Sam Parr interviews Chris Davi, CEO of Loot Crate — the geek-culture subscription box company that scaled to $170M in revenue by 2016 with only $25K in outside capital, before filing for Chapter 11 bankruptcy in 2019. Chris walks through the full arc: bootstrapping with YouTube influencers, raising a $33M Series A/debt combo, overexpanding into too many product lines simultaneously, and the hard lessons of debt covenants, cost restructuring, and coming out the other side. Raw, honest, and packed with DTC operational insight.
Speakers: Sam Parr (host, Exit Strategy), Chris Davi (CEO, Loot Crate)
Welcome and Loot Crate Overview [00:00:00]
Sam: All right, welcome to a new episode of the Exit Strategy podcast. We’re here with Chris Davi from Loot Crate. Chris, super excited to meet you — you and I have never chatted before, which rarely happens in this industry. Super excited to get to chat today.
Chris: Yeah, excited to be here. Looking forward to it. Super good to connect.
Sam: So Loot Crate is a subscription box of geeky products for $20 a month, or around that price point — is that a fair way to describe it, or is that completely off?
Chris: That’s kind of the origins of Loot Crate, and one of our products now. We’ve gotten into 25 different subscription lines, a bunch of different price points and offerings. But the original concept was “$20 Comic-Con in a box” — the best products across pop culture, $40 to $60 of value for that $20, in a really curated experience. That’s the origin, but it’s evolved quite a bit.
Sam: Is this one of those instances where the origin is still the bread and butter, like native deodorant — where the original product is the business? Or is it more like Amazon, where it’s like “okay, we sell books, boom, sell everything else”?
Chris: It’s by far the largest product line and really the holistic anything across gaming, film, entertainment, that genre.
Sam: Gotcha. And when did the business launch? When did you actually start it?
Founding Story and Startup Weekend [00:01:30]
Chris: We launched in 2012. We actually launched at a Startup Weekend in Los Angeles. I’d gone to a bunch of them for fun — there’s no better place to launch a new company than Startup Weekend.
Sam: What happened? Do you go on stage to pitch the business? What is a Startup Weekend?
Chris: It’s literally a two-day hackathon. I met my co-founder there. We had everything teed up, launched it, and the business took off kind of from day one. We were shipping a product 30 days later.
Sam: Did you come up with the concept during the hackathon, or did you come in with the concept?
Chris: I came in with the concept.
Sam: Okay. So you’re watching — by 2016 you’re doing a hundred million dollars in revenue. Actually, you’re doing a hundred and seventy million in revenue in 2016, yeah? You’re number one on the list of fastest-growing e-commerce companies by Inc. I read that in 2014 you had two hundred thousand subscribers, and by 2016 you’d tripled that to six hundred thousand. So tell me how the hell you built a business to do that.
Early Growth: YouTube Influencers and Organic Channels [00:03:00]
Chris: 2012 e-commerce is not what it is today. I was in e-commerce in 2012 — you were trying to buy Facebook likes, which meant nothing when you posted on your page. Today, if you do that, zero people respond. So how do you build a business? We primarily didn’t do any of the traditional paid Facebook until 2014, really on the ad side. Our largest channel was Influenster and, really, all the new YouTube celebrity folks coming up.
My brother had been early to Maker Studio and launched a channel doing video and sketch comedy. My co-founder Matt had worked with and managed a lot of those guys. So immediately — you know, that first weekend — we’re already pulling in some of these large creators with big followings. We were closely integrated with them. Then we scaled up.
Any paid spend on Facebook for the first two years was on building our pages — getting likes and all of that. And then Facebook was like, none of that anymore.
Sam: So in 2012, you’re getting YouTube influencers to talk about the product?
Chris: Yeah, exactly. Traditional performance/affiliate deals, and we gave equity to some of the larger ones that we wanted to be part of the business long-term. The product was super compelling and shareable for that audience, so we were distributing product, they were opening each month and sharing it with all of their subscribers.
Sam: It’s crazy how much authenticity still gets through with paid influencers. Somehow you still can’t fake it.
Chris: As a marketer, you don’t want to admit it — sometimes you’re optimistic that the less authentic, more scalable approach is going to work, but it never does.
Sam: Yeah. I mean, I’m watching Game of Thrones and I know all of these guys are acting, there’s no authenticity — and yet I’m so engaged. But when an influencer is clearly reading a script for a product they’re not excited about, it’s so clear. I don’t know if they’re just not as good actors, or if human beings have a built-in BS detector.
