"Billion Dollar Scrubs"

My notes and commentary on Patrick O’Shaughnessy's interview with FIGS CEO Trina Spear

Direct-to-consumer companies rarely become venture-scale outcomes. The list of failures is long. Casper, for example, is worth merely $282M as of today, having raised $340M in venture funding.

There are numerous challenges:

• Customer acquisition costs go up as you need to expand your customer base. Instagram ads can only take you so far…

• Margins on physical products tend to be worse than digital products, and require up-front capital until raising debt is possible.

• Brand tends to be the biggest differentiator. While supply-chain and product experience can be hard to replicate, it’s often a far weaker moat that software platform lock-in.

But once in a while, exceptional DTC companies emerge, like FIGS, a public company selling high-quality scrubs for healthcare workers. (And I don’t think FIGS would even agree with the DTC brand characterization given their focus on verticalizing an apparel supply chain. More on that later.)

CEO Trina Spear appeared in an episode of Patrick O’Shaughnessy’s podcast. Here are the notes on what I’ve learned and commentary on what was said!

Notes

Verticalizing

It took about 4 years to develop the product before there was significant growth. Today, FIGS has earned over $1B in revenue, but that first $1M happened over 4 years.

The pitch for verticalization makes sense at first glance:

There were companies that made medical apparel, and there were companies that sold it. There was no vertically integrated company that did both. You had companies that manufactured, they would sell to the retailer, and the retailer then sold to the healthcare professional. This is still true outside of us and a few others. But the healthcare professional goes into the store and they say, ‘I hate my scrubs. These are awful. I have no pockets. I'm pinning my wedding ring to my bra strap. I'm tying it to my draw string. Can you fix it?’ The associate at the store says, ‘we don't make this. We just buy it. We just get it from the manufacturer.’ All of the problems that we hear about every day in that feedback loop, which is so important in terms of making great product, didn't exist.

Compare this idealized “why” to the details of implementing the supply chain:

There was no factory. There was no manufacturing partner that we could go to and say, ‘hey, just do this.’ We were really first principles thinking. […] Over time we developed our proprietary core fabrication called FIONx, but it was all of these initial things of ‘these are the pain points, these are where people are having problems,’ and then truly finding partners that could help us develop it. Many partners across Asia. And I would say you don't figure it out right up front. The amount of people that you work with over time is immense. We've moved factories. I can't even tell you how many times. We've moved warehouses six times. When you're growing fast you can't be afraid of that. This got me from here to here, now I plan to upgrade. There are partners that we worked with for six months. Sometimes you feel like too much investment to quit. I put all my time, my energy, I was over there with them for weeks on it. And now I got to move again.

I appreciate the contrast between these two quotes. Verticalizing a product line is HARD and should take years. In the intro section, I commented that “brand” is the most common and durable moat for consumer goods. But having spent the raw amount of time to figure out manufacturing and logistics is a pretty good defense as well — sifting through hundreds of vendors is a process that takes years and can’t be leap-frogged.

This is in-line with the experience that Contrary portfolio companies have had. Maev, an early-stage portfolio company that sells luxury dog food, has similarly cycled through manufacturers and 3PLs. Very few venders are capable of maintainging high quality standards, operational SLAs, scalability, and cost-efficiency at the same time. Customers have LOVED Maev since the beginning (I can’t share private metrics, but take my word for it) but it’s taken 3 years to iron out the backend. Only now can Maev pour jet fuel on the flames. Dog food is not a particular defensible category in theory, yet Maev can price with juicy margins because nobody else has verticalized properly.

As a general principle, I and my partners at Contrary tend to avoid consumer-facing businesses without supply chain control because it’s hard to have defensibility, pricing power, and scalability unless you own the stack. The question becomes: can you build rabid enough customer love and software-like margins to overcome this?

Stunning efficiency metrics

Efficiency is a core metric we look at, particularly in the growth stages. Turning $1 of burn into $1 of revenue is an excellent efficiency to shoot for. I was impressed by FIGS capital efficiency, to say the least:

Making a product — bringing inventory into your warehouse to then sell — you have to finance that. We did raise money early on. We raised a $2 million seed round, and that was helpful getting the business off the ground. But even if you look over the past 10 years, we've only ever spent $10 million and we've generated now over 1.2 billion in total, on aggregate.

