Episode 49: The Stitch Fix IPO

In episode 49 of Acquired, hosts Ben Gilbert and David Rosenthal dissect the Stitch Fix IPO, emphasizing the company's challenge in competing against Amazon in the e-commerce space. They explore Stitch Fix's differentiation strategies, the narrative shifts from its private company days to its public debut, and the role of personal stylists in their unique business model. Additionally, they delve into the company's data-driven approach, led by former Netflix VP of Data Science Eric Colson, and the implications of their IPO's pricing and performance. The episode also touches on sponsor Statsig's impressive growth and the vibrant community in Acquired's Slack channel.

• Stitch Fix IPO discussed due to its unique positioning in e-commerce.
• Stitch Fix competes with Amazon during its rise to prominence.
• The company's journey from private success to a disappointing IPO.
• The importance of narratives in IPOs from both company and investor perspectives.
• The transition of the podcast's focus from acquisitions to IPOs.

"Today we are covering the Stitch Fix IPO, one that David and I have been excited to cover since the S-1 came out, because it's a fun read."

• The quote highlights the anticipation and interest in discussing the Stitch Fix IPO.

"There's a big part of IPOs which are narratives, and that's both narrative from the company side and narrative from sort of the investor side from the street."

• This quote emphasizes the role of storytelling and perception in the IPO process.

• Stitch Fix was founded by Katrina Lake and Erin Morrison Flynn.
• Katrina Lake was a Harvard Business School student, Erin had been a buyer for J.Crew.
• The initial idea was to create an online fashion company named Rack Habit.
• They recognized an opportunity to serve women with personalized styling services.
• The company was analytical and data-driven from the start, using surveys and spreadsheets.
• After securing seed financing, the company moved to San Francisco and rebranded to Stitch Fix.

"Stitch Fix was founded...in late 2010, to when Stitch Fix was founded. And it was started by two women."

• This quote introduces the founders and the inception period of Stitch Fix.

"They raised $750,000 from Steve Anderson at Baseline Ventures... He was the first investor in Instagram and many other great companies."

• The quote indicates the early support from a notable investor, emphasizing the potential seen in Stitch Fix.

• Stitch Fix employs a model of "assisted commerce."
• Customers, referred to as clients, fill out a style profile and are matched with a human stylist.
• A "fix" is ordered on a subscription or on-demand basis, with a $20 styling fee applied to purchases.
• Each fix includes five items, with incentives to keep all five for a discount.
• The target demographic includes individuals who care about appearance but dislike shopping.
• Stitch Fix's model caters to those valuing convenience and time-saving.

"The way it works is that consumers, or as Stitch Fix calls them, clients, they come to the site and then they fill out."

• This quote explains the initial interaction between Stitch Fix and its clients.

"Each box that they send you fix has five items... If you keep all five, you get a 25% discount on the entire purchase."

• The quote details the structure of the Stitch Fix offering and the incentives for customers.

• Mike Smith, former COO of Walmart.com, joined as Stitch Fix's COO.
• Eric Colson, former VP of Data Science at Netflix, became a pivotal figure in developing Stitch Fix's recommendation algorithms.
• The hires signaled a shift towards a technology and data-driven approach.
• Stitch Fix positioned itself as the "Netflix of fashion," leveraging data for personalized styling.

"The second, and perhaps even more important hire they made is they hire a guy named Eric Colson."

• The quote underscores the significance of Eric Colson's hiring and his impact on the company's direction.

"They really saw retention rates go up... and they really sort of reworked the whole process for, how do we learn about people and get the minimum amount of information."

• This quote reflects on the improvements in customer retention and the effectiveness of data utilization after strategic hires.

• Stitch Fix identified a societal shift towards convenience in shopping.
• The company's success challenged the assumption that women prefer traditional shopping experiences.
• Stitch Fix's model was not immediately obvious to investors, indicating an innovative approach to e-commerce.
• The service appeals to a broad demographic, including those with limited time for shopping.

