After building out Walmart’s multi-channel businesses in the rapidly changing early aughts, Mike Smith was ready for a new challenge. And while he would have been hard-pressed to go much bigger, leaving the commerce juggernaut — where he was responsible for nearly 15,000 people in the field — for the four-employee direct-to-consumer startup Stitch Fix was hardly the obvious choice.
“I was looking for something that felt more like a co-founder relationship,” says Smith, who discovered that partner in founder Katrina Lake. Smith went on to spend nine years at Stitch Fix holding a series of senior roles — and eventually taking the company public in 2017.
That eye for what makes a great founder (for starters: humility, hunger, and clarity of vision) led Smith to his next venture, too: venture capital.
In early 2021, Smith joined his operational expertise with Nikhil Basu Trivedi’s investment prowess to co-found Footwork VC, where they focus on consumer technology and the consumerization of enterprise technology.
In building the next generation of category-defining companies, Smith says he gravitates toward organizations led by women and those from underrepresented groups: “What do I want my legacy to be? Where do I want to give time? And where do I think the ecosystem needs a lot of work? I do believe, fundamentally, that early stage investing, early stage founders, the LP base, all needs to be more diverse.” And with Footwork, he adds: “I think we’ll show that diversity matters and diversity delivers great results.”
For the Iconversations series, Smith sat down with Greylock general partner Mike Duboe to suss out the startup vs. incumbent dynamic from the inside, as well as discuss what he looks for in founders (and what founders should look for in early hires), the unit economics that make or break direct-to-consumer companies, and what he anticipates in the next decade of commerce. You can watch the video from this interview on our YouTube channel here.
You can listen to the full conversation here:
Mike Duboe:
Hi, everyone. Welcome to Greylock’s Iconversations. I’m Mike Duboe, partner here at Greylock. And today I’m very happy to be joined by a friend, Mike Smith.
Mike is widely known as one of the most skilled operators in commerce, particularly in launching and advancing multi-channel retail and growth strategies. I’m personally honored to have worked with Mike when we were both back at Stitch Fix. Mike was an early employee and held most senior roles at the company, from COO to CFO and interim CEO, and eventually took the company public in 2017.
Prior to joining Stitch Fix, Mike spent nearly a decade building out the e-commerce and multi-channel offerings of Walmart at walmart.com. Mike is also a familiar face to many throughout the e-commerce ecosystem through his extensive board work. He’s involved with a wide range of organizations that are not only recognized for their diversity of business models and product offerings, but for their notable representation of women and people of color. He currently serves on the boards of Ulta Beauty, Maven, Herman Miller, Stitch Fix, Food52, and Goal Five, and until recently served [on the board of] Imperfect Foods.
Earlier this year, Mike co-founded Footwork VC with Nikhil Basu Trivedi. The firm backs founders of consumer and consumerized businesses.
We have plenty to cover here, from growth strategy to how to differentiate at a time of extreme competition. Mike, thanks so much for joining us today.
Mike Smith:
Thanks for having me, Mike. I’m obviously a huge fan of yours and a huge fan of Greylock. So excited for today.
MD:
Great. Well, you’re one of the most experienced people I know in commerce, and I’ve always admired the arc of your career. I think it parallels some of the major transitions in the industry over the years: the rise of online retail and subsequent innovation [in] multi-channel retail, the explosion of direct-to-consumer brands, and the most recent wave of new technologies and commerce infrastructure.
To understand a bit about how you got to where you are now, let’s go through a brief history of your career. So, maybe, to start: What drew you to the commerce sector in the first place?
MS:
A few things did. One, to be very practical. I had three jobs that weren’t quite the right fit for me as I left business school. So they were all 18-to-24 months. One was frankly a disaster, where I just was bad at picking the right early-stage company. And there was a practicality to finding a company where I felt like the people would be there to support me and, frankly, the company would be around — and Walmart fit that bill.
But a more thesis-driven reason was I just saw the change in commerce and the way people were interacting online, and [I] believe strongly in the digitization of commerce and e-commerce and multi-channel. It felt like it was a 10-year run that I could have at a great company, the world’s largest retailer and world’s largest brand, and thought that would work great for me. Frankly: it did. And the trends are even longer than 10 years, obviously, based on what we’re seeing today.
MD:
To go into a little bit more detail, what were some of those formative experiences early on in your career, even prior to Walmart?
MS:
I’ll touch on a few of them. I grew up in Virginia, and I worked in consulting after going to University of Virginia for undergrad. And consulting, really, the formative part of that was it taught me that I like to be in the deep-end of learning because every project is different in consulting — you’re not doing the same thing every day. So that helped shape [that] I always have to have a high hockey stick of learning.
After business school, there were a lot of formations based on mistakes I made. The first one was [that] right out of business school I went to Wall Street. I made that decision primarily because I was in debt and I needed to try to get out of debt.
I thought the fastest way to get out of debt in a job I thought I would really like was going to Wall Street. What I didn’t recognize about myself is that, once I got in that job, I became more transactional and less relationship driven. So I’d be on a call with someone like you, and I’d be like, “Is Mike rich? I need to know rich people.” I didn’t like who I was becoming and as a result of that, knew that that wasn’t the right fit for me.
Then, the next mistake, which was the one I referenced before, was going to an early-stage company, really chasing money versus [the] foundational principles that now drive my decision making.
The foundational principles that drive my decision making today are: I want to work with great people — and that definition is people that, ideally, are smarter than me, that’ll push me to be my best self, and people that I align [with] on core values and principles. And then I also, like I said earlier, want to be always learning.
