Exit Strategy S1:E7 //Chris Davi: Scaling to $170m in 4 Years and Then Going Bankrupt
Loot Crate: Bootstrapping, Bankruptcy, and Resurgence - June 19, 2020 (almost 5 years ago) • 01:05:24
Transcript:
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Moiz Ali | Alright, welcome to the new episode of the Exit Strategy podcast. We're here with Chris Davis from Loot Crate. Chris, I'm super excited to meet you! You and I have never chatted before, which rarely happens to me in the eCommerce industry. I'm really looking forward to our conversation today.
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Chris Davis | yeah no excited to be here and looking forward to it and super good to connect | |
Moiz Ali | So, Loot Crate is a subscription box for geeky products for **$20 a month** or around that price. Is that a fair way to describe Loot Crate, or is that completely wrong?
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Chris Davis | That's, I mean, that's kind of the origins of Loot Crate and one of our products now. But, you know, we've gotten into 25 different subscription lines with a bunch of different price points and offerings.
The original concept was a $20 common box, featuring all the best products across pop culture, getting $40 to $60 of value for that $20. It was really a curated experience. So that's the origin, but it's evolved quite a bit.
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Moiz Ali | Yeah, is this one of those instances where the origin is still the bread and butter of the business? Like, in Native Deodorant, is the origin the bread and butter of the business? Or is this the place where the origin is like, you know, ancient history? Like Amazon, where it's like, "Okay, yeah, we sell books, but we sell everything else too." No?
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Chris Davis | It's all our big product line and really has that holistic approach to anything across gaming, film, and entertainment. Yeah, genre field. Yep. | |
Moiz Ali | gotcha and when did the business launch when did you guys like actually start the business | |
Chris Davis |
We launched in 2012 and actually launched at a Startup Weekend in Los Angeles. I've gone to a bunch for fun, and it was like... there's no better place to launch a new company than at a Startup Weekend.
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Moiz Ali | What happened to startup? Do you go on stage to pitch the business? What does a startup weekend look like?
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Chris Davis | It's literally a two-day hackathon. I met my co-founder there, so we had everything teed up, launched it, and the business took off kind of from day one. We were shipping a product 30 days later.
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Moiz Ali | did you come up with a concept during the hackathon or no | |
Chris Davis | that was before yeah I came | |
Moiz Ali | In with the concept, I knew which one. Yeah, okay, gotcha.
Okay, you launched in 2012. I've done a bunch of research about Lucret. I'm a huge fan of the business. By 2016, you were doing $100,000,000 in revenue. Yeah.
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Chris Davis | We're doing, you know, almost $100,000,000. We're doing like $170,000,000 in revenue in 2016. Yep. | |
Moiz Ali | A $170,000,000 valuation! You're number one on the list of fastest-growing eCommerce companies by Inc. I read that in 2014 you had 200,000 subscribers. By 2016, you've tripled that to 600,000 subscribers.
So, tell me, how the hell did you build a business to do $100 million? You know, in 2012, eCommerce was not what it is today. I was in eCommerce in 2012. Back then, you were trying to buy Facebook likes, which meant nothing. When you posted on your page on Facebook, there were still a bunch of people who were actively engaged.
Today, if you do that, zero people will respond. So, how do you build a business? We interviewed the HubSpot Contacts guys, and Jesse was like, "I asked Jesse how he spent his first $10,000." It's like Facebook and Instagram, of course. It's Facebook and Instagram. What did you do in 2012?
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Chris Davis | So, yeah, we primarily didn't do any of the kind of traditional paid Facebook ads until 2014. Our largest channel was influencer marketing, really focusing on all the new YouTube celebrity folks coming up. My brother had been early at Maker Studio and had launched a channel doing video games and sketch comedy. My co-founder, Matt, had worked with and managed a bunch of those guys.
So, we immediately, even that first weekend, were already pulling in some of these large creators with big followings. We worked closely there and then scaled up. We were originally using any paid spend on Facebook for the first two years to build our pages and buy likes.
Yeah, and then Facebook was like, "No, no, no, no, no more of that." So, yeah, we were... but that was, yeah, Facebook and some of those other channels were really pretty small for us until a couple of years in. | |
Moiz Ali | Yeah, you said you didn't really get into investing, or you didn't start investing in Facebook until 2014. Facebook didn't have an ad engine until 2014. So, in 2012, you were buying YouTube influencers or getting YouTube influencers to speak about the product.
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Chris Davis |
Yeah, exactly. You know, traditional kind of performance affiliate deals. Integrating some of them... we actually integrated and gave equity to some of the larger ones that we want to be part of the business for a long time.
Oh, okay. It was, you know, the product was super compelling and shareable for them. And so we integrated them in the business from day one. So when we were distributing product, they were opening each month and sharing it with all of our subscribers.
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Moiz Ali | Yeah, yeah. So, like, you know, today when I was running Native, I had a really difficult time getting influencers to do any pay-for-performance or affiliate marketing. They were all like, "No, no, no, no. You need to give us X amount of cash before we do this thing, and we don't care how many sales we get."
Some people wouldn't... that wasn't true for 100% of the cases, but it was true for 90% of the cases back in 2013, 2012, and 2014. Are people still doing pay-for-performance?
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Chris Davis |
Totally. And I think, obviously, there was at that time too, all the MCNs [Multi-Channel Networks] were scaling up. So there was, you know, a mix of... like, there were now these professional ad sales teams coming out of big media companies to manage these guys. They're gonna charge massive amounts of money that weren't economical. But a lot of... yeah, I think they also charge more for products that weren't on brand. So when you're doing like a big CPG [Consumer Packaged Goods] integration...
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Moiz Ali | yeah | |
Chris Davis | You're going to pay brand dollars, but if you're a cool brand they like to work with, we were able to build a network directly that way.
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Moiz Ali | Are you still doing a lot of pay-per-performance type of deals, or has it now generally shifted to, "We're a brand as well, we have to pay you upfront"?
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Chris Davis | We've done both. I mean, we've spent, and I think it comes down to everything from, you know, PewDiePie, who's number one, down.
So I think we've had flexible approaches. A lot of it comes back to just that CAC (Customer Acquisition Cost) math. We were doing it with about 500 or 600 active influencers, so we had really great data on view-through and click-through conversion rates.
You could almost calculate what the equivalent would have been if people wanted flat fee payments. So, yeah, just a disciplined approach there.
But, yeah, it changed quite a bit into 2015 and 2016, and I think the market's even shifting again now with a lot of the MCNs (Multi-Channel Networks) dialing back. Now, the CPMs (Cost Per Mille) on YouTube have been coming down in the last couple of months. | |
Moiz Ali | And so, I guess the question is: how many people does it take on your team to manage 500 or 600 influencers? That team we had one per... yeah, yeah. How big is that team?
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Chris Davis | That team, at that time when it was at kind of a peak spend for us, which was in 2016 and 2017, was 5 folks.
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Moiz Ali | 5 folks managing 500 people | |
Chris Davis |
Yeah, because some of it's high-touch, some of it's low-touch. We use basic CRM to communicate, and there's a lot of automation in getting product out. We try to make the deals simple enough and repeatable enough that it wasn't particularly high-touch. But at the end of the day, these are folks that we want to make sure we had people available to talk to.
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Moiz Ali | Yeah, and what were the types of... did you guys test offers with the influencers? If so, what were the offers that worked?
