687: I Broke Every DTC Rule and Built a $1 Billion Brand From My Garage

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1:18Today's guest is the founder and CEO of KiwiCo, the kid's subscription brand that shipped over 50 million crates, profitable since 2016 with a team of under 150 and zero pressure to ever sell. Every lesson in this episode is a rule broken. The two-word answer that is buried in her churn surveys that unlock profitability, why running her own warehouse for 14 years lets her crush every competitor at Christmas time, and the acquisition mix where 70 % of her traffic costs almost nothing. So if you've only ever heard one way to build a brand, this is the other way. So let's get to it. Hear the stories, learn the proven methods and accelerate your growth and future through entrepreneurship.

2:03Welcome to the Founder Podcast with Nathan Chan.

2:09Hey, I have a quick ask. If you're loving these episodes, leaving a quick review is honestly the best way to support us. It helps the show grow and means we can keep bringing you the founder stories and insights you tune in for. Please share it with a friend. Thank you so much. Now, let's get into it. Sandra, you walked away from leading eBay's fashion business in 2011. You're a senior exec at eBay. It was one of the biggest e-commerce companies in the world, still is, to start packing craft boxes in your garage in 2011. What was the inflection point that convinced you this personal need for hands-on kids projects could scale into a mass market business?

2:55Those were actually decisions that were made somewhat independently. So I had been at eBay Inc. for about seven and a half years. I'd been at PayPal and then moved on to eBay, where, as you mentioned, I was running the fashion business. And I decided to leave. And I decided that I wanted to join a smaller company without the intention of starting my own company. As I had announced that I was leaving, somebody who I knew actually approached me and asked about founding and starting a fashion startup. And so I actually explored starting this fashion startup as I was leaving eBay, which was very, very relevant to my experience right before, and ended up not doing that.

3:44But as I was looking into it, I was learning the ropes around potentially fundraising, learning about Santo, et cetera, a new part of Silicon Valley, a part that I was not as familiar with. I started to do hands-on projects with my kids more and more. So my kids at the time were, were, my two oldest were two and four. And I had grown up doing hands-on activities with my mom growing up. I really wanted my kids to feel like they had agency to create and make. And so we started doing these hands-on projects. And I was like, this is taking way too much time and energy. Like I need to advertise this.

4:23So I invited my friends and their kids over. And one of the moms was like, Sandra, you should start a business around this. And so that's what really prompted me to say, gosh, is there something here? This certainly would not be a viable business around encouraging kids to get hands-on, to make, to create, if it was an N equals one problem just for me. But fortunately, come to find out at this point, we've shipped out over 50 million crates. And so this is something that really resonates with more than just my family. Yeah. So you've built an incredibly large company, billion dollars in lifetime revenue, nine figure business.

5:04So I'm curious, how did you bring this product to life? Talk to me about the early stages because it's not just one hero product like many of the founders that we usually interview. It's a series of products brought together. It's not an easy product to bring to life. That's correct. When we concepted kind of the idea of bringing hands-on projects to kids, one of the things we were curious about was the need by families and how we could actually fulfill what we wanted to bring to life. And what we discovered is parents in particular really liked the idea of something that just came to their doorstep that they didn't have to think about.

5:48And for kids, it was something that was delightful. So we landed on the idea of doing subscription commerce, right? So every month this child is getting a brand new experience to the doorstep. And as we were launching, there was a lot that had to go into thinking about, okay, if that is something that we need to do, how is it that we are defining what that product and what that experience actually is so that it's something consistent? And if you think about it, someone is going to be signing up for a subscription without even knowing what they're going to get, right? So we had to be able to define, at least at some level for the customer, kind of what that promise actually was and making sure that we were able to fulfill that.

6:30Because, I mean, there's this kind of sense of trust as well as the sense of when you have a subscription, you need to be able to replicate that so people stay on, right? You need that retention for the overall subscription equation to work from a business perspective. And so a lot went into thinking about what was the equation? Like, what is the equation, actually, of what it is that goes into a box? What is it that a kid is going to experience? And so we landed on certain things. Like, we wanted to make sure that it was incredibly fun. We knew that engagement from a child was going to be incredibly important.

