Serena & Lily: Serena Dugan and Lily Kanter. They Built a $20M Brand—Then One Investor Almost Destroyed It

Many founders think the hardest thing about business is finding customers. It's not. It's surviving success. When Lily Kanter and Serena Dugan launched a luxury baby linen business, they had no manufacturing experience, no inventory, and barely any capital. But after their first catalog landed just as a major competitor left the market, orders flooded in almost overnight. The problem? They hadn’t made the products yet. Today, Serena and Lily has grown into one of the best known luxury home goods brands in the country. But getting there was a grind. This is one of the most revealing conversations we've ever had about unplanned opportunities, and the hidden cost of taking outside investment. From financing their first inventory with customer deposits... to walking away from a disastrous investment deal... to nearly losing control of the company they built, this episode is a masterclass in what happens when rapid growth collides with the realities of cash flow. You Will Learn: The clever way Serena & Lily financed its first production runHow one perfectly timed opportunity launched the businessWhy "smart money" isn't always smartHow investor and founder incentives can be completely misalignedThe warning signs hidden inside a term sheet Timestamps: 06:11 – Lily's years at Microsoft, and the money that helped launch a business 11:55 – Serena repaints an old table and discovers people will pay for her designs 24:21 – “No bunnies, ducks or choo choo trains.” Lily and Serena meet, and decide to sell high-end baby linen: 36:01 – $100,000 in orders... for products that didn't exist yet 37:38 – The cash-flow hack that kept the company afloat 46:14 – “They patted us on the head.” Patronizing investors, and a predatory term sheet 51:28 – The financial crisis forces a complete reinvention of the business 58:47 – The lawsuit, the boardroom battle, and the investor who nearly brought Serena & Lily down 1:03:26 – Why acquisition offers couldn't save the company—and the lesson every founder should hear This episode was produced by J. C. Howard, with music by Ramtin Arablouei. Edited by Neva Grant, with research help from Katherine Sypher. Follow How I Built This: Instagram → @howibuiltthis https://www.instagram.com/howibuiltthis/ X → @HowIBuiltThis https://x.com/howibuiltthis Facebook → How I Built This https://www.facebook.com/howibuiltthis Follow Guy Raz: Instagram → @guy.raz https://www.instagram.com/guy.raz/ Youtube →guy_raz https://www.youtube.com/channel/UCNSfrxNEmCruNtjIzxCBHjg X → @guyraz https://x.com/guyraz Substack →https://urldefense.com/v3/__http:/guyraz.substack.com__;!! Iwwt! RZoD751oWzUzoqqdJiqaoL6HdJfRHDUO1TKvYJ424d3Udn7-Pw9Nj6nEsauh9zcgEvLjUEc$guyraz.substack.com http://guyraz.substack.com/ Website →https://urldefense.com/v3/__http:/guyraz.substack.com__;!! Iwwt! RZoD751oWzUzoqqdJiqaoL6HdJfRHDUO1TKvYJ424d3Udn7-Pw9Nj6nEsauh9zcgEvLjUEc$guyraz.com http://guyraz.com/ See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Guy Raz?

  Our presenting sponsor today is Anthropic, the team behind Claude. Every founder on this show started with a hard question, not the marketing plan, the 2:00 AM kind. Is this idea any good? Am I the one to build it? Should I quit my job? Anthropic got built the same way, a public benefit corporation founded on one hard question. How do we make sure AI goes well for people? So they asked over 100,000 people their hopes and their fears and are publishing what they find, even the uncomfortable parts. Me? I've got my own hard question about AI.

• 0:40Guy Raz?

  Here it is. If everyone has access to something that can help them write the business plan, build the prototype, analyze the market, maybe even come up with the idea, what separates the people who actually build something from everyone else? I don't have a clean answer yet, so I've been sitting with it with Claude. There's hope in hard questions. Ask yours at claude.ai/hibt. We get support from US Bank, a question I love asking founders. What's the one decision you almost didn't make, the one that changed everything? Because it's never the obvious stuff. It's never, I decided to start a company.

• 1:21Guy Raz?

  It's the small, boring, Tuesday afternoon decision you barely remember making until you realize it's the reason everything after it either worked or didn't. Say you're 18 months in, business is growing, you've got expenses coming from six directions, gas for the van, office supplies, your phone bill, team lunches that are actually client meetings, and you're putting it all on whatever card you grabbed in year one. You're not thinking about it. Why would you? You've got bigger problems. But here's the thing. Path A, you keep going like that. End of the year, you're sorting through statements, trying to figure out what went where. You've left hundreds, maybe thousands on the table in rewards you never earned,

• 2:04Guy Raz?

  money that could have gone back into the business. Path B, you pause and get the US Bank Triple Cash Rewards Visa Business Card. Now you're earning 3% cash back on gas and EV charging, office supply stores, cell phone service, and restaurants. You pick up an extra $750 cash back as a bonus. And you've got a low APR on purchases and balance transfers for 12 months while you're scaling. Same business, same expenses, two completely different outcomes based on one small decision. Visit usbank.com/business to learn more.

• 2:45Guy Raz?

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• 3:27Guy Raz?

  your pre-flight oasis to recharge with 15 visits and four one-time guest passes each medallion year when flying Delta together. That's up to $950 in annual value. Value estimate based on $50 per visit rate to purchase additional visits or bring a guest to the Delta Sky Club. Make every trip feel more rewarding with the card that upgrades your travel. Apply today at delta.com/cardsocial. Offer ends November 4, 2026. Minimum spending requirements and terms apply. Flights are fulfilled as flight certificates valid for Delta Comfort or Delta Main to select domestic destinations. Book 21-plus days in advance.

• 4:09Guy Raz?

  Up to $80 per person and taxes and fees apply. Other restrictions apply.

• 4:26Speaker 01

  We needed working capital, and so I asked a friend if they had any ideas of the valuation of this company. And they said, no, but I'm going to introduce you to a CFO at a private equity firm. So Serena and I went to pay them a visit, just literally to get their opinion on the valuation. And in about 10 minutes into the meeting, the CFO went and got one of the general partners of the firm. He literally patted us on the heads like we were dogs or puppies. Or children.

• 5:07Speaker 01

  He took a seat at the table and said, you girls sure have been busy.

• 5:20Guy Raz?

  Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built.

• 5:32Guy Raz?

  I'm Guy Raz, and on the show today, how a tiny baby boutique in Mill Valley, California grew into the luxury home goods brand Serena & Lily.

• 5:50Guy Raz?

  One of the hardest decisions that almost every entrepreneur faces is not what to build, it's how to pay for it. Because for a lot of companies, success actually creates new problems. The more customers you have, the more inventory you need, the more people you hire, and the more cash you burn. And suddenly, a company that seems like it should be printing money is desperately short of it. That's exactly what happened to today's guests, Lily Kanter and Serena Dugan. In 2003, they started a company called Serena & Lily, selling beautifully designed baby bedding. And almost immediately, they caught a huge break. Their first catalog landed in retailers' mailboxes at exactly

• 6:33Guy Raz?

  the right moment. And within weeks, they had close to $100,000 in orders. There was just one problem. They hadn't actually made the products yet, which meant they had customers, but no inventory. Demand, but no cash to fulfill it. As you'll hear, they found a pretty clever way through that first crisis. But it was only the beginning. Over the next decade, Serena & Lily expanded from baby bedding into furniture, home decor, wallpaper, lighting, eventually becoming one of the country's best-known luxury home brands. But getting there required round after round of financing. And somewhere along the way, the people writing the checks began to have very different

• 7:16Guy Raz?

  ideas about what kind of company Serena & Lily should be. What followed is one of the most instructive and maybe even cautionary stories we've told on this show about raising capital. Because not all money is the same. The wrong investor can cost you far more than equity. Anyway, to start at the beginning, Serena & Lily launched in Marin County, California in 2003. We'll hear from Serena Dugan a little later, but first to Lily. She grew up in Kansas City and studied accounting in college. And after a series of jobs in technology and retail, landed an executive role in Microsoft. It was the mid-1990s, just as the company was entering one of the most extraordinary periods of growth in business history.