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Chris Davis |
Yeah, I mean, it was really pretty basic. They should be able to have a discount code for their audience for rewarding them. And really, unboxing and showing the product was always the winning approach. You know, doing little pre-roll or mid-roll ads... it's not nearly as effective.
Same thing with podcasts, which is, I think, a very similar marketing medium. Like having somebody openly talk about the products, be genuinely excited - that always worked the best for us.
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Moiz Ali | Yeah, it's crazy how much **authenticity** still gets through with, like, you know, paid influencers. It's like somehow you still can't fake it.
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Chris Davis | it no I don't know why that's | |
Moiz Ali | the case yeah we don't I mean | |
Chris Davis | As a marketer, you don't want it to... you know, as a consumer. Sometimes you're optimistic that this less authentic, more scalable approach is going to work, but it never does.
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Moiz Ali | Yeah, but you know when I'm watching *Game of Thrones*, I'm like, "Okay, all of these guys are doing... oh my god, there's this epic battle, and whoever wins is gonna rule Westeros forever. Whoever dies is gonna die."
There's no authenticity, and yet I'm so engaged. When an influencer is hawking a product versus genuinely excited about it, it's so clear. I don't know if they're not as good actors or if it's just like, you know, human beings have their own lie detector. For sure, we can figure it out.
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Chris Davis | And that's the, I think, the most interesting thing with the influencers. They are the ultimate entrepreneurs. These guys had no startup capital and built an audience of 1,000,000. Their currency has always been being authentic and, yeah, that fan base.
So we found over time that they were never willing to sacrifice that authentic, genuine relationship with their viewers on behalf of some brand that's going to come and go.
Sure, I think it makes the integrations work really well when they do because, you know, their main currency is being trusted by their fan base.
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Moiz Ali | Yeah, and so are you still working with any of the influencers that you started working with in 2012? Has anyone lasted 8 years?
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Chris Davis | yeah some have some I mean a lot of those folks have shifted their approach to and and yeah | |
Moiz Ali | of course | |
Chris Davis | People move now, you know. Some people are Twitch exclusive, and some people are not. It's been really interesting to watch the evolution there. But yeah, we're still working with folks from back and forth in that era. | |
Moiz Ali | And so, like in 2014, you have 200,000 subscribers. By 2016, you have 600,000 subscribers. At what point do you fundraise?
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Chris Davis |
We had taken a really small seed check, $25K, right when we launched. Then we didn't raise again until we were at a $150 million run rate. So we bootstrapped through that whole [period] until 2016.
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Moiz Ali | sorry my internet cut off a little bit you took a small c check did you say it was $25,000 | |
Chris Davis | Yeah, we did a $25K seed check right when we launched with a couple of guys out of LA: Nick Ruff and Dave Waxman. Then we didn't raise again until that Series A.
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Moiz Ali | until the series a in 2016 | |
Chris Davis | yeah so yeah | |
Moiz Ali | So, you're profitable? You're profitable at 200,000 subscribers? Oh, like, because you're burning... there's no way you just burned $25,000 over 4 years. You must be profitable.
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Chris Davis | We were operating essentially just below and at break-even, so we're reinvesting everything.
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Moiz Ali | and how many people are at the team before you raise that series a | |
Chris Davis | we were at probably 60 70 folks at that. | |
Moiz Ali | Okay, and are you like... tell me what's going on in your head?
You know, when Native was doing well, I was like, "This can't be fucking possible!" I can't believe that we didn't have to raise more money in order to build such a big business. I also felt like everything was held together with duct tape because I was like, "I don't know when, like, you know, water is stuck, we're gonna start leaking on this ship."
I really don't know when a torpedo is gonna hit the ship and just blow this whole thing apart. It never happened, but I was constantly worried about that.
What is going on in your head when you know you're doing $100 million in revenue, you've raised $25,000, and at the time, you were not like Casper mattresses? Not everyone knew about it. It was like this DTC darling. Why wasn't it? What's going on through your head?
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Chris Davis | I mean, we were doing the right thing. We were marketing to our audience, which is a different segment. So, we were very focused on our consumer.
For us, as you know, it's a physical distribution business. There is crazy chaos every day, so we were used to that intensity level being at 100%. Being 100% direct to consumer, we controlled the whole funnel. As long as we scaled up different leadership in another area, everything was working.
We controlled fulfillment at that point. We were working primarily with third-party manufacturers on product, and the complexity scaled up month to month. You just got used to more and more of that craziness.
A lot of it was just, like you said, heads down. If there was a problem, we solved it. Then, we really focused on scaling up our capabilities across all those areas. | |
Moiz Ali | Is there... is there, you know, for me, I felt both terrified and invincible, which is a really weird dichotomy, right? Like, you feel like nothing can ruin this, but you also feel like everything is gonna fucking ruin this. Did you have that feeling, or were you just like, "I'm in the weeds. I don't really have time to appreciate what's going on" on a day, you know, on a month, or quarter over quarter?
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Chris Davis | No, both. I mean, that feeling is there depending on when things are going really well and when they're not.
Yeah, that's right. When you're in that rapid growth mode, there are a lot of things going really well. But behind that, there are all the things that you try to keep moving forward.
So we had, you know, port strikes, product recalls, and all kinds of crazy problems that come up. They feel very existential in the moment, and you just try to have some perspective on it after the fact.
But yeah, your cortisol levels spike. Yeah, I...
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Moiz Ali | Love that! Like, where you're just like, "There's a port strike." And, you know, for a long time, when you're growing up and you see something on the news, you're like, "There's a port strike." You're just like, "Whatever, who gives a shit?"
Now, all of a sudden, you're like, "You dumb port workers, get back to work! I need to ship this product!"
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Chris Davis | Can we call someone at the port to get our prices? You know, it's like you're really... you're like, "Oh no, this is..." yeah.
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Moiz Ali | Macro events. Gotcha.
Okay, Chris, we're talking about port strikes and existential threats. You're feeling invincible and fearful at the same time.
Then we were talking about the boxes and what you sort of had in the boxes. You had exclusive boxes, you had Star Wars boxes, Halo boxes. You were doing... you were licensing IP, is that correct?
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Chris Davis | So initially, we were working primarily with third-party manufacturers. Later, we scaled up our own internal product capabilities.
We were basically going out and saying, "What's the coolest product that no one knows about?" We would find it and then work with over 200 suppliers to create something each month. Each box had 4 or 5 items.
We said we could buy anything across the entire licensed product landscape. So we were buying books, apparel, collectibles, and even shipments of DVDs when I was sold. It was like, "Oh wow, anything that needed to be out there, we would go and find and then partner with companies to produce."
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Moiz Ali | And then you ultimately got to exclusive products, is that right? At some point, you were making products that other people had, and then you had exclusive products.
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Chris Davis |
Very early on, even when we were working with third parties, we produced exclusive products for us, which is a big part of the licensed product space. You'll do an exclusive variant that shows up if it's, you know, think about a collectible or something like that. So we would produce... we work with other companies but produce exclusive products with them.
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Moiz Ali | So, did you have to go to Lucasfilm to try and get that exclusivity or those licensing fees? Or did you just go to this third-party manufacturer that sort of had those already?
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Chris Davis |
So that was kind of phase 2 for us, where we actually started taking direct licenses ourselves. At the beginning, we'd go and find somebody that already had that license and work with them on a product. Then over time, we got to a big enough scale where we started taking more of that in-house directly.
