#73. Winky Lux is a quickly growing beauty brand built around accessible and fun products. We talk with co-founder Natalie Mackey, who started the company after realizing the mass market opportunity around drugstore-priced cosmetics that embody playfulness and delight. The Loose Threads Podcast features in-depth discussions with leaders across the rapidly changing consumer economy.

Check out the full transcript below.

Richie: [00:00:07] Welcome to the 73rd episode of the Loose Threads Podcast, a show about the rapidly changing consumer economy. This episode is brought to you by Loose Threads Membership which gives you actionable analysis, insights and events that drive growth, and Loose Threads Espresso, your energizing and high-pressure filter for consumer news—in context. We also have a newsletter that features the latest open letters to CEOs, podcasts with industry leaders and news from Loose Threads. Check it all out at LooseThreads.com.

Richie: [00:00:35] Joining me today is Natalie Mackey, co-founder of Winky Lux, a quickly growing beauty brand built around accessible and fun products. Natalie founded the company after realizing the mass market opportunity around drugstore-priced cosmetics, which were lacking any playful aspects.

Natalie: [00:00:49] We’re basically creating little love bombs for consumers. That’s what we do for a living. We create beautiful little things to make people have a pop of joy.

Richie: [00:01:02] We had a great talk about the brand’s founding, why it controls every aspect of the supply chain and why it’s moving into retail. Here’s my talk with Natalie Mackey.

Richie: [00:01:15] So why don’t we start. Just talk a bit about your background and then we can work our way up to this company and then this brand existing and so forth.

Natalie: [00:01:23] So I am from the South, sort of between Savannah, Georgia and South Florida. So I have this kind of weird mishmash of upbringing, just southeast upbringing. After college, I moved overseas for a year and then ended up in New York and I’ve been here for a decade. So I’m finally a New Yorker.

Richie: [00:01:45] Is that the litmus test?

Natalie: [00:01:45] I think the 10 years is where you get to be a proper New Yorker. You can bitch about everything and complain about the weather.

Richie: [00:01:54] Welcome.

Natalie: [00:01:54] Yeah. So I worked in finance in funds and I was the only girl in the whole group, pretty much almost in the whole company. Certainly on the investment side. And then, because I was the only girl, whenever a consumer deal would come along it was my job to explain why anyone would buy something. But I became really obsessed with brands and why brands made people happy and what made one glass worth more than another glass or what made one beauty product worth more than another beauty product. So I became kind of a study of the emotional connection with brands. I ended up leaving finance, going into brand licensing. So that was kind of the manifestation of that. I started a small firm.

Natalie: [00:02:45] And then, about four years ago, there was this big shift that was starting to happen in beauty, mostly around this YouTube world and Instagram was beginning. Obviously I was spending a ton of time just trolling through Instagram and thinking, “There is definitely a difference in the amount of stuff I’m discovering now.” So I wrote the business plan for kind of a completely different company, which was a curation software. So I called a friend of mine, Nate Newman, [whom] I had been friends with for about 13 or 14 years. He’s one of those people [who] I’ve always known. He was an entrepreneur in the consumer electronics space. He had sold his company and I was like, “You should move to New York. The rent is cheap. The weather is great.” I was totally lying, bamboozled him.

Richie: [00:03:41] “Everyone’s so nice.”

Natalie: [00:03:43] Yeah. But I sort of convinced him that this would be this really cool business and that there was going to be this personalization factor to discovering beauty. We finished up this business plan. We started working on this interface. We started to pay some developers to work out this tech. We decided—actually it was Nate’s idea—that we should do some surveys and make sure people actually gave a shit about what we were doing. So we interviewed about almost 200 girls between the ages of 16 and 29. We were just finding people everywhere. So if I had a cousin who was in a sorority, I was getting her whole sorority to participate. But the most interesting data that we got was from these focus groups where we would get these young women together and we would have them fill out these surveys and then we would ask them to start dumping out their makeup bags. The biggest learning that we found was that no one cared about our platform. No one thought they were going to use it. They just didn’t see the purpose in it. They enjoyed finding their own beauty products. So we were like, “Well, good thing we started working on that.”

Natalie: [00:04:52] But one thing that was really surprising is we kept noticing that there was this consistent message that happened when women were dumping out their makeup bags and that was about 50% or 60% of their products were drugstore products. And they would do this thing where they would apologize for them, which was really strange because, if you know beauty manufacturing, you know that there’s a lot of really great products at the drugstore. There’s actually a lot of stuff that’s kind of the same. It’s made by the same manufacturers as some of the luxury products. So you had these young women going, “Oh, I bought this foundation because I ran out of my good stuff.” And we just kept noticing this apologetic attitude toward these products, which were really the products they could afford because we were interviewing 16- to 29-year-old women. There is sort of a—wages have been somewhat stagnant for recent college grads. It’s pretty expensive to live in the world. Spending $500 at Sephora is not in the cards for everybody, particularly women in their mid-20s. So there’s something missing in the way this stuff is being marketed to them and the way that they feel about it. There’s this disconnect of feeling proud and excited about a product that you purchased and it’s become very commoditized and very much like you had to have it, so you just bought this eyeliner at CVS and that was fine.

