Episode #227: Alex Smereczniak, 2ULaundry, “Quality Has to Be At The Forefront of Everything That We’re Doing”
Guest: Alex Smereczniak is Co-Founder and CEO of 2ULaundry, a startup approaching laundry and dry-cleaning in a new way, helping customers make time for what matters most.
Date Recorded: 5/27/2020 | Run-Time: 53:06
Summary: In today’s episode, we’re talking about re-thinking the laundry and dry cleaning business. Alex cut his teeth in the business with a student-run startup at Wake Forest. We get into what he saw with existing startup models trying to scale the laundry business, and why he thought the model needed to be approached in an entirely different way.
We discuss scaling the business and 2ULaundry’s differentiating factors of pick up and delivery scheduling, vertical integration, and launching in markets where there is little competition, but room to scale.
As the conversation winds down, we cover what 2ULaundry has done to navigate during the COVID-19 pandemic.
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Links from the Episode:
- 0:40 – Intro
- 1:30 – Welcome to our guest, Alex Smereczniak
- 3:05 – Origin of Alex’s company 2ULaundry
- 4:30 – A break from the business and then Alex’s return
- 9:55 – Customer experience
- 14:00 – Ownership of individual laundromats
- 17:08 – Business model and why so many VCs struggled with it
- 22:15 – Technology to manage the orders
- 24:10 – Enterprise level arrangements
- 26:38 – Funding the business
- 28:09 – Expanding beyond the first market
- 30:50 –TechStars
- 32:34 – The early years of the business and what Alex learned
- 38:31 – How COVID impacts 2ULaundry’s business
- 43:08 – Preparing a franchise strategy
- 46:40 – Experimenting with donations and consignments
- 50:26 – Expansion plans
- 50:55 – Most memorable investment
- 51:59 – Best way to learn more: firstname.lastname@example.org or 2ULaundry
Transcript of Episode 227:
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Meb: Welcome, podcast listeners, it’s time to clean house. Our guest is co-founder and CEO of 2ULaundry, a start-up approaching laundry and dry cleaning in a new way, helping customers make time for what matters most. We all know we hate laundry. On today’s episode, we’re talking about rethinking the laundry and dry-cleaning biz. Our guest cut his teeth in the business with a student run start-up at Wake Forest. We get into what he saw with existing start-up models trying to scale the laundry business, and why he thought the model needed to be approached in an entirely different way. We discussed scaling the business and 2ULaundry’s differentiating factors that pickup and delivery scheduling, vertical integration, and launching in markets where there’s little competition but room to scale. As the conversation winds down, we cover what 2ULaundry has done to navigate during the pandemic.
Please enjoy this episode with 2ULaundry’s founder, Alex Smereczniak. Alex, welcome to the show.
Alex: Thanks for having me, Meb. I’m excited to dig in and get to know one another and our stories.
Meb: Where in the world do we find you today?
Alex: I am in overcast Charlotte, North Carolina today.
Meb: Before we dive in to all things dirt and laundry, you were a Demon Deacon. I grew up going to all the basketball games back when they were good, so the Rodney Rogers, Tim Duncan era, a little before your time, Randolph Childress. But most importantly, is Ziggy’s still around or was that before your time? There used to be a great music venue right at Wake Forest, is that still around?
Alex: Ziggy’s was still there when I was an undergrad, but I heard that they recently rebranded and got changed to something else. I think similar concept but either new owners or new name.
Meb: Sad. I have one more important question for you is that, have you ever been to a Ronni’s chicken wing place? I guess, the original was, maybe, out in Clemmons, have you ever been?
Alex: I’ve never been to a Ronni’s, what’s that?
Meb: Shameful. Well, it’s, like, probably the best buffalo chicken wing place in the entire country.
Alex: Oh, man.
Meb: If you’re from Winston, you will use Texas Pete hot sauce, and so we used to have friends who would come visit from university or after college, and we’d go get some… This is pre-Buffalo Wild Wings so you’d go and get wings for dinner. And say, “What are you talking about? Wings are an appetizer it’s not something you have for dinner.”
Anyway, so when you go back, that’s on your to-do list and you’re going to have to report back. Anyway, so let’s talk laundry. You are a budding laundry entrepreneur, started a company 2ULaundry. Tell me the origin story. I’ve heard it before, but give our listeners a little insight. It goes back to your Wake Forest days, right?
Alex: It’s funny, that’s one of the first questions I always get asked is, “How in the hell did you get into laundry and dry cleaning?” And some people joke, “It was a traumatic experience as a kid.” And, thankfully, it was nothing like that. It was actually a job that I had as a freshman at Wake Forest. I worked for another student-run laundry and dry-cleaning delivery start-up on campus called Wake Wash. And they were, essentially, a door-to-door laundry and dry-cleaning delivery service for those students on campus. And I just fell in love with the business model, I thought I could scale to Duke, Chapel Hill, Vanderbilt, all these other universities, you name it, and just kept tackling and asking the guys when they graduate, what were they going to do with it? And, thankfully, they wanted to be done with it and move on to investment banking, marketing, etc. And so, I offered to buy it my sophomore year.
And one way or another, eventually, found two other partners and got a loan from a bank, and ended up purchasing the business our sophomore year for what felt like a ton of money at the time. And, thankfully, it was one of the best experiences of my life. I learned more than I ever would have imagined running it and made some good money when we sold it before we graduated.
Meb: What idiot bank was lending you guys sophomores in college money to be buying a laundry business?
Alex: Can I disclose that?
Meb: Yeah, right. All right, so you ran this business. It’s funny to me because, and we’ll get into this, but the laundry business fits under one of these umbrellas that we talk about on the podcast of almost, like, frustration arbitrage, where it’s something that no one in particular ever wants to do, but it’s been a challenge. There’s no national brand, at least to my knowledge, and it feels like every business school student for the past 50 years goes to HBS, or Stanford, or somewhere, and comes up with a laundry roll up idea, and it’s been a real challenge. So tell me why you were just young, and impressionable, and didn’t know better, but you graduated, you didn’t immediately roll that into your company, you took a little laundry sabbatical, right?