• 8:01Speaker 01

  They dominated the desktop. I mean, they were, I'm not kidding you when I tell you, they were printing cash. They were printing cash on Windows and Office like no one's business, because there was no cost of goods sold. They just gave the license serial number to Dell, to all of their partners of their desktops and their laptops. I mean, they were compatible with every imaginable peripheral, whether it was printers, mouse, mice. They were compatible.

• 8:35Guy Raz?

  Yeah.

• 8:36Speaker 01

  So I always like to say, they put the gas pedal on the right, they put the brake on the left, and they created an industry.

• 8:44Guy Raz?

  You would stay there, I think, for about five years, a little over five years. And you end up leaving. I think you got pregnant with your first child, and you decided to take, I think initially to take time off, but you never went back to Microsoft.

• 9:03Speaker 01

  I did not go back. I left in 2000.

• 9:07Guy Raz?

  Yeah.

• 9:08Speaker 01

  And I did not go back to corporate America.

• 9:11Guy Raz?

  Did you feel, I'm curious, because you were, I mean, you were a young woman at the time, and you had this amazing run at Microsoft, and probably, you were there at a time where you got options and shares. Did you feel like, okay, I can live off this for a long time, like what I got in compensation from that experience?

• 9:32Speaker 01

  Oh, my God, yes. I mean, those were some wild years. I was there at a time where the stock split three times and doubled every single time it split. I probably was there at one of the most exciting times of that company's stock. And I was lucky. I was in the right place at the right time. But yeah, I thought we could live on that, for sure.

• 9:55Guy Raz?

  Okay, so you decide that you're not going to go back, and you have your first child. And tell me about how you

• 10:05Guy Raz?

  What were you thinking about maybe doing at that point?

• 10:08Speaker 02

  You know, my mind works in a kind of crazy brain way, but I, after having our first child, I got baby gifts that were personalized with his name on them, and they were very unusual. And I didn't feel like there was like an exquisite baby store that was highly curated. Now, keep in mind, I now have, you know, at 13, 15, if you go back to my high school years, I now practically have a 20-year career in the retail world. And so I just decided to open a baby store in downtown Mill Valley. The internet was alive at this time. We're now talking about 2001.

• 10:54Speaker 02

  So there was ways to, you know, find things, certainly not like today, but yeah.

• 11:01Guy Raz?

  All right. So you've got this business going. You're living in, at that point, you were living in Mill Valley, just north of San Francisco. But baby, things for babies, right? And?

• 11:11Speaker 02

  And kids, yeah.

• 11:13Guy Raz?

  And kids, okay. And clothes, so it was like decor for, was it clothing as well?

• 11:18Speaker 02

  We had a tiny department of apparel in the back.

• 11:22Guy Raz?

  But mainly like, it was decor. It wasn't like baby bottles and baby pacifiers?

• 11:28Speaker 02

  Not a ton of gear. We did have Bugaboo strollers.

• 11:31Guy Raz?

  Bugaboo strollers, man, I remember those. That was like the, that was the stroller.

• 11:37Speaker 02

  That was the Tesla of strollers back in the day. Yeah, no, we had mostly home decor, nurseries and kids' rooms, furniture, bedding, accessories, gliders, rugs. And we opened it in July of 2002.

• 11:56Guy Raz?

  That's you and your husband, Mark. You say we?

• 11:58Speaker 02

  Yes, my husband absolutely helped me out a lot. July of 2002, we opened our baby and kids' store called Mill Valley Baby. And by November of 2002, we moved down the street to a nearly 3,000 square foot store. We were kind of bursting at the seams in four months.

• 12:19Guy Raz?

  So this was like, I can imagine you're thinking, this is amazing. Like, this is really taking off. This could be a concept, like this could be, I could open a location in San Francisco. I could open a location in Los Angeles. Or do you remember thinking that way? I mean, given how?

• 12:34Speaker 02

  No.

• 12:34Guy Raz?

  No.

• 12:35Speaker 02

  I didn't think for one minute that I wanted to expand or scale what we had already done because so much of what we had done required my presence. And, you know, independent specialty stores really require the owner-operator. So no, there was no desire to scale Mill Valley Baby and Kids.

• 12:59Guy Raz?

  Okay. All right, I want to pause and I want to turn to you, Serena, because this is, we're going to get to where, you know, the two of you met. So you, from what I understand, were committed to becoming a psychologist. You went to college with, this was your, this is what you were going to do with your life?

• 13:16Speaker 02

  Yes, very much.

• 13:18Guy Raz?

  But obviously, you're not a psychologist today. You are an artist. What, what happened? How'd you veer off that path?

• 13:25Speaker 02

  So I graduated, I took the requisite year off in Colorado, and oddly, I started painting for the first time. I started painting.

• 13:38Guy Raz?

  You never painted before, like, as a teenager, or is it, no?

• 13:41Speaker 02

  So how did it enter my world? I was decorating my first house, and I would pick up shabby pieces of furniture, and I, I painted the furniture. So it was a table. It was latex paint. So imagine an ugly wood table. I painted it purply blue and painted houses along the perimeter that were cute.

• 14:10Guy Raz?

  Yeah.

• 14:10Speaker 02

  And I would have a lot of parties in those days. And I had a friend of a friend over to my house who managed an art gallery in downtown Denver. And she said, this is amazing. Can I sell it? If you can paint some other pieces, I'll show them in the gallery. And I thought, okay. And so I gave her pieces to show. They sold immediately. I painted more. They sold immediately.

• 14:37Guy Raz?

  Wow.

• 14:38Speaker 02

  And meanwhile, I'm applying to graduate programs in psychology. And I am just starting to feel this tickle of what am I not exploring? Because this is really fun, and I'm making money over here. And I thought, well, maybe I want to go into graphic design.

• 14:59Guy Raz?

  Got it. Okay, so you, you wisely go to art school. And I guess after you graduate, you, you land in the Bay Area where, or I guess what, you, you open up your own design studio?

• 15:12Speaker 02

  Yes, I had to build it the old-fashioned way, which is reaching out to interior designers, sharing my portfolio. And we met an old friend of my husband's, and she asked how I was doing and what I did for work, and I told her what I did. And she said, oh, how interesting. I work for Pottery Barn Kids. And I know that they are looking for a decorative painter. And the kismet moment in that is that these are the days of Pottery Barn Kids being kind of the gold standard in baby and kids' catalogs, magazines, marketing, brand, et cetera, in

• 15:56Speaker 02

  part because they developed this very loose, fun, playful style of decorative painting on walls. And that, it was me. It matched my style.

• 16:09Guy Raz?

  So you would decorate things that they would photograph for their catalogs?

• 16:13Speaker 02

  Yeah, I would paint the walls. I partnered with the stylist, and they knew what they had to shoot. I would look at the bedding. I'd say, okay, this is what I want to do on the walls. Everyone would clear out of the room, and the clock would tick because those photo shoots are expensive. And so I would have to speed paint a pattern on the wall or the section of the wall that would be photographed for the catalogs.

• 16:36Guy Raz?

  It's unbelievable, the amount of money they would spend on a photo for a catalog. That's insane to me, that you, right? But they wanted a hand-painted wall. Okay, so.

• 16:46Speaker 02

  Yeah.

• 16:47Guy Raz?

  So you, you've got this, this design studio and also doing, presumably over time, doing more work for, in homes?

• 16:59Speaker 02

  Yes, I had started to really create a specialty around baby and kids' rooms because of that portfolio that I was building and the connection to a beloved brand. That was not exclusively the work that I was doing. I was painting foyers and powder rooms and so forth.

• 17:23Guy Raz?

  And you were doing this by hand? You weren't printing stuff quite yet?

• 17:26Speaker 02

  Yeah, no, I, and this is actually where psychology and creativity really meet. I would go in, I would meet with you, Guy. You'd say, we have this entryway, and we want something that feels like it reflects the family. And I would then go back, I would kind of get to know you, and I would meet you back in a couple of weeks with visual samples of what I would like to do.

• 17:54Guy Raz?

  On the wall?

• 17:56Speaker 02

  On the wall. All original patterns created bespoke for your space and your family.

• 18:03Guy Raz?

  Wow, that was hard to scale, because it's just you.

• 18:06Speaker 02

  I wasn't thinking about scale.