7:04We also knew from a parent perspective it had to be of value to them. It couldn't be a craft box with things that they could buy off the shelf with some pom-poms and some felt and that type of thing. it had to feel unique and of something that somebody would actually want to pay for too. And so it was a pretty unique challenge, especially early on, because early on, you don't have the scale to be able to create something really unique. You can't create, for example, a custom mold to create a piece. You're really having to deal with things that are off the shelf, and yet you want to provide something that's valuable from an experience standpoint.

7:44And so we did quite a bit of, I would say, concepting and testing. We would put different types of ideas around what would go into a box and in front of parents through SurveyMonkey, really, and really put it out there into the world. And then the other thing that we did is we would have kids descend to my garage to actually engage with the projects too, to make sure we're hitting it. So many playdates. And how many playdates do you think you would have had to conceptualize, I guess, your first batch of crates? That's a great question. We had a lot of playdates because that first batch, we knew we had to get it just right.

8:30So different from, you know, my background has been in e-commerce and software as well as physical products. So I'd started my career at Park & Gamble. I'd been at PayPal and I'd been at eBay. When you're dealing with a digital product, you can kind of throw something into the world and you can iterate on it pretty quickly. When you're dealing with a physical product like we were dealing with, it's not as easy. And so there was a lot of iteration and time that went into the development of the product because we knew we had this one opportunity to get it right during launch. And then thereafter, you had something you had to send out every month.

9:01So it was something that we had to really define. So I'd say in terms of the number of testing sessions for a given crate, for the first three crates, each one probably had at least 15 testing sessions. And it ranged from concept all the way through to things like one of our initial crates had clay in there. And we found that certain clays were simply not malleable enough for little hands to be able to manipulate and things like that. So it's like things that we discover and then we're like, oh, then another testing session is something that we would have to do afterwards. Yeah. So this is interesting because usually how the process works is you design it, like you said, get a mold, break mold or white label a product and change it, tweak it slightly.

9:52And then you go through the sampling process. For you, you would have brought together many different products. products so how much would have it like can you it's a long time ago i know but how much would have you spent in and how much like in terms of money and time around going through that iterative process before you knew that you were on to something to get ready for even to launch or this is going to be a business yeah when we estimate the amount of time that we spend and and to be fair this is maybe more a little bit more recent but the amount of time that we spend on any given crate, which is kind of the unit that we deliver to a family, it's about a thousand hours per crate.

10:37And I think what's interesting about kind of the subscription product development design process is the idea of kind of, as you're describing product design development, you have kind of three different things that you're often kind of weighing, right? So you're dealing with time, you're dealing with cost, and you're dealing with quality. And when you're launching a particular product, a lot of times you can let something slip. You can be like, I'm going to keep it this quality, try getting this price point. Our launch date might slip. We're going to launch it a month later, two months later. Or you can say, you know what?

11:15This is actually our cost profile is going up. We're going to raise the price around this. For what we were delivering, the price is set. we had a certain quality bar that we needed to meet kind of month after month. And the timeline was also set. We had to send a crate out every single month. And so I think one thing that is really remarkable is that our team was able to do that consistently. And we continue to do that consistently as well. And so as we are coming up with new subscription lines. And so that's something that I think we have, as much as we say that we're encouraging creativity in kids, like our team has had to be very creative as well as very disciplined to be able to meet those requirements.

12:02Yeah. So once you jumped on that hamster wheel and launched, how many crates did you have worked out before you launched? We had about four. Yep. Okay. And so that meant, and you would have had a small team. So you raised money as well before even going live, right? We did raise money before going live. So we raised on the concept as well as the team. We raised in that summer. We launched in October of 2011. We had four or five people at the time. The primary product designer was yours truly. So I was the product designer basically. And it's funny now, right? I mean, we have a product design team, mostly mechanical engineers, industrial designers, et cetera.