The third one, which I added right as I was going into the role at Stitch Fix, is: I want to make sure that I have a positive impact, both as a leader and culturally, in driving a business. So once I got past chasing money or making decisions based on not-great criteria and came back to core principles of people, learning, and impact, I made better career decisions. And, frankly, did better in my career when I had those foundations that I was making my decisions on.
“So once I got past chasing money or making decisions based on not-great criteria and came back to core principles of people, learning, and impact, I made better career decisions.”
MD:
Optimizing for learning is definitely something that I took away from our time together and try to continue to follow, and maybe part of why we’re both on this side now.
So, getting to Walmart: You joined Walmart in the early 2000s. At that point, online commerce was really just starting to find traction, and reaching consumers was a totally different ball game since this was before smartphones and social media. You were responsible for building out Walmart’s multi-channel businesses, and you did it during a time when the industry was changing pretty rapidly. Maybe you could go into a little bit more detail on your experience there.
MS:
I got really fortunate at Walmart in that I had bosses and leaders and mentors that allowed me … like a lot of people, I think I get bored easily. And when I’m bored, I’m not the best employee, I would say. And I had bosses and leaders that allowed me to raise my hand and say, “Hey, I’d like to get stretched.” And then they’d find a new opportunity for me.
I had a great run where I started as a junior person on the operations team at walmart.com, just helping build our warehouses and transportation network. For a time, it was like a $150 million business, and then moved into this site-to-store multi-channel role of building that offering for Walmart, which was: order online [and] pickup in store for things not in a Walmart. The idea was to expand the four walls of a Walmart, use Marketplace and a lot more SKUs to provide Walmart customers with a lot more choice than you can have inside the four walls of a Walmart.
That was a really hard program to pull off. I think people underestimate the scale of Walmart until you’re working with Walmart, or until you work at Walmart. It was, at the time, 3,500 stores; there were 2 million associates. And when you’re rolling out a multi-channel offering like that, you actually have to think about: What does the hourly worker in the back room do? Do they care about the program that you’re rolling out? So I learned a lot about trying to roll out a program bottom-up and really understanding all the stakeholders that are required to pull off a program like that.
Then I got to be head of customer service and then chief operating officer. I think the range of the jobs allowed me to always be learning and getting more scale and scope in a job. I got to see the trend of multi-channel — as an example, what Amazon’s effect was going to be on a company like Walmart — and then also the effect of early-stage direct-to-consumer brands and develop my own opinions about who was going to win, whether it was going to be a Walmart or an Amazon or a direct-to-consumer brand. That experience does really impact how I think about my role now as an investor.
MD:
I want to ask you more about the COO role in general, later. I think it’s something that probably a lot of founders in the audience would be interested in as well. I think there’s a pretty wide range of definitions around it.
But, before that, it was a pretty interesting career move when you left Walmart, one of the biggest retailers in the world, to join Stitch Fix, a pretty small — I think it was a 10-or-so people startup at the time — shortly after it was launched. What prompted that? What was going through your mind when Katrina started talking to you? And maybe you could give us some color on what made that pitch so compelling at the time, as well.
MS:
Well, I went from chief operating officer at walmart.com — responsible for between 10,000 and 15,000 people in the field — to, there were four employees at the time when I said yes to Katrina. So it was a big adjustment. I had a big office at walmart.com, and I think our whole office holding the entire Stitch Fix crew in the early days was maybe 1.5-times my personal office. It was just maddening to think about going from [the] 10 million-square-feet of warehouse space that I was responsible for to 1,000-square-feet of warehouse space [from] which we were doing pick, pack, and ship out of our office. It was a pretty big transition.
The thing that made it really compelling: 80% of it was Katrina [Lake]. Katrina is just — I experienced her this way when she was recruiting me and experienced her this way [in] nine years working with her — very clear on vision and really, really vulnerable about what she thought she was good at and what she wasn’t good at and how she was seeking partners and partnership in helping her build the company.
[She had] a really clear vision for what she wanted to build, and we spent a lot of time on core values and [the] principles of how we wanted to show up as leaders and what her expectation was of leaders and what my expectations were in my leadership profile and who we would hire. And we were very aligned on those core values and principles. So 80% was her and how she showed up and how I thought I could be, if I was lucky enough, a good partner to her in scaling the business.
Then 20% was in three buckets. One was data science. I was really, really excited about the idea of using art and science specifically in apparel, and the way she talked about it.
The second was the unit economics of the business. As you know, Mike, these businesses that are direct-to-consumer are really hard to get to the average order value high enough and contribution margin high enough to make them work when you have to spend on paid marketing at some point. I thought that if we executed the model really well, the unit economics of the business would be extremely compelling — and they were as we grew the company.
And the third was, like I said, the core values and principles that translated into the culture of the company. I just thought: If we did it well, we would build an amazing company, but also a place that people were really proud to work at and for, whether they were there for a year or whether they were there for nine years, like I was.
MD:
I want to spend a lot more time on Stitch Fix with you.
Before that, to ask the generalized question, for founders: I think you were like a dream hire for Katrina, and for many other founders out there who would’ve loved to have hired you at the time too. What takeaways do you have for founders who are looking for their Mike Smith? And maybe when should they start looking for someone like you? Because, I think, in Stitch Fix, in many ways it was quite early.
MS:
I think it was extremely early. And I get asked this question a bunch as I’m now an investor. Whether it’s advising companies we’re not invested in that ask that question or companies that we are invested in at Footwork, what I normally say is: Most of these things don’t work.
