Holiday party dress central: How we started Rent the Runway

December 30, 2013, 4:35 PM UTC
Jennifer Fleiss (left) and Jennifer Hyman

FORTUNE — This New Year’s Eve, women on a budget will head online to Rent the Runway in order to borrow, not buy, a chic ensemble. In this excerpt from Fortune’s new book Zoom: Surprising Ways to Supercharge Your Career, Jennifer Hyman and Jennifer Fleiss share the story of how they created the company. It all started with an overpriced dress hanging in a little sister’s closet.

In 2008, Jennifer Hyman was in New York City on Thanksgiving break from her second year at Harvard Business School when her younger sister Becky showed off a $1,600 Marchesa dress she had just purchased for a wedding that weekend.

The price tag was far out of Becky’s budget, and Hyman, after seeing the “kazillion other dresses” in Becky’s closet, asked her sister why she couldn’t just wear one of those. The three-pronged answer: She didn’t like any of them anymore; she had already been photographed in all of them (and pictures from the wedding would go all over Facebook); and she couldn’t stand to repeat an outfit.

In Becky’s straightforward problem — a closetful of dresses, but nothing to wear — her older sister saw a business opportunity. She brought the story back to her friend Jennifer Fleiss, and together they created Rent the Runway, a now-popular website for renting women’s evening-wear that has been called a “Netflix for dresses.”

Two different early career paths ultimately led Hyman and Fleiss to each other at just the right time. Hyman grew up outside New York City in New Rochelle, where her high school extracurricular-activity list was almost comically long. She was in every school play. She took voice lessons and dance classes. She was on the volleyball team. She was president of the theater club and the debate club. She did volunteer work with autistic teens on weekends. And, inevitably, she ended up valedictorian of her class at New Rochelle High School.

At Harvard, Hyman was a member of the first class of The Seneca, a women’s organization created in 1999. The group was an early example of her being involved in something that solved a problem, as she and Fleiss would later do with Rent the Runway. The problem that Hyman believes The Seneca addressed? An on-campus culture that was male-dominated and masculine in its outdated traditions. “There were all these male clubs where men would network with each other, become lifelong friends, and help each other get jobs afterward,” she says. “There was nothing like that for women. So I was part of this small group of women who created what became kind of a social movement at Harvard, and now there are dozens of female clubs on campus.” Many of the most entrepreneurial and successful women she knows from Harvard were in The Seneca.

On registration day of her senior year, the World Trade Center was attacked. Hyman says it had a real impact on her career trajectory. A social studies major, she completely scrapped her planned thesis and instead did one on how network-news outlets covered 9/11—she interviewed broadcasters like Ted Koppel and John Stossel. But instead of deciding she wanted to go into media herself, she began thinking about business. “What Sept. 11 had done is wreak havoc on many different industries in the country, and I always think that in chaos there’s innovation,” she says. “So I wanted to find the most chaotic industry out there, because I felt I would learn a huge amount. There would be a lot of change and transformation.”

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Hyman was searching for a problem to solve. She looked toward the travel industry because 9/11 was having such an obvious impact on it, and landed in corporate strategy at Starwood Hotels. There she hit it off with then-CEO Barry Sternlicht, who had also started W Hotels. “The spirit of the company at the time was very entrepreneurial because of him,” she says. “So even though it was a huge company, there was an expectation that people at all levels of the company would have ideas and bring those ideas to fruition.”

One idea Hyman had, after a year of rotating through various groups in marketing and partnerships, was for Starwood to create a wedding division. She felt the company’s Preferred Guest rewards program should aim for recently engaged couples and their wedding-related events, from the bachelor and bachelorette parties to the wedding to the honeymoon. Hyman approached the president of her division and asked for $2 million to start a mini-business within Starwood. She was 22 years old and had been at the company for barely a year. It was an audacious move. But Hyman says she was thinking, “ Someone thinks I’m being too aggressive? The worst thing that could happen is he says no. And then I’ll figure out how to make it into a yes.” She did get a yes, and the division she came up with — a honeymoon registry combined with luxury services for newly engaged guests — thrived, generating $13 million in its first year. It is still in place at Starwood (HOT) today.

While at Starwood, Hyman had what she now describes as a pivotal moment in her career. After an important meeting with some senior people — during which Hyman, as she often would, spoke up and contributed ideas — a woman who had been with the company longer than Hyman took her aside. She told her that when Hyman speaks out in meetings too much, “it comes off as being too aggressive and too pushy. And just be aware of that.” The woman was trying to be helpful. But she was also, Hyman says, “trying to tell me that if you’re perceived as being this hard-charging 22-year-old girl, that’s going to be very off-putting to a lot of people in this company, especially people above you who are men. I kind of ignored her.”

After Hyman worked briefly for the startup and the sports and fashion agency IMG, she entered Harvard Business School in 2007. Hyman’s sister Becky knew Fleiss as a friend of a friend, and thought the two would hit it off. Hyman admits her first reaction was icy: “I already have more friends than I need right now. If I meet her, I meet her. But I’m not going to specifically look out for her,” she told Becky. Yet on the first day the two of them happened to land in the same section and they became instant friends.

