Posted by: Paige Craig
Posted on 09/22/2015
At Arena, we have been active investors in mobile-first marketplace startups – the sphere of startups using mobile apps to connect consumers with services they need at the press of a button. These marketplaces partner with a network of partners/contractors on the supply side to respond in real-time to customer demand for a given product or service in their city.
Laundry and dry cleaning is one of the most active spaces within the so-called “on-demand economy,” with (Arena portfolio company) Rinse as a major player in the market. The San Francisco-based company operates, however, on a unique model from competitors: they are available 7 days a week but have created a route-based model where they typically collect clothes from customers on a regular basis on the same two days each week between 8PM and 10 PM (either Sun / Wed; Mon / Thu; or Tue / Fri).
While other laundry startups prioritize speed, rushing through the cleaning process to get clothes back to customers within 24 hours, Rinse found that what consumers care about most is a) the quality of cleaning and b) having a service integrated into their life that picks-up and drops-off on a consistent cycle.
With a vision to eventually handle all aspects of clothing care, from dry cleaning to shining shoes, they are staking a claim as the highest quality cleaning service and integrating themselves into the weekly routine of loyal customers (who range from young professionals to busy families).
Founded in 2013, Rinse has built a strong initial foothold in San Francisco, and in March they took the jump to launch in their second city: Los Angeles. For any geographically-tied startup, the expansion to a new city is a critical point in scaling the company’s operations. It is high-risk to take the lessons and infrastructure you have only just figured out in your first city and immediately try to apply those to another one. I talked with Rinse’s CEO Ajay Prakash and Los Angeles GM Lonny Olinick to understand how they’re approaching the LA launch and what other entrepreneurs should consider when deciding whether or not they are ready to launch their second city.
Prove your model first.
For Rinse, the decision to add another city was not based on hitting a certain market share in one city first; it was about getting to the point where they felt like they had figured out how to scale the company’s operations while maintaining incredibly high customer satisfaction and retention.
Ajay and his team had to experiment extensively in the early days of Rinse to find product-market fit, including determining the right pick-up window and fleet logistics plus how to collaborate most effectively with local cleaning partners and with the Valets who are the face of their business.
“We realized that the acute pain point that Uber solves when you need a taxi, where on-demand is the right answer, doesn’t exist in clothing care. The pain point is chronic – you always have dirty clothes – and the way to remove friction is through a predictable schedule and consistently high quality service.”
Because of Rinse’s quality-first approach, they were very focused on growing in a controlled manner so they could maintain their standards for customer experience as they scaled. As well as using a questionnaire to help get the views and opinions of their loyal client base, they also found that the key to scaling a business like theirs, they say, is in managing the operational complexity, which starts with having solid processes and technology in place. The relevant technological practices are something that all businesses must have in place in order to help drive their company forward, as well as being able to keep up with the ever-changing digital world. Implementing sip trunk providers, communication systems, and the relevant internet protocols is something that they may want to think about doing first and they can expand from there. If done, this should greatly benefit their business. With the motto “slower is better, better is faster” they kept their focus on getting their core business model right in SF and on learning how to scale it in one city first. Although they were always focused on adding new customers, their key performance indicators centered on customer satisfaction, customer retention, unit economics, and partner satisfaction.
Rather than quickly hiring a large group of 1099-category freelancers to act as drivers on their routes, Rinse invested from the start in hiring their Valets as W2 part-time employees with a more thorough hiring and training process. “Our Valets are the frontlines of our customer experience, so we were very focused on hiring employees who would be great at customer service rather than simply looking for anyone who had a car,” explains Ajay. There are legal guidelines dictating the distinction between 1099 and W2 workers, and one of the key problems Rinse saw with 1099 networks like Uber’s is that the business isn’t allowed to provide much oversight or extensively train them. Because of Rinse’s priorities, they have invested significant time in training Valets from Day One and have built a system where the best Valets can take on mentorship roles for others or move into full-time roles on the Operations or Customer Experience teams.
By early 2015, Rinse was operating at full force in San Francisco and started eyeing its first step into another market.
When is the right time to launch in another city?
Ajay says Rinse started discussing expansion once growth in San Francisco took off and the team had proven it was able to confidently manage operations as it continued to scale quickly. They had grown rapidly since launching full service in September 2013 and had several thousand recurring customers (who were using Rinse on average twice or more per month), and had an ever growing team of Operations Associates and Valets making sure the nightly pickups and deliveries were seamless.
