How I Built This with Guy Raz - Everlane: Michael Preysman

Episode Date: November 20, 2023

When Michael Preysman founded Everlane, he knew nothing about fashion–he just wanted to see if he could build an online platform that would generate buzz around anything. He started with a cotton T-shirt, and taught himself every stage of production, from sourcing the fabric, to cutting, dyeing, and finishing. When Michael realized that some luxury brands charged as much as seven times the actual cost of a T-shirt, he decided to sell his for $15, and soon caused a stir by telling the world exactly what it cost to make. Eventually the brand shifted its focus to sustainability and social responsibility, a strategy that invited harsh criticism, especially during the Covid era. Today, Everlane is a multi-million dollar business that has expanded to sweaters, denim, outerwear, and accessories.This episode was produced by J.C. Howard, with music by Ramtin ArabloueiEdited by Neva Grant, with research help from Sam Paulson.Our audio engineer was Gilly Moon.You can follow HIBT on Twitter & Instagram, and email us at [e-mail] Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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It had tall windows, beautiful old details, and plenty of space for all of us. And being in that home on Airbnb, right in the middle of Vienna, walking distance from so much of the city, made it feel less like a visit and more like we were actually living there. Plus, taking a trip is the perfect time to host your space on Airbnb. Your place with all of its personal touches and its amazing location could make someone else's vacation even better. Your home might be worth more than you think. Find out how much at Airbnb.ca.ca. Hey, it's Guy here, and before we start the show, I want to share something I heard recently from Stephen Colbert. It's about learning from failure. He told me an incredible story from way back when he was doing improv in Chicago, and how he broke on

stage one night, which he initially thought was the worst thing ever, but it actually changed his life and his approach to comedy forever. To hear my conversation with Stephen Colbert and other incredible creative people, listen to my other podcast, The Great Creators. Just search for the great creators with Guy Raz wherever you listen to podcasts. And now, on to today's show. The strangest thing you would never expect, if you were to build a brand today and you start with a t-shirt, your next product would might be denim. Our next product was literally ties and bow ties. Ties and bow ties.

Ties and bow ties. It just seems like kind of a kind of a, just throwing a dart at a darkboard. Let's do bow ties. It is weird, yeah. We didn't have a lot of connections in it was we would have to wait six to 12 months to be able to launch a sweatshirt. And our alternative was we had a guy that could make ties and bow ties in two months. And how did those do? We never made ties and bow ties again.

Let's just put it that way. Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built. I'm Guy Raz, and on the show today, how Michael Phrasman set out to start an online retail platform, fell into the apparel industry, and built the multi-million dollar brand, Everlane. In early 2023, KPMG, the global consulting firm,

did some research around consumer behavior. And they found that about a third of people think about a company's social mission when they decide what to buy. So, for example, about a third of consumers might choose Ben & Jerry's over, say, the supermarket brand, because Ben & Jerry's is perceived to care about things like the environment. Over the past 20 years, this kind of research has led to an explosion of consumer-focused brands and companies that, emphasize their commitment to social responsibility. There's even a name for it, social enterprise. And for the most part, that's a good thing, right? We want our companies and brands to do less harm. But the problem is that being celebrated as a so-called social enterprise can also make you vulnerable

when you can't always live up to your ideals. And that is part of why Everlane hit a bumpy patch in the past few years. If you don't know the brand, they sell clothing, mainly basics like t-shirts, jeans, sweaters, sort of like the gap from the 90s. Everlane was one of the first direct-to-consumer brands that really leaned in on the concept of radical transparency. The company laid out the actual costs of making clothing, so for example a t-shirt can cost between $4 and $6 to make. What we're all paying for is the brand name, but you know that and so do I. Everlane wanted to double down and not just show you the true cost of making clothing, but everything about it, the factory, the shipping process, where raw materials were sourced, and the idea was to educate consumers, to show them that they could basically buy the same product from Everlane,

but for a fraction of the price, and they could do it ethically. When Michael Phrasman co-founded the brand in 2011, he wondered whether he could sell a simple t-shirt on the the internet and turn that into a brand. His concept, tell people the true cost of a shirt and then sell it for less than anyone else, was a big hit. And for many years, the company grew at an eye-popping rate. But, as you will find out, the pandemic had other plans for Everlane, and its business took a pretty significant hit. Today, the company is back on a path towards profitability in large part because it has also narrowed some of its ambitions. Michael Phrasman didn't set out to have a career in fashion.

He's the child of Russian immigrants and grew up in the 80s and 90s in the Silicon Valley. As a kid, perhaps not surprisingly, he was into computers. And after Michael graduated from college at Carnegie Mellon, he landed at a private equity firm in New York. And I'm just feeling a lot of angst. And the kind of angst that just feels like something's not. right. And I didn't know what it was, but I remember, I don't think this can be my life. And I had this period of two to three months where I was trying to figure out why am I feeling this way? What can I do about it? And I did this one exercise. And I remember I said, okay, I'm going to write down

everybody I admire. And I wrote my down my father. He had actually started a couple of businesses. I wrote down big names, Michael Eisner at the time, or Steve Jobs, Steve Wozniak, and they were kind of big names, but when I wrote down every single name, I realized not a single one worked in finance and all of them had operated or built something from scratch. And I said, oh, and that was the moment for me. It was as simple as that that I realized I've got to go and start something. So you thought, all right, I've got to figure something out. And presumably you had a few years where you were watching, you know, startups and people pitch ideas. And maybe some of those ideas you thought, well, this doesn't seem so complicated or maybe not. Oh, it definitely seemed complicated.

And I will tell you, having had the chance to work in the finance side, it's a pretty, it's a hard job, but it's a financially oriented low-risk job. And so you look at your life and you say, hey, if I stick here and stay, hey, if I stick here and stay here, I'm made. I'm fine, by all measure. And so to be in New York at that time, I started hanging out with entrepreneurs, but I had the fortune of having grown up in the Bay Area, so I'd been exposed to what you could call the best of the best. And I started hanging out with entrepreneurs, and I just didn't feel the energy in New York. So it was the summer of 2010, and I actually packed up my bags and moved back to California and moved to San Francisco with the intention to start something or work for a very select few companies that I had on my list.