You hire a big-company person into a small-company environment, and it doesn’t work most of the time. I think the reason it doesn’t work is because it’s extremely hard. So it’s very flattering and kind of you to say, “hire their Mike Smith.” But I would say it requires a lot of soul searching of the founder on a bunch of different dimensions.
Let me give practical examples. First of all, the founder/CEO needs to understand that they actually want a true partner in helping them build the business. One investor talked to me about COO roles, and we can go deeper on COO roles. But it could be a COO role [where] you’re just responsible for operations and, in the board context, you’re just coming in to talk about ops.
A second version of that is: You’re in the board meeting for most of the board meeting, like the P&L, but you get taken out on strategy or M&A or whatever. And the third example is one where you’re COO and you’re almost like a partner or co-founder with the CEO. I was looking for something that felt more like a co-founder relationship.
Now, the way you risk-reduce that, if you’re a founder, is you spend a lot of time trying to understand: What are the skillsets of the person you’re bringing in? Are they complementary to you? And, frankly, are you willing to give up some of the control that you have in what you’re doing?
So, for example: If you’re a founder/CEO that really is a chief product officer, and then you go try to hire a COO [for whom] product is their specialty, those relationships don’t work. Because the COO coming in wants to own product, but the founder/CEO really wants to own product because they consider themself the chief product officer.
I think the thing that made it work with Katrina and I is we were very complementary. She was very intentional about the complementary skills that each of us had. She wanted me to do ops and finance in the backend, and I really wanted to, at some points, do some demand gen and marketing and merchandising, and she was open to that conversation.
We had open communication lines around this: She was willing to share the stage of having a partner in building the business, and it met the criteria that I was looking for [of] feeling like a partner. But a lot of that, I think, is founder driven. Like: looking inside yourself and deciding, do you really want a partner in the business or not?
One last thing I’d say is: Look out for big-company people that say they want to do early-stage and can’t do it. Two pieces of advice. One, Katrina was really big on try-before-you-buy. I came in and worked and tried to figure out: Is this going to work for me? So there was a selfish part of it. But, for her, it allowed her to decide whether it was going to work for her, and [watch]: How did I show up?
Another practical thing you look for is someone that is extremely frustrated with the speed and the motion of their big company — where you ask them questions like, “Why are you leaving walmart.com?” and they answer it with, “We’re just not moving fast enough. I think we’re not disrupting ourselves fast enough.” Those are good signs that someone can actually make the transition. But the try-before-you-buy is a practical way to test whether or not a big-company person can really work in a smaller-company environment.
“…the try-before-you-buy is a practical way to test whether or not a big-company person can really work in a smaller-company environment.”
MD:
You mentioned the [unit] economics earlier and how unique it was to see a business like this that had the potential to have these economics in the D2C world. Stitch Fix was something of an anomaly in that it didn’t raise a ton of money before it went public, relative to others. And, for my own experience there, I know it wasn’t always by choice. But the silver lining was that it pushed everyone to be both disciplined and creative when it came to growth and ops.
What were some of the takeaways from your time there around that point [of] capital constraint versus having the luxury of having more and being able to do more? And, maybe: In hindsight, do you think it was a good thing for the business?
MS:
We could talk for over an hour on just this topic because I think it’s so fascinating. But let me set the stage by talking about— as Mike referenced, we were a bit of an anomaly. [When] we went public in 2017, we had raised $42 million of capital. We had raised our last round of $25 million of capital, [and] we didn’t spend a dime of that. We didn’t spend a dime of the $139 million that we raised in the IPO.
So we got to cash-flow-positive and profitability on $17 million of capital. We filed the go-public with almost a billion dollars in sales and 10 points of operating margin. So the scale of the business and how fast it got to a billion dollars and the operating margins were unusual, to say the least. We used to laugh like, “Oh my gosh, that company just raised $250 million and they’ve done $50 million in total sales. What are you talking about?” We were doing almost a billion in sales on $42 million in capital.
Now, that sounds great. But, to your point, Mike, there are things that, if we had been able to raise more capital, we may have been more aggressive on. Things like building growth earlier or investing in finance and ops infrastructure. The company for the last three or four years [has had to play catchup] because we didn’t have the capital to invest in the infrastructure like we should have.
So the pros were, I think, we got really, really good at operating the company, at being really, really good stewards of capital. I think the cons that I learned were that we could have and should have invested more in infrastructure so that the company could launch new businesses faster and could possibly even do more things outside of apparel faster as a result of building that infrastructure earlier. So there are some really good things that we did and then there are some areas where I think we, or I, probably would have done things differently.
MD:
I know that mirrors my journey there. I was coming, and recovering from, a startup that I think was probably overcapitalized, ultimately — where we were taking on too much. And coming to Stitch Fix, which I would say was undercapitalized and maybe even overly narrow and focused on what we were doing. But I think it netted out to be a positive for the company.
I think one of the things you mentioned around the forced operating discipline, I always felt like Stitch Fix put a really strong emphasis on predictability, driven both out of necessity, like we’re talking about, but also the data-science function being so central to our culture. The business just felt very tightly run. I think a lot of this was thanks to you. But forecasts were more precise and measurement on marketing spend was more granular. I think this played a big role in allowing us to go public when we did, but it also comes with trade offs.
I’m curious if you have comments on that: Did we get that balance right on predictability, overall, and what did you learn on that?
MS:
I think for the most part we did get that right. I was a public company exec for three years, roughly, and my experience in being on our roadshow and in every investor meeting and every earnings call was that you have to build trust with Wall Street and with the buy side in order for them to buy your stock and hold your stock for a long time. And that trust is built by actually saying what you’re going to do and then doing it.
