>> Hi, I’m Lori Rosenkopf, I’m the Vice Dean and Director of the Wharton Undergraduate Division and I’m a professor in the Management Department at Wharton. We’re here today for the entrepreneurship specialization and my guest is Amy Errett. Amy is a Serial Entrepreneur, she’s also a Serial Venture Capitalist and she is currently the CEO and Founder of Madison Reed. Amy, how did you know you had a good idea for Madison Reed?
>> I knew it was a great idea, because I’ve spent my career both running, starting and investing in consumer facing companies. And one of the things that I learned about both of sides of that is that great consumer ideas, typically where consumers have some pinpoint that you’re trying to solve. And the point that we’re trying to solve is better for you hair color to a 108 million women in the US who color their hair every 6 weeks. So as a venture capitalist, there’s sort of three things that you look for. One, size of the market. Well, this one’s huge. Two is the product different and differentiated. We’ve taken out the harsh chemicals and number three is, is there a passionate team that wants to invest. And typically, venture backed companies don’t have access for seven to eight years. I know that that’s news to most people who think it’s 18 months. And so, do you have a group of people that’s really passionate? And in addition, I took a walk with a venture capitalist friend when I was thinking about doing this and he kept calling me for days. Didn’t have a deck, just realized the size of the prize and that I was passionate about pulling it off. >> And what did you have to do as you got going with this to test that idea? >> Well, I’ve come to realize that for most people, but in particular, entrepreneurs. When you’re younger in your career, you don’t value this one thing that as you get a little older in your career you value, which is your time. Most people think it’s all about, can you get the money? And I think it’s a lot about can you get the money, but are you going to spend your time well? So I didn’t take any money until I had really figured out that we could formulate this, that we could actually get it into the tubes. And that most importantly, that it worked for consumers. So once I knew that we did that, then I understood that we had to put the gas pedal down and reduce the business and see where it went from there. >> And since then have you had to do any sort of pivoting or has it been smooth sailing? >> Well, I’d say, it’s been pretty smooth sailing. Although asking an entrepreneur about smooth sailing is sort of one of those things that our definition of smooth is that the boat didn’t capsize twice a day and the winds weren’t 80 miles an hour. Most entrepreneurs, the concept of smooth sailing is just powering through the resilience to get through all the things that you can’t possibly know that could go wrong, but kind of coming back Madison Reed. One of the biggest issues was we thought that the business was only direct to consumer and we’d been shocked that actually, there’s a salon channel business that we never anticipated. So the pivot is not that we’re doing anything that is different, it’s just that the demand is coming from a bunch of different places not just direct consumers. >> So, tell us how the professional salons have reacted to your offering? >> Yeah, it’s interesting, because we took an approach right from the beginning which was and versus or. And what I mean by that is out of the 108 million women, 50% of the women color their hair at home and 50% color at a salon. And so you would think that our stance about the brand would be fire your salon, they’re terrible, only use this DIY product. And in fact, we took an approach which said, we have a suite of products. Whether you color at a salon or you color at home, we can offer you a bunch of different alternatives like a root touch-up that you can use between salon usage. And I think the salon channel embraced us, because they actually saw it as a way to make more money off of some of our products and so it’s gone really, really well. The biggest surprise has been our business is directly consumer, we’re not used to having sales people that have to run ads or call salons or. So, we’ve had to spend a little bit of time understanding this intermediary channel and then another big surprise has been Sephora. We didn’t anticipate the retail distribution versus the direct to consumer on the website. And so we’re in 224 Sephora stores now and sephora.com and there will be a couple of other things in the next couple months that I’ll introduce that are sort of surprising for a company that you would think is direct to consumer. A 100% versus an omni channel approach, which is turning out to be what’s going to happen. >> How important is talent management for you and your venture and for all entrepreneurial ventures? >> Yeah. >> What mistakes do entrepreneurial firms make? What advice would you give? >> Yeah, I think that it always, whether you’re an investor or whither you’re a founder, really the world begins and ends with people. And so what I’ve learned every time that I’ve tried to convince myself that, that isn’t true and it’s usually out of moments of making bad hires or moments of not being able to find the right people. What you start to realize is that you could have the best idea in the world and the truth is that could be left on the table without execution. And so when I think about talent management, I think it’s pretty much everything. And it’s been everything from recruiting the best team that we could possibly get in kind of a crazy idea that people weren’t paying attention to, all the way to talent management and my investors and that’s a piece that people don’t talk about. Who you choose around the table on your board is as important sometimes as the people that are working side by side. There’s a lot of dynamics about investors and board relationships. So, talent management for me is like who are the people that you want in a life boat? Whether they be the execs that work for you, whether they be the folks that you partner with in terms of partnerships, consultants. In the beginning, we tried not to have a lot of full time employees, but we actually gave some equity up for people who form partnerships. Our first box was done by guys that use to work at IDO, we gave them some equity. All of the formulations were done with people that had come