Betting on the Lotus
Two years ago I left my company Staples to become a venture capitalist. Here's why it wasn't such a stretch for me to invest $18.8 million on a stylish little yoga-wear chain called Lululemon.
Venture capitalists like me invest in early-stage small businesses. We help entrepreneurs build them into big businesses. I identify with entrepreneurs because I've been in their shoes – I know what it's like to start a company. Over the years, I've been involved with other businesses that, like Staples, kind of changed their industries. For example, I've been on the PetSmart board of directors from the time it had just two stores in Arizona in the 1980s. Today, it's about a $5 billion company.
My philosophy in approaching a new company with potential is this: I've learned a lot of painful lessons along the way. Let me help you so you don't make the same mistakes I made. It's exciting to try to change an industry and make money at the same time. Even today, when I drive by a Staples or PetSmart in some other part of the world, I feel tremendous pride about how we've maybe changed that particular community and made it better.
Highland Capital had recruited me for years. They said that if I ever left Staples, I should come to Lexington and look for opportunities to invest in retail. I already knew I didn't want to do any more start-ups. I wanted something with a proven model, but that was raw and needed nurturing. Highland was a chance for me to reaffirm that I still enjoyed doing that. There were also some questions I needed to answer. In the early-to-mid-'80s, the venture capital community funded Staples, Office Depot, and God knows how many clones of those. It also backed PetSmart, Starbucks, Costco, Whole Foods, Sports Authority. Fast-forward to the late 1990s, and just one retail company came out of the venture capital community: Build-A-Bear Workshop. Was it because there weren't any opportunities? Or had the venture capitalists gotten too big for this retail stuff? I wanted to find out.
Anyway, that's the backdrop for the Lululemon story. When I arrived at Highland Capital in early 2005, my only staff member was Karen Graj-wer, a summer associate at the firm. We had an advantage, though: Highland had already identified yoga as a growth market. Of course, yoga is definitely not a fad; it's been around for centuries. But now, as America's population ages and there's more focus on wellness, yoga demographics are widening.
It didn't take long for something to happen. I got an e-mail from Jerry Gallagher, another venture capitalist. He did the PetSmart venture capital deal, which is how I got to know him. Jerry said, "I'd love to do a deal with you. I don't have anything going on right now other than this company called Lucy." It was a women's yoga-wear business based in Portland, Oregon. He asked me to look at it to see if I wanted to invest, so I got on a plane and went to a few stores.
When I go into a store, I look at how attractive it is, how it's laid out, whether it's different, how the customers react. I act like I'm buying something for my wife. "Gee, what do think of this? You're about her size." I play dumb. No one knows who I am.
At the same time, Sophie LaMontagne, an associate at Highland, said there was a company in Toronto called Lululemon. It was a lot like Lucy, she said. So I called Katherine Chapman, my partner in Toronto who runs Olly Shoes, the children's shoe company I founded. [Chapman and Stemberg also have a 2-year-old son together.] "Oh, yeah, Lululemon is great," she said. "I buy stuff there."
Then I was off to Toronto on a steamy Thursday afternoon in August. The city, same as Boston, clears out in the summer, so the streets were almost empty. I go into the store and it's like an Arab marketplace on a Saturday. There are people fighting for garments and a long line at the register, yet the service is pretty good. I'm going, "Wow!" And then I walk outside and notice it doesn't even say the name of the store on a sign, there's just a logo. And I go, "Wow!" again. I saw two more stores that day in Toronto, and it was the same thing. They were just as crowded.
I called Karen Grajwer back in Lexington and said, "Cold-call this company." She did and told them, "Tom Stemberg of Staples has joined us. We think we can help you guys grow." Eventually, she got through to Chip Wilson, Lululemon's founder. "You know, I've actually been trying to buy Stemberg's book," he said, referring to Staples for Success, the book we published on the 10th anniversary of Staples. It was basically a PR move – not many copies were sold. Karen thought fast and said, "I think Tom would be delighted to deliver you one in person. In fact, I think he might be in the area next week."
I rearranged my schedule and went to Vancouver. Chip showed me around his stores and explained his philosophy. We hit it off immediately. He sold only his stuff and it was brilliantly engineered. The fabric was distinctive, preshrunk and with flat seams so there was no chafing. I bought some more of his clothes for my partner Katherine. Chip had maybe 19 or 20 stores then, and they were profitable. At the time, he didn't have any outside investors. "How can I check you out?" he asked. I gave him the names of companies on whose boards I sat and the names of all the CEOs I've worked with. He found out that I'm not a guy who's just going to say, "Yes, Chip," and sit back and cheer. I can be demanding, but I'm fair. My job is to help you build a great company and I'm going to work my butt off to help you do that.
The deal happened way faster than any of us had imagined. In December '05, we invested $20 million Canadian [$18.8 million US]. Advent International – a private equity investment company based in Boston – put in $80 million. Chip retained the rest, 52 percent of the company.
The horizon we look at for staying invested in something like this is five years. I still spend a tremendous amount of time on Lululemon. But you never want to be running a company you've invested in. You just assemble a great leadership team. A small, largely Canadian private company is a whole different thing from a public company that's five times larger and operating in multiple countries. Fortunately, Chip Wilson knew that to take it to the next level he shouldn't be the CEO. Not every company founder understands that. He's still at the company, now as chairman of the board and chief product designer. Before we even encouraged him to step aside, he offered the CEO job to Bob Meers, the former president of Reebok, who was working with Advent. We helped Bob hire Mike Tattersfield as chief operating officer. We also helped him hire some other key executives. The idea is to grow as fast as you can without compromising the culture or the shopping experience. In this case, we're not trying to get the mass market – it's a narrow niche. The clothes are extremely high quality, but they're not cheap.
Don't think that there weren't things Chip wanted to do that we didn't agree with. For example, he planned to expand to the United Kingdom. He backed off after I explained to him about the landlord cartel there – you sign a 25-year lease that's reviewed every five years. It can be adjusted up, but not down.
Young companies are like children. Over time, they grow up and don't require as much outside involvement. The last thing I want to do is give advice to people who no longer need it. I like to think I'll look back at Lululemon as something I had a great time with and is doing well. I just won't have to do bed checks anymore. Discovering a company like this and getting a deal done is gratifying. It's fun, it's all fun. And I plan on doing it forever.
Mark Pothier is a senior assistant business editor at the Globe. E-mail him at mpothier@globe.com. 