Invest Like the Best with Patrick O'Shaughnessy - James Reinhart – Lessons in Process Power – [Founder’s Field Guide, EP. 32]

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Starting point is 00:01:08 that I became an investor. To embrace the future of sleep and get $150 off your new mattress, go to 8Sleep.com slash Patrick or use the code Patrick. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Founders Field Guide. Founders Field Guide is a series of conversations with founders, CEOs, CEOs, and operators building great businesses. I believe we are all builders in our own way, and this series is dedicated to stories and lessons from builders of all types. Founders Field Guide is part of the Colossus family of podcasts, and you can access all of our podcasts, including edited transcripts, show notes, and resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management.

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Starting point is 00:02:12 My guest today is James Reinhart, founder and CEO of ThreadUp, an online thrift marketplace. ThreadUp's online store is distinct in how the company touches every product, processing every piece of clothing at their own facilities, instead of focusing solely on being a marketplace, connecting buyers and sellers. We talk about the competitive advantages of building processing plants

Starting point is 00:02:33 from the ground up, how James turned Threat Up from having negative gross margins to very strong economic and the future of retail more broadly. I hope you enjoy this great conversation with James Ryanhart. James, so I think the best place to begin our conversation is for you to level set the audience by describing what ThreadUp does specifically. Just paint us a quick picture of the business because I think many won't be familiar. So Threat Up's on Marketplace for secondhand clothing. So we kind of do two things. One is we help consumers buy and sell high quality secondhand clothing, just women's and kids today through a managed marketplace, i.e., we touch all the goods. And so you can send stuff to thread up in our clean out kit. We'll process all

Starting point is 00:03:15 that stuff, put it online, and then sell it to buyers. And what we think is this incredible resale experience online. The second thing to do is we're starting to do this for brands. We have a platform called resale as a service. So we now work with more than a dozen brands. Walmart, Reformation, the Gap companies, Abercrombie and Fitch, throwback from my childhood. We're powering next generation resale experiences for them. So this are kind of the two things we do, core marketplace and resale as a service. Talk a little bit about how you came to this market, this idea 12 years ago. Yeah.

Starting point is 00:03:48 So the true founding story is I was in business school at the time. This was late 2008. And I was a teacher and an educator before that, which way of saying, I went to business school and I had no money. And I went to try and sell my clothes at the local consignment store on Mass Ave in Cambridge. Second time around, they wouldn't take them. They said, we just do luxury. And I kid you not, I was like holding a J-Crew cashmere sweater.

Starting point is 00:04:10 I was like, this has got to be worth something. And they're like, not our problem. So I went home that day with the same stuff I brought with me. And I thought, man, I've got to cause of clothes that I don't wear. Other people have this problem. Like, there's got to be a better way. And that was really like kicked it off. I remember going to school the next day, asking all my classmates, anybody would listen.

Starting point is 00:04:27 we're pretending of clothes in your closet, don't you wear? And nobody ever said, I wear more than 50%. Everybody's like, I don't know. I wear a third. And then I would say, like, what are you going to do with all that shit? And they're like, I don't know, eventually I'll just give it away. That was really like what got me fired up. What did other people think of the idea when you started it?

Starting point is 00:04:46 I think generally people were really kind. They said to me, oh, that sounds like a good idea for other people, which is just code for like, that's a terrible idea. I think generally people thought, well, James is smart. He must be on to something. But consistently, the feedback was, I don't see how this is going to work. Who buys used clothing? Nobody does this. So I got a lot of resistance. But I kept believing that there was a big opportunity out there because 70% of what people buy ends up in a landfill. Man, there's a lot of great stuff out there that's ending up in a landfill. So I just kept going on that thread. What was it like in the early days getting your first customers? This sounds like we talked a little bit before about the difficult. of selling low-priced goods on the internet. I would love to rip that thread apart as much as we understand it because it seems like the lessons you've learned might be very broadly applicable. I had this thesis from the very beginning that to build like really big long-term 25, 50-year businesses, you have to do incredibly hard things because I think if you do easy things, other people

Starting point is 00:05:50 can come into your market and do easy things. The strategy of starting with low-price goods was obviously like a big Amazon fan. I remember reading Bezos saying we started with books because if we could sell books on the internet for seven, eight, nine bucks, we could sell anything on the internet. And I was like, man, like if I could sell like $10 pieces of clothing and at the time we just launched with kids, if I could sell $8 pieces of kids clothing on the internet, like if I could figure out how to make that work, I could sell all kinds of stuff. I was obsessed with this idea of solving the hardest problem at the beginning and just getting conviction because if I had done that thing and I could get that going, it would be very hard to be able to compete with us. My co-founders, Chris and Oliver at the time,

Starting point is 00:06:32 we were just obsessed with working that hard problem. And so we started with just like a classic marketplace. We just connected buyers and sellers, eBay style. It took about 18 months. We were slow learners. It took about 18 months to figure out that the real opportunity was not connecting buyers and sellers, but like a first principles approach to reinventing how people bought and sold secondhand. eBay was famously, we don't touch stuff. And I'll never forget because at the time, I just kept telling anybody who would listen. I was like, but would you rather be Amazon or eBay? Amazon's approach was, we'll touch stuff. We'll do the really hard thing. And that will put us on this new trajectory. When we pivoted the business to really focusing on ingesting all that stuff,

Starting point is 00:07:14 the philosophy was, man, let's do the really hard thing. They may not work. But if we get it to work, it's going to be massive. That was kind of the early days around thinking about low price goods and the work involved. I mean, this was a negative gross margin business for years, trying to convince investors, yeah, we'll get there. Can you talk us through the evolution of the gross margin? So what made it negative gross margin to begin? I'm just fascinated about like what the line items were and how it progressed as you scaled.