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Moiz Ali | Gotcha, okay. Alright, so let's rewind or fast forward again to 2016. You raised a Series A of $18,000,000. It's led by Upfront, is that right? Yeah. And who's the partner on the deal? Is it Mark Stusser or somebody else?
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Chris Davis | greg vitinelli | |
Moiz Ali | Okay, and then you've got, like, I read that you also have Robert Downey Jr. in the round as well, or like his venture arm.
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Chris Davis | yeah exactly his venture arm came in and and often co invest with upfront in those guys yeah | |
Moiz Ali | that's great and so ultimately how many people like put in the money to get to $18,000,000 | |
Chris Davis | upfront was the largest jack I think there was 5 or 6 other investors alongside them | |
Moiz Ali | Okay, gotcha. I read somewhere that you're still a 50% shareholder, or something to that effect, after this round of capital. Between you, your co-founder, and all these guys, you still hold a large chunk of the shares. Is that correct?
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Chris Davis | Yeah, between my co-founder and myself, and then my company equity. Yeah, because we didn't really... we hadn't raised before, so the common still had a large portion of the company. | |
Moiz Ali | Yeah, and so tell me a little bit about how... what made you raise?
Yeah, tell me what made you raise. Like, how do you go from $0 to $160,000,000 in revenue in 4 years? Which is, you know, insane, especially those 4 years when targeting is what it is. But it's even more insane the idea that you did it with $25,000.
What ultimately makes you raise money?
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Chris Davis | So, I think, you know, we spent a lot. We actually kept very disciplined focus on that single Luke Ray product for the first three and a half years and really refined the model. We did a ton of user testing, and the actual product experience got dramatically better over time.
We got to a point where we thought it was necessary to start expanding into different fan verticals. We also wanted to start taking licensing in-house, which comes with a lot of upfront commitments, guarantees, and just a lot more upfront investment.
Then, we were working on a bunch of vertical expansions. We had Major League Baseball and the NBA to launch a sports vertical. We had one software engineer for 200,000 subscribers, and we were starting to get a lot more complex in the model. We needed to build out more around custom text, so we invested in a data science team and an engineering team, along with a lot more in-house product development folks. We were just kind of going to go to this.
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Moiz Ali | when you have 600,000 subscribers you have 1 engineer no | |
Chris Davis | $600,000. So, we probably had 5 or 6 engineers. We were having to take on more of the development internally. But up to $200,000, we were just leveraging a lot of the existing enterprise software.
I think it's a good lesson for a lot of D2C folks. Just like, you know, especially where Shopify is today versus where it was then, you really can get to a pretty massive scale before you need to invest a lot in custom development.
Yeah, so, you know, when we raised, it was to say, "Hey, we think there's, you know, in the $260 billion licensed consumer product space globally, there's a lot of room to scale and grow." If we're going to do that, we need to raise more capital to invest in that and then really ramp up.
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Moiz Ali | And you're not on Shopify back then, right? Shopify isn't what it is today. You're sort of building out your own custom tech.
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Chris Davis |
Exactly. Yep, we were using Recurly and Chargebee early on, and a bunch of these... basically built-for-enterprise software companies that we were kind of hacking together.
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Moiz Ali | And then why $18,000,000? How did you get to $18,000,000?
Do you know a $170,000,000 a year business can raise way more than that? I can't imagine that it's hard to find investors, and I can't imagine that it's hard to raise more money than that.
Why did you choose $18,000,000?
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Chris Davis | Well, I actually was not... it was not an easy time to raise capital. If you remember, in 2015 and 2016, there were challenges with China. There were a bunch of large e-commerce companies that had some difficulties and raised big rounds.
So, it actually was not a particularly easy time to raise. We raised, actually, 18.5 million in equity and 15 million in debt at the same time. So, the total raise at that time was like $30.33 million in a combination of debt and equity.
But we did bring in more capital. However, it was not the easiest time for e-commerce, right? Just because I think a lot of... you know, Fab had some challenges. There were a bunch of... yeah.
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Moiz Ali | yeah sure | |
Chris Davis | It was a... there had been a big investment in 2013 and 2014. A ton of investing into the space, and I think some folks have gotten burned there. | |
Moiz Ali | That's crazy how quickly people forget, right? If it was... yeah, people forgot about Fab in 2015. By 2018, you're back in it, right? We're like, "Great! Let's write huge checks to every single direct-to-consumer business, over-capitalize them, and we'll figure it out later." You know, hopefully, we'll pay for this later or somebody else will pay for this.
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Chris Davis | history repeats yep yeah exactly | |
Moiz Ali | and like history look and the | |
Chris Davis | venture cycles are like yeah | |
Moiz Ali | Yeah, it's almost like the 1917 Spanish flu that we're repeating with COVID. This is like, "Oh yeah, I forgot what happened 24 months ago." I've got milk in my fridge that's that old, you know? Like, that's crazy.
Alright, so you've raised $30,000,000, or around $30,000,000, between equity and debt. And then business gets much tougher. | |
Chris Davis | yes yeah yeah | |
Moiz Ali | I think... tell me, like, what happened? Like, ultimately, you know, the wheels started falling off. But tell me how things went from $170,000,000 to the wheels starting to fall off.
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Chris Davis | So, yeah, I think it comes down to this: we were raising funds to launch and expand both the team internally and our product offerings, as well as a lot of our internal capabilities, all at the same time.
I think a big lesson was that execution risk at scale becomes much more real. We had a lot of concurrent bets out that were straining the business. When we raised funds, we definitely ramped up our burn rate, increased marketing spend, and expanded our product lines. We went from just a couple of product lines to a dozen different subscription lines very quickly.
This led to challenges around inventory and forecasting. We assumed that our core business could continue to grow exponentially while we were marketing other product lines, but that didn't work as well as we had hoped.
We then built out brand teams and tried to distribute purchasing and P&L responsibilities to folks who had really done it at scale before. However, we experienced some margin compression. There were all these little things that chipped away at our progress.
On top of that, the actual product offerings were doing very well, but we were scaling operating expenses and team size more quickly than the business was growing. As a result, we burned through cash too quickly.
Eventually, we had to pivot from a growth orientation to a focus on efficiency and profitability. Plus, we had a large outstanding debt facility, which created a whole other set of challenges.
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Moiz Ali | Know of complexity. So, let's start first with just like the shift from going from no burn to starting to burn money. From a mental perspective, is that difficult to do?
I, like at Native, you know, we didn't burn money. Then all of a sudden, when we had... you know, I was constantly worried about running out of money. We raised $500,000 and we were sort of operating like you guys were. I was like, "If something goes wrong, or if we make a big mistake, or if I make a big mistake myself, I'm not sure the business can afford it."
Once we had P&G's backing, it was hard for me to mentally shift to the phase where I was like, "You know what? We can afford to make a big mistake now." I think as a result of not being able to take advantage of that balance sheet, I admit I made a mistake by not taking advantage of it.
Was it difficult for you to make that shift from being cash flow neutral to burning money mentally? Or were you just like, "Hey, I know how this works. I know we raised this money and we're going to put it..." | |
Chris Davis | I think, you know, there are the basic operating metrics. So, you're looking at your CAC to LTV ratio. You're tracking a lot of those operating metrics closely so you can feel good about the investments you're making. Even the burn rate is important.