All right. So you moved back to the Bay Area in 2010. And did you have any ideas at all? I had a little bit of an idea. You know, what I was really inspired by at the time was this company that still exists in some shape or form called Guild Group, which had really changed how people bought luxury online. No one had really bought luxury items online.

And all of a sudden, Guild Group came around during the recession and exploded because people could get Prada, Gucci, all these companies that say 50% off. And while it was a discount business, which isn't what I love, it was a eye-opening experience that people were willing to buy these brands online. And I had the idea for me was really critical was I wasn't technical. Even though I studied computer engineering, I didn't code, which is strange. I don't know. It just never really sang to me.

And so I was really set on find. a co-founder, and I, you know, happened to link up with a really great guy, Jesse Farmer. And he was a coder. He was a technical guy. He's more than just, yeah, he's a technical product leader, but very technical and able to write code and, you know, did development and end-to-end. And you knew that whatever it is you were going to start, I mean, you had the sort of the, you could handle the finance or maybe the business side, but you needed somebody who could handle the technical side because obviously this is going to be a digital base.

business. Yep. It was going to be digital-based. In the early days, it wasn't retail necessarily. Jesse and I were in explore mode. To be honest, we ended up at a place called Dog Patch Labs, which has a really storied history to it. But we ended up working there for a number of months, just iterating through ideas.

Yeah. And what do you do? You start talking about, like, what do you remember about ideas you talked about? Yeah, I can tell you. There were a whole ton. So the question for us was, how can we rethink online shopping? Okay. What does that mean?

And what can it look like? Yeah. And we each put down, opened up a bank account and each committed it and said, let's just put down $10,000. And the money being spent was to decide what this business was going to be, but you knew it was going to be an online retail. Yeah. And by the way, this is 2010. Yep. End of 2010, might be early 2011.

Okay. And we were trying different things. So I'll give me an example. One of Jesse's big beliefs was building on top of audiences. And in the early days, we said, okay, let's see how we can rethink shopping. And we were looking at all kinds of different platforms. Etsy is an example. And we built a tool on top of Etsy that basically turned your Etsy shopping into feeds.

And you could follow different shops, and then you would get updates on their newest items. And it worked. And it was very cool. and a lot of people loved it. And then we realized very quickly that building a business on top of Etsy was a losing proposition. And so then we went from Etsy to Tumblr, which was a big platform at the time. And we said, why don't we see can we build shopping on top of Tumblr? Yep.

So we start building tools on top of Tumblr. So one of the thoughts for us was can we build curation and can we create so much buzz around products that we can drive people to find the products they love by them? and then we would get an affiliate fee of some sort. And the concept was an iPhone case store. We would design iPhone cases based on the number of likes they got on Tumblr. We would actually put them into production and sell them. Where did you get the iPhone cases from? We went online and there was a place where you could upload graphics

and then they would make iPhone cases on demand. Who was designing the cases? The cases were designed by a group of five or six different graphic freelancers we found. We would have people design very cool graphics of different sorts. some culturally related, some beautiful, whatever. And we would post them on Tumblr and say, if this gets X number of likes, we'll make it and sell it. And then based on that, it would link to a store that we had where people could buy things. And indeed, people would like certain things.

We would put them up and they would sell. And it was sort of the beginning of creating this buzz and waitless. But we were buying all of these iPhone cases from some site, I don't know, call it customifoncases.com. and we would pay 20 bucks and sell them for 30. So the margin wasn't very good. We were making $10. And then we realized, huh, these $20 iPhone cases, I don't know why we made this assumption,

but we made the assumption that they probably cost $2 or $3 to make. And that we're only making $10, but generating all the demand. And this custom iPhone case company is making a ton of money off of us. Right. And that was this aha moment that said, wait, the markups in retail are actually pretty massive.

And why don't we just become the manufacturer and sell direct to the consumer? And at the time that we were building this iPhone case store, I do want to say that we had gone out and raised a small amount of money. And how much money do you raise? A million dollars. I guess it's not that small. No. And it was you raised that money in 2011 based on building an iPhone case store or was the pitch about doing other things? The pitch was building a new retail platform on top of Tumblr.

Okay. And you would sell, you'd start with iPhone cases, but you could go into all kinds of accessories over time. You got it. Okay. Yep, exactly. And who gave you the money? Was it professional investor, venture capitalists? Was it friends and family?

It was. You know, we just had a good network. Yeah. And we were surrounded by people doing other interesting work. And so quickly people introduced us to the right people. And it was the, you know, famous SV Angel Ron Conway. It was Kleiner Perkins put in a little bit of money. It was a whole host of different people that just said, hey, this sounds cool.

Tumblr, shopping, these guys seem smart. We'll give them a shot. Yeah. And when I go back to thinking about why I moved to California versus New York, that was the reason. The belief in California has always been, give it a shot. Let's see what happens. One of the things that I read that you, while you are kind of searching around for ideas and what might work and what might not work is you reached out to a bunch of different entrepreneurs. And I know one of them was Dave Gilboa who started Warby Parker because you probably loved that brand and they were a hot brand.

Tell me what you just reached out to him cold. I did. Dave was particularly helpful because indeed he had launched in 2010. I believe, or, oh, February 2010. So they were about a year and a half in. And I had, you know, we had just launched our iPhone cases and we said, wait a second, Warby selling direct. Why can't we sell direct and build a brand around that?

And Dave was just immensely helpful and just helping us think through the early days of what we were building. Yeah. And I was learning what mattered from Dave. And then I remember in the early days also, just learning how to manufacture because we decided we were going to be the manufacturer. Yeah, I mean, obviously what Warby Parker did was they realized

that glasses were being marked up extraordinarily high and that most glasses, most people wore, were controlled by one company, most brands. And so that model of like producing or owning sort of the means of production and then lowering costs, that was their model. And so clearly that had, you know, that I imagine it inspired you to some extent.

It inspired me and us in an immense amount. And what it was when we, I remember these iPhone cases, we realized the markups were so high and we said, okay, well, we're not going to start a company around iPhone cases. But what if we start a brand? And for whatever reason it was, we realized that the basic t-shirt, you know, I remember loving a brand called James Purse that sold T-shirts at the time for. $45. Now they're probably 80. And I found out those t-shirts cost $7, $6 to make. And that seemed borderline unethical, that a $7 t-shirt was marked up to $45, and the consumer had no idea. Is it unethical or is it just capitalism? I mean... And that's the idealism I had in the early 20s. Yeah. Now you could say, in the 30s, that's capitalism, good for you.