12:58And like, I would never be hired as a product designer now, which is a good thing. But that's the way that things kind of change and evolve. So what were the first bottlenecks to prevent operational collapse in those early days, even with that small team? Some of the really interesting challenge that we had operationally were around fulfillment related and then supply chain related. So as much as I had worked on physical product, it was really an R &D. And then as much as I worked on e-commerce, it was places that had no inventory, like eBay or PayPal. So this is like all new learning for me. And so I would say that, you know, from the very beginning, when we had ordered our first set of just boxes, right, just the crates themselves just printed out and stacked up, I did not realize how big of a footprint that would actually take up.

13:58So in terms of space planning, there were some really interesting initial lessons there. When we sent out our first alpha shipment, it was around, I think, like 19 crates. It took us all day for about five people. And we were like, oh, my goodness, how are we going to actually scale this? And so I think getting those systems, getting those processes in place, and part of it is really saying this is something that I'm not an expert in. How do I bring people in who are experts? And so pretty early on, I ended up getting an advisor. So Mike Smith, who is the CEO of Walmart, who went on to be CEO of Stitch Fix, actually came on board to kind of be kind of an advisor to us when it came to like the shipping, fulfillment, operations side of things.

14:46And I think we did that where and when we had to really try to bring in people who could help us out and help us understand where the potential pitfalls could be too. So 19 crates, it took one day to assemble, pick and pack and get them ready to send out. Yeah. Kind of a disaster if you think about trying to do that skill. That was the pace. Yep. That's crazy. So you did go in, you did not, when do you, like, so you didn't touch 3PL, you hand picked and put together the product for how long and yeah. We still do everything in-house. So we do not actually 3PL our fulfillment. And so we run our own warehouse.

15:30It looks a little different than it did out of my garage. but when we so initially were in my garage we moved as we launched into a warehouse and office location very intentionally because we really wanted to understand what it would take to fulfill these crates because to your point we had this kind of sub-assembly process with little bits and pieces we had the assembly of the entire crate and then it going out the door and we really really wanted to understand that and be nimble around it. And I remember the first few holiday seasons, we saw some other folks crop up, some other competitors crop up.

16:14And there were three PLOing in the business and their holiday shipping date, kind of the last day to ship was pretty early in December. But because we were controlling our own fulfillment, we shipped all the way to the very, very last day. And you can imagine that as a kid's kind of business that was had a really, really kind of holidays were a very, very important time for us. Being able to fulfill all that demand was really, really important. And so I think it's really allowed us to take advantage of those types of opportunities. And to this day, then we actually do operate our own warehouse.

16:51It's not to say that we won't 3PL or we're opposed to 3PLing the business, it has made the most sense for us on a number of different dimensions. We always are evaluated and analyzing what the best thing is. And it turns out that that has been the best so far. Are you able to share how much you raised for your seed? For a seed run, it was 2 million. Okay. So you raised 2 million. You had a small team. You were going through this iterative process how many how many like what was the moq for your first batch before you launched and and like what what did that look like uh initially i would say the first month when we shipped out crates the total number of units that we shipped out was around 500 yep okay all right so 500 okay so so you started small with your manufacturers and then obviously scaled up the interesting thing is that we didn't have manufacturers when we started and so it was literally things that were off the shelf um that we were then bringing together right and so the first crate that we sent out was a crate called colorful inspiration and if you think about colors and this is for kind of the preschool early elementary school age kids learn about colors in a lot of different ways it was not something where we could say take a red pot of paint and a yellow pot of paint and put it together and you make orange because people would be like we do that in preschool already and so what we ended up doing is we gave them a mat we gave them contact paper which is like sticky paper we gave them pieces of tissue paper to create a stained glass window and do color mixing that way we had wooden tops with paper that you could color in a you know a yellow fraction a red fraction a yellow fraction if you spin the top you would do color mixing that way and then we gave them a canvas bag.

18:43So using the same tissue paper, which bled, if the kids wet the bag and then covered it with tissue paper, it would bleed, the colors would mix, and they would have this little tote bag that they would bring to the library with them. So you can see that it was a different way of doing color mixing, but using kind of materials that were out there. So again, required real creativity, I think, on our part to come up with that so that it was something that people would want to actually buy as well. and they felt like would be fun and they would be educational for their kids. Yes. Okay. Awesome. All right.

