Hindsight is 20/20, but anyone who passed on Stitch Fix would have to be kicking themselves.
Just four years into the journey and already employing over 1500 staff, Katrina Lake’s online fashion empire is about as wildly successful as it gets.
A Harvard Business School graduate, Katrina was in her mid-twenties when she recognised a serious disconnect between what online shoppers wanted, and what they were actually getting.
Her sister, a fashion buyer in New York, always looked effortlessly-styled and Katrina’s wardrobe benefited as a result. Having her own personal source of sartorial inspiration proved to Katrina that “you could be super fashionable, even on a shoestring budget.” What she wanted to know was, could she leverage that bespoke style service and deliver it efficiently online?
“I felt there was an experience missing… it was [a] broken process because there was no way to incorporate the conversation you could have with an in-store associate. I wanted to prove this concept to myself as much as to future investors,” she says.
For a US$20 styling fee, Stitch Fix mails customers five curated items and the recipient can pick through and pay for the keepers, before returning the threads they don’t like, free of charge.
“Initially I tested it out on friends of friends. We’ve now got algorithms that guide the way we look [at] a piece of apparel, from its fit to its shape and style. But back then it was much simpler, like, ‘If this is a yellow dress and the person doesn’t like yellow, then it’s out!’”
As far as ideas go, she points out, it was “so easy to test”.
“I had a credit card with a US$6000 limit and I would use that to buy products from retail stores,” she explains about the early days.
“If they [customers] wanted to keep it they could pay me back the retail price, and if not I would return the clothing within 30 days. There are probably some boutiques in Boston where I’m still blacklisted for returning so many items!”
Blacklists aside, her retail escapades paid off. Katrina quickly discovered that merging a personalised styling service into a retail venture was a winning prospect.
But before she could begin gathering a data bank and fine-tuning her software, she needed to fund her fledgling fashion start-up.
One of Katrina’s early mentors introduced her to respected venture capitalist Steve Anderson, founder of Baseline Ventures. While Katrina is coy regarding facts and figures, she previously spilled to Forbes that she raised US$4.75 million in Series A funding, with Steve as her first official investor.
With a celebrated pedigree of proven performers in his investment portfolio, Steve wouldn’t have handed his cash over to Stitch Fix if he couldn’t see some serious dollar signs in its future. After all, this is the guy who ploughed the first seed investment into Instagram and was also an initial investor in OMGPOP, which Zynga bought for almost US$200 million. He’s invested in Heroku – a service that enables developers to build and run applications entirely in the cloud – which Salesforce paid US$200 million for.
In Stitch Fix, Steve could also clearly see the potential.
“It’s pioneering a new wave of e-commerce and addressing a multi-billion-dollar market opportunity that bridges the gap between the fashion industry and the consumer’s desire to access new and hard-to-find brands,” he said at the time of his investment. “The company’s early success with women across the country proved that consumers were ready for truly personalised fashion, delivered regularly to their doorstep.”
It’s Stitch Fix’s simple, yet sophisticated business model that has resonated with everyone from housewives and stay-at-home mums to career women and uni students throughout the US. Katrina says women aged 20 to 60 routinely use the service, hailing from the tiniest towns through to the biggest cities.
The process begins when shoppers fill out a detailed online survey, which feeds into a complex algorithm that narrows down outfit options.
Customers also grant Stitch Fix access to their social media feeds, which provides a glimpse of their everyday lifestyle and helps the team of “scary good” personal stylists to massage the choices selected by the software.
Understanding customer behaviour has been a huge learning, says Katrina.
“For most women, the definition of a successful shopping experience is buying two items. But how many units does she want to see first? We discovered that 10 is too many because the choice becomes overwhelming, but three is too few. Five is a good number that allows her to find the two things she really loves.”
Today, with two giant distribution centres and thousands of “fixers” employed to deliver tens of thousands of packages each month, Stitch Fix buys and holds inventory up to six months in advance.
The business has now attracted US$46.8 million since launching in February 2011, backed by Baseline Ventures, Lightspeed Venture Partners, Benchmark and Western Technology Investment.
As outright impressive as these figures are, Katrina confesses fundraising was “definitely a little bit of a slog.”
“It wasn’t easy! There are very few women investors – I think about four per cent are women – and that dynamic in and of itself was difficult,” she says of pitching a fashion start-up.
“For instance, I had one investor who only took on one or two start-ups a year. He’s a great guy and I really respect and admire him, but he said to me, ‘I love your concept and your team, but I just don’t think I’m going to be able to get passionate about women’s dresses.’ It’s hard to fault him about that.”
Katrina is also keenly aware her business model – which involves trading millions of dollars worth of product – is not altogether appealing to investors.
“Carrying inventory is not sexy! If you compare Stitch Fix to, say, an iPhone app that retails for a few dollars, you can see how it presented a lot of challenges in demonstrating mass market potential,” she says.
“There are other models that have less risk involved, by using drop-shipping or selling on consignment, but those didn’t work for us. Some of the venture money that we raised literally went directly into buying clothing, which is a scary proposition for investors. The proof was ultimately in the very attractive pudding; sales were strong in the first year of operation in 2011, and nearly tripled in 2012, with exponential growth year-on-year since.”
In retrospect, Katrina believes it was a blessing they didn’t have investors falling at their feet in the early days. It has allowed them to grow steadily, albeit quickly, without making too many wrong turns along the way.
“It was really good that we didn’t have US$10 million to buy inventory for a customer we didn’t quite know yet,” she says.
“As I believed this could work, the extent to which we’ve had organic growth and referrals has continued to surprise me. It’s just a simple product-market fit. That said, I still have pinch-me moments on a daily basis. Seeing Stitch Fix in the wild, like seeing someone wearing a Stitch Fix top in a bar, feels very surreal. It’s been an amazing journey and we have a lot to be proud of as a team.”