August 14, 2019

#69 When Less Is Not More

by The Pitch

Background show artwork for The Pitch

Founder Rahul Jindal might be the king of bootstrapping. And when investors see similarities between his startup, Hyde Closet, and a billion dollar business known as Rent the Runway, they start dreaming of unicorns. Until a wrinkle in the plan, snaps them back to reality. 

Today’s investors are Jillian Manus, Michael Hyatt, Phil Nadel and Charles Hudson.

Where to Listen


Michael: Jillian Manus Coming. Where’s Jillian Manus. Jillian Manus coming

Jillian: Bite me Michael

Michael: Bite me coming blah blah

Jillian Manus and Michael Hyatt, reunited at last. Get excited, because that dynamic duo and the rest of the investors are about to meet a founder who is throwing the Silicon Valley playbook out the window. 

Rahul Jindal is only asking for 100 thousand dollars in the Pitch room today. He has his business down to a science, he knows exactly where he’ll put every venture dollar, and he thinks he can use that humble round of fundraising to build a clothing rental empire. 

And a scrappy founder is exactly what vc's are looking for ... right?

From Gimlet, this is The Pitch. I’m Josh Muccio. 

Today’s investors are:

Phil built companies that sold for hundreds of millions of dollars. Now he manages Forefront Venture Partners, one of the largest syndicates on AngelList.

Jillian is a partner at Structure Capital, where they’ve invested 98 million in high-profile startups like Uber.

Michael built and sold two software companies for over $500 million dollars and now he invests for himself.

Charles started Precursor Ventures where he’s invested $45 million in over 100 startups to date. 

All right, on with THE PITCH.

Rahul: Hello.


Rahul:  So hello everyone. I’m Rahul.   So I’ll take you back a few years. 26 years old. I’ve spent my whole life working in what I call an engineering outfit. Blue shirt, baggy suit, white shirt once in a while. I worked all over the midwest. I used to work for Rolls Royce, Jet Engines   And then I got a job for McKinsey. So I moved to New York City, and immediately it was very apparent that whether it was serving a client or going out trying to get a date, frankly, something just didn’t work.

That something, was Rahul’s boring clothes. He was getting the side eye in business meetings. And when he tried to get into swanky new york hot spots, they would not, let him in.

Rahul: And so now   fast forward four weeks into New York, I’ve got a date with this girl that I’ve had a massive crush on all through college years. And I’ve got to go and pick out an outfit   So then I went, I tried to shop around, six hours in, I couldn’t find anything. Tried Trunk Club. They sold me good stuff. I remember, two shirts and a pair of pants and it cost me $500. Expensive. I wore it, I looked good, I admit. But, that’s ridiculous.  

For the less fashionable amongst us, Trunk Club sends customers monthly boxes of curated clothes. The customer decides to buy some of it, then sends back the rest. But, like Rahul says, looking good comes at a price.

Rahul: If I have a thousand dollars, 2000, 3000 to burn, anyone can make me look like James Bond. But that’s not what I have   I can’t afford to do that living in New York And that’s when I realized something’s broken in the market I like to look good. I don’t know how to do it   So, how do we fix that. That’s when I invented Hyde. it’s rental clothing. Like clockwork, week on week, you get your entire outfit.   

Charles: So it’s like Rent the Runway Work but for men?

Rahul: But for men. But it’s complete. Men don’t like putting together outfits. That’s what people have missed   We say, no, no. What have you got going on Charles? You’ve got to go to a work dinner? Tell me where it is. Oh, you know, it’s a nice four star restaurant here. Great. I’ll put together a nice blazer for you, with dark wash jeans, with a pair of nice   boots, perhaps, or wing tip shoes. All of this shows up at your doorstep. Sunglasses, cologne, everything. And you’re wearing $1500 worth of stuff for $50 so it’s easy on the wallet too. 

Michael: So it’s a male Rent the Runway kind of per event ...

Rahul: If you take Rent the Runway and merge it with Trunk Club, you get this. 

