Episode 49 The Stitch Fix IPO



In episode 49 of the "Acquired" podcast, hosts Ben Gilbert and David Rosenthal discuss Stitch Fix's IPO, providing insights into the company's unique position in the e-commerce space against giants like Amazon. They explore Stitch Fix's business model, which combines data science with personal stylists to offer a tailored shopping experience, and analyze the company's financial health, including its rapid growth, profitability, and challenges in customer acquisition costs. The episode also touches on the potential impact of the IPO on Stitch Fix's future strategies, such as expanding its product lines and leveraging public market capital for growth. With special attention given to the company's efficient use of capital and its ability to attract top talent, the hosts critically assess the timing and outcome of the IPO within the broader context of retail transformation and investor skepticism.

Summary Notes

Introduction to Stitch Fix IPO Discussion

  • Ben Gilbert and David Rosenthal discuss the Stitch Fix IPO in episode 49 of Acquired.
  • Stitch Fix is an e-commerce leader competing against Amazon during its prime growth period.
  • The hosts are intrigued by how Stitch Fix can compete and differentiate in the e-commerce space.

"Today we are covering the Stitch Fix IPO, a one that David and I have been excited to cover since the S-1 came out, because it's a fun read. It's fun to compare and contrast against other S-1s coming out recently. It's an e-commerce leader that is going up against Amazon in Amazon's absolute heyday and rise to prominence."

The quote explains the hosts' interest in Stitch Fix's IPO because of its unique position in the e-commerce market, especially against a giant like Amazon.

The Narrative Around Stitch Fix

  • Stitch Fix had a strong performance as a private company, but experienced a disappointing IPO.
  • The narrative includes both company and investor perspectives.
  • The company narrative is what they want consumers and investors to believe.
  • Investor narrative includes the media and analyst community's perspective.
  • Narratives are more prevalent in IPOs than acquisitions due to the roadshow and pricing strategies.

"Yeah, and this is one that is really tailor-made for our narratives section, because for the longest time, the narrative when Stitch Fix was a private company was this company is crushing. Know 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."

The quote highlights the contrast between Stitch Fix's strong private performance and the less impressive public debut, which is central to the narrative theme.

Pilot as a Sponsor

  • Pilot, a startup accounting firm, sponsors the episode.
  • Pilot offers accounting, tax, and bookkeeping services to startups and growth companies.
  • The company emphasizes outsourcing non-core activities to focus on what improves the product and customer experience.
  • Pilot's clientele includes notable companies like OpenAI and Airtable.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup-focused accounting firm in the US."

This quote emphasizes Pilot's role as a comprehensive financial services provider for startups, highlighting its growth and market position.

Acquired Community and Slack Channel

  • Acquired has a Slack channel with over 1000 members where listeners can discuss technology news and episodes.
  • The Slack community is an extension of the podcast and allows for real-time interaction among fans.

"Now that reminds me, we have a slack now with over 1000 people. If you go to acquire FM, you can join the slack."

The quote serves to inform listeners about the Acquired community on Slack and encourages engagement.

Stitch Fix's History and Founding

  • Stitch Fix was founded in late 2010 by Katrina Lake and Erin Morrison Flynn.
  • The company started as Rack Habit and later rebranded to Stitch Fix.
  • The founders were motivated by a desire for convenient, professional-looking clothing.
  • The initial concept involved detailed customer surveys and personalized clothing selections from boutiques.

"So, Stitch Fix, before we get into the much discussion that we will have around the narrative section, but first, let's go back just almost exactly seven years ago, in late 2010, to when Stitch Fix was founded."

The quote sets the stage for discussing the origins of Stitch Fix and its evolution over time.

Key Hires and Growth

  • Mike Smith, former COO of Walmart.com, joined Stitch Fix as their COO.
  • Eric Coulson, former VP of Data Science at Netflix, joined to lead Stitch Fix's data science efforts.
  • These hires were pivotal in shaping Stitch Fix's growth and data-driven approach.

