20VC The Rent the Runway Memo How Paid Marketing & Growth Hacking Ruined a Generation of Companies, When Will Rent the Runway Be Profitable & How Does it Compare to Other Fashion Co's and Why I Wish I Ran My Startup Like a Public Company

In a comprehensive discussion on "20vc the memo," Jennifer Hyman, CEO and co-founder of Rent the Runway, reflects on her company's evolution from a private entity to a publicly traded one, emphasizing the shift in perspective from highlighting uniqueness to identifying competitive advantages. She shares the origin story of Rent the Runway, sparked by her sister's one-time-use dress purchase, leading to the innovative idea of a "closet in the cloud" rental model. Jennifer candidly discusses leadership lessons learned, particularly during COVID-19, and the importance of building a team with a founder's mentality. She also addresses hiring philosophies, the transformative impact of AI on business, and the missteps of startups over-relying on paid marketing and growth hacking. Additionally, Jennifer offers insights from her experience on the board of Estee Lauder, advocating for strength-based leadership and long-term strategic thinking.

• Jennifer Hyman reflects on the difference in managing a private company versus a public company.
• In private companies, the focus is on proving uniqueness; in public companies, it's about identifying commonalities and competitive advantages.

"As a private company, the name of the game is by proving that you're different. How you run a public company is looking at all of the ways that you're the same and distinguish. What are the aspects of your business model and your PNL that actually give you a competitive advantage?"

The quote highlights the strategic pivot from emphasizing uniqueness in the private phase to leveraging similarities and competitive edges in the public market.

• Harry Stebbings introduces Jennifer Hyman and Rent the Runway's achievement as a pioneering company with female leadership.
• He also mentions Sana, an AI-powered learning platform, and Marketer Hire, a platform for hiring expert marketers.

"Today we're focused on Rent the Runway and Jennifer Hyman. Jennifer Hyman is the co-founder and CEO and under her leadership, rent the Runway has made history by being the first company to go public with a female founder and CEO, COO, and CFO."

This quote introduces the subject of the podcast episode, emphasizing Rent the Runway's unique position in the market as a female-led company that has gone public.

• Jennifer Hyman's inspiration for Rent the Runway came from her sister's experience with buying an expensive dress for a single event.
• The concept of a "closet in the cloud" was born, allowing customers to rent clothes instead of buying them.

"Aha moment was my sister going into credit card debt after buying an expensive dress that she knew she was only going to wear once."

The quote describes the personal experience that led to the founding of Rent the Runway, highlighting the issue of unsustainable clothing consumption.

• Jennifer Hyman admits to knowing very little when starting Rent the Runway at 27.
• She emphasizes the importance of transitioning from having a great idea to becoming a great leader, building a team, and investing in sustainable competitive advantages.

"I think an idea is a dime a dozen and the success of a company is really based on execution."

This quote underscores the notion that the true measure of a company's success lies in its execution, not just its ideas.

• Jennifer Hyman shares how the COVID-19 pandemic was a transformative moment in her leadership, stressing the importance of leading a team of committed individuals.
• She discusses her approach to hiring people with an ownership mentality, focusing on resilience and personal experiences rather than just career history.

"Covid was untransformative moment for me as a leader where you really realize even ten or twelve years into a business, you still have to lead a team of missionaries and not mercenaries."

The quote highlights the leadership challenges and realizations brought about by the pandemic, emphasizing the value of a dedicated team.

• Jennifer Hyman explains that hiring for a founder mentality involves looking for resilience in candidates' personal lives.
• She believes that understanding a candidate's background and values is crucial in assessing their fit for the company's culture.

"I'm giving you this job today. The only promise that I'm going to make to you is that you're going to be doing something totally different six months from now."

The quote illustrates Hyman's approach to setting expectations for adaptability and change within the company during the hiring process.

• Jennifer Hyman acknowledges that hiring mistakes are inevitable and that cultural fit is crucial for a successful tenure at a company.
• She advocates for open communication about fit early on to prevent long-term issues.

"Inevitably, until you start really spending time with someone, you're never really going to know if it's the right fit or not."

This quote reflects on the inherent uncertainty in the hiring process and the importance of recognizing cultural fit early in the employment relationship.

• Jennifer Hyman does not endorse hiring quickly, especially for senior positions, but does believe in the idea of firing quickly when necessary.
• She emphasizes the importance of trusting one's instincts in the hiring and firing process.

"I don't believe in hiring fast. I believe in hiring medium... In firing fast, I would say yes."

