Link to podcast: https://www.thetwentyminutevc.com/jennifer-hyman/ | 28th June 2023
Sajith Pai: Relevant excerpts & highlights from the transcript I helped organise below (the podcast publisher didn’t have a transcript for this episode). Loved her observations on hiring for strengths (and not worrying about their weaknesses), how going public (and the process of doing so) helped her relook at her business in the right light and reorganise the costs, why she thinks growth hacking / paid marketing corrupted businesses and made them invest in the wrong part of the funnel etc. Very good podcast episode for anyone in consumer brands / fashion to listen, or you can read the excerpts below! (The machine-edited transcript – didn’t have time to edit the entire transcript – is here, but do note has several errors and omissions. I have edited the below excerpts and highlights however.)
AHA moment, idea inspiration for Rent The Runway (“15 years since the idea, 14 years since the launch”)
Jennifer : Yeah. Moment was my sister going into credit card debt after buying an expensive dress that she knew she was only gonna wear once. and really this idea of why in clothing, we have to buy things that we own forever was the only option. And couldn’t there be an option for rental? Couldn’t there be an option for a closet in the cloud where the closet could actually change with you as your life evolved and changed.
I think that the demographic we were going after really did get it. I mean, women in their twenties and thirties who were the primary segment we were targeting at the beginning of Rent The Runway, understood that they were going out and buying dresses to be bridesmaids and to go to holiday parties and to celebrate events that they were wearing once or twice and then throwing away. I think that the rest of the universe, it took a little bit longer.
But one of the things that I, you know, shared with investors and really shared as well with even designers who I had to convince that this was a good idea, is that the concept of Rent The Runway is not a new idea. Renting clothes existed in another form already, and it was the majority of the fashion industry. Fast fashion is clothing rental. Whenever you go into H&M or Zara and you buy a top that you is cheap, that you know that you’re gonna wear once or twice and then push the back of your closet, that is renting the runway. You’re renting something. You’re using something for a short period of time where it has utility in your life, and then you don’t need it anymore. And what we were really doing with Rent The Runway is really taking fast fashion, making it way more financially sustainable, giving you the real aspirational brands, making it environmentally sustainable and doing it in a personalized tech forward way.
What she learnt since launching RTR
Jennifer: …figuring out what are the investments that this company is going to make over time to create sustainable competitive advantages. I think an idea is a dime a dozen. And, you know, the success of a company is really based on execution. Execution is based on where you choose to spend your human capital resources, and really directing your human capital towards things that are gonna create sustainable competitive advantage in the market is really one of the most important lessons to me of entrepreneurship.
Hiring great talent
Jennifer: I just will spend however long it takes in an interview with someone getting to know them as a person. I’ll say tell me about yourself, and they might start at their first job, and I was like, no. I don’t let’s start at where you were born. Where are you from? Tell me about your family. Do you have siblings? Tell me about your parents. I wanna know who made them and what made them who they are. And you’re getting a sense of is this person the sort of person that is going to put, you know, the company before themselves, is this person gonna be a missionary?
Is this person entrepreneurial. It does this person have great values. And that shows up in how they talk about their life experiences.
Harry : …what you said about founders and how they describe their siblings, if I had Doug Leone on the show from Sequoia. And he always asked, tell me about your relationship with your siblings. and how they describe that relationship to him is one of the most meaningful kind of signals of who they are as a person.
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Jennifer : Honestly, like, unless people are happy in their lives, they’re never gonna be happy at work, and they’re never gonna be able to give a 110%. And if you’re constantly pushing them to be like, they don’t have any time with their family. They don’t have time to go out. They don’t have time to see friends. Like, you’re texting them at 7, 8, 9, 10, 11 PM. Like, how are they gonna live a life? Like, life is about more than just your career. I think that the people that are actually best in their careers have really full and rich and amazing lives. Like, I happen to have a great marriage, great kids. I have a ton of friends. I put a lot of emphasis on those friends. I feel that now this is not to say that I don’t send out emails at 9, 10, 11 PM. I do.
Jennifer : I put my kids to bed. I have some time where I can, like, look at my email, but I don’t expect that someone’s gonna get back to me. when I send that email at 9, 10, 11 PM, I think that, like, if you want people to be ride or die intense for you at the company, which I do at Rent the runway. Rent the runway is an intense environment. where I want people to give it their all.