19:16So then let's talk about the marketing. How did you like Shopify would have just launched? It was, so Shopify was around 2009, right? 2010. And so you guys were 2011. Were you on Shopify? No. WooCommerce? Magento? Yeah. Wow. Old school. So Magento and then still mostly customized at this point, kind of e-commerce platform. And so, yeah, I mean, it's a little different now, I would say, in terms of being able to launch an e-commerce business. Yeah, you're old school. I don't know anyone that does Magento unless it's deep customization, deep SEO demands. but that's awesome okay all right so so magento you obviously had a developer that was coding up the site you know no off-the-shelf templates you can just rock and roll with no you know recut subscription plugins to do subscription management okay great and so all customized custom built that probably cost you an arm and a leg to be able to build that about that just as a as a little bit of an aside is we started to develop the site and I had been a product manager not super technical um it went poorly like it was you know we had outsourced it it was going poorly this whole idea of bringing out advisors so I had brought on a technical advisor because I was like I need someone to make sure this thing is actually robust and is gonna work so I brought a guy on board who was a co-founder at PayPal versus engineer at YouTube.

21:04His name is UPan. And I was like, please help. Like, please figure out what's going on here. It seems to be going horribly wrong. And so he got in, he got his hands dirty, and then I convinced him to become a co-founder. So that is one way you can bring a co-founder on board, have something go horribly wrong, and then have them help fix it. So yeah, so that was kind of an aside there around building the site. Yeah, okay, all right. So I want to talk about your unfair advantage because you clearly have an unfair advantage with your network and just the cluster being in Silicon Valley, the wealth of expertise around you to help build these incredible businesses like you have with KiwiCo.

21:53So how did launch go? talk me through what did you do to get your guys first batch of subscribers customers because you launched out the gate with a subscription you said you had four boxes ready to go no one knew you guys no one heard of you guys um it's you know selling subscription cold is is not easy and you know this is a at the time a very novel concept buying products online signing up to a subscription. You know, this is 15, no, 20. Yeah. Long, long time ago. 2011. Yeah. It was the end of 2011. So the things that we did to get ready for our launch are things that absolutely do not scale, but made a lot of sense for, for the time.

22:39So to begin with, we started basically to build an email list. We went to an event called Maker Faire here in the Bay Area. There's still some Maker Faires. It looks a little bit different now, but it's very much kind of the type of audience that we thought would find what we're doing to be interesting and attractive. So we went to Maker Faire. We explained what we're doing. We collected email addresses several months before we launched. We went to the Palo Alto Art and Wine Festival, again, collecting email addresses. We did a pretty decent sized press push. So we did that kind of internally.

23:20Our team went out to do a press push. So we got coverage in places like TechCrunch, et cetera, when we launched. And then a lot of it was kind of through investors and friends and family to start to get the word out. So I'd say kind of those were some of the preliminary channels that we began with. And then from there, I mean, it's evolved a lot. So I'd say still to this day, like things like CRM are still incredibly important, like low cost, no cost channels of acquisition. Direct and low cost channels still make up up to 70 percent of our traffic. And so that's very important because if you look at the blended cost of acquisition, you still want a healthy amount that is coming from those types of channels.

24:14On the paid side, that has evolved immensely. So when we had initially started and we were trying to do, for example, SEM, did not work at all. Nobody was looking for a subscription, kids, none of that. That market did not exist, right? And that has really changed now. SMM with Meta has changed significantly, and that's really important to us. And then we are constantly optimizing and utilizing other channels too. So we have affiliate, we have podcast, we have DRTV. We even do a snail mail catalog during the holidays. for example. And so it really is a mix. And the other thing that we find is our marketing efficiency per channel sometimes differs depending on the time of year, too.