And then you could say our version of capitalism was, great, we're going to sell it for less and tell our story. Yeah. But in the early days, it felt more than that. And it felt like there was an opportunity to reshape the industry. And we said if the basic t-shirt can be marked up seven times, let's build a brand around that concept because the t-shirt is the most basic part of a wardrobe. And these were plain T-shirts, just no, no design, no pockets, just a plain T-shirt. We did eventually have a pocket for sure, but, yeah, in the early days it was plain T-shirts. Good old plain, high-quality, Pima Cotton T-shirts.

So when you and Jesse were thinking about T-shirts, did you think about a full apparel company right away, or did you think let's start with T-shirts? We thought about it as a platform to launch product. not as much as a fashion brand. That came later. And this was a big point of one of those critical moments in the evolution of the company. Because we had raised our million dollars, maybe spent at this point 100,000 of it. And we had signed up all these investors on the idea that we're going to build a retailer on top of Tumblr.

Yeah. And the belief was, let's ditch the retail platform. Let's ditch all this technology. And let's go launch a brand. And in my head, I had this immense fear that our investors were going to say, this is not what I signed up for. And so I remember this moment where I draft up this long email about what the new plan is. We're going to shut all this stuff down and we're going to launch a brand and it's launching on this date. And I sat on this email and sat on this email and finally sent it to all of our investors expecting a bunch of people to say, what the hell are you doing?

And for the first hour to crickets. And then three emails come in of the 30-so investors we have that say, great, sounds good. Yep. And there again was that entrepreneurial spirit of whatever you need, just go do it. And you mentioned that when you found out that your $45 T-shirt cost $7. right? Did you think that, okay, we're just going to source those t-shirts from the same factories and sell them for less? Was that the idea? It should have been the idea, but the idea was we're going to source all the material and control the entire supply chain and then sell directly to the consumer.

And what I mean by that is the difference is in one case, you go to a manufacturer and you say, can you make me T-shirts and what are you going to charge me and I'll get the final product. And then the other one, we, you know, met a number of people down in Los Angeles and we bought the fabric. We learned how to do the patterns for the fabric. We had those patterns, what we call grating, so it can go from small to extra large. I mean, we learned every step of the process because there was this theory that if you're going to become a great show, Jeff, what you need to do was go to cooking school. And so we kind of, we believed we had to go through, call it Apparel School 101. By the way, how did you come up with a name, Everlane?

Jesse and I were sitting in a room one day on instant domain search.com. And we were just for three hours, typing in names, names, names. And I had a whole bunch of scratch. And I always, you know, we liked the names that were simple and clear. And all of a sudden, typed in Everlane.com. And it was available. for $17. And we bought it. That was it. That was it. Because it doesn't mean anything. I mean, it doesn't mean anything specific. There's no connection to, it could be a street.

It could be a... It was the idea that it was everlasting and at the same time rooted to a physical place because we were digital. But people get really worked up about names. I think brands and people live into their names, the name becomes them. I'm usually not that concerned. I don't think names matter that much. And a big part of what we were trying to do was to do right where others do wrong. And that's where the storytelling really came full front.

Okay, let's talk about this right where others do wrong. What you said in your view, what others are doing wrong was they were overcharging for what it cost them, which, you know, again, I mean, that's for better or worse. That's business, right? That's how businesses work. They, in a movie theater, you go to get some popcorn and they're overcharging you for that popcorn, like 1,000 percent. But that's, right, that's how they make money. I understand you basically wanted to produce clothing and make it become an online retailer. But what else were you going to do that was different from other brands?

When I say that do right where others do wrong, all of that came out over a period of time in a way that we really became students of the industry and tried to say if we were to build this from the ground up in a way that put the customer first. what would that look like? So pricing transparency was one, customer experience. The customer experience we really focused on the communication, the community, really having an open dialogue with the consumer, which felt the opposite of what you actually experienced oftentimes in retail, where you would go in and somebody might talk to you, somebody might not.

Getting help was challenging, knowing how to return things was challenging. So customer experience and customer service was always a big, big part of what we hung our hat on. Okay. I get the idea of customer service, but that wasn't new. I mean, you could go into Nordstrom or Neiman Marcus and get great customer service in 2011. You still can. What was going to be different about this? I mean, these were, it was going to be cheaper for one, but what else? It really started out with pricing transparency and being honest about that. And when you say pricing transparency, what did that mean? You were going to tell the customer what it costs to make this product and why you're selling it for this price?

We first started by selling a t-shirt for $15. That was the quality of a James Purse for $45.50 at the time. And how did you get those t-shirts made? Where did you get them made? In Los Angeles, end-to-end, we made them by sourcing the fabric. We used out of the gate Supima, which is the highest quality American cotton. Yep. Then finding people, I remember, driving an hour with fabric and taking it

a grater, who would grade it from extra small to large, and then getting a cut. And then we would actually take it from the cutter to the sower, to the dyer, to the finisher, and then package it all up. And how much did it cost you to make each shirt? I think in the early days, it was something like $5.60. How were you able to make the shirt for so little money? Is it because you guys were literally driving it from one part of the production process to the next? To me, that was the secret of the whole industry.

You know, you're making the fabric might have been, I think, call it a buck 50 to $2. The cutting, 45 cents. The James Percy cost $6, $7 to make two. And they were selling that for a four to six X markup. And the basic principle of Everlane in the early days was two to two and a half X markup. That's it. And so, yeah, ours was a little bit cheaper out of the gate because we managed all the different steps ourselves. But eventually, a few months in, we contract manufactured with one vendor who actually managed all the processes for us.

And they can make it all in Los Angeles. Correct. End to end. Yep. And the first run was going to be, like, what, a thousand T-shirts? Something like that. Oh, boy. Yeah.

The first run was 1,500 T-shirts. That's it. Okay. And we're probably, call this, we're in October now with a plan to launch November 1st. Of 2011. Yep. So, all right. So the idea was, let's get these shirts made, and then we're going to figure out how to sell them.

You hadn't launched the company yet, right? There was nothing. Everlane.com was just a placeholder at that point. Yep, just a placeholder. Everlane, Jesse was building a lot of the technology in the back end. And we had had a community, a small community that we had built through the different channels on Tumblr. And so you could call it we had five to 10,000 people on an email list that we knew we could reach out to when ready. And did you have an office by that point?

