How Two Friends Disrupted the Cashmere Industry, by Doing What Nobody Else Would

The founders behind Naadam took out the middleman in the cashmere world, creating a win-win for the company and the herders.
How Two Friends Disrupted the Cashmere Industry, by Doing What Nobody Else Would
Image credit: Naadam Cashmere
Magazine Contributor
13 min read

This story appears in the September 2017 issue of Entrepreneur. Subscribe »

On a clear day in June 2015, Matt Scanlan loaded $2.5 million in Mongolian tögrögs into 32 plastic bags, stuffed them into the back of a Toyota Land Cruiser and lit out into the desert. 

Scanlan, the then-26-year-old co-founder and CEO of Naadam Cashmere, was headed to Bayankhongor province, one of the most remote regions in the world, located deep in the Outer Mongolian Gobi desert. Each year around the same time, the nomadic goatherds in the area gather in a local village to sell their yield, which consists of some of the finest cashmere there is. 

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Leaving from the Mongolian capital of Ulaanbaatar, Scanlan spent the next two days off-roading across unforgiving desert terrain with the bags of money piled so high in the back, the driver could hardly see out the rear window. 

When he arrived, it was with a bold, risky plan, years in the making. When he left, he and his colleagues had 100 tons of cashmere, packed into a dozen tractor trailers, and the firm foundations of a socially conscious, sustainably sourced, ingeniously constructed clothing business that’s now on track to gross $45 million in its third full year. 

And like many great entrepreneurial adventures, it all started with a phone call, a dive bar, a good friend and some dumb luck.

Image Credit: Naadam Cashmere

Scanlan was a few years out of NYU in 2012 when he quit his job as a qualitative analyst at a small venture capital firm in Manhattan. “It was way over my head,” he says. “Compared to a real analyst, I was an idiot. I was faking it. So I left, not really sure what I wanted to do. And that’s when Diederik called.”

Diederik Rijsemus, a Dutch friend, was heading to Mongolia with a backpack. They first met during Scanlan’s brief tenure at Dickinson College before, as Scanlan puts it, “they politely asked me to leave the institution and not come back.” (Ditto a certain elite boarding school: “I was always mischievous as a kid and more interested in knowing what the rules were so I knew how to break them,” he says -- a mentality that would come in handy later.) By the end of the week, the two were sharing a bunk at a $20-per-night hostel in Ulaanbaatar. Soon after, they were out at a bar and hit it off with some locals named Ishee and Bodio, who extended an invitation to join them on a trip to the countryside the next morning. 

“We assumed that meant, like, going out to Connecticut for the weekend,” Scanlan says, laughing. “We didn’t bring clothes or food. We thought we’d be back that night.” Instead, they drove off-road for 20 hours straight until the truck broke down in the middle of the night. “After a few hours, a couple guys with motorcycles rode by and picked us up, and we drove for what felt like another three hours.” 

The journey finally ended deep in the Outer Mongolian Gobi, with nothing around for miles but a yurt belonging to a herder named Dash and his family, who came out to greet the visitors with a bottle of goat’s-milk vodka. “We spent the night hanging out with these guys and had an amazing time. They were rowdy and so much fun,” says Scanlan. “When we woke up in the morning, we asked the two gentlemen who drove us out there how we’d be getting home. They told us they were planning to stay for a month.”

Scanlan and Rijsemus gradually came to accept the situation. They slept on the floor, living off meat from the tiny stove in Dash’s yurt, and learned how to ride motorcycles in the desert, milk and herd goats and perform a few Mongolian wrestling moves. “By the last quarter of the trip, we had all become good friends,” says Scanlan. “We started asking a lot of questions about how they lived. And we came away with some really hard facts.”

Chief among them: While Mongolian goatherds produce some of the world’s most sought-after cashmere, it’s exceedingly tough out there. The million or so nomadic herders -- who make up a third of Mongolia’s population -- must survive long, punishing winters with temperatures of minus-40 degrees, relentless winds and massive snowfalls, with only the food they’d stored up over the summer. That harsh climate is actually part of what allows goats to grow their high-quality undercoats -- the longer and thinner the fibers, the more money they fetch at market. But as global temperatures rise, the quality of yields appears to be diminishing.