Natalie: [00:06:16] So we set out to create this brand that would be like a luxury feel and a really magical feel for just above a drugstore price. So a few dollars more than a drugstore product. That was how Winky Lux was born. And then we found this really cool artsy brand out of Brooklyn called LAQA & Co. and we met the founding team and they were super cool and they were actually selling their company. We ended up buying that business and folding it into our core business so now we have two brands. LAQA is supercool. It’s very high end. But Winky Lux is our goldstar brand and it’s the one that’s grown a ton. But we think a lot of that has to do with where the world is right now. It’s a balm of happiness. So that’s what we do. We sell happiness.

Richie: [00:07:06] Very cool. I guess to back up—and we’ll work through all that—the most recent anchor to this is SSENSE bought Polyvore a few weeks ago, which was this moodboard curation thing. Lyst exists and Pinterest and Tumblr and a lot of these have existed before. One, why do you think they’ve either worked or not worked and what led you away from where you were in that original incarnation to not go down that path?

Natalie: [00:07:28] The curation platform?

Richie: [00:07:30] Yeah. None of them—to me at least—feel like they’ve worked perfectly or as originally intended.

Natalie: [00:07:34] Yeah. In theory, marketplaces are great businesses and for a lot of verticals, they’re really important and they’re amazing and they help curate what the customer wants. But when you talk about high margin, really mature industries like beauty, the reason to buy one thing over the other is really truly about the brand and whether or not you feel like that brand means something—by buying that you are a certain type of person. You’re a fun person. You’re an aspirational person. You’re a successful person. You’re a confident person. So having a relationship with a customer is really about that emotion, whether or not they feel that emotional pull toward the brand. And for marketplaces—and I know there are some that work super well because they provide an amazing experience—but for marketplaces, you’re on the backs of those emotional pulls with the brands.

Richie: [00:08:28] Or you’re in the way.

Natalie: [00:08:29] Or you’re in the way. And unless you’re providing this extraordinary experience, which is hard to do when you have a $15 price point, it’s harder to create this beautiful, magical moment when you open up the box. You’re competing against who is a dollar cheaper than the next guy. So I think that would be my hypothesis on why sometimes they’re more challenging to build. Brands are obviously super challenging to build but, long term, if a brand has a really authentic and special point of view and people really love that and it makes them feel something, that’s where you have that longevity of a product or a relationship.

Richie: [00:09:07] It also raises a question around department stores too, or just wholesale in general, which is not a marketplace but has that same relationship—that’s somewhat in the way, somewhat propelling. It’s kind of straddling that position.

Natalie: [00:09:20] Totally. I think that the department store world is just not offering enough value to that customer. It’s not special enough. Not that she won’t go and buy something in a store. She will. But it has to be more special. It has to be a moment, a beautiful thing, something to do with her friends or something to show on Instagram or something to spark her imagination and get her really fired up about great design or beautiful environments. I think if you can’t provide that, it’s a really brutal battlefield.

Richie: [00:09:55] Okay, so this first thing works. You do these 200-plus surveys. Is it obvious to you to go start a brand? Take us in that deliberation.

Natalie: [00:10:06] Sort of. I think it was clear that that was where you could have something special with the customer. I think originally we thought, “Oh, maybe we’ll have a couple of brands and maybe we’ll have a site that has multiple brands.” I think that really was our goal for the first six or seven months and then Winky Lux had this viral product that came out which was the Flower Balm which is a lipstick with a flower inside of it. We had been in Korea and we saw this technology so we were kind of the first people to bring it to the U.S. and take out all the parabens all the nasties that are in some of them and create a really clean, beautiful version of it. That just exploded. We started sampling out highlighters and concealers. Then we had our next viral product which was this amazing concealer called the Peeper Perfect, which is an undereye concealer. All of a sudden Winky Lux just started to really take off and the price point was golden and people were really happy. They were getting something special and beautiful and it came in this filigreed box. We sent out these little pins that we called “the squad pins.” We felt like we were giving these little love gifts to these customers and it was really working.

Natalie: [00:11:22] I feel like the news cycle is very angry and there’s a lot of anxiety that is in the world right now everywhere. It’s not just in the Northeast or the South. There’s just a lot of screamy narratives going around. I think this place where you could go, even if it was just you got the box, you opened it up, there was a unicorn-themed product inside, there was a mermaid product inside, there [were] beautiful flowers and glitter and things that really made you feel nostalgic and made you feel like you were just doing something purely for fun. It didn’t have to be a statement and you didn’t really have to think too hard about it. I feel like that really resonated with people. So Winky Lux kind of blew up and so we decided to—instead of go after this multi-brand play—to really focus on this special relationship we were building with people.