We had moved from Dog Patch Labs because we overdid our stay there to a place in the financial district in San Francisco. So it was about 1,400 square feet. So the idea was let's sell the shirts at, we'll basically launch Everlane.com with this T-shirt sale. What were you going to sell the shirts for? $15. Got it. And we said, let's create a viral campaign if we can. Wouldn't that be great?

We sign up, I mean, it's sort of a dream, but how many people can we sign up before launch? So we built a little landing page, and the landing page had a series of rewards you could get based on the number of people you invite. And it was at everlane.com. And if you invite people, you offered, like, what kind of rewards? free shipping for life was if you invited 50 people, if you invited five people, you got early acts of the wait list. If you invited 10 people, you got free shipping on your first order. So it was like different tiers and you could track where you were. And it became a bit of the staple of Everlane over time, which is building wait lists.

But that was our first one. And it was a really simple concept. It said, your luxury goods sell for eight times what they cost to make. not at Everland. Launching November 1st at midnight. Sign up. But how did you get any attention for that page? That's where that first five to 10,000 email list came in.

So we emailed those 5 to 10,000 people with a really nice email and said, here it is, and you can sign up. And then we posted it on Twitter at the time and a couple other places. And next thing you know, I kid you not, this thing blows up. And we have 80,000 people. Sign up. Wow. 80,000 people. Did you say specifically how much less it was going to be?

We didn't even tell people we were offering T-shirts. So I was freaked out. I mean, we were all freaked out because we said they think we're selling luxury goods for eight times what they cost to make. Let's see what happens. Yep. And so we had these 80,000 people, and it felt really exciting, but it also felt very overwhelming.

And we go, uh-oh, we have way more demand than we have supply. and we don't even know if these people are going to be pissed off because actually what we're just selling is a t-shirt. When we come back in just a moment, Everlane causes a big stir in the fashion industry by telling people just how much their clothing actually costs. Stay with us. I'm Guy Raz, and you're listening to How I Built This. Did you know that over 80% of people have subscriptions they've forgotten about?

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That's rocketmoney.com slash built. Rocketmoney.com slash built. I talk with so many business leaders who use Squarespace as they're all in one platform for building their brand and engaging customers online. Squarespace lets you easily create a dynamic website and sell anything, your products and services, and even the content you create. Get started with a best-in-class website template and customize it to fit your needs. Browse the category of your business to find a perfect starting place. Every Squarespace website and online store comes with a suite of integrated features and useful guides

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use offer code built to save 10% of your first purchase of a website or domain. Hey, how I built this. My name is Eric Seddrance, and I'm from Hilton Head Island, South Carolina. Without a doubt, my favorite episode of all time is the Airbnb one. As an entrepreneur myself,

I think back often to them selling Obama and McCain's cereal as the definition of an entrepreneurial move in doing whatever it takes to keep your business alive for just one more day. If you want to share

your favorite episode of How I Built This, record a short voice memo on your phone telling us your name, where you're from, what your favorite episode is, and why? A lot like the voice memo you just heard. And email it to us at hibt at ID.wondery.com. And we'll share your favorites right here in the ad breaks and future episodes. And thanks so much. We love you guys. You're the best. And now back to the show. Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2011. and Everlane is hours away from launch with 1,500 T-shirts, a wait list of 80,000 people, and a clear strategy for how to generate buzz. So we send an email that says we have 80,000 people, but can't let you all in. So you're now on a wait list to be let into Everlane.com.

And we put everlain.com behind a wall. And so we launch with 1,500 T-shirts and let five or 10,000 people in. But fortunately, we knew we could create another 5,000 T-shirts and then let the next tranche of people in. And so that really became the way we built a bit of the business and the momentum for the first year. Did you, because you had another run of T-shirts,

did you sell all of them out relatively quickly? The first run sold out. I mean, it was 1,500 T-shirts times $15. It sold out in a day or two. I mean, quickly. And we did everything we did with cotton. And for a certain group of people, that's just Supima cotton, all what we call garment dyed. It was a higher quality product, without a doubt.

Yeah, I get that. But how did you communicate that to people? Because most of the people on that email list were, you know, are, I would imagine, like most consumers, are just looking for the best deal initially. Well, this is where, you know, I don't know, I believe that people are different than that for two reasons. One, it was a time and place. There were so few brands being launched online. Now it's a dime a dozen all over the place. I think Instagram and TikTok have become the shopping malls of America.

Yeah. You're discovering small brands at the time. Instagram had just launched. In fact, we actually sat next to Mikey and Kevin when they launched Instagram because they were in Dogpatch Labs. But no one thought it was for shopping at the time. Today, we're so saturated with discovery that it feels a bit banal that, okay, I discovered something new. Oh, I already heard about that.

But back then, it was a bit even 10 years ago, very different pre the rise of TikTok and Instagram. And so there was one element of it that was, oh, there's something new online. And then another that was this company is promising this quality. And I'm interested in that. It's not just price. It's, there's a story behind the price. But of course, I do think you're right.

We did struggle with saying, how do people understand that our $15 t-shirt is really different when we're online? Yeah. And so a month in, at the end of November, we actually launched what started transparent pricing, which is we said, we've got nothing to lose. Why don't we tell people exactly what our costs are, end to end? And how did you do that? How did you communicate that? We built an infographic that showed all the costs, and we put it up on our product page, and we put it up on Tumblr, and we said, let it go. And it got picked up.

Yeah, this was called The Making of a Designer Tea. I'm looking at it now. It's a wonderful infographic. It basically shows you the price that it costs to make a shirt. Cotton, 275, cutting 35 cents, sewing $1.35, dying 50 cents, finishing $1.25. transport 50 cents, cost of the brand, 670, sells to retailers for 15, sells to you for 50 bucks. So you put this infographic out there, and lots of people see this. I mean, like, this definitely goes viral.

Yeah. It was a series of numbers, but it was very human in its own way that people felt like, oh, that's interesting. I never knew this information, and now this company is sharing it. And in a lot of ways, that's also what the Internet's about. is exposing things that you didn't know before. So you put this infographic out, and not surprisingly, it also irritated some people because they've, you know, the accusation was, hey, this is a total oversimplification. Like, this is not actually accurate.