Wow! Burning $10M to generate $1.2B is excellent. Of course if you zoom out, the numbers might look different. I’m making these numbers up, but it would be very possible to burn $10M to generate the first $5M in revenue, hit profitability, and then make the remaining $1.095B with zero burn. But regardless of how it’s actually sliced, FIGS has achieved remarkable capital efficiency, especially for selling a physical product that requires manufacturing, warehousing, and shipping before a sale occurs.

There are number of levers an entrepreneur might pull to make that happen:

• Focusing on a small cohort of high-margin high-ACV customer profiles at the start.

• Setting a slower than possible growth rate with profitability in mind.

• Building as much of the product as possible without hiring or contracting.

• Quickly testing growth channels and immediately killing every experiment except for the highest performing channel.

Spear cites in-housing everything possible as a key driver of not only efficiency, but also quality:

I do think there's this perception that you need to raise all this money, and it's going to be so expensive. But there's so many things you can do yourself. I find more and more entrepreneurs are looking to find a partner to outsource this piece and outsource that piece. They're going to do our whole brand and they're going to do our whole product. Well, what are _you_ doing? That's when it gets expensive. […] Heather and I created our product. We wanted to do this, and we worked with people around the world. When you fully outsource is when, by the way, you don't understand what you're doing. You don't control it. You have no understanding of actually how it's going to be different. In order to create something different you actually have to be in it and do a lot of it yourself. It's your vision.

Of course the economics of the FIGS product lines became more favorable when owning the supply-chain, but the product quality that became favorable for this reason too.

Elsewhere in the podcast, Spear commented that word of mouth drove growth for free. She agrees that simply funding Meta and Google to drive growth is a painful strategy to rely on. It’s unclear that such organic growth and customer love would be possible without in-housing everything about FIGS.

Team efficiency

This philosophy applies at the company-building level as well. Spear referenced her mentor Meg Whitman:

This is a Meg line: “Every executive will come to you and say, in order to achieve greatness, I need $5 million more dollars and 20 more people. Everyone will always say that. For us it's, I need three more graphic designers. I need three more engineers. Well, how do you know what one would do? How do you already know you need three?”

This mindset can become piercing when widely applied. It works for timelines too, not just bandwidth. The famous Peter Thiel line goes something like “people come to me with a 10 year plan, and I ask, what would need to happen for you to do it in 1 year?” Usually there are reasons that 1 year becomes 10 year, but having a clear first-principles understanding of why is important.

The crux of the team efficiency issue comes down to revenue per employee (how much can you afford to pay up to retain great talent), and the uniqueness and meaningfulness of the team mission (why would someone join when money isn’t an important factor?). Building a company in pursuit of these makes team efficiency possible.

Product line power laws

Most companies experience a power-law relating individual products and revenue. This is commonly referred to as the Pareto Principle or 80/20 rule.

Sometimes this is framed in terms of customers: the top 20% of high-end repeat customers generate the vast majority of revenue in everything from liquor to clothing. But this can also be framed at the product-level. The vast majority of Google’s revenue comes from Search, not anything like Gmail or Maps.

FIGS has similarly concentrated it’s revenue at a SKU-level:

The SKU productivity is one of the most important metrics to look at. How do you sell more and more of the same thing? Those are the best business in the world. How do you keep it simple? 13 styles account for over 80% of our revenue. Beautiful thing.

I may be comfortable with Apple making most of their profit from the iPhone, or Google making most of their profit from Search. But with consumer brands I tend to get a bit more nervous. It’s great that 13 styles generate a billion dollars of sales with high repeatability and operational simplicity. But there are many ways that consumer brands can be subverted, and concentration of SKUs in some ways makes FIGS more vulnerable.

Of course there’s always the risk of competing brands winning on pricing, or figuring out how to market better. As discussed, that’s a challenge, though. More worrying would be competition between business models. A marketplace, for example, might subsidize popular products as a loss-leader to grow the rest of the marketplace. It can be hard to compete in cases like that without owning the marketplace itself or some other unique partnership or platform power.

Fin

FIGS is a great business with lots of room left to grow. DTC as a category is nothing short of brutal, but I first of all greatly respect the team’s focus, discipline, and results, and I do agree with Spear’s comments that there is tons of opportunity out there left to be uncovered.

If anybody reading this is willing to toil on manufacturing and logistics for years at a time, I would love to help find a market capable of becoming the FIGS.

Listen to the podcast yourself here, see FIGS here, and subscribe here for future notes.

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