I think just the complex reporting and the complexity of such a large organization— we had 300 full-time employees and another 250 temporary warehouse staff—there's a lot of scale and a lot of burn.
Wow, you're doing your own fulfillment?
Yeah, exactly. We had 100,000 square feet in LA where we were doing fulfillment. It's also a bigger ship to turn. There are just a number of challenges. It's difficult to be in multiple modes at once.
I think we'll get into more of that as we talk about the challenges, but like growth, lean efficiency, and cost-cutting—it's hard to be in both mindsets at the same time.
As a leader, as you scale, your organization gets bigger. You're in more markets, you're in more channels, and you have more product lines. You're really handing off responsibility in some of those areas and choosing where to focus. So, yeah, there's just a lot more to manage. | |
Moiz Ali | Yeah, and so you're starting to create a bunch of new boxes. You must be scaling more and spending at the same time in order to try and grow that, you know, continue that exponential growth.
Where are you spending marketing dollars in 2016 to 2018 when you're sort of trying to grow? Have you shifted from YouTube to Facebook, or is it still primarily YouTube?
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Chris Davis | Yeah, so we had a big belief in a lot of these organic channels. Driven by my co-founder, Matt, we had a large social team and various social channels for our different subscription lines. We created a lot of art—around 30,000 to 40,000 pieces of organic content generated by our community. We really had a whole engine working with the community and reinforcing that.
We also made a significant investment in influencers. By then, we were spending a large amount of money on paid Facebook ads—north of $1,000,000 a month. Additionally, we were doing direct response television and had a big investment in podcasts. We’ve probably done around 70 different conventions, which is a unique part of our industry.
For the first couple of years, we actually had a modified school bus that we would drive around to serve as our booth at these conventions. The in-person piece of it was significant. We also engaged in tons of co-marketing. For example, we worked with Marvel's social team to post about any of our manufacturers and suppliers that were in the box that month.
We had a whole set of co-marketing and partnership channels that we explored. We really focused on thinking about what proprietary marketing options we could own, rather than trying to bid against someone on Facebook or Google. We aimed to have those be scalable, predictable channels alongside our other efforts. | |
Moiz Ali | And so, when you're starting to negotiate, let me start with another question. In 2017, did you grow beyond your 2016 numbers, or was there a contraction?
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Chris Davis | No, that's when we started to pull back. Beginning in 2017, at that. Yeah. | |
Moiz Ali | Gotcha. So, 2016 to 2017 was sort of the peak for Marvel, and you were working on exclusive products. You're working with Marvel and not the manufacturer for that licensing. Does that licensing make up a significant part of your cost of goods sold?
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Chris Davis |
It varies a bit, but yeah, it ends up being... you know, the average licensing rates are about 10 to 15% on cost of goods. So it ends up being, yeah, it's material to margin. Yeah, but yeah.
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Moiz Ali |
I think everyone's always curious when a plushie doll comes out. I'm always wondering, "How much of this money goes to George Lucas or Lucasfilm? And how much of it goes to, you know, Harry Potter or WB [Warner Bros.]?" Versus like, the actual person who manufactured it or sold it.
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Chris Davis | yeah it's all it's | |
Moiz Ali | a 10 to 15% 15% | |
Chris Davis | Across... yeah, if you're, you know, if you're Star Wars, you get, you know, up to like 18% to 20% sometimes. But yeah, that's all right, that range.
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Moiz Ali | Yep, it sounds like there is one huge mistake. There is one big thing that you did, and you're like, "This is the mistake we made that sort of made us pull back on the business."
It's sort of like a bunch of little nicks. As you're expanding—you're expanding channels, you're expanding the types you offer, you're distributing P&L responsibility from yourself to other managers—and all of that chips away a little bit. Ultimately, it costs you the growth trajectory that you sort of want to be on.
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Chris Davis | Totally. I mean, I think the other big thing is once you have capital partners in the business, then there's a lot of alignment.
Getting everyone on the same page to get things done is crucial, especially with debt. If you're missing your covenants, you're defaulting on your loan. Lenders are... it's much more of a scaled D to C company problem.
But, you know, debt has very different dynamics than equity. We were dealing with a lot of complexity on that side of the business that was definitely impacting focus on the other side.
We really just decided we have to cut back costs to get to a sustainable level. | |
Moiz Ali | And so, look, was your cat going up a lot at this time? Was this more of an OPEX problem, or was this a "we're spending a lot of money on marketing" problem?
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Chris Davis |
The CAT [Customer Acquisition Cost] had been fairly stable. I think there's definitely increasing costs in some of the bigger channels like Facebook and things like that, that everyone was seeing around that time. It's more dollars moving there, but this was definitely... you know, just more of a kind of structural business issue.
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Moiz Ali | Gotcha. So ultimately, tell me a little bit about the dynamics with debt. I understand that equity is very different from debt. Equity is sort of along for the ride and gets paid when you get paid. With debt, you've got not only to pay them on a monthly basis but also covenants where they're like, "You have to hit certain metrics; otherwise, you're in default of our obligations."
Was the debt tough to deal with? Were they constantly calling you and being like, "Hey, you're not meeting your obligations?" Also, do they think—like you said, you had raised $15,000,000 in debt—do they think that there were $15,000,000 in assets? If they foreclosed upon the business or took possession of the business, would they get the money back?
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Chris Davis | You know, it didn't get to that level really quickly. Folks are trying to work through just like, "What's the plan?"
So we worked through it for quite a while and ended up refinancing them in 2018. A lot of it is just, you know, trying to align. We were looking at bringing in new capital at the same time as we were cutting costs to try to achieve profitability.
So we're out trying to raise equity with, you know, top line not growing the way it had been. What it does, I think, is the more complexity in the capital structure, the more misalignment there could be just in like near-term and medium-term objectives.
You know, there's a learning curve there to figure out how to manage those aspects. | |
Moiz Ali | And is this taking up a lot of your headspace? It sounds like it did because you have to manage not only the equity guys, but also the debt guys. You want to refinance and fundraise again. It sounds like the debt guys get to... it just sounds like it would take up a little more mental energy. Is that right?
Or is this more of a "I'm focusing on this one day a quarter" sort of thing? Or is this actually bothering you? Is there a little thing in the back of your head that you're always thinking about, and it's not going away? I'm thinking about it full time, once a week.
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Chris Davis | No, it's... yeah, for now, probably 2 years is about 75% of my time, right? And really letting the kind of data...
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Moiz Ali | it's managing like 75% of your time I'm sorry | |
Chris Davis | yeah managing% of | |
Moiz Ali | your yeah | |
Chris Davis | Managing all that... everything surrounding that, all of the complexity generated by, you know, figuring out. | |
Moiz Ali | 75% is an insane amount of time | |
Chris Davis | Insane! No, for sure. And that's why I think, yeah, it is an insane amount of time, but it is what it is. You know, the reality is that we had a great team of operators in place too.
But yeah, I think the lesson for a lot of folks is, you know, and I think everyone's probably seeing it now with COVID and the strains on businesses, is that the margin of safety and risk management is crucial. A lot of us who dive headfirst into these businesses are pro-risk.
I think the risk management side is something I've become a lot more focused on. I'm advising folks and helping people out. It's like, just give yourself a lot of margin for error. Because if you don't, you end up spending an enormous amount of time on things that aren't driving customer value and aren't really the core drivers of growth for the business.