And, you know, I mean, one of the things, to be fair, that the infographic doesn't explain is the cost of manufacturing the shirt 670 and then the wholesaler, the factory, sells it to the retailer for $15. But then there's that the $15 to $50 gap involves a lot of marketing costs. I mean, you could make the case about like a pair of Gucci slippers. Like, there are factories in Italy that can make the same slippers for, you know, $60. Why are they $900? Because you're paying for the brand.

So that's the, I mean, the costs, the associated costs at that point were because these companies were building a brand and they had to pay for it. Yeah, and they had wholesalers, and they had profit margins, if you're Gucci, of 30%. Yeah. And we had the fortune of being small and at that time being very, very simple. Yeah. And so we just sold direct and shared our model. And yeah, they didn't like it, but that's, to your point, perhaps capitalism. Yeah, there was a, the blog well spent wrote, this is a, I guess a fashion block or a, you know,

consumer freshman brand. They wrote, my issue with the graphic is it's a dangerous oversimplification. Essentially, Everland is attempting to demonize any clothing company charging greater than 2.25% in manufacturing costs, and that's ludicrous. So you're, you know, you kind of create a stir, but you guys, it seems like that was part of that was kind of the hope that that would happen. Without a doubt. That was fun. Yeah. So you do the second run and you keep selling out shirts. And by the way, I mean, your response to attacks from from people who represent, you know, retail groups is like, listen, we're an online business. And so we don't have to, there's no middleman. So at what point, you know, and this is two, now you're getting into 2012 and you're getting a lot of attention from obviously as, you know, people are buying these shirts, you're getting immediate attention. What point did you say, all right, we've got to make other things besides T-shirts? That actually came, I think, December 1st, 2011. Okay.

We had found, and again, the idea of Everlane was really a platform for going direct to consumer. And so the strangest thing you would never expect, if you were to build a brand today and you start with a T-shirt, your next product might be denim. And then you might do sweaters, and then you might do button downs and build a merchandise a line appropriately. our next product, because we had no context in the industry, was literally ties and bow ties. Ties and bow ties. Ties and bow ties. Made in a factory in the Bronx that manufactured everything for Brooks Brothers. Wow.

And we sold them for $35. And we bought 1,200 ties and bow ties. It's a very unusual, you know, I mean, given how, obviously, how thoughtful you guys were about T-shirts and about direct-to-consum. and talking to all these people in the apparel industry and talking to Warby Parker. Like, it just seems like kind of a kind of a, just throwing a dart at a darkboard. Let's do bow ties. You are correct. It is weird.

Yeah. I don't have a great explanation for you other than I was, we didn't have a lot of connections and it was we would have to wait six to 12 months to be able to launch a sweatshirt and a sweater and a button down because that's how. long it would take us to find the factory, source, the fabric. And our alternative was we had a guy that could make ties and bow ties in two months. And we just said, let's do that. It was always, let's try it. If it doesn't work, move on. And how did those do? We never made ties and bow ties again. Let's just put it that way. Yeah. I think we ended up potentially giving some away.

Yeah, I mean, the bow tie, like the Venn diagram of like hipsters and I guess, cheap apparel and Brooklyn, I guess the middle of that is a bowtie. But it's not a big enough. Like there were, you know, right, there's a bow tie thing. You had, like, people with the, you know, handlebar mustaches and leather aprons and bow ties walking around urban areas for a while. But that wasn't a very long-lasting thing. So I can't imagine, like, you know, you could really build a business on the bow-tie. I think it was just we wanted to get things out.

door. And we had a factory and we said, go. And indeed, other than us talking about this today, nobody who shops on Everling.com knows this story. Yeah. You, I think your co-founder, Jesse, left. One month then. One month then. Not in 2012. He left in 2011. Yeah. He left in December of 2011. Why? I'm sure you've had many of these conversations. The co-founder journey is it's a challenging one because in some ways you're getting married to somebody, but then you're spending all this time and building a business with them. At the end of the day for Jesse, what he wanted was to build a technology business. And what we moved away from was being a technology business and we moved into building a brand.

And that wasn't the journey he wanted to be on. And I commend him a lot for making that decision because I don't think a lot of people would be able to do that. This was even before we launched. He said, hey, I'm going to bow out. I'm going to help you launch, and then you need to find another tech person. And I remember that being so stressful and was fortunately able to find somebody an individual named Non-U who was both an engineer and incredibly well-versed in fashion and style that became our head of engineering and was at the company for six, seven years building the team. So it was a very stressful period, though. But what's amazing to me is that clearly already a year in, you did not, like, what Everlane became known for and what it became known as was not what you were at the time.

You didn't like bake this into the beginning of like, we are going to be an apparel brand that does basics. Like that was, you know, the transparent pricing was part of it. But that was not, it was almost like, to overuse this metaphor, you were flying a plane and building it and you were also selling things. in had passengers in the plane and we're selling them anything we could you know bring into the plane basically so ever so this was this was really it was not clear like you weren't really sure what you were even at that point the business model was clear which was direct to consumer but are we a fashion brand are we a basics brand are we a platform for products um that's just a retailer We didn't go into it with that idea.

We went into it with how do we sell directly to the consumer, high-quality product, and tell a story around it. Okay. Did you, just out of curiosity, did you have, and there's no judgment if you didn't, because there's plenty of great companies who didn't do this, but did you feel like you had baked the mission, the mission into the company from the beginning,

or would that come later? spiritually, yes, written down, no. But, you know, there was an external line. The luxury essentials under $100, your luxury goods sell for eight times what it cost to make. There was a spirit of let's build a brand that's honest with the consumer. But that would imply, and again, I'm pushing back only because, I'm part of my job. But, I mean, that would imply that the other retail. were dishonest with the consumer.

Is that true? Is that what you were implying? So you have an interesting distinction there because what started as honesty became transparency. And that was the evolution. Got it. Because it, to us, felt dishonest.

And then I think there was a point where we realized, actually, they're not dishonest. They're just doing what they're doing. But the vehicle that we can have that's different is transparency. And that's how that transparency graphic got born

and that's how we started to tell people, here's what we're making next. Do you want to vote on it? Tell us what you think of this product. Give us feedback. Everything was out in the open. Yeah. And I guess kind of on the subject of what you're making next,

I guess as you're kind of looking for the next product, you land on backpacks next, which is interesting. We did a Herschel supply company on the show, not too long ago. It's a fascinating story about, you know, backpacks and why they went into that. So it was around this time, really, you go into backpacks thinking, okay, this could be our next thing.