Starting point is 00:07:41 In the beginning, I had this thesis around supply. So the idea was people send us their stuff, take my J-Crew sweater, right? which we don't do men's today, which, of course, the irony is not lost on me that we've not yet solved my problem, but take this Jake Drew sweater, somebody bought for 120 bucks, or I bought for 120 bucks new cashmere sweater. In a resale context, we would price it for 25 bucks. And in the beginning, we gave the customer $12 or $13 of that. We gave them half of what we were going to resell it for. And then it cost us 10 or 12 bucks to process the item. Then it cost us a few bucks in overhead and logistics and things like that, you're to run out of dollars. But then we had so much

Starting point is 00:08:20 people sending us stuff. We could not get people to stop sending us stuff. We still can't get people to stop sending us stuff. What we realized is like, it's not really about the money. You're not going to get rich selling your used clothing. What people really wanted was they wanted convenience. They wanted this effortless way to do this annoying job in their life, which is I got a whole bunch of crap in my closet that I don't wear anymore. We started to change the payout rates that we would give people. So in that $25 sweater, where we used to give you $12 or $15, well, how about if we give you $9? And people were fine with that. Okay, you're still not getting rich. Well, what if we gave you six? We just started to tease out where was the value creation happening

Starting point is 00:08:59 in the marketplace? What we started to really appreciate is that buyers were generating tremendous value because they were getting a cashmere sweater, $25. Like a brand name cashmere sweater for $25. And sellers were like, you've solved a really big problem for me. I now don't have a closet full of clothes I don't wear. I actually like opening my closet and finding things that I like and not all the crap that I don't like. So we just started to really tweak the value proposition. And so that started to gradually improve the margins on the pay outside. The second piece is we opened operations.

Starting point is 00:09:31 We started processing the goods. And we had, you know, there's no playbook for this. Everything is a snowflake. Everything is a single skew. There's no barcode on a shirt you're wearing. It's not as though you just. just scan something, you're like, oh, this is a Banana Republic button down. Retail 4499, strike. You have to create all that data. Operations just got smarter and smarter about how we did this.

Starting point is 00:09:51 My co-founder, Chris, probably one of the smartest guys I know. We built the whole operation in the beginning on the iPhone, 2011, 2012. We ran our whole first distribution center, like 100,000 square feet on the iPhone and the iPod touch, because the hardest thing at the time was getting photos, of stuff on the internet without buying really expensive cameras and hardwiring everything in together. And Chris was like, well, why don't we just use the camera on the iPhone? We'll take pictures and we'll upload it and then we'll do some data on the iPod touch and we'll connect that data in the back end. And that's like Chris and a couple of guys built in a weekend, give you the image of like how scrabby this was. We had all these iPod

Starting point is 00:10:33 touches and all these iPhones. And the hardest problem at the time was like keeping them all charge. That really back there would suck. We had this great photo of this shoebox of chargers. People just running in there, plugging in iPhones, making up a new iPhone. Ops innovation. How do we process the goods and then payouts? And then obviously, we didn't know anything about pricing.

Starting point is 00:10:54 We didn't have anything about sell through. So maybe that Jay Cruz sweater should have been sold at $28 and not $25. So you get smarter about willingness to pay. That's the margins. Say a bit more about the hounding of making it more convenient for. or the person that sounds like really what they want to do is just get rid of their stuff, not just throw it out. The dollar amount doesn't really matter.

Starting point is 00:11:13 So what does that look like? Like what became more and more convenient? How did you think about that as North Star? You have a bike. You bought a bike for 800 bucks or 900 bucks. You don't use that bike anymore. You go to sell it on Time Craigslist or something like that or eBay or even today. Facebook marketplace, you can get like 200 bucks for that bike.

Starting point is 00:11:30 It actually seems worth it to take a photo of your bike and be like, It's a Schwinn from 2018 and it's got 12 gears and you can describe the bike because you're going to get 200 bucks for it. So if it takes you an hour to do all that, you're cool. Take that same analysis and do it for something you're going to sell for 12 bucks. You're like, oh, okay, well, now this is a big waste of my time because I value my time more than I value the return on this $12. What we identified was that for more expensive things, it makes sense to sell them on your own. but when you have individual units that are $12, $15, $20, the actual right organizing principle is to get rid of them in bulk.

Starting point is 00:12:10 So when we invented the Threatup Clean Out Kit, the thesis was it holds a laundry basket worth of stuff. The average bag took 25 items in it. And so the idea was, well, if you could pile like a whole bunch of stuff in there and Threatup would pick it up at your house, you know, comes with like a prepaid label. You don't need to take it anywhere or you don't do anything. All of a sudden, those 25 items might turn into 50, 7,000. 500 bucks. And then you're like, oh, okay, the ROI on my time across 25 items makes a lot of

Starting point is 00:12:38 sense. And so I think people started to be like, wow, historically, I've just given this stuff away. And I found it annoying to do. Now Threadup sends me a bag with a prepaid label on it. I send it and then I just leave it wherever my mail gets picked, we even pick it up at your house. And people are like, well, this seems like pretty easy. So anyway, that's kind of how it got started. But it was all about stripping out the friction on the supply side. Talk me through like the working capital and all of this. So I'm presuming you don't pay the person who's sending in the clothes until you need to and you don't have to finance it with working capital. Just talk me through what you've learned about working capital and inventory and this part of the business.