• 18:08Guy Raz?

  Right. Fair enough, yeah.

• 18:10Speaker 02

  It was scalable only in the sense that I would start to hire people. I had as many as four people, getting base coats on or, you know, helping me lay out the pattern or whatever, but all the brushwork was me.

• 18:25Guy Raz?

  I know that this is a bit of a digression, because you've got this business growing in, in the Bay Area. And, and this may have predated some of the things we're talking about, but just going back to your personal life, I know that your dad was tragically killed on 9/11.

• 18:43Speaker 02

  Yes, he was. And at the time, I was working for Pottery Barn Kids. I was literally in painting overalls, and I was about to be picked up by my photo team. We were on our way to set. And I had a friend call me from LA, and he just said, you've got to turn on the TV. There's big stuff happening. And he was frequently at the Pentagon. His primary client was the Army. He worked for Booz Allen Hamilton. He was private sector. But my family is all, was all in DC. And the questions were, has anyone talked to Dad?

• 19:23Speaker 02

  And, you know, we, we all had the sense that he was at the Pentagon, and we said, well, we can't reach him because he's probably on the ground helping.

• 19:34Guy Raz?

  Wow.

• 19:35Speaker 02

  It's an enormous tragedy and, you know, the loss plus trauma of a terrorist attack commingled with the loss of a loved one. You know, it will always cut right through for me.

• 19:50Guy Raz?

  Yeah.

• 19:52Guy Raz?

  Tell me a little bit about the business itself. I mean, were you, you know, by 2003, for example, would you describe your business as still a pretty small business that was supporting you and, you know, enabling you to pay rent and do all those things?

• 20:08Speaker 02

  It was a great business. I, it was growing. It provided reliable income. I always had a packed schedule. My goal was not scale necessarily. It was simply to do what I loved and have a pipeline of work. And when I use the word pipeline, I think of my dad because we would talk every Sunday. He was my consigliere and he would always ask about my pipeline. And he would want to know that I was safe and building a business. And, you know, I had pivoted from something very understandable and reliable and suddenly was a working artist.

• 20:53Speaker 02

  So pipeline was really important and his words kind of carried on for me. And I was most worried about, do I have enough coming in? And I always did.

• 21:04Guy Raz?

  Yeah. All right. I want to turn now to both of you and start with you, Lilly. So you, you've got, when we left off, you've got this thriving baby business, baby store. And you have, have your second kid, I guess, and you are, you're out, obviously, to have your kid. And you come back to the store and you notice some patterns that an artist drops off. Tell me about, about what happened.

• 21:30Speaker 01

  Well, let's see. I had my second child. I have to admit, it was a fairly easy birth. And I had him at 2:00 PM on a Thursday. And at 10:00 AM on a Friday, I was ready to go. And I saw my OB and I said, I'm ready to go. He's like, you look like you're ready to go. Goodbye. So I literally left the hospital and, you know, I do what new mothers do. And I want to do show and tell with my 20-hour-old baby. I, I bring him into Mill Valley Baby and Kids and I've got my employees there. And the day before, Serena had stopped by the store

• 22:14Speaker 01

  and she left this magnificent portfolio. She had created the most beautiful piece of collateral. They were postcards of all of her work in this perfectly die-cut, flooded with pattern envelope, like the packaging was magnificent. And she left it at the store the day before.

• 22:40Guy Raz?

  And Serena, you left it, you left this stuff at the store saying, hey, maybe you want to refer me to your, the people who shop in your store?

• 22:47Speaker 02

  Yeah, she's selling them baby bedding and perhaps crib, et cetera. She doesn't have the walls covered. And so it would give Lilly the ability to provide a bespoke, beautiful mural, you know, or something on the walls.

• 23:07Guy Raz?

  Okay. So Lilly, you see these designs, these patterns?

• 23:11Speaker 01

  I was like, oh, my God, she is so talented. I literally picked up my phone and I call her and I'm like, hi, you left this most magnificent portfolio of your work at my store yesterday. I can't wait to meet you. And Serena's like, um, did you have a baby yesterday?

• 23:36Speaker 02

  I think that I said that, those exact words.

• 23:40Guy Raz?

  Cause you would gotten into the store and I guess asked for the owner or whatever. And they said, oh, she just had a baby, probably.

• 23:48Speaker 02

  I thought, oh, I'll, I'll hear from her in a month, maybe.

• 23:52Speaker 01

  Yeah. And I think we met about a week later.

• 23:56Speaker 02

  I think under.

• 23:58Speaker 01

  Was it under? Cause keep in mind, the store is already set up with a multiple number of cribs and bunk beds and twin beds. So it's already organized in room environments. And I, when I saw Serena's work, I immediately thought to myself, wow, I want people to walk in and say, I want my baby's nursery to look like that. Or I want my kid's room to look like that. So I was like, I love it. Let's do this. And she's like, awesome. And then she starts showing me her block-printed textiles that she was producing for interior designers. And this was all pretty custom at this point.

• 24:43Guy Raz?

  And were you hand-printing it with your, like with a block?

• 24:47Speaker 02

  Well, see, that's really the operative question. I had an assistant who was block-printing and I swear I was losing money on every order. Because it had to be pretty perfect and contiguous yardage. Terrible business idea.

• 25:06Guy Raz?

  I mean, it's, it's a, it's an artisan business, right? This is like, you could only make a certain amount of these a month.

• 25:12Speaker 02

  Yeah. Yeah. I mean, it wasn't a thought-through business idea. It was a way of expressing myself and the economics were really beside the point, which is why I needed a Lilly in my life.

• 25:24Guy Raz?

  Yeah. So Lilly, you see, you see these designs, these textiles and you're thinking, these are really cool. We could, there's something more to be done with this.

• 25:35Speaker 01

  Yes. I, I wasn't all too thrilled at the time with the crib bedding options at the time. Keep in mind now, we're in 2003.

• 25:47Speaker 01

  Moms were still using baby bumpers back then.

• 25:51Guy Raz?

  Oh, yeah, I remember those around the crib. Yeah.

• 25:53Speaker 01

  That, that was a thing.

• 25:54Guy Raz?

  But it's not a thing anymore?

• 25:56Speaker 01

  It's not.

• 25:56Guy Raz?

  We had those all over the crib. I don't know. Yeah.

• 26:00Speaker 01

  I saw her designs and I thought, those would be very beautiful on a crib bumper, on a crib sheet.

• 26:10Speaker 02

  Yeah, I'll interject and say, I had a thought about what a nursery should feel like. And nurseries were not approached the way that felt right to me. And so design relates to a feeling, right? It doesn't matter if it's the bumper, if it's textiles, if it's artwork. What should it feel like? It should be more respectful than the choo-choo trains and bunnies and ducks and pastel. It just, the feeling was all wrong. And so, yes, I knew what the textiles should look like and it started there. It always starts there, in my opinion. But it was a whole-room notion.

• 26:51Guy Raz?

  So together, you're thinking, all right, there's maybe an opportunity here to do something. But let's talk for a moment about, about the partnership because you meet. And clearly you both like each other right away. And you have this, you both are aligned on a vision. But that happens, I shouldn't say all the time, but that happens a lot. You know, I mean, I've met people right away and I'm like, oh, my God, I love this person. And then, you know, you don't always know. So let's first talk about what you thought you knew. Lilly, what, what was it? Okay, you loved Serena's designs, obviously. You're talking about maybe doing something together. But that, creating a business together is more than just like a project.

• 27:35Speaker 01

  Yeah. I absolutely had amazing chemistry with Serena. And, you know, keep in mind, her first project she's doing with me is she's going to come in and paint the store. We're, we're spending a lot of time together now in the store, getting to know each other better. I remember learning about her father. I also had a tragic, I, I lost my father in a car accident when I was in my late twenties. And I just feel like we, we continued to bond.

• 28:08Speaker 02

  What I recognized in Lilly that felt familiar and like a good sign at each turn was this sense of limitless of possibility and a drive. And that drive might be motivated by, you know, for me, it's, mine is not logic-based. And I recognized hers is logic-based. And she had experience, accounting and merchandising. That's why we partnered.

• 28:39Guy Raz?

