Kunle: I’m super excited to welcome today’s guest, Julie Fredrickson. She’s the CEO and cofounder of Stowaway Cosmetics, a venture-backed direct to consumer cosmetics company that retail their own right-sized makeup that are half the size and half the price, she’s going to explain everything further on. I especially brought Julie in to discuss how she went about raising capital for a product-based e-commerce business. Before I introduce her, here’s a list of some heavy-weight investors Julie and Chelsa, her partner, and have managed to convince to invest in their idea and their business, actually grow their business: Gary Vaynerchuk, Brian Sugar, Dave Morin, Jason Calacanis, Fabrice Grinda, Don Hutchinson… you just name it. As I alluded to earlier I’m super excited to have you Julie on 2X eCommerce because we’re about to learn the nuts and bolts of raising Angel and VC capital for groundbreaking product in e-comerce busineses. Welcome to the show, Julie.

Julie: Thank you so much for having me, I’m thrilled to be here.

Kunle: Fantastic, fantastic. Coud you take a minute or maybe two to introduce yourself first, please?

Julie: Sure. Well I’m Julie and I’m the CEO and cofounder of Stowaway cosmetics. My entire background actually is in the e-commerce space. Straight out of university I started a company called Coutorture, which really focused on independent publishers and the affiliate world, so. And this was a decade ago when affiliates were not quite so mature and we brokered deals with some of the original luxury houses for independent publishers and were acquired by Sugar Inc. Which actually is one of the reasons that Brian Sugar is an investor in my current venture, Stowaway. And I spent several years in-house with the Ann Taylor team in an e-commerce manager position. So e-commerce is really my bread-and-butter and I love talking about the space and how more companies can get into it, as I think it’s one of the biggest opportunities of our time.

Kunle: I see, I see. Now that makes a lot of sense, because I can see on both companies on your profile… how long were you with Ann Taylor for?

Julie: So I believe it was just a little under three years. I was brought in by their President, Christine Beauchamp to help develop more of a social competency around their e-commerce. Especially in this day and age, there are so many different ways of driving traffic and some of the traffic that can convert the best is obviously consumers that are deeply engaged, which it comes across from social. So that was my role there.

Kunle: Okay, okay. That’s really interesting. From your Angel listing, yourself and Chelsa… Chelsa comes from a slightly different background, your co-founder. She seems to be more embedded into the industry, the beauty and cosmetic industry. I can see her profile with Estée Lauder in it. Could you tell us a bit about Chelsa and how you guys met, because it was a slightly different background?

Julie: It’s true, we like to joke that we’re the yin to each other’s yang. We have absolutely no skill overlap. So Chelsa and I have actually been friends for quite a while. Two University friends of mine introduced me to Chelsa probably years ago. At this point we’ve known each other so long that it would be hard to even pinpoint when we first met. And Chelsa’s career very much is deep in the beauty industry, She actually started her career behind the makeup counter at Clinique in Indiana and and worked her way up through the industry, so really deep knowledge in product and just deep knowledge of what products are good. And also how the industry operates, she spent all of her cosmetics career at one of the biggies which is Estée Lauder. A lot of people don’t realize how heavily consolidated the cosmetics industry is. 70% of the industry is intended conglomerates. So if you’re buying makep products, chances are it’s from L’Oréal , Estée Lauder, P&G, or one of the other heavy hitters. The space has a lot of similarities to say, eyewear, in which one or two dominant players own everything.

Kunle: I see, I see. And I like the fact that she’s just actually interacted and knows what your customers are looking from cosmetics. And you kind know how to build out an e-commerce business. So did you head the fund-raising activities for the company, for Stowaway Cosmetics?

Julie: Well, we had very big ambitions. Now, not every e-commerce business needs to be venture-backed. Obviously there are a host of amazing tools that are very low-cost, things like drop shipping have made it possible so that anyone can get into the e-commerce space. But our ambitions weren’t simply to build a direct consumer e-commerce business in the cosmetic space. But we had a very specific thesis, which is that cosmetics are incorrectly sized. Women’s lives have changed since the 1950s, we don’t stay at home any longer. We work, women make up over half of the workforce in America and this idea that cosmetics are being designed for a bygone era really bothered us. And actually, we commissioned a study that showed, of 4000 women, that showed that 75% of women don’t finish their cosmetics. Not just before they expire, but at all. So if three quarters of your customer base don’t finish your product, there might be something systemic that is wrong with the system. So for us, we had a very big play, which is that the future should be right-sized cosmetics. They should be half the size, they should be portable, they should be cheaper, they should fit into your life. And that was the pitch that we took to investors, saying that there is the potential for a massive disruption in the cosmetic space. It’s one of the few multibillion-dollar industries, in the US it’s actually a $60 billion a year industry, just makeup, that had been touched by technology, that hasn’t been disrupted. So for us, venture-backing made sense because we had a big vision, because we wanted to grow so rapidly and wanted to take on an industry in a way they just haven’t been tackled before.