Richie: [00:12:16] So it sounds like it was straightforward to go, “Okay, we need to shift from this platform to the brand.” When was that realization, timewise?

Natalie: [00:12:23] It took us about six months to get the brand together. We launched on October 17th of 2015.

Richie: [00:12:30] And so talk through those six months because you hadn’t built a beauty brand before.

Natalie: [00:12:33] No.

Richie: [00:12:34] What was that learning curve like? Where did you say, “We need to start with this” to work up to the launch?

Natalie: [00:12:40] So, when I was in licensing, I met [with] quite a few factories. I knew more about the factory process than I did about the brand-building process. I knew that brands were valuable. In that six months, our ignorance, our naivetè was both a hindrance, but also a big asset because beauty, as a category, has typically been a very long lead consumer product. Typically, when you’re creating a beauty product, the industry is still dominated by six big companies. And when you’re inside one of those companies, it’s anywhere from a year to two years to get a product off the ground. Because I knew more about the actual manufacturing process, I didn’t really know that that was a thing. I knew that actually producing the products didn’t take that long. You could go and you could fill lipsticks pretty quickly. The actual physical making of it just wasn’t that intensive. The formulations were, but those also, especially for a lot of products that are just mild edits on formulations—enhancing a color payoff, increasing or changing a fragrance, doing some new cool colors—all of those processes also were not that long. It was only in the really, really high R&D, doctor-grade skincare that there was a need for this long, long lead time.

Natalie: [00:14:02] So, because we were idiots, we were like, “We’ll just find these factories that’ll work with us and they’ll do really fast turn time.” So we met with tons of factories in the first couple—first of all, the big factories just didn’t want to mess with you and then the little guys were not high-quality enough. So we finally found this one factory that was really good. It’s actually owned by a woman, which is unusual. Our Chinese factory is owned by a woman too, which is even more unusual. Very, very unusual in China. Our Chinese factory was a second generation, this hot shot woman in her late thirties and she was like, “I come from the manufacturing world. I’m gonna build a badass beautiful factory that has U.S. grade-quality and I need cool happening brands. And you tell me what kind of equipment I’m going to buy. You tell me how we’re going to do this.” So in essence, we really built a lot of our business in step with a few really partner-manufacturers.

Natalie: [00:15:05] But then the other thing we did was we started to control everything from the raw materials to the beads that go into the injection molder to the injection molding factory to the dye factory to the fragrance company to the company that makes the little plastic collar to the metalization factory because plastic then gets metalized to the—am I wearing you out yet?

Richie: [00:15:29] No, this is fascinating.

Natalie: [00:15:30] This is like half the product. To the box factory, to the people who make the dye step that goes on the box, to the people who make the print on top of the plastic.

Richie: [00:15:39] This was anything but full package.

Natalie: [00:15:42] This was absolutely the opposite of turnkey. But what that did for us is—because we didn’t know what we were doing—instead of going to a big marquee factory and saying, “Alright, show us your new innovation for the next three years and we’re going to pick this product, this product and this product and we’ll see it a year and a half from now”—

Richie: [00:16:01] Right.

Natalie: [00:16:02] —we were basically the manufacturers. We were building out our own really low-grade tech to manage this whole supply chain and that let us become a lot faster. It also let us control what was in our products. It let us control those relationships a lot better. So I think that, if I was teaching someone and for anyone who’s listening who wants to start a makeup company, don’t necessarily do it this way because it’s really hard and you could probably begin a brand with just a turnkey product. However, because we did that in the beginning, long term it’s been a huge asset for us.

Richie: [00:16:41] So how did you figure out where you wanted to start product-wise? How many SKUs? How did the launch plan come together, from both the product side, but also—you knew the price point pretty well it sounds like—but also then how would the brand itself manifest?

Natalie: [00:16:54] We started with lipsticks because they were just so fun and we figured that was a place that people would try. And then I was at an innovation show and there was a raw material that had actually been used in the industry for a long time. It’s just crushed diamonds. So it’s like milled diamond powder and it’s been used in anti-aging products for a long time. The idea was let’s make a complexion powder but we can put this diamond powder inside of it. And that story really sold well for our customers. So we started with lipsticks. Our very next thing was complexion. So we really didn’t have a five year rollout of “and now we will go into this category, and now we go into this category.” We kept listening to our customers too and trying to understand what they wanted. When you’re really small, the best thing that first year was that we were involved in everything. It was me who was answering the Instagram questions and me answering the emails. Nate was taking customer service phone calls. We were a team of five people and we got to hear a lot from our customers. If something was messed up, in beauty, people will tell you pretty fast.

Richie: [00:18:05] I’m sure. So, remind me, the launch date was:

Natalie: [00:18:10] October 17th 2015.

Richie: [00:18:12] Okay. How’d it go?

