The Clock Is Ticking for Bonobos After eight years and $128 million raised, the men's clothing e-tailer has yet to reach 'escape velocity.'

On June 1, 2015, Fran Della Badia started as CEO of men's clothing company Bonobos.

Della Badia joined Bonobos from Coach where she was president of its North American retail division. She was supposed to provide Bonobos, an 8-year-old company that still acted like a startup, with adult supervision. She was supposed to take the company to the next level.

But, less than three months after she started, on August 28, Della Badia announced she was stepping down as CEO. Bonobos cofounder and former CEO Andy Dunn would be coming back to take over.

"While I was brought in to effect change and to evolve operations, it quickly became clear that at this stage, the company and culture still require Andy's involvement on a day-to-day basis," Della Badia wrote to announce her departure.

Although its trendy, well-fitting men's clothing have been praised by GQ and Esquire, it's impossible to ignore that after eight years and $128 million raised, the company has yet to reach escape velocity.

Even more worrisome, e-commerce startups are struggling to hit lofty valuation targets from investors. Gilt Groupe has gone sideways. Fab has crashed and burned. Zulily soared then sank on the public markets before selling.

Now Dunn will have to make sure that Bonobos doesn't suffer the fate of those aforementioned companies. Bonobos has been linked to an IPO for years now, but it seems unlikely to happen any time soon.

Founding Bonobos board member and Jet Blue chairman Joel Peterson told Business Insider that the company is approaching $100 million in annual gross revenue this year and that it is profitable.

Della Badia, who spoke to us after she left as CEO, said that she thinks the financials are promising. But the company has to build systems before it can scale.

It's up to Dunn now. He has to take his company to the next level.

The clock is ticking.

The perfect pair of pants

It all started at Stanford Business School in 2006. Dunn's best friend and roommate, Brian Spaly, had a habit of self-tailoring his pants to accommodate his athletic build.

Spaly figured there had to be other guys out there who wanted better-fitting pants, and so he was inspired to build a hypothetical company that would meet this need for an independent study project. His professor was impressed by Spaly's final pitch, which encouraged Spaly to turn it from a classroom exercise into an actual company.

He spent the majority of his free time the second year of business school developing the business, making deals with a pattern maker and manufacturer. He settled on the name Bonobos after reading an article about the bonobo ape species, a close genetic relative to humans that is best known for being promiscuous and peaceful.

After graduating Stanford in spring 2007 and helping Spaly sell pants out of the back of his car, Dunn decided that he wanted to join Bonobos full-time, but only if he was named CEO and made an equal participant with a significant share of equity.

Spaly told Business Insider he was happy to have Dunn join and that "he deserves a ton of the credit for turning it from this little hobby of mine to raising money, building a website, putting structure around it, taking a lot of risk."

By the fall of 2009, their online-only men's pants retailer had raised $3.75 million from StageOne Capital and Forerunner Ventures and had set up an office in New York City.

Yet tensions between Spaly and Dunn grew as the company did. The two frequently disagreed about decisions on where to take the business. Dunn said it was because they were "two alpha personalities;" Spaly agreed, adding that neither of them "had a clue" about how to run a company.

One day in October 2009, Dunn and Spaly had a conversation about the ways they were getting in each other's way. By the end of their talk, they agreed that Spaly was going to leave the company.

Things worked out for Spaly, who is the founding CEO of men's retailer Trunk Club, which was acquired by Nordstrom in 2014 for $350 million.

He and Dunn have let "bygones be bygones." He still has a founder's emotional connection to, as well as shares of, Bonobos and wants it to succeed, but is wary of its place among companies like Gilt and Rent the Runway that have raised plenty of capital over the years but have yet to go public or be acquired.

"There's an open question around how successful some of these businesses can be if they raised a lot of money at high prices," Spaly said. "I wouldn't single out Bonobos in that line of inquiry. In general in our industry, there's going to be a bit of a reckoning of the businesses that are really successful and the businesses that are going to have a hard time making it long term."

"And I'm really hopeful that Bonobos is in the former camp," he added.

Getting ahead of themselves

Dunn and Della Badia were introduced by a mutual friend in 2010. She had a long career in retail and was an executive vice president at Coach, and Dunn joked that he was trying to build Bonobos into a company worthy of a CEO like her.

