How I Made It: Stitch Fix founder Katrina Lake built one of the few successful e-commerce subscription services

Katrina Lake, 34, is the founder and chief executive of Stitch Fix, a San Francisco clothes shopping start-up that brought in $730 million in revenue in its 2016 fiscal year that ended July 31.

Stitch Fix is regarded as one of the few major success stories in the subscription shopping world. Customers fill out a detailed profile of their size, style and taste and receive a box of five pieces of clothing, shoes and jewelry monthly, bimonthly or quarterly. The items are hand-picked by Stitch Fix’s 3,500 full- and part-time stylists, who work with the company’s team of more than 80 data scientists to suit customers’ tastes. Stitch Fix charges a $20 fee for each box (which goes toward any purchases the customer makes), and clients pay extra for the clothing they keep, and can return what they don’t want.

The company has more than 5,000 employees, five clothing warehouses across the U.S, and $42 million in funding from venture capitalists. It most recently launched Stitch Fix for Men, a similar service for men’s fashion.

Not always entrepreneurial

Lake grew up in San Francisco and Minnesota, the daughter of a doctor and a school teacher. Unlike many start-up founders who describe having an entrepreneurial streak from an early age, Lake said she had always been risk-averse and attended Stanford with the intention of becoming a doctor. She tackled the pre-med curriculum but ended up majoring in economics because she was fascinated by the way data and statistics could be used. “I got sucked into the economics side of the world,” she said.

But what her family lacked in entrepreneurial spirit they made up for in creativity, she said. “Creativity was definitely a big part of our household, and I remember always writing stories and being encouraged to be creative.”

Creativity in restaurants and retail

Lake’s creativity followed her to an early consulting job she held at the Parthenon Group, where she analyzed data for the restaurant and retail industry. Part of her job was to figure out how consumer behavior was changing and ways restaurants and retailers could adapt.

“When I was at Parthenon, we worked for a department store client and the project was very open-ended: What is the future?” she said.

She had big ideas, including a store concept in which half the space was laid out like a museum where people could be inspired by the outfits on display, and the other half of the store was dedicated to fulfillment. Customers could wave a wand (this was before the ubiquity of smartphones) at the clothing they were interested in trying, and those items would be waiting for them in a fitting room on the other side of the store, complete with accessory recommendations and store assistance.

“Those were the types of ideas that I had, and people looked at me like I had three heads,” Lake said. “Even today, it’s a very foreign concept.”

Lake knew she wanted to be on the cutting edge of the retail industry. But bricks-and-mortar retailers weren’t the answer. So she decided to find out who was.

If not me, then who?

Lake joined a venture capital firm as an associate, and her hope was that one of the many start-ups she encountered would be a company she wanted to join.

“Ultimately, I didn’t quite find the company I wanted to join, but I met more than 100 entrepreneurs and realized that all these entrepreneurs were just as unqualified as I was,” she said. “If I wanted to be this retailer of the future, or if I wanted to join the retailer of the future, I could just start it.”

But being risk-averse meant she wasn’t going to quit her job and launch a start-up. So she decided to buy herself time. She applied to Harvard Business School and was accepted. The best case scenario, she thought, was she’d emerge at the end of it with a fully-formed business idea and a way of bringing it to life. Worst case? She’d have an MBA degree and a ton of debt.

“I didn’t want to have a two-year gap on my resume,” she said. “So it was a risk-reduced way to have a shot at entrepreneurship.”

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The seed for Stitch Fix

Lake started working on Stitch Fix during her second year at Harvard. Her academic research told her that people didn’t necessarily enjoy going into stores and sorting through hundreds of items of clothing in search for something they liked. And even online shopping was often tedious.

“As a consumer, you don’t want to choose from a million pairs of jeans,” she said. “You just want the one pair that’s going to fit you and look great on you. There was such a great opportunity there. What consumers wanted was not reflected in the marketplace.”

Lake’s idea was, in essence, an accessible personal shopper. But having a personal shopper meet with clients and then shop on their behalf wasn’t practical. Lake’s vision was bigger than that. What if you could have a personal shopper for any budget? And what if this service was available to everyone?

Starting in her apartment

In the early days of Stitch Fix, Lake asked friends of friends in the Boston area to fill out style surveys. She’d then go out and buy clothes on her credit card, and drop off a box at people’s homes. They’d write her a personal check for what they wanted to keep, and return the rest.

“I would buy and sell at retail, and kept track of stores’ return policies,” she said.

She also kept track of people’s preferences in an Excel spreadsheet. She stored inventory in her apartment.

She faced resistance when she tried to raise money to fund her company because investors didn’t like the idea that they were writing her a check with which she was going to use to buy clothes, she said. But she believed in her idea because, despite the scrappiness of Stitch Fix at the time, people loved it. And eventually, she found investors who loved it, too.

Venture capitalist Steve Anderson made a $750,000 investment in the company in 2011, which enabled Lake to officially launch her company.

Fast growth

A year after Lake started Stitch Fix in her apartment, the company had a small office in San Francisco where every Monday all employees helped package and ship out “fixes” — the boxes of clothing sent to clients. As someone who never liked taking risks, Lake concedes she made some risky bets during this time, such as trusting that clients would pay for the clothing they kept. (This was before Stitch Fix had a system that took people’s credit card numbers. At the time, customers were sending Stitch Fix money through PayPal or writing their credit card numbers on a piece of paper and sending it back with the clothing they didn’t want.)

Demand kept growing. At one point, the company had a two-year wait list. Eventually, the company opened warehouses to manage inventory, hired executives from Walmart and Netflix, and set up a more sophisticated (and less risky) payment system.

Carrying inventory remained risky, but as the company gathered more data on customers’ preferences it was able to mitigate some of the risk and predict how much and what kind of stock to carry.

Advice

Lake attributes Stitch Fix’s success to having the right team and always putting the customer first.

In the summer of 2012, she said the company made the wrong prediction about what kinds of clothing clients would want and had to write off a ton of inventory. “You might guess that our audience is coastal, Coachella-going, early-tech adopters,” she said. “But our clients were moms who were like, ‘I need longer hemlines because I volunteer at my son’s preschool, and I want to wear a fun summer dress but it needs to be appropriate.’ And we had a backless Coachella romper for her.”

Instead of sending out clothing that wouldn’t be an appropriate fit for its clients, Stitch Fix asked clients to wait.

“The inventory just wasn’t right for the customer, so we sent it back to the vendor or donated it,” she said.

The company took a hit but gained the trust and loyalty of many customers.

“Customer-centricity is unbelievably important,” she said.

Personal

Lake lives in San Francisco with her husband and their 9-month-old baby. She enjoys cooking and running.