Natalie: [00:18:13] It went really well. We actually launched at BeautyCon which is a big conference for beauty lovers. We were pretty sure that we would sell nothing and that we would get a chance to get some feedback from our customers. Our packaging is all really highly metalized so it’s all really shiny and it has that Barracuda effect. It’s like bright, shiny things. So we set up and we ended up getting this insane line and people were losing it over the product. Somewhere along the way, we talked to a Today Show producer. I think it was actually a production assistant [who] was there for fun. We were doing rainbow eyebrows. That was our activation for the day. So we had a palette and we still have this palette. It actually sells out all the time and we bring it back. But it’s a pallet where you can turn your eyebrows into rainbow. You didn’t even know you needed that. So we were putting that on people and we ended up getting on the Today Show with that. So that was a big boon for us.

Richie: [00:19:17] You mention the hit with the viral product. Was that something you set out to do? Was it something you stumbled upon? How has your understanding and intention around product creation and those mechanisms evolved?

Natalie: [00:19:31] There’s all of these tools that you can use to try and predict trends. We’ve never found them that useful. It’s been our thesis to throw it into the market and see if our customer likes it and try and remain really fast and really inventory-light. So no. We did not know which product would be viral. I don’t think anyone knows because you can predict that highlighters are huge or you can predict that contouring is big or glitter is big this season. And that’s all cool. You don’t want to just go off the reservation. But you never really know when you’re going to hit that product that consumers are going to be like, “This is it. This is amazing. Everyone must have this.” So what we found to be the most effective has been, in the creation process, we have a really fast creative process and we try to get all our stuff signed off on really quickly because that’s another bottleneck in manufacturing.

Natalie: [00:20:27] The process we use is we always talk about, if you were Alice in Wonderland and you fell down the rabbit hole and you were in Wonderland and you walked into the beauty store in Wonderland, Sephora wonderland, what types of products would you find there? And that has been what I found the most effective way to drive cool ideas because then the team is incentivized to think up things that are more special. How do we add a tiny bit of magic? Because that’s what the brand is about. The brand is about magic and fun. We have a primer that’s whipped so it’s like a whipped cream primer.

Natalie: [00:21:06] So the three things we ask [are]: Is it really beautiful? Can it be shared on social media? Because that’s where customers tell each other about the products and word-of-mouth is still the best way to build a cosmetics brand. Is it really, really, really beautiful? Is it really special? Does it have good quality? Is it a beautiful product inside and out? And then the third one is, can we put it through our supply chain? So we kill probably 50% of the products that are ideated throughout whatever funnel it comes into. But the ones that survive fit those three things. I mean we screw up once in a while too but, most of the time, the ones that survive hit those three.

Richie: [00:21:49] So, as you look to the business, was your goal to create hit after hit on the trend cycle? Was it to build something more stable that grew over time based on more core products? How did you figure out [whether you wanted] to run or walk or chase? How would trend permeate the business and to what degree would it do so?

Natalie: [00:22:07] We started with a lot of trend and the reason for that is that, when we first started, we had a really hard time getting any funding. So we bootstrapped for the first 20 months. We bootstrapped.

Richie: [00:22:18] Why was that?

Natalie: [00:22:19] Why?

Richie: [00:22:20] Was it the traditional “businesses white guys don’t understand”?

Natalie: [00:22:23] A little bit of that. I think less than 4% of venture capital is given to women-owned businesses.

Richie: [00:22:29] It’s terrible.

Natalie: [00:22:30] Yeah it’s pretty crazy. So we did the whole VC circuit. I came from finance so I thought, “This is my jam. I’m going to totally blow these people away.” But I had some really odd questions. Ninety percent of the people we pitched were dudes. Not that dudes aren’t great investors. We have dudes at our cap table now [who] are awesome, but it’s a learning curve—you have to teach someone about the beauty industry. I had one guy tell me that we were crazy and we were letting go of half the market because we didn’t target men or sell to men. I was like, “This is the beauty industry.” We had a prestige VC, one of the biggest and the best and supposedly the smartest, send us an entire breakdown of products he would cut and the first product he would cut accounted for millions of dollars in sales. It was one of our most beloved products. He was like, “My girlfriend—this is her feedback.” And we’re like, “You live in San Francisco in a $10 million dollar townhouse in Pacific Heights. You’re not in the world of normal people.” People love this product. It’s really fun and beautiful and magic and that is a problem in the investing world. You have a lot of this New York-, San Francisco-based staff and they forget about—

Richie: [00:23:47] The rest of the country and the world?

Natalie: [00:23:49] Exactly. And it’s no surprise that every shaving company gets funded and every dude-centric company [gets] funded.

Richie: [00:23:57] Harry’s is the most funded digitally-native startup ever. $475 million dollars.

Natalie: [00:24:01] Oh my gosh. I didn’t even realize it was that much invested.