Starting point is 00:13:14 Now we run a business, the high 60s, low 70s gross margin. So from negative to 70 roughly. And the working capital piece of this is, yeah, so when people send us their stuff, we put it online and then it's all in consignment. We don't have to pay you until. it sells. And the way it works, and we're very transparent with the seller around this is, you send us items, we sell your items. We then wait 14 days to make sure your items don't get returned. And then we just put the money in your account. We say, hey, we've sold your J. Crew cashmere sweater. We're just going to beat on J. Crew all during this podcast. You sold your J. Crew cashmere sweater. You earned $5 for it. And it goes into your

Starting point is 00:13:52 threat of account. You're not going out to dinner on five bucks. What ends up happening is people just let those items sell and that money accumulate. So it's like a little, slush fund. The women were like, I would just let it accumulate and my little like slush fund. And then I get to a point and I buy a new handbag. And the effect of that, obvious. All those dollars are sitting in working capital. The working capital is negative by a meaningful amount.

Starting point is 00:14:16 That's kind of a secret weapon to the business. I think people tend to not appreciate how good the gross margins are, but also the negative working capital. Yeah, it's a fascinating model. I really love it. How much of the dollars in a seller's account do they typically spend? on the platform versus taking off the platform. Anywhere from probably 15% they spend on the platform to 25 or 30 over the years.

Starting point is 00:14:40 Some people think like, oh, that should be higher. But one of the things that we've been really religious about is that we don't incentivize you to spend it on the platform. We don't say like, oh, we'll give you a 10% more or 20% more because I think it creates these unnatural platform lock-ins that make people feel like it's not really cash. And if you think about like the human dynamics of that, if you're, going to spend it on thread up, you're kind of already going to spend it on thread up, giving you an extra 10% and it's just taking money out of our pocket. And if you weren't going to

Starting point is 00:15:07 spend it on thread up, chances are giving you 10% more isn't going to push you over the edge. I actually think you're sort of destroying margin when you do that. So anyway, that's like historically what people have done. What's been interesting is now consumers are cashing out with our partners. So as I mentioned, our resale as a service, we're powering for retailers. So now when you go to cash out your earnings, say you're 50 bucks, there's a whole bunch of places where you can get more money. So one of the most popular ones is rent the runway, which is they come. They're like, oh, I have $50 and thread up credit, but I could get $55 or $60 or $65 at rent the runway because our brand partners are now paying you more.

Starting point is 00:15:47 Talk me through the evolution of the operations piece. So you decided to do the hard thing by keeping the physical goods yourself, building warehouses, et cetera. Like, what did the first warehouse look like? How has that evolved? What have you learned about when to invest in? CapEx and new technology, not just the one warehouse with iPhones and iPod touches. Talk me through what you've learned about that evolution on the op side. We got started in our first facility in 2011, then into 2012, and this was way out of my comfort zone. We didn't know anything about ops in a classic way. What we did was we said, look, we need to find the smartest person we can find to help us solve this problem. So we went out and hired somebody named John Boris, still chief

Starting point is 00:16:30 systems officer today. And John had spent seven years at Netflix helping build out their DVD business, building out their facilities. And prior between Netflix and when he came to Threatup, he was at SpaceX, actually working on replicating the rocket program. John had this incredible wealth of experience around how do you scale operations. In the beginning, it was John's show. Here's how we're going to build out the first facility, which was in California, right close to our office in St. Leandro, so we could be close to it. And it was 120,000 square feet, very, very manual. We migrated off the iPhone. We built custom stations around how we do photography.

Starting point is 00:17:10 And then it was just John and his team, just their big brains. How do we disaggregate this whole process, every single activity that we do in the value chain. and how do we do it better? How do we save money? How do we do it faster? We just became obsessed with all the individual pieces in the value chain. And to give you an example, like when we started using the iPhones taking the photos, we weren't taking any photos on mannequins at the time.

Starting point is 00:17:38 Everything was a way flat photo. We got to take photos on mannequins because that's how women want to shop. They want to see it on a form. We started taking photos on a mannequin. And then John realized that process is slow. you have a person who is putting items on the mannequin, and then you have a different person taking a photo. We built a new process to essentially continuous flow of taking photos.

Starting point is 00:18:01 So then all of a sudden, we started to be able to take photos much faster, puts up on mannequin much faster. The problem with that was that then we were like destroying mannequins left and right because no mannequins that are built at the time were built to have thousands of photos taken on them every day. The mannequin is designed for this bespoke photo shoot. So then we had to figure out how to make our own mannequins. And so we started working to develop our own mannequins.

Starting point is 00:18:25 They were custom molds of fiberglass. We could build that were light, that we could repaint. When you're taking 10,000 photos on a day on a mannequin, the mannequin starts to look a little worse for wear. So how can we refinish the mannequins? And I remember walking into the district center one day, and it was like a mannequin graveyard. We were throwing out so many mannequins.

Starting point is 00:18:44 It was like a horror film, arms and bodies and heads everywhere. And then we figured out like, okay, well, how do we improve the lighting? So we built new reflective lighting shields that allowed us to take a photo and then cut that photo out of its background so that it looked just amazing online. That's where we were in San Leandro. And then we got the process to a point where it made some sense to start automating. It took probably three years or so, running the business day in and day out, getting the process to a point where John and team and the board and I felt, oh, we should start to.