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Moiz Ali | The long and medium term... Yeah, absolutely. Look, when Native first raised capital, we raised $50,000 within the first 3 or 4 months of launching the business.
I talked to my brother about it. He actually ran a mobile gaming company that licensed a lot of IP. They created games like a Harry Potter game, a Marvel game, a Star Wars game, and a Family Guy game.
So I was like, "We've raised this $50,000." He's like, "I would never write you that check." I was like, "Why wouldn't you write that check?"
He's like, "$50,000? You get one swing at the bat. If you miss that swing, you're out of money and your business is over. Nobody wants to put in $50,000 and you only have $50,000 in your bank account. You're going to make a mistake and that $50,000 is gone quickly. If you've got $300,000, you can learn from that mistake and swing again, maybe one more time before you're sort of out of money."
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Chris Davis | totally and I'm | |
Moiz Ali | like well I think | |
Chris Davis |
I feel like, and you've probably dealt with this quite a bit, but I see it all the time, especially when you have inventory and you're launching something new. A lot of people get overly optimistic about the first run, and you're like, "Why did you just put 40 of your $50K into inventory you haven't sold yet?"
You know, I think if you're like, "That cash might be the last cash I ever get until I prove something out," you would think very differently about where you put money.
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Moiz Ali | Yeah, that’s great. You know, for us, we were like just-in-time inventory. So, if you bought your deal on a Thursday, we would actually make it probably the next day on Friday and ship it to you Monday or Tuesday.
The number one need we had for a really long time was customer service. People would be like, "I ordered a week ago, you haven't even shipped my package! What the heck is wrong with you?" Which is completely fair.
For us, we were just like, this is the only way we can afford to grow the business. Because if we start putting $40,000 of that $50,000 into inventory, you know, that $10,000 is barely going to last like 3 days.
Now, we're running ads, some random expense comes up, there's this other thing that we didn't realize we had to pay for, and now we're broke.
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Chris Davis | no I I think | |
Moiz Ali | at some. Though yeah sorry go ahead | |
Chris Davis |
No, no, I was going to say... Yeah, as a D2C [direct-to-consumer] company, not having inventory become something that controls your decision-making lets you be a better D2C business. You can really be customer-centric, work on the product, do all this.
If you have, you know, three times the amount you sell in a month sitting in inventory, you start having to:
- Discount it
- Ship it out
- Sell it in ways you don't want to
So I think really tight inventory management lets you stay customer-centric in a really healthy way.
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Moiz Ali | Definitely. To be honest, as soon as we expanded into brick-and-mortar stores, it was a revolutionary change in the amount of inventory we had to hold.
We went from holding small amounts, like 6 to 7 figures, to all of a sudden holding 8 figures of inventory. The first purchase order from a company might be $3,000,000. So, you're better off with $3,000,000 of inventory sitting in your warehouse, ready to ship to them.
That's a great problem to have, don't get me wrong. But when you get them to every Walmart, on a much smaller scale, you're just like, "How am I supposed to have this much inventory? That just doesn't seem possible."
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Chris Davis |
And I think that's the business too, right? Now for Walmart, we did a big retail rollout. All the forecasting and demand planning is... even, you know, shot. It's just so different and so far behind what we can do on the DC [Distribution Center] side that it surprised me at first. But yeah, it's just like there are too many ways to get caught with your pants down.
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Moiz Ali | it's complete garbage | |
Chris Davis | 100% | |
Moiz Ali | Yeah, when at first, we were sort of relying on the retailers to give us forecasts of how much they needed, or to build our own forecast. The retailer would say, "We think you're going to need this," and we were like, "We don't believe that. We don't know. We don't believe that you know what is going on in your own store. We've got this, don't worry about it."
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Chris Davis | yeah 100% | |
Moiz Ali | So, what did you do with the X-ray inventory? It sounds like you were creating these boxes back in 2016 and 2017. I'm sure you were overly optimistic at least once. When you're DTE, how do you discount it?
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Chris Davis |
So that product... if you think about every product in every month, every box is essentially exclusive, right? So we weren't able to resell that. We spun up a much bigger e-commerce business for customers, and so we... you know, wait 90-120 days and give customers access to products. Exactly things like that.
But in general, the better experience is just for the product to be gone when it's gone and to be exclusive. So, you know, we found ways to work through it, but yeah, you gotta be creative.
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Moiz Ali | Yeah, and so then like in 2016, 2017, when you're burning... what is like the peak burn? And then what happens at the end? It sounds like the creditors at some point are like, "Look, we need to recap this."
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Chris Davis | Yeah, no, I think we all kind of realized we needed to get the business where we needed to get it. It was going to be more challenging, you know, raising a Series B. Things like that would be challenging given the changes we had to make to the business to achieve profitability.
So, you know, we cut... if you think about it from peak, we were kind of at $6,000,000 a month in monthly operating expenses. By the time we ended up having to file in 2019, we had cut down to $1,000,005. So we did massive cost restructuring and brought in some really great restructuring advisors to help us think about hard decisions.
I think this is going to be really relevant for folks now. Something I learned through this was that you can do a lot more than you think you can. Giving yourself that flexibility... if we had done that earlier, again, we would have had a lot more flexibility. So we went through a very long process of just kind of rationalizing the cost structure. | |
Moiz Ali | Gotcha. Okay, so if you thought you should cut off expenses earlier, basically, if you had to redo it, you'd say, "In 2016, let me start cutting operating expenses significantly right away."
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Chris Davis | Well, I think, yeah, it's very important. When you're in a growth mindset as a company, that's crucial. However, it's hard to be in a growth mindset and in a cost rationalization mindset at the same time. | |
Moiz Ali | yeah | |
Chris Davis |
And so we were trying to do that dance for a long time where we were... I think, you know, a healthy dose of pain upfront gets you back so you can get back to that growth mindset and keep everybody aligned. Because I think it's difficult to be in two different... I think it's as an organization at once and, you know, you kind of always want to be growth-oriented I think as a company. But sometimes, you know, it's... you just gotta make bigger, harder choices faster.
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Moiz Ali | Sure. So, tell me, like, what are some of the operational expenses (OPEX) that you were able to cut to go from $6,000,000 in OPEX to $1.5 million? I mean, $4.5 million in OPEX is a lot. I'm sure there are many things, right?
I'm sure some of it is personnel. I'm sure it's like, you know, your office space, or maybe you need a 100,000 square foot shipping facility. Some of it may be reducing the number of boxes you have. What are some of the things that you focused on when you're cutting out expenses?
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Chris Davis | Yeah, so, you know, we looked at areas where we could cut costs and identify areas of ownership. We moved to a 3PL in 2019 and built out a much bigger team in the Philippines on the customer support side because we were getting around 40,000 to 50,000 tickets a month.
We kept our core team here in the U.S. and then had a team there to augment our efforts. Going back, we talked to all of our enterprise software vendors and really squeezed those prices down because those can inflate quickly. You realize you have, you know, 150 users of something that actually only 20 people are using.
So, I think we had a great head of finance who helped lead all that. Just like, you know, down the line, every item was an option. We pushed, we cut, and you kind of go through the whole business looking for opportunities like that. | |
Moiz Ali | and how long does it take to go from 6 to 1.5 is that like a a 1 year process | |
Chris Davis | 2 2a half years | |
Moiz Ali | Two years, yeah? Yeah, okay, gotcha. And then ultimately, you file for bankruptcy... you file for reorganization through RBC, is that correct?