Chris: I think the influencers — they’re the ultimate entrepreneurs. These guys had no startup capital and built an audience of millions, so their currency has always been being authentic with that fanbase. What we found over time was they were never willing to sacrifice that genuine relationship with their viewers on behalf of some brand who’s going to come and go.
Sam: It makes the unit work really well when they do authentic integrations, because their main currency is being trusted by their fan base. Are you still working with any of the influencers you started with in 2012, like has anyone lasted eight years?
Chris: Yes. I mean, a lot of those folks have shifted their approach — some people are Twitch exclusive now, some people have moved on. But yeah, we’re still working with folks from that era.
Pay-for-Performance vs. Flat Fee Deals [00:07:00]
Sam: When I was running Native, it was really difficult to get influencers to do pay-for-performance. They were like, “No, you need to give us X amount of cash before we do this, and we don’t care how many sales we get.” That was true for maybe ninety percent of the cases. Back in 2012 to 2014, were people still doing pay-for-performance?
Chris: Totally. And there was a mix — there were now professional ad sales teams coming out of big media companies managing these guys, charging massive amounts that weren’t economic. But when you’re a brand they like to work with, we’d work with them directly.
We’ve done both. We’d spent on everything from PewDiePie — who’s number one — down. We had five or six hundred active influencers, so we had really great data on view-through, click-through, and conversion rates. So even if people wanted flat-fee payments, you could calculate what the equivalent would be. Just a disciplined approach.
Sam: How many people does it take on your team to manage five or six hundred influencers?
Chris: At the peak — which was around 2016-2017 — it was five people managing five hundred.
Sam: Five people managing five hundred influencers?
Chris: Yeah. Some of it’s high touch, some of it’s low touch. We used basic CRM to communicate, there’s a lot of automation, and we tried to make the deals simple enough that it wasn’t taking an hour a day per influencer. But yeah, these are folks that we wanted to make sure had people available to talk to.
Sam: What were the types of offers that worked with influencers?
Chris: Pretty basic — they’d have a discount code for their audience, and really the unboxing and showing the product was always the winning approach. Doing a little pre-roll or mid-roll ad doesn’t work nearly as well. Same thing with podcasts, which I think is a very similar marketing medium. Having somebody open the box, talk about the products, be genuinely excited — that always worked best for us.
Fundraising: $25K Seed to $33M Series A [00:10:30]
Sam: So 2014, two hundred thousand subscribers. 2016, six hundred thousand subscribers. At what point do you fundraise?
Chris: We took a really small seed check — $25K — right when we launched. Then we didn’t raise again until we were at a hundred and fifty million dollar run rate. So we bootstrapped through that whole period until 2016.
Sam: Wait — you took a small seed check of twenty-five thousand dollars and didn’t raise again until the Series A in 2016?
Chris: Yeah. Twenty-five K seed check right when we launched, with a couple of guys out of LA — Nick Groff and Dave Waxman — and then didn’t raise again until the Series A in 2016.
Sam: So you must have been profitable. There’s no way you just printed $25,000 over four years.
Chris: We were operating essentially at and just below breakeven, so we were reinvesting everything.
Sam: How many people on the team before you raised that Series A?
Chris: Probably 60 to 70 folks at that point.
Sam: Tell me what’s going on in your head. When Native was doing well, I was like, “This can’t be possible — I can’t believe we didn’t have to raise more money to build such a big business.” But I also felt like everything was held together with duct tape. I was like, I don’t know when the water is going to start leaking on this ship. What’s going on in your head when you’re doing a hundred million dollars in revenue, you’ve raised $25,000, and you’re not a household name like Casper mattresses?
Chris: I think we were just doing the right things and marketing to our audience, which is a different segment. We’re a physical distribution business, and there’s crazy chaos every day. We were 100% direct-to-consumer, so we controlled the whole funnel. As long as we had scaled up leadership in each area, things were working. We controlled fulfillment. We were working primarily with third-party manufacturers on products.
You just got used to the craziness, month to month. But yeah, a lot of it was just heads down — if there’s a problem, solve it, and then scale up capabilities across all those areas.
Sam: For me, I felt both terrified and invincible at the same time, which is a really weird dichotomy. Like I feel like nothing can ruin this, but I also feel like everything is going to ruin this. Did you have that feeling?