  You, Lilly, you had a business. You've got the Mill Valley Baby Store. But this is going to be a different business called Serena and Lilly. And what, tell me what, how you, you were going to like? Spin this out as a separate standalone thing? It was gonna, how is it gonna? What was your thinking around how this business is gonna work? Like a side business?

• 29:00Speaker 01

  Yeah, absolutely. I spun it out immediately on LegalZoom as an LLC, Serena and Lily. And Serena's very dear friend is a branding, marketing person, and we kicked around a lot of names. And she was really the one that came up with this idea of how ownable, you know, our names were. They were ownable at that time. They probably wouldn't be today. Who knows? So many people would come in and tell us their their girls' names were Serena and Lily.

• 29:33Guy Raz?

  Right.

• 29:34Speaker 01

  But yeah, that's, that's kind of how it happened. We spun it out as a separate company. We were 50/50 owners. I told Serena I'd put $50,000 into this business. We'd be equal partners.

• 29:47Guy Raz?

  And you had that cash presumably from your Microsoft options that you got during that time?

• 29:52Speaker 01

  Yeah.

• 29:53Guy Raz?

  And the business would initially be textiles? Let's, let's just make textiles and, and start from there?

• 30:02Speaker 01

  Crib bedding.

• 30:03Guy Raz?

  Crib bedding, okay. So you are, you've got designs and patterns. But from what I understand, you're not, the two of you, you're not like, let's go find a manufacturer and start producing rolls of textile and fabric. That was not what you were gonna do. You were gonna figure that out later, right? First, you were gonna, because, because you wouldn't really launch this until, I think, May of 2004. But in that six-month period, when you started, started the business, you were not manufacturing anything, right?

• 30:35Speaker 01

  No. Honestly, Guy, we, we didn't know a damn thing about what we were doing. Serena had a cut and sew person that could make us samples to be used in our photo shoot. We got the name of an agent that can help us in Los Angeles find a printing source that can print our fabric for us. So we literally, you know, talked him into taking a risk that we were gonna be this multi-multi-million dollar brand one day. And can you please just print us 15 yards of the following 15 fabrics? Because we're doing our cut and sew photo samples.

• 31:21Speaker 01

  And they did it. And they took a risk on us. And we had the most incredible photo team and photo stylist. And we produced this beautiful lookbook. That, that, and we had the woman that was block printing Serena's fabrics, that was literally doing all of that labor, her assistant, Maureen. She came over and started working full-time for Serena and Lily. And she, I think they use the word "screen scraped." She screen scraped the entire internet for every retailer that would be the right place to get our crib bedding into their store

• 32:06Speaker 01

  and produce mailing labels for this first catalog.

• 32:11Guy Raz?

  So this really, you were gonna start with a catalog? You're gonna mail a catalog to, I guess, a few hundred stores around the country?

• 32:20Speaker 01

  Absolutely. We, we kind of took a play out of Serena's playbook, which was this gorgeous die-cut envelope that was flooded with pattern with a gorgeous sticker that when you got this thing in the mail, you're like, what the heck? Did I just get invited to the, you know, the White House gala? Like, what is this thing, right?

• 32:44Guy Raz?

  And you knew, based on your, like, your store, that, that the boutiques that would receive it, they would look at this. They would see this right away.

• 32:52Speaker 01

  They did. I mean, they opened it and they were like, wow. But something more exciting happened the weekend they received it.

• 33:00Guy Raz?

  Okay, and this is what, this is Memorial Day, weekend 2004, I guess?

• 33:04Speaker 01

  Yes.

• 33:05Guy Raz?

  Okay, what, what happens?

• 33:07Speaker 01

  Wendy Belissimo, who had a probably 600, possibly 800 independent specialty stores selling her beautiful premium crib bedding, literally faxed down her entire independent channel, thanking them for their amazing patronage for the last X number of years. And she said, I've decided to sell my brand or license my brand to Babies R Us.

• 33:38Guy Raz?

  Probably the biggest baby retailer in the country at the time.

• 33:41Speaker 01

  At the time, yeah. So she basically said, I'm going mass. Thank you so much, but I'm done.

• 33:47Guy Raz?

  Yeah. She's still around and obviously very talented. But this was, she was known as, as designing, I guess, the, the best available designs for cribs and blankets and things like that?

• 34:00Speaker 01

  That's correct. And she left this entire channel without a premium crib bedding company.

• 34:10Guy Raz?

  So all of a sudden, these retailers are like, what are we gonna do? And at the same time, they get your catalog.

• 34:17Speaker 01

  I, I can't even make this up. It happened the same weekend.

• 34:21Guy Raz?

  Wow.

• 34:26Guy Raz?

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• 34:47Guy Raz?

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• 36:17Guy Raz?

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• 37:01Guy Raz?

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• 37:45Guy Raz?

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• 38:19Guy Raz?

  Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2004 and Serena and Lilly now have a wholesale business going. And they've just sent out a catalog of their premium baby linen to a bunch of specialty stores.

• 38:34Speaker 01

  And our fax machine starts going and we're getting orders. It's like, oh, my God, it's happening. It's happening. And they're coming over the fax machine. They don't know us. Like, we came out of nowhere.

• 38:48Guy Raz?

  And they're ordering, what are they ordering? Are they ordering baby sheets? Are they, what exactly?

• 38:52Speaker 01

  At the time, we sold everything as a three-piece crib set, which was the bumper, the sheet, and the dust ruffle.

• 39:01Guy Raz?

  And the dust ruffle, okay.

• 39:02Speaker 01

  Yeah. It was very premium crib bedding. And we had a minimum order requirement of four crib sets. So it was basically a minimum order of $1,000 to open up an account with us. And in a matter of a few weeks, I just recall going, oh, my goodness, we have $100,000 in orders. And then I think at some point Serena and I went to a trade show, the ABC Kids Expo, I believe in Las Vegas. We had this genius idea to create these gorgeous, like, hat boxes

• 39:42Speaker 01

  that had a window and we packaged up our crib bedding in these gorgeous boxes and stacked them up in our trade booth. And I'm not joking when I tell you every single baby store stopped and said, wow, is that how it comes packaged? And we're like, yeah. And they're like, I'll take four. You know, it was just hilarious. Like, so we're just mounting the orders for an inventory we do not have.

• 40:11Guy Raz?

  And you were going to get this printed in India?

• 40:14Speaker 01

  No, at this time, we're still 100% domestic. We found a cut-and-sew facility down in LA. And there was a, there was a speed to market that we were able to accomplish with a lot of scrappiness, scrappy thinking and scrappy vendors. And so we were able to get this first production done in Los Angeles. But we didn't have the cash.

• 40:41Guy Raz?

  Yeah, I mean, yeah, so you've got the orders, but you don't have the cash.

• 40:45Speaker 01

  Yeah.

• 40:46Guy Raz?

  Which is, which is a common problem, right? You've got this great $100,000 in orders.

• 40:50Speaker 01

  Yeah.

• 40:50Guy Raz?

  But what do you do? And you've got to get, get it to them. I mean, this is in, I guess, Memorial Day and you want to get it to them, I don't know.

• 41:00Speaker 01

  I mean, we'd like to get it to them in the next, like, you know, two to three months.

• 41:05Guy Raz?

  Okay, yeah.

• 41:06Speaker 01

  So we're like, hey, why don't we call all of them?

• 41:11Guy Raz?

  Yeah.

• 41:12Speaker 01

  And let them know that we are in an oversold situation with our initial production. And if they would like to guarantee their order, they would have to provide us a 50% deposit on their order. And the oversold situation was that we actually had none. And, but they all basically, I don't remember one saying no. And so we raised our working capital, if you will, from our channel.

• 41:48Guy Raz?

  By asking people to deposit, right? Okay. Because you get cash. And how much, do you remember how much you, I guess, 50%? So $50,000.

• 41:56Speaker 01

  Yeah. But, but keep in mind now, I have scope creep going on with my initial investment. So I'm continuing to put money into the business to help us fund. I always kept Serena as my 50% partner. And we booked this, this infusion, if you will, as a due-to Lilly Kanter so that we had a, a liability on our books, but not...

• 42:23Guy Raz?

  It was like a loan.

• 42:25Speaker 01

  It was a loan.

• 42:25Guy Raz?