Alex: Yeah, that’s exactly right. I mean, we bought it in our sophomore year, we had a huge success right out of the gate, we immediately got a partnership with the university to have it as a check box option for incoming parents and their students. So, as you can imagine, parents are coming with their student, getting books, their meal plan, parking, etc., and we were an option that said, “Get your laundry package.” And so, at that point, check books are out, they’re worried about their son or daughter going off for the first time and they’re willing to pay for anything and everything to make their lives easier.
And that move alone allowed us to 10X the business we had just purchased within about a month. We were off to the races, really growing a pretty substantial business at that point in college. I ended up selling it, though, because my partners were like, “Hey, look, this is a great resume builder, we’re all going to make enough money to help pay for at least half of our college tuition, and what an awesome experience, like all the stuff that we learned. We’re ready to move on.” And one had an offer to go to marketing Pepsi, and another had a private-equity gig, and they just wanted to go on and do those. And I was like, “Hey, let’s go to Duke, and Chapel Hill, and spread this thing as much as we can,” but also didn’t want to be the guy that held them back. So we did ultimately sell it, made about a 10X return on what we bought it for.
And I thought I was done at that point, I’d learned all this stuff. I’m going to go get my big boy job now. I ended up going and doing management consulting at Ernst & Young in Charlotte, North Carolina, which is how I ended up here. And I love the people and I think the idea of consulting was exciting to me because it felt entrepreneurial. You’d go to work with different clients, different projects, you’d get this different flavour and taste of experience. And I didn’t get exactly that out of the experience after about a year and a half there. As much as I loved the people, the work wasn’t exciting to me, and I had that entrepreneurial itch and bug.
And at that point, I had seen two companies on the West coast, Washio and Rinse. I had been watching them since 2013, 2012, but this was in 2015, and saw they had raised about $30 million to go after the $40-billion laundry-and-dry-cleaning industry in the U.S. with what I thought were the completely wrong models. And what I mean by that is you were seeing Uber for everything at the time. You were seeing Uber for dog-walking, for massages, for grocery delivery, you name it. And they tried to take that page right out of the playbook and do the exact same thing, and copy and paste it to laundry and dry cleaning. And just knowing what I knew doing this in college, I knew they were dead before they got even off the launchpad. And from a unit economics perspective, there was just no way that point-to-point, $10.99 delivery was going to work in this space. And then, not only that, the consumer at the end of it doesn’t even really need their clothes picked up that quickly. It’s a very edge-case scenario where people do need that.
Laundry is just inherently different than food delivery or ride sharing, which is very much an impulse, acute decision. Laundry is much more chronic, recurring in nature and so our thought was, “Hey, we’re going to tackle this in a different way. Washio and Rinse are proving that there is a market, there is demand, and there is an appetite from investors to help grow it quickly. Let’s do it differently and do it in a way that we believe will work, and see if we can be the ones that consolidate this industry for the first time.” And so we launched 2ULaundry in January of ’16.
And really the three core differences from those competitors were, instead of being that point-to-point delivery, we were going to operate on static scheduled routes with W2 employees, they’re in branded bright pink vehicles, you can’t miss them. So the routing was just much more efficient, we can go pick up about 10 to 12 orders an hour whereas our competitors were doing 3 to 4 due to that point-to-point delivery approach that they’re taking.
The second biggest differentiator is quality has to be at the forefront of everything that we’re doing. At the end of the day, clothing is super personal, it’s arguably the first big decision we all make every day is, “What are we going to wear, what are we going to look our best in, feel the best in?” etc. It’s like clothing is important to people and it needs to be cleaned with that in mind. And what Washio and Rinse were doing was outsourcing it to mom and pop coin laundromats where, inherently, the quality is not in their control. And our thought was, “You can’t outsource what’s going to be your core competency, and you need to vertically integrate and own that.” So that was the second piece was vertical integration in mind.
And then the last and third piece was, instead of targeting your New Yorks, Chicagos, LAs of the world, much bigger, much more density, but also a lot more traffic, higher cost of doing business, etc., we wanted to target the secondary and tertiary markets cities like Charlotte, North Carolina, Raleigh, North Carolina, Atlanta, Georgia. Ones where there’s relatively little competition in this space, lower cost of doing business but still a good enough amount of density to make the juice worth the squeeze. And that’s exactly what we’ve done here, and Charlotte’s been a phenomenal success story. And now we’re at a place where we’re starting to scale it up.
Meb: Help us, the listeners, walk through, I want to hear it from, kind of, both sides where you can just tell it as one big story from both standpoints. How does it look from the customer standpoint? I’m sitting in my house in Myers Park, Charlotte somewhere… Myers Park in Charlotte, did I get that right?
Alex: It is. You got that right.
Meb: It’s been a while. Or I’m downtown in my loft in Charlotte, I assume it’s app based. How does it work, I mean, is it just wash and fold, is it dry cleaning? Talk to me a little bit about the costs, what’s the whole experience?
Alex: We started out without an app, we were almost like the anti-app at first, because our thought was, “Everyone’s phones are getting crowded and text is the way to go.” And looking back on it, it was one of the smartest things we did, we saved a ton of money upfront, and SMS has actually become more mainstream and is going to continue to do so. Text is just 100% open rate, it’s less invasive than, I think, some people realize if it’s a brand that they want to interact with.
So we, at first, went all in on SMS. You, as a customer, you’d visit our website 2Ulaundry.com. You’d go through about a three to five-minute sign-up process where we would ask you your favourite detergent, if you want softener or not, if you want hypoallergenic detergent, if you want your water hot or cold, if you want your dry cleaning hung or boxed? And so, you’d, kind of, fill out this questionnaire where you’d want it picked up, where you want it dropped off, created your payment information, etc. And at that point, everything was done through SMS, voice, or scheduling a pickup online.
And so, from a consumer’s perspective, you’d go on, let’s say it was today, like, “Hey, I need laundry and dry cleaning picked up.” So it’s either wash, dry, fold, which you would do at home or dry cleaning, which you would bring to your traditional dry cleaners. And you’d say, “Hey, I want my stuff picked up.” You could schedule it for as early as tomorrow. And at that point, we would send you a text message reminder the night before. So tonight, you get a message saying, “Hey, Meb, don’t forget to leave your bags outside your front door tomorrow before 9:00 a.m.” We’d also send you a reminder tomorrow morning with a similar message.