Jillian: Right.

Phil: $50 a week?

Rahul: $50 per outfit.  

Okay, what Rahul is doing is selling a subscription of stylish clothing. You wear the outfits and send em back to Hyde Closet.

Which is a tried and true business model. Rent the Runway just earned a 1 billion dollar valuation renting clothes to women. 

Rahul: So I’ll walk you through the plans we have   $50 for a one off. One off is basically hey, you’ve got somewhere to go, here’s your box. Thanks very much. A lot of people come back. $80 if you want it twice a month.   And the last one is 150 a month, which is like clockwork every week  

Charles:   The $80 offering, is that a week’s worth of clothing? Or is that...

Rahul: Yes.

Charles: So it’s a full week’s worth of clothing?

Rahul: So it’s always two shirts, pair of pants, outerwear, shoes, belt, sunglasses, and/or a tie. And cologne and all that.

Phil: So it’s not really a week.

Charles: It’s not a week. It’s two outfits.

Rahul: We try to optimize for an outfit and a half   

Charles: Can you show us?

Rahul: Yeah, absolutely. Please go ahead.

Charles: Do you want to hand us one? Do you want to show it? What’s easier?

Rahul: There you are.  

Charles: It’s everything!

Rahul: It’s everything  

Michael: So everything’s used?

Rahul: Yes. So I wanted to put these shoes in specifically to show you 

The investors gather around the Hyde Closet boxes in the middle of the room. Jillian grabs a belt, and Phil pulls out one of the neatly pressed shirts and shakes it out. Michael zeroes in on the shoes. 

Michael:   The shoes are quite worn, though. That kind of freaked me out a little bit.

Rahul: I put that in specifically for that reason.

Michael: I know because you have one more turn. But I’m still a little scared of that. The rest of it I could deal with.

Rahul: I wanted to show you the last turn.  

Michael: Okay. I think we get the idea of the product.

Now it’s time for the investors to head back to their seats and ask, does the business look as good as the outfits.

Jillian: Tell us about your sales thus far   

Rahul: Ah, yes. Sales. So we now have 35 running clients. I started it in December purely sort of promotional activities. Signed with 700 people within about three weeks, give or take. We did a couple of popups.   And we signed and we started supplying to 35 people. umm

Jillian: What happened to the 700?

Rahul: That’s just our sort of active engaged user list. I can’t let in more right now without hiring more operations people. Because my product experience will fall.

Phil: Well what’s involved with that?   Why is that holding you back?  

Rahul:   The first is the actual styling. So I want stylists to be building these boxes, not someone just randomly doing it   So what I’ve built now is that stylists can assemble boxes remotely. They don’t need to be with the clothes Second component is the actual packing, the logistics of it   I still need someone to actually package the boxes. Bringing everything into inventory and then checking it out of inventory, that needs to be immaculate. Right now, we don’t have things like barcode scanners so we’re all doing it manually. It works really well,  but it takes time, and I need people to do that.   

Phil:  Can you explain the styling and the inventory? It seems like that becomes   a real stumbling point.   

Rahul:   That’s absolutely my favorite question. So that’s the secret sauce here. What we’ve found is that four social events cover 80 to 90% of an average man’s calendar during a given week.   Sunday brunch, Thursday happy hour, Friday formal date, Saturday casual date. That’s it. If I can solve for these four events for the sizes, which also by the way, living in a metropolitan city, if you look them up they cluster, the median is a 40R. If you can pick up your sizes at that median, and forget about the two tails, I can cover most of my inventory. And I’m seeing that now in my data.

Michael: Wow   

Wow is right, Rahul turned a guy’s social calendar into a science ... backed that up with data … and then topped it off with a little style know how. 

Phil: But there are a lot of different size combinations. You have all different size shoes  and then different sized blazers and shirts. I’m just wondering, how many times you can turn that.

Jillian: And how you can automate that a bit, too.  

Rahul: So the model does exactly that right now. When you join on, it spits out to me and says, let’s say, I’m assuming you’re a 42R?