The quote presents Hyman's nuanced view on the common adage of "hire fast, fire fast," suggesting a more deliberate approach to hiring and a more decisive approach to firing.## Private vs. Public Company Management

• Jennifer Hyman expresses a preference for the management style she employs as a public company CEO, which she wishes she had applied during the private phase of her business.
• As a private company, the focus was on highlighting differences to attract investment, positioning Rent the Runway as a unique entity in the tech and logistics space rather than as a fashion company.
• In contrast, as a public company, it is crucial to identify similarities with industry peers to better understand competitive advantages and weaknesses.
• Upon going public, Rent the Runway was compared to other apparel companies, revealing that their inventory costs were significantly lower, which was initially perceived as a problem but turned out to be a competitive advantage.
• The analysis of public financials led to the realization of excessive SG&A expenses, prompting a restructuring to improve the company's financial health.
• Jennifer Hyman regrets the earlier focus on being different as a private company, suggesting it can lead to excuses for poor metrics.

"The way that I run the company today as a public company is how I wish I had run it more as a private company."

This quote indicates Jennifer's belief that the disciplined, comparative approach she uses now would have been beneficial even when Rent the Runway was private.

"As a private company, the name of the game in terms of how you raise capital and how therefore you grow is by proving that you're different and saying, I'm this special snowflake."

Jennifer explains the strategy of emphasizing uniqueness as a private company to attract investment and grow, which she later found to be less effective than anticipated.

"How you run a public company is by looking at all of the ways that you're the same as everyone else in your industry, and by nature of looking at the ways that you're the same, it's very clear to see and distinguish what are the aspects of your business model and your p l that actually give you a competitive advantage, and what are the aspects where you're falling behind as a public company."

This quote highlights the importance of benchmarking against industry standards to identify strengths and weaknesses in a public company's business model and performance.

"My competitive advantage is the thing that, as a private company, I thought was a problem."

Jennifer notes the irony in discovering that what was once considered a disadvantage as a private company turned out to be a significant competitive edge in the public market.

• Rent the Runway's inventory costs are substantially lower than traditional apparel businesses, at 30% of revenue compared to the industry's 50-55%, due to their high ROI rental model.
• Comparing P&L statements with similar-sized apparel companies revealed that Rent the Runway's SG&A expenses were disproportionately high, leading to a strategic restructuring.
• The financial transformation over the past two years has doubled gross margins, with Q4 2021 at 30% and Q4 2022 at 44%, indicating significant margin improvements.
• Jennifer Hyman emphasizes the importance of not excusing poor metrics by focusing solely on a company's unique aspects.

"So we have this kind of 20 to 25 point margin advantage versus other apparel retailers."

This quote outlines the significant margin advantage Rent the Runway has over traditional apparel retailers due to their unique business model.

"Our gross margins were around 30%. Q four of 22. Our gross margins were 44%."

Jennifer provides concrete figures to demonstrate the substantial improvement in gross margins within a year, showcasing the effectiveness of the company's financial strategies.

• Jennifer acknowledges that the expenses Rent the Runway incurred were necessary to build competitive moats, such as their distribution facilities and reverse logistics technology.
• The rental model's profitability comes from high returns on inventory, but it requires significant upfront investment and working capital to grow.
• Despite the high costs, these investments created unique operational strengths that are difficult for competitors to replicate.

"Our expenses actually were necessary in building out the competitive moats of the Business."

This quote explains that the high expenses were strategic investments to create barriers to entry for potential competitors, which are now considered competitive moats.

"We have pioneered, just in time reverse logistics of clothing and accessories, meaning all these clothes are sent back to us from women who have worn them."

Jennifer describes the innovative logistics process that Rent the Runway developed, which is a key part of their operational advantage.

• Rent the Runway's gross margins are higher than those of other apparel retailers, even when including all inventory and fulfillment costs.
• This margin advantage suggests that Rent the Runway should be able to achieve profitability and potentially outperform competitors in terms of profit margins.
• The company's previous lack of profitability was due to high SG&A expenses, which have since been addressed.
• Jennifer anticipates that with increased revenue scale, the business will generate significant cash flow.

"Our gross margins are 44% in Q four. Stack that up against the gross margins of other apparel retailers, and we have a 15 to 20 point gross margin advantage versus those companies."

Jennifer highlights the company's strong gross margin position relative to competitors, which is a positive indicator for future profitability.

