# Navigating Capital Misalignment and DTC Pivots

**Podcast:** How I Built This with Guy Raz
**Published:** 2026-08-03

## Transcript

We needed working capital.
And so I asked a friend if they had any ideas of the valuation of this company.
And they said, no, but I'm going to introduce you to a CFO at a private equity firm.
So Serena and I went to pay them a visit, just literally to get their opinion on the valuation.
And in about 10 minutes into the meeting, The CFO went and got one of the general partners of the firm.
He literally patted us on the heads like we were dogs or puppies.
Or children.
He took his seat at the table and said, you girls sure have been busy.
Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built.
I'm Guy Raz, and on the show today...
How a tiny baby boutique in Mill Valley, California grew into the luxury home goods brand Serena & Lily.
One of the hardest decisions that almost every entrepreneur faces is not what to build.
It's how to pay for it.
Because for a lot of companies, success actually creates new problems.
The more customers you have, the more inventory you need, the more people you hire, and the more cash you burn.
And suddenly, a company that seems like it should be printing money?
is desperately short of it.
That's exactly what happened to today's guests, Lily Cantor and Serena Dugan.
In 2003, they started a company called Serena & Lily, selling beautifully designed baby bedding.
And almost immediately, they caught a huge break.
Their first catalog landed in retailers' mailboxes at exactly the right moment.
And within weeks, they had close to $100,000 in orders.
There was just one problem.
They hadn't actually made the products yet, which meant they had customers, but no inventory.
Demand, but no cash to fulfill it.
As you'll hear, they found a pretty clever way through that first crisis.
But it was only the beginning.
Over the next decade, Serena and Lily expanded from baby bedding into furniture, home decor, wallpaper, lighting, eventually becoming one of the country's best-known luxury home brands.
But getting there required round after round of financing.
And somewhere along the way, the people writing the checks began to have very different ideas about what kind of company Serena Lilly should be.
What followed is one of the most instructive and maybe even cautionary stories we've told on this show about raising capital.
Because not all money is the same.
The wrong investor can cost you far more than equity.
Anyway, to start at the beginning, Serena and Lily launched in Marin County, California in 2003.
We'll hear from Serena Dugan a little later, but first to Lily.
She grew up in Kansas City and studied accounting in college.
And after a series of jobs in technology and retail, landed an executive role in Microsoft.
It was the mid-1990s, just as the company was entering one of the most extraordinary periods of growth in business history.
dominated the desktop.
I mean, they were, I'm not kidding you when I tell you they were printing cash.
They were printing cash on Windows and Office like no one's business because there was no cost of goods sold.
They just gave the license serial number to Dell, to all of their partners of their desktops and their laptops.
I mean, they were compatible with every imaginable peripheral, whether it was you know, printers, mouse mice, you know, they were compatible.
So I always like to say they put the gas pedal on the right, they put the brake on the left, and they created an industry.
You would stay there, I think, for about five years, a little over five years.
And you end up leaving.
I think you got pregnant with your first child and you decided to take...
I think initially to take time off, but you never went back to Microsoft.
I did not go back.
I left in 2000.
Yeah.
And I did not go back to corporate America.
Did you feel, I'm curious, because you were, I mean, you were a young woman at the time and you had this amazing run at Microsoft and probably, you know, you were there at a time where you got options and shares.
Did you feel like, okay, I can live off this for a long time?
Like what, you know?
what I got in compensation from that experience.
Oh my God, yes.
I mean, those were some wild years.
I was there at a time where the stock split three times and doubled every single time it split.
I probably was there at one of the most exciting times of that company's stock.
And I was lucky.
I was in the right place at the right time.
But yeah, I thought we could live on that for sure.
Okay, so you...
decide that you're not going to go back.
And you have your first child.
And tell me about how you, what were you thinking about maybe doing at that point?
You know, my mind works in a kind of crazy brain way, but I, after having our first child, I got baby gifts that were personalized with his name on them.
And they were very unusual.
And I didn't feel like there was like an exquisite baby store that was highly curated.
Now keep in mind, I now have, you know, a 1315, if you go back to my high school years, I now practically have a 20 year career in the retail world.
And so I just decided to open a baby store in downtown Mill Valley.
The internet was alive at this time, we're now talking about 2001.
So there was ways to you know, fine things.
Certainly not like today, but yeah.
All right.
So you've got this business going.
You're living in, at that point, you were living in Mill Valley, just north of San Francisco.
But baby, things for babies, right?
And kids.
And kids.
Okay.
And clothes.
So it was like decor for, was it clothing as well?
We had a tiny department of apparel in the back.
But mainly like it was decor.
It wasn't like baby bottles and baby pacifiers.
Not a ton of gear.
We did have Bugaboo strollers.
Bugaboo strollers, man.
I remember those.
That was like the, that was the stroller.
That was the Tesla of strollers back in the day.
Yeah.
No, we had mostly home decor.
Nurseries and kids rooms, furniture, bedding, accessories, gliders, rugs.
We opened it in July of 2002.
That's you and your husband, Mark.
Yes, my husband absolutely helped me out a lot.
July of 2002, we opened our baby and kids store called Mill Valley Baby.
And by November of 2002, we moved down the street to a nearly 3,000 square foot store.
We were kind of bursting at the seams in four months.
So this was like...
I can imagine you're thinking, this is amazing.
Like, this is really taking off.
This could be a concept.
Like, this could be, I could open a location in San Francisco.
I could open a location in Los Angeles.
Or do you remember thinking that way?
I mean, given how, no.
No, I didn't think for one minute that I wanted to expand or scale what we had already done because so much of what we had done required my presence.
And, you know, independent specialty stores, really require the owner operator.
So no, there was no desire to scale Mill Valley Baby and Kids.
Okay.
All right.
I want to pause and I want to turn to you, Serena, because this is, we're going to get to where, you know, the two of you met.
So you, from what I understand, were committed to becoming a psychologist.
You went to college with that.
This was your, this is what you were going to do with your life.
Yes, very much.
Obviously, you're not a psychologist today.
You are an artist.
What happened?
How did you veer off that path?
So I graduated.
I took the requisite year off in Colorado.
And oddly, I started painting for the first time.
I started painting.
