Business Case Studies #1: Allbirds' Journey to IPO (Classic)

What's up, everyone? This is Alex Lieberman, co-founder and executive chairman of Morning Brew. Welcome back to Founders Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. This week on Founders Journal, we're doing things a little differently. We are dropping a miniseries full of case studies that lay out a number of lessons you can learn from successful businesses. That means instead of just one episode Monday, Wednesday, and Friday, This week, we're giving you two: a new show that you won't want to miss, plus a classic episode you maybe haven't heard before. In today's classic episode, originally released on September 3rd, 2021, I talk about lessons we can learn from Allbirds' IPO. Let's hop into it. So let's rewind to 2017. I'm working full-time on Morning Brew, and I get a text from my sister Sydney, who's three years younger than me. At the time, she was a junior at the University of Michigan, and I get a text where she basically said, there's this new pair of shoes that I had to get that was revolutionary, that her and her boyfriend at the time were obsessed with. I later found out that pair of shoes was the Allbirds Wool Runner, which is like the OG sustainable everyday shoe made from merino wool. I got the shoes for $95 per the recommendation of my sister. And I fell in love with them. They were incredibly comfortable. They were breathable. I didn't have to wear socks with them. And it was around that time that Morning Brew as a company was starting to source advertisers. And in the early days of the business, one of the ways that we always thought about what companies do we want to advertise in our newsletter was simply a question of what products do we love using in our everyday lives? And so given how much I love these new shoes that my sister had told me about, I felt obligated to reach out and try to get their marketing team to spend money advertising in Morning Brew's newsletters. And there's a few things I remember from this experience of reaching out to Allbirds' marketing team and subsequently actually convincing them to run ads in Morning Brew. The first thing I remember is that Allbirds did zero discounting or promo codes on their product. They were super strict about this. And I think this just speaks to the company's emphasis on quality and their belief that by being a direct-to-consumer brand, a brand that is vertically integrated from raw materials to end consumer, that they are able to give great prices to customers. And so they don't need to offer any discount if they're already giving best-in-class prices. The second and more interesting thing that I remember that I'm going to hit on later in this episode is the performance of Allbirds in Morning Brew's newsletter. Simply put, Allbirds was the best-performing partner in Morning Brew the entire year in the year in which they advertised. I'm pretty sure they got more than 4 times the average number of clicks that a normal partner would get in our newsletter. And there are a lot of potential reasons this happened. But I think honestly, the main reason is that this was just a function of the perception of Allbirds as a brand and just the zeitgeist around Allbirds, especially in 2017 and 2018, as the Wool Runner, which was their original shoe, basically became synonymous with like Silicon Valley tech professional wearing these shoes to the office. But beyond my experience, what I want to do is help tell the story of Allbirds and the lessons that we can all learn, irrespective of if we work in retail, lessons we can take to our own careers and our own businesses that we're building. So why am I telling this story today? Well, because the company, as of recording this episode, officially filed to go public on the Nasdaq under the ticker BIRD. So let me give you the backstory. It's 2016, and Tim Brown and Joey Zwillinga launched Allbirds in an effort to bring sustainability to the footwear industry. Tim Brown grew up in New Zealand, where he ultimately became a professional soccer player, and he was the captain of the New Zealand football team. Tim had this idea to make a super comfortable shoe made from merino wool, which was inspired by his interest in merino that came from the sheep in New Zealand. And he also had just this unique experience experience where he had made leather shoes for his friends in business school. Ultimately, Tim received a grant to create a wool sneaker. He received it from like the Merino Wool Trade Association in New Zealand, and he used that grant to launch the idea of Allbirds on Kickstarter, where he raised $119,000 in 5 days. After Kickstarter, Tim teamed up with Joey, who was a biotech engineer and a renewables expert, and they officially launched Allbirds March of 2016 with the introduction of their Wool Runner shoe, the shoe that my sister recommended to me back when she was in college at Michigan, the shoe that I had up until 3 days ago until my dog Rambo ate it to shreds. And that shoe cost $95, the same as what it originally was offered for when the product launched. And since launch, Allbirds has been on what I would call the venture capital and direct-to-consumer business flywheel that so many businesses in the space have followed. Casper raised $340 million before going public and went from a single mattress product to a sleep