The Stitch Fix IPO

Ben and David dive into the most talked-about tech IPO of 4Q 2017: Stitch Fix. After downsizing the offering and pricing below the range, does this signal a warning that public markets won’t value high-flying silicon valley “disruptors” as high as VCs hope? Or is this a textbook example of a great return for a disciplined management team and well-run company? Most importantly, what happens next? Tune in for our heroes’ take. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Carve Outs: Ben: The iPhone X https://www.apple.com/iphone-x/David: Coach Wooden and Me: Our 50-Year Friendship On and Off the Court https://www.amazon.com/Coach-Wooden-Me-50-Year-Friendship-ebook/dp/B01LYJI4UO/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=&sr=

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

• 0:11Ben Gilbert?

  Welcome back to episode 49 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:18David Rosenthal?

  I'm David Rosenthal.

• 0:20Ben Gilbert?

  And we are your hosts. Today, we are covering the Stitch Fix IPO, a one that David and I have been excited to cover since the S1 came out because it's a fun read. It's fun to compare and contrast against other S1s coming out recently. It's an e-commerce leader that is going up against Amazon in Amazon's absolute heyday and rise to prominence. And we're going to dive in to figure out, how can they compete? How can they differentiate? How is there still a good business left in e-commerce in an era where Amazon looms high?

• 0:51David Rosenthal?

  Yeah, and this is one that is really tailor-made for our narrative section because for the longest time, the narrative when Stitch Fix was a private company was this company is crushing it. It's all up and to the right, which, as we'll find out, it was. But then it was actually a disappointing IPO in and of itself. So we'll dig into the story here. What happened?

• 1:14Ben Gilbert?

  Yeah, and for listeners who are new to the show, so we started as just acquisitions, hence the name Acquired. When we added IPOs, we realized we needed to change up our format a little bit. And there's a big part of IPOs which are narratives. And that's both narrative from the company side and narrative from the investor side, from the street. So it's what does the company want you to believe? And what does the analyst team or the analysts and media community want you to believe? You never hear much about that in acquisitions because they kind of happen and then you just hear about the news afterwards. But with the roadshow and the lead-up and trying to price optimally, depending on your definition of optimally, there's lots and lots of narratives flying around about IPOs. So we will dive into that. All right, listeners. Now is a great time to tell you about a longtime friend of the

• 1:59Ben Gilbert?

  show, Vanta. AI has scrambled the whole security picture. It used to be that you prove that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 2:14David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 2:35Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 2:57David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 3:15Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you.

• 3:43Ben Gilbert?

  Now, that reminds me, we have a Slack now with over 1,000 people. If you go to acquired.fm, you can join the Slack. You can learn about any news that we haven't really gotten to yet on the show, because we release sort of a week or a week and a half after anything happens, and mostly kind of just do historical episodes. So if your jam is talking about news as it's happening with other nerds like us, jump into the Slack and enjoy.

• 4:06David Rosenthal?

  Yeah, it's kind of awesome that there are over 1,000 people in the Slack now. I mean, this was like an experiment that Ben and I started right in the beginning of Acquired, and now it's taken on a life of its own. So thank you, guys, for being such great members of the community.

• 4:23Ben Gilbert?

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

• 4:31David Rosenthal?

  That'll be a good episode.

• 4:32Ben Gilbert?

  Yeah, yeah. Anything else before we, we dive into, to history and facts on Stitch Fix?

• 4:38David Rosenthal?

  No, I'll stop interrupting you. Let's do it.

• 4:41Ben Gilbert?

  Sweet.

• 4:41David Rosenthal?

  So Stitch Fix, uh, before we get into the much discussion that we will have around the narrative section. But first, let's go back, uh, just almost exactly seven years ago, uh, in late 2010 to when Stitch Fix was founded. And it was started by two women, uh, CEO Katrina Lake, who was then a business school student at Harvard, at HBS. And the wife of a friend of hers from college, uh, she went to undergrad at Stanford, uh, named Erin Morrison Flynn.

• 5:22David Rosenthal?

  And Erin had been a buyer for J. Crew. Katrina was looking for businesses to start and, and she, uh, didn't really like shopping for clothes, but liked looking, you know, nice and especially professional as a business school student and thinking about, uh, starting a business and her career after business school. Um, so they decide that there might be an opportunity to team up here. So they started the company, um, to be a online fashion company and they decided to call it Rack Habit.

• 5:55Ben Gilbert?

  Yeah. I mean, as soon as I read it, I was trying to think, is this actually a way worse name than Stitch Fix? Or have I just heard Stitch Fix so many times now where Rack Habit feels like a dumb, ridiculous, silly, they could never be successful with that name name?

• 6:08David Rosenthal?

  Yeah, I don't know. I mean, it sounds a lot like Rabbit.

• 6:12Ben Gilbert?

  Yeah. I was like, is that like some kind of like weird Task Rabbit parody?

• 6:16David Rosenthal?

  Yeah.

• 6:17Ben Gilbert?

  Yeah.

• 6:18David Rosenthal?

  Also started in Boston. But the world may never know because it doesn't stay Rack Habit for long. But the inspiration for the company and the product is that right around the same time, there was a company, actually might be another good acquired episode called Trunk Club, that was based in Chicago. And Trunk Club had pioneered, along with a few other businesses, this idea of an online retailer where instead of the customers choosing the clothes they want and buying them, they actually employed stylists, personal stylists, and the stylists would choose clothes and send them on a regular basis to their clients. And then the clients would try on the clothes and decide if they like them and if they like

• 7:03David Rosenthal?

  them, keep them. So it was like having a personal shopper online for you. And Trunk Club ended up being fairly successful, was acquired by Nordstrom eventually. But they only did this for men. Katrina and Aaron thought, well, maybe there's an opportunity to do this for women as well. So they start Rack Habit and they first, you know, they sign up a few friends in the Boston area and they decide to be really analytical about what they're doing. So rather than just, you know, sending them whatever they found that they thought was attractive, they asked pretty detailed questions about the style preferences of their friends. And they used an online survey to gather all this data and then they started logging it on a really big Excel spreadsheet.

• 7:48David Rosenthal?

  And then they would go around to boutiques in the Boston area, fashion boutiques, and buy clothes that they thought matched the preferences that their customers were putting in. So they do this while Katrina's finishing up her second year at HBS. And then when she graduates in 2011, next year, they actually raised some seed financing. So they raised $750,000 from Steve Anderson at Baseline Ventures. And Steve is a great, great, very early seed investor. He was the first investor in Instagram and many other great companies. Many of his portfolio companies have popped up on this show. And supposedly, he had been actively out there looking for the Trunk Club for women. So.

• 8:28Ben Gilbert?

  Before we get too far from RackHabit, there's a great remnant of internet history. If you go to rackhabitblog.blogspot.com, there's the RackHabit effectively content marketing. And there's just a few blog posts that are from 2011. And it's things like their interns writing posts and blog roundups and trend report. And you know, what you should be paying attention to. And the last post is called Packing List: Top 5 Must Haves for Sailing. And it's the very first branding that you see of Stitch Fix. So that's when they sort of formally moved onto their own, you know, platform and off of Blogspot. But you can still, still up there.

• 9:07David Rosenthal?

  Must haves for sailing?

• 9:09Ben Gilbert?

  Yeah.

• 9:10David Rosenthal?