"And the second, and perhaps even more important hire they made is they hire a guy named Eric Coulson. And Eric had been the VP of data science at Netflix and the chief algorithms officer."

This quote underlines the significance of Eric Coulson's role in bringing data science expertise from Netflix to Stitch Fix, which was crucial for the company's strategy.

Stitch Fix's Business Model and Customer Profile

  • Stitch Fix employs human stylists to curate clothing for clients based on detailed style profiles.
  • The service caters to customers who care about their appearance but do not enjoy shopping.
  • Stitch Fix's target demographic includes busy individuals who value convenience.
  • The business model challenges traditional assumptions about shopping preferences, revealing societal shifts towards convenience.

"And it wasn't entirely obvious when it started. I think a lot of people thought, oh, something like Trunk Club, that makes sense for men. Men don't like to shop, but women, of course, they like to shop."

The quote reflects on initial skepticism about Stitch Fix's model and the revelation that there is a significant market for people who prioritize convenience over the traditional shopping experience.

Stitch Fix's Business Model and Technology

  • Stitch Fix claims to be a recommendation engine, the "Netflix of clothing," with a large remote workforce of 3,400 stylists.
  • Stylists receive data-driven suggestions from the company's algorithms based on customer information and feedback.
  • The company stores detailed measurements of each clothing item in their inventory rather than relying on standard sizing.
  • Customers provide initial size preferences during onboarding, which Stitch Fix uses as a starting point to refine future selections.
  • Feedback on each "fix" (shipment of clothes) is crucial for the system to learn and improve sizing recommendations.
  • The technology allows scaling personal styling, which would be unmanageable for stylists without data science support.
  • Stitch Fix emphasizes the importance of machine accuracy for sizing over human estimation.
  • The company has an educational page and engineering blog to explain their backend algorithms.

"every single fix that's sent out is human assembled, and yet they're claiming they're a recommendation engine and that they're the Netflix of clothing."

This quote reflects the hybrid nature of Stitch Fix's service, combining human stylists with data-driven recommendations to personalize clothing selections for customers.

"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."

This quote explains the meticulous approach to inventory management that allows for more accurate and personalized clothing recommendations.

"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."

Feedback is critical to the system's learning process, allowing for better personalization over time as indicated by this quote.

"a machine is actually way better at doing sizing than a human would be by eyeballing things."

This quote highlights the advantage of using data and algorithms for sizing, which can outperform human estimations, especially at scale.

Stitch Fix's Growth and Investment Challenges

  • Katrina and her co-founder Aaron Flynn had a dispute leading to Flynn's departure and a lawsuit, which was later settled.
  • Despite early growth, Stitch Fix struggled to secure funding and faced cash flow issues.
  • Seed investor Steve Anderson provided a $2 million bridge round when the company was close to running out of cash.
  • Lightspeed Venture Partners led a modest Series A round of $4.75 million, reflecting cautious investor sentiment.
  • Bill Gurley of Benchmark was impressed by Katrina's financial acumen and invested $12 million at a $40 million valuation.
  • Katrina is known for her analytical and rational approach to business, with a focus on profitability and solid financial planning.
  • Stitch Fix's revenue and EBITDA growth were impressive, leading to a $30 million investment round from existing investors at a $300 million valuation.
  • The company's rapid growth posed challenges and learning opportunities for employees.

"Katrina and Aaron Flynn, her co-founder, get into a bit of a dispute that results in Flyn, in Aaron Flyn leaving the company and actually filing a lawsuit against Katrina and the company."

This quote details a significant early challenge for Stitch Fix, with internal conflict leading to legal action.

"Steve Anderson does a $2 million bridge round for the company, bridges them to the series A."

When Stitch Fix was in a critical financial situation, this quote shows how Steve Anderson's bridge funding provided crucial support.

"Bill Gurley... decides right then and there that he wants to invest."

