Can RTR maintain the Cinderella magic?

by John Smith-Ricco

Despite the obvious duplicability of its business model, Rent the Runway has aggressively protected its position as first-mover through investment in technology and operations management. Providing women with the “Cinderella” moments that accompany wearing otherwise inaccessible designer dresses may be Jen and Jenny’s mission, but their company’s expertise lies in the less sexy areas of inventory management, quality control and maintaining high utilization rates of each garment.

Rent the Runway was the case I anticipated the most as a student in Launching Tech Ventures. The RTR story is wonderfully hopeful, a feel-good MBA cautionary tale on the type of success risk-averse capitalists might miss out on by taking the safe route [insert finance/consulting/CPG career path here]. Rent the Runway has the potential to democratize the world of luxury ready-to-wear. However, in order to maintain the “magic” and keep would-be competitors at bay, RTR must avoid becoming TJ Maxx for the Netflix generation.

Technology is not enough
Hyman appropriately acknowledges that technology is at the core of the company. This poses a problem if a competitor were to enter the space with better technology in the form of faster turnarounds, better size matching, etc. So far this threat is unrealized, but one can imagine there are retailers and other players in the fashion ecosystem whose current expertise might overlap with and surpass that of RTR.

Fashionistas are fickle
The technological advantage that Rent the Runway currently enjoys may undermine its appeal among its most discerning customers. The business model is such that higher utilization of dresses yields more profits. In class, I opined that dresses are seasonal and therefore not utilizable year round, but learned that a significant fraction of inventory did not follow seasonal pattern. Furthermore, RTR purposefully leaves out dresses’ release dates (e.g. Fall 2010) so that dresses can be used year after year as trends start in New York and drift from the coasts to the heartland, thus spreading fixed costs even further.

While a Marchesa gown from a three-year old collection may be fine for the consumers in middle America, the 25 year old Manhattan PR girl may not be so impressed. Since RTR’s original focus groups included “it” girls and “almost it” girls from Harvard an Yale, I suspect this discerning consumer still comprises a sizeable portion of sale and it would be a disservice to alienate her. Doing so will commoditize the service and invite competition on the basis of technological execution rather than the elusive Cinderella wow.

Relationships matter
Ultimately, I’m still quite optimistic in my outlook on RTR. They have a head start on technology and by maintaining strong relationships with key design houses the team can keep the “it girl” consumer engaged. The key will be to avoid profitable shortcuts that will damage the brand in the long term.

There’s nothing wrong with being the TJ Maxx for the Netflix generation; TJX (the holding co. for Marshalls and TJ Maxx) has an impressive $30Billion market cap and its stock has outperformed the market over the last two years. However, if Rent the Runway is to be a premium service it must continue to deliver cutting edge fashion while using technology to make the overall operation more profitable.

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Screw being scalable

by Jake Cusack



I do economic development and occasionally investment work in a number of frontier markets and conflict zones: Afghanistan, Iraq, the West Bank, North Africa, et cetera. I enjoy this work. But, as I have oft said to others, I am exploring a variety of tech-enabled solutions and platform to bring scale to it. After all – my deluded subconscious might think -- if I can only make as much money as hours I work, how will I afford the private jet that could allow me to spend time 5% more efficiently? Where will I get that crucial "leverage" so I can continue to make money without actually doing anything?


Wait, here are some good things in life that you cannot scale: Giving personal advice to a friend. Playing with kids. A great bartender at a local bar. A sustainable artisan NGO in Afghanistan, that only survives because of the intimate approval of the local community. A genius, tailored piece of enterprise software. Doing an inconvenient favor. A ski run in fresh powder. Teaching through the socratic method. Making something with your hands. Your time. Your life. 


Four years ago I left the military because I thought private sector development in conflict zones was the missing piece of our national security. Now I get paid quite well to fly around the world to interesting places and work on exactly this. If you told me this is where I'd be when I first showed up at Harvard I would have been pretty pleased. But now, I'm always scheming on the ways to go bigger. I think -- if only I could come up with an idea that would require at least $2M of seed funding before I could even test it! Business school truly is transformational.

I love the massive egoism present in the thought that the truly bright among us must be involved in something scalable -- because after all there is only one of me, and how will the world cope if I'm only dispensing my time and influence on a few small projects and on my close friends.