  Yeah.

• 42:26Speaker 01

  And because I always felt like without Serena, we don't have Serena and Lilly. And without Lilly, we don't have Serena and Lilly. So we, we need to stay equal partners.

• 42:35Guy Raz?

  So you, you get these orders and, and were you, the, the factory you were working with, were they cutting everything and packaging it up? So you had like a package of the dust ruffle, the, the sheet and the bumper, whatever, cover in, all in one package, like, ready to go, ready to be shipped to the customer?

• 42:56Speaker 01

  Oh, my God, that's such a painful story to even talk about. They sent us all the pieces and parts up to Mill Valley. We had this fabulous woman who worked for us in the early days, who folded everything perfectly into our magnificent hat boxes that we designed and developed. And we then shipped it into our first 100 stores. And unfortunately, those boxes, most of them did not survive the shipping effort. It was like, kind of a certified disaster because our gorgeous boxes didn't end up being so gorgeous when they arrived.

• 43:40Speaker 02

  They structurally could not be stacked, basically, or shipped. They were beautiful to look at and structurally unsound because of that beautiful acetate window that we put in front, which compromised the structure. We know a lot more about boxing and packaging now. It actually has to function, not just look beautiful. I don't think either of us took that into account.

• 44:05Speaker 01

  In the meantime, you know, as much as we were trying to get away from having to use vinyl, we had to fall back on the tried and true packaging solution because the box solution was a disaster.

• 44:20Speaker 02

  We admitted defeat. Yeah.

• 44:23Guy Raz?

  All right. So, so here, here's what I'm curious about. By the end of 2005, you're going to do about $750,000 in sales. But, but the middle of that year, you decide, Lilly, to sell the baby and kids store. Why? I mean, was it not, I mean, because I imagine that was probably still bringing in maybe more money at that time than Serena and Lilly, or maybe not. I don't know. But was it just you saw more potential in this other thing you were doing?

• 44:50Speaker 01

  I, I literally was so overwhelmed. I had another baby in between all of this. I had another baby in July of 2005. So I have three little boys. They're under four years old. I've got Mill Valley Baby and Kids that requires my time. And then I've got Serena and Lilly taking off like a rocket ship. And I just remember going for a hike with my husband in October of '05. And I was like, oh, my God, something has to come off my plate. I just, I can't do this anymore. And I said, I think it's time to sell the store. And the next day, I came into Mill Valley Baby,

• 45:35Speaker 01

  one of my very best clients, who, anytime she walked in the door, she, she bought a lot of things. I mentioned the idea that I was trying to sell my store. If she knew any Tiburon or Mill Valley moms that might want to buy the store, to call me. And she literally called like a few hours later. She called my store manager and she's like, tell Lilly I want to buy her store.

• 45:59Guy Raz?

  Wow.

• 46:00Speaker 01

  So that was, you know, we closed that deal in, in December of '05 and got that monkey off my back.

• 46:10Guy Raz?

  All right. So you, that is out, that's off your plate. And now you are focused full-time on Serena and Lilly. And you guys have, just give me a sense, I mean, Serena, you are, Lilly is, is focused on like managing cash flow and, and sort of dealing with operations. And you are focused on design primarily, like making designs and coming up with different patterns and also things that could go on?

• 46:37Speaker 02

  Yeah, you know, in those early days, we were all pulled in to everything. If there was a crisis happening with one of our wholesale accounts, we were all brought in while Lilly was navigating around cash flow and viability. And she and I are both very similar in that we're like, ooh, here's an opportunity. We have to capture it. It's always a yes between the two of us. We don't, we're both gas. Neither one of us is break.

• 47:11Speaker 01

  So yeah, that was an exciting time, but my primary responsibility was design and creative.

• 47:18Guy Raz?

  One thing, one thing that's interesting is that is it pretty soon, I think your retailer started to ask for, for more stuff, like, like the stores that you were selling to, they wanted you to move from, from baby bedding to, to kids bedding or from, from bedding to furniture, right? Is it, is that right?

• 47:34Speaker 01

  Yes, we were doing kids bedding next, which was introduced in 2007. We wanted to grow up with baby. The parents were asking us to help them keep, because keep in mind, like, they had the look of our nursery and they wanted to keep the look, but bring in the big girls bed or the big boys bed. And, you know, our, our catalogs, as you pointed out, Guy, these photos are so expensive to produce.

• 48:06Guy Raz?

  Yeah.

• 48:07Speaker 01

  You bring in a stylist. Serena did all the decorative painting on our photo shoots. And people started asking us for all the props. They would call our customer care. They wanted to know the, the color of paint that was on the walls. They wanted to know the rug. They wanted to know the lamp. They wanted, they kept asking us to grow with the baby.

• 48:30Guy Raz?

  Right. So that, so that prompts you to start to think about moving, that makes sense in that direction because customers are asking for it. I want to, I want to ask about money, right? Because I guess, I guess by the end of 2006, you're doing a million and a half in sales. Great. You're still small. You are not probably able to pay yourselves much because most of that money is going to finance the business. And I guess around that time, you decide you, you need to raise some money. First of all, is because this is a cash heavy business, right? You, you have to have money on hand to make the stuff. So I'm imagining that was one of the reasons. And was the other reason just to grow, to expand?

• 49:13Speaker 01

  Oh, absolutely. I mean, the demand was creating this cash incinerator, you know, for lack of a better word. We needed working capital. And so we decided to do a friends and family round. I asked a friend if they had any ideas of the valuation of this company. And they said, no, but I'm going to introduce you to a CFO at a private equity firm. And they hold on to some bedding companies. They'll have a much better idea of the multiples and what to base your valuation on. So Serena and I went to pay them a visit, just literally

• 49:56Speaker 01

  to get their opinion on the valuation. And in about 10 minutes into the meeting, the CFO went and got one of the general partners of the firm and brought them in. He literally patted us on the heads like we were dogs or puppies.

• 50:15Speaker 02

  Or children.

• 50:16Speaker 01

  He took a seat at the table and said, you girls sure have been busy. And he said, I understand you're doing a friends and family round for one and a half million dollars.

• 50:30Guy Raz?

  You want to raise one and a half million dollars?

• 50:32Speaker 01

  At that time, that's what we wanted to raise. We saw that as the next one year. He said, we want to make your life really easy. We're just going to give you one check for that. So you don't have to go pass the hat around to all your friends and family and you can get back to work.

• 50:48Guy Raz?

  Wow. They were offering to just cover this.

• 50:50Speaker 01

  Cover it. They're going to cover it.

• 50:52Guy Raz?

  Sounds good. Sounds great.

• 50:53Speaker 01

  Sounded amazing. And I mean, Serena and I walked out of there going, what just happened?

• 50:58Guy Raz?

  But?

• 51:01Speaker 01

  The but is the term sheet came in. And I met a woman who was a client at Mill Valley Baby who represented founders. That was, she was a lawyer and she used to talk to me all the time. And I really liked her. And I called her up and I said, do you mind having a look at this term sheet and giving me your opinion? And she called me back and she's like, I forbid you to do this deal. You're not doing this deal. And I'm like, we need the money. She's like, no, they're asking for controlling interest in your company for 17% of your equity, you know? And she's like, no, you're not doing this deal. So

• 51:43Speaker 01

  I said to the associate over there, I said, our attorney wants you to strike this language, this language, this language. And the bottom line is, they took out a lot of it. But when it came to closing the deal, he really wanted to know how much salary. Now, keep in mind, we haven't taken a salary now for three and a half years. And I, I recall telling him we're going to take $150,000 salaries. And he just had kind of a hissy fit about it. He's like, well, you're not raising that much. You can't take that much in salaries. And my husband overheard the conversation because I had it on speakerphone. And when

• 52:24Speaker 01

  I hung up, he's like, honey, we're going to take a second on the house. You're not doing that deal.

• 52:30Guy Raz?

  A second mortgage?

• 52:31Speaker 01

  Yeah.

• 52:31Guy Raz?

  Yeah.

• 52:32Speaker 01

  Yeah.

• 52:32Guy Raz?

  But you didn't end up doing the second mortgage because you did decide to go to friends and family?

• 52:37Speaker 01

  That's correct. It was the middle of December and we literally had to raise this money by the middle of January.