Fleiss had grown up in Kentucky and New York, where she went to the Horace Mann School, then college at Yale, where she focused on political science and English. After graduation, she went into banking. “I have a pretty competitive personality in general, and I’m always trying to go after what is the best and the hardest thing to get and to do,” she says. “And coming out of Yale, everyone wanted to work in investment banking, like at Goldman Sachs.” The summer before her senior year, she got a Goldman internship, and the next spring, after graduating, she went to work at Morgan Stanley (MS) in the strategic-planning group doing internal M&A and consulting. After a year she moved on to a similar role at Lehman Brothers in 2006.

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Yet Fleiss was never passionate about what she was doing — she was coasting. “I didn’t know that you necessarily would be or could be passionate about a job,” she says. “And I guess the breaking point was once it became so much of my life, where it was like so many hours a day. It was suddenly the only thing I was doing. And that became a little much.” A further sign of her restlessness: On weekends she was running a successful side business, Carter Admissions, that edited papers and prepared high school students to apply to colleges — and enjoying it more than her real job. (During her first year at HBS, she expanded the concept and took it online.)

She had applied to and gotten into Columbia Law School, but it occurred to her that she hadn’t considered whether it was what she actually wanted. “I literally had this kind of last-minute, like, ‘I don’t really want to be a lawyer. What am I going to law school for? Is it too late to apply for business school?” Within a month and a half, she had taken the GMAT, applied to HBS, and gotten in during its third round.

After meeting on that first day, Hyman and Fleiss stayed close throughout their first year of business school and into their second. Then, during Thanksgiving break in their second year, Hyman had her “eureka moment” in front of her little sister’s closet. After Becky explained how she had felt forced to overpay for a new dress, Hyman asked, “Why did you buy a Marchesa dress, as opposed to a cheaper one?” (Becky at the time was a buyer for Bloomingdale’s; she now works for Rent the Runway.) Becky answered, “I want to feel beautiful.” Hyman noted the association between self-confidence and luxury, and has carried that idea through to Rent the Runway, a business that trades on the desire of young women to look and feel fancy even if their wallets aren’t equipped to own the very highest-end designer gowns.

There was a problem Becky had unwittingly identified, and Hyman thought she had an inkling of a way to solve it. “Why don’t we take all these dresses that you’re never wearing again,” she proposed, “and rent them out to other people, and create an income stream for yourself?” They weren’t about to actually do that using Becky’s dresses, but it got Hyman thinking about the concept of renting dresses, as well as the more abstract question of why women felt pressure to dress up.

On the first day back at Harvard after vacation, a Monday, Hyman related the closet story to Fleiss over lunch. “I didn’t go into it with the intention or the thinking that we would actually start something,” she says. “Every time I would go home, I would be talking about it with Becky and with my family. But in my head I didn’t really think it would be a company. I just thought it was something fun that we were working on.”

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Still, they did work on it. They laid out a map for how they could solve the problem that Becky and so many other young women like her were having. There were two trends in the market that Hyman and Fleiss had noticed and were contemplating. One was the “sharing economy” and movement from ownership to renting. It was happening in music (with streaming services like Pandora), television and film (Netflix), and even automobiles, with car-sharing services like Zipcar. (Soon there would also be Airbnb, for renting out people’s apartments.) The second, less measurable phenomenon they perceived was an increased saturation of celebrity worship — social platforms like Twitter (TWTR) and Facebook (FB) were making people more aware than ever before of socialites and pop-culture stars like Kim Kardashian, and what luxury brands they were wearing. Women increasingly wanted to develop their own personal brands via social media to show off their luxury. “Our culture is educating an entire population of people to aspire to this lifestyle that 99% of us can’t afford,” Hyman says.

Rent the Runway married the two trends. It harnesses the shareable economy and takes advantage of the aspirations to luxury that many young women harbor today. Hyman and Fleiss soon approached people at fashion labels, but many were initially hesitant to let Rent the Runway buy and rent out their products. Their talks with some of the labels were the most memorably difficult hurdles they faced. “Designers basically told us that over their dead body would they ever let us buy inventory from them,” says Hyman, “so that was pretty discouraging.” To persuade designers to partner with them, the duo had to understand what the labels wanted (which in most cases was brand protection and the certainty that they weren’t going to lose real purchases by making their products available for rent) and show them that Rent the Runway could be a major channel for them to get new customers and reach new demographics.

Even as they were pitching their concept to designers and VC firms, neither woman was ready to fully commit. Both had lined up other jobs for when they graduated. But less than two weeks before Fleiss’s wedding, they got an initial round of $1.75 million from Bain Capital Ventures. In 2010, Rent the Runway received another $15 million in funding from Highland Partners, and in 2011 $15 million from Kleiner Perkins. By March 2013 it had raised another $24.4 million. The site has more than 3 million members and the business is growing at nearly 100% year over year in users and revenues (it won’t disclose the latter).

While the moniker “Netflix for dresses” is meant admiringly, Hyman doesn’t particularly like that analogy. “Netflix is a very rational business, and everything that we are doing is about delivering an emotional experience,” she says.

Indeed, both co-founders, when they appear on television or do interviews, like to say that Rent the Runway gives women a “Cinderella experience.” But it’s less romantic than that. It’s a company that solves a problem. It’ll certainly solve one for women seeking a New Year’s Eve party outfit at low cost. (And indeed, their biggest business comes at New Year’s Eve and prom season.) That’s not to say women are never going to buy dresses anymore. But now they don’t necessarily have to. That’s clever entrepreneurship.

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