I do not think there is deep validation from the size of a funding round or number of subscribers. The search for scale means constant comparison, condemnation to inadequateness, against other people’s big numbers. Conversion metrics do not provide proof of soul: evil things can go the most viral of all.

The digital age brings efficiency and easy reach. But an idea that refuses to scale is not necessarily a waste of time – and just because you can go global, does not mean you should.

Postscript: I initially titled this post with stronger words. But I'm a bit worried it will come back to haunt me when I launch my scalable software-as-service frontier market investment analytics platform in three months.

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Startups Scale Like Revolutions Do!

by Charle Alfy

Those who have been following this recent Egyptian Revolution closely would know that the idea of demanding Mubarak to step down right away wasn’t foreseen when the calls for the protests started! They primarily started by calling for economic reform, political freedom and social justice. It was only by the end of the first day of the protests, 25 Jan, when demonstrators saw tens of thousands taking to the streets that they realized they have enough traction to demand those fundamental changes. And as the numbers grew larger, reaching the claimed millions in the next few days, people got to believe in their ability to achieve those demands and held fast to them.

Maybe it’s only because I’ve been pre-occupied with those events over the past period, but I do in fact see many parallels between the concepts we’ve been discussing about when to scale a startup and how to do it and those for scaling a grassroots revolution!

When to scale:

Achieving Product-Market-Fit: A basic prerequisite that emerged for scaling a business is achieving the much sought after Product-Market-Fit. Even though it’s important for the vision to be more “hunch-driven” as Fred Wilson has highlighted in class, the value of a “data-driven” confirmation for that vision was not discarded. Putting the idea out there in the market and pivoting quickly until the data proves that a product-market-fit is reached is important before scaling the business. Well, same thing applies for revolutions. As highlighted in the introductory paragraph, it was after the protests could verify they have a market-fit when thousands then millions took to the streets, that the demands took their eventual more drastic form and turned into a revolution.

Economies of scale: From Chegg’s case we saw that it is only valuable to scale a business if it lends itself to some economies of scale, whether on the revenue or the cost side. With revolutions, even though it’s not as clear from the first glance, scaling the demands or the number of participants is only relevant if it leads to more than a linear gain. In that case, scaling to the more fundamental demand of toppling the regime altogether had an exponential benefit compared to reforms in what was seen as a dysfunctional regime. Scaling the size to millions of people was also crucial to ensuring that the demands are met.

How to scale:

Getting mentorship & experienced executives: Ben Horowitz refers in his blog to the basic BoD advice of getting a mentor and finding “been there, done that” executives. He takes this many steps further with detailed advice, but it remains in its simplicity a quite valuable advice. The founders of companies are often visionaries with amazing capabilities in seeing the opportunity and building the first building blocks of the product. As the business grows, the help of a mentor and experienced execs brings the knowledge of scaling up to the much in need founders struggling with the challenges that suddenly evolve. The revolution in Egypt was started by young, middle-class citizens representing different segments of society. The faceless nature of the revolting youth is what sparked it, but the consequent support of many known thinkers, writers and intellectuals gave it a much needed boost in clarity of thought, direction and credibility.

Risks of partnerships with large corporations: HubSpot's Dharmesh Shah blogged on the risks of early partnerships with large corporations for business development. Such partnerships could potentially bring a lot of distraction for the founders struggling with time & energy to focus on their true north. They also create an unwanted lock-in to the aims of that corporation that quickly puff the initial PR glow. The right of first refusal in many deals also reduces the incentives for other players to join the game. Those same risks apply to grassroots revolutions if they align with an established political party. The lock-in to the ideologies & supporters of a certain party prevents a revolution from gaining the needed mass support from the rest of the public despite of the initial benefit of some credibility. That was a pitfall that was fortunately carefully avoided in Egypt’s case.

Striking a balance between Product & Engineering: A lot of talk went into the balancing act needed between product development and engineering, the essence of which is so nicely captured in one of Fred Wilson’s blogs. Compared to the Yin and Yang, the roles of the “VP Product” who defines the product requirements and the “VP Engineering” who works on bringing that product to life are largely complementary and should exist together with significant alignment. In a revolution, this is very similar to the roles of the visionaries promoting the ideals and the demands of the revolution, and the “executives” who are able to translate these into plans of action that can be implemented and brought to life when the opportunity presents itself. Even though some “Engineers” started surfacing in Egypt’s revolution, I think the nation is still hiring for a “VP Engineering”!