out of the hair color industry and we gave them a little bit of equity. So, talent is really a complex issue. But at the end of the day, I think it’s pretty much, everything. And as a business gets more complex, it gets hurt. So the truth is that it’s in the beginning it’s hard to recruit people who want to just think your idea is interesting and you get into the stage where it starts working and the stakes get higher, then the kinds of people that brought you to the level aren’t the people that can scale the level, then the people that can scale the level aren’t the ones that want to put process in. It’s the gift that keeps on giving, that’s the best way that I’ll say it. >> So you’ve mentored and advised many people over your career, but let me turn it around now. Who was the best mentor or advisor you ever had and what made them so? >> So I think early in my career as an investment banker and as I say, often, it was not good for all those involved. Meaning, it wasn’t a fulfilling. I may much more entrepreneurial than working in a large sort of financial institution person. I didn’t know that at that point in my career and I think in terms of the organization. I’m not sure that they got the best of me, but I ended up working for a guy who ended up being a life long mentor to me. And I remember my first conversation, I was just out of college, undergrad before I actually went to Wharton to graduate school and I was quite sure of myself. And I remember, having this conversation and saying to him, all these people are getting promoted. What do I need to do to get promoted? And he paused and he said, well, when you start acting that way, then you’ll actually become that. And that has always echoed in my head as a mentoring moment, which is that being an entrepreneur, it’s just about resilience and persistence and Paying it forward, and continuing to believe, in the face of nobody else believing. And in a certain way, that’s acting that way, and then you will manifest that and become that. And what I’ve said all along, in all the parts of my career in mentoring people, is you just can’t be any further than you are right at that moment. Right, so you need to understand the steps to get there, but you also have to understand that a lot of it is just paying it forward and a lot of it is, you’re not really entitled to anything, you have to earn hit. >> Are there certain personality characteristics that you believe are critical for entrepreneurs?
>> Yeah, one is that I talk about all the time is resilience.
Right, the way that I think about it all the time is, there was actually a little thing that I put on Facebook which was sort of hilarious, but it was really true. And it went something like this, I don’t know, yet I’m an entrepreneur I don’t whether I need a hug, a shot of vodka. [LAUGH] A reality check or somebody just to tell me my idea kind of doesn’t make any sense. From moment to moment, the amount of resilience that you need is just extraordinary. So what I used to look for as an investor is somebody who just wasn’t going to, no was not possible. They were going to go around the mountain, through the mountain, over the mountain and make it happen, right? because I believe if you get a group of people who want something bad enough, you can do extraordinary things. So one is resilience, second is just persistence. Third is what I call agility, not flexibility. And this is something I talk a lot about. Flexibility is one of those things which says, I’m going to move in whatever direction something shows me right at the moment. That’s a very dangerous trait I think in an entrepreneur, because most great entrepreneurs have some, there’s a moment inside of them where it’s an unwavering in the face of adversity, an unwavering peace. Which is in our business, it would had been easier to put chemicals on them. Cheaper, typically work better because it’s just blast your, the root follicle of your hair, colored deposits rate, what everybody is used to should smell bad. I’ve been unwavering that regardless of what anyone says we need to do what’s best for our consumer, that there is a social mission in this company, right? We’re going to prove to the CPG companies that it can work and be awesome and be better for you, right? So if I was flexible, I would have heard what people said, maybe that’s the way we should go, that seems easier. Versus being agile, those are two really different concepts and agility is really like, I look at the fact pattern, I understand what’s going on. I check in with myself about what’s okay, and I will course-correct as things go on. But I’m not just going to go with the wind because it seems like it’s easier or someone is trying to influence me. And I think if you just look at the history of time. You look at Howard Schultz, and his father-in-law didn’t think why don’t you get a real job? This coffee thing isn’t going to pay the bills, right? I mean, these are the things. I’m sure Mark Zuckerberg, Steve Jobs, you go down the list. And I am not comparing myself to any one of them, right? But I’m just saying if you look at people that are just, it’s almost like you just know and you’re not going to give up. So I think it’s those things, I think emotional intelligence is a huge part of being a great entrepreneur. Because it’s not really always just the idea, it’s the sensing, it’s the paying attention to all the little facts. And then the other part of it as I would say is being self reflective. Having self awareness, that in that meeting you were just obnoxious and you need to kind of go take a walk. That person seems like the way that you’re trying to motivate them isn’t working. And what part do you own? I think when you can get to that place in your life there’s magic there. >> Let’s talk about the bigger picture of venture creation in society. So as an entrepreneur, as a venture capitalist, how do you see this role? And how do you start to quantify it in our own work or more generally? >> So when I, this is my fourth company, in-between three and four I was a venture capitalist. I ran and opened the Marvarot office, a Seattle based firm. Had a third of its investments here in the bay area but never had a physical presence. And for the first six months I kept apologizing to all of my CEO friends. Like I jumped over the fence, do you still love me? And what I started to realize in that journey was, it’s one of the greatest gifts that