  I can say, I'm guessing that most of their, their customers at that time were HBS students. If they were in sailing, how east coast. So I guess they, you know, saw the light and Katrina had gone to Stanford for undergrad and grown up in the Bay Area. They decided to move back to San Francisco away from this east coast sailing after, after she graduates. And they get the investment from Steve at Baseline. And that's when they changed the name to Stitch Fix. I think we should probably take a pause here and then talk through kind of exactly how the product works. And this, this category that they helped pioneer that, you know, they refer to as assisted commerce. So the way it works is that consumers, or as Stitch Fix calls them, clients, they come to the site.

• 9:55David Rosenthal?

  And then they fill out, today, they fill out the style profile online on the site rather than talking to a friend.

• 10:02Ben Gilbert?

  And David, I actually, I went through it this morning and I can tell you, super, super nice, easy process. The one thing that was surprising and kind of a cool thing is in addition to all of your style preferences and asking the minimum number of really smart questions where they can infer the right things about you. You know, which of these two things are you more likely to wear? What tends to fit you better, things like that. There's one that's basically like, put in all of your social media handles. So we can just go do our own sleuthing. And so then the stylists have that at their disposal to really understand like, who are you? And what is your, what do you look like publicly to the world?

• 10:34David Rosenthal?

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

• 10:39Ben Gilbert?

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

• 10:43David Rosenthal?

  Yep. And you can even share a Pinterest board with your stylist that you can both post to. So this is an important point. When you sign up, you fill out the style profile and you get matched with a human stylist, a real person who works for Stitch Fix. And these are mostly part-time, remote workers. They have over 3,000 of them now. That human stylist, you can contact them and say, you can order a quote-unquote "fix" and you can have that happen either on a regular, you know, subscription commerce-type basis every one month or two months, or you can just do it on-demand whenever you want. So you have a job interview or a particular occasion, you can say, "I have this coming up. I need an outfit. Send me a fix." And so every time you order a quote-unquote

• 11:25David Rosenthal?

  "fix," you pay a $20 styling fee for the work that the stylist does. And that $20 then gets applied to any items that you buy. So if you don't buy anything that they send you, you still have to pay the $20. But if you do, the first $20 gets credited. And each box that they send you "fix" has five items. And like I said, you can keep whatever you want. You can keep one, you can keep three, you can keep four. If you keep all five, you get a 25% discount on the entire purchase. But otherwise, you're paying full price. So as opposed to a lot of other, well, online commerce businesses in general, but the sort of first generation of businesses that

• 12:08David Rosenthal?

  looked like this, like Gil Group or Zulily and the like, this is not a

• 12:12Ben Gilbert?

  Sort of flash sales.

• 12:13David Rosenthal?

  Flash sales. This is not a flash sales site. These are for customers and products that are going to be purchased at full price. Except if you buy all five, then you get the volume discount.

• 12:25Ben Gilbert?

  After talking to a couple of friends who are avid Stitch Fix customers, a lot of them find themselves liking three, maybe four things and keeping the whole box anyway, just because it's the same amount and they get one more item and they can either, you know, resell that if they want, or, you know, keep it and just save themselves the hassle of sending it back. It's basically like, in many cases, depending on the price point, buy four, get, I guess actually not, depending on the price point, but buy four, get one free.

• 12:48David Rosenthal?

  Yeah, it's a really interesting kind of consumer psychology play. And I'm sure they're very data driven, as we'll get into in a minute, about how they select those items and what the prices are and what they put in the box. But it's interesting, you know, the thinking about the, I was thinking about kind of like, who, who is the Stitch Fix customer? And it wasn't entirely obvious when it started. I think a lot of people thought, oh, you know, something like Truck Club, that makes sense, you know, for men, men don't like to shop. But women, of course, they like to shop. But it's interesting, you know, if you think about like, kind of a two by two matrix, sticking with the business school theme here of like, do you care about how you look? And do you like to shop? And the Stitch Fix customer is, you know, in the, yes, I care how I look,

• 13:33David Rosenthal?

  but no, I don't actually enjoy shopping. It turns out there's actually a lot more people, both men and women, that are in that category than you might otherwise think.

• 13:42Ben Gilbert?

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

• 14:14David Rosenthal?

  Yeah, it was really funny. I was talking about this episode last night, we're on the Thanksgiving break and Jenny and I are visiting my parents and I was telling my parents about, you know, this episode we were going to do today and about Stitch Fix, they hadn't heard of it. And I was explaining this concept to them and both of them were like, I can't imagine women ever doing that. And, and they're like, this must be a generational thing. And I was like, no, you know, I don't think so. Like their target customer is actually in their, you know, in their late 30s through late 40s.

• 14:41Ben Gilbert?

  Opportunities to start new businesses aren't always formed by technological shifts. They're often formed by societal shifts. And in the very same way that people would balk at the idea that you would let a stranger stay in your home, or you would get into the back of a stranger's car. This feels like a thing that's unintuitive, that, you know, quote unquote, "women won't do that." That, you know, it's, the world has changed and people value convenience.

• 15:04David Rosenthal?

  And we'll, we'll get back into this in a minute. But, you know, Stitch Fix, for all of the growth and the great business they've built and hype, they definitely had trouble raising money along the way. And I think this was, this was part of it. But just like any, you know, great business that gets built, you have to find something that's not obvious or else, you know, then why wouldn't it have already been done?

• 15:25Ben Gilbert?

  Right, right. Okay, so diving back in, they had relocated to San Francisco.

• 15:30David Rosenthal?

  So they'd relocated to San Francisco. The business starts growing. And, and the next year after they move out, in 2012, they make two really key hires. So the first is a guy named Mike Smith. And Mike had been the COO of Walmart.com. And he came over and was Stitch Fix's first COO. He then became the GM of the men's business when they launched that, I think about a year ago now. And now he's back in the role as COO of the whole company again. And the second, and perhaps even more important hire they made, is they hire a guy named Eric Colson. And Eric had been the VP of Data Science at Netflix and the Chief Algorithms Officer.

• 16:15David Rosenthal?

  So he was the guy at Netflix, or it was his team, that was responsible for the Netflix recommendation, which, you know, has driven so much of their success and their usage. You know, I don't know if before that, if, if they were positioning the business as such, but this idea that Stitch Fix is like the Netflix of fashion.

• 16:36Ben Gilbert?

  Yeah, it went from, it went from, you know, trunk club for women to the Netflix of fashion. And a lot of that, you know, driven by the way that they wanted to be perceived by their customers and the technology they were actually doing on the backend.

• 16:48David Rosenthal?

  Yeah. So Ben, you went through it this morning and I know you've also read a little bit, like all the data that they collect through the onboarding process then gets married with the human stylist and there's a whole robust product on the backend for the stylist.

• 17:02Ben Gilbert?

  Yeah. Yeah. So a little bit of insight into this. So after talking with someone who was close to the company for a long time, they basically looked at it as the business really started clicking when Eric came over and when he brought a lot of the practices from Netflix. And then ultimately, when he brought a lot of his team over as well, they really saw retention rates go up. They saw people keeping the packages after they shipped it and not returning as many items. And they really sort of reworked the whole process for how do we learn about people and get the minimum amount of information necessary to basically deliver the best possible customer experience and have them stick for a long time. And so I was trying to figure out what exactly does that mean? Because they have 3,400 stylists who are working part-time, you know, 15-ish dollar an hour jobs remotely. And so that's

• 17:46Ben Gilbert?

  the huge workforce that they claim every single fix that's sent out is human assembled. And yet they're claiming they're a recommendation engine and that they're, you know, the Netflix of clothing. How does that work? There's actually a whole product on the backend for these stylists where once you become one of the 3,400, you basically get all of the output from that data engine where they're collecting everything from your onboarding to what you're sending back and tuning based on that. To a lot of really interesting innovations I'll mention in a second on how they store the data to make sure the fit is right. And then using that to basically pop up options to the stylists. And then the last step is the stylist actually making the human calls about, do I really feel like this person would

• 18:31Ben Gilbert?

  like this thing? And one of the really cool things they do on the backend is rather than storing size information, like this person's a small, so we'll send them a small, they store all the measurements about each article of clothing. So when they have a piece of clothing come into the warehouse, they take all the measurements and store it that way. And so when they are looking up with something, you know, is this, how far away is this item from a data perspective from something that would fit this person well? It's not based on a variable thing, depending on how the manufacturer is.