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Lean Logic Extends To All Functions, Not Just Product Development

by Private

Our class discussion around Foursquare highlighted a strange paradox that I’ve been trying to articulate for a while now. We all agreed that Foursquare follows and is one of the best instances of a lean startup method we’ve seen. They launched with a buggy product, initially did not have too many features, collected consumer feedback on the product and constantly improved. However, the discussion broke down when we turned to their monetization strategy. Yes, Foursquare does have data about location and users that can be broken down in several ways to add value to advertisers, but then all the methods that we discussed involved high touch activities. At first sight there also seems to be a lack of metrics around how the success of advertising campaigns can be made measurable to add value to advertisers. 

The discussion highlighted that the lean methodology may not be consistent with all divisions at a startup. Some startups have done a great job implementing the lean method in their product development, but not necessarily followed the same principles while looking at their business development or monetization strategy. Let me illustrate: 

• First, the lean startup method as I understand it involves starting with a hypothesis and collecting data to validate that hypothesis. That necessarily means that you need to collect data and metrics not only around your customers and what they prefer but also around the advertisers whose needs you are trying to address. A startup’s business development activities will truly be lean when they can start with definite metrics around what they are trying to achieve from each advertising or monetization campaign and provide advertisers or entities on the other side very definite metrics by which to assess success. 
• Second, in a product context while you need to launch fast and get feedback, in a business development context you need to be scalable. A key problem we discussed with Foursquare is the scalability of a model that involves outreach to several local businesses to illustrate the value of the service and get them to sign up for deals. On the other side, I see a lack of metrics in the branded campaigns that the company is working on. Yes, their partnerships with Zagat, Bravo TV etc. definitely create engagement with the brand but what are the metrics that these advertisers can go back with when judging the impact of the campaign?

This discussion around scalability revolves not just around Foursquare but quite a few of the cases we have discussed such as Rentjuice. How scalable is it to reach out to brokers and real estate agencies on an individual basis for example to get them to sign up for the service? I would like to propose that the lean startup methodology be applied not just to product development to ensure that the startup perfects its product but also to other aspects that make sure it functions cohesively and scales fast. This requires applying the same rigor to business development as you would to product development to start with, introduce monetization strategies whose impact is very directly measurable for the advertiser and the company. Start with a target and then ascertain whether the monetization strategy can move the needle on that target instead of starting with a monetization strategy without a specific target in mind. On the costs side, running a program involves a cost, when we talk about product development we bring in metrics around CAC and LTV, similarly these methods should be applied to the business development process to ascertain whether this can really scale. 

I feel a lot of startups have mastered the lean startup methodology and have come up with great products that have viral features and thus drive user adoption but the same virality doesn’t apply to their monetization strategy, the approach to business development and monetization is still one off deals without a hypothesis behind it and high touch advertiser or brand acquisition as opposed to product features that encourage adoption by advertisers- a push versus a feature based pull strategy. As startups following the lean methodology grow up what I remain most interested in seeing is whether they can successfully apply the same lean methodology to their monetization practises as well.

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Figuring Out foursquare

by Jeff Bussgang, republished with permission from his blog

I had the pleasure of teaching a new case at HBS yesterday on foursquare that I co-authored with Professors Tom Eisenmann and Mikolaj Piskorski as part of Tom's new course "Launching Technology Ventures".  Foursquare executives Dennis Crowley, Naveen Selvadurai and Evan Cohen were kind enough to allow us to interview them in preparation for the case, which framed some of their current key strategic issues and looked back on the choices they made in the early days to draw pedagogical lessons of lean start-up best practices, building a platform business, network effects and running monetization experiments.

The foursquare team was consumed this week with SXSW preparations, but we were fortunate to have as class guests Charlie O'Donnell, who wrote the original blog post on foursquare that got many in the community excited about the company, and Andrew Parker, who was an associate at Union Square Ventures at the time of their Series A investment. 

As I did with the class a few weeks ago when Fred Wilson visited, I asked the students to pull out their phones and tweet throughout the class.  You can see the rich "dialog behind the dialog" here, using the Twitter hash tag #hbsltv.  Here were some of the takeaways I had from the class discussion framed around three major questions I posed to the students:

1) Why did foursquare succeed as compared to the same founder (Dennis) in a similar venture (Dodgeball) in a different era and as compared to other teams pursuing LBS services in the same era?  

