On the Nose

When Fabrice Penot pitched Le Labo--a fragrance company built on perfumes and no hype--investors laughed. Now with stores around the globe and millions in annual sales, Penot is the one who's smiling.
15+ min read

This story appears in the May 2010 issue of Entrepreneur. Subscribe »

There's no false modesty about it--Fabrice Penot wanted to start a revolution with Le Labo , the fragrance company he co-founded in 2006.

How could he not? For starters, he didn't want the small, boutique brand to do any advertising--a major no-no in an industry where Britney Spears makes dozens of in-store appearances to hawk her latest as-seen-on-TV potion.

Then Penot insisted on limiting distribution to his own stores and a handful of exclusive perfume counters, another crazy idea compared with the saturation strategy of fragrance industry giants such as Armani, where Penot worked before hatching his plan.

On top of that, he refused to keep stock on the shelf, instead making each store a kind of chic lab experience: a cool, minimalist space where ingredients are blended together on the spot, poured into plain glass bottles, wrapped in a brown paper package and custom labeled like a science project, with the date, scent and name of the buyer.

"No one believed in the idea," Penot says, echoing the downer vibes so often sent to startups.

And that led to perhaps the most absurd thing of all about Le Labo: Penot and his partner Eddie Roschi went ahead and started the business with almost no outside funding.

Today, just four years later--and a spectacularly lousy four years for luxury products like Penot's--Le Labo has grown into a $4.5 million a year fragrance brand with four stand-alone boutiques worldwide (and four more planned by the end of this year), plus 12 counters inside the world's most exclusive retail enclaves, including Barneys New York and Colette in Paris. Kirsten Dunst is one of many celebrity fans. And Le Labo is a darling of the fashion world, written about in high-end publications including W--enough to make a publicist plotz. If only they had one.

"We don't spend money on marketing," says Penot, again the contrarian to mainstream fragrance companies, where the bulk of the budget goes toward splashy campaigns. "We only spend money on perfume."

You can see why, when Penot and Roschi set out to finagle a round of financing--which Penot thought would be a cakewalk, given his deep industry connections--Le Labo was not an easy sell. In fact, big beauty's execs were the biggest naysayers of them all.

"They told us, 'OK--this is ridiculous,'" Penot says of his initial meeting with the brass from a major beauty company. Penot and Roschi's four-bottles-a-day sales goal for the first store drew the biggest laughs of all: A bottle of Le Labo--a name that the execs deemed "unpronounceable"--carries a $200 price tag, about double what the major brands charge. "They said, 'Just send us a résumé. We're gonna find you a job.'"

That was the last thing they wanted. Penot had been busy creating big-budget blockbusters during a six-year stint as a perfume developer at Armani Fragrances, and Le Labo was his chance to make the indie label of his dreams. (Just for the record, it's pronounced luh LA'-bo and means "the lab" in French.) Roschi, his best friend and fellow Armani Fragrances alum, was also becoming disillusioned with the corporate life and the commoditization of perfume. But more importantly, Penot also believed that there was a individualistic void in the mass-produced fragrance market, which, according to research group NPD, accounts for $25 billion to $30 billion in sales each year.

Though they needed cash, after that "ridiculous" experience--and many others like it--Penot and Roschi agreed: No loans for them.

"We knew we wouldn't sleep well," Penot says, "and when I'm exhausted, I'm an asshole."

So Penot moved out of his fancy downtown Manhattan digs and shacked up with Roschi in a one-bedroom, sixth-floor walk-up, where he spent the next 18 months sleeping on the sofa. Each kicked in about $100,000, and in the end, four close friends contributed roughly $30,000 (one of them used his work bonus; another, Penot later found out, sold his car). The money allowed Penot to hire top perfumers and buy expensive, pure ingredients, but it was still a far cry from the millions he had hoped to score from formal investors.

"Fortunately, nobody trusted us," Penot says with a chuckle. "We realized that the energy we were spending in trying to convince people to invest could have been spent in creation and trying to do things cheaply. Because if someone had given us $2 million to create Le Labo, we would have spent it."