Starting point is 00:19:18 build some steel in this building and build some structure, we then started to automate a bunch of the processes in the facility because we felt like we really understood them. John's philosophy was consistent with everything that I'd ever been told, which is it's much easier to tell a person to do things differently than it is to tell a machine to do things differently. So when we got to our next facility, we started to build these carousel systems. So now today, we run some of the largest carousel conveyor systems in the world. of the largest in the world, though that's a hard thing to prove. But our facility today in Atlanta, which is our newest, which is DC-06, holds three and a half million items on hangers in dynamic

Starting point is 00:20:00 storage. But imagine two plus or so football fields full of carousels and conveyors, and then put two football fields on top and that gives you a sense of what the Atlanta facility looks like. And the one we're working on now is could be bigger than that one. Would it be fair to reframe some of that knowing when to transition to a machine from a person as you sort of need to prove the method with humans in an unsc scalable way for some acceptably long period of time? And then once it's zero variance or low variance, only then build a new machine or a new machine driven process.

Starting point is 00:20:37 I think that's right. Yeah. And I think the time to prove out that you've got it right was variable on the process. Right now we're actually transitioning to like. like a next generation photo studio where even though we had automated a big part of the last photo studio, we had strong ROI and fishing cap X build. We had like a new breakthrough where we're now into like the next generation, those photo studios and those lighting strategies. It's a constant evolution. But I think the first big step from manual to some level of automation tends to be the biggest one.

Starting point is 00:21:08 But there is a continuous curve of how do we make this more automated. Right now we're working on photo matching technology that will allow us to take any garment and see, have we ever seen that garment before? Because in every item on Threatups of Snowflake, where we've processed more than a hundred million unique items. So we've seen a lot of product. So when we see that dress from reformation, and it's whatever the design of that dress, if that comes in the door in one of our clean-out kits, and we start to look at it, is there something we can do on it with using AI and using our camera technology to say, oh, we've already seen that Reformation dress. And these are its characteristics. And that helps us reduce all of the rest of the inbound processing over time.

Starting point is 00:21:52 I mean, it's amazing. I mean, example after example of process power and iteration, there's that great, what's the name of the book? I think it's called Innovation stacking from one of the founders of Square where they talk about, it's not one thing. It's like a hundred things and they're path dependent and you don't figure them out until you get to the roadblock and then you just solve a problem I'm iterated on it. And there's like no way of replicating that. That's just such an interesting operational story. Well, and I think we really rely on. I've been like obsessed in the very beginning around how do you build competitive advantage? Sustainable competitive advantage over time. To your point about the 100 things is it's not that we do, people say like, well, what's two things that you guys do amazing? And I said, it's like the wrong question. The question is what are the hundred things that we do that are each a little bit amazing? And because it's the classic Michael Porter. famous book, it's like competitive advantage gets built by compounding the unique activities that

Starting point is 00:22:45 you do. And so if you do three things uniquely well, when a competitor has a 90% chance of copying each of them, it's 0.9 times 0.9 times 0.9. That's the probability that they can copy you. If you do 100 things that are unique and valuable and defensible, it's 0.9 to the 100. We really live by that idea of how do we widen the moat with all of the unique activities that we do. I think that's the way the ops team is just wired. We haven't talked a ton about the buyer side of the equation. We've talked a lot about sellers and the convenience that you provided them. Talk me through that journey and that set of learnings.

Starting point is 00:23:24 What would have been the difficult hurdles that you've had to clear to make, I guess, make people aware that you exist in the first place and then be strong, repeat customers? The secondhand market, the thrift market, it's always bigger than people think. Every time I tell people, they recognize, oh, yeah, there actually is a few thrift stores in my town and a few consignment stores in my town. And it turns out there are 25,000 thrifting consignment stores in the U.S. So that's a lot of stores. So there's a lot of volume offline going through secondhand.

Starting point is 00:23:55 The way we've approached the buyer, I think in the beginning was how do we take the person who might be shopping secondhand to offline and bring them online. It was very much the Netflix approach. Well, how do we take the guy out of Blockbuster, put them in our DVDs by mail system? So we had the same, you know, a lot of Netflix DNA at Threatup. We have a number of executives who were executives there. In the beginning, there was very much of the, how do we get the buyer from offline to online? What evolved in 2015, 2016, through some of our survey work was these were not people who were shopping thrift offline and now had found threat up. These were people who were shopping off price or shopping discount retail who now were like, oh, well, now I can just buy it secondhand and it's even

Starting point is 00:24:43 cheaper and I feel good about it. So what's really evolved in our customer acquisition journey and our customer makeup is, is it used to be like the person who bought used and it was buying used and bringing them online. And now it's people who had never bought used before, but who really see the value proposition. That sort of iteration happened in 2015, 2016. And I think what's happened since is what you're seeing with young people, Gen Zs and millennials and their buying behaviors, their attention to climate change, conscious consumerism has just rapidly accelerated this, such that you're seeing young people buying secondhand at pretty astonishing rates. It's something like half of Gen Z or 40% of Gen Z and 40% of millennials have bought a secondhand piece of clothing.

Starting point is 00:25:28 him in the last year. Really profound acceleration in interest. So I think there's a bunch of big tailwinds for us in the consumer market. As far as like engaging them, I think the thing that people love about coming to thread up is there's always something new every day in your size. And it's fun. You go to the website, we don't take ourselves too seriously. It's designed to be sort of a fun, direct, slightly a reverent brand. But anytime a woman wants to find a new dress or a new pair of shoes or sweater. And you go to Threatup, there are millions of items for you to browse every day. We're refreshing that catalog. If you think about the traditional retail environment that we compete against, they might change collections six or eight times a year. Or even like a fast fashion retailer,