• 19:03David Rosenthal?

  Exactly, exactly.

• 19:05Ben Gilbert?

  And they actually ask you in the onboarding, hey, what size shirt do you wear when it's a button down? Small. Great. Is that usually too big, usually just right? Does it usually fit a little small? And so they use that as a starting place and then start to tune off of you selecting items over your first few fixes that they send out.

• 19:22David Rosenthal?

  Yeah. Interesting, interesting. So they're, they don't make you go through the trouble of like measuring yourself, but on the backend for them, on their inventory, they're not cataloging things based on just like the letter or number size. They're like actually taking the measurements of each garment.

• 19:38Ben Gilbert?

  Right, right. And so the first, the first fix they'll send you is a best estimate, but then it's really important as part of the process to constantly give feedback and it learns from basically what, what was just right, what was too small. And the further off your guesses are at the very beginning, the longer it's going to take to lock you in.

• 19:54David Rosenthal?

  Yeah. Interesting. And that's like, well, it would be really hard for a stylist to do that, even if they are like truly your personal stylist, but you know, on a scale basis to have like thousands of clients, you know, hundreds, two thousands of clients per stylist, like there's no way that could work without this data science backend.

• 20:12Ben Gilbert?

  Yeah, yeah. And a lot of the ways you could argue, you know, a human could never do X, Y, Z. Right now, with the absolute state of the art, a human is still the best way to do the styling, but to your point, David, with a scale backend that's storing things in the structured way, a machine is actually way better at doing sizing than, than a human would be by eyeballing things.

• 20:32David Rosenthal?

  Yeah, interesting. I mean, the parallels to Netflix are, you know, pretty clear.

• 20:36Ben Gilbert?

  Right, right. I have two more comments on their tech, just to talk about, well, one is how serious they are about it. If you go to algorithms-tour.stitchfix.com, there's this, this awesome explanation of how Stitch Fix works on the backend and they actually put a lot of time, a lot of front-end engineering work into making this page because it's pretty, it's pretty crazy as you scroll down it to watch it all fly around and animate, but basically talks you through a lot of the algorithms that they use. And if you click over to their engineering blog, that's called multi-threaded, which is like maybe the best name for an engineering blog of any company ever.

• 21:13David Rosenthal?

  That's awesome.

• 21:14Ben Gilbert?

  It's right up there with Slack's blog name of several people are typing.

• 21:19David Rosenthal?

  Several people are typing. That's awesome.

• 21:21Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 21:35David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 21:49Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 21:59David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 22:17Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise: the workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 22:33David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 22:49Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 22:59David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So picking the story back up, they've made these two great hires. Things are going great. The business is, is starting to grow, but there are a couple hiccups that come along the way. So first, in the summer of 2012, Katrina and Erin Flynn, her co-founder, get into a bit of a dispute that results in Flynn, in Erin, Erin Flynn, leaving the company and actually filing a lawsuit against Katrina and the company and Stitch Fix.

• 23:41David Rosenthal?

  That ultimately ends up getting settled a couple of years later in 2014 and terms are not disclosed, but not kind of really what you want to have happening in a, in an early startup. And, and that, and potentially also some of the other dynamics we were talking about that like, on the surface, this might not seem like the most obvious market. Ends up that the company, even though it's growing and doing well and making these great hires, they kind of have trouble raising money and they need to raise another round because they're running low on cash. So actually towards the end of 2012, Steve Anderson does a $2 million bridge round for the company, bridges them to the Series A.

• 24:23David Rosenthal?

  And this is not uncommon in startups and venture, but what is fairly uncommon is that a seed fund would lead a, a bridge that large. I mean, that's a lot of money for a very small fund to put into a company. So Steve had a lot of faith in, in Katrina and what the business was, was that was being built here. So that happens, the company apparently is, is only eight weeks away from running out of cash and not being able to make payroll at that point. They do the $2 million bridge and then in early 2013, they're finally able to raise a, you know, quote unquote, proper Series A and Lightspeed, the venture firm comes in. And this is 2013 and companies are raising boatloads of capital then.

• 25:07David Rosenthal?

  And, you know, even in the, you know, sort of new e-commerce and flash sales world, you know, Zulily is really large. There's a lot of momentum. Lightspeed's only willing to put in another two and three quarter. Million. So on top of the two that the additional two, the baseline puts in, they raise in total a $4.75 million Series A. And that I believe was at just under a $14 million post money. Yet at the same time, like the business is really starting to grow. So they, they shortly after that, they shipped their 100,000th fix, which is quite a lot. And right around the same time, ironically, after they closed the Series A,

• 25:49David Rosenthal?

  Bill Gurley at Benchmark hears about the company and hears about the momentum they have. And he gets really interested. So he gets in touch with Katrina and he asks her for a meeting. And as the story goes, she says, well, you know, we just raised our Series A, but you know, happy to meet with you and show you the business. So they sit down and the first thing that she does is she opens up an Excel spreadsheet and she shows him a three-year forward projection that she's modeled of both the cash flow and an income statement. And supposedly Bill gets quoted later as saying, "That has never happened in the history of my venture career."

• 26:30David Rosenthal?

  And Bill, of course, was a former stock analyst on Wall Street. And so he's used to seeing these models, but these are for much later, you know, like public businesses. And so apparently he decides like right then and there that he wants to invest. He's seen the momentum, the numbers are great. He doesn't care about the category. It's clearly growing. He wants to do it. But unfortunately, they had just done their Series A. So he keeps lobbying Katrina and the company. And finally, just a few months later, in the fall of 2013, he ends up investing $12 million, Benchmark does, at a $40 million post-money valuation. So to go from like being at the end of 2012, being basically out of cash,

• 27:12David Rosenthal?

  nobody's willing to give them money. They have to go back to Steve, their seed investor, to do a bridge round. They finally get the Series A done, but not even like a full lead. It's just somebody who's willing to essentially top up the bridge. And then Bill Gurley, of all people, gets so much conviction in the company that he lobbies them to invest. And I believe, I don't know for sure, but I was trying to figure out, based on PitchBook data and looking at the IPO prospectus, I think Benchmark writes the entire $12 million check into the company. And so it was quite a kind of turnaround for, for the company at that point.

• 27:47Ben Gilbert?

  Yeah, so great for Stitch Fix there, being able to get enough capital to really run the business for a good amount of time there. And great for Benchmark, looking at where Stitch Fix is today, to be able to get in at that valuation and buy a nice chunk of the company. Great on all sides. And when you look at Katrina opening up the three-year projection to Bill there, I mean, that's just very emblematic of her as a business person. When you talk to people who have worked with her, they say she's extremely calm under pressure, she's analytical, she's incredibly level-headed, she's highly, highly rational about her business, and like, very good at reasoning from first principles. And I think, you know, you watch Bill tweeting about the Stitch Fix IPO and talking about how there was never somebody

• 28:28Ben Gilbert?

  better suited to run a public company than Katrina. She's just very, very analytically sound and level-headed, and not surprising to me that she had a three-year financial projection there, that probably, you know, I'd love to see it and see how accurate it was. There's like a running joke among early-stage startups of, well, who knows if these will come true, but something tells me that they were grounded in some very solid assumptions.