company, as they call it. Warby Parker, I would say the first direct-to-consumer brand to launch, I believe in 2010, raised $535 million and went from sunglass company to eye company. Allbirds has followed the exact same playbook. It raised $202 million, most recently raising a $100 million round from Franklin Templeton and other financial partners at a $1.7 billion valuation. And it's no longer just that tech bro-y shoe brand. Now, on top of the Wool Runners that made it relevant, Allbirds offers running shoes, slip-ons, boat shoes, high tops, waterproof shoes, socks, underwear, activewear, hoodies, and more. Now, I want to stop there because you have the background, but I want to share 2 major lessons that any business mind can learn from this classic direct-to-consumer playbook that Allbirds, Away Luggage, Casper, Warby, and so many others have deployed. The first is that this playbook, this playbook that became popular in the mid-2010s, it is proving to be potentially outdated and definitely challenging. Scaling a retail brand, no matter how vertically integrated it is, is just not the same as scaling a software brand. Marginal costs in retail are significant— the cost of the resources, the cost of production— whereas in software or SaaS, it's basically zero, right? In the software industry, you have high fixed costs for the hardware that is used to create the software, and then the marginal cost of distributing that software is effectively zero. That is why venture capitalists and public markets love SaaS companies so much. Also, in direct-to-consumer retail, you need to continue convincing customers to open their wallets, whereas in software, you're often dealing with semiannual or annual contracts that businesses are fronting the bill for rather than consumers. This is what's known as recurring revenue. And so while direct-to-consumer became the hot new thing for venture capitalists in, let's call it, 2015 to 2019, both VCs and direct-to-consumer founders have rethought if raising a boatload of capital is the right strategy. The first reason is, like I said, because scaling a direct-to-consumer brand is not easy. And is far harder than a software brand. The second reason is companies have looked at the price performance of Casper, which was considered one of the OG direct-to-consumer brands in the space alongside Warby Parker. And now they see Casper, which went public recently. The company is down 53% in its price per share since IPO. The third reason that direct-to-consumer founders are rethinking the playbook is that they're just seeing examples of really meaningful exits by companies that didn't raise a lot of venture money and just built at their own speed. You saw this with MVMT Watches, Schmidt's Naturals, Kettle and Fire Bone Broth. And so they're stopping and asking themselves, if we can build a massive company without getting on the venture flywheel, why should we get on it? The other lesson from this DTC playbook is the challenge really that any non-recurring, non-software business has, which is growing your customer base and growing the lifetime value of your existing customers. It happens to every company. It especially happens in D2C. At some point you saturate a market with one product. For Casper, it was their mattress. Allbirds, it was their wool runners. Away, it was their suitcase. For Morning Brew, it was our daily newsletter. In order to grow the lifetime value of a customer, you need to launch adjacent product lines that are complementary or serve the same psychographic or demographic of customer. But the risk here is that you run the chance that you dilute your brand and become a company that really doesn't mean anything to people or stand for anything because you've just justified launching new products and calling yourself a sleep company or an eye company. There's also never been more pressure to launch new products as today because the cost to acquire customers through paid marketing, Facebook ads, Instagram ads, Snapchat ads has risen significantly over the last several years. What that means is in order to justify paying more to acquire a customer, your customer needs to be worth more to you, especially if you're a direct-to-consumer brand that has gotten on this flywheel. You need to justify to your venture capitalists who have given you money that there is good reason for you to put more and more fuel on the fire of spending on paid marketing. So these are some of the challenges of the traditional DTC playbook that Allbirds has practiced itself. We're going to take a quick break here, and when we come back, we'll dig into what we can learn about what Allbirds has done well in their journey. Let's jump back in. Despite these challenges in the model, I think there are a lot of things that we should commend Allbirds for. Companies have tried to do this in the past. Allbirds is not the first brand to try to do good, but I believe that many companies have fallen flat. The number one example that comes to mind for me is TOMS. TOMS was given a lot of shit by customers for their method of buy one and give one because they did not think TOMS was being authentic in their mission of giving away free shoes. And I think Allbirds has done this by being both great storytellers of their brand and actually executing on what they say they're going to do. So since 2016, since the business