Tammie on Start-ups

On the outside it looks just like any other office building on West 20th Street in New York City: no bright lights, no big signs, no fashion models running you over as you enter.walking into the office area and getting greeted by the Halloween décor is also different than I imagined. but just as I sit down in the waiting room I see my first celebrity of the day. It’s a different kind of celebrity than the ones you imagine seeing at a company that sells Marc Jacobs, Valentino, Hervé Leger and the like. It is Kevin Ryan!

Many of you might not know who this is (yet), and neither did I until I started my research for this article. But Kevin is one of the founders behind one of the fastest growing start-ups in the fashion industry at the moment. Together with Alexandra Wilkis Wilson and Alexis Maybank, both HBS grads, they founded a start-up that in its second year of operation reached sales of $150 million and is expected to reach sales north of $500 million in 2010. This is the story of the success of The Gilt Groupe.

In the beginning.
The Gilt Groupe started in 2008 with 6 founding members on the team. “I was walking in New York one day and saw this group of women in front of a store. When I asked what was going on, it appeared to be a sample sale. This is when I thought, why don’t we bring this concept to other people across the U.S.?” Kevin remarks. Alexandra adds that each of them had a similar idea and that they were also inspired by their European competitor Vente Privé.

The concept is quite fascinating: Gilt Groupe provides access, by invitation only, to Men’s, Women’s and Children’s coveted fashion and luxury brands at prices up to 70% off retail. Each sale lasts 36 hours and features hand-selected styles from a single designer.

Building the team
Most of us at HBS always wonder, how do we build out our team and how do we find those additional capabilities that we are missing?

Alexis and Alexandra were friends from college and had met each other again while at HBS. After HBS both Alexis and Alexandra went to work at other companies until 2007 when they started talking about the Gilt Groupe. Their skills complemented each other perfectly as Alexis had worked in the ecommerce / technology arena (eBay and AOL) while Alexandra worked in the luxury fashion arena (Louis Vuitton and Bulgari).

“Alexis and I were very lucky to have known each other and had a very solid relationship in terms of trust. In business school we worked on projects together, so we knew how it would be to work professionally together and we had very complimentary skills.

Business school students should be constantly trying to expand their network of different people-whether it is classmates, previous alums or colleagues from summer jobs and previous jobs; if they were to start their business they can reach out to people for whatever the subject matter is, whether its fundraising, recruiting, marketing, or even industry experience.

It is impossible for one person to have a perfect network, but recognizing people who complement your skills is really crucial as an entrepreneur. For example I did not have a deep technology background or network or infrastructure, but Alexis did, because she worked at eBay before. I did have a very extensive network of people in the retail industry. Now we have recruited over 50 merchandisers and buyers in our firm, so it was important to align our networks.”

In the beginning Kevin provided the initial seed funding to get the company started. As Alexandra says, “Kevin Ryan was our angel investor. He, [at the time CEO of double click] and Dwight Merriman [his CTO at Doubleclick.com], put in together our seed funding and got us started.”

Then in November 2007, approximately eight months after they started, Matrix Partners decided to fund their Series A with $5 million.

“The timing was very lucky because our European inspiration Vente Privé had just sold at around a billion dollars valuation. They sold a 20% stake right as we were launching, so the U.S. investor community was very interested in the business model. When they saw that someone with a great internet track record, like Kevin Ryan, was closely affiliated with the business, the investor community felt that it was a safe and smart investment; as opposed to just investing in something started by two young HBS entrepreneurs.

So it was great to have Kevin’s credibility associated with business. He is our chairman. He is physically here. He is very involved in the business.”

According to Silicon Alley Insider, in August 2009 General Atlantic and Matrix Partners decided to fund Series C with $43 million with a valuation of $400 to 500 million. Many of our first year’s TEM cases warn us about equity dilution, so the natural question that arises is: When should we take up VC funding?

“Every business is different and has a unique cap structure and unique situation in terms of competitive landscape. For us we knew it was important to grow as quickly as possible. We had heard that Vente Privé was going to come to the U.S., so that was one fear, and we knew that other U.S. sites were getting ready to launch. So we had the mentality that scale is important and that the first one to the finish line was going to get scale and was going to be the winner.

We did not have the luxury of time on our side and we needed funding. We did not really debate do we need VC money or not. It was a question of finding the right partner who is going to be supportive of our business, who we can work well with and who is going to propel us instead of slow us down. Matrix has been a great partner, very collaborative and supportive.

When you look at dilution, sure it is great to have as much equity as possible. But at the end of the day you look at how big is the valuation of the company and having funding is going to ultimately grow the business so much further, that is more important,” said Alexandra.