• 28:52David Rosenthal?

  It's rare, but you can make the mistake of going, you know, overboard on projections and being too, you know, having too much false precision. But what's really interesting is for this company, like, this is actually necessary, and modeling not just, you know, oh, I think I'll do this much revenue in three years, but like, the full, you know, three statements of like, you know, the cash flow statement and the income statement, and, you know, Bill doesn't say she had a balance sheet, but if you have a cash flow statement, you also need to have a balance sheet there, she had modeled, you know, all three financial statements. Like, part of what kills a lot of companies in this space is like, your inventory costs are just massive. And so like, as you grow, you can get underwater pretty quickly. It's really important, if you're going to run this business effectively,

• 29:34David Rosenthal?

  that you understand, you know, all of the financial aspects. And clearly, we'll get into this in Narratives, I mean, Katrina does, like, this is an exceedingly well-run business.

• 29:44Ben Gilbert?

  We're going to steal the show from Narratives a little bit here, but quite the focus on being unit and economic positive and running a profitable business from a very early point, rather than being grow, grow, grow, like a lot of, a lot of companies, where quite frankly, the business model is predicated on it, where Stitch Fix just isn't. So I think a good early recognition by the management team of that there.

• 30:06David Rosenthal?

  Yep, yep. And, you know, I mean, they were balancing this growth and profitability and understanding, they weren't profitable just yet, but they would be soon, understanding, you know, their balance sheet and their cash flow. But they also grow hugely. So Gurlian Benchmark invest in the fall of 2013. Now, the company is on a June 31 or July 31 fiscal year end. So their fiscal year ends kind of halfway through the year, a little over halfway. That current fiscal year that Benchmark Invest, at the end of it, which is in the summer of 2014, they do 73 million in revenue. And this company was only founded, you know,

• 30:46David Rosenthal?

  sort of less than three years before that. So really impressive. And then the next year, they grow even more. So end of fiscal 2015, which is summer 2015 for them, they do 343 million in revenue and 42 million in EBITDA. So they're cash flow positive and generating a huge amount, especially for a four-year-old startup. And so at that point, and I don't know the full story, whether it was the insiders, the existing investors and VCs lobbying to put more money in the company, or Katrina feeling like she wanted to raise a little bit more to have some flexibility as they started building out their other business

• 31:27David Rosenthal?

  lines, you know, men and plus-size and maternity. But they raised another $30 million at that point, all from existing investors. And that's a $300 million post-money. So again, just looking back two years before that, they couldn't raise any money. They could barely make payroll. And then they're doing over, well over 300 million in revenue, over 40 million in EBITDA. And they just raised at a $300 million valuation.

• 32:01Ben Gilbert?

  Yeah, you know, when you hear these stories, you got to wonder what it feels like to be an employee at one of these companies. If you look at, you know, 2012 versus 2013, or 2013 versus 2014, it's like you could have been at the company for only like 12 months. And I feel like when you get a new job, or you start something, it takes you kind of six months to feel like, okay, I know where the controls are. I feel like got my hand on this thing. You go from feeling like it is a thing that's duct taped together that might work to like, holy crap, the demand is insane, and we're actually meeting it, and we're actually running our business efficiently here. Like, it must just feel like whiplash to turn your head that fast and change your mindset that significantly,

• 32:42Ben Gilbert?

  and constantly be learning all the new tools that your technology team is putting out. And I don't know, it's unnatural, it seems.

• 32:51David Rosenthal?

  Well, I got to imagine that this is Katrina from very early on back in 2012, as we talked about, you know, really put some fantastic people on the management team. I mean, you know, Mike Smith from Walmart, he was a long veteran there. And then, of course, Eric from Netflix on the data science side. You know, these are folks that have run retail businesses, you know, at scale before. So, the next year, fiscal 2016, they do 730 million in revenue, and 72 million dollars in EBITDA. And then 2017, so the year that ended this past summer for them, they do just a hair under a billion dollars in revenue, and 60 million in EBITDA. So EBITDA actually goes down, but they argue

• 33:36David Rosenthal?

  they're investing much more in, you know, infrastructure and fixed costs, and they're adding out new verticals. So it makes sense. Throughout the summer, it's rumored that they're preparing to go public. And then finally, in October of this year, 2017, they do file to go public, and they're seeking to, they were seeking to price the IPO in a range of 18 to 20 dollars a share, which would translate to about a 1.8 to 2 billion dollar market cap. So even, you know, a great, you know, well over 5X return on even the the Series C, the 300 million dollar round that insiders did, and huge return on the investments that they made before that. And it seems like this would go great. The company's got huge growth. They're doing

• 34:20David Rosenthal?

  almost a billion dollars in revenue. It sort of grow even more than that. Of course, they're going to price above the range and trade up, but that's not quite what ends up happening. So they go on the roadshow and we'll transition into the narrative section here in a minute. But just to wrap up what happens with the IPO, they start the roadshow in October, kind of a whole bunch of questions come up. They end up downsizing the IPO and then on November 16th, they do price the IPO. They priced it at $15 a share, under the range that they were shooting for. And then they do go public on November 16th and they end up trading just under a billion and a half market cap. So still great, but

• 35:05David Rosenthal?

  clearly there was some disconnects between all the momentum that this business appeared to have, and it certainly did, and then how the public markets received it. So today, a little over a week later, the business is trading at a little over $18.60 a share, 1862. So that is within the range that they initially targeted. It's traded up a little bit, but certainly hasn't, you know, run like I think some people thought it might.

• 35:32Ben Gilbert?

  We've talked about this on the show before, but there's a lot of strategy and there's a lot of different parties who want a lot of different things out of an IPO. And they didn't get a pop. They ended up IPO-ing for, you know, a lower price per share than, than they were aiming to. But I don't really read this as bad news. I mean, I think there are different businesses that need to do different things around their IPO. For example, Stitch Fix didn't have a huge pop here, but their customers don't care how their stock is doing. So they don't need to necessarily create this story of day one trading was amazing because their enterprise customers are going to be buying their, you know, data services. It's, it's, it's a very different business. And I think that, you know, would they have

• 36:15Ben Gilbert?

  liked to maybe price higher and have, have more demand on day one? I think so, but I'm not looking at the, the drop before the IPO or the, the trading immediately afterwards as, as significantly disappointing. I think that they, they got employees and shareholders, you know, the appropriate amount of value out of the equity that they held in those companies or in that company.

• 36:39David Rosenthal?

  Well, yeah. So let's jump into narratives. I mean, I think the question is sort of what What caused this disconnect? Even though I totally agree with you, like, yeah, I mean, the vast majority of Stitch Fix's customers probably even have no idea that they did go public. But what was the disconnect here? And I think maybe let's start with the investor analyst side, and then we can get back into the company side, which pretty much will echo a lot of the things that we've talked about already. But on the investor side, I think there are a few things. So one, Blue Apron had gone public earlier this year and has been quite a disappointing IPO. That would be a good one for us to cover in the future.

• 37:22David Rosenthal?