You’d set that bag out, laundry in a blue wash, dry fold bag, dry cleaning in a black garment bag. And at that point, you set it out, our drivers will be by between 9:00 a.m. and about 11:30 a.m. in that same day. We let you know when the driver is on the way and when they picked it up, so you’re getting notified every step of the way. Those drivers then go to our facility, unload it, it gets checked in, made sure it’s sorted by your preferences and those different permutations that people want their clothes cleaned in. And it gets processed that day, and then it’s delivered the next afternoon.
So you’d get your clothes back by Friday by 4:00 p.m. ready for the weekend. And it’s as simple as that. I mean, you send those one or two text messages to get started and then everything is just automated from there on out from your standpoint. You get that freshly cleaned bag of clothes back on Friday, ready to be put away sorted by pants, shorts, by family member, we colour coordinate it, dry cleaning hung, and just ready to, basically, be put away.
Then from a pricing perspective, on the laundry side, we offer two sizes. We charge per bag instead of per pound. And the reason was that there’s some consumer anxiety around, “What does a pound of laundry look like, and what is this going to cost me?” No one has the answer to that, it’s a weird, kind of, unit of measurement and not one that people commonly look at or refer to. And so, the bag was easier for us to say, “Hey, fill this thing up as full as you’d like, stuff on it, jump on it. And the large bag is going to be $35, that’s 4 to 6 loads of laundry, and the small bag is $25, and that’s 2 to 3 loads of laundry. So relatively cheap by 5 to 6 bucks per load that you’re getting done, and that’s washed, dried, folded, sorted, etc.
And then, the dry cleaning is priced per piece, and it’s priced commensurate to what you would pay walking in and going to a brick and mortar dry cleaner yourself, only, you don’t have to package all your things up, pull to that place, go through the mystique of like, “What am I going to pay for this at the dry cleaner, there’s no transparent pricing?” And then, you’re going to have to remember to go back to that dry cleaner two to three days later when it’s ready, and remember to do that only to, again, have a bill that just isn’t transparent. And so we eliminate all those steps in the process, we bring transparency to the process for the consumer, and the price is roughly the same as what you pay, only, you don’t have to do any of that and it gets returned the very next day instead of three business days later.
Meb: You guys own the laundromat, are you outsourcing it, how does it work?
Alex: Yeah. So upfront, I mean, when we were first starting, there was actually five of us living in a three-bedroom apartment, we had mattresses on the ground doing everything as cheap as we possibly could. And our initial process, mirrored, that kind of scrappy mentality. We did outsource at first which was, kind of, going against our initial hypothesis with the goal in mind of getting vertically integrated once we were big enough and established and proven ourselves. Within about 8 months, we had bootstrapped to about $ 50,000 in monthly revenue, and that’s when we had enough power over the vendors to say, “Hey, can we rent out your off-hour capacity?”
So instead of vertically integrating right away, we just weren’t bankable that early on, we went to the laundromat owners and said, “Hey, look, you don’t want to be here more than 10 to 15 hours a week. This is a passive, self-service, cash-flowing business for you. You love the additional revenue of us.” But they’re not good operators, they don’t want to be managing 10-plus employees. They typically have unattended stores and/or maybe one employee. And so, the whole model for them, this was one of the issues with Washio and Rinse was just flipped on its head. They were asking these passive laundromat owners to work 40, 50 hours a week, hire teams of 10, 15-plus, layer technology under their businesses, where previously they worked 10 hours a week generating cash flow with very minimal hands-on ownership from them.
And so, at that point, we went to them and said, “Hey, Monday through Friday, your stores are, essentially, completely underutilized and they’re generating 80% of their revenue on Saturdays and Sundays, but we’re only operating Monday through Friday.” And so, there just became this perfectly synergistic opportunity where that owner could go back to that passive lifestyle but also generate revenue while they were sleeping and not at the store Monday through Friday. So they loved it. We loved it as well because we now had full control over the process and weren’t reliant on those vendors without any of the capex.
We built our process from the ground up at that point and ended up cutting cost by about 20% doing that, and then increasing quality significantly had shot through the roof, and we were able to provide just a much better, more consistent experience to our customers, which is the most important thing to us. And at that point, really, it felt like we had developed a model that no one had truly tried before or had tested, and the results, initially, were phenomenal.
Meb: How’d you do it at Wake Wash, was it similar or different?
Alex: So Wake Wash, I mean, as you can imagine, college kids bar for quality and their expectations is much lower than the mother of three kids in Myers Park who is, they’ve got designer clothes and their expectation is just much higher. So at Wake, we were outsourcing things to a local laundromat, and the quality that they’re producing was fine. It was not great by any means, I’ll be the first to say. But college kids who just wanted their sheets cleaned and their shirts cleaned, and it worked out outsourcing to that demographic. But in Charlotte, it was a whole new game and we had to really bring, again, that quality to the forefront, and hone in and focus on that.
Meb: I’m smiling as you’re talking about this because I recall being an undergrad and my roommate, we used to go to a local mom-and-pop drop-off laundry. And I just remember, he set the record for most pounds of laundry anyone had ever brought in, I forget what it was. I’ll have to ask him, it was something like 30 pounds or something. Maybe more, I can’t remember.
So let’s dive into the business model a little bit more because it’s interesting to me that very clearly, this is an enormous business or industry. Everyone washes their clothes, everyone hates it. Out of the whole process, I particularly hate the folding, it’s the worst. But you also mentioned a lot of VC money has been thrown at this and hasn’t been that successful yet. I actually remember using Washio in New York City on business trips where I just needed like one or two shirts. And it was kind of great from the user standpoint, as many VC-funded businesses are, because I would just have one shirt cleaned, come back either that night or the next day or something. But I can’t imagine it was profitable for them. Talk a little bit about why everyone has, kind of, failed at this point, and, kind of, where you think you guys stick out as being significantly different or just smarter, less dumb.
Alex: That’s a great question. And, honestly, it kind of pulls up the thread that I was mentioning earlier, is I had no plan to get back into the space when I was out of EY. It was really that watching Washio and Rinse start to raise capital and prove that there was a model or at least a market for it, but it was the underlying model that we had disagreed with. And what they were doing was, they’re in super large cities, like you said, like New York and LA where things are just much more expensive, so every dollar of capital they were raising was not getting the same two to three, if not four X, in some cases, of value that we’re able to get in a market like Charlotte, Raleigh, etc., from hiring, to rent, marketing dollars, etc. So that was part of it, some of it is the arbitrage in smaller markets that the unit economics make much more sense in.
