Warby Parker Co-Founder David Gilboa Joins Industry Focus

By Vincent ShenMarketsFool.com

In this episode of Industry Focus: Consumer Goods, Motley Fool analyst Vincent Shen chats with David Gilboa, who was just a business school student when he and his friends decided to launch an eyewear company that would eventually revamp the entire industry. Now serving as co-CEO of Warby Parker, he shares the story ofhow his company got its start, its position in the industry, and much more.

A full transcript follows the video.

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This podcast was recorded on Feb. 14, 2017.

Vincent Shen:Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I am your host, Vincent Shen, and it is Tuesday, Feb. 14. Fools, I have a really special show in store for you. Last week, I was able to spend some time chatting withDavid Gilboa, a co-founder and co-CEO atWarby Parker, the fast-growing eyewear company that in a few short years has built an incredible brand. The company has done that by giving consumers more choices, better prices, and overall, by challenging the status quo in an industry that has traditionally been dominated by just one company. For any Fools listening who are not familiar with Warby Parker, even those who are currently wearing their glasses but have not heard this before, the story of how the company was founded is really special. Here'sDavid on the inspiration behind Warby Parker in the earliest days of the company.

David Gilboa:I started Warby Parker, along with my co-founders, [in] February of 2010. We were all classmates at business school, we had met at Wharton, and really started the company to solve our own problems. I had been working in consulting and finance for a few years, and decided to go back to school to get a graduate degree, and took a few months off to travel, and was backpacking around Southeast Asia, and I happened to lose my only pair of prescription glasses. They cost me $700. I left them on a plane. The whole time I had been backpacking, I didn't have a phone. So, I got back to the U.S., phone-less and glasses-less, and the iPhone 3G had just come out, and I went to theAppleStore and paid $200 for this device that did magical things that people couldn't have imagined even a few years earlier. I paid $200 for that, and I couldn't understandwhy I had to pay so much more for a new pair of glasses. The technology behind a pair of prescription glasses is 800 years old. It just didn't make sense to me.

Andy, one of our other co-founders, he had been wondering why no one was effectively sellingglasses online. So, we got together andstarted talking about this idea. Neil,one of the other founders, he's also my co-CEO, he had spent afew years working at VisionSpring,which is a great non-profit where they'rehelping to address the 700 million peoplearound the globe that needaccess to glasses that don't have them,primarily in the developing world. He had been tofactories in a few places around the world and knew that there wasnothing in the cost of goods or the manufacturing process that required these high prices. And,as we started digging into it, we realized that one of theprimary reasons that glasses are so expensive was that there had beenvery little innovation on the product side or thedistribution side,because there's this massive concentration of power in the industry.

Shen: Thatconcentration of power lies withLuxottica, which wecovered in detail here on Industry Focusjust a few weeks ago, withthe news that it would be merging withleading lens specialistEssilorin a $50 billion transaction. Between theleading brands Luxottica owns andthe many more that it licenses with,its huge retail network and its position as a major vision insuranceprovider, you quickly realize that any newcomer to this industry faces adaunting uphill battle. But thisalso seemed to spark David and his friends totackle this challenge head-on.

Gilboa:I had been wearing glasses since I was 12 years old, and hadnever heard of a company called Luxottica. Mostconsumers had not, but they own brands likeRay-Ban, Oakley, Oliver Peoples, Persol, Arnette. They haveexclusive eyewear licenses formost major fashion houses,Chanel, Versace,Dolce Gabbana,DKNY, Ralph Lauren,a bunch of others. They own LensCrafters,Sunglass Hut,Target Optical,Sears Optical,Pearle Vision. They also own EyeMed,which is the second-largest vision insurance plan in the U.S. And they recently announced a merger with Essilor, the world's largest lens company, as well. As aresult of this concentration of power, there's really anillusion of choice in the industry. If you walk into a Sunglass Hut or LensCrafter, you might see 50 different brands of glasses, butdon't realize that most, if not all, ofthose brands are owned by the same company that owns the store you're standing in, and owns the insurance plan you're using to pay for those glasses, and will now likely own the lenses that are used to make those glasses, as well. We thought that didn't make sense, and there was a way to design the glasses that we loved and sell them direct to consumers for a fraction of the price. So, that was really the idea thateventually led to Warby Parker. Thefounding team was really excitedby the opportunity to build a for-profit business that had a positive impact on the world.

Shen: Keepin mind that the team of co-founders was not built from the ground up to start a company like Warby Parker. But their experiences inside and outside business school still proved quite valuable, as did the paths forged by other forward-thinking companies.