Richie: [00:24:03] Yeah, it’s crazy.

Natalie: [00:24:04] Not that they’re a bad company. They’re great but—

Richie: [00:24:06] I don’t know if they need $500 million dollars.

Natalie: [00:24:08] It’s a lot. It’s a lot of money.

Richie: [00:24:11] Yeah.

Natalie: [00:24:11] So we were on the struggle bus. Luckily, we had a few shekels between us that we could scrape together. I convinced my boyfriend at the time to commit a $50,000 loan. All of this, by the way, is—

Richie: [00:24:26] I hope he wishes that was equity.

Natalie: [00:24:26] It was. He ended up investing in our Round 2 and actually has done really, really well on it.

Richie: [00:24:33] That’s good.

Natalie: [00:24:33] So that’s good. He’s now my fiancé which is awesome.

Richie: [00:24:38] Oh, okay.

Natalie: [00:24:39] So luckily it went well. Sometimes we joke about that. What would have happened if it had really just crapped out? But we were just hand-to-mouth at the time and trend-driven products were really cheap CAC. Customer acquisition cost on trend products was really low. So, at this point, we’re about 50/50 trend, what we call “replenishment products.” So the way that we look at our calendars and the way we look at the ideation process is 50% of our products need to be things like concealer and brow and things that you buy again. And what we try to do is bring you in with some of the magical lip products or color that’s really fun and sassy. We have these amazing palates that have kittens all over them, so it’s a little pop of joy, and then [we] hit you with a sample of a tinted moisturizer, a brow pencil, something that you need on a day to day. It’s a really good price point. So once people sample it and try it then we move that customer into a true part of the squad. The squad are people who are repeat customers. They are coming back to us pretty consistently. Now we obviously, as a much bigger company, are able to do that, but I think the reason we were so trend-driven in the beginning—a lot of it had to do with the fact that we needed to have real revenue in order to keep the brand going.

Richie: [00:26:04] So you launched October 2015.

Natalie: [00:26:06] Yes.

Richie: [00:26:06] Talk through 2016. You’re out in public now. This thing is growing.

Natalie: [00:26:10] Yes.

Richie: [00:26:10] Talk through that year.

Natalie: [00:26:11] So we had this teeny little office inside our PR firm’s office. So we had four people. We met a product developer at a factory. She was presenting us new innovation at this very fancy Italian factory and she was so cool that we were like, “You should probably just come and work with us. You’re really cool and this company is so old school.” And she got really excited about it and she, to this day, is our head of product and is a partner in the company.

Richie: [00:26:41] That’s awesome.

Natalie: [00:26:42] It was the four of us. Me, Nate, Kristen and the intern, Tatiana.

Richie: [00:26:48] She gets the name.

Natalie: [00:26:50] Yes. So we were just doing everything. We knew that we needed to get to a million dollars in sales because this was just something in my mind that was like, in the first year, we have to do at least a million dollars. We ended up doing a lot more than that. I knew that that was where you had a heartbeat—as a business, hitting that million dollar threshold means that you hit some economies of scale and you probably aren’t going to die. The first six months was like, “Do not to die. Keep this baby alive.” So it was super scrappy. I did the Instagram, all the email marketing, all the performance marketing. I had to take a GA class to understand it. I’d never worked in Google Analytics before. We were kind of doing it all. We were going out to the factories. We were flying to China. We were going to trade shows to try and convince people to work with us because—now it’s really nice because factories come and present to you and they’ll take you to dinner. But back then we were like, “Please sir. May we please?”

Richie: [00:27:52] “We’ll pay for your meal.”

Natalie: [00:27:53] Yes. So for the first six months we were really focused on that. Then went to Korea, saw that cool innovation. We were getting really close to that million-dollar mark. We were starting to sell a lot of lipsticks. We had some really wild colors that were really fun. Our product developer was like, “We could do this flower thing. It’s totally gimmicky. I don’t know if people are going to love it, but let’s try it.” So we’re like, “Okay, fine. We’ll do a run of 3,000 of these and we’ll see if they work.” So we convinced our factory to reverse engineer this without any of the parabens or the nasties that could be in some of this stuff and it just blew up. It was on the Zoe Report and PopSugar and Refinery29 did a huge article on it. All of a sudden, all this press started to turn into real, serious sales.

Richie: [00:28:51] Can you pinpoint why?

Natalie: [00:28:53] I think it was just magic. It was cool to look at and it was $14 and press—I always tell people to get a PR firm. If you can scrap together and get even an inexpensive PR consultant, which is—basically we were on life support with our PR firm. We were like, “Please, throw us a little feature here and there. We’ll give you a little bit of money.” Now we’re a really great customer of theirs but, at the time, they were really kind and were working really hard for us. It’s such cheap customer acquisition and you get a chance to really build your cookie pool and understand who your customer is and see the people who are starting to follow you on Instagram. It’s such a great way to dip your toe into the water. Even if you’re just out there calling reporters yourself and just sending products out to beauty editors, I think it’s a really great way to start the process, to understand [whom] you’re actually selling to. Because you may think you’re selling to someone and it turns out you’re not. And you may think certain products are newsworthy but maybe they’re not. And press begets press. So then they wanted to talk about the founder and they wanted to talk about the rest of the company. So that was how it exploded. We had our first $50,000 sales day. And that, for us, was we’d never seen anything like that. We were like, “Holy smokes! Maybe we’re not going to be broke and lose all of our friends’ and families’ money.”