Kunle: Okay, that sounds really interesting and the two things I’ve picked up on are your big ambitions and the waste. So there is a problem of wastage in industry. Now just looking back to your big ambitions, when you were speaking with initial investors, I think there were about seven or eight of them initially, how did you demonstrate the big ambition you had. Besides the problem or in addition to the problem, how big is this ambition? Did they want to look at the financials of the ambition in terms of how big you want to go? You want to go to a billion-dollar business… how big is this ambition monetarily? Or nominally? [laughs]

Julie: [laughs] Well the ambition is very large. So just to give you an idea of how large… L’Oréal did $2 billion in acquisitions last year. Two billion in acquisitions. And the market caps of these companies are absolutely huge, right. So I think a lot of men in particular maybe don’t appreciate just how much women spend on cosmetics, it’s a very, very large industry with quite a bit of money being spent and so when you’re talking to venture investors you need to show a couple of things. One is how large could the opportunity be. And we made the case that it is quite large, probably larger than they realized. We like to make a joke that there were at the time three venture-backed shaving startups but no venture-backed cosmetics companies. And shaving is actually a quarter of the size of makeup, not just beauty, but makeup. So that if they really were in for the big dollars, we had something interesting to show them. But then you also have to show, can you execute to the vision? And I think that’s where Chelsa and I as a team really spoke to investors, because I had the deep e-commerce background starting from the real nitty-gritty of the affiliate space which is kind of the bowels of e-commerce, if we’re being really truthful. And she really knew the product perspective. So we thought, if we could make a really terrific product and a really well constructed e-commerce experience, we had a shot.

Kunle: Okay, okay. Again, I’ve picked up on another thing, you talked about execution to the vision. Given your background in affiliate marketing, could you describe how you both, with Chelsa in the cosmetics, how did you guys identify this vision? A lot of us have ideas and seeing them through is an issue. There’s so many thing broken in industry which I’ll just winge about. You know, there are many ideas, probably many things broken in industry you’ve come across, and Chelsa have come across. How did you know that this was the big thing? And how did you follow that through to action?

Julie: Well you know, it’s interesting. People like to have these Genesis stories about just knowing right away. But I think we slowly worked our way into the problem. And it started over breakfast actually. I was complaining to Chelsa that I was really sick of the fact that I was carrying around a ton of makeup. And as Chelsa was always my go-to expert on makeup I said, ‘Why is it so hard to find makeup that I love in sizes I can carry and actually finish?’ And Chelsa you know, thought long and hard, and she said, ‘You know, that’s really odd because as a makeup artist I think sizes should be smaller because they expire and as they expire, one, they become riddled with bacteria and, two, they don’t perform as well. So actually, none of this makes sense, that’s interesting and everyone I know would prefer smaller sizes in the makeup industry. And it sounds like consumers would prefer something smaller. Why aren’t we being provided with this?’ And so that moment we realized that there was demand but no supply, we started to hit on the idea that maybe there’s this systemic reason why, maybe there’s a deeply entrenched industry. And that’s kind of what started us down the garden path as it were, maybe that and too much coffee [laughs] as to saying that this could be a major opportunity. And anyway, it did happen quite fast from there. We started really researching why. Discovered that as most good problems are, it was a cost of goods issue. It actually costs just as much to manufacture a smaller size as it does a larger size, but consumer psychology being what it is, you think you’re getting a better value when you buy a larger size. But ofcourse, if you don’t finish the product you’re not getting a better value at all. Couple that with the fact that it’s a terrible lifestyle fit. Women are lugging around huge bags of make up with them all the time. The average woman actually owns 40 items of makeup and has five items on her at any given time, it just started to seem really silly that an entrenched set of problems was only being left to rot. Because these companies are very large, they’re publicly traded, and they have no incentive to cut into their profit margins. And we thought, ‘Aha! The solve for this is e-commerce! If we sold direct we wouldn’t have to worry about the markups of Sephora or Nordstrom. We would simply need to be able to be profitable on our own, which is how we landed on the concept of half of the size and half of the price. Because if we manufactured these and then wholesaled them, they would have to cost more and consumers would feel like they were getting a poor deal. And that’s the reason that nobody sells these sizes but I don’t need to wholesale my product. We can now reach massive audiences online. We have this thesis that the future of retail is the end of wholesale. And I e-commerce is the driving force behind that.

Kunle: Yeah, yeah, yeah. Make a lot of sense. So it was the major players in the cosmetics industry trying to play with our… well, with our psychology we like big and they were manufacturing to how far their economies of scale would stretch per volume for each cosmetic pack. Okay so from a validation standpoint, how did you validate with other ladies, other women in your situation, who got to complain? Did you run surveys? How did you to find out that this was a big enough problem to solve?

Julie: Sure. So prior to funding… we actually had two stages of validation: prior to funding and actually, post funding. Prior to funding, what we ended up doing was doing just a giant SurveyMonkey, let all of our friends know. Asking them multiple questions on, ‘Do you carry makeup with you? How much do you carry with you? Do you ever finish your make up? What are your biggest makeup pain points?’ And then we asked everyone to submit a photo of their makeup bag. And actually that visual was probably the most powerful thing because we had all of these women holding up overfilled, massive makeup bags just with grungy massy half-finished products that they’d had for years.

Kunle: With a mess, with all sorts of colors on the interior of their makeup bags.