"Opportunities to start new businesses aren't always formed by technological shifts. They're often formed by societal shifts."

• The quote highlights the importance of societal trends in creating business opportunities like Stitch Fix.

"It turns out there's actually a lot more people, both men and women, that are in that category than you might otherwise think."

• This quote speaks to the unexpected breadth of the market that values convenience over traditional shopping experiences.

• Stitch Fix aims to deliver the best possible customer experience to ensure customer retention.
• They employ 3,400 stylists working remotely, part-time, at around $15 an hour.
• All fixes (clothing selections) sent out are human-assembled.
• Stitch Fix claims to be the Netflix of clothing due to its recommendation engine.
• Stylists receive output from the data engine which collects various customer data points.
• Innovations include storing detailed measurements of clothing rather than standard sizes.
• The onboarding process includes questions about fit preferences to fine-tune future selections.

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

This quote highlights the human element in Stitch Fix's service, despite the comparison to Netflix which is known for its algorithmic recommendations.

"They store all the measurements about each article of clothing."

This quote points out the company's unique approach to inventory management, focusing on specific measurements rather than general sizing.

• The first fix sent to a customer is a best estimate based on onboarding data.
• Continuous feedback is crucial for refining future selections.
• The recommendation system learns from feedback on fit and preferences.
• A data science backend is necessary to manage the scale of personal styling.
• Machines are considered better at sizing than humans due to structured data storage.

"It's really important as part of the process to constantly give feedback."

This quote emphasizes the importance of customer feedback in improving the accuracy of Stitch Fix's personalization.

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

This quote suggests that data-driven approaches to sizing can outperform human estimations.

• Stitch Fix has a detailed webpage explaining their backend algorithms.
• The company's engineering blog, Multithreaded, showcases their technical focus.
• The technology enables scalability and precision in styling and sizing services.

"If you go to algorithms dash tour dot stitch fix.com, there's this awesome explanation of how the stitch fix works on the backend."

This quote points to the company's transparency and pride in its technological capabilities.

• Co-founder disputes and lawsuits can be significant hurdles for startups.
• Stitch Fix experienced difficulty in raising funds and was close to running out of cash.
• A bridge round and a subsequent Series A round provided crucial funding.
• The company's valuation and revenue grew rapidly over a few years.
• Benchmark's investment at a $40 million valuation marked a turnaround for the company.

"The company apparently is only eight weeks away from running out of cash and not being able to make payroll at that point."

This quote illustrates the financial challenges Stitch Fix faced before securing additional funding.

"Benchmark does at a $40 million post money valuation."

This quote indicates the valuation at which Benchmark invested, reflecting the company's growth potential.

• Katrina Lake, CEO of Stitch Fix, is known for her analytical and rational approach to business.
• The company focused on being unit economic positive and profitable early on.
• Detailed financial projections and understanding of inventory costs were key to management.
• Stitch Fix balanced growth with profitability, expanding into new business lines.

"She's highly, highly rational about her business and very good at reasoning from first principles."

This quote describes CEO Katrina Lake's analytical approach to business decision-making.

"It's really important if you're going to run this business effectively, that you understand, you know, all of the financial aspects."

This quote underscores the necessity of a comprehensive understanding of finances in the retail space.

• Employees at Stitch Fix experienced a fast-paced and dynamic work environment due to rapid growth.
• The company's management team, including veterans from Walmart and Netflix, contributed to its scalability.
• Revenue and EBITDA increased significantly within a few years of founding.

"It must just feel like whiplash to turn your head that fast and change your mindset that significantly and constantly be learning all the new tools that your technology team is putting out."

This quote conveys the intense and rapid changes employees may have experienced as the company scaled up.

• Stitch Fix's IPO was affected by market skepticism, partly due to other disappointing e-commerce IPOs.
• The company went public at a lower price than initially targeted.
• Despite a less enthusiastic public market reception, the IPO still provided value to employees and shareholders.
• The discussion suggests that the business model and customer perception may differ from investor concerns.