Phil: Um, yeah.

Rahul: Okay. So if...

Phil: No 42 long.

Rahul: Okay. 42 long. So you come on. It’ll tell me we have three 42 long blazers for him. We are okay for three weeks. It’s predictive buying. Then it tells me for the fourth week, if he sticks on, we need to buy something for him. And so I can now time the market. I can look out for sales. I can tell my buyers to say you’ve got three weeks. If he stays on, buy him something  

Rahul’s operation is so lean that he’s figured out how to only buy clothes at the very last minute, when he absolutely needs them. 

And while that might make Rahul the king of bootstrapping ... the question becomes, how lean is too lean for investors looking for fat returns?

That’s when we come back ...

Welcome back to the show. The investors like the clothes, they like Rahul, and they love the idea that Hyde Closet could become the next rent the runway for men. 

But Rahul might not understand how much money it’s going to take to get there?

Michael: Have you raised money to date?

Rahul: Yeah. So we did. So we did a small round I’ve raised 100 grand from a strategic.   And then $20,000 friends and family. Personally, I’ve put in about 20 grand with my partner. 

Michael: So how much money are you looking for?

Rahul:   A convertible note, 100 grand would be great.

Michael: You’re looking for 100 grand?

Rahul: M-hm.  

Michael: Why so little?

Rahul: I think that’ll take me to the 2500 customers I need and then we can raise a round after that. uhh I think anything greater than that at his stage will be too dilutive…

Michael: What’s your convertible note terms? Tell me about it. 

Rahul: A $1 million cap.

Charles: Oh that’s why.

Rahul:   I don’t want to give it a ridiculous valuation and... Look, I’ve done a lot of things in my professional life, I haven’t raised money.  

Michael: So what’s your revenue? If you sign on those 2500 clients, what’s the revenue?   

Rahul: So 2500 clients, what we’ve averaged out, what we’ve seen so far is about $100 per client a month.   

Phil:   And then what’s your acquisition cost?

Rahul: My acquisition cost ranged between 20 and 40 dollars.   We have not done any social media marketing. I haven’t spent a single penny because I don’t know enough about it, and I know enough about it to know it’s a money hole. So I haven’t put any money on it   So things we have done is I’ve gone and done fireside chats at WeWorks in DC. I’ve had popup stores at Union Market, at you know the DC startup week, etc. That’s where I’ve gotten people to sign up for the list. Then off of that list, I’ve converted people by literally going down and seeing who’s opening our emails the most we’ll only email them. That’s how we got to the 35, because I knew they would sign on.  

Phil:  The only thing I would say on the marketing is a business like this is going to ultimately come down to how good you are at marketing. I mean, this is a customer acquisition business, right?  umm And I don’t know if you’re planning to bring someone in ... 

Rahul: 100%.

Phil: Or outsource it. Ideally it should be someone on your team.

Rahul: Oh it has to be.

Phil: At a senior level.

Rahul: 100%. It has to be because I want the marketing person to be fully tied in with the product development and the product roadmap. Otherwise you’re distributing different messages. So I definitely don’t want to outsource this. I just need a good person to come join.   Perfectly honest about it. I know that’s a gap I need to fill very quickly.  

Rahul seems to have a plan for every part of the business. From how he’ll approach marketing, to how many socks he’ll need, a month from now. But is his comprehensive plan, the right one, for these investors 

Michael: First off, I really like you.   I’d say in a nice way you’re overly honest and straight up and I think realistic about your valuations and stuff. It’s nice. I think you’re offering a very interesting service. This is kind of cool. umm I guess what I’m struggling with is just the simple idea, is this really going to be a big   business? 

Rahul: Fair enough. Okay. So I want to grow with the 100 grand to 2500 customers at the end of the year. 

Michael: So estimated monthly revenue would be?

Rahul: We’d be at $250,000. That’s a $3 million a year business at the end of the year. Right?  

Michael: Would you have a net margin at that point?  