Chris: That feeling is there depending on when things are going really well versus when they’re not. In rapid growth mode, a lot of things are going well, but behind that there’s all the things you’re trying to keep moving forward. We had port strikes, product recalls, all kinds of crazy problems that feel very existential in the moment and that you try to have some perspective on after the fact. Your cortisol levels spike.
You know, when you’re growing up and you see something on the news — like a port strike — you’re like, “Whatever.” Now all of a sudden you’re like, “You need to get back to work, I need to ship this product.”
Licensing and Exclusive Products [00:14:30]
Sam: So you had exclusive Star Wars boxes, Halo boxes — you were doing licensing and IP. Tell me how that worked.
Chris: Initially we were working primarily with third-party manufacturers, then we scaled up our own internal product capabilities later. Basically we were going out and finding the coolest products — things no one knows about — and then working with two hundred-plus suppliers to create something each month. Each box had four or five items. We could buy anything across the entire licensed product landscape: books, apparel, collectibles — I even shipped some DVDs when that still made sense.
Sam: And you ultimately got to exclusive products?
Chris: Very early. We were working with third parties to produce exclusive products for us, which is a big part of the licensed product space — they’ll do an exclusive variant. So we’d work with companies to produce exclusive products. A collectible something-or-other, a variant that only shows up in the Loot Crate box.
Sam: Did you have to go to Lucasfilm to get that exclusivity, or did you just go to a third-party manufacturer who already had those licenses?
Chris: That was kind of Phase Two for us — where we actually started taking direct licenses ourselves. At the beginning, we’d find somebody who already had that license and work with them on a product. Then over time we got to a big enough scale where we started bringing more of that in-house directly.
Sam: Okay, let’s fast-forward to 2016. You raise a Series A. Eighteen million dollars, led by Upfront Ventures?
Chris: Yeah.
Sam: And the partner is Greg Bettinelli?
Chris: That’s right.
Sam: And I read that you also have Robert Downey Jr. in the round?
Chris: His venture arm came in and often co-invests with Upfront. Yeah, those guys were great.
Sam: How many people put money into the eighteen million dollars?
Chris: Upfront was a large check. I think there were five or six other investors alongside them.
Sam: And I read that after this round of capital, you and your co-founder still had a large chunk of the shares. Is that right?
Chris: Yeah. Me, my co-founder, and the company equity — because we hadn’t really raised before, so we still had a large portion of the company.
Why They Finally Raised and How They Spent It [00:18:00]
Sam: Tell me what made you raise. You went from zero to a hundred and sixty million dollars in revenue in four years — which is insane, especially those four years — and you did it with $25,000. What ultimately makes you raise money?
Chris: We spent a lot of time keeping very disciplined focus on that single Loot Crate product for the first three and a half years, and really refined the model. We did a ton of user testing and the actual product experience got dramatically better. We got to a point where we needed to start expanding out into different fan verticals. We also wanted to start bringing licensing in-house, which comes with a lot of upfront commitments and guarantees — a lot more upfront investment.
We had Major League Baseball and the NBA lined up to launch a sports vertical. We had one product engine that got us to two hundred thousand subs, and we were trying to add a lot more complexity to the model. We needed to build data science, a design team, a lot more in-house product development folks.
Sam: When you had 600,000 subscribers, how many engineers did you have?
Chris: Seven. And up through two hundred thousand we were just leveraging a lot of existing off-the-shelf software. That’s a good lesson for a lot of DTC folks — especially with what Shopify is today versus what it was then — you really can get to a pretty massive scale before you need to invest a lot in custom development.
So when we raised, the pitch was: there’s a $260 billion licensed consumer products market, there’s a lot of room to grow, and if we’re going to do that we need more capital to invest in that growth.
Sam: And you weren’t on Shopify back then?
Chris: No, we were using Recurly, Chargify, and a bunch of these enterprise software packages cobbled together.
Sam: Why eighteen million? A hundred and seventy million dollar revenue business can raise way more than that. Why not raise more?
Chris: Actually it was not an easy time to raise. If you remember 2015 to 2016, there were challenges in China, a bunch of large e-commerce companies had stumbled, Fab had had some challenges. So it actually was not a particularly easy time for e-commerce raises. And we raised eighteen and a half of equity and fifteen of debt at the same time, so the total at the Series A was around thirty-three million in a combination of debt and equity.
