At the earliest stages of venture capital investing, VCs prefer companies stay lean and spend their capital very carefully. But once they know they’ve got a winner, they want to fuel as much growth as they can, as fast as they can.
Witness the CEO Supper Club conversation between Lerer Ventures partner Ben Lerer, and Birchbox CEO Katia Beauchamp. (Lerer Ventures is a Birchbox investor as well as a PandoDaily investor.)
Lerer scolds Beauchamp for not being aggressive enough. When Beauchamp says that Birchbox’s product is beholden to the whims of its suppliers, Lerer tells her she should start making and branding her own products and control her supply. It doesn’t sound like the first time they’ve had this conversation.
“You are also an entrepreneur who raised money and hit your five-year goal in seven months, and you’re sortof a wuss, and you can lean in a little bit here and take some risks,” he says. Beauchamp responds that the company is experimenting with in-house supply for the long term, but it doesn’t solve her immediate problem at hand. “In order to meet supply needs for 201,3 we have to increase sample manufacturing in the US by a significant percent,” she says. “It is a band-aid over the fact that we have to retrain an entire industry about customer acquisition.”
The supper club was filmed in February, which happened a few months after I’d heard rumors of a big, frothy Birchbox fundraise. That deal didn’t happen for whatever reason; the company’s politic response, of course, is that it doesn’t need to. Birchbox raised $11 million in venture funds, and is now fueling growth with its own income. “We’re on the path to being independent forever,” Beauchamp said. Everyone says that, but it seems to be working out fine for Birchbox. The company has 150 employees, 100 of which were added in the last year.
Today Birchbox revealed some growth stats that show why the company has to work so hard to fill demand: Birchbox has 400,000 subscribers, around double what it had at this time last year. Half of all subscribers have converted to purchasing full-sized items on the site.
To get an idea of what that translates to in terms of revenue, let’s do some very, very rough back-of-the-envelope math. Four hundred thousand subscribers means around $48 million per year in revenue. I’ll throw in a completely made-up figure for Birchbox Man since the company hasn’t released any subscriber numbers: Let’s pretend 20,000 dudes subscribe at $20 a month. That’s another $4.8 million. Add in another (made-up) $500,000 for all the big co-branded boxes, such as a recent Ann Taylor-themed box and one to coincide with season two of USA Network’s Suits, and (also made-up) $100,000 for the “hundreds” of special occasion lifestyle boxes the company has begun to sell. Full-size purchases account for 25 percent of Birchbox’s revenue, so adding that in, Birchbox could be making something like $66 million.
The company enjoys healthy margins on those sales since the beauty products industry rarely discounts. Beyond that, Beauchamp insists that Birchbox still doesn’t pay for its samples, which is the big challenge as the company grows. Beauty brands that were willing to provide 10,000 samples aren’t necessarily interested in providing 100,000 samples. That means Birchbox has to segment its boxes, which involves a lot of coordination. The company sends between 20 and 50 different versions of the box each month.
Beauchamp says Birchbox’s investment in commerce, which requires taking on inventory, is the biggest way the company proves to brands that it’s serious about sampling leading to customer conversion. It goes back to teaching the industry about the value of sampling, especially when it comes to bringing beauty purchasing online. “Our job is to generate ROI,” Beauchamp says.
It worked on me. As I wrote last summer, Birchbox managed to convert me from a beauty philistine who shops at Walgreens for personal care items to the kind of person who spends $38 on a bottle of shampoo. It wasn’t until Birchbox actually won me personally over that I realized that the company is just as much about demand creation as it is about selling stuff in a box.
This category was crowded a few years ago but it’s starting to shake out. Only a few months after MyGlam, launched by YouTube beauty star Michelle Phan, raised $2.75 million, the company pivoted to Ipsy, which still sells $10 monthly “glam bags” with four or five full-sized products in them. The company does not have a commerce arm.
Last summer Birchbox acquired JolieBox, one of its competitors in Europe. GlossyBox, a Samwer brothers production, still competes there. In Asia, there’s Glamabox.
The next challenge for Birchbox is to prove that sampling works beyond consumable items like beauty products. That’s the theory behind Birchbox Man and Birchbox’s lifestyle boxes, which last year offered themes like “New Years Eve” and “hosting a dinner party.” The items in these boxes are the end product, not a sample. Once a user has, say, a special spatula, or a Birchbox-approved belt, there is no “full-sized” version to upgrade to. Beauchamp says that this can still be thought of as sampling because these boxes introduce recipients to new brands. If they like it, they might shop again. Birchbox Man subscribers surprised her by converting to e-commerce customers on the site faster and with higher shopping cart values than the women’s business, she said. If that strategy works, Beauchamp might just have her supply problem solved, investors be damned.
Illustration by Hallie Bateman