The Founder of Chewy.com on Finding the Financing to Achieve Scale

Most people assume that the high point of my professional career came on April 18, 2017, when the owners of PetSmart paid $3.35 billion for Chewy.com, the pet retailer I had cofounded six years earlier. No doubt, that day was incredible. It represented the culmination of a dream and a tremendous amount of work. But believe it or not, another handshake—another deal—mattered even more to me. That one happened on September 26, 2013. I had launched Chewy two years earlier with Michael Day, using our own cash and small loans, but my vision was to build a large business, and I knew that significant capital would be required to finance the growth. We approached dozens of VC firms—I even flew out to Silicon Valley from our South Florida headquarters and went door-to-door on Sand Hill Road explaining how Chewy would succeed by delighting customers and running an ultra-efficient operation. But everyone turned us down. Larry Cheng at Volition Capital was one of the people we pitched our company to. We first met him in 2012; he was en route to Disney World with his family and agreed to make a quick stop at our office. I remember that he asked me, “Who’s going to take this company to $100 million in sales?” I was 26 and probably looked even younger, but I confidently answered, “I am.” He didn’t invest. He followed up with us about six months later, though. We’d beaten the sales projections that we’d previously given him, and he was impressed. A few days later he signed off on a $15 million investment in Chewy. The satisfaction of that victory was even greater than the pride I felt following the eventual multibillion-dollar sale. After two years of building Chewy—and more than 100 conversations with VCs that went nowhere—I’d finally found someone who believed in me and our business model. Larry had validated our idea. From that point on, the mission was larger. I was even more committed to making Chewy an industry leader, because it was no longer just our own money on the line. Larry had gone out on a limb for us. I felt that responsibility. I approached every subsequent round of financing, including PetSmart’s acquisition, in a similar way—by underpromising and overdelivering on sales. Our mission was straightforward: to build a best-in-class, customer-obsessed pet retailer. We also wanted to leave everyone who’d backed us a winner. An Early Pivot I’ve been working since I was 13, when I started building websites for family members and local businesses. From there I moved into affiliate marketing. I met Michael in an online chat room discussing website design and computer programming. We hit it off immediately and started talking about collaborating on a business. I’d always wanted to build an e-commerce company, so we settled on what we thought was a terrific idea in an industry ripe for disruption: online jewelry sales. We built the website, set up the delivery systems, bought the inventory, and even put a safe in the office to store it. But about a week before our scheduled launch, I had a revelation. I was in a local pet store with my toy poodle, Tylee, asking the owner about the most healthful food I could buy for her. That’s when it hit me: I was getting into the wrong business. I didn’t care much about jewelry, but like many dog and cat parents I knew, I was passionate about what I bought for Tylee. The pet industry was big and growing, moving from mass market to premium. It was clear that the opportunity was huge. So although we were only a week away from launching the jewelry business, we pivoted. We sold all the rings, necklaces, and bracelets—and the safe—and started learning everything we could about the pet industry. We built a new website. We found a local distributor and partnered with a third-party logistics company nearby. In June of 2011 we launched. In just three months we went from my epiphany at the pet store to running a pet-supplies business. People sometimes ask if I worried about following in the footsteps of Pets.com, in 2000 one of the highest profile failures of the dot-com bubble. I didn’t. For one thing, I was 15 when that company declared bankruptcy, so I wasn’t very familiar with the story. Second, Pets.com existed at a time when most people had dial-up internet and weren’t comfortable making purchases online. By the time we started, e-commerce was second nature for most consumers. I also got questions about Amazon, and, of course, it was a real competitor. It had an incredible infrastructure, established relationships with customers and suppliers, and endless capital. But I knew that other companies, including Zappos (later acquired by Amazon) and Wayfair, had found success in specific product categories. Their secret was offering a differentiated customer experience. I thought we could do something similar in the pet space. With limited resources, we served as our own C-suite. I was CEO, Michael was CTO, and my longtime friend Alan Attal was COO. We knew that superior customer service had to be one of our core competencies if we wanted to deliver the same experience I’d had at the neighborhood pet store, so our first priority was building a team to work the phones, live chat, and emails in our call center so that we could stop doing all that ourselves. From the outset we reinvested all our cash from operations in the business, but eventually we needed the larger pools of money that VC firms offered. After months of searching, we finally found Larry and Volition. Scaling Up We closed the series A financing round on October 24, 2013, and I’ll never forget the moment the money hit our bank account. Although we had signed the term sheet, part of me was still skeptical that it was all going to work out. But when I saw the transfer confirmation, it became real. With that money we could invest in developing the systems, technology, and teams needed to scale up. We could also bring stocking and