Sam: That’s crazy how quickly people forget. By 2018 everybody was back writing huge checks to every single DTC business, over-capitalizing them. These cycles are like — I’ve got milk in my fridge that’s older than the memory of what happened 24 months ago.
Things Start Going Wrong [00:22:00]
Sam: All right. So you’ve raised around thirty million dollars. And then business gets much tougher?
Chris: Yeah. I think the core issue is that we were raising to launch and expand both the team internally and the product offerings, all at the same time. Big lesson: execution risk at scale becomes much more real. We had a lot of concurrent bets out that were straining the business.
When we raised, we definitely ramped up burn, ramped up marketing spend. I think we went from a couple of product lines to a dozen different subscription lines very quickly. So we had challenges around inventory and forecasting. We were assuming our core business could continue to grow exponentially at the same time as we were marketing other product lines — that didn’t work as well.
We built out brand teams and distributed P&L responsibilities to folks who hadn’t had to do it at scale before. There was margin compression. All these little things chipped away. And on top of that, we were scaling OpEx and team size more quickly than the business was growing. So we burned through cash too quickly and had to go into a pivot mode — from a growth orientation to an efficiency and profitability orientation. Plus we had a large outstanding debt facility, which creates a whole other layer of complexity.
Sam: Let’s start with just the mental shift from no burn to burning money. I was constantly worried about running out of money. When we had P&G’s backing, it was hard for me to mentally shift to the phase where I could be like, “We can afford to make a big mistake now.” As a result, I didn’t take advantage of that balance sheet. Was it difficult for you to make that mental shift?
Chris: I think you’re tracking the basic operating metrics — CAC, LTV ratio, those things — so you can feel good about the investments you’re making. When the burn is there, I think it’s just the complexity of operating at a larger scale. We had 300 full-time employees and another 250 temp warehouse folks at that point. We also did our own fulfillment — a hundred thousand square feet in LA. And it’s a bigger ship to turn.
I think the challenge was being in multiple modes at once. Growth-lean. Efficiency. Cost-cutting. It’s hard to be in all those mindsets at the same time. And as leaders, as you scale, you’re handing off responsibilities — you’re choosing where you’re focusing, and there’s just a lot more to manage.
Marketing Spend at Peak (2016-2018) [00:27:30]
Sam: Where are you spending marketing dollars in 2016 to 2018 trying to grow?
Chris: We had a big belief in organic channels, driven by my co-founder Matt. We had social channels for a lot of our different subscription lines, and we had something like 30 to 40 thousand pieces of organic content created by our community. We had a whole engine around working with the community and reinforcing that.
Then we had a big investment on the influencer side still. We were spending a large amount on paid Facebook — north of a million a month at points. We were doing direct response television. Big podcast investment. We’d done probably 70 different conventions. For the first couple of years we actually had a modified school bus we’d drive around to be our booth at conventions.
And then tons of co-marketing. We were working with Marvel — if we had a Marvel crate, we’d be working with Marvel’s social team to post content, and any manufacturers or suppliers in the box that month would be co-marketing with us. So we had a whole set of co-marketing and partnership channels as well.
The thinking was: what are the proprietary marketing streams we can own? We didn’t want to just be bidding against everybody on Facebook or Google.
Sam: And in 2017, do you grow beyond your 2016 numbers?
Chris: No, that’s when we started to pull back. 2016 was the peak.
Licensing Rates and the Margin Math [00:30:00]
Sam: When you’re working with Marvel — working on exclusive products — does the licensing make up a significant part of your cost of goods?
Chris: It varies, but yeah, the average licensing rates are 10 to 15% on cost of goods, so it ends up being material to margin.
Sam: Everyone’s always curious — how much of the money for a plushie doll goes to Lucasfilm versus the manufacturer?
Chris: Ten to fifteen percent across the board. If you’re Star Wars, it’s sometimes 18 to 20%, but yeah, that’s the range.
What Actually Went Wrong [00:31:00]
Sam: It sounds like there isn’t one huge mistake — it’s a bunch of little nicks. You’re expanding channels, expanding the product offering, distributing P&L responsibility from yourself to other managers, and all of that chips away at the growth trajectory you want to be on.