And just had a curiosity, why backpacks? I think exactly to what you said, there was the moment of Herschel, there was a trend happening, and we've had a connection to a factory. And your business model enabled this kind of quick pivoting. You could basically identify something that was hot, make it quickly, make a limited, number, sell them out, then move on to the next thing. Yep. And not only that, but we could pre-sell things, which, you know, wasn't a thing people could do back then. And I have to assume, I mean, that million dollars that you raised was not going to be enough. I mean, how were you able to do the backpacks? Did you have to raise more money? It was March 2012, I believe, when we raised

our next amount of money. We had been doing about $100,000 to $200,000 a month, but selling out every month. It's pretty good. Yeah, it was nice. It was a good run. And then we went out to raise, I think we raised two and a half million dollars at that point, just because the business was working and we were in the early days of the D to C, boom. Yeah. And that allowed us to take the business to the next stage and allowed us to buy backpacks. I mean, one of the biggest costs for us at the time was inventory, just buying new product. Because we didn't have great what you call terms with factories. It took a while to get us to a place where we could actually have a relationship with factories and pay them, you know, 60 days after delivery.

A lot of times we were paying upfront. And that was very expensive. Yeah. And then, you know, fast forwarding a bit to November 1st, 2012, we had launched backpacks. We were building a merchandising strategy. We launched button down, silk shirts, and a cashmere. And so we built all this hype. And we stayed up till 2 a.m. on November 1st, 2012, our one-year anniversary.

And at 2 a.m., we launched the products on the site. And all of a sudden, sales spike. And we did at 2 in the morning, an entire. days worth of sales in 20 minutes, and we thought that the site was broken and something had glitched. And then we verified every order by hand. And indeed, people had stayed up till two in the morning waiting for our Oxford's and, you know, silk and cashmere to launch. And that was one of the one of those moments that we said, whoa, we might have something here. When we come back in just a moment, Michael rethinking everlain's growth strategy and its approach to radical transparent.

Stay with us. I'm Guy Raz, and you're listening to How I Built This. Give yourself the gift of insane savings this holiday season with MintMobil's best wireless deal of the year. Right now, when you switch to MintMobil and buy any three-month plan, you'll get another three months for free. That's six months of premium wireless service for the price of three. MintMobile lets you order and activate from home, while saving tons on phone plans starting at just $15 a month. I can't think of a better gift than turning an overpriced wireless bill into just $15 a month with Mint Mobile. I was blown away by how much money I was able to save each month by switching to Mint Mobile. That is money back that I'm able to put towards going at to dinner with my wife.

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or the action intensifies, or there's a night sound which can kind of tone down loud effects when other people at home are trying to work or sleep. Head over to sonos.com and enjoy up to 25% off select products right now through November 27th, or while, supplies last. Hey, welcome back to how I built this. I'm Guy Raz. So it's 2012 a year after launch, and Everlane has done about $4 million in revenue. A year later, they're up to $12 million. And the year after that, they basically double it to $24 million in sales. Was that growth, I mean, were you spending any money on marketing? Was it just, it's hard for me to believe that it was entirely organic. It was almost all organic.

It was people were talking about the brand, telling the story. Commerce is one of the oldest forms of communication, and it's a form of trade, and it's such a backbone of culture. And particularly in America, people love to buy things and tell you what they bought. Yeah. And so if you made things that were interesting and people wanted to talk about them, listen, we're not building iPhones, but talk about someone who did that well or Nike. You know, it's like people line up for days. and in that way we were building things and had limited quantities and people were talk about it. So as you were growing, I mean, I have to imagine it became fairly easy for you to raise money.

You probably had investors who were really desperately trying to get into this business. We definitely had the opportunities. And so we raised $25 million in total. And we were profitable, and that was the year 2017, which was a huge. hugely pivotal year for Everland when we went from $53 million to $100 million in one year. Tell me about, I mean, before that time, I mean, I have to imagine, because this is a natural progression for certain types of companies, especially when they're doing well very early, is grow, grow, grow, grow, grow. And I have to imagine that was your view that we, let's just, let's just go crazy. Let's grow this thing massively.

Definitely. And it was the right decision. But the decision I would have made now, and I think everybody's making even today, is that when we hit 100 and we were profitable, that it was the time to transition from growing what we call the top line, which is the revenue, to growing the bottom line. So when we did, you know, called $3, $4 million a profit, the focus should have been how do we build and discipline

and get this to $10 million next year, and then $20 million the year after, et cetera. etc., versus how do we grow the top line at the expense of the bottom line? I mean, you start this thing in 2011. By the end of 2013, you've got $13, $12 million in sales. So you're running us, you know, not an insignificant business now with, you know, 25, 30, 40 employees.

And, you know, you were still a young guy. How were you learning about how to be a leader? I mean, I have to assume that at times you did it badly. Absolutely. And I was 27, 28 at the time. What we did really well, and I guess what I did well was we built a very entrepreneurial culture. Blair, who was a creative at the team, said one of her favorite lines was we have one founder and 60 CEOs. And there was this mentality that everybody contributed.

And everybody did every job, no matter how small. When we opened up many years later, our first store, people were at the store for four days in a row engineers, you know, helping set up a physical store. And these were engineers who were really technical and mostly spent their time in a digital world. The part that was just the total mess was there were certain areas like marketing and creative that honestly, we were trying to reinvent and it was hard to find the talent and I didn't know what great look like. So I didn't know what a great head of design or great head of marketing look like. And so I'll tell the story. We hired at one point in 2015, we go from T-shirts to backpacks to let's literally go hire one of the greatest designers in the world. And we hired this one, Rebecca Bay, who came from a company called Koss and then was actually the creative director of Gap for a year and a half.

and we built an office for her in New York. And I was just such a micromanager at the time that I think I drove her so nuts. She made it. She made it about a year and a half and she really created a new foundation of design. And we're good friends today. But it was definitely a tough period of over-micromanaging. What did micromanaging look like? Hey, why aren't we doing this?

