Bonobos raises another $55 million and aims for an IPO, all "in spite of being ecommerce"

By Sarah Lacy , written on July 6, 2014

From The News Desk

I like Andy Dunn, so when he tells me that his company, Bonobos, has just raised an additional $55 million -- on top of an already steep $70 million-plus -- I almost feel badly for him. I definitely feel like I should do one of those sign-of-the-cross blessings that Catholics do when they feel danger is close. After all, the outcome for ecommerce 2.0 companies raising mega rounds based on cracking some new code of how people want to shop generally hasn’t been too good.

Gilt and Fab come to mind, as do ShoeDazzle and Beachmint. In the ecommerce 2.0 world, “Go big or go home!” too often translates as “Wreck your cap table and bloat your costs up as you veer dangerously from the thing people loved about you, desperately trying to get new customers in at any cost to show gaudy growth numbers and keep more money coming in before you inevitably have to go home because that’s a horrible way to build a business.” Which won't be appearing on a motivational poster any time soon.

Dunn knows all of this. He acknowledges it's a scary amount to raise, all but eliminating that Bonobos could sell and still be considered a success. He pretty much has to build a public company now, and only ASOS in the UK has gone public using this kind of playbook. "We discussed it at the board and everyone looked at me and said, 'What do you want to do?' I don't want to be a punk," he says, channeling Ben Horowitz. "I want to go for it, and everyone in my company wants to go for it."

This may sound like bravado, but Dunn hasn't had an easy journey so far. He’s been “humbled” -- in his words-- multiple times in his journey to bring the world better fitting pants (and now, sweaters, shirts and blazers and women’s wear.) As he discussed on stage at our Southland conference last month, this has included a painful split with his co-founder, an ill-advised Palo Alto office and building out cutting edge ecommerce tech. His recent foray into women’s wear is a long way from proven.

But he firmly believes he’s hit on something that’s working and that those other ecommerce flame-outs just didn’t get right: “Brand” would be the buzzword way to describe it. The more wonky phrase is “vertically-integrated, multi-channel retail.”

I'll just say it this way: Bonobos isn’t really an ecommerce company. It’s a retailer that happens to sell online, but also in Nordstrom, via actual paper catalogs, and increasingly in small, inventory-free “guide shops” around the country. Expanding the latter is what this funding will be used for. Bonobos will expand its guide shops from 10 to 40 in the next two years. (Take that, Marc "physical retail stores are dead" Andreessen.)

The guideshop trend has been in vogue for the last year or so in ecommerce with Warby Parker doing a similar strategy and even Etsy doing pop up shops. One Kings Lane and Thrillist have considered them too. But few are as all-in on the trend as Dunn.

It’s all part of his slow transition from Standford Business School wanna-be techie to the next Mickey Drexler. From Web entrepreneur to old school merchant. From a guy running an ecommerce site selling better fitting pants to a guy selling pants and suits and shirts and sweaters who happens to sell some of them online. Or in Dunn’s words, “Bonobos won’t win because of ecommerce, but in spite of being ecommerce.”

551311_10151955020066815_1273541333_nWhat’s so bad about ecommerce? In general, two things: Cost of customer acquisition and atrocious customer lifetime values for much of the industry. It’s what keeps tanking company after company. In cost and breadth no one can compete with Amazon economics. Even Zappos -- which Amazon bought for roughly $1 billion-- didn’t do so profitably.

Meantime, much of the second generation of ecommerce companies that tried to compete through limited time sales or brand or subscriptions have struggled to continue to grow at a decent clip, acquiring customers through sustainable means.

The most obvious cautionary tale may be Fab: A company that became so obsessed with becoming an Amazon-based-on-design that it veered from its quality standards and burned through the equivalent of a series A a month trying to continually stoke the growth fires.

“Wreck your cap table and bloat your costs up as you veer dangerously from the thing people loved about you, desperately trying to get new customers in at any cost to show gaudy growth numbers and keep more money coming in before you inevitably have to go home because that’s a horrible way to build a business.”