The duo learned an early lesson in doing things on the cheap when it came time to build their first store, in the hip Nolita neighborhood of Manhattan. Unable to afford the $200,000 quoted by architects, Penot instead hired a general contractor to handle the permits and he and Roschi did most of the construction themselves. They actually started without a visual idea of what the store would look like, confident that their taste level would allow the store to "design itself." Plainly put, Penot and Roschi knew what they wanted their brand to look like and trusted themselves to make it happen however they could.

The result is a light-filled space with raw wood floors, an almost pharmaceutical perfume counter and austere surfaces interrupted by quiet bursts of sensuality--a silver, swag-patterned wall or soft glass lanterns.

In February, Le Labo opened its fourth store, in London. Like the others--in L.A., Tokyo and Manhattan--it was built without an architect, even though the pair can now afford one.

To generate cash flow while developing their business, Penot and Roschi again relied on industry connections. Only this time, they began consulting for fragrance brands. They still consult today and have created scents for stylish clients such as the Gramercy Park Hotel in New York, which sells a fragrance called Cade 26 that includes smoky notes inspired by the lobby fireplace.

That initial cash flow and lack of debt allowed the brand to build from profit, not fear, from Day One. And even today, Penot keeps his company "too small to fail." Save for its retail stores, Le Labo has no corporate offices. Instead, the four employees work remotely from laptops while about 20 others man the stores.

"We keep the costs of operations so low that it allows us to move the boat very quickly if the current is moving," Penot says.

Le Labo's expansion strategy, naturally, is as unorthodox as the rest of the business. "We open new stores only when the cash is in the bank. We only spend money when we have it." Penot says. Sounds like every American's "duh" moment over the last decade.

Pure Creativity
"The world doesn't need rational or reasonable products--the world is full of reasonable products and reasonable businesses," Penot says of what he considers the secret to his business' success. "It was just a business model with your own point of sale with an expensive price and an environment and aesthetic that wasn't meeting all the landmarks of the usual perfume business model. It was not reasonable for anyone. And that's why it makes sense."

And, of course, the scents had to be mind-blowing too. Rose 31, the brand's bestseller, is a spicy floral that accomplishes another feat: It is a rose perfume that is worn by men as well as women. By blending the sweet rose with the "dirty" scent of synthetic ambergris, Le Labo created "a completely contemporary perfume," The New York Times perfume critic Chandler Burr wrote. "Elegant yet something you smell between the sheets."

Indeed, Penot's philosophy of perfumery is to develop something that deeply affects the wearer. "When it brings the feeling of being special, and a certain idea of elegance and an extra confidence," he says, "the magic happens."

Perhaps Penot's least rational move was opening a store in Tokyo in 2008, despite a slight snag: The Japanese aren't big fans of perfume. But he calls that notion a self-fulfilling prophecy. "We realized that when you take the time to teach them that perfume can be an art and it's not only products in a bottle, they connect with that. Now a lot of perfume brands are opening doors over there, just because they realize there is a market."

Their creative approach is apparent, too, in the way Le Labo regularly develops limited-edition scents, exclusive to the cities where they are sold. So far, they have captured the floral-musky edge of Los Angeles, the peppery-Asian side of London, New York's smoky underbelly and even a clean, vanilla distillation of Dallas. The perfumes cost as much as twice that of the other products in the 12-scent lineup, which run $50 to $200. The exclusive city scents only add to the cachet that Penot initially set out to capture. And capture it he did.

"We had a lot of luck," he says of the immense buzz surrounding the brand. Part of that luck again falls to connections--the fragrance industry vets knew Le Labo deserved quiet mention. After W magazine's full-page spread a mere three months after the launch, The New York Times came calling. Then Barneys.

"In our business plan we wanted to go to Barneys two years after we opened," Penot says. "They came to us after four months."

And in case you're wondering, the Nolita store met the four-bottle-a-day goal. In fact, it exceeded it--by 66.

No loan? No problem.

Meet three more wily entrepreneurs who started successful businesses without outside funding

Venture capital fundraising was down by almost half in 2009, the slowest year since 2003. Although the SBA backed 37 percent more loans in the fourth quarter of last year, it was still just about half the 20,000 loans it backed in the final quarter of 2007. But you don't always need an infusion of cash to build a thriving business. Fabrice Penot proved it with Le Labo. Here are three other success stories that came to be without major outside funding. --E.W.