you could ever have. I mean here you are, literally being able to make people’s dreams come true, right. It’s a very noble profession, if you think about it. And if you can approach it that way, which is that I was a thesis based investor, right. So I knew the things that I was looking for and then trying to find the people that fit into those things. I think about being an entrepreneur or creating those businesses, historically look at the growth in the U.S. what, close to 70% of job creation comes from small companies, right? Now the other side of this that I always try to tell everybody as being, now an angel investor, and I am still a venture partner at true venture series, it was my series a investor. What I try and tell everybody is 95% of the companies in the US aren’t venture backed. So there’s a lot of danger in believing, I think people need to understand not every company needs to take venture money. And, in fact, in some cases, taking venture money is not a good thing to do. That doesn’t mean you won’t run a successful company, right? But I do think small business creation, as a concept, is what excites me, because I think it’s where passion meets career meets wealth creation meets mission, social mission. I think it takes a special kind of person to not just start one but to work in one because it’s really about can you handle the uncertainty and the creation of this dream rather then knowing that, I’m terrible when it’s certain.
That’s a part of me that I’m not good in big companies. I’m really not very good at it. >> Talk to us about your networks and how they help you acquire resources, whether that’s talent or funding or endorsements. >> I would say that the biggest
advantage that I’ve had coming back onto this side has been exactly that.
That I’ve always had a great sort of network, but I think the more of a track record, the more of an invest, my investors I coinvested with, right? I had shortcuts, right. I tell people all the time that one thing you’re getting is capital. That’s important. But really what you should be looking for in your investors is a network. Right? Who do they know that could help you recruit in an unfair advantage without having to pay recruiting fees. Right? Who do they know that they can call up and say, can you talk to this person because there’s a distribution field to be done, what are the short cuts? And then I always talk about getting the band back together, right. That’s something that one of my cofounders and I worked together two careers ago.
We don’t have to think about finishing the sentences, the trust, the factor of understanding who we are as real people are there between each other. And that’s just an advantage that you can’t buy that. That just exists, that’s the shortcut of all these things. So, I think it is very important. I also think that it doesn’t actually correlate just the age. So, I want to be really careful and to have people think well, you had to do these things for 20 years before that happens. That’s not true at all. The Alumni Association of Wharton, where you went to business school, where you went to undergrad, where you grew up with people, where you worked with them in the past, these are all the skill of networking. It doesn’t just have to come as a function of doing it for a long time. It comes as a function of understanding that those relationships are really going to shortcut your success.
>> Acquiring customers is an awfully important part of your business. Can you tell us about how you assess the costs of doing so and how much of your resources you decide to devote to that? >> Yeah, it’s a great question. I think that
this notion of talking about OmniChannel creates a very interesting dilemma. because in our opinion the women primarily that we are attracting or any company that is knowing their customer really has to understand that acquisition has a lot of parts to it, a lot of distribution. So, for us it’s been a lot online, right, in new tactics like actually targeting on Facebook. One of the things that Facebook has been incredibly interesting about, and I’m going to share a funny story about how these channels can affect each other, is that you can build these look alike audiences. So if you effectively know who your customer is or your target is, Facebook can build these audiences of like-minded people to serve your ads to, right? So, it’s very targeted. So for us our resources that in the beginning the majority of our resources was paid acquisition. Literally we were paying per customer to get to effectively get to a place where we had enough of a nucleus that we could start leveraging social. And we could also start leveraging what I would call referral, which has become a huge part of our business. So every time that we ship a box, we actually ship these beautiful cards that are inspirational quotes. And on the back of them, they’re give this to a friend, and you know $15 off your first purchase at Madison Reed. It’s crazy how much a consumer who loves something, wants to share that message, right? And so for us, it’s been a combination of paid acquisition, lots of things, Pintrest, Facebook, Pandora, a lot of organic traffic. So we’ve worked really hard on keywords, on SEM, a lot on social, a lot of referral. And then in our business this notion of now the Sephora of the world, which is what we call non-paid acquisition, but there’s margin erosion, right, what you get in retail. But how do you look at that on a blended basis? And then the newest thing for Madison Reed has been TV commercials. So we are on national TV. It’s been a really interesting ride. It’s so fascinating to me that our acquisition on TV is almost equal to Facebook, which is really unheard of, which it really just validates for us that she’s watching TV. And in our case she buys 1.5 x what everybody else buys. So that’s really our core target. Now the interesting question that you asked is, how do you look about, at resources? We’re 18 months into this ride, and so we’re very early in being able to understand the correlation between those two things. But the more complex your business gets, this notion of multi-channel attribution becomes a very complex subject. And what I think nirvana is is just what I call effective CPA, right. Nirvana at the end of the day is, you have this many customers. You spent this much money. You divide that, and you come up with a CPA that’s highly profitable.