You never painted before?
Like as a teenager?
No.
So how did it enter my world?
I was decorating my first house and I would pick up shabby pieces of furniture and I painted the furniture.
So it was a table.
It was latex paint.
So imagine an ugly wood table.
I painted it purpley blue and painted houses along the perimeter that were cute.
And I would have a lot of parties in those days.
And I had a friend of a friend over to my house who managed an art gallery in downtown Denver.
And she said, this is amazing.
Can I sell it?
If you can paint some other pieces, I'll show them in the gallery.
And I thought, okay.
And so I gave her pieces to show.
They sold immediately.
I painted more.
They sold immediately.
Wow.
And meanwhile, I'm applying to graduate programs in psychology.
And I am just starting to feel this tickle of what am I not exploring?
Because this is really fun and I'm making money over here.
And I thought, well, maybe I want to go into graphic design.
Got it.
OK, so you you wisely go to art school.
And I guess after you graduate, you you land in the Bay Area where I guess what you you open up your own design studio.
Yes, I had to build it the old-fashioned way, which is reaching out to interior designers, sharing my portfolio.
And we met an old friend of my husband's, and she asked how I was doing and what I did for work, and I told her what I did.
And she said, oh, how interesting.
I work for Pottery Barn Kids, and I know that they are looking for a decorative painter.
And the kismet moment.
And that is that these are the days of Pottery Barn kids being kind of the gold standard in baby and kids catalogs, magazines, marketing, brand, etc.
In part because they developed this very loose, fun, playful style of decorative painting on walls.
And that, it was me.
It matched my style.
So you would decorate things that they would photograph for their catalogs?
Yeah, I would paint the walls.
I partnered with the stylist, and they knew what they had to shoot.
I would look at the bedding.
I'd say, okay, this is what I want to do on the walls.
Everyone would clear out of the room, and the clock would tick because those photo shoots are expensive.
And so I would have to speed paint a pattern.
on the wall or the section of the wall that would be photographed for the catalog.
That's unbelievable the amount of money they would spend on a photo for a catalog.
That's insane to me.
Right?
But they wanted a hand-painted wall.
Okay.
So you've got this design studio and also doing, presumably over time, doing more work in homes.
Yes.
I had started to really create a specialty around baby and kids rooms because of that portfolio that I was building and the connection to a beloved brand.
That was not exclusively the work that I was doing.
I was painting foyers and powder rooms and so forth.
And you were doing this by hand.
You weren't printing stuff quite yet.
Yeah.
No, I...
And this is actually where psychology and creativity really meet.
I would go in.
I would meet with you, Guy.
You'd say, we have this entryway and we want something that feels like it reflects the family.
And I would then go back.
I would kind of get to know you and I would meet you back in a couple weeks with visual samples of what I would like to do.
On the wall.
On the wall.
All original patterns created bespoke for your space and your family.
Wow, that was hard to scale because it's just you.
I wasn't thinking about scale.
Right.
Fair enough.
It was scalable only in the sense that I would start to hire people.
I had as many as four people getting base coats on or helping me lay out the pattern or whatever.
But all the brushwork was me.
I know that this is a bit of a digression because you've got this business growing in the Bay Area.
And this may have predated some of the things we're talking about.
But just going back to your personal life, I know that your dad was tragically killed on 9-11.
Yes, he was.
And at the time, I was working for Pottery Barn Kids.
I was literally in painting overalls.
And I was about to be picked up by my photo team.
We were on our way to set.
And I had a friend call me from L.A.
And he just said, you've got to turn on the TV.
There's big stuff happening.
And he was frequently at the Pentagon.
His primary client was the Army.
He worked for Booz Allen Hamilton.
He was private sector.
But my family was all in D.C.
And the questions were, has anyone talked to dad?
And, you know, we all had the sense that he was at the Pentagon.
And we said, well, we can't reach him because he's probably on the ground helping.
Wow.
It's an enormous tragedy.
And, you know, the loss plus trauma of a terrorist attack commingled with the loss of a loved one.
You know, it will always cut right through for me.
Yeah.
Tell me a little bit about the business itself.
I mean, were you, you know, by 2003, for example, would you describe your business as still a pretty small business that was supporting you and, you know, enabling you to pay rent and do all those things?
It was a great business.
It was growing.
It provided reliable income.
I always had a packed schedule.
My goal was not.
scale necessarily.
It was simply to do what I loved and have a pipeline of work.
And when I use the word pipeline, I think of my dad because we would talk every Sunday.
He was my consigliere and he would always ask about my pipeline and he would want to know that I was safe and building a business.
And, you know, I had pivoted from something very understandable and reliable and suddenly was a working artist.
So pipeline was really important.
And his words kind of carried on for me.
And I was most worried about, do I have enough coming in?
And I always did.
Yeah.
All right.
I want to turn now.
to both of you and start with you, Lily.
So you've got, when we left off, you've got this thriving baby business, baby store, and you have your second kid, I guess, and you are, you're out, obviously, to have your kid and you come back to the store and you notice some patterns that an artist drops off.
Tell me about what happened.
Well, let's see.
I had my second child.
I have to...
admit it was a fairly easy birth.
And I had him at 2 p.m.
on a Thursday and at 10 a.m.
on a Friday, I was ready to go.
And I saw my OB and I said, I'm ready to go.
He's like, you look like you're ready to go.
Goodbye.
So I literally left the hospital and, you know, I do what new mothers do.
And I want to do show and tell with my 20 hour old baby.
I bring them into Mill Valley Baby and Kids and I've got my employees there.
And the day before, Serena had stopped by the store and she left this magnificent portfolio.
She had created the most beautiful piece of collateral.
They were postcards of all of her work in this perfectly die cut, flooded with pattern envelope.
The packaging was magnificent.
And she left it at the store the day before.
And Serena, you left this stuff at the store saying, hey, maybe you want to refer me to the people who shop in your store?
Yeah.
She's selling them baby bedding and perhaps a crib, et cetera.
She doesn't have the walls covered.
And so it would give Lily the ability to provide a bespoke, beautiful, mural.
you know, or something on the walls.
Okay.
So Lily, you see these designs, these patterns.
I was like, oh my God, she is so talented.
