Shawn Nelson, Founder & CEO of Lovesac

Guest: Shawn Nelson, Founder & CEO, Lovesac

Host: Chris Hatch

Listen on Spotify

Summary

Chris Hatch talks with Shawn Nelson, founder and CEO of Lovesac, the Utah-born brand that started with a giant bean bag Shawn sewed 10 days after high school and grew into a NASDAQ-listed company with about 300 showrooms and nearly $700 million in sales. Shawn tells the wild early story: a 12,000-unit Limited Too order, negotiating fabric in Mandarin in Shanghai, a tractor-powered foam shredder, the first store at The Gateway in Salt Lake, winning a Richard Branson reality show, then Chapter 11. He explains how Sactionals and a direct-to-consumer model turned stores into showrooms with some of the highest sales per square foot in retail, and why brand is the only moat left.

Key Takeaways

• "Just do something." Ideas only matter if you act on them. Shawn learned at least two other giant bean bag companies started the same year.

• Lovesac's first big mistake was growing too fast: 40 to 50 stores (half franchised) in about two years, which led to Chapter 11. Perfect one location and replicate it before scaling.

• Lovesac showrooms are about 800 to 1,000 square feet with about six employees, yet tickets often run $5,000 to $20,000, putting sales per square foot among the highest in retail.

• Heavy brand advertising means Lovesac no longer depends on mall foot traffic. Having taken most of the AA-plus malls, it is now opening mostly outside the mall.

• Don't play the real estate race game. A good concept has plenty of room to win, and your competitors are fighting their own battles too.

• With commoditization everywhere, patents are "banana peels in Mario Kart." The real moat is brand and culture.

• "You can quit or you can keep going." If you're not sure it's time to quit, the tie goes to the runner. Keep going.

Transcript

[01:45] Chris Hatch: Welcome back to the Dirt Dog Pod. Today we've got the founder and CEO of a retail concept, Lovesac: Shawn Nelson. Shawn, thanks for joining us on the pod.

[01:57] Shawn Nelson: Yeah, great to be here. Thanks for having me.

[02:00] Chris Hatch: We are really excited about your concept. You know, when I told the office that I, that Porter and I were recording with you today, unbelievable amount of excitement just because I think Lovesac and especially with us being headquartered here in Utah a lot of super fans here in the state for you and your concept.

[02:20] Shawn Nelson: Yeah, well, we are a Utah original and I think came up at a time originally when it was kind of preposterous for us to be doing what we were doing. So made a lot of noise.

[02:34] Chris Hatch: So I just thought the best place to start is where in the world, were you just sitting around, were you in college, were you in high school, and you were like, let's create these gigantic, huge Lovesacs and this is going to work. Where did the idea come from?

[02:54] Shawn Nelson: Yeah, it isn't glamorous, but I was 10 days out of high school. I went to Olympus High School in Salt Lake City, Utah. Sitting there on my parents' couch, watching The Price is Right, eating a bowl of Cap'n Crunch, and I had this dumb idea out of nowhere. Like I thought, how funny would it be to make a bean bag like this big, like me to the TV, the whole floor? And I'm obviously kind of an impulsive weirdo. So turned off the TV, drove down to Jo-Ann Fabrics, bought seven yards of tan vinyl, black vinyl that was on sale because that's what you make a bean bag out of.

Brought it home, looked at a baseball, a couple figure eights, drew it, cut them out, started sewing them together using my seventh grade home ec skills, jammed my mom's sewing machine. And it would be my neighbor who would finish it for me. With her seamstress skills, put a zipper in it and gave it back to me. And I had to stuff it. I went to Michael's, found some bean bag beads, didn't even make a dent. This thing was so massive. So packing peanuts, old blankets, anything I could find that was squishy to put in there. But I found my parents camping mattresses in the basement like a yellow piece of foam with a bungee cord around them, chopped those up on a paper cutter into strips, then into little cubes.

And three weeks of putting crap in there and finally had the thing full and it would fill the back of a truck. So we took it everywhere. Took it to the drive-in movies, took it camping, everywhere we take it, everybody's like, oh my gosh, where did you get that? They want one. There's my market research. But it would be three years until I ever made another one for a friend because I was in college utilizing it. Getting all this feedback and then went on a mission for my church, put it away, forgot about it, came back home, started dating again. My friends were going to the drive-in movies, dragged it back out.

And after seeing it go up and down the street a hundred times, my neighbors finally stopped me and said, look, you got to make me one of these for my kids for Christmas. And if I'm to make one, then I need like a name, a business, love, peace, hate, war... love bag, Lovesac. That's cool. Paid 25 bucks at the Utah State Tax Commission to register Lovesac in October of 1998. And I'm 21 years old and have this little company as a side hustle while I'm waiting tables to pay my way through school.

[05:26] Chris Hatch: That is amazing. Did your dad, when he got home day one and he's like, hey, wait a minute, you just cut up all of our camping mattresses? Were you just like so furious into the production of it that he just sat back? Or was he kind of like, hey, what's the deal here, bud?

[05:28] Shawn Nelson: Yeah. They had no idea what I was doing. Didn't even know. I'm down in the basement doing my thing. They paid no attention. It would be probably years before they realized they didn't have any foam mattresses anymore.

[05:56] Chris Hatch: So it's so funny because it literally was in the middle of a contested discussion with my 14 year old last night because he borrowed a bunch of camping stuff to go on a camping trip. And then he just left it all over the place. Was like a total state of chaos. I was like, all right, so you kind of need to clean up here when you're done, I had this vision. So that's it. So that was how it was born. It just kind of came to be and a fun. So Bob Barker is maybe the key to your success here with The Price is Right.