Starting point is 00:26:14 it might be 12 times a year. We're changing the assortment in the store, quote unquote, every day. I always reminded the story from one of our customers who was a teacher. And I always remember this because I was a teacher before Threatup. She said, oh, I always check Threatup in between my periods, between my classes. I have like five minutes. And I know you guys are always listing new stuff every hour. I have my set of filters that I have set up. And I just refresh and I add stuff to my cart all day long. That's the type of behavior that we see that drives engagement. It reminds me, too, of my favorite little concepts. One was the story of how Business Insider, the website was successful, which was nothing more complicated than at the time when it launched,

Starting point is 00:26:53 Wall Street Journal and New York Times only updated their websites once a day. They just updated them more often. And the second is this amazing concept about the internet. If you make information readable to the internet that are just like dormant otherwise, like Uber and Airbnb are the popular examples in your case, secondhand clothing. Magical things to start happening. I just think it's such a neat combination of ideas in such a simple category that people probably overlook. Most investors probably, I'm curious actually if you had this problem. My guess is many investors, certainly in the VC world, probably don't buy a lot of secondhand clothing. And I'm curious if that was an issue for you early on and what it was like raising money

Starting point is 00:27:29 and how you did that in a pretty unique category that's called less sexy in the early stages. I'm sure it's actually now with the numbers. Yeah, look, it was super hard in the early days because this has changed a lot, not far enough yet, but certainly a lot more women investors today than there were 10 years ago. You can imagine what it's like to walk into a venture capital firm full of 40 and 50 year old men and tell them that you're selling used women's clothes on the internet for $15. A, they may not have ever bought used clothing before. So they have like no concept of that. And then B, to our unit economics conversation, it's like there's just an extended disbelief around like, well, how could this ever work? And then there's just like a lack of

Starting point is 00:28:14 awareness around not there's their personal behavior, but just how big the market is. And so it was really challenging. But what I have found over the years raising money and our first investor was from Trinity Ventures, Patricia Nakash, who now the chair of my board, just a wonderful woman. She just sort of got it right away. It wasn't just because she was a woman and then a mom. She was just like a really savvy investor around where consumer trends were headed. So what's happened over the many years of fundraising is people, it's sort of a funny thing. spent time with a bunch of investors recently, and they have this moment when I'm telling the story, here's what we've built and here's why it matters. And all of a sudden, like, you can literally

Starting point is 00:28:51 see their eyes light up. I get this. And they start to relate it to their experience of cleaning out their closet. And then a lot of these folks, investors now, you know, have kids, daughters who are shopping secondhand in ways that they never imagined. I love that comment from folks like, I mean with investors and like, I totally get this. My daughter, like, she only shops at thrift shops. it's okay, well, how much would you like to invest? So it's really changed a lot in the last four or five years, but it was definitely challenging in the beginning. But I think it's made us today, I think as I reflect back over the past 10 years, it's made us just a much more resilient company with really high conviction of like where we're trying to go and what we're trying to build. Because I think there's that period, was it 15, 16, where that's when it really started where everybody was raising money and that trend has continued. And I think founders, who start off where their Series A has done at like a 40 million pre, and they raised 10 million bucks. I don't think they know what it's like to really grind through that hardship.

Starting point is 00:29:53 And I think our team, having run through the grinder multiple times over the last 10 years, has put us in this position where literally nothing gets us down. We relish the hard things. We put more chips on our shoulder every time. And I think that that resilience, you have to kind of live through it. I don't think it can be taught intellectually. You need to be resilient, Patrick. No, you either learn to be resilient or not.

Starting point is 00:30:18 And you really don't know if you have that resilience and that staying power for the long term until you're like repeatedly tested. Built the business out of the recession. It was really hard to raise money in 2010. But I think we're a better company for it. 12 years is a long journey. And it always looks so rosy at the end when the numbers are paid. Yeah.

Starting point is 00:30:37 They're stacked football field, you know, like automated aerosels working like a charm. And what was the most psychologically difficult period for you, especially doing something that is sort of contrarian and different and takes a long time to build? Just psychologically, was there an episode that stands out as the most difficult as that resilience got built up? I think everything really came to a head in late 2018, where we were out to raise some money and we had a couple term sheets. They basically like got retrated at the end. And that was really hard because we had put so much time and effort. And still to this day, I really like those investors, but those deals basically fell through. And I remember being like, this might not work. We might run out of money,

Starting point is 00:31:21 keep the coffers full to do the investments that you want to make. So I just remember that period being really, really hard at the end of 18. And we totally got through it and ultimately came out on the other side in 19 with a strong investor syndicate. But that kind of six month period in between where as a founder, like, has this all been for naught? That kind of, you know, that kind of thing. I definitely had some, like, dark days. But I think it's the resilience built up over the prior eight years where I was sort of like, all right, well, you got to get up tomorrow. Put your big boy pants on and go back to work. It sounds like you've studied the classic competitive advantage of literature. You mentioned going to business school. How do you think about as a leader,

Starting point is 00:32:01 about capital allocation and getting better at that through time inside the business? I don't know if you're familiar with Eric Reese's, not the lean startup, but the startup way, which is his second book. But in that, I think that book had some real influence on me because he started to talk about, as your business grows up, you start to think about capital allocation and you start to think about innovation. How do you think about giving dollars to run experiments within the organization? And he talks a lot about metered funding. What does metered funding look like? The way we think about capital allocation these days is he's very much in a metered funding approach, which is, okay, I'm going invest these dollars, this capital in, take an example, like in a new notifications platform for

Starting point is 00:32:44 threadup. Okay, well, it's like, okay, well, what are we going to do with it? Well, we're going to build a whole new system of notifications across push and email and on-site and physical mail and like a big platform to engage our customer. Okay, well, what's that going to cost? What are the milestones or waypoints that's going to help us understand, are we meeting those objectives such that we want to continue to fund that investment. That's probably closest to the sort of philosophical way that I think about it, which is around metered funding. We are definitely not a moonshot company. We don't bet the company on anything. We don't take flyers. We're constantly, to use the Bezos phrase, I mean, we're constantly planning seedlings. We're constantly doing new things and seeing how

Starting point is 00:33:29 they might generate good, strong outcomes. And then we watch how much money we're giving them. and are we really clear on the milestones and the feedback loops? I think Eric Rees in his book has a, I think the phrase is abandon or persevere point. Do we keep going with this notifications thing? Or is it time to be like, we tried it. Probably should just keep doing what we were doing before. Let's talk a little bit about the industry in which you operate. So clothing is, it sounds obvious, like it's a big thing.