Rahul: I’ll be breaking even at 2500 customers. Now after that, it’s on the upting   

Jillian: So talk about the buyers. And talk about how you... You’re raising 100,000, which sounds very, very tiny and I understand why. But it doesn’t, I can’t imagine how that 100,000 is going to actually get you to the 2500 if in fact you’re buying, you also have to pay stylists,   So can you… 

Rahul: I can answer that actually. Because I ran the math on that   

Rahul: So 2500 customers, $10 a customer spending 25 grand on it. That’s 25% of the $100,000, right?

Phil: Yes.

Rahul: I want about 50 grand to set up a team. I can pay them part-time. Operations and stylists. 

Michael: [laughs]

Rahul: Because I’ve got... See the thing is,   stylists are not actually in the store. They can work offline. That’s the beauty of it. So if I can get that set up, they’re only putting in the hours. They’re not driving anywhere. I can have them in Minneapolis for all I care.

Michael: Okay but if...

Phil: And then, and what... Finish the... I mean, it just, and then what about inventory?

Rahul: Okay. And inventory is actually, because we’re a cash generative business, I’m not actually putting any more money in inventory anymore. The money that the business generates, I buy new clothes with. It’s a cash generative business.

Phil: But to get started with 2500 people, you got to buy inventory.

Rahul: I won’t go zero to 25 now. That’s not possible. So as I scale up...

Phil: But you said 2500 by end of the year.

Rahul: Right.

Phil: That’s six months.

Rahul: Right. It’s six months. But it’ll be a gradual slope to 2500. I have enough inventory now for at least say 70 80 people. I add a bit more, I can get to 100. Now those 100 people are billing up front and then they get… 

Phil: And that accounts for all the different size variations?

Rahul: Mm. So they’re clustered.

Phil: And different styles?

Rahul: They’re all clustered.   

Michael: So there’s two things that are always true about starting a business. It always costs more and it always takes longer   And I’ve never met an entrepreneur that says, you know what my problem is? I just raised too much money. It doesn’t usually work that way.

Rahul: Got it.

Michael: So here’s the thing. I’m going to pass, but this is what I have to say. I really like you and I love your ambitions. I have rarely seen an entrepreneur come in and say on 25 cents I can get to the moon. And you’re doing it. And good on you. And I love it.   umm I’m going to pass But I really like you and I think you’re fixing an interesting problem.

Rahul: Thank you. Appreciate it  

Phil: I think it’s a very smart idea.   I see the value to consumers. I can really see people using it. I have concerns about the operations and logistical part of it.

Rahul: Sure.

Phil: I think umm the inventory issue is…   is capital intensive You’re going to have to spend a lot of money for inventory.   And right now marketing hasn’t been tested really.  

Rahul: Let me say this. I see your hesitation. Maybe we could take this offline. Because I measure tack time on jet blades. One thing I’m sure about is operations.   So maybe I can take this offline and walk you through it.

Phil: Fair enough   if you can convince me of the operational piece I may come in as an angel investor.   But I’m going to pass for now.  

Rahul: Sure. No, I would love to take the chance. Appreciate it. Thank you.

Charles: I feel if this were San Francisco, this would be a 500 on 3 kind of deal. Mostly because... Its’ weird.   I suspect you’ll get more out of $100,000 than the average entrepreneur that we meet. It’s just weird for me as an investor, I’m fighting my natural desire to recoil when I feel like somebody is asking for too little money  

Charles:   I think your capital raise doesn’t match your ambition. 

Jillian: Yeah.

Charles:   To me a $1 million cap is for someone who has nothing. Who hasn’t figured out anything. There’s serious questions about the model, there’s serious questions... I think this is a   business that I think deserves half a million dollars so that you can expand, begin to test the marketing, prove that the operation scales and that it’s manageable at thousands of customers, and then I think you’ll be really well set up  

 Charles is out, so are Phil and Michael. The only investor left, is Jillian.