The students concluded that the context around a venture matters tremendously - that smart phones, the explosion of apps and social networking all were important enablers that allowed foursquare to succeed at this particular moment in time.  At the same time, the foursquare team was incredibly skilled at applying lean start-up best practices, specifically:

• Product-obsessed founders:  both Dennis and Naveen were consumed with the product.  Always interacting with users in bars and over Twitter, thinking less about strategy, analytics and monetization and focusing more on a great user experience. 
• Hunch-driven:  they had deep domain knowledge and didn't need outside studies or market research to guide their prioritization.  One of the key takeaways that both Charlie and Andrew emphasized to the students was to be power users in whatever area of focus they choose to develop those instincts.
• Minimum viable product:  they didn't wait years and years to perfect the product but instead got it out there to solicit user feedback.
• Modest burn:  the company only raised $1.35 million in its series A financing and kept the burn rate at less than $100k per month to make he money last.  Dennis wrote a great post at the time of the financing that showed just how product obsessed he was, even after taking the seed money.  There's no bravado or BS - just a list of the great features they're going to roll out as a result of having the extra capital.

2) What was the magic of the foursquare system that drove rapid adoption that so many other consumer Internet companies fail to achieve?

• Game mechanic - students really honed in on the playfulness of the service, both the entertainment value and the addictive nature of competing for badges and mayorships.
• NYC launch - the fact that the service started in such a perfect venue gave it great advantage - a highly concentrated, very social community.
• VC validation - having Fred Wilson invest and promote the company helped provide it credibility with an insider crowd that may have provided some strong tailwinds.
• Win-win for all constituents - unlike many services, the students understood a key insight about foursquare:  the local merchants make the service.  The fact that merchants are so incented to promote, discuss and reward consumers creates a positive feedback  loop that transcends the power of a consumer-only service.
• Online - offline combination.  Another aspect of the magic of foursquare is that it is not an online only service.  In fact, the ability to drive consumers to actually walk into local venues is a special dimension of the service.  As one student pointed out:  "Facebook tells me what my friends are doing.  foursquare tells me where they are and where I can meet them."  This is a unique and powerful aspect of the service.

3) Once a company achieves product-market fit and starts to scale, how do their priorities, and burdens, shift?

• Raising money, scaling the team.  A rich discussion ensued about what it means to raise big money.  When foursquare took $20 million in venture capital at a reported valuation of $100 million, suddently they had transformed the company from a lean, product-obsessed start-up to a company that would need to generate tens if not hundreds of millions of dollars in cash flow to justify a billion dollar valuation.  A product-obsessed management team suddenly had to transition to become an operational scale management team.
• Monetization.  Consumer Internet companies have to decide when they begin to monetize - as part of the lean start-up experimentation or only after they achieve enough scale to attract partners and advertisers.  But it's not a binary decision.  Foursquare has run monetization experiments from the beginning, but to justify the big valuation they will have more pressure to show real financing results, perhaps at the expense of the user experience.  It takes a strong founder to resist that temptation (think Jesse Eisenberg playing Mark Zuckerburg in "The Social Network", sneering:  "No advertising.  Advertising isn't cool.")
• Vision/Becoming a platform.  What does the company want to be when it "grows up"?  To be a generation-defining company and enter the ranks of Facebook and, arguably, Twitter, foursquare needs to evolve from a great application into a platform.  But becoming a platform company requires a whole different approach and set of priorities.  Do you build out your own features or expand your APIs and invest in supporting third party developers to build applications to your platform. One of the students had coincidentally tried to work with the foursquare API to develop an application and complained that it was very rudimentary and limiting relative to the Facebook and Twitter API.  

The verdict?  I ended the class by polling the students - who would buy foursquare stock at a $200-250 million valuation (my very rough estimate of the current trading on the secondary market) and who would sell?  One third of the students were buyers at that price at the end of the class.  Two thirds were sellers.  One student pointed out in a tweet that the voters were unfairly negatively biased because only 10% of their classmates had even tried the application and, besides another tweeted, 3/4 of HBS students apparently wanted to sell Amazon short in 1998!  Another student tweeted that if there was even a 3% chance that the company could be a $10 billion company, it was worth buying at $200 million.  Now there's a future venture capitalist in the making!

Thanks again to the foursquare team for letting us write the case and adding to the HBS community's intellectual capital.

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