Katrina's financial projections impressed Bill Gurley, leading to a substantial investment from Benchmark, as this quote captures.

"they do 73 million in revenue... then the next year... they do 343,000,000 in revenue and 42 million in EBITDA."

These figures illustrate the remarkable revenue and EBITDA growth of Stitch Fix, showcasing the company's financial success and potential.

Stitch Fix's IPO and Market Reception

  • The company's IPO was initially targeted at $18 to $20 a share.
  • Concerns from investors, possibly influenced by other e-commerce IPOs like Blue Apron, led to a downsized IPO, pricing at $15 a share.
  • The public market's reception was lukewarm, with the company trading at just under a $1.5 billion market cap post-IPO.
  • Stitch Fix's stock price eventually reached within the initially targeted range, trading above $18 a share.
  • The IPO strategy and performance might reflect different needs for Stitch Fix compared to other businesses, with less emphasis on a first-day trading pop.

"they end up downsizing the ipo, and then on November 16, they do price the IPo at $15 a share under the range that they were shooting for."

This quote indicates the lower-than-expected IPO pricing, suggesting a mismatch between the company's momentum and investor sentiment.

"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."

The quote emphasizes the complexity of the IPO process and the varying objectives of stakeholders involved in taking a company public.

"I'm not looking at the drop before the IPO or the trading immediately afterwards as significantly disappointing."

Despite the IPO's initial performance not meeting expectations, this quote reflects a perspective that the outcome was not necessarily negative for Stitch Fix.

Market Saturation and Customer Acquisition Challenges

  • Stitch Fix has matured and is near saturating its core customer base.
  • As the core customer base is nearly fully tapped, acquiring new customers becomes more expensive.
  • Analysts and commentators like Ben Thompson have observed this saturation.
  • Stitch Fix grew initially through word-of-mouth and non-technology-based marketing, which was cost-effective.
  • However, as growth slows, the company faces increased marketing costs to reach less-targeted customers.

"Stitch fix is fairly mature in terms of saturating their target customer base. And you can see that it's worth."

This quote highlights the maturity of Stitch Fix in terms of market penetration within its target demographic, suggesting limited growth potential within that segment.

"The amount of money that you have to spend in marketing to then go acquire further customers ends up being a lot more because those customers are much harder to reach and acquire because they're not your target customers."

This explains the increasing customer acquisition costs (CAC) as the company tries to reach beyond its core customer base, which is more difficult and expensive.

Advertising Spend and Revenue Growth

  • In fiscal 2016, Stitch Fix spent $25 million on advertising against $730 million in revenue.
  • Advertising spend increased to over $70 million in fiscal 2017, while revenue growth slowed.
  • The increased advertising spend did not result in proportional revenue growth, indicating diminishing returns on marketing investment.
  • Analysis of cohort behavior shows existing customers spending less over time, necessitating increased spending to acquire new customers.

"That jumps almost three x the advertising spend up to over 70 million and revenue again grows nicely, but not nearly at the same rate that it had grown in the past."

This quote indicates a significant increase in advertising spend that did not correlate with a similar increase in revenue growth, suggesting less efficient customer acquisition.

S-1 Filing and Public Disclosure

  • S-1 filings do not always provide a complete picture of a business's health due to outdated requirements.
  • Companies can be "coy" in their disclosures, highlighting the need for better public metrics, such as cohort analysis and CAC to LTV ratios.
  • Stitch Fix's S-1 partially reveals customer cohort behavior but omits detailed acquisition costs.
  • The lack of transparency in S-1 filings can misrepresent a company's performance to potential investors.

"The sections that are required in an s one are not actually congruent anymore with understanding exactly how that business is doing."

This quote criticizes the current S-1 filing requirements for not providing a clear understanding of a company's performance, suggesting the need for more relevant metrics.

