Trunk Club CEO shares six tips for start-ups

octomedia

26th Jul 2016

Be frugal with your capital and don’t overvalue your business — that’s the advice from Brian Spaly, the founding CEO of Trunk Club, which was sold to US department store Nordstrom in 2014 for US$350 million.

In a week that saw US e-commerce start-up Dollar Shave Club acquired by Unilever for US$1 billion, Spaly shared his advice on how founders can cash in on the businesses they’ve built from scratch.

Prior to running Trunk Club, Spaly founded online menswear retailer Bonobos, before parting ways with the company in 2009.

In May 2014 Trunk Club was at a crossroads, Spaly said, delivering the keynote at the Online Retailer Conference and Expo held in Sydney last week.

A venture firm had offered the company $30 million “at a pretty reasonable valuation.” Taking the money would mean continuing to grow and eventually taking the business public.

While weighing up various options Spaly received a call from the Nordstrom family, asking for an update on the business.

“This is that phone call that you always dreamed of getting when you’ve been building companies for a really long time and you haven’t really made any money,” Spaly said.

“You know that you’ve got something of value but you don’t know when you’re ever going to be able to exit,” Spaly said.

Trunk Club’s Chicago Club House, complete with bar.

The following week the Nordstrom leadership team flew to Chicago to visit the Trunk Club’s 7th floor club house and the acquisition was finalised soon after.

1. Get to know your potential acquirers 

Spaly offered several pieces of advice on how to exit a start-up including “get to know your potential buyers” and importantly, take away some of their revenue.

“No matter your stage or growth phase, if you think at some point the right outcome is to sell your company, think about who those people are and spend some time getting to know them,” Spaly said.

For Trunk Club, Spaly was most interested on getting on the radar of three companies: Amazon, Neiman Marcus and Nordstrom.   

“At Nordstrom their largest store in the country is Michigan Avenue in Chicago, they were feeling the pressure. They knew we were stealing revenue from them in that market.”  

      2. Be disciplined with your P&L 

Spaly’s second piece of advice was to be extremely disciplined with P&L. At the time it was acquired, Trunk Club had spent around $12 million of equity capital over four and a half years.

“At that exact time Bonobos had raised $117 million and had spent nearly all of it and was smaller than we were,” Spaly said.

“Be frugal and thoughtful about how you spend your capital.”

“This last five years of seeing companies like Uber raising billions and just spending it on crazy stuff … I’m not betting against Uber, I’d just say the vast majority of us have to be disciplined about our P&Ls and have to be smart.”

       3. Don’t spend unsustainable amounts on customer acquisition

In particular Spaly cautioned against spending too heavily to acquire new customers. “Let me leave you with a rule of thumb: don’t spend more than 10 per cent of revenue on marketing.”

Trunk Club’s Chicago Club House

     4. Higher valuations can be a curse, not a blessing

Another trap for young players is overvaluing your business, so no one can ever afford to acquire it.

“At Trunk Club when we raised our series B we raised $6 million on a $80 million valuation,” Spaly said. “We could have easily raised $25 million on a $125 million valuation, even $150 million, but once you raise money at a high price it’s a curse not a blessing, because it puts enormous expectations on you and it traps you into this world where you have to prove your company is worth all that money.

“I don’t know if I think Uber is worth $65 billion today — that’s their last post-money valuation — those expectations are insane.”

      5. Don’t ignore interpersonal relationships

Spaly also spoke candidly about being asked to leave the company he founded, Bonobos, admitting he was a “really lousy manager, leader, partner — I just sucked.”

In the summer of 2009 at age 32, Spaly parted ways with his co-founder Andy Dunn and left the menswear retailer.

“This is the part of my life that I think of as my divorce,” Spaly said. “I’m surprised that I had the grace in that moment to just move on.

“I had a great idea, I’m proud of the visionary work I did to create this product but I was really not a great leader at Bonobos,” Spaly said. “And this introduced me to another challenge in entrepreneurship; the visionary is often not the right person to actually build the business.”

      6. Don’t wait too long to sell

Spaly also raised concerns over the state of e-commerce and retail in the US in 2016.

“Retail in the US is really struggling right now, all of the stock are down,” Spaly said. “There are just headwinds, I don’t if it’s cyclical or if it’s a total paradigm shift because Amazon captured 51 per cent of all incremental e-commerce sales over the last year.”

In other words, half of every new dollar spent online is going to Amazon. 

“It’s a really scary time. I don’t think Nordstrom could have bought us this year with their stock a $38 versus $68 where it was when they did the deal.”