Richie: [00:30:21] Nice. So when did that product launch?

Natalie: [00:30:22] That launched in September of 2016.

Richie: [00:30:26] 2016.

Natalie: [00:30:26] Yeah.

Richie: [00:30:26] Talk just briefly about—what is the release schedule? How often do you put new stuff out, update, restock? Because you mentioned the inventory lightness before, but how do you approach that piece?

Natalie: [00:30:37] Yeah. We launch about every two weeks, depending. So we try to have one big launch per month and then some ancillary launches that are more fun-driven. So we might launch a new color range or a new eyeshadow palette or something and then, in addition, that same month we’ll launch a big skincare hybrid or something that’s like a higher R&D, higher retention type of product.

Richie: [00:31:06] And then 2017 comes along. Talk through that year. And then I’m curious when—tell me when we get to brand number two, [when it] starts to come to into the picture and then I have a bunch of questions about that.

Natalie: [00:31:15] So brand number two came into the picture in 2016.

Richie: [00:31:18] Okay, it did.

Natalie: [00:31:18] We found LAQA & Co and it was this super cool, really artsy brand and it had this voice that was super strong. I was actually talking to a friend of mine [who] was an investment banker and she said, “I came across this small brand and one of the founders is moving to Australia—she’s moving back to Australia. It’s got this crazy following and people love it and it’s got some really nice intellectual property but they’re not quite sure what they’re going to do with it. And they have a rock star sales person but she can’t do it all on her own.” So we ended up acquiring the brand.

Richie: [00:31:51] Were you looking?

Natalie: [00:31:52] We were not really looking. It was just a really cool opportunity. We used debt to acquire it. So it was another way that we felt like we could grow without—because we were unfunded. So we used, basically, venture debt to buy this company. It was a lower price. What was really amazing about that is we got some street cred for it and then, on top of that, we got Nicole who’s our EVP of wholesale and she’s opened up Ulta and Sephora and all these massive accounts that we have now. It was almost like, in a way, we acquired her. And then the LAQA brand still grows. It’s much smaller than Winky Lux now, but it’s a really cool brand. I know if people are listening and they know LAQA, they love LAQA.

Richie: [00:32:35] Talk a bit about the channel piece in terms of, it sounds like you do do wholesale, selling direct. How did that evolve from the beginning and where is it today?

Natalie: [00:32:44] We have a pretty substantial wholesale business. Digital is where we put most of our talent and our money. We always knew we would have this omni-channel approach for two reasons. One, actually it’s very difficult to scale past a market. In beauty, it’s still less than 10% of the market [that] is digital. So 90-something percent of the market is in person. So you’ve got 10% and half of that is Amazon. So it’s really only 5% that’s [direct-to-consumer]. Amazon’s really driving a lot of that digital growth. Because I’d seen some of these from a business case study, I knew it would be difficult to scale past a certain point without having that wholesale relationship. Also our customer. We wanted to be where she is. So it’s always a battle. It’s always like do you do wholesale and let someone have the margin versus continuing to just put that same margin dollar into direct? The problem is so many of our customers have found us in those stores. So we get to touch people in places we probably never would have been advertising. So we always knew we wanted to do that.

Natalie: [00:33:56] And then the other thing was that our first round of outside institutional capital—we were doing pretty decent business. Small in the beauty world but in the startup world pretty good. It was like $4-something million in revenue when we first took any outside capital. So having some of those wholesale relationships helped bootstrap it. They were big chunks of wins that we could then turn into digital advertising dollars because I think the misconception is that it’s cheaper to acquire customer online, but that is the opposite.

Richie: [00:34:30] Yeah.

Natalie: [00:34:30] It’s much cheaper to acquire a customer [with] retail. However the value of the business is in that special direct relationship. So I like that as a company. It’s not for everybody. I’ve definitely heard founders say, “We will never touch wholesale.” Great. Cool. And then there are lots of beautiful, amazing companies are built strictly on the backs of wholesale. We’re kind of this in-between.

Richie: [00:34:56] On the apparel side, wholesale is generally shrinking as a channel. Is it still growing on the beauty side?

Natalie: [00:35:00] Ulta is going to open a thousand doors, I think, in the next four years.

Richie: [00:35:02] So it’s almost [like] you can’t compare the channels across category.