Chris: Totally. And once you have capital partners in the business, there’s a lot of alignment needed to get things done. And especially with debt — if you’re missing your covenants, you’re in default. Debt has very different dynamics than equity. We were dealing with a lot of complexity on that side of the business that was definitely impacting focus. And we just had to cut back costs to get to a sustainable level.
Sam: Was CAC going up a lot at this time? Was this a marketing spend problem, or a structural business problem?
Chris: CAC had been fairly stable. There were definitely increasing costs in channels like Facebook that everyone was seeing as more dollars moved there. But this was more of a structural business issue.
The Debt Situation [00:33:00]
Sam: Tell me about the dynamics with debt. Equity sort of goes along for the ride and gets paid when you get paid. With debt, you’ve got not only monthly payments, but covenants — you have to hit certain metrics, otherwise you’re in default. Were the lenders constantly calling you? Were they like, “Hey, you’re not hitting what you said you would”?
Chris: It doesn’t get to that crisis level quickly. Folks are trying to work through “what’s the plan?” We worked through it for quite a while and ended up refinancing in 2018. A lot of it is just trying to align — we were looking at bringing in new capital at the same time as we were cutting costs, trying to achieve profitability. So we’re out trying to raise equity with top-line not growing the way it had been.
What debt does is add more complexity to the capital structure. There can be more misalignment in near-term and medium-term objectives. There’s a learning curve in figuring out how to manage those aspects.
Sam: It sounds like it took up all your mental energy.
Chris: Yeah. For probably two years it was about 75% of my time — managing all the complexity surrounding it.
Sam: Seventy-five percent is an insane amount of time.
Chris: It’s insane. But at that point it’s the reality, and it’s the most important thing I could be doing. We had a great team of operators in place, but yeah. The lesson to a lot of folks — and something I’ve become a lot more conscious of when advising people — is margin of safety and risk management. A lot of us who dive headfirst into these businesses are pro-risk. Just give yourself a lot of margin for error, because if you don’t, you end up spending an enormous amount of time on things that aren’t driving customer value, aren’t the core drivers of growth.
Inventory, Cash, and What Really Controls DTC [00:37:30]
Sam: When Native first raised capital — fifty thousand dollars in the first three or four months — my brother ran a mobile gaming company that licensed a lot of IP. I was like, “We’ve raised $50,000.” He’s like, “I would never write you that check.” I said, “Why not?” He said, “Fifty thousand dollars, you get one swing at the bat. If you miss, you’re out of money and the business is over. With $300,000, you can learn from that mistake and swing again.” Did you deal with similar thinking early on?
Chris: Totally. And I think if you look at the cash as “this might be the last cash I ever get,” you think very differently about where you put money.
For us, we had just-in-time inventory. If you bought something on Thursday, we would actually make the next run on Friday and ship it to you Monday or Tuesday. So our number one need for a really long time was customer service — because people would be like, “I ordered this, where is it?” Which is completely fair. But we were like, this is the only way we can afford to grow this business. If we start putting 40K of that 50K into inventory, the other 10K is barely going to last three days.
Chris: Not having excess inventory lets you be a better DTC business. You can be truly customer-centric, work on the product, do all the things you want to do. If you have three months of product sitting in your warehouse, you start having to discount it to ship it out, you don’t want any of it sitting around. Tight inventory management lets you stay customer-centric.
Sam: As soon as we expanded into brick-and-mortar stores, it was a revolutionary change in the amount of inventory we had to hold. We went from holding six to seven figures of inventory to holding eight figures. The first PO from a big retailer might be three million dollars, so you better have three million dollars of inventory in your warehouse. That was like, how am I supposed to have this much inventory? And right now, all the forecasting and demand planning is so much harder in retail than DTC — retailers give you their forecast, and you don’t believe it, and they’re like, “Don’t worry about it.”
Chris: Hundred percent. Retailers sometimes don’t even know what’s going on in their own stores.
Handling Excess Inventory [00:41:30]
Sam: What did you do with excess inventory in 2016-2017?
Chris: Each box was essentially exclusive — we weren’t able to just resell them directly. So we spun up a bigger e-com business for customers, where we’d wait 90 to 120 days and give customers access to products through that channel. But in general, the better experience is for the product to be gone when it’s gone. You’ve got to be creative.
Peak Burn and the Decision to File [00:43:00]
Sam: In 2016-2017, what’s the peak burn, and what happens at the end?
