20VC: The Rent the Runway Memo: How Paid Marketing & Growth Hacking Ruined a Generation of Companies, When Will Rent the Runway Be Profitable & How Does it Compare to Other Fashion Co's and Why "I Wish I Ran My Startup Like a Public Company"

0:00The way that I run the company today as a public company is how I wish I had run it more as a private company. As a private company, the name of the game is by proving that you're different. How you run a public company is looking at all of the ways that you're the same and distinguish what are the aspects of your business model and your P &L that actually give you a competitive advantage. This is 20VC The Memo with me Harry Stabbing's. This is the monthly show where we deep dive on the incredible scaling story of a company. Today, we're focused on Rand the runway and Jennifer Hyman. Jennifer Hyman is the co -founder and CEO and under her leadership, Rand the runway has made history by being the first company to go public with a female founder and CEO, CEO and CFO.

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3:34You are now arrived at your destination. Jen, I am so excited for this. I had so many good things both from school, friend, and from Jennifer Fly. So thank you so much for joining me stay. I've been looking forward to this. That is very kind of you, but I wanted to start. I love a good ah -ha moment. So what was the ah -ha moment for you with Ran the Runway and what was that idea inspiration? Yeah, a ham moment was my sister going into credit card debt after buying a expensive dress that she knew she was only gonna wear once. Why in clothing we have to buy things that we own forever was the only option.

4:12And couldn't there be an option for a rental? Couldn't there be an option for a closet in the cloud where the closet could actually change with you as your life evolved and changed? Okay, so 14 years is watching 15 years as the idea. You've learned so much since then. What do you know now today, Jen? You wish you'd know when you started 14 years ago. That's a really hard question because I knew nothing when I started four years ago. I was 27 years old and I had to really figure out, I think the main themes of how do you go from having a great idea to becoming a great leader, inspiring others, building a team, and figuring out what are the investments that this company is going to make over time to create sustainable competitive advantages.

4:58I think an idea is a dime a dozen and the success of a company is really based on execution. Execution is based on where you choose to spend your human capital resources and really directing your human capital towards things that are going to create sustainable competitive advantage in the market is really one of the most important lessons to me of entrepreneurship. As you said, you started 27 -year -old respectfully, not as like a zero entrepreneur and incredible business either that you are today. What one or two moments really changed your mindset on how you lead companies? COVID was a transformative moment for me as a leader, where you really realize even 10 or 12 years into a business, you still have to lead a team of missionaries and not mercenaries.

5:46And the people that are going to stay with you through COVID, when we lost an enormous amount of revenue overnight. Are people that fundamentally are working here for more than just their job? Really understanding the power of having hired a team of people who ascribed to this core value of everyone's founder of Rent the Runway. And that's never been more important than when we were in COVID and when we had to figure out how to reinvent the company. How do you hire this ownership mentality? because honestly I don't see it today in 99 % and maybe I'm terrible at hiring but what do you do to get those people and how does one do it?

6:24So I feel the opposite of you. I think that the team here is 99 % plus missionary and how do you interview for that? I actually think it's one of the easiest things to see. One of the things I say to someone when they come to rent the runway is I'm giving you this job today. The only promise that I'm going to make to you is that you're going to be doing something totally different six months from now. And that I have no assurance of what that is. If you're not comfortable when this idea of consistent and constant change, this is not going to be the right environment for you. So what I'm interviewing for when I'm interviewing for a founder mentality is I'm interviewing for resilience and that shows up in asking people about their lives.

7:08I think that people when they interview are focused way too much on someone's career experiences. You may have shown resilience in a career experience, but more often, at the point when I'm interviewing someone, the resilience that has shown up in their lives has happened in their personal lives. Actually that I have a set of brilliant questions, I just will spend however long it takes in an interview with someone getting to know them as a person. I'll say tell me about yourself. They might start at their first job and I was like no, let's start at where you were Bored tell me about your family.

7:44Do you have siblings tell me about your parents? I want to know who made them and what made them who they are you're getting a sense of is this person the sort of person That is going to put with a company before themselves is this person going to be a missionary is this person entrepreneurial, it does this person have great values. That shows up in how they talk about their life experiences. When you think about hiring mistakes, you learn a lot over time. Have you made any hiring mistakes and how did that shape how you think? Inevitably until you start really spending time with someone like, you're never really going to know if it's the right fit or not.

