Before being hired as one of the first ten employees at Nau Inc., Ian Yolles was the online marketing guru at Nike. As director of marketing at Nau, Yolles crafted a marketing plan that garnered tremendous positive media coverage, was widely admired in the industry and helped the company raise approximately $34 million in three rounds. When the companys board decided to shut down the company May 2 after the company failed to raise a fourth round of funding, Yolles was the one who took the reporters calls. Reached at his home in Portland last week, Yolles defended the companys business model in an interview with The B.O.S.S. Report. Below are excerpts from that conversation:
BOSS: Who exactly financed Nau?
Yolles: The money we raised to date, there was not a single penny of VC. Roughly half the money we raised was from private individuals. We definitely had individuals contributing small sums, but at the other end, our chairman, Steven Gomez, he grew the Nikes Apparel business from $300 million to $3 billion and he invested in every single round. Another was Steve Luczo, a Stanford MBA and a very sophisticated investor. (Luczo currently serves as chairman of Seagate Technology, where he was CEO from 1998 to 2004 and is a former investment banker with Bear, Stearns & Co.) The other half of the money came from a couple of large institutional firms a PE firm and a hedge fund.
BOSS: What round of financing were you working on when the board voted to close down?
Yolles: It was the Series D round. Based on the plan we developed, we would not have turned the corner on profitability until late 2009.We knew from the beginning that there would be a sequence of rounds of financing.
BOSS: Some say Nau tried to change too much too quickly. Whats your response to that?
Yolles: We did not set out to reinforce the status quo. That was not the idea of this business. The idea was to design an entire enterprise from the ground up with sustainability at the core of the business. And to show businesses have a broader sense of responsibility. There is all kinds of interesting external conjecture. You can walk into our store and shop the store exactly like a traditional store. We had inventory, change rooms, sales associates. What was different that had never been done was the ship-to-you concept. If the customer wants product shipped to them, we would give them a 10% discount. There were three reasons we thought that was an interesting idea. First was from the customer facing point of view – how the emergence of ecommerce had influenced how people shop. Often with apparel, they might start researching product online and then go to a store to try it on then go back home and shop for price. We wanted to take discontinuity out of that experience. Second, if you peel back this idea from the business point of view, there are a variety of efficiencies. If you are not walking out the door with the inventory, we dont need as much inventory, so the store size is reduced, capital costs to build the store goes down and operating cots – rent, heating, lighting, staffing go down. Its an extremely efficient economic model. So we were sharing savings with the customers. If we were a traditional retailer, our stores would have had to be 3,400 to 3,500 square feet (vs. 2000 square feet.) Third, there were significant environmental efficiencies. The stores were small so we were using less materials, there was less energy use. Its better to have inventory in the warehouse where you dont have to heat it or light it. What you dont see as a customer is multiple level of shipping that goes on in the course of a season. When the season begins, its shipped to the store, then there is reshipping product from store to store to store. Then with end-of-season liquidation, you end up shipping all products back to the DC. So if you look at the whole picture, we were shipping less. We were also investing in carbon offsets. The customers were into what we were doing.
BOSS: Were you able to validate any of these ideas?
Yolles? One of the biggest unknowns was the customers propensity to choose ship to you. A lot of people told us at the beginning that this idea was flawed because it was antithetical to how people shop. So when we built our plan we anticipated customer adoption curve, so assumption we made is that when we opened doors 20 percent would choose it, 30% by end of year one and 70% by 2010. So we launched the business last year in March and April with Chicago, Boulder, Seattle and Portland. What we saw was 45 % of customers choosing to have product shipped to them. So that is confirmation to me that this concept worked.