So, I think, the predictability and the forecasting — if you look at the experience over the first three years of the company, we rarely missed a number. We didn’t blow out numbers because it was so predictable, but we rarely missed what we said we were going to do. And I love that part because I think it helped build trust with Wall Street.
“…you have to build trust with Wall Street and with the buy side in order for them to buy your stock and hold your stock for a long time. And that trust is built by actually saying what you’re going to do and then doing it.”
I think the only downside to it — but still I don’t think I would have done anything differently — is just being more aggressive on growth, and as a result, being willing to miss numbers, potentially, or blow out numbers and not be as close to the pin. But I’m not sure I would have done anything differently in the first three years because I do think it’s so important to build trust with Wall Street by just hitting your numbers.
We had a meeting I remember with a potential shareholder, I don’t know, 12 months into being public. And this guy was very honest, he could be a top-10 holder in the stock, and he said, “Look, I don’t invest in companies until they’re 18 months into being public because most companies aren’t really good at managing forecast and managing their business. So I’m just going to stick around, hang around the hoop until you show me 18 months of being really good at this and then I’ll invest.” And now he is a top-10 holder in the stock. I think it was really important to build that trust, which came from the operational discipline and the forecast discipline that we had.
So not much I would change, but I think now they have the opportunity, three years into it, to potentially be more aggressive in how they think about this topic.
“So not much I would change, but I think now they have the opportunity, three years into it, to potentially be more aggressive in how they think about this topic.”
MD:
You mentioned the growth point. Let’s talk about that for a bit, because I think that’s pretty generalizable and something that you and I both know pretty well. Relative to most e-commerce startups, at the time and also now, Stitch Fix waited a pretty long while before investing in anything user-acquisition related.
I think it led to a really healthy dynamic, and that the muscle that we built was around retention first and the predictability on client repeat rate and all that. I think building the acquisition muscle late in the game also comes with trade offs, though. You hinted at, earlier, [that] maybe you would have sequenced this differently. But when you’re looking at companies now that are starting to invest in user acquisition, it’s hard for me to say, “Hey, retention isn’t more important, and you obviously want to fix the leaky bucket before you start pouring water up top.” But it is a balance, and I’m curious what you have to say about that now.
MS:
Well, I hate to be so pithy about it, but I do think this is an “and” not an “or” and not a sequence. I do think you have to do both. To bring it back to your original question, Stitch Fix got to about $500 million or $600 million in top line with almost no growth marketing. There was such direct product-market fit that we didn’t have to spend on acquisition because the majority of it was coming pretty virally or through referrals or organic[ally].
So I think that sounds great, but to your point, Mike, and you know it way better than I do, building the growth muscle and actually getting good at it — especially given how much creative needs to change and how many different tools and distribution channels there are, between podcasts and Facebook and Instagram and Snap and TikTok — you actually have to build the muscle of acquisition as early as possible so that you can get good at channels and actually figure out what channels are most effective for user acquisition and ultimately for retention and LTV.
I think we didn’t do it early enough, because mostly we were tapped out on supply. So, again, if you get to $500 million or $600 million of top line without any user acquisition needs — one of the things that we were struggling with was just holding onto our hats around having enough stylists to manage the business that grew that fast, having enough warehouse workers and warehouse space to do it, having enough inventory, high quality inventory.
“…you actually have to build the muscle of acquisition as early as possible so that you can get good at channels and actually figure out what channels are most effective for user acquisition and ultimately for retention and LTV.”
One thing that the capital constraint forced us to do is we couldn’t over-invest in the supply side, which really hurt our chances of being more aggressive on acquisition and driving acquisition and building that muscle way earlier than we did.
I would say it was a mistake of not being able to go earlier on acquisition. And the way I advise most companies is: You have to be good at both. There’s just no question that in today’s world and how competitive it is, especially in direct-to-consumer, you have to be really good at understanding the reasons why people churn, the reasons why people are unhappy — but the same token, you have to get good at the top of the funnel and driving acquisition and get good at understanding what channels are most effective for your business.
MD:
One of the things you hinted at that’s really important, I think, adds a significant layer of complexity on what we were doing for acquisition, is: Quality acquisition is going to be a function of what supply, what merch, you have on hand at any given point in time. So actually dialing up the wrong types of users can be detrimental, and that’s not necessarily the case for other brands who are selling a pretty standard fixed-set of a few products, where actually overhitting your numbers will ultimately be fine, people [just] might be waiting a few extra days or something.
There’s more complexity to our model, which goes back to the point on predictability just being really key there. One of the things related to that, which I think was a pretty interesting and critical decision early on at Stitch Fix, was to run our own warehouses. I know you were a big part in that decision. Walk us through that. Do you think things [would] look different, if at all, given today’s evolved e-com logistics landscape or would you have done it the same again?
MS:
I generally try to look back and be pretty self-critical of things that I could have done differently or we could have done differently. On this dimension, as well, like your earlier question about balancing forecasting and predictability — I actually feel good about this decision. There are plenty of decisions that I screwed up and I’m happy to talk about those, too.
But I think owning your own warehouse, and the reason why I would push for it and would still push for it today, is because of client and customer experience. I think, [in] today’s dynamics, it is so competitive that if you don’t own your customer experience as much as possible, all parts of it — and I’m not a control freak, but on this I am, controlling the client experience — then you risk not having control of things when things are going wrong.