Gilboa: Ourfounding team, there were four of us. On paper, weprobably didn't look like the team that was going to launchthe next e-commerce company, or a fashion brand. A couple of ushad worked atBain & Companyas consultants, a couple had worked at investment banks, privateequity firms, and Neil had spent a few yearsin the non-profit world. But I think we were able to takea lot of what we had learned in those few years in between undergrad and business school and apply frameworks, or ways of thinking, to what was really a novel problem, where there was anindustry dynamic that we had to understand. Coming from a consulting background, we wereconstantly thrown into new situations where we had to quickly come up to speed on who the players were in a certain industry,what the market dynamics looked like, where there wereopportunities or threats. So, that way of thinking was super helpful as we wereputting together our initial business plan. Andonce we started talking about the idea,it was basically all we could think about 24-7, all we wanted to work on. So, the four us then,basically, chose classes at Warden where we would get credit for producing a business plan, orcontinuing to make progress on this idea. As we learned more, again, using a lot of the thinking and frameworks that we'd learned in our previous careers, and thinking about working withdifferent clients or management teams andhow they might approach some of these situations, I think the skills that we learned early on were really helpful.

Then, as we were getting ready to launch, and thinking about, how to finance the business, we initially bootstrapped it. Thefour of us took our life savings and launchedout of our apartments. We weren't paying ourselves a salary, didn't have many employees, didn't have a marketing budget. We were really scrappy. We got a couple initial loans. The skills that we had learned, both in consulting and finance, came in quite handy as we werethinking about how to capitalize and finance the business over time.

Shen: On that note,do you think, when you were getting started,were there any companies in particular, any start-ups, thatyou felt like you wanted to emulate, or that you pulledsome important lessons from?Gilboa: Yeah,I think there were a few companies that inspired us indifferent ways. Zappos,at the time, was independent. This was before Amazon hadpurchased them. I thought Tony Hsieh'sphilosophy around company culture andcustomer service was really fascinating. They allowed their company to scale and sell aproduct that didn't seem like a natural fit forsomething that you would purchase online,at least at the time. Another company that's more mature but reallyinspired us in terms of their valuesand philosophy and ethosisPatagoniain that they had this great social mission, hada lot of positive impact aroundsustainability and the environment, but they really didn't lead with that as a market message. They reallyfocused on creating and selling great products, and on the back end,focused on how they could leverage their organization to have positive impacts.I thought that was a reallyinteresting approach. And then, on more of the brand and design side, twobigger companies that we took a lot of inspiration from are bothNikeandApple. Nike in that it's become this mass global brand, yet they've figured out how to appeal to really niche influencers and stay cool,even as the brand has gotten much bigger. You still havepeople sleeping on the sidewalk for 24 hours before their latestlimited edition Nike SDs arereleased all over the world. Yet, it'sbecome this hugely successful and ubiquitous brand as well. Then, Apple has asimplicity of designand really focused on user experienceand customer experience. So, I'vetried to take the different aspects of companiesthat we had a lot of respect for, andthink about how we might incorporate them into our own model.

Shen: If youvisit the Warby Parker website,specifically their page on company culture, you'llactually see that their number one ground rule is totreat customers the way we would like to be treated. This is, of course, the Golden Rule,something that's very important to us at The Motley Fool, as well. Thatkind of got me wondering about what it might be like to start your own company, to have, essentially, ablank page where you get to define your culture, and you get to really influence what an employee feels when they walk into work each day.

Gilboa: There are surprises for us every day, and that continues. We got a lot of advice early on that it's a terrible idea to start a company with friends, that we're going toend up hating each other, that it's a terrible idea to have four co-founders, there'stoo many cooks in the kitchen. Then, after we launched the business,after we graduated, we gotadvice that it's a terrible idea to set up a co-CEO structure, that you really need hierarchy and one decision maker. But, for us, we've made it work. I wouldn't do it any differently. I feel really fortunate thatI was able to start a business with really close friends,and we remain really close friends, and having those partners along for the journey makes the highs a bit higher and the lows a bit higher. Starting any type of business is a roller coaster. And, I think, the way that we've beenable to make that work is to be really thoughtful about being honest,direct with each other, providingeach other feedback, whether that's positive feedback or constructive feedback, andrecognizing that we're in this together,and we need to help each other. Then, thinking through how to infuse that sameculture of feedback into our organization,which now has over 1,000 employees, and how do we ensure we can build in best practices as the organization scales.