Julie: [laughs] And it was just so unpleasant that we took these photos to go fund-raise and said this is the problem. It’s a really visceral problem. And of course there’s always the challenge when explaining to men a women’s problem. Because they don’t necessarily emotionally resonate with it, right. You can emotionally resonate with how frustrating it is to get a cab in San Francisco and understand Uber. And you can understand how frustrating it is to maybe get groceries and understand PostMates. But if you are a man of a certain age, as most venture capitalists are, really emotionally understanding this problem was a little tricky. But the second they started asking the women around, the feedback was immediate and really quite instantaneous, ‘Yes, this is such a problem. Why do you think traveling with me is such a pain in the butt? It’s because I’m always carrying these products.’ And the more that feedback came back, the evidence became really quite overwhelming. And actually one of our investors… so Gary Vaynerchuk works with a brilliant, brilliant associate named Phil Toronto. And he told me a story about how his mother used to drive him to school as a child. And she would apply makeup at every stop sign on the drive. And so that intuitive understanding, it was one of the reasons we knew that Gary and his team just had to be part of our round, because he had seen that problem firsthand.

Kunle: Interesting. Really, really interesting. Okay. Now, I’m going to just step a little back to the big ambitions topic again. And what I really want to tap into is mindset, right. Your mindset is unique. And where are you based? Are you based in New York or?

Julie: Yes, we are based in New York

Kunle: You guys are based in New York. And has most of your career prior to Stowaway been in New York?

Julie: Entirely in New York, yes.

Kunle: Okay. Right. Because my question really is, you have a Silicon Valley mindset. Which is entirely different to or slightly different from an e-commerce mindset. You know, some people want to build out e-commerce websites, you know build it out of a few million pounds or dollars, and that’s it. How did you to develop a startup mindset. Did you follow the tech press, like TechCrunch and VentureBeat in the past? Or how did it develop for you to want to disrupt an industry from a tech standpoint and a direct to consumer standpoint? Because there’s certain philosophies, like the Lean Startup Methodology, which you’ve employed by validation. You know, that’s quite unique to people with tech disruptive mindset. So how was it nurtured? I was just curious to find out.

Julie: Well, so I think that good startups are always lean, always think tactically. And I think that one of the reasons I love e-commerce is that it’s really won on good execution. And all of the little details add up to a great whole and I personally find that very satisfying. That really having the bottom of your funnel super tight, all of the optimization work that you can do… it gives you a great deal of control on a day-to-day perspective. But from the broader perspective, what I think brought me to this idea that it should be a venture business was quite simply that any industry that is incredibly consolidated and has practices that haven’t evolved in decades, deserves to be pushed. And frankly, needs to be pushed. And I think… and I have multiple theories on this, I think one of the reasons that an industry like cosmetics hasn’t been pushed by the Silicon Valley mindset is that perhaps men don’t see the problems in the same way that women see them and that there aren’t as many female tech CEOs with the kind of technical backgrounds that I have that want to push forward these problems or are being funded to push forward these problems. I don’t know if it is want or lack of access, I think frankly, women in technology is whole other kettle of fish that would require a different podcast. [laughs]

Kunle: Another topic, exactly. Exactly.

Julie: But I think because of that, the realization that, one, it was a tactical business that we felt we could win on the day-to-day, but that on an operational theater perspective it was a huge opportunity that deserved to be tackled And I probably got that mindset frankly from childhood. I was a… as much as I lived in New York my entire career, I was born in Silicon Valley. My father worked for Ingram Micro which is one of the largest distributors of computer software. And I grew up in a kind of homebrew situation as a child and I think being exposed to the idea that someone could come up with an idea in a garage and it could be a really small tactical business and turn into something major, just stayed with me for life. And that combination of experiences of growing up with it and then also New Yorkers are very scrappy, very lean, has given us a very unique advantage.

Kunle: Growing up, what memorable startups, garage startups do you recall? What’s been the most memorable growing up in Silicon Valley?

Julie: [laughs] Well, so I didn’t grow up all in Silicon Valley. I was definitely born there and we spent time there. But Ingram is actually based in Southern California.

Kunle: Okay.

Julie: Although it’s an excellent example of how big Silicon Valley mindsets can grow anywhere. I think Silicon Valley is increasingly a state of mind, not necessarily a place.

Kunle: Absolutely, absolutely. Great. Sorry to cut you short again, go ahead. [laughs]

Julie: Well, no, I think for me being able to see from childhood on that failure was okay, that big ideas could be interesting, that maybe you would succeed. And we did get to see a lot of successes; my father was certainly involved in a host a very interesting types of businesses. But then also we went bankrupt and we’d won. And going bankrupt actually was probably one of the most formative experiences of my life because it showed me that you can take big bets and fail and it’s actually not that big of a deal. You will survive and rebuild. And it was a personal bankruptcy, not a company bankruptcy, because all the risk had been put into this idea of change and newness and disruption. And I think I will forever hold that mentality but never want to experience a bankruptcy again. It happened right before I went to college actually, so try that one for size.

Kunle: Wow. Bad timing, yeah.

Julie: But it’s given me I think the fortitude and tenacity to try to pursue something very, very large while knowing that large battles are won on day-to-day execution.

Kunle: Exactly. You’ve been through the trenches and you know there’s light at the end of the tunnel. Okay. Right, that makes a lot of sense. I was just trying to scratch beneath the surface because I very rarely will speak to people, well… okay let me rephrase my statement. Given the way you’ve spoken and the approach and how you’ve built Stowaway Cosmetics up til now, it’s down to mindset. You know, your mindset actually is the source of all this fuel. So that makes sense now, it makes a lot of sense. I’ve got some context here to go with. Okay, now let’s start with Stowaway 1.0. What did version 1.0 look like? Did you actually have a 1.0 or did you just sell the idea to investors and then you started to build a prototype?