[06:24] Shawn Nelson: Who knows? You know, we have these dumb ideas. Everyone has ideas. And that's how I kick off. I wrote a book capturing this whole story called Let Me Save You 25 Years. It's the kind of book that I wish I had had as I got going in this craziness. Very honest, The subtitle is Mistakes, Miracles and Lessons from the Lovesac Story. And the first lesson, Shawnism number one of 25 in that little book, is just do something and in my case, I probably could have talked about a really big beanbag idea, but I got off the couch and funny on reflection, I'd come to find out later that in 1998, I know of at least two other giant beanbag companies that came into existence.

And that's how the universe works. It's weird. And my point is if we don't take action on our ideas, when the universe kind of gives them to us, they'll just be ideas forever. And so, I have no genius in it, but Lovesac has evolved. If you zap to present day, I could have never imagined. The question I get all the time is like, do you have the original Lovesac? No, once I started making more, the original had holes from campfires, and it's old and smelly. Tossed it. I didn't think this was going to become anything. Our first sale was on the lawn at the University of Utah in a little 10 by 10 booth.

We plopped some sacks down, played some Bob Marley at their annual student festival. And we took a half a dozen orders and that's how the company was for like the first couple of years. It was just a side hustle. It was a funny thing to do. Never made any money, had to fix the van and who would guess that, now 26 years later, we're publicly traded on NASDAQ. We're building toward a billion in sales. We've been valued over a billion at different times, depending on the market at the time and get to employ a couple thousand people have 300 locations across the country in the best shopping centers in the United States for sure.

Some of the highest sales per square foot in retail, forget furniture. And we sell mostly couches. By far, the product has completely shifted from where we started. And I couldn't have known that just doing something, making a big bean bag could have possibly led me to all that.

[09:10] Chris Hatch: So let's go back to those early days, right? So you're at the University of Utah. You got the 10 by 10 set up. You take the six orders. And then I just assume you're back to the garage, back for manufacturing.

[09:25] Shawn Nelson: Yeah, so basically I was waking up, going to school, studying business and Chinese. I learned Chinese on my mission. Comes into play later in the story. In the afternoons, I found a furniture company that made couches and they would have a bunch of this scrap foam and I needed it. And I was cutting it up by hand at first And on about my fifth visit, because it took weeks to make one of these things, I said, do you have any way to shred this stuff up? And they're like, yeah, we've got a foam shredder right back here. They hadn't used it since like the eighties and it had to be fixed and refurbished, but I got it working.

It's kind of like a grain grinder. It was a modified grain grinder with an electric motor on it. So think of like a wood chipper you use in your backyard. It's kind of like that. Then I would feed in strips of foam. I'd have to take a kitchen knife to cut down some of the bigger pieces of foam into strips that would fit inside of this machine. Shred it up. Spit it out. But now I can make a sack in like an hour. So in the afternoons, I'm making sacks, delivering them to people in this old Lovesac van on the weekends. And I recruited a couple of my friends who were just willing to kind of come in and help out, just help, because it never made any money, right?

Every time we made any money, I had to buy more fabric, fix the van, fix the shredder. So meanwhile, I'm waiting tables at night, paying my way through school. And after two, three years of doing this, we had a big order, 50 sacks, a big order for us, from Red Bull. Red Bull had discovered us and wanted a bunch of sacks for their booths, at the bottom of the ski hill, the mountain bike tent, whatever. And at the same time I had gotten this offer to go take an internship in Shanghai, China through the university to work speaking Mandarin Chinese leading training courses in, team building, presentation skills, leadership skills.

It was like a dream job for me and I had to take it. So I leave the company in my friend's hands. Said, look, try and finish this Red Bull order while I'm gone. I come back home a year later to finish my last semester of school from China and the Red Bull sacks had not shipped out yet. I had to finish them, help shrink them down. And so it gives you an idea of how tiny and scrappy and terrible our operation was for the first few years. But we had this little business and I had this job waiting for me that I was going to go back and this international career.

I just had to finish my last semester of school and I was going to close Lovesac because it never made any money. And every one I told that, hey I'm going to move on with my life. They're like, no, you can't close Lovesac. I love my Lovesac. And so I said, okay, we'll give it one last shot. I found my way to this trade show in Chicago where more companies like Red Bull could discover us, I guess. I set up a 10 by 10 booth, credit carded our way there, tried to look professional and lots of companies loved our stuff, sat on it, whatever. No one bought anything.

So I come back home dejected. I'm stuffing a Lovesac down at the factory, wrapping up my last month of school and my phone rings and it's an out of state number. As I turn off the shredder and brush the foam out of my hair and answer it, you know. Lovesac Corporation. This is 2001. And it's a buyer representing Limited Too, the Limited Corporation at the time, right? Bath & Body Works, Victoria's Secret, Express, Limited Too, which today is Justice. They want 12,000 little sacks, they have no idea. That it's me and a buddy and a wood chipper thing. And I said, of course, no problem.

We're the best bean bag company in the world. They FedEx me a piece of this blue fuzzy fabric, little silver specks in it they want. It's got to be by this date, super low price. We're buying 12,000 units. They have no idea they're talking to a kid about to graduate from college. And I fly off to High Point, North Carolina to find 30,000 yards of this fabric they're demanding and I find it and I'm all excited. I run up to the booth and this giant, the biggest fabric trade show in the United States. Said, Hey, I'm Shawn. I'm here for Limited Too. I need 30,000 yards.