So a funny, not-so-funny story about my time at Walmart. This literally happened to me in a week: My boss came to me on a Monday and said, “Hey, I just want to let you know something went wrong with an order. It actually went to my wife, and it was an order that came from one of our drop-ship vendors, and it came in a Costco box.” That just doesn’t work for a Walmart exec. Then fast forward to that Thursday, he comes back in my office and he said, “Hey, we got another issue. A senior Walmart exec got an order with a half-eaten apple in his order.”
“I think, [in] today’s dynamics, it is so competitive that if you don’t own your customer experience as much as possible, all parts of it — and I’m not a control freak, but on this I am, controlling the client experience — then you risk not having control of things when things are going wrong.”
Now, in both cases, not that I’m looking to fire people all the time — what I’m looking for is accountability. I had zero control over accountability of that mistake. I didn’t have visibility into the systems; I didn’t know who picked the product; I didn’t know who picked the box in either case. So I could say, “Hey, Steve, this isn’t my fault, it’s our drop-ship vendor network.” But the reality is: I want more control over when things go wrong so that I can fix them quickly or hold people accountable that have made the mistake, including myself.
There’s this idea of accountability and customer experience that really drove my decision to own our own warehouses, and I would still make that same decision today, even with [the] amazing infrastructure that exists that is different than what existed when I started there 10 years ago and when we worked there together.
That being said: It’s hard. It’s hard to own your own warehouses. There are 10,000 people that work at the company now, I think, and 8,000 of them are in styling or warehouses. So that’s a lot of employees to own and work with. There’s just a complexity to owning your own supply chain. But I would argue that, if you want control of your customer experience and you want to make sure you can drive accountability through your network in a very competitive environment, you should make that decision all day long.
MD:
Great. We have one question from the audience here, which is: “What characteristics did you see in Katrina that you thought made her a successful founder? How did she operate differently from others you’ve worked with? And what could we as founders learn from her in terms of building out our own teams and companies?”
MS:
Well, the characteristics, some of them I touched on. I think, again, clear vision for what she wanted to build. Building a company is super hard, and you have to figure out how to adjust when you need to adjust — but how to stay the course even when there are a lot of contrarians.
Katrina was the best I’ve ever seen at seeing around corners and being clear on vision, in a way that I’ve never seen any other CEO do. So I saw that early, as she was describing what she wanted to build in women’s [apparel]. Then I would ask her questions about men’s and kid’s, and she was super clear on when and why we should do those things. And that’s frankly how she operated.
But on that more intangible side, which I touched on: It takes a lot of vulnerability to say, “Hey, I’m not as good in operations” or “I’m not as good in these areas” or “I’ve never built a company before.” And she’s talked about this publicly in podcasts. She had managed one intern before she managed me. So she admitted that she’s new with this. And that vulnerability really resonated with me, because I’ve seen other founders that lack a little of that vulnerability or humility and believe that they have to do it all and be great at all these things.
Frankly, when Nikhil and I think about investing in founders, we look for a number of dimensions. But one plank is “hungry and humble.” We look for founders that admit where their mistakes are or admit where they lack superpowers and where they need to add people around them to help the company be successful. And Katrina showed all of that from the interview with her, multiple meetings with her, and then working with her for nine years. And, like I said before, I do think sharing the stage. She was really open to me having pretty senior roles and sharing the stage with her and with the rest of the exec team as we built Stitch Fix.
“We look for founders that admit where their mistakes are or admit where they lack superpowers and where they need to add people around them to help the company be successful.”
MD:
Well, this brings up an interesting point. I always felt like you and Katrina, both internally and externally to Wall Street and such, were very pragmatic in describing what Stitch Fix did at any point in time without zooming out too far. Clearly, there’s broader potential for a personalization engine to apply outside of apparel, but Katrina was always laser-focused, like, “No, this is what we [are] right now. That other stuff may be longer term.”
How do you think about the right balance between having that magnitude of vision versus being pragmatic and nailing near-term execution? You’re kind of hinting at this, but I think there are trade-offs, even ones that probably directly hit your valuation.
MS:
I think you have to do both. You have to stay focused on the clear vision, but you always have to come back to: What else could this become?
Every year, when we did our strategic plan, we would talk about whether we should use this in other applications. We would talk about whether we were ready to do it as a company, whether we had a right to win, whether the unit economics and the capital that we’d have to deploy in order to launch something new outside of apparel was a higher rate of return than just continuing to go down the apparel path. I think, for the first five or six years, it made sense to completely stay in apparel.
One of the things that I underestimated was, as copycats showed up in men’s and kids, I underestimated how… I wasn’t worried about them getting to a scale that was going to be really challenging to Stitch Fix, I was more worried about them claiming they were a personalization company and doing it poorly. That, then, the end consumer would wonder: Does personalization or this data-science stuff work?
We felt it worked, we could show it worked. But if people were launching businesses in other adjacent categories, like kid’s and men’s, and they were doing it poorly, then it would potentially mess up our brand.
MS:
So that’s why we had to stay in apparel and do men’s when we did it and kid’s when we did it and the UK when we did it. But there are such massive applications of this. And I think the strategy of being able to look at it at least once a year, [at] what makes the most sense, still feels right to me. Sure, the evaluation of the company is limited in terms of what people can see until you start doing these things. But I think staying true to the vision and making sure you’re executing that really well is the right answer.
MD:
We did get one other question from the audience, and it’s a follow-up to one of the things you hinted on earlier, around interviewing large-company employees or execs to join startups: “What are the key attributes to look for or ask in interviewing someone coming from a large tech company if you’re a startup?”
MS:
Let me try to give some practical advice here. So, again, asking the question of why you’re leaving. And if the answer is, “I just want to join a startup.” That’s clearly a weak answer and you should never hire someone for that.