Julie: So we had a prototype. We actually spent a year building out what I would call Stowaway 1.0 before we went for fundraising. So working on the formulations and the chemistry, working on the packaging. And some of it was terrible. Our early packaging really needed quite a bit of refinement. But we didn’t want to fundraise without something in hand: the idea that we could put together terrific formulations that women would love and beautiful packaging that would fit into their lives. And we treated it a little bit like a hardware startup where we said, ‘We’ve built the prototype, it’s wonderful, why don’t you test it out?’ Although sometimes a finding people for them to test it out could be a bit of a challenge. And from there we said, ‘Look, now we need to put into production. This is great stuff, people love it, the validation has come from the testing process. And now it needs to go into the world, it needs to be produced.’ And I think especially in a product business, it’s almost impossible even with a great team, and I think Chelsa and I are a very qualified team, to raise funds without a working prototype. I think those are simply table stakes now for fundraising.

Kunle: So how did you get your initial customers? Were they customers or did you give out samples?

Julie: So they were very much customers. We actually don’t do a lot of sampling. Part of it is related to this little quirk of the industry in which sampling was actually the only way you could get smaller sizes and then you were paying tremendous markups for products. And we didn’t want to encourage women to continue engaging in that behavior because we want to understand that well, there ain’t no such thing as a free lunch. Those free samples aren’t free. And anytime you take a free sample and then purchase up into a larger product, you’re purchasing a product at an enormously marked up price that you’ll never finish. But for us, we engaged in all of the little tactical things that you would expect from the start. We ran a two-week prelaunch campaign in which we said, ‘If you share, here are all the prizes you can win for getting lots of people to join our email list.’ And that formed the base of our initial customers. And then from there it was simply a matter of, ‘How do we fill top of funnel? How do we tell our story? How do we make sure that people find us credible?’ Because here was this brand-new makeup company and people aren’t used to seeing new makeup companies because they tend to be very established and they tend to be owned by large conglomerates. So we actually did something quite unusual for a young startup, which was hire a public relations firm.

Kunle: Okay! All right. Top dollar?

Julie: Yeah, and well, and the thing is they sound expensive but the ROI is really tremendous. Because, one, they build your credibility in major publications and when you care a lot about SEO and inbound links those publications are a lot better than if you’re just scrapping about trying to find smaller sites to link to you. So when you think of it from that perspective, it actually ends up being an incredible bargain. But I definitely shook my head of the price tag initially. [laughs]

Kunle: Okay. And all this was self-funded going forward?

Julie: So the prototyping and the year of development was self-funded. The launch of the company was not. We raised from a team of different types of investors, both institutional, we actually do have venture funds in us. Metamorphic is the largest fund,, which is a New York-based fund that specializes in both e-commerce and ad tech. They are our largest investor. But then a lot of heavy-hitters like Jason Calacanis, like Gary Vaynerchuk.

Kunle: We’re going to talk about the investors shortly. I just wanted to find out a bit more about the PR that you took. Was it towards the business community, business PR? Or was it towards your consumers? Was it consumer PR or business PR? Was it business PR for raising capital or was it consumer PR for getting customers, for acquiring customers?

Julie: Well, we already had funding by the time we launched. So we raised our round and closed it in August of 2014 and launched in February 2015. So we didn’t use PR to raise funds only because we didn’t have anything to sell. We needed the funds to produce the product. That’s one of the reasons I used the hardware metaphor.

Kunle: Gotcha.

Julie: But we did split the PR and one of the reasons we split the PR, we did both business and consumer, was that it is important to tell the larger story of Stowaway, that it is a huge opportunity, that it’s very interesting, because it’s something that as we scale, and we do plan to raise more funds, more venture capitalists will need to understand. So we did tell that story, so had quite a bit of press in the publications like Fortune and Bloomberg and Fast Company telling the business story. And one of the reasons we thought it was valuable is that women read business publications too, right. They’re half of the audience. And smart women like buying smart products and Stowaways is a smart product. We’re designed to make women’s lives easier and we wanted those women, those Fortune, Forbes, and Bloomberg reading women to realize that someone had created a product for them. And to understand the economics of it because the economics of it are very respectful to the consumer. And the economics of the current cosmetics climate are not friendly to the consumer. And I firmly believe that if you treat your customer as smart, you will get smart customers.

Kunle: Absolutely, the Warby Parker way. I absolutely agree with you. And just getting those high-caliber customers initially which would trickle down to ordinary consumers further down the chain. Okay, so I listened to your interview with Jason Calacanis on This Week In Startups, who’s an investor as you alluded to earlier and he said the reason he invested in you guys was you executing at a high level. And you know, that speaks volumes. And so how does that high-level execution prior to pitching to him… Or how did it look like, from that standpoint? A lot of people would be interested to find out how to execute at a high level for a product, direct to consumer business.