Company Narrative and IPO Justification

  • Stitch Fix is presented as a well-managed, capital-efficient company with impressive growth and profitability.
  • The company's future is tied to personalization in e-commerce, leveraging data science and human judgment.
  • The IPO provides liquidity for stakeholders and a public currency for potential acquisitions.
  • Stitch Fix may need to balance growth expectations with sustainable economics post-IPO.

"This is a cash flow positive business with really meaningfully positive EBITDA."

This quote emphasizes Stitch Fix's financial stability and profitability, which is a key part of the company's narrative and justification for its IPO.

"They're contribution margin positive, profitable on the first order that a new customer makes with them."

This quote highlights the company's effective cost management, where they profit from the first transaction with a new customer, supporting the argument for their IPO.

Future Strategies and Growth Potential

  • Stitch Fix may need to focus on creating its own supply to differentiate and better meet customer demands.
  • The company's ability to innovate and compete with giants like Amazon will be critical to its future valuation.
  • The IPO provides resources for potential acquisitions and investments in growth initiatives.
  • Stitch Fix's strategy contrasts with Amazon's by focusing on profitability and unit economics from the outset.

"They're going to have to become even more like Netflix, where they're making their own quote unquote content as well."

This analogy suggests that Stitch Fix's success may depend on its ability to produce its own unique products, similar to how Netflix creates original content, to differentiate from competitors.

"One other thing to discuss here before we move on to tech themes is they went the IPO route."

This quote raises the strategic decision for Stitch Fix to pursue an IPO, suggesting alternative paths like acquisition were possible but not chosen, which may have implications for the company's long-term strategy and independence.

Acquisition of Sister Brother Company

  • The sister brother company was acquired by a larger entity, identified here as "mean."
  • There were opportunities along the way for the sister brother company to take alternative paths.
  • A firm belief in the independence and enduring nature of the sister brother company was a guiding principle.

"of sister brother company got acquired by mean. I assumed along the way there were opportunities to do, 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 know."

This quote suggests that despite potential opportunities to change course, there was a strong commitment to maintaining the sister brother company's independence and long-term vision.

The Snapchat IPO Belief

  • The importance of belief in a company's direction is highlighted, referencing a previous episode on the Snapchat IPO.
  • The decision to take stock or not is influenced by the belief in the company's future.

"It's a little bit like, how much do you believe that? I'm remembering 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, you should take stock, right?"

The quote addresses the significance of confidence in a company's trajectory when making decisions about stock options, drawing a parallel with the Snapchat IPO discussion.

Avoiding AOL Stock

  • A cautionary reference to taking AOL stock is made, suggesting potential pitfalls in accepting stock options from certain companies.

"You know, don't take AOL stock."

This quote serves as a warning, implying that taking stock in a company like AOL might not be a wise decision, possibly due to its historical performance.

Sponsorship Announcement

  • Statsig is introduced as a new sponsor for the episode.
  • The CEO of Statsig, Vijay, was previously featured on the show.

"Our sponsor for this episode is a brand new one for us, Statsig."

The quote announces Statsig as a new sponsor, indicating a partnership between the podcast and the company.

Vijay's Background and Statsig's Purpose

  • Vijay's experience at Facebook is highlighted, where he developed a significant mobile app ad product.
  • Statsig is described as a modern tool for feature management and experimentation.

"Before founding Statsig, Vijay spent ten years at Facebook where he led the development of their mobile app ad product, which, as you all know, went on to become a huge part of their business."

The quote provides context on Vijay's expertise and the potential value he brings to Statsig, based on his successful tenure at Facebook.

Statsig's Capabilities

  • Statsig enables product teams to ship features faster, automate A/B testing, and measure feature impact on business metrics.
  • The platform offers real-time product observability with visualizations and a powerful stats engine.

"Statsig is a feature management and experimentation platform that helps product teams ship faster, automate A/B testing, and see the impact every feature is having on the core business metrics."

This quote explains Statsig's functions, emphasizing its role in enhancing product development efficiency and data-driven decision-making.

