When Jeff Carl decided to start a new business, he went the classic route of hitting up a few friends and family members for cash to get his idea off the ground. Here's Jeff telling the story of one pitch he made to an old college buddy. One of my first meetings was with a college um, my college neighbor I named Josh James, who's a very successful entrepreneur. Then we were in a basketball game. He said, I hear you're doing a new deal. What is it? Can I invest?
Tell me about it? And I think he was expecting, Um, we had done a lot of web analytics in the past, and I think he was expecting something pretty technical. Said I'm gonna sell socks, and he really liked took a pause and he's like, are you serious. I'm like, actually, I said I'm gonna sell men's hosiery. That sounded better, and and then he said, Okay, I'm in because one
of two things is gonna happen. You're either gonna make a lot of money or I'm going to tease you for the rest of your life about the time you made me give you a hundred thousand bucks for a sock idea and that's totally worth it to me. I'm in. Josh James, who's the CEO of a big software company called Domo, recalls it pretty much the same way, except Josh said he ponied up two hundred grand, not one,
and that's the least of it. That money Jeff raised was back in stances earliest days in two thousand nine. A couple of years later he raised another seven million, mostly from venture capital backers, and three years after that he raised twenty six million dollars. Two years ago he got another fifty million, and then last year another twenty seven million dollars. All in all, Jeff talked investors into
giving him about a hundred and ten million dollars. That's on par with Airwear, a big drone start up, and way more than stitch Fix, a hot subscription clothing company. So we're talking a hundred ten million dollars four socks. I had the same reaction myself. I had to run it by Jeff Carl and then I was like, oh my god, company has wised so much money. Weird. Hi. I'm Brad Stone and I'm Sarah mcgrad and this week on Decrypted, we're taking you on a tour of the
very unusual world of VC backed non tech startups. Let me break that down. Silicon Valley venture capitalists are known for backing tech companies, but for years they've also quietly backed plenty of companies they think will grow fast that have nothing to do with tech. This is the same set of investors that helped launch companies like Facebook, Airbnb, and Uber. The differences this other breed of company doesn't
sell software or build apps. They make products that we've been buying and using for decades, like Razors, mattresses, and Mannet's Stance. The sock company started by Jeff Curl is just the latest of these consumer companies that VC investors are pouring money into. Last year, non tech companies raised four point nine billion dollars from vcs, about a tent
of all money vcs invested, according to CB Insights. So we'll be asking why why invest in sucks not software and how how do these investors decide which companies are worth backing. Sound tech companies are notoriously hard to scale up, and there are many examples of companies that didn't make it stay with us. So um, Sarah, it seems a little counterintuitive hearing that nearly five billion dollars of VC
money went the companies outside of tech. Right, companies that do well in the venture world usually have a little technical razzle dazzle something truly transformative. I think machine learning or cloud computing, or the Internet, or even the semiconductor chips that the value got its name from. So what
inspires venture investors to put their money into these other categories. Well, the founders of these benee typically have persuaded their investors that even though the business looks ordinary, if you rethink it, you can expand that business many times, maybe even transform it. I talk to Mood rogani, an investor at Kleiner Perkins, co Field and Buyers, which is a huge venture firm, about how far to take that IDEA keyback stance. I think any category um. I mean, you're seeing it now
in agriculture, architec. You hear it in food, food tech. UM, you're hearing in an industrial, industrial tech companies, industrial IoT. So the notion that disruption is only in segments of the Internet or other areas of deep technology, I just think is um is incorrect. But sometimes those bets don't work out. Take too sero that's a company that persuaded investors that have drinking juice became easy, people would drink
a lot more of it. That's as long as they didn't have to clean up blenders or drag home lots of fruit from the market. Right. They convinced backers that juice Ero could sell four hundred dollar juice machines along with eight dollar a piece juice packs to put in them, and VC Backers gave them a hundred and eighteen million dollars. But as their colleagues Ellen Hewitt and Olivia Zeleski reported, it was perfectly possible to just squeeze the juice out
of the package with your mare hands. No four hundred dollar fancy juice machine required. In September, juice Ero said it was closing down. So how do you tell the difference? How do you know if the startup really does have a great idea that will give a shot of rocket fuel to a boring, old industry that has been around for decades. That is exactly the predicament of Jeff curl
Our sock hero. When I met him, he was wearing shorts and a tank top because he'd just come from a game on the in house basketball court, and he truly thinks he's found some ways to dress up the staid world of socks. You can see the potential. The US market for adult sos is nearly five billion dollars a year according to m p D. Now, Jeff has to convince the wider world he's the real deal. But that doesn't mean he's trying to pass his business off as something it's not. Do you think of yourself as
a technology not particularly. I think of us as a brand first and foremost. So to build his brand, Jeff needed to start with the right product. He methodically looked for a staple that could use better branding along with a little more innovation. Once he settled on socks, he had to hire people with and I can't believe I'm about to say this, some serious sock chops. One of those people is Taylor shoot Stance as co founder and chief product officer. He's a wiry and wisecracking guy who's
about ten years younger than Jeff. They had the same marketing professor at Brigham Young University in Utah who introduced them, and at the end of a long afternoon, it stands Taylor stood outside their research building and made a little bit of a confession. I was always a sock guy or a product guy. I always had a certain location at the Orange County Swat Meat that I went to buy my socks. And so when Jeff came into me like nine ten years ago, and what what was special abouts?