Natalie: [00:35:05] It’s crazy. I think all of it goes back to this moment with the consumer, this emotional connection that you have with buying a beauty product. It’s very sensorial. You want to smell it, touch it, feel it. There’s something magic that happens in a beauty store. It’s an emotional purchase. I think that it can be really more intense in person. Not to say that—some of our customers who found us online are some of our best customers. But I think that we don’t want to ignore 90% of the market. That’s just my thesis as a CEO. It doesn’t it mean it’s always the right one for everybody.

Natalie: [00:35:41] We opened our own first store this year that’s a Winky Lux store. We opened two actually. We did a pop-up at Roosevelt Field Mall in Long Island and then we have our showroom which is at our Lower East Side office. One of the most interesting things we found was that retail is a hard business. That was one thing we found. It is really labor-intensive. When we were going through it, we were like, “What are we doing? We can sell so much more online in a day than just dealing with this little store.” But something magic started to happen when we dug into the data of the people we were finding in the store. And the store was making money. It wasn’t a ton of money because it was really tiny store, but it was making money. When we were comparing cohorts—people who had discovered us online, in Long Island, the same day as someone who discovered us in the store—the person who discovered us in the store was three-times more likely to repeat.

Richie: [00:36:42] Wow.

Natalie: [00:36:42] So we know that being in Winky Lux store. There’s something special about it. There’s flower walls and neon signs and it smells good and there’s all these little magical products that you can touch and play with. We even have little halo lights which are not expensive. They’re just little selfie lights. But we would see groups of women, after brunch, popping over to take these perfectly lit selfies against the flower wall. So we know that there’s still something special in retail. It’s just changing.

Richie: [00:37:15] Yeah. And then so we talked about retail a bit. Any other 2017 developments that just take us into the present?

Natalie: [00:37:20] I think the retail was really interesting. Ulta was really interesting and Sephora Europe. So we went from getting accounts that were $50,000 dollars in a year to millions of dollars in a year. And that was a huge turning point. Now our factory’s buying equipment to deal with our capacity. Now we’re able to have much more efficient working capital because those are very backable receivables. So that was a big turning point. Plus we hired our first performance marketer in August of last year and she’s a huge badass and she takes no prisoners and so she has really created a really great performance funnel that we can start seeing real growth in digital. Because we were just kind of like, “Hey, if you like it, come on down and buy it.” We weren’t customizing the site. We weren’t segmenting emails. We were really like children playing business for one point.

Richie: [00:38:18] Yeah.

Natalie: [00:38:19] Real performance marketers hear that and they cringe. We were probably leaving a lot of money on the table by not really optimizing our experience. We also got more money too. Once we closed that first round of capital, we were able to really make our customer experience a lot better too. So we could hire a junior person to answer questions on Instagram. So now we do a lot of customer service on Instagram which is a place that a lot of our customers want to have customer service. We were able to upgrade our boxes and make them much more beautiful. They’re now keepsake boxes. You can turn them inside out and keep little things inside of them. They’re really pretty. They’re floral and sparkly. We became a better company.

Richie: [00:39:01] And brand.

Natalie: [00:39:02] Yeah. And we also kind of boiled down like what is this brand about too? We always knew it was about fun. We always knew it was about beauty products that made you feel happy. But our mission statement now is really clear in the office, which is we create joy through products, content, experiences. So I think that is very powerful and it took us some time to boil that down.

Richie: [00:39:29] And so, on that note, what is your goal for the brand from a scale perspective?

Natalie: [00:39:35] We’re growing a lot right now. It’s a lot of growth. I need to hire a lot more people. Don’t cut that out. Please apply. We are opening five stores.

Richie: [00:39:48] Wow.

Natalie: [00:39:49] So they’re really gonna be super cool. They’re really going to be experience-first stores. They are places where our community can gather. Beauty lovers, young and old, can come. There’s going to be some really magical activations. We have entire rooms of flowers, almost a little Museum of Ice Cream-esque.

Richie: [00:40:10] Yeah.

Natalie: [00:40:10] Truly, they’re about experiencing what it’s like to be inside the Winky Lux world, Winky World. I think that people are really craving that right now and I think it’s going to be really fun. That’s our big play for this year. Five not-so-small stores. They’re stores that have never been done before because it’s you walk through all of these different activations and get these photo machines that take your picture. They’re much more about the experience and the ‘gram.

Richie: [00:40:41] Yeah.

Natalie: [00:40:41] And also about parties. We’ve built a lot of our most loyal customers by having these little networking events at our showroom or at our store. I think that’s garnered a lot of goodwill because we want to be a place that girls and boys, beauty lovers of all types, can come and play and have fun together. I think that’s something that’s needed too from a macro-trend standpoint.

Richie: [00:41:05] Yeah. Can this get too big? Do you worry it gets to a point where it loses control or potency or any of that?