Julie: Sure. And I think what Jason meant when he said we were executing a high level prior to funding, and I certainly hope he continues to think we execute at a high level although our metrics certainly indicate that we do, was that when we came to pitch, we had a product that was very well thought through. The formulations were done, we had very specific rationales for the formulations, for the product, for the packaging. And then also for the business plan, the go-to-market strategy, that was very, very detailed, right. Pages and pages of information on how we planned to market, why we plan to build on certain technologies, what we plan to do, who the team was. And what we saw the first month, three months, six months, and you frankly 5-10 years down the road. And knowing that it’s not Field of Dreams, it’s not, ‘If you build it, they will come.’ That we had a plan to get people to the baseball game, that you are not Kevin Costner and you need to make sure that people are showing up and are interested. And we had both the product side of it, which is how you get repeat customers, but also the prospecting side of it very well under control from the start.

Kunle: That’s a lot, you know everything you’re touching on here. Okay so the beauty and cosmetics industry is 60 billion in the US. How much have you raised in capital thus far?

Julie: So we have raised publicly 1.5 million. So certainly not an insignificant sum, although probably chump change compared to how much a conglomerate would use on a new product launch. I’ve certainly anecdotally heard some very entertaining numbers on just how much it costs to innovate and build a new product, let alone launch and actually get customers on that product. So we’ve certainly done quite a bit on very little, which is also the obligation of a startup, of a seed funded startup, to show that you can get very, very far and do impossible things on very little capital because it’s your job to show that the scaling existence is possible.

Kunle: That the agility is there. Absolutely. Okay. And so how did you find and meet investors?

Julie: Sure, so it has certainly helped to have been embedded in both the New York startup community and the San Francisco startup community. I had had a previous exit in my first startup, so one of the first people that I went to obviously was Brian Sugar to say that this is something that I’m exploring, I think it could be very interesting. And I think it’s actually very, very challenging to raise venture without being at least somewhat inside the system. And anyone can get inside the system, I firmly believe that. So you have to find the one person who can introduce you to the next person who can introduce you to the person down the road that will be interested in cutting the check. And I know a lot of VCs and Angels will say that if you cannot find a warm introduction to them, no matter how good your idea is they’re not going to take it. Because they need you to show that you can move mountains and it’s a litmus test in some ways to show that you can find a way to people. And we did our very best to find ways into the people that we thought would be appropriate for us. And I think that was really the secret there, is showing that tenacity and showing that we could find our way in, and that we had something interesting to show. And then from fundraises do take on a life of their own. People talk. The venture community is extremely small and chatter builds. And if you are doing a good job of convincing people around your idea, investors will bring on other investors and your round will take shape very quickly. The old joke is that fundraising is the hardest thing in the world until it’s the easiest thing in the world.

Kunle: [laughs] It’s all a chain, really. You know, hinged on a really great idea. Okay, all right. So you had six investors at the start in June of 2014, from your Angel list profile page.

Julie: That may not be fully accurate, our cap table is a little larger than that. [laughs]

Kunle: Wow, okay. Okay, right. Let’s quickly talk about your pitch deck, your initial pitch deck. Did you have a pitch deck and how was it structured?

Julie: Yes, we very much did have a pitch deck. Firstly because we had to explain that the problem existed at all. Often people will go in and the problem will be at least somewhat familiar. We didn’t pitch anyone who was familiar with the problem because no one we pitched experienced the problem. So for us it was build the case around the problem, build why the problem exists, and then show how large the opportunity is if we win the problem.

Kunle: Okay.

Julie: And that kind of three-point narrative arc is also just how we as humans process: problem, solution, size of problem.

Kunle: Makes a lot of sense. Okay, right. So what does your team look like at the moment?

Julie: So we’re quite lean, and very proud of being lean actually. I think a lot of people have a tendency to take on large teams of self-raised funding but $1.5 million is chump change comparatively. Of course it’s an enormous sum of money, but very small when you’re trying to do the things that we are. So it’s six people: myself, Chelsa, our CTO who actually was my cofounder on my first two startups. So a very, very close-knit team in that sense. A GM, a customer service person, and then someone to help with design. And that’s it, we do every… I mean you would be surprised at the small menial things I do. I still code the emails, I still place all of the ads, I actually make most of the ads myself.

Kunle: Wow.

Julie: Because we also believe that you do not deserve more funding if you cannot show initial traction on the resources you have.

Kunle: That makes sense. So what about traction one year… you’ve been about a year and now… What does traction look like for the business now as we approach 2016?

Julie: So actually the business is only 10 months old from a launch perspective. Obviously from the point of raising funds we had to put the products into production and do quite a bit of work. But you know traction has really looked like consistent month over month revenue growth. That’s the metric that I track most keenly. But the second most intriguing metric, and the one that I think shows that our business is winning, is actually repeat purchasers. And I think so many businesses neglect that as a metric. And the reason I think it’s particularly crucial for us is that if three quarters of consumer cosmetics purchasers do not finish the product, what incentive do they have to buy another product? Well they have none, right, so the cosmetic industry is in this death spiral of having to introduce new products, new colors, new innovations. And suddenly you have Aqua eyeliners being marketed at great expense by Sofia Vergara. And I just don’t think that that’s a very efficient business. I think that you should sell a product people like, they come back and purchase it again and again and again.

Kunle: They’re hooked. It’s a habit, you make it a habit and you have customer business for life.