They had the best in elastic but left no They were just three by one, you know, like old athletic crew socks. You'd see all white, and they left no impression on my legs. So it had a really good, you know, sort of atlastic power. The product didn't kill. They lasted a lot longer than anything else I had. I can tell that's a guy who is way into a socks and as he learned, a little technology can go pretty far to improve a sock. Now he oversees a kind of Aladdin's Cave of sock machinery. It stands
its headquarters in San Clementi. The department goes by Shred for Sock Hosiery Research, Education and Development, and so here we test things like durability. There's pilling that right there is a rub test for durability. We test fit, we test color fastness, we test thermoregulation. That's a camera that shows heat signatures or infrared um crocking lateral stretch. What's that one do? It's a tear test for fabric for
our underwear. That was Taylor talking with Stance Is CTO Randy Sheckler, who happens to be a rocket scientist for real. When I was there, they showed me socks stretched almost three times their normal size and socks batted around on PVC pipes to make sure they could take a beating. The machinery looked so elaborate. I ended up asking Mood
the VC investor, if they really needed it. Whether it's absorption, whether it's wicking, whether it's ability to grip, whether it's ability to you know, survive through a thousand times through the wash, whatever those attributes are. They measure UM and there's customization around areas of the sock where that matters relative to what you're using it for. You'd be surprised.
You spin all of these knobs, you get permutations that are in the thousands, and so that's part of the scientific side of kind of what they're testing UM, as well as like produce ability. How much is it going to cost if we produce here? How much of a market is there, and so left brain, right brain, scientific fun, all of those things that come together. It's a lot
more complicated than you what you would think. Bottom line, they need all that testing and oh absolutely, yeah, yeah, yeah, okay, those are some fancy socks and it seems to be paying off. Stance has a pretty ardent customer base, including everyone from teen skaters to superstar athletes like the basketball
player Kobe Bryant. One time, after a game last year, Kobe, who was hired by Stance to create a sock line, talked about our socks helped his team, the Lakers, score a big basketball upset against the feared Golden State Warriors. The power of the socks. It's gotta be the socks, right, I mean it's uh, I think it's I think it's cool man. Stance also has licensing deals with the big
sports leagues, including the NFL and Major League Baseball. Everyone from Rihanna to Jay Z is wearing these socks, and many of stances celebrity boosters are also Stance investors, so they talk up the socks for free. But before Stance started tapping its network of celebrities, it made sure it got traction somewhere grittier in skate shops and with surfers. I learned while reporting this story that a lot of fashions start in those communities. Surfers have a kind of
low profile way of of dressing. This is Natalie Gamet from Hobie Surf Shop in San clement A, California, which sometimes ends up being uh more trend setting. Um. They could wear roll up Levi jeans, um uh uh retro, a low hush shirt and then stamp socks and then and then that be, that be the trend. Stance is constantly working to stay ahead of what's cool. It hired a team to come up with four thousand designs a year. They tried to make sure the patterns grabbed the eye.
