders of Chubbies. Chubbies produces shorter shorts or rather proper length shorts for men. We discussed the founding journey of Chubbies, why they raised VC money, and if Preston had to do it all over again, would he raise VC money? Their product assortment, what metric they first optimized for and why that changed, why they eventually sold to solo brands, and much, much, much more. After exiting Chubbies, Preston started Marathon. Marathon helps brands measure the revenue impact of brand building. And for more information, check out the link in the show notes or head to marathondataco.com.

1:20Without further ado, here's Preston.

1:28Preston, thank you so much for taking the time. How are you? I'm good, Mike. How are you doing? I'm great, thanks. I'm great. So let's start from the very beginning. Why shorter shorts? Well, it's a great question. Hard-hitting stuff. Well, they didn't exist at the time. And we loved them. And we were relegated to thrift stores and scissors. And that just won't do. So we had a need, the four founders. We were our own customer. And by golly, we had to do something about it. First of all, how did you all kind of, the four of you, come together? And also, four co-founders just sounds like a lot. So what was the origin story from that perspective?

2:22Goodness, we were all friends in college. so we all went to Stanford together and we're friends and we then started working for the man you know and you know five years in you're kind of like yeah I don't really like my boss I think I could do this myself I don't necessarily feel like I have the control and agency that I would like to have at this point in my life. And then the other piece is, well, shoot, I'm not married. I don't have kids. I don't have a mortgage. If we're going to do this, we've got to do it now. So there was that. But mostly, I think it was just the idea of, man, it would be awesome to start something, to create something where we're responsible for it.

3:12And we could create something. What a joy that would possibly be. So we're friends from school. And none of us studied computer science. right so one of our friends started instagram one of our friends started snapchat um it's like okay i mean that's that's pretty cool but uh not really in the cards for us so um just kind of go through every possible category and short shorts was the only thing now it was all of us kind of had a tie to shorter shorts in some weird funky way so i played rugby which is generally a shorter short type thing tom and kyle played soccer uh stanford which was uh generally a shorter short kind of thing rainer from spent most of his time growing up in the south and like the atlanta area generally shorter short we we started the business kind of like as a homage to our dads and cool pictures we had of our dads whether it be on spring break or on their honeymoon or whatever it might be like wearing awesome shorter shorts like the nike cortez's long socks tight t-shirts mustaches long sideburns like that look and feel i don't know there's just something that we it was kind of oddly aspirational and just so different from what existed in 2011 which was very much like abercrombie you got to have a certain six-pack you know shaved whatever whatever um too cool for school kind of thing here's what you know attractive means and we're like that's kind of like bullshit right and that doesn't speak to us and that's just weird so our thinking was let's just try to be the opposite of Abercrombie in that in that day Rainer and Kyle actually worked at Abercrombie in the Stanford Mall so they They experienced it firsthand.

5:13And, you know, that's kind of funny. Abercrombie's cool now, so separate story, blah, blah, blah. But if you think back in 2011, very, very, very different. So there was a vibe gap and there was a product gap. And, you know, we then set out to make a sample. And the first person we ended up working with took our money and, you know, was nowhere to be found. It was hard to find product manufacturers, people who could actually make apparel in San Francisco, which is like a funny place to make clothing in the first place. But so ended up finding someone. We made some samples, started wearing it ourselves and basically started selling to our friends out of our backpacks using a square card reader.

5:57And like this was pre-Venmo, which is so funny. And even pre-Instagram, which is just crazy to think about. we're old but uh you know those are some of the early days we started wearing it ourselves going out to like the park or boozy brunch or whatever and just wearing the product as a group of friends and then the group of friends wearing the product up bigger and bigger and bigger and then it became more and more of something where people like what are those kind of thing and it was what are those in a very positive way and what are those in a very negative way but that was great because it was clear that there was some kind of clear vibe that you could react to.

6:36So there was this notion of the brand, right? And anyways, I can go into more depth, but those were some of the initial, you know, starting points that, that got us going. And a lot, a lot happened after that point, but that's kind of the initial part. What were, when you found the manufacturer in San Francisco, first, why, why did you settle on san francisco i know you were all at sanford and based in the bay area but um but also were there any what was was there anything that was challenging when it came to actually producing the shorter shorts well a big challenge the first one was like we all put like 3 000 into it and they took it so that's a challenge we didn't we didn't have a lot of money and they took the money so big challenge you know given that a business kind of needs money so that was a big challenge like there's no um yelp for for this sort of thing right where we could get reviews where i mean i doubt this was the first time you know this happened where where this this fraud uh took money so like the asymmetry of information is maybe a sexy way of saying it but like just didn't know whether or not they were legit so that's a challenge um i mean making anything in San Francisco is very difficult.

