Jerry Hum | Hustle Con 2018

Alright. Hey everyone, I'm Jerry, CEO and co-founder of Touch of Modern, and I wanna talk to you guys about the decision between profitability and growth. This is one of those things that's often a trade-off that startups have to make because, you know, in the perfect world you can do both, but in reality, if you could do both, you would never tell anyone about it, and so we wouldn't be talking about it. So just some facts about Touch of Modern on the kind of, on the bird's-eye view. Founded in 2012, 16 million revenue, 16 million registered users, and we launch about 30 brands a day on our site because Really, we're all about discovery and we're gonna be showing something new every single day. Obviously, this is a great challenge to be kind of doing this on a day-to-day basis. And so we've grown to about $130 million in annual sales. And we got to a point where we had to decide whether or not to keep on this venture-funded growth path or make the pivot to profitability. And I'll talk to you about some of the decision points that we had to weigh in to make that decision. So some of the factors that are really important are the amount of money you've raised versus the annual revenue. And this is something that's often overlooked by young entrepreneurs because in Silicon Valley you go out there and you just wanna raise as much money as possible. Obviously that's good to give you a cushion 'cause you always need more than you think, but the bad thing is when you raise too much for the actual revenue that you're generating, it limits your options in terms of what you can do next. Because with raising money comes expectations from investors of how much you need to grow before the next round. Some of the things to consider also, the past valuations. Again, everyone wants to pump their valuation super high because it feels good, but again, limits your options for your next round as well, because obviously the next one needs to be multiples higher than that. And then for us, we were practically near EBITDA profitable. As a company, the way we run the company, we always kind of looked at it as swimming with one hand close enough to the edge of the pool where even though we're growing, we always knew that if we needed to become profitable, we could. Obviously, there's still some unknown of whether or not we could pull it off, but we had a pretty good idea that we could. And also, not our investors burned by ecommerce failures, but in general, a lot of folks in the space had become kind of jaded by ecommerce because of some of the other exits that happened in the recent years, right? Gilt, you know, a lot of investors lost money on that. Some made money, obviously. And likewise, the other companies that are near it. So what are some of the risks between deciding— What are some of the risks you have to consider when deciding between profitability and growth, right? When you decide to become profitable, obviously the company culture really changes. You start managing to a much smaller number, which is the money you actually bring in, versus the high-level number, which is just GMV, revenue, whatever it is for you guys. And then also, you start thinking about competitors who are pouring millions of dollars into acquiring possibly the same market that you are. If you're gonna decide to become profitable, you're not gonna be spending as much as they are, and you need to figure out what you're gonna do about that. So for us, we finally decided to shift from growth to profitability. This is about sometime mid-last year, and the reason we were able to do that is because we did really deep research and analysis about our most loyal customers. Because for us and for a lot of companies in Silicon Valley, the greatest cost is marketing and growth, right? And so if you're gonna pull back on that, what are you gonna do to make up that revenue? For us, we found that we had a really loyal user base that we can actually nurture and grow to offset the amount that we're pulling back. Here are some stats about what we found about our users, which is actually really unique for an e-commerce company. This chart shows anybody who's ever visited Touch of Modern, the site or the app, in 2012, and we found that 10% of those people actually come back every single day, which is really like gaming-level economics for a— or gaming-level metrics for an e-commerce site, right? And about 40% of that entire group actually come back at least once a week, which means they pretty much see every single thing that we put up at any given time. And 80% of anyone who's visited in 2017, not just purchased, but anyone who's ever visited, actually come back at least once a month. And no surprise, people who come back more often also more likely to purchase. So someone who comes back on a daily basis is about 10 times more likely to buy than somebody that only comes back once every 3 weeks. And this is a little bit also about the category preferences. So this is important because if we're gonna talk about How do we serve our best customers? We need to know how they're actually different than some of our less profitable customers. And what we found is that the category preferences are actually completely inverted from someone who— so for someone who visits every single day and purchases a lot, it's actually completely inverted from someone who doesn't visit at all and maybe purchases once a year or less. And this is really important for us because we found that, okay, well, we can't actually cut any category because people that are new actually want the things that our most loyal customers are not that interested in, right? And so if we just cut the categories that are not as popular with our most loyal customers, we lose a user acquisition channel for new users, right? And so we couldn't really cut that, but what we could do is really beef up on the things that the most loyal customers want. Just to give you an idea of, you know, the scale of the spectrum, about 80% of our revenue comes from the top 20% of customers. And so when we did this, there was— this is a little bit outdated from the first time I put this together, but we're now 10 months EBITDA profitable after having made that shift and focusing more on on the repeat customers and a little bit less on user acquisition. And so what are some of the key takeaways and how should you decide about becoming profitable versus sticking to growth? And there's a few things that you really need to factor in decision-making. The first one is understanding the market and what is actually more valuable at the given time. So your main responsibility as a CEO, as a founder, is to produce the most valuable company that you can possibly produce, right? And depending on investor sentiment, depending on what competitors are doing, or whatever market forces there are, at any given point, growth could be valued more or profitability could be valued more. And in the years prior to this decision that we've made, Growth was obviously, you know, in style. You know, the other companies were growing like crazy. But then when they started suddenly failing, investors suddenly got smart and said, you know what, maybe burning a ton of money just to grow the top-line revenue is not the smartest thing for this kind of company, right? Because ecommerce is not like a SaaS company. It's not super high margin and you can't just kind of make small tweaks and right the ship if you needed to become profitable. So they started looking at, you know, how do you actually become profitable, right? Because all these other companies that spent so much to grow couldn't do it. So that was something that factored into our decision-making, right? In general, what my philosophy and philosophy of our founders has always been is that growth for any given category comes in and out of style, but profitability is always cool. So it's also the harder thing to do. Another decision you have to think about is, do you actually have the levers or do you understand the levers that you can pull to achieve that desired result? And for some companies, it's easier to become profitable because you've been close or you really understand the metrics and what you can tweak to get there. Or it's easier just to raise money because, I don't know, you have the connections or you have an existing investor base that can introduce you to other investors who can get it done, right? Both of these carry their own execution risks because if you were a growth company and then you decide to become a profitable company and you can't get there, then you're neither profitable nor are you growing. And that is really the worst position to be in, obviously. And if you bet your chips on growing and raising money to grow and that doesn't happen, well, you also fall flat on your face. Face. And thirdly, and I think this is probably the one that is least talked about in the Valley, is that even though you're aligned with your investors because of the equity and all that, the way that you think about risk is also different than the way that your investors think about risk. And you should have a very honest conversation with your board and with your investors about that. And I think oftentimes when you're starting out, you think, oh, this is great. I'm putting in my time. The investors are putting the money, so the risk is really more on them. It's actually not, because you only have your given amount of time. The investors have a large portfolio. They have a lot of companies that they're betting on, right? You're just one of them. So they're always gonna ask you to shoot for the moon, because if you fail, you know, there's a bunch of other companies that might make it. For you, if you fail, that's your entire livelihood. That's all the years that you spent on this company, right? And so you're gonna be, a little bit more risk-averse when it comes down to making that decision. So, you know, talk to them and figure out what's really the best for both of you. Thank you.