"They didn't get a pop. They ended up IPOing for, you know, a lower price per share than they were aiming to."

This quote reflects on the less-than-expected performance of Stitch Fix's IPO in the public market.

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

This quote suggests that despite the IPO's underperformance, it should not be viewed as a major setback for the company.

• Subscription services like meal kit delivery have a lower engagement and retention than expected, leading to customer churn.
• The addressable market for subscription services is smaller than anticipated, which increases marketing costs as the core customer base is saturated.
• Companies like Stitch Fix have matured and are facing difficulties in acquiring new target customers.

"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."

• This quote highlights the issue of customer retention and engagement in subscription services.

"The addressable market for a service like that is also much smaller than people might have thought."

• This quote points out the overestimation of the potential market size for subscription services.

"Stitch fix is fairly mature in terms of saturating their target customer base."

• This quote indicates that Stitch Fix has reached a saturation point in its core market.

• Stitch Fix initially grew with minimal marketing costs through word of mouth and non-technology based marketing, acquiring customers inexpensively.
• The company's early growth was efficient, with substantial revenue against relatively low advertising spend.

"They didn't have to use all the traditional marketing techniques that you would see that are costly and help you really, really scale to the masses."

• This quote describes Stitch Fix's initial growth strategy that avoided costly marketing techniques.

"In 2016, fiscal 2016, where they do 730 million in revenue, they spend 25 million in advertising."

• This quote provides a specific example of Stitch Fix's efficient marketing spend relative to its revenue.

• As Stitch Fix's core market became saturated, the company had to significantly increase marketing spend to attract new customers.
• Despite tripling advertising expenses, revenue growth did not keep pace, indicating a less efficient customer acquisition strategy.

"In 2017, fiscal 2017, 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 shows the sharp increase in Stitch Fix's marketing spend and the disproportionate revenue growth.

"The new customers, the marginal new customer that they're trying to acquire is harder to find."

• This quote explains the difficulty and increased cost of acquiring new customers as a company grows.

• Existing Stitch Fix customers were churning or ordering at lower rates, and new customer acquisition became more challenging.
• Cohort analysis indicated that customers tend to spend significantly less after their first year with Stitch Fix.

"Clients, as they call them, end up spending on average less than half in the second year."

• This quote reveals the trend of declining spending among existing customers of Stitch Fix.

• The S-1 filing requirements do not fully reflect the current methods for understanding business performance, leading to potentially incomplete public disclosures.
• Stitch Fix's S-1 provided some cohort data but lacked comprehensive customer acquisition cost details.

"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 outdated requirements of the S-1 filings in providing a clear picture of a company's health.

"Stitch fix does they kind of do half the job in their s one."

• This quote acknowledges that while Stitch Fix disclosed some helpful data, it did not provide all the necessary information for evaluating customer acquisition costs.

• Stitch Fix's narrative focuses on being a well-run company with efficient capital use and a unique market position.
• The company's IPO may provide liquidity for founders, investors, and employees, as well as capital for future growth and acquisitions.

"We've done something that at the outset seemed crazy, that we would find this quadrant of the two by two matrix of people of all genders who enjoy looking good but don't enjoy shopping."

• This quote describes Stitch Fix's unique value proposition and target market.

"We're an extremely well run company, and we've done a great job managing this business."

• This quote emphasizes Stitch Fix's self-perception as a well-managed and successful business.

• Stitch Fix aims to compete with larger e-commerce companies like Amazon by focusing on personalized service and data science.
• The company might need to create its own products to fully realize its vision, similar to Netflix's strategy with original content.

"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."

• This quote states Stitch Fix's ambition to be a leader in personalized e-commerce.

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

• This quote draws a parallel between Stitch Fix's potential strategy and Netflix's approach to creating original content.