shipping in-house. We already recognized that if we wanted to create a multibillion-dollar business, fulfillment had to become another core competency. Consultants had told us that it would take a year and a half to build a warehouse from scratch. But with 300% growth year over year, we didn’t have that much time. The logistics company handling fulfillment couldn’t keep up, so the Chewy customer experience had begun to deteriorate. We needed more control, and fast. We knew we had to make the transition within a few months. We started scouting potential sites in February of 2014, focusing on the northeastern United States because so much of the country’s population lives there. The location we chose—Mechanicsburg, Pennsylvania—would allow us to provide overnight delivery to customers in the densely populated tristate area of Connecticut, New York, and New Jersey. By that summer we’d opened a 400,000-square-foot facility full of bags and cans of dog and cat food, carriers and cages, leashes, litter boxes, toys, and treats. Ryan Cohen with his toy poodle, Tylee, in Miami Mary Beth Koeth Although we managed to get up and running in less than six months, it certainly wasn’t easy. Everything that could go wrong did. We couldn’t hire people to work in the warehouse fast enough. When we were finally staffed, the scanner guns would stop working, or the Wi-Fi or warehouse management system would go out. We were tackling issue after issue 24/7 until we worked out all the kinks. We also focused heavily on marketing. From day one, we invested almost exclusively in direct response ads, so every dollar spent could be tracked—no Pets.com-style Super Bowl commercials for us. We expanded by investing in the team and processes to effectively acquire the right customers at the right cost. Our governor of growth was free cash flow. Our sales more than doubled from $205 million in 2014 to $423 million in 2015. Our new hires played a big role in scaling up the company. I realized early on that I’d need to use my time efficiently and focus on hiring. At first recruiting was a challenge. Alan and I spent countless hours reaching out to candidates on LinkedIn, explaining how quickly the company was growing and describing what we intended to build, but 98% of them didn’t bother to respond. Surprisingly, that turned out to be a useful filter. The 2% who did write back were true believers, team players, and business builders who were excited for the opportunity. They all had tremendous heart, fire in their bellies, and a will to win. We hired for passion. Many people quit stable jobs and relocated with their families from across the country to join us. It was a tremendous sacrifice that we never took lightly. Ultimately we raised six rounds of financing totaling more than $350 million from T. Rowe Price, BlackRock, Greenspring, Lone Pine, Verlinvest, and the investment bank Allen & Company. The Next Level Our revenue was $901 million in 2016 and growing 100% year over year. That got us thinking about an IPO for our next round of financing. We had about 7,000 employees and six warehouses, with plans to add another two in the next 12 months. From an operational and strategic perspective, the company was strong. As we prepped for the IPO, Petco, one of the biggest U.S. pet retailers, approached us about a merger. It couldn’t meet our terms, so we shook hands and parted ways. In early 2017 PetSmart, Petco’s primary brick-and-mortar rival, also reached out. I received an email from Raymond Svider, a partner and the chairman of BC Partners, the private equity group that had completed its acquisition of PetSmart in March of 2015. He said he was interested in buying Chewy and wanted to talk. We had met previously but didn’t know each other well. PetSmart was one of our top competitors, so we proceeded carefully. I explained that we were preparing for an IPO, so we expected a certain price in an all-cash, public-style deal. In view of the competitive dynamics, we weren’t going to give away our proprietary information and start a lengthy due-diligence process. I told Svider that if he wanted to make the acquisition, he would need to do it quickly. To his credit, he did. In April of 2017 we signed an agreement to sell the company for $3.35 billion. It was the largest e-commerce acquisition in history. See more HBR charts in Data & Visuals Our investors were happy too. The early-stage ones made huge gains, and the later-stage ones earned significant money. Investing in Chewy had made a lot of careers, and I’m proud of that. Those investors put their trust in me and my vision, and I repaid them with returns. The same would soon be true for BC Partners and PetSmart. Chewy’s revenues continued to rise post-acquisition, hitting $3.5 billion in 2018, while its losses narrowed to $267 million. In June of 2019 PetSmart spun Chewy off into a publicly traded company at a valuation near $9 billion, close to three times the sale price of only two years before. I left the company in March of 2018. It wasn’t an easy decision, but I felt I had done all I had set out to do. The company was sound, the foundation strong, and the vision set. But I was no longer in full control. And I didn’t want a boss. I’m a business builder, not a manager. My work was complete. When I think back to why raising the money to help grow the business was one of the best moments of my life, I realize it’s because the journey was far more exciting than getting to the finish line. I relished the challenges of disrupting an entire industry and trying to delight customers to a degree that had never been achieved before. The excitement I felt from putting together a world-class team of employees and investors, succeeding against all odds, and building a multibillion-dollar retail leader from nothing was unequivocally the greatest of my career.

The Founder of Chewy.com on Finding the Financing to Achieve Scale

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