Ethan Lipsitz, Apliiq
In 2005, when Ethan Lipsitz was a student at the University of Pennsylvania, he took a swatch of fabric and sewed it onto a hooded sweatshirt, patchwork-style. It made the drab piece stand out, and soon Lipsitz was charging $50 for one of his appliquéd sweatshirts. After his mom and a friend taught him how to use a sewing machine, Lipsitz created the line Apliiq (pronounced app-LEEK', a mashup of "appliqué" and "unique"). And when he took his goods to a Philadelphia boutique, he discovered his business model:

"The guy was like, 'Those are cool--I'll buy three,'" he says of his first sales call. "And he paid me in cash upfront."

The deal helped Lipsitz, now 25, realize that he could turn an immediate profit by selling his sweatshirts solely made-to-order. So he built apliiq.com, a site that allows customers to choose their sweatshirt color, fabric pattern and design template. "I could sell and ship direct to the consumer without keeping inventory."

By spring 2008, he moved to Los Angeles with only his bicycle, which he would use to pick up fabric and sweatshirts from American Apparel's downtown headquarters. That June, a friend put Lipsitz in touch with Greg Selkoe, CEO of the popular streetwear website Karmaloop.com, who quickly picked up the line of quirky, patchwork wares. Business boomed and Lipsitz realized that if he wanted Apliiq to grow, he had to shift his focus to marketing and promotion.

Good, old-fashioned cold-calling led to write-ups on streetwear blogs, the New York Post's Page Six column and Spin magazine.

By March, Lipsitz could afford to rent a small storefront in downtown L.A., which, coincidentally, was on his bicycle route. He built out the store himself using rope and piping from Home Depot and whatever furniture he could scavenge. PayPal and a lockbox are still the company cash register. But today, Apliiq has a CFO, and the line has expanded to include dresses, T-shirts and collaborations with well-known streetwear brands including The People's Shoe.

And Lipsitz has never given up the skip-the-middleman approach: "I've dabbled with wholesale and consignment. But the time it takes to get paid for the product you sell and the amount of investment you have out there, it's a risk. I prefer getting my orders, then getting paid and then making the product. It's amazing."

Andrew Ritter, Ritter Pharmaceuticals
When doctors told Andrew Ritter that he would never be able to eat dairy foods, Ritter decided he loved ice cream too much to accept that. He pored over medical journals to learn about lactose intolerance, then brazenly called the top researchers. And--after getting return calls from Harvard Medical School and Purdue University--he began mixing vitamins and minerals to make a compound to ease his symptoms.

He was in the eighth grade at the time.

"They looked at me like I was crazy," says Ritter, now 27, of the L.A.-area pharmacists who sold him the ingredients. "I had to have my teachers write me a note."

A few years later, he had a formula that seemed to work. He paid volunteers $50 to test it and report the results. (This was funded by a job selling In-N-Out burgers, and legal because the product is a nutritional supplement, not actually a drug.) Still, "I don't know why these people did it," he says, laughing. "But it worked."

After landing some local press, Ritter began selling his supplement, a 34-day system designed to retrain the digestive system to better break down dairy, for $150 a pop. He put the profits back into research and development. By his junior year at the University of Southern California, he had his own office and was fielding customer service e-mails during class.

Today, more than 15,000 people have taken Lactagen, an over-the-counter derivative of the formula Ritter cooked up, and his company, Ritter Pharmaceuticals, is about to launch trials for a prescription drug to treat lactose intolerance--an endeavor that can cost upward of $50 million before the FDA gives its OK.

As for the Harvard and Purdue researchers he once cold-called? They now serve on the Lactagen board.

Timothy Downs, Shorecliff Communications
Today, the entire media world is scrambling to figure out what comes next. Timothy Downs had his epiphany 14 years ago.

Back then, Downs was an editor at Triathlete magazine, but closely watching the fallout of the Telecommunications Act of 1996, which transformed the phone, cable and broadcast landscape into the Wild West.