I literally picked up my phone and I call her and I'm like, hi, you left this most magnificent portfolio of your work at my store yesterday.
I can't wait to meet you.
And Serena's like, um, Did you have a baby yesterday?
I think that I said those exact words.
Because you would have gotten into the store and, I guess, asked for the owner or whatever, and they said, oh, she just had a baby.
I thought, oh, I'll hear from her in a month.
Maybe.
Yeah.
And I think we met about a week later.
I think under.
Was it under?
Because keep in mind, the store is already set up.
with a multiple number of cribs and bunk beds and twin beds.
So it's already organized in room environments.
And when I saw Serena's work, I immediately thought to myself, wow, I want people to walk in and say, I want my baby's nursery to look like that.
Or I want my kid's room to look like that.
So I was like, I love it.
Let's do this.
And she's like, awesome.
And then she starts showing me her block printed textiles that she was producing for interior designers.
And this was all pretty custom at this point.
And were you hand printing it with your, like with a block?
Well, see, that's really the operative question.
I had an assistant who was block printing and I swear I was losing money on every order.
Yeah.
Because it had to be pretty perfect and contiguous yardage.
Terrible business idea.
I mean, it's an artisan business, right?
This is like you could only make a certain amount of these a month.
Yeah.
Yeah.
I mean, it wasn't a thought through business idea.
It was a way of expressing myself.
And the economics were really beside the point.
Which is why I needed a lily in my life.
Yeah.
So, Lily, you see these designs, these textiles, and you're thinking, these are really cool.
There's something more to be done with this.
Yes.
I wasn't all too thrilled at the time with the crib bedding options.
At the time, keep in mind now we're in 2003.
Moms were still using baby bumpers back then.
Oh, yeah.
I remember those around the crib.
Yeah.
That was a thing.
But it's not a thing anymore.
It's not.
We had those all over the crib.
I don't know.
Yeah.
I saw her designs and I thought those would be very beautiful on a crib bumper, on a crib sheet.
Yeah.
I'll interject and say I.
had a thought about what a nursery should feel like.
And nurseries were not approached the way that felt right to me.
And so design relates to a feeling, right?
It doesn't matter if it's the bumper, if it's textiles, if it's artwork.
What should it feel like?
It should be more respectful than the choo-choo trains and bunnies and ducks and pastel.
It just, the feeling was all wrong.
And so, yes, I knew what.
the textiles should look like.
And it started there.
It always starts there, in my opinion.
But it was a whole room notion.
So together, you're thinking, all right, there's maybe an opportunity here to do something.
But let's talk for a moment about the partnership, because you meet.
And clearly, you both like each other right away.
And you have this, you both are aligned on a vision.
But that happens, I shouldn't say all the time, but that happens a lot.
You know, I mean, I've met people right away and I'm like, oh, my God, I love this person.
And then, you know, you don't always know.
So let's first talk about what you thought you knew.
Lily, what was it?
OK, you loved Serena's designs, obviously.
You're talking about maybe doing something together.
But that creating a business together is more than just like a project.
Yeah.
Absolutely had amazing chemistry with Serena.
And, you know, keep in mind her first project she's doing with me is she's going to come in and paint the store.
We're spending a lot of time together now in the store, getting to know each other better.
I remember learning about her father.
I also had a tragic, I lost my father in a car accident when I was in my late 20s.
I just feel like we continued to bond.
What I recognized in Lily that felt familiar and like a good sign at each turn was this sense of limitless of possibility and a drive.
And that drive might be motivated by, you know, for me, it's mine is not logic based.
And I recognized hers.
is logic-based, and she had experience accounting and merchandising.
That's why we partnered.
Lily, you had a business.
You've got the Mill Valley Baby Store, but this is going to be a different business called Serena and Lily.
Tell me how you were going to spin this out as a separate standalone thing.
What was your thinking around how this business was going to work?
Like a side business?
Yeah, absolutely.
I spun it out immediately on LegalZoom as an LLC, Serena and Lily.
And Serena's very dear friend is a branding marketing person.
And we kicked around a lot of names.
And she was really the one that came up with this idea of how ownable our names were.
They were ownable at that time.
They probably wouldn't be today.
Who knows?
So many people would come in and tell us their...
Their girls' names were Serena and Lily.
Right.
But yeah, that's kind of how it happened.
We spun it out as a separate company.
We were 50-50 owners.
I told Serena I'd put $50,000 into this business.
We'd be equal partners.
And you had that cash presumably from your Microsoft options that you got during that time.
Yeah.
And the business would initially be...
Textiles.
Let's just make textiles and start from there.
Cribbedding.
Cribbedding.
Okay.
So you've got designs and patterns.
But from what I understand, you're not the two of you.
You're not like, let's go find a manufacturer and start producing rolls of textile and fabric.
That was not what you were going to do.
You were going to figure that out later, right?
First, you were going to.
Because you wouldn't really launch this until I think May of 2004.
But in that six-month period when you started the business, you were not manufacturing anything, right?
No.
Honestly, Guy, we didn't know a damn thing about what we were doing.
Serena had a cut-and-sew person that could make us samples to be used in our photo shoot.
We got the name of an agent that can help us in Los Angeles find a printing source that can print our fabric for us.
So we literally, you know, talked him into taking a risk that we were going to be this multi, multi-million dollar brand one day.
And can you please just print us 15 yards?
of the following 15 fabrics because we're doing our cut and sew photo samples and they did it and they took a risk on us and we had the most incredible photo team and photo stylist and we produced this beautiful look book that that and we had The woman that was block printing Serena's fabrics, that was literally doing all of that labor, her assistant, Maureen, she came over and started working full time for Serena and Lily.
And she, I think they used the word screen scraped.
She screen scraped the entire internet for every retailer that would be the right place.
to get our crib bedding into their store and produce mailing labels for this first catalog.
So this really, you were going to start with a catalog.
You're going to mail a catalog to, I guess, a few hundred stores around the country.
Absolutely.
We kind of took a play out of Serena's playbook, which was this gorgeous die-cut envelope.
that was flooded with pattern, with a gorgeous sticker, that when you got this thing in the mail, you're like, what the heck?
Did I just get invited to the White House gala?
Like, what is this thing, right?