Starting point is 00:33:55 Walk us through a survey of the clothing landscape. What would be surprising to people about where clothes get made, the businesses, behind them, the impact that they have on the world, anything that you find especially surprising or interesting about clothing writ large, and then we'll map that back on to what you do today and kind of what you plan to do in the future. Let's go back 100 years. The first department store, Fields in Chicago, and it was the first time that they were bringing the sort of mom and pop or individual cartelier into a big department store. So it wasn't that you went to the bootmaker, the hat maker or the shirt maker, you came to a place where you could get all of these things

Starting point is 00:34:34 in one big department store like multi-floor experience. That really dominated the growth of retail for the next 50, 60, 70 years. And then you had the growth of individual branded retail where, an example of that today would be the Gap companies. You had Gap and Banana Republic and were relatively the same age, right? It was like the heyday of the 80s and the 90s, the Gap Kacky's campaign. You had like a lot of these individual brands and what would be considered your store formats of the last 20, 25 years. And then what happens is the department stores and you have branded retail, all of a sudden there's sort of this inventory that they can't sell because they bought wrong or something happened.

Starting point is 00:35:18 So in the 80s, you actually see the rise of what I think has been the biggest structural change in retail ever, which is since the advent of the department store, which is the off price guys, T.J. Max, it started in the mid-80s. They start small and they build this compelling store format of discount retail and off-price retail. Fast forward. And then you start to see, you know, in the early mid-2000s, 2006, you have the founding of guilt. It's hard to be that to 15 years ago. But you have like guilt. And, Rue Lala flash sale companies, which were the rage for a while, which were, how do I take the off price model and do that online through a flash sales format? And you kind of get through that evolution from department stores to branded retail, off price, flash sale. There's obviously a bunch of steps in between covering 100 years of retail. But you get to the point where then it's really direct to consumer. Okay, now I'm going to cut out the middleman. I'm Everlane and I'm going to go straight to the consumer. Now you're in a position today where you have this great flowering of direct to consumer brands. It's easier than ever, frankly, to start a brand, harder than ever,

Starting point is 00:36:27 I think to scale a brand given the competition. But what all of this has been incumbent upon is improvements in how clothing gets made and the supply chains around the world. The cost to manufacture clothing pretty much has gone down every year for like 30 years. It's cheaper than ever to produce stuff. And the cost that that's having on the planet is meaningful. And I don't think consumers really appreciate how bad fashion is for the planet. Today, it accounts for 8% of global greenhouse gas emissions. It takes hundreds of gallons of water to produce a single T-shirt. So I think we're in a world today where that's starting to become more visible to the consumer. So I think young people in particular have really shined a light on this. And I think

Starting point is 00:37:15 the fast fashion world has been put on notice around this. And I use fast fashion, not in the H&M Forever 21, Forever 21, who's filed for bankruptcy, not just them, but any manufacturer or retailer who's producing clothing that they can sell for four or five bucks because that has a real cost on the planet. And so I've been really concerned around where is that ultimately going to take us? And if you look at the data from the Ellen MacArthur Foundation, which does a bunch of work in sustainability around this, by 2050, We just keep doing what we're doing.

Starting point is 00:37:47 The fashion industry is going to account for 25% of global greenhouse gas emissions, 25%. And it's a big number. I don't think yesterday is really internalized by all these brands that are making all this stuff. So as you take that backdrop of proliferation, rise of this stuff, lowering costs of manufacturing, increasing impact on the environment, et cetera, that backdrop of the retail space, how do you think about your own future and your own roadmap from here? It seems like you have almost like a Costco-like devotion to iterating on one thing that you do extremely well. Is it fair to extrapolate that you're just going to continue to do those hundred things really well and stay in this specific space?

Starting point is 00:38:27 Obviously, you can go into Mends and there's other places to go. But how do you think about your future from a business standpoint, but also against the backdrop that you just laid out for us? We're a mission-driven company, like from the very beginning. There has to be a better way where my team spends a lot of time. is what do we want the world to look like 10, 15, 20 years from now? And I think we want the fashion industry to continue on this much more sustainable, circular path. I'm not sure that we can get the fashion brands of the world to produce stuff more

Starting point is 00:39:03 sustainably, whether that means using Westwater or environmentally friendly dyes or the types of wool, the sustainable wool that they use. they're coming around to the idea that we need to start to treat these resources more carefully. And I think there's a lot of incredible work being done there, especially by great new emerging brands. Allbirds is a good example. Rothese is a good example. Everland is a good example.

Starting point is 00:39:25 I think our job is to get the fashion industry off the linear path. And the linear path is we make stuff, we sell it to you as best we can. We discount stuff we can't sell to you. You wear it and then you put it in a landfill. That has been the path of the fashion industry for a very long time. What that means is that 70% of what people stop wearing and give away ends up in a landfill. 70%. It's just crazy. And the thing that I'm obsessed about is, okay, let's break that path. Let's go from, yeah, let's produce stuff. I think we should produce less. I don't think we need to produce as much stuff as we produce today.