Della Badia was impressed with how far Bonobos had come in just a few years. In 2013, Della Badia was promoted to president of Coach's North American retail division. Shortly after her promotion, Dunn sent her a text asking if she'd like to talk about becoming CEO of his company.

When they first met, Dunn had put Bonobos on the path to becoming the "Zappos of pants." He was strongly influenced by the way Zappos CEO Tony Hsieh led the Amazon-owned e-commerce giant, with its dedication to being efficient but fun.

Dunn identified with Hsieh's belief that the best way to convince people to regularly buy clothes from a new online company was to primarily focus on a level of customer service other businesses didn't offer.

He even borrowed the quirky Zappos term "ninja" as a label for his customer service employees, and encouraged them to speak casually with customers for as long as was necessary. Returns were also free.

Boosted by praise from men's fashion writers, Bonobos grew a following and pulled in $4 million in gross revenue in 2009 and $10 million in 2010, according to Crains.

In 2011, Dunn decided that Bonobos' association with fit should extend to shirts, suits, and blazers to best take advantage of a younger generation's emphasis on clothes that weren't boxy or baggy. And although he'd once proudly declared that expanding into brick-and-mortar stores would "degrade the quality of the customer service experience of the brand," he had a change of heart when he noticed that practically no one was buying anything online except pants.

His solution was to experiment with a "guideshop," a shopping concept that would bring the personal touch you'd find in a high-end retailer like Saks Fifth Avenue and meld it with the ease of shopping through Bonobos' website. These inventory-less showrooms would allow customers to be fitted and try on representative articles of clothing before the Bonobos guide completed an order on their computer. If the customer did not want to make a purchase, he was still emailed his sizes and a log of everything he tried on.

Dunn figured that men — who typically shop for clothes twice a year, one-sixth of the time women typically spend — would appreciate the ease of trying something on, ordering something, and then not having to carry it around with them.

After a successful 90-day experimental guideshop in their Manhattan office's lobby, Dunn decided that guideshops would be the future of the company.

A convert to brick-and-mortar, Dunn brokered a deal with Nordstrom in April 2012 to bring Bonobos pants into 20 of its stores and its online store. The deal was part of a fundraising round of $16.4 million led by Nordstrom.

It was around this time that Bonobos upgraded its hipster vibe to a professional one. Its target demo is an 18- to 40-year-old man who wants to look sophisticated and fashionable. Its $88 chinos and $98 plaid shirts, for example, are meant to appeal to consumers who are either affluent or in a mid-range income bracket. Its main audience is young, but it wants to be a brand both older fathers and their sons would want to wear.

Excited about the prospect of taking the Bonobos model further, Dunn launched the Maide golf wear line in March 2013 and the Ayr women's line in February 2014. Both remain small, experimental projects.

After two years of discussion and planning, Della Badia became convinced of Bonobos' ability to scale and became its CEO on June 1, 2015.

The growth she saw in the company was promising.

In the first half of the year, Bonobos had gone from 10 to 19 guideshops across the US. Its pants and shorts had been in all 118 Nordstrom locations for a year and become the No. 1 selling chino. It had grown to 320 employees, up 20% from the start of the year. Non-pants items accounted for more than half of all sales, and the company had more than 250,000 customers who made a purchase in the last 12 months.

The company had recently become profitable and was approaching $100 million in annual gross revenue. Della Badia told Business Insider that Dunn had been fully transparent with financial information as she considered taking the job, and its healthy expansion inspired her to join.

But it didn't take her long to realize the company she had joined and the company she envisioned were two vastly different things. She said that while growth was as she expected, she simply did not anticipate that Bonobos would still feel so much like a startup. She was at Coach when it went from $500 million to $4 billion in annual sales, but said it was on a different plane than Bonobos.

Della Badia said she was expecting to run a more mature company, one that did not require her as CEO to be so involved with developing processes and training employees. "There's a big difference between interviewing for a job and actually doing it," she said.

When Della Badia joined, Dunn began his new role as executive chairman and chief brand ambassador by taking a four-week vacation, intended to give Della Badia room to adapt to the role. Upon his return, Della Badia told him that she was having serious doubts about the job.

After giving it some more time, Della Badia and Dunn agreed by mid-August that they should cut their losses and replace Della Badia with Dunn. Dunn said he was disappointed with the failed attempt but excited by the prospect of returning to the CEO role.

