Early this year Amie Fineberg, who has been my amazing assistant for over 10 years, mentioned that she and several other employees at Benchmark had fallen in love with a new ecommerce service, and that I might want to check it out. The company, which the founder cleverly named “Stitch Fix,” had a remarkably unique offering compared to other women’s fashion experiences. Customers are first asked to fill out an in depth profile to help identify their size, style, and preferences. Then, on the customer’s requested date, the company sends a personally styled offering (a Fix) of five items (previously unseen) to the individual to try on in her own home. You only keep and pay for what you like, and send back what you do not. Stitch Fix keeps track of what you keep, what you don’t, and why and integrates this your profile, growing smarter over time.
Having read the majority of Peter Lynch’s investment books, I knew not to ignore the overwhelmingly positive feedback from our team. It turns out that the majority of the women in our office were rabid fans of the service, and what’s more, so were many of their friends outside of Benchmark. Awareness of the service was clearly spreading virally through word of mouth. As I continued to learn more about the company, I found that Stitch Fix was commanding a greater share of its’ clients annual clothing budget. Lastly, I asked a few women that were not customers to try the service. Even those that started skeptically came back enthused. I immediately reached out to the founder and CEO, Katrina Lake, who had previously worked for another Benchmark portfolio company in the fashion space, Polyvore.
To be candid, I entered my first meeting with the company with some skepticism. Despite Benchmark’s strong association with ecommerce during the late 1990’s due to the success of companies like eBay, we have not been particularly active in ecommerce in the past several years. Fundamentally, we share the common concern that many of the new “Ecommerce 2.0” companies lack a core competitive advantage or material barriers to entry. A new pricing or packaging model does not by itself represent a meaningful core differentiation, and the rising abundance of “subscription” or “flash sales” companies heightened our concern with regard to barriers to entry. Also, many of these companies were built with heavy doses of advertising spend, a clear red-flag in our book.
In addition to market concerns, I had the unique experience of working with Dan Nordstrom and the team at Nordstrom.com in August of 1999. While I am extremely proud of that team’s accomplishments (the parent company recombined Nordstrom.com in 2002 and the direct division now has revenue of over $1.25B and is the fastest growing unit inside of Nordstrom), I built a healthy respect for the complexities and difficulties of managing women’s fashion inventory. Seasons, styles, sizes, and high industry-wide return rates all combine to create numerous opportunities for failure. Only with precision execution can one hope to succeed.
Somewhere very early in my first meeting with Katrina, these concerns began to fade quietly in the background, and I began to have a deep respect for the fundamentally unique company she is building. For starters, the business metrics are quite compelling. The company has clearly “struck a chord” with consumers. The majority of its growth is from word of mouth, and both frequency and share of wallet are high. Customers love feeling special and they love the “surprise” Stitch Fix delivers. Katrina herself is equally impressive. Not only does she have a remarkable feel for her customer, but she also has a keen awareness for the business and supply chain issues that can trip-up naive ecommerce founders. Katrina has also proven herself in the recruiting field, having recruited Eric Colson from Netflix to run analytics and algorithms, Mike Smith from WalMart.com to run operations, and Jeff Barrett from Opower to build engineering. Likewise, she had recruited both Julie Bornstein from Sephora and Sukhinder Singh from Google as advisers. Most importantly, I became convinced that Stitch Fix was one of those rare companies where the unique product advantage also contributes to a unique business model advantage.
Back in the mid 1990’s I had a front row seat to watch Dell’s ascendance from a small company in Austin, Texas to the world’s largest manufacturer of personal computers. I began covering Dell as an equity analyst for First Boston in early 1994, and over the six years that followed, Dell’s stock would appreciate 100x; a remarkable and perhaps unprecedented run of value creation. The engine at the core of that growth was a highly advantaged customization offering that took years and years for Dell’s competitors to figure out. By building products to order rather than inventory, Dell’s inventory turns, capital efficiency, and ROIC were dramatically better than the competition. And due to falling competent prices, Dell’s inventory turn advantage also contributed to a gross margin advantage. Dell’s product offering advantage, building to custom order, simultaneously created a business model advantage.
Stitch Fix’s personalization technology creates a very similar dynamic within women’s fashion. Through a better understanding of the customer, and using data to predict future orders, Stitch Fix has an engine that simultaneously better serves the individual desires of the customer and also contributes to higher inventory turns, fewer write-downs, higher capital efficiency and higher ROIC. This is business model nirvana.
Today, we are thrilled to announce that Benchmark has led a $12mm Series B investment in Stitch Fix, and that I have joined their board of directors. I look forward to working on the BOD with Steve Anderson of Baseline Ventures, with whom we co-invested with in Instagram, as well as Julie Bornstein whom I had the pleasure of working with at Nordstrom.com.
While we were working on the investment, the company has continued its remarkable momentum. On August 23, Stitch Fix announced that it had shipped its 100,000th Fix, and today the company announced that it has grown 500% since its last financing round this past February. The company also continues its remarkable string of recruiting victories, today welcoming the arrival of three amazing executives. Lisa Bougie joins from Nike as Chief Merchandising Officer, Meredith Dunn joins from Stella & Dot as Vice President of Styling, and Jennifer Olson joins as Chief Marketing Officer from the same role at Crate & Barrel. Each of these executives shares a remarkably similar perspective on the uniqueness of Stitch Fix as we do. The company is also announcing two new board members in addition to myself, Marka Hansen, former president of North America for Gap, Inc., and John Fleming, previously EVP of Walmart and CEO of Walmart.com.
The promise of “Big Data” is that we can enter the age of personalization, providing a unique customer experience for each and every user. Yet in practice it is remarkably hard to affect such a reality, and it is even harder to “personalize at scale.” In order to deliver its offering, Stitch Fix has analyzed over 500 million individual data points. And despite having shipped over 100,000 Fixes, the company has never shipped the same Fix twice. Benchmark could not be more excited about the opportunity to work with Katrina and her team at Stitch Fix. The special differentiation of the company gives it not only the opportunity to be a leader in its field, but also the opportunity to revolutionize an entire industry.
For male readers, while you cannot experience the offering, it makes an amazing gift for loved ones in your life. And you don’t have to worry about picking out the right clothes! https://stitchfix.com/gifts