Brian: Hi, this is Brian Smiga with Alpha Venture Partners podcast. I’m here today with Brad Harrison at Scout Ventures, and we’re going to talk about his category leading company, Bespoke Post. Welcome Brad.
Brad: Hey, thanks Brian. Good to be here.
Brian: Brad, tell us first about Scout Ventures. You’ve got an interesting name, and you’ve got an interesting differentiation. Tell us about Scout.
Brad: Scout is an early stage venture capital firm headquartered in New York City. We specialize in emerging technology companies in the areas of big data, marketing tech, and an area that we call frontier tech, which is AR, VR, AI, robotics, drones, autonomy, mobility, and all of those emerging tech-savvy areas. And while we’re based in New York, we invest across the country. We have a special relationship with MIT, where I am a Sloan alumni, and we also built a pretty good relationship at Carnegie Mellon. Carnegie Mellon and MIT are the top two leading institutions in the area of frontier tech, so we spend a lot of time there. Where we differentiated Scout is we are entrepreneurs and operators ourselves, so what we focus on helping these companies build the foundations to be great companies.
We do that by helping them avoid four critical pitfalls: 1) running out of capital 2) a bad critical hire on the early team 3) a bad early investor and 4) a bad anchor customer or partner. So we try to stay really involved in the company without wasting the founder’s time. We wanted to be their trusted consigliere, we want to be their first text or call with good news or bad news, and we focus on leveraging both our LP network and our advisor network to exponentially help these companies sell their businesses.
Brian: As fellow VC in New York focused more on growth, I know Scout and your team have a great reputation for seeing the best seed opportunities in the northeast, including those coming out of Carnegie Mellon and MIT. So let’s talk about your company, Bespoke Post. Tell us about the discovery and the ‘aha moment’ you had when you met them.
Brad: A couple of things. Rishi and Steve came to us through three different channels at once. Number one, I got emailed from another entrepreneur who had met Rishi and said, “Hey Brad, I met this young entrepreneur. He’s working on a company, I think they’re in the middle of a pivot, but I think you’ll just get along with Rishi. So you should meet him.” So through that, we started the dialogue. And then, they actually were in ERA for their previous incarnation of the product, which was an app that allowed you take a picture of clothing, and then it would tell you where that clothing was and how to curate the style around it.
They wound up pivoting away from that. But we had seen them because Murat at ERA had also said, “Hey Brad, I think you would really get along with the founders.” And finally, I was advising an angel network of professional athletes called Star Angel Network, and they got brought into the Star Angel Network investment review with a group of professional football players. And I got asked to sit in on that meeting. So those guys came to us through three different channels, which is always a good sign. And we immediately hit it off, for two reasons.
Number one, when we met them, and they were about to pivot into what is their current business model, they basically said, “Hey Brad, have you ever read a men’s magazine and you get to the page that tells you all the things you need for a great weekend away, or all the things you need to make a great dinner, or all the things you need for a great wine tasting or a scotch tasting? You know how when you read that in Men’s Health or Sports Illustrated or any of those magazines, they basically content curate the page, and then they give you all these URLs and you have to go to all these different places and buy everything. Well, as the magazine content curation is losing influence, we think there’s an opportunity to actually put those items together, market and curate the same type of idea to young males 25 to 45, where we’re curating around categories they care about. Which is booze, grooming, accessories, dating, etc.”
It was kind of this whole category of things, and I said I totally get it. I saw this at AOL, Time Warner, I remember working on how could we extract more money out, and these guys basically came up with a great idea to curate product, use content to help market the product, and develop a monthly subscription box at a $45 price point, which they would be able to grow. And that’s where they started.
Brian: So there were other monthly subscription boxes for women, BirchBox comes to mind. Where did Bespoke Post stand in that category when it got started?
Brad: So I think the thing that was unique about Bespoke Post was that I could immediately identify with the items they were selling. The first couple of boxes that we tested, I liked all of the stuff. They were cool glasses, it was just really well-done because the founders had very good taste. And the reason we ended up backing those founders, is that one of them had worked in logistics at Amazon and the other one had worked at logistics at Chegg. And so they had very deep understanding of the logistics of sourcing multiple thousands of units of the same sku, and then optimizing the distribution and fulfillment around that. So to me, the idea was I get it. I’ve been reading Men’s Health, men’s journals, Sports Illustrated for my whole life. And whether it was Jimmy the bartender or whatever the content section was, it always made sense.
Oh, for the Hamptons getaway, you need this duffel bag, these shorts, this suntan lotion. So the idea of marketing that to young guys that had taste, and actually they don’t have to do anything, they just get the box, that made perfect sense to me. The couple of things that we did that I think were transformational for the company, so number one, when we met the guys, they had raised less than $200,000 of capital. They were coming out of a different product. Number one, we said, “Let us put together a million dollar round. We’ll lead the round, we’ll put the round together.”