7:58Just doing business in San Francisco, like cost is crazy, right? I mean, minimum wage and regulation, blibbity, blabbity, very, very challenging, but faster than in the minimum order quantities are lower, right? I mean, and just like the, the speed to get some kind of feedback. Like, I think that's the reason why we did it, right? Because you could just walk in, go like drive 15 minutes and walk into the place and see them make it and give some feedback. Right. And, um, so anyways, pros and cons, but yeah, taking the money is a big challenge. Yeah, that makes, that makes a lot of sense. And I would say that, do you feel, cause remember that you said that you, when you were, um, going around and obviously wearing the shorts and your friends, and they got more friends and then more people that actually want to want to buy the shorts and, and, and obviously be part of chubbies.

8:50Um, what, but, But you also had people as well that were actually pretty turned off by the brand too. Do you think that's a necessity in terms of building a brand? Yep. Do you actually have to have both sides of the coin? Yeah. Yeah. Apathy is the opposite of a brand. Apathy is what happens when you try to please everyone. People have to hate you, right? I mean, there is the possibility of everyone hating you, and that clearly doesn't make sense, right? To be just universally hateable. but there's zero things on this planet that are universally loved to the degree that they then have the emotional impact that then cause people to change their status quo behavior, if that makes sense, right?

9:30So that, I mean, if you have that, then you're, you're maybe Jesus Christ, but a lot of people hate Jesus. So I don't know. I don't know what that answer would be, right? So, um, yeah, yeah. You need, I don't know what the percentages are, but let's just say you need 50 % of the people who come in contact with your brand to hate it or dislike it, right? Right. Why? Because there has to be something to hate. Right. There has to be something that is clear enough to understand what it is and then how it how you feel about what it is to to love it or hate it. Right. And when you don't have that, when it's like, meh, people are just going to keep doing what they're doing.

10:12Right. Earning hate is a huge win. Now, obviously you want to earn love, but yeah, I tend to think that it is an absolute requirement for any brand. What were some of the attributes when you first started Chubbies as well and really developing this brand identity too, right? What were some of the qualities that you thought maybe strengthened that love from folks when you first started wearing the shorts? and then also maybe strengthen also the hate from folks that actually really were quite turned off. This idea of, I don't know, I hate the word authenticity, but we were basically just making the product for ourselves and talking to our friends.

11:02Like the whole thing was, let's just have this feel like an email chain or a group text thread that we just love. So like, let's talk shit to each other. Let's share some memes. Let's just try to earn the time of people because everyone's busy. And the last thing we want to do is just like check a box and put shitty content in front of people, right? Because the way that we thought about it was every single person who sees our product our posts our emails they're they're a friend you know that we would have to stand in front of at happy hour or whatever and like our reputation is on the line and when when we thought about it from that perspective it was like we got to work really hard on our content like everything that we put in their feed or in their email inbox or even just the product or product description or whatever, it has to be able to stand alone as being in the running for the best piece of content that person sees all day, right?

12:16So I'd say number one is just like an exceptionally high bar for content and having that be something that is not just a nice to have, but like the core, right? Number two would be people felt like they knew us, right? I mean, I think it was one of the things that was different and is somewhat related to number one, but just this idea that they're not like this company and they're not executives, right? They're just people who are going out and just trying really hard to start a business and make product people like. And I know that, I feel that. They're just like me, but they're going out and like trying it.

12:57And that's fun. That's cool. So I think that really resonated um and i mean i think it product right i mean i think at the end of the day product as brand is maybe gets forgotten not that product is the only thing but like in a lot of ways the product just stood out and spoke for itself right it it's something that people wear on the outside of themselves right and i mean it in and of itself and it's bright like some of our first products were like neon green shorts neon pink shorts right just really you could even say aggressive clothing um and so you again you loved it or you hated it but it was very clear and the product you know did a lot of that for us and so those were those were a couple things i mean i think the this idea of like to get to like themes or ideas is fun, right?