And you knew, based on your store, that the boutiques that would receive it, they would look at this.
They would see this right away.
They did.
I mean, they opened it, and they were like, wow.
But something...
More exciting happened the weekend they received it.
Okay, and this is Memorial Day weekend 2004, I guess.
Yes.
Okay, what happens?
Wendy Bellissimo, who had probably 600, possibly 800 independent specialty stores selling her beautiful premium crib bedding, literally faxed down her entire independent channel.
thanking them for their amazing patronage for the last X number of years.
And she said, I've decided to sell my brand or license my brand to Babies R Us.
Probably the biggest baby retailer in the country at the time.
At the time, yeah.
So she basically said, I'm going mass.
Thank you so much, but I'm done.
Yeah.
She's still around and obviously very talented, but this was, she was known as designing.
I guess, the best available designs for cribs and blankets and things like that?
That's correct.
And she left this entire channel without a premium crib bedding company.
So all of a sudden, these retailers are like, what are we going to do?
And at the same time, they get your catalog.
I can't even make this up.
It happened the same weekend.
Wow.
When we come back in just a moment, how a desperate search for funding leads to a great deal until someone actually reads the fine print.
Stay with us.
I'm Guy Raz and you're listening to How I Built This.
Hey, welcome back to How I Built This.
I'm Guy Raz.
So it's 2004 and Serena and Lily now have a wholesale business going and they've just sent out a catalog of their premium baby linen to a bunch of specialty stores.
And our fax machine starts going and we're getting orders.
It's like, oh my God, it's happening.
It's happening.
And they're coming over the fax machine.
They don't know us.
Like we came out of nowhere.
And they're ordering, what are they ordering?
Are they ordering baby sheets?
What exactly?
At the time, we sold everything as a three-piece crib set, which was the bumper, the sheet, and the dust ruffle.
And the dust ruffle, okay.
Yeah.
It was very premium crib bedding.
And we had a minimum order requirement of four crib sets.
So it was basically a minimum order of $1,000 to open up an account with us.
And in a matter of a few weeks, I just recall going, oh my goodness, we have $100,000 in orders.
And then I think at some point.
Serena and I went to a trade show, the ABC Kids Expo, I believe in Las Vegas.
We had this genius idea to create these gorgeous hat boxes that had a window.
And we packaged up our crib bedding in these gorgeous boxes and stacked them up in our trade booth.
And I'm not joking when I tell you every single baby store stopped and said, wow, is that how it comes packaged?
And we're like, yeah.
And they're like, I'll take four.
You know, it was just hilarious.
Like, so we're just mounting the orders for an inventory we do not have.
And you were going to get this printed in India?
No, at this time, we're still 100% domestic.
We found a cut and sew facility down in LA and there was a speed to market.
that we were able to accomplish with a lot of scrappiness, scrappy thinking and scrappy vendors.
And so we were able to get this first production done in Los Angeles, but we didn't have the cash.
Yeah.
I mean, yeah.
So you've got the orders, but you don't have the cash, which is a common problem, right?
You've got this great $100,000 in orders, but what do you do?
And you've got to get it to them.
I mean, this is in...
I guess, Memorial Day and you want to get it to them, I don't know.
I mean, we'd like to get it to them in the next, like, you know, two to three months.
Okay, yeah.
So we're like, hey, why don't we call all of them?
Yeah.
And let them know that we are in an oversold situation with our initial production.
And if they would like to guarantee their order.
they would have to provide us a 50% deposit on their order.
And the oversold situation was that we actually had none.
But they all basically, I don't remember one saying no.
And so we raised our working capital, if you will, from our channel.
By asking people to deposit, right?
Okay, because you get cash.
And how much, do you remember how much, I guess 50%, so $50,000.
Yeah.
But keep in mind now I have scope creep going on with my initial investment.
So I'm continuing to put money into the business to help us fund.
I always kept Serena as my 50% partner and we booked this infusion, if you will, as a do-to Lily Cantor so that we had a...
a liability on our books, but not...
It was like a loan.
It was a loan.
Yeah.
And because I always felt like without Serena, we don't have Serena and Lily.
And without Lily, we don't have Serena and Lily.
So we need to stay equal partners.
So you get these orders and were you, the factory you were working with, were they cutting everything and packaging it up so you had like a package of the dust ruffle, the sheet and the...
bumper, whatever, cover in all in one package, like ready to go, ready to be shipped to the customer?
Oh my God, that's such a painful story to even talk about.
They sent us all the pieces and parts up to Mill Valley.
We had this fabulous woman who worked for us in the early days who folded everything perfectly into our magnificent hat boxes that we designed and developed.
And we then shipped it into our first 100 stores.
And unfortunately, those boxes, most of them did not survive the shipping effort.
It was like kind of a certified disaster because our gorgeous boxes didn't end up being so gorgeous when they arrived.
They structurally could not be stacked, basically, or shipped.
They were beautiful to look at and structurally unsound because of that.
beautiful acetate window that we put in front, which compromised the structure.
We know a lot more about boxing and packaging now.
It actually has to function, not just look beautiful.
I don't think either of us took that into account.
In the meantime, you know, as much as we were trying to get away from having to use vinyl, we had to fall back on the tried and true packaging solution because the box solution was a disaster.
We admitted defeat.
Yeah.
All right.
So here's what I'm curious about.
By the end of 2005, you're going to do about $750,000 in sales.
But the middle of that year, you decide, Lily.
to sell the baby and kids store.
Why?
I mean, was it not?
Because I imagine that was probably still bringing in maybe more money at that time than Serena and Lily, or maybe not.
I don't know.
But was it just you saw more potential in this other thing you were doing?
I literally was so overwhelmed.
I had another baby in between all of this.
I had another baby in July of 2005.
So I have three little boys.
They're under four years old.
I've got Mill Valley Baby and Kids that requires my time.
And then I've got Serena and Lily taking off like a rocket ship.
And I just remember going for a hike with my husband in October of 05.
And I was like, oh my God, something has to come off my plate.
I just, I can't do this anymore.
And I said, I think it's time to sell the store.
The next day, I came into Mill Valley Baby, one of my very best clients who, anytime she walked in the door, she bought a lot of things.