"We're a stone's throw away from profitability right now."

The quote suggests that Rent the Runway is close to reaching profitability due to recent improvements in their financials.

• The "street," or market investors, currently overlook unprofitable companies, which has been a challenge for Rent the Runway given its history of cash burn.
• Jennifer believes that Rent the Runway has made significant progress in demonstrating market potential (TAM) and the ability to be profitable.
• She is confident in the company's future, aiming to build a sustainable business that will last for decades.

"The street in general right now isn't looking at all paying any attention to companies that are unprofitable."

Jennifer points out the current investor disinterest in unprofitable companies, which has affected Rent the Runway's market perception.

"We've made significant progress on both of those in a very short period of time."

This quote reflects the company's rapid advancements in addressing market potential and profitability concerns.

• Jennifer Hyman is focused on the long-term success of Rent the Runway, seeking to attract investors who share this vision.
• She believes that AI will have a transformative impact on business operations, dividing companies into those that benefit from AI and those that are negatively affected.
• Rent the Runway is positioned to be a beneficiary of AI, using its data advantage to enhance customer discovery and shopping experiences.
• Jennifer is excited about the potential of AI to revolutionize the fashion industry and is actively investing in this area within the company.

"I think that over time, you get the investors you deserve."

Jennifer expresses her belief that a company's investor base will eventually align with its long-term strategy and performance.

"AI is going to be the biggest change to how we operate businesses since the iPhone."

This quote conveys Jennifer's view on the significance of AI in transforming business practices and the potential it holds for the future.

"We already have all those machine learning engineers within the company."

Jennifer indicates that Rent the Runway is already equipped with the necessary talent to leverage AI, which should not significantly increase expenses.

• Jennifer Hyman clarifies that while Rent the Runway is an apparel company in terms of customer experience, it is deeply integrated with technology in its operations.
• The company's identity is shaped by its unique business model, which combines fashion with advanced logistics and data analytics.

"We're in the business of getting women dressed every day in terms of how our customer experiences us. We're an apparel company now."

This quote defines Rent the Runway's primary business focus from the customer's perspective, emphasizing their role in the fashion industry.## Rent the Runway's Identity

• Rent the Runway is a fashion company enabled by technology.
• The company has a tech-heavy employee base but identifies primarily with the fashion industry.
• It disrupts a specific aspect of the $3 trillion global fashion industry.

"I've never said that before, but it's true. We're a fashion company and I'm proud of it."

This quote marks the first time Jennifer Hyman openly labels Rent the Runway as a fashion company, indicating a shift in identity and pride in the industry they are disrupting.

• Designer brands see Rent the Runway as a marketing engine.
• Rent the Runway introduces customers to designer brands, often for the first time.
• The company's customer base is considered luxury, with significant yearly spending.
• The customer demographic is young and wealthy, not traditionally the customer for these designer brands.
• Customers have a high likelihood of wanting to purchase after renting.

"Brands at this point see me as one of their most powerful marketing engines."

Jennifer Hyman explains how designer brands value Rent the Runway for introducing their products to a new, affluent customer base, which in turn increases the likelihood of purchases.

• Paid marketing and growth hacking are criticized for not adding value to customer experience.
• Startups invested in growth hacking with minimal long-term benefits.
• VC advice from the early 2010s pushed startups towards growth hacking and paid marketing.
• The approach was based on successful examples like Facebook but did not translate well to smaller companies.
• Paid marketing does not foster brand loyalty or improve customer experience.
• Billions of dollars may have been wasted on ineffective marketing instead of enhancing customer experience or brand value.

"What happened was all of these startups wasted an inevitable amount of time and money on building these growth departments that were just like pushing chess pieces around the board."

Jennifer Hyman reflects on the misguided focus on growth hacking, suggesting that it led to wasted resources and did not contribute to genuine customer value or company growth.

• Amazon and Airbnb are cited as companies that invested in customer experience and brand over paid marketing.
• A significant portion of Airbnb's traffic is now organic.
• Rent the Runway has also primarily relied on organic customer acquisition.
• Investing in customer experience and brand value is seen as more effective than paid marketing.

"The evolution of Amazon is just, let's give the customer more and more value so that it is ridiculous to think about not having a subscription to Amazon prime in your life."

This quote highlights Amazon's strategy of continuously enhancing customer value to ensure loyalty and subscription retention, which Jennifer Hyman admires and sees as a model for success.