• 52:45Guy Raz?

  Why?

• 52:45Speaker 01

  We had everything in production at this point for this 2007 launch and everything had to be get paid for and brought in.

• 52:55Guy Raz?

  And it was, it was again, paint and furniture and?

• 52:59Speaker 01

  We had probably a dozen kids bedding collections at this point. We had gliders, rugs, lamps, paint. We had expanded quite a bit on this next launch.

• 53:13Guy Raz?

  Mm hmm.

• 53:14Speaker 01

  And it needed to get paid for.

• 53:16Guy Raz?

  All right. So you need, you need the money fast.

• 53:18Speaker 01

  We need the money fast. And honestly, the partner knew that. He knew he kind of had us over a barrel.

• 53:25Guy Raz?

  So you had to get it from friends and family, a million and a half dollars. The story is you got the money, but was it, were people like excited? Were they ready? I mean, it sounds like people wanted to be part of this. So, uh, so it was probably not as hard as you thought it would be.

• 53:42Speaker 01

  It really was. I mean, Serena chased down every one of her friends. And I would say half the money came in from Serena's friends, half the money came in from my friends. And we raised the money in a 17 day sprint. So yes, we, there was a lot of people that wanted to be a part of it.

• 54:00Speaker 02

  It was pretty much every one of our family members and a slew of friends and Lily's rabbi, you name it.

• 54:07Guy Raz?

  Right. Yeah. Everybody was in there. Okay. And did you, you were still primarily selling to boutiques? And I imagine, and, and I, you know, I know by the end of 2070, you hit four million in sales, but, but you, you don't have any ad budget, right? You're not, I mean, this is all word of mouth. It's all boutiques. It's people going into boutiques. That was who you were selling to. It was entirely wholesale?

• 54:31Speaker 01

  100% wholesale. We had about 600 to 800 stores. We had zero online. We didn't even have a shopping cart on our website. So there was no direct to consumer happening for us, which, you know, in hindsight, building a wholesale business is far less capital intensive. So I don't regret that we started this business as a wholesale only. But yeah, we did not have e-comm.

• 55:00Guy Raz?

  I mean, this is like 2008. So it's a financial crisis. And I imagine some of these boutiques are not going to survive the financial crisis, right? I mean, I mean, so in a sense, like, it seems like going to direct to consumer at this point was like, you kind of had to do that, given that you were so dependent on these retailers carrying your products.

• 55:23Speaker 01

  Yeah. I mean, it was a really interesting time. And it just so happened to be serendipitously at the time of the financial meltdown. It wasn't like, we didn't say, oh my God, there's a financial meltdown. We need to take control of our destiny. It was, oh, we need to take control of our destiny. And oh shit, there's a financial meltdown that literally took out 50% of our wholesale channel.

• 55:50Guy Raz?

  Wow.

• 55:51Speaker 01

  Shut down. So I mean, talk about serendipitous timing, because we also put together adult collections and adult bedding and started to present adult bedrooms and living rooms. And we put together a direct to consumer catalog. And we sent out a test run of 85,000 books.

• 56:14Guy Raz?

  I mean, this is 2008. Catalog in 2008 landed differently than it does today.

• 56:20Speaker 01

  Yeah.

• 56:20Guy Raz?

  And this would be, okay, so the catalog, they get the catalog, and then you literally had a website where they would order from. And the business like, I mean, this is going to have a huge impact. And I think the business grows 50% in the, in the following year.

• 56:36Speaker 01

  The first year we were direct to consumer, we did $5 million. The second year we were in direct to consumer, we did 10 million. It doubled. That third year we were in direct to consumer, it went to 20 million. Like, we had a five, 10, 20 sprint.

• 56:51Guy Raz?

  How were you dealing with a cash issue at this point? Because you can't get customers to pay in advance.

• 56:59Speaker 01

  If it was made to order, which our upholstery was domestically, it was made to order. No, no, there was no chance. And keep in mind what years we're talking about. It was 08, 09. There was a complete financial meltdown happening. Nobody was touching consumer because it was contracting. I mean, I think some of the larger players like Williams Sonoma and RH, I mean, they were contracting in, at the magnitude of like 30% contraction.

• 57:33Guy Raz?

  And you, you could not raise money at that time because nobody was investing money.

• 57:36Speaker 01

  I did the capital dance across the United States. I've lost track of how many people I pitched this company to. It was nearly impossible. In fact, Mavron, who was, you know, came from the money of Starbucks. They told us that if Starbucks had walked in their door right now, they wouldn't fund them. You know, there was nobody, there was nobody funding traditional brand.

• 58:03Guy Raz?

  So you had to, yeah, I mean, I imagine like the cash issue starts to become really stressful.

• 58:10Speaker 01

  That would be putting it lightly.

• 58:18Guy Raz?

  When we come back in just a moment, how one investor creates a problem that almost takes the company down and why the solution is almost worse. Stay with us. I'm Guy Raz and you're listening to How I Built This.

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• 59:48Guy Raz?

  Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2010, and by now Serena and Lilly have raised a fair amount of money. And many of their funders now sit on the board. But Serena and Lilly are about to realize that not all investors want the same thing. A lot of their backing comes from a traditional VC fund, but they still need more money. So they reach out to a new investor.

• 1:00:14Speaker 01

  We still, because of this cash incinerator of this growing company, we brought in more of a private equity type of investor on the now this third major round. And so it was a family office, but they operated much more like what I would consider to be private equity, which meant they wanted profitability. They wanted slowing down the growth to be profitable. They didn't have the return expectation of, say, a venture firm from Sand Hill Road.

• 1:00:52Guy Raz?

  Right, they want you to grow. And this, at the time, that was the model. Grow, just grow, grow, grow. Because you were not profitable yet, I imagine.

• 1:00:58Speaker 01

  No, and we had the venture firm who was just like, we had a 70% cumulative average growth rate over a seven-year period. And honestly, to Sand Hill Road, like, we were a slow grower.

• 1:01:13Guy Raz?

  They want like 500% growth.

• 1:01:15Speaker 01

  Yeah, no, we were slow growers.

• 1:01:17Guy Raz?

  Right, okay, but this family office that was telling you to slow down growth and focus on profitability, I mean, could you have done that? Could you say, was there a case to be made that, you know what? Let's do this. Let me go to my other investors, my other, my board members and say, hey, we got to do this, we got to conserve cash. We're going to slow down growth. Or was that just not an option?

• 1:01:40Speaker 01

  I think in hindsight, they were right. And I also think the answer kind of resides in the middle. I would say more people around the table were more in favor of the growth. It was more exciting for them to have a company that was growing like a weed. But I think it was their delivery and the lack of chemistry that they created around our table that they were no longer a fit.

• 1:02:06Guy Raz?

  This was somebody who wanted you to chase growth or wanted you to chase profitability?

• 1:02:11Speaker 01

  The latter.

• 1:02:13Guy Raz?

  So tell me about your stress level at this time. I mean, you need cash, you're not getting more cash. Investors are like, we gave you cash. Some of them are saying, keep growing. You're saying, I need more cash. Some of them are saying, slow down and then conserve cash. And meantime, are you sleeping at night at this point?

• 1:02:33Speaker 01

  No, no, it was very, very, very, very stressful times. I probably wasn't necessarily my best self at that time. I had three little children. It was a very exhausting, stressful time, taking a lot of the joy out of the beauty and this magnificent brand that we were creating. We realized that we have to remedy our lack of alliance around our table. We need to get this investor who's being incredibly prickly off of our capital chart. Like, we have to get him bought out.

• 1:03:15Guy Raz?

  From what I understand, he threatened to sue you or he tried to sue you?

• 1:03:21Speaker 01

  He did sue us.

• 1:03:22Guy Raz?

  He sued you, but what was he suing you for?

• 1:03:25Speaker 01

  Irreparable harm of his investment.

• 1:03:28Guy Raz?

  Okay, and they were saying, my investment is being harmed, and I'm going to sue you for, what were they asking for?

• 1:03:37Speaker 01

  We never got far enough into the lawsuit to really understand what they were suing us for, besides the fact that it was time to get them bought out.

• 1:03:47Guy Raz?