But the biggest thing, really, was trying to be on demand, it’s not possible. When Washio went out of business, we talked to their founding team, we talked to their lead investors at Canaan Partners, and both were incredibly forthcoming about what went wrong and, honestly, informed a lot of the decisions that we made going forward from that point was from those learnings that they were so graciously willing to share with us. And, I mean, there were many but the two that really stuck out was the on-demand model just doesn’t work even at scale. They had been in LA for, I think, three and a half years and still had -15% gross margins because they have all these drivers sitting idle on the road that they’re paying some sort of base fair for, even though they are $10.99, just to keep them on the platform, and that quickly eats into your margin.
And we at the time were six, seven months in when we had this conversation with Washio and we were at 25% gross margins, and we were nowhere near scale or full optimization. So we felt, at least, directionally correct that it really has to be this UPS-like delivery route versus an Uber-like pick-up and delivery model. So that’s, really, one of the major nuances that led to our success here in Charlotte and with the model.
The second thing, though, that I alluded to earlier as well was, the quality control on the wash, dry, fold side of the business is just, it’s paramount, it’s the most important part. It’d be like if Apple outsourced its design, I mean, that’s really what it became known for and what has brought so many people into the brand is that design, they couldn’t outsource that, that is their core competency. And we were looking at laundry and the quality of it being clean, and the quality of the dry cleaning being clean the same way. And when we talked to Washio, they had raised $20 million, they were in 6 major markets in New York, Boston, Chicago, LA, San Fran, etc., and they we’re outsourcing everything to mom-and-pop laundromats.
And so, they had 6, 7 vendors in each market, 40, 50-plus vendors across the country. And if you think about it, I don’t know if you’ve been into the new laundromats or know any laundromat owners, they’re usually, there’s not employees working there, the owners are very rarely there, it’s very much a passive, self-service, cash-flowing investment for those owners. And what Washio and Rinse still does to this day, and what we were doing when we first started, was asking these passive owners to play an incredibly active role in the part of the process that’s arguably the most important for our end 2U customers. And so, you immediately have this dissonance, you immediately have this conflicting interest. And it’s not going to scale. I mean, you’re not going to have two parties or three parties that all want to play together even though those owners say they want to figure it out because you’re telling them that you’re going to double their top line revenue and you’re going to double their business.
But it turns out that additional business isn’t worth the three to four X amount of hours, they need to be there weekly having to manage 10, 15-plus employees, having to learn new technology and layer it onto their business. And very quickly, they start to lose the sense of caring about your end customers because it doesn’t feel real to them, it’s not as tangible, and the additional income they’re making isn’t worth it. And so, what ended up happening to Washio is Meb’s clothes would get mixed in with mine, your whole bag might go missing, and there’s article after article in vice.com, in “The Hustle,” I’m not sure if you’ve seen that newsletter, but there’s a number of articles that have been written about both Washio, Rinse, and now Cleanly, about just all these horror stories of people’s clothing just going missing, bags, worth hundreds, if not thousands of dollars. And that’s something that has to be addressed immediately in the underlying business model, and that’s what we’ve done through the vertical integration here in Charlotte.
Meb: And is there a tech element to that? Do you, like, record all the closes that come in? How do you handle that because, eventually, it just through, I guess, the process, there’s got to be some amount of loss or people just forget they put their jeans in, or didn’t, how does that work?
Alex: That’s where Washio, Rinse, Cleanly, they all doubled down right out of the gate. They had all raised a ton of money and build million-plus technology systems where… Well, we took the approach was, let’s take a weekend off the shelf at first and get us the most important parts that we need immediately for much cheaper, and then build anything proprietary and custom that’s really unique to our process once we’ve built a manual process that we know works better. And so, the tech that they’ve built was really robust and phenomenal, I think that they built the right tech for the wrong process, if that makes sense. And so, we really spent the first two years perfecting the process pretending that we don’t have this multimillion-dollar technology platform.
And now, in the latter two years or the four years we’ve been doing this is, we’ve built that technology platform out, and we do track every order from the moment you schedule it to the moment it gets back to your door, we know where it is, who touched it, when they touched it, how long they had it in their possession for, down to the bag level. On an item level, we see it on check-in for dry cleaning, so we do have it on an item level for dry cleaning.
For laundry, it’s not cost efficient to tag every single sock or a piece of underwear, so what we do is, we spread out the clothing on these large tables, and there’s cameras everywhere almost like a casino. And I get these eyes in the sky looking at every single order coming in, and we timestamp those as well. So if there is a question about an item, we can see when it came in and when it was sorted, again, who had it and pull up that footage to see what went wrong. And 9 times out of 10, we solve those issues. And so, long way of saying, yes, there is a massive technology component that allows us to better track your order, but it wasn’t always that way for us. We took, kind of, an inverse approach to our competitors, instead of going tech first, we went process first and then layered the tech on later.
Meb: You mentioned when you were at Wake Wash, one of the defining moments that rocket shipped the business was the ability for students to, sort of, opt in or out of the laundry service. Has there been any sort of, I don’t know if it’s B2B or any ideas that you’ve kind of taken that concept or reached out to, like, apartment buildings or other businesses, local banks and say, “Hey, look, we could handle this for all your employees.”? Do you guys do any of that or is it all just straight direct to consumer one-on-one?
Alex: When we first started, actually, Dan and I thought, “Hey, the end user of this, the person that has the biggest problem is us, it’s the consultants, it’s the bankers, the people that are so busy and they have more money than time. They want to buy that time back on the weekends and not be doing laundry, and not having to run to the dry cleaners.” So we did exactly that, we partnered with EY because that’s where I had been working, we went to every class A and B property you can imagine in Charlotte and we would just hold free laundry events where we’d actually, Dan and I, would set up a booth, we’d man it because we didn’t have a ton of money to spend on digital marketing dollars. And so, we had to be scrappy and boots on the ground, kind of, guerrilla marketing from the beginning.