Meanwhile, the worldwide demand for Mongolian cashmere has been skyrocketing. That would seem like a good thing, but in reality it’s created a host of new problems. From 1993 to 2016, Mongolia’s livestock numbers, which includes cashmere goats, grew from 23 million to 71.5 million, leading to the degradation of the native grasslands on which the animals feed and trapping the herders in what many fear is a vicious cycle. Bigger herds lead to undernourished goats, which yield coarser, less desirable hairs, which bring lower prices, which force producers to breed even bigger herds to make up for it, which increases the pressure on the grasslands.

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Even more threatening is a mysterious, periodic weather phenomenon known as a dzud, which causes severe summer droughts followed by even harsher winters. When one struck in 2010, nine million animals died, and a dzud last year took out a million more, wreaking havoc on a population that already lives on the edge. 

“We saw how hard it was for this family and how much they cared about their animals,” says Scanlan. “And so by the time we left, we felt like we needed to find a way to give back for this experience -- a month of them feeding us and clothing us and not asking for anything.”

So Scanlan and Rijsemus decided to repay the favor. First, they went around and raised money from family and friends to fund veterinary programs for the herders. Then, to see if they could support the cause but also build a business for themselves, they launched a Kickstarter in 2013 with an initial goal of $20,000, selling Mongolian-made cashmere sweaters with a piece of the proceeds going to efforts to aid the herders. They called the project Naadam, meaning “games,” a traditional festival in Mongolia. It wound up generating more than $100,000.

“We didn’t know what we were doing at that point,” remembers Scanlan. “We took all these orders and then we were like, ‘Oh, shit; we have to make some sweaters.’” They sourced the sweaters from a manufacturer in Mongolia and eventually sent a thousand orders out from Scanlan’s apartment in the West Village, where Rijsemus had been living on the couch. “The boxes were stacked to the ceiling, and we were sleeping on the floor for a week filling orders,” says Scanlan. 

They barely broke even, which meant there wasn’t much to send to Mongolia. But the experience showed them that people seemed to care about the plight of herders and wanted ethically sourced cashmere. The problem was, as Scanlan puts it, “we had only 50 percent of the puzzle.” For the other 50 percent, they’d have to head back to the desert.

Image Credit: Naadam Cashmere

Scanlan and Rijsemus returned to Mongolia the next summer to check on the progress of their nonprofit work. The news was not good. “We met with more families, talked to more people. They were saying, ‘Thanks, but actually it’s not changing anything. There’s no real impact.’”

It was the time of year when local traders begin arriving in the region to purchase huge loads of cashmere. And Scanlan noticed that the traders were engaging in what amounts to price fixing: deciding as a group beforehand not to pay herders more than, say, $20 a kilo for their yield. The traders would then sell that same kilo to a broker for $50. The broker handled the exporting and shipping and unloaded it to a mill for $70.

“So it’s worth $70, but the herder gets $20. The more we understood the supply chain, the more we thought, This is bullshit,” Scanlan says. “The herder doesn’t have the information to negotiate, or any leverage whatsoever. They have to sell their material. It’s been happening like this for a thousand years. That was the other 50 percent of the puzzle.”

Scanlan and Rijsemus saw a way to help the herders and also create a viable business. By cutting out the middleman and going directly to the herders for raw fibers, Naadam could produce its own sweaters at dramatically lower costs. Instead of $20 per kilo, they’d offer herders $32 or $38, which would have a far greater impact on their quality of life than any veterinary program could on its own. At that price, Naadam would have its pick of the highest-­quality material. And if Naadam controlled the processing, shipping and manufacturing, it could remove several more layers of markup and deliver a superior product at a better price than any competitor could -- boosting the herders’ bottom line while actually turning a profit for themselves. They’d then sink a portion of those returns back into nonprofit efforts like veterinary services and grassland management.

“I thought that if we could actually pull it off, why wouldn’t someone want to buy the end result -- a lower-priced, higher-value brand that helps people and doesn’t screw everybody along the way?” Scanlan recalls.