The Gilt Groupe is expanding so rapidly that they will be moving to a new office location soon. In the meantime they are located on West 20th Street in New York in an open space office with cubicles. Everyone seemed very approachable, and there was certainly a start-up atmosphere pervading the room.

“Our business changes from week to week. It is constantly evolving. We are constantly changing, growing and challenging our decisions. We are hiring about 10 employees every week. In the beginning we were launching Gilt, then six months later, a men’s business, then kids and home decor, then fuse and the travel site. However, that spirit of entrepreneurship, ideas, creativity and innovation has stayed consistent since the beginning,” said Alexandra.

Of course their growth has made the small start-up much more robust.

At first, “[w]e had a six person team and we had an idea we could test it very quickly; now we have such a big infrastructure and we have so many members (1.6 million members). We cannot test every day since it has impact on so many customers.”

Support at HBS
While at HBS there are resources that support student entrepreneurs, such as professors who make time to listen to business ideas and provide students with their perspectives, but also the business plan contest, IXPs, and Rock Center fellowships, among other opportunities.

However, according to Alexandra she felt that the support got even stronger after HBS: “The professors at HBS were very available once we really started working on our start-up. The professors were very engaged and wanted to see us succeed; they are a great resource for students.”

Alexis and Alexandra worked together with professor Sahlman on many issues that arose especially in the beginning of their start-up.

Success and managing growth
The Gilt Groupe has grown out to be a very successful venture. Its sales were around $25 million in 2008, $150 million in 2009 and expected to be $500 million in 2010. At the same time their customer base grew from 60,000 in 2008 to 1.6 million people in 2009.

As Gilt is expanding they are also launching new products, such as Gilt Fuse-aimed at a younger audience, Gilt Man-specially for men, and Jetsetter-providing exclusive access to insider travel deals on exclusive properties. Their strategies per product group are different, so for example, Jetsetter is located in another building at the moment, but they do share some resources (e.g., IT).

In addition to launching new products, their expansion in staff (approximately five people are hired every week) also brings operational challenges in office space. Walking through their office you feel that the place is about to become very small very fast. All the cubicles and chairs seem taken, piles of binders are everywhere, boxes and cabinets are randomly placed. Although a cozy mess, they are moving to a new location next month to accommodate their growth.

A CEO for the growth phase
While they were growing they also brought in a CEO. Susan Lyne, former President and CEO of Martha Stewart Living Omnimedia (MSLO), decided to join the Gilt Groupe in September 2008.

Alexandra comments: “We are very lucky that we got Susan Lyne on board, so we are thrilled that we were able to convince her. Initially what happened is that our partner from Matrix, Nick Beim, knew Susan and knew that she had left Martha Stewart. He initially reached out to see if she would be interested in a Board seat. Then we realized that she actually wasn’t working and was looking for a next step in her career. She was so far in her career that she could do something a little unconventional and didn’t really need to take a job with a high cash salary. We could never have afforded what someone of her experience was used to making. We were very lucky when she said that she would be interested in a full time position.”

Susan came from a corporate environment where she had worked for many years. This certainly must have been quite different from the “trading floor” feel of cubicles at the office of the Gilt Groupe.

According to Alexandra this did not change the culture much:

“We were nervous when she came on board. I remember thinking she is definitely used to a huge corner office, and a lot of amenities that we knew we could not offer. We are set up as a trading floor. Everyone is out in the open. When I first met her I asked her how she would feel about sitting like that. She said that it would definitely be a change, but she was excited and thrilled to be a part of it all. And for her I think it was invigorating and exciting to be part of something so alive and fresh, where she could really help shape the company. She definitely adapted to our culture and she has instilled a lot of great thinsg in the company. But she takes a seat out with everybody else. Even though she was very senior in her career she was very adaptable to the culture we have created.”

Alexandra’s advice for the young HBS entrepreneur
“Not everyone who ultimately wants to become an entrepreneur, who graduates from HBS, will become an entrepreneur right away. So, I worked for over three years in companies before we started Gilt. That was great for me because it gave me industry experience, gave me credibility in launching a start-up. So I think for someone who feels in their heart, while a student, I am an entrepreneur and I want to do something entrepreneurial, if you can find a great industry experience, don’t be afraid to do that for 1, 3, or even 5 years. Your career is going to be many years. You can always start up something in the future if you don’t have that idea [right now]. Now if someone has that idea, while they are a student, by all means go for it. It is a very exciting time and learning process,” said Alexandra.

Tamara Obradov is an entrepreneur at heart that is involved in the HBS entrepreneurial community. In order to shine a light on the many ventures of HBS graduates and the support of the HBS community towards entrepreneurs, she will bring you stories from HBS start-ups in a bi-weekly column. Should you have any ideas or suggestions on HBS entrepreneurs that we can learn from, do not hesitate to contact her at tobradov@mba2010.hbs.edu.