I mentioned the idea that I was trying to sell my store if she knew any Tiburon or Mill Valley moms that might want to buy the store to call me.
And she literally called like a few hours later.
She called my store manager and she's like, tell Lily I want to buy her store.
Wow.
That was, you know, we closed that deal in December of 05 and got that monkey off my back.
All right.
So you, that is out, that's off your plate.
And now you are focused full time on Serena and Lily.
And you guys have, just give me a sense.
I mean, Serena, you are.
Lily is focused on like managing cash flow and sort of dealing with operations.
And you are focused on design primarily, like making designs and coming up with different patterns and also things that could go on.
Yeah.
You know, in those early days, we were all pulled in to everything.
If there was a crisis happening with one of our wholesale accounts, we were all brought in.
While Lily was navigating around cash flow and viability, and she and I are both very similar in that we're like, ooh, here's an opportunity.
We have to capture it.
It's always a yes between the two of us.
We're both gas.
Neither one of us is break.
So, yeah, that was an exciting time.
But my primary responsibility was design and creative.
One thing that's interesting is that pretty soon I think your retailer started to ask for more stuff.
Like the stores that you were selling to, they wanted you to move from baby bedding to kids bedding or from bedding to furniture, right?
Is that right?
Yes.
We were doing kids.
Bedding Next, which was introduced in 2007.
We wanted to grow up with baby.
The parents were asking us to help them keep, because keep in mind, like they had the look of our nursery and they wanted to keep the look, but bring in the big girl's bed or the big boy's bed.
And, you know, our catalogs, as you pointed out, Guy, these photos are so expensive to produce.
You bring in a stylist.
Serena did all the decorative painting on our photo shoots.
And people started asking us for all the props.
They would call our customer care.
They wanted to know the color of paint that was on the walls.
They wanted to know the rub.
They wanted to know the lamp.
They wanted, they kept asking us to grow with the baby.
Right.
So that prompts you to start to think about moving.
That makes sense in that direction because customers are asking for it.
I want to ask about money, right?
Because I guess by the end of 2006, you're doing a million and a half in sales.
Great.
You're still small.
You are not probably able to pay yourselves much because most of that money is going to finance the business.
And I guess around that time, you decide you need to raise some money.
First of all, Because this is a cash-heavy business, right?
You have to have money on hand to make the stuff.
So I'm imagining that was one of the reasons.
And was the other reason just to grow, to expand?
Oh, absolutely.
I mean, the demand was creating this cash incinerator, for lack of a better word.
We needed working capital.
And so we decided to do a friends and family round.
I asked a friend.
if they had any ideas of the valuation of this company.
And they said, no, but I'm going to introduce you to a CFO at a private equity firm and they hold on to some betting companies.
They'll have a much better idea of the multiples and what to base your valuation on.
So Serena and I went to pay them a visit just literally to get their opinion on the valuation.
And in about, 10 minutes into the meeting, the CFO went and got one of the general partners of the firm and brought him in.
He literally patted us on the heads like we were dogs or puppies.
Or children.
He took a seat at the table and said, you girls sure have been busy.
And he said, I understand you're doing a friends and family round for one and a half million dollars.
You want to raise one and a half million dollars.
At that time, that's what we wanted to raise.
We saw that as the next one year.
He said, we want to make your life really easy.
We're just going to give you one check for that.
So you don't have to go pass the hat around to all your friends and family and you can get back to work.
Wow.
They were offering to just cover this.
Cover it.
They're going to cover it.
Sounds good.
Sounds great.
Sounded amazing.
And I mean, Serena and I walked out of there going, what just happened?
But?
The but is the term sheet came in.
And I met a woman who was a client at Mill Valley Baby who represented founders.
She was a lawyer and she used to talk to me all the time.
And I really liked her.
And I called her up and I said, do you mind having a look at this term sheet and giving me your opinion?
And she called me back and she's like, I forbid you to do this deal.
You're not doing this deal.
And I'm like, we need the money.
She's like, no, they're asking for a controlling interest in your company for 17% of your equity, you know.
And she's like, no, you're not doing this deal.
So I said to the associate over there, I said, our attorney wants you to strike this language, this language, this language.
And the bottom line is they took out a lot of it.
But when it came to closing the deal, he really wanted to know how much salary.
Now, keep in mind, we haven't taken a salary now for three and a half years.
And I recall telling him we're going to take $150,000 salaries.
And he just had kind of a hissy fit about it.
He's like, well, you're not raising that much.
You can't take that much in salaries.
And my husband overheard the conversation because I had it on speakerphone.
And when I hung up, he's like, honey, we're going to take a second on the house.
You're not doing that deal.
A second mortgage.
Yeah.
Yeah.
But you didn't end up doing the second mortgage because you did decide to go to friends and family.
That's correct.
It was the middle of December, and we literally had to raise this money by the middle of January.
Why?
We had everything in production at this point for this 2007 launch, and everything had to get paid for and brought in.
And it was, again, paint and...
Furniture and...
We had probably a dozen kids' bedding collections at this point.
We had gliders, rugs, lamps, paint.
We had expanded quite a bit on this next launch.
And it needed to get paid for.
All right.
So you need the money fast.
We need the money fast.
And honestly, the partner knew that.
He knew he kind of had us over a barrel.
So you had to get it from friends and family, a million and a half dollars.
The story is you got the money, but was it – were people like excited?
Were they ready?
I mean it sounds like people wanted to be part of this.
So it was probably not as hard as you thought it would be.
It really was.
I mean, Serena chased down every one of her friends, and I would say half the money came in from Serena's friends, half the money came in from my friends.
And we raised the money in a 17-day sprint.
So yes, there was a lot of people that wanted to be a part of it.
It was pretty much every one of our family members and a slew of friends and Lily's rabbi, you name it.
Right.
Got it.
Everybody's in there.
Okay.
And did you, you were still...
primarily selling to boutiques.
And I imagine, and I know by the end of 2007, you hit 4 million in sales, but you don't have any ad budget, right?
You're not, I mean, this is all word of mouth.
It's all boutiques.
It's people going into the boutiques.
That was who you were selling to.
It was entirely wholesale.
100% wholesale.
We had about...
600 to 800 stores.