  I think there is definitely a healthy, and in some ways warranted, amount of skepticism on the investor side of the fence right now about any commerce company, well, really, any commerce company that's not Amazon, but any commerce company that is playing, not playing tricks with, but doing something that the company would say innovative with how they sell their products. And in particular, you know, the box that Stitch Fix sends, you know, having five items in the box, and, you know, the consumer psychology to encourage you to keep all of them.

• 37:56Ben Gilbert?

  You're just saying there's sort of skepticism around, is that a sustainable, actual piece of value?

• 38:02David Rosenthal?

  I think the skepticism is, how much of this stuff do people really want or need? Versus something like Amazon, you know, you can buy, you go find and buy whatever you want, or you don't buy from Amazon. But it's completely up to you. With Blue Apron, what we definitely saw is a couple of things. One, people's desire for just staying subscribed or staying engaged with a regular delivery service like that is actually a lot lower than people thought. And thus there's churn. And two, the addressable market for a service like that is also much smaller than than people might have thought. And so as you start

• 38:46David Rosenthal?

  to reach the end of your core customer base, the amount of money that you have to spend in marketing to then go acquire further customers. Being a lot more because those customers are much harder to reach and acquire because they're not your target customers. And so I think there was, there was a fair amount of fine point that analysts took to Stitch Fix in trying to analyze this and figure out, hey, where is Stitch Fix on this continuum? And, you know, to be honest, we're not the first ones to say this, obviously, many others and Ben Thompson have said the same thing. Stitch Fix is fairly mature in terms of saturating their, their target customer base. And you can see that.

• 39:27Ben Gilbert?

  It's worth diving into sort of why this is the case. Stitch Fix is a great example of a company that basically grew within a narrow segment and, you know, not, not very narrow, they're over a billion dollar company, but a narrow segment of people that were just crazy for it. So they didn't have to use, you know, all the traditional marketing techniques that you would see that are costly and help you really, really scale to the masses, but lots of word of mouth, lots of non-technology based marketing and were able to kind of grow really, really cheaply, or at least acquire customers very cheaply.

• 40:06David Rosenthal?

  Totally. And you can see that. I mean, it's pretty incredible. In 2016, fiscal 2016, where they do 730 million in revenue, they spend 25 million in advertising, which $25 million is a lot of money, but compared to that amount of revenue, that's miniscule. And especially for the commerce, for, for a retail, you know, e-commerce business. So that's fantastic. But then in 2017, fiscal 2017, that jumps almost three X the advertising spend up to over 70 million and revenue, you know, again, grows nicely, but not nearly at the same rate that it had grown in the past.

• 40:48Ben Gilbert?

  It's 34%. I mean, it's just not a

• 40:50David Rosenthal?

  34% versus over 100%. And that's when they 3X their advertising spend. And now they're reaching close to triple digit millions on advertising. So you can definitely see these dynamics at play where, you know, one or two things are happening. Either their existing customers are churning or ordering at lower rates. And when you dig into the cohort analysis that they do provide, they don't provide quite the full picture, but you can dig into the numbers. Both of those things are happening. And the new customers, you know, the marginal new customer that they're trying to acquire is harder to find. And so that's why they're having to spend so much more in advertising.

• 41:28Ben Gilbert?

  Yeah. And, you know, the moral of that story is they're now spending way more money to acquire customers that spend way less. And they can still create a great business on that, but you know, that is a very different dynamic than a lot of the A-plus companies that we've covered on this show that are just total outliers where, and this is something Ben Thompson pointed out this week, the aggregators over time, the network effect is so powerful that the lifetime customer value increases and the cost to acquire decreases. And in this scenario, you know, they basically, it's, it looks more like a traditional business where they saturate a core market and then it gets harder to acquire more people over time.

• 42:10David Rosenthal?

  Yeah. And what you see exactly like you and Ben are saying is that in the companies like Uber, like an Airbnb, you know, you're seeing dynamics with your customer base that actually look like the best SaaS companies. You know, we covered Atlassian, we covered Square, and we talked about how having negative churn for those companies was really important because that meant that as they acquired customers, you know, each year, even though they would have some on a numbers basis, customers churn out. The ones that they already had were spending more and more such that they would spend more every year at that cohort. You know, Stitch Fix is the opposite of that. Clients, as they call them, end up spending kind of on average, less than half

• 42:55David Rosenthal?

  in the second year of what they spent in the first year. And then it continues to decline from there. So they're having to constantly refill the funnel with new folks.

• 43:03Ben Gilbert?

  I'm gonna use this as a quick tangent point. You mentioned something about it. You can't quite tell from their their SEC filing for the IPO, like what, you know, exactly what's going on, but you can kind of tease it out. The sections that are required in an S1 are not actually congruent anymore with understanding exactly how that business is doing because we have developed such better measurement tools. Where if you're an insider, you can have a much higher fidelity view of the business. And yet we don't mandate some of these newer and more high fidelity

• 43:42Ben Gilbert?

  understandings of the business in the public disclosures. So there are ways to be coy and dance around the story without telling the whole story. You know, I don't know if we need to change this, but it is worth talking about that. When companies, and we've seen this in Blue Aprons case, we've seen it in Stitch Fix's case. For competitive reasons and for other reasons, especially if there's a story inside the business that you don't want to be the dominant point for pricing your IPO, you just gloss over some of this stuff or you give too non comparable metrics. And so, you know, the big thing that's still missing from S1s is the ability to look at cohort analysis of what was your customer acquisition

• 44:25Ben Gilbert?

  cost for that cohort? What were the, you know, what's the LTV for that cohort so far? And really being able to compare even just a CAC to LTV ratio for a single point in time, let alone change over time. Be incredibly helpful for understanding if you want to buy a stock or not as somebody, you know, a member of the American public. This has been pointed out by several people and one person, one really great piece that I'll reference later on on TechCrunch, it was a guest post called Unboxing Stitch Fix's S1 by Ezra Galston. It's begging to have a light shone on it.

• 44:57David Rosenthal?

  And Stitch Fix does, they kind of do half the job in their S1. They do show their cohort, customer cohorts in terms of how much they order. And they even go down to, they show, which is actually quite helpful, two-year cohorts for, two-year purchase behaviors for cohorts that are, that have been around for over two years. Now, they only show two of those, even though they have multiple other cohorts going back farther, which is a little bit of a red flag, but kudos to them for showing it. Two-year purchasing behavior, one-year purchasing behavior, and six-month purchasing behavior. And that's really helpful to be able to see all those different time periods, and that

• 45:42David Rosenthal?

  can help you tease out, you know, as we did, wow, actually, like, the amount of money that people spend in the first year, and really in the first six months, drops off very quickly. What Stitch Fix doesn't show at all is their cost to acquire each customer, this sort of the other side of the equation. We can triangulate with the fact that they tripled their advertising expenditure in 2017, and they only grew revenue 30%. Even, as Ben Thompson also points out, while they're adding new categories like men, maternity, and plus-size. So that's a little bit of a red flag, too. I wouldn't lump them in with the Blue Apron S1, but they're also not where like the Atlassian S1 was either.

• 46:23Ben Gilbert?

  Totally. And, you know, it's hard to fault any company for doing this. Everybody is doing as much as they need to. But if you're supposed to be a member, the spirit of the law being you're supposed to be an informed member of the American public, making a decision on if you believe in the future of this company or not, whether or not people actually, nobody actually reads S1s except for people at investment banks. But you can misrepresent, if you want to, how your company is doing. And the only thing that people have to go off of is, reading into this lack of information is a bad thing.