He said, no problem. It's five bucks a yard. I said, no, no, no, no. I need it for like half that. He said, well, look, I'm a direct importer. You're not going to get any cheaper. By the way, I don't know how I'm going to purchase 30,000 yards of fabric. I'm a waiter. I'm a waiter. So I'm looking around this guy's booth and he's got these fabric sample boxes behind him and there's Chinese writing on there. And it's the address of the fabric mill that makes this fabric in Shanghai, China. So I can't quit now. I credit card my way back to Shanghai. I walk in the 32nd floor of this downtown office building, sales office for this fabric mill.

And I said, hi, I'm Shawn. I'm here for Limited Too. I need 30,000 yards of this fabric. They said, yeah, we'd make that no problem. It's five bucks a yard. I said, no, no, no, I need it for half. I do this in English. I speak Chinese, but I want to hold those cards. And yeah, I'm 23 years old. And they said, okay, well. They start talking amongst themselves, their Chinese sales reps about how much it costs to manufacture this fabric in front of me. And I understand everything they're saying. So I know that they can hit my price. So I just stand there for two, three days and negotiate.

It's five bucks, it's four bucks, it's three bucks. Okay, we'll do the deal. We'll make no money. We just want to have a new customer in America. So They're going to cut them. They're going to sew them. They're going to ship them to me, but I got to stuff them.

[15:08] Chris Hatch: In Chinese? Yeah.

[15:30] Shawn Nelson: And they said, all we need is a $65,000 deposit to get started on this order. And I've got to get back, like finish my last couple of weeks of school. So I call up Limited Too from China. Said, Hey, I'm here in China at my factory. I'm ready to go with your order. I need a $65,000 deposit to get you started. And they said, well, we're the Limited Corporation. We don't give deposits. I said, well, we're Lovesac. Like we've never done a deal without a deposit. What's wrong with you? And they wire me $65,000 to my University of Utah Credit Union account, because this is all I had.

I wire that to this fabric mill. And so now I'm committed, right? I spent their money. I can't back out. And I fly back home, send out every credit card offer I could find and build a stuffing factory on credit cards in downtown Salt Lake City. And I was going to try and buy some more of those grain grinders. I drive out to farm country. I said, do you have anything bigger? He said, oh yeah. He shows me this thing called a hay buster, which is a hay grinder that you'd see out in the fields of farmland meant to shred up those 2,000 pound rolls of hay.

And the first time I throw a bag of foam up in there, it jams it, kills it. Understand, it's tractor powered. So it's got a tractor connected, but, the farmer couldn't believe it. Cause this thing will shred up two by fours. Could throw a table in there. It'll shred it up, but the foam kind of wrapped around the blades and killed it. And so we had to make some alterations. Had to build a lid on all kinds of things. We make it work. It's the only thing I can afford. Can't afford a half a million dollar German shredder machine. So I get an agricultural loan from the United States government, purchase a 1970s tractor and hay buster, bring it down to this building we've rented, get the hay buster inside the loading dock.

The tractor has to stay outside on a platform. We connected every morning with a driveline and I have a tractor powered shredding factory to stuff 12,000 little Lovesacs that are just about to arrive. From Shanghai, China on a container. September rolls around, we've got this factory built, I got 20 temp laborers ready to rock. We've got to make 300 sacks a shift in order to meet their timeline. And the first shift we complete 30.

[17:55] Chris Hatch: Are you still shredding foam mattresses? Is that your material?

[17:58] Shawn Nelson: So I'm buying 2,000-pound bales of scrap foam from La-Z-Boy. They had a factory there in Utah at the time. Truckloads of foam on credit cards. So I could shred it into sacks and then collect money as I ship off full truckloads of shrunken down little Lovesacs. Because we invented the idea of sucking all the air out of them for shipping, which at the time was really novel. We had a patent on it. And we could stack them on pallets, The production was just terrible. We were a bunch of kids trying to run a mass production. We ran two shifts to get it done. We broke even on the order. 9-11 happened while we're in the factory.

Price of foam goes up, price of shipping goes up. It's chaos. But we get the order done by October. And the problem is, I'm in the process of collecting a quarter million dollars from a national retailer. And I have no other customers. And we have this factory that wants to keep going. So we scramble and go to the biggest furniture stores in the country. In the West, it's RC Willey, Warren Buffett's chain now. They look at us and laugh and they don't want, who's going to pay $500 for a big bean bag? Your name is silly. Your logo is ugly. Get out of here. Bigger furniture store, American Furniture Warehouse in Colorado.

Same thing. They've got dozens of stores, they want nothing to do with our product. We met with the buyer. Didn't go well. So we come back home dejected and my cousin says, my cousin Trace, who you know, says, well, let's open our own store in a mall. He'd been working cell phone stores for years through college himself. He knew retail a little bit. And I said, that's crazy, but we run to the malls. We have no other choice. And all the malls in Utah reject us. You know, they're like, again. We've got Abercrombie and Fitch coming. We got Pottery Barn. What's Lovesac? Get out of here. So, yeah, yeah.

[20:01] Chris Hatch: So I think we got to take a time out here because, and go back to this, Utah has such an entrepreneurial spirit. But whatever your parents and Trace's parents were feeding you guys at your houses, it's like you guys both got a 10x measure of whatever this entrepreneurial spirit is. Where do you think it comes from? I mean, just the story you just told right there is wild, right?