Starting point is 00:40:04 But let's produce stuff in a more sustainable way. Let's have brands sell it. Let's have them sell it in a way. where the margins get better, not worse, because of discounting and markdowns and everything else, which has crushed the fashion industry over the last 10 years. So let's stop doing that, let people wear it. And then when people are done wearing it, let's loop it back. And I think where threat-up sits in that is really in a powerful place. Okay, you're done with that thing. Let us take it back. Let's put it back online for somebody else to buy. And we can live in a better, more circular future. Is there anything else that we miss that's interesting about the supply chain in this space. You mentioned the unfortunate byproduct of 8% of greenhouse emissions or gases coming

Starting point is 00:40:45 from this space. What else have you learned that's most maybe surprising or interesting about? I'm thinking all the way down into like the raw materials that might go into clothing. Give us a little bit of extra meat on that bone around what that looks like and how you think it might get better. There already is a lot of great work being done in textile material recycling. The same way is that we made tons of progress in recycling plastic, recycling, glass, and these types of things. I think fashion has been a little late to that game, but I think it's catching up.

Starting point is 00:41:14 There's work being done by a number of companies to take any piece of clothing and break it down to its constituent parts, strip out the cotton and strip out the polyester and strip out the metal. And so I think you're going to see real breakthroughs over the next few years around garment recycling. And I think the biggest challenge is we need to get to a point

Starting point is 00:41:31 in the fashion industry where producing clothing from recyclable materials is the same cost. or potentially lower than it is to produce it from new materials. Because I think the margins in the fashion industry writ large are not amazing. Every brand would love to be more sustainable, but they have to pay 25% more for organic cotton or 25% more for recycled cotton. The math just doesn't work. Everything in these industries, it needs to be driven by like the fundamental economics.

Starting point is 00:42:01 So my hope is that a lot of the innovations being done in recycling will help us get there. and I think the development of materials that are made to be recycled. I think Adidas was doing this very, very well of thinking about the full cycle of their products. I just signed up, you know, this company on, you know, the running company. Yeah, sure. Cool guys. Like, I don't have any pairs of their shoes. I love what they're doing.

Starting point is 00:42:21 But I just signed up for their, I think it's called the cyclone or I can't even remember what it was. But it's like a shoe subscription. And the idea is that the shoe, literally every single part of the shoe can be broken down, recycled and made into a new shoe. And I think you're going to start to see things like that come to market in ways that I think will move us forward. Fascinating space. I mean, so big, something you wear every day, don't think too much about. Fascinating to hear the issues.

Starting point is 00:42:44 I think the other final topic that we'll cover that is unique and interesting about Threatup and how you run the business with your partners is the nature of work itself for your employees. I had a really popular episode with Dustin Moscovitz at Asana a couple weeks ago. I was amazed by how much inbound I got of people frustrated by, interested in. what work looks like, even though we've all gone remote, which is I think the reason why people are questioning this in the first place. We haven't changed that much in a very long time of the, you know, five-day work week, nine to five, blah, blah, blah. What's your thinking here? Why do you care about this topic and what have you done about it? Oh, how much time do we have?

Starting point is 00:43:22 I have all sorts of things. When I think about why people work, why do we work? You zoom way up. You're like, well, what is the point? You start to think hard about like the type of culture that you want at the company, the type of people that you want. And I think the shared values of a workforce of a culture at a company are really, really important. And I think the commentary right now around the future of remote work and distributed workforces, I'm very much in the, we all need to go back to the office camp because I just think the atomization and dehumanization that happens when everybody's sitting alone at their houses, I think can be really destructive. especially with given the amount of time that people will spend at work sitting behind their computers. And I think in the short term, people will think it's fine. I think over the long term, I think it's just another way that breaks down the fabric that binds us together. I think the office is like another place for you to like meet interesting and unique and different people.

Starting point is 00:44:19 And I think not having that social communal space, I actually think it's really bad for like the body politic. I think just bad for the country. I think it's bad for us as citizens to not have places where we can. collaborate. It feels like a dystopian future when we're all just sitting at home, reading our own news, right? Reading our own news that gets delivered to us, talking to the same people in our circles. And so I just think it's another step breakdown. So I'm like not a big fan of the distributed forever workforce. Our culture, in the beginning, we really tried to be innovative around how do we help people

Starting point is 00:44:51 do their best work. About five years ago, six years ago now, we started with a, let's create this thing called Maker Days. I remember reading the concept of a maker, you know, of a maker in an organization is somebody who makes stuff, designers, engineers. They don't spend their time in meetings. It's really like independent work. And I thought, well, shit, I'm the CEO. I do a lot of that too. I have to do a lot of thinking and a lot of independent work. I spend a lot of my day as a maker. How do we then create constructs in an office environment where people have dedicated time to do work, real hard work? So we came up with the idea of we're going to create this Maker Day phenomenon. And so Maker Days, we're going to be on

Starting point is 00:45:31 Wednesdays. Monday and Tuesday, we're normal like office days, Thursday and Friday, normal office days, but on Wednesday, it was a Maker Day. And the idea of the Maker Day was that there could be no standing meetings. The idea was that this would be the time for you to put your head down and solve the hardest problems confronting the business or work on development plans for your team, something that requires three, four, six, seven, eight hours of heads down time. That went so well over the next couple of years that a couple years later we were getting feedback from the company, we persistently were hearing, man, I am so productive on my Maker Day. But I get so much done.

