Nice pants: Bonobos raises $30m off of strong growth and Nordstrom deal

By Sarah Lacy , written on March 13, 2013

From The News Desk

A lot has changed since I last spoke with Bonobos founder Andy Dunn in 2010. For starters, I no longer work at TechCrunch, and his success metric for his line of well-fitting pants is no longer whether a girl grabs his butt in a bar. (Related: He also assures me he no longer does press interviews after a few whiskeys.)

The startup world around him has changed too. When Dunn and his co-founder Brian Spaly started selling pants out of their cars at Stanford, they were the odd fishes in a sea of MBA students building Facebook apps. No one knew quite what to make of them. Funding was so hard to come by for the decidedly un-techy idea that Dunn had to cobble early angel rounds together by raising some $8 million across more than 100 angels, frequently in checks of just $50,000 at a time. Anyone who's put together even a modest angel syndicate is wincing at the idea of that.

But now an ecommerce 2.0 wave predicated almost entirely on brand and fashion has grown up all around the company, making it very on trend. While Bonobos is a fixture in men's fashion magazines, it's been quietly sitting on a pile of unreported business news. Until now, that is.

For starters, Bonobos is announcing a $30 million round, lead by new investors Glynn Capital, Mousse Partners with participation from existing investors Accel, Lightspeed Venture Parnters, Forerunner Ventures, and Nordstrom. This brings the total funding to date for the company to $73 million.

As part of the round, the company will be spinning off a tech product it built in house that focused on personalization. It re-sorts category pages, based on a user's browser, location, and operating system. It was effective, but ultimately Bonobos decided it was better off as a customer of that product, not continuing to build it in house.

Some of the engineers will be going with that company, some will be going elsewhere, and Bonobos will be taking several of them -- ones focused on the ecommerce and mobile experience -- and moving them to its headquarters in New York, consolidating the whole team there. Being bicoastal gave the company access to the fashion smarts of the East Coast and the tech chops of the West Coast, but it didn't make for a cohesive company. "Tribalism is just part of human nature," Dunn says.

But more than just the finances of the company and the ecommerce world has changed since those early Stanford days. Operationally, the company has increasingly honed in on what makes men love it. As it's done so, it's grown revenues dramatically, doubling them for four years in a row.

Even better: In the last six months, it's begun slashing its customer acquisition cost. In a startup world plagued with worryingly unprofitable companies trying to play the brand game, Dunn is confident this $30 million round -- and a renewed focus on being an apparel company more than a tech company -- will be what gets to the company to profitability. His goal is the same as so many other hopefuls: To be the first $1 billion-plus ecommerce exit since Zappos.

While the product has always resonated, it hasn't been an easy road getting the company to this point. Early on there was a painful split between the founders -- which was not so resolved last time Dunn and I spoke. "Our business case study reads like a Vanity Fair article," Dunn says. The two of them recently went back to speak about their experience at Stanford's Graduate School of Business. The professor said one of the most awkward moments he'd ever had in his class was when someone asked if they were still friends. "Well! We're both here aren't we?" Dunn said with faux-chipperness after an awkward pause. Yeeeeeesh.

The company survived the split -- no small feat -- and has thrived. At the time of its last funding round, it was doing little more than selling brightly colored pants in a variety of fits. Today, it has expanded to shirts, sweaters, and suits. Back then it was only online. Today it has two real-world retail strategies as well.

The first is a small chain of five stores in New York, Washington DC, San Francisco, Boston and Chicago. They work similar to showrooms for a company like Warby Parker. The stores are a place where men can go to try on the pants and get a perfect fit, but it's still an ecommerce transaction. This allows Bonobos to focus on fit and service, and not have to have the square footage or inventory costs of a typical retail chain.

The stores average just 1,000 square feet each, and like Warby, Bonobos was impressed by the revenues per square foot it was able to get in these stores. Warby CEO Neil Blumenthal boasted to us last month that his were higher than Tiffany's at their New York headquarters-- and he only sells $80 glasses. Bonobos puts up similarly impressive numbers on its $80 chinos. Across all five stores, it does about $1,000 in retail sales per square foot per year -- something that only Tiffany's Apple and Lululemon exceed or match in the regular brick-and-mortar world. Clearly, if you have the right brand and product, there's something compelling to this strategy. Dunn plans to double the number of stores over the next year.

Equally important to the company has been a partnership with Nordstrom -- a direction we haven't seen many of the other ecommerce 2.0 companies taking. It's in 70 stores with its pants and 20 stores with its shirts, going to 40 soon. It was one of the top five best selling men's pants brands within a year. "Retail is a dog eat dog place," says Lightspeed's Jeremy Liew who sits on Bonobos' board. "You have to perform. The fact that they are getting more lines into more stores tells you the brand has resonance beyond the ability to buy customers through online channels."

That partnership was one of the things that caught the attention of new investor David Glynn from Glynn Capital, a firm that has also backed Zappos and Etsy. "The Nordstrom thing was a huge deal for us, not only their investment but their commitment to growing the brand in their stores," Glynn says. "Nordstrom told us the sales people were just flocking to that brand when customers came in because the story made sense. The story, the demographic appeal, and the fit of the clothes were just something you don't find everywhere."