Anexample of how we thought about that even in the early daysbefore we had launched the website, before we had designed any of our frames, just as we were talking about the business model and starting to put the pieces in place -- even in those early days, the four of us founders, we would make time for 360-degree reviews, where we would go to our favoritelocal bar in Philadelphia, where we were based at the time, and we'd just go around. One person would be in the hot seat, and couldtalk about how they were feeling about things. We tried to separate operational, tactical issues from how we were working together as a team, andwhat was working well and what wasn't. And then, the other three people would have anopportunity to provide feedback to that person. It could be something about ways of communicating that set off certain triggers. For example, ifsomeone sent me a three-paragraph emailabout a piece of the business thatI had said I would own, that could set off a trigger whereI just might feel defensive in that situation, feel like they don't trust thatI'm taking ownership of this, and thatI would rather have them just grab me, or give me a call and talk through it. Just,providing that feedback, the person that wrote the email might have had the best intentions, and they just wanted to jot down their ideas, and thought that wasthe most efficient way to get those thoughts across. So, just, havingthose types of conversations early on, I think, was super helpful in creating a culture ofopen and honest direct feedback as something that we spend a lot of time on. How can we structure that in the most effective way possible as our company scales?

Shen:About six or seven yearsafter they launched, the company is now a "unicorn", acoveted title reserved for start-ups and private companies that have achieved a valuation of $1 billion or more. Otherfamous unicorns includeUber,Spotify,andAirbnb. But while the company has its roots in e-commerce, as many start-ups do, it has not shunned the in-person retail experience. There are now about 50Warby Parker stores located across the United States and in Canada. Here's David onhow they view this opportunity.

Gilboa: We'vealways thought of ourselves as brand first, and we really used e-commerce as a way to launch in a capital-efficient way, and for us to giveaccess to customers no matter where they were. I think we surprised peoplewhen we started opening stores. But for us, it was really just a natural evolution of the business, where we want to make things as easy and accessible to our customers as possible. Our view is that theworld is never going to be black and white,it's never going to be all bricks and mortar,it's never going to be all e-commerce. So, the best brands and retailers should give their customers options, and that'swhat we're trying to do with our stores. Our goal is to open stores in areas where we haveenough of a concentration of customers to justify the economics. The great thing about starting off as an e-commercecompany and being vertically integrated is that we have direct access to our customers, anddirect access to customer data, so we knowwhere our customers live, and we can use thatto help inform where we should be opening stores. We still seevery strong growth in our e-commerce business andexpect that to continue, and expect e-commerce tocontinue to take share frombricks and mortar, industry-wise.Butright now, that split is about 95% bricks and mortar,5% e-commerce across the industry. Our splitlooks very different from that. Butif we want to offer the best experience to eyewear consumers, it makes sense for us to continue to open stores. We're at about 50 stores now, and we'll be at about 75 at the end of the year.

Shen: Thecompany is pushing forward in other respects as well. Vertical integration -- this is a term commonly associated with thecompany. Warby Parker has enjoyed so much success,essentially dumping the middlemen that have beenso common to the eyewear industry.Warby designs its frames in house, [so] they avoid licensing deals with fashion designers. Theglasses are sold either direct from their own site or at theirWarby Parker store locations. Thecompany even offers eye exams at about a dozen of its stores,removing the need for consumers to seek out separatemedical providers. Thisintegration has really allowed the company to maintain competitive pricing. The bulk of their frames start at just$95. Other name-brand offerings can run into several hundreds of dollarsin terms of pricing. So now, Warby has started dipping its toesinto the production side as well. It has recently opened a $50 millionfacility in New Yorkabout an hour outside of the city.

Gilboa: Yeah. We'rereally excited to have opened our firstoptical labs. It's an over 30,000 square footfacility in New York. It allows us to cut lenses,insert them into frames, and ship the final productdirectly to our customers. So, we've tried to focus ondifferent parts of our business, andtake control over many aspects of thebusiness. This is our next step in vertically integrating. There are a few reasons for it. One is justbeing able to provide the highest-quality productto our customers and having full control over that product, instead of relying on third parties. Two, we're really focused on faster turnarounds, and delivering our product out to customers faster once they place an order.I think you're seeingthat customer expectations are increasing at a really rapid clip, primarily due toservices likeAmazonPrime and Uber. We want tomake sure we have a supply chain that enables us to scale andcontinue to exceed customer expectations. And then, also, thinking about taking full control over our own destiny, and not being reliant on anyparticular supplier, and feeling like we can flex up and flex down according to our business needs. Finally, justthinking about the economics of the business, where there is an opportunity here for us to keep a little bit more of the margins to ourselves, instead ofpaying someone else for these services. So, we'reexcited to take the next step, and in the future,I think you'll continue to see us take more control over core aspects of our business.