• 46:56David Rosenthal?

  Now, on the other hand, though, clearly, clearly, folks in the investor community picked up on this and a few other things on the roadshow, and that's what led to the downsized IPO. But maybe let's switch back over to the company narrative here, which I think is also a really equally valid narrative. And it's, it's two things, in my view. One, sort of a direct rebuttal to what we were just talking about is like, hey, we are an extremely well-run company, and we've done a great job managing this business. We've raised only $42 million in venture capital, or actually, I think it's a little more than that. But most of that, we didn't even need that $30 million round that we raised

• 47:39David Rosenthal?

  from our insiders. We've built this business, you know, to, at this point, run rate over $1 billion in revenue. We're very large. We've done something that, you know, at the outset seemed crazy, that we would find this quadrant of the two-by-two matrix of people, you know, of all, you know, genders who, who enjoy looking good, but don't enjoy shopping. And, and this is a cash flow positive business with really meaningfully positive EBITDA. I mean, what other startup, and we've done all this, by the way, in like, less than seven years, you know, what, what other startup these days could say that? And all that is very true.

• 48:16Ben Gilbert?

  Yeah, pretty amazing. I mean, it's so capital efficient. They were funding, acquiring new customers largely with profit for the last few years. It's, it's just, it's impressive to watch. I had this down in tech themes, but I'm going to talk about it now in narratives instead. And again, this is, this is from that TechCrunch article, where if you're interested in this episode, go read that article. It's super, super well done, super analytical. It's really the anti-Amazon. Like Stitch Fix is succeeding in an era where they're doing profits first. So they're, they're profitable on every customer, at least every customer or every cohort. And it's, it's about making sure that they have good unit economics before they grow. And it's just a very different tack than a lot of these other companies are taking. Like, Amazon

• 49:01Ben Gilbert?

  has, I don't know, it's like, over half of America or half of Households now and you know that they make I think their margins are are like 2% or less. And you look at at a company like Stitch Fix that says like, well, we we provide a great service and we charge for it and we make money on it. It's interesting looking at what can succeed in this this era of Amazon where you're focusing on the Stitch Fix tack of products, not growth, doing things that Amazon can't because Amazon's margins are so thin. So they they have this this assisted, I think it's assisted commerce. Is that what we're we're calling it?

• 49:41David Rosenthal?

  Yep.

• 49:41Ben Gilbert?

  This basically assisted commerce niche where it costs some of their margin in order to match you with a stylist and have that stylist do work for you. And it granted, it costs $20, so the people are paying for that stylist, but it it does cost Stitch Fix something to to provide that service. And that amount that they're spending on a stylist is something Amazon really just can't do because their margins are so thin. And so whereas Amazon caters to, you know, everybody in the the world gets exactly the thing they want, they they can't really layer in this like highly curated thing because it's not their business model. And so that that is is where you sort of have niches left for for the Stitch Fix's of the world.

• 50:23David Rosenthal?

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

• 51:04David Rosenthal?

  and your math, you know, investor community, but like, I'm being so responsible here that I'm not only am I not losing money on customers the first time, but I'm actually making money the first time. And then so any further orders that they make with me is just gravy. You know, that's positive cash flow for me.

• 51:21Ben Gilbert?

  I think that begs the question of, okay, why do they need to IPO? That this is, this is our what would have happened otherwise section.

• 51:30David Rosenthal?

  Yeah. So I think, I think let's, let's marry maybe the, the what would have happened otherwise with what I think is the other part of the company's narrative around their IPO, which you alluded to a little bit, Ben, but is, I just want to call out more clearly is that the future of Stitch Fix is the future of any commerce company that could, in theory, compete with Amazon and that we are a personalized commerce company and personalization is, is the next wave in commerce and retail. And, and the way we do that is through this huge investment that we've made in data science, marrying that with human judgment and being

• 52:09David Rosenthal?

  able to provide, you know, today experiences to, to our clients that, that they can't get anywhere else.

• 52:18Ben Gilbert?

  Yeah. And I, I think there's, there's a tremendous amount of truth to that. I think personalization is the puck where everyone's skating, but Stitch Fix has the resources to do it.

• 52:26David Rosenthal?

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

• 52:31Ben Gilbert?

  Right.

• 52:31David Rosenthal?

  But, but that's, that's for, you know, we'll get into that later perhaps. But I think, but I think that's part of the reason why they would want to go public. I mean, one is, is clearly liquidity, you know, is, is, as we've talked about many times on this show, a good thing for, for founders, for investors, for employees. But, but two, you know, I think if they're really going to, and this is sort of my take on these competing narratives, I think if Stitch Fix is really going to end up realizing the totality of their vision, they're going to have to become even more like Netflix where, you know, they're making their own quote unquote content as well. They're taking all the data that they

• 53:12David Rosenthal?

  get from all the people watching or buying from them and all of the, you know, films or, or, you know, fashion brands that supply them. And then they take that data and can make better actual, you know, fashion items themselves. And they're already just starting to do this. So there's a really small line in the S1 that I think they clearly buried because they don't want, you know, if I'm them, I don't want my suppliers to get, you know, to my brand partners to get too worried right now. But there's this line. It says, "In October 2017, we purchased certain knitting, cutting, and sewing assets

• 53:52David Rosenthal?

  in Pennsylvania to experiment with making very small quantities of apparel to test with our clients. At present time, we have no plans to manufacture apparel in any meaningful quantities and anticipate that we will continue to rely almost exclusively on third-party vendors to supply our merchandise." You can imagine Netflix saying the same thing five years ago while they were in the background, you know, investing hugely.

• 54:17Ben Gilbert?

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

• 54:23David Rosenthal?

  And so that might be why they need to go public now, you know, to get both the, both the capital, but also the, you know, the, the public currency. They may need to make acquisitions. They will need to hire a lot more to be able to do that.

• 54:39Ben Gilbert?

  Yeah, this is one, you know, so the history of acquired, we wanted to only start with companies that, that we had a long, long lens on and had, had spent, you know, had had a decade to understand what the company did with the acquisition capital, or I'm sorry, by, by acquiring the company, or, or in this case, did with the capital that they, they raised in an IPO. You know, Stitch Fix just happened, and so we don't know yet, but foreseeably, yeah, it's, it's, it's M and A, it's ramping up production. Liquidity to, to employees is super important, as we talked about to the, in the Square episode, where suddenly, because they, they basically did a down, round IPO, many of their recent

• 55:23Ben Gilbert?

  employees were very, very undercompensated. So, super important for retention and recruiting great people to, to, you know, make those, make that stock worth something and worth something in the, the very reasonable timeframe. But I don't think we yet know why, why, you know, what are they going to do with the cash they raised? And it wasn't a huge IPO either. That's, that's worth touching on. I think it was, what, 100 and...

• 55:49David Rosenthal?

  I think they ended up raising, I think 120 million.

• 55:52Ben Gilbert?

  120 million.

• 55:52David Rosenthal?

  So they sold less than 10% of the company.

• 55:54Ben Gilbert?

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

• 56:08David Rosenthal?

  Well, don't forget too, I mean, Katrina talks about this, she talked about this in an interview after the IPO. This is a company that has always, for whatever reason, had a hard time raising money, including in the IPO. And if you need both resources and the ability to go make, be they cash or stock acquisitions, having a public currency for your stock is certainly much better than if you're having to argue about your valuation.

• 56:38Ben Gilbert?