And so, we went to all these apartment buildings and got a lot of our first customers that way. And, today, that B2B2C channel going into apartments or businesses is about 30% of our business. Where the other 70% really started to take off was, we were three or four months into launching 2U in Charlotte, and this one really influential, kind of, mommy blogger in Charlotte just happened to hear about the service, she signed up for it, and loved it. It’s, “I’ve never heard of this outside of a city like New York or Chicago, these services just don’t exist, but us families need help more than ever. Lots of us are working and the last thing we want to do when we get home from work is more work.” So they’re using the grocery delivery services, the meal-kit delivery services, someone is coming and cutting their grass and maintaining their lawn, but no one is really helping with this repetitive, mundane, never-ending battle against laundry.
And so, when she tried it, she started posting on Facebook groups, Nextdoor. And from there, it just took off, one parent after another started trying it, they started asking for referral codes and we just saw a lot of organic word-of-mouth in Charlotte, which was phenomenal to see. And now, that makes up 70% of our business, is those dual income families with kids where they just want a break and they need help, and this is one of the services that gives them that time back to focus on their family, their personal improvements and investments, and work, and whatever it may be, they now have the time to do that.
Meb: So you go to the business, mommy bloggers. Walk us through a little bit, did you, again, hit up the local bank to fund the business, did you guys go credit cards, how did it get started? Have you been doing any funding traditional routes?
Alex: So for the first eight months, I mean, I remember Dan and I had each put in, I think it was like five grand upfront just to buy laundry bags and basic materials. We built the website ourselves, we watched YouTube videos and tried just do the bare minimum to get something live. And then, as we got more and more traction, we realized we needed more and more help and wanted to add more and more features. So once that first $10k ran out, we had some revenue and profits from the business, we would reinvest everything. And then it came to a point where we needed to hire someone more technical. We were running the routes out of a spreadsheet that I had built and then using MapQuest to build those routes. That started to break and we needed some more technological expertise.
And so that’s when Dan and I said, “Do we raise money, or do we max our credit cards, or what?” And I had purchased a condo with some of the money that I’d made from selling Wake Wash, and so I had actually had enough equity built up that we could refinance the condo and pull out that equity. And so, we actually did that, we pulled out just shy of $100,000 that allows us to hire our first CTO and engineers, and we really just gave everything a quick facelift on the routing side, at least, we needed some help making sure that that was more automated and efficient than it was. And that got us to that first $50k in monthly revenue, and that’s when we raised a $400,000 friends and family round in August of ’16.
Meb: And so you said, “Okay, we’re going to work on getting Charlotte, right.” Then, have you expanded since, started moving to some other places?
Alex: Yeah. So the funny thing is, is when we raised the $400, we were like, “Wow, we’ve bootstrapped Charlotte to $50k a month. The families love it. We’ve nailed the demographic, let’s go launch Raleigh.” And we were super ambitious, and we raised the $400k under that pitch and that was the plan. And a week after, we closed the round, that’s when Washio went out of business after having raised $20 million. We’ve already, kind of, talked about why that was and what went wrong, but we had that phone call at that point and it changed our mindset completely.
We went, instead of a, “Grow for growth’s sake and get as big as you can, this is a land grab,” to, “Holy shit, no one’s figured this out yet and we need to be very methodical about how we’d go and do this. There’s no one chomping at our heels. There’s no Uber out there right now and we need to be the Lyft or vice versa. We should be thoughtful and patient with getting this business model right and really listening to our consumers, and what they want, and where our shortcomings are, and how we can fix those, and what we’re good at, and how do we double down on that.”
And so, actually, we went back to our investors and said, “Hey, look, this just happened, this is what we’ve learned. We don’t think we should launch Raleigh, we think we should continue to perfect Charlotte. We need to vertically integrate, we can’t rely on these mom-and-pop vendors.” So our first phase into distancing ourselves from them was, “We should process the volume ourselves using their assets and their equipment. But, eventually, we need to go build our own store.” And so, our investors challenge is, “Fine, go find a way to do that.” And that’s when we realized laundromats generate 80% of that revenue on the weekends, Monday through Friday, that equipment is almost completely dead. And that’s when we went in and started processing everything ourselves.
And a very important person joined the team at that point, his name is Beck Miller. His family has been in laundry and dry cleaning for over 100 years, and they actually did a very large volume of camp laundry in North Carolina. And the reason that that’s important is, they were cleaning hundreds of individuals clothing with all different preferences and whatnot for these campers. And so, they had this unique solution to processing everything that way versus having these commercial launders that dump 600 pounds of the same queen sheet set into one massive industrial machine. We have the challenge of, we have to keep that 600 pounds separate and in much smaller batches because they all have different preferences and you don’t want everyone’s clothes to get co-mingled etc.
And so, he came on, and over the course of 10 months, we perfected that process, “in house.” And that’s when we were ready to launch in other markets, so at that point had raised $ 2,500,000 in seed capital from a few venture capitalists and then went and launched Atlanta with that capital and got accepted into the Techstars Accelerator in that market.
Meb: I was just laughing because I think I was a camper and counsellor at Seagull and Morehead in North Carolina and I don’t think any of my laundry was individualized, definitely was not the 2ULaundry system. What was Techstars like?
Alex: Techstars was, honestly, one of the best experiences that Dan and I could have had as individuals, and it was also incredibly helpful for the company. Dan and I at the time were 25. I had a little bit of experience doing this in college. Dan had been working on start-ups in Minneapolis, but none that were at the level that we were getting to 2U to at that point. We were in two markets, we were at probably $225,000, $250,000 a month in revenue, the team was starting to grow and we were starting to face challenges that we had never faced. And so, we looked at Techstars as, “Hey, if 2U doesn’t work out in the end, the decision to do Techstars wouldn’t have mattered either way. But if 2U works out and we have an exit, and everything is amazing, and Techstars even has a 5% reason behind that happening, it was worth the little bit of equity that we gave up and the time that we spent there.”
And so, that was our thought process going into it. It was, even if it’s marginally added to our likelihood of success, it’s worth the small bit of dilution that we’ll take as a result. And so, we went into Techstars with the attitude of, “This is only going to be worth what we make it worth,” and we were absolute animals about it. I mean, every single mentor we could get in front of, we got in front of that made sense. We asked for favour, after favour, after favour, to connection, to connection, and it really expedited a lot of things on our end, hiring, launching Atlanta, getting relationships. We felt more connected in Atlanta in the three months we were in the program than we did being in Charlotte for a year and a half. So it really did just exactly what an accelerator is supposed to do and accelerated us, and was a phenomenal experience.