Chris: The creditors at some point all realized we needed to get the business restructured. Raising a Series B was going to be challenging given the changes we had to make to get to profitability. So we cut — from the peak, we were around six million a month in monthly OpEx, and by the time we filed in 2019 we’d cut down to about a million and a half. Massive restructuring. We brought in some really great restructuring advisors to help think through the hard decisions.
What I learned through this is: you can do a lot more than you think you can. And giving yourself that flexibility earlier — if we had done that sooner, we would have had a lot more room to maneuver.
Sam: If you could redo it, you’d start cutting OpEx significantly earlier?
Chris: Yeah. It’s just very difficult to be in a growth mindset and a cost rationalization mindset at the same time. We were trying to do that dance for a long time, when I think a healthy dose of pain upfront gets you back to that growth mindset faster and keeps everyone aligned.
What They Cut to Go from $6M to $1.5M Monthly OpEx [00:46:00]
Sam: Walk me through some of the actual cuts. How do you cut four and a half million dollars a month out of OpEx?
Chris: We moved to a 3PL in 2019 instead of running our own fulfillment. We built out a much bigger team in the Philippines on the customer support side — we were getting 350,000 tickets a month. We kept our core team in the US and then had a team there as well.
We went back and talked to every enterprise software vendor and really squeezed prices down, because those can inflate quickly. You realize you have 150 users of something that only 20 people are actually using. Across the board — we had a great head of finance who helped lead all that — everything was on the table. Down to the line item, everything was questioned, and we pushed and cut.
Sam: How long does it take to go from six to one and a half million?
Chris: About two years.
Chapter 11 Bankruptcy [00:48:30]
Sam: And then you file for bankruptcy reorganization. Is that correct?
Chris: Yes. Chapter 11, in August 2019.
Sam: I honestly think there are going to be a lot of companies facing that as a result of COVID, as a result of DTC financing drying up, as a result of people focusing on profitability. Tell me what that process entailed. My assumption is: equity shareholders are wiped out, debt holders become the equity holders, and they put in more to recapitalize.
Chris: That high-level overview is pretty accurate. Chapter 11 is where you’re restructuring and trying to figure out the best way to maximize value to creditors. You have trade creditors, senior lenders, subordinate lenders. For us, by 2018 we were spending more money on legal and professional fees than on sales and marketing. You get to a point where you just can’t grow and muscle your way through it. Chapter 11 restructuring is the right approach there.
We went through that in August, and as part of it went through an auction for the business. The largest creditor bid and acquired the business through that process. It was fairly quick — the acquisition happened in October. Lots of other folks looked at it, but the way credit bidding works, it’s primarily the large creditors that have the best shot at the deal.
The Delaware Court is actually pretty supportive of employees and of keeping the business up and running. Their goal is really to facilitate a fair process and keep the business operating. From my expectations of the process to how it actually played out, it was really smooth. The business is growing again. It was obviously disruptive, but it’s set up in a way that keeps things from falling apart while you’re going through the restructuring.
Sam: Do you still spend 75% of your time on cap table and lender management after you come out the other side?
Chris: No. That was done when the business came out of the acquisition process in October. Since then it’s really been about rebuilding customer trust and getting products out. The last year before bankruptcy, we were getting constrained financially, and there started to be some delays. The whole time through the whole process we tried to make sure there wasn’t a big impact on the customer experience, but that last six months was straining.
Debtor-in-Possession Financing Explained [00:53:00]
Sam: Just so people understand — DIP financing, debtor-in-possession financing, is where a lender funds you to continue running the business through bankruptcy. As that happens, they get a first lien position because they’re basically saying, “This is post-bankruptcy, we’re giving you money to continue.” How much DIP financing did you get?
Chris: I think it was publicly a ten million dollar facility. That came in and allowed us to handle a big backlog of things we needed to deal with.
Cap Table Post-Bankruptcy [00:54:00]
Sam: What does the cap table look like post-bankruptcy? You had Upfront, Robert Downey Jr., fifteen million in debt — all of that is basically wiped off the cap table, and whoever was your largest lender and put in more DIP financing is now your largest equity holder?
Chris: Yeah. The group that did the acquisition — it’s basically a reset of the entity. There’s the old company and the new company, and everything transitions to the new company.
Sam: How do you remain incentivized? Like, you were the CEO of the old company — do they negotiate with you to give you equity in the new entity?