13:54Fun, levity, removal from or relief from the stressors. Like we started, we graduated college in 2008, right? The world was a shit show at that time. Very stressful, hard to find jobs, like this whole identity of who am I? Am I going to make money to validate my existence kind of thing was just very like weighing weighing heavily on our whatever generation so we were just trying to provide the opposite of that like let's be the opposite of work let's represent weekend let's represent that moment that represents freedom where you have agency right and that's why we got to Friday at five right it's this whole idea of that feeling you have Friday at five when your time is now yours, you answer to nobody and, uh, you are free effectively.

14:50And so we really like oriented everything around the weekend. And when the weekend kicks off and like owning that like use case, you throw this on when you rip off your, your tie and your pants and, and that whole thing. And, and then there was, there was a lot around like having an enemy, like for us, the enemy was cargo shorts, like long over-pocketed cargo shorts, right? Where you could associate cargo shorts with characteristics of a human that are like universally hateable or not respected, meaning longer shorts, cargo shorts, right? Longer shorts in and of itself. You could, we tried to associate with lack of confidence, right?

15:36If they're so long, you're hiding something. Why are you hiding something? Well, you're insecure about your legs. So then we, as the opposite, were representative of confidence, right? You're willing to show your God-given legs, right? Like, why would you hide them? So there's this notion of like confidence and acceptance. And like, what do you, and then like questioning, like, what do you actually need those pockets for, right? What are you hiding in those pockets, right? So then there's like a skepticism. Like there were these kind of like funny things that we did that kind of just made it clear that we're on like the right side of history and not our product is on the wrong side of history there was a lot of that that stuff too but a lot of what we tried to do is like frame what we were up to is just like hey this is like the representation of fun and levity and you come to us if you want a laugh if you want high quality content great product a laugh something that is completely irreverent against the status quo, like our models aren't traditional sexy models, right?

16:41But they're, they're acting like it. And that in and of itself is funny. We're not going to do fancy expensive photo shoots. We're just going to take pictures from our shitty iPhone from 2012 and know that it's not going to look super amazing, but it just feels, again, it feels like it's from your friends. So those are a variety of thoughts, but I think those things in aggregate really started to resonate and separated us from the status quo at the time allowed us to like rise above the noise and all that sort of stuff i really appreciate that when you started seeing like other brands kind of pop up doing um similar maybe shorter shorts um obviously yours is superior but uh but uh but the but similar uh wanting to engage in in a similar space that you all are in.

17:30Was that validating? A little bit of both, right? I mean, as a competitor, as someone who's fundamentally competitive, you're like, who the fuck is this? Like, what are they doing? Why are they coming on our turf kind of thing? But that's always a knee jerk, I think. But it's totally validating. And it's totally, and I didn't, this is like the second feeling, right? When you start to bring your rational brain back, which like, it's totally validating. it totally expands the TAM, right? Because you have yet another person throwing ad dollars at the category in general, right? Given that like the TAM waterfall is like apparel, massive.

18:11Men's apparel, way smaller than women's. Men's bottoms, way smaller than men's tops. Men's shorts, way smaller than men's, like a super tiny component of men's bottoms. And then shorter shorts, which is a super, super, super tiny component of, of men's bottles. So like tiny ass tail. So having other people come in and spend their ad dollars advocating the same general ideas, totally a net positive. Right. And I think the benefit was that everyone kind of took their own approach and we, we were different enough. I mean, there were people who were trying to do our thing, but it So that was great because it was everyone was spending money to expand the TAM or the category.

19:01And no one was telling the same kind of story. I mean, there were like, I don't know, slight overlaps on the margin, things like that. But yeah, totally validating. And I probably stressed out a lot more about it than I should have. and and at the time well well in the beginning you were working on uh chubbies and the rest uh uh kyle rayner and tom were also working on this part-time and weekends is that right yeah we were all nights and weekends yep for a while like till about i don't know like two million dollar run rate something like that what was was there a point that um that you you you felt you achieve some type of party market fit or some type of pull maybe from the market that, oh, wow, this is actually working.

19:49If we, you know, maybe turn off ads or, or we gain a lot more kind of organic sales or even, um, our, uh, our, um, our repeat rate purchases are, you know, uh, our, our great question. Honestly, I don't know how much, if at all, we were spending on ads at that point it wasn't as obvious or it wasn't the knee-jerk to just you know jump on meta and start seeking one day click row ads you know what i mean it was it was different right it was very different at the time we may have been spending a bit but i mean having a two million dollar run rate i mean that starts to feel like i mean you're over 100k a month um like close to two obviously and you know we'd sold out multiple times we funded the business in the earliest days with pre-sales right so we'd have our customers kind of fund our ability to make product we we would sell out we started to see that the email list was growing started to see some social traction and um i might be incorrect but like most of the business was was organic like we were just trying to do fun stuff.