Shen: Rounding out our discussion, I wanted to talk to David about potentialopportunities he sees in other areas,specifically other consumer-facing industries that he feels might be ripe for disruption.

Gilboa: It's beeninteresting. Since we have launched,there's been a lot of other companies that have taken a similar approach, primarily around designing their own brand of products and using e-commerce to dramatically lower the price, and in most cases improve the customer experience. It feels like a lot of the low-hanging fruit in the consumer products space has already been picked off. I think what was initially attractive to us about the eyewear industry was that it's a massive industry that also seemedreally inefficient, and thepricing just didn't make sense for whatpeople were getting for their dollars. The most obvious example of an industry that has thesame characteristics is around healthcare, where such a hugepercentage of this country's GDP is spent on healthcare, but the pricing doesn't really make sense, and it's unclear how much value people are getting for those dollars. So, it's obviously a bit tougher to attack healthcare as a whole, but I think there are many different verticals within the healthcare space that could bedramatically transformed with new technology and new delivery models,in particular, that are able to cut out historical middlemen and are able to offerservices directly to consumers.

Shen: Andregarding the potential of up-and-coming technology and the roles it could play in retail:

Gilboa: Technology is one of our corecompetencies. We have built a world-class tech and engineering and data science team here in New York. We'reconstantly exploring,how can we use emerging technologies, what can we do to enhance the customer experience -- that's the prime focus, but also, how do we do things moreefficiently as a business? And when it comes to our retail stores, we custom-designed our own point of salethat we actually called "the point of everything", because it has multiple other applications within it. That runs oniPad Minis. It's oneunified system that connects to our e-commerce database. We have aunified view of our customers,regardless of where they're shopping, and that allows us toprovide much more personalized and better serviceto each and every customer. It's something thatit seems like every retailer should have, but mostdon't have systems that talk to one another,so when you walk into a store you're anonymous, and if you are their best e-commerce customer they often have no idea where you are, who you are, and can't even look up a lot of your customer records,and you might not be able to return something in a store that you bought online, andother things that don't make sense from a consumer perspective.

When it comes to newemerging technology, whether it's AR [augmented reality], VR [virtual reality], we're constantly exploring what makes sense, in terms of our consumer experience. But we're also careful not to launch things, or put things in front of our customers that we don't think solve problems. We seea lot of other companies out there that have a technologysolution that's looking for a problem. For us, we like to try tofigure out what the friction point in our customer journey is, and then, are theretechnology solutions that could help us address those friction points.

One quick example of that is, we werenoticing a lot of people in our stores were deciding between two or three frames that they were thinking about purchasing, that they either wanted their husband's or wife's opinions, theyweren't sure what their prescription was,they weren't sure what their vision insurance benefits were,or they were just in a rush and didn't have time to check out. So, initially, we had our retail advisorswrite down the name of the frames that they were looking at, then we said, "Why don't we just build an application around this?" We haveiPad Minis that are our point of everything,so we can take photos of the customer wearing the different frames, we can quickly have our retailadvisor select the frames that they're thinking about and hit a button, and that auto-generates an email, the customer gets that email. From there, it's one-click add to cart. So, once thecustomer has made a decision,make it really easy for themto remember what they were deciding between, and make that transaction easy to close.

Shen: Mylast question for David was intended to satisfy the Foolishinvestors among us who were wondering whenwe might have a chance to actually buy shares inWarby Parker.

(in-interview) We're an investing podcast. Any updates you can give for whenpeople might see you guys IPO? I checked today, the "WP" ticker symbol isavailable.

Gilboa: [laughs] We've raisedquite a bit of money. We've raised $215 million from some great investors. We have a goodchunk of that still on our balance sheet. Right now, we have no plans to go public. Although,it's likely, in the future, at some point. But,not making any immediate plans.

Shen: So,there you have it. Thanks again to Davidfor sharing his story,and thanks for listening, Fools! Remember that you can reach out to the entire Industry Focus team via Twitter @MFIndustryFocus, or sendquestions to our email at industryfocus@fool.com. Don'tforget to check out podcasts.fool.com for moreexcellent content.

People on the program may owncompanies discussed on the show,and The Motley Fool may have formal recommendations for or againststocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thanks for listening and Fool on!

Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, and Nike. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.