Natalie: [00:41:12] Luckily the brand is so bizarre. It’s so crazy. I think that the brand will stay pretty concentrated. My big problem now is that we’ll go to about 40 employees this year and I don’t get to spend as much time with people. That’s somewhat stressful to me as a CEO who’s run a small company before, but never a company with 40 employees. Learning how to bring everyone back to those core things. Right now we have our core values on the wall. We’re getting a big neon sign that says our mission statement. So it’s tough. They’re high class problems but they’re real problems. Scaling is a real thing. It’s a real issue and making sure that everyone knows that we’re like basically creating little love bombs for consumers. That’s what we do for a living. We create beautiful little things to make people have a pop of joy. It gets tougher as you get layer upon layer. When you only meet with your product people once a week because you’re doing something else.

Richie: [00:42:16] Nonsense like this.

Natalie: [00:42:18] This is fun for me. But yes. You’re dealing with finance stuff or you’re dealing with HR stuff. That’s the other thing too, is making sure that you keep that culture alive in the company. I think one of the things that’s really hard is I’m sort of psychotic about culture. We have a no asshole policy, no mean girl policy. I think that’s another, it’s like a growing point, where you get to a point where you’re like, “This person is really talented but we have to let them go because they’re not nice.” Those were all things that I had to learn. So I’m sure I’m going to learn a lot.

Richie: [00:42:52] What’s been the cheapest and most expensive lesson you’ve learned building the company?

Natalie: [00:42:55] Oh. The most expensive lesson I’ve learned? Keeping someone because they’re really smart and they’re not nice. I just think it’s so cliché. That one bad apple. But, man, it’s true. It’s really hard because you you go to fire someone and you’re like, “Wow you’ve done a really great job but you’ve got to go because you’re just a dick.”

Richie: [00:43:17] Yeah.

Natalie: [00:43:18] That’s a very expensive lesson and I’m glad that I bucked up and did it then. It took me too long though. It was too long. Another big expensive lesson? Hiring too slowly because I’m just afraid of that same thing. Not bringing the people in that we need at the moment. Last year, our CAC was really low, our customer acquisition cost. That’s like the lifeblood of a digital marketing company and our CAC was way too low, meaning that we left a lot of money on the table. Had we invested more in that, we would have sold a lot more and maybe we would have paid a little bit more for those customers but we still would have made money on the customers and we would have brought them into the fold. So, from a performance standpoint, I should have taken that risk, really invested in that team, given them the free rein to screw stuff up and let them start bringing people in. That was one. I guess that was a cheap thing because I didn’t spend money but it was expensive overall because I think we could have done more in digital in our last quarter.

Richie: [00:44:26] Where’s the name from?

Natalie: [00:44:28] It really was just made up. I was just thinking about fun names that were completely non-derivative. I didn’t really like names that sounded like everything else. I wanted kind of a fake name or a pretend name because I knew that the brand was about being in this fantasy world. I wanted something easy to remember. I think that I had watched that movie “Best in Show,” which is one of my favorite movies, and Winky is the dog that wins.

Richie: [00:44:56] Oh really?

Natalie: [00:44:57] Yeah. So I think that was just in my mind and it was just a fun word to say, Winky Lux. There was a whole thing about luck and winking and lux being Latin for light. So luck and light. I wish that I had a more succinct story about it but I’m pretty sure it was just subconsciously thinking about “Best in Show” and words that are fun to say.

Richie: [00:45:20] Yeah. We talked a bit about it but, as you look forward the next one, two, three years, what are you most excited about and what’s on the horizon?

Natalie: [00:45:27] I’m most excited about what the new cheap form of customer acquisition is and I’m really excited—

Richie: [00:45:33] Being retail?

Natalie: [00:45:33] Yeah, but five or six years ago, you had really inexpensive Facebook ads and a lot of companies were able to scale with those ads and then you had influencer marketing. But now Facebook is obviously fully priced.

Richie: [00:45:45] And only getting higher.

Natalie: [00:45:47] Yeah. And influencer marketing—it works, but it’s now also fully priced. So now there’s even indexes and things like that for how much to pay an influencer, which influencers to cede it. We actually don’t pay influencers any more. We did in the very beginning, but now we just cede out to them. I just don’t see that as some big opportunity. I think that there’s something on the horizon. There’s got to be something else that’s new and perhaps that is experience stores. But I think that’s what makes me really excited is that stuff.

Richie: [00:46:20] Awesome. Thanks so much for talking.

Natalie: [00:46:22] Yeah. Thanks so much for having me.

Richie: [00:46:27] Thanks for listening to the Loose Threads Podcast. You can read the full transcript of the podcast and join the newsletter at LooseThreads.com. Feel free to also leave a review on iTunes. We always appreciate it. And thanks to George Drake Jr. for editing this episode. We have a great roster of upcoming guests including Gabby Slome of Ollie, Jeff Denby of Renewal Workshop and Ashley Merrill of Lunya. Thanks for listening and talk to you soon.