Julie: Right, and so for us that means that even though… We’re currently profitable on an average order value right now, so I can spend at a great CAC on an average order value right now and feel really good about it, knowing that I have this repeat customer base which just allows me to feel more confident in my spend. So I could be more aggressive if I wanted to but the fact that I can spend on an average order value basis in a reasonable manner gives us a tremendous amount of latitude. And for us the fact that, so, and I’m going to be open kimono about this, our mature customers, so people that have been with us long enough to have finished the products, which are kind of customers from month one to say you’re around month six I guess, which would be September, those a repeat order numbers, it’s 30% on the first set of months and then it trails down you know 25%, 23%, 20% depending on the maturity of the customer. And that’s an astounding fact, right, that means that 30% of the people that bought a product that have now had a chance to finish the product were like, ‘You know what, this is terrific!’ and the average order value on the first order is not substantively different than the average order value on the second order. And that’s something that we’re very proud about. That means that they have purchased something, came back, and repurchased virtually everything. There’s a difference of $10 and the difference of $10 comes down to the fact that it’s easier to finish eye products and complexion products than color products. Color products take a little longer. And so I think as we mature we’ll actually start seeing that third average order value will end up being higher than second average order value.

Kunle: Because they need to restock on the colored, yeah, okay. Makes a lot of sense. So your brand name search must be going up steadily, given the fact that 30% of customers actually are repeat customers?

Julie: Exactly. And not only that, the conversion rate. And you know what benchmark conversion rates look like, right, people are happy at 1%, they’re thrilled at 1.5%. Our organic search converts at 3%.

Kunle: 3%, okay, that’s really, really good. Okay. Going back to… What about other sort of growth levers? Are you tapping into word-of-mouth referral marketing? To me there are three ways of growing in e-commerce or any business in general: acquiring more customers, increasing repeat customers, which, a lot of it hinges on the product itself which is a brilliant product in your case. And then the third component is really getting them to spread the word about you. So how are you working out on getting customer advocate from your existing customer base?

Julie: Sure. Well, so I like to say that you can’t shine a turd. The product has to be good, so that kind of is table stakes right there. But I think it will not surprise you that email is our best performing channel. And we take a lot of care in building the email database. We do quite a bit of co-marketing with brands that we feel are aligned with our values and aligned with our customer base. And from there it’s also being really respectful of the existing customer base. We have excellent customer service. Any problem that comes up we will solve it and we will solve it for you in an hour. And we do that through using tools like Groove, which is an excellent helpdesk, I highly recommend it as a product. We use Olark for live chat. And unlike a lot of e-commerce companies that may outsource their customer care, we have a person in-house that runs everything and we then feed that data into our product development cycle, into how we market. Because, and that’s something I think people maybe don’t appreciate about the current cosmetics business, is that Bobbi Brown or Clinique or NARS don’t know their customers. They have no CRM. Sephora has the customer data and CRM, the department stores do. And that’s the danger of being a wholesaler. Whereas we have completely transparent data around who our customer is and so we use that as the incredible strategic advantage it is by making sure that we really do pay attention to these people. And that has allowed to, and I think… so much of e-commerce analytics is reading shadows on the wall. But direct load traffic is very high for us, actually the highest I’ve ever seen. It started at 50% and still is kind of holding very steady around 30%. And obviously it’ll go down as we grow, but the fact that it’s that high at all means that women are sharing. And what’s a little unique about our customer base is, I thought more women would share on social media but because we serve not necessarily that Gen-Z and tweens, we serve mature millennial’s and professional women, they tend to share a little more peer-to-peer. So messaging apps drive traffic, the way that they talk to each other, they’re actually having conversations that are a little less, ‘Oh, I can see it on Twitter or on Instagram,’ and more person-to-person. And I think it’s kind of an interesting thing, right. We have this notion that social media can be a real panacea for driving traffic and actually social media traffic is only 5% of our traffic. And we’re comfortable with that simply because our customer share is in a different way. It doesn’t mean she’s not incredibly social, our direct low traffic clearly show she’s very social. She’s just social in a slightly different context and it’s important to be comfortable with that.

Kunle: So do you see, sorry for cutting you short, do you see messaging being the new social. You know with Facebook acquiring WhatsApp for billions, basically, and their focus on the Messenger app, do you see the future of social and e-commerce, a lot of the word-of-mouth referral component of e-commerce could be messaging? Because that’s intrinsically the way at the base level, that’s where we actually communicate, bar voice. It’s more or less voice and text, one to one, peer to peer.

Julie: Yeah, and I think we have drawn back as a culture on how we share. And I think you know if, perhaps this could be my own bias showing, you know Dave Morin is an investor of ours, but I think Path actually had it right. I think that more private intimate sharing actually is how certain generations feel good about social. And I think messaging is perhaps the heir to what Path got started, and this idea of the way we communicate with our friends becomes more intimate, becomes more circumscribed. So, and I don’t know how marketers are going to take advantage of that to be quite honest. I think that there’s a great deal of permission that will need to be involved there and inviting people in, so respectful brands will do quite well with this. Brands that are little more spray and pray probably won’t. So we certainly have done is much as we can to show that we’re a respectful brand and really care about our customers. So I don’t know that I have the answer here, I think the trend certainly shows that messaging is going to be very interesting and we already see quite a bit of that. And what it looks like long-term I think is anyone’s guess.