Chris: In a lot of these cases they want continuity in leadership. Most of the folks at the company today are folks who were there before the bankruptcy. My goal has really been to make the transition as effective as possible. I care a lot about the brand and want it to survive and be strong. We have a big chunk of the company in design and product development, and people want to be part of a positive story tied to the products we put out in the world.
The Emotional Side of Building Something for 8 Years [00:56:30]
Sam: You’ve been working on the business for eight years. I can imagine there’s an incredible amount of personal sweat, blood, and tears built into it. I don’t even work at Native today and I still think about it on a daily basis. I’ll tweet about it and someone will tweet me back, “I’m trying it” — and I’m like, I have no financial interest in this and there’s nothing I can do about it either. But there’s a certain loyalty to the brand.
Chris: Totally. The customers that are still with us from early on — there’s just a lot that you want to see go well, and you want it to be something that people love.
What’s Working Today [00:58:00]
Sam: What is working for the brand today? You must have cut back significantly and retooled marketing. Is it still a million dollars a month on Facebook?
Chris: No, not at all. A lot of the same traditional DTC channels are still working well. The dynamics shift depending on what’s going on. On Facebook, for example, the last 60 days costs have come down, and in general it’s manageable. For our product, it’s not a consumable that you need — it’s something that you want. So having trusted brands and partners — influencers, things like that — tell you that this is something you should have is still a great channel.
We’re not doing any of the higher-cost channels like remnant television anymore. We’re focused on our most efficient channels and leaning into those and being disciplined.
The actual underlying market dynamics that made this work well haven’t really shifted throughout the eight years. There’s a million different Marvel T-shirts on Amazon.com. Our core demo is not going to Target to buy a Marvel t-shirt — that curated, collectible consumer products experience is still there. Once it was liberated from a lot of the corporate issues, you know, it’s back.
Sam: So it sounds like a major shift has been from being overly optimistic — “we think we can sell 10,000 of these, let’s make 10,000” — to actually pre-selling and validating demand before you make the product?
Chris: A hundred percent. We have something called Loot Launcher, which is essentially a crowdfunding model — like Kickstarter in a way. We pre-sell and if we hit the target, we go make the product. We can do more partnerships, try more things, be more experimental. The pre-order model works really well.
Chris: The demand curves are all fairly predictable, but they’re all different by product line. When you’re running 25 or 30 different subscription lines, even with models that work well, the demand planning is just a lot. Asking yourself to execute perfectly every month is challenging. Building in some predictability and flexibility has been super helpful.
The Lesson: Trust Your Gut Less at Scale [01:02:00]
Sam: That’s mind-blowing because it’s almost the exact opposite of what you’d expect. Early on you had no formal discipline — basically you’re operating on gut instinct and you’re scaling, and you think, “Now I’ve been in this for four or five years, we’re at a hundred million dollar run rate, I can trust my gut even more.” But actually you have to trust your gut even less when you get that big, because the decisions you make are so much more consequential.
Chris: Yeah. We have a lot more data today than we did early on, and not to use that data would be foolish. Our whole growth model early on was Paul Graham’s “growth is the one metric that matters” — we started at 20% month-over-month and that essentially worked for three and a half years when we were focused on a single product. It’s a different world when you have products in different stages of the life cycle, totally different offerings and price points.
Sam: I think you’re right that you have to trust your gut less at scale. I should have done more of that at Native. I should have been like, “If I make a decision and it goes wrong, now we’ve ordered an extra 250,000 products — that’s a $500,000 mistake, and that’s a much larger mistake than it would have been three years ago.”
Inventory Lessons for DTC Companies [01:05:00]
Chris: One thing I’d say for DTC brands scaling up is to expense your excess inventory as cost of goods in the month — don’t let it sit on your balance sheet looking like an asset. I’ve seen a lot of folks where if you’re only looking at their P&L it looks great, but the reality is they’ve got excess inventory. Maybe 10% of gross margin should just be written down as inventory costs. There are things you can do to keep yourself from convincing yourself the model is working better than it is. More discipline around forecasting, demand planning, and inventory.
What He’d Do Differently [01:07:00]
Sam: What do you wish you had done differently? Do you wish you had never taken debt? Do you wish you’d been more focused on fewer product lines earlier? Or do you say, “Hey, we learned a ton and we did what was right”?