Meb: And so, what year would that have been, timeline?
Alex: That was the summer of 2017, and then we launched Atlanta in January of ’18.
Meb: Walk us forward to 2019, we’ll get to 2020 in a second. So 2018, 2019, what was, sort of, the trajectory, any pivots, any lessons learned, any new cities?
Alex: Throughout 2018, one of the biggest things we had learned was, we can’t rely on the mom and pops to do the wash, dry, fold volume. Dry cleaning, it works because there’s an established supply chain. A lot of people don’t know that the brick and mortar that they go to for dry cleaning gets sent out to a big wholesale dry cleaner. So we circumvent the brick and mortar, go right to the wholesaler. They are professional, they are used to having staff of 15-plus, they do have decent technology already layered onto the process, and they’re happy to work with us as we’re one account that can service a 40-mile radius versus half a dozen accounts that can only service a 1 to 3 mile square radius around the storefront.
So that relationship and that supply chain works perfectly, it’s really that wash, dry, fold piece, I think, everyone has always been hung up on and has a hard time nailing. And we felt like we had nailed that doing the, kind of, moonlighting model in Charlotte. And so, we launched Atlanta that same way, instead of outsourcing, we went right into a laundry facility that we said, “Hey, this is how this is going to work, we’re going to rent out your equipment Monday through Friday.” And they loved it. And out of the gate, quality was much better.
Fast forward through 2019, Charlotte grew to a size where we had three of these laundry facilities with our own teams operating out of them. And that just presented its own set of challenges that we didn’t anticipate. Some of these laundromats are 2,000 square feet, some are 4,000 square feet, some the equipment’s old, and breaking, and causing quality issues, others, they’re brand new but the most important part was the ownership. Some owners were professional, intelligent individuals that were reasonable to work with, others kind of fall into that stigma of laundromats, they’re glorified slumlords or, you know, very passive, and penny pinchers. And that showed through in some of our vendors. And we just realized, like, we can’t be at the whim of these mom and pops, and trying to squeeze a manufacturing-style process into a 2000-square-foot location just isn’t going to work long-term and we needed to figure this out.
And that’s when we really had this massive stroke of luck and right timing. And Electrolux, they’re an $18-billion appliance company based out of Sweden, second largest manufacturer of commercial washers and dryers in the world. The North American headquarters happens to be in Charlotte, North Carolina, and their head of all of laundry happens to sit in Charlotte. So we couldn’t have written a better story or gotten luckier from that perspective.
And they reached out to us and said, “Hey, we’ve been watching you guys. We think what you’re doing is really cool. We’d love to help in any way, and we think that this is a model that could start to consolidate the space and we want to stay close to it. Why don’t we vertically integrate and build a concept store together that is going to be a much larger laundromat than your traditional retail one but you could shut down and carve out some of the location to also process all of your 2U delivery volume?”
And so, that’s exactly what we did, we ended up buying about a 7,000-square-foot old Mc Donald’s, actually, and converted it to this hybrid retail laundromat that also has a manufacturing-style warehouse in the back of it for all of the processing for 2U’s delivery volume. And so, seven days a week, it’s open to the public. The demographic that uses it is lower income that traditionally or typically don’t have their own washer and dryer. And we really branded it in a way that it would feel like an extension of their home and provide the sense of community with the amenities. There’s children’s play areas, we have a financial literacy courses regularly. There’s a lot of these communal benefits, and for the first… Not the first time but for probably a few times, that demographic wasn’t being treated like second-class citizens, and it immediately was basically an overnight success.
Within two months, we grew to about $50,000 in monthly revenue just from that walk-in revenue stream, which more than covered all the fixed costs and financing costs of that location. It covered the mortgage on the land and the building, covered the note on the equipment to Electrolux who had financed 100% of the equipment for us, they didn’t require any cash down on our end, and then a cash load on top of that to effectively subsidize 2U’s cost of cleaning. And so, that walk-in revenue is just a beautiful addition to the model, and really made the whole system extremely profitable.
And then, on the 2U side, the way it worked is, Monday through Friday, we’d shut down about 60% to 70% of that store, which was more than enough for the walk-in traffic because they’re working jobs, it’s not as busy Monday through Friday as I had mentioned earlier. And so, again, you have this perfectly synergistic relationship between 2U and the retail business, and they get to share these assets, and you get to closer to 100% asset utilization which no laundromat has ever been able to get to because they can’t control the time at which people are working and when they’re going to come in. But through 2U we were able to do that. And that really changed and flipped the model, again, on its head entirely.
Electrolux was blown away by the results, they ended up flying me and two others out to their headquarters in Sweden to meet with some of their executives, talk about what does this look like after Charlotte, and ended up working out an agreement with them where they’re going to continue to finance 100% of our equipment at future locations. So once we build one in Atlanta, Raleigh, and cities beyond, we have this behemoth of a partner that’s excited about what we’re doing and wants to push as much metal as they can out the door and see us as a conduit for doing that.
Meb: How is the store branded, is it branded as 2U?
Alex: If you looked at the 2U brand and then looked at the store, you could tell that they’re related. The name is different, though, it’s called The Laundry Room. Part of that was for SEO purposes and laundromats being something that people are just typing like, “Laundry near me,” or “Laundromat near me,” so we wanted to rank highly.
The second, though, was we really wanted, again, this group of individuals to have a place that feels like it’s their own, and so we talked internally about, when you do laundry, you say, “I’m going to the laundry room,” or “I’m in the laundry room, I’m doing laundry.” And so, we wanted to have a name that, again, felt like it was something that was theirs. And so, The Laundry Room felt like, “Hey, you’ve got your living room, your bedroom, and here is the laundry room.”
And so, that’s why we branded it that way and wanted to keep the two brands distinct and separate for a number of reasons, but at the same time, show that they’re connected. And so, the font and the colouring is the same but the names are different.
Meb: So you guys are rocking and rolling, you’re trying out new business lines and ideas, you’ve got this cool new partnership with Electrolux, 2020 rolls around, and I’m trying to think or prep before you answer it about COVID because I could come up with some reasons why this might be really good for a business like yours, and I could come up with some reasons why it might be really hard and challenging. So ignoring all the pandemic parts of this, how has 2020 played out?