8:25Giving yourself some grace on both ends of equation. Both as the boss and the person who has just come to that company, that sometimes it's just not the right cultural fit. That's okay. And that doesn't mean that they're not paraded their job. It doesn't mean that you're not running a great company. It just means that sometimes there's a mismatch. And just being open about that earlier on in someone's tenure at the company is so much easier than waiting for 12 to 24 months in when And they're already kind of set into the vibe and the culture of the company. Do you agree with the higher -foss, fire -fossed kind of mentality?

9:02I know it's easy to say difficult to do, but you agree with that. I don't believe in hiring fast. I believe in hiring medium. Now this also matters a lot more as there's more seniority within the organization if I'm hiring someone more senior than I'm hiring slower. In firing fast, I would say yes. That doesn't always happen because of, you know, people are best of intentions, you want to give people more chance. I think most of the time, like our gut feelings are pretty untargeted, and I've done a better job over time at just trusting my gut. Also, what you said about founders and how they describe their siblings, they had Doug Leonie on the show from Sequoia, and he always asked, tell me about your relationship with your siblings, and how they describe that relationship to him as one of the most meaningful signals of who they are as a person.

9:47I could not agree more. I do want to discuss the company and actually revert to scheduling some way But you said I wish I had run my business as a private company now that I'm a public company CEO and I naturally saw this and I was like Oh, that's a great one. What did you mean by this and why do you wish you ran your company as a private company? The way that I run the company today as a public company is how I wish I had run it more as a private company and And I'll tell you why. As a private company, the name of the game in terms of how you raise capital and how therefore you grow is by proving that you are different and saying, I'm this special snowflake.

10:26Everything about Render Runway is different. We're not a fashion company. We are a technology logistics data company that happens to be in the fashion business. How you run a public company is by looking at all of the ways that you're the same as everyone else in your industry and by nature of looking at the ways that you're the same, it's very clear to see and distinguish what are the aspects of your business model and your P &L that actually give you a competitive advantage. And what are the aspects where you're falling behind? As a public company, because I was evaluated against a lot of other apparel companies, really for the first time, I had never been compared to apparel companies before I went public.

11:09And then I went public and everyone suddenly like, you're in the apparel business, you're in apparel business. And I started looking at the P &Ls of all of these other apparel companies and I realized, oh my God, my competitive advantage is the thing that as a private company I thought was a problem. So the competitive advantage of Red the Runway, which seems so obvious right now, is our product cost as a percentage of revenue, meaning the cost of our inventory. The cost of our inventory is about 30 % of our revenue. In most apparel businesses, the inventory cost is 50 to 55 % of revenue. Now, why is our inventory cost only 30 % of revenue?

11:49It's because we make very high ROI on all of the garments that we have because of the special business model that we have of this subscription to fashion and of renting clothes. So we have this kind of 20 to 25 point margin advantage versus other apparel retailers. Now, what it also does is it points out very clearly where are your biggest opportunities to improve? So when I lined up my P &L versus others in the apparel space and I looked at every one in the apparel space when they were around $300 million in revenue, which is what we were last year. So when NC had around $300 million in revenue, when ASOS, when revolve, when everyone.

12:31And the problem that I realized we had was our S -GNA, as a percentage of revenue, was completely out of whack. Like, for the size of business that we were, we just had a much bigger expense base than we should have had. We took massive steps in correcting that VR restructuring that we executed last year, but also really, over the last two years, have been executing a financial transformation of the business, which has effectively doubled our gross margins since our IPO. and improved our Gross margins, Q4 of 21, our Gross margins were around 30%, Q4 of 22, our Gross margins were 44%. So I'm making really big improvements in the margin profile of the business based on running this business kind of as a public company.

13:19Yeah, I wish I could go back and say, yeah, don't talk to yourself as a private company as if everything you do is different. The harm in doing that is then you can make an excuse for all of your metrics. Could you have got to the revenue scale as fast as you did without having the expenses in terms of whatever the expenses were that you had to then cut back on? Were they necessary to achieve the scale? Our expenses actually were necessary in building out the competitive modes of the business. This is a CapEx heavy business. We have to have distribution facilities. We have pioneered just in time reverse logistics of clothing and accessories meaning all these clothes are sent back To us from women who have worn them we have to ingest them single skew we have to Inspect them we have to clean them we have to repair them we have to restore them We have to then ship them out quality control them We have to then ship them out to new customers often with a zero or one turn around time None of that technology existed off the shelf and none of those processes existed off the shelf So we had to develop the infrastructure to be able to do this.