  Well, here's another thing is, do you think that they'll shift a little bit since they are, they do appear to have saturated their core niche a little bit? Do you think they'll, they'll start to be more aggressive on growth and use the IPO capital to finance growth a little bit and take some losses?

• 56:53David Rosenthal?

  Well, I don't know. In a little bit, they're between a rock and a hard place here because they need to grow and growth, as we alluded to, has been slowing. And in particular, when you look at it on a quarterly basis, growth has been slowing significantly every quarter for the last several quarters. So they're going to need to grow to please Wall Street. But at the same time, Wall Street is also heavily focused, as we've been talking about, on the economics around that growth and how much they're investing in marketing and customer acquisition. So they're definitely going to have to strike a delicate balance for a while. For me, it just comes back to the question that I think will decide whether

• 57:36David Rosenthal?

  Stitch Fix is a one to two billion dollar market cap company in perpetuity, which is great. I think they're an incredibly well-run company. They've proved that. Or if they can break out, and like Netflix, go from being valued on a certain level to something much bigger, is I think whether they can execute on this, being able to create their own supply that is differentiated and much better suited to what their customers want than third-party brands.

• 58:07Ben Gilbert?

  Yeah. Yeah, I think that's right. One other thing to discuss here before we move on to tech themes is they went the IPO route. I mean, they, they, they could have not stayed an independent company. I don't know anything in particular about who might have tried to acquire them or when, but we're in this era where brick and mortars are paying tons of money to acquire online, you know, e-commerce companies that are doing really well. We saw Bonobos, we saw Jet.com, Trunk Club, their sort of sister, brother company got acquired by Nordstrom. I mean, I assume along the way, there were opportunities to, to do that, but, um, you know, clearly stayed the course and put the stake in the ground that we believe that this is an enduring thing that should be an independent company.

• 58:52David Rosenthal?

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

• 58:55Ben Gilbert?

  Right, right.

• 58:56David Rosenthal?

  I'm remembering your, your quote on our episode about the Snapchat IPO. Because if you really believe that, this is the route to go. I mean, if you don't, um, you know, you should take Walmart stock.

• 59:09Ben Gilbert?

  Right.

• 59:09David Rosenthal?

  Or Walmart Cash.

• 59:10Ben Gilbert?

  Right. Or, you know, don't take AOL stock.

• 59:14David Rosenthal?

  Yeah.

• 59:17David Rosenthal?

  Somehow I don't think Stitch Fix is anywhere near. The Stitch Fix IPO, we haven't graded it yet, but it won't be in that league.

• 59:25Ben Gilbert?

  No, no. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 59:40David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 59:57Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:00:12David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:00:36Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:00:55David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:01:25Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you. Shall we move on to tech themes?

• 1:01:52David Rosenthal?

  Yeah, per usual, I think we've talked about a lot, but.

• 1:01:55Ben Gilbert?

  Yeah, yeah.

• 1:01:55David Rosenthal?

  Go ahead.

• 1:01:56Ben Gilbert?

  A big one, you know, well, here's one that we just haven't, there's one little piece of this one we haven't talked about yet. The decline of brick and mortar and the rise of e-commerce.

• 1:02:06Ben Gilbert?

  This is one where it's in every freaking iBanking deck that you see now and research report that you see now, and it's duh, completely obvious. For a long time, people, some people were claiming that this would happen and other people were sort of like, yeah, well. Well, we'll see when it does happen. Katrina was one of those people when they started Stitch Fix and when she would speak on on stages for the first few years of the company that was just saying like, we're a year or two away from this and just nailed the timing of it. I mean, this is, this is something that lots of people have been forecasting for a long time, but, but I think Katrina went out there and did something about it and stood by it and it was just perfect on timing.

• 1:02:46David Rosenthal?

  Yeah, I mean, I don't think it's any coincidence that during the time of Stitch Fix sort of founding and growth, you know, we've had JCPenney on the verge of collapse and Macy's and Sears and so many of these companies, you know, whether they are bankrupt now or, you know, are trending that way, really, there've been a lot of dominoes to fall and the timing is great.

• 1:03:13Ben Gilbert?

  Yep. Yep. My other one is this business. And again, everyone should check out Galston's piece in TechCrunch, a fast cost of customer acquisition payback period. It's tough to see exactly what it is from, from the S1, but the bottom line is that it's, it's really fast. And this is a combination, you know, it's on the order of nine to 18 months. The important thing to, to look at here is, is why. And, you know, the goods they sell are pretty expensive. They make a nice margin on the goods and it's about, about 45%, which is in line with sort of traditional retail margins. And they, you know, through all their data science, they have the ability to actually send people things they want.

• 1:03:53Ben Gilbert?

  So over time, the, the amount that people are keeping stuff they send goes up and, and so they, they end up spending more with, with Stitch Fix on each order and then sticking out and staying a customer for longer too. So lower churn and it's, it's just a business that, you know, you can grow more quickly because your customers pay back those, those acquisition costs very quickly.

• 1:04:16David Rosenthal?

  I think it's even quicker than that. Like we were talking about that for most customers, I think they're paying back. It obviously depends on how much they, how much they keep in their first fix, but you know, immediately on their first fix. Now the question is how long it doesn't take them from the time that they spend the marketing to acquire those customers to when they order that fix.

• 1:04:38Ben Gilbert?

  But that's. And this is one where I don't want to throw out exact numbers because those were derived and I think that depending on how you define things.

• 1:04:45David Rosenthal?

  Yeah, man, it would be nice if they had put that in the S1.

• 1:04:49Ben Gilbert?

  Yeah.

• 1:04:52David Rosenthal?

  Yeah, I mean, I think the only, the only theme I'd add is, is one that I think I've talked about a few times on the show, but really this concept of, you know, is the stock market a, a voting machine or a weighing machine? And I actually think, I mean, based on the amount of buzz that Stitch Fix, the company, has had in Silicon Valley over the past few years, you know, they have a great team. There are phenomenal people that work there. They compete and win for talent against the very best companies in the valley, you know, Airbnb, Uber, Google, Facebook, all the time, especially on the data science team. I mean, they are really, really, you know, the team Eric has built incredible. And, and

• 1:05:35David Rosenthal?

  there's a lot of hype about the company and a lot of it deserved, but the stock market didn't vote based on hype. They, you know, they voted based on some really, I know, rational, I think, as we've discussed, concerns about the future prospects of the business and its, and its growth prospects. So I just find it really interesting that like this is to me, another example of there's this meme in Silicon Valley that like Wall Street and the stock market is all, you know, short-term focused and they don't get these companies. And I think we've actually seen on a number of the IPOs that we cover, they get them sometimes better than, than Silicon Valley does. And, and still, you know, this has been

• 1:06:16David Rosenthal?

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

• 1:06:30Ben Gilbert?

  It's awesome.

• 1:06:31David Rosenthal?

  This is a fantastic outcome.

• 1:06:33Ben Gilbert?

  Yeah, Lake, Lake picked up 17 million in cash the morning of the IPO. She owns 15% of the company. So post-IPO, her shares were worth about $250 million. Like great, you know, lots of good things for everyone. And actually, if you look at what Lake owns of the company, it's, it's, at some point, we should do a show and talk about sort of where different parties end up from a ownership basis around IPO. Owning 15% of the company and, and isn't bad.

• 1:07:00David Rosenthal?

  Especially if you really believe, as we were talking about earlier, that there is an opportunity to grow the company, you know, through, through taking the Netflix approach to grow the company 10 or 100x in the public markets, owning 15% of a $100 billion, $200 billion public company, you know, as Jeff Bezos and Mark Zuckerberg have proved, is a lot of money.

