Note: This post is part three of a three post series on New York-based startup Warby Parker, driven by interviews with Neil Blumenthal, co-founder and co-CEO. At it’s core, Warby Parker is a company attempting to deliver high quality, fashionable, prescription eyewear to consumers at a reasonable price.
As co-founder and co-CEO of rapidly growing Warby Parker, Neil Blumenthal has been around the block when it comes to raising venture capital. Read on for what Neil had to say to me about going from bootstrapping and swiping pens to raising $12.5 million in Warby Parker’s most recent round of funding. For more on their investors, check out their AngelList profile.
Enter Neil [Except for emphasis added, those are all me (pats self on back)].
Raising Funds at the Intersection of Tech and Fashion
We think of ourselves as a technology enabled fashion brand. When we think about different communities that we are a part of, one is obviously the fashion community, one is obviously the tech community, another is the social enterprise non-profit space, and another is more traditional retail. We try and live in all of these worlds and contribute to them and learn from them.
We do spend a bunch of time in Silicon Valley, but I think that’s out of choice more than anything else. We have a big customer base there because obviously some of the technology enthusiasts end up being early adopters.
We didn’t have our first equity raise until 15 months after the website launched. And the website launched over a year after we started working on the business, so we really bootstrapped it, put our life savings into the company, and the company took off.
We launched the website and ad campaign with GQ, hit our first year sales goals in 3 weeks, sold out of out of our top 15 styles in 4 weeks, and realized we needed more capital. At that point we weren’t paying ourselves a salary and we weren’t paying rent, but we still needed to order more and more glasses, so we thought debt made the most sense.
Debt Funding Post-Recession
We ended up getting a $200,000 term loan that was SBA backed. We had to go to about 20 different banks before getting that. Here is a business that’s kicking butt, but it was really difficult for us to get financing because of the financial crisis.
The banks had instituted strict rules and needed at least two years of tax returns- which is impossible for an early seed start up. Even though [our loan] was backed by the SBA and the Federal government was guaranteeing it up to 90%, we still had to put 50% up as collateral. So we had to give the bank 100,000 for 200,000 of cash.
They said, “Frankly if you guys default we have to go after you and you have to declare bankruptcy before we are able to get money from the SBA. So that guarantee is not worth it to us.” That was really telling. I do believe in the SBA, but something is breaking down somewhere.
Diverse Investor Mix
When we did raise [venture] money, we tried to do it from a diverse pool of investors that could add value. We have folks from the tech world like SVA Mutual, First Round Capital, Lira Ventures. We also have people from the fashion world, such as the co-founder and former CEO of Tommy Hilfiger or the group that owns Michael Kors, or the family that owns Chanel. Likewise, we brought in people from the [entertainment] industry, like Troy Carter who is Lady Gaga’s manager, or Aria Manuel who is an agent who works at Endeavor, and Ashton Kutcher. We really tried to get a diverse group of folks that get what we’re doing.
We’ve actually done 2 [rounds of VC]. Our second raise was $12.5 million from a hedge fund, Tiger Global. We were really excited to work with them. They have over a billion dollars that they invest in private internet companies and they invest in the best in the world, not just in the U.S. but in companies in India, China, Turkey and Brazil that have rates of growth that made me ashamed of our 500% growth.
Bootstrapping vs. Angels vs. Incubators
[The decision] is very entrepreneur and idea specific. For us, the way we raised funds I think has been perfect for our need. The four of us were able to invest our savings into getting the proof of concept and launching the brand. For us that meant three things: being able to manufacture our first design collection, launching our website, and hiring PR. We had the ability to pay for those ourselves, and not everybody is in that position.
Because we had such great growth and momentum, we were able to choose the investors that we wanted to work with, on the terms that we wanted to work with, which allowed us to maintain control and ensure that our vision was going to be realized.
And our vision is disrupting and radically transforming the industry and creating a model for how a for-profit company should behave. We were always weary of investors that might have different thoughts than ours. In the end we’ve been able get the cash that we need to turbo charge the business without giving up the control that we want to make sure our baby grows into what we want, an amazing person.
I think that one of the most valuable classes we took at Wharton was Legal Aspects Of Entrepreneurship. We spent a lot of time going through term sheets and really understanding the terms. I think it is really important for entrepreneurs to understand what it is when we take money from somebody. At the end of the day, money is a service and product just like everything else. You need to choose your vendors wisely, and you need to really understand that contract, that agreement that you have with them, and make sure that you are comfortable with all of the provisions. I think the other thing is to really evaluate the investors as you would a potential employee. Do they fit culturally? Are your values aligned? Are your visions aligned?
Is There Such A Thing As Too Much Cash?
Cash sometimes can also create perverse incentives. We’re a stronger company because we bootstrapped for so long because scrappiness is ingrained in the culture of who we are. Up until recently we didn’t purchase pens. Our philosophy was “there’s enough pens in this world, why waste money on pens?” We would literally go to a meeting and later somebody might notice that a pen was missing. That’s an extreme example.
With early funding, you have pressure from investors to show results. At times, short term growth can be at the detriment of long time growth, which was something we never wanted to sacrifice. There’s also pressure to test, test and test and throw as many things on the wall as possible and see what sticks. While we’re a firm believer in testing and using data to make decisions, you want to make sure you stay focused on what it is that you are trying to do. Instead of throwing 10 things on the wall, maybe you should only be throwing 3 things.
More on Warby Parker:
Warby Parker Part One: Culture, Innovation, and a Culture of Innovation
Warby Parker Part Two: Market Strategy and a Social Mission