Katrina Lake, founder/CEO of e-commerce clothing/styling company Stitch Fix – Ethan Baron photo
Merrill Lynch last year put the total purchasing power of U.S. women at $5 trillion. Globally, women’s buying power will skyrocket to $18 trillion by 2018, from $13 trillion in 2013. By 2018, women’s purchasing power globally will hit $18 trillion from $13 trillion in 2013, and by 2028, women will control nearly three-quarters of all discretionary spending world-wide, the Boston Consulting Group says.
Tell that to the VCs on Sand Hill Road. Bring beer – guys tend to like it. And if you happen to have an idea for a sure-fire new “smart” trout lure, heck, bring that, too.
Only 6% of U.S. venture capital firms have female partners, according to Babson College’s Diana Project. And as one Harvard Business School MBA found out, that imbalance, combined with basic gender differences, can pose a problem for an entrepreneur seeking money from men for a startup selling to women.
Katrina Lake is the founder and CEO of Stitch Fix, a tech-driven online clothes styling and sales platform, and the 16th most highly funded MBA startup in Poets&Quants’ 2016 ranking. Lake started the e-commerce company in 2010, during the second year of her Harvard MBA program. Her San Francisco company has now received a reported $46.75 million in equity funding, and just moved into what will be five floors of new offices in downtown San Francisco.
GONE FISHING WITH THE WRONG BAIT
In 2013, in the period between seed funding and a $12 million Series B round, Lake ran into a little-discussed rampart of the Silicon Valley gender barrier. “There were definitely times when it was quite hard to fundraise,” says Lake, 33, who is one of only a handful of women in the Poets&Quants top 100 MBA startups ranking. “At the end of the day a venture investor wants to be passionate about the business they’re working on, and wants to add value. If I were a venture investor, I wouldn’t be interested in hunting or fishing or computer gaming.”
To be sure, other concerns kept potential investors’ wallets shut. Stitch Fix ships to its clients – after the women have sent in their size, clothing needs, and style preferences to a stylist via the Internet – five items of clothing at a time, any or all of which the customers can keep and pay for or send back for free. So the company must carry inventory – buying wholesale, selling retail. “Not a lot of investors are excited about using funds to buy things,” Lake says.
Still, she says, she never lost faith in Stitch Fix’s success. Even early on, when customer service was “imperfect,” customers kept coming back, she says. “I could always see that this business model works.”
Stitch Fix says it does not reveal how much funding it has received since series A and B rounds totaling $16.75 million. BloombergBusiness reported in April 2015 that Stitch Fix received $30 million in VC funding in the fall of 2014. When presented with the $46.75 million figure for total funding, a company spokeswoman did not dispute it.
In any case, major blocks of funding helped confirm Lake’s belief in her startup. “The fact that a well-known, smart investor is willing to make a high-risk gamble on you is validating, and I think a sign that you’re onto something,” she says.
The buying and merchandising department at Stitch Fix in San Francisco – Ethan Baron photo
Of course, VC investment means more cooks in the kitchen. “All the sudden there’s multiple stakeholders with multiple interests,” she says. “An angel investor versus a top-tier institutional investor are going to have different views around outcomes. Over time there’s going to be a little bit of differences that are going to be formed.”
Key to promoting harmony among the stakeholders is examining them closely before bringing them on, to make sure all players have similar alignment and goals, she says.
Also, once the VCs come in, options for exit become more limited, Lake points out. “Especially when you decide to take on an institutional big-time VC, a lot of times they’re going to want you to be a multi-billion-dollar company and they’re not going to want you to sell for $25 million.”
Lake built Stitch Fix upon two major market realities and a market gap resulting from their convergence. Reality No. 1: women love to buy clothes. Reality No. 2: people love to shop online. New market gap: women who buy clothes over the Internet miss the personalized service that comes with in-store shopping for stylish clothing.
WOMEN WITH LITTLE TIME FOR SHOPS AND MALLS
The models and styles in the company’s marketing imagery – and the hundreds of thousands of followers the company has on Pinterest and Instagram – suggest a receptive target market focused fairly closely on the e-commerce-loving millennial generation, however Lake notes that one customer was 65. “Our customer range is pretty diverse,” she says.
“What ties all of our clients together is kind of this notion of being a busy, time-starved woman. That’s what we see over and over. They still absolutely want to look good, but they don’t have the time and effort to devote a ton of time to shopping or going to malls,” she says.
To use Stitch Fix, women fill out an online “style profile” form. The 33 questions are intended to provide as complete a picture as possible of the customer’s body shape and clothing needs and preferences. Women input sizes for types of garment, can note the preferred rise in their jeans, and whether they like their clothing loose, tight, or in between, among other specifications. Stitch Fix pays attention to maximizing attributes, asking, “What do you like to flaunt?” and also asks what body parts a customer would prefer to play down. The booty issue is addressed delicately, with a yes-or-no question: “Are you curvy on your bottom half?”
The customer also rates seven collections of clothing in different styles shown in photos; the four choices range from “Love it” to “Hate it.”
The last step for profile submission is payment of $20 to Stitch Fix, money that is applied toward anything purchased, and there’s always a 25% discount for buying all five items. Customers can also subscribe to periodic deliveries of five-item “Fixes,” with a $20 charge for each shipment, which can be applied to any goods not sent back.
Katrina Lake, founder/CEO of e-commerce clothing/styling company Stitch Fix – Ethan Baron photo
In addition to matching customers with clothes they’re likely to buy, Stitch Fixes’ client profiles provide a wealth of customer data, a highly valued commodity for any business, with particular importance for companies carrying inventory based on predictions of what people will buy. The date-of-birth and occupation questions, as well as “Are you a mom?” certainly have relevance for clothing needs, styles, and fit, but provide valuable customer-demographics insight as well. Stitch Fix also gathers social media data from customers who fill in optional links to Pinterest boards, Twitter feeds, and LinkedIn profiles.
The company employs 60 data scientists, 50 of them with PhDs, Lake says. Data analysis maximizes supply chain efficiency, and, crucial for a company selling ephemeral styles, a window into the future. “Out data science is really good at making predictions about how likely someone is to love something,” Lake says. “The data science team and the stylists working together are much better than either of the two working alone.”
What you won’t find in the Stitch Fix website’s FAQ section is any mention of the algorithm that helps the company match customers with clothing. Stitch Fix is selling the personal touch, and the automation represented by an algorithm might give the wrong impression about the service’s “Total Personalization.” The stylist, Lake maintains, always gets first touch, and can then consult results from the automated data crunching to help identify the best choices.
SOCIAL IMPACT, WITHOUT TRYING
The company’s stylists, spread across the country, now number some 2,000 of the firm’s 3,000 employees. Stylists must commit to a set number of hours per week, typically 15 to 30, but can choose their hours. Many are women who have left the workforce to raise children, Lake says, and others are small clothing boutique owners and former stylists. Lake didn’t set out to provide flexible jobs for women across the land – the business just worked out that way, she says.
Lake’s pre-MBA background helped position her to launch her own startup. As an associate and senior associate for two years for The Parthenon Group, a Boston business strategy company bought by Ernst & Young in 2014, she consulted with e-commerce and retail companies, and she went on to work with dozens of startups during two years as an associate at Silicon Valley’s Leader Ventures, which issues loans to VC-backed enterprises.
The Harvard MBA program then provided “backbone skills,” including leadership and the ability to state a point of view confidently and concisely (as required by the case study method) that she used for her startup’s launch, and continues to employ today, she says. Because she launched Stitch Fix in San Francisco, she didn’t make significant use of the Harvard network, she says.
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