was founded, they've shared 3 beliefs that guide their business. The first is that consumers recognize that climate change is an existential threat to the human race. The second is that consumers connect their purchase decisions with impact on the planet. And the third is that consumers don't want to compromise looking good, feeling good, and doing good. They should be able to have all 3. And from the way they've organized their business as a B Corp and filing for an IPO as a public benefit corporation, which is a very new way of doing things, to launching every additional product line with truly sustainable materials, to having a net carbon neutral supply chain. I believe Allbirds has walked the walk in a way where consumers have never called bullshit on how genuine they are in their goals to be sustainable. And we've seen that with their most recent product line launch in activewear. They've avoided using polyester since it's environmentally unfriendly. And instead have replaced it with eucalyptus tree fiber and merino wool. And I think this speaks to why Allbirds has achieved an NPS net promoter score of 86, which is super high basically in any industry. The company has always been higher than 83. And going back to the example I gave of Allbirds advertising in Morning Brew and getting 4 times more clicks than every other brand, I think this speaks to that. I think the association that customers or just people in general have with Allbirds is wildly positive. The other thing that I believe Allbirds has done so well is to prove that moving from direct-to-consumer and being 100% digital sales through their website to having a physical retail footprint actually makes sense. You know, I think what happened in this evolution of direct-to-consumer brands that initially we saw with Warby and with Casper is people started to become really skeptical as they saw Casper going into Walmart and as they saw Warby launching its own stores, people were just like, DTC brands are just becoming brick-and-mortar brands. But Allbirds has proved that it's actually valuable. The best example they actually gave in their S-1, which is the report that's filed when any company announces that they're going to go public, is their Boston Back Bay store. So Allbirds currently has 27 retail locations. They're planning on going to hundreds. And specifically their Boston Back Bay store not only paid back its investment, the investment of the store within 8 months of opening. But the residual effect they saw on their customer base in their digital sales was wild in the Boston DMA. So the Boston metro area, in the first 3 months of their Boston Back Bay store existing, Albert saw a 15% increase in web traffic, 83% increase in new customers, and a 77% increase in sales. And I think this completely shows the value of being truly multichannel. Another stat here from Allbirds is that as of June 30th, multichannel repeat customers, which represented 12% of all of Allbirds repeat customers, on average spent approximately 1.5 times more than any single-channel repeat customer. What that basically just means is people who ordered from Allbirds in multiple of their channels. So say in retail they ordered product and then on website they ordered product, they were on average spending 1.5 times more than any other repeat customer. So I could go on and on about Allbirds, and I think the jury is still out how the company will do post-IPO, if they'll perform like their predecessor Casper, or if the public market gods will grant them with a higher stock price post-IPO. They're still losing money. DTC hasn't been treated very well in the public markets, and it remains to be seen if they are going to grow internationally well since they're still mostly a domestic company. But on the flip side, Allbirds reaps the benefit of being a vertically integrated brand that gets to consistently learn from its customers to inform its product pipeline. And it owns the relationship with 2 million of them through email, which is only more important in the age of social media gatekeepers and the disappearance of the third-party cookie. But beyond these lessons from Allbirds that you can take with you into any business or career, Lessons around increasing product portfolio, being an authentic brand, the challenges of raising venture money. I also hope you just realize and see that any business, Allbirds to the bootstrapped pizzeria down your street, any business can be turned into a case study that has lessons you can pull into your own business and career. With that, I want to turn it to you. We have a ton of new listeners. Whether you're old or new, I want you to write in and I want us to chat. Send an email to alex@morningbrew.com or DM me on Twitter @businessbarista. Tell me a little bit about yourself, who you are, where you work, and why you decided to listen to Founders Journal. And finally, if you enjoyed the episode, please share it with a friend that you think would love to use Founders Journal as a tool for thinking better in order to build better. Finally, our show is produced and engineered by Dan Bauza. Our associate producer is Bella Hutchins. Brian Henry is our executive producer. Alan Haberchak is Morning Brew's director of audio, and I'm your host, Alex Lieberman. Thanks so much for listening, and I'll catch you next episode. Here's to the next 250.