They spent most of the next year scraping together capital and figuring out logistics. “We had to put up some serious collateral and take really high interest rates,” Scanlan says. “It was hard money to raise.” They managed to secure a $2.5 million loan, and they lined up a designer to come aboard as a co-founder in the event the scheme worked. Scanlan would be the face of the company. Rijsemus, who Scanlan describes as “the other half of my brain,” would be COO.

Scanlan had the $2.5 million wired to Mongolia and returned to the desert in 2015. The first order of business was to put some of that cash into an envelope and slip it to the mayor who runs the cashmere auction. “We rigged the auction in favor of the herders,” says Scanlan. “He was traditionally getting paid off to do the opposite.” 

When the meeting opened, the traders were sitting at tables in the front of the hall, and the herders were standing in back. “Our guy gets up, and he’s telling them what’s happening, and all of a sudden every single trader in the place turns around and stares at me. I have my sunglasses on, trying to hide in back, and they’re all looking at me like, What the hell?” says Scanlan. The mayor got up to confirm the price: The herders were about to get a major raise. “We go to our spot, and all the herders start coming to us, lining up with their bags of cashmere, and we have a scale and are sorting on the spot. And we do this process from 6 a.m. to 12 a.m. every day for three weeks until we’re out of money. Herders from all over the region started flooding in.”

The material was cleaned and shipped to mills in Inner Mongolia and Italy to be spun into yarn. Back in New York, Scanlan and Rijsemus got to work putting together a clothing line, an effort spearheaded by their new designer and partner, Hadas Saar, the former head of global knitwear at the apparel conglomerate Li & Fung. “Early on, we thought we could just go to J. Crew and buy a sweater we liked and send it over to a manufacturer and have someone copy it,” says Scanlan. “But it’s hard to make a sweater.”

Saar also covered for Scanlan’s most glaring weakness as the head of a fast-rising clothing company. “I don’t really like clothing,” he admits. “I haven’t bought a new piece of clothing in probably two or three years. Most of mine has holes. I would wear the same thing every day if I could. So the design and the fashion stuff I leave to Hadas.”

Image Credit: Naadam Cashmere

Within just a few short months, Naadam was able to raise another $6.5 million and build out a website. It launched in September 2015 with an inventory of classic sweaters, hoodies, scarves, hats and gloves that sell for a fraction of the cost of comparable garments from luxury labels like Loro Piana and Brunello Cucinelli.

Naadam took in $1.3 million in its first four months and $7.5 million the following year, becoming profitable in just its second full year. For 2018, Scanlan projects revenues to hit $45 million -- and grow to $82 million by 2019. 

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While roughly 68 percent of revenue comes from Naadam’s direct-to-consumer digital platforms -- which offer higher margins -- the company has been careful to spread its risk across multiple channels. It created a fashion-forward wholesale line, Studio by Naadam, which it sells to major department stores like Saks Fifth Avenue, Nordstrom, Barneys, Bloomingdale’s and Selfridges. But it also produces pieces for those same companies to sell under their house brands. That way the cash flow from the latter pays for the production of the former, meaning Naadam isn’t out a pile of money at the start of every season.

In 2017 Naadam also quietly launched an off-price label called Project, which it sells through discount retailers like T.J. Maxx, Nordstrom Rack, and Saks Off 5th. “They’re huge orders of 50,000 or 60,000 pieces at a time,” Scanlan says. That, too, “spits off cash to fund the rest of the business.”

Meanwhile, Naadam’s nonprofit arm, now run by old friends Ishee and Bodio, is flourishing. Among its many efforts, the company manages the Gobi Revival Fund, which inoculated more than 250,000 goats in the past two years. And this summer, it invested $25,000 to build a fence long enough that it could encircle Manhattan as a part of a grasslands-mnagement project. 

It’s a lot to hold together -- growing a successful company with so many moving parts -- but Scanlan has come this far, learning as he goes. 

“All we have to do is not fuck it up, honestly,” he says with a laugh. “We’re still figuring it out on a daily basis. But we’re getting a lot better at it.” 

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