The most delusional may be Beachmint who raised $74 million from top investors (plus another $12 million in debt), based on a plan of launching a new vertical things-in-a-box category a week, with sometimes bizarre celebrity tie-ins. (You mean you wouldn't buy home goods from Justin Timberlake?) Beachmint has scaled way back and last we talked to them they admitted they had about nine more months of runway to start making the business work. That conversation happened a little under nine months ago.

The saddest story may be that of Ecomom. It was a company that wrecked its finances through costly customer acquisition-- to such a degree that the state of its business shocked even actively involved investors and staff who thought everything was going fine. That story ended with the tragic suicide of its founder.

The story of Bonobos’ success-- should it ultimately succeed -- will be one of success despite its primary online channel not because of it.

A big part of that is those guideshops. They aren’t the biggest acquisition channel for Bonobos, but they acquire customers with the greatest lifetime value by a wide margin. The average order of a guideshop purchase is $300 -- versus $180 online. And so far guideshops have been profitable in every location they’ve opened them.

It’s quite a twist in customer acquisition: To eschew all the “cheaper” methods of the Web and go back to brick and mortar to get valuable customers. But Dunn emphasizes that it’s not really a return to brick and mortar, since the stores don’t carry inventory or have to deal with logistics and warehousing the way traditional retail did. That makes the sales per square foot one of the highest in the industry (along with Warby Parker.)

The interesting thing about guideshops is how they have confounded expectations-- both Dunn and his board’s -- at every step. The very first version of a guideshop was built in 2011 in Bonobos headquarters, sort of by accident. The company was trying to move into selling shirts and suits, but no one was buying them online. Dunn had the idea that he could train an army of direct sellers who could come to customers. The guideshop was intended merely as a place to train those sellers.

When an industry friend suggested they open actual stores instead, Dunn practically laughed him out of the room, declaring it the dumbest idea he’d ever heard. But watching the customers in the make-shift store changed his mind. “I watched a fitting and saw a customer come in and place a Web transaction and leave the store with nothing in his hand and it was as if it was the greatest day in his life,” he says. “I was not the genius at the company who everyone was pushing back against. I was complicit in the skepticism.”

10457600_10152473949221815_2649600792602563607_nNext he had to sell his board on the idea. That lead to another debate, over whether these VCs had invested in an ecommerce company or not. Dunn's response, “What you invested in was an amazing menswear company. Now, that begs the question of whether we should be doing [Bonobos’ women's line] Ayr, but if our goal is to serve the customer and the whole point is fit, you need to be able to try it and touch it.”

The first guideshops were upstairs from fancier shops and were quickly profitable. Dunn kept cautiously expanding, met by doubts at every step. (Including his own.)

When he wanted to open a guideshop in Austin, the board was concerned the market was too small. Today it’s one of the company's more profitable shops.

Then there were debates on whether ground floor shops would be too expensive and kill the margins. Those shops also turned profitable. And then came debates about super posh shopping real estate. The New York Soho shop proved those concerns wrong.

The latest debate? Whether women will buy things the same way. Here again, people have cautioned Dunn that women wanted the instant gratification of walking out of a store with something. But so far early experiments with the first Ayr guideshop have performed well too, Dunn says.

For years everyone thought ecommerce was a magical way to sell because software should scale a lot more cheaply than bricks and mortar. But Bonobos' wholesale channel through Nordstrom is profitable, the catalog business is profitable and the guide shops are profitable. “We are working to get our core Web business to scale,” he says. “That’s the irony of it.”

Of course there is a reason most ecommerce companies -- and their investors -- hate the idea of becoming a retail chain, whether stores carries inventory or not. There are still hard, fixed costs. So much so that Bonobos has raised that additional $55 million in part to expand. The biggest debate of all is whether Dunn is gambling the company’s growth on a new holy grail way to find customers with a sexy lifetime value. Will that value top out at some point, start to have diminishing returns and destroy the economics? In other words, will Bonobos be another Fab or ShoeDazzle?