We had zero online.
We didn't even have a shopping cart on our website.
So there was no direct to consumer happening for us, which, you know, in hindsight, building a wholesale business is far less capital intensive.
So I don't regret that we started this business as a wholesale only, but yeah, we did not have e-com.
I mean, this is like 2008, so it's a financial crisis.
And I imagine some of these boutiques are not going to survive the financial crisis, right?
I mean, so in a sense, like, it seems like going to direct-to-consumer at this point was like you kind of had to do that, given that you were so dependent on these retailers carrying your products.
Yeah.
I mean, it was a really interesting time.
And it just so happened to be serendipitously at the time of the financial meltdown.
It wasn't like we didn't say, oh, my God, there's a financial meltdown.
We need to take control of our destiny.
It was, oh, we need to take control of our destiny.
And, oh, shit, there's a financial meltdown that literally took out 50% of our wholesale channel.
Wow.
Shut down.
So, I mean, talk about serendipitous timing.
Because we also put together adult collections and adult bedding and started to present adult bedrooms and living rooms.
And we put together a direct-to-consumer catalog.
And we sent out a test run of 85,000 books.
I mean, this is 2008.
Catalog in 2008 landed differently than it does today.
Yeah.
And this would be, okay, so the catalog, they get the catalog, and then you literally.
had a website where they would order from.
And the business, like, I mean, this is going to have a huge impact.
I think the business grows 50% in the following year.
The first year we were direct-to-consumer, we did $5 million.
The second year we were in direct-to-consumer, we did $10 million.
It doubled.
The third year we were in direct-to-consumer, it went to $20 million.
Like, we had a 5, 10, 20 sprint.
How are you dealing with a cash issue at this point?
Because you can't get customers to pay in advance.
If it was made to order, which our upholstery was, domestically it was made to order, no, no.
There was no chance.
And keep in mind what years we're talking about.
It was 08, 09.
There was a complete financial meltdown happening.
Nobody was touching consumer because...
It was contracting.
I mean, I think some of the larger players like Williams-Sonoma and RH, I mean, they were contracting at the magnitude of like 30% contraction.
And you could not raise money at that time because nobody was investing money.
I did the capital dance across the United States.
I've lost track of how many people I pitched this company to.
It was nearly impossible.
In fact, Maveron, who was, you know, came from the money of Starbucks, they told us that if Starbucks had walked in their door right now, they wouldn't fund them.
You know, there was nobody there was nobody funding traditional brand.
So you had to.
Yeah, I mean, I imagine like the cash issue starts to become really stressful.
That would be putting it lightly.
problem that almost takes the company down and why the solution is almost worse.
Stay with us.
I'm Guy Raz and you're listening to How I Built This.
Hey, welcome back to How I Built This.
I'm Guy Raz.
So it's 2010 and by now, Serena and Lily have raised a fair amount of money and many of their funders now sit on the board.
But Serena and Lily are about to realize that not all investors want the same thing.
A lot of their backing comes from a traditional VC fund, but they still need more money.
So they reach out to a new investor.
We still, because of this cash incinerator of this growing company, we brought in more of a private equity type of investor on now this third major round.
And so...
It was a family office, but they operated much more like what I would consider to be private equity, which meant they wanted profitability.
They wanted slowing down the growth to be profitable.
They didn't have the return.
expectation of, say, a venture firm from Sand Hill Road.
Right.
They want you to grow, grow.
And this, at the time, that was the model.
Grow, just grow, grow, grow.
Because you were not profitable yet, I imagine.
No.
And we had the venture firm who was just like, we had a 70% cumulative average growth rate over a seven-year period.
And honestly, to Sand Hill Road, we were a slow grower.
They want like 500% growth.
Yeah.
No, we were slow growers.
Right.
Okay, but this family office that was telling you to slow down growth and focus on profitability, I mean, could you have done that?
Could you say, was there a case to be made that, you know what, let's do this.
Let me go to my other investors, my board members and say, hey, we got to do this.
We got to conserve cash.
We're going to slow down growth.
Or was that just not an option?
I think in hindsight, they were right.
I also think the answer kind of resides in the middle.
I would say more people around the table were more in favor of the growth.
It was more exciting for them to have a company that was growing like a weed.
But I think it was their delivery and the lack of chemistry that they created around our table that they were no longer a fit.
This was somebody who wanted you to chase growth or wanted you to chase profitability?
The latter.
So tell me about your stress level at this time.
I mean, you need cash.
You're not getting more cash.
Investors are like, we gave you cash.
Some of them are saying, keep growing.
You're saying, I need more cash.
Some of them are saying, slow down and then conserve cash.
And meantime, are you sleeping at night at this point?
No.
No, it was very, very, very, very stressful times.
I probably wasn't necessarily my best self at that time.
I had three little children.
It was a very exhausting, stressful time.
Taking a lot of the joy out of the beauty and this magnificent brand that we were creating, we realized that we have to remedy our...
lack of alliance around our table.
We need to get this investor who's being incredibly prickly off of our capital chart.
Like, we have to get him bought out.
From what I understand, he threatened to sue you or he tried to sue you?
He did sue us.
He sued you, but what was he suing you for?
Irreparable harm of his investment.
Okay, and they were saying...
My investment is being harmed and I'm going to sue you for what were they asking for?
We never got far enough into the lawsuit to really understand what they were suing us for besides the fact that it was time to get them bought out.
What did you do?
Did you did you I mean, you know, when you're in a situation with lawyers involved, they tell you do not talk to the person.
Don't get involved.
You just let us handle it.
It can be very frustrating.
I've been.
Thankfully, not in lawsuits, but when I dealt with lawyer to lawyer stuff, it is frustrating because you're just hearing what they're telling you that the other lawyer told you from their client and you don't know.
Sometimes it just helps to just talk straight to the person, which is risky.
Lawyers say don't do that.
Sometimes it works.
I actually got on a plane.
I didn't call them.
I mean, I emailed and said, I want to pay you a visit.
I went in person to just sit down and say, this is going to take us to the ground.
Obviously, you no longer believe in us.
I think it's time that we get you bought out.
But let's not like sue us to the ground.
Like that doesn't serve anyone, including your investment.