21:01Like we would do giveaways, things like that. Like at the time, Facebook was the thing, right? And your engagement rate on Facebook, like your ability to reach your audience, first of all, was like, it was effectively your email list. Now it's a totally different world, right? And your engagement rate was like 10%, whereas now it's like a fraction of a fraction of a percent. So it was just a different world from the perspective of being able to use organic social. So the need to use ads was less obvious. So we did a bunch of giveaways to grow followers. And so I think the vast majority of our revenue was from unpaid sources.

21:40But, and yeah, I mean, I think we started to generate a bit of a repeat business, but not much. I mean, like 2 million, not a huge rookie business, but certainly some. So in aggregate, all of those sorts of things. But yeah. And I think, I think the transition happened at the right time. Like I would, I would recommend some people think you got to go all in, quit your job. Like if you believe in it, do it. I'm not, I'm not, I'm not religious about this, but I'm not so sure. because I think you can mitigate a lot of risk by making sure you have something. And you also don't need to necessarily be spending 200 % of your time on a thing because you could be doing incorrect things like starting to spend on ends too early, for instance.

22:39So I think I would recommend that approach to anyone else if they were going to start a thing. That's helpful. I know from the beginning, you mentioned how you pretty much finance the business through pre-sales as well as some upfront money, it seems, from your co-founders. Eventually, you ended up did raise a bit of money. When did it make sense for you all in the business trajectory to actually start raising your first round? Yeah, there were a variety of transactions throughout the life of the business. The first one, however, you mentioned pre-sales, was when we missed delivery date on pre-sales.

23:21And I may be incorrect, but a lot of our product is extremely seasonal or event-driven. So I think getting close to or missing like a 4th of July, for instance, is kind of like if you're buying American flag shorts and you miss 4th of July, it's kind of a big deal. Now, I don't know if it was American flag shorts. It may have been something else. But it's just something you can't do. And so we realized, okay, we need a little bit of cash to be able to actually have inventory that we can fulfill. So, you know, we raised a bit of money from 60 friends. And, yeah, it took a long time. and it made the K-1s, made tax time extremely expensive and administratively challenging.

24:10But that was kind of like the first part where we were just kind of like, okay, the way we had done it, not that you have to raise money. And I'm not saying that universally, because there are a lot of brands that haven't, but that was what we realized we needed. So that was our first bit of money that we took on. Got it. And when did it make sense for you all to raise, you know, a seed round, for example, and then also, and then also a series A? Make sense is a, is a, is a funny term, right? Because I don't know if it ever made sense for a brand like ours to, to necessarily raise traditional venture.

24:49We, we had great investors. I mean, we're very blessed with everyone that we ended up getting to work with. But fundamentally, I am not convinced that it ever made sense in a purely objective term or purely objective manner.

25:10Because particularly like traditional venture LPs, fund timelines, requirement for returns. I'm relatively convinced that that's not a fit for consumer brands where you don't really have I don't know SAS margins ability to expand to become a you know ten billion dollar business six seven years so that would be my thing but you know we were Silicon Valley so we thought okay we're like Facebook well there's no difference we're gonna get acquired in three years on a revenue multiple and that's obviously not correct so but one of us worked at a VC firm fantastic VC firm and the partner fantastic I mean I recommend this person to anyone and everyone and and then there was another person who was a very awesome high net worth individual who just really understood consumer brands who ended up investing.

26:18And so we got very lucky, found, found great people and they were very helpful. Um, and obviously hindsight's 2020 and grass is greener, blah, blah, blah. So maybe it was absolutely required. Maybe there was no way that Chubbies would have ultimately, you know, been successful or gotten acquired without those dollars. But, um, yeah, I don't, I don't necessarily know if it ever makes sense to, to take outside capital. Was that for outside capital and just in general when it comes to decision making, since you are for co-founders, did that ever come up as an issue or worry in terms of butting heads and in terms of decisions, whether to raise capital or even just strategic decisions when it comes to the company?