Statsig's Customer Base

  • Notion, Brex, OpenAI, Flipkart, Figma, Microsoft, and Cruise Automation are mentioned as Statsig customers.
  • The platform's versatility in managing AI product features is highlighted.

"Customers include Notion, Brex, OpenAI, Flipkart, Figma, Microsoft and Cruise Automation."

The quote lists some of Statsig's notable customers, showcasing the platform's adoption across various industries and suggesting its effectiveness.

The Decline of Brick and Mortar and Rise of E-commerce

  • Stitch Fix's timing in capitalizing on the e-commerce trend is praised.
  • The decline of traditional retailers like JCPenney and Macy's is noted alongside Stitch Fix's growth.

"The decline of brick and mortar and the rise of ecommerce. This is one where it's in every freaking ibanking deck that you see now and research report that you see now."

This quote discusses the significant industry shift from physical retail to e-commerce, a trend that Stitch Fix correctly anticipated and leveraged.

Fast Customer Acquisition Payback Period

  • Stitch Fix's fast payback period for customer acquisition costs is analyzed.
  • The company's ability to send customers desired items and the resulting low churn and high retention rates are key factors.

"A fast cost of customer acquisition payback period. It's tough to see exactly what it is from the s one, but the bottom line is that it's really fast and this is a combination. It's on the order of nine to 18 months."

The quote underlines Stitch Fix's efficient customer acquisition strategy, with a rapid return on investment, contributing to the company's growth.

Stock Market Perception vs. Reality

  • The stock market's reaction to Stitch Fix's prospects is contrasted with Silicon Valley's hype.
  • The stock market's rational concerns about Stitch Fix's future growth are acknowledged.

"Is the stock market a voting machine or a weighing machine? And I actually mean based on the amount of buzz that Stitch Fix the company has had in Silicon Valley over the past few years, they have a great team."

This quote introduces the debate on whether the stock market values companies based on short-term hype or long-term fundamentals, using Stitch Fix as an example.

Stitch Fix's IPO Outcome

  • Katrina Lake's successful financial outcome from the IPO is discussed.
  • The potential for Stitch Fix to grow significantly in the public markets is considered.

"And Lake picked up 17 million in cash the morning the IPO, she owns 15% of the company. So post IPO, her shares were worth about $250,000,000."

The quote provides specific figures regarding Katrina Lake's earnings from Stitch Fix's IPO, illustrating the substantial monetary benefits for company leadership following a public offering.

Grading the IPO

  • The IPO's long-term benefits for Stitch Fix are uncertain.
  • The timing of the IPO and its potential as a catalyst for future growth are debated.

"Super high variance, because 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?"

This quote reflects on the criteria used for grading an IPO's success, emphasizing the importance of long-term strategic benefits over immediate outcomes.

Carve Outs

  • Personal recommendations for a book by Kareem Abdul-Jabbar and the iPhone X are shared.
  • The iPhone X is praised for its innovative features and user experience.

"It's the iPhone X. David and I talked about how you were getting the iPhone se, and there was nothing impressive about the X that you could tell."

The quote reveals a personal endorsement of the iPhone X, contrasting initial skepticism with the actual experience of using the device.

Crusoe's AI-Focused Cloud Infrastructure

  • Crusoe's partnership with Nvidia and focus on AI workloads are mentioned.
  • The environmental benefits and cost savings of Crusoe's unique energy strategy are highlighted.

"So Crusoe, as listeners know by now, is a clean compute cloud provider specifically built for AI workloads."

This quote introduces Crusoe as a specialized cloud provider for AI, emphasizing its commitment to clean and efficient energy use for computing.

Final Thoughts

  • The episode concludes with a call to action for listeners to subscribe and review the podcast.
  • Appreciation for the audience's participation is expressed.

"If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client."

The quote encourages listeners to engage with the podcast by subscribing and providing feedback through reviews, fostering a sense of community and ongoing dialogue.

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