So let's figure this out.
You had to, what were the terms?
In your book, you say 50% return.
That's what you want.
Okay, so you, it's pretty great because it was about a year in that he was invested.
So you had to buy him out.
You had to buy his investment out.
His initial investment plus 50% return on that.
So that was going to cost quite a bit of money.
Presumably, your existing board were the ones who were going to have to furnish that money.
Yeah.
Our other major investor on Sand Hill Road came up with the capital.
They actually put the money into the company on top of our cap stack, on top of the capital chart.
at a very heavy-duty preference of a 2X preferred participating, very gnarly security for anyone who knows how all of that works, and got them bought out, but made it nearly impossible, actually impossible, to raise additional money for the company.
Okay, this situation to buy out this problematic investor, If they were going to pay him out, the terms were they would double their investment back first.
So whatever investment they put in, once the company sold or there was another round or whatever happened to the public, they would double their investment first plus their percentage of ownership, right?
And they would get that before anyone else, including the founders or employees or any other investors saw anything in return.
So they had really preferential treatment.
Did you protest?
Did you say, this is not what we want?
Did you say, I don't want to do this?
Yes, yes.
We were like, this is crazy.
And our board chair at the time said, we don't have a choice.
This lawsuit and this investor are going to take the company under.
So that's the choice you have right now is to take this investment.
And we were kind of at...
A place where we just had to take it, put our heads down and go build a company.
The reality is like you got unlucky.
You had an investor who just was going to cause a problem and you had to solve that problem.
I want to throw in there that there's good money and there's bad money.
We learned that.
There is definitely a correlation between how badly you need the money and when you are raising money.
What was the valuation at the time?
Was it over $50 million?
It was not.
It was not over $50 million at that time.
All right.
So you – but you had no choice.
You had to do this deal.
And it meant that it was going to affect your – I mean you could – it was going to sort of I guess get – get rid of this problem and you could move on.
But was it, were there going to be any long-term consequences from the deal?
I mean, I absolutely told our board chair, I remember it just like it was yesterday.
I said to him, we will never be able to raise another dollar for this company.
Couldn't raise the money because no investor would raise money in a company that had an investor with terms like this.
They would want the same terms.
Yeah.
And then everybody at that point would want the same terms, you know, and it was like, wait a minute, what are we doing over here?
You know, we're going to end up with 20 cents at the end of this.
And so our friends and family are the people who believed in us at the very beginning are going to get 20 cents.
So it's like, I realized that it was time to restructure the company to figure out how to get rid of.
this insanity on our cap chart.
And I knew that was going to be the next major project.
But at the time, we were getting ready to launch a store in the Hamptons.
There was a lot going on at that time that we just needed to get back to work.
You just need to focus on work and then you would solve, try and solve this problem or challenge on the cap table later.
Maybe you would find somebody who would just buy them out and something would happen.
Or just buy the company, you know, or something.
Like we were just at a place where We needed to solve for this distraction.
And knowing now what I know now versus then, I probably would have pounded my fist on the table a little bit harder and said, no, we're not taking that deal.
And just take the risk that you could fight this other investor of the law.
Or just settle him down.
I don't know.
And so basically at that point – because I think by 2010, you're doing $20 million in revenue.
I mean that's no joke.
Now you're really – I mean now you're approaching a medium-sized business, right?
But what I'm trying to understand is if you can't raise money, what do you – you're back in the same situation.
You don't have working capital.
You're just growing.
It's a good and bad problem to have.
But it's harder now because it's even – no one's going to – you don't want to raise money from people who are going to demand the same term.
So what are you doing for capital?
Well, it just so happened in the next year or so, we got two acquisition offers.
Sadly, they were nearly impossible to take because of the preference that was on the stack.
And so much of the value of these acquisitions.
was in the earn out.
And that's what Serena and I would sign up for.
Basically, you were selling, you might get a little bit of cash up front, but the earn out is where you would make your money.
Exactly.
But because of the terms from these other investors and maybe the acquirer, the earn out might not be much left.
That's correct.
And meanwhile, our investors...
Want us to take the acquisition offer regardless of the egregious terms, including owning our name, image, and likeness in perpetuity.
Name, image, and likeness.
In perpetuity.
I mean, but you guys didn't have to take those.
You didn't have to take that acquisition offer because you still controlled, presumably controlled the company.
Listen, we, the board.
could have voted to sell the company because they had enough votes around the table that were incentivized to sell the company.
The problem is that the acquisitions were requiring us to sign three-year employment contracts.
So we were kind of still had the leverage because we were like, sure, guys, you could sell the company, but we're not signing three-year.
Right.
Employment contracts.
So you can imagine how well that went over.
Right.
That wouldn't be as attractive to an acquirer if Serena and Lily were not involved.
That's correct.
And that really honestly became the rub.
And it also became a pretty serious rub with our board.
Did it, with tension.
Yeah.
Tension, threats.
It was an ugly time simultaneous to our attempt to open our first store.
So there were battles in the months leading up to a very big moment within the company and the life of the brand.
And you're building the plane as you're getting a store, you're opening a store.
You open the first brick and mortar store in the Hamptons, which I think you do strategically make sense.
I mean, the Hamptons.
It's a lot of money is there, a lot of high-end shoppers, people who have homes in Manhattan.
They're there on the weekends.
There's word of mouth that comes with being at the Hampton.
Was that the reason why?
Because you're in Mill Valley.
Why wouldn't you open in San Francisco, for example, or in, I don't know, in Los Angeles?
I'll jump in on that one.
It wasn't important to us to put it in our own backyard first.
We wanted it to have its greatest chance of success.
And I don't know that Marin or San Francisco was that.
And everything aligned to support its success.
Did it work, that store?
Oh, yeah.
Was it the right choice for our first store?
Probably not.
But you know what?
It put us on the map with every major media, New York.
So we had some unintended consequences as a result of where we planted our beachhead.
Fact of the matter is, that was the first time that any of us had seen any of our product collected somewhere.
It lived in a warehouse.
It lived in our imaginations.
It lived on set when we were photographing a room for the catalog, but we never had it spread out in front of us.
And so we were able to articulate the brand, mood, and ethos so completely because of that location, because of how funky and fun that space was.