There’s a popular phrase coined by Y Combinator’s Paul Graham that new startups – especially marketplaces – need to “do things that don’t scale” in order to build their early traction. It’s a truth memorialized in tales like the Uber founders driving black cars themselves and the Airbnb founders filling inventory by duplicating Craigslist posts, and Rinse has stories of its own. But according to Ajay, “you’re ready to launch in another city when you can take care of your customers without having to ‘cheat’ like that anymore.”
When the team had reached that point themselves, they decided to start building a customer base elsewhere – both for customer growth and to prove the Rinse model could work outside of tech-forward San Francisco. “San Francisco is a unique city for startups because there are so many early adopters here who will try a new service and be extra forgiving knowing that the company is still figuring things out,” he said, explaining it was important to confirm their service would work well in other locations without that. So at a Board meeting in early 2015, Rinse decided to accelerate its timeline for expansion.
Ajay and his team considered several cities but settled on Los Angeles because of its proximity to the SF headquarters – if needed, anyone on the team could fly down to handle an issue within two hours. LA also boasts a large tech startup ecosystem on the Westside and Downtown, with tech employees who could act as their early adopters promoting Rinse to other friends.
Launching in Los Angeles.
Rinse sent one of its team members, Eliot Chang, to LA in March to start laying the groundwork for the launch, and then hired Lonny as its full-time GM in May so Eliot could return to oversee San Francisco operations. As Ajay describes, it’s important when you launch a new city to hire someone who has a local’s understanding: “it’s hard to quantify, but there’s a lot of value in local knowledge and pre-existing relationships” (from traffic patterns to the culture of different neighborhoods).
Rinse organized its initial LA rollout into four stages: an alpha test with locals they knew, an early beta test with friends-of-friends and some early adopters, a partnership-based “Friends of Rinse” campaign, and then finally a shift into outbound marketing to the public.
The first stage included solely people the Rinse team actually knew: investors, friends, and other contacts who would be understanding of any mistakes and would take the time to give them thorough feedback. While the LA operation would benefit from extensive lessons learned and infrastructure built up north, it was still a start-up operation building a presence in a new city from scratch. Rinse wanted to make the inevitable early mistakes in a safe environment and give its first Valets on-the-job training to learn the ropes.
Like in SF, they devoted extra time toward hiring the best qualified Valets, because those initial hires would not only be the face of Rinse to LA customers, but they would also be in charge of training the waves of Valets hired after them. “Customer service starts and ends with our Valets,” explains Lonny, “so we have a multi-step process for hiring that includes interviews, reference checks, and riding alongside them on test shifts.” All the early valets came to Lonny through referrals, encompassing a wide mix of demographics from college students to actors looking to make extra income in the evenings.
Once initial operations were in place and Rinse had successfully served a few dozen early customers, the team moved into Stage Two. That meant expanding to a wider network of friends-of-friends and some of the early adopters who had proactively waitlisted themselves online for the LA launch. Rinse included more zip codes in its coverage of LA (all still west of the 405) and determined the most efficient pickup/drop-off routes in its coverage areas.
After quickly proving that they could maintain high standards of quality and service as the additional demand developed over the second stage, Rinse shifted into Stage Three, where they accelerated customer acquisition among tech-minded residents who would be most receptive. For several weeks, Rinse reached out to other tech companies around the “Silicon Beach” ecosystem in Santa Monica, Venice, and Culver City to have them share custom referral codes (including $20 credit) with their employees. While not a core part of Rinse’s normal marketing strategy, it proved to be an effective tactic for acquiring initial users by the bucket instead of one-by-one. (Pro tip: according to Lonny, taking time to customize the landing page for each company’s referral link resulted in considerably higher conversion rate.)
Rinse is now in Stage Four, starting to publicly promote themselves to everyday Los Angelenos. By refusing to sacrifice on quality over the first five months in town (they closely monitor their Net Promoter Score and LA Yelp reviews), they have already generated substantial word-of-mouth leads from new customers. On the outbound marketing side, Facebook is their primary marketing channel and has proven to be an effective “billboard” to help build awareness early on. They are also starting to reach out to popular LA fashion bloggers to get in front of an audience that particularly values how their clothing is handled, and recently launched a Gilt City offer to attract fashion-forward shoppers in town. Lonny says the team is also considering a traditional advertising campaign using the exterior of public buses that run through their target neighborhoods, something that has been effective for Rinse in San Francisco.
Expanding to multiple cities of operation is a big step for any startup. There are countless stories of teams raising their first large rounds of venture capital and then expanding too quickly, only to have to withdraw from some of those locations a few months later. Rinse offers a valuable lesson in finding the balance between aggressive growth and refusing to sacrifice the customer experience or operational stability that allows that growth to keep accelerating.
Paige invests in brilliant founders from across the US, using his Outlander Founder Framework to drive returns in the top 5% of VCs globally.
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