Kunle: Yeah, I think the only issue now with apps and mobile is attribution. We’re really having problems from an analytics standpoint. And the tech companies should really solve that problem; I think they could pass some referral data or something or anything like…you know, get out of their ecosystem at some point. Okay, are you planning to make a move into the UK or Europe any time soon?

Julie: Oh we certainly hope so. I get probably 5 to 10 emails every single day with complaints about how we do not do international shipping. And it’s really quite a shame that it’s so logistically challenging. You know, we’re a very small team so I think it’s the sort of thing that may have to come after Series A in which we have more than say six warm bodies around the table. Because there are issues around customs, there are issues around distribution, and there are certainly issues also around just sort of the general regulatory environment. So one thing that we’re very proud of is we are EU compliant. The US is notoriously lax around ingredients and ingredient safety, which is sort of terrifying. If you’re a US listener, you should actually be a little scared. I’m a capitalist and libertarian so I don’t necessarily think it’s the government’s job to regulate this but the fact that companies don’t disclose their ingredients should petrify all of us.

Kunle: So what does it look like back in the US in terms of the restrictions on…

Julie: Virtually none, virtually none. Eleven ingredients are banned in the US, 1300 are banned in the European Union.

Kunle: Phenomenal.

Julie: Yeah. So there’s definitely…there’s something fundamentally wrong with that. So we very proudly hue to EU compliant standards, so that means we’re paraben-free, we’re phthalate-free, cruelty-free, we’re actually most of our products are vegan but the one or two products that are not vegan are not vegan because they have beeswax in them. We’re gluten-free. So we really care a great deal about the ingredients. Because you put on your body, right, and you care about what you put into your body. You certainly wouldn’t drink arsenic so why would you put an endocrine disruptor on your skin?

Kunle: Exactly. Your skin actually absorbs it, absorbs the chemicals, the ingredients, rather. Okay, let’s talk about your exit. We’re about to wrap up now. What’s your philosophy on an exit? Just from a startup standpoint, what do you think a perfect exit should look like, from your perspective?

Julie: Well, and you should always be thinking about liquidity, right. Like the idea of having that moment should always be at the back of any entrepeneur’s mind. And I think we have multiple opportunities along our journey, right. Because like I mentioned early in this call L’Oréal did $2 billion in acquisitions, right. Like, that’s like a tech company level of acquisitions, right. Like I don’t think Yahoo did that many acquisitions last year.

Kunle: Right.

Julie: So and when we look at that there’s definitely the possibility of major acquisition.

Kunle: From a L’Oréal?

Julie: Rght, from a L’Oréal or an Estée Lauder who frankly can’t develop their direct distribution channels very effectively on their own because it would upset their retail partners. If you look at say a Revlon, 25% of their revenue comes from Walmart. So they can’t really upset their retail distribution partners, it’s just not in their best interest. But if you acquire someone with great direct distributions, then you kind of solve your problems. So I think that’s one potential strategy. But quite frankly I’m thinking bigger than that. Not that I’m necessarily at the stage in which you call me a qualified public CEO, but I do think that we could IPO. I think that the market is large enough and the opportunity is large enough.

Kunle: Yeah.

Julie: Because we look at into what used to be mid and large-cap companies that were publicly traded, are now private, right. We’ve had this idea of keeping companies private a lot longer and I think that there could be an excellent opportunity for a very disruptive, very different cosmetics company to say, ‘You know what, we’re taking on the biggies. We can be public, we can be that accountable.’ Because frankly if you looked at our books versus the books of a L’Oréal or an Estée Lauder, we’re that much more efficient and Wall Street analysts love efficient companies. Love seeing the fact that we can acquire and maintain a customer so much more cost efficiently than our publicly traded brethren. And I don’t just think that this is you know of a couple hundred million dollar opportunity. I think this is a billion, this could be a multibillion dollar opportunity when you look at it. And right sizing as the thesis is about helping customers in their current lives. And nobody else is focused on the customer experience in the way that we are. And that’s not to say that things couldn’t change, that there couldn’t be upstarts and there couldn’t be new competitors. Frankly I don’t worry at all about the incumbents, I worry about upstarts. But that exit opportunity of a genuine IPO, and now granted that is 10 years down the road, I think very much exists. But I’m happy that there are plenty of paths for liquidity along the way.

Kunle: I personally want to see you guys IPO. Just given the ethos and the whole D2C and disruption mindset, I would be delighted to see you guys IPO and have a life of your own as a multi-billion dollar company and doing things differently from an efficient perspective.

Julie: [laughs] Oh, and believe me I’ve already got my public CFO and my public COO all picked out in my head.

Kunle: Good stuff, good stuff.

Julie: They don’t know it yet but I’m going to start pulling them real early.

Kunle: [laughs] They’re all there, okay. Good stuff. Okay so, this is the lightning round, I just ask evergreen questions so these questions have been asked of almost everyone who’s been on the show. You could just answer with a sentence or two. How do you hire people?

Julie: Woo! That feeling, honestly. I really care about mental agility and even if someone doesn’t necessarily have the exact qualifications that might be necessary, if I think that you can solve problem without complaint, then you’re in.

Kunle: Yeah, it’s mindset. Okay. What are your three indispensible tools for managing Stowaway Cosmetics?

Julie: My three indispensable tools. Mailchimp, UnBounce and Google Analytics. [laughs]

Kunle: Okay, good stuff. We’re aware of all that, we’ll link to them on the show notes. Okay. What’s been your best mistake to date? By that I mean a setback that’s given you the biggest feedback.