If they answer like, “I see the disruption in your model that is going to change the way people consume, or how this product is going to be used in the future, and I wanted to build something like this in my incumbent company and I couldn’t get the resources to do it.” That’s a much more tangible and exhaustive answer that would give me more comfort that they can do it.
If someone’s expressing [that], ask a question like: “How fast do you guys move and make decisions at walmart.com?” And if the answer is: “Well, we would put something on a product roadmap and it would probably show up in the fulfillment systems or on the website 18 months later and that would drive me crazy.” That’s another good answer. You’re seeking people that want to move fast and are frustrated with how fast their incumbent company is moving.
This is an interesting nuance and balance. I have not liked the idea of someone falling so in love with the founder or a company that they come in and basically kiss your butt about how great you are, how great this opportunity is. But at the same time, they have to spend time on the business and talk about what they think is great about the business and what’s challenging about the business.
The level of engagement that a big-company person shows for a smaller company: Do they keep thinking about it? And then do they send you an email after being like, “Oh my gosh, I answered that question so poorly. Now that I know more, here’s how I would think about it differently.” That was a really good sign for us in hiring bigger-company people.
Because if they kept thinking about the complexity of Stitch Fix and came back admitting that they had screwed up one of their answers — look for things like that, where they’re always thinking about it and thinking about how their new thinking or new ways of applying what they learn would be something that they’d be excited to work on.
But baseline answers of, like: “Oh, I heard you’re going public” or “I heard it’s better to work in a startup” — strangely, there are execs that answer the questions that simply, and those are like huge red flags that that exec has no idea what’s going to be like working in an early-stage company.
On the flip side, one last thing I’ll point out is that Katrina was super patient with me in the transition. She doesn’t remember this, or she says she doesn’t, but I wasn’t great in the first six months of the transition. I was struggling with being in an early-stage company and not having the resources and not being great as a COO in the first six months. She had the patience to help me work through not being that great at first start. I think that requires founders to be patient if they think the person can scale into the partner and COO that they want.
MD:
Awesome. Very, very tactical, as well, so thanks for getting into that. Let’s move to today’s commerce landscape more broadly and talk a little bit about growth strategy within that.
Today it’s easier than ever to start an e-commerce business, but also more expensive than ever to scale one. Starting at the highest level, what generalized principles have you taken away when it comes to growth strategy for e-commerce? And what are you looking for now as an investor in this space?
MS:
A few things. Generally, I’d say we, like a lot of people, like viral growth. It’s growth that comes from people just loving the product, where you don’t have to spend on acquisition initially to get to some level of scale. Like I said earlier, viral growth doesn’t mean you don’t do acquisition — we should have done it earlier. I would say companies should still do it even if they have bottom-up growth.
But that’s what we look for: where people love the product or service at such a level that it’s just growing organically. I think that speaks to: Is there true product-market fit in whatever the consumer product is or product or service? So that’s one of the things we look for.
Another thing is: Do people and the founders and founding team really understand the difference between exactly what you said, which is: starting a company and scaling a company? And have they thought through what those transitions are going to be?
I think that you’re right, it’s been the easiest environment based on the tools and software that’s available to start companies. I do think that when you’re talking to founders about: Well, what’s required for you to scale? What are the things that you are going to own in your tech stack, between marketing and fulfillment and payments, versus going to use other people’s software to do it, and the questions of why are you doing that.
That helps Nikhil and I figure out: Who are the companies that are thinking already about the harder scaling problem? But I think some of these trends that we’re seeing today — and Mike, I think you feel the same way about the thesis — like I mentioned earlier, I got into walmart.com thinking it was a 10-year trend of e-commerce and multi-channel, [but] I think this is a 30-year trend.
I do think the last 18 months have massively accelerated where e-commerce and digital is going. People have gotten way more comfortable with shopping online, with interacting online, with doing things like we’re doing in this environment, versus face-to-face. I do think that will continue to accelerate e-commerce and brands and retailers growing.
But it requires them to grow efficiently and effectively, which, to me, leads to a trend of e-commerce infrastructure that you and I both feel passionately about — like software that helps a brand or an e-commerce company run more effectively by understanding inventory levels or understanding how to do fulfillment better. I think those trends will continue for probably the next five years, if not 10.
MD:
I think we’re both actively investing behind this thesis: that a lot of the value’s going to accrue to the enablement layer and also be the networks around NextGen commerce. I think D2C, I think the healthy view of it, in my opinion, is: It’s a channel. It’s one of several channels. It’s not its own category. I think brands who view it just as a category are going to hit a ceiling at some point where the economics might not continue to work. So wholesale is back en vogue again.
There’s actually a related question from the audience here asking: “Looking at the state of the tech and industry, would you build a D2C company any differently today? And also, as a follow up to that: Does the current environment change the parameters for which D2C may be [an] irrelevant channel or not?”
MS:
I think I would only do things differently if I felt like I could better understand how to get to unit-economic-scale more quickly. Let me bring it back. I just believe, strongly, that a $40 or $50 average-order-value business is very hard to be a successful D2C company. It’s hard, because if you look at the economics of: OK, how much gross margin is there in a $50 order? And then: How much does it cost to ship or fulfill that product? How much does it charge for payments? They aren’t great unit-economic businesses.
So, if I were starting a D2C company, I wouldn’t goal-seek for AOV, but I certainly wouldn’t start a direct-to-consumer AOV company unless I saw the ability for AOV to grow over time [and] be above $75 or $80, and where I could see gross margin expansion as a result of scale.