Number two, we said, is that you guys have no corporate governance. So it’s just the two founders, and that’s great, but I think if we’re going to lead the round, we’re going want to put together a board. So we decided to constitute a board that was the two founders and myself as the official board members, and then Brendan, the principal at Scout, was a board observer. So that allowed us to put together a corporate governance. And then the next two things we did that I think were revolutionary in making the business successful, was number one, we said what can we do to increase our retention? And the first thing that we saw around these subscription-based products is if you saw a box that you didn’t like, if your only option was to cancel your subscription, you would just cancel subscription.
Brad: So we came up with the idea of allowing you to opt out of the box. By doing that, you didn’t cancel your subscription. If you didn’t like the box, you just opted out of it. So instead of us losing 30 – 40% of our monthly subscribers, which is what a lot of the other subscription companies did, we actually were able to lower the attrition 10x to three percent. So we have a 97% retention rate, and on average, what we saw is somewhere between 51 and 60% of the monthly boxes were opted into. So we gave everybody a choice on every single box every month, that was number one. That became a massive competitive advantage.
The second thing we did is, we got really smart about which boxes worked in the life cycle of the consumer. So we know that if you came in as a new customer, and we showed you box A, B, C, and D in that sequence, we knew you were more likely to accept those four boxes because we had data across multiple years of what boxes had the highest sell-through rate. So then what we started doing is, instead of having a monthly box that was the same for everybody every month, we actually got up to the point where every month, we might have 20 or 25 different boxes. And depending on where you were in your customer lifecycle, this would dictate what box you got.
Then we got more sophisticated, we said, if you want to opt out of that box, we’re going to recommend three to five other boxes that you might want to opt into. So now, we allowed you to opt out without canceling, we allowed you to pick another box, and we were able to optimize your experience. So whether you joined in January or September, you would get the best boxes as your first set of boxes regardless of when you joined us. That became a massive plus for the company.
On the heels of that, hat we realized that we had this data on the content and the boxes that were getting consumed, so we then opened an online store. And so over time, the online store has gone from being a small fraction of revenue, to now representing 35% of the revenue. So we now have 65% of the revenue in monthly subscriptions with a low attrition rate, and great lifetime value.
Brian: Well I just want to be clear on how great a deal this is for men, and I hope our male listeners and also the women who love them are listening. Because you guys really delivered on the brand promise, this is not just a generic box you get every month, it’s truly Bespoke. It’s tailored to individuals, and then you can order up through the store more goods. This is a great model. And it’s great to know how you helped the company get to this value-add. What does this look like for investors that are interested in an e-commerce space, or might have investments in retail?
Brad: Yeah, so the first thing, and I think if you look at what’s been going on in the venture community, is that anything consumer-facing really becomes a brand-building exercise. And so how do you build a brand? Well number one, you have to build a brand that consumers can identify with. So that’s name, aesthetic, UI, UX, usability, customer service, all of those things. So we made sure that we were good at all of those things. So let’s just build a good brand. A lot of that is a direct reflection of the founders. And Rishi is a very stylish guy, we are not just curating other products, we’ve actually launched our own white label brand called Line of Trade. So when we saw an item that we liked but it wasn’t exactly what we thought our consumers would like, we could go out and redesign it using our own brand.
For example, there are computer bags that were designed by Line of Trade. And that was actually by a designer and a product person that we hired into the company. So we have product procurement sourcing. The idea is if I can buy a bag from a third party for $30, but I can make that bag myself for $12 and it’s essentially a better product, it’s a no-brainer. And in so doing, they’ve built an authentic brand.
The founders emulate the values of the brand, the team, Brendan and I, have been integral in the team since they were five people. They’re now 40 people, so we’ve been there as they’ve developed the team. And one of the things I’ve always noticed, and I think it’s really good for all the investors out there, to judge how successful your company’s going to be, we always say it’s really good to go to a company holiday party and see what the attitude is and how the company interacts. And Rishi and Steve have done an amazing job of building the right culture within the company. And that gets reflected not only in the products they sell, but the quality of the images, the quality of the content they write. And so they’ve built this really amazing thing, which is a team of people that really care about curating amazing products for males 25 to 45.
Brian: Bespoke Post, in its current business, could get to 50 to 100 million in revenue and profitability. Where do you go from here as an investor? You’ve done a great job adding value, I want to understand the end game.
Brad: They’ve been profitable from the beginning because we’ve been very focused on metrics and sustainable growth. One of the things I hate about the venture model is when you see these companies that raise $50 million, and they’re spending $1,000 to acquire a customer where the lifetime value is $200. That math doesn’t work. Zenefits is the most famous of those companies.