[20:09] Shawn Nelson: Yeah.

[20:27] Chris Hatch: To just look and read on the box and see the factory name and then just hop on a flight and go to Shanghai and go find the factory, I mean, it's truly remarkable, right? Very few people are wired to work like that, right? Where do you think that comes from for you?

[20:36] Shawn Nelson: Yeah. I don't know. I mean, On my own podcast, Let Me Save You 25 Years, I talk to entrepreneurs every week and some of the most successful people on earth. And I don't believe that everyone should be an entrepreneur. I think that in our society, it's super celebrated. It's of course, because you're talking about millionaires and billionaires all the time. And who doesn't want that? But there's a lot of natural, I won't even call it ability. I'll call it personality traits, the ability to live in uncertainty, the ability to take risk and be able to sleep at night. Not everybody has that naturally and it can be super uncomfortable.

And maybe even deadly almost for people to take that on if it's not naturally. So I don't know how to answer your question. Just, that was how I operated. And I don't know where it comes from. I just, am wired that way. And I try to not lose it. You know, here I am 26 years in and, I expected to be on my fifth business, I have friends who are on their fourth and fifth businesses and I'm still running the one I started in college, which is embarrassing. At the same time, it's kind of cool. Because once you get to a point you realize, like our ambition at Lovesac, like if I go to present day, is to build the most loved brand in America.

And it's going to sound ridiculous to those listening to this podcast who are in business. It's fine. But that's exactly what we're going to do and we're going to do it. And I think we have a path to it for reasons I can get into later, but it requires me to have patience. The book ends with this Shawnism: maintain top ambition with infinite patience. And when I finally made the decision, look, I'm 25 years in, I'll go another 25. Who cares? Like I'm friends with centimillionaires and billionaires. Many of them not necessarily super happy depending on how they've lived their life. It's the chase that's so interesting and fun.

And once I made that decision, I'm free to basically go as long as it takes to reach my ambition. So I want a Nike, I want an Apple, out of Lovesac, which I know sounds ridiculous. But by the way, if Phil Knight and his friends can do it, why can't I? Why not? And so, I try, my point is I try to even now this far in maintain an attitude of risk. I do not have outside investments really outside of Lovesac. I'm not very diversified. All my chips are in on the table and I'm not offering financial advice. I'm not saying it's a good thing.

But I will tell you, the reason we completed that first order is because I had to. I had to pay back the Limited. It would be a bad outcome. I had to pay off my credit cards. Embrace economic pressure. This is not a place that most people can be comfortable in. And I'm grateful. I don't know. I'm grateful that that's how I'm wired because it got us here.

[24:15] Chris Hatch: It's amazing. Truly amazing. I think the people who are customers of yours will understand your sentiment of building the most loved brand because at least for the people I know that are familiar with Lovesac, anybody who is a customer, loves it. They're emphatic, right? It's not like, and I think about that, like think of all the various products that we've got inside of our homes, right? lamps and coffee tables and all kinds of things right dining room tables etc Where do you really hear somebody being super passionate about one of their furniture items? But when you're talking about your Lovesac product, people get really fired up about it. They get excited about it, which is awesome.

[24:53] Shawn Nelson: Furniture is pretty boring. Well, I think, just to build on that, and I'll come back to the story, The reason I, the reason I believe we have a path to building a brand that's here for a century and resonates with people in a different way. And by the way, extends beyond furniture even is because of the philosophy that emerged later in our story that drives. Everything we do now, we call it design for life. We make things that are built to last a lifetime, but can evolve as your life changes. It's a very hard and high design bar to live up to. We don't make a lot of things.

Understand, Lovesac is the 19th-largest purveyor of furniture in the United States. We've passed Ethan Allen, as an example. We sell two products. Every one of the competitors above me sells everything in your home from flatware to trash cans for your bathroom. And so we have a path to do it, but we would not have had this path and everything we've evolved into had we not just stuck it out for so long. So coming back to that first store, a mall that had rejected us calls us up. And says, okay, we'll let you in on a temp lease for Christmas and the winter Olympics, the winter Olympics are coming.

We got to fill some spaces, brand new mall in Salt Lake called The Gateway. It was going to be like the centerpiece of coolest mall Salt Lake had ever had up to that point. And they gave us the space that was the bridge over 100 South. It was kind of like the center of the city. It was like this giant sign that said gateway. It spanned over 100 South in Salt Lake City with the launch of the Winter Olympics a block away. For Christmas, they had a giant like 30 foot wreath around this sign and it encompassed our sign that said Lovesac in our neon script with our hibiscus flower that was bought on Trace's credit cards, the carpet, the paint.

We tried to make it look good and we did. And so much so that we couldn't believe it. 10 days in we were on track to do a million bucks in our first year, which for us was like, we didn't even know if people would take us seriously. And by the numbers, like we were cranking and people were coming in, the music was going, big screen TV, playing movies, couch in the corner to look pretty, flopped down on a Lovesac. And they were buying them. They were taking them home. They were buying our hoodies. No one's buying a Pottery Barn hoodie. There's a brand there.

That is totally unique and we were seeing this from the outset. Meanwhile, someone came in and said, this is so cool. The music's gone, they're having a good time, the vibe is good, it looks professional. What is this? How have I never seen this? Who do I talk to about a franchise? And I see this happening. I'm working the store 12 hours a day. My friend Dave is running the factory, bringing sacks over still warm from the shredder. And they ask my cousin Trace, who do I talk to about a franchise? And so I see this happen. Trace gives him my card and says, here, call this guy.

