A Journey into Personalized Luxury Fashion: Editorialist YX CEO Rafael Ortiz (Part 3)

Sramana Mitra: It’s important to figure out why it didn’t validate. What was your analysis of why the company failed?

Rafael Ortiz: In the end, the reason was margins were so tight for those retailers. They were in no position to issue dynamic pricing for their products. At that time, the whole sales channel was under a lot of pressure. Retailers simply cut prices to break even. There wasn’t a way in which they could do that. We could not deliver enough customers who were willing to pay different prices. The savvy shoppers would just play with our software. They did their homework and they would just hold out for discounts.

Sramana Mitra: How did you pivot?

Rafael Ortiz: This happened in 1999. The bubble was still inflating. We had 55 employees with no revenue. It dawned on our employees that the company wasn’t working out. Half of them quit right away to join other startups that would fail six months later. We didn’t have to layoff many people. They just quit. We lost our big round of funding once the bubble crashed. The $25 million check was gone.

Sramana Mitra: What do you mean gone?

Rafael Ortiz: The investor was about to write us a check for $25 million. They pulled the term sheet. We had nothing. We went back to our Series A investors. We said, “We’ll work for free. We just need more money.” We cut our salaries down to $25,000 or something like that. They promised $2 million. They ended up writing a check for $1.6 million.

With that, we got employees to work for close to nothing or more equity. A year later, we just surveyed and we found a company somewhat similar to us that we heard was growing quickly. We looked very closely at them and what they were doing. We said that we could do that and we probably could do it better.

Sramana Mitra: What was that company?

Rafael Ortiz: That was PriceGrabber. It was run by two smart people out of Southern California. They had figured out paid search marketing early. Before there was Google, there was Goto.com where you could buy your ad for five cents. PriceGrabber was paying five cents and was getting traffic to their comparison shopping site and then sending the clicks out to the retailers. It was really only because they had figured it out. We have experimented with a lot of other things like building marketplaces for magazines. It didn’t work.

Sramana Mitra: You basically copied a concept that was working and implemented it better. Who was the VC that gave you the lifeline?

Rafael Ortiz: Morgan Taylor Ventures. Our only source of funding for A and B rounds was Morgan Taylor. We were a very concentrated bet for them.

Sramana Mitra: We are still in 1999?

Rafael Ortiz: The $1.6 million was in 2000. We got traction in 2001 and self-funded our growth from then on.

Sramana Mitra: $1.6 million is the only cash in the company?

Rafael Ortiz: Yes. After that, we were extremely careful with money. Our egos were firmly in check. We just grew the company from earnings.

Sramana Mitra: We love capital-efficient stories. What are the key highlights of that journey?

Rafael Ortiz: It was the pivot. It was finding out that a company could be successful. That was key. Convincing our investors to put more money was key. The third was looking at the problem of what we now know as paid search or search engine marketing and making a decision that this was not a job that should be done by humans in an ad agency.

This was an optimization problem that you could do at scale with some really good math and modeling. We always viewed paid search as that. Instead of doing paid search marketing for 50 keywords or a thousand keywords, from the beginning, we said this was going to be about 500,000 keywords or a million keywords.

This segment is part 3 in the series : A Journey into Personalized Luxury Fashion: Editorialist YX CEO Rafael Ortiz
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