• 1:07:24Ben Gilbert?

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

• 1:07:31David Rosenthal?

  Incredible.

• 1:07:32Ben Gilbert?

  Yeah.

• 1:07:33David Rosenthal?

  All right. Should we grade it?

• 1:07:36Ben Gilbert?

  Yeah, I'll start first. Super high variance because we just, the, the way that we grade on this show is, did doing this thing, the IPO or the acquisition, was it a long run good move for them? And did it enable them to do something that they wouldn't have otherwise been able to do? We don't yet know what they're going to do with the cash. Some of it'll go to growth, presumably some of it'll go to starting a new line, you know, lots of R and D there. But of course, it was a good move. Was it a great move? I don't know. I don't, we don't know yet. I'd say it was a necessary move and the timing was about right. I'll go with a B and there's variance to go probably up to an A there. Do I think there's variance to go up to an A plus and become a, you know, $100 billion

• 1:08:18Ben Gilbert?

  company? I don't think so, but maybe worth revisiting at some point.

• 1:08:23David Rosenthal?

  It's interesting, these grading on IPOs, like, it's much better when we do it many years later and we can, we can really assess the impact that the IPO had on the business. And I think there's an opportunity here, as we've been talking about, for the IPO to be a catalyzing event to really take Stitch Fix from, you know, being a, a commerce company to a, you know, really unique and leading provider of, of fashion, you know, garments to everyone, that using data science to do things that nobody else can do. They're not there today. What we can grade today, though, I think they probably should have gone public a year ago.

• 1:09:06David Rosenthal?

  And this is an example of like, you know, there's so many things about timing that are out of your control. They couldn't control the reception to the Blue Apron IPO and all the decisions that were made around there and the impact that that had on Wall Street and investor psychology. And, you know, quite honestly, Stitch Fix was growing much faster and a lot of the economics around their customers and cohorts looked better a year ago than they do today. So that probably would have been a better time to do it. On the other hand, it's hard to imagine that the company was quite ready at that point. I mean, it's still only a seven-year-old company right now, and to argue that they should have been ready a year earlier, maybe even more things would have gone wrong trying to pushing to go too soon.

• 1:09:50David Rosenthal?

  So, yeah, I think I also, I think I'd go B right now. You know, it was fine, but they certainly could have optimized more. But again, like these things, like the real grade is something we'll know in five to 10 years. All right. Carvouts? Carvouts. Let's do it. So mine, over the break, I have, over the Thanksgiving break, I've been reading Kareem Abdul-Jabbar's new book, Coach Wooden and Me: Our 50-Year Friendship on and Off the Court, about his relationship with John Wooden, the Wizard of Westwood, his coach at UCLA,

• 1:10:31David Rosenthal?

  who is just a legend in basketball, but also in all sports and really just in life, an amazing, amazing guy, as is Kareem Abdul-Jabbar, an equally amazing guy. But really, a really fun book about how, you know, when Kareem came to UCLA from New York City, you know, highly, highly, one of the most highly recruited, sought-after basketball players from high school ever, back when high school players played all four years in college because you couldn't go to the NBA right out of high school or after one year. And how his relationship with John Wooden evolved from like, you know, coaching him and then helping Further hone his skills and talent into becoming one of, you know, certainly the top

• 1:11:15David Rosenthal?

  three greatest basketball players ever in his NBA career. But then how that evolved into just this 50 year incredible friendship and how close they were, even though they came from such incredibly different backgrounds and ages. Really, really great book.

• 1:11:31Ben Gilbert?

  Well, mine is a not a book, not a piece of media, obvious and almost a fanboy pick. It's the iPhone 10. David and I talked about you were getting the iPhone SE and there was nothing impressive about the 10 that you could tell. It's one of these things where you use it and you are like, oh my God, this is so different and it's difficult to articulate why. And I'm going to do my best job at articulating why, because I feel like I'm using a product that came out two years from now and I'm like getting to use it like as I'm time traveling from 2019 to now. And when you use other, like every other traditional iPhone, they all feel the same relative to this. Like they all feel like they were foreshadowing

• 1:12:14Ben Gilbert?

  that this would be the product one day. And it's, it's a lot of the gestural stuff that you're like, oh, this is so natural and this makes so much sense. It's a lot of the, I feel like finally the display technology and the, the compute power have made it so that it feels like everything is exactly directly manipulated without any sort of lag, without any sort of distance between my thumb and what I'm actually tapping on. Things just happen so smooth and so fluid and, and it just feels like I'm interacting with something directly instead of through, you know, through this piece of electronics.

• 1:12:58Ben Gilbert?

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

• 1:13:13David Rosenthal?

  Wow. Interesting. So I've heard that from other people, too. And I still haven't tried one in person. I'm really looking forward to. But how do you feel? So like, in the keynote, right? Like, they definitely positioned the iPhone X as, you know, the future, you know, of iPhone, the future of computing, you know, the next 10 years. Do you feel? And I was thinking and hearing that, like, I don't know that the phone is the next 10 years of computing. Like, how do you? But how do you feel now, having used it?

• 1:13:47Ben Gilbert?

  So I think I've talked on the show before about how I want there to be this world where it's just maybe like the watch and the AirPods or something like that. I think we'll always have a screen of some sort because as good as voices for input, it's terrible for output. So it's really good for consumption to have a screen. I don't think we are three to five years away yet from going phoneless. I think we're gonna have, continue to have phones for a little while longer. I think when Apple says that, it's more about like, you know, we're gonna use OLED and we're gonna use, like, Face ID works so effing well. Like, it's, it's, it's, it's kind of mind blowing. And then when it works in the dark, when I have a hood on and I have my glasses on and it still works, you're like, how on earth?

• 1:14:32Ben Gilbert?

  So there's some of these features where you're just like, if you told me that you were gonna try and build this, build this, even with a massive team, I would tell you that like, ah, that's been tried before and it's kind of impossible because it's really, it's always a terrible experience. Like, all those things are not actually a terrible experience and they feel like they're all baked into one device.

• 1:14:52David Rosenthal?

  Well, well, there you have it. You've got the X, I've got the SE. Next time we get together in person, we're gonna have to.

• 1:15:01Ben Gilbert?

  Yeah, absolutely. I'm gonna, I'm gonna miss the nice, small form factor. You're gonna use this thing and be blown away.

• 1:15:06David Rosenthal?

  Well, but the X is like, it's smaller than the plus form factor, right?

• 1:15:10Ben Gilbert?

  Oh, my gosh. Yeah. When I go and pick up my seven plus again, I realize I felt like I was using a phone that was like too awkwardly sized for me and it like turns out I was. And this one makes.

• 1:15:21David Rosenthal?

  Totally how I feel now, too.

• 1:15:23Ben Gilbert?

  Yeah. Yeah, I also, I'll put this out here. I think the notch is here to stay for a while. Not only do I not think are they going to be able to get rid of those sensors, but I think the notch is the new home button. And it's the thing that makes you know that it's an iPhone if used correctly, which I think most standard OS apps do. You just don't really, it's not an issue.

• 1:15:44David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:15:50Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:16:01David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:16:21Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:16:34David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:16:45Ben Gilbert?

  Well, listeners, thanks for being with us today. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you feel so inclined, we would love a review on iTunes. And we'll see you on the next one.

• 1:16:57David Rosenthal?

  And we'll see you next time.