He's like the head guy. And so I run outside the store. I answer my phone out on the bridge, Lovesac Corporation. And he said, yeah, you guys franchise. And I said, sure. Yeah. What location are you in? He said, your Salt Lake location. I said, oh, that's a good one. And 30 days later, we're selling franchises. First it was in Arizona. And then simultaneous, we took kind of the money out of the drawer, drove to Southern California, started opening our own stores. And we were a bunch of idiots. We're 24, 25 years old, signing temp leases, signing permanent leases where we could get them in. And we know nothing about anything retail. It was, yeah.

[29:12] Chris Hatch: The pace at which you were opening stores was truly remarkable, right?

[29:20] Shawn Nelson: Yeah. I think in that first year and two, we got up to like 40, 50 locations and half of them franchised, half of them our own. And I, listen, I'm not proud of it. Like the people ask me all the time, like, what would you have done differently? I mean, let's start there. I should have sat inside that one location that was working so well, really figured out why it was working so well. And duplicated it into a second and then gone and raised proper money on this wonderful concept. Instead, I didn't know anything about finance. I didn't even know people were willing to write checks.

I was just trying to like make money by slinging sacks. That was all I knew. I was just young and dumb. And so we had good ones and bad ones like anything. Then, and then somewhere a couple of years in, I get recruited to be on this reality TV show with Richard Branson. I had this high flying business. Fox network wants to build this show. That's an answer to The Apprentice for Richard Branson. It's kind of going to be like The Apprentice meets The Amazing Race. And they were coming through different American cities recruiting and they came through Salt Lake and their ads didn't take.

And so they go to the University of Utah and said, Hey, we're here for a couple of days recruiting for this show. Do you know any entrepreneurs who are young and dumb, young and crazy and have businesses? And, they found me and I made a video and forgot about it. And then got a call back a few months later said, hey, can you be in London a week from now? You're going to have to leave your business, leave your cell phone, no contact, two months filming all over the world, Richard Branson. And I'm running this little retail chain, right? That's amassing debt, opening locations, happy franchisees, p***ed off franchisees, the whole ball of wax.

And once again, my gut, in fact, my partner's asked me, well, that's a big risk take off like that. How do you feel? And I said, well, I feel like I'm going to get kicked off the first episode or I'm going to win. What do you win? I don't know, but it's, they claim it's the biggest prize in reality TV show history. 2004 filming the show, 16 contestants flying all over the world, Africa South Africa, Zimbabwe, Japan, Hong Kong. Back to London, back to Necker Island, leaving people on the tarmac along the way, business challenges, risk challenges with Branson, walking between hot air balloons, jumping off waterfalls, all kinds of crazy stuff.

And I win. I win a million dollars on national TV, a million dollar investment. I'm handed this check on Necker Island. Of course, the TV won't tell you that I'm two million in debt having built all these dumb stores and taking on inventory. And I'm made president of Virgin Worldwide for a period as well as part of this. My runner up, by the way, for this show is Sara Blakely, the founder of Spanx. And who is amazing, of course, and a great friend. I've had her on the podcast. And I go back home and I've got to travel around for my duties with Virgin. I'm meeting all their CEOs, doing all this stuff.

Lovesac, blowing up. We have all this celebrity momentum. And with this momentum, we raised venture capital and venture capital's first big idea after looking at the whole business was, Hey, we'll fund this into the next strata. But we've got to get out of some of these bad leases and the best strategy for you is going to be to bankrupt the company, take it through chapter 11 and re-emerge, with, a dozen locations that are clean and good and, get out of franchising, it's no good for this kind of thing. And it was humiliating, man. I mean, here I am, a local celebrity when someone from Utah wins a national show like that it's a big deal. And it really was the biggest prize in reality show history ever at that time. So, and now...

[33:34] Chris Hatch: You were the talk of the 2000s.

[33:37] Shawn Nelson: Right? Exactly. And now I'm in chapter 11, first page in all the newspapers, and we've got to run the business. And that's what people don't understand is like, if you're not just done, you have to run the business while you're going to court, fighting out over all this stuff. People hate me. I've lost people money, different investors and lenders and all kinds of things. We've got to keep our morale up, keep selling sacks so we can make it through. Meanwhile, I'm closing down locations, dozens and dozens of locations that I just opened. I'm, going in personally sometimes at night as you do in shopping malls, chopping up cash wraps with a sawzall that I just installed paid to install and then getting back to the business by Monday to keep the wheels on the bus.

And it's just devastating physically, mentally, emotionally, spiritually. Devastating. So we make it, we make it through our investors kind of buy us out on the other side and we reemerge with a dozen stores. They want us to either be in New York or LA to be close to this little group of investors that we've brought on. And we choose New York and land in Stamford, Connecticut. And I moved my wife, I was married somewhere in there and she makes the move with me to Stamford and we end up having four children out in Stamford building the company for the next decade from, I don't know, 10 employees back up to a hundred get the company.

Let's say from 2006, when we emerged, to 2016, we grew it to about 60, 70 million and 40, 50 really profitable locations, selling mostly couches. In that first store we had a couch to look pretty. People kept asking about the couch. So we invented Sactionals, the couch that we could actually ship and make internetable. And that became super relevant by 2015 when we saw the entire direct consumer movement happening, Casper, Warby Parker. And we woke up as this little furniture retailer selling mostly couches. Realizing that we have the couch for the direct consumer movement. What we've never done is really heavily advertised digital or traditional.