Alex: Yeah. So at the beginning of the year, ignoring COVID right now, 2019 wrapped up with another great year. We’ve been growing over 100% every year since we started. 2019, we ended up growing about 80%, so still good growth for our fourth year. We were locked and loaded and had just raised a $6-million series A in the fall of last year and were ready to start launching even further markets this year. So we’d launched Raleigh in mid-January of this year, the first month it blew our projections out of the water, it was going very well. Charlotte continued to grow. Atlanta, we were under contract on a property to build that second physical location because in Atlanta we’d still been using existing laundromats just with our own teams going into them.
So everything was tracking smoothly and nicely, and then the pandemic hit and that definitely did shake things up. And I’m happy to jump into that if that’s the direction…
Meb: What was the walkthrough of how that impacted you guys, and how are you coming out the other end of the tunnel?
Alex: It’s funny because I remember looking at that Johns Hopkins tracker, the map that I’m sure everyone has seen at this point of where the cases are, and how it’s spreading, and all that. I remember looking at that in January before there was any cases at all in the U.S. and just watching it spread through Asia and Europe, and I, kind of, nerd out and geek out over stuff like that and data, and I would watch it almost every day, I’d look at it and just watch it. And I look back and just feel so naive because I remember thinking, “Oh, yeah, like, good it’s not going to reach here.”
But you’re always watching, it spread across all these other countries and continents, and just for whatever reason thought that we were untouchable and that it wasn’t going to come, and I think a lot of people reacted that way. I still try to look back and think why that is that we think we were immune.
But then, the first cases started coming, and at that point, it was… Thankfully, we have a very smart and experienced board that has seen a number of black swan events. One of our board members started Pamlico Capital here in Charlotte. It’s a $108-billion private equity group. And so, he’s seen everything, he’s been doing this for 40 years. And then, one of our other board members is the CEO of 360i, which is one of the largest digital marketing agencies in the country, they’ve worked with a lot of brands like Nestle and Hilton.
And those two perspectives combined, I mean, probably as soon as we got the first, kind of, wave of cases, we had a board meeting, they were like, “Guys, this is going to be way worse than everyone is saying it is right now. We need to hunker down, we expect some businesses to get wiped out. Hilton is saying they think that 90% of their business is going to get pulled back.” And just like, all this really extreme stuff. Dan and I were sitting there like, “Are these guys, are they being extreme or is this legitimate?” And then just things unfolded over the next week or two, and what they were saying started to become more and more true. And it was just amazing that they had some of that, kind of, foresight.
But their recommendation was, “Preserve as much cash as absolutely possible.” And, thankfully, we had raised that round last year. But their thought was, “If it’s not additive, if it’s not profitable, cut it off right now. It’s not going to rebound anytime soon, this isn’t going to come back like a V. You guys need to sit on as much cash as you can, protect the parts that are profitable and additive, and eliminate everything else.” Which, again, felt very extreme, but, thankfully, looking back on it was very good advice.
So we did have to make the hard decision to shut Raleigh down because we had just launched it. It wasn’t profitable and it wasn’t going to be for at least a year so that just didn’t make sense to do in this environment so we very quickly shut Raleigh down. Then we temporarily suspended operations in Atlanta. Same thing, it was profitable at very low margin, but as soon as the volume started to get hit, week, over week, over week, it would have lost more and more profitability. And looking at what’s happened in Charlotte, again, we’re glad that we did that in Atlanta because the writing was on the wall, and that profitably slips, and now it’s burning cash, and it wouldn’t have made sense to keep operating there so we shut Atlanta down temporarily as well.
Charlotte, thankfully, as a result of the facility and just the maturity of the market, they would take a 80% to 90% reduction for Charlotte to not make sense to leave open and we’re not close to that. So Charlotte will indefinitely remain open, and there’s a good proof point that once a market does reach scale, and once you have that full vertical integration, it’s a pretty solid brick and mortar retail play with this nice delivery component on top of it that is pretty resistant to these, kinds of, adverse environments and situations.
And so, what we’ve been doing the last two months while all this has been going on is preparing our next move. Instead of being reactionary, thankfully, reacted early enough that we’ve been able to give ourselves that mental space and as a company, the space to really challenge all the assumptions of the underlying business model and where we think the world is going, and spend that time focusing on the move out the other end of all this. And where we’ve landed is, and I’m very proud of our team and our board for being as receptive as they have been to these changes in these pivots, but we’re looking at Charlotte and saying, “Wow, you know, this laundry facility throughout a pandemic hasn’t shrunk at all, it’s actually grown.” The dry cleaning on 2U side has taken a hit and the laundry has taken a very minor hit, so that was validating as well that people still, even when they’re home, want help with the laundry.
But this brick and mortar piece was just shocking to us, the fact that it grew and is as stable as it’s been, and so, we’re looking at, at this juncture, franchising The Laundry Room concept, so the brick and mortar laundromat. We’ve gotten really good with site selection. When we were looking across Raleigh and Atlanta, Electrolux was just blown away by the sites we were able to find and the demographics in the areas of those sites using some of the technology that we’ve built to find better sites. So we’d help with site selection, branding, marketing, technology to operate the facility more efficiently for those franchisees, and then the, kind of, operations playbook for that physical location.
And the reason behind that is, we think that up the other end of this is, there’s people that might be scared to invest in other asset classes that recently lost their job or left their job as a result of all the uncertainty. And we believe that franchising provides a certain level of control that people are going to be desiring out the other end of this. It allows them to be their own boss, it allows them to control their own fate, and their own destiny. And no one has ever franchised laundromat successfully, partially, because it’s, traditionally, been a very… It’s a cash business and there hasn’t been a way, actually, to track the success of an individual unit because it’s all quarters. But there’s technology out there now that is tracking every dollar and every quarter that’s going through every bit of equipment and Electrolux just released that about three years ago, and so, the timing feels right from a technology perspective as well.
So we’re looking to franchise those physical brick and mortars, use those franchise fees and royalties to self-fund the business going forward, so we don’t have to raise to too much more capital and then layer 2U a delivery component on top of those franchisees. So they’ll basically act as our way of funding the business as well as our supply chain as we launched markets for 2U.
Meb: And what does that look like from the franchisee, is it more of a McDonald’s costs, more of a Subway costs, more of a…so how does it work?