It was essential to building the brand that came after it.
Okay.
So you've got that store.
And meantime, you've got acquisition offers.
And some of them are challenging.
But I guess one of them does come through that is, let's say, good enough.
It's a family office.
And they offer to acquire Serena and Lily.
And you guys.
Decide to go with that one.
Decide to accept it.
Yeah.
It's a majority shareholder acquisition in the sense of I'm going to come in and clean up your cap chart.
We're going to buy everybody out.
We're going to give a tender offer.
We're not going to force anyone out.
Anyone who wants to stay is welcome to stay.
And honestly, it was a...
dream come true.
And it happened as a result of opening our store in the Hamptons because that investor saw it.
And so you, presumably, you explained the situation and they're interested in helping and working with you.
Yeah, we did a really genius restructure.
So anyone who wanted to leave at this time was granted And they could leave.
They could sell their shares.
They could sell their shares.
Many of them were making at that point over a 3X.
And they could sell their shares or they could convert to common and they can ride along in the car with us.
All right.
So you – OK.
So you now – and the commitment that you guys made was to – it wasn't going to be a three-year commitment.
It was probably going to be – What, a year or two, a year or a little bit more?
No, we were all in.
We were excited to get this money.
You were going to help grow this thing.
Oh, yeah.
We were really pretty excited.
I mean, it was such a, I don't know.
I like to refer to it as like a triple gainer on the balance beam, and we landed on our feet.
But don't you feel like...
that was the way it was going to turn out.
As stressful and awful as it was, I just always knew that we were going to end up in a situation where we could do a triple gainer on a balance beam and land on our feet because this brand was not done.
No.
We weren't done.
It felt inevitable.
Yeah.
I mean, you've been through many years of just stress and like conflict.
Did that just take all of that away?
that acquisition and the terms of it?
Because now you're back.
You guys presumably are staying on, so you're common stockholders now.
Now it's sort of back, a little bit back to where it was, although now I'm assuming that this acquire owns the majority of the company.
Yeah, it was definitely over 50 at that point.
But you could now, with their support, really scale this to something even bigger.
Yep.
I will say that we opened up some magnificent stores in the next year to 18 months after this new infusion and things were growing great.
And I have to be honest and tell you that I was absolutely exhausted.
I ran this sprint with tremendous stress and I'm a scrappy, innovator, and now we were really becoming a grown-up company, and there was a lot of meetings.
That would prompt you to, I'm assuming, to say, this is great.
I'm going to, you know, once you guys are ready to replace me, I'm out.
Yeah.
I mean, I said to the new owner, the new majority shareholder, I said, listen, this brand needs someone who can really scale it.
And I hadn't really spent enough time with my children at this point.
And I wanted to spend more time with them.
And so I kind of said I'd like to do a search and find the CEO.
Yeah.
I mean, it was just time.
So you, I think your last day was the last day of the year of 2015.
And I think, Serena, you stayed on in a consulting relationship, right?
Because you're still designing.
Well.
Initially, I stayed on in my role, but my role was redefined.
And I lasted maybe six months.
And then I left and had essentially a part-time role that was external.
And at this point, you both have completely stepped away from the company.
Like I think today, neither of you own any shares anymore.
And both of you have started your own new...
design businesses.
But I'm curious, I mean, when you guys see Serena and Lily out in the world, right, how do you feel about it?
I mean, I think it sounds like both of you are proud, but is it more complicated than that?
I mean, I think of other founders whose names are on brands that, you know, that they're no longer part of.
And I don't know, there's mixed feelings about it.
Of course, there are mixed feelings.
I think that the overriding sentiment is pride.
First and foremost, there are many ways that this could have gone.
We've all seen examples of founders exiting a brand and the brand deteriorating.
I think that they have done an amazing job keeping it aspirational.
I definitely recognize the differences.
in the overall aesthetic, but I also know that that is part of the strategy.
You have to reach and appeal to more customers in order to grow a brand.
So I recognize that.
Yeah.
Lily?
I'm with Serena 100%.
I feel a deep sense of pride when I see this.
The stores are gorgeous.
Every time I'm in a city that has a store, I make it a point to introduce myself to the employees.
And I really, you know, I hope we've built a heritage brand that will be around in 100 years.
When you think about the journey you took, and if you've heard my show, you know that I always ask this, how much of where you got to do you attribute to the work and how much you think is due to just luck and, you know, serendipity and everything else?
First to you, Serena.
I don't believe that there's any such thing as luck that you don't participate in.
I think there are so many examples of ways in which we did something unlikely.
And some would say we were lucky to have so-and-so come knock on our door.
I would say we listen to our guts.
We are positive.
We are inviting.
And we invite in good things.
Yeah, I mean, I agree.
I think that part of success in entrepreneurship is resilience and tremendous hard work and the ability to pick yourself up when honestly you've been knocked over.
And I can't emphasize enough the importance of that to be successful.
There were so many opportunities where we got knocked over and we just, the resilience was.
so much of our success.
And yes, we had some lucky breaks.
We happened to be at the right place at the right time, but boy, did we work hard.
That's Lily Cantor and Serena Dugan, co-founders of Serena and Lily.
By the way, an interesting biographical detail from Lily's past, back when she went to college at Arizona State University, she worked at a men's clothing store with someone else who's been a guest on this show.
the late designer Kate Spade.
In fact, Lily worked with both Kate and her soon-to-be husband Andy at Carter's Men's Clothing in Phoenix.
It was at a time, she says, when they were all pretty broke.
Years later, Kate Spade wrote the foreword to a book written by Serena and Lily called Nursery Style.
Hey, thanks so much for listening to the show this week.
Please make sure to click the follow button on your podcast app so you never miss a new episode.
And if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please do sign up for my newsletter at gyros.com or on Substack.
This episode was produced by J.C.
Howard with music by Runtina Rablui.
It was edited by Neva Grant with research help from Catherine Seifer.
Our audio engineers were Robert Rodriguez and Kwasi Lee.
Our production staff also includes Casey Herman, Chris Messini, Alex Chung, Carrie Thompson, Carla Estevez, Sam Paulson, John Isabella, and Elaine Coates.
I'm Guy Raz, and you've been listening to How I Built This.