When we talk to D2C companies, we ask them very specifically: “What are the unit economics today? And what are your plans to enhance average order value? And what are the opportunities for gross margin expansion so that you have really solid contribution margins?”
Because, at the end of the day, if you don’t have the contribution margin of unit economics to invest in paid [advertising] and invest in people, it’s just not a good business. And, I think, there are very few businesses that can do that.
So the only difference I would say is: Go deep on unit economics to make sure that, if I was starting a company, I felt like I could get to an AOV and a gross margin that makes sense to build a big business. Or, as an investor now, that’s where we spend the majority of our time, in trying to understand: Does a founder understand their business model enough? And can they speak to where they will get expansion of AOV, gross margin, or operating margin over time?
MD:
I think one of the important points you mentioned earlier was around the virality that you saw early on. These businesses typically aren’t naturally viral; there’s not a natural bottom-up adoption like there would be with certain software components, and there is not virality, too. Or at least in the traditional sense of Stitch Fix’s model, actually, there might be some offline virality. People could see what you’re wearing, where you get it from, etc.
But I would say that the word of mouth being so strong in the early days was a function of focusing on the right demographic and being deliberate on that, whereas our competitors were focused on maybe the easier ones that seemed more obvious.
Stitch Fix being focused on the middle of the country, a demographic that had the pain point that was underserved for this, that’s where it really struck a nerve, and things blossomed from there. I think that is probably generalizable to other founders who are thinking about scale of acquisition versus really learning who the people you want to acquire early on are. That’s another reason why you focus on the highest value, highest intensity users early on.
MS:
Well, and I think your points are super well taken, which is: [you] talk about TAM [total available market] and then you talk about serviceable TAM and you talk about who’s actually using and loving your product today. Is that a group that, one, is going to be super profitable for you for a while and, two, allows you to extend what you want to do into other areas?
I think a lot of founders don’t spend the time to truly define serviceable TAM, truly understand who’s loving the product, and then [ask]: How do I take that loving-the-product to a whole other customer segment that can be just as profitable, or at least make money for the company?
MD:
One dynamic here [that] I think you might have an interesting point of view on is the startup-versus-incumbent dynamic. You’ve been at large incumbents and you’ve been at emerging startups in broadly related spaces. I think we see this across multiple dimensions, from niche D2C brands taking on central conglomerates to new distribution channels taking on traditional department stores or even traditional marketing channels. So I think your vantage point here would be unique. How do you think about the incumbent-versus-challenger dynamic in your roles?
MS:
Well, I guess because I’ve really appreciated underdogs that become incumbents, and seeing the growth of that, I really love smaller companies that are trying to disrupt. So, let me give two perspectives.
Let’s start with a big company, and big-company dynamics that I think hurt big companies from actually being successful over time. And these are probably potentially too tactical, but things I look for when I’m in a big company, or I’m talking to a big company, are about: Are they really understanding the dynamics that are underneath them?
I look for phrases like: Are you future proofing your business? I view that phrase as not disruptive enough and not innovative enough. Because future proofing your business by definition is: I have a business, I like what I’m doing there, and I’m going to make sure that business is around. Well, if you’re in consumer today, regardless of how big you are, everything is getting disrupted so fast that future proofing seems like you’re already behind the eight ball. So that’s a phrase that I think is problematic for incumbents.
Another phrase that I think is problematic for incumbents is: Oh, I don’t want to launch this business because it’s going to cannibalize my other business, or: It’s more diluted to my core business. Well, every new business that you have is dilutive. You’re investing more resources against something that has no revenue, so that’s diluted to something you could do otherwise.
I’m not saying that you should be irresponsible on dilution, but you shouldn’t let dilution or cannibalization make the decision for whether you should launch something new. Because every business is dilutive when you launch it relative to the successful one.
“…you shouldn’t let dilution or cannibalization make the decision for whether you should launch something new.”
And then, a third point — and this is just a personal opinion — but innovation labs within a large company, I’m not a fan of. And the reason I’m not a fan is literally everyone should be thinking about how to disrupt themselves. You shouldn’t have a separate group that’s thinking about innovation. Whether you’re in marketing or merchandising or supply chain, you should be innovating along the lines of what’s important in your function, not letting some separate group that doesn’t have P&L responsibility do innovation.
Those are personal pet peeves I have around large companies.
But switching to small companies. Most [large] companies do what I just described: They talk about future proofing, they have innovation labs, they talk about not launching new businesses because it’s cannibalistic or dilutive — which allows smaller companies to go take share. I think that’s great. I think it’s so cool.
Because a small company like Stitch Fix, when we first started, did anyone think we were going to turn into a $2 billion revenue company? No. We got feedback from some very large retailers, when they were looking at Stitch Fix, that we were never going to make it and that we would at most get to $100 million [as a] company.
Well, that mentality at large companies drives small companies. And it forces a small company to innovate and disrupt and hopefully be successful. Obviously, most small companies are not successful. But I just like the dynamic of large companies and small companies.
My advice to large companies is to take some of that language and behavior out of your lexicon and vernacular. And, for small companies: Keep pushing hard and not being scared of large companies, because I think most large companies are not able to disrupt themselves in the ways that they need to.
MD:
There’s a lot more to cover here, and we don’t have a ton of time. One of the areas I wanted to make sure we got to was board work. I’ve seen you in the boardroom. I think you are someone who founders would unequivocally want on their board, now, as well. And you’ve also been doing it on the other side of the table. So let’s talk about your experience in the boardroom a bit.