For example, Taylor, he's the sock guy who took me on the tour of Stances Research Lab, showed me a pair of holiday socks. One foot has the letters S L A Y across it and the other R I D E. I thought at first it was a type of about socks is that it's just such a great canvas for expression, and you know it's so novelty that you can do it like this. One sleigh ride that's what it's called, right, Like, yeah, so in missile so
with the team. Yeah, that one was confident to two words, one on each sock, spelling out the weapon and the part of your foot, not the seasonal plant. Stance has endless clever designs. Recently, the internet lit up because Justin Judeau, the Canadian Prime Minister, wore a pair those showed Chewbacca from Star Wars. So Stance seems to be doing well so far, but it's a tall order having to think of four thousand catchy sock designs a year. How do
we know it has staying power? Stance is checking all the right boxes. But a lot of the biggest flame outs could say that, at least for a time. Drew Serro, the juice startup we mentioned, said it had special technology and shut down anyway. And retailers like One King's Lane and shoot Azzle had big time celebrity ties and they ended up selling for fire sale prices. Jeff Carl says he's avoiding their problems, and he partly blames those failures
on the investors. He says a lot of vcs just didn't understand how to size up a retail business, especially a few years ago when he started talking to them about raising money. Jeff actually makes an interesting point about e commerce, one that deserves a deeper discussion, maybe for another time. So he decided to go old school. He didn't start Stance by focusing online. He went for traditional
retailers like Natalie at Hobie Surf Shop. Other online retailers have leaned heavily and selling consumers monthly subscription plans like Dollar Shave Club for raisors or Birch Box for cosmetics. Only now seven years in is Jeff gearing up subscription
socks and seriously beefing up his online sales. That's in part because so many brick and mortar retailers are struggling, including some of the retailers that sell socks, and those troubles in retail are partly why Jeff raised so much a venture capital money in case he ever got the opportunity to buy some struggling brands that could help Stance. So far that hasn't panned out, and opportunistically, maybe we could find some great teams, some great entrepreneurs, some interesting
product categories to acquisition. So I wanted to have a big balance sheet if that ever happened, and it just really hasn't. And I think it's been more cost effective and more innovative for us to work on our work on those products ourselves. So a lot of that venture money is still in the bank and Stances revenues are over one million dollars. They expect to turn a profit starting next year. Sarah, does anybody have anything bad to say about Stance? I found one person Sucharita Cadali, a
retail analyst, raised a red flag or two. That's always a risk that that a company likes Stance has to faces, is you know, kind of everything from knockoffs to companies like Target, you know, kind of basically doing their version of a lower price point UM, a lower price point version of the same thing ing. She also had some sobering comments about a core group of Stance customers Stances, I think for the most part of millennial brand and UM.
Millennials are really fickle and they're constantly trying new things and UM. The challenge with that is that, you know, kind of some of these new brands experience success really quickly because everybody learns about them on social networks. In other words, easy come, easygo, and one more thing. A former employee who didn't want to be named told me a lot of people just don't work very hard at the company. I guess I understand that they're in southern California,
just a few minutes from the beach. Sarah, you told me that even right at the office, they've got a pretty distracting setup, right with the putting green and a basketball court and on site massages, right, and even a skate ramp. But some of their vcs are more worried about other stuff. For example, once that they shouldn't depend so much on word of mouth to build the brand and and they should advertise more. But Jeff and his marketing VP Noel Bates both think word of mouth is
working great. Rihanna came out with soft line two days or last week that has her on them in her like met gall address and her video. Drake wore them and posted on Instagram two days ago of him hanging out. Do you know this in the Rihanna just f y I Drake, the singer is Rihanna's ex boyfriend. I actually did not know that. That's being Mashable, E News, people, in Style, Vogue, l cos everyone covered her collection. But now they're all covering it again because it's all the
page six all about how Drake. You know, it's like this, this is as close as Drake and you can get to Rihanna right now, you know. And he looks all sad and video he looks all sad and be true. So it's running a report on like everywhere that this has appeared, and it was like six million dollars worth of advertising. Good rebuttal to the debate on ad spending. Still, this is a fundamentally pretty traditional business. Does venture capital
have any business investing in it? Isn't venture money supposed to get crazy world changing ideas off the ground? Well, that's how people think of venture capital, and lately it does seem like venture capital has backed a lot of fundamentally non tech businesses, although statistics from CB in sight It's say it's no more or less than in the past.