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Chris Davis | yes yeah yeah yeah | |
Moiz Ali | And that happened in 2019, so that happened last year. Exactly. Yep, in August of last year.
Look, honestly, I think there's going to be a lot of companies that are facing that this year as a result of COVID, as a result of DTC financing drying up, and as a result of people focusing on profitability.
Tell me what that process, in part, entails. Like, how hard is it to go through that? And what happens on the other side?
From my perspective, what I would imagine is that the equity shareholders are wiped out, the debt holders now become the equity holders, and they've got to put in more cash to recapitalize the business. I think that's what happens. But tell me what happened with you guys and sort of how you went through that process.
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Chris Davis | Totally. I think your high-level overview is pretty accurate.
There's Chapter 11 and Chapter 7. We went through a Chapter 11 process, which is where you're restructuring and really trying to figure out the best way to manage your creditors. You have trade creditors, actual senior lenders, and subordinate lenders—all that stuff. So, you're really trying to go through a process that maximizes the value to creditors.
For us, we had spent more money on legal and professional fees in 2018 than we had on sales and marketing. You just get to a point where you can't grow and muscle your way through it. So, a Chapter 11 restructuring is the best approach.
We went through that in August, and as part of that, we essentially had an auction for the business. The largest creditor bid and acquired the business through that process. It was fairly quick; the acquisition happened in October.
Were there other bidders at the table? A lot of other folks looked at it, but the way the credit bidding works, it's primarily the large creditors that have the best shot at the deals.
The actual process itself, like the Delaware court, is supportive of employees and of keeping the business up and running. Their goal is really to facilitate a fair process and keep the business operating.
From my expectations of the process to how it's all played out, it's been really smooth. The business is growing again. It was obviously disruptive, but it is set up in a way that keeps things from falling apart while you're going through the restructuring itself.
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Moiz Ali | Okay, I want to ask more questions about the restructuring. But before I get there, do you still spend 75% of your time focusing on your cap table and your lenders? Or are you now spending more of your time in the business?
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Chris Davis | No, I mean, I think now, you know, that's all done. That was completed when essentially the business came out of the acquisition process in October.
So, a lot of it has just been about rebuilding customer trust and getting products out. You know, last year, as we were really getting constrained financially, we started to have some delays. Throughout the whole process, we made sure that there wasn't a big impact on the customer experience.
For that last six months, while we were straining to get products out, there were delays and things like that. We have been focused really on turning the customer experience piece around, which often gets lost in all of the company-building and running pieces. That has always been the goal, so the team's really been focused there. Gotcha. | |
Moiz Ali | During bankruptcy, it was just hard to meet not only the financial obligations of the debt holders but also customer expectations. As you're running the business, you have to get a product out on time. So, you're trying to sort of turn that ship around and say, "Hey consumers, we're out of this now. We're going to ship our stuff on time. We're back!" | |
Chris Davis | It's right. That's really even more so the pre-bankruptcy piece. Once you're in bankruptcy and you have the DIP financing, then you can operate in a much more normal course. Your vendors have protection and everything else.
So that was really when we filed in August. It's when we turned all the operating teams' focus on getting all these products that are late in and out, and trying to get back to some kind of normal operating cadence.
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Moiz Ali | And just so people understand, **DIP financing** is like **debtor-in-possession financing**, which means that a lender is going to fund you to continue running your business through bankruptcy. As that happens, they get the **first lien position** because they're basically saying, "This is post-bankruptcy, and we're giving you money in order to continue your business."
So, how much debtor-in-possession financing do you get to continue running the business? So, we had...
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Chris Davis |
We, I think, publicly talked about it. It's a $10,000,000 facility that came in when we were doing that. So that came in and allowed us to handle a ton of this stuff... like, kind of the backlog of things we needed to handle.
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Moiz Ali | And so, what is the cap table? I want to talk about the business as well, sort of post-bankruptcy, and what you're seeing in 2020. But what does the cap table look like post-bankruptcy?
So, you had Upfront and Robert Downey Jr. with $15,000,000 in debt. I imagine Upfront and Robert Downey are now sort of wiped off the cap table. The guy who is your largest lender and put in more money in the debtor-in-possession financing is now your largest equity holder on the cap table.
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Chris Davis |
Yeah, the group that did the acquisition... it's basically a reset of the entity and all that, right? So that group, there's essentially the old company and the new company. Then that whole new company, everything transitions there.
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Moiz Ali | And then, how do you remain incentivized? Because, like, you know, there's that old company, and you were like the CEO of that old company and the CEO of the new company. Do they negotiate with you to give you an equity stake and incentives as well?
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Chris Davis | It happened, I mean, too, in a lot of these cases that, you know, they want some continuity and leadership. Most of the folks at the company today are people who were at the company prior to the bankruptcy.
We're now hiring the team back. My goal has really been to make the transition as effective as possible and work with the team on that. I care a lot about the brand; I want it to survive and be strong.
So I think that's really been the focus: can we get everybody back to a normal operating environment? I think most of the team really wants that. We have a big chunk of the company in design and product development. People want to see a positive story tied to the products we put out in the world.
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Moiz Ali | Yeah, well, one, I certainly think you've been working on the business for 8 years. I can imagine there's an incredible amount of your own personal sweat, blood, and tears built into it.
I think a lot of times people get lost on that. I don't even work at Native today, but I still think about it on a daily basis. I'm like, "This is how I do that." Whenever people tweet about it, they tweet at me and they're like, "I'm trying it." I'm like, "Oh yeah, if you don't have a good experience, let me know."
I'm like, "Actually, I have no financial interest in this. If you tell me you hate it, there's not anything I can do about it either."
Yep, but there is a certain... there's a lot of personal loyalty to the brand that you sort of built, especially if you've been doing it for 8 years. | |
Chris Davis | Totally. I think the customers that are still with us from there... I mean, there's just a lot of them. You want to see it do well, and you want to see it, you know, be something that people love.
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Moiz Ali | Yeah, and so what is working for the brand today? Like, where... what, you know, you must have cut down on operating expenses significantly. You've probably retooled marketing where you're like, "Hey..." I mean, some of the influencers that you're using eight years ago, you're still using, but that Facebook ad spend isn't $1,000,000 a month any longer. What is working today in order to grow the brand again?
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Chris Davis | So, I mean, a lot of the same traditional D2C channels are still working well. I think the dynamics shift depending on what's going on.
For example, we've seen that on Facebook, the costs have come down over the last 60 days, but in general, it's manageable. I think all of the same best practices apply for us.
It's kind of like, for our product, it's not something that is a consumable that you need; it's something that you want. So, having trusted brands and partners tell you that this is something you should have—yeah, influencer marketing and things like that are still great channels that work.
A lot of it is just figuring out the unit economics. We're seeing that all the same channels that worked before are still working well. We're not really engaging in some of our higher-cost channels, like remnant television, but we're looking at our most efficient channels and our best channels, Facebook included, and leaning into those while being disciplined.
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Moiz Ali | you | |
Chris Davis | I think, again, the actual underlying market dynamics that made this work well are important. You know, there are a million different Marvel tees on Amazon.com, and our demographic is not going into Target to buy a Marvel t-shirt.