Why aren't we doing that? Just constant questions. It's managing the process versus managing the outcome and not letting someone as great as her do her job. So I want to ask you about the other side of the brand because you're big, at your core, it was radical transparency around pricing. But that would evolve. That would grow to radical transparency about other things, too, not just pricing. it grew into transparency around where the clothing is made, how it's made. This became much more important to consumers in the 2010s as people were learning about, you know, where their clothes were made, what the environmental costs were, etc.

Tell me about how you came to this view about, let's, hey, let's tell everybody everything about how we make our stuff and what the conditions are like in the factories. In 2013, there were a couple of key events that happened for us. One is we had started to manufacture in China, and we really wanted to understand are the factories we were working with in China high quality. And myself and a few of us went to China, and we basically live blogged the entire week, talking about the factory, sharing the stories inside so people could see. what was going on. Also on every label, we would name the city where things were made, not just the country. We wouldn't say imported. And then, of course, in 2013, there's the unfortunate collapse

in Bangladesh of Brauna Plaza. And people realized that perhaps some of the clothes they're wearing was made there. And that connected the dots for us of, let's not just live blog this, let's connect every product we make with every factory we work with and also the cost. And it was essentially like, we're giving away our secret sauce. Because normally, if you're another brand and you want to know where someone makes things, it's almost impossible. You can't find out where a luxury brand makes its products.

But here we were, for the industry and for the consumer, saying this t-shirt or this bag was made exactly in this factory, and it costs us exactly this much. But at the same time, that means you are, you're going to be held to a different standard. And any slip up, you're in trouble. Like your factories better be ethical. Your pricing better be ethical.

Your environmental record better be, you know. I mean, if you're going to put yourself out there, you also are going to make yourself vulnerable to charges of hypocrisy if you're not hitting those standards all the time. Yeah. In 2017, something happened, which is we've launched denim. And by all measures, you should have launched denim. We should have launched denim in 2012.

Yeah. It took us a while. And part of that while was that denim just is hard to fit. And then we didn't know how we were going to do it differently. And what ended up being the difference was that we found this incredible factory called Sytex, run by a wonderful human Sanjeev, where they take the denim. And denim is a product that you actually. die and then you undyed to get that faded look as if you've been working through the denim over a period of time. And they take the dye stuff and detoxify it and turn it into actually bricks that you can use.

And that really opened up a whole new path of what is our impact on this world. And we're going to start moving towards sustainability. or environmental consciousness. Did that actually, did that matter to consumers? I mean, I know people say it does, but I mean, is there evidence that consumers care? I believe we have some data to support that it creates resonance with the brand. But when it comes to the individual buying decision of, do I buy this coat versus that coat? The answer is usually not so much, especially today.

but they do want to participate with brands that do better for this world. And that is true. But how much, and Michael, I'm not, and I'm asking this question not to sort of accuse you of, or of Everlane, of like doing good just because it's good for PR. But I am curious about certain things, and not just Everlane, other companies do it too. Yeah. Isn't it enough to just say, you know, our value proposition is we're going to make a great high quality product at a fair price? And that's it.

Isn't that enough? Or do you think that it has to be more than that? That it's got to be ethically made, ethically sourced. I used to. I think now what I would say is it's whatever is right for you. I have a lot more admiration and respect than I used to for people that, for these luxury businesses that create incredible, beautiful. product tell beautiful stories and make their 30% profit and that's totally fine. It was also this respect for others that perhaps changes as you grow up and face your own set of challenges

and realize maybe there's a reason they do things the way they do because as long as they're doing, to your point, capitalism, but as long as they're content and it's working for them and they're not inflicting harm and other people are into it, power to, power to you. Up until that point, you mentioned 2017, you hit profitability. You're doing $100 million. And so at that point, it was like, okay, let's just grow. And looking back on that time today, you would have made different decisions. You would have focused on increasing the bottom line rather than just focusing on the top line. As more competitors started to jump into direct-to-consumer or, you know, online, let's say retail. did you start to see the business slow down? I think that's hard to say. I think whenever you grow 100%, you can't grow like that forever. But I mean the next year we grew 50 to 70%

and the next year after that we grew another 30 to 50%. So it was, wow, this is an incredible run. I mean, we had these opportunities where we launched everything from an entire collection of outerware made from recycled materials. called it Renew. We launched stores in San Francisco, New York, L.A. You launched brick and mortar stores. Yep.

We didn't think we would need stores. And this is one thing I would say we did do well is we listened to the consumer. And we had these pop-ups and showrooms. And people were showing up, and they were asking us to open up a store. And so we listened. And it worked tremendously well. But as you focused on growth, the returns.

You also had to compete against Uniclo and, you know, even Amazon was getting into apparel. So did you start to see, you've gone from profitability, presumably, to losing me. Break even, break even, and then losing a bit of money in 2019. Nothing, you know, when you think about it, it was nothing extraordinary because it was the days of venture that says, oh, there's the business to be had here. And so a lot of people fund. and then, you know, people were willing to lose money and drive growth. And so we started to manage against that and started running paid ads.

And the business continued to grow, but the profit didn't grow as fast because we were investing more in marketing to drive the business. So one of the – I mentioned this earlier, which is when you – you know, when you are focused on doing the right thing, which I think is important and something that – as a show, we support and want businesses to do, but it also makes you target, right? And so in 2019, there was a rating company called Good On You, and they gave you two out of five rating for your, you know, because they said that you weren't tracking greenhouse gases and that you weren't guaranteeing living wages or reducing water use. And there were people like, yeah, I'll see that company there. do-gooders and now they're, you know, they've been exposed or something like that. And there were people who said that. Yeah. In some ways, I remember the first reaction around that being, like, frustrated and upset. And then the next reaction was, great, let's do something about it. So what did you do?

We started tracking our greenhouse gases. We started working with our factories on how do we reduce our emissions. we made a commitment to remove all virgin plastic from our supply chain. We're 95% of the way there. We've replaced some 70, 80% of our wool to be recycled. Same thing on cashmere. So the amount of product we're using that's now recycled and the way we're doing everything to lead across all metrics.