And we embrace that model. And that just was a bombshell. We rapidly propelled the company from 70 to 700 million over that next decade till now going public in the middle at about a hundred million in sales. We 7X'd it from 2018, when we went public. Ticker L-O-V-E on Wall Street, which I'm super proud of. And here we are at about 700 million, selling mostly couches that you can have the rest of your life if you want to, ready to pivot into all kinds of other products and realms on this design for life philosophy that emerged over that decade.

[36:33] Chris Hatch: Love that. When did you figure out, I understood you had the first couch in that location one, but when did you start selling Sactionals?

[36:59] Shawn Nelson: Yeah. So I kind of skipped over accidentally on that part, but, it was Sactionals that, that I think really gave us and our investors, our earliest investors, the faith to see this company through. Had invented it back in 2005 and six, even as we were heading into that chapter 11, but, we knew it had a ton of potential, but we needed the company to survive, to deliver on that. And we spent the next decade, by the way, from, let's say, 2006 to '16, trying to figure out how to out-Pottery Barn across the hallway. And we were selling rugs and lamps and bowls and baskets and decorative accessories out of 800 square feet.

And it never really worked that great. Kind of hiding all of the really cool things about Sactionals underneath all of the stuff and, having all the inventory problems and merchandising problems that any furniture company has. And it was really when we jettisoned 90% of our SKUs, got rid of all that stuff and focused only on the couches and this and the sacks are still around growing. But the but these magical couches, you could have the rest of your life and building advertising and a direct consumer model around that and pivoting our stores by the way into showrooms. So Lovesac today is actually an internet model.

The stores are not stores. They're showrooms to show you these fairly complex products and how cool they are. Now we have Stealth Tech inside. This is full surround sound built into these pieces that you can add to the pieces you already had 10 years ago. Front speakers, rear speakers, Dolby Digital 5.1, perfect audio, better than your home theater. I don't care if you have a $30,000 home theater, Stealth Tech is better. The proximity to your skull, the feeling of the bass reverberating through this giant sectional sofa really tastefully. It's amazing. It's our invention. It's our patents. We have dozens and dozens of patents on unique products and eventually we'll have a whole connected home and Lovesac and we'll do things.

You know, we're a major competitor in home audio. We really are by the numbers. I don't even think people realize that home audio, not one of my direct competitors is even thinking that way. And we have a lot more up our sleeve when it comes to tech and what we can do with it in the home. And so what you're seeing from Lovesac today is just the beginning of what you're going to see. And, we're only a year or so away from really kind of revealing a lot more about how that's going to unfold and what that looks like and why we think it's going to be so compelling and take us to a few billion in sales, at least in the over this next chapter of our lives.

[39:53] Chris Hatch: So you get everything running in 2001 and there's a huge lift there in the '01, '02, '03, '04 range as you're opening the stores, you're figuring out how to produce at massive scale compared to what it was before. And then you get hit with the chapter 11. I got to imagine that it's so hard to find lightning and trap it in a bottle once and then to put in the brain power and the actual physical power. I mean, part of this too is you're looking at your wife and you're wondering who marries an entrepreneur like me, right? You know, in a lot of ways in commercial real estate development, a broker is the same thing, right?

Like my phone rings at 7 p.m. when we're sitting there at dinner and it's unfortunate sometimes, but you take your work home with you, right?

[40:44] Shawn Nelson: Go take it.

[40:48] Chris Hatch: And that's unfortunate for those loved ones in your life. Now, the good news is it puts you in a position where you can do what you want with your life a little bit more, but you never quit. You're never off. So how did you muster up the oomph, what it took to get the thing going round two?

[41:09] Shawn Nelson: Listen, I've wanted to quit a thousand times. That particular timeframe, muscling through that reorg, of course was the most dramatic, scary, difficult, humiliating time. In the book, I share the story. I'm at home, kind of talking to my parents one Sunday. I'm out there closing all these stores, keeping the wheels on the bus, laying people off, keeping the company going. And I'm kind of like venting to my parents on one Sunday afternoon and they they've never built anything to the scale. They're, they can't really help me directly with any specific advice. But I said what do think I should do? People hate me. I look like a fool.

I've lost all this money. It may not even work. What should I do? And I think my mom was a little bit upset, but she stood up from the table and said, finally, all I can say is you can quit or you can keep going. And as dumb as that sounds, it's no different than today. You know, I could tomorrow, I guess, choose to sell my stock and move on and do something else. Or you can keep going. And I guess after doing that a thousand times and making the decision to keep going, that's just my muscle memory at this point. And in fact, I have to do it again, like in the sense that Lovesac's doing great, has done great.

We've weathered this post COVID recession better than all of our competitors who are back to like their 2020 levels of sales. If we were to do that, we would be at half the sales we're at today. So we've hung on and. But it's been a really tough three years for the home category, because most people were buying this stuff during COVID like crazy with government money. And here I am telling you we're going to branch into new rooms, new realms. We've got to reinvent ourselves again. And we're going to. And I'm very confident that we're going to be successful. I think we're going to eat up other categories just like we've done before.

And I guess that's my advice is. You quit or you keep going. And if you're not sure, or even if you feel beleaguered, but you're not sure that it's time to quit, then the tie always goes to the runner. You keep going. And so I'm very grateful to have the opportunity to keep going. And in fact, I think I've gotten very good. And the organizations built up a lot of resiliency. That's the blessing of coming up slow and ugly, as opposed to just being one of these companies that raises a bazillion dollars and burns. And look, some of those situations are great. They make someone super rich.