That curated collectible consumer product experience hadn't really shifted throughout the eight years we've been running the business. Once it was kind of liberated from a lot of the corporate issues, it became more viable.
I think we're looking at new experiments. We have a thing called "Loot Launcher" that we're doing, which is like a crowdfunding approach. This allows us to take on a larger number of partnerships, try more things out, and be more experimental. So, we're using that crowdfunding model. I think we're just...
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Moiz Ali | So, tell me about that. Is that like, sort of almost... not Groupon, because it's not discounted, but is that like, if we sell 7,000 of these, we'll go bake all this stuff?
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Chris Davis |
Exactly, Captain. Exactly. A lot of... yep.
So we're doing more of those, and I think the pre-order model works really well. We're... I think there's still a ton of demand in the category, and I think direct-to-consumer is such a great way. It's where we're all consuming the content.
Sure, building out kind of new economic models around those opportunities... there's a ton, ton, ton we can do there. So if...
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Moiz Ali | You really shifted. It sounds like the month has shifted from "like" to doing a better job understanding demand over the last 2 or maybe 3 years.
Where you're like, "We're really optimistic about this new box. Let's launch this new box." Oh shit, it didn't go as well as we wanted. We have all this excess inventory.
So, let's pre-sell this box. Let's make sure at least 7,000 people want it before we make it. Let's make a max of 10,000 so we don't have a ton of excess inventory. Is that accurate or is that not accurate?
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Chris Davis |
100% right, I think. Yeah, I mean, churn curves are all fairly predictable, but they're all different by product lines also. So when you're getting into 25-30 different subscription lines, even with models that work well, with the buying, the demand planning, and things moving... it's just a lot.
You know, asking yourself to execute on that dance perfectly every month is challenging. So building in some flexibility and some predictability has been super helpful.
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Moiz Ali | That is... do you know that's so mind-blowing? Because it's almost the exact opposite of what you'd expect.
You went from having no discipline, basically, early on—or not no discipline, of course—but basically saying, "Look, we're operating on a gut perspective and we think that'll work."
Then, you scale the business and you think, "Okay, now I actually trust my gut more." I've been in this for 4 or 5 years. We're in a $100 million run rate. We have hundreds of thousands of subscribers. We've been around and we've only raised $25,000.
But actually, you have to trust your gut even less when you get that big. The decisions you make are so monumental. The ship is so large that when you're making those decisions, they can be not mortal blows, but significant blows to the business.
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Chris Davis | Yeah, and I think we have a lot more data today than we did as we were scaling. To not use that data would be foolish, right?
You know, I think in our growth model, Paul Graham had put out that essay on growth. I had a good friend in Y Combinator at the time, and so our whole growth model was, "Let's start at 28% a month." That really worked for three and a half years.
We had some kind of a north star growth metric that we could all focus on around a single product. It's just so different when you have products in different stages of their life cycle with totally different offerings and price points. We saw a very different approach to managing those different stages of the product life cycle, isn't it?
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Moiz Ali | That makes a ton of sense. I guess, like, it blows my mind that you trust your gut less. I think it's accurate because I feel like I should have done more of that. I should have trusted my gut less when we reached scale. Instead, I was just like, "I can make no mistake. I'm obviously invincible. I know how to do everything. Of course I do! I've generated all this revenue and EBITDA."
In reality, I should have been like, "Well, if I make a decision and it goes wrong, now we've ordered an extra 250,000 products that cost us $500,000." This is a much larger mistake today than it was, you know, three years ago.
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Chris Davis |
And... did you guys... that's... How is your gut? Yeah, just ask a question: How is it like when you guys expanded outside of deodorant? Where are areas where your gut was just totally wrong?
**Everywhere. Everywhere.**
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Moiz Ali | Yeah, my gut... I don't trust my gut any longer, actually. I mean, the reality is that once we expanded outside of the organization, we were a part of Procter & Gamble (P&G). There were a lot of different interests playing alongside where we could expand and where we wouldn't expand.
You know, we had to sit within a P&G division, and that P&G division really owns the P&L. As a result, there are more limitations. I was like, "Okay, great! We're now part of P&G. We can make whatever we want. P&G makes paper towels; we can make native paper towels." That really was not the case. We had more independence in terms of making those decisions pre-P&G than we did post-P&G.
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Chris Davis | so your gut was managed well by the yeah yeah my gut was yeah | |
Moiz Ali | my gut was it's strange | |
Chris Davis | but the reality is that | |
Moiz Ali | Even then, I had gut feelings about a lot of other things. You know, even inventory on seasonal items and things to that effect. When I made wrong decisions, they were a lot more consequential.
I think overall, you try to maximize revenues. You're almost like, "I'd rather have too much of this product instead of too little," until your business is large enough where you see how many things are on your balance sheet. All of this excess inventory that I ordered too much of is becoming a huge liability on my balance sheet. It's not a good asset; it's not going anywhere moving forward.
I shifted my mindset to being like, "I'd rather sell out of this item rather than have too much of this item."
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Chris Davis | And now, I think that as we brought in a bunch of CPG finance executives, that was the number one thing.
Scaling up D2C brands can help manage excess inventory and reduce the cost of goods in a month. I think I've seen a lot of folks who, if the inventory is here on your balance sheet, your P&L looks great. But the reality is, that's excess inventory.
You start to realize maybe 10% of gross margin should just be written down as inventory costs. There are a bunch of things you can do to avoid convincing yourself that the model is working as well as it is. I think this can help companies maintain better discipline around forecasting, demand planning, and inventory management.
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Moiz Ali | Yeah, great advice. I guess I have two more questions.
One is: What do you wish you had done differently? Do you wish you had never taken on debt? Do you wish you were more focused on operating expenses (OPEX) early on? Do you wish you hadn't expanded into as many boxes? Or do you say, "Hey, you know what? I learned a ton, and we did what was right"?
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Chris Davis | I think you learn a lot, right? During the learning process, you have to make sure that it's a positive experience. The pain and agony are going to come in those moments, and you have to find some healthy way to reframe it.
I think there are a ton of things I would have done differently. We had gotten so used to hyper-growth that the risk-taking and the confidence to solve hard problems on the fly were things we just didn't need to think about. I believe I've become a much better communicator with boards, lenders, and equity—those really important structures that sit on top of the business.
If you're going to manage it, it really needs to be done the right way. I had a lot of great mentors and went through many experiences; I think I could have done better there. It goes back to risk management and making hard decisions earlier, faster, and bigger than you'd like to.
We had a CEO who had done like 20 turnarounds, committed to the company, and advised us. We were talking about cuts, and he said, "If you ever cut too deep when you're doing a cut..." and I remember him saying, "I always cut too deep, and I never regret it." I think that was a significant insight, which is why I was like, "Wow." I didn't internalize it at the time, but I think part of the...
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Chris Davis | Is because you can always build back up, but then you eliminate existential risk.
I think there are a lot of lessons that many companies are going to go through during this time. The world has changed; know that and make big, decisive actions—more so than you think you need to right now.
This gives you the flexibility when you know there are going to be a lot of incumbents that are super distracted and debt-laden right now. A lot of these upsides in B2C brands can capitalize on this, but you need to be in a position to capitalize.
So, you know, make hard, big decisions fast.