Alex: So we’ve looked at all these different QSRs. We’re actually in the process now of selecting a franchise partner to help develop the playbooks and bring it to market. And the franchise fee that we’re looking at would be about $20,000 to $25,000, and so a little less than half of the cost of what it would be in franchise fees for like a Subway or some other QSRs. McDonald’s are much more expensive, I mean, they’re $200,000, $300,000, and then the upfront investment for those fast food restaurants are anywhere from about $1 million to $3 million, depending on the location. All in, ours is going to be about $700,000. The franchisee would need to go get an SBA loan, but it will produce about $150,000 a year in cashflow. And so, it has a really good ROI and payback period relatively compared to the other franchise alternatives out there.
Meb: Better than the 1% yield you can get at the bank right now. Alex, I know you got to go soon but I want to squeeze in a couple of more questions. You also had an interesting, sort of, I don’t know what right word to describe it, idea, feature that involved either clothes donation, or consignment, or something, can you talk about that?
Alex: We survey our customers very frequently because, again, we want to be obsessed with what they’re saying, and what they want, and what they’re telling us. And we did a survey last fall, and it was 90% of our customers said, “If 2U offered, like, a clothing consignment and resale service, then they would love to participate and would take advantage of that service.” So just a huge amount of interest and response in that, and we were all blown away by it. And so, I think like any start-up, we wanted to rapidly test it and build an MVP and not invest too much time before we know it’s worth doubling down on.
And so, we did exactly that, we opened up a beta, we collected about 70 orders. So what we did is, we ordered new bags, customers filled them with clothes that they wanted us to resell for them. We ended up getting about 1000 or so items. And we went to go resell them, and our assumptions were that resale value on average would be $15 to $20 because our customers are more affluent. We looked at resale websites like Thredup and TheRealReal and saw some of these items that we believed our customers would have we’re going to be in the $15 to $40 in resale value range. And so, we did this test, and what ended up happening is, we were just getting a ton of junk. And we were getting stuff that was worth $1 or $3.
And so, when we looked back at the pilot that we had run, it just wasn’t worth the effort of setting up, basically, a whole secondary company within 2U to start offering clothing resale at this juncture. I mean, we learned a lot, certainly, there was definitely interest, and people will do it, we just have to be better about gating what people are giving us upfront. We’d have to build the whole website for it and commit resources to it. And, ultimately, the juice just wasn’t worth the squeeze yet at this point, but it was validating that once we do have scale in this captive audience, there’s very much interest on their ends to rely on us for other services and open up more of that wallet share to us.
Meb: This is one of my favourite business ideas, Alex, so you have to do it. I don’t want to do it, you have to do it. And let me explain why. All my friends just shake their head and don’t want to hear any more about this, but I say, particularly with clothes, but this also extends to other things like electronics or whatnot, nobody wants to go and A, they’re not capable of doing it. Most people couldn’t sell something on eBay, or Poshmark, or Thredup, they couldn’t optimize where to do it. But the bigger problem is the breakage comes in just the effort required to do it, you list it on Thredup, you’ve got to respond to people. And I think the way you would have to frame it is, it removes all the effort, you say, you can pick up and say, “Only put stuff in here that you think is worth more than 50 bucks,” or whatever it is, “And the rest of it, we’re just going to donate.”
And I think that sort of mindset gets you away from poo-stained briefs and boxers from Hanes and t-shirts with yellow armpits. But I think it’s a massive business idea, again, once you work out the specifics of it, because it removes all the breakages of people. Like, I, right now, if this was available, I would put half of my closet into this, but I don’t want to have to go to the effort of listing it. There’s an arbitrage there somewhere, and you’ve already figured out all the hard work on the laundry side.
So, anyway, when you decide to move forward, talk to me, this is something I’m extremely interested in. You’ve seen it work well on the electronic side already online with Gazelle and all the other hundreds of sites that do it, but no one, to my knowledge, has really done with clothes too. Anyway, well, let’s wind down. So very quick questions, when are you come to LA?
Alex: I don’t know. I need to make a trip out. I’ve never been and I’ve always wanted to go, and my girlfriend’s in laws…
Meb: No, I don’t care about you, when is 2U coming to LA?
Alex: Oh, man. So our focus, we were really focused on these small, secondary, and tertiary markets in the South and the Southeast at first. I mean, I imagine if it was just the route that we were going, it would have been a handful of years. Now that we’re franchising, now, I think there is this ability to accelerate much faster, at least, on those physical brick and mortars. I see in the next three to five years, being very much in the realm of possibility.
Meb: Maybe I’ll transition to becoming the laundry mogul of LA. We’ll have to talk about this later. What’s been your most memorable investment? You’re not allowed to say Wake Wash, anything else come to mind, or 2U?
Alex: Wake Wash definitely is and I know I can’t say that. I think it was when I was at EY, and I really got into the crude oil trading and buying futures on that when I didn’t really know anything about what I was doing, but that was when oil was going crazy in 20, what was that, ’14 or ’15? And I remember, by mistake, purchasing probably much more than I should have and it ended up about six X-ing the investment in a matter of weeks. That was one that is forever, kind of, cemented in my brain. It was also nerve wracking because I think the week prior, I had done something similar and it didn’t work out that way, but, thankfully, that big one did and it’s something that I probably wouldn’t want to continue to do long-term just given the risky nature of it and I didn’t really know what I was doing.
Meb: Thankfully, you’re still not an oil trader in 2020 with the futures moving negative and everything else going on in the world. I think a lot of people not only lost all their money, they lost a bunch of money they didn’t even have. It will be interesting to see how that plays out. Alex, it’s been a blast. I know you’ve got to run. Where can people find out more information if they’ve got their dirty laundry, if they’re interested in franchising, anything else they want to chat with you about, where do they go?
Alex: So if they want to reach out to me directly, happy to share my email, it’s alex@2Ulaundry.com, and that’s the number two, with the letter U, and then laundry.com. And if they’re interested in learning about the service at all, it’s www.2Ulaundry.com. And, again, it’s the number two and the letter U. You’ll find all sorts of information on there, pricing as well as information on the franchise opportunity as well.
Meb: Alex, it’s been a lot of fun. Thanks for joining us today.
Alex: Likewise. Thank you so much, Meb, for having me, and look forward to keeping in touch.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us email@example.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. My current favour is Breaker. Thanks for listening, friends, and good investing.