Julie: So you know, we made a lot of engineering mistakes that came from a good place probably in April and May, we had a couple of dips that were not our finest moments. But being very honest about how the mistakes came about and how we fixed them and how quickly we fixed them ended up giving us a lot more visibility into how we wanted to build going forward. And we’ve been able to maintain those lessons month over month very consistently since then. So sometimes messing up your tech actually ends up being the best way to have better tech long term.

Kunle: Exactly, good feedback. [laughs] Okay. One thing by the way, just digressing a bit, I was on your website yesterday and I going through the checkout. It’s so smooth in terms of… it’s questionnaire-based, which was quite interesting from that perspective. And you know, in about 15 seconds I had $75 of mine in my basket, I wasn’t going to buy anything but it was quite clever. [laughs] Okay. What one piece of advice can you give listeners looking to raise capital for their direct to consumer e-commerce ventures?

Julie: Thank you for saying that about our checkout flow. We took a ton of time and energy to make it as smooth as possible, especially when you have people who need to make a lot of choices, there’s the old trope that the more choices people make, the worse your conversion is. Which is not necessarily true, you can definitely engineer a fast conversion process with a lot of questions. You just need to do…

Kunle: Breaking it down to…

Julie: Yeah.

Kunle: I’m going to actually write a blog post around that transition process on your checkout. It’s worth the case study. It’s just, that speed and transition is quite efficient and the fact that you give people options, 3-4 options max per page and then they move on.

Julie: Yeah. And it’s actually… so this isn’t true necessarily when they get to the cart but 95% of people who start the kit builder process, finish the kit builder process.

Kunle: Ah, that’s your secret sauce. [laughs]

Julie: So, and that’s not to say that they all get through actually paying for it, but we get them through. Which is amazing, right. You want someone to have that extra 10 seconds with your brand so we’re very proud of it, so feel free to share that stat.

Kunle: I will, I will, I’ll take a video screen shot. Okay, so what one piece of advice can you give to listeners looking to raise capital for their direct to consumer e-commerce ventures or venture?

Julie: Be as prepared as humanly possible. Do not have a single data point that you cannot have a justification or a validation for. You need to know a hundred times more than the person that you’re talking to. So if you’re going in and you’re talking to someone who really knows the e-commerce space, which a lot of the better VCs do, you need to make sure that you have done every possible bit of homework. Know exactly how much it costs to acquire a customer, know exactly what channels they’re coming through, know exactly what products they like and why, how your merchandising strategy has approached these things. Just being better prepared than your opponent. And let’s be real, venture capitalists are your opponent until they’re your actual backers, in which case they’re your best friends.

Kunle: [laughs] True. The money is in it. Okay. Very, very good point. That thoroughness is important. Okay. If you could choose a single book or resource that’s made the highest impact on how you’ll be building a business today and grow, then what would it be?

Julie: Hooo. Well. Gosh, picking one would be almost impossible. I would say to prepare you to raise capital, Brad Feld’s Venture Deals. Read it once, read it twice. About the fifth time you’ll know enough to actually be a functional human being when raising capital. But actually this is going to sound a little strange but I would say read a lot of science fiction. Anything that helps you see the world from a different angle enables you to solve problems better. And science fiction may not be the way that everyone sees the world from a different angle, but your ability to see a problem that no one else sees and then optimize for a solution comes from your own creativity. So read whatever it is that helps you be the most creative in your problem-solving.

Kunle: Interesting. Very, very interesting point. My last guest actually has authored five science fiction books and he’s only 19.

Julie: I’ll have to read them.[laughs]

Kunle: [laughs] You’ll have to listen to that one. Okay, finally could you let our audience know how to find and reach out to you if they wanted to connect?

Julie: So I am very accessible on social media and via email. And I respond to everyone actually, it’s one of my greatest joys. I love talking to entrepreneurs and future entrepreneurs. So you can reach me at Julie (at) StowawayCosmetics.com, you can find me on Twitter @almostmedia. Gosh, there… and probably you can email Hi (at) StowawayCosmetics.com and find me too. I always respond. I take very seriously the responsibility of responding to people because so many people helped me, I will help you.

Kunle: Absolutely. I can testify to Julie’s responsiveness via email. Very, very fantastic, well, very nice email etiquette, you just come back to me within the hour. So it’s fantastic. Okay. It’s been an absolute pleasure having you, Julie. I learnt a ton, I’ve taken notes here. I’m going to listen to this episode again, [laughs] I hardly do. Yeah, it’s been fantastic having you on the 2XeCommerce Podcast. Thank you for sacrificing your time and sharing your knowledge. And I wish you guys the best, you guys have to IPO, I would just be delighted for you guys.

Julie: Well keep an eye on us. We’ve got a long journey but we are going to work hard and fight every day to get there.

Kunle: Brilliant, brilliant. So thank you guys for sticking to the very end of today’s show and I hope you’ve found Julie’s story about Stowaway Cosmetics and raising capital inspiring. To download the show notes and read the full transcripts, head over to 2XeCommerce.com about a week from when this is published on iTunes. And for updates and tips to help grow your store, be sure to sign up for email alerts on 2XeCommerce.com. Until the next show, do have a fantastic one, everybody. Cheers, bye.