Jillian: Um. So ah... You are unusual because you are coming with here with such a depth of knowledge, and I think your McKinsey background definitely shined bright here for all of us. And I liked the way that you’ve addressed all of our issues. I, I do feel that you need to raise more.

Rahul: Okay.

Jillian: I do think that this is doing you a disservice. Because $100,000 in our world   Doesn’t even make sense. Like $100 can’t buy you a cup of coffee. Right. And so...

Phil: Actually it can.

Jillian: Okay. Good. Thank you, Phil. All right.  

Jillian: So I’m very sad to say that I’m passing because I think you have such grit and potential   And I want to see where this goes. I really do want to see where this goes.   

Rahul: Can I, before I leave, and I really appreciate everyone’s feedback, can I sort of very tangibly get down to what are the things that I would do. And I’m not asking you to get on the path of if you do this, I’ll invest. But just as going forward in a constructive manner, so one is ask for more money but do it in a sensible way.

Michael: It’s ask for money and show us how you can get bigger faster. It’s what are you going to do with it. Because what you told us is that you’re raising so little we don’t believe you’re going to move the company big enough.   Venture investing is about putting money down and making a big return. This isn’t going to be a big company based on what you’re doing right now.

Rahul: Got ya.

Michael: It’s going to be a good company but it’s not going to be a great outcome for us.

Rahul: Got it.

Jillian: By asking for 100,000, we don’t see that you’re really reaching for the stars here.

Rahul: Got it. 

Rahul: I appreciate it. Thank you so much.

Phil: No, thanks for taking time.  

Michael: And you can send me Tom Ford sunglasses. Those, if you don’t want those, I’ll keep those  

Rahul leaves the room, without investment, but WITH the clothes he brought. He needs those. He’s running a lean operation, after all. 

As he left, I stepped into the room to find out what the investors really thought about Rahul’s pitch.

Michael: You know, it’s one of those episodes where you just really wanted to invest because you like the guy.  

Charles: And we spent so much time   meeting entrepreneurs who are anchored on prices that were unrealistically high.

Phil: And this is the opposite!

Charles: And it just goes to show you that being anchored on a price that’s unrealistically low can be just as dangerous to a business as being anchored on a price that’s too high.

Michael: Do you think he was, he just wasn’t thinking big enough.

Charles: I think that’s DC though. I don’t want to criticize anybody who invests in DC, I have friends, many great people, DC is a very  price insensitive show-me market. So the fact that he raised on one is actually not surprising to me.  

Josh: But why wouldn’t view this like, this founder basically is raising a friends and family round in front of me. I get in now, get a ton of the company because it’s cheap...

Michael: Because he’s wrong. He can’t get that big. He won’t get to his numbers.

Josh: He wouldn’t raise another round down the road?

Michael: Listen, time is the expensive thing. If time is the expensive thing, then I’m going to waste six months telling him he should have raised 500 grand and we could have been further ahead.

Phil: He should raise 500 grand now. 

Jillian. Yeah  

Michael: He seems gun shy. He seems worried about raising money. He seems like...

Phil: It’s going to cost more than he thinks, I believe.

Michael: Yes  

Jillian: I think there’s something very special about him.

Phil: Yeah I do too. I liked him a lot.  

Despite them loving Rahul, it seems like his tiny fundraise just wasn’t the right fit for these investors. 

When we come back, Rahul responds to the idea that he just isn’t thinking big enough.

Welcome back. Rahul and I spoke about a month later. And he told me, that prior to his pitch, he was advised by some local investors based in DC, to raise a small round of fundraising, at a low valuation ... They wanted him to be realistic, keeping his feet planted firmly on the ground. 

But the investors on our show who seem to subscribe to the Silicon Valley mindset, were looking for a moonshot.

Josh: Do you think maybe just doing a raise of a 100 thousand dollars in front of those VC's makes it seem like you aren't being ambitious enough?