14:26So I would say that there were significant investments that we had to make into the technology, which has become a mode of ours, into the operational prowess of the business, which is a massive mode. And the thing about a rental model is you are making a lot of money off your inventory, as evidenced by the fact that it's only 30 % of our revenue versus the 55 % for other companies. but you're laying out that money before you make it back. So there's a working capital issue related to the cost of growth. There's so many things we need to unpack here. There's like, kid in a sweet shop, but there's 30 % versus 55%.

15:02What does that look like though? There's a lot of logistics to the business. It is not an easy business to run. Does that not make the margin perform very different? Our gross margins, which include the cost of all of our inventory, all of our fulfillment. And by the way, our fulfillment has all the two way shipping, all the dry cleaning, all the restoration of the goods, all the reverse logistics, etc. Our gross margins are 44 % in Q4. Stack that up against the gross margins of other apparel retailers, and we have a 15 -20 point gross margin advantage versus those companies. And those companies, many of them, are profitable today.

15:39So there's no reason why you shouldn't believe that rent the runway will be profitable and in fact Should be more profitable than those companies because we already have a 15 to 20 point gross margin Advantage the thing that has capped us From being profitable and put us into the camp where we're losing a lot of money was the expense of our SGNA which has now been changed which is why we're a stones throw away from profitability right now and why we shared on our last earnings call that this was going to be a transformative year where it was going to be obvious to even a layperson who spends 30 seconds on our financials that our cash burn was coming way down.

16:24You can see that with a little bit more revenue scale, this business starts producing a really nice amount of cash. What does the street know? Get them. Yeah. Okay. So the first thing is that the street in general right now isn't looking at all paying any attention to companies that are Unprofitable and until recently rent the runway as a company that has burned a lot of cash and we've been unprofitable Then once you deal with that issue, I think there's two major questions about Rent the runway number one is is this a market is their tan and number two is can this business make money? And we've made significant progress on both of those in a very short period of time.

17:04Can I ask for you as a leader when you think about the short term demands of the street in terms of profitability, in terms of next quarter earnings, it doesn't allow really for long term innovation research thinking around how AI impacts future consumer shopping habits, collaboration of shopping, whatever that is. Do you feel there is a misalignment between what the street expects tomorrow and what you want to invest in over time. I think that over time you get the investors you deserve. I'm here for the long haul. I believe that 50 % plus of the closet in the future doesn't have to be filled with items that we own forever.

17:44Now that has not shown up at all in our stock price to this point because we have not been able to amass those long -term investors because the long -term investors are looking for profitable companies. By the way, it's not that we are trying to get to profitability because that's what the market favors. We're trying to get to profitability because I want to build a sustainable company that is around 50 years from now. Coming back to something that you said about AI, which I think is really going to divide companies in half. There are going to be companies that are AI beneficiaries and then there are going to be companies and full industries that are just decimated by AI.

18:23I am of the mindset that AI is going to be the biggest change to how we operate businesses since the iPhone. Interestingly, fashion, which is a very physical business, I just talked about all of the catbacks. The bad thing about my business is it's been very expensive to build. The thing about my business is it's not being disrupted by AI. We are going to be a massive AI beneficiary. It's really freaking annoying right now. Be it on Amazon or on Red the Runway or on Zara or on Nordstrom to shop the endless aisle of products and figure out what you want to wear. AI is going to make the equation of discovery so much more efficient, so much more delightful and we are starting to furiously run inside of Red the Runway to use the data advantage that we have to really harness the power of AI.

19:17So I've never really been more excited about a technical. I don't even want to call it innovation I think it's like a new playing field that we're all on Design or add another expense if we look at AI engineers if you look at machine learning engineers If you look at any kind of research in this a takes a lot of cash You as she and a is gonna go again We already have all this machine learning engineers within the company So I actually think that the expense has just come down because of products like chat GPT. The interface that enables with chat GPT of being able to have almost a shopping companion, I think it could be game changes.

19:57And it game back to the question of like, are you a technology company or an apparel company? We're in the business of getting women dressed every day. In terms of how our customer experiences us, we're an apparel company. Now, is it a company that is certainly enabled by technology 100 % the majority of my employees are tech? But I definitely think that we're a fashion company. It's taken me 15 years to say that. I don't like. I've never seen that before, but it's true. We're a fashion company and I'm proud of it and we're disrupting an aspect of fashion which is a $3 trillion global industry.

20:32But to brands like you, if you think about it, the big brands are like, the circular economy is not good for us. We like purchases, we like as many purchases as possible. Shortly the relationship that is frictitious now. I'm introducing these designer brands to my customer, often for the first time. I have a customer base number one, add my average subscriber, spends about $2 ,000 with me per year. So this is a luxury customer that I have. This puts me on par with LVMH or with top luxury beauty companies for how much people spend per year. Number two, my customer is between 25 and 45 years old.