27:01We butted heads all the time, constantly, 20 times a day, but not from the perspective of like, I'm leaving the business if you go in this direction kind of thing like there was we were very lucky in that we there were all four of us you know we we knew everyone had the best of intent we respected the hell out of each other loved and still love you know each other and and all wanted to be operationally involved which if you get those four things three things I don't Oh, and they had mentioned that's a very powerful, and our skill sets were complementary in productive ways and different in productive ways.

27:45So you get all that together, and it's, I think, a very powerful combo. But yeah, we argued all the time about everything, but we're fundamentally, I think, aligned on the most important things. but as it related to like phrasing there was always debate but i i think we got to the i think given the information we had and given our level of sophistication and the experience we had and what we had seen you know we we got aligned did you feel since you were venture backed did you feel pressure and i'd imagine as well there were you know a couple um transactions or this is kind of maybe the thinking with brands that started off DTC or E-Com to be, you know, that acquires are going to base it off of, you know, the revenue multiple rather than EBITDA.

28:40Was there a lot of pressure in terms of actually growing from like a revenue standpoint as opposed to EBITDA standpoint? Yeah. Why I'm pensive is I'm wondering if any of it was external. I don't think it was. I mean, I think our investors were just sort of like, build a good business, you know? And I think, I can always speak for myself. I think I viewed success as revenue growth. And I read TechCrunch and I read Business Insider and I saw that Allbirds had gone from zero to 100 in like 12 days. I saw that Harry's had done the same thing. I saw the Dollar Shave Club had done the same thing, right?

29:23There's just all this stuff where it's like, okay, press release, revenue, that's what success is. That's what I can brag about. That's how I can validate my existence if I'm not making a ton of cash, right? Because none of us are paying ourselves a lot, right? Compared to all of our friends in venture or in banking or in consulting or whatever, right? So how do we validate our existence? no I think that the pressure wasn't was internal and I'd say that's that's probably true even if you have investors at the board being like we got to hit this growth number ultimately I mean there are certainly cases where you get ousted for not hitting a revenue number as a founder but I'd say that's few and far between it I think truly is entrepreneurs need to take ownership of their business and do the right thing that they know is right in the mid and long term.

30:18And investors will agree to that, assuming the rationale is sound. So no, no external pressure. I think it was all internal, self-induced. Was there a point where you feel like there was a shift in the market and that you actually had to focus on a positive EBITDA versus revenue? Yeah, for sure, for sure. So somewhat niche, but in men's apparel, Bonobos and Trunk Club and a few other brands got acquired for nice numbers. And that largely informed the multiple because that was largely the market at the time. And a few years later, they were written down by Walmart and Nordstrom massively. and then so then the value the market or the multiple on a revenue basis effectively like went to zero overnight right these PR articles came out roughly around the same time so it's like Jesus Christ that's a just shows you like the importance of timing and how volatile equity is and paper wealth and all this whole thing.

31:29But yeah, uh, 100%. So we had to, and then, you know, we almost went out of business too, because we were so focused on revenue growth that we had architected our machine to support that. Right. And, and fundamentally we did not have a cash generative asset for the first, I don't know, four or five years of the business. We would try to break even. And like on a rational basis, you're like, yeah, we're just investing all cash back into the business for growth, et cetera, et cetera, spending as much as we can to break even. But we would always be wrong. You know, every Q4, we'd kind of like be wrong.

32:08So we'd end up losing a bit of money.

32:14And that's not awesome, right? So you kind of had to become a bootstrap business because we kind of like mowed through all the money that we raised didn't waste it. And obviously when, when you're an entrepreneur, you, you, you learn things, but yeah, there was certainly, and I don't remember when, I don't know, 2017, 2018, where it was just like, okay, we got to change the way we bonus our team. We got to change the way we quantify and define success. And that's a process, right? Cause now you've got like, I don't know, 30, 40 people involved and we've got to change the whole sort of like view of what we're doing here and why we do it and what good means so totally a different a different process but the reality is that a revenue multiple is very rarely the right thing to be optimizing for clearly you can name a bunch of businesses that were required on the revenue multiple it's not my point my point is if you're at 10 15 20 percent EBITDA margin and you're able to grow that those dollars that you're generating every year you have optionality and yeah when a market gets frothy and you're acquired on a revenue multiple you will make a lot of money or you're going to have such a good asset that you're not going to want to sell which is the dream anyways right because you're you're putting money your business generates the cash your business is allowing you to take dividends or partner, whatever distributions.