But in the past few years. Examples include Casper Mattresses and the Melt, a grilled cheese shop, All Birds a shoe company is another, and those types of traditional consumer businesses can deliver great returns. Starbucks coffee was venture back in the early nineties and today it's worth seventy nine billion dollars. More recently, Blue Bottle Coffee raised about a hundred and twenty million and got acquired by Nestley for
hundreds of millions. And that's Jeff's point. He says, a well built brand can deliver the same kind of returns to investors as a traditional internet or software company. The problem is that not all entrepreneurs know how to build great brands. One reason we see so many venture back bus has less to do with how traditional or not the company that is getting funded is and more to do with how their founders play the game well. First of all, UM, raising money is sort of its own
skill set. There's definitely a way to position companies to investors, and I think that actually creates, you know, an adverse bias and deal selection, because a great presenter can actually get an average or below average business funded. UM and a bad and a bad present you know, so a great the positioning of a business. There are many great businesses that go unfunded because no one was able to translate it into a language that a VC could find investable.
On the other end of the spectrum, there were a lot that did get funded because fast talking entrepreneurs convinced vcs that simply adding an app to a traditional industry would take it to new heights. A lot of the time, the founders and entrepreneurs underestimated the underlying logistics and complexity an app does little to solve those. Food delivery is
a classic case study. Good Eggs and Sprig are two examples of companies that raised about sixty million dollars each, but a couple of years ago, good Eggs had to close three of its four locations, and Sprigue shut down. Earlier this year, Monterrey, which raised a hundred million dollars,
had to switch out at CEO, recapitalizing fire employees. This feeds right into the idea that Silicon Valley caters too much to millennials with a lot of money to spend on frills, including food delivery juice and I have to say it socks, even if it does make money for them, Our socks the best use of VC cash. Are they the best use of Jeff Carl's time for up A really good question, which is and it's hard. I think, how impactful can an apparel brand really be in the world?
And you know, when we first started it, maybe I was it a less mature, you know, phase in my life and thought less about legacy. And at the time it was really quite a selfish notion of what I missed doing is going into the office with a small group of really talented, hungry, ambitious people and I don't really care if it's software consumer products, or maybe the passion for the product can be completely secondary, because what I care about is the group of people. And with
stands we've absolutely created that. It's it's a very special leadership team. It's an incredible culture. People love to work here. Okay, but Brad, don't you think that when you meet some of these entrepreneurs who are clearly like brilliant, super capable people, and you feel like, yeah, they could be curing cancer, you know, and instead they're helping us get around faster or making more comfortable socks. I can say though, I mean,
I'm sort of impressed by what Jeff has built. I mean, clearly these socks are a little bit of a fad. You see them all over the place. Um, maybe they've identified something. We've kind of taken this garment for granted for so long, but we can have a little bit of fun with He says that the product goes well beyond the sock. He has all these ideas about how it stands for individuality and so on, and buy that. What is the future for them? Are they going to
do other kinds of clothing? So you can already buy men's underwear, women's underwear about to lunch? So what is next beyond undergarments? Can you see stands shirts? Or they wouldn't really go into details, but yeah, that would be a natural for them, also taking on under armo or maybe getting or um Lulu Lemon, getting into yoga pants and other fitness apparel more broadly, as long as they're
not see through, as long as they're nuts. So it's Jeff comfortable just running like an apparel company or does he have ambitions that go beyond just creating clothes? I asked him about that, and actually recently somebody in his family went through cancer and he started thinking way differently. And I will admit that when I look at that, I find deep motivation of cheese. I've got to get myself in life sciences. These are real problems that are solvable. Um.
None of them are easy problems, but they are solvable. UM. And I feel like I could make a difference doing some of that, But I have employees here, and I have shareholders here. We've built a good business, and we have oil fans, and so look, I think it's probably the kind of thing where and all you know, Candor, Look, maybe stance is something I operate till till I'm old. But if there was a transition, I think I would find myself thinking about a venture that had the potential
for more purpose. And that's it for this week's episode of Decrypted. Thanks for listening. We always like to hear what you think of the show, so get in touch at Decrypted at Bloomberg dot net or I'm on Twitter at McBride s G and I'm at brad Stone. If you haven't already, subscribe to our show wherever you get your podcast, and while you're there, please leave us a rating and a review. This goes a long way to
get the show in front of more listeners. This episode was produced by Pia gud Caryo, Liz Smith, and Magnus Hendrickson. We'll talk to you next week. M