I don’t think that anyone can give something their all unless they have a rich totality to their life. And that is something that I very much encourage here. I think that people who put in 247 just related to their job are just gonna burn out. And you might have them with intensity for a year or 2, but then they’re gonna be gone. And I really like when people are at rent the runway for many years, and can grow their careers here and can transform even what they dream of for their own careers by nature of surprising themselves here, taking on completely new experiences and opportunities that they didn’t even expect that they’d be able to do.
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Jennifer: The other thing that I’ve learned from Fabrizio Freda, CEO of Estee Lauder (she is on the board) that I take into my leadership is strength based leadership. So Fabricio is a huge proponent that you should spend almost no time thinking about someone’s weaknesses and how to improve them. And you should identify what are the things that make someone great, what are their superpowers, and how do you accelerate those strengths. And I have a 100% adopted that within my own leadership style, you know, let’s focus on what makes someone amazing.
Let’s give them even more runway for them to be even more amazing in this area. And let’s build teams around those strengths. We don’t even have to waste our time on the weaknesses. And you know, some moderate improvement in weakness like who cares when we can 10 x your strengths.
‘How I run my co today as a public company is how I wish I had run my business as a private company’
Jennifer: As a private company, the name of the game in terms of how you raise capital and how therefore you grow is by saying and proving that you are different that I’m this special snowflake, that I’m gonna disrupt the way that women wear clothes. That, everything about Rent the Runway is different, we’re not a fashion company, we are a technology logistics data company that happens to be in the fashion business etc.
How you run a public company is by looking at all of the ways that you’re the same as everyone else in your industry, and by nature of looking at the ways that you’re the same, it’s very clear to see and distinguish what are the aspects of your business model and your P&L that actually give you a competitive advantage.
And what are the aspects where you’re falling behind? As a public company, because I was evaluated against a lot of other apparel companies, really, for the first time, I had never been compared to apparel companies before I went public. And then I went public and everyone suddenly like, you’re in the apparel business. You’re in apparel business. And I started looking at the P and Ls of all of these other apparel companies, and I realized, oh my god, my competitive advantage is the thing that as a private company that I thought, was a problem. At Rent the Runway, which seems so obvious right now, is our product cost as a percentage of revenue, meaning the cost of our inventory. The cost of our inventory is about 30% of our revenue. And in most apparel businesses, apparel of the inventory cost is 50 to 55 percent of revenue. Now why is our inventory cost only 30 percent of revenue?
It’s because we make very high ROI on all of the garments that we have because of the special business model that we have of this subscription to fashion and of renting clothes. So we have this kind of 20 to 25 point margin advantage versus other apparel retailers as it relates to this really unique aspect of ensuring that the clothing that we have remains in perfect condition, that we can rent it out to dozens of women, etcetera.
Now what it also does is it points out very clearly, well, where are your biggest opportunities to improve? So when I lined up my P&L versus others in the apparel space, and I looked at everyone in the apparel space when they were around $300m in revenue, which is what we were last year. So when Etsy had around $300m in revenue, when Asus, when Revolve, when everyone, and by the way, you can’t call yourself a special snowflake anymore when you’re looking at everyone in the apparel business because there’s a lot of really special companies there as well, and this the problem that I realized we had was our SG and A as a percentage of revenue was completely out of whack, for the size of business that we were, we just had a much bigger expense base than we should have had. We took massive steps in correcting that via restructuring that we executed last year, but also really over the last 2 years have been executing a financial transformation of the business which has effectively doubled our gross margins since our IPO, and, you know, improved our gross margins, Q4 of 2021, our gross margins were around 30%, q4 of 2022, our gross margins were 44%. So we’re making really big improvements in, you know, the margin profile of the business. based on running this business kind of as a public company.
So, yeah, I wish I could go back and say, yeah, like, we’re doing something that’s really cool. It’s really innovative. We’re getting people to rent clothes and use our service a 100 days of the year. But don’t talk to yourself as a private company as if everything you do is different, the harm in doing that is then you can make an excuse for all of your metrics.