In 2016, while running ops at Stitch Fix, you started on your first board, which was Own The Room. And since then, you’ve held a bunch of other board roles: Ulta, Imperfect [Foods], Herman Miller, Maven, and others. You’ve also been an advisor to a growing network of diverse founders for years and are actively working to increase representation of women and people of color in the tech industry through your work at Footwork.
What are some of the most important lessons you’ve learned from board members? And, maybe: Are there any anecdotes that really stick with you when you think about the kind of board member you want to continue to be?
MS:
I feel so lucky. It sounds obnoxious when you list the boards because, one, those brands are amazing brands, and I get to be a very small part of it as a board member. And, two, it’s a lot of boards, and Nikhil’s on me a lot about it because we like to take board seats at Footwork, and how are we going to create capacity to take board seats as investors? So I’ll have to figure that out as we scale Footwork.
But, a couple of insights from being on boards. One, it is a gift. It’s really fortunate to be on the boards that I’m on, mostly because of what you referenced — the people around you that you get to learn from.
I’ll cite one explicit example. Mary Dillon, the CEO of Ulta Beauty. They just went through a transition from her being the CEO for seven or eight years and then transitioning to her number two, Dave Kimball. And to be able to watch, as a board member, Mary as the CEO transition to Dave — how well she supported Dave, how much the business is crushing it today as a result of being super intentional about that transition — one, it’s just a joy and an inspiration to watch. But, two, I can apply a lot of that learning to companies as they are thinking about a CEO transition into another role. So I feel super fortunate to be able to do that.
The other thing I’d say about my boards: Most of the boards I’m on are with women CEOs or underrepresented CEOs, and that has been intentional. I do want, if I’m lucky enough, to have that be the majority of my portfolio. I just love that, being true about how I’m spending my time.
I could not be more proud of the founders and CEOs that I get to see up close and personal. So, I highly recommend it to people who are lucky enough to. Get on boards. I think I add a lot of value because I was an operator for a while; I was in a really disruptive space. And I think that value hopefully helps the company and the CEO over time. But I’ve really, really enjoyed my board work.
MD:
What advice do you have for founders who are thinking about bringing on an independent board member, having seen it so many times on the other side?
MS:
I’d say my advice is the earlier the better, but being super intentional about what you’re seeking. Just like the COO choice and finding someone like me and how it worked with Katrina, I do think independent board members — if you find the right person — add a ton of value over investor board members.
Now, it’s hard, because I am, to your point, sitting on both sides of the table. As an operator, I really liked independent board members because I felt like they could understand the journey that I was on and how important and hard operating is. Now I’m an investor trying to work my way into earning the right to be on someone’s cap table and I want a board seat as an investor.
So I do think you should go earlier [rather] than later with independent board members. But be super intentional about what is the right fit for you, both you personally, in tangible things — the competencies that they have — and then also a fit culturally, [on] core values and principles. But I think independent board members early is a good decision.
MD:
Let’s wrap with a quick comment on your transition into venture. You’ve been on the periphery of venture capital for some time now, and, as we both know, it’s been quite an active time around all things commerce and consumer, but also just venture. So there are probably differences between this period and other periods of high activity and venture. Why did you personally decide to get into it now?
MS:
A few things drove my decision, some professional, which make sense from what the job is, and some super personal. I’ll share both.
On the professional side, everyone tells you, to my earlier points, “It’s a high hockey-stick of learning.” One day you’re meeting with a healthcare company, the next day you’re meeting with a B2B SaaS company, the next day you’re meeting with an NFT creator company. And there’s a lot to learn in each one of those things to be a value added investor and actually to win deals. So I like the high hockey-stick of learning that comes with the job.
The second is that I think I have a lot to give. I had a very unique [position] sitting in the number two seat with Katrina at the stage I joined, going through some really, really hard times and then coming out the other end and getting to a public market offering. I’m learning that founders really appreciate the experience and journey that I went on, and I want to be able to give that back. Because I do think there aren’t a lot of people that have had the unique experiences that I’ve had.
Then on the personal side, I was very deeply affected by the racial unrest in 2020 and George Floyd and the Christian Cooper incident in particular. I really thought about: OK, I’m fortunate enough that I don’t have to work. That’s a super ridiculous thing to say. But what do I want my legacy to be? Where do I want to give time? And where do I think the ecosystem needs a lot of work?
I do believe, fundamentally, that early stage investing, early stage founders, the LP base, all needs to be more diverse. I think — raising this fund, and, hopefully, Nikhil and I being really good at this business — we’ll show that diversity matters and diversity delivers great results.
“I do believe, fundamentally, that early stage investing, early stage founders, the LP base, all needs to be more diverse.”
MS:
I guess the last [thing], and it means a lot to me, is Nikhil partnered with me. Nikhil, for those that don’t know him, is a tenure investor. He went to Princeton, he’s super smart, he’s very good at his job, and he’s taking a chance on me, because I’ve never done this before.
I feel really lucky to be with someone who is such a craftsman. We both have mutual admiration and respect for each other. We bring complementary skills. And so we feel good about where we sit today as an investor-operator combo, which is one of our biggest differentiators. I feel lucky that we get to work together.
MD:
I feel lucky too, even though I don’t get to work with you daily, to have you as a friend and collaborator in multiple functions here. So, thanks so much, Mike.
This brings us to the end of our session. I’m super thankful for you joining us. Outside of just being a great human, you bring this really rare mix, I think, of operational knowledge from some of the biggest incumbents to the earliest startups. And I think your insights were really valuable to everyone who was listening in today, so it’s been a privilege.
So thanks, Mike. Thanks, everyone. And have a great new year.
MS:
Thank you, Mike.