Starting point is 00:46:07 I do my best work. If I just had more Maker Day time, I was like, well, we can solve that. So if that's the thing that employees want to do their best work, well, let's go to two maker days. So we moved to a schedule where Monday, Wednesday, Friday was in-person meetings at the office and Tuesday, Thursdays were Maker Days. And the switch on that was also for MakerDays is you didn't need to come into the office. You should go wherever like you do your best work.

Starting point is 00:46:32 And some of that is the DNA from me as the founder because when I was in college, I always did my best work in the coffee shops. I love sitting in a coffee shop full of people writing or reading or studying or thinking. And that was always like my safe place to like get stuff done, do my best work. The idea of the Maker Days being like you kind of work from anywhere. You want to come into the office. Great. You want to stay at home.

Starting point is 00:46:53 Great. You want to go to a cafe. great. And I think that carried us pretty far around building this construct around maker days and meeting days. The other thing we added is we added an early sabbatical policy. Once you've been at Threatup for three years, you get two months sabbatical. We pay you. And the idea was we need people to constantly be refreshed and recharged. One of the things I loved about being a teacher when I was in my 20s was the summer's off. I got to travel. My wife and I got to travel. We did all kinds of like amazing stuff. And he came back to the school year.

Starting point is 00:47:24 And you're fired up. And I thought, well, why is the business world? Why can't we have some similar construct? We built sabbaticals into thread up. And the only thing we asked you on your sabbatical was that you like didn't sit around and do nothing. You had to do something meaningful. Like go travel. Go do something that gets the pistons firing in your brain expands the universe for all of us.

Starting point is 00:47:46 And so part of the sabbatical when you came back is you did a little 15 minute slideshow Q&A with the team. We had people who went to the Great Barrier Reef, learn to scuba dive and like repair the Great Barrier Reef. Man, that is awesome. And the last thing we did, which is very recent, which is the beginning of the year, we moved to a four-day work week, which I spent a lot of time thinking about, the management team spent a lot of time thinking about, we came to the decision that people do their best work when they're fresh and they're recharged.

Starting point is 00:48:15 They're like fired up about coming into work. There's something about the three-day weekend. We've all experienced it where having that extra day, you come. back into the office and you're like, man, it was great to have Monday. It was great to have Friday. You're kind of ready to hit it hard again because you just had that extra day of recharge. So we're experimenting now. We're in the middle. It's a six-month experiment. We'll kind of review it in June. So far, the feedback is really positive. I think we're going to build a cycle of four days on, three days off that's going to create superior output over time.

Starting point is 00:48:47 What a fascinating progression of new things to be tried. It's cool how your theme is reassessing large, important things that people have slipped into the background and not thought too much about, right? Like 25,000 thrift stores, work week. It's a neat first principles approach to building a business. What has you most excited about the future, just period? When I think about the future, like the best days for like our country, I think they're ahead of us. I have an enormous sense of optimism about where we're headed. I mean, I took such great pride. Live images of Mars coming back. We can still do like amazing stuff. So I'm pretty like inspired around where technology is taking us. There's going to be pitfalls and we're going to make mistakes and

Starting point is 00:49:27 there'll be negative derivative outcomes of the progress in technology. You and I were talking about Starlink, satellite internet, the ability to deliver internet all over the world to rural places that don't get it today. There's such incredible progress being made so many parts of life that I really do think the future is pretty bright. But I think it's going to require entrepreneurs and politicians and elected officials and work more collaboratively. And think that's the rubber, right? I think that's the thing that I'm like, we need to get back to a more civil, collaborative politics. I think government has a role to play in secondhand. I was talking to some of the other day. Like, if you think about the real acceleration in solar and electric batteries

Starting point is 00:50:09 and things like that, it was when government started to create subsidies. We really want the fashion industry to stop the cycle that it's on and we want people to make better decisions. Like, what's the role of government incentives to do that? So, you know, I'm spending a lot of time I'm thinking about what that looks like over time. What's the carbon tax equivalent in the fashion industry? Once those fashion companies have to really internalize the fact that 70% of stuff ends up in a landfill, things will have to change. I ask the same closing question of everybody. I've loved talking about your business is so unique and my favorite themes in business are applied here,

Starting point is 00:50:42 especially fun for me since I hadn't really experienced the products. I love hearing about it for the first time. The last question I ask everybody is to ask, what is the kindest thing that anyone's ever done for you. All the things that my mom did where she would always give me the confidence that I could do anything. There were all these failures in my childhood and life formative years. Every time that I would like mess up, she would just be the like, during mom, we'll be like, just get yourself back up. You're going to be good. You can kind of do anything you want. And I think if you're an entrepreneur, you always ask entrepreneurs like where resilience comes from,

Starting point is 00:51:18 I don't think it comes necessarily from any one thing. But I think having somebody who no matter what always picks you back up, I think that's probably the kindest thing. And it's probably kindness over many moments in my life. That's probably the best thing. Fantastic. This is so much fun, James. So great to meet you in this format.

Starting point is 00:51:38 Thanks so much for your time. Yeah. Likewise. Thanks, Patrick. This episode of Founders Field Guide was brought to you by Dell Technologies. Dell Technologies and Windows can help you upgrade your business tech with these small business month specials. Save up to 45% on PCs with Windows 10 Pro, plus business stocks, monitors, and more. Work anywhere with Windows 10 Pro. Call a Dell Technologies Advisor at 877 Ask Dell.

Starting point is 00:52:00 That's 877 Ask Dell. You can also check out the link in our show notes to see deals that Dell has today. Thanks for listening. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

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