• Stitch Fix must balance the need for growth with the scrutiny of Wall Street regarding customer acquisition costs and marketing investments.
• The company's future success may depend on its ability to offer differentiated products and services using the data it collects.

"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."

• This quote highlights Wall Street's focus on the cost-effectiveness of Stitch Fix's growth strategies.

"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."

• This quote suggests that Stitch Fix's ability to create unique products will be critical for its future growth and differentiation.

• The era of brick-and-mortar companies acquiring successful online e-commerce platforms is highlighted.
• Examples of acquisitions include Bonobos, Jet.com, and Trunk Club.
• Stitch Fix's decision to remain independent and pursue an IPO is discussed, emphasizing their belief in the company's enduring value.

"I mean, 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 e-commerce companies that are doing really well."

• This quote illustrates the context in which Stitch Fix decided to go public, at a time when similar companies were being acquired by larger, established brick-and-mortar businesses.

• The importance of a company's belief in its own direction and the implications of choosing an IPO over acquisition are discussed.
• The reference to Snapchat's IPO and the choice between accepting stock/cash from a potential acquirer like Walmart or AOL is made.

"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. If you don't, you should take Walmart stock or Walmart cash, right?"

• The quote raises the question of conviction in a company's strategy and the decision-making process between going public or being acquired.

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• The decline of traditional brick-and-mortar retail and the concurrent rise of e-commerce are discussed.
• Stitch Fix's founder Katrina Lake is credited with accurately predicting and capitalizing on this shift.
• The struggles of established retailers like JC Penney, Macy's, and Sears are mentioned as indicators of the broader trend.

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

• This quote summarizes the overarching trend of e-commerce growth at the expense of traditional retail, a trend that has been widely recognized and reported in the financial industry.

• The efficiency of Stitch Fix's customer acquisition and payback period is examined.
• The company's ability to quickly recoup customer acquisition costs is attributed to high margins on goods sold and successful data science applications.
• The discussion includes speculation on the exact payback period, which is estimated to be between nine to 18 months.

"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."

• This quote addresses the topic of customer acquisition efficiency and the challenge of determining the precise metrics from available financial disclosures.

• The difference between Silicon Valley's hype around a company and the stock market's more rational evaluation is discussed.
• Stitch Fix's performance in the public market, despite the hype, is noted.
• The concept of the stock market as a "voting machine" versus a "weighing machine" is brought up, suggesting that Wall Street may sometimes understand companies better than the tech industry does.

"But the stock market didn't vote based on hype. They voted based on some really rational. I think, as we've discussed concerns about the future prospects of the business and its growth prospects."

• This quote reflects on the stock market's response to Stitch Fix's IPO, indicating that the market's assessment may have been more grounded in the company's fundamentals than in the surrounding hype.

• The financial benefits of the IPO for Stitch Fix's stakeholders are discussed, including founder Katrina Lake's earnings.
• The potential for significant future growth is considered, drawing parallels to the success of Jeff Bezos and Mark Zuckerberg.

"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 million."

• This quote provides specific details about the financial gains for Stitch Fix's CEO following the IPO, highlighting the substantial rewards for company founders when going public.

• The timing of Stitch Fix's IPO is debated, with suggestions that an earlier IPO might have been more advantageous.
• The impact of external factors, such as the reception to Blue Apron's IPO, on Stitch Fix's IPO timing and reception is considered.
• The difficulty of optimizing IPO timing is acknowledged, with a recognition that the true impact of the IPO will only be known in the future.

"I think they probably should have gone public a year ago. And this is an example of, like, there's so many things about timing that are out of your control."

• The quote discusses the challenges of timing an IPO correctly and the influence of uncontrollable external factors on a company's decision to go public.

• Personal recommendations, or "carve outs," are shared, including Kareem Abdul Jabar's book and the iPhone X.
• The iPhone X is praised for its innovative features and user experience, suggesting a significant leap in technology.

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