You’re in business. We aspire to get there. We’re getting better. But it was very much getting the flywheel going in the beginning. A hard part about e-commerce businesses is you can get upside down pretty quickly, right, because if the lifetime value isn’t there, right? If the cost of your customer acquisition doesn’t get payback because she doesn’t come back. Now, the good news in our business it’s a subscribable business which has already very, very, high lifetime value. So we have the ability to understand that. But, I would say for anybody thinking about this that the core issue in a business model is really this notion, especially of a consumer facing business, is what does it cost to get the right customer? We’ve had to make some decisions that have been really courageous, hard. We were acquiring some customers at one point for a single product. And even though the product was highly, really boosting our revenue, they weren’t coming back and buying because the product was lasting too long.
So we had to decide that that was the product that we were going to put in non-pay channels. So that we didn’t have to acquire a customer, but it was just some margin erosion. But it was basically, in some ways, we acquired a customer on somebody else’s distribution. And it took a while to get there, but for a month and a half, we took a revenue hit. And it took a lot of courage to both know those metrics but to make a decision. I just don’t believe that any short-term decision in a company is the right decision. I think juicing numbers, I think all those things come back in, they’re not the right decision. And this is another thing about entrepreneurs, is like you’re really playing for the equity, the value. You’re not playing for December or February or April. And I think that’s a mistake, a rookie mistake a lot of times that people make. Just because conventional wisdom is show that you grow really fast, jack up your valuation, get a whole bunch of money. The problem with that scenario is eventually, if your business isn’t profitable, you don’t really have a business. >> You talked about your networks coming from a series of career experiences, affiliations with prominent places like Wharton. Our audience may or may not have those same opportunities. What sorts of things would you recommend to our viewers about building their own networks? >> Yeah, it’s a great question. I think that everybody has a network.
I think it’s a matter of trying to figure out how to leverage your network, right? And so, believe it or not, as many of my network comes from my non-profit affiliations, right? So I think this notion of sort of giving back, this notion of being in your community actually is a great thing to do for the world. And I also think it has a lot of benefits. So join a board. You’d be surprised who else is on the board with you, right. You’d be surprised about the experiences of what you find out about meeting other donors. You’d be surprised about what you learn around the table. I think their community creates the ability for people to spend time together and learn, and I just think that everybody has a network. Right, it’s just a matter of trying to figure out what is your network and where can you put that to use. I also think things like in LinkedIn, Facebook, these things have created connections between people that don’t necessarily have to be something that happened because you actually met somebody face to face. But LinkedIn is an amazing thing. If you check out LinkedIn and you look at how many people are actually one step away from you. It’s amazing, the number of people that I get to reach out to me that I don’t know that are asking me for something is enormous. And the truth is every time somebody does that, I respond. I may respond by saying I’m swamped, I can’t do that. But do you want to send me an email and I’ll read it and tell you whether I think it’s crazy or not? Do you want me to send a business plan? You want me to make two intros, right? I actually think that if you do things respectfully, people will respond to that. >> Any other advice you might have for aspiring entrepreneurs? >> It’s the greatest thing that you could ever do, right? It’s just if you’re somebody who believes in the passion of those dreams,
how lucky are we to get to do that? I try to tell younger folks that work at Madison Reed, when they’ve just have a bad day, I’m like, wait wait, wait, whoa, whoa, whoa. Let’s come back to this. At some point of your life you’re going to look back and you’re going to say I created that, right? That my thumbprint is on that, that most people spend their whole life and never get that chance. So I consider it just an honor and something that I think if people have gratitude about that they’ll realize that we’re lucky.