How RTR’s relationship with top luxury brands has evolved
Jennifer : … brands used to be very confused by me, hate / love the runway, because first at first glance, you think, Why on earth would anyone buy clothes if they had the option to rent, to subscribe? Fast forward now 15 years, Who’s my customer base? I have a customer base number 1, and my average subscriber spends about $2000 with me per year. So this is a luxury customer that I have. This puts me on par with, you know, LVMH or with top luxury beauty companies for how much people spend per year. Number 2, my customer is between 25 45 years old. So I have a wealthy young customer who is not currently the customer of these Designer Brands. I’m introducing these Designer Brands to my customer often for the first time. In fact, 98% of my customers say, that they’re renting brands on rent the runway that they have never owned before. So this is my first experience wearing Ola Johnson, or my first experience wearing Proenza Schooler. And then, I am able as the customer to determine whether I wanna purchase that product. So brands, at this point, see me as one of their most powerful marketing engines because they’ve now have 15 years of data where they assess where do their top customers come from. And most of their top customers they see found out about the brand and started using the brand via Rent the runway.
Now then ask yourself, well, why is that? Why has Rent The runway become so powerful as a marketing engine for the designer fashion industry? And that’s because younger women are busy. They’re not entering physical retail stores in the way that they did 20 or 30 or 40 years ago. And what is rent the runway really? It’s a replacement to the retail store. You don’t have to go into Saks 5th Avenue and go into a dressing room and try things on anymore. You can get a RTR to send the garment to your home. You have 5 designer items in it. You can wear them in your real life.
You could try them on in your bedroom. The dressing room is now the street. It’s now your office where you’re showing up in this new Proenza top, and you’re getting compliments.
You’re figuring out if you love it. Like, that’s what the department store dresser room used to be 50 years ago. So for brands, we’re kind of innovating what they’ve always known to be true, which is when women put on the clothes, they have a 70% higher likelihood to wanna purchase the clothes.
Jennifer : We have a 100% retention of all the brands who have ever worked with us. And this is in an industry where typically, if you’re a fashion brand, you change somewhere between 10 20 percent of your distribution partners annually.
Designers have been really, really hurt over the last few decades because of fast fashion. Right?
Fast fashion has come in and copied their designs, put it out into the universe, into the global marketplace much quicker than the designers at much lower price points, and that’s where all the money has moved. Over 80% of what’s purchased in this nearly $3tn global market is fast fashion now.
“Performance marketing and growth hacking ruined a generation of startups”
Jennifer: …when we were growing up so we first raised money in 2009, And that was really the beginning of an explosion in venture capital funding throughout the US. So I think that some of, like, the highest years of venture capital funding were, like, 2011, 2012, 2013. At this exact time, there was we were running parallel with the massive success of companies like Facebook, Google, and companies like Expedia and booking.com. And so when you raised money from a VC in 2009 or in 2011, The first thing they would say to you is you need a growth team. You need to start doing growth hacking. And why did they say that? Because there was a culture and with the big personality attached to it, Chamath, at Facebook, that had built this unbelievable growth machine and it worked for Facebook.
And what was growth hacking? Growth hacking was like looking at your PDP (Product Detail Page) and saying, okay, I wanna change this button from blue to green, and that’s going to increase the conversion rate on page. It’s gonna get more people to be to go further down the funnel. Now Facebook, that might have worked because they were dealing with such a big revenue base that moving the metric, 1 100th of a point could actually add up to a $100m or something significant.
But for startups that were very small, changing the button color from blue to green might give you some small, you know, perception that you were changing your metrics, but all of that would be erased, you know, within a few months because what you were doing is you weren’t delivering any incremental value to your customers. You weren’t actually fundamentally changing their experience in any way whatsoever to make your brand stickier to them, to make your customer experience better. So what happened was all of these startups wasted an incredible amount of time and money on building these growth departments that were just like pushing chess pieces around the board. And all of the gains would be erased, you know, whether it was within 6 months or was it 18 months and nothing would fundamentally change in the customer experience. So, VCs at the time were taking the lessons learned that were true lessons from mega companies and they were falsely thinking that those mega lessons could actually benefit small companies, which they did not.
Then let’s move to paid (performance) marketing. Okay. So you had these successful companies. You had Facebook. You had Google. They wanted you to spend money on ads. Those VCs also were investors in Facebook and in Google, and they wanted you to spend money on those ads. And there was a mathematical equation at the time where, you know, people just thought, hey, we’ve outsmarted decades of marketing knowledge. What we can do here is we can buy an ad for a really cheap CAC, we can buy a search ad on Google. And if the LTV is higher than the CAC, we should do this all day long cha-ching. Let’s just keep on doing this.