So this has been about a tight focus on unit economics and metrics to grow the business. They’ve been profitable the whole time. Our goal, and normally our goal as a great seed investor is to find a great series A investor to take the company to the next level. And when we think about that, we think about an investor that can capitalize the company on the next tranche of growth capital, but also join the management architecture so that we can add new knowledge, new expertise.
With the guys at Bespoke, we were very fortunate to successfully close the team at Walden Ventures as our series A lead investor. An amazing VC, knowledgeable about e-commerce, understands how to scale the business. We’re hoping this year we’ll be able to do somewhere between 28 and 32 million.
Brian: I agree. So we’ve got you guys, who have added the value at the seed stage, now Larry Marcus and the Walden team adding the value along with yours. Is there one more investor that comes in to get you guys to 100 million?
Brad: Yeah, you know I think with all these companies, what you’re seeing in the retail category, is you’re seeing a lot of activity from the strategics. Brian Spaly, who was Trunk Club and Bonobos with Andy Dunn, those guys brought Nordstrom in as strategic investors in both of those companies early on. And that eventually led to acquisition. So I think what we would do is find a strategic investor that would be a part of another growth round, to 50 to 100 million, with an eye on acquisition and putting them into a bigger platform. So what’s been interesting, and I won’t share the names because it’s confidential, but there are a lot of other organizations out there that actually sell to women, girls, or different demographics that have a large business, that want to add another category.
So when you think about the male, 25 to 45 demo, there is nobody that’s total dominating that market today. So there’s a lot of these bigger organizations that say “If I could figure out how to get $45 worth of mind share of that consumer over an average lifecycle of 19 months, all I have to do is upsell them one suit, one trip, one whatever, and now I’ve doubled my EBITDA margin”. So you’ll likely see is somebody that’s either in a complementary category that sees how much EBITDA contribution in a business like Bespoke Post can generate. Because as I mentioned, the 65% of the revenue that’s subscription, that revenue is growing at a steady pace, that retention is holding at a steady rate, so that’s fairly easy to model what that EBITDA contribution is.
And then every year, the guys outperform on the online store revenue. So I think these guys understand the way e-commerce is evolving for not only the millennial consumer, but the consumer that wants curated, convenient access.
Brian: In closing, I’m going summarize a couple of the great nuggets of advice that came out. The first is, if you’re a founder, if you can hit the VC through three different trusted, warm intros, we regard that as a positive signal. And next, to be open to setting up governance right away, that ended up being critical. And of course, this team had both the style points, and the hard one, logistics management points, that are the right DNA for this e-commerce company. Do you have one other closing piece of advice to other seed investors that you’d like to share today?
Brad: Yeah, I think you and I have talked it about multiple times and has really been a focus for Scout. I’ve been doing early stage investing on and off since ’99, and I’ve been building Scout over the last seven or eight years. And the one thing that I would tell seed investors is it’s not about the technology, it’s not about the business model, it’s not about any of that. I mean, you have to get all that right, but you assume at this juncture in our evolution, we’ve got enough people doing diligence that that’s not where we’re going wrong. The key ingredient, and the key ingredient that’s made this company successful, is “compatibility with coachable entrepreneurs.”
These guys are a sponge. And so unlike other entrepreneurs, where Brendan and I spend two or three hours in a board meeting, and then we walk away, and then the next board meeting we have the exact same conversation because they don’t listen, these entrepreneurs always showed up at the board meeting with an update on what we had accomplished as the metrics we had set forward in the last board meeting. Number two, they always had not 100 things that they wanted to focus on, they always had the three to five things that were critical – that we as a corporate governance focused on every single board meeting.
And then lastly, they just had a great cadence on how we operated the business. We never got too over our skis, we never got too upset when we had bad data, we were very metrics-driven, we were very level-headed. And in my mind, they are a special team. And I remember when they didn’t want to put a board together because they were so worried about losing control, and I said guys, it’s not about losing control. It’s about getting to the next level. And they were able to grasp that.
So from me to other seed investors, that coachability and compatibility is really the difference between being able to impact and influence your entrepreneurs. And I view them as, whether I’m playing the older brother role, I’m going to stay with older brother, I’m not ready to be the father figure yet. But I think when you play that older brother role, you’re using the Socratic method to ask questions that allowed them to reach the decision point that you wanted them to reach. But ultimately, a little bit of luck, a great team, everybody’s getting together, and we have high hopes for them. And they deserve it.
Brian: So there we have it. Compatibility with coachable teams. So for entrepreneurs, you have to show from moment one that you’re listening, and you’re open, and you’re coachable. And for seed investors, your ability to be the big brother, to coach, to care enough to be a great coach, to lead by example, that’s a great headline, Brad. And we’re really happy you shared the Bespoke Post story and the Scout story with us today. A great talk, and thanks for being here with us today.