• Startups have historically inverted the marketing funnel, focusing too much on direct response paid marketing.
• There has been an overemphasis on marketing over product and operational improvements.
• The misallocation has led to a lack of customer retention and loyalty.

"The funnel should have never got into a place where 90% of your marketing budget was spent on those ads that make you feel good."

Jennifer Hyman criticizes the disproportionate spend on bottom-funnel marketing tactics that do not contribute to long-term brand strength or customer satisfaction.

• Growth hacking is distinguished from broader growth efforts, which may include product improvements.
• Growth hacking involves minor tweaks that may not significantly impact the customer's fundamental relationship with the product.
• The term "growth" has a blurred definition within the industry, sometimes conflated with product team efforts.

"But gross hacking is something that's fundamentally different. That is literally, you are hacking the difference between changing your font color from this to that, like moving this line from here to there."

Jennifer Hyman differentiates between substantial growth efforts and superficial growth hacking, questioning the latter's impact on customer relationships and long-term company health.## Subscription Business Models

• Subscription businesses should not be lumped together due to their varying structures and financials.
• Rent the Runway's subscription model differs from typical subscription services that provide more tangible goods monthly, such as ButcherBox.
• The fashion industry has shifted from a purchase and wastefulness model to a replenishment business model, similar to grocery, through Rent the Runway.
• The average American buys approximately 70 new articles of apparel per year, indicating a high demand for variety in clothing.

"Lumping all subscription businesses together is as wonky as when I used to say that we shouldn't be thought of as an apparel company."

The quote emphasizes the uniqueness of Rent the Runway's business model compared to other subscription services and apparel companies.

"So the customer clearly cares about variety."

This quote highlights the consumer's desire for variety in clothing, which Rent the Runway capitalizes on with its business model.

• Serving on the board of Estee Lauder is a privilege and provides learning opportunities from CEO Fabrizio Freda and the Lauder family.
• The Lauder family exemplifies long-term thinking and stewardship, aiming for the company's longevity.
• Leonard Lauder's continuous curiosity and willingness to embrace change even at an advanced age is inspirational.
• Being on the Estee Lauder board has influenced thinking more long-term and adopting strength-based leadership within Rent the Runway.

"The founder, sitting on the board of Estee Lauder is just one of the privileges of my life."

Jennifer Hyman expresses the honor she feels being on the board of Estee Lauder and the learning opportunities it provides.

"Let's focus on what makes someone amazing."

This quote reflects the strength-based leadership approach that Jennifer has adopted from Fabrizio Freda, focusing on amplifying individual strengths.

• A personal connection led to Beyoncé's manager partnering with Rent the Runway.
• Beyoncé's alignment with Rent the Runway's culture and beliefs led to her featuring on the homepage and involvement in other promotional activities.
• The collaboration with Beyoncé brought significant traffic and sales to Rent the Runway, though Jennifer Hyman regrets not leveraging it more.

"I'm Beyonce's manager."

The quote reveals the unexpected connection that led to the collaboration between Rent the Runway and Beyoncé.

"It did. It brought a lot of traffic at the time and I do think we got a nice bump from Beyonce."

Jennifer Hyman acknowledges the positive impact of Beyoncé's endorsement on Rent the Runway's traffic and sales.

• Jennifer Hyman believes work-life balance is possible.
• The most important aspect of building a business is maintaining forward momentum and not giving up too soon.
• Continuously pushing forward with positivity is crucial for success.

"Totally possible."

This quote affirms Jennifer Hyman's belief in the feasibility of achieving work-life balance.

"The most important thing about building a business is forward momentum."

Jennifer Hyman emphasizes the importance of perseverance and continuous progress in building a successful business.

• Jennifer Hyman's views on AI have evolved to see it as a critical leapfrog moment for companies.
• AI is considered a game-changer for how companies will operate and how people will experience the world.

"I've changed my mind on AI."

The quote indicates a significant shift in Jennifer Hyman's opinion on the importance of AI for business innovation and growth.

• By 2028, Rent the Runway aims to be very profitable, much larger, and have potentially millions of subscribers.
• The focus will be on growing existing services rather than introducing massive changes.
• Rent the Runway is at the beginning of a significant shift in how people approach dressing.

"We're going to be very profitable. We're going to be much bigger."

Jennifer Hyman expresses confidence in the future growth and success of Rent the Runway.

"I think we're at the very beginning of a tidal wage shift in how people get dressed."

This quote suggests that Rent the Runway is leading a transformative change in the fashion industry's approach to consumer attire.