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Moiz Ali | And so, do you think he's right? You can't... like, you should cut deep. Like, you should cut too deep and not regret it. Or did you cut too deep and you don't regret it? Was he right?
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Chris Davis | I think in the phase which was much earlier in our life cycle, it was the right advice.
I think there's obviously a need to prioritize customer experience. In all these companies, customer experience is number one. This has to be in a way that maximizes customer experience.
You can't, like, if you have 20,000 customer support tickets, you need enough folks to respond to those tickets. If you're delivering a product, you're competing with everybody else. It's gotta be the best product.
If you have to start making trade-offs and your product quality is affected, that's not really a business anymore. So I think outside of that, really know what those core areas are, and then everything else has to be fair game.
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Moiz Ali | That is fantastic advice. I feel, first, this is my favorite interview that I've done ever in my entire life. Not only did you grow this brand to $170,000,000 on $25,000 in capital invested, which is literally nothing compared to the, you know, Dollar Shave Club of the world and Harry's of the world and Allbirds and Outdoor Voices.
You went through genuine... look, I feel like a lot of people, myself included, never had... you know, I had a hard day at work, but I never... like my hard day at work was a good day for you. I never went through a recession. In many ways, I was a real coward about the business. You said, "I'm gonna raise money, I'm gonna go to the mattresses. This is a $260,000,000,000 business, and I'm gonna fucking take advantage of it."
Me? I was a real bitch. I was just like, "We're gonna hire very slowly because I think I'm gonna run out of money every day. I don't know what the fuck I'm doing over here." You know, everything is going wrong, and there's gonna be a torpedo that hits the side of this boat at any given time.
So for us, we didn't face those problems, but I knew that we wouldn't face those problems because I was being a real bitch instead of having a lot of courage to build the...
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Chris Davis | there's no there's that's why I said there's nothing wrong with that I think everyone's gotta realize there's nothing wrong with that | |
Moiz Ali | yeah yeah | |
Chris Davis | but I | |
Moiz Ali | Guess you got through that like very few people. You know, very few people go through those hard days, come out the other end, and they're like, "We're gonna build another sustainable business." That requires an incredible amount of tenacity and courage.
Look, it's not easy to go to a bunch of employees or to go to your fulfillment center and say, "Look, we're not gonna keep this fulfillment center anymore. We're gonna outsource this. We're gonna outsource some of our customer service. We have a core team here, but we're gonna outsource them."
It's not easy to get up day after day and sort of make those decisions and rationalize your operating expenses for two years, then come through and be like, "Now we're gonna start building again." That requires more tenacity than I've ever seen. That's like a fucking G, you know? General Electric type of restructuring. It's really spectacular, and I'm in awe of the business as a result of that today than I would have been in 2017 or 2016. I would have been back as well.
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Chris Davis | No, I really appreciate that. I think the one thing for me has been the benefit of scaling. We got to bring in a lot of seasoned folks.
When I was having a hard time making tough decisions, I had people who had seen this a few times say, "These decisions aren't... you're overthinking these things. We have to do what we have to do."
So, I think having a great leadership team, especially as companies scale, is crucial. Folks need to start removing themselves from decision-making because, you know, we're so emotionally tied to the brands and the products. It's hard to make tough trade-offs when it's your baby.
So, I think getting better at finding great advisors, making yourself less the ultimate decision-maker, and having people who know certain parts of the business better than you help you make those really hard choices has been huge for me in terms of how...
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Moiz Ali | do you find your advisors | |
Chris Davis |
You know, asking people I trust... I think in any of these areas, there's a whole separate universe that most of us never interact with. On the restructuring and debt side, there's a whole group that does this. But it's the same way we approach things on the growth and marketing side.
When we were scaling up, and I was trying to figure out who the best DC marketers were, you just hit everybody up and learn as much as you can. So I think it's the same kind of general principles:
1. They're out there
2. They're ready to help
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Moiz Ali | Okay, two final questions:
1. What is your favorite video game, assuming you play video games?
2. What is your favorite box from the last 8 years of Blueprint?
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Chris Davis | Okay, so I think everybody... I think this is the moment for VR to really take off.
There's this game called *Pistol Whip* on Oculus that's amazing. It's so fun! You literally have your arms dead within 10 minutes because you're just running around. It's an amazing experience.
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Moiz Ali | you like pistol whipping people | |
Chris Davis | You're a pistol-whipping, shooting first-person shooter. Like, if you don't have a VR, this is the time. Well, I didn't have a VR.
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Moiz Ali | headset on oculus | |
Chris Davis | vr headsets yeah oculus is the one | |
Moiz Ali | how long have you had an oculus | |
Chris Davis | like a year | |
Moiz Ali | okay yeah oh I'm still playing like | |
Chris Davis |
We had one at the office... we've had them for a long time. We had an interactive [VR headset] for... but yeah, we've had them for a while. But yeah, no, like it will change. There's Beat Saber, there's some amazing games that more casual gamers can get really into. So yeah, but yeah, Pistol Whip is amazing and...
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Moiz Ali | good one I'm gonna go buy an oculus and pistol whip today yep | |
Chris Davis | It's sold out, obviously, because everybody had the same idea. But yeah, you're on the waiting list. They'll be back soon.
And then, what was your second question?
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Moiz Ali | What has been your favorite box that Luke Crites has ever sent out over the last 8 years? We, you know, one of...
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Chris Davis |
My favorites... I'm trying to actually remember the... We have theme names for everyone, so they're like curated. But it had a replica, like a 1/5th scale replica hoverboard. Like Doc Brown when he's holding the two jump starters together, it's like a collectible figure. We had a... It had a "Back to the Future" *"Be Excellent to Each Other"* shirt, which is like the best message of all time. And it was just like... Yeah, I had all my favorite gear there.
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Moiz Ali | when did that box come out | |
Chris Davis | that was in 20 end of 2015 okay | |
Moiz Ali | So, a ways back... yeah, Chris, this is amazing! Thanks so much for sharing your journey. I feel like you've got a lot more experience than those people in direct-to-consumer. You've seen a lot more things when it comes to direct-to-consumer, and very few people would be as honest, upfront, and open as you've been.
I really appreciate that as a founder. I realize the amount of tenacity and courage you've had to go through this and build a successful business on the other end of all this is superhuman and heroic.
I hope people in your company recognize that. If I worked at your company, I would think of you as the superhero that would go in the box. You're one of those people in the direct-to-consumer industry. Thanks so much for being here; I really appreciate that.
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Chris Davis | No, no, this was great! I really enjoyed it. And yeah, I think this is an awesome platform, man. I'm loving all the podcasts so far.
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Moiz Ali | awesome great | |
Chris Davis | yeah thanks so much thanks | |
Moiz Ali | This was really great. I really appreciate this. I can't believe that I remember the first time Chris and I heard about your brand. It was at Packable when you were talking about custom boxes. My friends at Japan Crate were also based in LA. | |
Chris Davis | oh yeah we talked to those guys a bunch yeah oh yeah | |
Moiz Ali | They were like, "Have you heard of Lucret?" I was like, "Yo, I'm new in the industry." They said, "Lucret is doing 80,000 packages a month."
"Fuck you, boys!" And here I am, I get the opportunity to talk to you, so I really appreciate that.
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Chris Davis | no this is awesome | |
Moiz Ali | thanks so much chris really appreciate it | |
Chris Davis | talk soon |