With his wife at the time, Andrea, he came up with the idea of a "live action" trade magazine for a slice of this new world: A conference on the cell tower industry. The potential margins were much bigger than they would have been with a print magazine, Downs says, with attendees paying as much as $800 to hear experts speak and sponsors ponying up at least $10,000 to involve their brands. "And the best part was," he says, "they would all prepay."

Downs sold a car to hire two employees and pay for a tiny office. He monitored the industry while Andrea was the public face of their company, which they called Shorecliff Communications. In 1996, Downs and Downs produced one conference for roughly 50 attendees. Two years later, they were up to three conferences with as many as 800 attendees each. "And it's still going to this day," he says.

Only today, the business no longer belongs to the Downses. They sold it to CMP Media in 2006 for $12.3 million. Downs says success came from listening to customers and following the industry closer than it followed itself. So when cell tower building slowed, Downs shifted into a new sector: broadband.

"I thought the word had a nice ring to it," he says, even though few at the time knew what it meant.

Start a Business for Nothing

Or almost nothing. Before you sign a lease (or buy a phone plan or make a hire), find out what's available for free.

You don't need a fancy telecom system and an office full of equipment to get your business off the ground. Hell, you don't even need an office, especially with the ever-growing array of virtual services at your disposal. --E.W.

The un-office
Save the rent and work with your colleagues anywhere that has a Wi-Fi signal. Basecamp--a web-based project-management app--lets you assign tasks, send instant messages, collaboratively edit documents, create presentations and track projects with employees and clients. A good service for web design professionals and other creatives completing longer-term assignments. Plans start at $24 a month for as many as 15 projects and go up to $149 a month for unlimited use. But if you can find office space at that price, we suggest you take it.

Basecamphq.com: From $24 a month.

Credit cards
Setting up a conventional credit card payment system involves contracts, equipment rental and thousands in transaction fees. Ex-Twitter CEO Jack Dorsey has a new startup called Square that allows you to swipe plastic with your iPhone or iPod. Simply plug Square's, er, square, into the headphone jack and your customers can make a purchase from anywhere. With instant photo verification, on-screen signature technology and e-mail receipts, the system is paperless, too. It's still in beta testing, but expect Square to arrive this summer.

Squareup.com: $1 for the app, plus 2.9 percent of each transaction. Hardware will be free.

The phone
Telecom systems killed the receptionist. Now Google Voice is set to kill telecom. Voice gives you the local number of your choice and lets you forward it to as many landline or cell phones as you please, giving you an "office number" even if said office consists of nothing more than you and your cat. Voice kindly transcribes voicemails for access through text message or e-mail, and incoming calls can be recorded and played back on the web. Local calls are free; long distance starts at just 2 cents a minute.

Google.com/voice: Free, or close to it.

The fax
Buying a bulky fax machine is so 1993. And then there's the monthly cost of the dedicated landline needed to run the thing. With eFax, $16.95 a month gets you a local fax number of your choosing and 130 incoming pages each month. And eFax sends incoming faxes as e-mail attachments--very 2010, indeed.

Efax.com: $16.95 a month.

IT department
Get the perks of a corporate computer network with Dropbox's free downloadable software: Just drag and drop files into a desktop folder to sync them to computers and PDAs--no IT guy needed.

Dropbox.com: Free.

Accounting department
Freshbooks--an online invoicing, time-tracking and expense service--automates the accounting department with an easy web interface that sends documents (with your logo) to clients. Manage as many as three clients for free; a $19 monthly upgrade increases that to 25. Getting clients to pay on time? That's another matter.

Freshbooks.com: Free.

Complaint department
Get Satisfaction--a startup that mint.com and Nike are already using--collects questions, complaints and feedback from throughout the social media universe and organizes it into a customer service platform that can be used on your website. Led by CEO Wendy Lea, Get Satisfaction has plans starting at $19.

Getsatisfaction.com: From $19 a month.

Make it legal
Create a simple LLC or trademark your business name with LegalZoom, a low-cost alternative to hiring counsel. LLC document preparation starts at $149 (about one-tenth of what an attorney would charge) and includes all filing fees and a custom operating agreement.

LegalZoom.com: $149 for an LLC document.

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