Della Badia said there were two main reasons why she only gave the job a mere three months. One was that Bonobos' board had long been planning on building a new team of executives by the end of 2015, and she didn't want to build a rapport with them when there was a significant chance she would ultimately decide to leave the company. The other was that she believed her skill set was not translating to Bonobos, and that kept her from giving the company her all. She didn't want to waste her or anyone else's time.

She told us that she will remain an adviser to Dunn and believes the company will succeed, but that she simply wasn't the right fit.

As founding board member Peterson put it, Bonobos is like a kid about to hit adolescence. "Bonobos is still kind of in a childhood stage," he said. "It has all the exuberance of a child, all the capabilities, but it doesn't have all the systems in place." Della Badia, he said, was better suited to run a company that had all of these systems already and didn't require her to focus on building approaches from the ground up.

It was a learning experience for Dunn. Bonobos may be entering a new phase, but it still requires significant work before it can become a large company competing with the likes of J. Crew and Brooks Brothers.

"I've got more work to do to get us to a place where an outside, more professional CEO could come in," Dunn said.

From pants startup to established fashion brand

Bonobos' growth since 2007 has been impressive for a men's retail company, but it's reaching a critical juncture: It will either grow up or stagnate.

Traffic analytics of the past 10 months from SimilarWeb suggest that Bonobos has a healthy base of loyal customers — direct traffic to the site leads the industry at 53.5%, and browsing time and page clicks are second only to J. Crew — but the number of total visits to the site has been flat since the beginning of the year.

Dunn said this doesn't worry him, and that it is the result of having "radically cut online marketing spend from over 25% to under 4% of net sales" as well as having "dramatically" reduced sales promotions. Instead, his recent focus has been on building guideshops and building their relationship with Nordstrom. "Given all these forces we expected online traffic to be flat, but of a much higher quality, with an online conversion rate [the percentage of site visitors who make a purchase] approaching 5%."

It plans to expand to 30 guideshops by the end of 2016 — a significant financial risk. Sucharita Mulpuru, principal analyst of e-business for Forrester Research, noted that even though the company saves money on inventory using its guideshop model, the locations are in cities with high overhead costs.

New York University Stern School of Business professor Scott Galloway disagrees. His research has shown that customers want a multi-channel experience, and that Bonobos is smart to expand its physical presence. "I don't believe any pure-play e-commerce firm will survive," he said.

Dunn said that the guideshops, in aggregate, were profitable last year, and are losing money this year on account of the recent expansion. He said it doesn't take long for most new stores to become profitable, so he is hopeful about the new and upcoming locations.

In a 2013 blog post, Dunn wrote that he's not only "incredibly long on" this e-commerce/showroom model, but he considers proving it can work to the scale he is attempting to be his "life's work."

At the end of the summer, Bonobos seemed to be a precarious situation, with a CEO who announced just a few months prior that he didn't feel as if he could continue to serve the company best as CEO.

In a May 7 blog post, Dunn explained that he was juggling the roles of founder, CEO, and chairman, and that he was ready to singularly focus on being a founder-chairman. "I have a long vision for the company, one that could take decades to unfold, and I didn't think that my running the company day-to-day was necessarily optimal to getting there."

The investors we spoke with, however, said they are not too concerned about the sudden change of plans, and Dunn said that after his recent conversations with Della Badia and the board, he's more confident than ever.

While analysts think the company may want an exit deal akin to Trunk Club's, Dunn denies it. "Call me crazy, but I'm hoping we can build something standalone," he said.

He said there are no plans to raise another round of capital this year or next or to take the company public, but the latter is an option that remains open.

Dunn will need to spend the next couple years developing a team and building the systems that will bring Bonobos to scale. It has a loyal following, but if the fan base doesn't dramatically expand, the company's burn rate could reach a dangerous level as it continues to build new brick-and-mortar locations.

Dunn hopes, however, that these guideshops will be the key to customer acquisition. He said that beyond driving sales, the guideshops serve the purpose of boosting brand familiarity in the company's largest markets.

"The e-commerce business is really challenging, and we feel like with this online-offline equation we've really unlocked something that can scale," Dunn said. "We've discovered how this can work. Now let's bring a ton of discipline and focus, and let's nail it."