  What did you do? Did you, I mean, you know, when you're in a situation with lawyers involved, they tell you, do not talk to the person, don't get involved. You just let us handle it. It can be very frustrating. I've been, thankfully, not in lawsuits, but when I've dealt with lawyer-to-lawyer stuff, it is frustrating because you're just hearing what they're telling you that the other lawyer told you from their client, and you don't know. Sometimes it just helps to just talk straight to the person, which is risky. Lawyers say, don't do that. Sometimes it works.

• 1:04:14Speaker 01

  I actually got on a plane. I didn't call them. I mean, I emailed and said, I want to pay you a visit. I went in person to just sit down and say, this is going to take us to the ground. Obviously, you no longer believe in us. I think it's time that we get you bought out. But let's not like sue us to the ground. Like, that doesn't serve anyone, including your investment. So let's figure this out.

• 1:04:44Guy Raz?

  You had to, what were the terms? In your book, you say 50% return. That's what he wanted. Okay, so you, it was pretty great because it was about a year in that he was invested. So you had to buy him out, you had to buy his investment out, his initial investment, plus 50% return on that. So that was going to cost quite a bit of money. Presumably, your existing board were the ones who were going to have to furnish that money.

• 1:05:11Speaker 01

  Yeah, one of our other major investor on Sand Hill Road came up with the capital. They actually put the money into the company on top of our cap stack, on top of the capital chart, at a very heavy-duty preference of a 2X preferred participating, very gnarly security, for anyone who knows how all of that works, and got them bought out, but made it nearly impossible, actually impossible, to raise additional money for the company.

• 1:05:50Guy Raz?

  Okay, this, this situation to buy out this problematic investor, if they were going to pay him out, the terms were they would double their investment back first. So whatever investment they put in, once the company sold or there was another round or whatever happened, go public, they would double their investment first, plus their percentage, percentage of ownership, right? And they would get that before anyone else, including the founders or employees or any other investors, saw anything in return. So they had really preferential treatment. And did you protest? Did you say, this is not what we want? Did you say, I don't want to do this?

• 1:06:31Speaker 01

  Yes, yes, we were like, this is crazy. And our board chair at the time said, we don't have a choice. This lawsuit and this investor are going to take the company under. So that's the choice you have right now, is to take this investment. And we were kind of at a place where we just had to take it, put our heads down, and go build the company.

• 1:06:59Guy Raz?

  The reality is like you got unlucky. You had an investor who just was going to cause a problem, and you had to solve that problem.

• 1:07:07Speaker 01

  I want to throw in there that there's good money and there's bad money. We learned that.

• 1:07:13Guy Raz?

  Yeah.

• 1:07:14Speaker 01

  There is definitely a correlation between how badly you need the money and when you are raising money, what the terms are. So egregious terms are more likely if you need the money, and they can read that.

• 1:07:31Guy Raz?

  What was the valuation at the time? Was it over 50 million?

• 1:07:35Speaker 01

  It was not. It was not over 50 at that time.

• 1:07:40Guy Raz?

  All right, so you, but you had no choice. You had to do this deal. And it meant that it was going to affect your, I mean, you could, you know, it was going to sort of, I guess, get rid of this problem, and you could move on. But was it, were there going to be any long-term consequences from the deal?

• 1:08:00Speaker 01

  I mean, I absolutely told our board chair, I remember it just like it was yesterday. I said to him, we will never be able to raise another dollar for this company.

• 1:08:11Guy Raz?

  Couldn't raise the money because no investor would raise money at a company with, that had an investor with terms like this?

• 1:08:17Speaker 01

  They would want the same terms.

• 1:08:19Guy Raz?

  Yeah.

• 1:08:20Speaker 01

  And then everybody at that point would want the same terms, you know? And it was like, wait a minute, what are we doing over here? You know, we're going to end up with 20 cents at the end of this. And so are our friends and family, the people who believed in us at the very beginning are going to get 20 cents. So it's like, I realized that it was time to restructure the company, to figure out how to get rid of this insanity on our cap chart. And I knew that was going to be the next major project. But at the time, we were getting ready to launch a store in the Hamptons. There was a lot going on at that time that we just needed to get back to work.

• 1:09:00Guy Raz?

  You just needed to focus on work, and then you would solve, try and solve this problem or challenge on the cap table later. Maybe, maybe you would find somebody who would just buy them out and something.

• 1:09:11Speaker 01

  Or just buy the company, you know, or something. Like, we were just at a place where we needed to solve for this distraction. And knowing now, what I know now versus then, I probably would have.

• 1:09:29Speaker 01

  Pounded my fist on the table a little bit harder and said, no, we're not taking that deal.

• 1:09:35Guy Raz?

  And just take the risk that you could, you know, you could fight this other investor of the law.

• 1:09:41Speaker 01

  Or just settle him down or so. I don't know, you know?

• 1:09:45Guy Raz?

  And so basically, at that point.

• 1:09:47Speaker 01

  Yeah.

• 1:09:48Guy Raz?

  Because I think by 2010, you're doing 20 million in revenue. And I mean, that's no joke. Now you're really, I mean, now you're approaching a medium sized business, right? And, but what I'm trying to understand is, if you can't raise money, what do you, you're back in the same situation. You don't have working capital. You're just growing. It's a good and bad problem to have, but it's harder now because it's even, no one's gonna, you don't want to raise money from people who are going to have, demand the same terms. So what are you doing for capital?

• 1:10:23Speaker 01

  Well, it just so happened in the next year or so, we got two acquisition offers. Sadly, they were nearly impossible to take because of the preference that was on the stack. And so much of the value of these acquisitions was in the earn out.

• 1:10:46Guy Raz?

  Mm hmm.

• 1:10:47Speaker 01

  And that's what, you know, Serena and I would sign up for and.

• 1:10:52Guy Raz?

  Basically, you were, you were selling, you might get a little bit of cash upfront, but the earn out is where you would make your money.

• 1:10:59Speaker 01

  Exactly.

• 1:11:00Guy Raz?

  But because of the terms from these other investors and maybe the acquirer, the earn out might not, there might not be much left.

• 1:11:08Speaker 02

  That's correct. And meanwhile, our investors want us to take the acquisition offer regardless of the egregious terms, including owning our name, image and likeness in perpetuity.

• 1:11:26Guy Raz?

  Name, image and likeness.

• 1:11:29Speaker 02

  In perpetuity.

• 1:11:30Guy Raz?

  I mean, but you guys didn't have to take those, you didn't have to take that acquisition offer because you still controlled, presumably controlled the company.

• 1:11:38Speaker 01

  Listen, we, the board could have voted to sell the company because they had enough votes around the table that were incentivized to sell the company. The problem is that the acquisitions were requiring us to sign three year employment contracts. So we were kind of still had the leverage because we were like, sure, guys, you could sell the company, but we're not signing three year.

• 1:12:12Guy Raz?

  Right.

• 1:12:13Speaker 01

  Employment contracts. So you can imagine how well that went over.

• 1:12:16Guy Raz?

  Right. That wouldn't be as attractive to an acquirer if Serena and Lilly were not involved.

• 1:12:21Speaker 01

  That's correct. And that, that really honestly became the rub. And it also became a pretty serious rub with our board.

• 1:12:29Guy Raz?

  Did it, with tension?

• 1:12:32Speaker 01

  Yeah. Tension, threats. It was an ugly time simultaneous to our attempt to open our first store. So there were battles in the months leading up to a very big moment within the, the company and the life of the brand.

• 1:12:54Guy Raz?

  And you're building the plane as you're, you're like, got a store, you're opening a store. You opened the first brick and mortar store in the Hamptons, which I think you do strategically makes sense. I mean, the Hamptons, it's a lot of money is there, a lot of high end shoppers, people who have homes in Manhattan, they're there on the weekends, they're, there's word of mouth that comes with being at the Hamptons. Is that, was that the reason why? Because you're in Mill Valley, why wouldn't you open in San Francisco, for example, or in, I don't know, in Los Angeles?

• 1:13:27Speaker 02

  I'll jump in on that one. It wasn't important to us to put it in our own backyard first. We wanted it to have its greatest chance of success. And I don't know that Marin or San Francisco was that. And everything aligned to support its success.

