How Canadian Entrepreneur Yona Shtern Built Beyond The Rack to a $200 Million Business: Part II

Read Part I here.

It was 2008 and Beyond The Rack’s Yona Shtern and Robert Gold had not only declined one venture capital offer in Toronto, but also had another drop out. They were out of cash.

John Stokes, the only investor still willing to invest money in the company, was at LeWeb conference in Paris. There he got to talking with a European investor named Oleg Tscheltzoff, who he had previously met during his time spent building companies in Japan.

Tscheltzoff told Stokes that a well-known investor from Zurich happened to be in the same room. Oliver Jung was the man who had already poured serious capital into a German company with the same model as Beyond The Rack. Shtern later called Jung, “the best thing that could have ever happened to our business.”

“It was a lot of serendipity that my time in Japan had delivered me a relationship with the only guy I really knew at the conference, while [Jung] was literally 15 yards away,” said Stokes. “In the end the founding investing team was these two angels and I.”

Shtern and Gold immediately bought a plane ticket to Zurich to pitch Jung. “It was extremely stressful,” said Gold. “We had to go lay out $5,000 on honestly a Hail Mary pass to go to Zurich for the day.”

Shtern pitched the investor that night. Unfortunately Jung told him he wouldn’t be investing.

But he did tell him to write up a new business plan and go for Thai food with him the following night. “Rob and I stayed up all night and we re-did the business plan. He said we had to do a million bucks in revenue by week ten and I thought he was crazy,” said Shtern. “I didn’t think that was possible.”

Jung told him, “You’re going to do it. You have to be aggressive. We need a business that can scale.”

Shtern had his lead investor and flew home with a verbal agreement for a $600,000 cheque. Jung later told him that had he not been on that flight 12 hours after the phone conversation it would have been over before it started.

“He was incredibly valuable,” said Shtern. “Find somebody who knows as much or more about your business than you do. It’ll pay greater dividends than the cheque they’ll write.”

It was still just the beginning though. Before they built up the company to four offices in Montreal, Toronto, New York and Las Vegas, they needed to scale.  

For the first two years most of Beyond The Rack’s capital was invested in marketing, building some of the 9.5 million users they stand at today. Where they wanted to spend money they tested, re-tested and made data-driven decisions.

An oxymoron, Gold called it a very conservative approach to growing quickly. “Our competitors had raised $5 million and $20 million each, spending money like drunken soldiers, so we had to have a very economical approach,” he said. “We decided that we weren’t going to spend more than $5,000 on any market channel, almost like test-drilling for gold.”

Stokes saw a strong value proposition along with great products at a great price. Coupled together, it could be a fundamental driver for growth. They were also able to prove the “per unit economics,” or the cost of acquiring a customer and the lifetime value of that customer. The final variable was a willingness to “pour fuel on the fire,” raising more money at critical times.

“They had investors around the table that understood that it was going to require a lot of capital,” said Stokes. “They and I were writing two or three million dollar cheques based on three months of data on 48 hour decisions.”

Nault compared their early decisions to the fitness of an Olympic athlete: “Everything was fine-tuned,” he said. “They didn’t leave anything to chance, they scaled their users, their financial model was working, their metrics were there and they continuously tweaked it.”

They sold $6,000 in the first six hours during one of the company’s first weekly flash-sale events (now they run 20 a day). That year they surpassed their objectives by two months, doubling their projections by the end of the year.

Skip ahead to today and Shtern is looking ahead to a year-end total of $200 million in sales. In five years he wants the company to be a billion dollar company. “We want to be the preeminent ecommerce business in Canada and I think our best days are still in front of us.”

Given that ecommerce makes up just five percent of all commerce, Stokes said there’s still a “massive amount of opportunity in the ecommerce space.” “There are going to be some new world-class companies that continue to be creative in the space and I absolutely expect Beyond The Rack to be one of those,” he said. “I’m surprised they only said $1 billion.”