Some founder gets super rich. Some PE firm gets super rich, but meanwhile, someone's usually left holding the bag. And most of those situations become worthless. Lovesac will always be valuable because we have strong bones and not just me, the company. The product, the fan base, because we kind of had to come up the hard way.

[44:38] Chris Hatch: So you've shared the lesson learned when you had the one successful store that one of the things you wish you would have done is spent more time figuring out what made that successful and then trying to repeat that. You've opened a lot of stores, you've closed a lot of stores, and now you've reopened new stores. What do you think, what do you see when you look at a new potential store location? What are the attributes that you're looking for that you think makes it most successful for you and your operation?

[44:49] Shawn Nelson: Well, like any retailer, we have our formula and it's unique for Lovesac because we have so many unique attributes. Look, you walk out of an Apple store, Apple, how much did you spend there? Thousand bucks, couple thousand bucks. They've got 50 employees just at that one location, maybe a hundred, maybe 200, depending on the location. I'm not picking on Apple. I mean, they're the biggest company in the world, most successful retailer, maybe depending on how you slice it. You walk out of Lovesac though, down the hall, it's 800 square feet, maybe a thousand. There are six employees in total on the staff, one or two of them probably there at any given moment and you've given me 15, 18, $20,000 a whack because that's the type of stuff we sell.

Five, 10, $15,000 sectional sofas packed with stealth tech. Now the recliner, all these things. That's a very, very unique business model. And from co-tenancy, which we obviously have a point of view on, to type of location, which is evolving... We are opening mostly now because remember our reality is changing. We've spent half a billion on TV advertising specifically for couches. There's no other firm on earth that's done that. And so our ability to drive traffic, be attractive to a landlord. You can just imagine what our sales per square foot are. After Apple and Tiffany's, we may have the highest sales per square foot in retail.

Because of these metrics, right? And so our ability to be selective, our ability before we couldn't get a space under the escalator, our ability to go into the best centers and look, we've gobbled up most of the AA plus centers in terms of malls. We're onto different types of real estate now, mostly outside of the mall. And a lot of that has to do with the fact that we have spent as much as we have on driving brand recognition and demand for our own product, as opposed to needing the foot traffic from the mall. So it is a constantly shifting landscape for us. And the shifts have to do with both the evolving landscape at retail and our own march forward as a brand.

[47:50] Chris Hatch: You know, it's so interesting. I think we're like episode 23 or 24 here for our podcast. And we've had a handful of CEOs on here and we've had a lot of people responsible to help open stores. And most of the concepts we're talking to are hyper growth concepts. What is so amazing to me is so much of the recipe for success. Seems like with the retailers that have come on our pod so far. It's kind of twofold. One is it's culture driven, right? And I think a great example of that is like the Dutch Bros coffees of the world versus every, versus most of the other established coffee concepts and how they create that culture.

And then the second thing is simplification of menu, right? A lot of our people are food people, but, like Layne's Chicken or Dave's Hot Chicken, right? I mean, it's a pretty narrow focus menu. It's not wide. It's pretty tight. And I think that is what is really fascinating about what you have done. And it's wonderful that you've added in the Sactionals. And so you have at least a couple of product lines, but it's still narrow. Right.

[49:00] Shawn Nelson: Yeah, I think that those are great observations. Those are great patterns to recognize. I think they are largely true because the world has evolved so much over this past 20 years. Like when we started, Walmart was still kind of on the come up in a lot of ways. Amazon wasn't even in existence. Walmart and Amazon have eaten the world. If you need something, you can find it there. So all that's left in product land anyway, and, look food we can have a different conversation, but is experience driven and even Lovesac selling, couches, which you can find plenty of places, including Amazon or Walmart, and others. need to have a point of view behind them that's very pungent.

Otherwise they have no reason to exist. People can find their chicken sandwich or whatever, or couch at a hundred different places. And so without a strong point of view, without a strong culture, without a strong brand in the end, in the end, the only moat left is brand. Because even IP... we have numerous patents at Lovesac. We defend them vigorously. We are very aggressive with our intellectual property, both getting it and defending it, but they'll never stop. You know, I liken them to banana peels in Mario Kart. They will spin out your competition and they'll make their life sucky for a minute. But that there's always ways to continue on.

So the moat is not patents. The moat is not even trademarks or anything like that. The moat is the brand. You mentioned Dutch Bros, coffee, the culture, all of those, all of those aspects, the culture, even the to some degree, the product itself, it's all pieces of the brand. The brand is all that's left because everything has been commoditized.

[51:24] Chris Hatch: That's pretty fascinating. What was the biggest lesson you learned in the 2003, 2004 era? What did you learn to do? What did you learn not to do?

[51:41] Shawn Nelson: Yeah, so we got to kind of experience hyper growth at least twice once was in that first realm and the second was really COVID. And even leading up before COVID, like I'd say, from the time we went public in 2018 until let's say 2022, I mean, the company 7X'd in a period of about three, four years. And so, and that's at scale, right? That's not in the 10, $20 million range. That's at the hundred to $700 million pace. And, first of all, mean, what have I learned? Let's go to the negative, classic mantra grow too fast. Things get bad. So growth can and should be controlled.

We tried to grow too fast in the beginning by, by just racing off and going for it. You know, there, we really could have done better by purposely. I remember at the time feeling like. Let me give you an example. I'll get a dig in. Utah is a very entrepreneurial place. Utah is the land of knockoffs. We had in our first five years in business, when we were just getting going in retail, in those early two thousands, we had at least seven or eight copycats. Seven of the eight were from like, Orem, Utah. By the way, we had stores nationally. Right? But Utah's this weird copycat place.