And I think doing a very good job of it now. Yeah. All right. You know, plug in along. and then, bam, COVID happens. And you're a little bit different than other retailers because you weren't selling office clothing necessarily. But this proved to be, I think,

this is going to be an understatement, an extremely challenging time for Everlane. First, I would say, thanks, Guy, for reminding me about this wonderful time in my life. I really appreciate it. And then I would say, walking into 2020, money. We had this great plan. We're going to start investing in being a brand instead of just a price transparency retailer. And then we're in the midst of fundraising, by the way, because we needed

money for inventory and for retail, which was working really well. And then COVID hits. And it is just to every retailer, I mean, it was a brick wall. We started to look at the, well, actually, we were in the midst of fundraising and we don't have enough cash. You know, never walk into a crisis flow on cash, we need the cash. And so we started to have to cut costs. And, you know, some companies did it later. We did it pretty early on. And that started to set a pretty fast tone of how do you manage a community that was so tight-knit at that time through crisis. Let's talk about a couple of, in many crises that happened in the midst of this, right? One was a group of employees were let go.

They claimed because they had intended to unionize and that they wanted to discuss their salaries with each other in the spirit of radical transparency, which they were discouraged from doing it ever late. Let me just caveat this by saying, me personally, I think radical transparency can be hugely problematic. I don't necessarily think it's good for everybody to know about everybody else at all times.

I think there's value in some discretion. But that happened at Everlane, and all of a sudden people are saying, hey, this is the radical transparency company. They're not allowing transparency. Yeah, and you are completely right, and I had always said transparency is great, and then it also has downsides.

I mean, I don't even, it's hard to trust the government, but at the same time, I don't want to know every decision that the government's making all of the time. No, I don't want to know this stuff. message is always made because sometimes it takes backroom deals. It has to. Yep. And also, it takes time to make decisions. And if you're informed about every decision every time, all you're going to do is induce anxiety. Paralysis, by the way, nothing would get done.

Yep. But for us, it was, Everlane, to your point, was on a pedestal. We were far from perfect in a lot of areas where we went ahead of HR, but not a chief HR officer for a company with a few hundred people. And so the processes weren't there. And without, processes, you create a place where things aren't always seemingly as equitable or fair. And that came to bear for a lot of other sort of companies of our time because we had all ushered in this, hey, we can build a company, do good, be transparent, and treat everyone well, our customers, our employees, our factories. And then COVID happens and it's sort of like, how do you do right anywhere when everything goes

wrong. I've been thinking a lot about what's what happened with a lot of companies and still is happening to some extent. They started with this premise that you're part of a mission and the mission is transparency and openness, whatever it might be. It's making the world a better place. And employees believe that that was their role. And I wonder whether some of that tension, because you had employees who were really mad and, you know, and lots of companies did. And I wonder whether some of that comes from that idea, that all of a sudden they're like, wait, my mission is to make money for the company? I don't know. Is that, does any of that resonate with you? It completely resonates. We were in a massively funded environment where profit didn't matter to an environment where all of a sudden profit did matter,

and top line sales are getting challenged for a lot of people, especially the first three to six months of COVID. Yeah. So people are making tough decisions, and it was the first time going from infinite opportunity

to wait a second, we have to make some tough decisions. And by the way, those tough decisions are about employees, and they go, well, I was already,

might have been a little frustrated about this and that happened in the past, and now I'm just pissed. Yeah. I don't necessarily blame employees, especially

younger employees for feeling that way, because they were promised a mission. Completely agree. I don't blame them at all. And listen, I think that's the opportunity is to be clearer on expectations. But in a lot of ways, also employees have made it clearer on what they expect both ways. That expectation is very, very valuable and very helpful. You came out of COVID and you stepped down as CEO to become executive chairman. Yep. And I'd imagine that was a relief, a little bit of a relief too.

That was probably the toughest two years of your career at Everlane. Yeah. It was a time where Brian, who was on our board and Betsy had spent a lot of time with me saying, is this really what you want to do for the next five, ten years? And I think that's an important question because you've probably spoken to so, I mean, you have spoken to so many founders here. And some are lifers and some are not. There was a moment in time where I imagined my life being a lifer.

And the more I thought about it, I was like, wait, I don't, I'm not the best person to run a fashion brand that's sustainable. So for us continuing to double down on the environmental side of what we do while building a growing and profitable business is really critical. And it's, that's where I go back to, I still am involved in the company quite close. And it's a fun and self-reflective experience to be able to exit something, but still involved in it and watch that almost separation. I imagine one day it's like having kids and letting them go to college. Yeah, but I wonder of just, but just from a personal side, it's your whole identity, right? And so did you struggle with that? I mean, all of a sudden you're going from like, you're the guy, everyone's calling.

You're the person that you're making the final decisions to all of a sudden your phone's not ringing as much. It rang in a different way. But yeah, I struggled with it. But also, and this is, I'm sure you say this of many founders, but it's also true of anyone that works at any company for a period of time that you can never take away that period of someone's life. You know, you're still the founder or you're still the creative director of a company or you're still the, you help build something. And so now it's just a part of my identity. It's not my identity. When you think back on the journey that you've been on, you did very well and still

own a considerable amount of this company. And so it's made you wealthy and successful. How much of where you are, how do you attribute to luck? And how much of it do you think is to do with your skill and your intelligence and your work, hard work? It's hard to know. You know, somebody once said your goal is to do as many things as possible to get yourself in a place of luck happening to you. And so when you asked that question, it was so weird that we launched ties and bow ties.

But at the same time, it was this unfettered attitude of just go try things so that luck could happen to us. So I think part of it is being quick and thoughtful and moving and understanding the world around you to put yourself. in the pathway of luck as often as possible. That's Michael Paisman, founder of Everlane. By the way, if you search the brand's Tumblr archive, you can actually see an example of one of their ill-fated bow ties. There's a picture of one of them. It's kind of a nice-looking navy blue one with daisies on it.

And it's kind of a shame that they're no longer selling them because they're pretty cool. Hey, thanks so much for listening to the show this week. Please make sure to click the follow button on your podcast app so you never miss a new episode of the show, and as always, it's free. This episode was produced by J.C. Howard with music composed by Rompina Arablui. It was edited by Neva Grant with research help from Sam Paulson. Our audio engineers were Gilly Moon and Robert Rodriguez. Our production staff also includes Casey Herman, Carrie Thompson, Alex Chung,

Malia Agudello, John Isabella, Chris Messini, Carla Estevez, and Catherine Seifer. I'm Guy Raz, and you've been listening to how I built this.