• 1:13:46Guy Raz?

  Did it work, that store?

• 1:13:48Speaker 01

  Oh, yeah. Was it the right choice for our first store? Probably not. But you know what? It put us on the map with every, a major media, New York. So we had, you know, some unintended consequences as a result of where we planted our beachhead.

• 1:14:10Speaker 02

  Fact of the matter is, that was the first time that any of us had seen any of our product collected somewhere. It lived in a warehouse. It lived in our imaginations. It lived on set when we were photographing a, a room for the catalog, but we never had it spread out in front of us. And so we were able to articulate the brand mood and ethos so completely because of that location, because of how funky and fun that space was. And it was essential to building the brand that came after it.

• 1:14:51Guy Raz?

  Okay. So you've got the, you've got that store. And meantime, you've got acquisition offers and some of them are challenging. But I guess one of them does come through that is, let's say, good enough. It's a family office and they offer to acquire Serena and Lilly. And, and you guys decide to go with that one, decide to accept it.

• 1:15:18Speaker 01

  Yeah. It's a majority shareholder acquisition in the sense of, I'm going to come in and clean up your cap chart.

• 1:15:32Guy Raz?

  We're going to buy everybody out.

• 1:15:33Speaker 01

  We're gonna, we're gonna give a tender offer. We're not going to force anyone out. Anyone who wants to stay is welcome to stay. And honestly, it was a dream come true. And it, and it happened as a result of opening our store in the Hamptons because that investor saw it.

• 1:15:55Guy Raz?

  And, and so you presumably, you explained the situation and they, and they're interested in, in, in helping and working with you.

• 1:16:04Speaker 01

  Yeah. We did a really like genius restructure. So anyone who wanted to leave at this time was granted a price and they could leave.

• 1:16:17Guy Raz?

  They could sell their shares.

• 1:16:19Speaker 01

  They could sell their shares. Many of them were making at that point over a three X. And they could sell their shares or they could convert to common and they can ride along in the car with us.

• 1:16:33Guy Raz?

  All right. So you, okay. So you now, and the commitment that you guys made was to, it wasn't going to be a three year commitment. It was probably going to be, what, a year or two, a year, a little bit more?

• 1:16:44Speaker 01

  No, we, we were, we were all in. We were excited to get.

• 1:16:48Guy Raz?

  You were going to help grow this thing.

• 1:16:50Speaker 01

  Oh, yeah. We were really pretty excited. I mean, it was such a, I don't know. I like to refer to it as like a triple gainer on the balance beam and we landed on our feet.

• 1:17:02Speaker 02

  But don't you feel like that was the way it was going to turn out? I, as stressful and awful as it was, I just always knew that we were going to end up in a situation where we could do a triple gainer on a balance beam and land on our feet because this brand was not done.

• 1:17:22Speaker 01

  No.

• 1:17:23Speaker 02

  We weren't done. It felt inevitable.

• 1:17:25Speaker 01

  Yeah.

• 1:17:26Guy Raz?

  I mean, you've been through many years of just stress and like conflict. Did that just take all of that away, that acquisition and the terms of it? Because you, now you're back, you guys presumably are staying on. So you're common stockholders now. Now it's sort of back, a little bit back to where it was, although now I'm assuming that this, this acquire owns the majority of the company.

• 1:17:52Speaker 01

  Yeah. It was definitely over 50 at that point.

• 1:17:55Guy Raz?

  But you could now, with their support, really scale this to something even bigger.

• 1:18:01Speaker 01

  Yep. I will say that we opened up some magnificent stores in the next year to 18 months after this new infusion and things were going great. And I have to be honest and tell you that I was absolutely exhausted. I ran this sprint with tremendous stress and I'm a scrappy innovator. And now we were really becoming a grown up company and there was a lot of meetings.

• 1:18:38Guy Raz?

  That would prompt you to, to, I'm assuming, to say, I'm, this is great. I'm gonna, you know, once you guys are ready to replace me, I'm out.

• 1:18:47Speaker 01

  Yeah. I mean, I said to the new owner, the new majority shareholder, I said, listen, this brand needs someone who can really scale it. And I hadn't really spent enough time with my children at this point. And I wanted to spend more time with them. And so I kind of said, I'd like to do a search and find the CEO.

• 1:19:11Guy Raz?

  Yeah.

• 1:19:12Speaker 01

  I mean, it was just time.

• 1:19:16Speaker 05

  So you, I think your last day was the last day of the year of 2015.

• 1:19:19Speaker 01

  Yeah.

• 1:19:20Speaker 05

  And I think, Serena, you stayed on in a consulting relationship, right? Because you're still designing.

• 1:19:27Speaker 02

  Well, initially, I stayed on in my role, but my role was redefined. And I lasted maybe six months. And then I left and had essentially a part-time role that was external.

• 1:19:46Speaker 05

  And at this point, you both have completely stepped away from the company. Like, I think today, neither of you own any shares anymore. And both of you have started your own new design businesses. But I'm curious, I mean, when you guys see Serena and Lilly out in the world, right? How do you feel about it? I mean, I think it sounds like both of you are proud, but is it more complicated than that? I mean, I think of other founders whose names are on brands that they're no longer part of. And, I don't know, there's mixed feelings about it.

• 1:20:18Speaker 02

  Of course, there are mixed feelings. I think that the overriding sentiment is pride, first and foremost. There are many ways that this could have gone. We've all seen examples of founders exiting a brand and the brand deteriorating. I think that they have done an amazing job keeping it aspirational. I definitely recognize the differences in the overall aesthetic. But I also know that that is part of the strategy. You know, you have to reach and appeal to more customers in order to grow a brand.

• 1:21:02Speaker 02

  So I recognize that.

• 1:21:04Speaker 05

  Yeah. Lilly?

• 1:21:06Speaker 01

  I'm with Serena 100%. I feel a deep sense of pride when I see this. The stores are gorgeous. Every time I'm in a city that has a store, I make it a point to introduce myself to the employees. And I really, you know, I hope we've built a heritage brand that will be around in 100 years.

• 1:21:25Speaker 05

  When you think about the journey you took, and if you've heard my show, you know that I always ask this. How much of where you got to do you attribute to the work? And how much you think is due to just luck and, you know, serendipity and everything else? First to you, Serena.

• 1:21:44Speaker 02

  I don't believe that there's any such thing as luck that you don't participate in. I think there are so many examples of ways in which we did something unlikely. And some would say we were lucky to have so-and-so come knock on our door. I would say we listen to our guts. We are positive. We are inviting, and we invite in good things.

• 1:22:13Speaker 05

  Lilly?

• 1:22:14Speaker 01

  Yeah, I mean, I agree. I think that part of success in entrepreneurship is resilience and tremendous hard work. And the ability to pick yourself up when honestly you've been knocked over. And I can't emphasize enough the importance of that to be successful. There were so many opportunities where we got knocked over and we just... The resilience was so much of our success. And yes, we had some lucky breaks. We happened to be at the right place at the right time, but, boy, did we work hard.

• 1:22:54Speaker 05

  That's Lilly Kanter and Serena Dugan, co-founders of Serena and Lilly. By the way, an interesting biographical detail from Lilly's past. Back when she went to college at Arizona State University, she worked at a men's clothing store with someone else who's been a guest on this show, the late designer Kate Spade. In fact, Lilly worked with both Kate and her soon-to-be-husband Andy at Carter's Men's Clothing in Phoenix. It was at a time, she says, when they were all pretty broke. Years later, Kate Spade wrote the foreword to a book written by Serena and Lilly called Nursery Style. Hey, thanks so much for listening to the show this week. Please make sure to click the follow button on your podcast app so you never miss a new episode.

• 1:23:38Speaker 05

  And if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please do sign up for my newsletter at guyraz.com or on Substack. This episode was produced by J.C. Howard with music by Runtin' Arab Bluey. It was edited by Neva Grant with research help from Katherine Cypher. Our audio engineers were Robert Rodriguez and Kwesi Lee. Our production staff also includes Casey Herman, Chris Messini, Alex Chung, Carrie Thompson, Carla Estevez, Sam Paulson, John Isabella, and Elaine Coats. I'm Guy Raz, and you've been listening to How I Built This.