21:09So I have a wealthy, young customer who is not currently the customer of these designer brands. In fact, 98 % of my customers say they're renting brands on -run the runway that they have never owned before. And then I am able as the customer to determine whether I want to purchase that. So brands at this point see me as one of their most powerful marketing engines because they've now have 15 years of data where they assess where do their top customers come from. So for brands, we're innovating what they've always known to be true. When women put on the clothes, they have a 70 % higher likelihood to want to purchase the clothes.

21:50That's on the supply side. On the demand side, you said something fascinating, which is paid marketing and growth hacking ruined a generation of startups. I was so intrigued by this statement. White, it paid marketing and growth hacking ruined a generation of startups jam. This is like a new thing I've been thinking about a lot recently because obviously we're in this very park and very bizarre time where a lot of startups are going bankrupt, a lot of companies are having trouble. And I was thinking about my own trajectory as a business. I've always thinking about lessons learned. What can I do better?

22:27What, what do I wish I would have done a few years ago? So we first raised money in 2009. So I think that some of the highest years of venture capital funding were like 2011, 2012, 2013. At this exact time, we were running parallel with the massive success of companies like Facebook, Google, and companies like Expedia and Bookings .com. And so when you raised money from a VC in 2009 or in 2011, the first thing they would say to you is you need a growth team. You need to start doing growth hacking. Why did they say that? Because there was a culture and with the big personality attachment, Chimath, at Facebook, that had built this unbelievable growth machine and it worked for Facebook and what was growth hacking?

23:16Growth hacking was like looking at your PDP and saying, okay, I want to change this button on the PDP from blue to green and that's going to increase the conversion rate on this page. It's going to get more people to go further down the funnel. Now, Facebook, that might have actually worked because they were dealing with such a big revenue base that moving the metric, one one hundredth of a point, could actually add up to $100 million. Is something significant, but for startups that were very small, changing the button color from blue to green might give you some small perception that you were changing your metrics, but all of that would be erased within a few months because what you were doing is you weren't delivering any incremental value to your customers.

24:03What happened was all of these startups wasted it, an inevitable amount of time and money on building these growth departments that were just like pushing chess pieces around the board. All of the gains would be a race, whether it was within six months or it was in 18 months and nothing would fundamentally change in the customer experience. So these C's at the time were taking the lessons learned that were true lessons from mega companies and they were falsely thinking that those mega lessons could actually benefit small companies which they did not. Then let's move to pain marketing. Okay, so you had these successful companies.

24:44You had Facebook, you had Google. They wanted you to spend money on ads. Those VCs also were investors in Facebook and in Google. They wanted you to spend money on those ads. And there was a mathematical equation at the time where people just thought, hey, we've outsmarted decades of marketing knowledge. What we can do here is we can buy an ad for a really cheap cat. We can buy a search ad on Google. And if the LTV is higher than the cat, we should do this all day long, cha -ching. Let's just keep on doing this. What people couldn't for seer couldn't think about is buying that search ad on Google.

25:26Just like growth hacking is doing nothing to fundamentally improve your customer experience, how do brands grow? Brands only grow based on the organic growth of a business. You've got to get people to love your brand. You've got to get people to talk about your brand. The best brands on earth are brands that grow virally and organically. And the way that you do that is you invest in either delivering a much better customer experience or you invest in building a brand that is so emotionally resonant with the consumer that they want to come to you. So what was happening at the time was there was almost this arrogance within Silicon Valley.

26:03I made these mistakes as well. We thought that we were smarter than these old school companies who were spending their marketing dollars on things like retail stores and billboards and events and connecting with their customers and all of those things. We were completely wrong because buying an ad on Facebook or buying an ad on Google might give you a quick hit, it might give you a quick conversion, but that is fundamentally doing nothing to breed brand loyalty, to improve your customer experience, and I think billions of dollars have been wasted there, where they should have been built on the real nuts and bolts of building customer experience.

26:44There's two that have done it really well. Well, one is obviously Amazon. They have invested all of their time and effort on improving their customer experience. The evolution of Amazon is just let's give the customer more and more value so that it is ridiculous to think about not having a subscription to Amazon Prime in your life. Another company that I think has done this unbelievably well and their change has really happened more over the last few years, Airbnb. Where Airbnb has said, let's forget everything about paid marketing. Let's take all of our dollars and invest it into the brand, into PR, into product innovation that's actually going to breed loyalty.