And so I felt this boogeyman over my shoulder. Like if I didn't go fast, others were going to beat me to those malls. Huge mistake. Huge mistake. Stay focused on what you're doing and do it really well. I think this is one of the things that biggest lessons I've had to learn the hard way is it's there's plenty of coffee places. I think Dutch Bros is probably going to do just fine if they just keep doing well what they're doing and not be looking over their shoulder trying to beat fill-in-the-blank brand to every street corner. Don't play the real estate race game. It's not necessary.

If you have a good thing, a good concept. There is plenty of room to win. And in fact, here's another thing you have to remember that like as hard as these last three years have been for Lovesac because it's this post COVID pullback, whatever. And we're doing fine. Like I said, we're doing better than all of our competition in a lot of respects. We're profitable, we're cashflow positive, we're still growing, we're opening locations, all this stuff. But it's still painful compared to the growth that we got to enjoy when the getting was good in the early 2020s. All of my competitions feeling the same pain.

You know, they're feeling these same headwinds. They're going through their own cultural struggles, maybe even worse, because they don't have my culture. They don't have my energy. They don't have my stamina. And when I say my, I mean my businesses. You know what I'm saying? And I don't see that. I see their glossy stores or I see their good products or I see their Instagram, But they all have their own demons to battle. You got to have faith in that. You have to have faith that, yeah, you have your problems as a business, as a brand, as a concept, but so does your competition. So just keep your head down and control what you can control and build the best brand and culture.

And if you just swim long enough, you're probably going to look up, raise your head, look up and look around and you may be the leader. And I think we're on a path to do exactly that. And in a lot of ways we already are that. We have the best-selling sectional in the United States of America right now by the numbers. But I still feel like a pygmy compared to some of the brands you can think of that are across the hall from us or whatever. Just because there's power in having that chip on your shoulder. So, focus on your brand, your culture, your concept.

And it can succeed as long as by the way the fundamentals are there, right? Like if it was never good to begin with, that's a different problem.

[56:38] Chris Hatch: I think what's so cool about your story and how many of people that kind of came up along the way with you, right? So many of those peers, the friends from the neighborhood, some of your family members. It's just a good testament that, look, we both grew up here in Salt Lake and it's a wonderful town. It's obviously become a much larger town here today than it was when you and I were growing up. But it's not like some town that you would note for exceptional creativity of brands or brand creation, but it is that drive. How much of it is that drive of just waking up every day and getting after it?

[57:19] Shawn Nelson: Yeah. I mean, you mentioned this earlier. I think that Utah and Salt Lake, whatever the, let's just say Utah is a wildly entrepreneurial place. It is known, I think that way for anyone paying attention and it may not be brands coming out of there necessarily, but tech companies, food concepts. And I think it does have a lot to do with the local culture. I I think it doesn't have to just be Mormons, obviously. But the culture that surrounds Mormons is a self-reliant want to be home with my family. Don't, if I can find a way not to work a nine to five and instead spend time with my family and so it drives professions like yours.

It drives entrepreneurship and founding. And look, I made my dig. It's the land of copycats, but bless their heart, they're all trying to do that. And finally, it's a culture of comparison. I've thought a lot about this. When I lived in Connecticut, I knew some of my neighbors, some of them scattered, may have had kids in our same schools, so you know them a little better. But in Mormon land, people are seeing their friends and neighbors every Sunday. They're driving by their homes. They have all these different programs to connect. And even if you're not in the church they'll kind of wrangle you in and try and make you a part of it and try and make you a part of that neighborhood.

For better or for worse, it creates a culture of extreme comparison, partly because of just the proximity of it. Like people aren't just necessarily in their own little hive coming and going, ignoring their neighbors like you can in different places. And I just think like you play that out across millions of people and you have a lot of, you have a very competitive comparison driven thing. And it's not all bad. Like it drives some of what you're poking at.

[59:37] Chris Hatch: It also works when the Joneses get the new sectional with the sound system and the recliners and then the Smiths see it and then the Smiths are like, well, we really have to have it. The Jones have it.

[59:48] Shawn Nelson: Which also makes Utah a great place to get things off the ground for that reason, because you have this transmitting effect that you don't necessarily get everywhere in the country. So it's not the only place, but that is part of the unique culture of Utah.

[1:00:03] Chris Hatch: When we drive new retailers, potential retailers that are looking to expand into the state, that is one of the first things to try to help educate people. It's just this whole concept that in your geographical unit that's there where the local Mormon church congregation is, everybody knows literally every single family name in that area. And it's kind of mind blowing when you think about that. And just that sense of neighborhood that gets created from that, and then where that goes from a consumer consumption standpoint.

[1:00:39] Shawn Nelson: It's very strange. It's very strange. But it's real.

[1:00:44] Chris Hatch: Yeah. Well, Shawn, thank you for joining us on the Dirt Dog Pod today. You're doing huge things with Lovesac hearing about the recovery story and 7X-ing the brand after going public and some of these sentiments from your early days. Wonderful insight. Thank you for being with us today.

[1:01:04] Shawn Nelson: Yeah, thanks for having me. It's a lot of fun.

[1:01:06] Chris Hatch: Yeah. And for everybody out there, if you don't have a Lovesac, go check out the Sactionals line, go find a store, go find a friend that has one, because they make incredible products and see where you can put one in your home or your office.