The Nordstrom deal has also helped with the biggest problem modern ecommerce companies are having: Customer acquisition costs. Revenues have doubled the last four years for Bonobos, but anyone closely following this wave of ecommerce companies knows the real question to ask is what that revenue is costing.

Bonobos does well once it grabs a customer, particularly now that it offers shirts, sweaters, and suits. But grabbing that customer the first time can be hard and expensive. Nordstrom has effectively given Bonobos an acquisition channel that it also gets paid for.

We've written at length about some dicey gambles brand-oriented ecommerce companies are making trying to acquire customers, hoping the lifelong value pays off. Offline marketing cost was one of the biggest reasons Bonobos raised its 2010 venture round, according to my 2010 interview with Dunn. At the time he noted that SEO and SEM just wouldn't work when you had to generate demand for a new product and a new brand. But as he's learned since, overspending on social, even print isn't necessarily the answer either.

Like a lot of this wave of companies, Bonobos has a raging case of Lululemon envy. Last month at our ecommerce CEO Supper Club, One Kings Lane's CEO Doug Mack gushed about the chain's margins and multiples as if he was describing a hot, leggy blond. One big part of getting numbers like those is private labeling, or selling your own stuff -- the lessons of ecommerce 2.0 powerhouses Asos and WarbyParker and the direction that everyone from One Kings Lane to JackThreads to NastyGal are moving towards. It's a similar shift for ecommerce to when The Gap's Micky Drexler decided the chain should be making their own jeans, kicking off a golden age of vertical brick and mortar brand retailers, says Dunn.

But additionally, companies can't get to Lululemon-style economics by throwing away margins in customer acquisition gambles that may or may not pay off. "You can't spend a customer's lifetime value in twelve months," Dunn says. "That can get you funded, but it builds a time bomb into your financials that you can't ever turn off because it kills your growth. Everything goes to 15x earnings once you go public no matter who you are."

Bonobos used to spend more on online marketing -- particularly social -- but it just didn't scale. It wasn't getting them their best customers either. The best customers spend $300 in their first orders and repeat shop, and they almost never came through display ads. In an attempt to get off the "growth crack," he's cut marketing from 30 percent of net revenues in 2011, to below 20 percent in 2012, and now 10 percent.

The partnership with Nordstrom helped immensely, Dunn says. Liew points to the company's PR strategy too. Rather than talking up funding news and launches, it's built repeatable press stories around the product, feeding men's fashion press stories about the latest, border-line unwearable pants for each holiday, like an Irish flag on St. Patrick's Day or tear-away pants for March Madness. "Being willing to stand out and be noticed is the core of the Bonobos brand, and that's what the story has been around them month after month," Liew says.

Bonobos isn't profitable yet, but Dunn expects to get there on this round of funding. He expects the new found clarity and streamlining of the company away from tech for the sake of tech and towards brand and fashion to help.

That's ultimately key to all of the threads in this article, says Liew. The growth, the decrease in what Bonobos pays for customers, the retail strategy, the funding, and the spin off all come down to what Bonobos has done around brand. It's a frustrating word every ecommerce company is throwing around these days, that's nearly impossible to measure or quantify. But this whole wave of ecommerce companies hinge on an ability to build a brand that consumers love, not simply competing on cost and convenience like the first wave of shopping online. Brand is the unsatisfying answer to what sets most successful ecommerce 2.0 companies apart from the ones who are starting to fade-- not celebrity endorsements or sales gimmicks.

It comes down to truly knowing the customer and always giving them more of what they want, even when they don't know what it is they want. Fab is the design aesthetic of co-founder Bradford Shellhammer writ-large and in every category. The only thing that ties the many items on its site together is the feeling that the hippest gay man you know scoured the world and hand-picked this for you. NastyGal is the hard-to-explain swagger and attitude of Sophia Amorosa. She knows "her girl" so intimately, she quipped at dinner recently that her girl wouldn't be impressed by a celebrity endorsement, because her girl only reads US Weekly at the nail salon as a guilty pleasure.

Bonobos too has that mind-meld with its guys. Buying pants for men is about like bra-shopping for women. It takes a full day. It's a horrible experience. You never feel great about the fit. The opposite sex has no idea it's such a horrible experience. And if someone solves it for you, you love them. By taking on the hardest thing in fashion first, it won loyalty. On a simple level, all the company needs to do is find more men with that problem and solve it for them. When it does, Bonobos can win a whole closet.

This has been a company a bit like Twitter, where the strength of that product and the relationship with users has carried it through acrimonious founder splits and changes in strategies. Today, the company is aligned behind the idea that it's not a tech company that happens to sell pants; it's a fashion company that sells through tech channels. That's why it's spinning off the more sophisticated part of its tech division, that's why it's expanding to shirts and suits (with more product announcements to come), that's why it's focusing on offline ways to acquire customers, that's why it's headquarters is consolidated in New York, not Silicon Valley.

Through a tumultuous and changing five years, Bonobos is entering 2013 not only with another $30 million in the bank but with remarkable clarity on what got it here and what it has to do to be a rare ecommerce survivor.

[Photograph by Meg Wachter]