Rahul: Yeah that's a good question. So I did think about that a lot and   I, I balanced it umm between being realistic off the valuation as an early stage company. Maybe I did go a little too far   but I also kept it really realistic in terms of the money I actually need right now. I felt like that was a fair, very lean, but a fair number.   But I didn't sort of think that I was coming in too cheap.  

Josh: Yeah, do you buy that though? It just seems like such a weird thing to say, your business is too cheap to invest in so we're not going to invest in it  

Rahul:   I think that there are four consistent opinions right now,   I think that the point which these guys raised was you're not solving for the next six months or eight months. We invest in businesses that are solving for growth over the next three or four years. And we are happy, and if the investor's happy to take on the risk over a longer duration of time then who am I as an entrepreneur to restrict that? That doesn't make any sense, and I didn’t quite ... I should have grabbed that earlier on.  

Josh: So you wish you would have come to that understanding before pitching the investors?

Rahul: Yeah absolutely. I think if I had   you know, four people who are good at this can't all be wrong, obviously right? I'd be an idiot to think that.

Josh: I mean they might. I mean four people have been wrong before. 

Rahul: That's true, that's true, and that's fine. But I certainly can't be arrogant enough to say I'm the right one there, so I got to crowdsource some data and really understand how to go forward with this. But at this point it'd be premature for me to say whether they're right or wrong   

Josh: Makes sense. Rahul, do you think you got caught in the middle of the discrepancy between the way Silicon Valley investors think, and maybe the way the rest of the world or a smaller   startup community, like the DC market for example thinks?  

Rahul: So I think and I have had a few pitches in DC.   I think the city sort of skews toward more technology heavy, cyber security, and government contract type firms. They like to see a lot more revenue and they come in much later, and they expect a lot less risk. I think that I may have overreacted to that probably, but that certainly was bearing on my mind when I pitched. Clearly these guys are not part of that ecosystem.

Josh: Yeah. Does that change how you take advice from DC investors going forward?

Rahul: I think it's a matter of calibrating.

Josh: Oh, like knowing your audience, knowing what type of investor you're talking to?

Rahul: Right, now I know. The way I look at it is now I know, next time I'll do this. You know I'll make a different mistake, but I won't make the same one again.  

Josh:  You have, because of your quantitative experience and background, it seemed like every dollar, every penny was accounted for in your plan. And you had found a way to somehow with a 100 thousand dollars build this business over the next year. And I wonder if the way that came across to these investors was this guy is thinking too scrappy. Like we need a founder who’s like ...   what could I do if I had 500 thousand dollars, what could I do with a million dollars? Thinking less about the… . being completely efficient with every dollar.

Rahul: Yeah, I think you're right. I think maybe I over indexed on the scrappy.   now I know. I'll make different mistakes next time, won't make the same one.  

Josh:   Alright so...  very early on the investors made the comparison of Hyde Closet to Rent the Runway.   Do you think that Hyde Closet could one day actually get as big as Rent the Runway?

Rahul: Absolutely, I mean   I think this could be it   I genuinely want to build something. I think I'm excited by operational challenges. I, I’m   just genuinely I like building things. I'm fascinated about all these different things you get exposed to when you're building a business. So I really just want to create some thing. 

Josh: It sounds like you like the game of it. It sounds like you like the whole thing.

Rahul: I think it's fantastic, I mean this show, and pitching, and trying to build a product and being involved with you know people, all sorts of people, good and bad.   and fundraising really brings it to a head because everybody has a different agenda.   And everybody's done this a million times in their past so they're bringing all of this latent knowledge. To me it's a massive learning opportunity.  

Rahul says he’s still searching for someone to help run the marketing at Hyde Closet… so if you know anyone … you can’t see this but I’m winking right now.

How do you make the sound of winking? [laughs]

That’s all for today’s episode. But I’ll be back, next week. So stay tuned.

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Our show is hosted by me, Josh Muccio. Produced by Kareem Maddox and Heather Rogers. We are edited by Blythe Terrell and Sara Sarasohn.

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Lisa Muccio planned the recording of this pitch.

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