What people couldn’t foresee or couldn’t think about is buying that search ad on Google just like growth hacking is doing nothing to fundamentally improve your customer experience. Buying the search ad on Google is doing nothing to fundamentally improve your brand. How do brands grow? Brands only grow based on the organic growth of a business. You gotta get people to love your brand. You gotta get people to talk about your brand. The best brands on earth are brands that grow virally and organically. And the way that you do that is you invest in either delivering a much better customer experience, or you invest in building a brand that is so emotionally resonant with the consumer that they want to come to you. So, what was happening at the time was there was almost this arrogance within Silicon Valley of which by the way, I’m viewing myself as being a part of that. I’m not saying, oh, they made me do this.
I did this, made these mistakes as well. there was an arrogance where we thought that we were smarter than these old school companies. who were spending their marketing dollars on things like retail stores and billboards and events and connecting with their customers and all of those things. And you know what? We were completely wrong because buying an ad on Facebook or buying an ad on Google might give you a quick hit. It might give you a quick conversion, but that is fundamentally doing nothing to breed brand loyalty to improve your customer experience, to build morality, to build organic growth, and I think billions of dollars have been wasted there where they should have been built on the real nuts and bolts of kind of building customer experiences.
A business that I think did this absolutely right that the one tech company that I can think of well, there’s 2 that have done it really, really well. One is obviously Amazon. where they have invested all of their time and effort on improving their customer experience. I mean, the evolution of Amazon is just like, let’s give customer more and more and more value so that it is actually ridiculous to think about not having a subscription to Amazon Prime in your life.
Another company that I think has done this unbelievably well and their change has really happened more over the last few years is Airbnb, where Airbnb has said, let’s forget everything about paid marketing. Let’s take all of our dollars and invest it into the brand, into PR, into product innovation that’s actually gonna breed loyalty, and I think now, like, over 90% of Airbnb’s traffic is organic.
At Rent the Runway, over 80% of our customers have always come to us organic So we’ve never really fallen privy in the same way to paid marketing. Like many of our peers, paid marketing has always been less than 10% of our revenue. But even that 10% of our revenue that I was spending on paid marketing, I wish that I can go back in time and say, that was stupid. I should have spent that on more engineers to build better customer experiences for my users, or I should have spent that on more brand marketing that would have enhanced the value and the, you know, emotional connection between my customers and my brand.
Most of the time, if you look at startups over the last 15 years, the funnel has been inverted, meaning that you would take marketing spend less than 10% of that marketing spend was often spent on top of funnel or mid funnel activities and 90% was spent on bottom of funnel. Bottom of funnel being direct response paid marketing. That’s the problem. The funnel should have never got into a place where 90% of your marketing budget was spent on those kind of ads that make you feel good. It makes you feel like customers are coming in and converting. But are those customers really staying with you? Like, the only way that customers are gonna stay, the only way way that you’re gonna get high net promoter score, is if alongside you kind of getting them at the front door, you’re improving that customer experience, or you’re improving your brand. And I think that we all had limited resources. Also, over the last 10 to 15 years, or many of us did, and the allocation was off, where people were favoring just the paid marketing around growth as opposed to the continuous improvement of the customer experience. So it’s really just about, like, how do you allocate your resource and I think way too many resources went to bottom of the funnel, number 1, within the marketing budget, and then way too many resources in general went to marketing over things like, fundamentally improving your product experience, improving your operational experience, the things that actually keep customers loyal.
Harry: Is that not Growth? We have 20Growth interviewing the world’s biggest growth leaders. They will work on things like simplifying a home screen or removing annoying features or elements which cause churn. And so when you say, like, do people stay? Do they retain? That is uncertain. This is why growth is difficult because the definition is kind of blurred. Like, to some people, that’s just product teams. And to some people, that’s gross. Do you see what I mean?
Jennifer: That there’s always within a product team, there is always an element in any business of simplification. Let’s make this site easier to use. Let’s take this, like, archaic, screen away, and reduce this reduce this the friction around the product funnel. Yeah. That that’s a part of the health of a product organization.
But growth hacking is something that’s fundamentally different. That is literally you are hacking the difference between, you know, changing your font color from this to that, like moving this line from here to there, you’re running hundreds of experiments at one time that may show up mathematically in the metrics, but to the customer, like, does it really freaking matter? Like, does that change their fundamental relationship with Rent The Runway? That you move the button from here to there. Like, the only thing that’s gonna get customers to stay with Rent the Runway longer is if they wear more clothes for me, they get more utility out of those clothes. They feel awesome every single day wearing them and the experience of receiving those clothes becomes easier and easier over time.