Chris: You learn a lot. And during the learnings you have to make sure that’s a positive piece of it, because the pain and agony is going to come and you’ve got to find some healthy way to reframe it. There are a ton of things I would have done differently.
We got so used to hyper growth that the route we were taking — that confidence to solve hard problems on the fly — we just didn’t need to think about risk management. I’ve become a much better communicator with boards, lenders, and equity holders. That structure that sits on top of the business really needs to be managed the right way. I could have done better there.
And it just goes back to risk management. Making hard decisions earlier, faster, and bigger than you’d like to.
Sam: Tell me about that.
Chris: We had a CEO come in who had done like twenty turnarounds to advise us. We’re talking about cuts, and I said, “Have you ever cut too deep?” He said, “I always cut too deep, and I never regret it.” Because you can always build back up, and you eliminate existential risk. There’s a lot of lessons there for companies going through this period. The world has changed. Know that, and make big decisive action. More than you think you need to. It gives you the flexibility to capitalize when opportunities come, and there are going to be a lot of incumbents that are too distracted and debt-laden to act.
Sam: Do you think he was right — you should cut too deep and not regret it?
Chris: In the phase we were in, much earlier in our lifecycle, it was the right advice. There’s obviously a point where customer experience is number one, and the cuts have to be structured to maximize that. You can’t have 20,000 outstanding customer support tickets without enough people to respond. You can’t compromise product quality. Outside of those core areas, though — everything else has to fit around that. Know what those core areas are, and cut everything else.
Sam’s Closing Reflection [01:12:30]
Sam: This is my favorite interview I’ve ever done. Not only did you scale to $170M in revenue on $25,000 in seed capital — which is literally nothing compared to Dollar Shave Club or Harry’s — but you went through something that I think a lot of people haven’t. Myself included, I had hard days at work, but my hard day at work was a good day for you. I never went through a recession. In many ways I was a real coward about the business — I said “we’re going to raise money” and we hired very slowly because I thought we were going to run out of money every day.
For us, we didn’t face those kinds of problems — but the fact that you went through those hard days and came out the other end saying “we’re going to build another sustainable business” requires an incredible amount of tenacity and courage. It’s not easy to stand in front of a bunch of employees and say, “We’re not going to keep this fulfillment center, we’re outsourcing that, we’re outsourcing some of our customer service.” It’s not easy to get up day after day for two years and make those decisions, and then come out the other side and say, “Now we’re going to start building again.” That’s like a GE-level restructuring. It’s really spectacular.
Chris: I really appreciate that. The benefit of scaling is that once we got to a certain point, we brought in a lot of seasoned folks who had seen this before. And they were like, “These decisions aren’t that hard — you’re overthinking. We have to do this.” Getting better at finding great advisors, making yourself less the ultimate decision maker, having people who know certain parts of the business better than you help you make the really hard choices — that’s been huge for me.
And those advisors on the restructuring and debt side — there’s a whole separate universe that most of us never interact with. Just the same way that on the growth and marketing side we were scaling up and I was hitting everybody up to learn as much as I could. Same general principle. They’re out there, they’re ready to help.
Final Questions: Favorite Video Game and Favorite Box [01:17:00]
Sam: Okay, two final questions. One: what is your favorite video game? And two: what is your favorite Loot Crate box?
Chris: So I think this is the moment for VR to really take off. There’s a game called Pistol Whip on Oculus that is amazing. Your arms are dead within 10 minutes because you’re running around — it’s like a first-person shooter where you’re pistol-whipping and shooting. If you don’t have a VR headset, this is the time. Oculus is the one.
Sam: How long have you had yours?
Chris: About a year. We had them in the office for a while. There’s also Beat Saber — there are some amazing games that more casual gamers can get really into. But yeah, Pistol Whip is amazing.
Sam: And your favorite box?
Chris: One of my favorites — we have themed names for each one — had a one-fifth scale replica hover board. Like Doc Brown’s, from Back to the Future. Plus a collectible figure, and it had the message “Be excellent to each other” on it, which is the best message of all time. Just held everything together perfectly. I think that was from 2015.
Sam: Always fascinating. Chris, this is amazing. Thanks so much for sharing your journey. Very few people would be as honest and open as you’ve been. The tenacity and courage it took to go through this and build a successful business on the other end — that’s superhuman. I really appreciate you being here.
Chris: No, this is awesome. Thanks so much.