Dunn says he is trying to be measured, even in his ambition. “We have conviction that there are another twenty to twenty-five markets that can be profitable and another ten to fifteen markets where we can double down with more shops and get quite big,” he tells me.

* * * *

Whether Dunn's strategy is sound will become clear soon enough. Bonobos has never quite had the buzz of a Warby Parker -- a company with a similar strategy into which Dunn invested a small amount in early on. But, as Fred Wilson said at our PandoMonthly with him, “hype is a drug” and can be a curse for companies. By Bonobos never quite being the darling of ecommerce, it’s been able to bob-and-weave its way to success without believing in its own hype too much.

Early on, Dunn had to raise $8 million among some 100 angel investors, hustling for each small check, one by one. It was brutal. This round in comparison took about sixty days.

It was lead by Coppel Capital, the investing arm of a major Mexican retailer who hasn’t done much investing or much work in ecommerce. Coppel is a very different type of brand than Bonobos -- more Sears Roebuck than Nordstrom. But Dunn said he connected with David Coppel, a rising star in the family business and the company’s chief merchant. Coppel will be joining Bonobos’s board along with Charles Heilbronn of Mousse Capital, a previous investor in Bonobos with deep retail experience.

The partnership with Coppel is a bit of a headscratcher. Bonobos has no immediate plans to expand in Mexico, and  has been one of the very few ecommerce 2.0 highfliers to stay focused solidly and almost stubbornly on the US market. Coppel has no real experience or expertise in high end brand or ecommerce or the US for that matter. But the deal was a Godsend for Bonobos.

"We discussed [an IPO] at the board... ’ I don’t want to be a punk. I want to go for it, and everyone in my company wants to go for it."

He's blunt about the fact that Bonobos needed to raise another round to keep going. He mocks all those entrepreneurs who tell tech blogs that they didn't need the capital they raised, and it's all just sitting there in the bank. "I read that and I'm like, 'What? You live in a different world than me,'" he says. "I've been humbled by how capital intensive this is."

But Dunn wasn’t entirely sure who to raise money from next. Between Jeremy Liew of Lightspeed, Sameer Gandhi of Accel, and Kirsten Green of Forerunner he already had a near dream team of venture investors on his board-- ones with bruising and surging recent experiences in funding ecommerce. Green, in particular, has a deep knowledge in specialty retail. He didn’t want to “take a step backwards”-- a nice way of saying add in a dumb money late stage investor who didn’t know shit about retail. (You can read my profile of Kirsten Green here.)

In terms of strategic investors, he had challenges too. He already had Nordstrom and couldn’t bring in anyone who’d be considered competitive. So that opened up thoughts around international partners. He also didn’t want someone investing who was essentially just buying an option to acquire Bonobos. His intention is to get this company public one day, making Bonobos only the second survivor of this wave to do so after Zulily.

With all those caveats of what he didn’t want, there wasn’t a super clear path. There was a heavier bout of analysis and due diligence than he’d seen before with any of Bonobos’ previous rounds, verging into “analysis paralysis” as he says. He got to know Coppel amid all that, and pretty early on they plunked down an offer to invest $25 million-- far more than Dunn thought he’d get out of a lead. "He just kind of came in and grabbed it," Dunn says. "I was like, 'Wow, we didn't see this one coming.'" His existing investors ponied up another $30 million. That brings Bonobos’ total raised year to date to $125 million-plus.

The round wasn’t “easy,” and Dunn notes that they had an up valuation from the last round, but not a crazy Uber-style or even Warby-style price.

That said, it’s certainly gotten far easier for Bonobos to raise capital than those early days of endless dog-and-pony pants shows to get one $10,000 check at a time. But Dunn says he still doesn’t take a single dollar coming into the company for granted.

Another big difference between this round and late stage deals of ecommerce flame outs? Not a single dollar went to cash out early investors or Dunn. It’s all going into those guideshops.


Watch Sarah Lacy interview Bonobos' Andy Dunn at Southland here.