Another unprecedented thing we did was we not only gave away 5% of every sale, we invited every customer to participate in the giving process. We presented you with a menu of ten non profits and we asked you to tell us where you wanted it to go. When we designed this part of the transact, we did not know how people were going to react to it. We anticipated some folks would be in a rush, so we let them check off Ill let Nau decide. Of all the transactions that took place, 7% of customers selected let Nau decide. Ninety-three percent took whatever time was involved in deciding where the money would go, which demonstrated a high degree of engagement and interest in the giving process. I think those ideas are viable ideas and I think data and customer response prove that.
BOSS: One big questions people are asking is where did all the money go?
Yolles: The money went to designing and developing the product and building out the supply chain. There were capital costs associated with running retail stores, all operating costs for creating two distribution channels, retail and the web. And there was building a brand from scratch – a brand that in a relatively short period of time became highly differentiated. Employing staff. This, this was an ambitious plan. This industry has never set out to do what we did. We not only designed remarkable product line from scratch, we developed a brand from scratch, but also we made the decision to distribute product direct to our customers. Since we announced this the amount of sales and traffic has gone through the roof.
BOSS: How well received were your ideas among suppliers?
Yolles: There were an amazing groups of partners that were very excited about collaborating with us even as a small fledgling business. We were often running under minimums for product. They see the way the world is going and we were working with them to push things forward. In the apparel industry right now there is all kinds of hype about green apparel, but its almost entirely focused on fabric. Fabric is important, but it is not only part of the equation. Before we developed a single garment, we developed a document of ideal garment development. We asked what happens to consumer care and at the end of useful life? All could be washed in cold water.
BOSS: What was the impact of all this on your costs?
Yolles: The costs of fabrics we developed were 10 to 20 percent more expensive than competitors, but we were selling directly to the customer so he had a tremendous margin advantage. Because the business model gave us economic efficiency we could afford to invest in product and still sell it at a price point that was competitive from an industry point of view. We knew we had to hit price points and still have a healthy margin.
BOSS: Who did you consider your competition?
Yolles: I think we created a new genre of apparel. We wanted to blend three things. Take everything we knew about function, but we knew (another functional outerwear line) was the last thing the world needed. Second, raise the bar on how the entire apparel industry was thinking about sustainability. The third thing was beauty. You could not only wear Nau to do things in, but you could wear it in a sophisticated urban environ and look great. There are a lot of brands doing one of those things, a handful doing two of those things but we were the only ones do all of them. All outdoor brands were viewed as competition. On the fashion side there was G Star, Diesel, etc. The idea was people could come to Nau because they were interested in performance, style or sustainability or all three of those things.
BOSS: When will the company file bankruptcy?
Yolles: The board has made a decision to wind down operations for the company and we are currently engaged in that process. There are some people who will not be made whole. If you could mention that the products are still for sale for 50% off on the web site that would help.
BOSS: There is a lot of irony in how things turned out. Can you reflect on that?
Yolles: There is another dimension of irony. One of the things I am personally finding so difficult to comprehend is that I feel like I am now occupying two very inconsistent, incongruent realities. Our business was developing a lot of momentum. Ten days ago we opened the store in Los Angeles and we had four stores under construction. Last week we were in Fortune in an article “8 Great Entrepreneurial businesses.” Then Tuesday night of this week the Sundance channel did a documentary piece on us in the show “Big Ideas for a Small Planet.” If you look at the extraordinary outpouring of the response go to our blog and look at the commentary the bulk of people who are buying our product knew about us. They are not only buying product they are saying this is a strategy.
To me thats part of the irony. I look at the momentum that we were developing and the reality that we could not close this round of financing so we had to close the business. We tried to push ourselves. We were committed to innovation from the point of view of sustainability and the idea that businesses have a broad responsibility to communicate beyond that single, rabid pursuit of profit at the expense of everything else. If people make the conclusion as a result of this that these ideas are flawed we are fundamentally fucked. We have to pursue these ideas. The stakes are extremely high. Yes at the end of the day we were not able to overcome a very specific financial obstacle. If there are lessons to be learned here, for others to pursue this path I am all for that.