25:05So the holiday times versus non-holiday times, we're also sometimes targeting different audiences, depending on, you know, if it's holiday time or not, too. And so we've definitely learned and iterated, and sometimes the channel will work at one point and not work another point. So it's kind of on us to continue to test and iterate and try new channels. I mean, most recently, of course, looking at AI optimization and that type of thing. So trying to always get ahead of the curve is important too. You said a large proportion from your MER spread is no cost. What exact channels are they? So I would say those would be, for example, we would include CRM.

25:55So we include our email channel as a low cost kind of no cost channel. A significant part of it is people coming through what we think is word of mouth or each individual kind of family. a lot of times mom being a micro-influencer themselves, right? And talking about Kiwi Code in their network or maybe posting something to their organic social and people finding out about it that way too. So a lot of those organic, I mean, I think there is, to be fair, some interplay, right? So if you think about people coming to KiwiCo.com, inevitably some of that you can think about that as like, there's a funnel.

26:32So there may be some kind of a paid touch point along the way. But I think what's great overall is that the equation works for us because we do have a lot of people just coming to KiwiCo.com. Now, you said that you guys, fast forward to now, are playing with new channels, especially AI. What are you guys doing there? So we're spending quite a bit of time thinking about kind of optimization, right? Kind of the AI. Oh, I mean, it's like the letters that people use differ depending on who you talk to.

27:11Yeah, yeah, exactly. So there's certainly that piece. We have actually, we're early, early adopters in trying out ads. Yep. With ChatGPT. The ChatGPT. Yep. Had that going. I mean, I think we find it to be really interesting and promising, but I think that it's evolving very quickly, right? And I would say kind of our initial foray into it, maybe the targeting, et cetera, was not quite what it needed to be, but it's something that we're going to continue to experiment with and look at ongoing. uh and so i think the other places where we're leveraging it from a marketing perspective is certainly on the creative side of things too um and that goes on the marketing side all the way through to if you think about what we do we are creating a lot of product as well as content and so the content creation is not only on the marketing side from a paid organics perspective but also kind of the experience that we're providing to consumers kind of in Crate as well.

28:25Yeah. And I guess one thing that you guys have done exceptionally well is you're in the repeat customer business. And that is, I think, the ultimate business in many ways. There's many other business models. But when you get that right, like you said, and you have a healthy retention profile, depending on scale, velocity, all these different, you know, where you're trying to go, you could hypothetically turn off all your marketing if the business is in a good spot and you would not need one new customer in the month to still be profitable. If it all lines up, right? So while new acquisition, all these different things we're talking about is sexy, it's fun, and many e-com brands rely on that, you've built a model where hypothetically, hypothetically, I don't know your numbers and all these different things, but I'm going to assume you could structure the business that you could turn off new marketing, you could turn off everything and not get one new customer for the month and still be profitable, correct?

29:32Yeah. So let's talk about that model. I'd love to explore that a little more because very foreign when you launched subscription and you took a major operational risk by expanding into multiple new age-based subscription lines in 2014. So that was not much longer after you launched, but this has been a genius move because you're able to effectively expand the customer journey's age and longevity with you because otherwise you would face the incremental churn of somebody growing up. And so you've been able to combat that. So talk me through the debate behind launching several at once rather than sequentially and how you conceptualize that and how it all works.

30:30At the time, after we had launched the business, we were growing at an okay clip is the way that I would describe it. And we knew that we wanted to see more from the business. And as a result, we actually experimented with a number of different other things too. So we had toyed with an idea around doing something with content and then selling materials or doing something in kind of the grown-up crafting space or doing something. So we were kind of looking at a number of different ideas. And then we went kind of back to what was KiwiCrate at the time, kind of our first subscription line. And we started to look at it more carefully.

31:19And we saw, okay, we collected churn reasons because one of the things that I think we did from the very beginning is collected data from our customers. So very first crate we sent out, and this is one of the benefits of a D2C business is having that direct relationship with a customer. We got survey feedback from the very, very first crate. And so as we were looking at some of that data, one of the things that came back was kind of like churn reasons. And one of the big churn reasons was too young and too old. And so like, OK, what does that mean then? And what should we do about it? And maybe there's something there that could be an unlock.